EC US Pharmaceuticals: A Bifurcated Market

The US pharmaceutical industry faces two important goals–which conflict with each other. One goal is to provide needed drugs at the lowest possible price. The other is to provide incentives for research and development of new drugs, which requires some form of compensation for the risks of undertaking such efforts. The US patent system allows inventors to have a temporary monopoly on their discovery, so that they can charge higher prices for a time. After the patent expires, it then becomes legal for others to produce generic equivalents. The result is a two-part market for US pharmaceuticals: expensive drugs still under patent and inexpensive generic drugs.

William S. Comanor layout some of the patterns in his essay, “Why Are (Some) U.S. Drug Prices So High?” which is subtitled, “The Hatch–Waxman Act promotes both pharmaceutical innovation and price competition, confounding simple comparisons of U.S. and foreign drug prices” (Regulation, Winter 2021/2022).

Here’s a table showing how the US pharmaceutical industry has evolved. Notice that about 90% of dispensed prescriptions are generics, accounting for about 20% of total invoice spending, while 10% of prescriptions are branded drugs, accounting for 80% of invoice spending.

Regulation - v44n4 - Article 2 - Table 1

A common complaint about the US pharma industry is that brand-name drugs sell for more in the United States than in other countries, which often impose price controls and other rules on drugs from US firms. What is less-heard is that prices for generic drugs are typically lower in the United States. Here’s a comparison from Comanor. When adjusted for manufacturer discounts (“net pricing correction”), branded drugs cost about twice as much in the US as in Japan, Germany, and the UK. However, generic drugs in the US cost about one-third less than Germany and the UK, and less than half as much as in Japan.

Regulation - v44n4 - Article 2 - Table 3

The bifurcated US approach to pharmaceuticals has led to the global dominance of US drug companies. Comanor reports:

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