Lifecycle Management Strategies Maximizing ROI Through Indication Expansion Reformulation and Rx-To-OTC Switching

H E A LT H C A R E
Lifecycle Management Strategies

Maximizing ROI through indication expansion,
reformulation and Rx-to-OTC switching
By Alison Sahoo
Alison Sahoo
Alison Sahoo is a pharmaceutical industry analyst with more than 10 years of

experience researching the development of medicines and medical devices. She holds a
B.S. in Physics from McGill University and an M.B.A. in International Business from
Rutgers University.
Copyright © 2006 Business Insights Ltd

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Table of Contents
Lifecycle Management Strategies
Introduction 10
Indication expansion 11
Reformulation 12
Second generation launch 13
Rx-to-OTC switching 14
Launch of a branded generic 15
Divestiture 16
Chapter 1 Introduction 18
Summary 18
The importance of lifecycle management 19
Patent expiration 20
Types of patents 20
The value of patents 21
Expiring patents on blockbusters 22
Impact on drug revenues 24
Cost containment and the rise of generics 24
United States 24
United Kingdom 27
Germany 28
France 29
Italy 30
Spain 31
Patent challenges 32
Case study: Lipitor (UK, US) 32
Brand loyalty 34
Strategic pricing 36
Lifecycle management options 38
Benefits and limitations of lifecycle management strategies 39
Low product sales 40
Patent expiration 40
Niche products 42
Lack of brand equity 42
Ineffectiveness 42
Side effects 43
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Uncompetitiveness 43
Budgetary constraints 44
Lack of research and development expertise 45
Lack of strategic focus 45
Trends in usage of lifecycle management strategies 46
Conclusion 47
Chapter 2 Indication expansion 50

Summary 50
Introduction 51
Objectives of indication expansion 52
Prerequisites for a successful indication expansion 53
When indication expansion is appropriate 53
Strategic considerations 56
Pricing 57
Timing 58
Benefits and limitations of indication expansion 59
Benefits 60
Limitations 60
Case studies 63
Betapace (US) – unsuccessful indication expansion 63
Singulair (US) – successful indication expansion 64
Conclusion 65
Chapter 3 Reformulation 68
Summary 68
Introduction 69
Line extensions 70
Objectives of reformulation 71
Prerequisites for implementing a successful reformulation 72
When reformulation is appropriate 73
Pricing 75
Timing 75
Benefits and limitations of reformulation 77
Benefits 78
Limitations 79
Case studies 82
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Paxil (US) – successful reformulation 82
Prevacid (UK) – unsuccessful reformulation 84
Conclusion 86
Chapter 4 Second generation launch 88

Summary 88
Introduction 89
Objectives of second generation launch 91
Prerequisites for implementing a second generation launch 91
When second generation launch is appropriate 92
Combination products 94
Pricing 96
Timing 97
Benefits and limitations of second generation launch 98
Benefits 99
Limitations 100
Case studies 103
Nexium (US) – successful next generation launch 103
Conclusion 105
Chapter 5 Rx-to-OTC switching 108

Summary 108
Introduction 109
The OTC market 110
Rx-to-OTC switch regulation 111
Objectives of switch 113
When a switch is appropriate 114
Industry pressure to switch 116
Prerequisites for competing in the OTC market 117
Pricing 118
Timing 119
Benefits and limitations of Rx-to-OTC switch 119
Benefits 121
Limitations 122
Case studies 125
Claritin (US) – successful Rx-to-OTC switch 125
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Prilosec (US) – successful Rx-to-OTC switch 128
Zocor (UK) – unsuccessful Rx-to-OTC switch 129
Conclusion 130
Chapter 6 Launch of a branded generic 132

Summary 132
Introduction 133
The generics market 133
Objectives of generic launch 135
Prerequisites for competing in the generics market 135
When a generic launch is appropriate 140
Determining the attractiveness of a potential generic 140
Proactive versus reactive launch decisions 143
Opportunities arising from the US patent system 144
Pricing 145
Timing 146
Benefits and limitations of generic launch 147
Benefits 148
Limitations 149
Case studies 151
Capoten (Germany) – successful generic launch 151
Conclusion 152
Chapter 7 Divestiture 154

Summary 154
Introduction 155
Out-licensing 155
In-licensing 156
Discontinuation 157
Objectives of divestiture 158
When divestiture is appropriate 159
Pricing 162
Benefits and limitations of divestiture 163
Benefits 164
Limitations 165
Case studies 166
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ElixSure (US) – out-licensing 166
Conclusion 167
Chapter 8 Appendix 170

Primary research methodology 170
Index 171
Glossary 175
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List of Figures
Figure 1.1: Efficacy of lifecycle management strategies based on product and owner
characteristics 39
Figure 1.2: Timing considerations for lifecycle management strategies 41
Figure 1.3: Risk and return for lifecycle management strategies 44
Figure 1.4: Implementation times and costs of lifecycle management strategies 45
Figure 1.5: Shifts in usage of lifecycle management strategies 46
Figure 2.6: Breakdown of new indication launches by therapeutic area, 2005 55
Figure 2.7: Pricing opportunities and threats for a new drug indication 57
Figure 2.8: Efficacy of indication expansion based on owner and product characteristics 59
Figure 3.9: Efficacy of reformulation based on product and owner characteristics 77
Figure 3.10: Comparative benefits of drug reformulation 79
Figure 4.11: Efficacy of second generation launch based on product and owner characteristics 98
Figure 5.12: Efficacy of Rx-to-OTC switch based on product, condition and owner characteristics
120
Figure 6.13: Average number of generics by market size 141
Figure 6.14: Average generic price relative to brand by patent challenge situation, 2003 - 2005 146
Figure 6.15: Efficacy of generic launch based on product and owner characteristics 148
Figure 7.16: Drivers of drug divesture 159
Figure 7.17: Efficacy of divestiture based on product and owner characteristics 163
List of Tables
Table 1.1: Revenues and patent expirations for selected companies’ blockbusters, 2005 23
Table 2.2: Selected indication expansions for US commercialized drugs, 2000-05 54
Table 3.3: Selected reformulations for US commercialized drugs 74
Table 4.4: Selected second generation launches for US commercialized drugs 93
Table 4.5: Selected combination products introduced in the US, 1999-2004 94
Table 5.6: Non-prescription drug classification structure by country 109
Table 5.7: US switches, 1995 - 2005 112
Table 5.8: Switch environment by country 115
Table 5.9: Key events leading to Claritin’s switch in the US 116
Table 5.10: In-house OTC capabilities of major pharmaceutical companies 117
Table 6.11: In-house generics capabilities of major pharmaceutical companies 136
Table 6.12: US alliances between branded and generic manufacturers, 2001 – 2005 138
Table 7.13: Selected recent divestitures of US commercialized drugs, 2003 - 2005 162
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Executive Summary
9
Executive Summary
Introduction
Maximizing the return on investment of brands through appropriate lifecycle

management is a key objective for pharmaceutical companies, since patent
expiration typically results in steep sales declines. Blockbuster patent expirations
are particularly important, since blockbusters can account for the majority of a
pharmaceutical company’s revenues.
Leading lifecycle management strategies include indication expansion,

reformulation, second generation launch, Rx-to-OTC switch, generic launch and
divestiture. Other ways branded manufacturers can maximize sales include
effective branding campaigns to foster loyalty, which is particularly true in the US
where manufacturers may advertise directly to consumers, and strategic pricing
which can be implemented to raise, maintain or cut drug prices upon patent
expiration.
In both the US and Europe, generics have become an increasingly popular means
for healthcare payers to mitigate the effects of rising drug costs, and this is putting
pressure on branded drug manufacturers. Additionally, generics manufacturers are
increasingly challenging the validity of patents in order to introduce a generic
version of a drug before its patent expiration.
The usage of generics can vary considerably across different countries, depending
upon the size of the market, degree of free market pricing and structure of the
health care system. Usage of generics is strong and rising in the US, where both
public and private health care plans continue to focus on cost containment. In the
UK, high-selling drugs that are available in multiple formulations attract a higher
number of generic competitors than other products. Intense competition for larger
brands in Germany drives generics out of the market. Although usage of generics
has been low in Italy, implementation of a new reference price system in 2003
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basing reference prices on the cost of the lowest priced generic is likely to stimulate
usage.
Indication expansion
An indication expansion broadens a drug’s usage beyond its original intended use.
The most common types of indication expansion include extending the drug’s use
to pediatric populations, related conditions or other diseases. Use of the strategy is
extremely common, with some developers employing extensive indication
expansion programs, particularly for products whose usage can be leveraged to
address closely related conditions.
In addition to enlarging the target market for the drug, indication expansion can
also help delay generic competition, since originator companies that pursue
significant new indications receive extended periods of exclusivity.
Successful indication expansions require both strategic focus on the product as well
as strong research and development capabilities.
Pricing considerations for new indications are important; if a drug is priced higher
than products that address a potential new indication, it is unlikely to be used in the
new indication unless it provides significantly greater benefit. On the other hand, a
lower price point could be a significant competitive advantage.
Timing considerations are less of a concern with an indication expansion strategy

than with other lifecycle management strategies, since the new indication
represents an added usage for the drug in addition to existing indications.
The chief benefit of indication expansion is the gain of an additional period of data
exclusivity and/or patent protection, which can delay the impact of generic
competition. Despite some limitations and lack of clarity resulting from new
European pharmaceutical legislation, this benefit has largely been preserved.
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In both the US and the EU, the most significant limitation of an indication
expansion is the ability of generic manufacturers to introduce a drug, albeit by
excluding the new indication from their label. This is a particular problem in the
US, where off-label prescribing is common.
Reformulation
Reformulation refers to the launch of a modified product involving either a change

in the drug delivery mechanism, a change in the chemical composition of a product,
or both. Line extensions are a particular type of reformulation which are intended to
co-exist with the original drug while expanding the brand franchise. In both the US
and Europe, reformation has long been an important and effective brand protection
strategy.
Reformulations intended to replace original drugs must provide clear benefits over
their predecessor, while line extensions may merely offer different characteristics.
In either case, excellent in-house R&D capabilities or access to them is essential.
A drug reformulation is most appropriate for products with significant market

potential, when the reformulation meets an unmet need. For line extensions, this
need may be important to just a small segment of the patient population, but for
reformulations intended to replace original projects, the improvement must be
considerable and of value to the majority of patients.
Reformulations, particularly those related to extended release formulas, are often

intended to match competitive moves and/or protect against generic competition. In
these cases, proper launch timing is critical to ensure that the new product does not
cannibalize more of the original product’s sales than necessary but still provides
ample time to switch patients before competition arises.
As with other product launch strategies, reformulations must be competitively

priced with careful consideration of the cost-benefit of the new product.
12
Successful reformulations allow manufacturers to proactively build sales and/or
maintain brand sales by switching patients to an improved product.
The most significant limitation of reformulations is that they are only commercially
viable if they add significant value to the treatment of a particular condition.
Second generation launch
Second generation products address similar therapeutic applications and patient

