Abstract
Competition among generics helps keep drug prices low and control medical costs. Good estimates of the effect on price of the entry of another generic competitor would inform competition policy and test oligopoly theories. However, identifying the causal effect of entry is difficult since the number of firms that compete in a market is endogenously determined. We exploit provisions of the 1984 Hatch–Waxman Act to identify a causal effect. We find that ignoring endogenous selection into generic drug markets imparts a significant downward bias to the estimates of the effects of two and three competitors on generic drug prices.
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Notes
Federal Trade Commission 2011. See also http://www.ftc.gov/os/highlights/2012/topics/prescriptionDrugs.shtml, where the Federal Trade Commission (FTC) specifically identifies drug prices in its policy mission, and, http://www.kaiseredu.org/Issue-Modules/Prescription-Drug-Costs/Policy-Research.aspx, which identifies various instruments to control drug costs.
The same study—a 2015 report by the Generic Pharmaceutical Association, “Generic Drug Savings in The US: Seventh Annual Edition”—estimates that generic drug use reduced pharmaceutical expenditures by approximately $254 billion in 2014. http://www.gphaonline.org/media/wysiwyg/PDF/GPhA_Savings_Report_2015.pdf.
The Supreme Court case is Federal Trade Commission v. Watson Pharmaceuticals, Inc., No. 12-416. The Hatch–Waxman Act is formally the “Drug Price Competition and Patent Term Restoration Act of 1984.” Medicare Part D, formally known as the “Voluntary Prescription Drug Benefit Program,” is a section of the Medicare Modernization Act, formally known as the “Medicare Prescription Drug, Improvement, and Modernization Act of 2003.”
The importance of accurately measuring the effects of competition is further underscored by studies like Danzon and Chao (2000) who concluded that drug market regulation may have a deleterious effect on the potential benefits of competition.
The unit of observation in all of our analyses is the unique combination of molecule-strength-therapeutic class-dosage form-month, where a molecule is the unique combination of all active ingredients in the medication.
If the ‘branded’ product has exited the market, the reference drug may be one of the remaining marketed products. Since we consider drugs that face recent generic entry, this possibility is not an issue for our sample.
In a report on the status of promotional spending for prescription drugs, the Congressional Budget Office notes that promotional spending is “usually undertaken on behalf of brand-name drugs, rather than generic drugs.” See http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/105xx/doc10522/12-02-drugpromo_brief.pdf.
Caves et al. measure generic prices as the ratio of generic drug prices against the contemporaneous branded price.
In most of the Reiffen and Ward (2005) specifications, the marginal effect of a competitor reduces price monotonically, so that the cumulative effect of the number of competitors always weakly increases in the number of competitors.
Regan (2008) finds that the effects of the latest entrants—entrants four-five, and greater than six—are not larger than 1% relative to a single generic competitor, and the effects are statistically insignificant at the 10% confidence level.
Caves et al. (1991), Frank and Salkever (1997), and Regan (2008) also examine the price response of the branded firm to generic entry. For theoretical papers that model the price response of the branded firm to generic entry, see Frank and Salkever (1992) and Davis et al. (2004). See Bergemann and Valimaki (2006) for a model of dynamic branded drug pricing in an earlier period.
Articles that cover the price increases as well as the public reaction include: “Drug Goes from $13.50 a Tablet to $750, Overnight” New York Times, September 20, 2015; and “Big Price Increase for Tuberculosis Drug Is Rescinded,” New York Times, September 21, 2015.
The count of generic manufacturers includes all drugs other than the reference listed drug, including authorized generic competitors that license through the “new drug application” (NDA) of the brand firm. The count excludes firms that are identified as repackagers in FTC (2011). See Table 4 in the “Appendix” for a list of these firms.
Figure 1 reflects information for the first 24 months of generic competition. The relative price is the ratio of generic drug prices at time t to brand prices in the quarter prior to generic entry. See Sect. 4 for a more in-depth discussion of how the number of competing generic manufacturers and generic drug prices are constructed.
Reiffen and Ward (2005) find results that are consistent with these types of discrete jumps in markets with greater than four competitors.
