Generic drugs can save patients and insurance companies substantial costs.
The principal reason for the relatively low price of generic medicines is that competition increases among producers when drugs no longer are protected by patents.
Companies incur fewer costs in creating the generic drug, and are therefore able to maintain profitability at a lower cost to consumers.
The costs of these generic drugs are so low that many developing countries can easily afford them. For example, Thailand has imported millions of doses of a generic version of the blood-thinning drug Plavix (used to help prevent heart attacks), at a cost of 3 US cents per dose from India, the leading manufacturer of generic drugs.
Generic manufacturers do not incur the cost of drug discovery, and instead are able to reverse-engineer known drug compounds to allow them to manufacture bioequivalent versions.
Generic manufacturers also do not bear the burden of proving the safety and efficacy of the drugs through clinical trials, since these trials have already been conducted by the brand name company.
It has been estimated that the average cost to brand-name drug companies of discovering and testing a new innovative drug (with a new chemical entity) may be as much as $800 million.
However that figure is disputed in Merril Goozner's book the $800 Million Dollar Pill. Goozner estimates that the true cost of bringing a new drug to market is closer to $100–$200 million
Generic drug companies may also receive the benefit of the previous marketing efforts of the brand-name drug company, including media advertising, presentations by drug representatives, and distribution of free samples.
Many of the drugs introduced by generic manufacturers have already been on the market for a decade or more, and may already be well-known to patients and providers (although often under their branded name).
For as long as a drug patent lasts, a brand name company enjoys a period of “market exclusivity” or monopoly, in which the company is able to set the price of the drug at a level which maximizes profitability.
This price often greatly exceeds the production costs of the drug, which can enable the drug company to make a significant profit on their investment in research and development, thus enabling them to fund the research and development of new medicines which most generic companies cannot afford to do.
The advantage of generic drugs to consumers comes in the introduction of competition, which prevents any single company from dictating the overall market price of the drug.
Competition is also seen between generic and name-brand drugs with similar therapeutic uses when physicians or health plans adopt policies of preferentially prescribing generic drugs as in step therapy.
With multiple firms producing the generic version of a drug the profit-maximizing price generally falls to the ongoing cost of producing the drug, which is usually much lower than the monopoly price.
Further Reading
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