influence of firm specific effects
Master thesis MSc Business Administration – Strategic Innovation Management
January 2017
Abstract
Nowadays, the research-oriented pharmaceutical firms deal with influential issues such as increasing R&D costs, scarcity of potential new drugs and stronger regulations, which makes it much more difficult to introduce new drugs in order to ensure the continuity of the firm and cope with the detrimental effects of patent expiration. Consequently, these pharmaceutical firms are designing patent expiration strategies to achieve long- to medium term success and exploiting maximum value of their existing drug portfolio. The objective of this paper is to examine how strategic pathways, containing a wide range of patent expiration strategies, influence the product performance of brand-name drugs and if firm specific effects influence the successful implementation of these strategic pathways. Based on 820 annual reports of pharmaceutical companies active in the United States pharmaceutical industry, this study built a dataset containing 205 unique observations from 41 patents subjected to patent expiration within the period of 2006-2014. Subsequently, this data set was analysed using a Poisson regression model, aiming to measure the impact of strategic pathways on product performance and to investigate the role of firm specific effects in this relation. The analysis suggests that the strategic pathways of innovation and extraction both have positive significant influence on the product performance, however that firm specific characteristics play an influential role in the successful implementation of these strategic pathways. Moreover, the prevention pathway does not influence product performance on the long term, yet the analysis suggest that some specific firms can implement prevention patenting strategies successfully on the long term.
P.H. Mulder S2806525
Word count: 13.844
Supervisor: dr. F. Noseleit
2nd Supervisor: H.J. Kok, MSc
University of Groningen
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I. Introduction
Literature has shown that when patents expire, the pharmaceutical industry, and more specifically the research-based pharmaceuticals firms (after this brand-name firms) experience a severe loss of market share up till 60% in the first six months. (Caves, Whinston, Hurwitz, Pakes, & Temin 1991; Agrawal & Thakkar, 1997; Jimenez, 2012).
Patents are an important mechanism for brand-name firms to appropriate value from their innovations (Teece, 1986), as they grant their owners with a temporary monopoly by excluding other parties of commercializing the patented invention. Furthermore, patents provide an opportunity to earn rents to make a decent profit and compensate for the investments made to develop the invention (Kakkar, 2015). This mechanism has proven to be an influential incentive for innovation, especially in pharmaceutical, chemical and other high-tech industries (Bath, 2005). When the patent expires the monopoly shifts to fierce and strong competition, due to low cost imitation products (so called generics) marketed by generic companies, mostly resulting in severe losses in sales and market share for patent owners. Following Raasch (2009) this competition is fierce and strong due to three reasons: (1) patents contain codified knowledge and are publicly registered, thereby simplifying imitation, (2) physicians generally perceive the generics from similar quality as the brand-name drugs, and (3) prices are highly transparent, which implicates that price changes will be quickly noticed and quickly effect the whole market. Considering all above, it has become very difficult to protect and render off-patent products and it has generated great interest from pharmaceutical companies in developing strategies to cope with detrimental effects of patent expiration.
Back in the 80‟s and 90‟s, the pharmaceutical industry flourished due to the discovery of multiple life-saving medicines, which enabled new treatments and made it possible to treat several diseases effectively (Grabowski, 2004; Khanna, 2012). Innovation, considered as the driving force of the industry, made companies solve their patent expiry issues by introducing new drugs, as their pipelines were well-stocked with new highly potential drugs (Khanna, 2012; Kakkar, 2015). A fact which is not self-evident considering the current situation of the industry. During the last decade, the industry struggled with extensive R&D costs, lower productivity and the lack of discovery of new promising drugs (Grabowski, 2004; Bath, 2005; Kakkar, 2015). Although the pharmaceutical industry spends the highest proportion of revenues to R&D, the industry is confronted with difficulties such as successfully developing and marketing new products that generate more money than they cost (Burdon & Sloper, 2003). Increasing costs and high failure rates, as well as higher quality requirements, more complex products, and stronger regulations from the Food and Drug Administration (FDA) are reasons that explain the current struggles of the industry (Khanna, 2012, Song & Han, 2016).
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This act (on which will be elaborated more later) was intended to stop the rising drug prices by generating a faster introduction of generic drugs (Grabowski & Kyle, 2007; Bath, 2005; Song & Han, 2016). Before the act, marketing a generic drug was a complex process due to the FDA requirements, which implied that the generic drugs needed to pass similar clinical trials and tests as the brand-name firm product to get market approval (Grabowski & Vernon, 1992). The Hatch-Waxman Act changed this expensive process and allowed generic companies to only replicate earlier invented chemical molecules and to pass a bio equivalency test (Grabowski, 2004). Moreover, the costs and entry barriers were heavily reduced for the generic companies, and successfully increased the introduction of generic drugs as Pearce (2006;73) states that “Generic drugs represented 55 per cent of overall pharmaceutical sales in 2004, compared with 19 per cent in the year that preceded Waxman-Hatch”.
The Hatch-Waxman Act, increasing R&D costs and scarcity of new promising drugs has made brand-name firms look for alternative strategies to achieve long- to medium term success and exploiting maximum value of their existing drug portfolio of which their patents will expire in the short term (Raasch, 2008). Literature has identified several pathways to address the patent expiry issues. The most commonly known pathway are legal strategies or prevention strategies, entailing to extent patent protection along legal measures. For instance, strategic patenting is frequently implemented and implies that brand-name firms patenting different aspects around the basic chemical compound (Kappe, 2014; Song & Han, 2016). Another known pathway is innovation, which in patent expiration literature is also known as differentiation (e.g. Raasch, 2009) or R&D strategies (Kappe, 2014). The underlying principle of this strategy is to restrain the decline in revenue by distancing the competition due to marketing a modified or new product, or shift old products to new markets such as switching from prescription drugs (Rx) to over-the-counter drugs (OTC) (Argawa & Thakkar, 1997). A third pathway is extraction or the full exploitation of the current market position of the product. Along two essential dimensions, price and marketing, brand-name firms try restrain revenue loss as long as possible (Caves et al, 1991; Raasch, 2009; Song & Han, 2016). Lastly, another strategic pathway is known as adaption, also mentioned in literature as duplication or pre-emptive launch of a generic (Pearce, 2006; Reiffen & Ward, 2007). Although this strategy has received some attention in literature, the implementation of this strategy in practice is, according to the recent article of Song & Han (2016), very uncommon.
