DEREGULATING DIRECT-TO-CONSUMER
`MARKETING OF PRESCRIPTION DRUGS: EFFECTS
`ON PRESCRIPTION AND OVER-THE-COUNTER
`PRODUCT SALES*
`
`DAVINA C. LING,
`Harvard University
`
`ERNST R. BERNDT,
`Massachusetts Institute
`of Technology
`
`and
`
`MARGARET K. KYLE
`Carnegie Mellon University
`
`Abstract
`
`This paper examines the impact and interrelationships between direct-to-consumer
`(DTC) and physician-oriented marketing on the sales composition of the prescription
`(Rx) and over-the-counter (OTC) versions of antiulcer and heartburn medications.
`To understand better the implications for competition of the 1997 Food and Drug
`Administration’s policies regarding DTC marketing, as well as recent Rx-to-OTC
`switch approvals, we also examine the relationship between order-of-entry effects
`and marketing intensities. We find spillover effects of marketing for Rx drugs on
`same-brand OTC versions of the drugs. We also find that the ratio of cumulative
`marketing intensity (cumulative marketing efforts divided by cumulative sales) in
`the OTC segment increases monotonically with order of entry. Our regression results
`show that various marketing demand elasticities depend on order of entry. Our find-
`ings document the importance of nonprice competition in the OTC drug market and
`suggest that the recent deregulation of Rx DTC marketing enhances rivalry and
`facilitates competition.
`
`* This paper was presented at the University of Chicago Law School–Medical School con-
`ference Regulation of Medical Innovation and Pharmaceutical Markets, April 20–21, 2001.
`Research support from the National Science Foundation (to E.R.B.) and the Massachusetts
`Institute of Technology Program on the Pharmaceutical Industry (to E.R.B. and M.K.K.) is
`gratefully acknowledged, as is data support from Information Resources, Inc., J&J Merck
`Consumer Products, IMS Health, and Merck & Co. We have benefited from discussions with
`Richard Frank, Richard Manning, and Will Manning and from the comments of anonymous
`referees and the editor, Sam Peltzman. The views expressed in this paper are those of the
`authors only and do not necessarily reflect those of any institutions with which they are related
`or of any research sponsor.
`
`[Journal of Law and Economics, vol. XLV (October 2002)]
`䉷 2002 by The University of Chicago. All rights reserved. 0022-2186/2002/4502-0016$01.50
`
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`The effects of marketing efforts on consumer choice and well-being have
`
`I.
`
`Introduction
`
`long been controversial among economists, marketing analysts, and public
`policy makers. Classic debates include the following: Do marketing efforts
`generate informational and educational value for consumers, which enables
`them to make more informed choices? Do marketing efforts exploit infor-
`mational asymmetry between producers and consumers, increase perceived
`product differentiation, and induce inefficient rent-seeking behavior by pro-
`ducers? Or do both of these effects hold, varying by product and stage in
`the product life cycle?1 These issues are at the heart of current debates
`concerning the welfare effects of recent regulatory changes at the U.S. Food
`and Drug Administration (FDA) regarding direct-to-consumer (DTC) mar-
`keting for prescription (Rx) drugs.2
`In 1997, the FDA clarified guidelines on DTC marketing of Rx drugs that
`allow manufacturers to place both the drug’s name and the condition that
`the drug treats in an advertisement without requiring manufacturers to include
`all the additional safety and efficacy information that are traditionally found
`in the product insert.3 Prior to this change, whenever a drug’s brand name
`appeared in an advertisement, such detailed product insert information was
`required as well.
