How Second and Third Generic Drugs Drive Down Prescription Prices

When a brand-name drug’s patent expires, the first generic version hits the market. Prices drop-sometimes by more than half. But that’s just the beginning. The real savings come when a second and then a third generic manufacturer enters the race. These aren’t just more options-they’re price smashers.

Why the second generic is a game-changer

The first generic usually cuts the brand-name price to about 87%. That sounds good, but it’s not enough to make a real difference for most patients. Then the second generic arrives. Suddenly, prices crash to around 58% of the original brand price. That’s a 30% drop in just one step. Why? Because now manufacturers are fighting for shelf space. They’re not just competing with the brand-they’re competing with each other. And in generic drug markets, price is the only thing that matters.

This isn’t theory. The FDA tracked this across hundreds of drugs approved between 2018 and 2020. In every case, the second entrant triggered a sharp, measurable drop. It’s not magic-it’s basic economics. When you have two companies selling the same pill, neither can charge what they want. One undercuts the other. The other responds. The cycle continues until prices stabilize at a fraction of what they were.

The third generic? It gets even worse-for drug makers

Add a third generic, and prices plunge again-to 42% of the original brand price. That’s more than a 50% drop from the first generic alone. In some markets, prices fall even lower. The data shows that with three or more competitors, drug prices often drop 60-80% compared to the brand. For patients paying out-of-pocket, that means a $300 monthly pill becomes $90. For insurers and Medicare, it means billions in savings.

The numbers don’t lie. Between 2018 and 2020, 2,400 new generic drugs entered the market. Together, they saved consumers $265 billion. Most of that came from the second and third entrants. The first generic opened the door. The second and third kicked it down.

What happens when competition stalls

But here’s the problem: not all markets get that far. Nearly half of all generic drugs in the U.S. end up with only two manufacturers. That’s called a duopoly. And in a duopoly, prices don’t keep falling. They often stop dropping-or even rise.

A 2017 study from the University of Florida found that when a market shrinks from three competitors to two, prices can jump 100% to 300%. Why? Because without a third player to pressure them, the two remaining companies can quietly coordinate pricing. No one’s left to undercut. No one’s left to force the price down. The result? Patients pay more. And no one’s really checking.

This is why the number of competitors matters more than the number of brands. One generic isn’t enough. Two is risky. Three or more? That’s when the real savings kick in.

Who’s blocking the third entrant?

You’d think more generics would mean more competition. But in reality, big players are making it harder for new ones to enter.

Brand-name companies used to rely on patents to keep generics out. Now they use other tricks. One common tactic is “pay for delay”-where the brand pays a generic company to stay off the market. The Blue Cross Blue Shield Association estimates this costs patients $3 billion a year in higher out-of-pocket costs alone.

Another tactic? “Patent thickets.” A single drug can have dozens of overlapping patents. One blockbuster drug had 75 patents filed to stretch its monopoly from 2016 to 2034. That’s not innovation. That’s legal obstruction.

Even when generics do enter, they face a supply chain stacked against them. Three wholesalers control 85% of the market. Three pharmacy benefit managers (PBMs) handle 80% of prescriptions. These middlemen have enormous power. They can favor one generic over another-not based on price, but on kickbacks or contracts. That means even if a third generic manufacturer offers the lowest price, they might not get on the formulary.

Why price drops aren’t always seen at the pharmacy

You might wonder: if manufacturers are lowering prices, why do some prescriptions still cost a lot at the counter?

The answer lies in the supply chain. The FDA compared two types of pricing data: what manufacturers charge (Average Manufacturer Price) and what pharmacies actually pay (wholesale invoice price). The manufacturer price dropped 60-70% with multiple generics. But the pharmacy price only dropped 40-50%. Why the gap? Wholesalers and PBMs are taking a bigger cut.

This doesn’t mean generics aren’t working. It means the savings aren’t always reaching the patient. If you’re paying cash, you might still see high prices. But if you’re covered by insurance, your plan is likely saving money behind the scenes. And those savings help keep premiums lower for everyone.

What’s being done to fix this?

There are signs of change. The 2022 CREATES Act makes it harder for brand companies to block generic access by withholding drug samples. The Preserve Access to Affordable Generics Act targets “pay for delay” deals. And the FDA’s GDUFA III program, running from 2023 to 2027, is pushing to speed up approvals-especially for complex generics that have historically seen slow competition.

The Congressional Budget Office warns that without action, Medicare could lose $25 billion a year by 2030 due to reduced generic competition. Meanwhile, the Actuarial Research Corporation estimates that accelerating third-generic entry could save the U.S. $1 trillion over the next decade.

What this means for you

If you’re on a generic drug, ask your pharmacist: “How many manufacturers make this version?” If it’s just one or two, ask if there’s another brand available. Sometimes switching to a different generic version can cut your cost in half.

If you’re paying cash, use tools like GoodRx or SingleCare. They compare prices across pharmacies and often show the cheapest generic version-even if it’s not the one your doctor initially prescribed.

And if you’re on Medicare or private insurance, know this: your plan’s ability to negotiate low prices depends on how many generics are out there. More competitors = lower costs for everyone.

The bottom line

The second and third generic entrants aren’t just nice-to-haves. They’re the main reason prescription drug prices fall so dramatically after patents expire. Without them, we’d still be paying brand prices for pills made by one company. With them, we get real savings-sometimes over 60% off.

The challenge now isn’t getting generics approved. It’s making sure enough of them get to market. If you care about affordable medicine, support policies that break up pay-for-delay deals, speed up approvals, and protect competition. Because in the world of generic drugs, more companies don’t mean more confusion. They mean lower prices-and better access for everyone.