Drugs and Money - Prices, Affordability and Cost Containment
(2003; 158 pages) View the PDF document
Table of Contents
View the documentIntroduction
Open this folder and view contentsPart I: Problems and approaches to a solution
Close this folderPart II: Selected experiences with policy options
View the documentChapter 6: Measures relating to use of drug subsidy lists and to regulation
View the documentChapter 7: Experiences with budgets
View the documentChapter 8: Experiences with reference pricing
View the documentChapter 9: Experiences with patient charges
View the documentChapter 10: Switching to non-prescription status
View the documentChapter 11: Experiences with generics
View the documentChapter 12: Experiences with pharmacy benefit management programmes in the USA
View the documentChapter 13: Experiences with professional education
View the documentChapter 14: Providing affordable medicines in transitional countries
View the documentChapter 15: Access to medicines in low-income countries
View the documentList of Contributors
View the documentBack cover

Chapter 11: Experiences with generics

Kees de Joncheere, Ad H. Rietveld and Christine Huttin

1. Background and definition

A “generic drug” contains the same active ingredient as the original brand name product on which is it based. Provided it is well made, it is to all intents and purposes identical to (and hence interchangeable with) the branded product. Quality requirements for generics need to be the same as for the corresponding original branded products. Generics are usually manufactured without a licence from the innovator company and are only marketed after expiry of the latter’s may be marketed either under the approved international nonproprietary name of the active substance or under a new proprietary (“brand”) name chosen by its manufacturer [23].

Good generic medicines are affordable alternatives to more costly, patented brand name products; by providing precisely the same medical benefit at a lower price, generics reduce the cost of pharmaceutical care.

2. The concept and effects of generic competition

Generic competition is usually used in deregulated markets to encourage price competition. It is considered as one of the major forms of leverage which can be exercised in a relatively liberal environment to contain market prices on multiple source products. In Europe, conclusions reached by the European Council of Ministers in May 1998 concerning the single market in pharmaceuticals declared that the development of a more competitive generic European market is one priority in European drug policy in respect of patent-expired medicines [5]. Nevertheless the situation still varies considerably among the national markets in the EU (see Table 1), and it is not possible to analyse the situation for the large European market as a whole [4].

The American market has a much longer experience of large-scale generic price competition; several important studies, started in the late 80’s and in that country [1,2,7,8,15,16,21]. The experience from the USA seems to show that the global trend is a decrease in the average market price for most products which exist in both branded and generic form. However, the prices of branded products, viewed individually, have generally increased over the years despite the launching of generics at much lower prices. It appears that the main reason for the increase of originator drug prices is usually the segmentation of demand for drugs and the existence of different price elasticities at a micro-level; in other words, there is a part of the market which will continue to demand the high-priced branded drug even if it becomes increasingly expensive, while a separate segment of the market will look for the cheapest product available. In the US it was found that the price differential between branded and generic products was usually not passed on in its entirety to the consumer but was in part absorbed by an increase in the margins of the wholesalers and the retailers [17].

Table 1
Comparison of generic medicine markets


Drug market size (US$ million) in 1997

Market share held by generics in 1997

Pricing policies for generic medicines

Average price differential generic/originator


670 (1997)

40% of prescriptions
15% of value

Provincial formularies pricing; In Ontario prices are deregulated; Reference pricing exists in British Columbia


United States

9,600 (1997)

42% of prescriptions
11% of value

Free (market) pricing



789-969 (1998)

3-4% of value - pharmacy sales
20% of value - hospital sales

Regulated pricing



2,600 (1997)

40% of prescriptions
17% of value

Free (market) pricing

27%3, 80-90%4

The Netherlands

276 (1996)

22% of prescriptions
12% of value

Reference pricing and price equalisation (comparative scheme with prices from Belgium, France, Germany, UK)



50.8 (1998)

1% of value

Regulated pricing



1,156 (1996)