`Recent years have also seen an acceleration in the number of Rx-only to
`over-the-counter (OTC) (Rx-to-OTC) switches that have been approved by
`the FDA.4 In the 14-year period between 1976 and 1989, the FDA approved
`39 Rx-to-OTC switches (about 2.8 per year), but between 1990 and 1996,
`
`1 See, for example, Federal Trade Commission, Advertising for Over-the-Counter Antacids:
`Final Staff Report and Recommendations (1983); Mark A. Hurwitz & Richard E. Caves,
`Persuasion or Information? Promotion and the Shares of Brand Name and Generic Pharma-
`ceuticals, 31 J. Law & Econ. 299 (1988); Keith B. Leffler, Persuasion or Information? The
`Economics of Prescription Drug Advertising, 24 J. Law & Econ. 45 (1981); Richard L. Schma-
`lensee, The Economics of Advertising (1972); and Richard L. Schmalensee, Product Differ-
`entiation Advantages of Pioneering Brands, 72 Am. Econ. Rev. 349 (1982).
`2 See, for example, Ronald S. Bond & David F. Lean, Sales, Promotion, and Product Dif-
`ferentiation in Two Prescription Drug Markets: Staff Report of the Bureau of Economics of
`the Federal Trade Commission (1977); Marcel P. Gemperli, Rethinking the Role of the Learned
`Intermediary: The Effect of Direct-to-Consumer Advertising on Litigation, 284 JAMA 2241
`(2000); Jane E. Henney, Challenges in Regulating Direct-to-Consumer Advertising, 284 JAMA
`2242 (2000); Alison J. Huang, The Rise of Direct-to-Consumer Advertising of Prescription
`Drugs in the United States, 284 JAMA 2240 (2000); National Survey of Consumer Reactions
`to Direct-to-Consumer Advertising, Prevention Mag. 8 (1999); Meredith Rosenthal et al.,
`Demand Effects of Recent Changes in Prescription Drug Promotion, in 6 Frontiers in Health
`Policy Research (Alan M. Garber & David M. Cutler eds. 2003); and Michael S. Wilkes,
`Robert A. Bell, & Richard L. Kravitz, Direct-to-Consumer Prescription Drug Advertising:
`Trends, Impact and Implications, 19 Health Aff. 110 (2000).
`3 Manufacturers are required to direct the audience to another source (for example, a toll-
`free number or a Web site) to obtain additional safety and efficacy information.
`4 For FDA comments on switches, see Tamar Nordenberg, Now Available without a Pre-
`scription, FDA Consumer Magazine (1996) (http://www.fda.gov/fdac/features/996_otc.html).
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`20 switches occurred (about 3.3 per year). Between 1994 and 1996 alone,
`the FDA approved 10 Rx-to-OTC switches, including Children’s Advil, Chil-
`dren’s Motrin, Orudis KT, and Actron for pain relief; Femstat 3 for treating
`vaginal yeast infection; Pepcid AC, Tagamet HB, Zantac 75, and Axid AR
`for heartburn; and Rogaine for promoting hair growth. Many of today’s
`leading selling OTC products had an Rx heritage. For example, OTC med-
`ications such as Advil, Motrin IB, Benadryl, and NyQuil were originally Rx-
`only drugs that switched to OTC status in the 1980s.5 The increase in ap-
`provals of Rx-to-OTC switches reflects in part the impact of those advocating
`greater consumer choice, self-medication, and consumer empowerment. It
`also likely reflects manufacturer incentives as embodied in the Waxman-
`Hatch Act of 1984, which in some cases permits an additional 3 years of
`marketing exclusivity for previously Rx-only products whose new approved
`efficacy indications involve an OTC formulation.
`The clarified DTC advertising guidelines provide manufacturers even
`greater inducements for Rx-to-OTC switches. Specifically, by marketing the
`Rx version of a drug directly to consumers while it is still under patent
`protection, a producer may be able to exploit spillovers to its subsequent
`OTC version, particularly when marketing signals quality and translates into
`long-lived brand-name equity. Hence, DTC marketing of a branded Rx prod-
`uct may have long-term effects on the subsequent success of Rx-to-OTC
`switches.
