Factors That Impact the Cost of Brand Name and Generic Drugs

Small molecule drugs make up the majority of drugs that people use. Other types, such as biologics and monoclonal antibodies are growing in use, but only represent about 10% of pharmaceuticals in the United States. This post examines the differences in two types of small molecule drugs, patented and generic. Patented drugs are sometimes referred to as branded drugs, and they are only manufactured and sold by the patent-holder. 

What does it mean if a drug is patented?
When an individual, company, university, or other group discovers a potentially new drug, they can file for a patent on the molecular structure of the drug and its potential use with the United States Patent and Trademark Office (https://www.uspto.gov). At that time, the molecular structure is published and legally protected. According to Jonathan Sexton, Assistant Professor of Internal Medicine, Medical School, and Assistant Professor of Medicinal Chemistry, College of Pharmacy, (https://pharmacy.umich.edu/people/jzsexton) the molecular structure is all of the information necessary for the drug to be recreated. “Any skilled medical chemist could recreate it,” he says, noting that the patent is important because it protects investments in research and development. 

Patents are issued for 20 years, in most cases, although the Food and Drug Administration (https://www.fda.gov) can grant exclusivity beyond the patent protection in certain situations. The 20 year time period may seem at first glance to be lengthy, but Sexton says that it takes a long time, sometimes as many as 10 years, for a drug to go from initial discovery and development to being prescribed. In such cases, the patent-holder has a much shorter timeline to recoup the cost of developing the drug. 

In addition to the fact it can take many years for a drug to reach the market, there’s also a surprising failure rate in the pharmaceutical industry. “There’s only about a 9-10% approval rate for drugs that go into clinical trials by the FDA,” says Sexton. That means that about 90% of drugs fail. There are numerous reasons that could cause the drug to fail. It may cause unacceptable side effects, or not have an effect at all. This high attrition rate is another reason that patents are crucial. Research and development is expensive, whether the clinical candidate fails or reaches the market. 

The United States Patent and Trademark Office only protects the rights of the patent-holder in the United States. If the patent holder wants to market their drug in other countries, they must file for protection in other countries, which adds layers of complexity and cost to the process. 

 

What is a generic?
Once a patent expires the chemical structure of the molecule can be recreated and sold as a generic medicine. Generic versions of drugs must match the patented versions exactly. In fact, Sexton says that the two must be chemically identical to such a degree that a chemist in a lab using advanced tests couldn’t tell them apart, adding “If I can’t tell the difference at a molecular level, there’s going to be no difference with respect to the efficacy to the patients.” 

However, there may be differences in the formulations, and Sexton says if a patient has questions about taking a generic version of a patented drug, it’s always a good idea to discuss it with their care provider. 

What happens when the patent expires?
The process for manufacturers of generic drugs isn’t always simple or straightforward. Simply because a drug can be recreated in a laboratory doesn’t mean that it will be easy to manufacture at scale. Sexton says makers of generics consider a host of factors including the patient base (how many people are prescribed the drug), the cost of the patented drug, the complexity of manufacturing, and others. 

One major consideration for manufacturers of generic drugs is the complexity of the manufacturing and formulation process. Although the molecular structure of a patented drug is available, the patent-holder doesn’t disclose other information such as the manufacturing process, so generics companies must invest in development. They also have to seek approval from the FDA to ensure that the end product is equivalent to the branded product in terms of effect, stability and safety.. 

What impacts the price of a drug after the patent expires?
The price of a generic drug is more complicated than many people realize. Many of the same factors that are pertinent to the whether or not a generics manufacturer decides to invest in developing any given drug are factors in the price of that drug once it is on the market. 

Another important factor in the cost to consumers is the number of generics available. When a patent is in effect, only the patent-holder can manufacture and market a patented drug, but once the patent expires many generics companies may decide to make the drug. “The price drop is directly proportional to the number of generics,” says Sexton. He notes the topic has been studied quite extensively. “If you have only one generic, there’s some price drop, but if there are 10 generic manufacturers, the price goes precipitously down,” he says. 

The original patent-holder also continues to sell their branded products, as well. Sexton says the branded product is usually sold at a premium over the generic, “but it has to be something the market will tolerate,” he says. For example, if a branded drug is $700 and the generic is $600, it’s likely many patients will continue taking the branded version because there’s some perceived risk in changing products. However, if the generic version costs $10 and the branded version is still $700, there’s a strong motivation for the patient to switch. “It depends on many factors, but the main one is the number of manufacturers of the generic,” says Sexton. 

Are generics safe?
One thing that Sexton says patients should know is that in the United States the FDA has a very good track record of keeping people safe. “Drug safety is something we take for granted,” he says and that’s because the drug manufacturing environment is exceptionally well-regulated and safe for patients. We generally don’t have to worry about counterfeit drugs or other similar issues. 

The other thing Sexton would like for more people to be aware of is the fact that people in the United States usually have access to new drugs first. “Sometimes it feels like Americans get stuck with funding research and development with high drug costs, but what we get is access to the latest and greatest,” he says. Just in the last eight years, a cure for hepatitis C was discovered in the United States and it was available to people here first. 

Sexton is very optimistic about the next decade in drug development, as well. The combination of improved disease modeling and artificial intelligence is improving the success rate in labs. “Improved success rates will ultimately reduce the cost of drugs,” says Sexton, “And our success rate is going to go through the roof. We are going to solve a lot of problems that plague humanity and the reason our success rate is increasing is two things, our ability to model disease and AI.”