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Effects of 'Authorized-Generics' on Canadian Drug Prices

Author

Listed:
  • Paul Grootendorst
Abstract
This paper examines how the use of ‘authorized-generics’ (AGs) influences Canadian prescription drug prices. An authorized-generic is the actual brand name drug product, manufactured by the brand firm, but sold as a generic by a licensee or subsidiary of the brand, competing with independent generics (IGs), which operate independently from the brand firm. In theory, AGs have offsetting effects on drug prices. On the one hand, AGs compete against IGs and increases in the number of generic competitors should lower prices. On the other hand, the threat of AG entry into a therapeutic market might deter entry by IGs and this would lessen competition. Moreover, brand firms might increase prices of their brand drugs to increase demand for their AG. I find that when AGs are first to enter a drug market, average drug prices drop by about 12%; average prices drop by smaller amounts, the larger the AG share of the generic market. I could not directly assess whether the threat of AG entry into a market might deter entry by IGs. IG executives, however, state that the threat of AG entry has decreased their incentive to challenge ‘marginal’ drug markets. In particular the threat of AG entry has increased from $5m to $10m the threshold market size – the value of brand drug sales in the 10th year that it has been on the market, below which the IG firm will not attempt to enter. IG executives also stated that AGs have seriously reduced IG retained earnings. The reduction in retained earnings has hampered their ability to challenge brand drugs with annual sales well above $10m, but which have particularly high entry costs. Finally, the IG executives claimed that brand firms have attempted to use the threat of AG entry to negotiate agreements with the IG to delay entry (or not enter at all). A comprehensive evaluation of the competitive effects of AGs would need to verify and quantify these costs and compare these to the benefits of AG competition.

Suggested Citation

  • Paul Grootendorst, 2007. "Effects of 'Authorized-Generics' on Canadian Drug Prices," Social and Economic Dimensions of an Aging Population Research Papers 201, McMaster University.
    • Handle: RePEc:mcm:sedapp:201
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    File URL: http://socserv.mcmaster.ca/sedap/p/sedap201.pdf
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    References listed on IDEAS

    as
    1. Aslam H. Anis, 1992. "Pharmaceutical Prices with Insurance Coverage and Formularies," Canadian Journal of Economics, Canadian Economics Association, vol. 25(2), pages 420-437, May.
    2. Ying Kong & James R. Seldon, 2004. "Pseudo-Generic Products and Barriers to Entry in Pharmaceutical Markets," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 25(1), pages 71-86, August.
    3. Aidan Hollis, 2002. "The importance of being first: evidence from Canadian generic pharmaceuticals," Health Economics, John Wiley & Sons, Ltd., vol. 11(8), pages 723-734, December.
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    Cited by:

    1. Ricardo Gonçalves & Vasco Rodrigues & Hélder Vasconcelos, 2015. "Reference pricing in the presence of pseudo-generics," International Journal of Health Economics and Management, Springer, vol. 15(3), pages 281-305, September.

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    More about this item

    Keywords

    authorized-generic drugs; independent generic drugs; drug prices; Canada;
    All these keywords.

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • L65 - Industrial Organization - - Industry Studies: Manufacturing - - - Chemicals; Rubber; Drugs; Biotechnology; Plastics

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