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Market Dominance & Socioeconomic Weight Dynamics in the US

Pharmaceutical Industry

An extensive view on the OTC-Analgesics market

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Bachelor of Science

Edited by

Milan van Aagten

Supervised by

Stephan Jagau

February 2017

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Abstract

Statement of Authenticity

During the last decades the US pharmaceutical industry has been subject to numerous incidents, challenging its highly self-valued image on trustworthiness and benevolence. This paper investigates how and to what extent pharmaceutical companies are able to secure the market share of their products. We focus on the over-the-counter analgesics market as to its homogeneous properties and substantial group of consumers. A regression on brand share has been performed with the number of years a company was allowed to sell in a monopoly position and total yearly lobbying expenditures as explaining variables. The company’s total assets and its market capitalization have been added as control variables. We find a highly significant positive effect of distributing years under exclusivity protection on brand share. We do not find evidence that implies a significant effect of total lobbying expenditures on the number of drugs sold relative to the total market sales.

This document is written by Milan van Aagten who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is

original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the

supervision of completion of the work, not for the contents.

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TableofContents

Introduction1. WelcometothePharmaceuticalIndustry

2. Literaturereview

2.1Lobbyingandpoliticalpower2.2AdvertisementofOTCmedicine2.3Marketshareundergenericentry2.4Physician-industryinvolvement

3.Econometricanalysis Data 3.1Definingthemarket 3.2Dependentvariable 3.3Explanatoryvariables 3.3.1Operatingyearsinexclusivity 3.3.2Estimatingmarketdominance: Kwoka’sDominanceIndex 3.3.3Lobbyingexpenditures 3.4Controlvariables 3.4.1Direct-to-customeradvertisement 3.4.2Firmsizeindicators 3.5Results Method 3.6Themodel 3.7Paneldataspecifications 3.7.1Theindividualtimeseries 3.7.2Fixedeffectsestimation 3.8Post-regressionanalysis 3.8.1Linearity 3.8.2White’stestforheteroskedasticity 3.8.3Jarque-Beratestfornormality 3.8.4VIFonmulticollinearity 3.8.5Wooldridge-Drukkertestforautocorrelation

4.Concludingremarks 4.1Inretrospect 4.2Furtherresearchopportunities

ReferencingAppendix

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Introduction

1. WelcometothePharmaceuticalIndustry

Theworldofpharmaceuticalsenduresrapidlyexpandingpressureastimegoesby.Thisisfora

greatextentduetoindustrydynamicsandself-inducedactionalthoughitisinconjunctionwith

aninvariantlegalandeconomicenvironmentinwhichtheindustryoperates.

WithmediaoutburstsasofMartinShkreli’s700%pricehike,initiatedbyhiscompanyTuring

Pharmaceuticals,ofDaraprim™,adrugusedforthetreatmentofaidscomplications.More

recentlyMylansparkedoutragewithregardtoitsEpiPen™,followinga500USdollarincrease

perpackageinjustsevenyears.MylanCEOHeatherBreschclaimstobea:‘’victimofadeficient

healthcaresystemasintermediariessuchaswholesalersandpharmacybenefitmanagersadd

totheultimatecostresultinginahigherpay-checkforpatients’’(Mangan,D.CNBC,2016).Both

CEO’sarguetoofferdiscountstoselectedcustomers.Thisgesturehoweverwillbeinsufficient

ashigherdrugpricesrampupinsurancepremiumsasasecondaryresult.

Concernslikethesedonotonlyraisequestionsregardingthemotivesbehindpriceincreases,it

testsourjudgmentonhowitisinanywayjustifiable.Includingaforementioned,theAmerican

pharmaceuticalindustryisrichonscandalsascorporaterap-sheetsarepervasiveenoughto

covermultipledecades.Allofwhichhavechallengedthegeneralconsensusconcerninghow

andifgiantpharmaceuticalcompaniesshouldexerttheamountofpowertheyhavegrownto

possess.OngoingoutrageouspricehikeslikeMylan’swillcontinuetoignitediscussion

regardingtheethicalenvironmenttheindustryisengagedin.

Itisevidenttodiscussboththecontroversyandacademicgravityoftheissueandhowitis

supportedbyexistingliterature.,especiallywhentakingintoaccountthatthenegativeeffectsof

industrypowerhavenotthoroughlybeenexposednorwithsufficientbackup.

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AsnoUSlawexiststhatprotectspatientsorconsumersfromunreasonablepricehikesby

pharmaceuticalfirms,itmightbehelpfultoobservetheindustrydynamicsmoreclosely.

Inthelastdecadestheindustryhasbeentransformeddrasticallyfrommerelyamanufacturerof

chemicalstoaresearchorientedsectorthatcontributesgreatlytohealthcaretechnology.The

originofsuccessintheindustryingeneratingastreamofnewdrugswithimportanttherapeutic

benefitshasinvolvedtheindustryinintensepublicpolicydebatesonareasconsidering:

researchfinancing,theveracityofclaimsforitsproducts,thepriceschargedforthem

(moreoverwhopaysthosecharges)andthesociallyoptimaldegreeofpatentprotection.

Thedebateismainlyrevolvedaroundthewelfareeconomicissueoftheongoingtrade-off

betweenpromotinginnovativeeffortandsecuringcompetitivemarketoutcomes.TheR&D

sectoroftheindustryisheavilyreliantonpatentprotectionmeasures.Howeverwhilethe

monopolyinducedprofitsfromsalesinexclusivityserveasawarrantforinitialinvestment,

theyinhibitcompetitionandthusincreasedeadweightlossinthemarket.

