ALCON 2022
`Apotex Corp. v. Alcon Research, Ltd.
`Case IPR2013-00428
`
`

`
`
`
`VOL. 85 N0. 2
`
`INFORMATION, EDUCATING, AND MARKETING IN HEALTH CARE
`
`101
`
`traditionally have been relatively unaware
`of drug prices. Other observers have sug-
`gested that moral hazard in the form of
`third-party (insurance) payment practices
`also contributes to low price responsiveness.
`Very little econometric evidence on demand
`elasticities for drugs is available,
`in part
`because the traditional consumer demand
`paradigm (utility maximization, marginal
`rates of
`substitution equal
`to relative
`marginal prices, etc.) cannot be expected to
`describe behavior adequately in a market in
`which principal-agent problems (stemming
`from relationships among physicians, pa-
`tients, and insurers) are widespread.‘ In this
`paper we report elasticity estimates viewed
`from the vantage of the firm, not the “con-
`sumer”—whoever that may be.
`Since marginal production costs are small,
`enhancing revenues is essentially the same
`as increasing profits, and thus drug firms
`face strong incentives to shift out the de-
`mand curves. Thus it is not surprising that
`marketing—sales ratios are quite high in the
`pharmaceutical industry. The largest com-
`ponent
`(70—80 percent) of marketing has
`traditionally involved detailing to physi-
`cians; it consists of a company representa-
`tive providing as much product information
`as possible to physicians, given the typical
`short time of the visit (3-10 minutes) and
`the content regulation enforced by the FDA.
`Medical journal advertising is also carried
`out but is less extensive than detailing. Fi-
`nally, in the last few years, pharmaceutical
`companies have increasingly employed di-
`rect-to-consumer
`advertising in various
`media.
`The information content of marketing ef-
`forts deals primarily with product differen-
`tiation and nonprice aspects.
`In the H2-
`antagonists market,
`five quality attributes
`are of particular importance? First, the var-
`ious H2-antagonists are viewed as being
`roughly similar in efficacy (the four- to six-
`
`;see, however, Michael Baye et al. (1994).
`For more extensive discussion, see Berndt et al.
`(1994).
`.
`
`week treatment healing rate is about 70-80
`percent for duodenal ulcer patients), al-
`though there is some evidence suggesting
`that Zantac has a significantly lower relapse
`rate than does Tagamet for patients on duo-
`denal maintenance treated at recommended
`dosages (see K. R. Gough et al., 1984).
`Second,
`less frequent dosages are thought
`to enhance patient compliance. When Zan-
`tac entered the U.S. market
`in 1983,
`its
`twice-daily dosing frequency was considered
`more favorable than the regimen of four
`times a day recommended for Tagamet.
`Tagamet responded with a twice—a-day ver-
`sion in late 1984, after which considerable
`rivalry ensued; today all four I-I2-antagonists
`have a once—a-day version. A third quality
`attribute involves adverse interactions with
`other drugs. Here Tagamet has been on the
`defensive, for early on it was discovered
`that Tagamet interacted with the liver and
`kidney system in a way that could affect the
`metabolism of other drugs. As of 1994,
`Tagamet had reported to the FDA signifi-
`cant drug interactions with ten other drugs,
`whereas Zantac and Axid had only one re-
`ported drug interaction, and Pepcid had
`none. A fourth quality characteristic in-
`volves side effects. Here again Tagamet has
`been somewhat on the defensive, for condi-
`tions such as mental confusion in the el-
`derly and gynecomastia (breast swelling) for
`males are apparently not as prevalent with
`Zantac, Pepcid, and Axid. Finally, the four
`products compete in terms of medical con-
`ditions (indications) for which the FDA has
`granted treatment
`approval. Although
`Tagamet was the first to win approval for
`the treatment of duodenal ulcers, duodenal
`ulcer maintenance, and gastric ulcers,
`in
`1986 Zantac was the first to obtain approval
`for gastroesophageal
`reflux disease
`(GERD), a rather common condition that
`ranges from modest heartburn and acid in-
`digestion to being a very serious condition.
