Generic Versus Brand-Name Drugs: Does it Really Matter?

Abstract

The market for pharmaceuticals is in constant evolution. We are interested not only in the price and quantity effects of generic drug entry, but also the ones concerning patients and physicians choices, namely about treatment continuity. Following the work of both Frank and Salkever (1992 and 1995) and Wiggins and Maness (2004), we derive a model of vertical differentiation in which consumers/patients may opt to be out of treatment (technically, the market is not fully covered). We have found three relevant effects from entry of generics entry: market size increases and both price and market share of brand-name drugs decrease. The model fits different NHS drug-financing systems, such as reference pricing and proportional cost-sharing; the effects have the same sign under both systems, but the former has higher impact over the market than the latter. While the last two effects are relatively well-known, the existence of a fringe of consumers that may stop treatment for higher prices, introduces potentially a different strategic interaction between entrants and incumbents (the former may grow at the cost of market expansion)

We present an empirical analysis based on Portuguese pharmaceuticals market, and in specific therapeutical classes. The choice of classes is based on relevance (representative classes among the total sales volume of the generic pharmaceuticals market), the presence of generic drugs and the treatment of a chronic condition being involved (so that continuity of treatment is an issue)

On methodological terms, the analysis is split into two different parts. The first one is the traditional study of price and quantity evolution; the second discusses the effects over the agent's - both physician and patient - decision. Concerning the former, we present empirical data, from the mid-90s to 2005, which suggest there might be both vertically differentiated and traditional markets. This is surely consistent with the work previously done in the literature. The estimation of models of price responses to generic entry in the market for both brand-name and generic pharmaceuticals confirm these results. As for the second part of our analysis, a careful look at market data and a questionnaire delivered at pharmacies suggest the importance of the effects initially pointed out. Patients, pharmacists and physicians react in a different way when it is possible for generic drugs to enter the market. It becomes clear that benefits from generic entry must include continuity of treatment aspects, besides lower prices of generics (that may induce a strategic response from incumbent drugs). The strength of the effects is also related to the existence of a reference pricing system.

Keywords: generic entry, vertical differentiation, reference pricing system