SENJU EXHIBIT 2151
`INNOPHARMA v SENJU
`IPR2015-00903
`
`

`
`
`
`
`
`7
`
`The Roles of Marketing, Product
`Quality, and Price Competition
`in the Growth and Composition
`of the U.S. Antiulcer
`
`Drug Industry
`
`Ernst R. Berndt, Linda T. Bui. David H. Lucking-Reiley,
`and Glen L. Urban
`
`7.1
`
`Introduction
`
`- 5.‘...
`1.3‘-_ _»
`
`7.
`1-
`
`
`
`,.
`
`'
`
`The introduction ofTagamet into the US. market in 1977 marked theS
`ning of a revolutionary treatment for ulcers and the emergence of a new
`try. What distinguished the products of this new industry was their ability '
`heal ulcers and treat preulcer conditions pharmacologically on an outpatie
`basis. trtoteby substituting for traditional, and costly. hospital admissions
`surgeries. Tagamct. known medically as an H,-receptor antagonist.
`the healing of ulcers by reducing the secretion of acid by the stomach.
`A striking feature of the antiulcer market is that it has sustained
`sales (quantity, not just-revenue) for over fifteen years and still shows2
`of slowing. New prescribing habits have clearly diffused to an ever increasing;
`number of physicians. Today there are a total of four H1-receptor antagonist‘
`Tagtimet. Zantac. Pepcid. and Axid. Zantac is now the United States’ (and,
`world s) largest-selling prescription drug, having estimated worldwidegsai”
`in 1992 of about $3.5 billion. Moreover, Tagamet is also among the ten mg‘.
`selling prescription drugs in the United States.‘
`'
`"T
`
`,
`
`
`
`
`276
`Ruben C. Feenstra and Clintonflk. Shiells
`
`(2) if price is mismeasured. so is the dependent variable, but then their formula
`for the coefficient becomes( [3 + 1)(o - l), and the implied tr = l.2 is even
`less credible.
`"Aging of lines": Once popular restaurants lose customers over time. We
`could bring in new ones and make an adjustment for their superiority. But then,
`some time later. the chefs are hired away and the old restaurants regain their
`share. Will we come back to the same level? How’?
`A major finding is that if one allows for the changing mix of import goods
`this leads to lower estimates of their income elasticity. That makes sense. but
`how low "should" the import income elasticity be? Can one really explain
`rising world trade just by the reduction in transport costs and the rising quality
`of traded goods? I find the notion that traded goods have higher income elastic-
`ities quite plausible. The explicit “bias" adjustment to the price index that fol-
`lows is. however, more problematic. But the advice to collect more data is
`surely right!
`
`References
`
`Berry, 5. 'I'. 1994. Estimating discrete-choice models of product differentiation. Rand
`Journal ofEconamics 25. no. 2 (summer ): 242-62.
`Griliches, Zvi, and Iain Cockbum. I994. Generics and new goods in pharmaceutical
`price indexes. American Economic Review 84 (5): 1213-32.
`Hanoch. Giora. l97l. CRESH production functions. Ecanamerrica 39 (5): 695-712.
`Trnjtenberg, Manuel.
`I990. Product
`innovation, price indices and the (mis-)
`measurement of economic performance. NBER Working Paper no. 3261. Cam-
`bridge, Mass.: National Bureau of Economic Research.
`
`

`
`E. R. Berndt. L. T. Bui, D. H. Lucking-Reiley, and G. L. Urban
`296
`_______;.___ _______ ____
`
`297
`
`The US. Arrtiuiccr Drug Industry
`
`by total industry patient-days, one would implicitly be assuming that the vari-
`ous drugs are perfectly substitutable. To circumvent this problem. we employ
`the economic theory of price indexes and calculate the industry price using the
`Fisher-Ideal price index."