`The FDA permits marketing only for ap-
`proved indications. Although Tagarnet ob-
`tained FDA approval for GERD in 1991,
`and even though Tagamet had very similar
`effects to Zantac, suggesting that it would
`likely also be effective in treating GERD,
`not having FDA approval
`for GERD
`
`BAN*
`
`and most
`dvertising.
`)I'6 pricing
`and order-
`
`that have
`icture and
`
`industry.
`.
`in particu-
`ict to mar-
`
`ing patent
`nent, per-
`ining final
`g Adminis-
`timated at
`
`er" 4, for
`ucts,
`ng are very
`t data are
`uncommon
`
`percent of
`Informal
`.
`rls suggest
`action costs
`price.
`
`nplications
`:5 firms the
`the extent
`er markup
`humb, one
`-cost condi-
`
`9 = — 1/.99,
`: elasticity.
`-25 percent
`it), the im-
`ould range
`asticities of
`ion percep-
`)1] drugs is
`'emin (1980
`physicians
`
`-...~../.._»-r,m....-\...-«;-..--......i..u.-,i.»--..—V.-.\«-\uw--~'-—-¢-v~rr-r--.-.-im.-m..:-.-...t.n.m.—~..--m-—............_........,....,.....,.._.__...p—-...,._—.i-.......-.--..
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`
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`
`;-.u...,,m-myuwgr-;.......-...Au--\.-.-...,-i-......--n-fl|A"h-—.,...,....,.,..s.r..,.,-....-M;-.-..-.........w....i_...i
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`1
`
`
`
`

`
`
`
`
`
`I02
`
`AEA PAPERS AND PROCEEDINGS
`
`MAY1995
`
`
`EE".'—T-El-E.=l<_/1::arr:
`
`de;
`sin
`tit}
`mi;
`est
`lin.
`
`fol
`Var
`me
`W0
`qua
`cur
`
`LN
`
`
`
`(whereas Zantac did) may have constituted
`a significant marketplace disadvantage for
`Tagamet.
`In terms of pricing, at entry Zantac was
`priced at an 80-percent premium over Taga-
`met, but by May 1994 this premium had
`gradually declined to 19 percent. In May
`1994, the price per day’s treatment (to drug
`stores) was $2.61 for Zantac, $2.56 for Axid,
`$2.30 for Tagarnet, and $2.17 for Pepcid;
`quantity shares for the four products were
`49 percent, 12 percent, 22 percent, and 17
`percent, respectively.
`To understand the roles of marketing,
`pricing, and quality attributes in explaining
`the growth and changing composition of the
`H2-antagonist market, we now outline an
`econometric model
`first
`for
`the H2-
`antagonist industry as a whole, and then for
`the market shares garnered by the four H2-
`antagonist drugs.
`
`I]. An Econometric Model
`
`of the H,-Antagonist Market
`
`At the industry level, we expect the quan-
`tity demanded (number of patient days of
`duodenal-ulcer therapy) to depend on price
`per treatment day, various marketing ef-
`forts, and quality attributes. Since market-
`ing efforts provide long-lived information, it
`is
`important
`that cumulative information
`stocks be distinguished from current-period
`new information flows. Define the cumula-
`tive marketing information stock S, at end
`of month t as
`
`(1)
`
`Sr=(1—5)S:—1+Fr
`I
`
`= X (l—6)TFI—T
`1:0
`
`advertising (DCA)? It is worth noting that
`the DCA efforts for H2-antagonists did not
`mention any drug by name, but only encour-
`aged viewers to seek advice from their
`physician if they experience heartburn and
`acid indigestion.
