The Hatch-Waxman Act of 1984 changed the process by which generic drugs receive FDA approval by allowing generic companies to submit Abbreviated New Drug Applications (ANDAs) to the FDA. Under the ANDA process, generic manufacturers must show that their product is bioequivalent to the branded drug, but are not required to replicate the safety and efficacy clinical trial data submitted by the branded drug manufacturer as part of the original New Drug Application (NDA). Generic companies are also allowed to conduct their development work prior to patent expiration. These provisions have reduced significantly the cost and development time associated with the launch of generic products.
The Hatch-Waxman Act in combination with changes to state generic substitution laws—laws that now allow or mandate pharmacists to fill prescriptions with generic versions of drugs when available—significantly increased generic competition. Cornerstone Research’s analysis of a sample of non-hospital branded drugs that experienced generic entry between January 1992 and December 2002 shows that, on average, sixteen generic competitors enter within three years after initial generic entry. As more generic competitors enter the market, generic prices fall and the share of prescriptions filled with the generic version of the drug increases. For branded drugs with annual sales over $500 million, generics offered on average a 65 percent wholesale price discount and a 38 percent retail price discount twelve months after entry (Figure 1). For these same drugs, 83 percent of prescriptions were filled with a generic version twelve months after initial generic entry (Figure 2). Recent generic entry for blockbuster drugs such as Pravachol, Zoloft, and Allegra suggests that the share of prescriptions filled with generic versions has increased even more rapidly in recent years, reaching rates over 80 percent two months after generic entry.
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Generic competition also affects brand promotion and rebating behavior. Branded drug manufacturers often choose to decrease promotion of their products (including the distribution of free samples) after generic entry because most sales resulting from such promotion will likely go to generic drug manufacturers. Decreased promotion often leads to a decline in total quantities sold of the drug (both brand and generic). Branded drug manufacturers may also reduce the rebates they pay to third-party payors and pharmacy benefit managers, which in combination with reductions in free samples can sometimes lead to an increase in the effective price of the brand.