The Role of Generic Medications in Lowering Rx Costs

Top 3 Things You’ll Learn

  1. The differences between brand and generic medications
  2. How market competition impacts the entry-level drug pricing
  3. How inconsistent entry pricing of new generics leads to higher net costs for plan sponsors

In the 1990s, new technology made it possible for drug manufacturers to more easily replicate drugs. This meant that multiple manufacturers could produce the same drug and compete for market share. Meanwhile brand-name drug manufacturers were racing to the market with their new products in record numbers. The stage was set for a new era in prescription drug management, as the battle of the brands versus generics began.

The Economic Value of Generic Drugs

Generic drugs, which are a copy of a patented brand-name drug’s novel chemical substance, are comparable in dosage form, strength, route of administration, quality, performance, and intended use. While branded medications go through extensive clinical trials and an extensive Food and Drug Administration (FDA) review and approval process, generic drug developers face a less strenuous and less expensive process through the FDA’s Abbreviated New Drug Application. Generally, generics are a good value compared to the brand-name alternative. In fact, in 2020, generic drugs made up 87% of pharmacy claims and only 13% of overall pharmacy spend, compared non-specialty, brand-name medications comprising just 13% of claims and 38% of overall pharmacy spend. However, there are some instances when this is not always the case.

The FDA reviews and approves a wide range of new drugs each year, and among those are the occasional “first generics.” This term refers to a drug’s first generic approval, which comes with an important benefit: the generic manufacturer is allowed to market the drug in the United States for an exclusive period of time. This exclusivity means the drug maker enjoys several months of no marketplace competition as the one and only manufacturer, and results in the manufacturer demanding a high price until the exclusivity period ends and generic drug competitors enter the market. In these instances, the generic drug may cost close to, or as much as, its brand drug counterpart.

People expect that when a generic drug becomes available, prices will drop, but this is not always the case. Achieving the lowest net cost of any individual medication involves understanding key market dynamics, including the FDA approval process, brand marketing strategies, and entry-level generic price-points.

Generics’ Role in Lowering Prescription Drug Plan Costs

Recently the RxBenefits clinical team tracked the 2018-2020 prices and average pharmacy plan costs of five commonly dispensed non-specialty brand drugs that had a generic alternative approved between late 2019 and early 2020. The analysis revealed that the AWP of those five drugs increased an average of 10% in aggregate. However, with a competitive PBO pricing and rebates contract in place, the net cost of those same five drugs decreased by an average of 33%.

An interesting point is that the number of generic drugs approved for each brand ranged from 1 to 14.  The net price of the generic entity at release date varied greatly, ranging from 68% below the brand cost to 452% over the brand cost, showing no correlation between generic launch price and the brand price. However, there was an inverse relationship between generic prices to the number of manufacturers allowed to market the generic. The generics released by only one manufacturer, i.e. a single-source generic, were priced higher than those approved with multiple manufacturers. As generic manufacturers lost that exclusivity and competitors entered the market, the generic drug prices decreased.

Consider the two examples in the graph below. Pregabalin (generic Lyrica®) entered the market in the third quarter of 2019 with multiple manufacturers, while febuxostat (generic Uloric®) launched with just two authorized manufacturers. An RxBenefits data analysis shows that pharmacy plan sponsors realized immediate savings with pregabalin’s launch, while the launch of febuxostat did not deliver similar results.

The Bottom Line

While generic drugs have the potential to offer cost savings to plan sponsors, the initial market launch of a generic does not automatically mean immediate relief. Consideration must be given to contract pricing and rebate terms along with member cost share to determine the plan’s true cost. As more generic options are introduced to the market and AWP goes down, then plan sponsors should expect to see the expected generic savings.

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