Global Marketing Strategies For Pharmaceuticals At Patent Expiry Marketing Essay

Published Date: 23 Mar 2015

The world pharmaceutical industry is one of the most inventive, innovative and profitable of the so-called high-tech industries. In 2010 it generated US 856 billion sales revenue and is expected to reach US $1,081 billion by 2015 with a CAGR (compound annual growth rate) of 5% (KPMG UK, 2011). In 2012 the global drug market was dominated by a few pharmaceutical corporations such as Pfizer, Johnson & Johnson, Novartis, Merck, Roche, Sanofi-Aventis, GlaxoSmithKline, Abbott Laboratories, AstraZeneca, and Eli Lilly. These industry giants are able to dictate drug prices and in fact the prices of pharmaceuticals have risen significantly in the past years. Because of the small price elasticity of the products, the profitability of the pharmaceutical industry is extremely high. In addition, the limited competition in the industry, ensured by strict patent laws and high barriers for smaller firms to enter the market, enables the companies to post even bigger profits. Moreover, the process of consolidation is intensified by the continuing trend of mergers and acquisitions of big corporations (Corporate Watch, no date). Research and development together with marketing and sales activities are the key driving force and a strategic priority in the pharmaceutical industry. Figure 1 illustrates the development of R&D expenditure in the past years in the three major pharmaceutical markets - USA, Europe, and Japan.

Figure 1: Pharmaceutical R&D expenditure in Europe, USA and Japan, 1990-2011

*Note: Europe: € million; USA: $ million; Japan: ¥ million x 100

Source: EFPIA member associations, PhRMA, JPMA

The cost of researching and developing a new chemical or biological entity was estimated at US $1,318 million in 2005 (Di Masi, 2007) and by the time it reaches the market an average of 12-13 years will have elapsed since its first synthesis. However, patents protect these new molecular entities for about 20 years on average, so it leaves 6-7 years of market exclusivity for the company to maximize their return their investment, before the generic versions of the drug enter the market.

Even though demand for medicine and the global pharmaceutical market continues to grow, research-based companies are facing a challenging market place. The industry ROI (return-on-investment) is at stake because of the decline in R&D productivity and greater regulatory constraints by governments such as pressure on the companies' pricing policies (AstraZeneca, no date). One of the biggest threats for the profitability of the research-driven pharmaceutical companies is the market entry of generic copies once the patent of the original drug has expired. The majority of these generic equivalents are sold under a new brand name and are positioned as equal in efficacy, offering the consumers the additional benefit of a considerably lower price. This creates an intensified competition within the industry which is demonstrated by the fact that for each branded drug that comes off patent there is an average of five generic copies launched. As a result, the market share of generic brands is growing and on average they are able to capture 50% of the market (Dean et al., 2012). Therefore, research-based pharmaceutical companies need to implement strategies that defend their market share after their patents expire and allow them to maximize their return on investment.

Problem statement

The success of the pharmaceutical industry in the 1980s has been fuelled by strong research and development, aggressive patent protection and a powerful sales force. As a result, the industry has enjoyed annual sales growth rates in excess of 10% annually and a subsequent growth in profits (Schuiling & Moss, 2004). One important issue in this market is the patent expiry of the new molecular entities (NMEs). Patents now guarantee exclusivity for a period of 20 years; it takes around 12-15 for drug development and clinical tests, which leave the NME with only 5-8 years for commercialization, before the generic drugs enter the market (Kvesic, 2008). Since the majority of revenues are achieved during this time of market exclusivity, it is essential for the research-based companies to maximize the income within their portfolio within this period (Kvesic, 2008). While in the 1980s pharmaceuticals could still expect 60% of sales turnover 12 months after patent expiry, in the 1990s this figured decreased to 40% and in certain cases the sales turnover is continuing to shrink in the new millennium. Figure 2 illustrates the typical market life of an approved drug, where the initial investment is about US $ 1 billion. Once introduced, the drug started gaining market share and its revenues were rapidly rising. But with the introduction of generic drugs at stage six, it entered a decline phase in sales (Dubey & Dubey, 2010).

Figure 2: Typical market life of an approved drug product before and after approval of generic products (See Dubey & Dubey, 2010)

The entrance of generic copies changes the pharmaceutical industry dynamics and disrupts the normal life cycle of the branded drug - the growth phase is immediately followed by a steep decline rather than the maturity phase. Two factors explain this atypical product life cycle. Firstly, consumers are more likely to switch to the generic version once it enters the market because of its lower price. Secondly, several generic copies of one branded drug flood the market soon after patent expiry and compete with each other to gain maximum market share, crashing the product price (Dubey & Dubey, 2009).

This trend is further driven by the desire of public authorities to reduce healthcare spending and the generic company sales are benefiting from the end of patent protection (Moss & Schuiling, 2004). For example, in some countries regulatory authorities allow pharmacists to replace the branded medicine prescribed by the doctor with its generic copy. This is not only more profitable for the health authorities, which cover a certain amount of the drug's price, but also for the pharmacists themselves, since they receive on average a higher margin from the generic brand.

In addition, despite the rising research and development expenditure the industry faces a decrease in the number of new pharmaceutical ingredients (Raasch, 2008). Consequently, research-driven pharmaceutical companies receive pressure about the sustainability of their products and search strategies to fully exploit the potential of their existing product portfolio. The decrease in the discovery and development of NMEs caused by the short patent protection and reduced return on investment has a negative effect on the general public since this shrinks the new portfolio of generic companies as well (Dubey & Dubey, 2009).

