President Trump wants to bring back drug manufacturing to the United States. Yet, he is unlikely to do so to any significant degree. About 90% of the drugs Americans take are generic drugs. Generic drugs are those that have lost patent protection. The profit margins on generic drugs are slim, and competition is often fierce. To make matters worse, the primary wholesale buyers of generic drugs are pharmacy benefit managers (PBMs) and hospital group purchasing organizations (GPOs). Both industries are characterized by oligopolies, where a handful of large firms dominate their industry. They have the market power to drive down prices, sometimes below average cost, and retain the difference as profits. The CEO of Sandoz, one of the biggest generic drug makers, told The Wall Street Journal recently:
“You sell a packet of antibiotics more cheaply than a packet of M&M’s,” and he continued, “That’s offensive, and we lose money doing that.”
Indian drugmaker, Dr. Reddy, has been trying to sell its shuttered generic drug plant in Shreveport, Louisiana for years. A spokesperson for the company told the Shreveport newspaper that the plant lacked “a clear path to profitability.” According to the NYT:
The brutal economics of generic drug manufacturing has made these closings common. In 2021, America’s largest remaining generic drug factory, in Morgantown, W.Va., shut down, with production moving to India and 1,400 people losing their jobs.
In the last few years, other plants that produced generic chemotherapies, antibiotics and treatments for diabetes, A.D.H.D. and asthma have closed in Illinois, North Carolina, California, New Jersey and Minnesota. A factory in Pennsylvania is scheduled to close next year.
Tight margins in the United States means that virtually no company can afford to build new plants in the U.S. to produce generic drugs. Many of the existing plants are aging and need refurbishment, which is often too expensive to do. When there is a shortage of a generic drugs in the U.S. it is often due to an aging plant that was shut down for maintenance by the FDA.
The number of U.S. facilities formulating generic drugs, like the Shreveport plant, has fallen by 27 percent since 2013, according to a New York Times analysis of data collected by the Food and Drug Administration.
In addition, state environmental laws have had an impact, according to the New York Times:
States passed a series of clean air and clean water laws that, along with rising U.S. labor costs, helped drive drug manufacturing out of the United States. Around that time, a wave of top-selling medicines were losing patent protection, and overseas factories, particularly in India, were jumping at the opportunity to make generic versions.
Moreover, something like 90% of generic drugs require imported ingredients necessary to produce the drugs. These are mostly made in India and China. When the raw ingredients (or pharmaceutical active ingredients) originate in a foreign country, it is generally easier to finish the manufacturing process there as well.
In economics there is what is known as pure competition. Pure competition is characterized by homogeneous goods that cannot be differentiated from one another. The best example is agriculture. Wheat from one field is little different from wheat from another field. Thus, wheat growers are price takers. They can do nothing to convince buyers to pay more for their wheat than wheat grown by their neighbor. Generic drugs are similar. My dog is on a generic medication. One brand seems to work better than others. Yet, local pharmacies may carry our preferred brand of generic drug for a few months and then switch to another manufacturer when they are offered a better price. Many of the generic drugs sold in the U.S. are manufactured in India, where the cost of production is far lower. When a foreign generic manufacturer can produce their drug much cheaper than their U.S. competitors it often means the US ones will lose money. While one source estimates the profit margin on generic drugs at 10% to 20% in the U.S., another source estimates the cost to produce generic drugs in India is 35% to 40% below their US counterparts. Simple math suggests the Indian drugmakers is far more likely to earn that 20% while the U.S. competitor may lose that much.
Read more at NYT: This Closed Factory Shows How Hard Reviving Drug Manufacturing Will Be