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 87% of the original price. It sounds like a big discount, but here’s the real story: the biggest price drops don’t come from the first generic. They come from the second and third.

Why the second generic is the game-changer

The moment a second company starts selling the same drug, prices don’t just dip-they plunge. Data from the FDA shows that after the first generic enters, the average price is still at 87% of the brand’s original cost. But as soon as a second manufacturer joins, that number drops to 58%. That’s not a 10% reduction. It’s a 31% drop in just one step.

This isn’t luck. It’s basic economics. When there’s only one generic seller, they have little pressure to lower prices further. They’re the only option. But bring in a second company, and suddenly there’s a race to the bottom. Each one tries to undercut the other to win contracts with pharmacies, hospitals, and pharmacy benefit managers. The result? You pay less. Insurance plans pay less. The whole system saves money.

The third generic makes it even worse-for drug companies

If the second generic cuts prices nearly in half, the third one slams the door shut. Prices fall again-to just 42% of the original brand price. That’s more than a 50% drop from the second generic’s price alone. In some cases, drugs that once cost $100 a month drop to under $40 after three manufacturers are selling them.

The FDA tracked this across thousands of drugs approved between 2018 and 2020. The result? $265 billion in savings for patients and the healthcare system. Almost all of that came from competition beyond the first generic. The first generic opened the door. The second and third kicked it down.

What happens when competition stalls

Not every drug gets a second or third generic. In nearly half of all generic markets, only two companies ever enter. That’s called a duopoly. And in those cases, prices don’t keep falling. They stabilize-or even rise.

A 2017 study from the University of Florida found that when a market drops from three competitors to two, prices can spike by 100% to 300%. Why? Because with only two players, they can quietly coordinate pricing without fear of being undercut. It’s not collusion-it’s just the natural outcome of too little competition.

This isn’t hypothetical. Drugs like levothyroxine, metformin, and amlodipine have all seen wild price swings when manufacturers exit or merge. When one of the three makers of a common blood pressure drug shuts down production, the remaining two raise prices. Patients pay more. Pharmacies pay more. And the system pays more.

Who’s really setting the price?

You might think drug manufacturers control prices. But in reality, they’re caught in the middle. The real power lies with the “Big Three” wholesalers-McKesson, AmerisourceBergen, and Cardinal Health-and the big pharmacy benefit managers (PBMs) like Express Scripts and CVS Health. These companies buy in bulk and demand the lowest possible price.

The more generic options they have, the more leverage they have. A PBM can tell a manufacturer: “We’ll buy from you if you match the lowest price on the market-or we’ll go to someone else.” That’s why prices keep falling with each new entrant. It’s not charity. It’s negotiation.

But here’s the catch: when only one or two generics are available, PBMs have no real alternatives. That’s when prices creep up. And that’s exactly what happened with some antibiotics and heart medications after consolidation reduced the number of manufacturers.

Why some drugs never get a second generic

Not all drugs are created equal. Simple pills like generic ibuprofen have dozens of manufacturers. But complex drugs-injectables, inhalers, or those requiring special manufacturing-take longer and cost more to copy. That’s why many of these drugs stay with only one or two makers.

Brand-name companies also fight back. They use tactics like “pay for delay,” where they pay a generic maker to hold off on entering the market. One study estimated this costs patients $3 billion a year in higher out-of-pocket costs. Another tactic? Filing dozens of overlapping patents to stretch monopoly protection for years. One drug had 75 patents, keeping generics out for nearly two decades after the original patent expired.

The FDA and Congress have started pushing back. The CREATES Act blocks brand companies from refusing to supply samples needed for generic testing. New laws aim to ban pay-for-delay deals. The FDA’s GDUFA III program is speeding up approvals for complex generics. But progress is slow.

What this means for you

If you take a generic drug, check how many makers produce it. If it’s just one or two, ask your pharmacist if there’s a version from another company. Sometimes, switching brands (not the drug, just the manufacturer) can save you 30% or more.

If you’re on a high-deductible plan or pay cash, this matters even more. A $100 pill at 42% of brand price is $42. At 87%, it’s $87. That’s $45 you didn’t have to spend. Multiply that across your prescriptions, and you’re talking hundreds of dollars a year.

Your insurance company knows this. That’s why they push for multi-source generics. They want you on the cheapest version. But you have to be the one to ask.

What’s next?

Analysts predict generic prices will keep falling 3% to 5% a year through 2027-if competition stays strong. But if mergers continue to reduce the number of manufacturers, or if pay-for-delay deals go unchecked, those savings could vanish.

The bottom line? The second and third generics aren’t just nice-to-have. They’re the main reason generic drugs work. Without them, we’d still be paying brand prices. With them, millions can afford their prescriptions.

Don’t assume your generic is the cheapest just because it’s generic. Ask if there’s another maker. Ask if switching will save money. And remember: competition isn’t just good for the market. It’s the best tool we have to keep drugs affordable.