Therefore, the purpose of this paper is to identify global marketing strategies that increase the return on investment of pharmaceuticals after their patent expires and discuss their advantages and disadvantages. These strategies should protect the products sales from decline at the market entry of generics and subsequently prolong its life cycle. Moreover, the study focuses on strategies that are standardized and are applicable in all local markets.

Methodology

Following the objective outlined in the problem statement, this paper aims to review the existing literature focusing on marketing strategies for pharmaceuticals at patent expiry. For this purpose five main approaches are being considered. In the first section the paper examines how research-based pharmaceutical companies could employ branding and advertising to defend their market share. Furthermore, the following three product-related marketing strategies are discussed - product innovation, product differentiation, and investment in own generics. Lastly, the paper investigates the effect of price alterations on branded products' market success after their patent expires. In the second section, the factors shaping the post-patent drug market are analyzed. On that basis, some managerial implications for the implementation of the above mentioned strategies are identified. Lastly, a conclusion is drawn and fields of further research are suggested.

The core sources of this paper are articles from the academic journals "International Journal of Medical Marketing" and "Journal of Medical Marketing". These are one of the leading journals in the marketing in the medical industry, and thus provide the reader with a profound insight in this market. Moreover, the articles chosen have been published in the last 10 years, since they illustrate the most recent developments and research in the industry.

Literature Review

Maximizing brand loyalty

With rising research and development costs and stagnant success of NMEs, it is essential that companies exploit fully the new products that come to market. One way is taking advantage of their strong position and reputation in the market and focusing on branding. While in a new disease area with unmet medical needs clinical data is the most important indicator for drugs, in highly competitive mature markets pharmaceutical companies rely on sales and marketing activities, where branding plays an essential role (Moss & Schuiling, 2003).

A brand name entails values other than technical excellence and thus creates benefits for health authorities, doctors and patients (Blackett & Harrison, 2001). In a competitive market environment, where lower priced generics are present, it is crucial to create and maintain brand loyalty from physicians and patients. A brand acts as a guarantee for quality and safety and it also generates trust - a vital aspect for products that have an impact on human health (Moss & Schuiling, 2003). Customer commitment enables pharmaceutical companies to sustain revenues and predict future cash flows. In fact, brands have even become a management tool to plan marketing investment according to their value creation performance within a given portfolio (Blackett & Harrison, 2001). In the nonprescription drug market brand name is a key factor in the purchase decision-making (Ladha, 2007). In addition, brand loyalty can generate a positive word-of-mouth which can boost up the sales, especially in the non-prescription drug segment. Therefore, a strong brand would sustain the company's sales turnover to some extent and prolong the product's life cycle.

What is more, in the intense competitive environment of the pharmaceutical market, a powerful brand provides a significant point of difference to the generic products (Moss & Schuiling, 2003). In the post patent stage, a strong brand might receive additional time to maximize its return on investment. Extending the market dominance of a major brand with annual sales of US $1 billion by only 100 days will be sufficient to recover the costs of its R&D (Blackett & Harrison, 2001). A strong market position of the brand might as well prevent generic companies from achieving a competitive position in the market once the patent expires (Kvesic, 2008). Should the company decide to apply a global approach and standardize its marketing activities across borders, it can benefit from lower costs in developing brands by transferring brand value into new markets. This strategy is being increasingly employed with the growth of the over-the-counter segment (Blackett & Harrison, 2001).

What is more, advertising is a powerful marketing tool and it is indispensable for branding, since it is the instrument that conveys the brand essence, the brand values, and the tangible and intangible benefits incorporated in the brand image. The next section provides a critical insight to the potential of advertising.

Advertising

As in every other industry, advertising is an essential marketing tool in the pharmaceutical world. It raises the brand awareness of the product and places it on the top of the consumers' mind. In addition, advertising assists the consumers in learning and forming their preferences. The resulting brand loyalty helps reduce the price sensitivity of the consumers (Dean et al., 2012). Consumer advertising is especially crucial for drugs that will face generic competition when their patent expires. Through this tool research-based pharmaceutical companies maintain visibility of their product and reinforce the point-of-difference to the competition in the consumer's mind, thus strengthening the position of their brand. A study analyzed advertisements for two drugs - Chlorpropamide and Diazepam, and discovered that prior to the patent expiration promotion of the products focused mainly of the research results. However, after the patent expired there was more emphasis on the competition between the brand and the generic copies (Agrawal & Thakkar, 1997). Moreover, a doctor's recommendation plays a significant role in the purchase decision of prescription drugs, whereas for nonprescription drugs the purchase decision is strongly influenced by in-store promotions, family and friend recommendations, brand name and advertising (Ladha, 2007).

Nonetheless, it is doubtful whether consumer advertising is effective in defending a brand's market share against generic competitors and act as a barrier to entry. It is assumed that through advertising established companies are able to differentiate their product to a point where consumers perceive the brand as a slightly different product. Thus, the competitor's product cannot fully substitute the original branded product, which makes it hard for potential competitors to gain customer acceptance and creates a barrier to entry (Moffatt, 2008). However, the cost of entry for generic companies is comparatively low and the use of advertising as an entry deterrence has proven to be inefficient in the pharmaceutical industry (Morton, 2000). In addition, advertising increases the growth and size of the category; hence it may actually encourage generic entrants since they will expect bigger profits in a larger market (Morton, 2000).

