Table of Contents
This is part four of a six-part series on drug lifecycle management: Four Strategic ChoicesPrevention Innovation Extraction Adaptation Summary and Conclusion
This article is adapted from Song CH, Han J-W. Patent cliff and strategic switch: exploring strategic design possibilities in the pharmaceutical industry. SpringerPlus. 2016;5(1):692. doi:110.1186/s40064-016-2323-1 under a Creative Commons Attribution 4.0 International License. It has been edited for length and style.
Extraction Strategy
The third strategy is to fully exploit the current market position without making additional investments in the product innovation. Innovators have several options to attenuate pricing, marketing, and collaborations to maximize the revenues from drugs facing patent expiration.
Differentiation
In differentiation, the patent holder leverages the brand name of their drug, aiming to mitigate declining sales by adjusting strategies along the dimensions of “price” and “promotion”. Brand owners normally decrease the price to compete directly with generics, but they can also increase the price to reach the price-insensitive segment of the market (Grabowski and Vernon 2000; Chandon 2004). Ching (2010) confirmed that myopic firms would set higher prices to maximize short-term profit, as the incentive becomes smaller over time with uncertainty about the generic quality slowly resolving. However, these only have a marginal effect of delaying the decline in sales. Sooner or later, these strategies need to be abandoned, as the increasing marketing costswill at some point fail to justify the additional revenues.
In dropping prices branded firms must take into account that generic providers are also willing to reduce their prices to maintain a price gap. For example, the extraordinary success of the drug Neurontin after its patent expiration lies in the fact that the generic product was only about 15% lower priced than the branded drug; a difference for which the prescribers can waive the use of generics. Alternatively the generic version of Pfizer’s Lipitor Atorvastatin Hexal® offered a price advantage of up to 85% on launch.
Exit
Another option is for the patent holder to intentionally cut marketing expenses and reduce investments in sales. The goal of these cost reductions is let the product phase out with the loss of market exclusivity. The product still can generate revenues from “loyal prescribers”, who do not shift their patients to low cost alternatives, but these revenues will ultimately diminish.
Licensing
The second strategic approach under this category is selling or licensing a patent to generic suppliers. Instead of a controlled, strategic withdrawal from the product line, selling or licensing patents and trademarks to other entities may turn out to be more appropriate. Further, it might be attractive to license the drug to another company to explore alternate indications (repurposing; see Part 3 – Innovation). Even without further innovation smaller companies may find the residual potential of the blockbuster drug appealing.
Table 3: Overview of extraction strategies
| Strategic options | Description | Effect | Source |
|---|---|---|---|
| Differentiation | Competitive advantage through brand recognition; strong brand image | Mid-term | Agrawal and Thakkar (1997) |
| Exit strategy | ‘Milking’ of the product; letting the product slowly phase out | Short-term | Chandon (2004) |
| Licensing | Licensing or selling of the exclusive rights to generic manufacturers | Short-term | Glasgow (2001) |
Next: Part 5 – Adaptation
This is part four of a six-part series on drug lifecycle management: Four Strategic ChoicesPrevention Innovation Extraction Adaptation Summary and Conclusion
References
- Chandon P (2004) Innovative marketing strategies after patent expiry: the case of GSK’s antibiotic Clamoxyl in France. J Med Mark 4:65–73 View Article Google Scholar
- Ching AT (2010) Consumer learning and heterogeneity: dynamics of demand for prescription drugs after patent expiration. Int J Ind Organ 28:619–638 View Article Google Scholar
- Grabowski H, Vernon JM (2000) Effective patent life in pharmaceuticals. Int J Technol Manage 19:98–120 View ArticleGoogle Scholar