Generic Drug

When a company develops a new medicine, it receives a patent on it. A patent is a time-limited right to be the sole seller of an invention. During this period, no one else may offer the remedy. Once the protection expires, other manufacturers may produce a medicine with the same active ingredient. That is exactly what a generic drug is. The active ingredient is the part of the medicine that actually has an effect in the body. It is identical in both the original and the generic; only the name, packaging, and price differ.

Why generics drive down drug prices

As long as only one provider exists, it sets the price almost entirely on its own. Once several companies sell the same remedy, competition arises. Prices then often drop by 70 to 90 percent compared to the original. For health insurers, this represents billions in savings. In Germany, roughly three-quarters of all prescribed packages are generics, yet they account for only a small share of overall drug spending.

This price drop also has a downside. For very cheap standard medicines, production is barely worthwhile anymore. Many manufacturers have therefore relocated production to India or China. If a factory there fails, the active ingredient is missing worldwide. Supply shortages of fever-reducing syrups or antibiotics have had exactly this cause.

For the original manufacturers, patent expiry is a hard blow. In the industry, this is called the patent cliff: a medicine’s revenue collapses within just a few months. That is why investors closely watch when important patents at major pharmaceutical companies are set to expire.

What a generic drug must prove

A generic manufacturer does not have to repeat the original’s extensive studies. That the active ingredient works and is safe has already been demonstrated. Instead, the manufacturer must show what is called bioequivalence. This means: the active ingredient must reach the body in a comparable amount and at a comparable speed as with the original.

To do this, usually a few dozen healthy test subjects take both preparations. Afterward, the concentration of the active ingredient in the blood is measured over several hours. The curves must match within defined limits. Only then do authorities such as Germany’s BfArM or the European Medicines Agency (EMA) grant approval.

Differences do exist nonetheless, namely in the excipients. These are components such as dyes, binders, or lactose that turn the active ingredient into a tablet. They can differ because the original’s composition is often itself protected. For most people, this makes no difference. In cases of allergies or with active ingredients that have a very narrow dosing margin, doctors look more closely.

Generics in the pharmacy and on the stock market

Anyone who fills a prescription in Germany almost always receives a generic drug. The reason is rebate contracts: health insurers negotiate favorable prices with individual manufacturers. The pharmacy must then dispense exactly that manufacturer’s product. This is why the package sometimes looks different than the last time, even though the medicine is the same. Only if the doctor checks the box for 'aut idem' does the patient receive the original product.

Generics regularly appear in business news. Companies like Teva, Sandoz, or Stada live off this business. Their share prices depend on when which patent expires and how quickly they can bring a copy to market. The first provider after patent expiry earns the most.

Biosimilars play a special role. These are copycat products of medicines that are produced from living cells, such as antibodies against cancer. Such molecules cannot be copied exactly, only reproduced very similarly. That is why the requirements there are higher and prices fall less sharply. A biosimilar is therefore not a generic in the strict sense, even though both follow the same basic idea.