Nevertheless, a study by Dean et al. (2012) showed that even tough consumer advertising does not reduce the number of generic entrants at patent expiry, it does help brands to defend themselves from generic competition. This is especially true for the over-the-counter (OTC) segment, where the customer can make their own purchase decision without needing a prescription from a physician. In this segment the marketing strategies of pharmaceutical companies are much similar to those in the fast moving consumer good market. A strong and powerful OTC brand can become so popular as to deter generic entrance. An example would be Bayer's Aspirin which in some countries has become a so-called household brand. On the other hand, it is worth mentioning, that in the prescription-only segment consumer advertising is highly limited by the government and in some countries it is even not possible. Therefore, pharmaceutical companies pursue different strategies to influence purchase decision of the prescribers and strengthening their image within the doctor society.

The next section deals with the benefits and drawbacks of two product strategies - product differentiation and product innovation. Product differentiation for pharmaceuticals can be achieved through introducing new packages and flavors, or a different form of drug delivery. On the other hand, a research-driven company can innovate their existing molecule by either combining it with another molecule, or discovering a new application for a different indication.

Product innovation and differentiation

Product differentiation is a commonly employed strategy by both research-driven and generic drug companies to sustain their growth and profitability. In the context of pharmaceuticals, product differentiation can be defined as developing a new form of the existing drug to improve patient convenience, combining the existing molecule with another to achieve a better therapeutic effect and tolerability, or discover a novel usage. Hence, differentiation helps maximizing the utility of an existing molecule and slows down the decline of its market share triggered by generic competition (Dubey & Dubey, 2009).

Innovative products have the ability to defend the research-based companies' market share in two ways. Firstly, extending the brand's product range through launching innovative products and line extensions can shift consumers' preferences before the market entry of generic competition (Reiffen & Ward, 2007). Through the introduction of a new product consumer's preferences are shifted towards it, since it offers a point of difference to the brand's current product that better suits their needs (Dean et al., 2012). Secondly, introducing a new technology discourages competitors from entering the market. It signals that the company is investing resources into growing and the innovation makes the available technology outdated (Hauser et al., 2006). Moreover, innovation can reposition the brand in the mind of the consumers with the tangible and intangible benefits of innovation and thus increase sales of the existing products (Kapferer, 2008). A study conducted by Dean et al. (2012) revealed that indeed the introduction of an innovative product reduced the market share of the generic brands to some extent.

New form and dosage

Most drugs are developed as conventional pills in the form of tablets and capsules. These forms are preferred because they are produced in short time, pose small development challenges and enjoy scalability and high user acceptance. Through the introduction of a new dosage form of a NME companies can differentiate their products from generic competition and achieve a competitive advantage. They can maintain their market share by increasing their customer loyalty and enhance the brand image (Kvesic, 2008). In fact, between 2002 and 2005 more than a third of the products launched by the top 50 pharmaceutical manufacturers were reformulations (PharmaWatch, 2007). With reformulations companies intend to replace the original drug, offering significant benefits over their predecessor to the consumer (Sahoo, 2006). One of the most preferred choices is the controlled release oral formulation. The technology used for developing this form is well established and employed by many large and small pharmaceutical companies. Hence, the oral controlled release formulation leaves little room for technological differentiation and can be easily copied by generic companies (Dubey & Dubey, 2009). Therefore, most research-based companies prefer to launch their existing and new molecules in dosage forms that are innovative and pose technological challenges to their generic competitors, possibly allowing for a secondary patent as well (Spruill & Cunningham, 2005). Recently new technologies are being employed that are technically complex and patent protected, posing high entry barriers. Some of the new dosage forms that have successfully been launched in the market are time-released formulations, site-specific drug delivery, depot formulation and inhalation drug (Dubey & Dubey, 2009). Furthermore, product differentiation can be achieved through the introduction of new and improved flavors and packaging. Even though this does not involve innovation but pure differentiation, it can lead to an additional emotional or functional benefit for the consumer, enhance the awareness and the image of the brand and thus increase its equity (Chandon, 2004).

This strategy, however, requires time, financial resources for research, authorization, and marketing. For a successful product innovation, it is essential that the company possesses excellent research and development capabilities or has access to them (Sahoo, 2006). Nevertheless, in some cases it might not extend the patent of the product, thus it cannot offer further market exclusivity protected by law. Moreover, the improvements can sometimes be easily copied by generics which results in an insignificant impact on sales and reduced margins. This strategy is appropriate for products with significant market potential, where the reformulation can tackle an unmet need. Since they are intended to replace the original product, the additional benefit they offer must be significant to a considerable amount of their customer base (Sahoo, 2006). Therefore, this strategy should only be considered if the company has access to a novel technology and the budget to develop a new dosage form, which will extend its product's patent. Moreover, the reformulation should be launched before the original patent expires, so that consumer can switch to the new product before the generic copies enter the market. In the short term, the profitability may be negatively affected, however, the delay in the decrease of sales could leave enough time for the company to recover their costs and maximize its ROI. On the other hand, improving the product with new flavor or package can be perceived as a marketing gimmick by the final consumer which can hurt the image and scientific integrity of the brand (Chandon, 2004). In addition, these improvements can be easily copied by generic copies and since this type of innovation does not allow for a secondary patent, it is more difficult to pass the costs to the consumer.

