When a brand-name drug’s patent runs out, the first generic version hits the market-and prices usually drop by about 13%. That’s a relief for patients. But here’s what most people don’t realize: the real price collapse happens after the second and third generics arrive.
Why the second generic changes everything
The first generic drug maker doesn’t have much pressure to lower prices. They’re the only game in town. So they price just below the brand-say, 87% of the original cost. That’s still expensive for many. Then, the second generic enters. Suddenly, there are two companies fighting for the same customers. That’s when prices start to plummet. Data from the FDA shows that with two generic competitors, prices drop to about 58% of the brand’s original price. That’s not a small dip-it’s a 30%+ drop in just a few months. This isn’t theory. It’s happened over and over. Take the cholesterol drug atorvastatin. After the first generic came in, it sold for around $1.20 per pill. When the second generic launched, the price dropped to 75 cents. By the time the third arrived, it was down to 45 cents. That’s a 62% price drop from the first generic alone. And that’s typical.The third generic is the game-changer
The third generic doesn’t just add to the competition-it multiplies it. With three manufacturers, distributors and pharmacies can play them off each other. Wholesalers demand lower prices. Pharmacy benefit managers (PBMs) start negotiating harder. Hospitals and insurers get leverage. The FDA found that when a third generic enters, prices fall to just 42% of the brand’s original cost. That’s nearly two-thirds off. This isn’t just about the manufacturers cutting prices. It’s about the entire supply chain adjusting. When there are three or more generic makers, PBMs can demand deeper discounts because they have real alternatives. Evernorth, one of the largest PBMs, confirmed that their best deals on generics only happen when there are at least three suppliers. No competition? No leverage. Three competitors? Suddenly, you’re getting 50-70% off.What happens when competition stalls
But here’s the problem: not all drugs get a third generic. In nearly half of all generic markets, only two manufacturers ever show up. That’s called a duopoly. And in those cases, prices don’t keep falling-they stabilize… or even rise. A 2017 University of Florida study looked at 120 generic drugs and found that when competition dropped from three to two manufacturers, prices jumped 100% to 300% in some cases. Why? Because with only two players, they can quietly coordinate pricing. No one wants to be the first to cut prices and lose margins. So they hold steady. Patients pay more. Insurers pay more. And no one wins. This isn’t random. It’s structural. A few big generic manufacturers-like Teva, Viatris, and Mylan-control most of the market. Smaller companies struggle to enter because of high production costs, regulatory delays, and supply chain bottlenecks. The result? Many drugs never get past two competitors.
Why the system is rigged against competition
You’d think more competition would be easy to achieve. But brand-name drug companies have spent decades building walls to block generics. One tactic is “pay for delay.” That’s when the brand pays a generic maker to stay out of the market. In 2023, the Blue Cross Blue Shield Association estimated these deals cost patients $3 billion a year in higher out-of-pocket costs. Another trick is “patent thickets.” A single drug can have dozens of overlapping patents-some on the pill shape, others on packaging, others on how it’s taken. In one case, a drug had 75 patents, stretching its monopoly from 2016 all the way to 2034. That’s not innovation. That’s legal obstruction. And then there’s the supply chain. Three wholesalers-McKesson, AmerisourceBergen, and Cardinal Health-control 85% of the U.S. generic drug distribution. Three PBMs handle 80% of prescriptions. These giants have so much power that even when five generic makers are competing, they can still squeeze prices down to the point where manufacturers can’t profitably make the drug. That leads to shortages. And when a drug disappears from the market, prices spike again.How much money does this save?
The numbers are staggering. Between 2018 and 2020, the FDA approved 2,400 new generic drugs. Thanks to second and third entrants, those drugs saved consumers $265 billion. That’s not a guess. That’s an official FDA estimate. The Assistant Secretary for Planning and Evaluation (ASPE) found that markets with three or more generic competitors saw price reductions of 70-80% compared to the original brand price. For patients on chronic medications-like blood pressure pills, diabetes drugs, or antidepressants-that’s hundreds, sometimes thousands, of dollars a year in savings. In 2021, a study showed that just adding one more generic competitor to a market with two saved an average of $1,200 per patient annually. Multiply that across millions of prescriptions, and you’re talking about tens of billions in savings. The Congressional Budget Office warns that if we don’t fix the barriers to competition, Medicare could lose $25 billion a year by 2030.