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Drug patents allow pharmaceutical companies, having invested heavily in new products, to enjoy a defined period of exclusivity before competitors enter the market. When drug patents expire, however, generics may be ready to be introduced immediately, and downward price pressure may be strong.
How quickly brand share drops off after patent expiration can translate into revenue differences to the tune of hundreds of millions of dollars. If pharmaceutical companies can forecast the rate of revenue drop-off, what strategy is best for facing it?
A patent is a strong protector. It permits a company to enjoy a period of limited competition and proﬁt from its monopoly of a particular product. It also prevents competitors from marketing exact copies of a patented product.
When a patent expires, however, lower-priced versions of the item can be introduced by rivals. In the ﬁrst year alone after the patent on a product expires, an average of 17.2 producers enter the market, according to research on 18 industries. This increases to 25.1 after two years. The principal consequences for the company that formerly held the patent are that its product loses market share and proﬁtability in a very brief period.
Market share retention after drug patent expiration is influenced by individual product attributes and drug class attributes. Product attributes include things such as complexity of dose administration. A drug with an advanced or novel delivery system tends to attract fewer generic competitors.
If generics are already available in a particular drug class, the addition of yet another will have a weaker effect on prices. If a new therapeutic class is expected to enter the market, share losses after drug patent expiration are expected to be greater. Understanding these dynamics is necessary to managing a drug's post-expiration strategy.
It may make sense for brand names to preemptively drop prices and attempt to retain market share. This doesn't always work out, however. Some brands choose to maintain (or even increase) price as share diminishes, to maintain margin on remaining sales.
Sometimes it makes sense to preemptively drop brand name prescription drug prices
Generally, products with strong price retention attributes are likely to maintain more market share after drug patent expiration if the manufacturer lowers prices to align more closely with generics. There are exceptions, however, so a thorough understanding of the market is essential.
Authorized generics are another option for the brand facing patent expiration. By entering into an agreement with an authorized generic maker before patent expiration, there's no flood of generics right away. Therefore, erosion of the brand name price is slower.
Authorized generics tend to work well when:
Without a well-researched strategy for coping with drug patent expiration, brand names can expect quick price erosion. How quickly prices drop after patents expire depends on factors including existing competition before patent expiration, drug class, and complexity of drug administration. Price changes as patent expiration approaches and possible authorized generic deals can be used in some cases to minimize the effect of drug patent expiration on price.