70% of prescriptions6
39% of value6

Prices set by National Insurance Board




49% of prescriptions
21.7% of value8

Prices set by monthly Drug Tariff



338 - 405

50-60% 9

Regulated prices and price comparisons with UK, France, Spain, Greece, Czech Republic



360 (1996)10

70% of prescriptions10
30% of value10

Prices set by Ministry of Finance based on cost recovery and profit, and price comparisons with UK, France, Greece, Italy, Spain



450 (1996)

15% of value

Regulated pricing




15% of prescriptions
8% of value

Free (market) pricing



1,977 (1998)

30% of value

Free (market) pricing



1 Discounted prices on popular generic medicines can be as much as 80% below the brand price.
2 Through administrative act.
3 Based on sick-fund estimates for all ‘second applicant’
4 For “blockbuster” drugs.
5 Based on reference prices which are set in comparison to the most expensive product in each reference price group.
6 Estimates are based on all multisource products (i.e. including the original patented drug).
7 For reimbursement purposes only.
8 Based on net ingredient costs of UK NHS spending at community pharmacy level in England.
9 Includes low-priced copy drugs.
10 Includes domestic companies only.
11 Primarily copy drugs.

Data: WHO and London School of Economics.

In those European countries with a comparable experience, though on a smaller scale than in the USA, trends as regards prices and margins have not been homogeneous and events have been influenced by national controls on pricing which do not have their equivalent in America [10]. For instance in the UK an increase in the prices of both branded and generic drugs was observed on a sample of products similar to that used in the Grabowski and Vernon’s on several pioneering products when they faced generic competition. The difference is probably linked to the negotiation on product portfolios in which firms engage with the British government. Certainly the existence of generic products is of itself no guarantee for low prices. Where there is no competition in the off-patent market, because only one or two generic versions of a product are available, prices have been reported to go up as in other monopolistic situations [11]. Even where there is a fair amount of competition between generics, one is not likely to see them obtain a substantial share of the market unless deliberate measures are taken to catalyse the process. Those measures range from the provision of information and encouragement to “generic substitution” - an arrangement by which the pharmacist is entitled or even obliged to dispense the generic version of a drug even where the physician has prescribed the original product (see 4.4. below).

Effective competition between generic products and the original brands on which the patents have expired is today of key importance in containing the costs of pharmaceutical care. There is now a clear recognition of the importance of using generics in a country’s funds for other purposes, including the financing of truly innovative new products; it has been argued that, in this way, generics create “headroom” for innovation [20].

3. The situation of generic prescribing and dispensing in various countries

The strength of the national market for generic drugs in any given country is largely a function of three characteristics:

(1) the national pharmaceutical pricing policy;

(2) the system of patent protection; and

(3) cultural aspects of pharmaceutical use, in particular the attitudes of both doctors and patients and the information available to them.

The extent to which generic drugs, rather than the more expensive branded originals, are prescribed and dispensed varies widely among countries throughout the world (Table 1). Market shares can be expressed either in terms of units prescribed or as expenditure, and both modes of calculation are presented here wherever possible.

The countries with the highest penetration of generic medicines into the pharmaceutical market are the United States, United Kingdom, Denmark, Germany, The Netherlands and Canada. In many developing countries generic penetration is high as well, but as various of these countries have not until recently maintained strict laws on the protection of intellectual property, the “generics” on sale here have in part been copies of drugs still widely patented; they are regarded by the manufacturers of the latter as illegal and they do not circulate in other parts of the world. Of the items on the WHO Essential Drugs list, however, more than 90% are off-patent and available as generic drugs.

The policies put in place to promote generic medicines are quite varied, as is the degree of interest in implementing such policies. In the industrialized world penetration by generic medicines is most marked in countries where the prices of innovative medicines are unregulated and high. By contrast, those countries - like France, Spain and Italy - that generally have used regulation to lower the prices for patented drugs, were until recent years less strongly motivated to encourage low-cost generics to enter the market, as the price differentials were less. More recently these countries too have initiated national programmes to increase the use of generic products [12,14].

