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!