The level of pharmaceutical promotional expenditures for a given drug is sensitive to competitive market conditions, among other factors. Because generic entry involves the marketing of “chemical carbon copies” at substantially lower prices than those of branded originators, a substantial drop in total brand plus generic sales revenue results following generic entry (e.g., Frank and Salkever, 1997; CBO 1998; Grabowski and Vernon, 1992; Hudson, 2000).^2–5 Previous theoretical models have shown that manufacturers’ promotional strategies are likely to be affected by entry of generic equivalents (Frank and Salkever, 1992).⁶ In fact, empirical research has generally found that a branded drug’s promotional spending decreases in anticipation of and immediately following entry by a generic equivalent (e.g., Hurwitz and Caves, 1988; Caves, Whinston, and Hurwitz, 1991; Iizuka, 2004; Berndt, Kyle, and Ling, 2002).^7–10 Less is known about the effects on a branded drug’s promotional strategy when a competing brand molecule in the class faces generic entry. Branded products can extend the life of their marketing exclusivity by introducing product reformulations and obtaining Food and Drug Administration (FDA) approval to market an existing drug for additional clinical indications in advance of generic entry. These “product life cycle” strategies may be undertaken to extend market exclusivity and preserve profitability. Over the past decade, several manufacturers have introduced reformulated products or obtained FDA approval to market their drug for additional indications (e.g., Glaxo SmithKline received FDA approval to market Paxil for generalized anxiety disorder in April 2001). Product reformulation and expansion of clinical indications can be expected to affect promotional expenditures. There is little empirical evidence, however, on the effect of these strategies on manufacturer promotion for the originator product.

A second distinguishing feature of the market for pharmaceuticals is that, like most health care services, the majority of prescription drug expenditures are paid for by third party insurers. Currently, nearly all (98%) covered workers in employer-sponsored health insurance plans have prescription drug benefits (Kaiser Family Foundation, 2005).¹² Prescription drug benefits are also covered under Medicaid and Medicare (as of 2006). In 2002, third party payers accounted for 70% of prescription drug expenditures (Smith, 2004).¹³ In recent years, insurers/pharmacy benefit managers (PBMs) have sought to encourage use of lower cost generics as well as stimulate price competition among brand name drugs through the use of tiered or incentive-based formularies (Gibson, Ozminkowski, and Goetzel, 2005).¹⁴ Incentive-based formularies have been shown to reduce demand for drugs placed on the highest copay tier by 22% to 65% depending on the therapeutic class of drugs (Huskamp et al., 2003).¹⁵

These two demand side characteristics interact with a third important characteristic of prescription drug markets -- the presence of monopoly power on the supply-side -- to support prices that well exceed marginal production costs (Scherer, 2000).¹⁶ Monopoly power is conferred by patent protection, which makes it illegal for any other company to sell the same drug between the time the FDA approves a drug and its patent expires (or is deemed invalid). The Hatch Waxman Act extended the duration of monopoly protection, granting exclusive marketing rights (known as exclusivity) to pharmaceutical manufacturers for a period of at least five and not more than 14 years from FDA approval date for new drugs (referred to as new chemical entities (NCEs) or new molecular entities (NMEs)). Pharmaceutical firms may obtain three years of additional exclusivity for new indications or formulations. The introduction of new product formulations and applications for approval for new indications have become increasingly common in recent years, yet the implications for promotional spending for the originator product and the new formulation are unknown.

The Dorfman-Steiner result implies that the marginal profitability from advertising increases as the price elasticity of demand for the good falls (in absolute value). An implication of this theorem for pharmaceutical markets is that the optimal level of advertising intensity will decline with generic entry. When generic equivalents enter the market, the numerator of the ratio (the elasticity of demand with respect to advertising) is expected to decrease, because of the potential spillover of any branded promotional efforts onto the generic alternative. At the same time, the denominator of the ratio (the price elasticity of demand) is expected to increase, as generic entry allows a set of nearly perfect substitutes into the market. As a result, the Dorfman-Steiner theorem implies that the optimal advertising to sales ratio for a brand-name drug facing generic competition will decrease.