In Denmark the use of generics is stimulated through generic substitution, official publicity campaigns to promote the use of generic medicines and non-financial incentives for physicians and pharmacists. Substitution is mandatory if a substitutable product is available and meets certain criteria regarding the savings which will be achieved by prescribing it. The non-financial incentive for generic prescribing is through the use of databases which reference only the cheapest available product.

The success of national policies in this respect is also explained by different factors. In the USA the high level of private expenditure on medicines plus the increasing coverage of the population through managed care with its strong cost-containment incentives have been the big driver for high generic penetration. The strict regulatory control exercised by the FDA has been critical in generating confidence in generic drugs. In the UK the market for generics has been successfully developed through financial incentives to physicians (fundholding practices) and pharmacists, and the promotion of generic prescribing in medical education. Generic substitution is not permitted, but more than 65% of prescriptions are in fact now written generically, thus allowing for dispensing of the cheapest product. In Germany generic penetration is driven largely by generic substitution, the reference price system and the setting of prescribing budgets for general practitioners, making doctors and consumers price-conscious.

In Canada the provinces use a wide range of policies to encourage the use of generic medicines including generic substitution (which is mandatory in most provinces) and incentives to pharmacists and physicians. In addition a reference price system is in place. Finally, The Netherlands has implemented a variety of measures including reference pricing, non-financial incentives for health professionals, generic substitution, teaching generic prescribing at universities, and financial incentives for the pharmacists: when a generic product is dispensed instead of a branded drug, the pharmacist is allowed to retain 33% of the price differential.

4. Measures to implement generic drug policies

As implied by the few examples above, generic drug policies can be effectively implemented through a mix of measures influencing both supply and demand. On the supply side this may involve introducing and implementing:

- legislation and regulations that guarantee the quality of generic medicines (and which need to be explicitly made known to prescribers and the patients, in order to secure their trust in the products);

- regulations to facilitate market entry for generics, such as fast-track and simplified registration procedures (omitting the need for presenting a full dossier with clinical data, but basically concentrating on quality and information issues);

- differential registration and licensing fees;

- “Bolar” or “experimental use” provisions (that allow for generic product development while the innovator product is still under patent, so that the generic equivalent can enter the market as soon as the innovator’s product patent expires).

On the demand side, these policies largely focus on encouraging generic prescription, both with financial as well as non-financial incentives, on stimulating generic dispensing by the pharmacies through financial incentives and price regulations like reference pricing and degressive margins, as well as through professional incentives, and on encouraging the patient to use generic medicines (financial savings where it concerns out-of-pocket payment, as well as awareness campaigns, and differential co-payments).

Some of these approaches are reviewed below.

4.1. Marketing authorization and registration

The European Union has provided a definition of what can be considered to comprise an “essentially similar product” for purposes of marketing authorization. This is necessary since, where a particular product has already been registered on the basis of a complete file, an “essentially similar” product can be registered through a simpler “abridged application”, in which the results of pharmacological and toxicological tests and clinical trials do not need to be submitted [18]. The agency that is reviewing an abridged application will naturally have to be aware of the various problems which can arise with bioequivalence; in some cases two versions of a product which are very closely similar in formulation can nevertheless show significant difference in bioavailability, and in the clinical documentation accompanying an application for marketing authorisation, reports on the assessment of bioequivalence will sometimes be needed. Some countries require stronger assurances of therapeutic equivalence than do others. Certain regulatory agencies, such as the United States FDA, also publish lists of drugs that can present bioequivalence problems - for example, certain drugs where the margin between the therapeutic and the toxic dose is very narrow - and some formularies restrict the list of therapeutically equivalent products to exclude any products which could present a problem with bioequivalence or any other aspect of quality. In those industrialized countries with strong regulatory systems, there have few if any well-documented cases of therapeutic failure due to bioequivalence problems [13].

