Pharma industry demonstrates low success rate of inventions, decline of product price after patent expiration, and impact of brand loyalty

[Ling Zhou, Ecole polytechnique federale Chair of Innovation and IP Policy, 4iP Council, “Patents and Supracompetitive Prices: Evidence from Consumer Products,” , accessed: 7-11-24, ES]

The pharmaceutical industry offers an obvious set-up for studying the effect of patent protection on product prices. The drug discovery and development process is costly and risky. R&D expenditure for each new molecular entity is esmated at $1.8 billion; meanwhile, the average success rate from pre-clinical stage to launch is esmated at about 8 percent (Paul et al.,2010). Furthermore, patents are an efficient way to deter entry in this industry. Drugs are so-called ‘discrete’ products with a well identified ‘invention’ (i.e., an active ingredient) clearly described in the patent specification. However, production is relatively cheap, and patent-protected drugs are usually sold with a high markup (Morton and Kyle,2011). This setup is particularly attractive for generic manufacturers, who enter the market as soon as drugs lose patent protection.

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A host of studies has investigated the effect of patent protection on the price of drugs. This stream of research has been facilitated by data on the correspondence between drugs and patents compiled in the Orange Book Datales by the U.S. Food and Drugs Administration (FDA). Studies typically focus on the evolution of drug price around the me of patent expiry. Since patents are valid for a limited period of me, patent expiry is an exogenous event, allowing scholars to establish the causal impact of (a loss of) patent protection on price.

Using data on 30 drugs that lost patent protection in the 1976–87 period, Caves et al. (1991) estimate that the innovator’s price declines by 4.5 percent on average. Fur- thermore, generic substitutes are sold about 17 percent below the innovator’s pre-entry price. They a7ribute the relatively small price decline of the branded drug to the “loyalty- inducing goodwill” accumulated by the innovator during the period of patent protection. Grabowski and Vernon(1992) examine prices and market shares of 18 drugs turning o@- patent after the implementation of the 1984 Drug Price Competition and Patent Term Restoration Act, which eased the testing requirements for entry by generic drugs in the United States. They and that prices for most branded drugs did not react strongly to entry; nominal prices continued to increase following roughly the same trend as during the pre-entry period. They a7ribute this result to the strength of brand loyalty for branded drugs. By contrast, generic drugs quote prices that are 39 percent lower than branded drugs at date of entry, and prices of generic drugs decrease sharply over time.

The low sensitivity of the price of o@-patent branded drugs has been confirmed by most studies (cf. Wiggins and Maness, 2004), both in the U.S. market (Frank and Salkever, 1997) and the European market (Vandoros and Kanavos, 2013). However, the features of the drugs market make generalization to other product markets perilous. When drugs are for repeated use, consumers may have developed a strong preference for the branded version during patent protection. Besides, concerns about perceived quality for the generic versions and recommendations from doctors may exacerbate brand loyalty.