Pharmaceutical Followers [report]

Peter Arcidiacono, Paul Ellickson, Peter Landry, David Ridley
2013 unpublished
We estimate a model of drug demand and supply that incorporates insurance, advertising, and competition between branded and generic drugs within and across therapeutic classes. We use data on antiulcer drugs from 1991 to 2010. Our simulations show generics and "me-too" drugs each increased consumer welfare more than $100 million in 2010, holding insurance premiums constant. However, insurance payments in 2010 fell by nearly $1 billion due to generics and rose by over $7 billion due to me-too
more » ... on due to me-too antiulcer drugs. Abstract We estimate a model of drug demand and supply that incorporates insurance, advertising, and competition between branded and generic drugs within and across therapeutic classes. We use data on antiulcer drugs from 1991 to 2010. Our simulations show generics and "metoo" drugs each increased consumer welfare more than $100 million in 2010, holding insurance premiums constant. However, insurance payments in 2010 fell by nearly $1 billion due to generics and rose by over $7 billion due to me-too antiulcer drugs. JEL: I11, L13, L65 Introduction Prescription drug spending as a share of U.S. national income more than tripled between 1984 and 2010. 1 This occurred despite the generic share of prescriptions quadrupling over the same period. 2 The increased use of generic drugs was facilitated by the U.S. Drug Price Competition and Patent Term Restoration Act of 1984 (also known as the Hatch-Waxman Act) which exempted generic manufacturers from costly clinical trials. However, some branded manufacturers responded by launching "me-too" drugs, meaning patented drugs that require clinical testing for regulatory approval, but are little differentiated from drugs already on the market. The quintessential me-too drug is Nexium (esomeprazole) which became one of the highest-selling drugs of all time, despite being the fifth branded drug in its class and facing competition from generic versions of other drugs in its class. We formulate a demand and supply model to examine how pharmaceutical followersboth generic and me-too drugs -affect competition and welfare. * Michael Anderson provided excellent research assistance. We are grateful for helpful comments from Yair Taylor and seminar participants at
doi:10.3386/w19522 fatcat:ly2spzx77jhlfgxbgiuw3pasxq