`In this paper, we examine recent DTC marketing efforts and Rx-to-OTC
`switches involving the H2-antagonist class of drugs, which treats a wide
`variety of gastrointestinal disorders including duodenal and gastric ulcers,
`hypersecretory conditions, acid indigestion, and heartburn. These top-selling
`Rx medications all switched from Rx to OTC in 1995–96—Pepcid to Pepcid
`AC, Tagamet to Tagamet HB, Zantac to Zantac 75, and Axid to Axid AR.
`The Rx version of Tagamet lost patent protection in 1994, as did Rx Zantac
`in 1997, Rx Pepcid in 2001, and Rx Axid in 2002. For some of these drugs,
`DTC advertising has been used for both the Rx and OTC formulations.
`In this paper, we first assess whether order-of-entry effects, documented
`to be strong in the H2 Rx market, are also present in the H2 OTC segment
`and examine whether there is any carryover of order of entry from the Rx
`
`5 For further discussion, see Davina C. Ling, Advertising, Competition, and Prescription-to-
`Nonprescription Drug Switches in the US Antacid Market (unpublished Ph.D. dissertation,
`Massachusetts Inst. Tech., June 1999); Barbara Hesselgrave, Will Managed Care Embrace Rx-
`to-OTC Switches? Drug Topics, June 2, 1997, at 13; Robert McCarthy, OTCs: The Wild Card
`in Cost-Effectiveness, 17 Bus. Health 33 (1999); Mickey C. Smith, Rx-to-OTC Switches:
`Reflections and Projections, Drug Topics, July 20, 1998, at 70; Bruce Stuart & James Grana,
`Are Prescribed and Over-the-Counter Medicines Economic Substitutes? A Study of the Effects
`of Health Insurance and Medicine Choices by the Elderly, 33 Med. Care 487 (1995); and Elyse
`Tanou & Thomas M. Burton, More Firms “Switch” Prescription Drugs to Give Them Over-
`the-Counter Status, Wall St. J., July 29, 1993, at B1.
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`to the OTC markets.6 Next we consider the role of DTC marketing, as well
`as traditional physician-oriented “detailing” marketing, on the sales com-
`position of the OTC H2s and of the Rx H2s. Finally, we assess whether there
`are any significant interactions between the Rx and OTC DTC marketing
`efforts for a brand.
`As best we can determine, the research we report here is the first systematic
`empirical examination of the impact and interrelationships between DTC
`marketing on Rx and OTC versions of “sunset” branded pharmaceuticals
`facing Rx patent expiration.7 Our research integrates data from various
`sources, such as Rx drug sales and marketing data from IMS Health, scanner
`OTC data from Information Resources, Incorporated (IRI), as well as DTC
`marketing data from Leading National Advertisers. We begin with a historical
`overview of regulatory and other factors affecting the Rx and OTC H2-
`antagonist products.
`
`II. Background
`
`As early as the 1800s, patent medicine advertisers were the largest patrons
`of newspaper advertising.8 The modern distinction between Rx and OTC
`drugs began with the 1938 Federal Food, Drug, and Cosmetic Act, which
`defined different labeling guidelines for Rx and OTC drugs. Under the 1938
`act, even though the authority over the labeling of both Rx and OTC drugs
`was given to the FDA, control over drug marketing remained with the Federal
`Trade Commission. The 1962 Kefauver-Harris amendments to the Federal
`Food, Drug, and Cosmetic Act gave the FDA its current responsibility for
`monitoring Rx drug promotional materials. The 1962 amendments outlined
`basic requirements for Rx marketing: Rx promotional materials cannot be
`false or misleading; they must provide a “fair-balance” coverage of risks and
`benefits of using the drug; they must provide a summary of contraindications,
`side effects, and effectiveness; and they must also meet specific guidelines
`for readability and size of print.
`
`6 See Ernst Berndt et al., Information, Marketing and Pricing in the U.S. Anti-ulcer Drug
`Market, 85 Am. Econ. Rev. 100 (1995); Ernst Berndt et al., The Roles of Marketing, Product
`Quality and Price Competition in the Growth and Composition of the U.S. Anti-ulcer Drug
`Industry, in The Economics of New Goods 277 (Timothy F. Bresnahan & Robert J. Gordon
`eds. 1997).
