Health concepts and applications

Frank, R.G. & Salkever, D.S. (1997). Generic entry and the price of pharmaceuticals. Jnl of Economics and Financial Strategy 6(1): 75-90.

What is the goal of this study?

The goal of the study was to examine market responses to the 1984 Waxman-Hatch Act. Market responses for pharmaceuticals seemed to differ from traditional patterns of pricing after a generic product competes with the pioneer. Frank & Salkever (1997) studied a series of formerly patent drugs and their generic pairs to determine any patterns in pricing response. The research investigates brand-name pricing strategies after generic drugs enter the market as well as generic drug pricing patterns.

What is the time period analyzed?

The current research analyzes pharmaceuticals that lost their patents between 1979 and 1987.

A iii. What is/are the data sources?

Data sources include a broad sample of pharmaceuticals that had lost patent protection between 1979 and 1987. Only pharmaceuticals that required prescriptions were included in the current research; any drug that was downgraded to an over-the-counter formula was excluded from the research. No combination products or small-circulation medications such as specialized injectibles were included in the research. The resulting data set included 45 brand-name pharmaceuticals and their generic counterparts. The main source of pricing data derives from IMS America Inc.'s MIDAS system, using the United States Drugstore and Hospital Database (p. 80). The database accounted for almost all pharmaceutical sales in the United States for the years in question.

A iV. What are the main findings?

An average of five generic products enter the market during the first post-patent year, and generic product entry slows thereafter (p. 83). Remarkably, findings reveal a significant price increase for brand-name pharmaceuticals after the generic counterpart enters the market. The price increase was as much as 50%. Increasing brand-name prices in response to generic entry runs completely counter to traditional marketing practices regarding pricing responses in other product areas. Usually, brand name pricing decreases to compete with the newly emerging generic product. The generic product competes strongly with the pioneer on pricing alone, and the brand-name product usually drops in price to compete. In the case with pharmaceuticals the reverse is true. Generic products remain significantly cheaper than their brand name counterparts, but the brand name drugs actually increased in price.

v. What new information did you learn?

The pharmaceutical industry operates with different marketing strategies and techniques than other industries. Competition in the pharmaceutical industry stimulates aggressive pricing strategies among generic manufacturers. However, brand-name manufacturers have opted out of price wars with their generic competitors. Generic drugs with the same formula compete with one another more than they do with their pioneer brand counterpart.

A vi. What are some suggestions/criticisms you would make to the author?

The authors offer little commentary or analyses of the results. Their explanations of the weaknesses in the research model show that the study is preliminary, but some speculation as to why pharmaceutical companies use the pricing strategies they do would have been helpful.

A vii. Question you have for the author?

I would ask the authors what they felt the best approach for future research in this area might be. I would also want to know what economic and marketing theories might account for the pricing strategies used by pharmaceutical companies. For example, are pharmaceutical companies hoping that brand recognition engenders consumer trust to the point that pricing becomes less important?

Comanor, W.S. (1986). The political economy of the pharmaceutical industry. Journal of Economic Literature 24: 1178-1217.

i. What is the goal of this study?

Pharmaceutical prices generally exceed the costs of manufacture (p. 1178). Revenues purportedly are funneled into research and development but, as Comanor notes, the industry had drifted toward monopolistic power by the 1980s. The situation led to governmental intervention and a vetting of the industry and its practices. Comanor investigates a wide range of resources detailing the political economy and marketing strategies of the pharmaceutical industry to elucidate patterns. The research also demonstrates any relationship between public policy or legislation and marketing strategies.

A ii. What is the time period analyzed?

Comanor investigates economic literature spanning several decades, beginning with the 1960s.

A iii. What is/are the data sources?

Data sources derive mainly from economic publications but also from political committee report documents. Established indexes of economic analysis are also a source of data for determining rates of profit and other economic parameters. Essentially, the Comanor research is a meta-analysis.

A iV. What are the main findings?

Pharmaceutical companies engage in spurious marketing, and especially pricing, strategies. Pricing far outweighs costs, and many companies tout moneymaker products that account for a substantial proportion of earnings. Until the 1980s, pharmaceutical companies possessed proven monopolistic power, measured on a number of different scales including profit rates.

v. What new information did you learn?

Monopolistic power is not a product of market share alone. The pharmaceutical industry's marketing tactics and pricing strategies strongly suggests a need for third-party intervention and governmental regulation. Competition can also be measured using different standards. Pharmaceutical companies have accounted for high profit margins by claiming that consumers benefit from heavy investment in research and development. However, empirical research shows that revenues are channeled more into marketing than into research.