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Overall, the research stream about patent expiration strategies is quite developed. Along several case studies and practical examples numerous strategies are identified (e.g. Chandon, 2004; Raasch 2009) Also, the influence of firm specific characteristics on general performance in the pharmaceutical industry has been investigated by several studies (e.g. Henderson & Cockburn, 1994; Yeoh & Roth, 1999; Phua, 2006). For instance, Yeoh & Roth (1999) investigated the impact of firm resources and capabilities on the SCA in the pharmaceutical industry. The authors found unique resources such as R&D and sales force expenditures had a direct and indirect effect on the firm‟s SCA, but also found that obtaining FDA approvals and development of radical new drugs are essential capabilities for a SCA in pharmaceutical industry. Altogether, it can be assumed that strategies are endogenous, and that firm specific characteristics can be influencing factors in the success implementation of patent expiration strategies. Yet, so far no studies have been conducted focussing specifically on the relation between firm specific effects and patent expiration strategies used. As a result literature seems to assume that pharmaceutical companies can follow all the above mentioned pathways, while having no proof that this is the case. Previous literature therefore also mentions that more empirical research is needed to get a better understanding of which strategic pathways are successful and why these strategies are successful (Kappe, 2014). A suggestion for research is made by Kappe (2011), to collect data about various strategies and look to the effect on the performance of pharmaceutical firms.
Based on this note of Kappe (2014), this paper does not only examine how strategic pathways, containing a wide range of patent expiration strategies, influence the product performance of brand-name drugs. Moreover, to get a better understanding why these strategic pathways are successful, this research pays also specific attention to how firm specific characteristics influence the successful implementation of patent expiration strategies. The main theoretical underpinning used is the resource based view. To answer the above discussed literature gap, a sample of 205 unique performance observations is built. Of a total of 41 patents that expired in the United States (US) pharmaceutical market within the period between 2007 and 2011, each specific patent is examined over a period of five years, running from one year before the patent expired until three years after the patent expired. Performance was measured along the sales figures of the specific patents. Moreover, our dataset contains repeated observations for the same firm, which means that our data can be defined as time-series cross-section data or panel data. As the sales figures followed a Poisson distribution, this paper used a Poisson regression to analyse the results.
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evaluate previous executed strategies to identify key resources and capabilities, thereby improving the knowledge about how to exploit maximum value from their existing drug portfolio.
The following section of this paper will provide more in depth information about the importance of patents and the Waxman-Hatch Act within the pharmaceutical industry. In the next chapter, hypotheses will be developed based on the elaboration of existing literature about patent expiry strategies. Subsequently, the methodology of this paper shall be depicted, followed by the results of this research. Finally, the results will be discussed along existing literature, succeeded by contributions to literature and practice and suggestions for future research.
II. Background
Developing new drugs is an expensive, complex and time-consuming process for pharmaceutical companies, especially considering the trend that R&D costs are rising more than ever (Grabowski, 2004). The development and commercialization of new products often take more than 10 years and up to one billion dollars (Song & Han, 2016). In contrast, the imitation or reproduction of these products have low cost and are quickly realized (Bath, 2005). Therefore patents are essential in this industry, as they provide a time of protection against competition and give the incentive to brand-name firms to keep innovating and develop new drugs (Pearce, 2006). However, when a patent expires, brand-name firms can experience a severe loss of market share up till 60% in the first six months due to competition of generic companies who market their own imitation of the brand-name product (so-called generics) (Raasch, 2009).
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market the generic version using one of four options (so-called certifications) applicable on the ANDA (Bath, 2005). These four options or „ANDA certifications‟ are (1) Patent information on the drugs has not been filed; (2) The patent has already expired; (3) The date on which the patent will expire; and (4) The patent is invalid or use or sale of the drug will not infringe the patent. This last choice is also known as paragraph IV and implicates that the generic manufacturer is challenging the patent of the patent owner. When there is a case of paragraph IV filled against a patent holder, the certification is directly send to the patent holder and automatically gives the patent holder 45 days to respond and decide to fill an infringement suit (Bath, 2005). In most cases the patent holder will file the infringement suit, as these cases can take up to several months and the act prevents the FDA to approve the ANDA before the court has made a decision or the patent expires (Song & Han, 2016). However, when a court decides in favour of the generic firm, they are allowed to market the generics version of the patent drug, thereby avoiding patent protection and enter the market before the protection expires (Panattoni, 2011). Panattoni (2011) also showed the effect of the paragraph IV on the brand-name firms, which implied that these brand-name firm invest less in R&D so that the risk of losing expensive investments due to prior patent lost are not too high. The paragraph IV law can also be seen as a factor for the brand-name firms to search for strategies to achieve long- to medium term success and exploiting maximum value of their existing drug portfolio.
III. Literature review
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Prevention pathway
The current challenges in the pharmaceutical industry described above drive companies to look for alternative strategies to get the maximum value from their innovations after their expiration dates. Following the framework of Song & Han (2016), the study mentions several strategies under one overarching pathway prevention. The goal of these strategies is to block or stall generic competition from entering the market. Kappe (2014) recalls these strategies as legal strategies, as the core intention of these strategies is additional patent protection.