`7 For related empirical research on Rx-to-OTC switches, see Peter Temin, Costs and Benefits
`in Switching Drugs from Rx to OTC, 2 J. Health Econ. 187 (1983); Peter Temin, Realized
`Benefits in Switching Drugs, 35 J. Law & Econ. 351 (1992); and Ernst R. Berndt, Margaret
`K. Kyle, & Davina Ling, The Long Shadow of Patent Expiration: Generic Entry and Rx-to-
`OTC Switches, in Scanner Data and Price Indexes 229 (Robert C. Feenstra & Matthew D.
`Shapiro eds. 2002). Additional research on order-of-entry effects in Rx pharmaceutical markets
`is Ernst Berndt et al., An Analysis of the Diffusion of New Antidepressants: Variety, Quality
`and Marketing Efforts, 5 J. Mental Health & Pol. Econ. 3 (2002).
`8 James Harvey Young, The Medical Messiahs: A Social History of Health Quackery in
`Twentieth Century America (1967), as cited in Wilkes, Bell, & Kravitz, supra note 2.
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`Since then, Rx drugs have been marketed not only to physicians, but also
`more directly to consumers. As noted by Ernst Berndt and coauthors,9 for
`example, in March 1988 Tagamet Rx launched “Tommy Tummy” and “stom-
`ach TLC” DTC marketing campaigns, and soon after Glaxo initiated an
`extensive television and print DTC effort for Zantac. Under the interpretation
`of FDA regulations regarding DTC marketing at that time, the marketing
`was quite restrictive in that if a brand name was mentioned in the adver-
`tisement, extensive product-labeling information was required to accompany
`the advertisement.
`These restrictions on DTC marketing were relaxed and clarified in 1997
`when the FDA issued new draft guidelines. A manufacturer is now permitted
`to advertise an Rx drug’s name and the condition for which it is indicated
`without needing to issue as fully detailed a summary regarding the product’s
`side effects and other risks. The FDA requirements for risk disclosure in
`advertisements may be met if the advertisements contain information on the
`product’s main risks and refer to other sources from which consumers may
`obtain additional product information and full product labeling. For instance,
`a prominently positioned toll-free phone number (or Web address) must now
`be found on the advertisement, which the consumer can use to obtain further
`information. Usually, there is explicit encouragement for readers and viewers
`of DTC advertisements to discuss the product with their physicians.
`While relatively little is known to date regarding the ultimate impacts of
`DTC marketing of Rx products on consumer utilization and health status,10
`there is little doubt that relaxation of the DTC restrictions by the FDA has
`been associated with a very substantial increase in DTC marketing of Rx
`products. In particular, according to IMS Health, DTC marketing expenditures
`for Rx medications increased from $1.1 to $2.5 billion between 1997 and
`2000.11
`Both the shift in regulatory regime for DTC advertising and the more
`favorable regulatory environment for Rx-to-OTC switches are important in
`explaining recent developments in the H2-antagonist market. The first H2-
`antagonist, Tagamet (chemical name, cimetidine), was introduced in 1977.
`It revolutionized the treatment of ulcers by allowing pharmacological treat-
`ment on an outpatient basis, rather than with expensive inpatient care such
`as hospital stays and surgeries. Three other H2-antagonists were launched
`between 1983 and 1988: Zantac (ranitidine), Pepcid (famotidine), and Axid
`(nizatidine). The benefits of patent protection, together with successful mar-
`keting and the resulting widespread utilization, led to spectacular revenue
`
`9 Berndt et al., The Roles of Marketing, supra note 6.
`10 For an initial and preliminary analysis, see Prevention Mag., supra note 2. Also see Wilkes,
`Bell, & Kravitz, supra note 2; and Meredith Rosenthal et al., Promotion of Prescription Drugs
`to Consumers, 346 New Eng. J. Med. 498 (2002).
