Estimating the cost of strategic entry delay in pharmaceuticals: The case of Ambien CR
With the Hatch-Waxman Act of 1984, the FDA included an unchallengeable exclusivity period for newly approved drugs, independent of patents. This potentially generates an incentive for firms to strategically delay the introduction of new versions (reformulations) of drugs until just before patent expiration of the original drug. This way the reformulated drug competes mainly with newly introduced generics of the original drug. If instead, the reformulated drug was to be introduced well before the original drug’s patent expires, the reformulated drug would compete only with the original drug. While the pattern of strategic delay is well documented in the literature, its effects on consumers and firms are not. Reformulations may increase utility through improved efficacy and through fewer doses per day or a more even molecule decay rate. However, as suggested in the press and literature, it is also possible that the adoption of reformulated products is mostly the result of advertising rather than product-related benefits. Using detailed prescribing and pricing data from the prescription sleep aid market, I document significant adoption of the reformulation Ambien CR and show that it is not only driven by advertising. I use these estimates to evaluate two different policies designed to induce earlier entry of Ambien CR. I find that there are large potential gains in consumer surplus and in revenue.
KeywordsPharmaceutical innovation Entry Regulation Advertising
JEL ClassificationI10 I18 L5 M31 M38 O3
I thank Nancy Rose, Ernst Berndt, Stephen Ryan, Florian Zettelmeyer and two anonymous referees for their helpful comments, as well as participants at the MIT Industrial Organization lunch. I thank Cindy Halas at IMS Health for her help with data resources. This research was supported by the National Institute on Aging, Grant Number T32-AG000186 and the National Science Foundation Graduate Research Fellowship under Grant Number 1122374. All mistakes are my own.
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