Retail generic drugs usually get cheaper over time, but my previous analyses have documented substantial generic inflation. Our latest exclusive investigation, however, finds that generic inflation may be easing.

During the first quarter of 2015, generic drug price increases were low compared with our two most recent examinations. We also found no drugs with mega-increases (exceeding 1,000%).

While inflation has slowed, generic drugs that have experienced cost increases haven’t necessarily become cheaper. As I show below, the actions of the Food and Drug Administration (FDA) have prevented new supply from entering the market.

But as the FDA’s backlog of 4,000 applications starts to clear, generic costs will start deflating. Until then, expect some generics to remain costly and inflation to continue.

METHOD

To examine generic drug costs, I analyzed the National Average Drug Acquisition Cost (NADAC) data, which the Centers for Medicare & Medicaid Services (CMS) collect and publish. For my methodology, see the description in Retail Generic Drug Inflation Reaches New Heights. For more info on NADAC, see “Acquisition Cost Reimbursement,” on page 96 of our 2014–15 Economic Report on Retail, Mail, and Specialty Pharmacies.

I compared:

• The April 2015 data release (dated 4/1/15) with the previous year’s file (dated 4/2/14); sample size = 1,796 drugs

• The April 2015 data release with the previous quarter’s file (dated 1/7/15); sample size = 1,899 drugs

Note that I define a drug as an ingredient/strength combination, so that each manufacturer’s version of the same drug has the same price in the analysis. (This is a limitation of the NADAC data.) If I had considered each manufacturer's version of an ingredient/strength combination to be a separate drug, then the sample size would have been five to six times larger.

This approach updates my previous analyses:

• In the Third Quarter, Retail Generic Drug Inflation Kept on Truckin’ (November 2014) 

• Retail Generic Drug Inflation Reaches New Heights (August 2014) 

ANNUAL CHANGE

The chart below shows the frequency distribution of year-over-year acquisition cost changes from April 2014 to April 2015.


These results show less annual inflation compared with the findings of my previous analyses.

• Nearly two-thirds (63.0%) of the generic drugs declined in cost. The median decline was -8.6%. More than a quarter (27.2%) of the sample experienced declines greater than -10%.

• More than one-third of the generic drugs (36.5%) increased in cost. The median increase was +15.5%.

QUARTERLY CHANGE

The chart below shows acquisition cost increases during the first calendar quarter of 2015. About half of the generic drugs increased in cost, just as they had in our most recent analysis. For the first quarter of 2015, however, the increases were much lower than those in our previous quarterly examination.

There are some important differences from our most recent quarterly analysis:

• The median increase was +5.3%, which is below the annual increase discussed above. Of the drugs that increased in cost, three-quarters had increases of less than 10%.

• Almost half of the generic drugs (44.0%) declined in cost. The median decline was -5.1%.

• No products have experienced mega-increases in recent months. The table below shows the 10 drugs with the greatest percentage increases during the first quarter. Unlike the findings in our previous analyses, no drug’s cost increased by more than 1,000%.

While inflation has slowed, generic drugs that have experienced cost increases haven’t necessarily become cheaper. Consider amitriptyline hcl 50 mg tab. It increased by more than 2,000%, from $0.01 in July 2014 to $0.51 in November 2014. By April 2015, however, its price had declined slightly, to $0.49.

WHAT’S NEXT?

High prices for a particular product should encourage new suppliers, thereby lowering prices. Unfortunately, new generic drug approvals are still backlogged at the Food and Drug Administration (FDA).

New supply is also being limited by the FDA’s enforcement actions. Here’s what Eric Percher of Barclays Capital wrote after the recent Barclays 2015 Generic Symposium:

Barclays Asia Healthcare & Pharmaceuticals analyst, Balaji Prasad, shared insights from his third annual India HC trip. The most important finding was that expanding FDA action is likely to sustain generic inflation. As the FDA’s scrutiny moves from data integrity to interpretation of guidelines, it is evident that only 5-7 Indian generic manufacturers possess truly strong compliance. Consequently, many of the Indian generic manufactures who would be most likely to compete in the U.S. on the basis of price have been unable to access the market.”

There may be good reasons to keep certain suppliers out, but the FDA’s sluggish response generates higher prices and ongoing inflation. Here’s an insightful chart from Randall Stanicky at RBC Capital Markets. As you can see, the backlog at FDA has grown from 2,866 files in 2012 to roughly 4,000 today. Meanwhile the number of annual approvals has dropped.


In a keynote address at this year’s Generic Pharmaceutical Association (GPhA) annual meeting, the Director of the FDA’s Office of Generic Drugs, Kathleen Uhl, promised faster action. (Click here to see Dr. Ohl’s presentation.)

If she makes good on this promise, then competition will drive down generic prices within 12 to 18 months. Let's see if the FDA can act.