Fixed drug combination

Fixed drug combination (FDC) is another strategy used by research-based pharmaceutical companies to extend its product's life cycle when its patent nears expiry. FDC is a combination of two or more existing molecules, which are either being prescribed together by physicians, or when given together have a better therapeutic effect or tolerability. This product needs to undergo extensive clinical trials to prove its therapeutic benefit and receive approval from the health authorities. This combination product can be prescribed instead the individual products, when the bioequivalence of both drugs is proven. Therefore, chemical stability of the molecules combined is essential for a successful product development. If the molecules are incompatible, copackaged drug product may be launched to increase patient compliance (Dubey & Dubey, 2009). FDC has the potential to prolong the market exclusivity of the molecule. If it is launched under a new indication and the combination is novel, or if the molecules are combined in an atypical dosage for a new therapeutic effect, health authorities will grant the company with a new patent (Kvesic, 2008). Thus, the product will enjoy extended market exclusivity and a new customer base. In addition, it can provide the company with a competitive advantage over its competition as it offers the consumers an additional benefit.

Launching a fixed drug combination can be a challenging strategic option. Since the patent only protects the combination technology and not the molecules by themselves, the product will face competition from companies that produce the individual drugs (Kvesic, 2008). Moreover, FDCs require a significant time for research and development and clinical trials which lead to increased costs. Its increased price, however, can be passed to the final consumer unlike the price of the new dosage form of the same medication. It is questionable, though, whether patients and physicians alike will be willing to bear the higher costs. Since the patent protects the combination only, consumers will be able to purchase the drugs separately at a lower price from generic companies. It is doubtful as well whether the consumer segment gained will justify the resources invested in the development of the FDC and increase the profitability.

Effectiveness for new indications

Indication expansion for an existing molecule is a common strategy pursued by research-based pharmaceutical companies to secure market share. It involves preclinical studies to discover effectiveness in the pediatric population, related conditions, or other diseases (Dubey & Dubey, 2009). As with the fixed drug combination, if successful, this strategy can allow a secondary patent, which extends the market exclusivity of the product and delays the competition from generic copies. Often pharmaceutical companies investigate this option especially when leverage can be achieved in closely related diseases (Kvesic, 2008).

Discovering effectiveness for new indications of an existing molecule increases market size since it extends indicated conditions and consequently the target group. Additionally, it deters competition from generic companies as it entitles the innovator with another three years of market exclusivity (Dubey & Dubey, 2009). Nevertheless, successful indication expansion requires a substantial investment in research and development which sometimes deters companies from pursuing that option. Another issue arises from the fact that there are other medicines competing in the new therapeutic area, so the company has to make sure that their pricing is competitive (Kvesic, 2008).

Investment in generics

This strategy involves the research-based pharmaceutical company launching either their own generic version of the drug facing patent expiration or licensing it to a generic company in exchange for royalties. There is a growing trend for firms to launch their own low price generic version of the branded product under a different brand name in order to distinguish it from the original product (Dean et al., 2012). Some branded innovator companies even have their own generic branch for this purpose (Kvesic, 2008). This approach can be very effective if the company's overall strategy supports it and allows for resources to be dedicated to generic activity. It is important that the company recognizes the different objectives of the branded drug and its generic copy. The generic drug's purpose is to defend the market share against other generic competitors and preserve profitability for the company as a whole, not to share the reduced profit with the branded medication (Barak & Wilson, 2003).

The own-brand generic will benefit from the access to raw materials and manufacturing know-how, as well as lower production cost and larger sales team (Kvesic, 2008; Dean et al., 2012). It is worth mentioning that generics often expand the molecule's market share by either drawing market share from other branded drugs in the same class or by attracting new, untreated patients to the class (Tuttle et al., 2004). The success of this strategy stems from the fact that the company can gain a first mover advantage in the generic market with its own generic version. Since an own-brand generic is not subjected to patent protection and has regulatory advantages over other generic brands, it can be launched even before patent expiry (Reiffen & Ward, 2007). The first generic brand to enter the market establishes consumer preference and captures the market share in the low price segment. It also receives higher preference with pharmacists as it is easier to switch consumers to the first generic copy - it offers a significant cost benefit compared to the branded drug, but little cost saving compared to the generic brands that enter the market afterwards (Hollis, 2002). Moreover, a study conducted by Dean et al. (2012) discovered that the first generic brand to enter the market, after the patent expiry of the branded drug, gains a market share advantage over the next entrant in the category. In addition, the more time has passed between the launch of the first generic copy and the next generic competitor, the greater reduction in the market share of the next generic brand entrant. Thus, if the company manages to launch its own-brand generic a great time ahead before the patent of the original molecule expires; it will gain a bigger market share in the low-price segment. Furthermore, the introduction of the generic version signals to potential entrants that their market share and profits will be reduced, which discourages them to enter the market (Reiffen & Ward, 2007). As a result, the launch of an own-brand generic reduces the number of generic brand entrants in the segment (Dean et al., 2012).