HealthcareagentshavecontinuouslyarguedtobeforcedtoprioritizeandsecuretheirR&D

possibilitiesbeingvictimoffastgrowingcostsofdruginnovation,thusclaimingtorighteously

steeruptheirprices.

Itisgenerallypresumedthatdrasticpricehikeslikeaforementionedarelabeledas

unreasonable.Itbecomesthereforenecessarytoelaborateonthecasesinwhichsubstantial

pricehikesareindeedjustifiable.

Scherer,(2001)showsthatpharmaceuticalcompaniesareeconomicallyboundtoinvestvast

amountsofcapitalintheresearchwhichissubordinatetoinventneworhigherquality

medicine.Withcostsofdevelopingnewdrugshavingincreasedto2.6billiondollarsin2014

(PrMAProfileofBiopharmaceuticalindustry,2015),pharmaceuticalcompaniescollectively

claimtobeforcedtoraiselistprices.

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NottomentiontheinvestmentexpendituresinR&Dconflictheavilywiththelackofa

correspondingincreaseinthenumberofmedicinebeingapprovedbytheU.S.Food&Drug

Administration(Pammolli,,Magazzini,Riccaboni,2011),whichindicatesofamorecostly

therapeuticinnovationprocess.

NonethelesscasesasthatofMylandonormallynotrevolvearoundnewtreatmentmethods.

Thecontroversyusuallyisnotaboutmedicinewithgroundbreakingtherapeuticproperties.Itis

silentlyassumedthatdespitetheseimmenseR&Dcoststherestillisanoutrageousamountof

incomingcashflowsleftnotdefinedtobeusedforoperationalfactorsonly.

Myaimistofindaclarificationofhowbigpharma-firmssecuretheirbrandshare,evenafter

competitionraisedbygenericentrants.Iaminspiredtoresearchhowthisdirectlyaffectsusas

patients.

Iwillthereforesubdividethemainquestionintotwo:

• Whatimpactdoesmarketpoweroratemporalprivilegeprovidingmarketpowerinthe

formofapatenthaveonbrandshare?

• Towhatextentisacompanyabletoaffectregulationinitsownadvantagewith

monetarymeans?

Iwillfocusmyresearchonanalgesicsthataresoldoverthecounter1(OTC).Whatmakesthis

marketespeciallyinterestingtostudyisthegapbetweentheperceiveddistinctionbetween

productsandtheactualabsenceofdifferentiationduetothealmosthomogeneousnatureofthe

products.Theworkingsubstancedifferssolelybetweenibuprofenandacetaminophen(Table1,

Appendix).Thisrulesoutanyqualitybasedpreferencesaconsumercanhave.

Oneofthecorecontroversysparksrevolvingaroundpharmaceuticalcompaniesistheir

increasingpoliticalinfluence(Henry,Lexchin,2002).Especiallyaroundtheaffectsona

company’srelativemarketpowerandultimatelythenumberofproductstheysell,tous.

Possibleoutcomesofthisresearchmayallowustospeculateonoftenmadesubstantial

statementsincluding;thedeficiencyoftheUShealthcaresystem,acontaminated

pharmaceuticalindustryorneglectingcorporateregulation.

1AsstatedbytheU.S.Food&Drugadministration:‘’OTCdrugsaredrugsthathavebeenfoundtobesafeandappropriateforusewithoutthesupervisionofahealthcareprofessionalsuchasaphysician,andtheycanbepurchasedbyconsumerswithoutaprescription.’’

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2. Literaturereview

Thepharmaceuticalindustryhascontinuouslybeenidentifiedasanattractiveareato

investigateasitissubjecttoanabundanceofscandals.Nexttopopularmediabeingmagnetized

towardstheindustry’slatestmovements,itattractsvastamountsofacademicsastheneedfor

well-foundedbackupinnewsreportsishigherthanever.Thecontroversyandlackoftrust

revolvingaroundtheindustrycanonlybeatplaceifhardevidenceisshownthatconflictswith

theargumentsgivenfortheiractions.Attemptsofdissectingtheindustrytoallowforthe

constructionofclearcorrelationsarenumerousandeachshineslightonadifferentelementof

theeconomicsofhealthcare.Allhavetheaimhowevertoultimatelyprovideuswithsome

explanationonhowtheindustrybehaves.Existingliteratureonpharmaceuticalsissegregated

intothreemainfields:

1.Theeffectsofdirect-to-customeradvertisementonOTCdrugs

2.Physicianinvolvementwithpharmaceuticalcompanies

3.Patentprotectionandtheinfluenceonbrandsharedynamicsandgenericcompetition

Allthreeofthemwillbeelaboratedon.

Advertisementandmorespecificallythepromotionofanytherapeuticnecessitieshasalways

beenaclassiccontroversialtopic.Theextenttowhichitscompetitiveeffectreacheshas

importantimplicationsforlegislationaroundadvertising,antitrustlitigationsandotherlegal

procedures.

Inthe1999paperbyJohnRizzoonantihypertensivemedication,hefindsthatproduct

detailing2systematicallylowersthepriceelasticityofdemand,handinganexplanationasto

whypharmaceuticalcompaniescontinuouslyraisepriceswithsuchease.Contrarytothis,Rizzo

findsthatthepricethefirmsetsisofnegativeandhighlysignificanteffectonitssales,which

thusconcludesthedisproportionallyhighcompensatingpowerofadvertisement.He

furthermorefoundthatgenericentrystronglycontributestothispricesensitivity.Causesgiven

inthepaperalllinktoincreasedbrandloyaltyresultingfromdrugdetailing.Thisisshown

howevertohavedetrimentaleffectsonpricecompetitioninthemarket.

