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Abstract

Development of a new innovative drug is costly and risky, yet offers the company protection against competition and high returns on its investment. Years after, generic products are launched and the price of the drug sharply reduces. In recent years, research-based pharmaceutical companies have deployed a tactic, deployed in consumer products markets such as razors and disposable diapers, to deal with generic competition in shape of introduction of a line-extension product for its older drug. In many cases this newer version does not carry with it enough benefits, yet gives the company fresh monopolistic protection against competition. The widespread development of line-extension drugs is replacing the development of new chemical entities. Such a reduction in true innovation slows the stream of new medications flowing into the market. In addition, line-extension switching may force customers to change to newer, more expensive products and may prevent realisation of the cost saving introduced by the generic competitors. Owing to marked differences between pharmaceuticals and other products, line-extension switching may offer no or little benefit to customers, in comparison to older drugs. While low-risk levels and future revenues make new line-extension drugs lucrative to the company, they may not contribute any proportional social benefit to society.

Keywords

generic competition line-extension marketing value monopoly

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Prevailing against Cost-Leader Competitors in the Pharmaceutical Industry

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