There are some significant disadvantages of this strategy that need to be considered. Research-based pharmaceutical companies need different skills to produce and market generics and it is difficult to be successful in both business models (Chandon, 2004). It is doubtful to what extent an own-generic brand would limit the competition from other generic companies. In fact, the launch of an own-generic brand does not decrease the market share of other generic brand entrants, but increases it (Dean et al., 2012). Some pharmaceutical companies opt to license their drug before paten expiry in exchange for royalties (Chandon, 2004). This, however, does not protect their original molecule from generic competition. Therefore, they will need to consider whether the income from royalties will compensate for the loss of revenue from the original branded drug (Kvesic, 2008).

Launching a fighter brand

This strategy is similar to launching an own-generic brand to compete in a price sensitive market. The difference is that in the latter case brand loyalty is low and brand sensitivity is high, so the company can transfer the brand image of the branded drug to its generic version. A so-called "fighter brand" is aimed to replace the company's own brand and switch consumers to another lower price brand rather than allow them to switch to the competitors' generic copy (Barak & Wilson, 2003). This provides opportunities to profit from the low-price market segment near patent expiry and deter the market entry of generic competitors. The strategy involves market segmentation of demand on the basis of price sensitivity, maintaining a higher profit margin of the original drug and not completely losing the price-sensitive consumers. The price of the new fighter brand can either match the price of generics, or be a little higher, depending on the strength of the brand (Raasch, 2008).

This strategy offers several advantages to the research-based companies that opt to pursue it. As in the case of the launch of an own-brand generic, the company can gain a first mover advantage. The reputation of the producer of the original brand is likely to benefit the new brand as well. As a result, physicians may prefer prescribing the close substitute, either before the patent ends or after, to switch their patients to the lower priced drug. Once they have switched their patients to the new brand, they will be reluctant to switch them again to a generic brand unless it offers significant cost savings. Furthermore, by producing a fighter brand companies would utilize their capacity by using their current manufacturing equipment. They can employ their existing knowledge of doctors' prescription habits and tailor their marketing activities accordingly. Lastly, the early market entry of the discount market might discourage other generic competitors, thus softening the competition and slowing down the decline in sales (Raasch, 2008).

Nevertheless, the fighter brand strategy holds some significant drawbacks. The launch of a lower priced brand can have a cannibalizing effect on the original brand. On one hand, it would be prescribed by physicians who want to switch their patients to a lower priced brand. On the other hand, doctors who would have initially stuck to the original brand might opt to switch their patients to the fighter brand. Like in the case of an own-generic brand, the launch of a second lower-priced brand might pose some challenges in terms of marketing and corporate strategy. The two almost identical brands need to be marketed in a completely different way, in order to avoid cannibalization. Entering the discount market requires lowering the price according to the competitive environment, and having a fast decision process in order to be able to respond quickly to the dynamic market conditions (Raasch, 2008). An unsuccessful example of the fighter brand strategy is illustrated by the case of Merck & Co.'s drug Zocor that combats high cholesterol and reduced the risk of coronary heart disease (Raasch, 2008). When the original product was facing patent expiration in Germany, the company decided to launch Zocor MSD, a so-called fighter brand, aiming to sustain market share for Merck and fight generic competition. However, the product did not meet the expectations and it was discontinued by its parent company. Two of the main reasons behind that were that pricing was very cautious and the strategy lacked internal support. Zocor MSD was "stuck in the middle" unable to compete neither in the brand loyal segment, nor in the low price segment. It was priced substantially higher than the generic copies and price reductions were implemented with a considerable lag due to the fact that Merck's decision-making process was not geared to short term price changes. This was mainly due to the lack of internal support for the product and its unfitness with the corporate philosophy.

pricing

When generic copies enter the market, after the patent of the original drug expires, the price within the category falls on average by 60% as each generic competitor tries to establish a low price position. The research-based companies must address this competitive threat; however it is debatable whether price strategy is the most appropriate marketing mix component to pursue (Dean et al., 2010).

Barak and Wilson (2003) have defined several pricing strategy options depending on the objectives of the company, its position in the market and internal capabilities, the market conditions, and the level of generic threat.

Maintaining the current price. This approach is used where the threat of generic competition is relatively low. Moreover, the company's brand position in the market has to be strong and its market share has to be growing.

Increase price. Since in some markets the generics prices are determined by the price of the branded product, higher brand prices will result in higher generic ones. Thus, the loss of market share will be compensated by the increased profitability due to the higher price in the short term. This approach is best suited for markets with strong brand loyalty and low price sensitivity.

Decrease price. The company may decide to decrease its list price. This strategy is not very successful in defending against lower priced competitors since it usually cannibalizes the profit. In addition, it will lead to a price reduction in other countries through the mechanism of external reference pricing. On the other hand, the company can choose to decrease the price selectively, i.e. reducing the price only for certain groups, depending on the structure of the particular market, to retain some profitability in the higher price segment. Furthermore, special terms and rebates may be used to keep price sensitive customers from switching to a generic copy. The company can still profit from less price sensitive customers, who are brand loyal.