4.2. Patent protection issues

The other important issue here is the timing of the application. In those countries with legislation that allows for “experimental use” (or with the “Bolar” exemption), like the USA through the Waxman Hatch bill, generic manufacturers can develop their products while the innovator product is still under patent, and can submit their application to the regulatory authority and get it approved during the patent period. This allows generic competition to start basically on the day after patent expiry, and normally results in a strong price drop with several generic companies competing. This is especially likely to be achieved where the market for a particular product is very large. One should add however that innovator companies have been building their defences against this rapid erosion of their market. In the case of the USA they have obtained compensation in the form of additional years of patent protection. In recent years there have also been a number of cases of innovator companies seeking to delay generic competition through legal challenges to generic firms based on alleged defects in applications and or unlawful use of data that are claimed to belong exclusively to the innovator’s In those countries where such “experimental use” clauses are not in force, as is the case in much of Europe, there is normally no such rapid onset of competition when patents expire, and often the innovator product enjoys another 2 to 3 years monopoly, until generics products make it to the market. This also allows the innovator company to start marketing its own generic product, and thus benefit from the first-entry advantage in order to achieve generic market share, before competitors reach the market [19].

The other area that has come under scrutiny is the period of data exclusivity (i.e. the period during which it is not permitted to use data contained in the dossiers of the innovator companies for preparing new submissions by generic companies). Data exclusivity clauses were introduced at a time when certain types of products (such as biotechnology products) could not obtain a patent, and it was considered important to provide an incentive for innovation. Though patents have now also been introduced for biotechnology products and for therapeutic indications, the principle of data exclusivity has continued to exist. Periods of data exclusivity vary from 5 years (the current standard in the USA) to an optional 6 or 10 years in EU countries. Current proposals by the EU Commission aim at extending the data exclusivity to 10 years, while at the same time introducing a “Bolar” clause in the European legislation [6].

Concern has been expressed that excessive data protection is more an impediment to innovation than a stimulus, as it may cause funding to be diverted from innovation to marketing, in order to maximize the benefits of an extended monopoly situation in the market.

4.3. Encouraging generic prescribing

Much can be done to encourage doctors to prescribe generic drugs where there is no specific therapeutic reason to prefer the more expensive branded products. Generic products can be listed in therapeutic guidelines and in (printed or electronic) formularies; training and education programmes can focus on generic prescribing both at medical school as well as in continuing education. Prescribing by physicians is strongly influenced by drug promotion and this is often a major barrier to generic prescribing. In many medical schools throughout the world, physicians learn of drugs using their generic or scientific names, but drugs are introduced into the marketplace under the generally simpler and intensely promoted brand names, and it is the latter that most physicians soon grow accustomed to, when prescribing a product. Unless the very strong influence of brand name promotion is adequately counterbalanced by a reasoned and ongoing campaign to generate medical belief and trust in generic prescribing there will continue to be excessive medical reliance on expensive brands.

In addition financial incentives to generic prescribing can be provided, especially by allocating each physician a total prescribing budget as an encouragement to keep the cost of individual prescriptions low. Several countries have used variants on this method (fund holding practices in the UK, budgets and systems for remuneration for doctors in France and Germany); the physician may simply be obliged to stay within the limits of the budget, or savings on prescribing costs may be made available for use in the physician’s practice. In Ireland, if physicians 50% of the savings. Overall goals may also be set: in France the health insurance system agreed in 1999 with the country’s physicians that 7% of generic products.

