Effect of multiple-source entry on price competition after patent expiration in the pharmaceutical industry

Objective. To analyze the effect of multiple-source drug entry on price com petition after patent expiration in the pharmaceutical industry. Data Sources. Originators and their multiple-source drugs selected from the 35 chemical entities whose patents expired from 1984 through 1987. Data we re obtained from various primary and secondary sources for the patents' exp iration dates, sales volume and units sold, and characteristics of drugs in the sample markets. Study Design. The study was designed to determine significant factors using the study model. developed under the assumption that the off-patented mark et is an imperfectly segmented market. Principal Findings. After patent expiration, the originators' prices contin ued to increase, while the price of multiple-source drugs decreased signifi cantly over time. By the fourth year after patent expiration, originators' sales had decreased 12 percent in dollars and 30 percent in quantity. Multi ple-source drugs increased their sales twofold in dollars and threefold in quantity, and possessed about one-fourth (in dollars) and half (in quantity ) of the total market three years after entry. Conclusion. After patent expiration, multiple-source drugs compete largely with other multiple-source drugs in the price-sensitive sector, but indirec tly with the originator in the price-insensitive sector. Originators have f irst-mover advantages, and therefore have a market that is less price sensi tive after multiple-source drugs enter. On the other hand, multiple-source drugs target the price-sensitive sector, using their lower-priced drugs. Th is trend may indicate that the off-patented market is imperfectly segmented between the price-sensitive and insensitive sector. Consumers as a whole c an gain from the entry of multiple-source drugs because the average price o f the market continually declines after patent expiration.