Generic Policies and the Generics Paradox
(2008; 12 pages)

A key objective of genericization and generic entry post patent expiry is the reduction in the cost of the patentexpired drug. Generic entry and competition should in principle lead to price reduction in this market segment over time. However, while these two factors primarily affect the prices of generic medicines, this may not be the case for their originator equivalents. In fact, in some countries despite the presence of cheaper generic alternatives, the prices of originator medicines have been shown to carry on increasing, a phenomenon called the “generics paradox”. This is a surprizing outcome, given that the advent of market entry by generics and the ensuing competition intuitively should lead to price decreases.

Empirical evidence based on 32 drugs with significant sales in the mid-1980s which had gone off-patent found that the introduction of generic products in the pharmaceutical market led to price increases in originator brand medicines rather than price decreases. Further work also found that originator brand manufacturers do not decrease prices after generic market entry, and that generic entry only leads to a slow-down in the increase of originator drug prices. Empirical evidence also suggests that R&D-based drug manufacturers do not attempt to deter generic entry through their pricing strategies. Rather, in most cases, these manufacturers continued to increase their prices at the same rate as prior to generic entry. All these studies used US data to demonstrate the existence of the generics paradox.

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