4.4. Encouraging generic dispensing

The fact that a doctor has prescribed an expensive brand name drug does not always mean that the pharmacist will dispense it. A public policy on generics often relies on a clear rule regarding substitution, i.e. the dispensing of an equivalent drug which is less expensive than that which has been prescribed. In different countries and at different times pharmacists have variously been forbidden to substitute, allowed to do so on certain conditions, or even encouraged or obliged to do so. There are also differing rules on consultation: a pharmacist may be free to substitute on his own initiative or obliged to seek the agreement of the prescriber, the patient or both before doing so. Rights of substitution for pharmacists exist in America and several European countries such as Germany, Denmark, The Netherlands, Luxembourg and more recently France. Substitution is mandatory in some of the States of the USA and some European countries such as Denmark for particular categories of drugs. In other countries, it remains optional. Usually, when the physician writes on the prescription pad that he or she will allow substitution, the pharmacist is free to replace the prescribed speciality by a generic product. In Denmark, since the “G” agreement of 1991, the physician can write a G (for “generic”) on the prescription, and the pharmacist must then dispense the least expensive drug in groups of essentially similar products.

In those countries where the pharmacist’s income is in the form of a percentage earned on each product dispensed, substitution by a cheaper drug will adversely the pharmacist’s earnings and comprise an important disincentive unless special measures are taken. Various countries (Belgium, Estonia and more recently France) have introduced parallel measures - such as degressive margins - to avoid a reduction in the pharmacists’ remuneration as a result to collaborate by a provision entitling them to retain a proportion of the savings made by dispensing a generic instead of the brand name equivalent. The problem of decreased earnings does not arise where the pharmacist has a fixed income or receives a standard dispensing fee on each drug which he supplies, whatever its price.

Whatever the approach adopted, pharmacists are clearly key players in a successful generic policy and all the various factors which can motivate or influence them must be borne in mind.

4.5. Influencing the patient

The patient can influence the doctor’s can be told and taught that generic products are as effective and safe as their branded equivalents. All branded products should be required to display the generic name prominently alongside the brand name, in labels, literature and advertising, thus repeatedly stressing the fact that the branded and generic product are identical. In this respect public campaigns to promote the use of generic drugs over branded ones may usefully put the question “Why pay the premium price if you can get the same medical benefit against a much lower cost?” However, there is no documented proof of the effectiveness of such campaigns, and on occasion they have been counterbalanced by promotion from the innovative industry playing on the belief of some members of the public that cheap drugs are likely to provide only second-rate treatment. Obviously in a system where patients pay a large part of drug costs themselves, it will be simpler to create public acceptance of generics than in an environment where drugs are publicly financed, and the patient contribution is limited. In the situation where the patient bears part of the cost, a reference price system will ensure that it is to the patient’s Both for the physician and the patient it is important that lists of drugs eligible for insurance payment or reimbursement indicate the prices of the various branded and generic versions of a drug so that the financial choices and consequences are clear.

4.6. The need for a multi-facetted approach

Generic drug policies can only be effective if the regulatory policy is appropriate, if doctors, pharmacists and patients fully understand, endorse and embrace the concept, and if positive incentives and rewards are provided. The simple fact that in many countries pharmacists are, as noted above, now permitted to substitute the prescribed brand product by the generic has substantially increased the use of the latter. Overall measures aimed at increasing information and transparency in the market should provide for regular publication of a current list of interchangeable products available to physicians, pharmacists and consumers. The regulatory authority should publish a list with drug products that can be substituted and those that cannot because of problems with bioequivalence, e.g. “the Orange Book” published by the Food and Drug Administration (FDA). Generic prescribing by doctors can be stimulated by the introduction of all the various methods outlined before.

The success of any of these policies is also dependent on the nature of the relationship between physicians and their patients. Other competing factors are the cost sensitivity of the physician and the degree of trust that the physician himself has in the safety and efficacy of generic medicines. While it is clear that physicians can be persuaded in one way or another to change their prescribing habits, there is little or no evidence that physicians have changed their as a result of legislation on generic substitution in the pharmacy.

5. Manufacturing and trading in generic products

There is generally little need for a government or health service to encourage directly the growth of manufacturing and trading in generics since it develops spontaneously as soon as a market environment comes into being in which the trade can grow, obstacles to the use of low-cost drugs are removed and competition between generic and branded drugs is encouraged, in the manner reviewed above.

