As the FDA looks to boost generic competition, a new working paper published by the National Bureau of Economic Research (NBER) suggests that competition among generic drugmakers slows over time, potentially leading to higher prices for older treatments and drug shortages. The analysis authored by Ernst Berndt and Stephen Murphy of the Massachusetts Institute of Technology, and Rena Conti from the University of Chicago, reveals that generic drug prices have risen by a statistically significant margin over time as the rate of new entrants to the market has slowed and the number of firms competing for individual drugs has fallen over time. After 2007, the authors say the median number of competitors for an individual generic dropped from between two and three to just two through 2016, with 40% of generics being made by a sole manufacturer.
Implications of the Research
The findings of this paper have several implications. First, the research indicates that the generic drug markets in the U.S. are supplied by monopolists. Some therapeutic classes and molecule formulations appear to be long characterized by this market structure. With such limited suppliers of generic drugs observed over the study’s time frame and high levels of concentration, the researchers wonder why prices of generic drugs and associated revenues have not risen more dramatically over the time they have observed.
Another implication of the paper’s findings is that while the Waxman-Hatch Act is founded on the assumption of the desirability of establishing competition through lowering initial entry costs, less policy focus has been placed on the long-term maintenance of competition in generic prescription drug markets. Over time, several forces may act to erode the latter. Alleged anticompetitive activities among generic manufacturers and between generic and branded firms include raising entry barriers by, for example, “pay for delay” agreements. The paper’s evidence suggests that federal policies in pursuit of worthy goals, including ACA and GDUFA I, might have inadvertently eroded generic competition through increased user fees that increased entry barriers and incentives to exit.
Future Research
The paper’s authors note their results are preliminary and their limitations suggest potentially fruitful areas for future research. One such area involves further analyzing of manufacturer “type” by identifying annual revenue, country of incorporation, year of incorporation, organizational structure, and the existence and timing of mergers and acquisitions among manufacturers using the databases on companies registered in the U.S. This could provide information on the roles of consolidations and merger and acquisitions on measures of concentration, and ultimately on price levels, price changes and revenues.
Finally, future research might explore use of semi-structural and structural models to relate cross-sectional and dynamic market structure to observed pricing and revenue trends among generic drugs under conditions of imperfect competition. To circumvent issues of endogeneity, one could limit the sample to triopolies, and examine the price and aggregate output effects of exits that result in a duopoly, or entrants that result in a four-firm market.