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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.
Declining R&D productivity, rising costs of commercialization, near-term patent expirations for many top-selling drugs are forcing companies to adopt new systems to introduce innovative products to market and to focus on strategies that increase the returns from their existing product portfolio. This article explores various strategic and tactical management approaches and further discusses how the mix of competition policies and strategic instruments can be used to maintain declining revenue streams from the blockbuster business model of the pharmaceutical industry.
There are several reasons for generic entry and the associated patent cliff. Traditionally, innovators have attempted to replace blockbusters with new drugs from their pipeline to offset the looming decline in sales. However, the R&D productivity of the pharmaceutical industry has been continuously declining and the costs of bringing new drug to market have been increasing, while drug approval processes by government agencies are taking longer (Pammolli et al. 2011). Such maturity problems result from the fact that the companies have struggled to develop and market products that are effective enough to compete with existing product ranges and meet regulatory requirements (Mittra and Tait 2012). The shrinking pipeline of research-driven pharmaceutical companies and the generic competition have caused them to deploy a range of strategic approaches (Paul et al. 2010), such as the acquisition of biotech companies to refill their R&D pipelines (James 2002). The rationale behind such acquisitions is to enhance the earnings performance in the patent cliff period, to increase portfolio breadth diversify revenue sources.
In 1984 the Hatch–Waxman Act, also known as the Drug Price Competition and Patent Term Restoration Act, changed the dynamics of generic entry. It was intended to expedite generic drug approval and to encourage generic participation in the prescription drug industry, and has positively contributed to the growth of the modern generic drug industry in US (Grabowski and Vernon 2000).
Title I of this legislation established the Abbreviated New Drug Application (ANDA) process, which grants a 180-days market exclusivity period to the first generic manufacturers who successfully files an ANDA. Under this legislation, a manufacturer only needs to demonstrate the bioequivalence of the drug. Before its adoption, there was been no streamlined drug approval process for generics, and generic suppliers were obliged to go through the same costly and time-consuming clinical trials to obtain a market approval. This incentive has driven generic competition, promoting the prompt entry of generics to the market. Moreover, the number of generic entrants is determined by pre-expiration brand revenue, length of market exclusivity period and the ease of manufacturing (Scott Morton 2000; Grabowski and Kyle 2007). Naturally higher sales and shorter market exclusivity periods for the branded drug attract more generic entry. Additionally, the gradual decrease in market share can be linked with branded drug withdrawing the pre-expiration brand advertising.
Payer initiatives to drive generic use have also led to the erosion of branded drugs. For example, in Europe and the United States there exist generic-promoting policies obliging pharmacists to always dispense the cheapest product.
Generic entry has consequences for many different market players. It can lead to substantial changes in the average price of drug, thereby shifting the competition focus from monopoly towards competition based on price. Therefore, innovator-companies are forced to implement profit-raising measures by either adapting the prices of branded pharmaceuticals or by finding new source of profit, ideally in the form of new blockbuster drugs. For example, Eli Lilly’s anti-depressant Prozac® lost about 70% of its market share within the first 20 weeks of generic entry (Druss et al. 2004). Such rapid revenue loss for innovator calls for the incorporation of sophisticated product lifecycle management, maximizing a product’s lifetime value through optimal use of patents and other means (Prajapati et al. 2013).
Two major events have emerged to respond to this new economic environment. Firstly, the patent cliff spurred a new type of product innovation. With much of the low-hanging fruit for drugs serving large population depleted, many companies focused on specialty drugs with low substitution potential, replacing blockbusters with “niche busters” (Dolgin 2010; Kakkar and Dahiya 2014). By focusing on niche markets, companies are able concentrate on their core competencies, freeing up resources and getting rid of less-competitive assets. One example is the agreement between Novartis and GlaxoSmithKline (GSK), whereby Novartis purchased the oncology business from GSK and GSK obtained the vaccine business in exchange.
Secondly, a substantial effort has been put into developing new business models and evaluating the legislative practices that suit the changed business environment (Rusu et al. 2011). While the business environment has changed significantly, the respective business models have not kept pace. If revenues can only be sustained by exploiting legislative loopholes, companies willing to invest in the development of medicine will face a serious dilemma on a long-term scale. Without proper policy intervention, the rise in patent challenges will not only shorten the effective market life, but also contribute to the dearth of high-risk and high-necessity drugs (Higgins and Graham 2009). The predominant version of the current business model, in which an extensive marketing effort and sales presence is crucial for maintaining streams of revenue, will be less effective. In the future, most medicines will likely be paid for on the basis of the results they deliver and pharmaceutical companies need to pursue the path of “profiting together” instead of “profiting alone” by moving into health management space and to go beyond medicine (pwc 2009).
With rising R&D expenditures, it is important for pharmaceutical companies to recoup positive returns from innovation. This can be only achieved by improving both effectiveness and efficiency. The use of generic drugs is expected to continue in the future, as payers continue promoting the use of low-priced alternatives.
Research-driven pharmaceutical companies can employ a range of strategies to extend their patent protection on drugs, thus maximizing the commercial value and retaining market share. Four general strategic pathways exist. Differing levels of strategic and marketing influences define the appropriate actions. For instance, considering the 4P marketing mix (product, price, place and promotion), the variable “place”, which determines the intensity and manner how products will be made available (van Waterschoot and Van den Bulte 1992), plays a minor role in the marketing of pharmaceuticals, since the prescription drug market is regulated by state authorities and there is hardly any entrepreneurial flexibility with regard to the distribution channel. Additionally, depending on the time period, a different mix of strategies is required to effectively prolong the life cycle of the drug and to balance risk and reward. In simplified terms, the strategic decisions regarding the variable “product” need to be taken at an early stage, as the development of product innovation usually takes time, while “promotion” and “price” can be adapted more flexibly and on short notice. Thus, determining which pathway to pursue depends largely on company’s existing capabilities, opportunities and priorities. The figure at right gives an overview of the four generic strategic pathways.