c. Blockbuster models replace innovation with advertising.

The pharmaceutical industry faces significant technological uncertainty and high costs from a lengthy and complicated drug development process. Strong intellectual property rules have long become been a key policy support for firms that must confront the uncertainty of blockbuster drug development. On the other hand, when a drug is approved and begins to generate revenues from its sale, this uncertainty is transformed into relatively stable and secure returns on investment. Hence, the market instability faced by drug makers is restricted mainly to patent disputes originating with generic drug producers, unexpected side effects of a new drug, or the introduction of a competitor drug within the same class of therapy. Without knowing the number of drugs they would launch, the largest pharma companies introduced the management of uncertainty. They put forward the promotion of ethical drugs to sustain growth and generate cash by assuring the maximum penetration on market with an intense marketing strategy and the longest period of patent protection possible.

This specific institutional environment favors particular profit strategies. First, socialized demand enables mass markets and strong growth and, therefore, exploitation of economies of scale. Second, patents and the expectation of a strong market incentivize innovation and the search for monopoly rents. Quality is less important as a means of generating profits (drugs are not a luxury or “distinctive” good), and cost-cutting strategy is not really relevant owing to the strong growth of demand, the relative weak role of prices and the “innovative” character of the industry. The profit strategies available to the pharmaceutical industry are volume (economies of scale), innovation and volume, volume and variety (scale and scope). Typically, generic models are based on a volume sales strategy. Old chemical conglomerates adopted a volume and variety strategy. The blockbuster model is primarily based on a profit strategy, which combines innovation with both volume and flexibility (see Appendix for a list of different productive models in the pharmaceuticals industry). The blockbuster pairing is made possible by the monopolistic rents created by patent systems. For the strategy to work, however, drug companies must develop a product policy based on intense marketing that positions new ethical drugs at the center of the drug market to increase profits assuring the finance of R&D. Blockbuster drugs represent the essential source of profits to be made that are complimented by increasing sales figures. Because of high R&D expenditures, large companies focus on blockbusters to generate sufficient profits to recover their sunk costs. For example, Procrit/Eprex of Johnson & Johnson was an orphan drug that has brought the company more than $42 billion in sales revenue since its release in 1991. Given the opportunities, larger firms began to increase their advertising expenditures considerably, directing their armies of sales representatives at physicians and their patients. According to Gagnon and Lexchin (2008), large pharmaceutical companies spend twice on marketing what they spend, on average, on R&D.

Yet, a blockbuster is not necessarily an innovative drug. It can be a product of an incremental innovation over pre-existing drugs. Principally in the United States, extensive marketing aims to induce medical doctors to prescribe their brand to patients, who are also encouraged with direct advertising to demand the same drugs from their physician (called Direct-To-Consumer advertising). As of 2004, 72% of blockbuster sales were in North America. Pricing flexibilities in the US market permit substantial margins and high growth potential while advertising allowances incite consumption. In 2011, the top 50 companies had 80 blockbuster drugs based on 2000 prices compared with 41 in 2000. More than half of these drugs are marketed by US and British companies, and the overall ratio of blockbuster sales to total sales was 36% compared with only 25% in 2000. Tables 4 and 5 highlight that the increases in the number of blockbusters and the ratios created by their sales represented a dramatic shift for European and Japanese companies.

[Tables 4 & 5 omitted]

Large pharmaceutical companies increased their presence in the US market owing to profitable, extended, and flexible pricing practices as well as rapid growth of health-related expenditures. Marketing agreements or promotions permit extension of the marketing network. Company groups carry out life cycle management of their blockbusters that is based on research on extended therapeutic indications developed through post-marketing clinical trials. When a drug loses its patent protection, its price and the profit it generates decreases drastically. Strategies to extend patent protection have long been crucial to sustaining the drug industry, and litigations between companies have become prevalent as a strategy for self-preservation.

The trend of increasing pharmaceutical spending in richer countries and rising costs of clinical trials push pharmaceutical groups to focus on the most profitable therapeutic areas (typically cholesterol, oncology, central nervous system, etc.). Given these conditions, a profit strategy demands that a larger proportion of marketing and R&D network is devoted to well defined therapy markets, and merger and acquisition strategies are a common means of acquiring drug technologies in those areas. Larger firms thus have refocused on ethical segments by ceasing their less profitable activities.