Generic Drug Pricing Strategies: An Economic Analysis Report

This report provides a comprehensive analysis of the pricing strategies employed by generic drug manufacturers, drawing upon the New York Times article and further research. It examines the factors influencing these pricing decisions, including competition and economic forces, and evaluates the advantages and disadvantages of various approaches. The report delves into the social and financial implications of these pricing strategies for different stakeholders, such as patients, manufacturers, and government entities. Furthermore, it explores the concept of a socially optimum pricing strategy, considering both the United States and global contexts, and proposes recommendations for balancing affordability, innovation, and stakeholder interests. The analysis highlights the complexities of the pharmaceutical market and the need for strategies that promote access to essential medications while ensuring the sustainability of the industry.

Running head: STRATEGIZING THE PRICE STRUCTURE OF GENERIC DRUGS
STRATEGIZING THE PRICE STRUCTURE OF GENERIC DRUGS
Name of the Student
Name of the University
Author Note

1STRATEGIZING THE PRICE STRUCTURE OF GENERIC DRUGS
Table of Contents
Response 1:................................................................................................................................2
Response 2:................................................................................................................................2
Response 3:................................................................................................................................3
References..................................................................................................................................5

2STRATEGIZING THE PRICE STRUCTURE OF GENERIC DRUGS
Response to question 1:
Producers of the generic drug, manufacture medicines of similar quality and
composition as produced by an existing marketed branded company. The only difference is
that it should charge less, as it does not have to bear the same level of research cost and FDA
(Food and Drug Administration) approval (Morgenson, 2019). In other words, it acts as an
equivalent substitute for its brand-name drug manufacturer. As a result, the price of these
drugs is set at a lower level than the producer of the patented drug. Now a days, due to
competitive pressure in the pharmaceuticals market, manufacturers of these medicines are
increasing their rates, neglecting the needs of the patients. Manufacturing companies with
high market capitalization, the remarkable modifying ability of the existing drug and rare
illegal activities are the ones capable of hiking the prices of these replicative drugs (Stern,
Alexander & Chandra, 2018). These firms target only those medicines that are rarely used for
treating patients diagnosed with critical diseases (Stern, Alexander & Chandra, 2017).
Moreover, they raise the prices of only those medicines that are produced by a few numbers
of manufacturers. This strategy has significantly facilitated in enhancing the sales and profit
levels of the companies providing generic medications.
Figure 1: Generic drug price continues to rise in the USA
(Source: Team, 2015)

3STRATEGIZING THE PRICE STRUCTURE OF GENERIC DRUGS
Response to question 2:
According to recent reports, there are a few numbers of firms competing against each
other in the market of generic drug production (Morgenson, 2019). They compete against
one another in terms of prices and drugs that are rarely produced by fewer firms. Researchers
pointed out that the absence of perfect competition is the reason behind this skyrocketing
price of medicines. Generic medicines are prescribed in about 90% of the prescription in
neurological, cardiothoracic and psychiatric disorders; hence, they have a high demand
among patients with chronic diseases (Chan et al., 2016). Increasing demand for generic
drugs are reducing the number of innovations by the originating patented drugs brands, and
this is the result of lower profit levels of these high-cost manufacturers. The pharmaceuticals
market is subject to regulations and limitations from the government and FDA (Berndt et al.,
2015). Henceforth, there are barriers to entry in this market and thus, opens the scopes for
newer firms for collaboration with existing companies. These restrictions by congress induce
the intense price competition and hence, lead to a price hike.
Higher prices offered by the manufactures have turned out to be advantageous in
terms of both sales and revenue of the concerned organizations. Their pricing strategy is,
since, medicines take a lot of research and years to get produced, hence, the supply of new
varieties of drugs is less compared to their increasing demand (Kesselheim, Avorn &
Sarpatwari, 2016). Thus, this strategy is crucially adopted for competing against fewer firms
producing similar yet rare drugs. Although their costs for clinical trials are much less
compared to those of branded organizations, their current charging rates are almost
equivalent to the originating firms (Morgenson, 2019). These eroding prices set by these
firms are against the law of the government and the FDA. Hence, indicating a significant
disadvantage in the path of success. Though the legal authorities do not approve these
indiscriminating prices, yet these firms have submitted relevant excuses in favour of their

4STRATEGIZING THE PRICE STRUCTURE OF GENERIC DRUGS
pricing policies. However, they are certainly at risk whenever found guilty of violating the
laws and regulations of the FDA.
Response to question 3:
The creditors engaged in the production of generic drugs are financially flourished by
the pricing decisions adopted by these firms. The sky-high prices implemented by these
producers have increased the sales revenue of these imitating drugs, leading to higher
incentives for its stakeholders. The only identified social consequence is over the patients
suffering from severe disease, who are entitled to pay higher medicine bills (Conti, Nguyen &
Rosenthal, 2018). However, sponsors of these concerned drug manufacturers are re-assessing
their dimensions to provide drug within the affordable limits of the buyers. Although there
are significant conflicts between buyers' perspectives and profit margins of the investors and
shareholder, yet this area is given much attention in providing social benefits to patients.
Prices are sensitive to patients, and thus, optimal pricing should be used to direct their
attention towards medicines. The United States has managed care firms who assist the
patients in their best possible way. They decide their medical facilities and bills, with primary
concern in providing affordable medicines. About 75% of the population is insulated with
reimbursement, thus, lessening the pain from high prices (Morgenson, 2019). Government of
the United States should allow entry of new firms into the market to intensify the competition
and reduce the cost of drugs. Prices should so be set in a manner, which is both affordable
and generate revenue. Globally when the brand-name medicines are patented, then the
manufacturers of the generic drug would reduce their price level. Hence, to be socially
optimum, the buyers should be prioritized than the revenues of the firms.

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References
Berndt, E. R., Nass, D., Kleinrock, M., & Aitken, M. (2015). Decline in economic returns
from new drugs raises questions about sustaining innovations. Health Affairs, 34(2),
245-252.
Chan, R., Wei, C. Y., Chen, Y. T., & Benet, L. Z. (2016). Use of the biopharmaceutics drug
disposition classification system (BDDCS) to help predict the occurrence of
idiosyncratic cutaneous adverse drug reactions associated with antiepileptic drug
usage. The AAPS journal, 18(3), 757-766.
Conti, R. M., Nguyen, K. H., & Rosenthal, M. B. (2018). Generic prescription drug price
increases: which products will be affected by proposed anti-gouging
legislation?. Journal of pharmaceutical policy and practice, 11(1), 29.
Kesselheim, A. S., Avorn, J., & Sarpatwari, A. (2016). The high cost of prescription drugs in
the United States: origins and prospects for reform. Jama, 316(8), 858-871.
Morgenson. G. (2019). Defiant, Generic Drug Maker Continues to Raise Prices.
Nytimes.com. Retrieved 27 August 2019, from
https://www.nytimes.com/2017/04/14/business/lannett-drug-price-hike-bedrosian.html
Stern, A. D., Alexander, B. M., & Chandra, A. (2017). How economics can shape precision
medicines. Science, 355(6330), 1131-1133.
Stern, A.D., Alexander, B.M., & Chandra, A. (2018). Innovation incentives and
biomarkers. Clinical Pharmacology & Therapeutics, 103(1), 34-36.
Team, T. (2015). Why Are Generic Drug Prices Shooting Up?. Forbes. Retrieved 27 August
2019, from https://www.forbes.com/sites/greatspeculations/2015/02/27/why-are-
generic-drug-prices-shooting-up/