Generics don’t make the largest companies profitable. In fact, I don’t know where things stand now, but 20 years ago, most pharmaceutical companies divested their OTC products and generics were an insignificant portion of sales. Basically all of their profits come from patented products and pharmaceutical companies attempt numerous workarounds to try to extend their patents as long as possible. Some of that has changed more recently due to the difficulty for companies to get generic biologics approved by the FDA, but still pharmaceutical companies don’t care about their generic products.
All pharmaceutical profits are derived from innovation whether new targets or simply improved side effect profiles, method of delivery, etc.
Anyway, it stands to reason that pharmaceutical companies strive to keep their product pipelines full. So, what do you think would happen if the industry were less profitable, had PEs similar to commodities, and earned exactly what the government thought was their right to earn?
First, we would see good things - smaller sales forces, lower drug prices, less advertising. But later we would also see more mergers and acquisitions as the industry continued to mature. And we would see a decrease in development as the return on investment would justify fewer innovative, riskier products.
Does this mean that innovation would die? Of course not. It would only slow down initially. However, in this scenario where government controls pharmaceutical prices, what happens as the government still has shortfalls in what it has budgeted to pay for pharmaceuticals? Well of course it would lower pharmaceutical prices even more. At some point without profits, development of pharmaceuticals comes to a crawl verses the rapid innovations that have occurred since penicillin was commercialized during WW2.