`In tenns of quality, to the extent that product-quality characteristics affect
`the size of the potential market, they should be included in an overall industry
`demand equation. We would expect that the size of the potential patient market
`would depend on the specific indications for which the FDA has granted
`approval. We shall concentrate on one particular indication, GERD, which
`represented an especially large potential new market, and for which the H2-
`antagonists first received FDA approval relatively late in the sample. Specifi-
`cally, when the FDA granted approval to Glaxo’s Zantac for GERD. Zantac
`detailers were permitted to provide specific information to physicians concom-
`ing the treatment of GERD. This was significant, for instead of being confined
`to detailing to gastrocnterologists who saw ulcer patients, now Zantac detailers
`also made calls on general practitioners who commonly saw patients having
`GERD symptoms. This undoubtedly expanded the potential market.
`Such reasoning suggests that a dummy variable, say. GERD (taking the
`value of I following FDA approval), be employed in the overall industry de-
`mand equation. However, it is worth noting that information concerning the
`efficacy of drugs for different indications typically diffuses prior to formal
`FDA approval. The medical community is often aware of results of clinical
`trials prior to the FDA’s reviewing the clinical-trial data and coming to a final
`decision concerning approval for a new indication. As a result, a great deal of
`prescribing is done off-label prior to the FDA‘s granting approval. Thus, it is
`not clear how reliable the GERD dummy variable will be in capturing major
`changes in the size of the potential patient base.
`The third set of factors affecting industry demand involves marketing cf-
`fons. Earlier we noted that, in this industry. the two principal forms of market-
`ing efforts are minutes of detailing and either pages or deflated dollars of medi-
`cal journal advertising. There are several important
`issues concerning the
`measurement of marketing efforts. First. since drug marketing is largely a mat-
`ter of providing information about the existence and usefulness of the product,
`we expect its impact to be long-lived; once a physician has been informed, it
`is hard to see how such information might be destroyed. Indeed, precisely be-
`cause of this durability, firms typically expend a particularly large amount of
`marketing effort in the early stages of a new products life. Hence the impact
`of marketing on sales is likely better measured by the cumulative stock of
`marketing efforts since product launch, rather than simply by the flow of cur-
`
`ld. Specifically. the Fisher-Ideal price index is the geometric mean of the Laspeyres and
`Paasche price indexes, where each of them is computed using updated weights. New products are
`incorporated as soon as is feasible (i.e.. in the second period of their existence. so that their first
`difference is calculated). For further details concerning the Fisher-Ideal price index. set: Dicwert
`(I981. 1992).
`
`PAGE 3 OF 5
`
`rent monthly expenditures. We will also want to allow for the pozstilbrgwhitz
`this stock of information deprecratesbor deteritorates over Llmfi.
`0 8
`m’ght expect the depreciation rate to e quite ow.‘
`1We therefore employ the well-known perpetuahnventory method. Let M, be
`the stock of marketing effort at the end of month 2 (as measure?”by the stpzl:
`ofjournal advertising and detailing minutes), 131 5 be ‘hf’ m°f':_ Yd”
`ofime
`preciation of this stock, and let rm be the flow of markenng 9 °_‘‘ ““ 3
`eriod t. Define M, as the depreciation-adjusted stock of marketrng effort car-
`:ied over from the last month (1 - 3 )M,_, . P1115 new marketing °ff°“5 during
`months I (m,), that is
`
`(1)
`
`M,=<I—8)M,-.+m.= Z <'~5>'t‘"'~-
`v - |
`
`We construct separate stock measures for detailing and for journal advertising.
`Unlike the typical case for capital-stock accounting. we have no problem Wth
`establishing benchmark or “starting values" since we know that prior to August
`1977, the Tagamet journal (and detailing) stocks were pero. To implement
`equation (1), one must however assume rates of depreciation for each of these
`stocks. As discussed below, we will use the historical data on marketing and
`sales to estimate 8 econometrically,.rather than assume its value aflprron. “us
`The other major issue in measuring the effects of marketing e orts en 1
`an innovation of this paper. Other authors have suggested that ativertrs1n_g.be
`modeled as having two simulmneous effects in the market: overall advertising
`by all firms affecting overall market demand. and l'f=la1iV6 1€V815 05 3dV€1't|3m8
`among firms affecting the individual finns’ market shares." We take this mod-
`eling onc step further here by hypothesizing that firms may chglosetgltmil
`their marketing efforts to emphasize one of thetwo effects more
`an
`-
`Although the degree to which firms’ marketing efforts are directed, say.'at
`overall market expansion cannot be directly observed frpm data 0: quautllitétfff
`of marketing done by firms, we now propose a method or estrma mg
`fcct econometrically.
