Marketing and Diffusion in Pharmaceutical Markets: Prescription Drugs in the United States of America

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Victoria Moyiseyeva (1441930) Masters in Business Administration Concentration: Marketing

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Marketing and Diffusion in Pharmaceutical Markets: Prescription Drugs in the United States of America Victoria Moyiseyeva Student number: 1441930 E-mail: victoriakrim@gmail.com University of Groningen

Faculty of Management and Organization Master of Science Marketing Management

First supervisor: Dr. Jaap E. Wieringa Assistant Professor of Marketing

Department of Marketing and Marketing Research Faculty of Economic Sciences

University of Groningen

Second supervisor: Dr. Karel Jan Alsem Assistant Professor of Marketing

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“Knowledge is the best medicine of all”

Pharmaceutical Research and Manufacturers of America

Preface

This report concludes my research on marketing and diffusion in the pharmaceutical industry in the United States of America and my study at the University of Groningen. Accelerated growth of pharmaceutical use and spending on marketing promotion makes it interesting to investigate the effects marketing and other characteristics on the diffusion of the prescription drugs. The report yields interesting conclusions on which marketing tools and what product quality and product class characteristics have an influence on the diffusion process of prescription drugs.

I would like to sincerely thank many people who helped me to accomplish the goals of this research. I would like to thank my thesis supervisor, Dr. J. E. Wieringa, who introduced me to the area of diffusion in pharmaceutical industry. He also helped me to draw an outline for my master thesis, provided me with essential data, and guided me throughout the research. Also, I would like to thank Dr. K. J. Alsem for his time and support I have received to pursue a graduate degree and complete this research. I am indeed grateful to Dr. A. B. Allaway and Dr. G. D’Souza from the University of Alabama for their valuable comments and help in contacting the physicians.

I would like to express my deep appreciation to Maarten van der Linde who has supported me, patiently listened to my worries, and kept me positive.

I will always be grateful to my family for their love and support.

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Cross-sectional analysis is carried out to investigate the effects of four marketing instruments on the parameter estimates of the diffusion model – βˆ₀_iand βˆ₁_i– representing a basic propensity to try new product and the physicians’ internal influence, respectively, and

i 2

ˆ

β representing the effectiveness of consumers’ product trial or direct product experience on repeat purchases of prescription drugs. Other factors that could have an impact on the diffusion of pharmaceuticals and are investigated are product quality characteristics: side effects, innovativeness of the drug and its efficacy; and product class characteristics: whether drug is used to treat life-threatening disease, whether it is designed for asymptomatic disease, and chronic or acute are researched. Other factors that are investigated are the time when a drug was introduced on the market place and the order of entry.

Based on monthly marketing expenditures for 52 new drugs from 1993 to 2000, this research yields several findings with important strategic implications for product development and marketing managers. The results of cross-sectional analysis make it possible for managers to take better informed decisions related to the allocation of marketing budget to different marketing instruments.

The results of cross-sectional analysis reveal that basic propensity to try a new drug is related to innovativeness of a drug as well as to the marketing activities such as detailing and journal advertising. That means that managers should allocate marketing budget on the detailing and journal advertising activities to stimulate a trial purchase at the beginning of a drug introduction. They should insure that the sales representative communicate to physicians about an innovative drug and stress that it is the innovative solution. The cross-sectional results suggest that physicians will tend to try a new drug if they believe it is an innovative solution.

The effectiveness of the physicians’ internal influence or word-of-mouth communication on the trial rate is related to marketing efforts directed at physician meetings and journal advertising. This implies that managers should allocate enough money to support physician meetings and congresses; also managers should place advertisements in medical journals.

The analysis of the time variable suggests that the longer the drug is on the market, the higher the propensity is to try it but the lower the effectiveness is of the physicians’ internal influence. Also, the sooner the drug is on the market, the higher the propensity to try it, which means that drugs introduced on the market earlier have a higher probability that physicians will prescribe them first. As a result, if the trial rate successfully affects the repeat rate, drugs introduced earlier have a higher chance of taking a first-mover advantage and have a higher chance to occupy a preferable position in the physician’s drug offerings.

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marketing money on the physicians meetings to stimulate the repeat purchases. Additionally, repeat rate is related to the product quality characteristics such as efficacy and innovativeness of the drug. This means that it is very essential for the managers to ensure that in the physicians’ meetings sufficient amount of information is provided about drug efficacy and innovativeness of the solution. Time variable has a strong effect on the repeat rate during the first 12 months after the introduction, meaning that the earlier a drug is introduced the higher the repeat rate during the first 12 months after the introduction. The order of entry variable is also related to the repeat rate, which means that the drugs introduced on the market earlier have a first-mover advantage and occupy a preferable position in the physician’s drug offerings.

The repeat rate during the complete period of eight years is reinforced by the activities directed at physicians. In the long run managers should focus on the marketing directed at physicians. The effects of the efficacy and the innovativeness of the drug have significant effect on the repeat purchases during the complete period of eight years. Thus, it is very important for the pharmaceutical manufactures to discover innovative and effective solutions.

There are some limitations to this research. The research solely deals with the U.S. pharmaceutical market, specifically the prescription drugs market. The surveys gathering physicians’ opinions on the product quality and class characteristics are performed in the United States, the South-East: Eufaula, Birmingham, Alabama, Bowling Green and Tompkinsville, Kentucky. The physicians’ opinions could be biased for that area.

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1 Introduction

One of the largest and most revenue generating industries in the United States is the pharmaceutical industry. The U.S. drug sales grew to $235.4 billion in 2004 with a growth rate of 8.3% in 2003 (IMS). The U.S. comprises roughly 45% of the pharmaceutical market worldwide, while Europe comprises about 25% (AMR Research).

Research and Development (R&D) is a vital activity in the pharmaceutical industry. For every 5000 drugs discovered, only one ever reaches the consumer (Standard and Poor’s). According to Pharmaceutical Research and Manufacturers of America (PhRMA), only three out of ten prescription drugs on the market generate revenues that meet or exceed average R&D costs, while on average $800 million and 10-12 years are required to get a potential medicine from the researcher’s lab to the patient. The research based pharmaceutical industry invests proportionally more in R&D than other R&D-intensive industries such as computer software, electrical and electronics, and others industries (PhRMA Research).

High R&D costs, coupled with long testing and approval times, pressure pharmaceutical companies to choose the most effective tools of pharmaceutical marketing to stimulate sales of prescription drugs.

The pharmaceutical industry is different from other industries because the buyer, the payer and the user are not the same person. The drugs are usually not chosen by the end consumer, i.e. the patient. Physicians control the choice of many drugs. They write prescriptions that determine which drugs will be used by the patient. Influencing the physician is a key to pharmaceutical sales.