`11 IMS Health data can be obtained at http://www.imshealth.com. Also see Rosenthal et al.,
`supra note 2.
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`sales growth for the Rx-only H2s. In the early to mid-1990s, Zantac was the
`most widely prescribed and the highest-sales-volume Rx drug in the United
`States, and Tagamet was among the top 10 best-selling Rx medications.
`Although the introductions of the Rx H2s marked the beginning of new
`medical treatments for gastrointestinal disorders, the H2s were not spared
`from the forces of creative destruction. In 1989, new and more potent drugs
`for the treatment of ulcers and gastroesophageal reflux disease (GERD),
`namely, the proton pump inhibitors (PPIs), were introduced. This latest gen-
`eration of drugs has a convenient once-a-day dosing regimen and very few
`side effects. Even at the time of its initial approval in May 1995, the man-
`ufacturer of one of the PPIs (Prevacid) was able to claim superiority in its
`labeling and promotion over ranitidine (then the best-selling and most pre-
`scribed H2) for the treatment of heartburn. By 1997, the PPIs had overtaken
`the H2s as the largest-revenue-generating Rx drugs in the United States (and
`the world).
`Besides confronting intense competition from the PPIs in the 1990s, the
`H2s also faced the threat of Rx patent expiration and imminent generic entry.
`Tagamet’s patent expired on May 17, 1994, followed by the loss of Zantac’s
`market exclusivity in late July 1997.12 Drug manufacturers may benefit from
`Rx-to-OTC switches because in certain cases they can gain the limited ad-
`ditional market exclusivity granted by the Waxman-Hatch Act of 1984. This
`provision allows pioneer manufacturers an extra 3 years of market exclusivity
`provided that the manufacturer obtains FDA approval for a new presentation
`and indication for a chemical entity.13 Expecting loss of patent protection in
`the mid-1990s, for example, beginning as early as 1985, SmithKline discussed
`with the FDA the possibility of seeking and gaining approval for an OTC
`version of Tagamet to treat heartburn.14
`With this as background, we proceed with the remainder of this paper as
`follows. In Section III, we provide a brief literature review and examine
`important concepts for the Rx and OTC markets. In Section IV, we discuss
`data sources and the construction and interpretation of various price, quantity,
`and marketing measures, first for Rx drugs and then for OTCs. In Section
`
`12 See Berndt, Kyle, & Ling, supra note 7; Berndt et al., Information, Marketing and Pricing,
`supra note 6; and Berndt et al., Roles of Marketing, supra note 6, for a more detailed discussion
`of the historical development in the H2-antagonist market.
`13 Empirical analyses of the effect of the Waxman-Hatch Act include those by Henry G.
`Grabowski & John M. Vernon, Brand Loyalty, Entry, and Price Competition in Pharmaceuticals
`after the 1984 Drug Act, 35 J. Law & Econ. 331 (1992); Richard E. Caves, Michael D. Whinston,
`& Mark A. Hurwitz, Patent Expiration, Entry, and Competition in the U.S. Pharmaceutical
`Industry, Brookings Papers on Economic Activity: Microeconomics 1 (1991); and Richard G.
`Frank & David S. Salkever, Generic Entry and the Pricing of Pharmaceuticals, 6 J. Econ.
`Mgmt. 75 (1997). For a historical overview of FDA regulation of the drug industry prior to
`1980, see Peter Temin, Taking Your Medicine: Drug Regulation in the United States (1980).
`14 For a Harvard Business School case study discussion of the race to develop and launch
`the first OTC H2-antagonist in the United States, see Charles King III et al., Pepcid AC(A):
`Racing to the OTC Market (2000).
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`V, we present evidence on the importance of order-of-entry effects in the
`OTC market for H2-antagonists and assess the extent of order-of-entry spill-
`overs from the Rx heritage to the OTC market. In Section VI, we formulate,
`and then provide empirical evidence for, a relatively simple set of econometric
`models quantifying the effects of DTC and traditional detailing on shares
`among the Rx and OTC H2-antagonists. Finally, in Section VII we summarize
`and conclude.
