Anticompetitive Product Changes in the Pharmaceutical Industry

81 Pages Posted: 27 Mar 2011

See all articles by Steve D. Shadowen

Steve D. Shadowen

affiliation not provided to SSRN

Keith B. Leffler

University of Washington - Department of Economics

Joseph T. Lukens

affiliation not provided to SSRN

Date Written: October 10, 2010

Abstract

Manufacturers of branded pharmaceuticals sometimes strategically redesign their products in order to prevent the substitution of a generic product at the pharmacy counter. This product-redesign strategy impairs the generic’s most cost-efficient (and only commercially feasible) means of competing. Regardless of whether the reformulated product brings any medical or other benefits to consumers – indeed, even if the reformulated product is undeniably inferior to the original brand product – the brand manufacturer’s reformulation can significantly impair consumers’ access to the far less expensive generic product.

In this first of two articles on the subject, we begin by outlining the legal and regulatory context in which product reformulations occur, emphasizing the structural aspects of the pharmaceutical marketplace that make reformulations an effective strategy for brand manufacturers.

Fundamentally, prescription pharmaceutical markets suffer from a “price disconnect”; the doctor who prescribes the product does not pay for it, and the consumer (or her insurer) who does pay does not choose the product. Thus, these markets are not founded on the consumer’s price/quality choice that, in most markets, ensures that manufacturers make only those product changes that are likely to enhance consumer welfare.

We next discuss a comprehensive database of more than 400 pharmaceutical reformulations from 1995 through April 2009. The data reveal 32 reformulations – with more than $28 billion in combined annual sales – that are temporally linked to imminent generic competition and are clearly “suspect,” e.g., minor reformulations such as changes from a capsule to a tablet or vice versa; changes in chemical structure that yielded little or no consumer value; and multiple, seriatim product reformulations. Another 22 reformulations, with combined annual sales of an additional $15.8 billion, involved switches to extended-release products or “combination” products.

We discuss the dataset in light of the various tactics that manufacturers use as part of their reformulation strategies, including: (1) switching promotional efforts from the original product to the reformulated product; (2) introducing the redesigned product before generic entry; and (3) withdrawing the original product from the market. We then evaluate whether the recent court decisions in TriCor and Nexium effectively deal with the unique aspects of the pharmaceutical industry and with the economic effects of the manufacturers’ tactics. This sets the stage for our proposed second article, which will advocate a fact-based approach to the proper antitrust treatment of pharmaceutical reformulations.

Suggested Citation

Shadowen, Steve D. and Leffler, Keith B. and Lukens, Joseph T., Anticompetitive Product Changes in the Pharmaceutical Industry (October 10, 2010). Rutgers Law Journal, Vol. 41, No. 1-2, Fall/Winter 2009 . Available at SSRN: https://ssrn.com/abstract=1792864

Steve D. Shadowen (Contact Author)

affiliation not provided to SSRN ( email )

Keith B. Leffler

University of Washington - Department of Economics

Box 353330
Seattle, WA 98195-3330
United States
(206) 543-5795 (Phone)
(206) 685-7477 (Fax)

Joseph T. Lukens

affiliation not provided to SSRN

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
350
Abstract Views
1,646
rank
91,792
PlumX Metrics