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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.
The second strategic orientation is to avoid competition through product or business model innovation. The basic principle of ‘innovation strategy’ is therefore to outpace the competition with a new move on the perceived value of a product or business model. Typically, the ability to continually innovate and actively provoking shifts in industry evolution are the hallmark of a successful outpacing strategy (Gilbert and Strebel 1987). In this sense, product-related innovation strategies comprise product-line extensions, approval in new indications, introduction of follow-on product and Rx-to-OTC-Switch.
Product-line extensions refer to a variation of the existing products by proactive measures aimed at advancing it. Most frequently the drug itself is altered or the product manufacturing procedure is improved to achieve a higher level of purity or to achieve cost saving potential (Dubey and Dubey 2009).
Superior formulations of a drug can promote patient compliance through reduced dosing, new route of administration or improved compatibility (fewer side effects). For example, after the patent expiration of the blockbuster drug Prozac® (fluoxetine) in 2001, Eli Lilly obtained patent protection for the combined use of olanzapine and fluoxetine (Symbyax®) for treatment of refractory depression. The patent of this new combination drug extended to 2017. This kind of product bundling approach is a popular mechanism to prolong the product lifecycle, since the bundling can facilitate the leveraging of market power from one to another. Pfizer’s Procardia XL® is a result of line extension with controlled-release formulation for the treatment of arterial hypertension. Such reformulations build on same active ingredient of the original drug and have a shorter approval path. Hong et al. (2005) reported that a product-line extension helps to maintain the price level to a reasonable extent despite the entry of generic suppliers.
Alterting manufacturing can also extend patents. Shifting from a racemic mixture, a compound consisting of an equal mixture of a pair of enantiomers, to a single isomer can improve drug efficacy or result in a favorable pharmacokinetic and pharmacodynamic profile. One example is Prilosec® (omeprazole) from AstraZeneca. The company has successfully marketed Nexium®, which is the single (S)-enantiomer of omeprazole, as an extension.
Indication extension refers to the practice of identifying novel applications for an existing drug. In the course of clinical use, new opportunities for disease targets can emerge. If the resulting evidence on possible new indications appears to be promising, an extension of the drug approval may be requested. Upon receiving approval for reformulation or new indications, innovators can acquire at least 3-years of market exclusivity, and possibly additional patents.
The most promising, but the most difficult strategy to implement is the introduction of a follow-on product, which is either therapeutically or technologically innovative and permits better patient outcomes. The underlying rationale behind this strategy is to transfer the brand reputation and patient base to the follow-on product in order to make up for the losses of sales. A key success factor for the implementation of this strategy is the interplay between two factors: price sensitivity of the market and the expected degree of improvements of drug profile. Without any significant improvements over its predecessor, it is extremely difficult to persuade the prescribers to switch to a follow-on product.
Another important question is whether the follow-on product should be promoted in a complementary or substitutive relationship. Follow-on products often have cannibalizing effects on predecessors, but the parallel offerings can avoid the risk of substitution, generating complementary revenues streams without any further cost or effort.
Switching a prescription drug (Rx) to an over-the-counter (OTC) drug may provide a new venue for revenues. The switch means the removal of the active pharmaceutical ingredient from prescription-only status. The rationale for the OTC-switch is that patients, who had positive experiences with the branded prescription drug, will remain brand-loyal and select the branded OTC option.
Choosing this strategic path may create new revenue opportunities by diversifying the customer base and can also benefit consumers with more accessible and affordable self-care solutions. However, the switching of Rx–OTC is not always practicable. The switch process is highly regulated and scientifically rigorous. For a medicine to be granted OTC status, regulators must accept that the drug is safe enough for patients to select and use without medical supervision.
Many firms do not survive despite their product innovation capabilities. The cause for this failure is often that they failed to adjust their business models to changing environments.
The prevailing blockbuster business model that has driven the pharmaceutical industry over the last few decades is increasingly out of alignment research methods and changing social demands. Research and development is being redirected away from blockbuster products towards therapies for stratified groups of patients, as the concept of personalized medicine promises a patient-centered clinical practice while improving drug efficiency (Mittra and Tait 2012).
Since there is an increasing diversity in the strategic profile and innovation process, the vertically integrated value chain might transform into a service- or product platform-oriented business model by either producing diagnostic devices that aid the understanding of pharmacogenomics profile or by focusing on the discovery and pre-clinical development of active compound with a view to license it (Bigliardi et al. 2005).
|Strategic options||Description||Exclusivity period|
|Product-line extension||Extensions of existing drug (e.g. reformulations and combination drugs); improvement over the predecessor||Depending on the patentability of the product/3 years of market exclusivity for extensions involving clinical research|
|New indications||Finding new potential usage by extending the therapeutic indication of the drug||3 years of market exclusivity|
|Introduction of follow-on products||Introduction of next-generation drug; demonstration of improved properties||Depending on the patentability of the product|
|Rx-to-OTC-switch||Switching a prescription drug to OTC status; expansion of the market||–|
|Business model innovation||Altering the firm’s core logic for creating and capturing value by specifying the value chain||–|