Studies in Income and Wealth
`
`Volume 58
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`
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`
`
`The Economics of
`New Goods
`
`Edited by
`
`Timothy E Bresnahan and
`Robert J. Gordon
`
`Page 1 of 5
`
`SENJU EXHIBIT 2151
`LUPIN v. SENJU
`IPR2015-01100
`
`

`
`
`
`7
`
`7.1
`
`Introduction
`
`The introduction of Tagamet into the U.S. market in 1977 marked the begin
`ning of a revolutionary treatment for ulcers and the emergence of a new ind 1
`try. What distinguished the products of this new industry was their ability
`heal ulcers and treat preulcer conditions pharmacologically on an outpati
`basis, thereby substituting for traditional, and costly, hospital admissions
`surgeries. Tagamet, known medically as an I-I,-receptor antagonist, promo
`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 growth M
`sales (quantity, not just revenue) for over fifteen years and still shows no
`of slowing. New prescribing habits have clearly diffused to an ever increasm
`number of physicians. Today there are a total of four H2-receptor antago__
`Tagamet, Zantac, Pepcid, and Axid. Zantac is now the United States’ (and..th‘
`worlds) largest-selling prescription drug, having estimated worldwid6,..s_,
`in 1992. of about $3.5 billion. Moreover, Tagarnet is also among the ten t"
`selling prescription drugs in the United States.‘
`-
`
`Ernst R. Bemdt is professor of applied economics at the Sloan School of Management?’
`Massachusetts Institute of Technology. Linda T. But is assistant professor of economics at Bo
`University. David H. Lucking-Reiley is assistant professor of economics at Vanderbilt U,I1i_\il'-1:5"
`Glen L. Urban is professor of marketing and dean of the Sloan School of Management
`Massachusetts Institute of Technology.
`Financial support from the Alfred P. Sloan Foundation is gratefully'.aCkn0Wiedged."asf—
`data support of Stephen C. Chappell, Nancy Duckwitz. and Richard Fehring at IMS Intern_at:i_,
`and Joan Curran, Marjorie Donnelly. Phyllis Rausch, Ditas Riad, Paul Snydcrrnan, and _le
`lowe at Merck & Co. The authors have also benefited from the research assistance of Adi
`Ami: Alon, Ittai I-larel. Michele Lombardi, and Bonnie Scouler, and from discussions wi
`
`
`
`The Roles of Marketing, Product.-.
`Quality, and Price Competitio_n_
`in the Growth and Composition
`of the U.S. Antiulcer
`
`Drug Industry
`
`Emst R. Berndt, Linda '1". Bui, David H. Lucking—Reiley,
`and Glen L. Urban
`
`Robert C. Feenstra and Clinton R. Shiells
`
`
`(2) if price is mismeasured, so is the dependent variable, but then their formula
`for the coefficient becomes (13 + 1 )(U ‘ 1 )a 3115111153 i1'flP1i9d U 2 1-215 CV5“
`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, S. T. 1994. Estimating discrete-choice models of product differentiation. Rana‘
`Journal afEconomi'cs 25, no. 2 (summer): 242-62.
`‘
`_
`Griliches, Zvi, and Iain Cockburn. 1994. Generics and new goods in pharmaceutical
`price indexes. American Economic Review 84 (5): 1213-32.
`Hanoch, Giora. 1971. CRESI-I production functions. Ecanometrica 39 (5): 695-712.
`Trajtenberg, Manuel. 1990. Product
`innovation, price indices and the (mis-)
`measurement of economic performance. NBER Working Paper no. 3261. Cam-
`bridge, Mass.: National Bureau of Economic Research.