ThesefindingsareconsistentwithHurwitzandCaves(1998),whofindevidenceofthe

inhibitionofentryintothemarketbyadvertising.Theystatethattrademarkholders’sales-

2Definition:Industryexplainingofdrugpropertiestoamedicalagent,perceivedasequivalenttoproductmarketing(Rizzo,1999).

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promotionoutlaysdopreservetheirsharesagainstincursionbygenericentrants.

Correspondinglytheirresultsshowadiminishedeffectonbrandsharebyincoming

competition,afterintensecomparativeadvertising.SimilarlytoRizzotheystresstheindustry’s

highbrandloyalty.

AsthevastmajorityoftheOTCdrugsarehomogenousinnatureorhavesimilartherapeutic

propertiesitisanattractivemarkettodelveinto.Anderson,CilibertozandLiaukonyte(2008)

arguethatthegapbetweenactualandperceiveddiscrepancyofinparticularOTCanalgesicsis

generatedbyadvertising.TheOTCanalgesicsmarketischaracterizedbysubstantialadvertising

expendituresbythemarket’sleadingbrands.Advertising-to-salesratiosrangeanywherefrom

20-50%,beingmorethanasevenfoldofthepharmaceuticalindustry’saverage.Thepaper

showsthatconsumersformtheirbrandpreferencebasedonanythingbuttheworking

substancetheproductspossesses.Allaforementionedconcludeadvertisementeffectscannotbe

excludedfromthisresearch.

Anotherfocuspointofexistingliteratureonthehealthcaresystemisindustryinvolvementwith

healthcareagents,mostlybeingphysicians.ChrenandLandefeld(1982)foundthatphysician

interactionwithdrugcompanies,affectedphysicianrequestsfordrugstobeaddedtothe

hospitalformulary.Howevermorethanhalfofthenewmedicinerequestedofferedlittletono

therapeuticadvantageovercomparabledrugsalreadyontheformulary.

Physiciansareofferedcompensationsrangingfromgiftsandindustrypaidmealstosamples

andevenfundingfortravelandeducationalsymposia.Theattitudesabouttheseexpensesare

dividedandcontradictory.Asmuchas85%ofmedicalstudentsbelieveitisimproperfor

politicianstoacceptagift,whereasonly46%founditimproperforthemselvestoacceptagiftof

similarvaluefromapharmaceuticalcompany(Wazana,2000).Perhapstheconcernisrelated

tothepotentialconsequencesregardingcostlyprescriptiondrugsornegativeoutcomesfor

healthingeneral.Theconsensusaboutthistopicamongfuturephysiciansmayindicateofafar

stretchinginherenturgeforchange.

Anotherelementthatisessentialoftheindustryisitshistoricpatentprotectionpolicy.The

DrugPriceCompetitionandPatentTermRestorationAct3(alsoknownastheWaxman-HatchAct

of1984)wasamajorchangeinpublicpatentpolicy.Itservedasacompromisebetween

brandedandgenericproducersandsetaminimumfortheeffectiveperiodinwhichadrug

developercanmarketexclusively.Ontheotherhanditreducedtheburdenforgenericentrants

togaingovernmentapprovalwithrespecttoinordinatetesting.Nonetheless,aspatent

protectionhasalwaysbeendefinedasatradeoffbetweencompetitionandinnovation,Boldrin

3http://www.fda.gov/newsevents/testimony/ucm115033.htm

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andLevine(2013)findnoempiricalevidencetoshowthatpatentsservetoincreaseinnovation

orproductivity.Evenwhenidentifyingthenumberofpatentsawardedwithinnovationthey

concludenosignificantcorrelation.

Themainfocuspointinexistentliteraturewithrespecttopatentprotectionistheeffectsof

expiration.Thesecondaryeffect,namelytheentryofgenericcompetition,haslikewisebeen

subjecttoahighlevelofinvestigation.Statman(1981)findsevidencesuggestingthatdrugs

protectedbypatentareabletoholdontotheirmarketpositionsbeyondexpiration,althoughin

generalgenericandothernamebrandsgraduallycaptureanincreasingshareofeachdrug's

market.Statmanalsostatesthatgenericcompetitioninthehospitalmarketismorevigorous

thaninthedrugstoremarket,despitetherelativelysmallersizeofthehospitalmarket.This

differencepresumablyisduetoagreaterincentivetoeconomizeorsimplyduetogreater

medicineknowledge.

Iwouldliketostresshoweverthereisaprominentlackofliteraturethatmagnifiesoncompany

effortstogainpoweronareasoutsideofthatofeconomicalormarketrelatedpower.The

pharmaceuticalindustrysetshighstakesatlobbying,spendingmorethan7millionUS$yearly

onaverage4.Thequestionconcerningtowhatextentbigpharma-firmsexerttheeconomic

powertheypossessinaffectingregulations,isonethatwillbecarefullyfocusedoninthispaper.

WithalIhavestilltoencounterliteraturethatdiscussesthenumberofyearsacompanywas

abletodistributeandsellitsproductunderpatentprotectionorhasadopteditasexplanatory

variableforcorporateperformance.Thetemporarymonopolypositionpatentsofferisassumed

tohavelong-lastingeffectsonbrandloyaltyandultimatelymarketshare.

Myaiminthisresearchisnotonlytoaddresstheexplanatoryvariablesofqualitythatis

profoundlyproveninexistingliterature,moreoveritistoincludeinfluencecomingfrom

directionsthathaveuntilnownotbeenlookedinto.

