Pioneering Advantage in Generic Drug Competition

Abstract

Pharmaceutical markets experience the entry of numerous generic firms upon expiration of the brand firm's patent. In this paper, we take a close look at competition among the generic entrants during the first three years after patent expiration and examine whether there is a first mover advantage. We specify a random effect nested logit model of competition that allows for competition between the brand drug and generics, and among multiple generic drugs. The model accommodates the effects of prices, detailing, sampling, journal advertising, time-in-market, and molecule-specific characteristics. The model is estimated on cross-section time-series data for 49 molecules in which the brand drug lost patent exclusivity between 1992 and 2000. We find strong evidence that the early generic entrant enjoys a substantial market share and profit advantage over the second and the third entrants, after controlling for differences in marketing activities. We also find evidence suggesting that the advantage is due to the response of the retail pharmacy channel, and due to differential effectiveness of advertising and pricing between earlier versus later entrants.

Keywords: Pharmaceuticals, generic drugs, market share models, pioneering advantage

JEL Classification: C13, C33, I11, L11, L65, M31