Diverging Brand and Generic Price Trends Mean Changing Pharmacy Incentives

Despite their substantially lower selling price, U.S. pharmacies have traditionally had significant financial reason to promote generics over brand drugs due to the offsetting effects of high gross margins on generics (typically around 50% but as high as 80% compared to approximately 10% for branded drugs). In recent years, however, brand drug makers have leaned heavily on price increases to drive growth while generic firms have faced an intensely competitive environment that keeps driving prices lower.

With that in mind, it’s a good time to revisit the truism that “pharmacies earn more from generics than brands.” As shown in the table below, which uses data from VOI’s new U.S. pharmahandbook® report, the price gap between the two categories has diverged to such a degree that one-tenth of the average brand price is now greater than half of the average generic price. Back in 2007, the average generic prescription resulted in $5.22 more in pharmacy gross profits than the average brand prescription; by 2012, this equation had completely reversed so that pharmacies were earning $10.27 more dispensing brands than generics.

 

Drug Type

Metric

2007

2012

% Change (Cumulative)

Brands

Average Price

$ 119.51

$ 206.10

72.5%

 

Pharmacy Gross Margin

10%

10%

 

 

Pharmacy Gross Profit

$ 11.95

$ 20.61

 

Generics

Average Price

$ 34.34

$ 20.68

-39.8%

 

Pharmacy Gross Margin

50%

50%

 

 

Pharmacy Gross Profit

$ 17.17

$ 10.34

 

 

Difference in Gross Profit (Generic minus Brand)

$ 5.22

($10.27)

-296.8%

 

Of course, this won’t do much to affect generic penetration rates. There are too many other structural incentives for that to happen. Also, the above figures are averages for all brand and generic drugs sold through retail channels (there are considerable differences in the profitability of recently-launched versus commodity generics). In any case, however, it’s always good to know how the incentives are aligned, especially when they have realigned in an important way.


Todd Clark
Todd Clark

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