Generic-Drug Makers Pay for Speed

For years, branded-drug makers have paid for speed at the Food and Drug Administration. In 1992, the Prescription Drug User Fee Act, or PDUFA, established a fee for submitting marketing applications in exchange for the FDA establishing goals for completing their review; that's where the term "PDUFA date" comes from.

But generic-drug makers have always resisted a user fee on their business. When you're already working on thin margins, every cost counts.

Apparently, though, the backlog of approvals has gotten bad enough that the industry has changed its mind and agreed with the FDA on a fee structure -- complete with a new acronym: Generic Drug User Fee Act, or GDUFA. A timetable for approvals wasn't given in the meeting minutes, and it'll still have to be approved by Congress, but the two sides look close to settling on a deal.

While the fee will cut into margins, companies may be able to pass some of that along to consumers by raising prices since other generic-drug makers will also have to pay. The fee could also indirectly limit competition since the added cost may be seen as an obstacle for generic drugs that already have a large number of players; Merck's (NYS: MRK) Zocor, for instance, has 11 generic-drug makers approved to sell the drug in the U.S. Nudging in to grab a small slice of the pie might not sound so appealing if there's a fee involved.

In addition to money collected for applications, generic-drug makers -- such as Teva Pharmaceuticals (NAS: TEVA) , Mylan (NAS: MYL) , Novartis (NYS: NVS) , and Watson Pharmaceuticals (NYS: WPI) -- will have to pay fees for their manufacturing plants. Those will help offset the cost of the FDA performing inspections at their facilities.

Extra inspections are bad for the individual generic-drug makers, but they're actually good for the industry as a whole. Weeding out competition that isn't up to snuff is especially important in an industry where the end users have little control over who manufactures their product; patients get what's on the pharmacists' shelves and likely couldn't tell you who made it. So when an inferior generic drug is recalled, it hurts the entire industry.

PDUFA was possibly the best gift Congress ever gave the branded-drug industry. Let's see if GDUFA can do the same for the generic industry.

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At the time thisarticle was published Fool contributor Brian Orelli holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Teva. Motley Fool newsletter services have recommended buying shares of Novartis and Teva. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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