`Although such DCA advertising is plausi-
`bly intended to augment overall
`industry
`demand, when two or more products exist,
`marketing efforts are often only focused on
`a particular brand. During its monopoly era,
`Tagamet recouped all
`the benefits of its
`marketing efforts (it had 100 percent market
`share).“ However, once Zantac entered,
`even though rivalry between Tagamet and
`Zantac was intense, some of Tagamet’s
`marketing efforts might have spilled over to
`the benefit of Zantac, and vice versa. Simi-
`larly, once Pepcid and Axid entered, while
`marketing efforts were typically focused on
`specific brands, spillovers to Zantac and
`Tagamet might have occurred. To allow for
`marketing spillovers
`affecting industry
`(rather than just product-specific) demand,
`we define the effective industry marketing
`stock Sf‘ as a weighted sum of the market-
`ing information stocks originally formed in
`various market structures:
`
`(2) Sf=F-1S1:+.U«2S2:+l~53S3:+i1vaS4r
`
`is the surviving marketing infor-
`where S,,
`mation stock at end of month t that origi-
`nally accumulated in the Tagamet monopoly
`era, S2,
`is the similar stock formed during
`the Tagamet-Zantac duopoly, S3,
`is that
`from the Tagamet-Zantac-Pepcid triopoly.
`and S4,
`is that from the Tagamet-Zantac
`Pepcid-Axid rivalry. Since in a monopoly all
`marketing efforts affect
`industry demand.
`
`-an--nu
`
`where F, is the flow of new marketing infor-
`mation efforts during month t, and 6 is the
`monthly depreciation rate. Since 6 is un-
`known, we estimate it econometrically. In
`terms of marketing efforts, we distinguish
`three channels: the minutes of detailing to
`physicians (DET), the number of pages of
`medical-journal advertising (PJL), and the
`target rating points of direct-to-consumer
`
`3Target rating points are defined as the target reach
`(the percentage of the over-age-35 population \_'Ji|°
`View the message over the course of the ad camping“
`times the frequency, where frequency is the number
`times the average target individual views the me5SfiE°-
`For further discussion, see Philip Kotler (1991 P9‘
`606-8). The proprietary DCA data were kindly‘ Pf°'
`vided us by Lowe & Partners/SMS in cooperation Will‘
`Glaxo, Inc.
`‘The discussion that follows is based in larsfl 9”"
`on Berndt et al. (1994).
`
`
`
`
`
`

`
`
`
`
`
`
`
`mm...-...-..—--4--um-i..«m.......W.W.-3--.-.....¢.-....—m...........................,.,,.,,.,_,,,,..,,_,.,___
`
`
`
`
`
`or 1995
`
`noting that
`lists did not
`mly encour-
`from their
`artburn and
`
`rig is plausi-
`all
`industry
`Jducts exist,
`' focused on
`onopoly era,
`nefits of its
`rcent market
`:ac entered,
`‘agamet and
`E Tagamet’s
`ailled over to
`versa. Simi-
`itered, while
`i focused on
`Zantac and
`To allow for
`
`industry
`ng
`fic) demand,
`ry marketing
`? the market-
`
`]:
`
`med in
`
`n + #454:
`
`rketing infor-
`I that origi-
`net monopoly
`)r1ned during
`. S3,
`is
`that
`acid triopoly,
`amet-Zantac-
`
`monopoly all
`stry demand,
`
`; the target reach
`population who
`;he ad campaign)
`is the number of
`ews the message.
`Keller (1991 pp.
`were kindly pro-
`cooperation with
`
`sed in large part
`
`VOL. 85 NO. 2
`
`INFORMATION, EDUCATING, AND MARKETING INHEALTH CARE
`
`103
`
`we normalize the ,u’s by setting it, = 1.
`Several interesting hypotheses involve the
`p,’s. First, if the effectiveness of firms’ mar-
`keting on industry sales is independent of
`market structure,
`then pi, = p.3 == p., = 1.