The main problem at patent expiry of the branded drug is that its brand equity can no longer withstand the large price discrepancy, thus narrowing the price gap with generics addresses this issue. A small price decrease might be sufficient to align the price gap with the level of the brand equity gap. On the other hand, a large price cut would be easily communicated to doctors, pharmacists, and health authorities, possibly making them indifferent between the branded and the generic drug (Chandon, 2004). Moreover, a reduction in price before patent expiry acts as a signal to potential entrants that they should expect lower profits. Hence, it deters the market entry of generic companies (Dean et al., 2012).

Nevertheless, price reduction is considered a risky strategy because of several factors. Low price is the only competitive advantage of generic companies, so a price reduction of the branded product might result in a price war that would decrease the profits in the category as a whole (Chandon, 2004). As a result, the expected increase in sales might not suffice to cover the loss of margin earned on each unit sold (Raasch, 2008). This is illustrated by a case study of Beecham's amoxicillin drug Clamoxyl in France (Chandon, 2004). When the product's sales started to erode due to generic competition, Beecham decided to decrease its price and match it with the price of the cheapest generic. This generated positive media exposure and because of the large price cut generic competitors were not able to match their prices to Clamoxyl's right away. As a result, Beecham managed to regain their market share in the amoxicillin market in a couple of weeks; however the strategy did not break even as the higher market share did not compensate for the large price reduction.

Argawal & Thakkar (1997) state that it is not possible for the research-based company to reduce its price once the patent has expired and the generics have entered the market. Figure 2 illustrates this assumption.

Figure 3: The wheel of generic pricing (see Agrawal & Thakkar, 1997)

With generic competition present in the market, the high price of the branded product results in low sales volume (Stage II). At this point the company attempts to decrease its price and stay competitive. This, however, leads to an under-utilized production capacity (Stage III) and consequently to high production costs (Stage IV). The product does not bring profits any longer and might as well incur losses, so eventually the company is forced to raise its price to its original level or even above it.

A study by Dean et al. (2010) assumes that a change in the price of a branded drug does not impact the market share of the generic companies. That is so because generic drugs do not actually compete with the original product, but between themselves in the price sensitive segment and not in the brand loyal segment. Furthermore, lowering the price in one country, where the patent has expired, might trigger parallel exports where the drug still enjoys patent protection. This will diminish the profits in the aggregate (Raasch, 2008). However, if the price is discounted globally, then the high profitability will be undermined where the product is still under patent protection (Barak & Wilson, 2003). Government price controls is another issue that needs to be considered, since health authorities in some countries do not permit price increases, or control generic pricing. Finally, a price discount might not be compatible with the corporate image and philosophy of a research-based pharmaceutical company, which focuses on research and innovation, not price competition (Chandon, 2004).

Discussion

When deciding on a market share defense strategy at paten expiry of their branded drug, it is essential that research-based pharmaceutical companies plan ahead. One of the crucial steps is assessing the drug market, predicting the size of generic competition, its impact, and knowing the consumer behavior in the market in question. Usually an implementation of a marketing strategy occurs at a global level, depending on the life cycle stage of the product. However a particular strategy may have to be altered according to the regional or local market conditions. The generic market varies in each country; it can be at a different developmental stage and/or level of acceptability. For instance, generics are dominating in the US, but their market share is relatively small in Japan (Kvesic, 2008). Companies should also take into account the various consumer purchasing behavior in different regions. Pharmaceutical companies must understand the difference in the perception of consumers and their purchase intentions between branded and generic drugs. If consumers buy medicines based solely on price, then branding efforts may not have any influence on the sales revenue. On the other hand, if consumers perceive branded drugs as better than generic drugs, then it is worth investing in the branding process (Ladha, 2007). In addition, pharmaceutical companies need to consider the patient demographics and prescribing environment when deciding on a defensive strategy. The prescribing environment is shaped by such factors as recommended drug lists, managed care benefit structures and medical insurance coverage or reimbursements. The local pharmaceutical regulations and guidelines influence the pharmaceutical market as well (Kvesic, 2008).

Tuttle et al. (2004) stress out that all investment decisions in the research-based pharmaceutical company should be based on a reliable forecast of the impact of generic competition. They categorize two classes of product attributes that allow the brand to retain a large part of its market share after the patent expiration (Table 1). Therefore, if the company's product lacks some or all of these features, then its revenues and market share will erode significantly after its patent expires.

Product attributes

Class attributes

Less interchangeable with other brands

Part of a class with many prior generics

More potential for risk, adverse outcomes

Less subject to managed care control

Lacking a follow-on product

Smaller category size

Prescribed by few physicians(specialists only)

Part of a class with less new-brand activity

Harder to manufacture

Table : product and class attributes associated with higher post-expiration brand share (See Tuttle, Parece & Hector, 2004)

Medicines that require advanced technology and are difficult to manufacture are less likely to lose market share at patent expiry. Generic companies either lack resources to use this technology, or cannot reach sufficient revenues with a lower priced product to cover their initial investment; hence they are discouraged to enter this market. Moreover, if drug administration is complex and holds risks, then post-expiration share retention is likely to be higher. Doctors are more cautious, patients are less demanding, and generic companies are less aggressive about high risk products. For instance, the blood-thinning drug Coumadin faces little generic competition and has enjoyed high sales turnover, partly because of the risks associated with its narrow therapeutic index. In addition, follow-on products launched by the company are likely to cannibalize the old drug and thus accelerate its share erosion. Therefore, the product is likely to sustain its brand share if the manufacturer does not introduce a new medication.

