Drugmakers increasingly are creating generic versions of their own brand-name drugs, aiming in part to sustain revenue after patents expire, but some critics say these so-called "authorized generics" stifle competition and ultimately could increase prices.

How to stabilize generic drug prices and reduce shortages

How authorized generics work

In 1984, Congress passed the Hatch-Waxman Act, which effectively created today's generic drug business by establishing safety and competition rules, such as granting six months of market exclusivity to the first generic version of each brand-name drug.

However, critics say brand-name drugmakers are taking advantage of that provision to create and market so-called "authorized generic" versions of their own drugs at the same time as or before any generic rival hits the market.

For example, in 2016, PDL BioPharma purchased the brand-name blood pressure medicine Tekturna from Novartis. When PDL learned that Anchen Pharmaceuticals was developing a generic, PDL authorized its own generic version of Tekturna, called aliskiren. PDL BioPharma CEO Dominique Monnet told stock analysts earlier this year that the release of aliskiren "was timed to secure us the benefit of being first to market." Monnet added that the goal was "to maximize profit," noting that "the economics would still be very favorable to us" even if a generic rival entered the market and sales of the brand-name version fell.

Research shows that authorized generics can in fact be very profitable. Cutting Edge Information in 2015 estimated that authorized generics generate a $50 return for every $1 invested. 

The debate over authorized generics

Brand-name drugmakers argue that authorized generics increase market competition even if they're not sold by other drugmakers.

Holly Campbell, spokesperson for the Pharmaceutical Research and Manufacturers of America, said authorized generics "reduc[e] prices and resul[t] in significant cost savings."

However, critics argue that these drugs stifle competition and can even increase costs. For instance, Sumit Dutta, CMO of OptumRx, told Congress earlier this year, "These authorized generics often result in net prices higher than the brand drugs they replace." He explained that while authorized generics may have lower list prices, they can end up costing payers more than their brand-name counterparts because they typically are not subject to rebates. Daily Briefing is published by Advisory Board Research, a division of Optum, which is a wholly owned subsidiary of UnitedHealth Group.

For example, the list price for the authorized generic version of Eli Lilly's Humalog insulin is $137, compared to $275 for the brand-name version. But according to a senior pharmacy benefits executive who spoke to Kaiser Health News on condition of anonymity, the generic version won't actually reduce Eli Lilly's revenue because, after rebates, Eli Lilly typically nets about $137 for Humalog now.

Critics also argue that authorized generics can harm competition by reducing incentives for other companies to make generic drugs, in part by counteracting Congress' intent to allow a competitor to have market exclusivity on the generic drug after a brand's patent expires.

Robin Feldman, a professor at the University of California Hastings College of the Law, said that authorized generics "stave off generic competition and make sure that generics can't get much of a foothold when they do get to market. That's the game. And drug companies have become masters at this."

Analysts say authorized generics could be a key strategy for brand-name drug companies as patents for higher-priced biologic drugs begin to expire and the potential for competition from biosimilars rises (Hancock/Lupkin, Kaiser Health News, 8/5; Owens, "Vitals," Axios, 8/6).