Brad Shapiro on the Cost of Strategic Entry Delay in Pharmaceuticals

Pharmaceutical companies sometimes engage in "product hopping," in which they attempt to move patients to a new product with longer patent protection before the generic version of an older drug becomes available. Product hopping was recently in the news with New York state's antitrust suit against Actavis for its decision to withdraw Namenda IR, its 2x/day Alzheimer's drug (with patent protection ending July 2015), to force patients to switch to Namenda XR, a 1x/day version (with patent protection until 2029). In an opinion by Judge Walker, the Second Circuit upheld a preliminary injunction barring withdrawal of Namenda IR prior to generic entry, concluding that the "hard switch crosses the line from persuasion to coercion and is anticompetitive."

The cost to consumers of product hopping that obstructs access to generic drugs is clear. But these marketing strategies raise another potential welfare loss that receives less attention: when a pharmaceutical company delays the introduction of a new drug version until just before patent protection on the old version is set to expire, that delay can harm consumers who prefer the new version. This later cost is the focus of a new empirical paper by Professor Brad Shapiro (Chicago Booth), Estimating the Cost of Strategic Entry Delay in Pharmaceuticals: The Case of Ambien CR.

Shapiro studies Sanofi-Aventis's introduction of Ambien CR, a time-release version of its popular Ambien insomnia drug, two years before the patent for regular Ambien would expire. From the abstract:

Using detailed prescribing and pricing data, I document strategic delay in the prescription sleep aid market. I find that adoption of the reformulation, Ambien CR is significant and driven not only by advertising. Assuming advertising gives zero real utility to patients, I estimate cost to consumers from strategic delay at about $755 million over seven years. Alternative policies that eliminate the incentive for delay are discussed.

I haven't delved into the details of how he calculated this figure, but as he notes, "the total value at stake in this market might well be lower than many other pharmaceutical markets."

Shapiro's policy suggestion is "that exclusivity be granted to new versions immediately upon entry and last until the date it would otherwise end if it had been delayed. That is, the length of exclusivity would vary based on entry date, and the expiration date would be fixed relative to the date of expiration of the original drug’s exclusivity rather than the length of exclusivity being fixed." There are of course a variety of possible policy interventions to incentivize the introduction of information goods. Thinking about which make the most sense in this context—or in other areas in which our current system distorts pharmaceutical incentives, such as Eric Budish, Ben Roin, and Heidi Williams have shown for early-stage cancer patients—could be interesting for law students searching for a potential Note topic.