Authorized Generic Entry prior to Patent Expiry: Reassessing Incentives for Independent Generic Entry

Appelt, Silvia (April 2010): Authorized Generic Entry prior to Patent Expiry: Reassessing Incentives for Independent Generic Entry. Discussion Papers in Economics 2010-23

Abstract

Patent holders frequently attempt to mitigate the loss of monopoly power by authorizing generic entry prior to patent expiry (early entry). Competition in off-patent pharmaceutical markets may be adversely affected if early entry substantially impairs the attractiveness of subsequent market entry. I examine generic entry decisions made in the course of recent patent expiries to quantify the impact of early entry on incentives for generic entry. Using unique micro data and accounting for the endogeneity of early entry, I estimate recursive bivariate probit models of entry. Drug markets' pre-entry revenues largely determine both independent generic entry and early entry decisions. Early entry in turn has no significant impact on the likelihood of generic entry. Original drug producers appear to authorize generic entry prior to loss of exclusivity primarily fueled by rent-seeking rather than strategic entry-deterrence motives.

• Item Type: Paper (Discussion Paper)
• Keywords: Generic Entry, Early Entry, Anticompetitive Practices
• Subjects: Economics; Economics > Discussion Papers in Economics
• Dewey Classification: 300 Social sciences; 300 Social sciences > 330 Wirtschaft
• Journal of Economic Literature classification: L41, I11, O34, C35
• Language: English

References

Accenture (2005). \Die Bedeutung der Generikaindustrie für die Gesundheitsversorgung in Deutschland."

acis Arzneimittel GmbH (2007). \Generika in Deutschland." Company Website.

Berndt ER, Kyle MK, Ling DC (2002). \Deregulating Direct-to-Consumer Marketing of Prescription Drugs: Effects on Prescription and Over-the-Counter Product Sales." Journal of Law and Economics, 45(2), 691-723.

Berndt ER, Kyle MK, Ling DC (2003). \The Long Shadow of Patent Expiration: Generic Entry and Rx-to-OTC Switches." NBER Studies in Income and Wealth v.64 - Scanner Data and Price Indexes, pp. 229-273.

Berndt ER, Mortimer R, Bhattacharjya A, Parece A, Tuttle E (2007a). \Authorized Generic Drugs, Price Competition, and Consumers' Welfare." Health Affairs, 26(3), 790-799.

Berndt ER, Mortimer R, Parece A (2007b). \Do Authorized Generic Drugs Deter Paragraph IV Certifications? Recent Evidence." Working Paper.

Bhattacharya J, Goldman DP, McCarey DF (2006). \Estimating Probit Models with Self-Selected Treatments." Statistics in Medicine, 25, 389-413.

Caves RE, Whinston MD, Hurwitz M, Pakes A, Temin P (1991). \Patent Expiration, Entry, and Competition in the U.S. Pharmaceutical Industry." Brookings Papers on Economic Activity. Microeconomics, 1991, 1-66.

EUC (2008). \European Commission: Pharmaceutical Sector Inquiry - Preliminary Report."

EUC (2009). \European Commission: Pharmaceutical Sector Inquiry - Final Report."

Evans WN, Schwab RM (1995). \Finishing High School and Starting College: Do Catholic Schools Make a Difference?" The Quarterly Journal of Economics, 110(4), 941-974.

Fisher Ellison S, Ellison G (2007). \Strategic Entry Deterrence and the Behavior of Pharmaceutical Incumbents Prior to Patent Expiration." NBER Working Paper No. W13069.

FTC (2002). \Federal Trade Commission: Generic Drug Entry Prior to Patent Expiration - An FTC Study."

FTC (2009). \Federal Trade Commission: Authorized Generics - An Interim Report."