Pharmaceutical companies employ various marketing tools directed towards physicians. They send sales representatives to physician’s offices (this activity costs $5 billion annually, PhRMA), arrange physician meetings, advertise in medical journals, and give out free samples. Another main marketing tool used by pharmaceutical companies is direct-to-consumer (DTC) advertising. DTC advertising is primarily directed towards patients through advertisements in magazines, newspapers, radio, television, and the Internet. Since the Food and Drug Administration (FDA) substantially relaxed the regulations on DTC advertising in 1997, the DTC expenditures have experienced tremendous growth.

The pharmaceutical industry requires high margins, and is saddled with high R&D costs as well as a low survival rate of new drugs. Therefore, studying the effects of different marketing tools along with different industry players makes pharmaceutical marketing an interesting discipline to research.

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Based on the previous cross-sectional studies of the diffusion process by Hahn et al. (1994), Ruiz Conde (2004), and Tornatzky and Klein (1982) the effects of four marketing instruments (DTC advertising, detailing, physician meetings, and medical journal advertising) on the trial and the repeat purchases will be investigated. In addition to the effects of marketing instruments, separate effects of marketing directed at physicians – “push” strategy – and marketing directed at consumer – “pull” strategy – will be examined. Furthermore, other factors related to the trial and the repeat purchases of pharmaceuticals will be investigated. These other factors include product quality characteristics such as side effects, innovativeness of the drug and its efficacy; also product class characteristics such as whether a drug is used to treat life-threatening disease, or whether it is designed for asymptomatic disease, and if the disease is chronic or acute. The time effect when a drug was introduced on the market place on the trial and repeat rates will be studied.

The trial and repeat rates are obtained from a diffusion model, not calibrated in this study. The diffusion model provides parameter estimates that represent trial rate: βˆ₀_i - basic propensity to try new product, -βˆ₁_i- the physicians’ internal influence or word-of-mouth communication; and -βˆ₂_i - repeat rate. These parameter estimates are used as dependent variables in the regression to analyze the relationships of different marketing instruments and other variables on these parameter estimates. The parameter estimates as used in this study are provided by Dr. Wieringa from the Faculty of Economic Sciences of the University of Groningen.

Monthly marketing expenditures on the prescription drugs in the United States are used in this study. The marketing expenditures are collected on the seven drug categories: asthma, anti-depressant, anti-obesity, anti-ulcerative cholesterol reducer, arthritis - osteoarthritis - rheumatoid arthritis, and rhinitis. In total these seven categories comprise 52 new drugs that were introduced during the observational period (1993-2000). Surveys are conducted to gather physicians’ opinions on product class and product quality characteristics.

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They are then used to explain the heterogeneity in the parameter estimates. Thirdly, surveys were conducted in which 20 American physicians contributed their opinions about the product quality and product class characteristics that belong to the seven drug categories that include 52 drugs. The use of primary data contributes to the validity of the research and is an addition to existing studies. Furthermore, the variable representing “innovativeness” of a drug was not analyzed in other studies related to the diffusion process in pharmaceutical markets. By regressing the parameter estimates on the “innovativeness” variable provides us with interesting relationships. Such as whether the innovativeness of a drug influences the basic propensity to try a new product, or whether it influences the physicians to try an innovative drug about which they heard from other physicians and whether they have an impact on repeat-purchases.

In Chapter 2 a research objective is formulated followed by the detailed research questions. Details of a diffusion model used to obtain the parameter estimates are presented. Furthermore, managerial and scientific relevance of this research are also discussed in Chapter 2.

Chapter 3 focuses on the importance of marketing in the pharmaceutical industry, defining marketing instruments such as detailing, medical journal advertising, physician meetings and DTC advertising. This chapter points out the importance of the R&D activities, patents, and the role of the FDA in the pharmaceutical industry. It covers the specifics of the decision buying process of the prescription drugs. Finally, chapter 3 addresses the “informative” and “persuasive” functions of pharmaceutical marketing; and trial and repeat rates.

Chapter 4 addresses different works and articles done by other researchers about the diffusion process in pharmaceutical industry.

Chapter 5 elaborates on the hypotheses specified in this research. Chapter 6 presents the econometric model.

Chapter 7 describes the type of research, data, sample and measurements of the variables used in this study.

Chapter 8 provides results of the cross-sectional analysis of the effects of marketing instruments and other variables on the trial and repeat rates of the diffusion process.

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2 Research Framework

For pharmaceutical companies it is very important to come up with new and more effective drugs to be able to survive in the industry. High R&D costs combined with long testing and approval times, pressure marketing managers to use the most effective marketing tools in disseminating information and accelerating the rate of adoption of new drugs. At the same time, a high speed of diffusion of new drugs is beneficial for the patients who obtain new medicine that could treat their diseases.

Pharmaceutical companies use four main tools of promoting their products: detailing, DTC advertising, physician meetings and advertising in medical journals. Detailing occurs when pharmaceutical companies send their sales representatives to the physician offices to provide free samples for distribution to patients and communicate characteristics of new drugs. Pharmaceutical companies also promote their products directly to consumers (DTC advertising) through various channels and media such as: magazines, newspapers, consumer brochures, the Internet, radio and television. Pharmaceutical companies also organize physician meetings and seminars where they convey information to a group of physicians about drug innovations. Additionally, pharmaceutical companies place advertisements of new drugs in professional journals.

Pharmaceutical marketing activities affect sales of drugs in two ways. First, pharmaceutical marketing activities stimulate trials of a new drug by creating an awareness of it by providing free samples to physicians for potential distribution to the patients. Another role of pharmaceutical marketing is to encourage repeat purchases. It is important for the marketing managers to know which promotional tools to use and when and how much money should be allocated to each promotional tool.

To capture the effects of the consumer’s word-of-mouth on the trial rate of a new drug, and the effectiveness of the trial experience on the repeat purchases, a diffusion model is developed.

The model utilizes a four-segment trial and repeat framework and can be calibrated using aggregate data for frequently purchased products in the early stages of the product life cycle. The trial-repeat purchase diffusion model developed by Hahn et al. (1994) states that market is divided in four segments of physicians:

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4) Non-repeaters, physicians that have tried the new product in the past, but decided not to prescribe it in time period t .

Hahn et al. (1994) make the assumption that every potential consumer (physician)1_actually buys a product in the product class and the potential consumers move between the four segments. The trial and repeat framework provides us with definitions of the product trial rate and of the repeat rate. The trial rate is a fraction of non-trial buyers who try a new product in time period t , and repeat rate is a fraction of post-trial buyers who repurchase a new product in time period t .

From the existing literature on diffusion models the assumption is made that the diffusion rate is divided into trial rate and the repeat rate. It is also assumed that the trial rate is time varying.

The diffusion model captures three aspects of new product buying behavior: the innovative trial, the imitative trial, and the repeat purchase. At the beginning of the diffusion process when a new product is introduced, it is tried by innovative consumers (innovators) who influence others (imitators). This influence refers to the word-of-mouth communication or it is also called internal influence. The effectiveness of consumers’ product trial or direct product experience represents the repeat rate.

