How Second and Third Generic Drugs Drive Down Prescription Prices

When a brand-name drug loses its patent, the first generic version usually hits the market at about 15% to 20% of the original price. That’s a big drop. But here’s the real story: the biggest savings don’t come from the first generic. They come from the second and third ones.

Why the second generic changes everything

The moment a second company starts selling the same generic drug, prices don’t just dip-they plunge. According to the FDA, after the first generic enters, the price drops to about 87% of the brand’s original cost. But when a second generic joins the race, that number crashes to 58%. That’s a 31-point drop in just one step. For a drug that cost $100 a month, you’re now paying $58 instead of $87. That’s $29 saved per month, just from one more competitor.

This isn’t luck. It’s basic economics. Generic manufacturers don’t have R&D costs to recoup. Their only goal is to sell more pills than the next guy. So when the second company enters, they undercut the first generic to grab market share. The first generic can’t ignore that. They have to lower their price too. The result? A race to the bottom-and patients win.

The third generic hits the sweet spot

Add a third generic, and prices drop again-to 42% of the brand’s original price. That’s nearly 60% off from where it started. In some cases, prices fall even lower. The ASPE found that in markets with three or more generic makers, prices drop by about 20% within three years of the first entry. But the biggest savings happen right after the third entrant shows up.

Why? Because now the market has real competition. Two companies might quietly agree to keep prices stable. Three? That’s when someone has to move first. And once one drops their price, the others scramble to keep up. This isn’t theoretical. A 2017 University of Florida study showed that when a market goes from three generic makers to just two, prices often jump by 100% to 300%. One less competitor, and suddenly the savings vanish.

How much money does this save?

The numbers are staggering. Between 2018 and 2020, the FDA says 2,400 new generic drugs saved U.S. consumers $265 billion. That’s not a guess. That’s based on actual prescription data and price tracking. And the bulk of those savings came from drugs with two or more generic versions.

Think about it: if you’re taking a cholesterol drug that used to cost $300 a month as a brand, and now it’s $126 with two generics, that’s $2,160 saved per year. Multiply that by millions of people taking similar drugs, and you see why this matters. It’s not just about big pharma profits. It’s about whether someone can afford their medicine this month.

What’s holding back more competition?

You’d think more generics would mean lower prices. But in nearly half of all generic markets, only two companies sell the drug. That’s called a duopoly. And in duopolies, prices don’t fall as fast-or sometimes they don’t fall at all.

Why? Because big generic manufacturers have been buying up smaller ones. Teva bought Allergan’s generics division. Viatris was formed from Mylan and Upjohn. That means fewer independent players. Fewer players mean less pressure to cut prices.

Then there’s the “pay for delay” problem. Sometimes, the brand-name company pays the first generic maker to delay entering the market. That’s legal in some cases. And it works. The Blue Cross Blue Shield Association estimates this practice costs patients $3 billion a year in higher out-of-pocket costs.

Even worse, brand companies file dozens of patents-sometimes over 70-for one drug. These aren’t new inventions. They’re minor tweaks: a different pill shape, a new coating, a slightly different dosage. But they’re enough to block generics for years. A 2002 blockbuster drug had 75 patents that stretched its monopoly from 2016 to 2034. That’s 18 extra years of high prices.

Who benefits from this price drop?

Patients do. But so do insurers, Medicare, Medicaid, and even pharmacies. Pharmacy Benefit Managers (PBMs) like Express Scripts get better discounts when there are more generic options. Why? Because they can play manufacturers against each other. One offers a 70% discount? The next one offers 75%. The PBM picks the best deal-and passes the savings along.

Hospitals and group purchasing organizations also win. When there are five or more generic makers for a drug, prices can drop to 10-15% of the brand price. That’s huge for institutions buying in bulk. One study showed that in markets with 10 or more generic competitors, prices fell 70-80% compared to the original brand cost.

What’s being done to fix the system?

There are signs of progress. The CREATES Act, passed in 2022, stops brand companies from blocking generic makers from getting the samples they need to test their drugs. Without samples, generics can’t get approved. That was a major roadblock.

The FDA’s GDUFA III program, running from 2023 to 2027, is pushing to speed up approvals for complex generics-drugs like inhalers and injectables that are harder to copy. These are the ones where second and third generics are slow to appear.

Congress is also looking at the Preserve Access to Affordable Generics and Biosimilars Act. It would ban “pay for delay” deals outright. If passed, it could save $45 billion over ten years.

What’s next?

The trend is clear: more generic competitors = lower prices. The sweet spot is between the second and fifth generic entrants. After that, if too many companies exit the market due to thin margins, prices can spike again.

The FDA and ASPE agree: this is the most effective way to cut drug costs. No new drug. No fancy tech. Just more companies making the same pill. And the data doesn’t lie. If you want lower prices, you need more competition. Not just one generic. Not just two. But three, four, five.

Right now, the system works best when the market stays open. But consolidation, patent games, and pay-for-delay deals are closing doors. The next time you fill a prescription and see a low price, don’t thank the pharmacy. Thank the second and third generic makers who made it possible.