The other set of attributes deals with the class that the product belongs to. If the therapeutic class is already saturated with generic copies, companies can expect that the entrance of a new generic would have a weak effect on both brand and class overall. That is because consumers have already shifted to some generics and a new shifting is unlikely to occur. A smaller category size acts as entrance deterrence, since generic companies are not attracted due to low profit expectations.

Further characteristic of the drug market that can predict the significance and intensity of generic competition are the previous brand revenues. If the revenue of the brand a year before patent expiration was high, then it is likely that more generic companies, attracted by high profit expectations, enter the market. In addition, if the branded drug is highly purchased by hospitals, the number of generic entrants is likely to be higher, as this means higher revenues as well. Likewise, chronic condition segments attract generic companies, since the patients have a high elasticity of demand, i.e. they are sensitive to price changes (Morton, 2000).

After careful evaluation of the factors mentioned above, research-based companies can chose the strategy or set of strategies that will best suit the particular market. Chandon (2004) classifies some of the discussed marketing strategies according to the intensity of price competition and the extent of brand building (Figure 4).

Figure 4: Marketing strategies after patent expiry (Chandon, 2004)

Brand building is one of the factors that defines the other strategies and it can be assumed that it is indispensable for creating a blockbuster product. Blackett and Harrison (2001) state that the potential of the product must be assessed parallel to the clinical studies of the medicine, long before the product enters the market. In order to build a successful brand all future aspects of the market place at product launch should be considered, including the competitive landscape, the prescribing behavior of the physicians and the consumers' needs. Building brand loyalty, credibility and trust with patients is essential for a long-term success and can turn the brand into an important corporate sheet asset (Blackett & Harrison, 2001). Moreover, the company will benefit if its customers associate its name with corporate social responsibility, good ethics and other non-profit organizations that the company is involved with (Ladha, 2007). Still the success of branding might be compromised by high levels of consumer trust to generic versions, as well as by the government reimbursement policy (Kvesic, 2008).

Advertising is another brand building element as it raises awareness of the product and helps consumers build preferences, especially if it is an innovative product. It is said that advertising can be effective in limiting the impact on market share of generic competition (Kvesic, 2008; Dean et al., 2012). Advertising can be directed to the end consumer, to the physician, or to the pharmacist. In the prescription-only segment of drugs promotion should be targeted toward the physicians and tries to influence what they prescribe. The product's therapeutic advances, its absence of side effects, and the quality and service of the product's company should be emphasized in the advertising message (Morton, 2000). If the local health authorities permit pharmacists to substitute a branded drug with its generic version, then the company's promotional efforts should be directed to the pharmacists as well. Moreover, this is very crucial in the over-the-counter segment where pharmacists often decide what drug to sell on the customer's request. They can choose between branded products with different active ingredients that treat the same symptom and their generic versions. A crucial factor that influences the effectiveness of advertising is the government reimbursement structure. If the patient does not pay for the drug or pays a flat rate, then he or she is most likely to be concerned with the product quality and would be reluctant to buy a generic version even if it is available. In this case, research-driven companies can employ an advertising strategy rather than pricing strategy to create switching costs and shift future demand to branded products (Morton, 2000). On the other hand, if health insurance does not cover the full costs of the product, patients are likely to be more price sensitive. Research-based companies will struggle to defend their market share at patent expiry and advertising might not prove efficient against generic competition. However, a brand's advertising might help switch consumers from other branded products rather than from generic brands as a result of the consumer segmentation in price sensitive and brand loyal segments (Kvesic, 2008).

Next we consider the product innovation strategy. It provides the highest level of brand building and the lowest of price competition, since its greatest advantage is the possibility of patent extension and prolonged market exclusivity. In their article Dubey & Dubey (2010) compare the three innovation approaches, i.e. new dosage form, fixed drug combination (FDC), and effectiveness for new indication, on the basis of developmental costs, risk of failure, and approval rate (Table 2).

Developmental costs

Risk of failure

Approvability

New dosage form (NDF)

Low

Low

High

Fixed drug combination (FDC)

High

High

Low

Effectiveness for new indication

High

High

Low

Table : Comparison of new dosage form, fixed drug combination, and effectiveness for new indication (based on Dubey & Dubey, 2010)

Indication expansion is the most cost intensive innovation form. It requires a thorough preclinical evaluation before it can be tested on human subjects. The need of such elaborate studies makes it comparable to developing a new molecular entity. An FDC product requires certain clinical and preclinical tests as well, in order to prove that there is no serious risk to patients by combining the two drugs. This also increases its developmental costs. The advantage is that these innovation forms can receive the same benefits as a new molecular entity and obtain a patent extension. A new dosage form (NDF), on the other hand, does not offer patent extension opportunities by itself, but it acts as a differentiation strategy. In addition, the evaluations needed to prove its safety and efficacy are not as expensive. If it is produced by a technology that is expensive and/or is under patent protection, this can prevent generic companies from copying it. The risk of failure is greater with FDC and indication expansion, since preclinical and clinical tests might prove their inefficacy, for instance, due to chemical incompatibility. NDF, in contrast, poses little unforeseen risk. Furthermore, NDF are authorized more easily since they offer more convenience, increase adherence to medication, and suggest better treatment outcome. However, FDC and new indications face thorough investigation by health authorities and need to prove their supremacy with elaborate clinical results. Considering the above comparison, it can be concluded that NDF involves the lowest costs and risk than the other innovation strategies. If launched before the patent of the original drug expires it can help switch consumers and consequently retain market share and profitability. Fixed drug combination and indication expansion are worth considering as well because, despite the greater risk and development costs, they might grant the company with the ultimate protection against generics, namely a patent extension.