The best known and commonly applied strategy is strategic patenting. This strategy means that the brand-name firm will patent certain parts around the basic ingredient in order to extend the patent protection for as long as possible (Burdon & Sloper, 2003). The whole idea behind this strategy is that next to the already patented chemical entity, other processes and formulations concerning the original drug are patented later on (Hutchins, 2003). Ultimately, this strategy can delay generic entry for more than a decade (Song & Han 2016). Whereas this strategy may result in additional patent protection, Burdon & Sloper (2003) argue that this strategy is difficult to implement, as it is challenging to maintain the validity of the secondary patents in court. Moreover, generic companies are seemingly more successful at these legal challenges (Song & Han, 2016). Although strategic patenting is difficult to implement, several brand-name firms have successfully extended their patent protection with secondary patents, as the FDA have acknowledged them as improvements. However several of these extensions only concern very small improvements, meaning that customers will continue to pay considerable amounts for medicine that only have minor improvements (Dwivedi, Hallihosur, & Rangan, 2010). This phenomenon is described by Dwivedi, et al (2010) as an “evergreening” strategy. Whereas these strategies are not illegal, several authors (e.g. Hutchins, 2003; Dwivedi et al 2010) speak of misuse of patent laws and state that this disregards the idea behind patents.
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Commission (FTE) in 2002, this strategy is applied about 72% of the ANDA cases (US Federal Trade Commission, 2002).
Another prevention strategy is patent term restoration. The Waxman-Hatch Act, and specifically title II of the act, provide firms with an extra period of up to five years offering exclusivity for compensating the time the FDA needed for the clinical trials and the approval process (Kappe, 2014). Next to that, two other prevention strategies that give an extra period of exclusivity are Orphan exclusivity and Paediatric exclusivity. The latter one is to encourage research of drugs for children. This paediatric version could give an extension of 6 months when approved by the FDA (Bath 2005; Pearce, 2006). The Orphan Drug Act was approved in 1983 with the idea to assure more research to diseases that affect only a small patient group (0.1% of the population within the US). The act stated these rare diseases can receive a period of seven years of exclusivity to compounds that are not patented or already expired, meaning that a firm may use or combine expired patents so that they can earn an additional seven years of revenue from a certain drug (Song & Han, 2016). However, the regulations on orphan drugs do not result in the desirable effect, as the patient groups are too small to be interesting for pharmaceuticals companies and patients are scattered around the world which makes clinical testing highly difficult (Minghetti, Giudici, & Montanari, 2000).
Overall, the strategic pathway of prevention compromises strategies that are of vital importance for all brand-name firms subjected to patent expiry, because the extension of patent protection will help to appropriate millions of dollars revenue. Therefore this paper assumes the following hypothesis:
H1: There exists a positive effect of the strategic pathway of prevention on performance of products subjected to patent expiry.
Innovation pathway
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Thakkar (1997) about a drug of Pfizer named Procardia, a drug which faced patent expiration but successfully maintained its market position due to the release of a new form (a modification of dosage) named Procardia XL. Another strategy is giving indication of new uses of the brand-name drug. Whereas the Waxman-Hatch Act gives an additional three years of exclusivity, it is not applicable for the original indication which it was used for (Song & Han, 2016). To be more clear, giving a new indication should request new clinical trials to additional patent protection, however will not provide patent protection for the original indication (Bath, 2005).
Another innovation strategy is the switch from prescription (RX) drugs to over-the-counter (OTC) drugs. This strategy commonly means that the brand-name firm will lower the dosage of the active ingredient in the drug or even create an OTC version without the active ingredient from the RX version (Brendt, Kyle & Ling, 2003). The switch from RX to OTC, encouraged by several health insurers due to soaring healthcare cost, is most often also a strategic move from the brand-name firm to outplay the generic competition just before the expiration of a patent. The logic behind this is that original RX consumers will choose the OTC drugs above the generic RX version due to lower prices and no waiting hours for the prescription of a physician (Cohen, Paquette & Cairns; 2006).The pharmaceutical company Upjohn with its patented drug Xanax is an example RX to OTC switch. This pharmaceutical company introduced their own OTC version of the drug just because it realized that pharmacies used to choose for the first generic drug launched on the market and to stay with that generic. By introducing its own generic OTC version of the brand-name drug, it was able to sustain its own 90% market share of the RX market in to the OTC market (Pearce 2006).
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H2: There exists a positive effect of the strategic pathway of innovation on performance of products subjected to patent expiry.
Extraction pathway
Extraction is the third classification provided by Song & Han (2016) in their framework of strategic possibilities that the pharmaceutical industry may use to deal with patent expiry. The extraction strategies are all about the full exploitation of the current position of the drug without investing in ways to exploit the drug on a long-term basis.
Along the two important factors, pricing and promotion, pharmaceuticals are trying to leverage their brand as much as possible (Chandon, 2004; Song & Han, 2016). Chandon (2004) speaks about divesting the product, or in other terms following a „Milking strategy‟. Raasch (2009) names this as the harvesting strategy and the purpose of this strategy is rather straightforward, maximizing the turnover by raising prices as far as possible. At the same time, this strategy cuts all promotional and research expenses related to the product, thereby increasing profit margins. The resources that are saved are invested in other activities (Agrawa & Thakkar, 1997).
A brand-name firm may also choose to use the pricing and promotional dimensions in another way, namely by focusing their pricing and promotional strategy towards brand loyalty of consumer (Kvesic, 2008). The objective is to compel current users to stay loyal to the brand drug and thereby deterring generic competition from entering the market. Most brand-name firms already start with this strategy in the period when the drug is still protected by patents (Kvesic, 2008). Although, Wilkie, Johnson & White (2012) mention that this strategy is executed to get on top of the minds of consumers, improve consumer learning and adjusting preferences of the consumers, they put question marks at the effectiveness of this approach due to conflicting results in literature. Something that is more elaborated in the paper of Morton (2000), who states that the entry barriers of generic firms are very low after patent expiration and proves that advertising is insignificant in deterring generic firms from entering the market in US pharmaceutical industry.
Another course of extraction that is frequently used is that brand-name firms license their patent rights to generic companies. By licensing these rights, a brand-name firm grants permission to a generic firm to produce an authorized generic version of the brand-name drug (Da Veiga et al, 2013). The license allows the generic manufacturer to introduce the generic drug two months before the expiration of the brand-name drug (Pearce, 2006; Hollis, 2003). Brand-name firm do this, as research found that “the first generic entrant has a lasting competitive advantage: being first into the
market appears to lead to an increase of around 30% in market share (among generics) over a period of at least 4 years” (Hollis, 2002; 723). In addition, Appelt (2015) mentions that the first entrant
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desirable, as consumers and insurers will pay more when this strategy is executed. So overall, this strategy is executed not only with the objective of medium term success but also to deter other generics from entering the market (Reiffen & Ward, 2007).
