Dynamic Competition in Pharmaceuticals. Patent Expiry, Generic Penetration, and Industry Structure

European Journal of Health Economics, Vol. 5, No. 2, pp. 175-182, 2004

Posted: 21 Nov 2007 Last revised: 30 Jul 2012

See all articles by Laura Magazzini

Laura Magazzini

University of Verona

Fabio Pammolli

Polytechnic University of Milan - Department of Management, Economics and Industrial Engineering; CERM Foundation

Massimo Riccaboni

KU Leuven - Department of Managerial Economics, Strategy, and Innovation; IMT Institute for Advanced Studies

Abstract

This paper investigates patterns of industrial dynamics and competition in the pharmaceutical industry, with particular reference to the consequences of patent expiry in different countries. We focus on the competition at the level of single chemical entities, distinguishing between original brands and generic products. Quarterly data, spanning from July 1987 to December 1998, on sales of pharmaceutical products in four countries (USA, UK,Germany, and France) constitute the basis of our analysis. All the products containing major molecules whose patent expiration date lies between 1986 and 1996 are included in our sample.We show how diffusion of generics is linked to the characteristics of the market and investigate how price dynamics of original products are affected by generic competition. Our empirical investigation shows that the dynamics of drug prices and the competition by generic drugs vary significantly across countries. This heterogeneity notwithstanding, a clear distinction seems to emerge.On the one hand, systems that rely on market-based competition in pharmaceuticals promote a clear distinction between firms that act as innovators and firms that act as imitators after patent expiry. Here, original products enjoy premium prices and exclusivity profits under patent protection,and face fierce price competition after patent expiry. On the other hand, in systems that rely on administered prices, penetration by generic drugs tends to be rather limited. Its descriptive and preliminary nature notwithstanding, our analysis seems to have relevant implications at different levels of generality, especially for Europe.

Keywords: Pharmaceuticals, Patent expiration

Suggested Citation

Magazzini, Laura and Pammolli, Fabio and Riccaboni, Massimo, Dynamic Competition in Pharmaceuticals. Patent Expiry, Generic Penetration, and Industry Structure. European Journal of Health Economics, Vol. 5, No. 2, pp. 175-182, 2004, Available at SSRN: https://ssrn.com/abstract=1031406

Laura Magazzini

University of Verona ( email )

Via dell'Artigliere, 8
Verona, 37129
Italy

Fabio Pammolli (Contact Author)

Polytechnic University of Milan - Department of Management, Economics and Industrial Engineering ( email )

Via Lambruschini 4C - building 26/A
Milano, 20156
Italy

CERM Foundation ( email )

Via Fiorentina, 1
Siena, Siena 53100
Italy

HOME PAGE: http://www.cermlab.it

Massimo Riccaboni

KU Leuven - Department of Managerial Economics, Strategy, and Innovation ( email )

Naamsestraat 69 bus 3500
Leuven, 3000
Belgium

IMT Institute for Advanced Studies ( email )

Complesso San Micheletto
Lucca, 55100
Italy

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