If product innovation is not an option for the research-based company, it can benefit of being proactive and launch the product in different flavors or packages. This strategy holds opportunities for brand building and can shift and reinforce consumer preferences (Kvesic, 2008). Despite the relatively low costs involved and the lack of need for authorization, it is doubtful whether it has the potential to defend the market share against generic at patent expiry. On one hand, generic companies can easily copy these improvements. On the other hand, it might fail to appeal to consumers especially in price sensitive segments.

Investment in generics and launching a fighter brand are some of the opportunities to compete in the price sensitive market after the patent of the original drug expires. It does not allow a significant brand building and intensifies price competition. If launched before patent expiry either product can capture significant market share and switch consumers to the lower priced version of the product before other competitors enter the market. In addition, it is well aligned with health policy objectives in many countries (Raasch, 2008). It can be also effective in retaining market share if the local health insurance does not reimburse the full costs of medications and consumers are price sensitive. Nevertheless, it is worth considering whether the strategy will be compatible with the corporate policy and whether it will receive internal support. Marketing generics is very different from marketing innovative, patent protected drugs and the respective teams need different set of skills and knowledge. Therefore, a research-based company might consider establishing or acquiring an own generic affiliated company for this purpose. Another option would be a licensing agreement in exchange for royalties. The potential of this strategy should be evaluated against the market size and conditions, availability of generic competition and its intensity, consumer behavior and consumer trust in generics.

Finally, the pricing strategy offers the most direct solution to the problem emerging at patent expiry, i.e. the market share of the branded drug is at stake because of lower priced generic competition. It does not allow for brand building, but heightens price competition. It is assumed that a lower price has the potential to discourage generic entrants. Provided that a research-based company lowers their price, generic companies lose their only competitive advantage, i.e. a significant price discount, and hence expect lower profits that might not cover the fixed costs of entry (Morton, 2000). In addition, the company does not need to match their price with the generic one, but reduce it to a level where the consumer would still prefer the branded product (Argawal & Thakkar, 1997). In order to choose an effective and appropriate pricing strategy, it is essential to understand the market structure, market segmentation, and consumer behavior (Barak & Wilson, 2003). For instance, a manufacturer can employ a skimming price strategy, i.e. high price, during the introductory and growth phase of the drug, and switch to penetration price strategy near parent expiry (Argawal & Thakkar, 1997). Furthermore, Barak & Wilson (2003) suggest that pricing should not be used on its own, but in combination with other strategies such as defense of intellectual property, follow-on products and line extensions, sales and marketing campaigns. To sum up, pricing strategies provide an opportunity to tackle generic competition in certain market conditions. They should be pursued only after thorough evaluation of the particular market in order to determine whether a significant market share will be gained due to the reduced price and whether the potential growth in revenues will be sufficient for an increased profitability.

Conclusion

Despite the rising demand for medicine in the global pharmaceutical market, the research-based pharmaceutical companies are facing a challenging market place. Decline in R&D productivity and government pressure on pricing policies puts the industry's return on investment at stake. Above all, their profitability is threatened by the market entry of generic companies once the patent of the original drug has expired. Therefore, this paper attempted to analyze some of the global marketing strategies that can be employed by innovative pharmaceutical companies in order to defend their market share and discourage generic entrants. To achieve this goal, a variety of articles have been reviewed that discussed the benefits and drawbacks of these strategies, as well as factors to consider when assessing the pharmaceuticals market environment.

There are a few limitations to this study. First of all, some strategies discussed in the academic sphere were not considered in this paper. These are divestiture and prescription only to OTC status switch. Even though the latter strategy provides opportunities to access a larger customer base, build a strong brand and increase revenues, it was not considered since its implementation depends to a great extent on the local government regulations. Moreover, this approach is not applicable to all medications. Secondly, the potential advantages and disadvantages of a combination of strategies were not taken into account. This is definitely an interesting topic for future observation and research.

It is inevitable that generic brands enter the market after the patent of the original medicine expires. Nevertheless, that does not mean that research-based companies should not take measures against it. As demonstrated in this paper, there are some strategies that can extend the life of the product for some more years and retain its profitability. Still, these approaches are not a remedy for every problem. The pharmaceutical market is very specific and shaped by the consumer behavior, the competitive landscape and government regulations. Even though the paper discussed global marketing strategies, their implementation depends highly on the local market conditions. Therefore, pharmaceutical companies should carefully research the market, assess how these strategies can be employed there and adapt them to the specific market environment. Furthermore, the company should plan the post-patent profit protection strategies well in advance of the patent expiry in order to ensure a smooth implementation and a successful outcome. It is also worth considering employing a combination of these strategies, each tackling a different aspect of the issue triggered by generic competition. Thus, research-based pharmaceutical companies can sustain their revenues after the patent expires. After all, the increased return on investment on new drugs is an incentive for the innovator companies to invest in the discovery and development of new molecular entities which, without doubt, benefits the general public and improves human health.