Options to Promote Competitive Generics Markets in the United States.

In August, the price of the 62-year-old drug pyrimethamine (Daraprim), used to treat many potentially fatal parasitic infections, was increased practically overnight from$14 to$750per tablet. This colossal increase attracted renewed attention to generic pharmaceutical price spikes, prompting public outrage and a new round of proposals to address this issue. Over the past few years, increasing drug shortages and price spikes haveaffectedgenericdrugs,whichnowaccount for86% of prescriptions and 29%of pharmaceutical spending.1 A stable supplyof affordablegenericpharmaceuticals is crucial to improve health care access and appropriate utilization for many Americans. A 2014 report from the US Government AccountabilityOffice foundthat thenumberofactivedrugshortages increasedsteadily from154 in2007to456 in2012, and the majority of the affected drugs were generic.2 According to a recent Senate subcommittee investigation,manygenericdrugspriceshave increasedsubstantially asproducershave left themarket; forexample, the price of albuterol sulfate tablets, used for asthma and other lung diseases, increased 4014% between October 2013 and April 2014 from $11 to $434.3 These generic drug shortages and price spikes are adverse outcomes of a malfunctioningmarketplace. Two features of the US generic drug market make itmore prone to price swings and shortages than other commodity markets. First, entry into the generic drug market is restricted, including financial barriers (thecost of product formulation, quality assurance, and bioequivalence testing) and a time barrier due to the need forabbreviatedclinical testingandtheuncertaintyof the AbbreviatedNewDrugApplication(ANDA)reviewcycle. Second, again in contrast to more efficient commodity markets, there are barriers to the substitution of other products for a given generic drugmolecule. Theeconomicsof thegenericdrugmarketaredriven by theopportunity for 180daysofmarketexclusivity for the first generic product on the market. These products are available at prices only slightly reduced from those of the originator products. Generic manufacturers may enter themarket after 180 days in the hope of a substantial financial return in the short period of time before thepriceof theproductdeclines.Firms takeacalculated risk in financing bioequivalence studies and in entering the marketplace without knowing how many competitors will enter the market nor how quickly the priceof theproductwill decline.Asother firmsenter the market and the price of a product approaches its marginal cost, the incentive to remainasupplierdiminishes.4 At that time, firmsmakedecisionsaboutexiting themarket without knowledge of the actions of other firms. Eventually, exit of enough firms supplying a particular product can lead to substantial price increasesas the remaining firms operate with little competition, or drug shortages if remaining firms lack the capacity to supply theentiremarket.Thesearethedrugshortagesandprice increases observed by Congress. Recently, Hillary Clinton unveiled a policy proposal thatwouldrequiresomepharmaceuticalcompaniestoreinvest revenue into research and development. Similarly, Senator Bernie Sanders has proposed several policies to address the pharmaceutical market, including a windfall profits tax and price negotiations directly between the US Department of Health and Human Servicesandmanufacturers.Althoughwell intentioned,these policies donot address the underlyingmarket imperfections, and they risk exacerbating price spikes and shortages by further decreasing incentives for pharmaceutical companies to enter or stay in the genericsmarket.