The specification of the diffusion model on which this research is based is provided below. The specification is adopted from the diffusion models of Hahn et al. (1994) and Ruiz Conde (2004). From this model the parameter estimates used in this study are derived.

[

, 1

]

2 , 1 1 , 1 0 , −  − − + −            + = _t _i_t _i_t t t i i i t i m q q m s s β β β withq_i_,_t −q_i_,_t₋₁ =s_i_,_t −β₂_iq_i_,_t₋₁

where, for brand i (i = 1, … , N) in month t (t = 1, …, T):

t i

s_, = sales of brand i in time period t (sales from trial and from repeat purchases);

t

m = total market sales in time period t ; 1

,t−

i

q = potential sales of brand i to physicians in the post-trial segments (triers, repeaters and buyers of competing brands that have tried brand i before) at timet−1;

i 0

β = basic propensity to try brand i, without influence of prior buyers or marketing

expenditures, on the sales of brand i in time period t ;

i 1

β = internal influence on the trial rate of brand i;

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i 2

β = repeat rate of brand i in time period t .

In this model, s_i_,_t₋₁/m is included to measure the effects of word-of-mouth communication _t

or the internal influence: it is assumed the prescribers of brand i at time t−1are likely to influence non-prescribers to try this brand in time period t . The variable q_i_,_t₋₁ is included to measure the repeat rate. The parameters in the model can be interpreted as follows. The parameter β₀_i indicates that the basic propensity to try brand i without the influence of prior buyers or marketing expenditures. The parameter β₁_i captures the effect internal influence on the trial rate. β₂_i is the repeat rate.

The model is expressed in terms of sales that are directly observable from aggregate data. This diffusion model was not estimated in this particular study. The diffusion model was estimated by a different source in order to obtain the parameter estimates. However, the parameter estimates of the diffusion model were estimated based on the same data used in this study.

The diffusion model provides parameter estimates such asβˆ₀_i- basic propensity to try new product, -βˆ₁_i- the physicians’ internal influence or word-of-mouth communication, and -βˆ₂_i -repeat rate. Furthermore, the parameters of the diffusion model are used in the cross sectional analysis that is carried out in this research. The cross-sectional analysis is carried out to investigate the effects of four marketing instruments (detailing, DTC advertising, physician meetings, and medical journal advertising) and other variables related to the product quality and class characteristics, time and order of entry. The product quality characteristics include side effects variable, innovativeness of the drug and its efficacy; and product class characteristics comprise the threatening variable, i.e. whether drug is used to treat life-threatening disease, asymptomatic, i.e. whether it is designed for asymptomatic disease, and chronic or acute variables.

2.1 Research Objective and Questions

The objective of this research is to study the effects of various marketing instruments and product characteristics on the adoption process of pharmaceuticals.

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RQ1: What are the effects of detailing on the trial rate and on the repeat purchases?

Managers need to know whether DTC advertising has an effect on the trial rate because it creates consumer awareness of a new medicine or on the repeat purchases because it reminds a patient about an existing drug and persuades a patient to ask for that particular prescription from a physician.

RQ2: What are the effects of DTC advertising on the trial rate and on the repeat purchases?

Additionally, managers should know how strong the effect of organizing physician meetings is on the rate of adoption of a new drug.

RQ3: What are the effects of physician meetings expenditures on the trial rate and on the repeat purchases?

Furthermore, marketing managers should know whether advertising in medical journals has an effect on the diffusion rate of pharmaceuticals.

RQ4: What are the effects of medical journal advertising on the trial rate and on the repeat purchases?

Also, the separate effects of marketing directed at physicians – “push” – strategy and marketing directed at patients – “pull” – strategy are important for managers to effectively target either the physicians or the patients.

RQ5: What are the effects of “push” strategy on the trial rate and on the repeat purchases?

RQ6: What are the effects of “pull” strategy on the trial rate and on the repeat purchases?

In addition to marketing instruments, other attributes could be related to the trial and the

repeat purchases of pharmaceuticals. These other attributes include product quality

characteristics such as side effects, innovativeness of the drug and its efficacy. Product class characteristics such as whether a drug is used to treat a life-threatening disease, an

asymptomatic disease, and whether is for chronic or acute diseases. The time when a drug was introduced in the market place could be related to the trial or repeat rate. Information on how these other attributes are related to the trial and the repeat rates are very useful to the new product managers. For example, they may discover the product quality characteristics for which the trial rate is high, the class of products for which the repeat rate is high, or which type of promotional tools to use on a different stage of a product life cycle.

RQ7: What are the relationships of the product quality characteristics to the trial and to the repeat rates?

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RQ9: What are the effects of introduction time on the trial and on the repeat rates?

2.2 Research Limitations

The research solely deals with the U.S. pharmaceutical market, specifically the prescription drugs market.

The study reveals the cross-sectional effects of the marketing activities and other product characteristics on the parameter estimates of the diffusion model. In this study the diffusion model is not developed, but rather the econometric model. The parameter estimates of the diffusion model are obtained from another source and are used in the cross-sectional analysis.

The surveys gathering physicians’ opinions on the product quality and class characteristics are performed in the United States, the South-East: Eufaula, Birmingham, Alabama, Bowling Green and Tompkinsville, Kentucky. The physicians’ opinions could be biased for that area.

The conclusions are based on the cross-sectional analysis of 52 new drugs introduced in 1993 through 2000.

Price is not included in the analysis of the effects on the parameters of the diffusion model. Physicians are typically more concerned with other product quality characteristics such as efficacy and side-effects of a drug. Nevertheless, price could have a significant impact on the diffusion process in more price sensitive pharmaceutical markets.

2.3 Managerial and Scientific Relevance

The effectiveness of the firms’ communication activities on the trial rate and on the repeat purchases contains valuable information for product development and marketing managers. Information on how trial and repeat rates are related to such variables as product quality characteristics, product class characteristics and the time when a brand was introduced into the market place is also important to managers. Managers use these relationships to obtain useful guidelines on the market dynamics. For example, they may learn the type of product for which the effect of detailing on a product trial is strong, the type of marketing instrument which influence the product trial of a particular drug, and the time when a specific type of drug is introduced on the market to achieve an effectiveness of the DTC advertising.

Another important contribution of the managerial relevance this study conveys is that it helps in setting budget goals for different marketing instruments such as detailing, DTC advertising, and medical journal advertising.

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3 Pharmaceutical Industry – Prescription Drugs

In this section the main aspects of the pharmaceutical industry will be presented. Importance of R&D, patents, as well as pharmaceutical marketing activities in the pharmaceutical industry will be conveyed. Four main marketing instruments (DTC advertising), detailing, physician meetings, and medical journal advertising) will be briefly discussed. Furthermore, the relevance of the decision buying process will be pointed out.

A prescription drug is a medication that is regulated by legislation that requires a prescription before it can be obtained. The term is used to distinguish it from over-the-counter drugs which can be obtained without a prescription. Different jurisdictions have different definitions of what constitutes a prescription drug.