A somewhat different situation can exist in some countries where there is a weak manufacturing tradition. The European Community’s Development generic drug production and quality control in developing countries [3], but it is not at all clear what can be achieved in countries where there is no existing tradition of pharmaceutical manufacturing at all. It could prove more profitable to encourage the existing manufacturers of high-quality generic drugs, especially those in low-cost countries such as India, to expand their business by providing them with ready access to both western and developing markets.

6. The generic situation in developing and transitional countries

In low income countries with a high incidence of frank poverty in the population there is an especially strong reason to promote the prescription and use of generics [9]. Particularly in developing countries a high proportion of drugs in the public sector are donor-funded and these are almost exclusively generic; however alongside the public sector there is usually a thriving private sector, especially in the towns and cities, funded almost entirely by out-of-pocket payments. Unfortunately in practice, various factors tend to result in a greater use of these expensive specialities than is therapeutically justified, in particular the widespread belief among the public that the branded product is better or safer than the generic; even more unfortunately, the weakness of some regulatory systems allows the marketing of some poor quality generics which further foster this belief. Other problems arise from the lack of transparency on prices and the widespread existence of corruption which can hinder the production, prescribing and availability of quality generics at affordable prices. These matters are referred to at greater length in Chapters 14 and 15 of this book.


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[2] R.E. Caves, M.D. Whinston and M.A. Hurwitz, Patent expiration, entry and competition in the US pharmaceutical market, Brookings papers on economic activity, 1991.

[3] Council of Ministers of the European Commission, Development: Communicable diseases and poverty, 2304th Council meeting, Brussels, 10 November 2000.

[4] European Generic Manufacturers Association EGA, http://www.egagenerics.com/facts_figures/facts_figures.htm, accessed June 2001.

[5] European Commission, Commission Communication on the Single market in pharmaceuticals, COM (98) 588 final, Brussel, November 5th, 1998.

[6] European Commission, Pharmaceutical Legislation 2001 Review, http://dg3.eudra.org/F2/review/index.htm, accessed April 2002.

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[11] J. Jones, Government orders inquiry as prices of generic drugs soar, BMJ 319 (1999), 1151.

[12] LSE Survey on Pharmaceutical Pricing and Reimbursement Structures in the European Union and Worldwide, http://pharmacos.eudra.org/F3/g10/p6.htm.

[13] Medical Letter 41 (1999), 1053; 47-48 Generic drugs.

[14] M. Mrazek and E. Mossialos, Increasing demand while decreasing costs of generic medicines, Lancet 356 (2000), 1784-1785.

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[16] D. Reiffen and M. Ward, Generic drug industry dynamics, Federal Trade Commission Bureau of Economics (2002), http://www.ftc.gov/be/workpapers/industrydynamicsreiffenwp.pdf, accessed 6 May 2002.

[17] S.W. Schondelmeyer and J. Thomas 3rd, Trends in retail prescription expenditures, Health Aff. (Millwood) F 9(3) (1990), 131-145.

[18] Council Directive 87/21, O.J. 1987, L15/36.

[19] Scrip Magazine, 13-19 February 2000, Persistence pays off.

[20] Third Round Table “Completing the Single Market in Medicines” Round Table organised by Martin Bangemann, European Commission, December 7th, 1998, Proceedings published by EFPIA in collaboration with IMS Health.

[21] USA Congressional Budget office, How increased competition from generic drugs has prices and returns in the pharmaceutical industry, July 1998, http://www.cbo.gov/showdoc.cfm?index=655&sequence=0&from=5, accessed 1 March 2002.

[22] Washington Post, 23 April 2002, Drug firm, FTC settle patent dispute, http://www.washingtonpost.com/wp-dyn/articles/ A37639-2002Apr23.

[23] World Health Organisation, Marketing authorisations of pharmaceutical products with special reference to generic (multisource) products, WHO/DMP/RGS/98.5, 1998.

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