populations as originator products; they may be chemically similar to the original
product, represent combination products or follow very different mechanisms of
action.
A second generation launch allows a manufacturer to leverage the market share

established by an earlier product by switching patients to the new drug. To aid the
rate of patient switching, companies sometimes remove the original product from
the market upon introduction of the second generation product.
Second generation launches are most appropriate for products with significant
market potential, particularly those in which the science continues to evolve and
developers believe they may be able to introduce new and improved products.
Therefore, the most important prerequisite for companies considering the strategy is
R&D capabilities, particularly in the therapeutic area of interest.
Ideally, a second generation product will yield sales at the same or greater level
than its predecessor, thereby preserving the original product’s brand equity. Pricing
plays a key role in the success of a second generation launch strategy, and is largely
based upon the therapeutic advantages offered by the new product compared with
both the originator product and other competitors. Increasingly, new products must
demonstrate clear advantages to be covered by health care plans.
Second generation products allow developers to re-start the clock on patent

protection, leverage existing intellectual know-how and capitalize on brand equity.
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Gains may be significantly greater than those from other lifecycle management
strategies. However, the strategy is also considerably more costly and time
consuming, requiring a significant commitment to a development program.
Rx-to-OTC switching
Rx-to-OTC switching refers to the process of moving a prescription drug to the

over-the-counter (OTC) market for use by consumers without physician
supervision. In some countries such as the US, this allows the drug to be broadly
available in any retail outlet and in others, such as the UK and Germany, it must be
requested from a pharmacist.
Switched products are more convenient for consumers and considerably less
expensive for healthcare plan providers; after a drug switches to OTC use, many
plans implement disincentives for participants to use medicines in the same class.
Ideal switch candidates are those that address conditions patients can self-diagnose,
not require ongoing monitoring by a physician or pose a significant risk of
unacceptable side effects, and possess a dosing regimen and/or labeling instructions
that patients can readily understand. However, switching drugs for therapeutic uses
new to the OTC market is difficult, particularly in the US
Rx-to-OTC switches forced by healthcare payers are a new phenomenon, but are
rarely pursued due to the considerable time and resources required to accomplish
them, as well as the potential ill will that can be generated within the industry.
Switching provides a revenue stream for a maturing product whose sales would
otherwise be cannibalized by generics. It also offers new product opportunities for
companies’ OTC divisions. In Europe, companies may build brands for switched
products by advertising to consumers, a practice that is not permitted for
prescription drugs. However, because OTC drugs are considerably lower priced,
switched drugs offer significantly lower revenue opportunities than prescription
medicines.
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Launch of a branded generic
The aim of a branded generic launch is to maintain a revenue stream from an off-
patent brand by competing in the generics market. Although the originator
company could simply reduce the price of its branded product without introducing
a separate generic product, this is often perceived as “cheapening” of the brand.
Companies with a generics division typically introduce their own generic through
this group, while pharmaceuticals without a generics business could acquire all or
part of a generics company, although this is often impractical so most enter into
agreements with generics companies pursuant to particular products. Such friendly
generics agreements are an increasingly common way for originator companies to
introduce generic brands, especially in the US, as they can benefit from their
partner’s sales and distribution relationships.
A generic launch is most appropriate for top selling drugs that are nearing patent
expiration. However, trailing drugs in large markets and specialty products that are
not expected to face significant generic competition also offer opportunities.
Originator companies may proactively introduce a generic after other more

lucrative lifecycle management strategies have failed; or they may reactively
launch a generic as competition from other generic versions emerges. In the US,
originator companies benefit most from a generic launch during the 180-day
exclusivity period granted to a successful patent challenger. During this time, an
originator may team up with a competing generics company to take advantage of
the limited competition.
Key benefits of generic launch include relatively low investment and ability to
utilize manufacturing capacity. However, companies must be able to accurately
predict the impact of competition from other generics; also, the strategy will not
significantly benefit declining products that suffer from low sales, lack of brand
equity or other problems.
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Divestiture
Divestiture refers to the selling off of all or part of the rights to a product. It may
occur at any point in the product lifecycle, involve either exclusive or non-
exclusive rights to the product; and may encompass the rights to the product in all
worldwide markets or just selected markets. Manufacturers may also discontinue
products entirely when an acquirer with an acceptable transaction cannot be found,
but this happens less frequently.
External drivers of divestiture include anti-trust considerations, competitive

pressures and declining market conditions. Internal drivers, which are more
common, include lack of strategic fit, lack of sufficient sales and/or lack of
marketing resources.
The objectives of divestiture typically revolve around eliminating a product with

lagging sales or growth potential and/or reallocating resources to products with
greater potential.
Benefits typically include the ability to implement a divestiture on short notice with
minimal investment, applicability to mature products with expired patients and the
generation of cash that can be used to fund other activities. However, striking deals
can be challenging since many acquirers seek to invest in entire product lines,
technologies or companies and only consider individual products that address very
specific markets. Also, divestiture can be difficult for products with intrinsic
problems, such as declining competitiveness, insufficient efficacy or unfavorable
side effect profiles.
Due to these limitations, divestitures typically occur for very mature products with
expired patents and products with limited potential. Sometimes, an acquiring
company can harvest latent potential in a product that was divested for lack of
strategic fit. However, these cases often involve reformulation or other product
changes.
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CHAPTER 1
Introduction
17
Chapter 1 Introduction
Summary
Maximizing the return on investment of brands through appropriate lifecycle

management is a key objective for pharmaceutical companies, since patent
expiration typically results in steep sales declines. Blockbuster patent expirations
are particularly important, since blockbusters can account for the majority of a
pharmaceutical company’s revenues.
Leading lifecycle management strategies include indication expansion,

reformulation, second generation launch, Rx-to-OTC switch, generic launch and
divestiture. Other ways branded manufacturers can maximize sales include
effective branding campaigns to foster loyalty, which is particularly true in the
US where manufacturers may advertise directly to consumers, and strategic
pricing which can be implemented to raise, maintain or cut drug prices upon
patent expiration.
In both the US and Europe, generics have become an increasingly popular means
for healthcare payers to mitigate the effects of rising drug costs, and this is
putting pressure on branded drug manufacturers. Additionally, generics
manufacturers are increasingly challenging the validity of patents in order to
introduce a generic version of a drug before its patent expiration.
The usage of generics can vary considerably across different countries, depending
upon the size of the market, degree of free market pricing and structure of the
health care system. Usage of generics is strong and rising in the US, where both
public and private health care plans continue to focus on cost containment. In the
UK, high-selling drugs that are available in multiple formulations attract a higher
number of generic competitors than other products. Intense competition for larger
brands in Germany drives generics out of the market. Although usage of generics
has been low in Italy, implementation of a new reference price system in 2003
basing reference prices on the cost of the lowest priced generic is likely to
stimulate usage.
18
The importance of lifecycle management
With R&D productivity stalling and profit margins increasingly eroded by cost
containment initiatives, maximizing the return on investment of brands through
appropriate lifecycle management is a key objective for pharmaceutical companies.
There are many sales, branding and distribution strategies companies can employ to
maximize sales, although fully exploiting return on investment will depend upon the
cost of implementation. This report examines the leading lifecycle management
strategies, which accomplish one or more of the following objectives:
Brand protection strategies extend time on the market without generic competition;
Market expansion strategies increase sales within the patent protected period;
Market protection actions defend against competitive erosion of sales.
The lifecycle management strategies discussed in this report represent the most
commonly used and most effective strategies to maximize returns on maturing
products. These are:
Indication expansion;
Reformulation;
Second generation launch;
Rx-to-OTC switch;
Generic launch;
Divestiture.
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Patent expiration
When a branded product loses patent protection, bioequivalent generic versions of the
original compound can be launched by competitors, invariably at a lower price. This
leads to strong competition for the branded product, which then typically experiences
declining sales and market share. Patent expiries are thus viewed with considerable
apprehension by pharmaceutical companies, particularly if the affected products are
major revenue drivers and/or blockbusters.
Types of patents
In the pharmaceutical industry, international patent legislation typically encompasses

four statutory classes of patentable inventions. These include:
Process patents: Process claims refer to the method used to produce a

pharmaceutical rather than to the chemical itself. Since it may be possible to
develop the same chemical through several different methods, it is often difficult to
protect pharmaceutical products solely with process patents or to prove
infringement of process patents;
Product patents: Product patents protect tangible products. These are typically
commercially viable entities that are ready to be launched or already on the market.
In the pharmaceutical industry, product patents are usually applied to medical
devices, such as drug delivery mechanisms, since few manufacturers would want to
wait until they had performed clinical trials on a compound (and, therefore,
developed it into a product) to apply for patent protection;
Composition patents: Composition patents are filed on the active ingredient and
protect its molecular structure from replication. Along with use patents, which
protect the application of a particular compound to a certain therapeutic indication,
they are often among the key patents that challengers must invalidate in order to
introduce a generic product;
Use patents: Use patents require utility, novelty and non-obviousness.
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The value of patents
Protection of intellectual property through patenting provides the necessary incentive

for drug developers to invest the considerable resources required to develop new
medicines. Patents guarantee market exclusivity for a period of 20 years, and after a
drug development time of approximately 12-15 years, companies have around 5-8
years of marketing time during which time the bulk of the drug’s sales are made. This
is important since the demands on these development resources continue to rise each
year, with the Pharmaceutical Research and Manufacturer’s of America (PhRMA)
estimating an average investment of more than $800m and 14 years to take a single
compound from discovery to commercialization, including the cost of developing
failed compounds. Furthermore, there is no guaranteed return on this investment, since
the likelihood of a compound in preclinical development reaching the market is about
one in 10,000.
The value of lost revenues following the expiry of a drug patent is greatest for
blockbusters (defined as those with annual sales in excess of $1bn), since 50% or more
of the value sales of a product may be eroded by generic competition within the first
few months following patent expiration. As companies marketing blockbusters are
often dependent on a handful of such products for their revenues, the patent expiration
of high selling products has a significant influence on the sales revenues of those
companies. Therefore, strategies to protect blockbuster revenues and, gradually, to
replace them with new products, are essential.
Most pharmaceutical products have annual sales below $500m and are marketed by a
wide range of companies, from domestic manufacturers to large multinationals.
However, the impact of patent expirations on smaller products can be as great for a
small pharmaceutical company as those on blockbuster drugs for a market leader. For
example, specialty companies typically expand via a growth-by-acquisition strategy,
relying heavily on sales of one product to fuel development of others. As a high-selling
product approaches patent expiration, such companies are forced to acquire a
replacement growth driver. As competition for new product acquisitions intensifies,
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pushing up acquisition prices, and as specialty companies require ever-larger products
to maintain/increase their growth rates, their need for proactive patent and lifecycle
management strategies also rises. Often, the strategies adopted by companies to protect
or replace blockbusters are also applicable to smaller companies with individual
product sales below the blockbuster level.
The high value of patents, and resulting losses to a company upon their expiration, is
driving increased focus on lifecycle management strategies. In a proprietary survey of
more than 240 drug company executives conducted by Business Insights, 79.1% of
respondents said patent expirations are ‘very important’ in driving lifecycle
management, compared with considerably fewer respondents citing other issues, such
as shrinking product pipelines (56.1%), competitive pressures (54.0%) and financial
pressures (38.0%), as being ‘very important’ drivers of lifecycle management.
Expiring patents on blockbusters
By 2008, an unprecedented number of blockbuster drugs will lose patent protection,