`
`III. Literature Review and Conceptual Considerations
`
`The market for Rx drugs involves complex interactions among pharma-
`ceutical companies and regulators as well as among patients, physicians,
`pharmacists, third-party payers, and policy makers. Physicians act as agents
`for their patients and in that capacity prescribe drugs for them. Since phy-
`sicians choose among competing drugs, and because of historical restrictions
`on advertising to patients, until recently most marketing efforts for Rx drugs
`have been directed at physicians, both in the form of visits by sales repre-
`sentatives to physicians (detailing) and by print advertising in medical jour-
`nals. Previous studies, such as those by Berndt and coauthors,15 have shown
`that along with other factors, such physician-directed marketing efforts in
`the Rx market have had a substantial sales impact and are long-lived.
`Moral hazard likely affects sales in the Rx market, for patients with Rx
`drug coverage typically make copayments that are considerably less than the
`total payment for the Rx, with the third-party insurers responsible for most
`of the cost. Other things equal, this insurance-induced wedge between patient
`copayments and total payments for a Rx undoubtedly increases demand for
`Rx drugs.16
`The roles of principal-agent issues and moral hazard are likely to be much
`smaller in the OTC than in the Rx market. Over-the-counter drugs are typ-
`ically inexpensive relative to brand-name Rx drugs, although consumers
`usually bear the total costs out-of-pocket because third-party insurance rarely
`reimburses for OTC drugs. Since many OTC (and, for that matter, Rx) prod-
`ucts are primarily “experience” rather than “search” goods, brand loyalty is
`strong, which perhaps reflects consumers’ idiosyncratic responses to medi-
`cations, risk aversion, and/or imperfect information. Thus, even for OTC
`products, perceived switching costs may be high despite their relatively low
`cost.17 Once consumers experience benefits from use of a particular OTC
`
`15 Berndt et al., Information, Marketing and Pricing, supra note 6; and Berndt et al., Roles
`of Marketing, Product Quality and Price Competition, supra note 6.
`16 For more discussion of this point, see Ernst R. Berndt, The U.S. Pharmaceutical Industry:
`Why Major Growth in Times of Cost Containment? 20 Health Aff. 100 (2001).
`17 For a classic discussion of search and experience goods and the importance of their
`distinction in understanding marketing efforts, see Philip K. Nelson, Advertising as Information,
`82 J Pol. Econ. 729 (1974). Additional discussion of decision making in the OTC market is
`found in Ling, supra note 5.
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`medication, they may be reluctant to experiment with alternative OTC prod-
`ucts. Consumers may be less informed than medical professionals regarding
`the efficacy and appropriate uses of various OTC medications. In such ways,
`risk aversion and imperfect information may raise switching costs and confer
`important roles on brand names, which signal quality. As noted by Richard
`Schmalensee18 and others, high switching costs and imperfect information
`can lead to first-mover, or at least order-of-entry, advantages to incumbents.
`Ronald Bond and David Lean,19 Berndt and coauthors,20 and Charles King
`and coauthors21 have documented strong order-of-entry effects in the branded
`Rx H2-antagonist market. Within OTC and other nonmedication consumer
`markets, there is a large literature documenting the importance of order of
`entry for pioneering brands; surveys are given by Glen Urban and coauthors22
`and William Robinson and coauthors.23
`To date, there is no empirical evidence on the spillover of order of entry
`in Rx markets onto the OTC market. In the current context, it is worth
`emphasizing that Zantac was able to overcome Tagamet’s first-mover ad-
`vantage in the Rx market in part by employing aggressive marketing efforts
`that conveyed information on Zantac’s claimed advantages—more conven-
`ient daily dosing, fewer side effects, and fewer adverse interactions with
`other drugs than Tagamet. Although their product profiles were more like
`Zantac than Tagamet, third Rx entrant Pepcid and fourth Rx entrant Axid
`were not able to overcome their late-entrant disadvantages. As we discuss
`in more detail in Section V, order of entry in the OTC market differed from
`that in the Rx segment; in the OTC segment, Pepcid AC was first entrant,
`then Tagamet HB, Zantac 75, and finally Axid AR. While the time gap
`between first and second entrants was only about 2 months in the OTC market,
`in the Rx market it was 6 years.
