Profit margins are higher for generic drugs compared to brand-name drugs. However, total profits on brand-name drugs are higher than generic drugs, as companies retain exclusivity for a certain time period once the drug is approved by the Federal Drug Administration.
Cost of Drug Development
Developing a drug is a costly and time-consuming process. Getting a drug approved is also an expensive and lengthy process with various clinical trials required to prove that the drug is safe. In recent years, costs have decreased due to advances in biotechnology and genomics. Additionally, for every drug that makes it to the market, a number of drugs never make it out of the lab or end up not being approved by the FDA.
Exclusivity of the drug allows pharmaceutical companies to recoup losses from failed drugs. Profit margins may seem impressive for a single brand-name drug, but it is much less impressive given that it subsidizes the cost of research and failed drugs.
Once exclusivity ends, generic drug companies are allowed to produce the same drug, sold under a different brand name. The cost of a generic drug is significantly less for the consumer and the pharmacy. For both parties, generic drugs cost 20% to 70% less.
Generic drug manufacturers have no significant research departments to subsidize; instead, they simply have to copy the compounds used to manufacture the drug. The compounds are made public due to FDA regulations. Due to low research and development expenses, as well as a significantly lower burden for approval, the profit margins for generic drugs are higher despite significantly lower prices.