The pharmaceutical industry exists in what is almost a parallel world relative to other business sectors. Many of the critical forces and incidents that affect pharmaceuticals do not occur in any other markets. Still, we often search for solutions to pharmaceutical marketing problems in the more general world of business, and often cling to some of the concepts that are taken for granted in other markets. One phenomenon in pharmaceutical markets that doesn’t occur in other markets is “loss of exclusivity” or LOE. Although patent loss does occur in other markets, in no others do laws and policies require that alternatives must be used instead of your product. If you were to Google the phrase “loss of exclusivity” you would need to go through several pages before getting to anything that doesn’t relate to pharma—this problem is really ours alone.
To highlight the difference in the meaning of LOE to non-pharma firms, Kellogg’s Corn Flakes had “generic” competition within a month of its launch more than 100 years ago, but is still the dominant brand in its market. That doesn’t happen in our markets. Kellogg’s Corn Flakes has been a powerful brand, generating substantial profits for Kellogg’s and allowing the firm to leverage the brand name for other purposes. There is real value in the name “Kellogg’s Corn Flakes” just as in the brands for Coke and Pepsi. These brands—and their identities—have real and measurable value in the marketplace. The value of a brand in the marketplace is also called “brand equity,” something that is essentially non-existent in prescription pharmaceutical markets.
Several factors combine to make the concept of “brand equity” inoperable in our markets. These include:
- Mandatory generic substitution
- The share of generic versus branded prescriptions in the market today
- Insurance benefit structure
- The nature of pharmaceuticals as products patients don’t really want
This final point is among the most critical aspects of pharmaceutical markets. Unlike most other things consumers purchase, nobody really wants to buy prescription medicines—they have to buy them. This means consumers will never be satisfied with the prices. Even those who appreciate the effects of medicines tend to resent paying for them. Marketers must keep this in mind: Much of what occurs in marketing today actually builds resentment against pharma, rather than brand loyalty.
Generics’ Cost to Pharma
Mandatory generic substitution is unique to our markets. This alone prevents the concept of brand equity from taking hold. If it isn’t paid for, the brand is essentially irrelevant. Consumers are so accustomed to generic prescriptions that they really see no downside, but they do see a huge benefit in lower costs. Today, more than 80% of prescriptions filled in the U.S. are generic, costing patients $10 or less—because health insurers want to encourage generic use. With brand co-pays several multiples higher than that, generics will almost always be preferred.
Add to that the fact that most chain pharmacies evaluate and reward their pharmacists on their ability to substitute with generics, and you have a “perfect storm” that will sink most brands.
A firm can lose more than 90% of its sales in less than 90 days after generic entry—nothing like that exists in any other market. There are exceptions, but none are due to any action taken by the brand team. The lack of generics for Premarin (conjugated estrogen) is due solely to a regulatory and historical anomaly, which is not likely to ever occur again. The delayed generic erosion of oral Cipro was due to generic manufacturing problems—not any efforts by Bayer. These and a few other examples of exceptions are the equivalent of winning the lottery with a ticket that was a gift—not astute strategic planning.
Every pharmaceutical brand (not biologicals—yet) will find itself faced with the same insurmountable problem: Brand equity for prescription drugs ends with exclusivity. Witness the “brand equity” of Lipitor, the greatest pharma brand in history. With the loss of its patent, it was worth virtually nothing, as LOE immediately turned the “Lipitor Market” into the “atorvastatin market,” to the delight of patients and payers.
From LOE to OTC?
Some firms have been able to take their product OTC to preserve the brand, but this is only available to certain categories. It is important to understand in such cases that the development and exploitation of brand equity must begin with the OTC entity since it does not carry over from the brand. This has been proven time and again when leading brands have moved from Rx to OTC status.
