Manufacturing and Regulatory Barriers to Generic Drug Competition: A Structural Model Approach

Understanding the drivers of market concentration in the generic pharmaceutical industry is essential to guaranteeing the availability of low-cost generics. In this paper, we develop a structural model to capture the multiple determinants governing manufacturers' entry decisions; in particular, we focus on how manufacturing complexity and the regulatory environment affect concentration in generic drug markets. We estimate the model using data collated from six disparate sources. We find that manufacturing complexity, as reflected in the drug administration route, for example, significantly reduces the likelihood of generics entry. Moreover, the speed at which generic drug applications are processed by the FDA significantly affects the number of firms entering a market. Our policy simulations suggest that to encourage competition in the generic drug markets, the FDA needs to maintain a moderate review speed; being either too fast or too slow can be problematic and associated with more concentrated markets.