Generic medicines are not usually newsworthy in Australia. They seldom achieve the level of public awareness that they do in the United States where many patients have to pay full cost for their medicines and selection of a generic product may result in a substantial cost saving. Several factors have made generic medicines newsworthy recently. The first and the most obvious is the publicity given to the mandatory (but rather small) 12.5 per cent price cut imposed by the Commonwealth Government on the first generic equivalent of a branded drug that is listed on the Pharmaceutical Benefits Scheme. Generic medicines have also featured heavily in the debate about ‘anti-evergreening’ legislation introduced by the Labor opposition in 2004, prior to the implementation of the US/Australia Free Trade Agreement. More important than either of these is the threat to an important part of the World’s supply of cheap generic versions of drugs for HIV/AIDS, currently made by pharmaceutical manufacturers in India. This essential resource could be lost after changes to Indian patent law mandated by the World Trade Organization in January 2005.
The nature of generic medicines
So what are generic medicines, why are they important, and why are they likely to become increasingly familiar to Australians getting their prescriptions filled at the local pharmacy? Most medicines that become household names are branded products, (eg. Lipitor, Prozac, Viagra). There are some important exceptions to this rule, the most obvious being aspirin (acetyl salicylic acid), which is now used more often to prevent blood clots than to relieve pain and inflammation. Brand name products are almost all produced by major trans-national corporations, and the countries where they are sold provide them with market exclusivity. This is achieved by issuing a patent. In practice, quite a lot of the patent time has been used up by the time the product arrives on the market, and the company, typically, will have 8 to 14 years of unopposed marketing, after which generic manufacturers can legally copy their product.
Generic medicines are cheap copies of original drugs. Mostly, they are not particularly difficult to make. The technology and the processes needed to manufacture any drug are fastidious but not inherently complex. The objective is to produce a palatable tablet or capsule that contains what it says on the label, delivers the drug at the correct rate and amount to the relevant bodily organs in a reliable way, is free of impurities or contaminants and is stable during storage. Prior to marketing, generic drugs are compared with the originator brands to show that they are ‘bio-equivalent’. This means that the profile of concentrations in the blood after swallowing the drug are acceptably close to those generated by the originator. If a company has the correct chemical, of pharmaceutical grade, the appropriate excipients (bulking agents, stabilizers, flavouring, colouring etc.) and a high quality production process, it is not difficult to produce something that is very similar to the original product. In fact, some generic manufacturers will tell you that their products are ‘better’ than the original brands. The pharmaceutical science and production techniques may have improved during the period that the originator brand has been on the market, and there is little incentive for the patent holder to go through the laborious process of updating and re-certifying their pharmaceutical specifications, which may become dated. In developed countries most generic manufacturers are good at producing drugs; it is their core business. There is a trend for some branded medicines manufacturers to outsource their manufacturing to generic producers. So the latter may be manufacturing both the originator brand and their generic equivalent. The main difference will be selling price.
Criticisms of the generics drug industry
Criticisms of the generics industry are common. The research-based manufacturers point out – with justification – that generics don’t have to bear the costs and risks of drug research and development. Patients and doctors frequently voice concerns about generic products, wondering if a switch will lead to loss of efficacy. But these concerns are seldom justified, and the bio-equivalence testing performed in Australia provides considerable assurance as to the quality and substitutability of the generic products. There are occasional failures and batches of drugs are withdrawn (most spectacularly in the case of Pan Pharmaceuticals); but history shows that occasional withdrawals have been necessary for both generic and originator drugs.
Life-savers in developing countries
From an international standpoint generic drugs are extremely important. They are the only way that some countries can afford to supply important therapeutic drugs to their population. The best examples are the potent drugs used in combination to suppress the AIDS virus. Competition from generic manufacturers in India and pressure from lobby groups and NGOs caused the average annual cost of AIDS drugs for an individual to fall from over $US10 000 to around $US300. This is still beyond the reach of people living in low income countries, but it has enabled aid organisations to fund treatment programs in many parts of the world. A major concern, noted earlier, is that Indian generics manufacturers may be barred from making some of these drugs following the passage of the India Patents Act 2005. India previously patented production processes rather than the drugs themselves, but had to become compliant with the rules of the World Trade Organisation in January 2005. An expert group is examining the extent to which patents will be applied to new and existing drugs. If Indian patents are granted to the multinational manufacturers of important AIDS drugs we can only hope that the patent owners quickly license them to the low cost Indian manufacturers to enable the current world-wide treatment campaign to continue.
Developed countries need generic drugs too
In the United States generic drugs are the only means by which many people can afford the drugs they need. This is because generic drugs are priced well below those of the originator brands and remain so through their product cycle. In Australia this is not the case, because of the effects of pricing policies operated by the Pharmaceutical Benefits Scheme (PBS). The PBS relies on a technique known as ‘reference pricing’, which requires that drugs within a defined therapeutically equivalent class should be priced within a small margin of the cheapest product. Once a generic drug in that class comes on the market all other branded products in the class must drop their prices to meet it. This form of price equalisation means that generic products may not be quite so cheap in Australia as in other countries; however, the price reductions required of the originator brands lead to substantial overall savings to the PBS. Developed countries tend to fall into two main groups. One is where generics are much cheaper than branded products even though they have identical effects. In countries like Australia and others that use rigorous reference pricing, all of the products in a class are priced the same. This is ‘value-based pricing’ and is viewed as a market force as it rewards clinical performance rather than other factors such as manufacturing costs or the need to recover development costs. Reference pricing is very unpopular with major research-based manufacturers.
The true marginal costs of manufacture are probably 10 per cent or less of the selling price of many branded products. Companies have to recover their ‘sunk costs’, which represent the large outlay and risk associated with the discovery and development process. These costs are still a subject of debate, but even if they amount to several hundred million dollars, sales of successful products will generate these quickly during the period of marketing exclusivity provided by patents. Furthermore the marketing costs of major companies are about twice what they spend on research and development.
The overall effects of patents on the drug development process are the subject of fierce debate. On one side advocates of rigorous intellectual property protection claim this is essential to encourage ‘innovation’. Opponents argue that the number of truly innovative drugs in the product development pipeline is in sharp decline and companies prefer to extend the patent life of their existing profitable drugs, through legal challenges and minor product variations. This process is known as ‘ever-greening’ and is much more comfortable for companies than facing the uncertainties and costs of developing genuinely new drugs.
But all patents eventually expire and in the next few years generic equivalents of some very profitable products for treatment of heartburn, depression and elevated cholesterol will be available in generic form. The international generics business is competitive and Australia may benefit through access to a broader and much cheaper range of generic products than at present. When this happens it will represent the return of genuine competition to a sector that has been characterised by market failure for many years. Hopefully these market forces will encourage the research-based companies to invest more in what they do best — the discovery and development of genuinely new innovative products for serious diseases.