Estimating the Cost of Strategic Entry Delay in Pharmaceuticals: The Case of Ambien CR

30 Pages Posted: 17 Jun 2015 Last revised: 28 Sep 2016

See all articles by Bradley Shapiro

Bradley Shapiro

University of Chicago - Booth School of Business

Date Written: August 9, 2016

Abstract

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.

Keywords: Pharmaceutical Innovation, Entry, Regulation, Advertising

JEL Classification: L00, L13, M31, I11, I18

Suggested Citation

Shapiro, Bradley, Estimating the Cost of Strategic Entry Delay in Pharmaceuticals: The Case of Ambien CR (August 9, 2016). Available at SSRN: https://ssrn.com/abstract=2619253 or http://dx.doi.org/10.2139/ssrn.2619253

Bradley Shapiro (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://faculty.chicagobooth.edu/bradley.shapiro/

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