Pharmaceutical Lifecycle Extension Strategies - Innovation and Marketing in the Pharmaceutical Industry - page 223

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Fig. 8.1 The number of new drug approvals between 1950 and 2010 is relatively stable
new drug development have risen enormously over the last 60 years, the number of
newly approved drugs has remained relatively stable (see Fig. 8.1 ; Cockburn 2007 ;
Munos 2009 ). In 2008, the pharmaceutical industry spent $50 billion on R&D and
21 new drugs have been approved in the United States (Munos 2009 ).
At the same time, the share of generic drugs has increased substantially. The
generic share of prescription drugs in the United States has risen from 18.6 % of
unit sales in 1984 to 78 % in 2010 (Forden 2011 ; Frank 2007b ). The current generic
share is comparable for most other countries with high drug sales, although in some
countries like France, Italy, Japan, and U.K. the generic share is 50-60 % (Danzon
and Furukawa 2008 ). The rise of the generic share has several reasons. The growth
of managed care organizations (MCO) and health maintenance organizations
(HMOs) have increased the emphasis on generics. Pharmacy benefi t managers
(PBMs) act as managers for reimbursement for fi rms and HMOs and stimulate the
usage of generic drugs. In several countries—such as the United States, Canada, and
Belgium—insurers have introduced tiered copayments (or partial reimbursement
rates) and generics have the lowest copayments. Pharmacists have been incentivized
to prescribe more generics, due to higher margins (Grabowski and Vernon 1992 ).
Many countries and all states in the United States have now laws in place that permit
pharmacists or make it compulsory for them to substitute a branded drug by a
generic if one is available (Vivian 2008 ). Hellerstein ( 1998 ) reports that, in 1995,
pharmacists already substituted generics in half of the cases when the doctor pre-
scribed a branded drug. An extensive literature has discussed the determinants (e.g.,
Grabowski and Kyle 2007 ; Grabowski and Vernon 1992 ; Hurwitz and Caves 1988 ;
Saha et al. 2006 ; Scott Morton 2000 ) and consequences of generic entry (e.g., Caves
et al. 1991 ; Hurwitz and Caves 1988 ; Reiffen and Ward 2005 ; Saha et al. 2006 ).
This literature shows that the number of generic entrants decreases the generic
price. The number of generic entrants is mainly driven by market size, pre-patent
expiry advertising, and the ease of manufacturing. The generic share increases in
the extent of HMO coverage and is larger in hospital markets. In addition, most