According to the Families USA, the drug industry has been the most profitable industry in the U.S .measured by the median return on revenue, for each of the last 10 years (till 2002). Table 1 shows that the top 9 pharmaceutical companies spend 11% of total revenue on R&D activities, while 27% on marketing, advertising and administration activities.

Table 1

2001 Financials for U.S. Corporations Marketing the Top 50

Percent of Revenue Allocated to: Company

Revenue (Net Sales in millions of USD

Revenue (Net Sales in Millions of Dollars) Marketing/ Advertising/ Administration R&D Profit (Net Income)

Merck and Co., Inc. $47.716 13% 5% 15%

Pfizer, Inc. 32.259 35% 15% 24%

Bristol-Myers Squibb Company 19.423 27% 12% 27%

Abbott Laboratories 16.285 23% 10% 10%

Wyeth 14.129 37% 13% 16%

Pharmacia Corporation 13.837 44% 16% 11%

Eli Lilly and Co. 11.543 30% 19% 24%

Schering-Plough Corporation 9.802 36% 13% 20% Allergan, Inc. 1.685 42% 15% 12% Total $ 166.678 27% $45.413 11% $19.076 18% $30.599 Source: Families USA (2002).

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3.1 Research and Development

R&D that results in new drugs is essential for long-term revenue growth because for every 5000 drugs discovered only one ever reaches the consumer (Standard & Poor’s Global Pharmaceuticals). The costs typically make up around $800 million (year 2000 dollars) for each successful drug (PhRMA). According to PhRMA, only three out of every 10 prescription drugs on the market generates revenues that meet or exceed R&D costs.

In 2002, the top 9 drug companies invested more than $19 billion in drug research and development, 11% of the total revenues (Table 1). According to the PhRMA, the U.S. pharmaceutical industry invests a greater percentage of their sales in research and development than other American industries, including electronics, communications, and aerospace sectors (PhRMA).

Discovering and developing new medicines is increasingly expensive and time-consuming. The development cycle of a drug takes up around 12 years (Manchanda et al., 2005) The fact that more and more complex diseases are being investigated and more sophisticated drugs are needed to cure those diseases makes the process of new drugs research and development longer. Moreover, the complexity of clinical trials extends the time and costs it takes a product to get to the market.

Industry provides much of the intellectual and financial capital to develop products and bring them to market; the federal government also invests in drug development through intellectual property protection in the form of patents, federal support for research and development, and tax subsidies (Gluck, 2002).

3.2 Patents and Generics

Intellectual property protection aims to provide incentives for innovation. Patents and other forms of protection eliminate direct competition for a fixed period of time. During this period the company that invented the product can often charge premium prices, which ensures an attractive return on what might have been considerable investments in R&D. Technically, patent life is 20 years starting at the application filing date. Effectively, patent life is usually shorter because patents are obtained before products are approved for marketing. Companies usually have approximately only 8-10 years left to effectively use their patent rights. When the patent for the drug runs out, a generic drug is usually created by a competing company and released, causing the price to drop markedly.

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and earn profits from the sales of drugs. Marketing is considered to be one of the means to speed up the diffusion process of pharmaceutical products.

3.3 Pharmaceutical Marketing

In order to recover high R&D investments and to get the most out of patents, pharmaceutical companies try to the maximize performance of existing brands by employing specific marketing tactics.

In 2003, drug manufacturers spent over $25 billion on total product promotion, including samples, brochures, detailing, and DTC advertising (Figure 1 Total U.S. Promotional Expenditures in the U.S. by Type).

Figure 1

Total Promotional Expenditures (in billion of dollars) in the United Sates by Type

$0 $5b $10b $15b $20b $25b $30b 1998 1999 2000 2001 2002 2003 1996 1997 Professional Direct-to-Consumer 3.325 2003 2.638 2002 2.679 2001 2.467 2000 1.848 1999 1.317 1998 1.069 1997 0.791 1996 $Billions Year Total Direct-to-Consumer Spending

(in Billions of dollars)

$0 $5b $10b $15b $20b $25b $30b 1998 1999 2000 2001 2002 2003 1996 1997 Professional Direct-to-Consumer $0 $5b $10b $15b $20b $25b $30b 1998 1999 2000 2001 2002 2003 1996 1997 Professional Direct-to-Consumer 3.325 2003 2.638 2002 2.679 2001 2.467 2000 1.848 1999 1.317 1998 1.069 1997 0.791 1996 $Billions Year Total Direct-to-Consumer Spending

(in Billions of dollars)

Source: IMS Health.

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DTC advertising was the fastest growing component of all pharmaceutical promotional expenditures in the late 1990s. From 1996 to 2000, DTC advertising spending – advertisements in journals, newspapers, and on television, radio and the Internet – tripled. Television advertisement spending increased the original amount by seven times (Figure 1).

Pharmaceutical companies face two options with regard to the promotional strategies: “push” and “pull”. The “push” strategy traditionally was directed towards physicians. While the “pull’ strategy is directed towards consumers (consumers are the patients). These two promotional strategies (Ruiz Conde, 2004) have changed the marketing of the U.S. drug firms and increased marketing spending. DTC advertising – the “pull” strategy – involves pharmaceutical advertising on television, magazines and newspapers, on radio and outdoors. The “push” strategy involves the following marketing instruments: detailing, physician meetings and seminars, medical journal advertising, samples and direct mail (IMS Health). 3.3.1 Direct-to-Consumer Advertising – The “Pull” Strategy –

In 1997, the FDA relaxed its rules on prescription drugs allowing many of them to be advertised on TV and using other type of DTC advertising. Since then the pharmaceutical firms’ expenditures on DTC advertising have been increasing as well as the sales of prescription drugs (See Table 2).

Table 2

U.S. Prescription Drug Sales Growth Rate and DTC Spending

Year Sales Growth (%) DTC Spending (billions, $)

1999 18.8 1.84 2000 14.9 2.46 2001 16.9 2.67 2002 11.8 2.63 2003 11.5 3.23 2004 8.3 4.10 2005 8.5* 4.00* * Estimated

Source: IMS Health and Krisanits, T., (2004). DTC's big surge: direct-to-consumer spending soared to record levels in 2004. Will this charge continue? Tracy Krisanits looks at the key trends and brands that will shape DTC Medical Marketing & Media; Dec2004, Vol. 39 Issue 12, p49-49

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type of advertising risks medicalizing2 normal human conditions, with the drug companies raking in increasingly healthy profits. Meanwhile, proponents of DTC advertising argue that it increases awareness and expands treatment for under-diagnosed conditions (Donohue et al., 2005).