slowing the double digit growth the pharmaceutical industry has experienced
previously. From 2000 to 2005, for example, the compound annual growth rate
(CAGR) for global blockbuster revenues was an estimated 19.5% and comprised nearly
a third of a typical blockbuster marketing company’s total revenues, on average. For
some companies, blockbusters have been even more important, comprising more than
40% of the total revenues of Bristol-Myers Squibb and Eli Lilly, over 50% of Pfizer’s
total revenues, around 60% of Merck’s revenues and virtually all of Amgen’s sales, as
shown in Table 1.1.
However, strong blockbuster revenue growth is not expected continue. Over the past
several years, growth has been slowing, and between 2005 and 2008, the blockbuster
market is expected to increase with a CAGR of just 4.3%, as patents on blockbuster
products continue to expire. With a lack of innovative new drugs emerging from
pipelines to replace the loss in revenue that mass patent expiry represents, companies
will become increasingly reliant on patent protection and lifecycle management
22
strategies for at least their short to medium term growth. Companies that lack
replacement products with the potential to reach blockbuster status are therefore
considering extensive in-licensing alliances and/or acquisitions to boost the revenue
potential of their portfolios.
Table 1.1: Revenues and patent expirations for selected companies’

blockbusters, 2005
Company Drug 2005 % of total US patent

revenues ($m) company expiration
revenues
Merck Zocor 4,400 20.0% Jun 2006

Fosamax 3,200 14.5% Feb 2008
Cozaar and Hyzaar 3,004 13.9% Apr 2010
Singulair 3,000 13.6% Feb 2012
Blockbuster total 13,604 61.8%
Bristol-Myers Squibb Plavix 3,823 19.9% Nov 2011

Pravachol 2,256 11.7% Apr 2006
Avapro 982 5.1% Sep 2011
Abilify 912 4.7% Oct 2014
Lilly Zyprexa 4,202 29.3% Jun 2011

Gemzar 1,334 9.3% May 2010
Evista 1,036 7.2% Jul 2012
Pfizer Lipitor 12,187 23.8% Jul 2011

Norvasc 4,706 9.2% Jan 2007
Zoloft 3,256 6.3% Jun 2006
Zithromax 2,025 3.9% Expired
Celebrex 1,730 3.4% May 2013
Viagra 1,645 3.2% Mar 2012
Xalatan 1,372 2.7% Mar 2011
Zyrtec 1,362 2.7% Jun 2007
Aricept 1,068 2.1% Nov 2010
Amgen Neulasta 3,528 29.9% Oct 2015

Enbrel 2,672 22.6% Sep 2009
Epogen 2,500 21.2% Expired
Aranesp 3,360 28.5% n/a
Source: Company annual reports Business Insights Ltd
23
Impact on drug revenues
The ultimate impact of patent expiration on branded drug revenues is directly

proportional to the likelihood of generic competition. This, in turn, is based upon three
key factors – the profit potential of a particular therapeutic area for generics
manufacturers, the nature of the condition treated, and the difficulty of compound
production. The large market size of the cardiovascular, infectious diseases and other
areas attracts the attention of numerous generics players, and the blockbuster status of
many of the drugs within these categories not only provides a significant opportunity
for generics but also means that the drugs are often the focus of cost containment
initiatives by healthcare payers, which is likely to drive uptake of generics upon
launch. Conditions appropriate switching patients from branded to generic products are
those with relatively lower levels of severity and/or conditions that are not chronic. As
severity and/or chronicity rises, physicians and patients become increasingly reluctant
to abandon viable therapies for alternate medications, even though they contain the
same active ingredients and patients would obtain a cost savings since the drugs are
being used for an extended period of time. The difficulty of producing the compound
can also play a role, particularly for products that require specific production
technologies such as injectables.
Cost containment and the rise of generics
In both the US and Europe, generics have become an increasingly popular means to
mitigate the effects of continually rising drug costs. However, usage of generics can
vary considerably across different countries, depending upon the size of the market,
degree of free market pricing and structure of the health care system.
United States
The US is the world’s single largest market for pharmaceutical products, accounting for
about 45% of total global sales in 2005. In 2004, US spending for prescription drugs
reached $205m, according to the Centers for Medicare and Medicaid Services, or about
11.3% of all US healthcare spending. Annual price drug price increases, which are
typically in the high single digits or low double digits, combined with an aging
24
population that is using more medication, has resulted in ongoing growth in
prescription drug spending which continues to outpace that of all other health care
services. Drug spending is therefore being heavily targeted for cost containment.
Unlike in Europe where pharmaceutical prices are tightly regulated, the US operates a
free pricing system for drug products, with prices determined by market forces. This
disparity has led to higher prices for branded products in the US than in Europe. It has
also resulted in cost containment measures at both the public and private sector levels
that have historically focused on negotiating rebates from pharmaceutical
manufacturers and/or instituting incentives for consumers to utilize lower cost
medicines rather than implementation of strict price controls. While the public sector
has not been able to substantially increase patients’ out-of-pocket payments as a cost
containment mechanism, many of the initiatives in private sector health plans have
focused on passing an increasing proportion of costs to the consumer through higher
pharmacy co-payments and tiered formularies, for example. With administration of
Medicare prescription drug coverage from 2006 being contracted out to private sector
providers, utilization of patient-driven cost controls is expected to increase.
The public sector, largely through the federal-run Medicare program for senior citizens
and the state-operated Medicaid programs for low income individuals, currently
accounts for about one fifth of US prescription drug spending. The two programs
together cover more than 60m persons. While Medicare had not historically covered
prescription drugs, the Medicare Modernization Act of 2003 introduced outpatient
prescription drug coverage to the program and has resulted in an ever greater need to
focus on pharmaceutical prices as a target for cost containment, particularly since
program cost estimates released in 2005 indicate that the new coverage could be more
than 20% more expensive than originally projected. Virtually all of the state Medicaid
programs are implementing drug cost containment measures, according to a 2004 study
conducted by the Kaiser Family Foundation, with increasing numbers of states
requiring prior authorization for prescriptions, introducing a preferred drug list, seeking
supplemental rebates, instituting new or higher co-payments, reducing the dispensing
fees paid to pharmacists and instituting aggressive generic substitution policies. Thirty-
25
nine states have mandatory generic substitution, which requires the generic version of a
drug to be dispensed to Medicaid beneficiaries when available.
The net effect of these trends on the usage of branded prescription drugs in the US will
be mixed. On the one hand, the use of on-patent brands is likely to increase among
Medicare beneficiaries who were previously uninsured and could not afford the
products. On the other, the increased cost of insuring these individuals is likely to put
pressure on US public healthcare funds, spurring the development of even more
aggressive cost containment policies than those already in place.
Private sector payers, which account for almost 80% of prescription drug spending, are
also implementing cost containment initiatives. Historically, this has focused on
negotiating rebates with pharmaceutical companies in return for formulary inclusion,
but as costs continue to rise, healthcare plan sponsors are becoming dissatisfied with
these efforts since the full savings of the rebates are usually not passed onto these
sponsors. This will likely result in increasing use of generics. For example, an August
2004 report by Dietz found that over 80% of employer-provided drug coverage
programs used tiered plans as a method of containing costs in 2003, compared with
only 25% of schemes in 1993. Under a tiered plan, more generous coverage is offered
for generic drugs.
To further encourage patient selection of generics, pharmacy benefit managers (PBMs)

are increasingly promoting generic and even over-the-counter options to plan
participants. For example, Medco Health Solutions’ Generics First program provides
physicians with generic samples in four therapeutic categories – non-steroidal anti-
inflammatory drugs (NSAIDs), gastrointestinal drugs, anti-infectives and anti-
hypertensives – and sends clinical pharmacists to meet with physicians to discuss
generics. During the first six months of the program, the generic prescribing rate of
participating physicians increased 22% versus a comparison group of non-participating
doctors. The program was later expanded to include samples of Wyeth’s OTC products
Advil and Alavert to encourage physicians to recommend patients begin therapy with
OTC products before trying prescription drugs. As a result, Medco reports that its
26
generic dispensing rate has grown from 36% in 2000 to over 46% in 2004. Several
Blue Cross/Blue Shield health plans have also introduced schemes attempting to
contain costs by increasing use of generics.
For the 45m uninsured, as well as Medicare recipients with pharmaceutical expenses
that fall into the non-reimbursed “donut hole” in the Medicare Modernization Act’s
(MMA) prescription drug coverage, importation of drugs from markets with lower drug
prices is emerging as a means to make prescription drugs more affordable. In 2004,
more than $1.4bn was spent on drugs imported from Canada and other countries.
Although this represents less than 1% of total US prescription drug revenues,
importation could eventually pose a threat to US drug sales – particularly those of
lifestyle drugs like Pfizer’s Viagra (sildenfil) which are typically not covered by
insurance – if the practice continues to exhibit strong growth.
United Kingdom
In the UK, the number of generic competitors to a brand varies widely with the
formulation and size of the market opportunity. Drugs that are available in multiple
formulations attract a higher number of generic competitors than single formulation
products, as do brands with high sales. This trend of greater generic competition for
drugs with more formulations is stronger in the UK than in any of the other European
markets discussed in this report. This is likely to be due to the relatively free pricing
mechanism in the UK, which means that an increased number of generics directly
results in increased levels of price competition, and increased incentives for generic
uptake. This system also means that the number of generics that can profitably enter a
particular product market is directly related to the size of that market.
When broken down by brand product size, generic market share follows the expected
pattern whereby products with higher branded sales suffer from higher levels of generic
erosion, resulting in a higher market share for generics. Companies in the UK generally
raise the price of their brands following generic entry. The exception to this is in the
27
large $100m-$500m brands, where generic competition is so intense that the originator
has no choice but to reduce its price if it is to retain any market share.
However, the number of generic versions launched of injectable drugs in the UK is

