Generics: a threat to innovation in the US Pharmaceutical Industry

The pharmaceutical industry is one the most profitable industries, but innovative companies are in a period where innovation seems to stagnate. The road to new drug development has become increasingly more complex due to regulations and rising costs. Estimates for the cost of one new FDA approved drug have risen from US$ 802 million in 2003 to US$ 1,318 billion in 2007. Not only drug development costs have increased, but also healthcare expenditure. If health expenditures continue to rise and no appropriate action is taken, governments might not be able to fund the healthcare needs of every individual. A possible action is the use of generics, therapeutically equivalent to branded drugs, but at a fraction of the costs. This helps the governments to contain healthcare costs. However generic firms, typically, do not aid to the development of new therapies and drug development of conditions to which there is no treatment available. Too abundant use of generics reduces the motivation for branded firms to innovate, as it would be harder to recoup investments. It might be that generics seize a share large enough to threaten innovation in the US pharmaceutical industry. Drug development cost has increased over the years, while the patent protection system -on which the pharmaceutical industry heavily relies- seems not keep up with current developments. As Governmental regulation continues to strongly promote usage of generics, pharmaceutical companies can combat generics through various marketing strategies and interfirm agreements, however this may not be enough to improve R&D productivity.