Bonaccorso and Sturchio argue that, through advertising, drug companies can enable patients to make better informed choices about their health and treatments (Bonaccorso and Sturchio, 2002). According to IMS, nearly 90% of consumers learn about brand-name drugs through manufacturer ads. Top media outlets include: TV, ads in journals, ads in magazines, newspapers, and the Internet. For example, on average, US consumers are exposed to nine DTC advertisements per day (Dyer, 2002)

Drug sales have also been continually rising. From 1999 to 2005 more aggressive marketing of prescription drugs to doctors and consumers has stimulated a major increase in sales, in part because consumers learn of new remedies and ask their doctors for prescriptions. Increasingly comprehensive insurance coverage for pharmaceuticals has also contributed to this upward trend, since patients’ out-of-pocket expenses have been lowered, which makes consumers less sensitive to the price of drugs. There are other reasons for increased sales of drugs. An aging population, high cholesterol, arthritis and diabetes, contributed to the growth of spending on prescription drugs by almost 20% in 2000, to $132 billion.

DTC advertising is concentrated on a few products in a variety of therapeutic classes. According to NIHCM (Prescription Drugs and Mass Media Advertising, 2000), the 50 drugs with the highest DTC advertising spending in 2000 accounted for 95% of all DTC advertising that year, and the top 15 DTC-advertised drugs accounted for 54% of all DTC advertising spending (Table 3). According to the study conducted by IMS: “U.S. Physicians Responsive to Patient Requests for Brand-Name Drugs”, the most commonly requested brand-name products included Claritin, Viagra, Celebrex, Vioxx and Allegra. These are also among the most heavily advertised products to consumers.

Table 3

Drugs with the Total DTC Spending, 2000

Drug Condition

Percentage of DTC Spending for All

Drugs a

Percentage of Sales for All Drugs b

Vioxx Arthritis 7.1 1.2

Prilosec Acid Reflux 4.8 3.1

2_{Kawachi and Conrad (1996) describe medicalization as a “process by which non-medical problems become}

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Claritin Allergy 4.4 1.5

Paxil Depression 4.1 1.4

Zocor High Cholesterol 4.0 1.7

Viagra Impotence 4.0 0.6 Celebrex Arthritis 3.5 1.5 Flonase Allergy 3.3 0.5 Allegra Allergy 3.0 0.8 Meridia Obesity 2.9 0.1 Flovent Asthma 2.8 0.5

Pravachol High Cholesterol 2.7 0.9

Zyrtec Allergy 2.7 0.6

Singulair Asthma 2.6 0.5

Lipitor High Cholesterol 2.6 2.8

Total 54.5 17.7

a

Total DTC Spending for all drugs was $ 2.5 billion.

b

Sales for all drugs totaled $ 132 billion.

Source: Kreling, Mott, Wiederholt, Lundy, and Levitt, Prescription Drug Trends: A Chartbook Update, 32. NIHCM Foundation, Prescription Drugs and Mass Media Advertising, 2000, 9.

The 15 drugs with the highest DTC spending in 2000 were allergy treatment drugs: Claritin, Flonase, Allegra and Zyrtec; anti-depression: Paxil; arthritis treatment drugs: Celebrex, Vioxx; cholesterol reducers: Pravachol, Zocor and Lipitor; anti-obesity: Meridia; anti-ulcerant: Prilosec; and drugs for asthma treatment: Flovent and Singulair (NIHCM, Prescription Drugs and Mass Media Advertising, 2000). Most of these drugs belong to the seven drug categories that are very popular and belong to the best selling drugs categories in the United States in 2000. These seven categories are used in this study with the purpose to examine the potential influence of marketing strategies – marketing directed at consumers and marketing directed at physicians – on the sales of drugs.

However, no matter how effective a DTC marketing campaign is for a consumer, there is no sale without the approval of a physician who is going to prescribe the drug.

In the prescription drug market there are many parties involved: governments, manufacturers, insurers, pharmacy benefit managers, physicians, pharmacies (retailers) and patients. Although pharmaceutical companies direct their DTC advertising efforts on drugs with large target markets, marketing to physicians remains an important activity. Unlike most consumer goods, prescription drugs are not available to the patient unless a physician has prescribed the drug for a particular patient. Though it is possible that the patient has some influence on this choice, the primary decision-maker is the physician. Thus, among other factors, physicians write the drug prescriptions and, of course, cannot be overlooked in the company’s marketing mix (Laitin, 2000). The promotional efforts directed at physicians are critical for the success in the pharmaceutical industry.

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The World Health Organization (WHO) defines pharmaceutical promotion as “all information and persuasive activities by manufacturers and distributors the effect of which is to induce the prescription, supply, purchase, and/or use of medicinal drugs” (World Health Organization, 1988). Pharmaceutical companies seek to inform physicians about a drug, convince physicians to write prescriptions for the drug, remind physicians of the drug throughout its product life cycle, and to maintain the drug’s brand equity. Pharmaceutical companies incorporate advertising, personal selling, sales promotion, and public relations into their promotional mix (Roughead, 1995). The commonly used media and information sources for pharmaceutical industry include pharmaceutical sales representatives, samples, magazine advertisements, physician meetings and seminars, and direct mail. Each of these will be discussed in turn.

Pharmaceutical Sales Representatives (Detailing). The pharmaceutical industry must

promote its products extensively through “visits to physicians, pharmacists, and other health care sales professionals” through a process known as “detailing.” Since doctors make the ultimate prescription decision and pharmacists distribute the drug through retail or hospital pharmacies, detailing is a crucial element of prescription drug promotion. Detailing is an important component of pharmaceutical marketing also because it represents a substantial amount of spending for the industry (Figure 2); therefore, it is important for a pharmaceutical company to effectively manage this instrument of the promotion mix (Lagace and Twible, 1990: pp. 28-31). Most companies do spend large amounts of money on the detailing. Walter Reed Army Medical Center reported an average of 146 detailer visits per month from 37 different drug companies (Lewis, 1992). The average estimated cost of an office-based physician call is $142, and for hospital-based physicians, $179. Each year, this estimated cost is adjusted for the Consumer Price Index (CPI). Costs based on the average cost of a sales call, including fixed costs associated with keeping a rep in the field (salary, car allowance, travel, bonus, etc), but none of the variable costs (samples, marketing materials, etc) (Wittink, 2002).

Samples. The traditional focus of drug marketing is the personal “detail”, in which a sales

representative sits down with a doctor to discuss the efficacy and side effects of a drug and often hands over free samples. (The Economist, 2003)

Sampling constituted 55% of the total promotional spending on pharmaceutical activities in the United States in 2001. While detailing was 29%, DTC advertising was 14% and only 2% was spent on the journal advertising of the total promotional spending in pharmaceutical industry (Figure 2). Sampling is a very expensive element in the promotional activities of pharmaceutical companies.

