John Vernon

Brand Loyalty, Entry, and Price Competition in Pharmaceuticals after the 1984 Drug Act

IN 1984, Congress enacted a new law that greatly affected the economics of the pharmaceutical industry in the United States. It has been characterized as the most important legislation affecting competition in the pharmaceutical industry since the 1962 Kefauver-Harris Amendments to the Food and Drug Act. This 1984 law, known as the Drug Price Competition and Patent Term Restoration Act (hereinafter the 1984 Act), facilitated the entry of generic drug products after patent expiration while it also restored part of the patent life lost during the premarket regulatory process for new introductions.1 Market entry by generics was relatively limited prior to 1984 because of costly Food and Drug Administration (FDA) requirements that had to be met by the imitative products. That is, generic drugs often would have to duplicate many of the pioneers tests to gain market approval after patent expiration. As a result of the 1984 law, generic products need only demonstrate bioequivalence to the pioneers brand, and generic entry has increased significantly. This has provided a body of very interesting data to analyze the pattern of entry and the pricing strategies followed by the entrants and incumbents. In this article, we make use of data covering the sales and prices of the pioneer and generic products for eighteen drug products, generally over the time period 1984-88. A number of issues are examined. First,

Returns on research and development for 1990s new drug introductions.

AbstractBackground: Previously published research by the authors found that returns on research and development (R&D) for drugs introduced into the US market in the 1970s and 1980s were highly skewed and that the top decile of new drugs accounted for close to half the overall market value. In the 1990s, however, the R&D environment for new medicines underwent a number of changes including the following: the rapid growth of managed-care organisations; indications that R&D costs were rising at a rate faster than that of overall inflation; new market strategies of major firms aimed at simultaneous launches across world markets; and the increased attention focused on the pharmaceutical industry in the political arena.n Objective: The aim of this study was to examine the worldwide returns on R&D for drugs introduced into the US market in the first half of the 1990s, given that there have been significant changes to the R&D environment for new medicines over the past decade or so.n Results: Analysis of new drugs entering the market from 1990 to 1994 resulted in findings similar to those of the earlier research — pharmaceutical R&D is characterised by a highly skewed distribution of returns and a mean industry internal rate of return modestly in excess of the cost of capital.n Conclusions: Although the distribution of returns on R&D for new drugs continues to be highly skewed, the analysis reveals that a number of dynamic forces are currently at work in the industry. In particular, R&D costs as well as new drug introductions, sales and contribution margins increased significantly compared with their 1980s values.

Returns to R&D on new drug introductions in the 1980s.

This study finds that the mean IRR for 1980-84 U.S. new drug introductions is 11.1%, and the mean NPV is 22 million (1990 dollars). The distribution of returns is highly skewed. The results are robust to plausible changes in the baseline assumptions. Our work is also compared with a 1993 study by the OTA. Despite some important differences in assumptions, both studies imply that returns for the average NCE are within one percentage point of the industrys cost of capital. This is much less than what is typically observed in analyses based on accounting data.

Longer Patents for Increased Generic Competition in the US The Waxman-Hatch Act after One Decade

SummaryThe 1984 Waxman-Hatch Act had two main objectives. Title I was designed to promote price competition by establishing an abbreviated new drug application (ANDA) process for generic market entry. Title II was designed to encourage drug innovation by restoring some of the patent life lost during the lengthy FDA regulatory process. In this paper, we consider whether these twin objectives have been realised during the first decade of the Act’s existence.First, we investigate the pattern of generic and brand name prices and market shares for the major products whose patents expired between 1984 and 1993. A regression model indicates that generic competition has been intensifying significantly in recent periods. Major brand name products now typically lose more than half their market share within the first year after patent expiration. In addition, we examine changes in patent protection for new chemical entities introduced over the period 1984 to 1993. For 1991 to 1993 new drug introductions, the average effective patent life was 11.8 years with 2.3 years resulting from Waxman-Hatch extensions. In the final section of the paper, we consider how the US law compares with that in Europe and discuss possible legislative improvements in the 1984 Act.

Estimating the Effects of Regulation on Innovation: An International Comparative Analysis of the Pharmaceutical Industry

INNOVATION in the U.S. ethical drug industry in recent years has been characterized by a number of adverse developments. In particular, there has been a sharp decline in the rate of new product introductions and the incentive for engaging in research and development (R & D) activity has been negatively influenced by rapid increases in the costs and risks of developing new products. While there is little debate about the existence of these adverse trends, there is considerable controversy about the factors producing them.

R&D Costs and Returns by Therapeutic Category

Objectives: This study examines the degree to which therapeutic class accounts for variability in drug development costs. It also scrutinizes how sales levels vary across the associated therapeutic classes for those drugs that have reached the marketplace. Data and Methods: A stratified random sample of 68 investigational drugs that first entered clinical testing anywhere in the world from 1983 to 1994 was selected from the pipelines of 10 pharmaceutical firms. Clinical period cost data were obtained for these compounds by phase. The sample consisted both of drugs that failed in testing and drugs that obtained marketing approval. We grouped the drugs by therapeutic category. Clinical period costs per approved new drug (inclusive of failures) were obtained for the analgesic/anesthetic, antiinfective, cardiovascular, and central nervous system (CNS) therapeutic classes. Worldwide sales profiles for new drugs approved in the United States from 1990 to 1994 over a 20-year product life cycle were computed based on IMS Health sales data. All costs and sales were expressed in year 2000 dollars. Results: Out-of-pocket clinical period cost per approved drug (inclusive of failures) for cardiovascular (

Effective patent life in pharmaceuticals

277 million) and CNS (

R&d Costs, Innovative Output and Firm Size in the Pharmaceutical Industry

273 million) drugs was close to the overall average (

PIONEERS, IMITATORS, AND GENERICS - A SIMULATION-MODEL OF SCHUMPETERIAN COMPETITION

282 million). However, antiinfective drug costs were considerably above average (

The Distribution of Sales Revenues from Pharmaceutical Innovation

362 million) and analgesic/anesthetic drug costs were modestly below average (