`
`Page 2 of 5
`
`

`
`E. R. Berndt, L. T. Bui, D. H. Lucking-Reiley, and G. L. Urban
`__.___________________i
`
`297
`
`The U.S. Antiulcer 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 ofthe 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
`detailcrs were permitted to provide specific infomiation to physicians concom-
`ing the treatment of GERD. This was significant, for instead of being confined
`to detailing to gastroenterologists 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 ef-
`forts. 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 joumal 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-
`
`l4. Specifically, the Fisher-Ideal price index is the geometric mean of the Laspcyres and
`
`rent monthly expenditures. We will also want to allow for the possibility that
`this stock of information depreciates or deteriorates over time. although we
`might expect the depreciation rate to be quite low.‘
`We therefore employ the well—known perpetual—mventory method. Let M, be
`the stock of marketing effort atthe end of month 2 (as measureguby the stpcgl:
`of journal advertising and detailing minutes), let 8 be th_6 H1011 Y |‘3_° ° _
`preciation of this stock. and let m, be the flow of marketing effort during time
`eriod t. Define M, as the depreciation-adjusted stock of marketmg effort car-
`Eied over from the last month (1 - 3 )M,_, . P1U5 new marketing °ff°“5 during
`months 2 (m,), that is
`
`(1)
`
`M=(l —s>M.-.+m.= 2 <1-5>"‘"*v
`'
`v I I
`
`We construct separate stock measures for detailing and for journal advertising.
`Unlike the typical case for capital-stock accounting, we have no problem W111
`establishing benchmark or “starting values" since we know that prior to August
`1977, the Tagamet journal (and detailing) stocks were aero. 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 marltetl|_1g and
`sales to estimate 8 econometrically.rather than assume its value afipnon. an
`The other major issue in measuring the effects of marketing e orts en 1 8
`an innovation of this paper. Other authors have suggested that advertisrrigbe
`modeled as having two simultaneous effects in the market: overall advertising
`by all firms affecting overall market demand. and relative levels of advertising
`among firms affecting the individual lions’ market shares." Wehtalte
`cling one step further here by hypothesizing that firms may c glosethté other
`their marketing efforts to emphasize one of the.two effects more
`an
`.
`Although the degree to which firms’ marketing efforts are directed, say._at
`overall market expansion cannot be difficllll °b5°“’ed f'°"‘ dafa ‘Ti qugiguceff
`of marketing done by firms, we now propose a method for estima ng
`fect cconometrically.
`_
`To clarify this concept, we discuss it in the context of the antiulcer drug
`market When SmithKline marketed Tagamet from its introduction in 1977
`until the entry ofZantac in 1983. they did not wony about c:fmP:11“S f‘t’1'1;‘na:
`ket share in the H3-antagonist markel._for Patel“ Sm“5_ F°
`‘:1’
`‘Ed map
`temporary monopoly position. From tins monopoly posit1on,_ e go
`T
`keting for SmithKline was to convince more and more physicians ofthe untitty
`of H,—antagonists in treating ulcer patients. They, and no other filrpr, reapflisg
`rewards ofhaving expended efforts on diffusing lIlfO1'l'l‘IaI1(l>-;'l on 2 8:“: Zan-
`to physicians, since they held 100 percent market share.
`owever,
`
`

`
`E- R- Berfldt. L. T. Bui, D. H. Luckiiig-Reiley, and G. L. Urban
`
`
`
`311 The US. Antiulcer Drug Industry
`
`table 7.2 focus only on relative quantifies (market shares), but leave fixed the
`We of total ‘“d“S“'Y demand 351 Say. Q; denote these price elasticities by ei‘.
`A total—price elasticity also captures the impact of a product’s price change (in
`total industry demand; denote such a price elasticity by 2” (no asterisk). As
`has been 5h°Wn _bY- inter alia, Berndt and Wood (1979), the relationship be»
`tween eff and e”. is as follows:
`
`cumulative detailing or cumulative medical journal advertising is a more ap-
`propriate measure of marketing impacts than are 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 the ex-
`penditures originally occurred. In a monopoly market structure, all marketing
`expenditures are market—expanding, for the monopolist has I00 percent market
`share. In a market structure with k products, however, marketing activities be-
`come more rivalrous, and as k becomes large, we expect relatively little “spill—
`over” of a firm’s marketing efforts in affecting industry demand. We have hy-
`pothesized, therefore, that in terms of affecting industry demand, the relative
`effects of marketing expenditures originally made when k products were in the
`market will tend to decline as It increases. In other words, we hypothesize that
`the effectiveness of marketing in generating industry sales depends on market
`structure in a systematic manner.