Medical Journal Advertising. Magazine and journal advertising is a basic strategy of

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Detailing b Sampling a DTC 2% Detailing Sampling Direct-to-Consumer Advertising Journal Advertising 29% 55% 14% Journal Advertising

advertorials. Advertorials are medical journal promotional articles that appear similar to feature articles. Pharmaceutical companies support clinical trials that later appear in magazines as feature articles discussing the specific findings of the research study on a drug. In addition, sales commonly appear as bind-in inserts in medical journals and magazines. They promote a specific drug brand and provide prescription information for physicians. Advertising in medical magazines and journals provides brand exposure and information updates for both physicians and final consumers.

Physician Meetings and Seminars involve discussions that are organized or sponsored by

pharmaceutical companies where experts can talk about treatments of specific diseases or illnesses.

In 2004, 237,000 meetings and talks sponsored by pharmaceutical companies featured doctors as speakers, and 134,000 meetings led by company sales representatives (Hensley and Martinez, 2005).

Figure 2

Spending on Pharmaceutical Promotional Activities, 2001

Source: IMS Health, “Total U.S. Promotional Spending by Type, 2001.”

a_{The practice of providing samples during sales visits to office-based physicians.}

b_{Sales activity of pharmaceutical sales representatives directed at office- and hospital-based physicians.}

Direct Mail involves printed material that is sent out to physicians as information aids.

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economically, or culturally, the average mailing piece is obviously promotional in design. The challenge is to create interest while delivering a selling message (Smith, 1991).

Among the promotional activities, detailing and sampling have been and continue to be the primary forms of promotion directed at physicians. Pharmaceutical companies mostly concentrate their marketing efforts on visits to doctors' offices, which typically represent some 70% to 80% of industry marketing expenditures (Figure 1) (Hurwitz and Caves, 1988; Berndt et al., 1997).

Pharmaceutical companies use both promotional strategies: “push” directed at physicians and “pull” directed at consumers. The pull strategy provides an assumption that it pulls the patients to ask the physician to prescribe the required by the patient drug. However, studies by Rosenthal et al., 2002; and Wosinska, 2002 reveal that although DTC advertising allows patients to be better informed about availability of the drug treatments, it does not affect the physician’s decision. Thus, the effect of DTC adverting is likely adjusted by physician preferences, which may in turn be influenced by detailing or other promotional tools.

3.3.3 FDA Role

The pharmaceutical industry is one of the most regulated industries in the United States. The FDA is the federal agency whose responsibility is to supervise the developments in the pharmaceutical industry. The FDA has two functions: the first one is to oversee the developments before the drug approval and the second one is to supervise the activities after drug approval. Pre-approval activities are directed on insuring that a drug is safe and effective before consumers can buy it. A post-approval period controls the marketing activities of the drug manufactures, and to make sure that advertising and promotion of a drug does not deliver misleading information regarding efficacy and side effects to the consumers.

For prescription drugs, the FDA Act requires advertisements to disclose certain information about the advertised product's uses and risks and to contain "information in brief summary relating to side effects, contraindications, and effectiveness" (21 U.S.C. 352(n)). Comparative advertising must be supported by clinical trials, and comparisons of side effect profiles are prohibited (Kessler and Pines, 1990).

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The following three sections address the role of pharmaceutical marketing on the trial and repeat rates of new prescription drugs as well as “informative” and “persuasive” roles of pharmaceutical marketing. Furthermore, the prescription drugs buying process is discussed. 3.3.4 Trial Rate

Pharmaceutical marketing affects the trial rate of new prescription drugs. The trial rate influence could be split in two types: internal influence and the external influence (Narayanan et al., 2004; Ruiz Conde, 2004). Internal influence refers to the interpersonal communication among the physicians who, for instance, through meetings together learn about new drug developments, exchange information about drug efficacy, safety and side effects. In this way, the current users of a drug influence the potential adopters of that drug. If many physicians are prescribing a drug, then the potential prescribes are more likely to be sure to prescribe that drug too because they might think that the drug is safe and effective. This influence can affect the rate of market diffusion for a newly introduced drug, and can lead to dominance of one drug despite the availability of close substitutes (Berndt et al., 2003).

Another type of influence related to the trial rate is external influence. External influence refers to the innovative behavior of the physicians, which can be modified by promotional activities employed by pharmaceutical companies. Marketing activities can play an informative function in a physician’s decision. Marketing activities may allow for improved health care and lower costs because physicians are up-to-date with medical treatment options, therapies and medications (Mossinghoff, 1992).

3.3.5 Repeat Rate

Pharmaceutical marketing is also related to the repeat rate. Prescription drugs refer to the category of the frequently purchased products. This means that physicians could switch to another drug or prescribe a substitute drug if available on the market. The repeat rate occurs when consumers who once tried a drug purchase it again. Repeat rate could be observed in the short run, in 12 months after the introduction on the market, and in the long run, during the complete period.

Pharmaceutical marketing may play a role in influencing the physician’s decision to prescribe the same drug instead of its substitute.

3.3.6 Informative versus Persuasive Role of Marketing

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is referred to play an informative function. If it shifts consumers’ tastes, it is referred to play a persuasive function (Narayanan et al., 2004).

Pharmaceutical marketing activities play an “informative” function when the physician chooses a certain drug, while there are several drugs available to treat a particular disease. The reason a physician prefers that particular drug could possibly be based on the positive information flowed to him/her related to the side effects, efficacy or other considerations. Information is very important in this case. The more information a physician has, the better decision he/she can make. It is essential for the pharmaceutical companies to provide physicians with all the necessary information. Leffler (1981) finds support for the hypothesis that advertising mainly plays an informative role while also having some persuasive effect. Azoulay (2002) studies the interaction between scientific sources of information like clinical trial and non-scientific sources like advertising and finds that advertising plays an informative function. Also, Ackerberg (2003) finds support for his argument that advertising plays mainly an informative function on purchases of newly introduced brands of yoghurt. Mukherjee (2002) uses a different approach in finding out what role promotion plays in the pharmaceutical industry. She states that communication may inform physicians either about overall quality or about patient -drug match. Based on her empirical analysis she finds that communication mainly informs about drug-patient match.

The “persuasive” function of pharmaceutical marketing refers to the influence that marketing activities make in creating market power for the promoted drug. This creates a barrier of entry for a certain drug from other competing products. Branded pharmaceutical companies are able to protect their market shares from generic entrants through promotional activities. Through drug promotion pharmaceutical companies are able build up a market share when patents are still in force and retain loyal customers after patent expiration (Hurwitz and Caves, 1988). Stern and Trajtenberg (1998) also present evidence that drug promotion primarily plays a persuasive role

Narayanan et al. (2003) finds evidence for both informative and persuasive effects of detailing on physicians’ prescription behavior. They find that detailing plays a primarily informative role in the introductory phase (typically 9-18 months post introduction) but the persuasive role dominates later on.

