Generic drugs are supposed to be cheap, so why has the price of some generics risen a thousandfold or more? Blame the not-so-free market.
In October 2013, a month's supply of doxycycline, a widely used antibiotic that has been available in generic form for three decades, cost hospitals $1.20. Just six months later, it cost $111.00, an increase of 9,150 percent. In July 2013, a month of tetracycline, another antibiotic long generically available, cost pharmacies $1.50, but a year later it was $257.70, an increase of 17,080 percent. These are extreme instances, but they are not aberrant.
According to Medicare and Medicaid data, from July 2013 to July 2014, the price of half of all generics went up, and nearly 10 percent of them went up by double or more. Among this 10 percent, the average increase was 448 percent. By remarkable coincidence, the most frequently prescribed generics were among the more dramatic risers. One report found that in 2010, the 50 most popular generics cost an average of $13.14 per prescription, but by 2014, it was $62.10, a 373 percent spike.
Teva's share of the US generics market in recent years has ranged from just 13 to 22 percent. Second-place Mylan has held a mere 8 to 13 percent. The four biggest generics manufacturers combined control only 40 to 50 percent. Those numbers don't have the ring of oligopoly, but the generic market is different from most, chiefly because even the biggest manufacturers can make only a modest fraction of the thousands of generic drugs in existence. Teva and Mylan, for example, make 400 or so each, many overlapping. Other manufacturers make but a few dozen. The industry as a whole may not be oligopolistic, but the production of particular drugs most assuredly is.
Cephalon held the exclusive patent to modafinil and had been selling it since 1998, but the patent was set to expire in 2006. Teva wanted a piece of the action when it did expire. Cephalon, however, wasn't ready to give up its monopoly, so in 2005 and 2006, it paid more than $300 million to Teva and three other makers of generics to stay out of the market until 2012. Generic firms love "pay to delay" deals, as they are known in the trade, because of the guaranteed profit. Name-brand firms of course love the extension of their monopoly. After buying off its competitors, Cephalon's profits on Provigil took on a fleece-like texture. In 2005, when the first deal was struck, annual US sales of the drug were $475 million. Just two years later, they topped $800 million. By 2011, the last full year of Cephalon's monopoly, they reached $1.1 billion. In 2004, a month's supply of Provigil cost about $166 (drug prices vary from pharmacy to pharmacy), but by 2007 it was $272, by 2009 it was $409, and by the last year of Cephalon's patent in 2012 it was $1,001. The gross take - an altogether apt phrase - during the extra years of Provigil's monopoly came to about $5 billion, not a shabby return on $300 million in baksheesh to the generic companies.
Another trick of the pharma trade as a drug approaches the patent cliff is to develop a new drug to replace the old one, often by making the merest of tweaks, like putting an extended-release coating on an immediate-release tablet. Sometimes the benefits are more substantial, but even then they may be outweighed by new side effects or may be helpful only to a small subpopulation of patients. Regardless, the drug maker will tout its new pill - often spending millions, even tens of millions, to herald its improvements (and minimize its flaws) - and a lot of doctors and patients will be swayed. Those who aren't swayed may migrate to the new drug anyway because the price of the old one has been jacked up so high, as Cephalon did with Provigil, that even the new drug is a bargain. The value of all this is not just the short-term profiteering but getting a base of doctors and patients hooked on the new drug before the old one turns generic. Most doctors and patients don't care to fix what ain't broke, so if the new drug works OK, they're less likely to use the old drug even after it goes generic and its price plummets. This was essentially Cephalon's strategy for Provigil and its lightly tweaked replacement, Nuvigil. Trouble was, in 2005, Cephalon was running behind in getting FDA approval for Nuvigil. By buying off Teva and the rest, Cephalon was buying time to get the drug approved and market it to doctors and patients. Nuvigil finally arrived in pharmacies in mid-2009 (priced at $269 a month, compared to Provigil's jacked-up $409) and grossed $39 million over the remainder of the year. By 2012, when Provigil went generic, annual sales of Nuvigil had reached $437 million. In all, Cephalon took $1 billion from Nuvigil during the extra years of its Provigil monopoly and along the way established a solid base of doctors and patients from which to wring future profits.
What happened to modafinil after Provigil went generic in 2012 is emblematic. By the end of that year, things looked good for consumers: a month's supply of modafinil dropped from Provigil's larcenous peak of $1,101 to as low as $5. But the descent was ephemeral. Only months later, the price soared to more than $1,200 - seven times the true value of even name-brand Provigil (if you take as its true value the cost, $166, before Cephalon made the pay-for-delay deals and started hiking up Provigil's price). The price has since dropped again, but only from the stratospheric to the tropospheric. In Boulder, Colorado, the lowest advertised price for the most common dose was $706. Even in more competitive precincts - lower Manhattan and downtown San Francisco, for example - the cost was $520. Big Generic has yet to offer an explanation for the prices, but surely it is no coincidence that when prices reached their nadir in 2012, more manufacturers seem to have sold generic modafinil than sell it today.
Under the most basic Obamacare plan, the average copayment for generic drugs is 32 percent, which would leave the patient who has a $700 modafinil prescription stuck paying $224 out of pocket each month, nearly $2,700 a year. (Out-of-pocket costs aren't capped until $6,600 for an individual and $13,200 for a family.) This is in addition to the plan's annual premium, which, depending on one's age, health, income and state of residence, runs from $1,000 to $8,000.