`Davina Ling24 notes that unlike in the Rx market, most private labels,
`minor brands, and other drugs in the OTC market do not need to seek specific
`approvals from the FDA before marketing, so long as they meet good man-
`ufacturing practice and other drug regulatory standards. For off-patent prod-
`ucts having approved active ingredients, OTC drugs encounter relatively
`minor barriers to entry. In spite of this, OTC markets for, say, gastrointestinal
`(GI) and pain remedies are relatively concentrated, with old brand names
`
`18 Schmalensee, Product Differentiation Advantages, supra note 1.
`19 Bond & Lean, supra note 2.
`20 Berndt et al., Information, Marketing and Pricing, supra note 6; and Berndt et al., Roles
`of Marketing, supra note 6.
`21 King et al., supra note 14.
`22 Glen Urban et al., Market Share Rewards to Pioneering Brands: An Empirical Analysis
`and Strategic Implications, 32 Mgmt. Sci. 645 (1986).
`23 William T. Robinson, Gurumurthy Kalyanaram, & Glen L. Urban, First-Mover Advantages
`from Pioneering New Markets: A Survey of Empirical Evidence, 9 Rev. Indus. Org. 1(1994).
`24 Ling, supra note 5.
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`still dominating sales. For example, as early as the 1970s, the OTC GI
`remedies market was already dominated by eight major brands, which ac-
`counted for approximately 80 percent of the market revenue share. Similarly
`in 1995, OTC drugs such as Tylenol and Advil, more than 20 years old, still
`achieved combined sales of more than $1.2 billion.
`Consistent with the endogenous sunk-cost theory proposed by Sutton,25
`the OTC drug market has traditionally been dominated by a few major brands
`that invested heavily in marketing and a small competitive fringe with nu-
`merous firms and low marketing investments. In particular, in 1977, the
`average advertising/retail sales ratio for the eight major brands in the OTC
`GI remedies market was approximately 21 percent.26 Direct-to-consumer mar-
`keting has continued to play an important role in the more recent OTC GI
`remedies market. For the seven largest-selling antacid OTC products, between
`1990 and 1996 the median advertising/retail sales ratio was approximately
`34 percent.27
`While first-mover advantages are considerable, they may not be insur-
`mountable. Entrants who invest heavily in marketing and who can differ-
`entiate their products from the pioneer may overcome the incumbent’s edge.
`In such cases, the information content of marketing efforts reduces switching
`costs by informing consumers of other, possibly more effective, alternative
`medications. In this context, deregulation of DTC marketing of Rx products
`can play an important role in reducing order-of-entry advantages to pioneers,
`thereby increasing nonprice competition among early and later entrants. How
`such deregulation of DTC marketing of Rx products spills over into same-
`brand advantages in the subsequent OTC market is not clear, however. Our
`modest goal in this paper is to identify and quantify such impacts, if they
`exist.
`In evaluating the impacts of DTC marketing on Rx and OTC versions of
`H2-antagonists, we expect the marginal product of marketing to vary over
`the product life cycle. For example, for new products, marketing may convey
`important incremental information, attracting new users and raising consumer
`awareness of the product and its uses (particularly when the medical condition
`is underdiagnosed and undertreated), thereby increasing the size of the market
`being served. However, for mature products for which consumers have al-
`ready developed strong preferences and high levels of brand loyalty, and
`particularly when the market has been saturated, the social marginal product
`of additional marketing may be much smaller, even though the private mar-
`
`25 John Sutton, Sunk Costs and Market Structure (1991).
`26 Federal Trade Commission, supra note 1.
`27 Ling, supra note 5. The seven brands are Tums, Mylanta, Gaviscon, Maalox, Alka Seltzer,
`Rolaids, and Pepto Bismol.
