The principal reason for the relatively low price of generic medicines is that these companies incur fewer costs in creating the generic drug, and are therefore able to maintain profitability while offering the drug at a lower cost to consumers. The costs of these generic drugs are so low that many developing countries can easily afford. For example Thailand is going to import millions of generic version pills of Plavix, a blood-thinning treatment to prevent heart attacks, costs just 3 US cents per pill from India, the leading manufacturer of generic drugs.

Generic manufacturers do not incur the cost of drug discovery, and instead are able to reverse-engineer known drug compounds to allow them to manufacture bioequivalent versions. Generic manufacturers also do not bear the burden of proving the safety and efficacy of the drugs through clinical trials, since these trials have already been conducted by the brand name company. In most countries, generic manufacturers must only prove that their preparation is bioequivalent to the existing drug in order to gain regulatory approval. It has been estimated that the average cost to brand-name drug companies of discovering and testing a new innovative drug (with a new chemical entity) may be as much as $800 million.[1] However, these estimations are strongly disputed as much too high.

Generic drug companies may also receive the benefit of the previous marketing efforts of the brand-name drug company, including media advertising, presentations by drug representatives, and distribution of free samples. Many of the drugs introduced by generic manufacturers have already been on the market for a decade or more, and may already be well-known to patients and providers (although often under their branded name).

Prior to the expiration of a drug patent, a brand name company enjoys a period of “market exclusivity” or monopoly, in which the company is able to set the price of the drug at the level which maximizes profitability. This price often greatly exceeds the production costs of the drug, which can enable the drug company to make a significant profit on their investment in research and development. The advantage of generic drugs to consumers comes in the introduction of competition, which prevents any single company from dictating the overall market price of the drug. With multiple firms, the profit-maximizing price generally reflects the ongoing cost of producing the drug, which is usually much lower than the monopoly price.

A generic drug (pl. generic drugs, short: generics) is a drug which is produced and distributed without patent protection. A generic must contain the same active ingredients as the original formulation. In most cases, it is considered bioequivalent to the brand name counterpart with respect to pharmacokinetic and pharmacodynamic properties. By extension, therefore, generics are assumed to be identical in dose, strength, route of administration, safety, efficacy, and intended use. In most cases, generic products are not available until the patent protections afforded to the original developer have expired. When generic products become available, the market competition often leads to substantially lower prices for both the original brand name product and the generic forms. The time it takes a generic drug to appear on the market varies. Drug patents give twenty years of protection, but they are applied for before clinical trials begin, so the effective life of a drug patent tends to be between seven and twelve years.

A drug sold or prescribed under the nonproprietary name of its active ingredients or under a generally descriptive name rather than under a brand or trade name. The name of the active ingredient is established by a government or international body, and is typically the U.S. Adopted Name, British Approved Name, or International Nonproprietary Name. Generic drugs must contain the same active ingredients that their brand name counterparts do and are tested to assure that they are therapeutically equivalent, but they may contain different inactive ingredients from those found in the brand name medications.

There are generic versions of both over-the-counter and prescription medications, but not all drugs have generic equivalents. Generic drugs can only be produced when a patent on a brand name drug expires or when a patent has never existed. They are generally cheaper than the equivalent brand name drug because of much lower marketing and development costs. Because a generic competitor can hurt a brand name manufacturer’s profits, drug companies have used legal action and regulatory delays to slow the introduction of generics, or have paid generic manufacturers to postpone the production and marketing of generics. The Medicare overhaul legislation passed in 2003 contained sections designed to speed the introduction of generic drugs by making it easier to challenge weak or invalid drug patents.