Chapter 9: Problem 26

Why are generic pharmaceuticals significantly cheaper than name brand ones?

Short Answer

Expert verified

Generic pharmaceuticals are significantly cheaper than name-brand ones primarily due to lower research and development costs, the absence of patent protection, reduced marketing expenses, and government regulations promoting accessibility and affordability of medications. Generic drug manufacturers can rely on the original drug's data and do not have to invest as much in the development process or marketing, resulting in lower production costs.

Step by step solution

Understanding the development process of pharmaceuticals

To explain the price difference, first, we need to understand the developmental process of pharmaceutical drugs. The process has several stages, including research and development (R&D), clinical trials, obtaining necessary approvals, and marketing. Name-brand pharmaceutical companies invest a significant amount of resources and time into the development of a new drug.

Patent protection and exclusivity

After obtaining Food and Drug Administration (FDA) approval, the original inventor of the drug (usually a name-brand pharmaceutical company) is granted a patent. This patent gives the inventor the exclusive right to sell and market the drug for a certain period (usually 20 years from the date of patent filing). During this period, the name-brand drug has no competition in the market, allowing the company to set a higher price to cover their R&D costs, clinical trials, regulatory approval costs, and marketing expenses.

Introduction of generic drugs

Once the patent for the name-brand drug expires, other pharmaceutical companies can produce and sell the same drug, known as a generic version. Generic drug producers don't have to invest as much in the research and development process, as they can rely on the original drug's data to prove the safety and efficacy of the drug. This considerably reduces the production costs for generic drugs.

Lower marketing and advertising costs for generic drugs

Generic drug manufacturers also have lower marketing and advertising expenses compared to the name-brand companies. As a result, they can sell the drugs at a lower price without incurring the high promotional costs that name-brand corporations bear.

Government policies and regulations

To ensure affordability and accessibility of medicines, many governments and health organizations promote the use of generic drugs. Some governments have price control mechanisms in place to keep the prices of generic drugs low. In conclusion, the price difference between generic pharmaceuticals and name-brand ones is primarily due to the high research and development costs, patent protection, marketing expenses, and government regulations. Generic drugs are cheaper because they don't have to cover the high R&D costs, have lower marketing expenses, and are subject to governmental policies promoting the accessibility and affordability of medications.