Current Events Pharmaceuticals

Do generic drugs cost too little?

Much of my blog discusses the value of new, innovative treatments.  In the current patent environment, drug patents expire and low cost generics enter the market.  This results in huge surplus value accruing to consumers.  However, those benefits only occur if the supply of effective, low-cost generic medication reach patients.  Unfortunately, that is not always the case.

As The Economist reports:

“Over the past three years, the number of medicines in short supply in America has increased by half, to more than 280…In France, medication shortages increased 20 fold between 2008 and 2018…One in five pharmacists in America and one third in Europe say they know of medication errors linked to drug shortages.”

Part of the reason for this is that the margins for generics are so slim.  This means that typically only a few firms will manufacture a generic and if there are supply issues, there is no slack in the system. Further, the Economist claims that some generic drug makers may not invest sufficiently in factory upgrades due to the thin margins.  Further, much of the generic manufacturing process has been outsourced to China and India, with potentially lower quality standards then elsewhere.   A lack of slack in the system also makes shortages prone to natural disasters.  Two hurricanes in Puerto Rico caused damage to a cluster of factories such that 11 of the top 20 most popular drugs were in short supply. 

Low-cost generic drugs provide enormous benefits to patients and the health care system.  Let’s insure a fair pricing system to make sure patient access to these medicines is not threatened.