The Generic Drug Supply Chain

With 89 percent of all prescriptions dispensed in the U.S. last year filled with a generic drug — but those scripts accounting for only 26 percent of total drug costs — generic medicines play a crucial role in the U.S. health care system. To keep lifesaving generics available, it’s important that policymakers understand the supply chain differences between generics and brands. These differences can create different financial incentives for stakeholders throughout the supply chain for branded products and generic products, with the supply chain capturing 64 percent of all revenue on generics, while brand market manufacturers retain 76 percent of revenue.

Read the full factsheet, Introduction to the Generic Drug Supply Chain and Key Considerations for Policymakers.

Policymakers need to understand the difference between the generic and brand business

The market dynamics of brand and generic drugs are very different, as the brand industry is generally controlled by one manufacturer with exclusivity, while the generic industry follows a multi-competitor model with drug prices decreasing as more competitors enter the marketplace. As a result, since 2008, generic drug prices have declined by more than 60 percent1, while brand drug prices have continued to increase. 

1 Department of Health and Human Resources. Understanding Recent Trends in Generic Drug Prices. ASPE Issue Brief, January 27 2016.

Generic manufacturers do not negotiate rebates with pharmacy benefit managers and health plans

One of the most important differences is that generic manufacturers rarely, if ever, negotiate rebates with PBMs and health plans. In the brand drug market, where there is a sole manufacturer, PBMs and health plans will negotiate utilization discounts with manufacturers. Generally, payers will negotiate more favorable coverage (lower cost-sharing, less utilization management) in exchange for larger rebates.

Pharmacy reimbursement methodologies for generic drugs are different than for branded drugs

Another major difference between the branded and generic supply chains is the way that pharmacy reimbursement rates are set by payers. Reimbursement for branded prescription drugs is usually a percentage of a published list price for the drug itself. Because branded drugs are single source, and are only marketed by one manufacturer, the manufacturer can report a price for the product to publicly available pricing compendia. The dynamic gives branded manufacturers more control over their pricing decisions, while a generic manufacturer competing in a crowded field with multiple other generic manufacturers has less control over their pricing decisions.

It is important that policymakers consider the differences inherent in the branded and generic prescription drug markets when considering public policy changes concerning drug pricing. The differences between the respective markets may require solutions tailored to the specific challenges, rather than a one-size-fits-all solution. In doing so, policymakers should carefully consider how to ensure the sustainability of generic drug markets and a stable supply of lifesaving generic medicines.


Rachel Schwartz

By Rachel Schwartz, AAM Communications Director 

Association for Accessible Medicines


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