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`ginal product for each participant may be positive. This is consistent with
`the market expansion and “market-stealing” effects of marketing.28
`
`IV. Data Sources, Descriptions, and Interpretations
`
`Empirical research on interactions among Rx drug and OTC markets at
`the time of patent expiration requires integrating data from a number of
`diverse sources. We now briefly summarize our data sources. We begin with
`Rx drugs and then move on to the OTCs.
`
`A. Prescription Drug Markets
`
`Price, quantity, revenue, and marketing data for antiulcer and heartburn
`Rx drugs are taken from IMS Health, monthly from January 1988 through
`June 1999. IMS’s Retail Perspective tracks monthly shipments from man-
`ufacturers and wholesalers to retail warehouses and outlets. The revenue data
`are those to manufacturers and wholesalers, and not to the retail outlets (who
`add retail margins). Although revenues are net of charge backs (discounts
`given to purchasers and channeled through wholesalers), rebates (payments
`made to providers who often do not take title to the pharmaceuticals, for
`example, managed care organizations) are not included in the IMS revenue
`data, and neither are prompt payment discounts. The exclusion of rebates
`from the revenue data implies an overstatement of Rx revenues and prices,
`but the extent of this overstatement is unknown, for data on rebates tend to
`be highly proprietary. In spite of this drawback in the IMS data, however,
`many branded and generic pharmaceutical companies purchase and utilize
`the IMS data for their internal research.
`The level of aggregation of the IMS retail purchase data is at the presen-
`tational form, for instance, bottles of 30 tablets each having a 150-mg
`strength. We convert these various presentational sales measures into quantity
`or unit data by using the recommended daily dosage for active duodenal
`ulcer treatment as the transformation factor. The resulting quantity data can
`then be interpreted as the hypothetical patient-days of therapy per month if
`all patients were taking the recommended active duodenal ulcer daily dos-
`age.29 Data on recommended daily dosages are taken from the Physicians’
`Desk Reference.30 Price per day of therapy is then computed as revenues
`divided by the quantity of therapy days in that month. Further details on
`
`28 Also see Berndt et al., Information, Marketing and Pricing, supra note 6; and Berndt et
`al., Roles of Marketing, supra note 6, for an analysis of market expansion versus competitive
`effects of marketing in the Rx H2 market.
`29 The transformation factors are Tagamet (cimetidine), 800 mg/day; Zantac (ranitidine), 300
`mg/day; Pepcid, 40 mg/day; and Axid, 300 mg/day.
`30 Physicians’ Desk Reference (2000).
`
`Exhibit 2211
`Page 10 of 33
`
`

`

`deregulating direct-to-consumer marketing
`
`701
`
`price, quantity, and revenue measurement are found in the data appendix of
`Berndt and coauthors.31
`The price, quantity, and revenue data we employ cover only sales into
`drugstores. While drugstore sales constitute on average about 70–80 percent
`of sales in all outlets, the data exclude sales to hospitals, long-term care
`facilities, and mail order distributors.32 Since hospital usage and marketing
`differs considerably from the outpatient environment, we confine our attention
`here to the traditional retail sector.
`To measure marketing efforts involving pharmaceutical sales representa-
`tives’ (detailers’) physician office visits, we employ IMS Health data from
`their Office Contact Report. On the basis of a panel of about 3,800 physicians
`who report the number of visits and minutes spent with detailers discussing
`particular products, IMS extrapolates monthly detailing efforts by drug to
`the national level. Using an estimated cost per detailing visit, IMS also
`estimates total detailing expenditures.
`Medical journal advertising pages and expenditures are estimated by IMS
`in their National Journal Audit. The universe measured by this audit includes
`journal pharmaceutical advertising directed to those in all types of medical
`practice, including pharmacists, nurses, podiatrists, and dentists as well as
`medical and osteopathic practitioners. On the basis of circulation, the number
`of square inches and pages of a