In a first-of-its-kind look at the generics industry, this article demonstrates that the generic industry itself is not what it appears. Quite simply, many generic drugs are not true competitors in the market, but, rather, are produced or licensed by the brand company. Although known in the industry as “authorized generics,” this article will refer to them as “captive generics,” given that these drugs are subject to the interests and direction of the brand drug company. Rather than as a gift to consumers, captive generics operate to elevate prices and reduce competition, undermining the entire structure of the Hatch-Waxman system.

This article contains a detailed analysis of 373 different drug markets and finds that those hosting a captive generic share several alarming features.

• Captive Generics Triple the Magnitude of Brand Price Increases: The increase of brand net prices once generics entered the market was three-and-a-half times greater in drug markets with a captive generic (21%) compared to drug markets without one (6%).

• Captive Generics Boost the Growth of True Generic Prices: The presence of a captive generic caused the price of true generics to increase 11% more during their first year on the market.

• Captive Generics Reduce True Generic Market Share: True generics hold 22% less of the market if a captive generic enters.

• Captive Generics Better Permeate Markets: Compared to the average true generic, a captive generic is able to occupy a 6% larger market share.

• Captive Generics Do Not Increase the Total Number of Generics: One may assume that a captive generic constitutes an extra generic on the market, increasing the total number of generics available. This is not the case; rather, when a captive generic is present, there tends to be one fewer true generic option.

• Captive Generics Contribute to Irrational Formulary Tier Placement of True Generics: Given that brand drugs are so much more expensive than generics, it would be irrational to place the brand and generic version of a drug on the same health plan reimbursement tier. The proportion of true generics located in the same formulary tier as the brand drug averaged 12% higher where a captive generic was available than in markets where one wasn’t available.

The article proceeds as follows. Part I outlines the rise of captive generics and places them in the context of the Hatch–Waxman system, describing how they disrupt the incentive structure designed to promote generic entry. Part II explains how brand drug-makers use captive generics to induce delayed generic entry through pay-for-delay deals and other collusive arrangements. Part III offers an extensive analysis of 373 distinct drug markets to examine how the entrance of captive generics impacts prices and generic market share. Part IV, responding to these findings, outlines prospective regulatory and legislative actions to check the harm of captive generics on patients and payors.

Disclaimer: This publication was funded in part by the Arnold Foundation.