One piece of good news for consumers is that generic drug prices are falling. However, generic drug prices could drop significantly, leading to drug shortages (which is not a good thing).data from working file Sardines (2023) found that generic drug prices have fallen dramatically in recent years.
The authors claim that generic drug shortages are caused by three main reasons: (i) low profitability, (ii) low quality value, and (iii) complex global supply chains.
No obvious product differentiation or quality tracking [e.g., reputation] Distinguishing product quality differences in the industry, the market competition in the generic drug industry does not have market exclusivity, and mainly focuses on the price dimension.
Price competition is especially fierce due to the control of 3 large PBMs 92% of the US market. Price competition has resulted in most generic drugs being produced outside the United States. According to FDA:
…as of August 2019, 72% of FDA-approved API manufacturing facilities were located outside the United States.A recent 2021 in-depth study revealed that approximately 75% of COVID-19-related drugs, 97% of antibiotics, 92% of antivirals, and 83% of the top 100 most consumed generic drugs did not have an API source from the US
Foreign markets are attractive due to government subsidies, lower labor costs and less regulation. But because the quality is not guaranteed, there are some problems:
- More than 80% of APIs in FDA-regulated essential medicines and more than 90% of top antibiotics and antivirals have no U.S.-made origin
- Less than 5% of the world’s large API plants are located in the US – most of the large manufacturing plants are located in India and China
- India and China have the largest number of API plants supplying the US market, and more than 10% of these plants have received FDA warning letters1
Overall, generic drug makers are not a great business. EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) has declined in recent years. Return on investment has fallen from nearly 10% in 2013 to just 5% in 2023.
With tight profit margins, there is little room to invest in quality. Additionally, compliance with FDA quality standards is declining.
…the percentage of industry resolutions of regulatory issues (i.e., issues resolved to FDA standards) has fallen from one in four warning letter resolutions to one in 20 by 2022…26% of prescriptions nationwide are now being processed . Provided by companies that have received warning letters since 2020.
The author proposes 3 solutions to this problem, you can read here.
