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Generic drugs make up about 88 percent of prescriptions filled in the United States, providing generally low-cost relief for the overwhelming majority of Americans who are presently afflicted with a variety of health-related maladies. A 2015 study published in the Journal of the American Medical Association found that among American adults 20 years and older, 59 percent take at least one prescription drug. Yet, since 2010, the prices of 315 generic drugs had seen extraordinary price increases of “at least 100 percent,” according to a U.S. Government Accountability Office (GAO) report from September 2016. 

The GAO report also notes that “drugs with extraordinary prices increases moderated the overall decline in generic drug prices.” In fact, generic drug prices declined 59 percent from the first quarter of 2010 through the second quarter of 2015. In other words, the impact of these extraordinary price increases was mitigated by the fact that the vast majority of the drugs that experienced these extraordinary price increases did not appear among the 100 most commonly used generic drugs under Medicare Part D.

Since 2012, the Food and Drug Administration’s Office of Generic Drug Review has benefited from the passage of the Generic Drug User Fee Act. A common criticism is that such exorbitant fees for generic drug manufacturers has led to such dramatic increases in generic drug prices.

As part of its review, the GAO interviewed five generic manufacturers, including larger manufacturers Mylan, Sandoz, and Teva, as well smaller manufacturers G&W Laboratories, and Nephron Pharmaceuticals, to solicit their views. The general response from these generic pharmaceutical manufacturers was that competition is the major factor in generic drug pricing. In other words, company pricing is dependent on the price and availability of the identical drug established by their competitors. Academic research has corroborated that every time a new generic pharmaceutical enters the market, drug prices drop significantly, leading to significant savings for consumers.

The GAO also found that generic drug prices could be affected by supply disruptions to active pharmaceutical ingredients, production difficulties, consolidation among suppliers and buyers, and a backlog of new generic drug applications awaiting FDA review. Nowhere, however, does the GAO mention the “exorbitant fees” assessed by the FDA as a potential factor in the dramatic price increases listed by the surveyed generic drug manufacturers.

Since the enactment of the Generic Drug User Fee Amendments (GDUFA) in 2012, the FDA has received pharmaceutical industry user fees which now account for 58 percent of the annual budget for the Office of Generic Drugs (OGD). For calendar year 2016, the FDA approved the highest number of drug approvals and tentative approvals in the history of the program. Also, for the fastest 5 percent of generic drugs approved, the median approval process time has declined to under 15 months for FY2015 — a staggering decline from the 42 to 44 month median approval time prior to passage of the GDUFA.

This approval time is still not at the level of new drug approvals, which are more complex and take only 10 months to review. The good news is that under the next iteration of GDUFA in 2018, the median standard review time for abbreviated new drug approvals will be 10 months from submission, while priority review will be eight months from submission. This will effectively eliminate any “backlog” of new generic drug applications awaiting FDA review. It is also strong evidence of the success of user fees in getting many essential generic drugs safely to the American consumer.

But the generic pharmaceutical industry needs to step up to embrace increased competition, too. As RBC Capital Markets noted in a study last fall, the generic pharmaceutical industry had only 23 “innovator” drugs, i.e., generic drugs that can introduce competition against an established brand, pending at the OGD. The bottom line? There are no significant regulatory barriers preventing a generic pharmaceutical manufacturer from bringing increased competition to the generic marketplace.

More disturbing, however, is that RBC found that there are 125 additional “innovator” drugs with no approved generics and no abbreviated new drug approvals submitted to the FDA. And this despite that the FDA announced in the spring of 2016 that it would prioritize the review of generic applications for certain off-patent “sole source” prescription drugs with only one manufacturer — precisely to increase competition and lower costs in the generic pharmaceutical marketplace. More recently, the new FDA Commissioner, Scott Gottlieb, announced that his agency would change the generic drug approval process with a focus on further lowering consumer prices.

Another public policy concern involves so-called “pay-to-delay” agreements between brand name pharmaceutical companies and generic pharmaceutical manufacturers. A 2013 Supreme Court decision rendered these agreements to restrict generic competition from recently non-patented drugs potentially subject to antitrust reviews. And subsequent court decisions have narrowed the use of such agreements. The FTC estimates that “pay-to-delay” agreements cost American consumers approximately $3.5 billion annually in increased health care costs. Meanwhile, the FTC has been vigorously pursuing antitrust litigation against pharmaceutical companies who use “pay-for-delay” agreements with generic pharmaceutical companies, including litigation initiated last year against Endo Pharmaceuticals Plc, Allergan Plc, and Impax Laboratories.

With the FDA’s OGD well on its way to reaching a reasonable time frame for generic drug approvals, the responsibility for improving price competition rests with a generic pharmaceutical industry. Since the 2013 Supreme Court decision, there has been a significant decrease in “pay-to-delay” agreements initiated by brand pharmaceutical companies. But the FTC should focus its resources on continuing to monitor the pharmaceutical industry for such antitrust violations in the off-patent, generic drug marketplace.

An increasingly effective FDA regulatory approval process, coupled with a vigilant enforcement effort on the part of the FTC, will mean more competition and lower healthcare costs for the American consumer.

Thomas A. Hemphill a professor of strategy, innovation and public policy in the School of Management, University of Michigan-Flint, and policy advisor at the Heartland Institute, Chicago, Il.

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