6.2 Generic Drugs

Medical drugs have a period when the pharmaceutical company which first developed it has the exclusive rights for manufacturing and marketing them (period during which patent is in effect and reevaluation period for verifying efficacy and safety), and the drugs manufactured and marketed during this period are called original drugs.

Once this period expires, based on the publicized patent information, other pharmaceutical companies can manufacturer/market drugs which contain the same active ingredients. These drugs thus launched which contain the same active ingredients as the original drug are called generic drugs.

The characteristics of generic drugs are that while they have the same active ingredients and as a general rule the same efficacy, effect, dosage and administration as the original drug, their prices are lower. Also, while the original drugs are exclusive to the pharmaceutical company which developed it first, in many cases, generic drugs are manufactured and marketed by several pharmaceuticals. In the Western market, as these drugs are often prescribed using the generic names of the active ingredients (as opposed to original drugs which are often called by their brand names), they have been called generic drugs, and this term has become popular in Japan as well.

In this section, “medical expenditure” refers to the actual cost incurred at medical facilities for examinations, medications, and treatment for sickness or injury. Note that while “medical expenditure” refers to approximate medical expenditure, “national medical care expenditure” refers to the estimated costs of treating injuries and diseases covered by insurance. Specifically, “national medical care expenditure” includes costs for medical and dental treatment, pharmaceutical dispensing, hospital room and board, in-home nursing care, and treatments such as those from chiropractors/acupuncturists.

Efficacy and Safety of Generic Drugs

To manufacture and market generic drugs, unlike the original drug, there is no need to conduct clinical trials to verify efficacy and safety of the active ingredients, as efficacy and safety have already been established in the approval process of the original drug. However, even if the drug has the same active ingredients, if it is made by a different manufacturing process, it may not have the same mode of action. Therefore, in the manufacturing and marketing of generic drugs, they are examined to see if the efficacy and safety are equivalent to those of the original drug. Evaluation criteria consist of “Test Procedures and Acceptance Criteria”, “Stability Test”, “Bioequivalence Studies”. If, based on these criteria, the generic drug is proved to be the same as the original drug, its efficacy and safety are cleared of any issues and the generic drug is eligible to get approval.

In Japan’s National Health Insurance System, when physicians prescribe medical drugs, it is a common rule to use the generic name of the active ingredient.  However, a physician can choose to put his signature on his prescription to specifically request the pharmacist to dispense original drug and not to change to generic drugs. Pharmacies, unless there are specific instructions from the physician, are encouraged to dispense generic drugs upon briefing to the patient and getting his/her consent. Incentives are set to make sure pharmacies will proactively choose to dispense generic drugs.

France is another market which adopts a similar mechanism of prescription and dispensing of generic drugs. In France, if a pharmacy refuses to dispense generic drugs in substitution to the original drug, the patient has to pay 100% out-of-pocket at the pharmacy and apply for reimbursement later. This system is a strong incentive to drive penetration of generic drugs.

USA is an example of a market which adopts a different system than Japan. In the USA, the insurance policy held by the patient dictates which medical drugs he can use, giving limited freedom of choice to the physician or the pharmacist. The decision of which drug is to be adopted is made by the HMO, the insurer, in negotiation with the pharmaceutical company.

As generic drugs don’t require clinical trials and relieves the pharmaceutical company of large chunks of R&D expenses compared to an original drug, pharmaceutical companies can remain profitable even if the drugs prices are set lower than the original drugs. For this reason, in Japan’s National Health Insurance System, it is a common practice that the reimbursement price of generic drugs is set significantly lower than that of the original drug, generally at 50% or less.

Furthermore, in Japan’s NHI system, reimbursement prices are determined by taking actual market prices into consideration. Therefore, if several generic drugs which contain the same active ingredient exist in the market and price competition occurs in the market, cheaper reimbursement price will be set reflecting those circumstances.

Twice in a year (June and December), generic drugs have opportunities to get screening for approval and inclusion in the NHI reimbursement list.

If generic drugs are to be included in the NHI list for the first time, the basic rule is to set its price at 50% of the original drug, with two exceptions: the price of internal medicine is set at 40% of the price of the original drug if the number of items proposed for inclusion in the NHI list exceeds 10 items; and price of biosimilar is to be set at 70% of the original drug.

Furthermore, after the initial inclusion in the NHI list, drug prices will be gradually reduced at each of the biannual drug price revision which target all listed products in the NHI list, according to the changes in the actual market price. In cases where several generic drugs exist, a policy is implemented for setting one price per each price range, as described below:

• Generic drugs whose price is estimated to be less than 30% of the highest price are included in the list at single price (weighted average)
• Generic drugs whose price is estimated to be 30% or higher but less than 50% of the highest price are included in the list at single price (weighted average)
• Generic drugs whose price is estimated to be 50% or higher of the highest price are included in the list at single price (weighted average)