How Generic Drugs Affect Brands Before and After Entry



The authors develop a dynamic nonlinear model to test the dynamics surrounding patent expiration and apply this model to data from two blockbuster brands that went off patent in 1997. They estimate the model using importance sampling-based techniques. The results indicate that increases in generic drug sales fully go at the cost of branded drug sales and that, from the manufacturer’s perspective, the observed reduction in the brand’s marketing expenditures toward patent expiration corresponds to an appropriate allocation of marketing expenditures in the long run. A policy simulation shows that branded drug sales at the time of patent expiration are four to eight percent lower than they would have been if the firm had maintained marketing expenditures at a high level. The policy simulation further indicates that societal cost savings may be obtained by increasing marketing expenditures for the branded drug before patent expiration. This finding is interesting, particularly given the criticism on pharmaceutical marketing efforts.
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Dr. G. Liberali