4Source:https://www.opensecrets.org/lobby

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3. EconometricAnalysis

Thefollowingsectionwillelaborateonthedatathatisconsultedtoanalyzetheeffectsofmarket

dominanceandsocio-economicpoweronbrandshare.Themethodologywillbediscussed

includingathoroughdescriptionoftheempiricalmodelanditsvalidity.Toconcludea

subsectionisdevotedtogiveanextensiveviewontheregressionresults.

Data

3.1. Definingthemarket

Definingthemarketcorrectlyiscrucialinthisresearch,asIamcircumnavigatinganimportant

componentofindustryinfluenceonhealthcare,namelythedirectphysician-to-company

contact.Asmentionedbefore,physicianinvolvementwithpharmaceuticalfirmshasbeen

extensivelyinvestigated,showingaclearpositiveeffectonthequantityofdrugsthatisaddedto

thehospitalformulary(Chren,Landefeld,2000).

Yetwhenfocusingonover-the-countermedicineanditsdemanddynamics,anynon-monetary

compensationorsymposiaaimedatmedicalagentswouldhavenegligibleeffects,asthe

physicianishighlylimitedinhisattemptstoaffectthepatient'spreferenceondrugbrands.

Patientsdonotnormallyaskfortheirphysicians’adviceregardingrelativelyharmlessdrugs

boughtoverthecounter.

Thisoffersasolutiontotheinaccessibledataaboutphysicianinvolvementwithpharmaceutical

companies.Analyzingprescriptiondrugsandtheirpowerinthemarketwithoutincluding

industry-physiciancontactwouldgiveheavilybiasedresults.ThisiscontrarytoassessingOTC-

drugswithoutbiaswhenomittingthesamevariable.Thesub-marketofanalgesicsis

particularlyinterestingduetothesignificantdiscrepancybetweentruedifferentiationofalmost

homogeneousmedicalproductsandtheperceiveddifferentiationamongdifferentbrands.This

ispresumablyoriginatedinbrandimagedifferencescreatedbydrugadvertisement.

3.2-Dependentvariable

Analyzingthecompetitivepositionofaspecificdrugasksustoapplythemostaccurate

measure.Anaccuraterepresentationofaproduct’srelativepositioninthemarketisits

quantitysold,whichdirectsustothebrandsharepermedicineasdependentvariable.Dataon

thisisretrievedfromPassportdatabase,consistingoftime-seriesdataonOTCdrugbrand

sharesfrom1998to2016.Withal,theconceptofthisthesisarosefromthecontroversylinked

topricehikesinthepharmaceuticalindustrywithoutanyobviouseconomicalconsequence.

Thiseconomicalconsequenceisusuallyinitiatedbylowermedicinesalesorlowerquantity

demanded.Thislaysthefoundationofdefiningthedependentvariableasbrandshare,whichis

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definedastherelativesalesofthemedicineagainstthetotalanalgesicssales.

3.3 Explanatoryvariables

3.3.1Operatingyearsinexclusivity5orunderpatent6

Bothpatentsandexclusivityareboundtoatrade-offbetweeninnovationandcompetition.

Offeringamonopolypositionforalimitedtimeguaranteesprofitsthatwarrantthe

manufacturer’sinitialinvestment.Thissignificantlydecreasesinnovationcostswhileonthe

otherhandnegativelyaffectingcompetitioninthemarket.

Statman(1981)showedthatdrugsprotectedbypatentareabletoholdontotheirmarket

positionbeyondexpirationdatesalthoughgenericsgraduallycaptureanincreasingmarket

share.ThesefindingsareconsistentwithFrank&Salkever’spaper(1991)whofindsadeclinein

priceelasticityofbrandnamemedicinedemandstemmingfrommarketentryduetopatent

loss,indicatingadiminishedthreattobrandnamedrugshare.Existingtheoryimplies

significanteffectsofyearsacompanyhasmarketeditsdruginexclusivity7on(post-generic

entry)marketshare,validatingthevariable’sexplanatoryfunction.

3.3.2Estimatingmarketdominance:Kwoka’sDominanceIndex

Appointingameasureformarketpowerhasbeenacomprehensivetask.IntheGlossaryof

IndustrialOrganizationEconomicsandCompetitionLaw(1993)marketpowerisdefinedas:

‘’Theabilityofafirm(orgroupoffirms)toraiseandmaintainpriceabovethelevelthatwould

prevailundercompetition.’’.

MarketpowerinthisanalysiswillberepresentedbyKwoka’sDominanceIndex:

5‘’Exclusivityreferstocertaindelaysandprohibitionsonapprovalofcompetitordrugsavailableandcanrunconcurrentlywithapatentornot.Itwasdesignedtopromoteabalancebetweennewdruginnovationandgenericdrugcompetition.’’

6‘’ApatentisapropertyrightissuedbytheUnitedStatesPatentandTrademarkOffice(USPTO)toaninventor“toexcludeothersfrommaking,using,offeringforsaleorimportingtheinventionintotheUnitedStates”foralimitedtime,inexchangeforpublicdisclosureoftheinventionwhenthepatentisgranted.Generally,thetermofanewpatentis20yearsfromthedateonwhichtheapplicationforthepatentwasfiledintheUnitedStates.‘’(5&6bothretrievedfrom:http://www.fda.gov/downloads/drugs/developmentapprovalprocess/smallbusinessassistance/ucm447307.pdf)

7Specificationofthevariable:Theyearthepatenthasbeenissuedorinwhichexclusivityhasbeengivenaccountsforthestartingyearforthevariable.Thefirstyearinwhichthepatentisexpiredandthusisofnoforcealongwithabsenceofanyexclusivityentitlementaccountsfortheclosingyear.