3.3.7 Prescription Drugs Buying Process

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drug because of their insurance policies. However, in case when insurance does not fully cover the costs of the drug or when patients are not insured, a price could also play an important role in affecting the choice of a prescribed drug. When patients are covered by the insurance, there are different co-payments for more expensive or less expensive drugs. Some insurance plans have a different co-payment amount depending on whether a drug is branded or generic (Artunian, 2002). In addition, health maintenance organizations (HMOs) or government agencies often have preferred drugs on their formulary that they require physicians to prescribe unless as off-formulary drug is absolutely essential to prescribe. In January 2006, the U.S. instituted a new public prescription drug plan through its Medicare program. Known as Medicare Part D, this program engages private insurers to negotiate with pharmaceutical companies for the placement of drugs on tiered formularies.

Most of the patients have health care insurances that cover fully or at least partly the cost of the drug. According to Families USA, 72% of the population which is approximately 212 million adult population under the age of 65 have some sort of health insurance that includes coverage of prescription drugs in 2003 (See Appendix A People under Age 65 Uninsured, by State). Therefore, when insurance fully covers the costs of the drug, a patient is more concerned with other product characteristics such as efficacy and side effects.

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4 Literature Review

Since the FDA relaxed its rules on the DTC advertising, the DTC expenditures have tremendously increased from less than $1 billion to almost $4 billion in 2005 (Section 3.3.1, Table 2 U.S. Prescription Drug Sales Growth Rate and Direct-to-Consumer Spending). This increased spending has attracted many researches to study the return on investment (ROI) from the marketing activities as well as the effects of pharmaceutical marketing on the diffusion of prescription drugs.

4.1 Return on Investment

Studies analyzing the ROI from marketing activities were conducted by Neslin (2001) and Wittink (2002) (unpublished studies carried out for the Association of Medical Publications); and by Narayanan et al. (2004). Neslin (2001) and Wittink (2002) find that ROI from detailing is higher than that from DTC advertising and that the highest ROI is from journal advertising. Narayanan et al. (2004) explore the revenue impact of marketing-mix activities and their interactions. They find that detailing and DTC advertising affect demand, detailing raises price elasticity, and detailing has a higher return on investment than does DTC advertising.

4.2 Effects of Marketing on Diffusion

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4.3 Diffusion Framework Background

Within the context of a drug market, when a new drug is launched into an established product class, consumers become aware of a new drug through marketing activities (through detailing, DTC advertising, journal medical advertising and physician meetings) carried out by the firm that is launching the drug, and through word-of-mouth communication by current consumers (consumers are considered to be the physicians because they make the final decision in buying process of prescription drugs). This word-of-mouth (termed as the physicians’ internal influence in this particular study) occurs when the doctors who first start prescribing a new drug, the innovators, influence other doctors, the imitators. The firm’s marketing efforts and the physicians’ internal influences are the two sources that stimulate a trial of a newly launched drug. The repeat rate occurs when consumers who once tried a drug and purchases it again. Since word-of-mouth of the trial rate was proved to reinforce the firm’s marketing efforts (Coleman et al., 1957; and Bauer and Wortzel, 1966), researchers have applied the diffusion framework to study the sales growth of pharmaceutical drugs. Diffusion refers to “the process by which an innovation is communicated through certain channels over time among the members of a social society” (Rogers, 1995). An innovation is “an idea, practice or object that is perceived as new by an individual or other unit of adoption” (Rogers, 1995).

Many researchers of the diffusion of new products incorporate the Bass model (Mahajan, 2000). The basic model looks simple, because its basic form that contains only three parameters. The model can capture a wide variety of diffusion patterns observed in practice. The model parameters can be interpreted in terms of internal influence (imitation), external influence (innovation), and saturation level (maturity). The Bass model is used for market analysis and demand forecasting of new products (Bass, 1969). However, the Bass model of the diffusion of new products has assumptions that reduce the model applicability. The Bass model assumes that each adopter purchases a product only once. This assumption makes the model not usable for non-durable products, when repeat purchases occur. Another assumption of the Bass model is that the effect of the marketing variables is implicitly captured by the model parameters. This assumption makes it impossible to analyze the effects of separate marketing instruments on the diffusion process of innovation. In the pharmaceutical business it is very essential for the managers to know the effects of separate marketing instruments. Therefore, many researchers extend the Bass model to account for non-durable goods and repeat purchases.

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trial-repeat diffusion models including the effects of promotional efforts. Rao and Yamada (1988) validate the work of Lilien et al. (1981). Mahajan et al. (1983) analyze the non-uniformity of the word-of-mouth effect over a long period of time.

Lilien et al. (1981), Rao and Yamada (1988), Hahn et al. (1994) and Ruiz Conde (2004) consider trial and repeat purchases and they assume that the diffusion rate is divided into a trial rate and a repeat rate. Lilien et al. (1981) demonstrate that the company’s detailing expenditures decrease the repeat rate. The findings of Lilien et al. (1981) are supported by Rao and Yamada (1988).

4.4 Comparison of Cross-Sectional Analyses

This study deals with analyzing the cross-sectional effects of marketing expenditures and other variables related to the product characteristics on the diffusion of pharmaceuticals and incorporates the studies by Hahn et al. (1994) and by Ruiz Conde (2004).

Hahn et al. (1994) expand the diffusion framework to account for repeat purchases and estimates a repeat rate parameter for 21 new pharmaceutical drugs. Their parameter estimates of the diffusion model include:

1) the effectiveness of the firms’ communication activities (sum of detailing and medical journal advertising);

2) the consumers’ word-of-mouth (doctors who first prescribe a drug (innovators) influence other doctors – imitators);

3) other factors (such as academic articles, informal contacts between doctors and producers of drugs, etc);

Those three parameter estimates represent different components of the trial rate and the other parameter estimate represents the effectiveness of the consumers’ product trial which is:

4) the repeat rate.

Hahn et al. (1994) use aggregate expenditures of detailing and medical journal advertising to represent marketing activity variable. They conduct a cross-sectional analysis to relate the effectiveness of communication activities, internal influence, and the repeat rate to variables representing product quality, product class, and market characteristics, as well as the entrant’s launch strategy. Particularly, they investigate the relationships between the coefficients of the diffusion model and product quality characteristics (dosage, side effects, efficacy), product class characteristics (life-threatening variables, asymptomatic and acuteness of the disease and other variables), market size, market growth, competitiveness, market familiarity, launch investment, launch timing and whether the drug is generic or branded variables.

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1) the basic propensity to try a new product without the influence of prior buyers or marketing expenditures;

2) the consumers’ word-of-mouth – physicians’ internal influence (doctors who first prescribe a drug, innovators, influence other doctors – imitators);

Those two parameter estimates represent different components of a trial rate and the other parameter estimates represents the effectiveness of the consumers’ product trial which is:

3) the repeat rate.

The marketing expenditure variables used by Ruiz Conde (2004) are detailing, medical journal advertising, physicians’ meetings and DTC expenditures. She studies the effects of those variables as well as the order of entry in the market place on the parameter estimates of the diffusion model. Also, Ruiz Conde makes a distinction between the direct-to-physician advertising – “push” strategy – (it includes detailing, medical journal advertising, and physician meetings expenditures) and DTC advertising – “pull” strategy – (DTC advertising). She studies the effects of those strategies on the parameters estimates of the diffusion model.

