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Drug Prices

Generics Get Cheaper, As They Should

Here’s a useful perspective from Alex Tabarrok at Marginal Revolution: several recent studies have concluded that, over the last several years, generic drug prices as a whole have continued to decrease. That’s how it’s supposed to be: all those prescription drugs whose prices seem ridiculous are (eventually) doomed. They’ll go generic, and the price will come down, and in most cases it’ll continue to go down even more.

I don’t think that the general public appreciates this, in general or in these particular data sets.  A lot of people (including some with loud, passionate opinions on drug prices) don’t actually know the difference between a patent-protected drug and a generic one, or are at best rather hazy on it. It’s outside the normal range of experience, as a consumer. People are used to prices coming down on (say) electronics, but that’s rarely (if ever) because of patent expirations. And as discussed here the other day, the other goods that people typically pay for that are protected by intellectual property law are under copyright, which never seems to let up. So compared to what people are used to, pharmaceuticals are in a rather weird category.

I run into people who aren’t aware that drug patents ever expire at all; they think that inventing a new drug is just a perpetual fountain of money. But it isn’t. Patents go away, even on big multibillion-selling pills, even though their sellers surely very much wish that there were some way that it wouldn’t happen. And they go generic, and become cheap. The Valeants and Shkrelis of the world are trying to change this, which is a terrible idea.

9 comments on “Generics Get Cheaper, As They Should”

  1. cirby says:

    I always enjoy pointing out that a lot of those Big Evil Profitable Pharmas don’t actually make a lot of money, overall.

    “What do you mean, Whole Foods makes a higher profit per dollar of sales than BEPP? That’s unpossible!”

    1. M says:

      How are you calculating this? Top line numbers for the first two I checked are Whole Foods has net profits of 500 million of 15 billion sales (~3%) and Pfizer has 7 billion on 50 billion (~15%).

      In general I would expect pharma to have relatively high profits given the uncertainty and long lead times before investments pay off.

      1. cirby says:

        It’s according to which pharma you pick. Pfizer does pretty well compared to a lot of them.

        1. M says:

          Throwing in BMS, Abbvie, Amgen, Novartis, Sanofi and Glaxo and I’m still getting a range well above Whole Foods’ 3%. BMS is the worst of the bunch at seven percent last year, most of the rest are in the 15-20% range.

          This is pretty consistent with http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/margin.html, which has the industry wide margin at 18%, vs 2% for groceries.

          Unless there’s some other interesting metric you’re using, I don’t think the claim is the sort of thing I can use.

  2. Gretchen Becker says:

    Insulin is becoming very expensive, except for two kinds sold at Walmart, NPH and R. What some manufacturers do is stop producing the cheaper insulins like Lilly’s UL (ultralente) when they design a more expensive one, thus forcing patients to buy the expensive stuff.

    So far, there are no biosimilars.

  3. Andy says:

    To Gretchen’s comment on insulin, there’s a good article written by a physician in the NYTimes on that topic over the weekend:

    http://www.nytimes.com/2016/02/21/opinion/sunday/break-up-the-insulin-racket.html

    Commentary therein, about the financial shell games played by the pharmacy benefit managers (P.B.M.s) was also enlightening. These middlemen seem to be very much a part of the equation, but I haven’t seen too much discussion of them In the Pipeline.

    “The hitch is that the biggest P.B.M.s are out to make a buck. They get “rebates” from drug manufacturers — payments based on sales or other criteria, which look suspiciously similar to kickbacks. The rebates are not publicly disclosed, but they are sizable. Industry analysts estimate that those payments, and other back-room deals, amount to as much as 50 percent of the list price of insulin.”

  4. JAB says:

    @cirby: Grocery profitability, even in the whole foods market, is very slim – a couple of percent is about all they get. So, no, pharmaceuticals are more profitable than groceries.

    1. sort_of_knowledgable says:

      Margins between price of goods sold and price of production is lower for groceries than pharmaceuticals. Whether the margin for the is lower when including overhead of drug development is another matter.

  5. J. Peterson says:

    The whole 3D printing craze took off several years ago because the basic patents on fused deposition modelling expired. $20,000 industrial equipment became a $500 hobbyist accessory.

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