`Second,
`if in the presence of competition
`_marketing efforts only affect market shares
`and have a zero—sum impact on industry
`_demand, then 11.2 = in, = ,u,, = 0. Finally,
`if
`the industry sales—augmenting effects of
`firms’ marketing decline as the number of
`products in the industry increases, then 1 >
`u2>#«3>u«4>0-
`'- For our industry demand equation, we
`specify a log-log model, where Q,
`is quan-
`tity, P,
`is CPI-deflated price, DET,*, PJLT,
`and DCA"j are the effective industry stocks
`defined in (1) and (2), and DGERD is a
`dummy variable taking on the value of 1
`following FDA approval for GERD:
`
`pages marketing stocks, LNDTJ1 and
`LNJPJ 1; the number of adverse drug inter-
`actions for product j relative to Tagamet,
`I_.NINTIl;5 a discrete variable, DSGERD,
`indicating whether product j has a GERD
`indication advantage relative to Tagamet (1,
`advantage; 0, no advantage; -1, disadvan-
`tage); an order-of-entry variable, ENTRY,
`taking on the value of 2 for all Zantac
`observations, 3 for Pepcid, and 4 for Axid;
`and an AGE variable indicating the number
`of months product j has been in the mar-
`ketplace. Again, an instrumental-variable
`procedure is employed to allow for simul-
`taneity.
`Our data sources are described more fully
`in Berndt et al. (1994).? The direct-to-com
`sumer marketing data are for a campaign
`begun by Glaxo (the manufacturer of Zan-
`tac) in June 1992., and they extend through
`May 1994.
`
`(3) LNQ, = ,3, + ,B,LNP, + [32LNDET,*
`
`III. Econometric Results
`
`+ ;3,LN1=JL=*; + ,B,,LNDCA’j
`
`+ B5DGERD, + 3,.
`
`Since the effective industry marketing stocks
`depend nonlinearly on the ,u’s and 8’s, and
`since marketing efforts, pricing, and quan-
`tity demanded are likely to be jointly deter-
`1 mined (see Richard Schmalensee 1972), we
`estimate parameters in equation (3) by non-
`linear two—stage least squares (NL—2SLS).5
`Our econometric model of market shares
`follows Urban et al.
`(1986)
`in specifying
`variables relative to the incumbent (Taga-
`_ met). In particular, using a log-log frame-
`work, we specify that in month I, demand
`"quantities of product
`1' relative to the in-
`cumbent [ln(Q,-/Q,)E LNQ.Il, j= Zantac,
`Pepcid, Axid] depend on:
`relative prices,
`LNPRJ1;
`relative detailing and journal-
`
`SA5 instruments, we employ the producer price in-
`dex for intermediate goods, production worker wages
`in the pharmaceutical industry, cumulative marketing
`(“TONS by the four companies on non-H2-antagonist
`-' Products for each of the three instruments, and time.
`
`Based on 201 monthly observations from
`September 1977 through May 1994, we esti-
`mated parameters of equation (3) for the
`industry using NL-2SLS. To be parsimo-
`nious in parameters, we constrained the ,u.’s
`and 6’s to be the same for the DET and
`PJL marketing stocks, but allowed 8 to dif-
`fer for DCA. The preferred model was cho-
`sen based on the lowest value of the tradi-
`tional NL—2SLS residual criterion function.
`Our estimated H2-antagonist
`industry
`price elasticity is -0.689 (1 =3.80), while
`elasticity estimates for the DET, PJL, and
`DCA surviving stocks are 0.553 (I = 7.52),
`0.198 (I = 2.79) and 0.008 (t = 2.67).“ Hence,
`industry demand is positively affected by all
`three of the firms’ marketing channels, but
`D131" is most effective; the sum of the three
`marketing elasticities is 0.759, suggesting
`decreasing returns to scale.
`In terms of
`
`E'To accommodate zeros, 1.0 is added to both the
`DCA and the [NT variables.
`7Here we extend the Berndt et al. (1994) data base
`to May 1994. Data on prices, quantities, detailing, and
`journal pages are from IMS International.