`.
`In our empirical analysis of the antiulcer drug market, we obtained consider-
`able but not quite unanimous support for this hypothesis. In particular, nor-
`malizing the impact of a monopolist‘s marketing investments on current sales
`to unity, we estimated the impact in a duopoly to be 0.6, in a three-product
`industry to be 0.8, and in a four-product market to be 0.5; these last three
`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 hypothe-
`sis that once there is competition, the only impact of marketing is on market
`share, and there is none on overall market size). Thus our results suggest that
`in the antiulcer drug market there is clear evidence of spillovers, and that these
`spillovers are considerably less than 100 percent effective. Moreover, for the
`most part, these spillovers decline as the number of products in the industry in-
`creases.
`
`Second, we find that at the industry level, both cumulative minutes of detail-
`ing and cumulative pages of medical journal advertising affect sales; typical
`estimates of these elasticities are 0.5 and 0.2, respectively. At the market—share
`level, relative sales of products are also positively related to relative cumulative
`minutes of detailing; this elasticity is typically in the range of 0.7 to 0.9. To-
`gether these results imply that the marketing efforts of firms in the antiulcer
`drug market had substantial effects, in terms of affecting both market shares
`and the size of the overall industry.
`Third, a somewhat unexpected result we obtained is that at the industry
`level, the rate of depreciation of stocks of both minutes of detailing and ,m’edi.-.=
`cal journal advertising was estimated to be zero. We believe that this: result.
`rcflects the fact that market-expanding marketing primati1y.involvesinformi=rig:
`physicians about the usefulness of this class of drugs, and that once a.physic.ian
`begins prescribing these drugs, he or she is not likely to-forget aboutstheir
`
`61 Q.
`
`a1
`
`a1 P
`
`_
`
`((3121?) (8li:PJ.)’
`E” _ €’fl‘2:5 +
`lisdthe ‘?l“3“lit.‘l demanded of productj,.Q is total industry demand,
`S m ustry price. The first partial derivative in equation (10) can be
`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 _] in total industry revenues.
`Alternative OLS and 2SLS estimates of er are given in table 7 2 While NLS
`,
`‘
`'1}
`.
`_
`°
`3
`and NL-2SLS estimates of the industry-price elasticity are presented in table
`7.1. For the two—product market, 1993 drugstore revenue shares for Tagaincr
`and Zaritac are approximately 0.25 and 0.75. For the f0ur—product marker
`m':i5‘:)5:9a‘e:
`approximately 0-19 ('I_'agam'et).'0.60 (Zantac). 0.12 (Pepcid),
`)- T0g8LT1er. these relationships imply that in the two—product
`LS 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 Tagamet. -1.153 for Zantac, —0.s2o for Pepcid and -0 799
`for Axid. Note that while these point estimates imply that some (if the deniand
`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).
`
`7.6 Concluding Remarks
`
`In this paper we have attempted to explain the phenomenal growth of the
`‘I-Ifantagonist antiulcer drug industry in the United States, as well as changes
`11111 the market shares garnered by the various products over time. Although we
`fave eiéamined the roles of product quality, order of entry, and price, we have
`091133 Particular attention on the role of various marketing efforts. Our
`framework and results can be summarized as follows.
