Tuesday, November 03, 2009

How Generics Change the Market

I just came across an intriguing new study that examines how generic drug entry affects prescription volume and manufacturer revenues. See TIME RELEASE: The Effect of Patent Expiration on U.S. Drug Prices, Marketing, and Utilization by the Public

The paper poses an interesting question and contains some neat data on post-generic market evolution—brand market share, prices, promotional expenses. I’m a bit underwhelmed by the author’s conclusions. So, I suggest that you enjoy the pretty pictures and perhaps incorporate the conceptual ideas into your forecasting models.

The authors use monthly data for 2000–2004 from IMS Health on virtually all prescription drugs sold in the United States. A few fun facts from the paper about the generic market in 2000 to 2004:
  • Generics’ market share increases sharply and suddenly after year 12. Thank you, Hatch-Waxman!

  • For a patent-protected drug, the average price increases about 44 percent (about 3.5 percent per year) from year 0 to year 12.

  • Between year 12 and year 17, the average price declines by 61 percent. Advertising expenditures drop by roughly the same amount.
Here’s my favorite chart:

I believe that substitution speed has increased since 2004 a la the Fosamax example that I highlighted in Medco Takes on Eli Lilly. Anyone know of a study that looks at a large sample of recent generic launches?

Here’s my summary of the author’s main theoretical question:
  • Promotion by a manufacturer increases total prescriptions for a drug.

  • Following the launch of the generic version(s), competition reduces the prices of both the innovator drug and the generic.

  • Promotion by the manufacturer of the brand declines after generic entry because there is less incentive to promote as the price drops.

  • At the same time, a decline in price should stimulate demand per Economics 101. Thus, the net effect of generic competition on demand is (theoretically) indeterminate.
And the answer?
“The two hypothesized effects of increased competition from generics—increased utilization due to falling prices, and decreased utilization due to reduced marketing—appear approximately to offset each other.”
Thanks for checking, guys!


  1. Underwelmed greatly by the whole article and listening to the podcast makes one wonder who paid for all this--and why?

    But it was probably of great use to the branded companies that have never understood the generics market

  2. Adam,

    Great find, and nicely summarized as always. As you say, conclusions border on the mundane. Doesn't help with pre- or post-generic strategies. Should prices be increased more during life of product? Does substitution happen faster now and what can be done to slow it down? Should they be decreased more post-patent? Should they market more or less? Can the early shape of the curve determine the rate of substitution?

  3. Adam,

    Thanks to Blanche, Irwin, and our friends at IMS for sharing such exciting information.

    Does it take a genius to determine that as a drug loses patent protection, it's volume will rapidly erode?

  4. Hi Adam,

    You don't need to post this comment... it's more direct for your enjoyment...

    I think that today's Dilbert cartoon is very apropo... marketing by Pharma trumps the availability of a lower cost therapeutic alternative...

    Have a good day!

  5. here's a study about going from lipitor to zocor/simvastatin/etc.


  6. just to add...here's more on the zocor switch