`8The equation R2 is 0.995, and the Durbin-Watson
`statistic is 1.912.
`
`
`
`

`
`104
`
`AEA PAPERS AND PROCEEDINGS
`
`MAY 1995
`
`,u.3, and 1.1.4
`spillovers, the estimates of ,u.2,
`are 0.601 (t=6.59), 0.924 (t=5.30), and
`0.410 (t = 4.00); these ,u.’s are jointly signif-
`icantly different from 1, and from zero, indi-
`cating that marketing spillovers occur and
`that
`the effectiveness of- firms’ marketing
`efforts on industry sales depends on market
`structure. The extent
`to whichspillovers
`occur, however, does not decline monotoni-
`cally with the number of products in the
`_market. The DGERD dummy variable co-
`efficient
`is 0.104 (t -= 3.20), indicating that
`FDA approval for GERD increased the size
`of the H2-antagonist market by about 10
`percent. Finally,
`the NL-ZSLS criterion
`function is optimized at the point where 8
`for the DET and PJL stocks is 0.00, while
`that for the DCA stock is 0.15 (t =0.20),
`implying an annual DCA deterioration rate
`of about 80 percent. Although we are some-
`what surprised that the information stocks
`of DCA and PJL marketing do not depreci-
`ate at all, we note that a similar 5=0
`finding in the context of R&D knowledge
`stocks has been reported by Zvi Griliches
`and Frank Lichtenberg (1984).
`Turning now to econometric results based
`on the market-share model, we obtained the
`following NL-ZSLS results, based on 291
`monthly observations:
`
`LNQJ1, = -0.4-27ENTRY — 0.057 LNPRJ1,
`(44.00)
`(3.95)
`
`+ 0.649LNDT.l1,+ 0.167LNJPJ1
`(19.77)
`(6.31)
`
`+ 0.052 DSGERD, — 0.252 LNINTJ1
`(2.17)
`(9.00)
`
`+
`
`0.010AGE
`(10.05)
`
`with an R2 of 0.983. Order-of-entry effects
`are negative and strong, implying significant
`first-mover advantages, consistent with evi-
`dence from other markets (see Urban et al.,
`1986). The within-H2-antagonist price-elas-
`ticity estimate is ~ 0.67 and significant, while
`coefficients on relative stocks of detailing
`(0.649) and journal pages of advertising
`(0.167) are positive and significant. The esti-
`
`mated monthly depreciation rate for the
`DET and PJL stocks is 0.030 (I =13.77),
`implying that relative information market-
`ing stocks deteriorate at about 30 percent
`per year. With respect to quality variables,
`the DSGERD coeflicient is 0.05, while that
`on relative adverse drug interactions is
`-0.25, suggesting that Tagamet’s market
`share was significantly negatively affected by
`its disadvantages in terms of GERD and
`adverse drug interactions
`in the H 2-
`antagonist market. Finally,
`the age coeffi-
`cient
`is positive and significant,
`implying
`that, ceteris paribus, longevity in the mar-
`ketplace positively affects market shares.”
`
`IV. Concluding Remarks
`
`We have reported results on factors af-
`fecting the growth and composition of the
`H2-antagonist drug market. With an H,
`antagonist
`industry own-price elasticity of
`-0.69 and between-drug price elasticities
`of -0.66,
`the implicit brand—specific own-
`price elasticities in May 1994 are -0.80 for
`Tagamet (SE = 0.08), - 1.03 (SE = 0.12) for
`Zantac, -0.76 (SE = 0.08) for Pepcid, and
`-0.74 (SE = 0.08)
`for Axid. Except
`for
`Zantac,
`these elasticity estimates are still
`slightly smaller than the - 1.1 to - 1.3 val-
`ues one might expect based on the Lerner
`markup rule of thumb; nevertheless they
`are not far from 1, and clearly differ from 0.