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Itemphasizesthegapbetweensuccessivefirmswhentheyarerankedbysize.Thevaluesofthis

measurerangefrom1to0,withtheformervalueindicatingamonopolisticmarket.Conversely,

theclosertozerothemeasureis,theloweristhepowerofanysinglecompany(J.E.Kwoka,

1977).

Itisevidenttheindexinvestigatesonthemarketlevelandisunabletodiscusscompanyspecific

traits8.Thusanexternalfactor,namelythecompetitiveenvironmentofthecompany,willbe

usedratheracompanybasedvariable.KDIisthereforeconstantwithrespecttodrug,thoughit

remainstimevariant.

3.3.3Lobbyingexpenditures

Myintentionistoclasscompaniesbytheirnationalinfluenceonregulationsandbythelevelof

protectiontheyendurefromgovernmentsorotherinterestgroupssuchastradeunions.Their

specificlobbyingexpenditurescouldbeapreciseindicatorofthis‘’socio-economicweight.’’The

assumptionisthatthisultimatelyleadstobrandloyalty,evenaftergenericentry.

Opensecrets.orgprovidesanextensivedatabasewithannuallobbyingspendingpercompany,

Thevalidityofthedatapoolisconfirmedbyevenprovidingspecificlobbyingreportssortedby

nameofthelobbyistandissuethatislobbiedfororagainst.Itisassumedeffortstogain

influenceonregulationtakeasubstantialamountoftimetobeenforced.Thereforea1-year

laggedvalueoftotallobbyingexpendituresisusedintheregressiontoexplainbrandshare.

3.4 Controlvariables

3.4.1Direct-to-customer9advertisement

Themostprominentomittedvariablebiaswillberesultingfromignoringtheimmense

advertisingspendingbypharmaceuticalcompanies.TheOTC-analgesicsmarketischaracterized

byadvertisingexpenditurescomparabletotheirR&Dspendingwhenitcomestothetop

brands.HurwitzandCaves(1998)findevidencethatadvertisinginhibitsentryintothemarket.

Theyfoundtrademarkholders’sales-promotionoutlaysdopreservetheirsharesagainst

incursionbygenericentrants,whichjustifiesadvertisementspendingasanindependent

variable.Datasetsofasufficientsizehowever,areoughttobepurchasedwhichlimitsthedata

thatisattainable.TosolveIusean2001-2005averagegivenintheAnderson,Cilibertozand8I have considered taking a unit variable for market dominance being equal to 1 when market share would exceed the 40% (Definition retrieved from: https://stats.oecd.org/glossary/detail.asp?ID=3199). However the OTC-analgesics market showed to be highly competitive with market shares not exceeding the 20% benchmark.

9 While the advertising numbers include expenditures on multiple media, almost all of the advertising budgets were spent on broadcast television advertising, including network, cable, and spot TV (Anderson, Ciliberto, Liaukonyte, 2008).

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LiaukonytepaperonOTC-analgesicsadvertisementin2008.Thisaveragerepresentstheshare

oftotaladvertisingexpendituresbythetoppainkillerbrands.Iwillusethisshareasaconstant

bylackofsuperiordata,whichpresumablywillaccountforthegrandpartoftheomitted

variablebias.Anderson(2008)furthermoreexposestotaladvertisementspendingtosalesratio,

whichwouldbeapoorerrepresentationassumingtheshareofvoice10tobelinearlyaffectedby

advertisementspending.

3.4.2TotalAssets&MarketCapitalization

OtherfactorsofinfluenceonmarketshareIaccountedforarecompanysizeand

correspondinglyitsmarketvalue.YearlydataisretrievedfromExcel’sintegratedDataStream

for1998till2016withUSdollarsasvaluta.

3.5 Results

Theresultsoftheindividualt-testsshownintable5showaclearpositivecorrelationbetween

theyearsacompany’sproductwasprotectedfromcompetitionanditspresentmarketshare.

Furthermoreinterestingtonoticeisthatnoneofthecontrolvariablesactuallycontributetothe

accuracyofthemodel.Notonlylobbyingexpendituresexperiencesincreasedsignificance,

Kwoka’sdominanceindexlikewiseseemstobetterexplainbrandsharewhenthecontrol

variablesareomitted,thoughata10%significancelevel.Wethereforeconcludethatno

evidencewasfoundtosuggestinequalityinthemarketimpactsadrug’smarketshare.

10 Share of voice is defined as the ‘’degree to which people see a company’s advertisements, etc. in a particular market, compared to those of competitors’’. ‘share of voice. (n.d.) Cambridge University Press. (2008) Retrieved from http://dictionary.cambridge.org/dictionary/english/share-of-voice

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ThereisnoevidenceofsignificantinfluenceofahigherKwoka’sDominanceIndexon

pharmaceuticalsales.Thiscaneitherhintonadeficientvariabletomeasuremarketdominance

orofmoreconclusively,nosignificanteffectofanunequalmarketonbrandshare.

Reasonsforthismayincludethattheemergenceofacompetitiveenvironmentisa

comprehensiveandlengthyprocess,whichisassumedtobehighlytime-invariant.It

presumablyfluctuatesmostduringtheyearsfollowingpatentexpiration,yearsinwhichgeneric

entryrapidlyincreases.Combinationsoflaggedvaluescouldthereforebeofgreatervalue,

howeverthisrequirestheirjointsignificancetobetested.

Theincreaseinthemodel’sexplainingpowerafterremovingoneofthecontrolvariablesthat

indicatefirm-size,mayberesultingfrommulticollinearitybetweenmarketcapitalizationand

totalassets.Asbothimplytherelativesizeandmagnitudeofacompany,omittingonedoes

indeedimprovethemodel.