`_
`To clarify this concept, we discuss it in the context of the anttulcer drug
`market. When SrnithKline marketed Thgarnet from :5 rntroducpfin tr;
`until the entry ofZantac in 1983, they did not worry 2: out csfml-‘:3 Sn them 8
`ket share in the H3-antagonist markel._f0f Pale!“ St“1“5_ F°
`‘:1’ O‘; of map
`temporary monopoly positron. From this monopoly p0Sl£l0ll.'
`8 S
`T
`keting for SmithKline was to convince more and more physicians ofthe 2:11ti}?!
`of Hfantagonists in treating ulcer patients. They: and "0 f"h°' fig": regponisé
`rewards ofhaving expended efforts on diffusing tnforrnatitgl on W;8:“: Zan-
`to physicians. since they held 100 percent market share.
`owe
`.
`
`W W 5 ?°rt?c<:::::.°fr.t<.';:.r”"=«...;:.';:.::
`sea rm
`Iated. but distinct. approach that decomposes advertising "' 9 l f _ d“
`‘C: mm“ (1981) and
`components. For examples in the context of the phannaeeutrca in
`say.
`Hurwitz and Caves (1988).
`
`

`
`310
`
`E.R. Berndt, L. T. Bui, D. H. Locking-Reiley, and G. L. Urban
`
`
`
`311 The U.S. Antiulcer Drug Industry.
`
`table 7.2 focus only on relative quantiiies (market shares), but leave fixed the
`size of total industry demand at. say, Q, denote these price elasticities by ejjf.
`A total—price elasticity also captures the impact of a product’s price change on
`total industry demand: denote such a price elasticity by e”. (no asterisk). As
`has been shown by. inter alia. Bemdt and Wood ( 1979), the relationship be
`tween elf} and e” is as follows:
`
`‘W
`
`at,
`
`M
`
`MP
`I
`
`where Q]. is the quantity demanded of product j, Q is total industry demand,
`and P is industry price. The firs: partial derivative in equation (10) can be
`assumed to equal unity (other things being equal. demand for product j grows
`equiproportionally with market demand, i.e., according to its market share),
`while the second partial derivative is the industry- or market—price elasticity
`(estimated values of which are given in table 7.1). The last partial derivative
`in equation (10) indicates the impact of a change in product j’s price on the
`overall industry price index; it can be approximated by the revenue share of
`product j in total industry revenues.
`Alternative OLS and 2SLS estimates of eg.‘ are given in table 7.2, while NLS
`and NI.—2SLS estimates of the industry-price elasticity are presented in table
`7.]. For the twoproduct market. 1993 drugstore revenue shares for Tagamet
`and Zantac are approximately 0.25 and 0.75. For the four-product market,
`these shares are approximately 0.19 (Tagamet), 0.60 (Zantac), 0.12 (Pepcid),
`and 0.09 (Arid). Together. these relationships imply that in the two-product
`context, the ESLS estimates of the total own -price demand elasticities for Taga-
`met and Zantac are approximately - l.l54 and - 1.690, respectively, while in
`the four-product market. the 2SLS estimated total own-price demand elasticity
`is -0.909 for Tagamct. -1.153 for Zantac, -0.820 for Pepcid, and -0.799
`for Axid. Note that while these point estimates imply that some of the demand
`elasticities are less than one in absolute magnitude, the associated standard
`errors may well imply that reasonable confidence intervals include values of
`one and above (in absolute value).