low. As could be expected for a product that attracts a smaller number of generic
competitors, injectable brands in the UK exhibit a relatively low price differential
between branded and generic versions. This is in contrast to oral drugs, where there is a
large difference in price between versions of the highest selling brands and the lowest
selling. Three years following generic entry for a large $100m-$500m selling brand,
generics are priced at just 40% of the brand price in the UK, while generic versions of
small $10m brands are roughly equivalent in price to the branded version. Initial uptake
of injectable generics is slightly below average, but within three years of patent
expiration, these products actually have a higher than average share of the molecule’s
market. This can be explained by the method of drug purchasing in hospitals, which is
where the majority of injectable products are used. In the UK, drug companies bid for
the contract to supply a hospital with all its needs of a particular drug. This may
explain the slow uptake to begin with, as many hospitals may be committed to
purchasing the product from the originator company. As contracts expire and new ones
are negotiated, generic companies that can offer hospitals a good service as well as a
lower price replace the originator company, rapidly taking market share.
Germany
In Germany, intense competition for larger brands has driven many generics companies
out of the market. During the first year and a half following generic entry, the highest
selling $100m-$500m brands face competition from the largest number of generics, but
beyond this, the number of generic competitors falls to below that of smaller brands. At
this point it is likely that the intense levels of generic competition in the larger group
drives prices down to such an extent that it is no longer profitable for an average of 20
generics players to split the market between them, and some players are forced to exit
the market. These larger brands follow a “maximize volume sales” strategy, cutting
their price in order to compete with generics in an attempt to maintain some sales. This
28
is feasible because of the large market size of the original brands. Meanwhile, those in
the smaller $50m-$100m category follow a “maximize value sales” strategy by
increasing their price, aiming to maximize the return on every unit of branded product
sold.
In contrast to the UK market, there is only a limited correlation between the number of
generics entering the German market, and the size of the market. However, the positive
correlation between number of generics and the degree of generic erosion, as measured
by generic volume market share, seen in the UK is also found in Germany, which
suggests that competitive pricing is a key factor driving uptake of generics in the
German market.
France
In France, as in the UK, brands with higher sales before patent expiration are likely to
be manufactured by a larger number of generics companies. In the French market,
generic erosion is faced by all but the smallest brands. This may be related to the
tightly controlled generic pricing system, where generics must automatically be priced
30%-40% lower than the brand to be eligible for reimbursement and substitution. This
means that while larger brands face competition from a higher number of generics
manufacturers, the number of generic entrants is not closely correlated with the degree
of price erosion, hence the incentive for generic substitution is not increased as more
generics enter the market. It is also important to note that pharmacists do not generally
view cost as the most important factor in their dispensing decision, and therefore a
direct correlation between price and degree of generic erosion would not be expected in
the French market.
Additionally, there is little impact of the formulation of a product (injectable versus

oral) on the number of generic entrants, and generic injectables tend to take a higher
than average market share in France. While the average of all French generics reach a
volume market share of about 40% three years following patent expiry, injectable
generics’ market share can reach 80%. This may be related to the fact that injectables
29
are often hospital products. While retail pharmacists in France may be swayed by the
patient’s brand awareness to dispense the brand, thereby reducing the level of generic
penetration, hospital pharmacies tend to stock only the manufacturer that has won the
hospital supply contract for a brand via a competitive bidding process. The focus of the
hospital pharmacy on price means that this is often a generic manufacturer. A similar
pattern is seen in the Italian and Spanish markets, suggesting that in these regions,
where generic penetration is generally low, hospital products are at a greater than
average risk of generic erosion.
Italy
In Italy, strict controls over generic pricing have historically broken the linkage
between the number of generics on the market and the degree of brand erosion. Generic
prices in Italy have been around 20% to 30% lower than the brand, and with the
exception of injectable products, remain in this range for the three years following
generic entry. However, the implementation of a new reference price system in 2003
created a two tier system that based reference prices on the cost of the lowest priced
generic. Unlike other systems, products priced above the reference price are no longer
reimbursed up to the reference price, and do not qualify for reimbursement at all.
Branded companies have therefore begun dropping their prices once entry of generics
results in a decline in the reference price, as they would otherwise risk not being
dispensed by pharmacists.
The limited number of generic launches identified in the Italian market is particularly
pronounced for injectable products, highlighting the limited number of generics
companies with injectable capabilities in the Italian market, compared with the UK and
Germany. As in France, however, injectable generics in Italy typically have a higher
volume market share than oral generics. This is likely due to the status of the majority
of injectables as hospital products, as in the French market, as well as the fact that in
Italy, injectable generics are often sold at a greater discount to the brand than oral
generics.
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Spain
In Spain, there is a marked difference in the number of generics companies entering the
market depending upon the size of the original brand. While an average of more than
20 generics companies introduce products within three years following patent
expiration of both mid-size $50m-$100m and large $100m-$500m brands, less than 10
generic products are introduced after patent expiration of small $10m-$50m brands.
Similar to the situation observed in France and Italy, there is no relationship between
the number of generic entrants and the price of a generic or degree of generic erosion.
As in France and Italy, the lack of a direct correlation between the number of generic
entrants and the price of a generic may be explained by the high degree of control over
generic prices, through the fixed 20%-30% discount to the brand and reference pricing,
that serves to break the direct linkage between number of generics and price, and
therefore between number of generics and the incentive for generic uptake. However,
for brands with high sales of $100m-$500m, originator companies tend to reduce their
prices in response to generic competition. It is likely for brands of this size, the large
market makes it feasible for branded companies to follow a “maximize volume sales”
strategy after patent expiry, aiming to maintain volume sales by competing with
generics on a cost basis. However, for smaller brands, the low levels of generic erosion
found in the Spanish market mean that branded companies can best protect their
revenues by maintaining prices at current levels. Going forwards, branded companies
may need to reconsider this strategy as revenues will increasingly be threatened by
generic erosion caused by further development of the Spanish generics market.
However, in keeping with the pattern found in other Southern European markets,
generic injectables have a higher market share in Spain than oral generics. This may be
because, while factors such as pharmacist opinions and patient reluctance to switch to
generics have continued to restrict uptake of oral generics in the retail environment, the
use of injectables in the hospital environment drives their uptake to the extent that
generics manufacturers win the competitive bidding process to supply the hospital with
the product. Furthermore, there is a general trend in the Spanish market for branded
31
manufacturers to decrease the price of injectable products following generic entry. It is
likely that in the case of injectable products, this is a strategic move in order to retain
some of the company’s hospital supply contracts. The trend is not observed for orally
administered products, prices of which are maintained at a relatively constant level
following generic entry.
Patent challenges
In order to introduce a generic version of a drug before its patent expiration, generics
manufacturers are increasingly challenging the validity of patents. If successful, this
not only allows them early access to the market, but also provides them with an
exclusivity period during which they may build share in the absence of competition
from other generics makers. It should be noted, however, that even during this
exclusivity period, the branded drug manufacturer may introduce its own generic
version of the product, or it may license its right to do so to another generics
manufacturer. Because of their high cost, patent challenges are generally undertaken on
only the largest drugs.
Case study: Lipitor (UK, US)
The recent challenges involving Pfizer’s blockbuster cholesterol reducer, Lipitor

(atorvastatin), demonstrate the importance of patent protection. In 2005, Lipitor was
the world’s single highest selling drug with sales of more than $12bn per year. It is key
for Pfizer, accounting for over 23% of the company’s global revenue and 25% to 30%
of its profit. That contribution is particularly important now, following Pfizer’s recent
withdrawal of its arthritis drug Bextra (valdecoxib) and dramatically reduced sales of
its earlier arthritis medication Celebrex (celecoxib), both on safety concerns. Lipitor
was acquired through Pfizer’s $114bn acquisition of Warner-Lambert in 2000.
In October 2005, a British High Court rendered a somewhat mixed verdict, upholding
one of Pfizer’s patents on Lipitor but invalidating a second one following a challenge
by Indian generics maker Ranbaxy. Ranbaxy had asserted that one of the two Lipitor
patents did not cover the exact molecular form of atorvastatin that Pfizer sells as
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Lipitor. The company further alleged that the second patent, which does cover the exact
molecular form, should be invalidated because it does not represent a meaningful
advance on the first patent. The ruling will have no practical effect on Pfizer's control
over Lipitor in the UK, because the court simultaneously upheld a patent that covers
the main active ingredient in the drug which does not expire until November 2011 and
Pfizer’s exclusive right to sell Lipitor in Britain will remain intact until November
2011. The patent that the court invalidated was to expire in July 2010. Although the
UK represents just 6% of Lipitor sales, the verdict was concerning as it set a precedent
for patent challenges in other regions. Both Pfizer and Ranbaxy have received approval
to appeal the decision, with a final outcome expected by the end of 2006.
The US ruling, however, was considerably more favourable for Pfizer, with a federal
judge upholding the validity of both key Lipitor patents in December 2005. The
decision effectively blocks a generic version of the drug and confirms patent protection
on Lipitor through June 2011. The court entered a judgment in favor of Pfizer and
against Ranbaxy on Pfizer’s claims that Ranbaxy had infringed upon two key Lipitor
patents by attempting to introduce a generic version of the drug. In the US, the patent
expiration dates are reversed from the UK, with the first and most basic patent on the
drug expiring in March 2010 and the second expiring in June 2011. Had the court
followed the British precedent, Pfizer could have faced competition for Lipitor in the
US in 2010, a year earlier than expected. This could have had a significant impact, as
the US accounts for about 60% of Lipitor sales. Ranbaxy, which had hoped to
introduce a cheaper version of atorvastatin as early as 2008, has said it will appeal the
decision.
After the UK and US decisions upholding the Lipitor patents were rendered, Pfizer
shares gained 2% and 10%, respectively – a significant improvement, since they had
been trading at eight-year lows due to reduced sales of the company’s arthritis drugs
and generic cannibalization of Pfizer’s epilepsy, fungal infection and hypertension
products. Many analysts who previously doubted Pfizer’s ability to win both cases now
expect the decisions to ease concerns about the vulnerability of large drug makers to
patent challenges from generics manufacturers.
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Brand loyalty
Despite efforts of US managed care organizations and European healthcare providers to

contain rising drug costs by encouraging the use of lower cost generics, effective
branding campaigns can often counter these efforts by fostering brand loyalty. This is
particularly true in the US, where manufacturers may advertise directly to consumers
(DTC) and thereby build brand recognition. An April 2004 study conducted by Medco
Health Solutions found that of 1,000 US consumers surveyed:
50% would use a generic for heart disease;
52% would use a generic to control diabetes;
56% would use a generic to address asthma;
79% would take a generic for less serious conditions such as cold or flu.
Furthermore, pharmacists’ dispensing decisions can often be swayed by patient