Conditional upon demonstrable bioequivalence to a reference drug, the ANDA process allows generic drug applicants to rely upon clinical trial evidence that was provided in the original NDA. Prior to the Hatch–Waxman Act, the generic filer was required to conduct its own clinical trials. Due to the expense of performing clinical trials, independent generic firms rarely enter without an ANDA submission. Brand firms are increasingly licensing “authorized generic” drugs that use the original NDA approval. This is an example of generic entry without an ANDA, but it is an option that is available only to the holder of the original NDA and its licensees.
The length and terms of the marketing restrictions associated with the Hatch–Waxman Act often depend upon the approval conditions of the associated reference drug, such as whether the FDA designated the drug as a new chemical entity (NCE). For example, all NDAs that are approved by the FDA are subject to at least a three-year marketing “exclusivity” period. See http://www.fda.gov/Drugs/DevelopmentApprovalProcess/SmallBusinessAssistance/ucm069962.htm (accessed February 25, 2015) for more information.
Paragraph Four refers to the relevant provision of the Hatch–Waxman Act.
See “Guidance for Industry: 180-Day Exclusivity When Multiple ANDAs Are Submitted on the Same Day,” for a detailed discussion of multiple first filers. http://www.fda.gov/downloads/Drugs/GuidanceComplianceRegulatoryInformation/Guidances/ucm072851.pdf. Accessed February 25, 2015.
When a Paragraph Four challenge fails, generic firms are able enter when all patent and regulatory exclusivities associated with the branded product expire. This is the same means of entry as drugs that did not experience a Paragraph Four challenge.
IMS Health, IMS National Sales Perspectives™, January 2003 to December 2010, Retail and Non-Retail Channels.
An oral solid medication is defined as a drug that is packaged as a capsule or a tablet dosage form.
We omit Clopidogrel due to unusual circumstances that are associated with at-risk entry. We also omit any drug with annualized aggregate generic revenues that are more than five times that of the annualized quarterly branded revenues immediately prior to generic entry. We do not attempt to explain this phenomenon, but this could occur if, for example, a branded drug discontinues marketing the drug in anticipation of generic entry.
We deflate all expenditure information by the medical component of the Producer Price Index.
Since p b d corresponds to the brand drug’s price averaged over the 3 months prior to generic entry, the term does not require a time subscript.
Pre-entry brand price is constructed as the total dollar sales of the drug during the 3 months prior to generic entry divided by the total unit (i.e., pill) sales during the same period.
Our definition of a competitor omits re-packagers and treats several firms with similar names as the same firm (e.g., Watson and Watson Labs). In addition, we treat firms as market participants unless observed without sales for four consecutive months. The date of exit for these firms is backdated to the last month observed without sales.
Authorized generic drugs (AGs) are included in our count of competing generic drug manufacturers. FTC (2011) finds that AGs have similar wholesale prices as ANDA-approved drugs during the Paragraph Four exclusivity period.
The same molecule may be counted in multiple samples as different drugs with the same molecule. The sum of the molecule counts across groups does not equal the totals reported in Tables 1, 2 and 3 because of these split molecules. For example, the 125, 250, and 500 mg strengths of the immediate release tablet of divalproex (brand name Depakote) experienced a failed Paragraph Four challenge, and generic competition began in August 2008 upon expiration of the branded product protections. However, the patent associated with the extended release version of the 500 mg tablet was successfully challenged, which triggered a 180-day exclusivity period in February 2009. Moreover, the same molecule may be counted among both the large-market and small-market drugs. The 250 and 500 mg strengths of the immediate release tablet of divalproex are classified as large-market drugs, while the 125 mg strength is classified as a small-market drug.
Tenn and Wendling (2014) find some evidence that incumbents engage in efforts to deter entry outside of the exclusivity period for small-market drugs, but not for large-market ones. However, their study does not consider whether the exclusivity period, itself, chills entry by potential entrants. We are not aware of any study that does. The evidence from Table 1 suggests that drugs with exclusivity periods eventually have at least as many competitors outside exclusivity as drugs that never had an exclusivity period.
Much of the prior literature (e.g., Caves et al. 1991; Frank and Salkever 1997; and Regan 2008) has acknowledged this relationship by using market-size as an instrumental variable in similar specifications. Panattoni (2011) and Scott Morton (1999) find direct evidence that market-size is an important determinant of generic firm entry.