Hurwitz and Caves (1988) studied the determinants of pharmaceutical promotional spending in a study of 150 products from 29 multisource drug markets (in which both brand name and generic equivalents were sold) between 1978 and 1983.⁷ Promotional spending included detailing, journal advertising, and direct-mail advertising. They examined the impact of a number of structural and competitive factors on product-specific advertising to sales ratios. Their cross-sectional regressions showed that the number of years since the first generic competitors entered the market had the largest impact on a brand name drug’s advertising to sales ratio. Caves, Whinston and Hurwitz (1991) examined branded and generic drug prices, market shares, quantities sold, and brand advertising (defined as detailing and journal advertising) for a panel of 30 drugs that lost patent protection between 1976 and 1987.⁸ They found that generic entry had a negative impact on advertising expenditures, with advertising outlays falling during the two years prior to generic entry. Branded advertising fell 20% with entry of the first generic, an additional 40% when the number of generic entrants reached five, and an additional 20% when the number of generic competitors reached ten. Similarly, in an analysis of 98 drugs that lost patent protection between 1986 and 1992, Scott-Morton (2000) found that the amount of time on patent was strongly negatively correlated with expenditures on detailing and journal advertising, meaning that the longer a drug had been on the market the less was spent on promotion.²¹

In a study of the product- and market-level determinants of spending on DTCA, Iizuka (2004) examined a total of 606 drug-year observations for 169 unique brand name central nervous agents, respiratory agents, and renal and genitourinary agents over the period 1996 through 1999.⁹ He found that the number of branded drugs in the therapeutic class had a negative and significant effect on DTC advertising outlays. In addition, the coefficient for generic entry was large, negative and statistically significant. These findings are consistent with the Dorfman-Steiner theorem, which predicts lower advertising to sales ratios in more competitive markets where demand is more price elastic. Iizuka (2004) examined the impact of product-level generic entry but not generic entry elsewhere in the class as a whole or among close competitors, on an individual firm’s DTCA outlays.

In one of the only analyses of the effect of generic entry on a competitor’s promotional spending, Berndt, Kyle and Ling (2003) examined changes in detailing minutes and pages of journal advertising associated with Zantac (an H₂ blocker used to treat acid reflux) losing patent protection in the late 1990s.¹⁰ In the months leading up to Zantac’s patent expiration date and in the months afterward, the manufacturers of Axid and Pepcid (two other H₂ blockers that had not yet lost patent protection) decreased detailing for their products. Journal advertising increased for Pepcid in the months before Zantac generic entry and dropped afterward, while journal advertising for Axid dropped before Zantac generic entry and continued to drop afterward. The case of the H₂ blockers is somewhat unique because the H₂ market was already in decline during the period that the H₂ blockers began losing patent protection due to the introduction of proton pump inhibitors (PPIs), which are generally regarded as more potent therapeutic substitutes, and the launch of over-the-counter versions of the H₂ blockers. Hence, the results are difficult to interpret in light of the theory set out above.

While most studies have focused on the potential for advertising to affect demand for a given drug, Ellison and Ellison (2000) hypothesized that advertising and new product formulation introduction might also be used as tools to deter generic entry, particularly in medium-sized markets (in very large and very small markets, deterring generic entry was unlikely or unnecessary, respectively).²² Using a panel of drugs that lost patent protection between 1986 and 1992, they report some empirical evidence suggesting that incumbents in medium-sized markets facing generic entry were more likely than incumbents in similarly-sized markets not facing entry to decrease detailing expenditures. Those facing generic entry were also more likely to introduce reformulations as patent expiration approached.

Prozac was the first SSRI to lose patent protection (Table 1). Prozac’s patent expired in August 2001 and generic fluoxetine products entered at that time. Generic entry followed for Paxil in June 2003, Celexa in October 2004, and Zoloft in June 2006.