`
`cumulative detailing or cumulative medical journal advertising is 3 m°‘° 3?‘
`propriate measure of marketing impacts than current monthly expendi-
`tures. In the context of industry demand, we distinguish investments of firms
`in these marketing activities by the industry structure prevailing when thc fix-
`penditures originally occurred. In a monopoly market structure. all marketing
`expenditures are market-expanding. for the monopolist has 109 PeT°“-_‘“_§‘3I:‘5‘
`share. In a market structure with k products. however, marketing activr Es _e-
`come more tivalrous, and as Ic becomes large, We ¢XP°°”513”"e'Y “me 5P‘”'
`over” of a finn's marketing efforts in affecting industry demand. We have hy-
`pothesized, thereforc. that in terms ofaffecting ind”-W3’ d°”"‘“d~ the reimge
`effects of marketing expenditures originally made when k PTO?‘-‘ts
`‘nthai
`market will tend to declrneas
`increases. In‘other words. WC VP; 0513‘? k ‘
`the effectiveness of marketing in generating industry sales depen
`on mar e
`structure in a systematic manner.
`I
`_
`_d
`In our empirical analysis of the anuulcer drug market, we obtained cons: er-
`able but not quite unanimous support for this hypothesis. In Pamculai» “‘I’“
`malizing the impact of a monopolist s marketing investments on cur:-en sgest
`to unity, we estimated the impact in a duopoly to be 0.6, In 3 W6:-Pfothlrti
`industry to be 0.8, and in a four-product market to be
`these ast
`e
`numbers are all statistically significantly different from unity (implying that
`we reject the hypothesis that the effectiveness of marketing efforts is indepen-
`dent of market structure). and from zero (indicating that we reject the hYP°th¢'
`sis that once there is competition. the 001)’ MP3“ °f mwkemg ‘5 °“ market
`share. and there is none on overall market size) “"15 °“T ‘°5“"5 Suggest ‘hat
`in the antiulcer drug market there is clear evidence Of 5Pl“0"'¢T5» and “W the“
`spillovers are considerably less than 100 P91’Cent °ff°C""°' M°'e°,v°r’ for Ehe
`most part. these spillovers decline as the number of products in the industry m-
`creases.
`‘
`_
`.
`Second. we find that at the industry level, both cumulative minutes of detail-
`ing and cumulative pages of medical journal advertising affcctpsales‘. typical
`estimates of these elasticities are 0.5 and 0.2.. reSpeCtW¢1y- At ‘hf: ma"k°"5h‘_“'°
`level, relative sales of products are also positively related to relative cumulative
`minutes of detailing; this elasticity is typically in the range of'0.Zht0
`1'1":
`gether these results imply that the marketing efforts of fir:’sfl:n afk3:1 Ill:ates
`drug market had substantial effects, in terms of affecting
`In
`C S
`
`

`
`
`
`312 E. R. Berndt, L. T. Bui, D. H. Luclting-Reiley, and G. L. Urban
`
`
`
`313 The U.S. Antiulcer Drug Industry
`
`(Tagztmet. Zantac, Pepcid, and Axid), we find that the market-share impact of
`the stock of detailing minutes deteriorated at an annual rate of around 40 per-
`cent, reflecting perhaps a more rivalrous content of marketing efforts.
`The remarkable growth in the market share of Zantac over time can be par-
`tially explained, then, by the very substantial marketing efforts undertaken by
`Glaxo. However. pricing policies also had an impact. Zantac gained share over
`Tagamet in part because the price premium commanded by Zanlac declined
`from about 56 percent in 1983 to only 25 percent in I993. Our estimates of
`industry-price elasticities range from about -0.7 to -0.9. while estimates of
`cross-price elasticities between any pair of the four products are about 0.7.
