The Successful Launch and Diffusion of New Therapies - Innovation and Marketing in the Pharmaceutical Industry - page 203

decreased the launch price level of a new drug in the category. “Follow-on,” or “me-
too,” drugs have more difficulty obtaining a higher price because they have to dem-
onstrate their superiority in comparison with existing substitutes (DiMasi and
Paquette 2004 ). DiMasi ( 2000 ) studied price levels of new entrants in an existing
therapeutic class in the USA and found that 65 % of the observed drugs had an
introductory price that was 14 % lower than the category's average price. Ekelund
and Persson ( 2003 ) also studied new drugs' launch prices in Sweden, where regula-
tions are stricter than in the USA, between 1987 and 1997. Similarly to Lu and
Comanor ( 1998 ), they found that the extent of a drug's therapeutic innovation posi-
tively affects its relative introductory price. However they found that, competition
does not influence launch prices. In addition to the extent of therapeutic benefit and
number of substitutes, another factor influencing price is therapeutic indication:
drugs indicated for acute conditions have larger premiums than those indicated for
chronic illnesses (Ekelund and Persson 2003 ; Lu and Comanor 1998 ).
The evolution of new drugs' prices over the product life cycle—or price dynam-
ics—has also received some attention. Lu and Comanor ( 1998 ) observed a price-
skimming strategy, i.e., a high introductory price and then a decrease in price level,
for drugs that constitute a substantial therapeutic advancement, whereas they found
that pharmaceutical companies apply a penetration pricing strategy—low introduc-
tory price and then an increase in price level—for drugs that offer a small therapeu-
tic gain (Lee 2004 ). Price increases were smaller if more brand-name substitutes
were available in the market. In contrast to Lu and Comanor, who studied pricing
strategies in the USA, Ekelund and Persson ( 2003 ) observed higher relative intro-
ductory prices and a price-skimming strategy across all drugs in the regulated coun-
try Sweden. The main source for the differences between the results of Lu and
Comanor ( 1998 ) and those of Ekelund and Persson ( 2003 ) is likely the difference in
the regulatory environments in the USA and in Sweden. Regulators in Sweden seem
to compensate the pharmaceutical manufacturers' limitation of a price cap by allow-
ing a relatively high introductory price before price decreases, and competition
seems to matter less in a regulated country.
Many countries worldwide enforce price regulations, and a pharmaceutical com-
pany in such countries can only launch a new drug once price negotiations with local
health regulators have ended. Price regulations can include price cap mechanisms
that limit the price a new drug can attain. For example, a country's public health
administration might enforce an ex-manufacturer price cap, i.e., a maximum price or
reservation price that a manufacturer can charge to the wholesaler of a pharmaceuti-
cal product (Danzon et al. 2005 ). Belgium, Greece, and Portugal are examples of
countries with strict ex-manufacturer price regulations. Verniers et al. ( 2011 ) find no
direct effect of these price regulations on launch price. When setting a launch price,
pharmaceutical companies often also take into account whether a new drug will get
reimbursement or not.
At the moment of patent expiration in the product life cycle of a drug, generic
drugs—drugs that are bioequivalent to the brand-name drug—enter the market. This
generic entry poses a challenge for brand-name pharmaceutical companies, as
generic manufacturers' drugs enter the category at lower prices. Morton ( 1999 )