requests, with the overwhelming majority of pharmacists less likely to dispense a
generic when a patient specifically asks for a branded product. Therefore,
implementing a strong branding strategy early in the product lifecycle can boost peak
US sales and mitigate sales declines post patent expiration. Continuing promotional
efforts even late in a product’s lifecycle can maintain visibility in a therapeutic area
ahead of various lifecycle management strategies such as reformulation, Rx-to-OTC
switch or the introduction of a next generation product or a company’s own generic.
For example, Shire’s extended release (XR) reformulation of its attention deficit
hyperactivity disorder (ADHD) drug, Adderall (amphetamine mixed salts), came to
market just one quarter before the entry of generic competition to the original product.
The company’s promotional efforts for the brand remained strong in the period leading
up to patent expiry. This allowed Shire to maintain visibility in the ADHD market
ahead of launch of the XR formulation and resulted in minimal sales declines to the
franchise. On the other hand, Organon’s promotion of the Remeron (mirtazapine)
34
antidepressant franchise declined, despite introduction of a reformulation ahead of
patent expiry, and resulted in loss of momentum in patient switching to the new
formulation and undermined the success of the reformulation strategy.
These benefits also accrue in certain European markets such as France and Spain, even
though manufacturers may not conduct DTC advertising there. In these markets, brand
loyalty campaigns must be directed towards physicians and pharmacists, since some
generic substitution takes place at the pharmacy. For example, research suggests that in
France, creating brand awareness can translate into brand loyalty post patent expiration
and in Spain, trust of manufacturers is ranked on a par with cost in influencing the
dispensing decision. This means targeting physicians to mark prescriptions “do not
substitute”.
However, in the UK and German markets, the product is dispensed based on cost
considerations and the pharmacist does not generally take patient requests for a
particular brand into account. Since the UK does not allow generic substitution by
pharmacists physicians must be targeted to prescribe drugs by brand name and
pharmacists must be encouraged to dispense the brand when a prescription is written
generically. This often requires strong incentives to overcome the high levels of
generic prescribing driven by GP budgets. Hurdles to building brand loyalty are even
higher in Italy, where generics are provided free of charge, while patients must pay for
a branded drug.
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Strategic pricing
There are a number of ways in which manufacturers can implement drug pricing
strategies in both the US and Europe.
Where limited generic competition is anticipated, or where high levels of brand loyalty
are expected to retain a segment of the customer base post patent expiry, manufacturers
may be able to raise the drug’s price in order to sustain sales value. This strategy can
also result in generic prices being set at a higher level upon entry. In the US, for
example, patients covered by a fee-for-service/indemnity plan, who pay high monthly
premiums but enjoy full medical coverage, are often not motivated to switch from a
branded drug to its generic version. On the other hand, patients enrolled in HMO plans
are typically subject to restrictive formularies with tiered patient co-payments, with
financial incentives to use generics. As the proportion of patients enrolled in indemnity
plans declines, and these plans increasingly adopt the pharmaceutical cost containment
methods used in managed care, the potential of the branded industry to profit from this
strategy may be reduced. Similarly, significant price increases are often not possible in
Europe due to strict governmental pharmaceutical price controls as well as
disincentives for the consumer. For EU markets employing reference pricing for multi-
source drugs, price increases would mean raising prices above the reimbursement level,
with the patient paying the difference between the cost of the brand and the reference
price. Italy’s two tier reimbursement system means products priced above reference
price are not reimbursed at all, passing the entire cost to the patient.
Manufacturers of branded drugs may also maintain a product’s price after patent
expiration. This is often seen in the US market, as it enables companies to capitalize on
the segments of the market that are not as sensitive to pricing without generating
negative publicity or endangering relationships with healthcare payers with a price
increase. Manufacturers may use this strategy to maintain prices to end payers, while
reducing the discounts offered to pharmacists and wholesalers. In Italy, France and
36
Spain, trust of the manufacturer is a key factor in prescribing and dispensing decisions,
allowing branded companies to maintain market share provided they can offer a
reasonable price.
Implementing a price decrease at or prior to patent expiry allows brands to compete on

a price basis with generics, and may enable the company to maintain its relationships
with wholesalers and pharmacists by offering a known and trusted product and service
while going some way to matching the generics manufacturers on price. This strategy
is often recommended when high levels of price competition are anticipated and the
manufacturer wants to maintain wholesaler and/or hospital supply contracts.
There are effectively three ways a manufacturer can reduce a product’s price. It can:
Cut the list price – cutting the official list price for a product may not be an
attractive strategy in the EU, as it risks parallel importing into other European
markets, can reduce the price of the brand in non-patent expired markets that use
external reference price systems, and reduces the price for all parties, even those
that might otherwise pay the higher price. In some markets though, it may be
necessary to drop the price if the brand is to retain reimbursement status;
Implement selective price cuts – companies can offer packages for wholesalers to
reward high volume users. Such a strategy can be particularly effective in the
hospital environment, where companies can sell off-patent products as part of a
bundle with their newer brands;
Offer discounts or rebates – a manufacturer may prefer to give a rebate than drop its
price. This gives wholesalers and pharmacists an incentive to dispense the
company’s product by improving their profit margins on sale of the brand.
Brand companies with their economies of scale may be able to squeeze smaller
generics out of the market by cutting brand prices to such a level that makes it
unprofitable for the generic to compete, but this is unlikely to be beneficial for either
party. Additionally, brand companies that cut their prices in the face of generic
37
competition are often faced with a corresponding decrease in price of the generic. The
rise of Indian generics players, with extremely low cost bases, also reduces the
feasibility of such a strategy, and raises the chance that dropping brand price may
stimulate a price war resulting in a downwards pricing spiral eliminating profits for the
brand manufacturer.
In the UK, companies have historically dropped the price of off-patent products in
exchange for maintaining or raising prices of newer drugs. This process, known as
brand equalization, was eliminated under the revised Pharmaceutical Price Regulation
Scheme (PPRS) scheme introduced in 2005, which specifies that price modulation will
not be allowed to include price reductions made on products with Supplementary
Protection Certificate (SPC) or patent expiry occurring between July 1, 2004 and
January 1, 2006. Companies are also no longer allowed to include sales where
additional discounts result in branded products being dispensed against prescriptions
written generically. Furthermore, cutting prices can have implications for brand price
in other markets due to external reference pricing systems.
Lifecycle management options
Drug developers may utilize a variety of options to maximize product sales and
minimize the impact of generic competition, including indication expansion,
reformulation, second generation launch, Rx-to-OTC switch, own generic launch and
divestiture. While each has its own strengths and weaknesses, the most common tend to
be indication expansion and reformulation since they are more straightforward to
accomplish and potentially more profitable than the other alternatives. Second
generation launch tends to be extremely costly and time consuming, while Rx-to-OTC
switch is often dependent upon regulatory approvals. A generic launch, like a
divestiture, is typically not profitable due to the low returns that are usually realized by
the manufacturer.
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Benefits and limitations of lifecycle management strategies
Each lifecycle management strategy has strengths and weaknesses, depending upon the
characteristics of the particular product and its originator, as shown in Figure 1.1. The
following sections discuss the strategies best suited to certain common characteristics
of pharmaceutical products and originating companies. It should be noted that many of
these lifecycle management strategies are complimentary and are therefore pursued in
tandem.
Figure 1.1: Efficacy of lifecycle management strategies based on product and

owner characteristics
Product Indication Reformu- 2nd Rx-to- Own Divestiture

characteristic expansion lation generation OTC generic
launch switch launch
Low sales
Mature product/
expired patent
Addresses niche
market
Lack of brand
equity
Lack of
effectiveness
Side effects
Uncompetitiveness
Owner
characteristic
Budgetary
constraints
Lack of technological
know-how
Differing strategic
focus
Source: Author’s Research & Analysis Business Insights Ltd
39
Low product sales
In general, few lifecycle management strategies can invigorate products with low sales.
With the exception of certain products that are not covered by healthcare insurance
(such as lifecycle drugs like Pfizer’s Viagra (sildenfil) or very high-priced drugs like
certain injectable biologics), unit volume generally does not improve upon the
introduction of generics and because prices fall, net sales tend to decline. Similarly,
originating companies are unable to command high prices for low revenue products in
a divestiture. Reformulations may enhance sales somewhat, if they provide
significantly greater benefit. This can occur with an extended release version
(particularly when competing products are not available in such a format) or an oral
formulation of an injectable drug. Indication expansions can also increase sales, if the
new indication addresses a large market and the drug offers competitive advantages
over other products. An Rx-to-OTC switch may also offer opportunities in a new
market, however due to the significantly lower prices of non-prescription drugs
compared to prescription medications, total sales tend to be lower for OTC drugs even
though unit volume may be high. A second generation launch may also offer increase
sales, if the new product represents an improvement over the original.
Patent expiration
Rx-to-OTC switch, generic launch and divestiture are well-suited to mature products
nearing patent expiration, as shown by the responses to Business Insights’ survey of
drug development executives in Figure 1.2. Rx-to-OTC switch and generic launch
directly cannibalize sales of the branded Rx drug, so they should be undertaken as late
as possible in the product lifecycle. The introduction of a high value-added
reformulation, such as an extended release version, or an improved second generation
product, can be a highly effective means of switching patients to a new product and
thereby preventing cannibalization from the introduction of generic versions of the
original drug. Indication expansion may also provide this opportunity, but due to heavy
off-label drug usage in the US, often does not completely stem generic competition.
40
Divestiture is typically considered after these other, more lucrative, lifecycle
management strategies (Rx-to-OTC switch, generic launch, reformulation and
indication expansion) have failed and can be undertaken even after patent expiration. It
generally offers the greatest return when the product has some residual value that can
be harvested by the acquiring company, such as the potential for reformulation, or a
strategic fit with an acquirer’s distribution model.
Figure 1.2: Timing considerations for lifecycle management strategies
Divestiture
Launch of own
generic
Rx-to-OTC
switch
Second
generation
launch
Reformulation
Indication
Expansion
Phase II Phase 0 - 3 years 4-8 years < 3 years

testing or III post post prior to
earlier patent
Source: Business Insights Primary Research Survey Business Insights Ltd
41
Niche products
Niche products that address small markets often do not offer significant return for any
lifecycle management strategy. Indication expansion and Rx-to-OTC switch offer
access to potentially larger markets, which could stimulate increased sales depending
upon competing products in those markets. Divestiture may also offer some
opportunity, if, again, the product has some untapped value. However, the success of a
reformulation, second generation launch and/or generic launch strategy will be limited
by market size, as none of these alternatives has the capability to counter low demand.
Lack of brand equity
Lack of brand equity is a major hurdle to successful implementation of any of the

lifecycle management strategies discussed in this report, since brand equity is often one
of the key product characteristics that manufacturers attempt to leverage through
lifecycle management. Depending upon competing products, indication expansion and
Rx-to-OTC switch can offer the greatest opportunities by exposing a product to new
markets. Divestiture may also provide returns, particularly if an acquirer has a strong
reputation within the product’s therapeutic area that it can transfer. Reformulation and
generic launch are more dependent upon a product’s brand equity for success, therefore
they are less likely to be of use.
Ineffectiveness
Lack of effectiveness in a product’s original indication can also be difficult to

overcome. Usually, the introduction of a more effective second generation product is
the best option, although if a developer can show that the drug is more effective in
another indication or formulation, these may also offer opportunities. Rx-to-OTC
switch, generic launch and even divestiture are usually not the best options for products
with lagging efficacy as even the lower prices of an OTC or generic product often
cannot compensate for lagging therapeutic value – particularly if the product faces
competition from more efficacious drugs.
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Side effects
The presence of significant side effects is also a constraint, with the best solution often
being a safer next generation product. This is particularly true in the current era of
heightened regulatory scrutiny of pharmaceutical products and ongoing safety
concerns. A reformulation or indication expansion may offer some opportunity also,
depending upon the level of competition in each therapeutic area, as it is not
uncommon for all of the drugs within a particular class to demonstrate similar adverse
reactions. For example, many of the cholesterol-reducing statins cause liver toxicity to
some degree, however Novartis has continued to expand the indications for Lescol
(fluvastatin), as the drug’s cardiovascular benefits are significant and most competing
products have not obtained as many specific clearances.
Uncompetitiveness
Uncompetitiveness may occur for a variety of reasons. Some of these, such as

