A generic drug is a pharmaceutical drug that contains the same chemical substance as a drug that was originally protected by chemical patents. Generic drugs are allowed for sale after the patents on the original drugs expire. Because the active chemical substance is the same, the medical profile of generics is believed to be equivalent in performance. A generic drug has the same active pharmaceutical ingredient (API) as the original, but it may differ in some characteristics such as the manufacturing process, formulation, excipients, color, taste, and packaging.
In most cases, generic products become available after the patent protections, afforded to a drug’s original developer, expire. Once generic drugs enter the market, competition often leads to substantially lower prices for both the original brand-name product and its generic equivalents. In most countries, patents give 20 years of protection. However, many countries and regions, such as the European Union and the United States, may grant up to five years of additional protection (“patent term restoration”) if manufacturers meet specific goals, such as conducting clinical trials for pediatric patients.
When a pharmaceutical company first markets a drug, it is usually under a patent that, until it expires, the company can use to exclude competitors by suing them for patent infringement. Pharmaceutical companies that develop new drugs generally only invest in drug candidates with strong patent protection as a strategy to recoup their costs of drug development (including the costs of the drug candidates that fail) and to make a profit. The average cost to a brand-name company of discovering, testing, and obtaining regulatory approval for a new drug, with a new chemical entity, was estimated to be as much as US$800 million in 2003 and US$2.6 billion in 2014. Drug companies that bring new products have several product line extension strategies they use to extend their exclusivity, some of which are seen as gaming the system and referred to by critics as “evergreening”, but at some point there is no patent protection available. For as long as a drug patent lasts, a brand-name company enjoys a period of market exclusivity, or monopoly, in which the company is able to set the price of the drug at a level that maximizes profit.