`h Firlst, miarketing efforts suchas detailing and medical journal advertising
`
`Page 4 of 5
`
`

`
`E. R. Berndt, L. T. Bui, D. H. Luclting-Reiley, and G. L. Urban
`
`
`
`313 The U8. Antiulcer Drug Industry
`
`(Tagamet, 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 expliined, then, by the very substantial marketing efforts undertaken by
`Glaxo. However, pricing policies also had an impact. Zantac gained share over
`Tagainet in part because the price premium commanded by Zantac declined
`from about 56 percent in 1983 to only 25 percent in 1993. Our estimates of
`indiistry—piice 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 marl-cet—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 accountT'agamet fared relatively badly (by 1993, Tagamet 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. Ari 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-entry 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
`firms, but our findings demonstrate that this could have negative social welfare
`impacts. The findings in this paper suggest that marketing efforts also play a
`very important role in the diffusion of information to physicians, although the
`degree to which this is true probably declines somewhat as the number ofprod-
`ucts in a market increases. Moreover, our results suggest that in order to over-
`come pioneer-product advantages, later entrants have found it necessary to
`advertise more intensively. An implication of these results is that if all pharma-
`ceutical firms were constrained in their marketing activities, it is possible that
`the benefits would accrue primarily to the pioneer firms, at the expense of later
`
`vantages. Thus, such a policy could have anticompetitive impacts, although it
`would be consistent with a patent system that rewards innovation.
`_
`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 pro-
`vide important initial evidence on the roles of marketing, price, and product-
`quality competition in the antiulcer market, the underlying models could be
`modified in a number of useful ways. The most obvious exltension
`Itgurfl;
`formulate the models withrn an explicitly dynamic diffusion rami=i\i:ioffi,JSi0n
`as those involving the Gompertz, logistic. OT 011'l€T 11101? $e11e13_ _‘
`_
`curve formulations. In such a framework, marketing and P1'1C111g P01113135 1111811‘
`not only affect the long-run or equilibrium level of demand, but they might
`also affect the speed at which a long-run equilibrium level is approached.
`As second useful extension would involve incorporating data on direct—to—
`consumer marketing. In I988 SmithKline experimented with a “Tommy
`Tummy” television advertising campaign that was aimed directly at consumers
`but did not mention Tagamet by name. More recently, Glaxo has advertised in
`magazines and on television, suggesting that patients with hearfiblzlsrlihiiilfilflafiigo
`discomfort should see their physicians. Thfisfi ads 313 5P°11591°
`3’
`Research Institute and, consistent with FDA regulations on direct-to—consumer
`.
`.
`.
`.
`.t
`advertising, do not mention the Zantadproduct by namle unjlegs thet1::]Sl;1:dE_=
`warning and other product information 1S also fully disc osel .
`_ incet ‘S more
`vertisements typically do not mention products names. E11611’ "T1930 _1
`likely to be on industry demand than on market share. Moreover, direct-to-
`consumer advertising may change the physician-patient inforination-sharing
`relationship and therefore could modify the diffusion process. It would be
`useful to exiimine whether such effects have actually occurred, and by exten-
`sion, how effective is direct-to-consumer marketing in the aritiulcer market-
`place.
`.
`_
`.
`Third, and perhaps most importantly. 1113 fi11d1I1_8S Of 11115 231$’ 5“g[_geS;1‘::::'
`e-sting topics in the theory of 11'1Cil1SII‘1ai organization. What is
`e op tin
`keting strategy for firms when there are spillovers and marketing activities haV€
`.
`.
`.
`-
`-
`-
`'
`h .
`‘
`long-lived impacts’? What is the correspondingly optimal Pl'1C1118_ 133 “V101
`How does this optimal behavior vary with market structure? How is the opti-
`.
`-
`-
`'
`th
`mal behavior affected by federal tax provisions that alloqwutlfiie :3XPe1:;:1§1(11":ic:
`than amortizing) of long—lived marketing investments.
`3 316
`P
`tions for social welfare?
`.
`Obviously much remains to be done. We believe we have demonstrated
`quite clearly that marketing efforts are very important in understanding the
`diffusion and economic success of new products. Product quality and pricing
`behavior have also been shown to play i1T1P01'15a111 W135
`tit‘: dlffifstiggI1:::e'::_::
`We hope the results of this paper contribute to this an of or re aoducts
`I
`projects that enrich our understanding of the economics 0 new pr
`.-
`M
`
`:2
`
`Page 5 of 5