inappropriate pricing or lack of promotional support, may be correctable while others,
like therapeutic value compared with competing products, may not be. Because even
correctable problems can require significant time and resources to address, the
introduction of a more competitive second generation product is often the most
successful lifecycle management strategy. Depending upon the nature of the problem, a
reformulation, Rx-to-OTC switch and/or generic launch may also be appropriate.
However, while generic launch and divestiture offer the lowest risk, they also usually
result in the lowest returns, according to respondents in Business Insights’ drug
developer survey. As shown in Figure 1.3, indication expansion and second generation
launch are believed to offer the greatest returns, followed by reformulation, Rx-to-OTC
switch, generic launch and divestiture.
43
Figure 1.3: Risk and return for lifecycle management strategies
High High
Profit potential
Risk of failure
Low Low
Indication Reformulation Second Rx-to-OTC Launch of Divestiture
expansion generation switch own branded
launch generic
Profit potential Risk of failure
Budgetary constraints
For originator companies with budgetary constraints, divestiture offers an immediate

return with minimal investment. In Business Insights’ survey of drug development
executives, divestiture was consistently rated the least expensive lifecycle management
strategy with the shortest implementation time, as shown in Figure 1.4. A generic
launch can also be extremely cost effective, particularly if the original developer
licenses the drug to a generic maker for commercialization; in the survey, it was rated
second most favorable in terms of cost and time. Indication expansion and
reformulation require greater investment, particularly in expensive clinical testing. The
development of a second generation drug is the most costly alternative, often requiring
hundreds of millions of dollars and years of development work.
44
Figure 1.4: Implementation times and costs of lifecycle management
strategies
Very
expensive Very long
Somewhat
expensive Somewhat
long
Manageable
Manageable
Somewhat
inexpensive
Relatively
Very
short
inexpensive
expansion generation sw itch ow n branded
launch generic
Implementation cost Implementation time
Lack of research and development expertise
Lack of research and development expertise also renders divestiture more attractive.
Although originator companies may access specialized technological capabilities
through development partners or even acquisitions, indication expansion, Rx-to-OTC
switch and generic launch are the least demanding in terms of technological
development. Depending upon the objectives, reformulation and particularly second
generation launch are the most demanding and require the highest degree of expertise.
Lack of strategic focus
When an originator company’s strategic focus does not include a particular product or
the therapeutic area it addresses, a divestiture is often the best option to maximize
returns. An indication expansion may be appropriate if the potential new indication is
45
of strategic interest. However, the remaining options are typically not optimal, as all
require some investment of time and resources and are unlikely to be successful
without a sufficient level of commitment.
Trends in usage of lifecycle management strategies
As shown in Figure 1.5 respondents to Business Insights’ survey of drug development

executives expect usage of all strategies to rise over the next three years, with greatest
increases expected for indication expansion, reformulation and second generation
launch. Although usage of divesture is also expected to rise, these gains will be less
than those observed for other strategies.
Figure 1.5: Shifts in usage of lifecycle management strategies
Increase
significantly
Increase
somewhat
Change in usage
No change
Decrease
somewhat
Decrease
significantly
expansion generation switch own branded
launch generic
Last 3 years Next 3 years
46
Conclusion
Throughout the US and Europe, cost constraints continue to make generics more
attractive, increasing the need for branded drug developers to implement effective
lifecycle management strategies that will mitigate the effects of generic competition
upon patent expiration. Large numbers of patent expirations on top-selling blockbuster
drugs over the next several years will make lifecycle management particularly
important. While indication expansion, reformulation, second generation launch, Rx-
to-OTC switch, generic launch and divestiture are commonly used, none are ideal in all
situations. A variety of factors must be considered including drug sales, patent
expiration, market size, brand equity, therapeutic benefit and adverse reactions,
competitiveness as well as the originator company’s budget, technological expertise
and strategic focus.
47
48
CHAPTER 2
Indication expansion
49
Chapter 2 Indication expansion
Summary
An indication expansion broadens a drug’s usage beyond its original intended

use. The most common types of indication expansion include extending the
drug’s use to pediatric populations, related conditions or other diseases. Use of
the strategy is extremely common, with some developers employing extensive
indication expansion programs, particularly for products whose usage can be
leveraged to address closely related conditions.
In addition to enlarging the target market for the drug, indication expansion can
also help delay generic competition, since originator companies that pursue
significant new indications receive extended periods of exclusivity.
Successful indication expansions require both strategic focus on the product as

well as strong research and development capabilities.
Pricing considerations for new indications are important; if a drug is priced

higher than products that address a potential new indication, it is unlikely to be
used in the new indication unless it provides significantly greater benefit. On the
other hand, a lower price point could be a significant competitive advantage.
Timing considerations are less of a concern with an indication expansion strategy
than with other lifecycle management strategies, since the new indication
represents an added usage for the drug in addition to existing indications.
The chief benefit of indication expansion is the gain of an additional period of

data exclusivity and/or patent protection, which can delay the impact of generic
competition. Despite some limitations and lack of clarity resulting from new
European pharmaceutical legislation, this benefit has largely been preserved.
In both the US and the EU, the most significant limitation of an indication
expansion is the ability of generic manufacturers to introduce a drug, albeit by
excluding the new indication from their label. This is a particular problem in the
US, where off-label prescribing is common.
50
Introduction
An indication expansion broadens a drug’s usage beyond its original intended use. The
expanded usage may take a variety of forms, including:
Expanded usage of the drug under more flexible conditions, such as for
monotherapy instead of combination therapy;
Extension of the drug’s original usage to new patient populations, like children
and/or adolescents;
Extension of the drug’s usage to related indications, such as the approval of an

antibiotic for specific types of infections;
Addition of entirely new therapeutic indications, such as treatment of additional

diseases or conditions.
While all of the extension types list above serve to increase the size of the potential
patient population for a drug, pediatric expansion and particularly the addition of large
new therapeutic indications generally have the most significant effect upon a drug’s
usage, and thus sales. Furthermore, indication expansions can also serve as an effective
means of delaying generic competition, since regulations in both the US and the EU
provide some additional protection for drugs whose usage is extended.
In the US, innovator companies are awarded three years of data exclusivity for a
change to a product’s label that requires clinical trials to be conducted, although
changes to the Medicare Modernization Act of 2003 have limited the opportunity to
generate multiple 30-month stays. These multiple stays were accomplished when
companies listed patents covering new indications in the Orange Book, thereby forcing
generics manufacturers to make a paragraph IV certification in its Abbreviated New
Drug Application (ANDA), and generating an automatic 30-month stay of approval.
51
In Europe, manufacturers have long taken advantage of the requirement for generics
companies to use the Mutual Recognition Procedure (MRP) process but also have the
same Summary of Product Characteristics (SmPC) as the listed drug in each market, to
extend patent protection by filing different indications in different markets. This results
in SmPCs for the listed drug differing between regions and makes it impossible for a
generic to gain approval for the full range of indications in each market via the MRP. A
related action that can delay generic competition, even if SmPCs are harmonized across
markets, is the filing of patents for new indications, which may expire at different times
in different countries. Thus the generic company would be prevented from marketing
the product for a particular indication. This can prevent launch of the product even for
patent expired indications. The mention of a patented indication in the generics
company’s marketing authorization (MA) amounts to patent infringement, but
excluding the patented indication can result in difficulties in gaining approval since the
generic SmPC would differ from that of the originator product.
Objectives of indication expansion
In general, the objectives of indication expansion are threefold:
To extend the product’s usage into new patient populations and thereby capture
additional sales;
To match competitive moves;
To protect a product from imminent generic competition.
52
Prerequisites for a successful indication expansion
Like reformulations and second generation launches, successful indication expansions

require both strategic focus on the product as well as strong research and development
capabilities. However, while reformulations tend to be more technological in nature
and second generation products require strong discovery capabilities, indication
expansion calls for excellent clinical programs. Developers must be able to amass
information about the drug’s effect on other conditions from many disparate sources
and efficiently conduct trials to validate or disprove such associations. They must also
be able to optimize administration requirements and make changes to the drug’s
format, if necessary, to accommodate any expanded indications. For example, many
medications behave quite differently in adults than they do in children and adolescents,
therefore, extreme care must be taken to identify any variations in pediatric population
response and make appropriate adjustments. This may include either raising or
lowering dosages, adjusting dosing frequency, varying a formulation or even altering a
chemical composition or certain ingredients.
When indication expansion is appropriate
Indication expansion is a common lifecycle management strategy, with 84% of the 50

top selling brands in 2004 having had additional indications approved since their initial
launch in the US. Developers of blockbuster drugs often investigate additional
indications – particularly usage expansion to younger patients – as a means to extend
the product’s patent life and delay generic competition. This can give rise to several
new indications for a single drug, as shown in Table 2.2.
53
Table 2.2: Selected indication expansions for US commercialized drugs,
2000-05
Company Drug Original indication Expanded indication Date
SP Avelox Infections Intra-abdominal infections Nov 2005

Wyeth Effexor Depression Panic attacks Nov 2005
Abbott Humira Rheumatoid arthritis Psoriasis Oct 2005
J&J Remicade Rheumatoid arthritis Ulcerative colitis Sep 2005
J&J Levaquin Infections Bacterial sinusitis Aug 2005
J&J Remicade Rheumatoid arthritis Psoriasis May 2005
J&J Remicade Rheumatoid arthritis Active ankylosing spondylitis Dec 2004
Roche Xenical Obesity Delay onset of type 2 diabetes Oct 2004
in obese patients with pre-diabetes
J&J Topamax Epileptic seizures Migraines Aug 2004
Amgen Enbrel Rheumatoid arthritis Psoriasis Apr 2004
Roche Xenical Obesity; patients to age 16 Patients to age 12 Dec 2003
Shire Adderall ADHD; pediatric patients ADHD; adults Oct 2003
Novartis Lescol Cholesterol reduction Risk reduction in coronary May 2003
revascularization in patients
with coronary heart disease
Merck Singulair Asthma Allergies Jan 2003
Pfizer Zyrtec Allergies; patients to age 2 Allergies; patients to age 6 months Nov 2002
GSK Flonase Allergies Non-allergic nasal symptoms May 2002
Allergan Botox Various medical indications Cosmetic/aesthetic use Apr 2002
TAP Prevacid Ulcers and heartburn; Patients to age 1 Mar 2002
patients to age 11
SP Claritin Allergies; patients to age 11 Patients to age 2 Dec 2000
SP/Berlex Betapace Ventricular arrhythmia Maintenance of normal sinus Apr 2000
rhythm in patients with atrial
fibrillation (AF)
Merck Singulair Asthma; patients to age 6 Patients to age 2 Mar 2000
GSK = GlaxoSmithKline; J&J = Johnson & Johnson; SP = Schering Plough
Source: Company news releases and public filings Business Insights Ltd
Expansion of a drug’s usage to pediatric patients is not appropriate for all products,
however, since many of the most widely-used drugs address conditions that are most
prevalent among older persons. These include medications that lower cholesterol,
control hypertension, address various cardiovascular conditions, and mitigate
depression.
Often, a manufacturer will obtain information from external sources suggesting a

