Generic API Margins Being Squeezed?

Here’s What to do

The U.S. government and the pharmaceutical industry continue to be pressured to bring down the high cost of drugs. In response, the Food and Drug Administration (FDA) has been fast-tracking generic drug approvals. The agency either approved or tentatively approved a record-setting 971 generic drugs in fiscal year 2018. The total figure is somewhat higher than the 937 final and tentative approvals in fiscal year 2017, which was the previous record.

“We’ll continue taking additional steps to help ensure patients have access to the drugs they need by making generic drug approval more efficient and predictable,” said FDA Commissioner Scott Gottlieb in a statement. “In too many cases, there is no generic competition for these costly branded drugs even after they have lost their exclusivity protections.”

The need for medicine continues to grow

Still, like death and taxes, the need for medicine is a constant and always will be. People get sick in good and in bad economies. And with millions of people around the world being pulled out of poverty into middle class, one of the first things they demand is access to medicine and to improved healthcare. 

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That greater demand is leading to generic company consolidation, as we have seen in so many other industries including airlines, automobiles, and technology, to name just a few.

It isn’t only the makers of branded drugs who are being squeezed. This article will focus on factors impacting generic drug makers, whose margins are being squeezed as never before, and the key reasons for entering into partnerships with drug developers.

Why the cost of making generic drugs is rising

Generic drug makers are no longer enjoying anywhere near the margins they used to. That can be attributed to three main reasons:

  1. Increased regulatory enforcement around the world, raising costs.
  2. China’s environmental problems, resulting in shutdowns that are causing raw material costs to increase.
  3. Rising competition that is eroding prices.

Instability hits generics

One would think with the rapid pace of FDA approvals and heavy promotion for the use of generic drugs, there would be an industry boom. But that’s not the case. What actually happens is that a few years before patent expirations, companies begin development of generics only to find that a number of other companies have done the same. By the time a generics company is ready to go to market, there may be 10 other similar generic drugs already available for the same indications.

What happens? What was a boom becomes a bust.  And without the ability to profit, generics companies start to withdraw from the market until there are only one or two players left.  With a monopoly or near-monopoly, the surviving companies charge an arm and a leg, and cost-conscious consumers are sometimes left not much better off.

In an unregulated market, that’s what can happen. It’s good and it’s bad. It’s good for consumers when there are several competitors. It’s bad for generic drug makers when they invest in an API that will be abandoned due to market conditions.

The downside of faster FDA approvals that impacts sponsors, CDMOs

There’s another downside to faster FDA approvals, one that impacts sponsors, CDMOs, CMOs and CROs.  GDUFA (Generic Drug User Fee Amendments) and GDUFA II, which extended FDA inspections of international manufacturers while also speeding the approval process,may lead to a shortage of raw materials, which could hinder the availability of generics.

As more and more generics are in demand, there may be a scarcity of raw materials required to produce them, which could lead to drug shortages and higher prices for raw materials and final products. And even though the FDA is opening barriers to entry for generics, industry consolidation among big pharma, with deeper pockets and significant buying power, could make it tougher and more expensive for small generic manufacturers to acquire necessary raw materials.

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There’s no question that there is a need for cheaper-priced alternatives to life-saving drugs and that large pharma companies have held patients hostage to exorbitantly high prices simply because they know they have no alternative.

What generic companies can do to stay a step or two ahead

To be profitable and pick up market share, generic companies have to become even more innovative and find ways to differentiate their products.  They can pair their generic with a new delivery method, or a new way to administer that increases patient compliance. They can make sure the molecule is soluble for greatest therapeutic effect and so on.

Working with a CDMO can bring new ideas and techniques for accomplishing these goals to the table.  It brings productivity, efficiency and speed of execution to the drug development process.

Outsourcing to CDMOs provides additional know-how, speed to market

There are many advantages to bringing a generic to market quickly.  First and foremost, it may slow down or impede competitors.  Here’s where certain CDMOs shine. Not only do they bring a wealth of experience and know-how to the table, but those that faithfully employ a “right first time,” Quality by Design and who keep regulatory approval front and center every step of the way, can significantly shorten the time it takes to get a drug into the clinic. They start with the end in mind and think through how to get there quickly and efficiently.

The FDA’s increased regulatory requirements have served to differentiate among API developers. Those who understand what the FDA wants and helps sponsors get to market fastest are those with the experience, technology and tools needed. They have superior analytical capabilities. They have horsepower internally to deliver the API faster than others.  No one knows how many approvals for a generic there might be. The only thing in a sponsor’s control is getting approval as fast as possible, and that’s where a CDMO can help.

For most generic products, historically there were three, maybe four generic approvals and not much of a market after that. But with blockbuster drugs like Lipitor, on patent expiration day one there can be 10 approvals, and the market collapses from $10 billion a year to $400 million a year.  We have seen that scenario play out. The sponsor spends three to four years, investing millions in R&D and agency submissions, only to be late to the party and decide not to bother.


When developing generic drugs, you can’t predict what will happen or how many other players are also entering the market.  Outsourcing to a knowledgeable CDMO where there is a true partnership, open communications, and sharing of information about how a product will be used can be invaluable in reaching the market quickly with a differentiated product that will win regulatory approval.  The CDMO can make a different form of the product or change the specifications. Many generic companies don’t realize just how much technical skill to solve problems they never thought could be resolved CDMOs have. They should ask.

While we focus on best practices, we do also look at market issues. You can check out related articles like: “What’s The Real Answer to Rising Costs of Blockbuster Drugs? Competition”; “Grading GDUFA”; and “Generic Drug Makers Continue to Face Hurdles in Race to Make Drugs More Affordable.” If you’d like to talk more about these sorts of issues, give us a call at (978) 462-5555. Or please sign up for our newsletter by clicking here.