Naveen Kumar

2K22/EMBA/14

Case Study:- India’s Generic Drugs & Consumer Surplus

Question 1. Why are generics cheaper than patented drugs?

The availability and affordability of generic drugs in India have significantly impacted the pharmaceutical
industry, both domestically and globally.

Several factors contribute to the lower cost of generic drugs compared to patented ones:

1) No expenditures for research and development generic drug manufacturers do not bear the high cost
associated with the research and development of new drugs. Innovative pharmaceutical companies
invest heavily in discovering and developing new drugs, obtaining regulatory approvals, and conducting
clinical trials. Once a drug patent expires, generic manufacturers can produce and sell the same drugs
without incurring this initial cost.
2) Competition: The entry of multiple generic manufacturers into the market creates competition. This
competition often results in price reduction as companies strive to offer the most cost-effective
alternatives. In the case of Gleevec and its generic version Veenat. The competition from Indian
companies like NATCO and CIPLA led to a significant reduction in the price of the medication.
3) Low manufacturing cost: the cost of manufacturing generic drugs is generally lower than that of
branded drugs. Generic manufacturers can replicate the production process established by the
innovator companies without investing in the development of manufacturing technologies.
4) Consumer surplus: The concept of consumer surplus is crucial in understanding the dynamics of drug
pricing. In the case of Gleevec and Veenat, the generic version provides the same efficacy at a fraction
of the price, creating a surplus for consumers. This surplus arises when consumers are willing to pay
more for a product than they have to pay. The substantial consumer surplus in the case of generic
drugs has contributed to their widespread acceptance and demand.

Question 2. Why is the demand for generic drugs high in both the developed and developing world? Are the
underlying reasons for this increase in demand the same in both cases?
Answer:- The demand for generic drugs is high globally for several reasons:
1. Affordability: generic drugs offer a more affordable option for patients and the health care system.
This is especially crucial in developing countries and for chronic conditions where patients require long-
term medications.
2. Access to essential medicines: Generic drugs play a vital role in providing assess to essential medicines,
including those for life-threatening diseases like HIV/AIDS. The affordability of generic HIV/AIDS drugs
has been a game changer in global health.
3. Global health initiatives: Organizations such as Medicines sans Frontières (MSF) heavily rely on Indian
generic drugs to treat patients in their program. The lower cost of generic enables these organizations
to reach more patients with limited resources.
4. International Aid programs: Measure international donors including the global fund, PEPFA, UNITED,
and UNICEF, rely on generic drugs to support their aid programs. The cost-effectiveness of generic
allows these organizations to starch their budgets and treat a large number of patients.
Conclusion: The reduction in the cost of generic drugs can be attributed to various stages in the
pharmaceutical supply chain, including manufacturing efficiency, competition among suppliers, and the
absence of RND cost.
The significant consumer surplus generated by generic drugs has contributed to their widespread adoption
and has played a crucial role in global health incentives.

Question 3. Which part of the supply chain can be identified as the major contributor to the reduction in the
cost of generic drugs?
Answer: Several phases in the pharmaceutical supply chain are responsible for the decrease in the price of
generic medications used to treat HIV/AIDS patients. Nonetheless, the following elements of the supply chain
are frequently linked to the main drivers of cost reduction:

1. Manufacturing Scale and Efficiency: The manufacturing process's efficiency is one of the main factors
in lowering costs. By producing medications in big numbers, generic drug manufacturers, particularly
those in India, have been able to realize economies of scale. Manufacturers can lower the cost per unit
by spreading fixed expenses over a higher number of units through high-volume production.

2. Lack of Research and Development Costs: A new drug's total cost to bring to market includes a
sizeable amount of research and development (R&D) costs. Since generic medicine makers are creating
copies of medications whose patents have expired, they are exempt from these expensive R&D
expenses. Generic producers may concentrate on cost-effectiveness and manufacturing efficiency
because R&D expenses are eliminated.

3. Global Health Initiatives and Nonprofit Organizations: To get reasonably priced drugs for their
programs, global health initiatives and nonprofit organizations, like Médecins Sans Frontières (MSF),
aggressively collaborate with generic drug makers. By negotiating favorable pricing with suppliers and
using their purchasing power, these organizations help to lower total expenses.

It's crucial to remember that different medications and therapeutic areas may exhibit distinct cost-reduction
dynamics. The cost of generic versions of HIV/AIDS medications has been facilitated by a variety of variables,
including competition, efficient manufacturing practices, and supportive laws. This has allowed organizations
such as MSF to treat a greater number of patients with less resources.