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Method

3.6 TheModel

Thesetupoftheregressioncanbedescribedisasfollows.Paneldataisanalyzedforyears1998

–2016.

𝐵𝑟𝑎𝑛𝑑𝑠ℎ𝑎𝑟𝑒!" = 𝐵!𝐸𝑥𝑐𝑙𝑦𝑒𝑎𝑟𝑠! + 𝐵!𝐿𝑜𝑏𝐸𝑥𝑝!" + 𝐵!𝐾𝐷𝐼! + 𝐵!𝑀𝑎𝑟𝑘𝑒𝑡𝐶𝑎𝑝!" + 𝐵!𝑇𝑜𝑡𝑎𝑙𝐴𝑠𝑠𝑒𝑡𝑠!"+ 𝐵!𝐴𝑑𝑣𝑆ℎ𝑎𝑟𝑒! + 𝑣!"

:Idiosyncraticerror11

3.7 Paneldataspecifications

3.7.1Theindividualtimeseries

Thefactthatwearedealingwithyearlytimeseriesdataraisessomeessentialquestionsthat

needtobeansweredbeforeanalyzinglinearrelationshipsbetweenthetimeseries.Presenceof

stationarityofthetimeseriesiswhatrequirestobeexaminedfirst.Wecanencountertheriskof

spuriousregressioniftheserieshappentobenon-stationary12.Spuriousregressionindicatesa

professedlystronginter-timeseriesrelationship,whichleadstotheestimatorsbeing

inconsistent.TestingforstationarityiscommonlyexecutedbyaDickey-Fullertest.However

duetooursamplesizethathasamaximumof95observationsthesignificanceofthetestis

inherentlydecreased,thuswecanonlyassumestationarity.Toavoidinconsistentestimates

basedonthisassumption,weconsultGrangerandNewbold(1974)inthattheR2ofthemodel

cannotbegreaterthantheDurbin-Watsonstatistic,otherwisebeingindicativeofaspurious

regression.TheDurbin-Watsonstatisticisnotapplicableonpanel-datathereforeplacinga

statisticalanalysisofstationarityoutofreachwithinthescopeofthepresentanalysis.

Ifwefocusonthepropertiesofbrandsharewecanreasonthatitishighlydependentonother

companybehaviorandtheircorrespondingmarketshares.Consideringthesignificanteffectof

advertisementinfluenceonbrandloyaltyandultimatelynumberofproductssold(Rizzo1999)

wecanarguetheoreticallythatbrandsharedoesnothaveaunitroot,asaunitrootwouldimply

aweakorstronglylaggedeffectofadvertisement.InhisresearchRizzoavoidsusinglagged

valuesofmarketingexpendituresimplyingadirecteffectthatisnotlagged.

11Timeinvariant&druginvarianterrortermsomitted.Thisiselaboratedonin‘’Paneldataimplications’’

12http://sergei-sarkissian.com/papers/spurious.pdf

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-50

5

Res

idua

ls

0 5 10 15Fitted values

3.7.2Fixedeffectsestimation

Primarilywetakeintoaccountthatpooled(perdrug)OLSwillnotbeapplicableheredueto

unobservedheterogeneity,conflictingwiththeGauss-Markovassumptionofazeroconditioned

meanfortheerrorterm13.AHausman-Testshowstheinitialnullhypothesisissoundlyrejected,

whichstatedtheindividual-leveleffectsareadequatelymodeledbyarandom-effectsmodel.

Thecovariancebetweenthetime-consistenterrorandexplanatoryvariablethereforedoesnot

holdtobeequalto0,justifyingafixedeffectsestimation.Nonethelessasestimatingwithfixed

effectsremovestheeffectoftime-invariantcharacteristics,itwillsubsequentlyomitanytime-

constantvariables.Theyearsthefirmhassoldthedruginexclusivityaswellastheaverage

shareofadvertisementspendingarebothtime-constantresultinginfixedeffectsestimation

beingunsuitable.Settlingforthisissuerequirestoaddyearlydummyvariablescombinedwith

dummiesforeachpharmaceuticalandexcludingfixedeffectsestimators.Thiswillpreventany

time-constantvariablebeingomitted.

3.8 Post-regressionanalysis

3.8.1Linearity

One of the Gauss Markov assumptions states the dependent variable, in our case market share,

requires to be a linear function of the set of explanatory variables. If we plot the residuals against the

predicted values it becomes clear whether or not we deal with nonlinearity. The points should be

distributed around the horizontal line in a symmetrical manner. As can be seen in Figure 2 the points

start symmetrically distributed

however as the values increase, more

outliers become visible. This violation

of linearity can lead to miss-specified

determinants. However interpreting

this distribution as nonlinear would be

impetuous, taking into account the

limited range of the sample size.

13Odell,P.L.(1983).Gauss–Markovtheorem.Encyclopediaofstatisticalsciences.

Figure 1. Residuals versus fitted values

17

Figure 2. Normal quantile plot of residuals

3.8.2Heteroskedasticity

AWhite’stesthasbeenappliedforheteroskedasticity,whichresultedinrejectingthenull

hypothesisstatingthatthevarianceofourerrorsgiventheexplanatoryvariablesisequalto0.

Wecanassumeheteroskedasticitytobepresentandhaveaccountedforitbyaddingrobust

errortermstoourregression.

3.8.3Normalityoftheresiduals

Violationsofnormalitycancreateproblemsfordeterminingwhethercoefficientsare

significantlydifferentfromzero.Askewederrordistributionisoughttobeexcludedstressing

theabsenceofanylargeoutliers.