Based on previously discussed literature findings, this paper expects that the strategic pathway of extraction will have a lower positive effect on product performance compared to the prevention and innovation pathway. However, the strategic pathway of extraction appoints several strategies that can provide substantial benefits to drugs subjected to patent expiration. Therefore, this paper assumes that the strategic pathway of extraction has a positive effect on the product performance.
H3: There exists a positive effect of the strategic pathway of extraction on performance of products subjected to patent expiry.
Adaption pathway
As this research is focussed on extension strategies for products after patent expiry, the framework of Song & Han (2016) names the last strategic pathway adaption. This pathway contains the strategy of launching an own generic version of the brand-name drug through a wholly owned independent subsidiary or through the brand-name firm. Nevertheless, although Raasch (2008) names this strategy a fighter brand, she also states that at that moment it is rarely implemented but has increasing interest to the pharmaceutical firms.
Raasch (2008) points out four advantages of this strategy, (1) the brand-name generic drug can make us of the reputation of the original brand, which may cause physicians to choose this closely related product to the original brand-name drug, (2) the entrance of a brand-name generic drug may scare of other generics firms because fierce price competition, (3) the brand-name generic drug may help the brand-name firm to produce efficiently as they can make use of the same manufacturing techniques, and (4) the brand-name generic drug is targeted at the same market segment, so prior knowledge about the targets groups will help to effectively and efficiently market the generic. However, there are also some disadvantages regarding this strategy. One obvious disadvantage is the possibility that the brand-name generic drug will have a cannibalizing effect on the brand-name drug itself (Raasch, 2008). Furthermore, Pearce (2006) and Raasch (2008) both point out that there could be a potential clash between the culture of the company and strategy itself, referring to the fact brand-name firms are mostly focussed of research, exploration of the cutting edge of technologies or drugs and low levels of competition whereas the generic firms strategy means the entry in a highly competitive market, economies of scale and low prices, which is a potential misfit. Brand-name firms need to decide if the introduction of generic drugs fits in the company and does not slow down core activities of the firm.
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predict because this pathway is very rarely implemented and uncommon in practise according to Song & Han, (2016). However, a positive effect is still expected in contrast to no action.
H4: There exists a positive effect of the strategic pathway of adaption on performance of products subjected to patent expiry.
Firm specific effects
The resource based view is a widely acknowledged theory in strategic management literature (Conner, 1991). The theory assumes that resources and capabilities are heterogeneously distributed along the industry and imperfectly immobile, which in the long run creates heterogeneity in strategies and performance between firms (Barney, 1991; Helfat & Peteraf, 2003). These differences in strategy and performance are a function of the potential of a firm to develop a sustainable competitive advantage (SCA), which depends on the ability of a firm to acquire, exploit, manage and deploy resources and capabilities ((Peteraf, 1993; Yeoh & Roth, 1999). In other words, the resource based perspective has played an influencing role connecting performance along firm specific competencies (Conner, 1991). It defined the concept of strategy as the firm‟s competitive position based on unique firm specific resources and capabilities (Conner, 1991). To develop a SCA these resources should be valuable, rare, imitable, and non-substitutable (Barney, 1991), however to effectively exploit or deploy these resources the firm should have relevant capabilities to enjoy the full potential of these valuable resources (Amit & Schoemaker, 1993). Newbert (2008) defines resources as the stock of available factors owned or controlled by the firm, whereas a capability is defined as the capacity to deploy resources. The heterogeneity of resources and capabilities create firm specific effects, implying that the firm‟s unique resources and capabilities influence strategy and performance, which ultimately explains differences between firms.
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expected that the effect of strategies on product performance will be for that particular reason less pronounced and therefore the following hypothesis is stated:
H5: Once controlling for unobserved firm specific effects, the influence of strategic pathways on the product performance will be less pronounced.
IV.
Data & Methodology
Previous research has identified numerous patent expiration strategies through several qualitative researches (e.g. Chandon, 2004; Raasch, 2009). Moreover, several authors have performed literature reviews to synthesize literature, create a clearer image of these strategies and provide suggestions for future research. The literature review of Kappe (2014) identified that research concerning various patent expiration strategies and measuring the effect of these strategies on the performance of pharmaceutical firms would provide tremendous benefits to research and practice. Moreover, explaining why certain strategies would be very beneficial to research according to Kappe (2014). This paper uses a quantitative approach to get better insights in the impact of specific pathways and look if firm specific characteristics influence the success of patent strategies, when looking to product performance.
Data & Sample
The data used in this research was obtained from the database Orbis, annual reports from several pharmaceutical companies, Thomson Reuters Datastream and the Federal Reserve Bank of ST. Louis. At first, the database Orbis contains data about more than 200 million private companies in the world (Orbis, 2016). The database includes a wide variety of data such as company information, summaries, market surveys, industrial reports, financial strength metrics and projected financials (Orbis, 2015).The data obtained from Orbis used in this research, contained information about the size of the firm and firm age. The second data source used in this research are 820 annual reports of several pharmaceutical firms (e.g. GlaxoSmithKline, Pfizer, Novartis, Sanofi-Aventis or Bristol Myers Squibb). Information about expiration dates of patents, country of expiration, sales figures, size of the firm, firm age and patent strategy were obtained from these annual reports. Data regarding the R&D intensity were obtained through the Thomson Reuters Datastream. This database contains economic and financial data of firms throughout the whole world (Datastream Thomson Reuters, 2017). The fourth data source used for this research is the federal reserve bank of ST. Louis, which is a database that offers a large amount economic data and information to promote economic education and enhance economic research (ST. Louis, 2016). Data about gross domestic product (GDP) and unemployment rate were obtained from this database.