`Another set of important factors affecting sales of antiulcer drugs concerns
`product-quality attributes. At the industry level, the evidence suggests that the
`size of the market was enlarged considerably when the FDA granted approval
`for the GERD indication—a condition that occurs in a relatively large popula-
`tion. At the matket-share level, we find that when a product had a GERD-
`approval advantage relative to other products, its market share increased. Thus
`another reason why Zantac fared so well in the marketplace is that for quite
`some time it was the only product that had received FDA approval for the
`treatment of GERD. Another variable affecting market share significantly is
`the number of adverse interactions with other drugs reported to the FDA. On
`this account Tagarnet fared relatively badly (by 1993. Thgamet had twelve drug
`interactions, Zantac and Axid had only one, and Pepcid had none). Thus Zan-
`tac also enjoyed advantages from this product-quality characteristic. An unex-
`pected result we obtained, however, was that dosing frequency did not appear
`to affect market shares in a statistically significant manner.
`Finally, we found that, as in many other markets, order-of—cntry effects are
`very substantial. In particular, holding constant price, marketing efforts, and
`product quality relative to the nth product. the (rt + l)th entrant can expect
`about forty percent lower sales.
`The results of this paper are of considerable interest in the current health-
`care reform debate. Critics of the pharmaceutical industry have argued that
`much detailing is merely aimed at market share and is socially wasteful. Some
`have suggested placing ceilings on the marketing activities of pharmaceutical
`finns. but our findings demonstrate that this could have negative social welfare
`impacts. The findings in this paper suggest that marketing efforts also play a
`
`Vam,»,ge5_ Thus, such a policy could have anticompetitive impacts. a|lh0l-‘Sh it
`would be consistent with a patent system that rewards 1m1_0V3“°“-
`The research reported in this paper should be extended in a number of ways.
`First although the industry and market- share equations are plausible and PTO‘
`vide important initial evidence on the roles of marketing‘. P"¢¢(;d3'{;5 P|'°f:‘13;
`quality Competition "1 the antrulcer market, the underlying m e
`con
`modified in a number of useful ways. The most obvious extension is to re-
`formulate the models within an explicitly dynamic diffusion framelwprflft, such
`as those involving the Gompertz, logistic. or other more genera '1 ust-on
`curve formulations. in such a framework, marketing and pncrng polrcres might
`not only affect the long-run or equilibrium level of demand. but ‘hey might
`also affect the speed at which a 1onS"'_"“ equilfbrlmn 1°V_‘’l
`'5 aPp'°a?°d't to_
`As second useful extension would involve Incorporating dafa 0“ ““°° '
`consumer marketing.
`In 1988 SmithKline experimented with 21 Tommy
`Tummy" television advertising campaign that was armed drrecgli’ ‘1td°°’:_‘;;"‘i°:':
`but did not mention Tagatnet by name. More recently, (ilaxpl
`ariba ve rd acid
`magazines and on television, suggesting that Pallems Wm‘ ea
`‘"1’ an
`discomfort should see their physicians. These ads are sponsored by the CW0
`Research Institute and. consistent with FDA reg1113‘1°05 °“ d"°°"‘°‘°°“5"_m_"
`
`‘
`warning and other product information is a so ‘ y rsc ose.. _ rnc
`Venisemenrs typically do not mention products names, their impacts more
`likely to be on industry demand than on market share. Moreover, dlrficl-.t°*
`consumer advertising may Change ‘he PhY5i°i3n'P3fi°“t i"f°"m"fi°"‘Sha"ng
`relationship, and therefore could modify the diffusion process. It Would be
`useful to examine whether such effects have actually occurredaand by CXICU‘
`sion how effective is direct-to-consumer marketing in the antrulcer market-
`
`place.
`’
`.
`_
`.
`_
`Third, and perhaps most importantly, the findings of tlus paptir sugtgesglmti
`esting topics in the theory of industrial organization. What is
`e op rm tn
`keting strategy for firms when there are spillovers and marketing activities have
`long—lived impacts? What is the conespofldingly optimal pncIns_behaV1°{'-’
`How does this optimal behavior vary with market structure? How is the 0Pn'
`mal behavior affectedby federal tax provisions thatalloywvfi/1|: 3XPen;1m$II(1T‘:ti1;:'
`than amortizing) °f1°“E'l|"ed maiketmg ‘""°5‘m°“t5'
`at are
`e ' P