Generic drugs are less expensive because generic manufacturers don’t have the investment costs of the developer of a new drug. New drugs are developed under patent protection. The patent protects the investment—including research, development, marketing, and promotion—by giving the company the sole right to sell the drug while it is in effect. As patents near expiration, manufacturers can apply to the FDA to sell generic versions. Because those manufacturers don’t have the same development costs, they can sell their product at substantial discounts. Also, once generic drugs are approved, there is greater competition, which keeps the price down. Today, almost half of all prescriptions are filled with generic drugs.

The U.S. Food and Drug Administration offers a 180 day exclusivity period to generic drug manufacturers in specific cases. During this period only one (or sometimes a few) generic manufacturers can produce the generic version of a drug. This exclusivity period is only used when a generic manufacturer argues that a patent is invalid or is not violated in the generic production of a drug, and the period acts as a reward for the generic manufacturer who is willing to risk liability in court and the cost of patent court litigation. There is often contention around these 180 day exclusivity periods because a generic producer does not have to produce the drug during this period and can file an application first to prevent other generic producers from selling the drug.

Large pharmaceutical companies often spend thousands of dollars protecting their patents from generic competition. Apart from litigation, companies use other methods such as reformulation or licensing a subsidiary (or another company) to sell generics under the original patent. Generics sold under license from the patent holder are known as authorized generics; they are not affected by the 180 day exclusivity period as they fall under the patent holder’s original drug application.

A prime example of how this works is simvastatin (Zocor), a popular drug created and manufactured by U.S. based pharmaceutical Merck & Co., which lost its US patent protection on June 23, 2006. India-based Ranbaxy Laboratories (at the 80-mg strength) and Israel-based Teva Pharmaceutical Industries (at all other strengths) received 180 day exclusivity periods for simvastatin; due to Zocor’s popularity, both companies began marketing their products immediately after the patent expired. However, Dr. Reddy’s Laboratories also markets an authorized generic version of simvastatin under license from Zocor’s manufacturer, Merck & Co.; some packages of Dr. Reddy’s simvastatin even show Merck as the actual manufacturer and have Merck’s logo on the bottom.

When a pharmaceutical company first markets a drug, it is usually under a patent that allows only the pharmaceutical company that developed the drug to sell it. Generic drugs can be legally produced for drugs where:

1) the patent has expired,

2) the generic company certifies the brand company’s patents are either invalid, unenforceable or will not be infringed,

3) for drugs which have never held patents, or

4) in countries where a patent(s) is/are not in force.

The expiration of a patent removes the monopoly of the patent holder on drug sales licensing. Patent lifetime differs from country to country, and typically there is no way to renew a patent after it expires. A new version of the drug with significant changes to the compound could be patented, but this requires new clinical trials and does not prevent the generic versions of the original drug.

This allows the company to recoup the cost of developing that particular drug. After the patent on a drug expires, any pharmaceutical company can manufacture and sell that drug. Since the drug has already been tested and approved, the cost of simply manufacturing the drug will be a fraction of the original cost of testing and developing that particular drug.