Goldman DP, Bhattacharya J, McCaffrey DF, Duan N, Leibowitz AA, Joyce GF, Morton SC (2001). \Effect of Insurance on Mortality in an HIV-Positive Population in Care." Journal of the American Statistical Association, 96, 883-894. Grabowski HG, Kyle MK (2007). \Generic Competition and Market Exclusivity in Pharmaceuticals." Managerial and Decision Economics, 28, 491-502.

Grabowski HG, Vernon JM (1992). \Brand Loyalty, Entry, and Price Competition in Pharmaceuticals after the 1984 Drug Act." Journal of Law and Economics, 35, 331-350.

Greene WH (2008). Econometric Analysis - Sixth Edition. Pearson Prentice Hall.

Hollis A (2002). \The Importance of Being First: Evidence from Canadian Generic Pharmaceuticals." Health Economics, 11, 723-734.

Hollis A (2003). \The Anti-Competitive Eects of Brand-Controlled \Pseudo-Generics" in the Canadian Pharmaceutical Market." Canadian Public Policy / Analyse de Politiques, 29, 21-32.

Hollis A, Liang BA (2006). \An Assessment of the Effect of Authorized Generics on Consumer Prices." Working Paper.

Hudson J (2000). \Generic Take-up in the Pharmaceutical Market following Patent Expiry - A Multi-Country Study." International Review of Law and Economics, 20, 205-221.

Hurwitz MA, Caves RE (1988). \Persuasion or Information? Promotion and the Shares of Brand Name and Generic Pharmaceuticals." Journal of Law and Economics, 31, 299-320.

Janakiraman R, Dutta S, Sismeiro C, Stern P (2008). \Physicians' Persistence and Its Implications for Their Response to Promotion of Prescription Drugs." Management Science, 54, 1080-1093.

Jones AM, Xander K, van Doorslaer E (2006). \The Impact of Having Supplementary Private Health Insurance on the Use of Specialists." Annales D' Économie et De Statistique, 83, 251-275.

Kyle MK (2006). \The Role of Firm Characteristics in Pharmaceutical Product Launches." The Rand Journal of Economics, 37, 602-618.

Kyle MK (2007). \Pharmaceutical Price Controls and Entry Strategies." The Review of Economics and Statistics, 89, 88-99.

Magazzini L, Pammolli F, Riccaboni M (2004). \Dynamic Competition in Pharmaceuticals: Patent Expiry, Generic Penetration, and Industry Structure." The Europen Journal of Health Economics, 5, 175-182.

Moreno-Torres I, Puig-Junoy J, Borrell-Arque JR (2009). \Generic Entry into a Regulated Pharmaceutical Market." Review of Industrial Organization, 34, 373-388.

Morton FMS (1999). \Entry Decisions in the Generic Pharmaceutical Industry." The RAND Journal of Economics, 30, 421-440.

Morton FMS (2000). \Barriers to Entry, Brand Advertising, and Generic Entry in the U.S. Pharmaceutical Industry." International Journal of Industrial Organization, 18, 1085- 1104.

Papke LE,Wooldridge JM (2005). \A computational trick for delta-method standard errors." Economics Letters, 86, 413-417. Reiffen D, Ward MR (2005). \Generic Drug Industry Dynamics." Review of Economics and Statistics, 87, 37-49.

Reiffen D, Ward MR (2007). \Branded Generics as a Strategy to Limit Cannibalization of Pharmaceutical Markets." Managerial and Decision Economics, 28, 251-265.

Saha A, Grabowski H, Birnbaum H, Greenberg P, Bizan O (2006). \Generic Competition in the U.S. Pharmaceutical Industry." International Journal of the Economics of Business, 13, 15-38.

Scherer FM (2000). The Pharmaceutical Industry. Handbook of Health Economics, I. Elsevier. Culyer, A.J., Newhouse, J.P. (Eds.), Amsterdam.

WHO (2005). \The WHO/United Nations - Pre-qualification Project."

Wilde J (2000). \Identification of Multiple Equation Probit Models with Endogenous Dummy Regressors." Economics Letters, 69, 309-312.