New product formulations of three of the four SSRIs indicated for the treatment of depression have been introduced over the past several years (Table 1). In March 2001, Eli Lilly introduced Prozac Weekly, a once-weekly formulation of Prozac. In April 2003, GlaxoSmithKline (then SmithKline Beecham) introduced Paxil CR, a controlled-release version of Paxil. In August 2002, Forest Labs introduced Lexapro (an isomer of the Celexa molecule) and claimed that Lexapro may have a slightly shorter onset of action than Celexa (Burke, Gergel, and Bose, 2002).²⁶

We specified and estimated two types of empirical models of promotion. First, we estimated drug-specific models of total quarterly promotional expenditures (DTCA, detailing, and sampling combined) and detailing expenditures alone. Second, we estimated a pooled (across drug products over time) logit model of the likelihood of any DTCA expenditures in a given quarter. Unlike detailing expenditures, which are consistently non-zero from quarter to quarter, DTCA expenditures can be highly variable over time. As a result, we estimated the probability of any DTCA expenditures in a quarter rather than the level of spending. We do not estimate separate models for sampling expenditures because of the high correlation between detailing and sampling spending.

As seen in Figures A – C, detailing expenditures for the originator products Prozac, Paxil and Celexa dropped dramatically when a reformulation of the molecule was introduced (there were no reformulations of Zoloft). For Paxil and Celexa, promotional expenditures had virtually stopped by the time of generic entry for these molecules (15 and 27 months after new formulation entry, respectively).

Promotional spending (both total and detailing alone) is generally lower after own generic entry than before, a finding consistent with the Dorfman Steiner theorem and other empirical literature, although the impact of generic entry has become more nuanced in the wake of regulatory changes permitting extension of marketing exclusivity. Promotional expenditures generally dropped as patent expiration approached for the drugs that lost patent protection during our study period.

The introduction of a new product formulation appears to be a common strategy for attempting to extend market exclusivity for medications facing impending generic entry. Because the Hatch-Waxman Act allows for an additional three years of market exclusivity for a new formulation, manufacturers have an incentive to shift demand for the original formulation of a brand drug that will soon lose patent protection onto a reformulation of the drug. The manufacturers of Paxil and Celexa shifted almost all promotion dollars from the original brand to the new formulation (Paxil CR and Lexapro, respectively) when the new formulation was introduced. In both cases, the reformulation was introduced long before generic entry (15 months before paroxetine’s entry in the case of Paxil CR and 27 months before citalopram’s entry in the case of Lexapro), which is consistent with the hypothesis that manufacturers attempted to shift demand for the original brand onto the new formulation in advance of generic entry. Eli Lilly released Prozac Weekly, the first SSRI reformulation to enter the market, just five months before generic entry of fluoxetine. Promotional spending for Prozac decreased somewhat gradually in the months after patent expiration rather than stopping more abruptly once the reformulated product entered or right before patent expiration. One reason could be that Eli Lilly may have expected to win a patent litigation case that would have delayed patent expiration beyond the actual expiration date of August 2001 (Angell, 2004).³⁰ Eli Lilly’s detailing and DTCA contracts may have been fixed in the short term and non-cancellable immediately after generic entry. Also, Prozac was the first SSRI to lose patent protection, and the past six years have likely generated considerable experimentation and learning in the marketing of antidepressants.

It is clear that the manufacturers of these products faced a trade-off between lost profits today from brand cannibalization versus increased profits tomorrow stemming from brand protection. Our empirical work can offer some insights on the optimal timing of the launch of a reformulated product, viewed from the manufacturer’s perspective (not necessarily the consumer’s). Future work should examine manufacturer strategies regarding the timing of new product formulation entry relative to the originator brand’s patent expiration, recognizing that the observed effect of generic entry on promotional spending is conditional on a particular reformulation introduction strategy pursued by manufacturers.