potential new indication. This may arise from physicians, researchers and others who
notice additional therapeutic benefits from a particular product, as well as similar
54
competing products that obtain approval for additional indications. When this latter
event occurs, it is not unusual for all the drugs within a particular class to one by one
undergo an indication expansion. This occurred, for example, with Abbott’s Humira,
Amgen’s Enbrel and Johnson & Johnson’s Remicade, all of which are biological
response modifiers for treatment of rheumatoid arthritis.
As shown in Figure 2.6, infectious disease, central nervous system disorders and
cardiovascular disease are the most popular areas for new indication expansion, largely
due to the high numbers of patient sub-populations in these areas and the high
commercial value of related products.
Figure 2.6: Breakdown of new indication launches by therapeutic area, 2005
Immune &
Inflammation Diabetes
7% 4%
Women's Health Infectious
7% Disease
27%
Endocrine
7%
Oncology
11%
CNS
22%
Cardiovascular
15%
Source: Business Insights Business Insights Ltd
55
Strategic considerations
Some developers employ extensive indication expansion strategies, particularly for

products whose usage can be leveraged to address closely related conditions. For
example, Novartis has systematically obtained clearances for a range of indications for
its cholesterol reducer, Lescol (fluvastatin). The drug was initially cleared to market in
1994 for use as a dietary supplement to reduce elevated total cholesterol (total-C) and
LDL-C levels and to increase HDL-C in patients with primary hypercholesterolemia
and mixed dyslipidemia (Frederickson Type IIa and IIb) whose response to dietary
restriction of saturated fat and cholesterol was not adequate. In 1997, Novartis obtained
approval to use Lescol to slow the progression of coronary atherosclerosis in patients
with coronary heart disease, and two years later, Lescol was approved to decrease
triglycerides (TG) and apolipoprotein B (Apo B) in patients with mixed dyslipidemia
(both elevated cholesterol and triglycerides). In May 2003, Lescol was then approved
to reduce the risk related to coronary revascularization in patients with coronary heart
disease, and currently Lescol is also being evaluated in trials involving renal transplant
patients. Similarly, through the end of 2005, Johnson & Johnson had obtained eight US
approvals for new indications for Remicade, a biological response modifier initially
cleared to market for the treatment of rheumatoid arthritis in 1998, and Allergan’s
Botox (botulinum toxin) had been cleared for more than 20 different indications related
to muscle-freezing in markets around the world.
Occasionally, developers will implement less significant modifications, which

nonetheless result in new patients that can extend a product’s lifecycle. For example, in
2003, King Pharmaceuticals acquired muscle spasm reliever Skelaxin (metaxalone)
from Elan. Although the drug’s original patent had expired, Elan had protected the
brand by filing a new method of use patent expiring in 2021, for increased
bioavailability when administered with food. While this is not strictly a new indication
patent, the strategy is similar to that of gaining approval for a new indication in that it
resulted in a change to the brand’s labelling.
56
Pricing
Pricing considerations for new indications are important, and are often determined by
the differences between the drug’s current cost and prevailing prices of competitors for
the new indication. Because a drug must be priced at the same rate for all indications
(otherwise the lowest priced version of the drug would be used for any approved
indication), differences between the drug’s current price and the prices of competitors
in the new indication may create either opportunities or disincentives for an originator
company, as shown in Figure 2.7.
Figure 2.7: Pricing opportunities and threats for a new drug indication
Scenario 1: Opportunity Scenario 2: Threat
Price differential
between new indication
Rest of market
Price
and market
New indication
New indication
Rest of market
Aside from a situation in which the drug, in its initial indication, is priced on par with
products sold for a possible additional indication, there are only two scenarios – either
competing products in the new indication will be largely priced higher, or they will be
mainly priced lower, than the drug to be expanded. If they are priced higher, as in
Scenario 1, a lower-priced drug would benefit in this market since healthcare plans
would likely favor the low cost candidate (assuming that efficacy and other effects
were similar).
57
On the other hand, in Scenario 2, if drugs in the new market are largely lower priced, as
in the case of a market that has been heavily genericized, there would be no reason to
use the new drug unless it offered significantly greater therapeutic value. Most
commonly, however, this situation (Scenario 2) would represent such a significant
competitive threat as to render an indication expansion worthless. Alternative measures
may be considered. For example, the price of the drug may be reduced in all markets –
particularly if generic competition is soon expected in primary markets.
Timing
Timing considerations are somewhat less of a concern with an indication expansion

strategy than with other lifecycle management strategies, since the new indication
represents an added usage for the drug and manufacturers are not seeking to switch
patients to a new product, as they do in a reformulation, second generation launch, own
generic launch or Rx-to-OTC switch strategy. In these other strategies, companies
attempt to maximize sales of the original product before converting patients to the new
product and must properly time new product launches so as to occur only after the
original product has been fully exploited. However, new indications do not replace
original indications. Therefore, new indications are often introduced throughout a
product’s lifecycle as clinical support warrants, with multiple new indications often
introduced for a single product. Moreover, exclusivity periods can be extended at any
point in a product’s lifecycle in the both the US and EU, so that manufacturers may
obtain extensions even very early after a drug’s initial launch.
58
Benefits and limitations of indication expansion
The key benefit to be obtained from indication expansion is an increase in product sales
and/or an increase in a product’s exclusivity period. However, an indication expansion
strategy is limited by a product’s maturity, since the closer the drug is to patent
expiration, the more likely that generic competition will emerge to undercut product
prices. Figure 2.8 illustrates the efficacy of an indication expansion category against a
number of product and owner characteristics.
Figure 2.8: Efficacy of indication expansion based on owner and product

characteristics
Product characteristic Efficacy of strategy
Low sales
Mature product/expired patent
Addresses niche market
Lack of effectiveness
Side effects
Uncompetitiveness
Owner characteristic
Lack of technological know-how
Differing strategic focus
59
Benefits
A drug manufacturer can significantly extend its sales by broadening the population of
potential patients for the drug, especially when a drug’s indications are expanded early
in its lifecycle. Furthermore, an additional period of data exclusivity and/or patent
protection, which can delay the impact of generic competition, may be gained when
new indications are approved later in a product’s lifecycle. This can be particularly
helpful in Europe, which generally experiences lower levels of off-label drug use than
the US, serving to limit generic erosion of patented indications.
The European regulatory review, conducted in 2004, introduced the potential for
innovator companies to benefit from an additional one year of market exclusivity (for
the whole product) when receiving approval for a “significant new indication” during
the product’s first eight years on the market. New indications filed during the first eight
years on market are expected to gain exclusivity for the product as a whole, while for
new indications for products with well established use (on the market for over 10
years), exclusivity is likely to apply to the new indication only. This provision of the
new legislation will not apply retrospectively, therefore the first generics applications
made under the 8+2+1 system will not occur until late 2013 (eight years following
official implementation of the law in November 2005), and the generic launches can be
expected no sooner than 2 years after this date. All products approved up to the date of
implementation will qualify for the existing six or 10 years of exclusivity.
Limitations
In both the US and the EU the most significant limitation of an indication expansion is
the ability of generic manufacturers to introduce a drug, albeit by excluding the new
indication from their label. Even with this constraint, however, the generic may be
prescribed off-label for price-conscious patients, particularly in the US as healthcare
providers continue to shift more cost burden to program participants. This can
significantly undermine the success of an indication expansion strategy for products
losing patent protection. In the EU, planned SmPC harmonization and a provision of
new EU legislation to exclude patented indications from abridged MAs for generic
60
indications will also reduce the effectiveness of this strategy as a delaying tactic in the
generic approval process.
This overhaul of European pharmaceutical legislation, which was finalized in April

2004, removed many of the barriers to generic penetration in Europe, and with it, many
of the strategies that have historically been used by branded companies to delay or
prevent generic competition. These include the introduction of a European reference
product, removing the potential for companies to prevent generic competition by
withdrawing a product from the market prior to patent expiry. In France, this removed
the additional 10 years of data exclusivity for each new indication, dose, and
pharmaceutical form approved. Also, there is some uncertainty about what constitutes
“a significant new indication” in order to qualify for an additional year data protection.
Changes have also occurred in the US, particularly in the Medicare Modernization Act
(MMA) of 2003, to limit the usefulness of an indication expansion strategy. Innovator
companies are still awarded three years of data exclusivity for a change to a product’s
label that requires clinical trials to be conducted, but in the case of indication
extensions, generics companies can frequently get around this exclusivity by excluding
the additional indication from their application. Because of the high levels of off-label
prescribing in the US, the generic product is often used for the new indication even
though its label does not reflect the new usage. Although innovator companies had
historically listed patents covering the new indication in the Orange book, thereby
forcing generics manufacturers to make a paragraph IV certification in its ANDA, and
generating an automatic 30-month stay of approval, the MMA of 2003 removed the
potential to generate multiple 30-month stays.
Furthermore, in both the US and Europe, indication expansion is limited by the

characteristics of the product and market it addresses. As with other lifecycle
management strategies, products that are uncompetitive or cause significant side effects
are unlikely to benefit from an indication expansion, although low sales, a small
market, lack of brand equity, budgetary constraints and a lack of technological know-
how have less impact on an indication expansion strategy than on other lifecycle
61
management strategies. Furthermore, conducting the testing required to gain approval
for a new indication is often considerably less expensive and time-consuming than
conducting the research required to develop a next-generation product or even a new
formulation.
It should also be noted that the success of an indication expansion strategy is heavily
dependent upon the level of generic competition. As illustrated in the Betapace case
study below, drugs that are subject to intense competition from generics may be unable
to build share for a new indication, while those with less competition may be more
successful in this regard. For example, Merck KGaA was able to build sales for a new
chronic heart failure indication in Europe for its Concor (bisoprolol) brand, largely due
to the limited attractiveness of bisoprolol to generics manufacturers because of its small
market size. Concor is a beta-blocker marketed since 1986 for hypertension and angina,
which gained approval for chronic heart failure in 1999. Merck developed a new brand,
called Concor COR, for a chronic heart failure indication in a bid to defend against the
off-label use of generic bisoprolol. Uptake of Concor COR has sustained overall brand
sales in the face of generic competition, resulting in below average generic market
share in the UK and Spain.
62
Case studies
Two case studies for indication expansion are presented below. The first details
Schering’s unsuccessful expansion of Betapace from life-threatening ventricular
arrhythmia to atrial fibrillation. The second describes Merck’s successful expansion of
its Singulair from asthma to allergies.
Betapace (US) – unsuccessful indication expansion
Schering’s largely unsuccessful attempts to expand usage of its Betapace (sotalol)

