How Safe is Too Safe?
President Trump mentioned cheaper pharmaceutical drug prices during his State of the Union.
It's not just pharmaceutical companies that cause the high prices. Government regulations favor companies that create drugs over competitors who have figured out how to make the same concoction for a fraction of the price.
Everyone wants safe drugs, and the FDA has a system for approval. But it too favors the original patent holders. In the meantime, everyone suffers because the supply/demand cycle is thwarted.
Scott Gottlieb, an accomplished doctor and a scholar, wrote a 2016 article explaining why drug prices are so high. Gottlieb is now Trump's FDA commissioner. Maybe if the man at the helm has any say, the regulatory process will be streamlined, and everyone will benefit from greater access to right-priced drugs.
The modern generic-drug industry emerged after the 1984 Drug Price Competition and Patent Term Restoration Act, better known as Hatch-Waxman. The law created a cheaper and faster path for bringing generic copies of branded drugs to the market. By keeping regulatory barriers low, Hatch-Waxman enabled vigorous competition from multiple firms, each one vying to sell drugs for close to the cost of manufacturing.
Yet in recent years the Food and Drug Administration has imposed on generic firms many of the same costly requirements that the agency applies to branded-drug makers. For example, in a push to reduce the risk of contamination, the agency in 2009 forced generic-drug makers to retool their sterile manufacturing plants and make production lines less intricate. The abruptness of the change caused many facilities to be shut down, creating drug shortages and driving up prices.
The complexity and cost of completing a generic-drug application has also grown enormously. In 2003, when I began working at the FDA, we estimated that it cost less than $1 million for a firm to file a generic-drug application. A drug would have to fetch about $10 million in annual revenue before it would be subject to generic competition. Today, filing a generic application requires an average of about $5 million and can cost as much as $15 million. This means that a drug may not face brisk generic competition until it exceeds $25 million in annual revenue. Thanks to these changes, infrequently used generics—such as clomipramine for major depression—may now have only one competitor and cost as much as branded drugs.
The FDA recently committed to review new generic-drug applications in a 15-month cycle, an improvement over a median of more than two years for applications submitted in 2013. For generics filed in 2009, the median review time exceeds three years. Yet generics launched in 2015 took about four years for the FDA to approve, since less than 2% of applications were approved on their first submission. The agency has committed to improve first-cycle approvals, but it still rejects most applications before demanding resubmissions, further stymieing competition.
The key to the generic-drug economic model is to keep entry prices low enough to attract multiple competitors. One FDA study estimated that consumers pay 94% of the branded drug’s price for a generic if there is only one generic entrant. But the price falls to about 40% if there are four competitors, and 20% when there are eight.
Yet of the more than 1,300 branded drugs on the market, about 10% have seen patents expire but still face zero generic competition, according to the Department of Health and Human Services. New regulations have, in many cases, made it no longer economically viable for more than one generic firm to enter the market.
The FDA should prioritize applications for generic categories where competitors are exiting. Companies that pursue copies of “abandoned” generics could receive a voucher that gives them expedited review of another generic drug. The value of this voucher would give firms more incentive to market copies of low-volume generics.