OBJECTIVES: Patent protection is the key condition of pharmaceutical innovation. After patent expiry utilisation of generic drugs decreases health care expenditure, and alleviates the scarcity of health care budget. Our objective was to measure the ability of generics to reduce the pharmaceutical expenditure in the Hungarian market. METHODS: Drug utilisation records of 10 substances with patent expiry between 2001-2006 have been compared 12 months before and after the entry of the first generic product. RESULTS: Although entry of generics reduced daily therapeutic costs, the increase in volume sales outbalanced the potential savings in drug budget. Overall generic drugs increased the expenditure of a subtance with no patent protection by 30.1%, the public reimbursement by 25.7%, and unit sales by 21.0 %. In 5 cases the originator successfully converted the majority of patients to a non-substitutable formulation. When we limited our analysis to substances with no restrictions in generic substitution, public reimbursement and unit sales were still increased by 21.1%, 17.4% and 18.6% respectively. CONCLUSION: The entry of generic drugs in Hungary – as opposed to the international experience – did not reduce pharmaceutical expenditure between 2001-2006, what is more, generics increased the tendency of pharmaceutical spending. The main reason for this failure was the inappropriate generic drug policy. The lack of delisting, the low generic price erosion, the lack of incentives to physicians and pharmacists to switch patients to generic products, the branded promotional campaigns by generic manufacturers, and the conversion of patients to patented formulations by original manufacturers contributed to the inefficiency of the generic programme in Hungary.