Is the generics market well-structured or poorly structured?

Via Marginal Revolution, libertarian economics professor and FDA commentator Alex Tabarrok on the generics market.

The United States has some of the lowest prices in the world for most drugs. The U.S. generic drug market is competitive and robust—but its success is not accidental. It is the result of a series of deliberate, well-designed policy interventions.

The 1984 Hatch-Waxman Act allowed generic drug manufacturers to bypass costly safety and efficacy trials for previously approved drugs by demonstrating bioequivalence through Abbreviated New Drug Applications (ANDAs). To spur competition, the Act also granted 180 days of market exclusivity to the first generic filer who challenges a brand-name patent—a mini-monopoly as a reward for initiative. Balancing static efficiency (P=MC) with dynamic efficiency (incentives for innovation) is hard, but Hatch-Waxman mostly got it right.

The Generic Drug User Fee Amendments (GDUFA), modeled after the very successful Prescription Drug User Fee Act (PDUFA), require generic manufacturers to pay user fees to the FDA. These funds allow the Office of Generic Drugs to hire more staff and meet stricter approval timelines. GDUFA dramatically reduced ANDA backlogs and accelerated market entry, especially under GDUFA II.

He also mentioned the FDA’s Division of Policy Development in the Office of Generic Drug Policy, which was apparently helpful in accelerating generics to market. 

Here's another viewpoint on a specific arm of the generics market, via an article in JAMA by Eli Cahan: 

One family of drugs that has remained stubbornly susceptible to shortage is what experts call generic sterile injectables (GSIs). This class—which includes non–brand-name IV medications like fluids as well as many antibiotics and chemotherapies—accounts for a disproportionate share of the problem: between 2017 and 2023, 67% of all drugs in shortage were GSIs, according to data from IQVIA.

Part of the supply chain vulnerability derives from GSIs being less than enticing from the manufactures’ perspective, explained Erin Fox, PharmD, MHA, associate chief pharmacy officer at University of Utah.

An April 2025 report from the US Government Accountability Office (GAO) characterized “low price and low-profit margins” as key drivers of the GSI shortages. Late last year, a US Department of Health and Human Services (HHS) report likewise found that 70% of GSIs do not achieve profitability by 3 years. This limited upside has led to manufacturers exiting the market, according to the GAO report.

I think this is the core issue that isn't mentioned by Prof. Tabarrok - in some places, the generics market is genuinely neither competitive nor robust. Instead, there are not enough players in the market, the margins seem to be razor-thin, quality is lacking and the only profits to be made are in the times of shortage when prices spike. I am not saying that Prof. Tabarrok is wrong, but I think I am saying his praise is incomplete.

(In truth, I think Prof. Tabarrok is praising the policy responses from both Congress and the FDA for creating the correct conditions for the strengths of the American generics market and not the weaknesses...)