Togiveanindicationoftheerrortermdistributionanormalquartileplotoftheresidualsis

showninFigure2.Astheplotissensitivetodeviationsfromnormalityinthetailswecan

concludethereisnoevidenceofnon-normality.Thisagreesclearlywithwhatisrevealedinthe

KernelDensityEstimate(Figure3).Nonetheless,consideringtherelativelysmallsamplesizea

Jarque-Beratestisperformedtofullysecuretheabsencenon-normality.Theoutcomedidnot

allowforrejectingthenull-hypothesisofhavingnormallydistributederrorterms.

18

3.8.4Multicollinearity

VarianceInflationFactors(VIF)havebeenusedtotestacorrelationbetweenanyofour

explanatoryvariables.Multicollinearitywillmanifestinourmodelbyinflatedstandarderrors,

whichdamagesthesignificanceoftheestimators.ApplyingVIFresultedinabsenceofany

collinearity,asnovaluethatwascalculatedexceeds4(Table3).Thesefindingsareconsistent

withthePearsonvaluesexposedinthecorrelationmatrix(seeAppendix,table4).

Figure 2. Kernel Density Estimate

19

3.8.5Autocorrelation

TotestifthereisarelationshipbetweentheerrortermsIperformedaWooldridge-Drukker

test.ThereasoningbehindpreferringtheWooldridgetestoverthecommonlyusedDurbin-

Watsonteststatisticisitssimplicitywithrespecttopanelmodeltestingalongwiththeabsence

oflargetablesprovidingthecriticalvaluesofboththecross-sectiondimension(i=1,...,N)and

thetime-dimension(i=1,...,T)(Wooldridge,2010).

Thetestindicatedwecouldnotrejectthenull-hypothesissuggestingthereisindeed

autocorrelation.TheoutcomeraisedfromperformingtheWooldridgetestcaninprinciple

originatefromthreecomplications:

1. Themissingofadecisiveexplanatoryvariable,causingomittedvariablebias

2. Afunctionallymiss-specifiedthemodel

3. Ameasurementerrorinoneormultipleexplanatoryvariables

Fromthese,ameasurementerrorofanindependentvariableismostplausible.For

advertisementspending,whichisproventobeofhighandsignificanteffectonOTC-

pharmaceuticalbrandshare(Anderson,Cilibertoz,Liaukonyte,2008),thevariableusedistoa

greatextentunspecified.Advertisingcanbesubdividedtocomparativeordetailingandauditive

orvisual,allhavingdifferentimpactlevels.Additionallyaconstantvalueisusedinsteadofa

linearestimation,asduetothelimiteddataused.

4. Concludingremarks

4.1Inretrospect

Theresultsshowaclearrelationbetweentheyearsthecompanycoulddistributeitsproduct

underprotectivemeasuresandthebrand’sshareofthemarket.Creatingamonopoly

environment,evenforalimitedtimeisaprivilegetoaccountforinthepharmaceuticalindustry.

Anexplanationforthiscanbethatwhenitcomestohealth,peopletendtocomposetheirbrand

loyaltyinanacceleratedfashion.Acomplementaryrisk-averseattitudetowardstryingnew

drugs,whilebeingcontentwithanalternative,islikelytoexist.

Focusingonlobbyingexpenditureswecanconcludethereisnotenoughstatisticalevidence

foundtoclaimtheyhavesignificantpositiveeffectsonaproductssales.Severalreasonsforthis

canbeacclaimed.Tostartlobbyingeffortsinthemodelaredefinedatthecompanylevel.As

manyplayersinthepharmaceuticalmarketalsohaveinvestmentsandstakesinother

20

industries,itcandifferfromyeartoyearwhatpercentageoflobbyingeffortisspecifically

aimedatOTCdrugreregulation.Thesecondexplanationmayberootedinthelaggedeffecton

regulationinfluenceattempts.Creatingnewlegalstructurestakesatremendousamountof

time,notevenconsideringitsimplementation.Ifthemostprominentpharma-firms

communicatetheiridealsitwillrequirerevisingofexistingandfuturelawswhichfurthermore

lengthenstheprocess.Thereforeusinga1-yearlagmightbesuboptimal,althoughourdataset

didnotallowforagreatnumberoflags.Athirdexplanationcontainsthemorecomplicatedweb

ofregulationaroundprescriptiondrugs,relativetothataroundmedicineboughtoverthe

counter.Thismayindicateofthatagreatpartoflobbyingistargetedatprescriptiondrug-

relatedissues.

Theshareofthetotalmarketadvertisementspendinghasnotbeenfoundtohaveasignificant

effectonabrand’smarketshare.Thismayshowthecomplicatedmannerofdefiningand

subdividingadvertisement.Anderson,CilibertozandLiaukonyte(2008)statethatwhether

drugpromotionisofcomparablenatureornothasgreatpositiveinfluenceingenericentry

inhibition,stressingtheimportanceofclassifyingadvertisement.Furthermoreadvertisement

expendituresareassumedtobelinearlycorrelatedtocompanybenefits,orifadvertisement

spendingcorrelatestoahighershareofvoice,therelationshipmaybehyperbolic(Rizzo,1999).

Inthisresearchaconstantisusedwhichishighlylikelytonegativelyimpactthevariable’s

explanatorysignificance.AsHurwitzandCaves(1998)emphasizethehighlevelofadvertising

impactonOTCdrugsales,anotideallyspecifiedregressorcanresultinserialcorrelation,which

weindeedfoundevidenceofusingvarianceinflatedfactors.

Remarkablytherewasnoevidenceofmulticollinearityinthemodel.Thetotalamountofassets

afirmhasnexttoitstotalmarketcapitalizationarebothindicatorsoffirmsize,whichsuggests

ofadegreeofcorrelation.Apossibleexplanationforthisisthatassetsarebalancedbythe

burdenofliabilitiesacompanycarries,whileitsvaluecalculatedfromstockpricemaybea

morehonestmarketrepresentationofitsvalue.

