Biomedical Engineering Reference
In-Depth Information
2.2.6
Watch Out: Here Come the Generics!
Patent expiration or the end of the exclusivity period (whichever comes last) is the
dreaded moment for every pioneer brand. Although in practice market exclusivity
can extend past the loss of a patent, for brevity purposes hereafter we refer to the
loss of all regulatory protection collectively as patent loss.
When the market opens up to generic entrants, aggressive price competition
ensues and the original brand quickly loses market share. It is worth noting that by
then, the brand might have been competing with me-too or follow-on drugs for
some time. However, the competition with branded alternatives is likely to be more
quality-based than price-centered. If marketing efforts emphasizing differentiation
have been effective in expanding the market, the loss of market share for the pioneer
brand might have been relatively limited. But when the drug patent expires, exact
generic clones appear promptly at prices that can be as much as 50 % lower than
those of the original brand (Griliches and Cockburn
1994
).
Generally, the average price of the fi rst generics to enter the market is about 25 %
lower than that of the original brand. Over time and with increases in generic entry,
generic drug prices stabilize at levels close to the long-term marginal cost of
production and distribution, which is about 20 % of the original brand's price.
For example, in 2006 the average price of a brand name prescription in the USA was
$111, whereas the average price for a generic prescription was $32 (Kanavos et al.
2008
). Given that two-thirds of the global pharmaceutical market, currently valued
at about $1 trillion, consists of molecules that are already subject to generic compe-
tition or whose patents have already expired (Kanavos et al.
2008
), generic drugs
offer an option for signifi cant savings and cost-containment. Yet, generics represent
a formidable threat to incumbent brands and their entry introduces a major turbu-
lence in the markets they enter.
The selection of new markets for entry by generic drug manufacturers is driven
primarily by economic factors and considerations. Empirical fi ndings demonstrate
that markets of large revenue potential, markets with a greater proportion of hospital
sales relative to pharmacy sales, markets defi ned by chronic conditions, markets
offering high profi t margins to incumbents, and treatment forms or therapeutic areas
with which the generic drug manufacturer has prior experience constitute the most
attractive conditions for entry by generics (Morton
1999
,
2000
; Hudson
2000
;
Magazzini et al.
2004
). Therefore, product/market characteristics conducive to
greater price elasticity of demand, in conjunction with provisions associated with
functional effi ciency (scale and scope effects, experience, concentration of effort,
business sustainability) have a preeminent role in the market entry strategies of
generic drug manufacturers.
Brand-name manufacturers typically eschew price competition with the generic
drugs. The price competition is left to the generics, which, due to insuffi cient dif-
ferentiation, tend to experience a strong downward price pressure over time. By
contrast, the price of the original brand remains higher and may even rise in nominal
terms after the generic entry. This counterintuitive move is justifi ed by the strategic
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