Market Dynamics and Financial Trajectory for the Drug: Velosef
Introduction
Velosef, also known as cephradine, is a semisynthetic cephalosporin antibiotic used to treat various infections, including respiratory tract infections and skin infections. To understand the market dynamics and financial trajectory of Velosef, it is crucial to analyze its performance in the pharmaceutical market, particularly in the context of generic competition and patent expiration.
Patent Expiration and Generic Entry
One of the critical factors influencing the market dynamics of Velosef is the expiration of its patent. When a drug's patent expires, generic versions of the drug can enter the market, significantly impacting the original branded drug's market share and revenue.
Impact on Market Share
Following the patent expiration of Velosef, generic versions of cephradine quickly entered the market. These generics were certified by the FDA as "perfect substitutes" for the branded version, selling at much lower prices, typically 30 to 50 percent cheaper than the original branded drug[1].
Price Dynamics
The entry of generic drugs led to a substantial drop in prices. The average generic price of cephradine dropped further within the first two years after entry, often to around 25 percent of the original price of the branded version. This reduction is close to the long-run marginal cost of production and distribution[1].
Financial Performance Pre- and Post-Patent Expiration
Pre-Patent Expiration
Before the patent expiration, Velosef generated significant revenue. For example, in 1986, the year before cephradine went off patent, the wholesale sales of Velosef were just under $40 million[1].
Post-Patent Expiration
After the patent expired, the financial performance of Velosef declined sharply. By 1989, the total annual wholesale revenues from the sale of Velosef had fallen to $17.4 million, a significant drop from the pre-patent expiration figures[1].
Market Share and Revenue
Despite the drop in prices and the entry of generics, the incumbent firms (in this case, Eli Lilly and Squibb) managed to retain a respectable share in market revenues, although their market share in quantities sold decreased substantially. This is because many consumers continued to prefer the branded version over the generic alternatives, even at higher prices[1].
Consumer Preferences
The persistence of branded versions in the market can be attributed to heterogeneous consumer preferences. Some consumers prefer branded drugs due to perceived differences in efficacy and quality, despite FDA certification that generic and branded versions are perfect substitutes[1].
Competitive Landscape
The entry of multiple generic firms further intensified competition in the market. For cephradine, the number of manufacturers increased from 3 in the month after the patent expired to an average of about 30, selling various presentations of the drug. This competition led to a continuous decline in the average generic price[1].
Financial Implications for Incumbent Firms
Incumbent firms face significant financial implications when their drugs go off patent. The loss of market share and revenue can be substantial, as seen with Velosef. However, these firms often maintain a portion of their market share and revenue by targeting consumers who prefer branded products.
Strategic Responses
Incumbent firms typically do not reduce their prices significantly in response to generic entry. Instead, they focus on maintaining their brand loyalty and targeting consumers who are willing to pay a premium for the branded version. This strategy allows them to retain a respectable share of market revenues[1].
Regulatory and Market Index Considerations
The treatment of generic drugs in market indexes is crucial for understanding the true impact on consumer welfare. Standard price indexes often fail to reflect the substantial welfare gains from generic entry, as they treat generics as distinct goods with fixed weights. Alternative indexes, such as the Tornqvist-Divisia index, better capture the market dynamics by adjusting weights based on market shares[1].
Conclusion
The market dynamics and financial trajectory of Velosef are characterized by a significant decline in market share and revenue following the entry of generic versions after patent expiration. Despite this, incumbent firms can maintain a portion of their market share and revenue by targeting consumers who prefer branded products.
Key Takeaways
- Patent Expiration: The expiration of Velosef's patent led to the entry of generic versions, significantly impacting its market share and revenue.
- Price Dynamics: Generic versions sold at much lower prices, leading to a substantial drop in the average price of cephradine.
- Consumer Preferences: Heterogeneous consumer preferences sustain the presence of branded versions in the market.
- Financial Implications: Incumbent firms face significant financial implications but can maintain revenue by targeting brand-loyal consumers.
- Regulatory Considerations: Alternative market indexes better capture the welfare gains from generic entry.
FAQs
Q: What happened to Velosef's market share after its patent expired?
A: After the patent expired, Velosef's market share in quantities sold decreased substantially, although the incumbent firm retained a respectable share in market revenues.
Q: How did the entry of generic drugs affect the price of Velosef?
A: The entry of generic drugs led to a significant drop in prices, with generic versions selling at 30 to 50 percent cheaper than the branded version.
Q: Why do some consumers prefer branded drugs over generics?
A: Consumers may prefer branded drugs due to perceived differences in efficacy and quality, despite FDA certification that generic and branded versions are perfect substitutes.
Q: How do incumbent firms respond to generic competition?
A: Incumbent firms typically do not reduce their prices significantly and instead focus on maintaining brand loyalty and targeting consumers who prefer branded products.
Q: What is the impact of generic entry on the financial performance of incumbent firms?
A: The entry of generics leads to a significant decline in market share and revenue for incumbent firms, although they can maintain some revenue by targeting brand-loyal consumers.
Sources
- NBER Working Paper: "New Goods and Price Indexes for Generic and Branded Drugs" by Frank R. Lichtenberg.
- Velocity Financial, Inc.: "Velocity Financial, Inc. Reports Fourth Quarter and Full-Year 2023 Results."
- Congress.gov: "An Inquiry into the ImClone Cancer-Drug Story Hearings."
- Drugs.com: "Velosef: Package Insert / Prescribing Information."