Receiving FDA approval to market a drug for a new clinical indication may represent another way for a brand manufacturer to extend market exclusivity for its product. The results for the SAD and GAD indications suggest that manufacturers may target a particular type of promotion for a given indication. Paxil’s manufacturer increased detailing expenditures for Paxil after receiving FDA approval to market the drug for GAD, but did not appear to change its use of DTCA for Paxil. This suggests that the primary promotional target for GAD, a condition seen often in both primary care and specialty mental health settings, may have been physicians instead of consumers. In contrast, FDA approval to market Paxil and Zoloft for SAD did not affect the manufacturers’ detailing expenditures but did result in a greater likelihood of using DTCA in a given quarter. This result suggests that the primary target for promotion of the drugs as treatments for SAD may have been consumers rather than physicians, with manufacturers perhaps hoping to convince consumers that social anxiety is a treatable clinical condition. A complementary explanation may be that Paxil was the first drug to receive an FDA indication approval for SAD. Therefore, its manufacturer needed to convince patients to ask their doctors for the medication but did not have a need to persuade doctors that its drug was the best to treat that condition.

It is important to place our findings into the context of what is known about the welfare effects of pharmaceutical promotion for antidepressant medications. Most studies that shed light on this issue focus only on DTCA. Donohue and colleagues (2004) found that DTCA for antidepressants results in increased antidepressant prescribing.³¹ Donohue and Berndt (2004) found that DTCA has little effect on the choice of a specific antidepressant among individuals who initiated antidepressant treatment, although detailing does have an important effect on medication choice.³²

The evidence on the effect of promotion and patient requests stemming from those promotions on the appropriateness of antidepressant use is mixed. Donohue and colleagues (2004) found that DTCA expenditures were associated with a small increase in appropriate duration of antidepressant use among individuals diagnosed with depression who initiated antidepressant therapy. Kravitz and colleagues (2005) found that standardized patients (actors following strict protocol for presenting their condition) who presented with symptoms of major depression were more likely to receive appropriate medications if they made a request either for any antidepressant or one that they had seen advertised (e.g. Paxil) than if they made no medication request.³³ To the extent that DTCA results in patients requesting medication from their doctors, this suggests that DTCA may result in more appropriate treatment for major depression for some patients. However, the study also found that patients who presented with symptoms of adjustment disorder with depressed mood (a condition for which there is no consensus supporting antidepressant use) and who made general or DTCA related requests for an antidepressant were also more likely to receive an antidepressant than those who made no requests and merely presented with symptoms. Thus, DTCA may alleviate problems with underuse of antidepressants but could result in increased utilization of these medications for conditions for which there is no clinical consensus on the appropriateness of treatment. Thus, the net welfare effects of increased promotional spending for antidepressants are unclear.

There are several limitations of our work. First, findings from the antidepressant market may not generalize to other therapeutic categories. Second, when time series analysis is employed, it can be difficult to distinguish effects of multiple events occurring approximately simultaneously. Third, there may be partial adjustment of Paxil detailing expenditures that we do not account for with our specification. Fourth, we ignore price in these models because we lack data on transactions prices. Manufacturers seeking to maximize profits have several instruments available to affect profits, including promotion, new product formulations, new clinical indications, and prices. Fifth, our analyses of total promotional spending do not include data on journal advertising expenditures. However, journal advertising expenditures for SSRIs and SNRIs represented a very small share (0.4%) of total promotional spending for these medication classes in 2005.¹

A number of changes in the competitive environment for SSRIs and other drugs are likely to affect manufacturer promotional strategies in the future. For example, in response to increased generic competition, brand drug manufacturers are increasingly releasing authorized generics (generic versions introduced by the original brand manufacturer) in an attempt to maintain revenues after generic entry, albeit at a lower level. The release of an authorized generic is likely to affect the promotional strategy of a brand drug manufacturer.³⁴ Because promotions for the original brand could have positive spillovers onto a brand manufacturer’s authorized generic, promotional spending for the original brands might actually increase right before and after generic entry. Also, three-tiered formularies have no doubt led to stronger price competition in some classes. As pharmacy management tightens further and there are more generic SSRIs available, pressure by payers for consumers to use generics may cause manufacturers to invest even more in development and promotion of reformulations. If manufacturers can convince consumers and payers that the reformulations are sufficiently different from the original brand product, payers may be more likely to include the reformulations in preferred tiers of their formularies or be more willing to grant prior authorization or formulary exceptions for the reformulations.