Pharmaceutical Lifecycle Extension Strategies - Innovation and Marketing in the Pharmaceutical Industry - page 236

The literature is consistent on fi rms decreasing their marketing expenditures
before and after their patent expires (Berndt et al. 2003 ; Caves et al. 1991 ). The lit-
erature is also consistent on a decreasing market size for the molecule after patent
expiration (Caves et al. 1991 ; Gonzalez et al. 2008 ), though this may not hold for
current markets due to the advent of stronger managed care pressures.

8.3 Marketing Strategies

Firms of branded drugs that face patent expiration have different marketing tools to
retain sales and soften the impact of generic entry. They can make their product
attractive by the price, promotion, and by differentiating it from generics, to either
limit the generic share directly or by deterring generic entry (Scott Morton 2000 ).
A fi rm can also decide to divest its drug around patent expiry. In addition, the fi rm
can introduce a branded generic or an OTC version of the drug. I discuss these
marketing-related strategies in turn below.

8.3.1 Pricing

When the market exclusivity period for a drug ends, lower-priced generics enter the
market. The branded drug manufacturer can react by decreasing the price to com-
pete directly with the generics (e.g., Chandon 2004 ). For example, they can decrease
the unit price or give volume discounts to large distributors or pharmacies. They can
also maintain or increase the price and focus on the price-insensitive segment of the
market, although price increases are not an option in countries where the price is
regulated (e.g., Europe). In the United States the most common reaction of branded
fi rms to generic entry is a price increase.
Frank and Salkever ( 1992 ) explain the price increase of branded drugs in response
to generic entry by dividing the market into two segments. They show theoretically
that a price increase after generic entry can be explained by optimal fi rm behavior.
They distinguish a segment that is price insensitive (or brand loyal) to the branded
drug and a price-sensitive segment. The price-insensitive segment can consist of
patients of doctors in fee-for-service practices, while the price-sensitive segment
consists of hospitals, HMOs and Medicaid patients. They conclude that generic
entry decreases the price elasticity of the demand for the branded drug and hence a
price increase for the branded drug is optimal (this is extended and confi rmed by
Regan ( 2008 ), who incorporates the payment type of the patient for the drug). In a
later paper Frank and Salkever ( 1997 ) confi rm these predictions empirically.
Gonzalez et al. ( 2008 ) use doctor-level data from the U.K. to study the patent expiry
of Prozac. They confi rm the existence of two doctor segments: a marketing-sensitive
segment that prescribes less of the molecule losing its patent and switches to the
more heavily marketed alternatives, and a smaller price-sensitive segment that starts
prescribing the cheaper generics.