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companies that faced expiration in the US in the period from 2006 till 2011. This database contained data about the brand- name drug, scientific name of the patent (also known as generic name), expiration date and manufacturer of the brand-name drug. The companies selected in this study are multinational pharmaceutical companies active around the world. However, the data collected from these companies are specifically based on the US pharmaceutical industry as it is the largest pharmaceutical market in the world containing the most registered patents (Marketline, 2016). Also, the regulations described in the background section apply only for the US industry. Moreover, after some research, it became evident that pharmaceutical companies seem to provide the most detailed information about sales figures and strategies within the US pharmaceutical industry.
Based on the 820 annual reports of the pharmaceutical companies that faced patent expiration, 27 companies (see Appendix C) provided information about patent expiration strategies and together held ownership of 64 patents facing expiration within the period of 2006 till 2011. From each one of these 64 patents a patent expiration strategy is identified. Overall, along these strategies three of the four strategic pathways were identified namely innovation, prevention, and extraction, yet this study also identified that several firms choose to implement no strategy which is labelled as a none-strategy. This last „strategy‟ provides a clear constant, enabling to measure the effect of the other strategic pathways because drugs with no strategy are influenced only by the expiration. Unfortunately, data about the implementation of the fourth described strategic pathway, adaption were not found in this dataset. Whereas certain alliances were mentioned in the annual reports, no data about alliances with the intention to create an own generic version together with an alliance partner were found. This makes it impossible to measure this strategic pathway. This is very unfortunate, however it corresponds with literature, as Song & Han (2016) mention that this strategic pathway is very uncommon and rarely used.
After the implemented strategies of these 64 patents were identified, sales figures from one year before the expiration date till three year after the expiration date were obtained from the annual reports. Unfortunately, not all brand-name companies disclosed their sales figures per patent. Some pharmaceutical companies did not implement sales figures or some firms only provided total sales figures from their whole product portfolio, which made it inaccessible to trace back the sales figures per patent. Moreover, a few brand-name firms reported their sales figures in their local currency, which al been adjusted to US dollars. This matter resulted in a final sample of 41 patents from 17 pharmaceutical companies which lost their patent protection between 2007 and 2011.
Measurements
Dependent variable: Product Performance15
figures are measured from one year before the patent expiration till three years after the patent expiration within the United States. The reason behind selecting a five year period is that patent expiration strategies are initiated to achieve long- to medium term success and exploiting maximum value of the existing drug portfolio, so selecting a short period after patent expiration will not provide a valid representation of the effect of patent expiration strategies on product performance (Caves et al, 1991). Moreover, the increasing number of generic companies entering the market will results in lower prices as Brendt et al (2007) illustrates is the effect of generic entry. This means that the prices will decrease faster with every new generic entrant. Therefore this current paper expects that effect of patent expiration strategies should be measured on long term as after three years the competition is the strongest. Also, this study measured product performance instead of firm performance, as firm performance is subjected to a wide variety of influences such as performance of the whole drug portfolio which contains patent protected drugs and off-patent drugs. Therefore, to isolate the effect of patent expiration as much as possible, this study measured product performance along the sales figures of drugs facing patent expiration within the US.
Independent variable: Patent Expiration Strategies
Along the reasons presented in the background part, brand-name firm have developed several patent expiration strategies to achieve long- to medium term success and exploiting maximum value of the existing drug portfolio. As mentioned in the literature review, testing these strategies one by one would have raised reliability issues, driving to classify these strategies into strategic pathways to execute a feasible research. The strategies were identified via the annual reports and assigned to an overarching strategic pathway. A dummy variable “Strategic Pathways” was created, in which each pathway was numbered according to the following order: None-pathway (firms that applied no strategy) = 1, Innovation pathway = 2, Extraction pathway = 3 and the Prevention pathway = 4. The none-strategies are labelled with 1, so that this group is used as the constant in the analysis. The reason behind this is that this group is ideal to compare and get insight in the effect of the other strategic pathways, as this so-called none-group does not apply a strategy to their drug subjected to patent expiry. Furthermore, to investigate if firm specific characteristics are important when a firm follows a specific strategic pathway, the variable “Manufacturer” was added. This variable contains every single manufacturer that applied one of the four pathways found in this research and thereby enables to measure the influence of each specific strategic pathway on product performance along each manufacturer. When differences are seen, it gives an indication that specific resources and capabilities are necessary to successfully implement a strategic pathway.
Control variables
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private healtcare sector, especially in the US (Behner, Vallerien, Ehrhardt, & Rollmann, 2009). Therefore, the variable „GDP‟ was added to control for influences of the global financial crisis. The real GDP of the US was implemented in this study, as the sales figures of product are already adjusted for inflation. Further, following previous research this study controlled also for „Firm Age‟ (Phua, 2006), as older firms may be more experienced in attracting, developing and deploying key resources and capabilities, whereas younger firms have shown better result in introducing new innovative performance (Terziovski, 2010). Firm age was measured as the number of years since the establishment of the firm. Moreover, as R&D is such an important factor in the pharmaceutical industry and especially for brand-name firms (Grabowski, 2004; Raasch 2009). This research controlled for R&D intensity, as this is one of the most important capabilities in pharmaceutical companies (Yeoh & Roth, 1999). This control was measured along the R&D expenses of one specific firm in one year divided by the total sales of that firm in one year. The final control variable used is „Firm Size‟, which is measured along the total number employees of the manufacturer of patented drug (Phua, 2006). As Yeoh & Roth (1999) mention that firm size influences the scope of resource allocation such as employees, money and facilities. Also, as this study makes use of time-series cross-section data, the data for all the control variables are adjusted for the measured year. So to be more clear, this study also measured the GDP, Firm Age, R&D intensity and Firm Size from one year before the patent expiration till three years after the patent expiration, to ensure a reliable and valid research.
