Pharma Industry: Patents call the shots?

The underlying idea behind granting patents is to encourage pharma innovators to advance the state of technology, and increase the development of better formulations. According to the UN definition, a patent is a legally enforceable right granted by countrys government to its inventor.

Patent Law represents one branch of a larger universe known as intellectual property rights. Patent offers exclusivity covers to many pharma companies and they have literally built and empire out of their patented discoveries. So wonder what is going to happen after the patents of Pharma giants expire?

I am eagerly waiting for 2011...as it will represent the beginning of the end for some of the industry leaders in Pharma sector.Maximum number of innovator molecules are going off patent between 2012-2018. Its going to be a splendid display of shifting loyalties, division of market share and dwindling prices.

The veterans of the industry still have some time to fine tune their strategies and decide on the way ahead. Some of the options are:

1.)Price reduction of your current offering

2.)Launching a fighter brand before your patent wears off, and then tackling the competition head on with price wars.

3.)Authorized Generics/Co-optition

Lets see how each of these options can misfire and what are the learnings that we can have from them.

1.)Price Reduction: Premium offered by your brand will wear off, customer perceptions may change which might increase switching. Patent may go off only in certain geographies, hence this strategy cannot be evenly executed which might lead to inter-geo exports, black marketing and price confusion.

2.)Fighter Brand:

Here s a case which demonstrates how an MNC(Merck) was not adaptive enough and how its fighter brand strategy backfired miserably:

Merck's blockbuster drug Zocor was going off patent in Germany. Zocor—a statin used to treat high cholesterol—had been a major cash cow for Merck, but after the patent expired, generic drugs would offer identical efficacy would be made avialable for as little as 30% of Zocor's price!

The obvious strategic response was a price reduction, but for Merck that was not an option, because it would have encouraged parallel exports of Zocor from Germany to EU markets where patent protection still existed.

Instead, Merck decided to launch a fighter brand called Zocor MSD. It rolled out the fighter brand four months before the patent expiration to give it some time to cannibalize Zocor’s customers, who would then, Merck hoped, remain loyal when generics invaded the market(obvious mistake). Because Merck was competing with only itself during this initial stage of Zocor MSD’s launch, the fighter brand was priced just slightly less than the original premium brand(there should have been a significant price-value erosion to make a difference and change people's preferences). Once generics entered the market, the new brand’s price dropped to 90% of Zocor’s.

Within three months of its launch, Zocor MSD had missed its modest sales goals by 50%. More than 30 generics would divided the lion’s share of the category among themselves. Merck’s desire to protect its profits for as long as possible had prevented it from launching a brand priced low enough to seriously compete with the generics.

Even when Merck realized it had set the wrong initial price, it was incapable of quick course correction. As a blue-chip multinational, it lacked the competencies to win the kind of price war it was entering. Merck was used to maintaining prices for long periods of time and altering them only after much consultation and reflection(Typical of any MNC). Its generic competitors, accustomed to competing on price, obviously benefited. With losses mounting fast, Merck withdrew all marketing support from Zocor

3.)Striking strategic alliances with low cost manufacturers and opting for co-opetition.

This I believe, is one of the most sound policies that neither calls for the efforts required to launch a fighter brand nor pushes the competition to go crazy on price wars. One can strike a strategic price alliance with one of the local generic manufacturers and control the price at a certain point(still a little above the generic drug providers).It calls for shifting and creating a relatively new category, called "authorized generics". Essentially, the original manufacturer licenses exact copies of its branded drug to a generic manufacturer, allowing it to hang onto some of the generic revenues.

This approach also appeals to those patients who feel most comfortable with a name they know. The premium drug manufacturer can retain its brand name and positioning and let the price go down.This way it can fight with other generics on price, saves its brand name and also expect very limited erosion of loyalties.

So,lets wait and see how "molecular" strategies shape Pharma industry in times to come!