It’s time to bring generic drug manufacturing back to the U.S.

By Peter Kolchinsky, Ph.D

Peter Kolchinsky is a founder and Managing Partner at RA Capital Management and author of The Great American Drug Deal.

Originally published in STAT First Opinion.

June 2, 2020

In a hearing Tuesday afternoon on Capitol Hill, policymakers will consider repatriating America’s drug supply chain to avoid future shortages like the ones caused by Covid-19. They should think bigger.

Repatriating the American drug supply is key not just to averting shortages but to restoring and preserving the integrity of generic drugs in America. It will also create tens of thousands of high-quality jobs in part of the U.S. that have been hurt by globalization.

Reliable, high-quality generic drugs are the great value proposition of continued biomedical innovation. They are the ultimate price control on branded drugs and a unique phenomenon in all of health care, where nothing else goes generic — not hospitals, not services, not surgery.

Drugs, however, are difficult to manufacture consistently to high-quality standards. Every company making a drug must constantly run tests to make sure that intermediate and final products are exactly right. A company that sells a new, high-priced, branded drug has a strong profit motive to keep quality high, especially as it works to prove to physicians that its new medicine can be trusted.

The same cannot necessarily be said for generic drug companies. Some cut corners and invest in methods to evade being caught instead of investing in quality production. To make matters worse, generics companies overseas are outside of the Food and Drug Administration’s effective oversight. And when all that matters is cost, it just takes one cheater to drive the honest players to quit or also get dirty.

As many doctors and patients have recognized, a generic version of an essential medicine can be more or less potent than the brand or other generics. It might not have the stated amount of an active ingredient, might contain deadly impurities, or might release a day’s worth of drug into the bloodstream all at once. So an infection that could be controlled with a properly made drug might instead turn deadly. Blood pressure or high cholesterol remain unchecked. Or a transplant patient losing a precious new organ to rejection.

There’s a good chance that the generic medicines in your cabinet are made by Indian companies cited by the FDA for drug-quality violations in the last year. Look them up. If a you wanted a drug made in America, your doctor or pharmacist couldn’t guarantee that unless they prescribed the branded drug (which insurance won’t cover). The system is based on the idea that, for a given drug, all generic versions are as effective as one another and the brand, so you simply get the cheapest one.

Americans have no way to demand quality except to support repatriation so the FDA can ensure quality.

Generic drugs made in America are not inherently safer because Americans are more ethical but because they are made on the FDA’s home turf so the leading drug regulator in the world can keep U.S. manufacturers in line with warning letters based on spot inspections: more than 50 in the last 12 months related to drug quality assurance. The violations overseas are extreme and all the worse considering that the FDA typically gives companies several weeks’ notice that its inspectors are coming, giving them time to clean up their operations, or, in some cases, cook their books and coach employees to lie.

Contracting for generics: an opportunity

Even if American-made generics might cost more than the ones we get now, the presence of bad actors makes today’s generics not totally reliable, so whatever low price we pay for them is too high. But we can still be smart about how we get American-made generics.

Repatriating the entire competitive generic drug market as it exists today would be counterproductive. Competition achieves the lowest profit margins possible under free-market principals. But fixed costs for each manufacturer — with plants and corporations to run and executives to pay — stack up. Instead, we can turn to the more cost-effective model used to ensure that America has pandemic flu vaccines and drugs for smallpox: long-term procurement contracts with U.S.-based manufacturers who are capable of upholding quality standards and who will be inspected by FDA.

Long-term contracting can achieve less redundancy, fewer factories for the FDA to inspect, greater consistency, and at a lower cost. Just recently the federal Biomedical Advanced Research and Development Authority awarded a four-year $354 million contract to Phlow, a Virginia-based generics manufacturer, to produce certain essential generics. Now we need to scale such contracts many times over.

Instead of trying to get dozens of different generics manufacturers to compete on price for a widely used drug, the U.S. can negotiate long-term contracts with a few companies, allowing them each to enjoy greater economies of scale and greater absolute profits while Americans pay less overall for the drugs. These contracts can include funding for manufacturing innovation and automation to further reduce costs, all with the FDA ensuring that the end product stays the same.

The contracting model can also help solve another growing problem that Congress has not even begun to contemplate: some drugs cannot go generic under our existing legal, ethical, and regulatory frameworks.

Some new drugs are extraordinarily complex and nearly impossible to copy. I believe that generic manufacturers will never be able to reliably make the antibody-drug conjugates and gene therapies that are on the rise.

Think of the cost of branded drugs that will go generic as finite mortgage payments that America makes towards medicines it will eventually own, like a home your parents paid off and passed on to you. But the costs of drugs that can’t or won’t go generic are rent from day one. Companies that sell such drugs need never worry about patent cliffs or hustle to invent new drugs to replace lost revenues. They just collect the rent indefinitely.

The modern generics era established by the Hatch-Waxman Act in 1984 did not contemplate complex biologic drugs. The Affordable Care Act finally created a pathway for biosimilars, but it is harder to establish cost-saving interchangeability for biologics than for small-molecule drugs (though arguably that is not as easy as we once thought either). We shouldn’t have to hope that a dozen U.S.-based manufacturers figure out how to replicate AbbVie’s blockbuster antibody Humira to finally see an end to mortgage payments, now $15 billion a year, that America has been making since 2002, years after most other drugs have gone generic.

The most reliable manufacturer of any biologic is the company that has been making it for years as a brand. The same mechanism we use to remake America’s generic drug supply can also be used to contract with biopharmaceutical companies to continue to make their biologics at a contracted, low, but still profitable price once their patents expire. Yes, this is a price control. But it’s one even Milton Friedman would approve because it fixes the free market’s failure to achieve the same end through competition.

Without generics, the U.S. would spend hundreds of billions of dollars per year more on branded drugs. Because of generics, the U.S. spends about $271 billion on brands and only $73 billion on generics, although 90% of all scripts are for generics. If all drugs were to go generic, through competition or contract, then if we are still spending $271 billion on branded drugs in 2035 it’s because  the biotechnology industry has invented an entirely new set of branded drugs, all better than the generic drug foundation on which they stand. We’ll leave our kids better off without burdening them with rent.

There might be good arguments against this proposal. Let me dispatch the ones that are clearly untrue: Repatriating generic drug manufacturing is not an assault on free trade — it’s a necessarily response to unreliable trade. It would not be an unprecedented incursion of government price regulations into pharmaceuticals — the government already contracts with drug companies where the free market falls short.

We must think bigger and repatriate most, if not all, of our generic drug supply under contracts. We must always be able to look forward to paying off the mortgage of a drug to take possession of an inexpensive, reliable, public good while innovators move on to the next set of upgrades of our medical armamentarium, which also will someday go generic.