Statistical method
This study analyses the relationship between patent expiration strategies and the total number of sales in US dollar per patent. Furthermore, it analyses if firm specific effects influence this relationship with data across time and patents. The data about our dependent variable is count data of sales in US dollars of a specific patent for one specific firm in one distinctive year. Furthermore, the distribution of the sales figures is non-continuous and contains non-negative values. Moreover, our dataset contains repeated observations for the same firm, which means that our data can be defined as time-series cross-section data or panel data (Hausman, Hall, & Griliches, 1984). Overall, considering that the data is count data, this does not follow a normal distribution, is strongly skewed (see Appendix B) and cannot take any negative real number, therefore linear regressions will be biased and therefore not appropriate to use in this research.
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In this first equation it is shown how a Poisson distribution is constructed. In this equation, X is the random variable that counts the precise number of events occurring in time (Hogg & Craig, 1995), which in our application is the expiry of patents that randomly and independently occur in time, so k is the number of patents that expire in time. λ or lambda is the average number of expected patent that expire in time, whereas e (number of Euler) is also known as the base number of natural logarithm. In several cases this distribution can be calculated, however due to the randomness of patent expiration in time the λ cannot be given. Therefore, λ is applied in a different way, shown in the Poisson process. This process follows the following equation:
In this latter equation, λ is calculated as the average number of patents that expire before a certain point in time, mentioned in this equation as Ntwhich is an assumption of the average number of events occurring before time period t. So overall, due to the discrete randomly occurring events of patent expiry, the lambda is calculated along a certain time period, yet shall not provide any certainty about future occurring events.
The panel data used in this research contains random observations and our dependent variable seems to follow a Poisson distribution, as seen in Graph A (Appendix B). This led to the conclusion that the random effects Poisson regression (xtpoisson in stata) is the appropriate model. Moreover, this study also looked into the negative binominal regression, considering that the dependent variable shows signs of over dispersion, as the standard deviation exceed the mean. However, Stata declared that the randomly negative binominal regression (xtnbreg in stata), however convergence was not possible, because discontinuous regions were encountered. Therefore the random effects Poisson regression is chosen, however a reduced model, using a negative binominal regression, was estimated and provided similar results.
V. Results
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Table 1: Descriptive Statistics
Table 2: Descriptive Statistics: Correlation Matrix
Moreover, Table 2 the results of a pair-wise correlation in order to look for multicollinearity between the variables used in this research. The results show that the variables have no issues concerning multicollinearity. Furthermore, Table 3 shows the number of observations of each specific strategic pathway per unique patent and per patent-year. For example, the innovation pathway is identified at 13 unique patents, of which each unique case is observed over 5 years, resulting in 65 observations of specific patents.
Variable Mean Std. Dev. Observations
Product Performance overall 922.5707 1478.131 N = 205
between 1169.808 n = 41
within 918.286 T = 5
Firm Size overall 67336.13 41228.23 N = 205
between 40957.12 n = 41
within 7.427.853 T = 5
GDP overall 1.707317 1.617337 N = 205
between .581081 n = 41
within 1.511537 T = 5
Firm Age overall 97.56098 53.71952 N = 205
between 54.25405 n = 41
within 0 T = 5
R&D Intensity overall 15.31893 4.368585 N = 205
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Table 2: Observations Strategic Pathways
In table 3, the results of the Poisson regression along three models are depicted. Model 1 displays the control variables, and show high significance values. Firm size (p<0.001) has a significant positive influence on the product performance of pharmaceutical firms, which support the findings of Poah (2006) who finds that firm size has a significant influence on performance. Furthermore, GDP is highly significant (p<0.001) and, as expected has a negative coefficient (-0.062) on the product performance, which corresponds with the findings of Behner et al (2009). Surprisingly, R&D intensity has been found to be negatively significant (P>0.001) and stays this way throughout all the models a negative coefficient, which seems in contrast with Yeoh & Roth (1999), who find that R&D capabilities are important for competitive advantage and ultimately for performance.
Within model 2, the four strategic pathways innovation, extraction, prevention and none (taken as a constant) were added. Results from model 2 reveal that two strategic pathways have a highly positive significant influence on the performance of products subjected to patent expiration, whereas the prevention pathway is insignificant. Innovation has the highest significant effect on product performance (coef. 3.811, p<0.01), followed by the extraction pathway (coef. 2.043, p<0.01), seemingly indicating that these two strategic pathways have positive influence on the product performance. This provides support for H2 & H3, whereas H1 is not supported. However, when measuring the influence of each specific strategic pathway on product performance along each manufacturer in model 3, the magnitude of all the three pathways changes. The extraction pathway becomes insignificant and the innovation becomes less significant (from p<0.001 to p<.0.05), having has a reduced effect on product performance. Meanwhile, the prevention pathway becomes the most influencing significant factor in this model. Model 3 provides an indication that firm specific characteristics play an influencing role when following strategic pathways to drugs subjected to patent expiration. Therefore, these results provide evidence to support H5. In order to be complete, H4 could unfortunately not be tested due to sample issues explained in the data & sample section.
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Table 3: Random Effects Poisson Regression
VI. Discussion
The main findings of this study suggest that strategic pathways, containing a wide range of patent expiration strategies have a significant influence on the performance of drugs subjected to patent expiry, however that firm specific characteristics play an influential role in the relation between patent expiration strategies and product performance.
