Proactive Planning of the Timing of a Partial Switch of a Prescription to Over‐the‐Counter Drug

Abstract

This paper focuses on the proactive planning of a partial switch of a prescription (Rx) drug brand to over‐the‐counter (OTC) status within the former's patent‐protected life. The planning issues are whether and when to make this switch from the “single‐status” Rx drug phase to the “dual‐status” Rx+OTC phase with or without the grant of a 3‐year market exclusivity period for the OTC drug by the US Food and Drug Administration. We formulate an optimal control problem that leads to a two‐phase optimization problem with finite‐time horizon involving switching time‐dependent switching cost and terminal value. Applying a variational approach, we establish the conditions under which it can be optimal to make the partial switch. Counter to conventional thinking, the grant of market exclusivity is neither necessary nor sufficient for a partial switch before the Rx drug's patent expiry. Further, we show in a functionally specified model‐based illustration, involving varying combinations of plausible ratios of OTC and Rx version margins and potential market sizes, that denial of OTC market exclusivity can imply that the firm should advance rather than delay the partial switch, and yield greater savings for Rx drug consumers. Implications for pharmaceutical Rx–OTC switch planners and policymakers are discussed.