Pharmaceutical companies get a bad rep, even perceived as “evil” in some people’s eyes. Terms like “Big Pharma” have rocked the media while corruption and lawsuits have run rampant throughout the industry. But is this different from any other industry? You can find corruption in every industry if you look, however, it is more heartbreaking in this industry since corruption can literally translate to life or death for patients. Nevertheless, there are a lot of brilliant people with good intentions working on medicines that will ultimately save lives.
Within the pharma industry there are brand manufacturers and there are generic manufacturers. These two companies, while they share some common ground, for the most part have completely different experiences and challenges. Let’s take a look at the differences between them so that you can better understand the role generic manufacturers play in this industry and why we could start to lose them at an increasing rate.
Brand Manufacturers
Brand drug manufacturers are the innovators within the industry. They are the ones that do the research and development and invest on average 2.6 billion dollars to bring a new drug to market. There are several phases to bring a new drug to market, including clinical trials, and it can take 10 years to get FDA approval and start distribution. Once the drug is to market, or soon to be, the biggest challenge is getting doctors to write prescriptions for it and patients to ask about it. Huge costs then get dumped into sales and marketing to create the demand for the drug.
Additionally, drug patents are typically good for 20 years from filing, however, it might take 10 years to get it to market and then they have exclusivity for the remaining 10 years. The purpose of this is to give them an opportunity to get a return on their investment and ultimately create a profit for the company. Since they are the only one who supplies this drug during that time period they have a lot of leverage (assuming they have created the demand for the drug) to set the price and negotiate favorable contracts with customers. Sometimes these prices are very high and patients cannot afford to get the medications they need, which in some cases is life-threatening.
Once a brand drug loses exclusivity the sales plummet for the brand companies as generic versions of the product come to market. Brand manufacturers will often create a modified version and file for an extension on the exclusivity to maintain profitability.
Generic Manufacturers
Generic drug manufacturers do not innovate new drugs. By definition, they create a generic version of a brand drug, which takes less money and less time than creating a brand new drug. They research the marketplace and look for brand drugs that are losing exclusivity and have good script volume. They estimate which ones are best for their company to create a generic for and start the process. What most do not know is that there are strict FDA guidelines that require the generic to have the same exact active ingredients and strengths as the brand. The active ingredients in a drug are referred to as API (Active Product Ingredients) and there are typically only 1-2 active ingredients in a drug, the rest are fillers.
Generic drugs are run through testing and trials to ensure that they have the same quality, dosage, strength, and effectiveness as the corresponding brand drug before receiving FDA approval and being made available to patients. Once they are on the market they cost much less than the corresponding brand and make drugs much more accessible to patients.
Increasing Pressure and Decreasing Profit on Generic Manufacturers
What most people outside of the pharma industry do not know is that the generic manufacturers do not make huge profits like most brand companies. In the generic world, competition is fierce and profit margins are small. If there are multiple companies making the same generic they split that pie since they do not really have a competitive advantage. By nature a generic is a commodity, one generic is no better than the other generic and distributors and patients do not ask for generic companies by name. However, if you are the sole generic manufacturer of a drug, then you do gain some leverage. Although most generic drugs typically have 2-3 generic manufacturers making them.
In the pharma industry there are 3 main wholesalers that represent 90% or more of the distribution. This means that if you want to survive you have to do business with 1,2, or all 3 of these giant wholesalers. Since the wholesalers are very large they typically dictate the terms and conditions regarding failure to supply penalties and payment terms. The industry also has very complex financial transactions that include rebates, discounts, admin fees, chargebacks, and government reporting. Sometimes the payment terms are setup in a way where the manufacturer actually ends up owing their customer money on paper since they are not being paid for 60, 90, or even 120 days after invoicing and supplying product.
On top of all that, there are additional FDA fees, DEA inspections, expensive software and infrastructure, and contract deals that in some extreme cases might result in a profit of $1 per bottle. To make it worse, the middle men like distributors, PBM’s, and pharmacies are marking up the drugs as they pass through the drug supply chain. As a result, the patient sees a high price. All of these costs combined are making it more and more difficult for generic manufacturers to be profitable and ultimately could force them to close up shop.
A World Without Generic Drugs
When was the last time you went to the pharmacy and requested a brand drug? If you’re like most the answer is never. I cringe when I go to the pharmacy to pick up a prescription because I’m afraid they will tell me there is no generic and only a brand, which will cost me $100 instead of $5 for the generic. Some brand drugs actually can cost $1,000’s per month like Insulin and other drugs. Most health insurance drug plans don’t even cover brand drugs, and sometimes they don’t even cover the generic. It is becoming more and more costly for patients to get the drugs they need and depend on. In some cases, patients flat out cannot afford the medications they need, which puts their health at risk and in some cases takes their life.
The more the generic manufacturers get squeezed on pricing and fees, the more likely they are to go out of business. Right now, 90% of prescriptions are filled with generic drugs. As generic manufacturers shut down, it will create a shortage of generic drugs and patients will be forced to buy the brand if they can afford it or worse stop taking the medication because they do not have enough money. This will create a catastrophic impact within the healthcare and pharma industries and, ultimately, we will all suffer.
Keeping Generic Drugs Alive
We need generic drugs in the marketplace as an alternative to the high-priced brand drugs. However, if generic manufacturers continue to get squeezed with additional fees, price deflation, expensive software systems, and poor payment terms they will not be able to remain profitable and will be forced to shut down. This will create a shortage of needed generic drugs in the market and patients will be forced to the higher priced brand drug. Ultimately, they will suffer both financially and medically.
At MDH Insight, Inc. our goal is to leverage technology to help pharmaceutical manufacturers become more profitable and keep generic manufacturers alive. EmpowerRM is our innovative cloud-based revenue management software specifically designed for pharmaceutical manufacturers to handle contract management and chargeback processing, while increasing profits and efficiency. Designed from the ground up by industry experts, our system is built to streamline your operations, mitigate risks, and eliminate issues that commonly occur. We do this through AI, predictive analytics, and seamless integrations with ERP systems. As a result, you and your staff can focus on what is most important – growing your business.