Firstly, the results show that innovation and extraction pathway both have a positive significant influence on the product performance. These findings support literature (Song & Han, 2016), as both pathways are designed to enhance the performance of drugs subjected to patent expiration. The innovation pathway has as expected a strong influence on the performance within the long term. This proves that marketing a new of modified product is the best strategy regarding the continuity of product performance and the seemingly the best way to neutralize the detrimental effects of the patent expiration. Contrary to what was expected, the prevention pathway does not influence
Model 1 Model 2 Model 3
Coef. (Std. err.) Coef. (Std. err.) Coef. (Std. err.) Independent variable Strategic pathways Innovation 3.811*** 1.364* (0.689) (0.696) Extraction 2.043** 0.789 (0.687) (0.750) Prevention 1.354 1.648* (0.732) (0.640)
Controlled for firm spefic effects No No Yes Control Variables Firm Size 1.415*** 1.424*** 1.430*** (0.022) (0.022) (0.022) GDP -0.062*** -0.062*** -0.062*** (0.002) (0.002) (0.002) Firm Age -0.000 0.003 0.019 (0.007) (0.005) (0.015) R&D Intensity -0.060*** -0.060*** -0.060*** (0.002) (0.002) (0.002) Constant -5.935*** -9.193*** -12.358*** (0.757) (0.844) (1.424) N. of cases 205 205 205
Product Performance (sales)
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product performance on the long term. A possible explanation of this fact is that the strategies within this strategic pathway are difficult to implement or do not work on the medium- to long term. To be more clear, strategies such as strategic patenting and 30 months exclusivity contain difficulties with maintaining the validity of the secondary patents build around the basic compound, which are under increasing exposure of patent challenges from generic companies (Burdon & Sloper, 2003). Following the RBV, it could be the case that generic companies have developed superior capabilities in patent litigation over time and challenge secondary patents with more success than before. Furthermore, the orphan drug strategy is applicable for very rare diseases of which the patient groups are very small (Bath, 2005), which may imply that R&D regarding these rare diseases is not valuable or potential drugs are rarely found. Building on this arguments, it can be suggested that the outcome of the prevention pathway is very uncertain and may hinder managers to allocate important valuable resources to these specific strategies. Consequently, this can result in inconsistencies and ultimately failure.
An explanation for the significance of prevention pathway in the third model can be that the two „evergreen‟ strategies are the only viable strategies for a specific firm on the longer term. This reasonable suggestion should be followed with caution, as this paper does not analyse per specific strategy. However, looking to the literature section, it can be concluded that most strategies within the prevention pathway will probably not work on the long term or are of rare nature (orphan drug), except the „evergreen‟ strategies (strategic patenting and 30 months exclusivity). Moreover, both these strategies are frequently applied through pharmaceutical companies (Dwivedi et al 2010), and some examples of these „evergreen‟ strategies have been significantly successful (Burdon & Sloper, 2003). Also, these strategies are attractive options to follow for brand-name firms, as their patenting and litigation capabilities can be considered to be strong due to their large investments regarding these capabilities (Brown, 2015). Whereas maintaining the validity of patents and the successful implementation of these strategies stays highly uncertain, the results of model 3 imply that some specific firms did successfully implement prevention strategies, seeing the weak significant influence on the performance on the long term.
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2010). This latter fact implies that patients are becoming victims that continue to pay considerable amounts of money for drugs, which have only very small improvements.
The results regarding the extraction pathway implies that effective implementation of this specific strategic pathway is completely dependent on firm specific characteristics. This is in line with the RBV. A suggestion is that the two important dimensions of extraction strategies, price and promotion, play an important factor in explaining this finding. Regarding brand-name firms, accelerating on these dimensions might be difficult, as their core processes and organizational culture are concerned to research & development, high-cost innovation and high margins, whereas extraction strategies ask the opposite and demand different processes such as efficient manufacturing, low-priced products and low-cost culture (Raasch, 2009). Culture and reputation within an organization can be seen as resources and help to develop capabilities, which are essential to the competitive advantage as these resources can be considered as socially complex (Barney, 1991). Brand-name firms are dedicated to give rise to an innovative culture and develop a reputation as a producer of leading edge drugs. To develop these specific resources and capabilities brand-name firms have developed highly socially complex organizational routines, which ultimately lead to higher performance (Yeoh & Roth, 1999). A similar logic can be assumed when regarding the two mentioned dimensions. A good example are generic firms who accelerate at the price and promotion, as they build their highly efficient and low-cost manufacturing skills based on their complex organizational routines (Raasch, 2008). Moreover, generic firms have specialized in low-price competition by acquiring, exploiting and developing specialized resources and capabilities, which are based on unique historical conditions and become imperfectly imitable for brand-name firms (Amit & Schoemaker, 1993).
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Although the described difficulties, the results of this study implicate that brand-name firms also can accelerate on these dimensions, seemingly implying that certain brand-name firms developed specific abilities on price and promotion. This suggest that brand-name firms should thoroughly investigate their specific abilities and evaluate if they should consider following the extraction pathway, as this pathway is dependent on firm specific resources and capabilities. This paper expects that channel bonding, standardized marketing campaigns and understanding how pricing strategies affect products are important abilities to consider. As Day (1994) describes channel bonding is an important marketing capability in market driven companies, this study assumes the regarding the low-price competition after patent expiration, close connections to key distribution channels can deliver important advantages regarding lowering cost and reaching customers sufficiently. Moreover, considering that the patient group of one specific drug has great similarities, standardized marketing campaigns will lower costs in contrast to consumer specific campaigns, nevertheless also increase the consistency of the of the brand (Wilkie et al, 2012). Also, the managerial capability of how pricing strategies influences the performance of the drugs seem important, considering that the competitive landscape of each individual drug are different (Kvesic, 2008; Raasch, 2008). However, brand-name firms should take in consideration that if they allocate resources into developing specific capabilities concerning the extraction pathway, it can be beneficial but also could implicate a stuck in the middle problem (Porter, 2008). An example is illustrated by the contrast between an innovative and low-cost culture (Raasch, 2009).
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name firms should also consider resources and capabilities concerning promotion and pricing, as these are of vital importance concerning the fierce competition after patent expiration. Similar to the discussion about the extraction pathway, this study supposes that channel bonding, standardized marketing campaigns and understanding how pricing strategies affect products are important abilities. However, as Bruni & Verona (2009) find that a close connection with opinion leaders is an essential capability in launching new patented products on the pharmaceuticals market. These opinion leaders are mostly prominent doctors working in different fields of medicine and help to increase the scientific status of the new drugs (Bruni & Verona, 2009). A similar reasoning can be assumed regarding the innovative pathway, as these strategies concern new or modified products developed to shift the current user base to the new drug. Moreover, this paper expects that this capability is even more essential launching new of modification of the original drugs subjected to patent expiry than new patented drug. Mostly because these modified or new drugs will need to get strong brand-awareness during fierce competition whereas the new patented drug does not encounter that competition aspect.