She finds that the diffusion process is affected by the marketing instruments directed at physicians and slightly affected by the DTC advertising. She finds that the higher the marketing activities, the higher the propensity to try new brands and the higher the repeat rate. Her findings also revealed the marketing activities have no impact on the effectiveness of the physicians’ internal influence. Marketing activities have a different effect on the trial rate during the first 12 months after the introduction. The impact of marketing activities is higher on the repeat rate than on the propensity to try. DTC advertising (“pull” strategy) seems neither to affect the internal influence, the propensity to try nor the repeat rate during the first 12 months after the introduction.

The main differences and similarities between Hahn et al. (1994), Ruiz Conde (2004) and this particular cross-sectional study are presented below. The Table 4 summarizes the similarities and differences between the cross-sectional studies by Hahn et al., Ruiz Conde, and this study.

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life-threatening, if it’s designed for asymptomatic disease, and if/or acute, the time of introduction, and the order of entry in the market place. Ruiz Conde (2004) includes the order of entry and whether a drug is generic or branded, which are variables that figure into in her research besides the marketing activities variable. Hahn et al. (1994) include more variables such as product quality characteristics (dosage, side effects, efficacy), product class characteristics (life-threatening variable, acuteness of the disease, if it is asymptomatic and other variables), market size, market growth, competitiveness, market familiarity, launch investment, launch timing and whether the drug is generic or branded, are variables in their research.

Table 4

Comparison of Cross-Sectional Analyses by Ruiz Conde, Hahn et al. and This Study

Hahn et al. (1994) Ruiz Conde (2004) This Study

Marketing Activities Direct-to-Physician “push” strategy Direct-to-Consumer “pull” strategy 1.Detailing 2. Journal Advertising 3. NO NO 1. Detailing 2. Journal Advertising 3. Physician Meetings 4. DTC Advertising 1. Detailing 2. Journal Advertising 3. Physician Meetings As a sum and separate variables are researched 4.DTC Advertising Product Quality Characteristics Dosage Side Effects Efficacy Innovativeness YES YES YES NO NO NO NO NO NO YES YES YES Product Class Characteristics Life Threatening Acute Asymptomatic YES YES YES NO NO NO YES YES YES Other variables Market Size Market Growth Competitiveness Market Familiarity Launch Investment Launch Timing Generic/Branded YES YES YES YES YES YES YES NO NO NO NO NO YES YES NO NO NO NO NO YES NO Data/Drug categories _{7 drug categories}21 new drugs _{3 drug categories}34 new drugs _{7 drug categories}52 new drugs

YES means variables are included in the research NO means variables are not included in the research

Hahn et al. (1994) find that the effectiveness of the firms’ communication activities on the trial rate is related mainly to product quality attributes and market growth. Whereas internal influence is associated with product class characteristics and market competitiveness. Furthermore, their findings reveal that the repeat rate is related mainly to product quality

As a sum As a sum

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attributes and various market characteristics such as size, growth, competitiveness and familiarity. The side effects of a drug variable are found to be positively related to the repeat rate and the word-of-mouth parameter estimates. The efficacy of a drug variable has a positive relation to the promotion effectiveness and does not show significant relation to the repeat rate, the word-of-mouth and other sources of information. The life-threatening variable does not show a significant relation to any of the parameter estimates (Hahn et al., 1994). The order of entry variable is called launch timing in the study by Hahn et al. (1994). Studies on “first mover advantage” of a product suggest that the timing of a product launch is an important strategic variable (Carpenter and Nakamoto, 1989). First mover advantage creates a barrier of entry for new firms and resists the marketing efforts, price competition and innovations by the existing rivals. A product launched early will be easier to promote more effectively because it has a better opportunity to occupy the optimal position in the consumer’s product space. In the studies by Hahn et al. (1994) the order of entry (termed launch timing in their study) variable is related to the physicians’ internal influence and it is not related to the repeat rate.

Ruiz Conde (2004) finds that the diffusion process is affected by the marketing instruments directed at physicians and slightly affected by the DTC advertising. She finds that the higher the marketing activities, the higher the propensity to try new brands and the higher the repeat rate. Her findings also revealed that the marketing activities have no impact on the effectiveness of the physicians’ internal influence. Marketing activities have a different effect on the trial rate during the first 12 months after the introduction. The impact of marketing activities is higher on the repeat rate than on the propensity to try. DTC advertising (“pull” strategy) seems neither to affect the internal influence, the propensity to try nor the repeat rate during the first 12 months after the introduction. In the study by Ruiz Conde (2004) the order of entry variable does not show a significant relationship to any of the parameter estimates.

Innovation is a variable which is analyzed in this study and is not analyzed in the Hahn et al. (1994) or Ruiz Conde studies. This variable measures the level of innovation of a drug perceived by physicians. The innovation-decision is made through a cost-benefit analysis where the major obstacle is uncertainty. People (physicians) will adopt an innovation if they believe that it will, all things considered, enhance their utility. So physicians must believe that the innovative drug may yield some relative advantage to the drug it supersedes (Rogers, 1995: p.208).

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5 Hypotheses

In this chapter the hypotheses of the presumed relationships between the parameter estimates and marketing tools and other variables will be discussed. Based on the results of previous studies discussed in the Chapter 4 Literature Review and my own expectations about the effects of certain variables on the parameter estimates are discussed below. The expected relationships are summarized in the table 5.

Marketing Instruments. Detailing, medical journal advertising and physician meetings

regressed separately on the parameter estimates are expected to positively influence the basic propensity to try a new drug. When a new drug is introduced, sales representatives of pharmaceutical companies are concentrating their efforts on delivering information to the physicians about a new drug, its efficacy and its side effects. Physicians tend to react to detailing efforts by starting to prescribe a drug to try it out. Therefore, detailing efforts are positively influencing the basic propensity to try a new product. The same applies to medical journal advertising and physician meetings. Ads in medical advertising are expected to persuade the physicians to try new drugs.

Detailing, medical journal advertising and physician meetings are expected to positively influence the physicians’ internal influence parameter. Physicians’ internal influence is related to the interpersonal communication between physicians who are already prescribing a new drug and potential physicians who have not prescribed a new drug yet. Therefore, marketing activities such as detailing, medical journal advertising and physician meetings, are efforts – when combined with the influence from the physicians who are prescribing a drug – already are supposed to have an effect on the potential physicians who have not prescribed a drug yet and stimulated a trial.

Detailing, medical journal advertising and physician meetings are expected to positively influence the repeat rate because these variables are used as a reminder for the physicians to keep prescribing a certain drug.

These expectations of separate effects of marketing activities on the parameter estimates are based on own judgment. In the study by Ruiz Conde (2004) separate effects of marketing instruments on the parameter estimates could not be detected due to the problem of multicollinearity.