4.2FurtherResearchOpportunities

Agreatpartoftheinitialmotivationforthispaperliesinthedirecteffectonusaspatients.

Questioninghowthegrowingpoliticalentanglementofthepharmaceuticalindustrytogether

withfrequentoutrageouspricehikescorrelatetoconsumerhealthcareandconsumerbehavior

hasbeenkeytotheconstructionofthispaper.Examiningthequantitythatispurchasedofover-

the-counterpharmaceuticalscanonlypartlycoverthismatter.Amoreaccurateandauthentic

measureforindustrysocioeconomicpowerwouldthepriceelasticityofdemand,inparticular

21

thatofprescriptiondrug.Althoughexistingliteraturespreadsfromadvertisinginfluenceson

OTCmarketsharetotherelationofphysician-companycontactwithdrugsaddedtothehospital

formulary,Ihaveyettoencounterresearchwhichfocussesontheeffectsofregulationand

effortstoaffectthelegalenvironmentitforms.

Ideallyatime-seriesinvestigationwouldbeexecutedincludingdataon:

● advertisement,shareofvoiceorexpenditures

● patentprotection&exclusivity

● genericentry&marketsharechanges

● effortstogainsocio-economicpower,bothlobbyinginvestmentsandinvolvementof

industrywithhealthcareagents

● priceelasticitiesofdemand

Thiscombinedwithadatasetthatreachesfarbeforeandaftergenericentrywouldgive

interestinginsightsonthenatureofthiscomplicatedindustry.

22

Referencelist

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Avorn,J.,Chen,M.,&Hartley,R.(1982).Scientificversuscommercialsourcesofinfluenceonthe

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Boldrin,M.,&Levine,D.K.(2013).Thecaseagainstpatents.Thejournalofeconomic

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Kwoka,J.E.(1977).Largefirmdominanceandprice-costmarginsinmanufacturingindustries.

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Frank,R.G.,&Salkever,D.S.(1991).Pricing,patentlossandthemarketforpharmaceuticals(No.

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provider.TheLancet,360(9345),1590-1595.

Hurwitz,M.A.,&Caves,R.E.(1988).Persuasionorinformation?Promotionandthesharesof

brandnameandgenericpharmaceuticals.Thejournaloflawandeconomics,31(2),299-320.

Mangan,D.(2016,August25).‘’MylanCEOBresch:'Noone'smorefrustratedthanme'about

EpiPenpricefuror.’’CNBC.Retrievedfrom:http://www.cnbc.com/2016/08/25/mylan-

expands-epipen-cost-cutting-programs-after-charges-of-price-gouging.html

Odell,P.L.(1983).Gauss–Markovtheorem.Encyclopediaofstatisticalsciences.

Pammolli,F.,Magazzini,L.,&Riccaboni,M.(2011).Theproductivitycrisisinpharmaceutical

R&D.NaturereviewsDrugdiscovery,10(6),428-438.)

Rizzo,J.A.(1999).Advertisingandcompetitionintheethicalpharmaceuticalindustry:Thecase

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Scherer,F.M.(2001).ThelinkbetweengrossprofitabilityandpharmaceuticalR&Dspending.

HealthAffairs,20(5),216-220.

Statman,M.(1981).Theeffectofpatentexpirationonthemarketpositionofdrugs.Managerial

andDecisionEconomics,2(2),61-66.

Wazana,A.(2000).Physiciansandthepharmaceuticalindustry:isagifteverjusta

gift?.Jama,283(3),373-380.

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24

Appendix

BrandShares(Global-HistoricalOwner)|Historical|RetailValueRSP|%breakdown

Geographies USA USA USA USA USA

Categories Analgesics Analgesics Analgesics Analgesics Analgesics

Brand Tylenol Advil Aleve MotrinBayerAspirin

Effectivesubstance Acetaminophen Ibuprofen Naproxen Ibuprofen Aspirin

Companyname(GBO) Johnson&JohnsonInc PfizerInc BayerAG Johnson&JohnsonInc BayerAG

Yearsinexclusivity 8 10 6 2 2

1998 11.80 14.60 6.60 4.60 5.20

1999 11.60 14.80 6.90 4.70 5.10

2000 10.90 15.10 7.90 5.00 4.80

2001 11.20 13.90 8.20 5.40 4.90

2002 13.00 13.40 8.40 5.30 4.80

2003 14.30 12.80 8.30 5.60 4.70

2004 15.60 12.50 8.10 5.80 4.10

2005 16.30 14.10 7.90 6.20 4.20

2006 16.50 14.30 7.80 6.10 4.30

2007 16.70 13.00 7.50 6.30 4.20

2008 16.80 12.00 7.10 6.40 4.70

2009 16.50 12.40 7.00 6.60 4.60

2010 9.80 14.00 7.80 3.20 4.90

2011 7.20 15.00 8.10 1.00 5.40

2012 5.10 15.90 8.70 1.40 5.70

2013 6.70 14.80 8.50 2.50 5.40

2014 7.80 14.10 8.60 2.90 5.30

2015 8.60 13.90 8.10 3.40 5.10

2016 8.90 14.60 7.30 4.00 5.10

Table 1. Analgesics Legenda Source: Euromonitor Database (2016)

25

-50

5

Res

idua

ls

0 5 10 15Fitted values

Figure 4. Residuals versus fitted values

Figure 3. Normal quantile plot of residuals

26

Figure 5. Kernel Density Estimate

27