GSK’s Zantac, for instance, was by far the leader in its category of H2 Blockers, but was late switching to OTC, so Pepcid, previously the No. 3 brand in that category as an Rx entity, still leads in the OTC race. Zantac’s brand equity as an Rx entity carried no weight into the OTC arena. Moreover, sales of the blockbuster Prilosec far exceeded those of the H2s as an Rx entity, but never got near the level of sales generated by Pepcid AC as an OTC product. This has also happened with the NSAID category as well as the antihistamine category; the drivers of OTC use differ substantially from those in the Rx area. This illustrates that Rx brand equity does not carry into the OTC market, where “first mover advantage” appears to be a more critical advantage to a brand.
Moreover, an OTC switch only makes sense in the very long run because the price differences are substantial. Price reductions of at least 60% are typically required to convert an Rx product to a viable OTC candidate—the recent switch of Flonase was accompanied by an 80% price reduction. Such actions only pay off in the long haul, bringing in new revenue after LOE, but seldom at the same level as the Rx product.
Approaching Lifecycle Management
Where does this leave brand teams seeking to maximize brand equity, business performance and product potential? The team—and company—must realize that effective lifecycle management planned and executed early and often is more important than any efforts undertaken during the last year or two of exclusivity. Programs and initiatives to replace your own product as it ages are more effective than late in the game salvage attempts.
Strategies aiming to replace current products with actual improvements or convert brands to a viable OTC status take years to develop and should be started before launch. For branded firms, it is imperative to replace current products with newer ones because we cannot count on long-term assets to have any useable value. Still, steps can be taken late in the product’s life to minimize damage and generate some additional profit. These include:
1. Initiate price increases that don’t threaten the unit sales of the product. Although in the current environment price increases are coming under severe scrutiny, adjustments of 5% to 10% once or twice annually can generate substantial incremental revenue for a brand without causing problems. Such actions taken in the final two years of exclusivity can help squeeze that last few dollars out of a brand. Because generics will take away your business as soon as they are available, it just makes sense to “fall from the highest cliff” possible.
2. Back off from or eliminate contracts for your brand nearing LOE. Because payers love generics, they would much rather see patients stay on your brand until generics come along, as opposed to switching to another “high-priced” brand. As such, the reduction or elimination of contracts in the final two years of exclusivity is unlikely to result in a status change for your product, and payers would be stupid to try to reduce the use of a product soon to have generic competition.
3. Offering a more generous co-pay assistance program at the end of exclusivity can help if insurers do try to punish you for removing contracts, and it is likely that the absence of contracts can more than pay for the cost of such a program. And please don’t worry about “maintaining good relationships” with payers by maintaining contracts. They are in business just as you are and understand that you must protect yourself, even if they don’t like it. It may make the account managers’ jobs a little tougher but, frankly, making their jobs easy should not be a major objective for you; if their job is easy then you don’t need them. Here’s a tip: If payers really like your company, you are doing it wrong!
4. One point most firms don’t seriously consider: After LOE most of your brand inventory sitting on retailer and wholesaler shelves isn’t going to be sold. Instead, it will be returned to you for credit, likely after you have taken a price increase or two. Purposefully managing inventory before and after LOE can save your brand millions of dollars. Look at this issue carefully and consider contacting the one or two experts who can guide you toward meaningful cost avoidance in this area.
5. Finally, the almost universal tactic of launching “authorized generics,” is one of the most wasteful and dangerous things to do except in special circumstances. Unless you have a generic division or can partner with a generic company willing to give you the vast majority of the profits for the sales of an AG, it is simply foolish to launch one prior to your LOE—the only thing that will do is reduce sales and profits from your brand. Although many firms appear to have jumped into the AG pool head first, some have realized the risk of this foolish followship. Again, unless your firm has a generic division or a relationship with a large generic company that will give you the bulk of the revenue from sales, you are better off just letting it go.
The best way to capture and use the “brand equity” for your product is to start from the beginning by maximizing the value of your brand and plan to replace it. If, however, you are just a couple years from LOE, you can take a few steps to generate some additional profit or avoid future losses. Just don’t think that you can ride that “brand equity” train very far.