Managerial implications
This study empirically shows that the implementations of innovation and extraction strategies have a strong positive influence on the product performance on the long term. This proves that firms can use these both strategic pathways to in order to exploit maximum value of their existing drug portfolio and provide new ways to deal with the current challenges of the pharmaceutical industry. However, another important implication for managers is that both strategic pathways need firm specific resources and capabilities to successfully implement these strategies. Whereas the extraction pathway is highly dependent on these specific characteristics, the innovation pathways is only partially dependent, yet this paper argues that these pathways share some overlapping resources and capabilities(concerning pricing and promotion) to successfully follow these strategic pathways. This means that firms should be well aware of their specific capabilities when considering following strategic pathways to achieve long-to medium term success of drugs subjected to patenting. Managers should re-evaluate previous executed strategies to identify key resources and capabilities needed to successfully implement a patent expiration strategy, thereby improving the knowledge about how to exploit maximum value from their existing drug portfolio In contrast, managers should reconsider following the prevention pathway, as it provides no distinct success on the longer term but also concerning a more ethical point of view, namely the implications of miss-use patent regulations.
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whole healthcare sector and especially patients, as the costs of certain medicines remain very high. Therefore, although previous stated in literature, patent regulations should be adjusted to overcome these problems.
Theoretical implications
Previous research has stated that theory behind patent expiration strategies lag empirical research (Kappe, 2014). Therefore, this paper explored the effect of various strategic pathways on performance and looked to the influence of firm specific effects. The first theoretical implication is that this study extends the patent expiration literature. As the RBV assumes that strategies are endogenous, meaning that they are conditional to specific characteristics that determine the success of the strategy. This research confirms this assumption seen the results that firm specific characteristics play an influencing role in the successful implementation of patent expiration strategies. Concerning the specific pathways, the extraction strategies are highly reliant on firm specific characteristics, whereas the innovation strategy is partially dependent on firm specific characteristics. Another theoretical implication is that various pathways are empirically tested in one single model. As Kappe (2014) suggested, that research would benefit of empirical research comparing the impact of various strategies, this paper had to deal with limitation that due to limited cases per strategy investigating firms specific effects at one strategy a time can would raise reliability issues. Each strategic pathway comprehends several patent expiration strategies. Therefore this research provides empirical evidence of the impact of the various strategic pathways. The last theoretical implication is that the economic crisis, measured along the proxy of GDP, has a significant negative result on the performance of sales, but more importantly also has a significant negative result when looking to the influence of strategies on product performance. This results shows that future research should consider the economic downfall as an influential factor during the years 2008 till 2015.
Limitations & Future research
Several limitations can be drawn from study which provides new options for future research. At first, the focus of this study regards only 41 patents from the pharmaceutical industry in the US. This causes not only difficulties to generalize the current findings to pharmaceutical industries all over the world, but more importantly to other high tech industries that rely heavily on patenting. Examples are the biochemical, semiconductor, software and manufacturing industries. Future research should conduct additional research that incorporates more industries to get a larger sample of patents subjected to patent expiry. This can provide a more complete understanding of the effect of firm characterises on the relationship between patent expiration strategies and product performance.
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the other three pathways (Raasch, 2008). Reason behind this suggestion is that firms may be able to combine key resources and capabilities and implement adaption strategies more successfully compared to the single firm pathways investigated in the research (Barbosa, Faria, & Eiriz, 2014).
A third limitation is that this research had to deal with the fact that not each firm performed all the three investigated pathways. Therefore, considering firm specific effects, future research should conduct do a more comprehensive research containing multiple observations of each specific strategy per firm to look at firm specific effects. However, research and practise would also benefit tremendously by looking to the suggested resources and capabilities such as promotion, pricing or IT processes. As empirical evidence may provide proof for the possible explanations given in this research.
A fourth limitation is regarding the control variables. Both firm size and R&D intensity are measures based on firm level, whereas the dependent variable is on product level. It may be possible that firms differ on the aspects of allocation of resources and R&D intensity to products subjected to patent expiry. Through data and time limitation, this research was unfortunately not able to gain data for measuring the resource allocation and R&D expenses to a specific product, however future research should take this in considerations as it will provide more accurate results.
A fifth limitation is that this research does not encounter the possibility to combine certain strategies, as some papers addressed this possibility (Raasch, 2009; Wilkie et al, 2012). During the data collection this research found that pharmaceutical companies only report one specific strategy. However as some literature corresponds about these combinations, it is beneficial to look into this matter and especially from perspective of firms specific effects.
A sixth limitation is that this research contains generally large pharmaceutical firms. This influences the generalizability of the research because results may be different in smaller firms. As Kappe (2014) suggested to look for moderating factors concerning the effects of patent expirations, future research should compose a research containing pharmaceutical firms that differ in size. As firm size can be considered as a measure for the current resource base and scope economies (Pradhan, 2003) this moderator might be very interesting to consider for future research.
VII.
CONCLUSION
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name drugs and if firm specific characteristics influence the successful implementation of these strategic pathways. Based on the 820 annual reports of the pharmaceutical companies, this study built a dataset containing 205 unique observations from 41 patents subjected to patent expiration within the period of 2006-2014. Subsequently this data set was used in a Poisson regression model, aiming to measure the impact of strategic pathways on product performance, and investigate the role of firm specific effects in this relation. The analysis shows that the extraction and innovation pathway both have a positive influence on the long term product performance, of which the innovation pathway has strongest influence regarding performance. This proves that marketing a new or modified product are the most relevant strategies regarding the continuity of product performance and the seemingly the best way to neutralize the detrimental effects of the patent expiration. Moreover, firm specific effects play an important factor in the successful implementation of patent expiration strategies. Based on previous literature and the current results this article suggest that pricing and marketing capabilities are essential for successfully following the strategic pathways of both innovation and extraction. Moreover, the prevention strategies had no significant influence on the product performance of drugs subjected to patent expiration. Thus, prevention apparently does not reduce the effect of patent expiration on the longer term.
Acknowledgements
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