Chapter 9: Problem 26

Why are generic pharmaceuticals significantly cheaper than name brand ones?

Short Answer

Expert verified

The price difference between generic and name-brand pharmaceuticals can be attributed to the initial research and development costs, marketing expenses, and market competition. Name-brand pharmaceuticals require significant investments in research and development as well as marketing. When a drug's patent expires, generic manufacturers can enter the market without bearing these costs, leading to lower prices for generic drugs. Increased competition among generic manufacturers further drives down the prices, making them more affordable for patients and healthcare providers.

Step by step solution

Understand the difference between generic and name brand pharmaceuticals

A name-brand pharmaceutical refers to a drug that is originally developed and marketed by a pharmaceutical company under a specific brand name. On the other hand, generic pharmaceuticals are the drugs manufactured after the patent expires for the original drug. Both name brand and generic drugs are required to meet the same standards for efficacy, safety, and quality. However, there are some differences that contribute to the price gap between them.

Initial Research and Development costs

Developing a new drug involves a significant investment in terms of time and money. Pharmaceutical companies have to spend billions in research and development for creating and testing new drugs before they reach the market. These costs include laboratory experiments, clinical trials, safety assessments, and the lengthy process of approval from regulatory bodies. So, when a company introduces a new medication in the market, it receives a patent that provides them exclusive rights to sell the drug for a certain period, typically for 20 years. This allows them to set higher prices that help them recoup their initial development costs.

Absence of Research and Development cost for generic drugs

Generic drugs enter the market after the patent for the original drug expires. Since generic manufacturers do not have to bear the cost of developing and testing the drug, they are able to produce the medication at a significantly lower cost than the original manufacturer. This, in turn, results in lower prices for generic pharmaceuticals.

Marketing and Advertising Costs

Name brand pharmaceutical companies invest substantial amounts in marketing and advertising their drugs, including promotions, sales representatives, and physician-focused campaigns. These marketing expenses add up to the final cost of the branded drug that consumers pay. Generic drug manufacturers, on the other hand, do not have to incur these marketing costs, which help them offer the medications at a lower price.

Competition in the market

Once a drug's patent expires, multiple generic manufacturers are allowed to enter the market and produce their generic versions. The increased competition in the market leads to lower prices for consumers, as these companies try to grab a larger share of the market by offering their products at a competitive price.

Conclusion

The significant price difference between generic and name brand pharmaceuticals can be attributed to various factors such as initial research and development costs, marketing expenses, and competition in the market. While both types of drugs maintain the same standards of safety and efficacy, the lower cost of generic drugs makes them an affordable option for patients and healthcare providers.

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