WITHDRAWN: The Generic Drug Global Supply Chain: Economic Costs and Benefits

OBJECTIVES: The supply of generic pharmaceuticals has provided enormous benefits to U.S. consumers. Not only are 90% of all dispensed prescriptions filled by generic drugs; but also U.S. generic prices are the lowest in the world. According to a recent RAND Report, U.S. generic drug prices are 43% on average of those found in Japan, 62% of those in Germany and 68% of those in the United Kingdom. At the same time, important quality control issues have arisen and there is discussion of returning the current international supply chain to the United States. In this study, we determine the economic costs of doing so.

METHODS: Our calculations employ the empirical methods suggested by De Loecker and colleagues that provide estimates of production function parameters as well as price-cost markups from accounting data. We estimate their model with a unique data set of pharmaceutical companies which produce Active Pharmaceutical Ingredients (APIs) in China, India and the United States for the years between 2017 and 2019.

RESULTS: Some preliminary findings are available. Chinese API firms appear to have the highest output elasticity to variable (labor and materials) inputs, while U.S. firms have the largest output elasticity to fixed (mostly capital) inputs. Chinese firms earn substantial markups indicative of significant market power or scale economies or both in API production, while U.S. firms earn essentially zero economic profits. Indian firms also garner substantial markups. While U.S. labor costs are much higher than those in China: because of the small labor share and the significant markup charged by Chinese firms, reshoring API production from China to the United States may lead to generic price increases estimated at 80%.

CONCLUSIONS: The average prices of generic prescriptions may increase from under $23 currently in the United States to less than $41 per retail prescription dispensed.