This transformation of the pricing variable allows for an intuitive interpretation of the coefficients of interest. In addition, this transformation provides an infinite support. Although this specification assumes that the coefficient on the natural log of pre-entry brand price is one, more flexible specifications could not reject this hypothesis.
The number of competitors does not vary over time within a drug market during the 180-day exclusivity period. Consequently, our model cannot include drug fixed effects and separately identify the effects of competition.
We cannot include a direct metric of strength since the same unit of measure is not the same across drugs. For example, a 100 mg tablet of Bupropion is not comparable to a 100 mg tablet of Oxycodone, which are two drugs in our sample.
The results are not sensitive to this time period restriction. Estimates from models with as many as 24 months and as few as 12 months of generic competition have quantitatively similar results.
The omitted category is the effect of one generic competitor during Paragraph Four exclusivity for large-market drugs.
The brand drug competes during the entire period for every drug in our sample. Thus, a drug with two generic competitors has three marketed products: the brand, and the two generic competitors (one of which may be an authorized generic competitor). Our discussion of the number of competitors omits any reference to the branded drug product since there is never any variation in whether the branded drug is marketed during our sample.
The percentage effect estimates from Table 2 are derived from the coefficient estimates in Table 5 in the “Appendix”. For example, the first cell value in Table 2, − 0.101, corresponds to the effect of two manufacturers outside of exclusivity and is calculated from the coefficient estimates such that exp(δ2 − δ 1) − 1 = exp(− 0.188 − (− 0.082)) − 1 ~ = − 0.101. Similarly in Table 2, the percentage effect estimate that corresponds to the effect of two manufacturers inside of exclusivity, − 0.110, is calculated as exp(γ2) − 1 = exp(− 0.117) − 1 ~ = − 0.110. The markets with a single manufacturer inside of exclusivity and large markets with a single manufacturer inside of exclusivity are the respective left out category for specifications 1 and 2.
Heteroscedasticity-robust Wald tests for the joint significance of separate effects of competition in large-market drugs are 3.65, 3.82, and 31.66 for the full sample, the Paragraph Four sample, and the exclusivity sample, respectively. Each is significant at the 0.001 level.
Reiffen and Ward (2005) also find that the second generic competitor has a positive effect on prices outside of the exclusivity period. Although the magnitude of our effect is large, it is statistically insignificant.
Some generic firms enter markets by certifying that they do not infringe on a patent without challenging the validity of the patent. For example, a patent may relate to the extended release mechanism of the drug. A generic firm may concede that the patent protecting the drug is valid, but asserts that they have a different extended release mechanism that does not violate the patent. If other generic firms do not or cannot develop an extended release mechanism that does not violate the existing patent, then the drug may face generic entry, but would remain protected by patents.
The “relative effect” is relative to a single generic competitor. Our estimates also include an estimate of greater than 10 manufacturers.
As we note in earlier sections, the two may be related. Drugs that attract successful patent challengers may also attract entry more generally. Indeed, as noted in Table 1, drugs with Paragraph Four challengers attract more generic entrants outside of exclusivity than do drugs without Paragraph Four challengers.
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Acknowledgements
We thank David Schmidt and Steven Tenn for invaluable advice. We also thank Viola Chen, Abe Dunn, Daniel Hosken, Karen Goldman, Kubo Kensuke, Chris Metcalf, Elizabeth Schneirov, Joel Schrag, Christopher Snyder, Aileen Thompson, Mike Vita, and Nathan Wilson for providing helpful comments. Greg Kuczura provided outstanding research assistance. The views expressed in this paper are those of the authors and do not necessarily represent the views of the Federal Trade Commission, any individual Commissioner, the Office of the Comptroller of the Currency, or the U.S. Department of the Treasury.
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Olson, L.M., Wendling, B.W. Estimating the Causal Effect of Entry on Generic Drug Prices Using Hatch–Waxman Exclusivity. Rev Ind Organ 53, 139–172 (2018). https://doi.org/10.1007/s11151-018-9627-y
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DOI: https://doi.org/10.1007/s11151-018-9627-y