`It is worth noting that when marketing vari-
`ables are omitted from the relative—demand
`equations, price-elasticity estimates fall
`to
`about half these values.
`We find that marketing information stocks
`positively affect sales, that the sales ClE15llC-
`ity is largest for detailing, followed by jour-
`nal pages of advertising, and is smallest _f0f
`direct-to—consumer advertising. Marketing
`information appears to display overall dt3'
`creasing returns to scale. We also find Illa‘
`
`9AIthough DCA is arguably intended to aflecl
`tn‘ demand rather than market shares, when th€ Dcd
`information variable is added, shares of Tagalne‘ “'1
`Axid were Positively affected relative to those Of 13""
`tat: and Pepcid.
`
`

`
`
`
`VOL. 85 NO. 2
`
`order-of—entry effects are significant, as are
`quality attributes.
`
`REFERENCES
`
`105
`INFORMATION, EDUCATING, AND MARKETING IN HEALTH CARE
`Lancet, 22 September 1984, 2(8404), pp.
`659-62.
`Griliches, Zvi and Lichtenberg, Frank. “R&D
`and Productivity Growth at the Industry
`Level: Is There Still a Relationship?” in
`Zvi Griliches, ed., R&D, patents, and pro-
`ductivity. Chicago: University of Chicago
`Press, 1984, pp. 465-502.
`Kotler, Philip. Marketing Management, 7th
`Ed. Englewood Cliffs, NJ: Prentice-Hall,
`1991.
`Schmalensee, Richard L. The economics of ad-
`vertising. Amsterdam: North-Holland,
`1972.
`Temin, Peter. Taking your medicine: Drug reg-
`ulation in the United States. Cambridge,
`MA: Harvard University Press, 1980.
`Urban, Glen L.; Carter, Theresa; Gaskin, Steve
`and Mucha, Zofia. “Market Share Rewards
`to Pioneering Brands: An Empiricai
`Analysis
`and Strategic
`Implications.”
`Management Science, June 1986, 32(6),
`pp. 645-59.
`
`'Baye, Michael R.; Mnness, Robert and Wiggins,
`Steven N. “Demand Systems and the ‘True’
`Cost of Living for Pharmaceuticals.”
`Working paper, Department of Eco-
`nomics, Texas A&M University, May
`1994.
`Berndt, Ernst R.; Bui, Linda; Reiley, David and
`' Urban, Glen. “The Roles of Marketing,
`Product Quality and Price Competition in
`
`' Anti-Ulcer Drug Industry.” National Bu-
`reau of Economic Research (Cambridge,
`-MA) Working Paper No. 4904, October
`1994.
`_Gough, K. R.; Korman, M. G.; Bardhan, K. D.;
`Lee, F. L; Crowe, J. P.; Reed, P. I. and Smith,
`R. N. “Ranitidine and Cimetidine in Pre-
`vention of Duodenal Ulcer Relapse.” The
`
`MAY 1995
`
`ate for the
`
`' (t =13.T’),
`zion market-
`t 30 percent
`ity variables,
`5, while that
`:eractions is
`net’s market
`iy affected by
`GERD and
`
`the H2.
`in
`e age coeffi-
`mt,
`implying
`in the mar-
`;et shares?
`
`rks
`
`lfl factors af-
`rsition of the
`
`With an H2-
`elasticity of
`:e elasticities
`-specific own-
`ir’
`0.80 for
`31
`1.12) for
`r Pepcid, and
`. Except
`for
`rates are still
`. to -1.3 val-
`)n the Lerner
`zrtheless they
`differ from 0.
`iarketing vari-
`lative-demand
`imates fall
`to
`
`rmation stocks
`5: sales elastic-
`lowed by jour-
`is smallest for
`1g. Marketing
`ay overall de-
`. also find that
`
`led to affect indus—
`es, when the DCA
`:5 of Tagarnet and
`e to those of Zan-
`
`
`
`.......i.i.,,..
`
`i i