brand illustrate the challenges faced by a manufacturer without marketing exclusivity.
The company first launched the drug in 1993 for treatment of life-threatening
ventricular arrhythmia. A month after Betapace’s patent expired in April 2000, Par
Pharmaceuticals received FDA approval to market a generic version. In response,
Schering launched Betapace AF in April 2000, indicated for the maintenance of normal
sinus rhythm in patients with atrial fibrillation (AF).
In an attempt to minimize usage of the generic product for the new AF indication,
Schering emphasized that Betapace AF “is not therapeutically equivalent to Betapace
or generic sotalol”, because of “significant differences in labeling”. Black box
warnings on both products state “Betapace and generic sotalol should not be
substituted for Betapace AF because only Betapace AF is distributed with a patient
package insert that is appropriate for patients with AFIB/AFL”. The product was
marketed with the tag-line “The only sotalol approved for highly symptomatic atrial
fibrillation”, and promotional materials stated, “Protect your decision. Specify Sotalol
AF”. The company also offered additional services to Betapace AF patients, such as a
complimentary subscription to Heart Watch, a newsletter containing cardiovascular
patient information, and access to a patient/healthcare professional Web site,
www.BETAPACEAF.com.
63
Despite Schering’s efforts, however, Betapace AF did not experience significant
uptake, and much of the franchise’s sales were lost to generic competition. This was
due to a variety of factors including confusion between the two Betapace products
indicated for two different conditions and Par Pharmaceuticals’ introduction of a
competing product. The total value of the sotalol market declined from about $54m in
the first quarter after initial generic entry, to $27m in the 12th quarter following generic
entry, with Betapace annual sales falling further to less than $10m in 2005.
This case study illustrates the importance of timing in an indication expansion since a
new generic product will compete with the original branded product.
Singulair (US) – successful indication expansion
Merck & Co has employed a very successful lifecycle management strategy for its
asthma and allergy drug Singulair (montelukast), largely by proactively expanding the
product’s indications early in its lifecycle.
Singulair was approved by the FDA in February 1998 for the prophylaxis and chronic
treatment of asthma in adults and children 6 years of age and older. This was virtually
identical to the claims allowed for competing products, such as AstraZeneca’s Accolate
(zafirlukast). In March 2000, Singulair’s asthma indication was extended to children as
young as two, making the drug the first asthma controller therapy in more than 15 years
to be approved for children of that age. In mid 2002, Merck submitted an additional
application for the use of Singulair in allergic rhinitis (hay fever), in an attempt to gain
entry to the then $6bn US market for allergy medications, after attempts to combine
Singulair with Schering-Plough’s allergy drug Claritin failed.
Singulair operates with a different mechanism of action from the steroids and sedating
antihistamines for the treatment of asthma, and offers relief of symptoms without
drowsiness, thereby providing it with a competitive advantage over first generation Rx
products and many over-the-counter allergy remedies. The allergy indication also
provides Singulair with a competitive advantage over other asthma medications, for
64
asthma patients who also suffer from allergies. Approval for treating outdoor allergies
(seasonal allergic rhinitis or “hay fever”) was obtained in January 2003 and in August
2005, Singulair was cleared to market for the treatment of indoor allergies (perennial
allergic rhinitis or allergy to dust mites, pet dander, and/or molds). Studies evaluating
Singulair’s advantages and disadvantages compared with other allergy medications are
ongoing. Merck continues to explore new indications for Singulair, filing an
application for the prevention of exercise-induced bronchospasm in 2005. Merck also
plans to file an application to market Singulair for acute asthma during the second half
of 2006 and for respiratory syncytial viral bronchiolitis in 2008.
Worldwide sales of Singulair have continued to rise, growing from $1.5bn in 2002 to
$2.0bn in 2003, $2.6bn in 2004 and $3.0bn in 2005. The drug has become the most
prescribed asthma product in the US, largely on continued strong promotion by Merck.
This case study illustrates the benefits to be gained in expanding the indications of a
drug into a large, well established market. The US prescription allergy market was
valued at more than $6bn in 2005, with a handful of key products. For many allergy
sufferers, current products are not sufficient so patients are eager to try new
medications. Furthermore, because allergy medications are heavily promoted in DTC
advertising, consumers are comfortable asking their physicians about new products.
Conclusion
Indication expansion is a commonly-used lifecycle management strategy that may be

employed to expand target markets and/or delay the onset of generic competition. It
offers among the highest returns of the lifecycle management strategies, although risk
of failure is also relatively high, as are the cost of implementation and time involved.
Because of this, indication expansion is often undertaken early in the product’s
lifecycle – typically in Phase III testing, before the product is introduced to market. For
example, many manufacturers routinely seek to extend the usage of their drugs to
children and adolescents to gain an additional exclusivity period. While new
65
pharmaceutical regulations in both Europe and the US have limited these extensions,
manufacturers may still receive additional periods of data protection, which can be very
valuable for top-selling products.
The most significant limitation to the strategy is the ability of generic manufacturers to
introduce products excluding any new indications in their labeling. This is a particular
problem in the US, where off-label prescribing is common and consumers are likely to
use generics for new indications approved only for the original branded drug. Because
of this, many originator companies do not rely exclusively on indication expansion, but
rather pursue it in tandem with a variety of other lifecycle management strategies
including reformation and the launch of a second generation brand.
66
CHAPTER 3
Reformulation
67
Chapter 3 Reformulation
Summary
Reformulation refers to the launch of a modified product involving either a

change in the drug delivery mechanism, a change in the chemical composition of
a product, or both. Line extensions are a particular type of reformulation which
are intended to co-exist with the original drug while expanding the brand
franchise. In both the US and Europe, reformation has long been an important and
effective brand protection strategy.
Reformulations intended to replace original drugs must provide clear benefits

over their predecessor, while line extensions may merely offer different
characteristics. In either case, excellent in-house R&D capabilities or access to
them is essential.
A drug reformulation is most appropriate for products with significant market

potential, when the reformulation meets an unmet need. For line extensions, this
need may be important to just a small segment of the patient population, but for
reformulations intended to replace original projects, the improvement must be
considerable and of value to the majority of patients.
Reformulations, particularly those related to extended release formulas, are often
intended to match competitive moves and/or protect against generic competition.
In these cases, proper launch timing is critical to ensure that the new product does
not cannibalize more of the original product’s sales than necessary but still
provides ample time to switch patients before competition arises.
As with other product launch strategies, reformulations must be competitively

priced with careful consideration of the cost-benefit of the new product.
Successful reformulations allow manufacturers to proactively build sales and/or

maintain brand sales by switching patients to an improved product.
The most significant limitation of reformulations is that they are only

commercially viable if they add significant value to the treatment of a particular
condition.
68
Introduction
Reformulation refers to the launch of a modified product. Most commonly, this

involves new formulations that allow for less frequent daily, weekly or even monthly
dosing. However, a reformulation may also involve a change in the chemical
composition of a product. This may allow for new delivery formats, such as enabling
an injectable drug to be administered orally. In many cases, changing the method by
which a drug is administered and the chemical composition of a product are one and
the same thing, since frequently a drug’s composition must be altered before it can be
accommodated in a new delivery mechanism. Both types of reformulation serve to
prolong the duration of a product’s patent life and thereby inhibit the market
penetration of generics, provided that users of the original drug can be switched to the
reformulated version before generic versions of the original are introduced.
In both the US and Europe, reformation has long been an important and effective brand
protection strategy. Although requiring a significant level of investment in R&D, a
reformulation can extend the market exclusivity of a product by up to three years in the
US and until recently, even longer extensions could be obtained in Europe. In France,
for example, companies were rewarded with extended periods of market exclusivity of
up to 10 years until this legislation was removed in 2004, with early implementation of
certain provisions of the EU Review. In other European markets, a key strategy
employed by pharmaceutical companies was to launch a reformulated version of a
mature brand, and withdraw the original formulation so that generics companies could
not refer to it in their abridged approval application. This strategy was successfully
used by numerous pharmaceutical companies, until it was precluded by a 2003 ECJ
ruling that a generic can be approved even if the marketing authorization (MA) for the
original branded product had been withdrawn in that country, provided the MA was
valid when the generic application was filed.
The review of European pharmaceutical legislation, published in April 2004, also

included provisions to prevent reformulations as a brand protection strategy by
introducing the concept of a European Reference Product, which can be referred to by
69
generics players when a product is not marketed in the particular member state in
which approval is sought. With removal of this circumvention technique, reformulation
will now only be successful in defending against generic penetration when patients are
switched to the new formulation ahead of patent expiry, and provided the reformulation
offers sufficient improvement over the original version to deter physicians from simply
switching patients back to the old formulation once cheaper versions are available. This
is key not only in some European markets, where authorities have begun to frown upon
the switching of patients to new formulations of a brand if it does not represent a
significant advancement in either efficacy or patient compliance over the original
formulation, but also in the US, as healthcare plans are increasingly promoting the use
of lower cost generic products over more expensive branded medications.
Direct-to-consumer (DTC) advertising has historically driven the success of the

reformulation strategy, by allowing manufacturers to favorably present new and
improved products to patients directly, thereby causing them to schedule visits with
their physician to request the product. However, virtually all US healthcare providers
have implemented programs to encourage the usage of generic medications over more
expensive branded products, and as these and other efforts to contain costs continue,
only those reformulations that represent a true advantage over the original are likely to
be accepted onto drug plans’ formularies without restrictions once low-cost generic
versions of the original product become available.
Line extensions
Line extensions are a particular type of reformulation intended to co-exist with the
original drug while expanding the brand franchise. This contrasts with reformulations
in which the upgraded product is introduced to replace the original drug and offers
benefits not available from the original product or anticipated generic versions of it.
Line extensions are designed to incorporate features that may preferentially appeal to
some patient populations but not others. These include, for example, new flavors,
value-added addition (such as Merck’s Fosamax Plus Vitamin D) and varying delivery
formats (tablet, capsule, syrup, or patch). Unlike replacement reformulations that are
70
introduced as patent expiration approaches, line extensions are launched throughout a
product’s lifecycle.
Schering-Plough’s allergy drug Claritin (loratadine), is an example of a brand with an

extensive family of line extensions. The original tablet was launched in 1993 and was
followed three years later with instantly soluble Claritin RediTabs, Claritin syrup and a
24-hour extended release formulation. The product and its subsequent range of
reformulations were so successful that they comprised almost 40% of the company’s
total revenues just prior to patent expiration. In 2001, the year before Claritin was
switched to over-the-counter use in the US, sales of the full product line reached
$2.2bn.
Objectives of reformulation
Manufacturers attempting to introduce a reformulated product may do so for a variety

of reasons:
To extend the product line and capture additional sales;
To match competitive moves, and re-capture lost share, particularly in the case of
extended release formats;
To protect a product from imminent generic competition.
In the first case – line extension – the objective is to proactively grow the product’s
franchise, increase visibility and capture share from other branded competitors. Line
extensions may include somewhat minor reformulations that are intended to contribute
only incrementally to the line, such as new flavors, new dosages or injectable versions;
however, they may also include more significant reformulations, such as an oral
version of an injectable drug or the first extended release formulation within a
particular indication.
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Once such significant products have been introduced, however, competing products
must keep pace or risk losing share. This risk of losing share also arises from the threat
of generic introduction of an original product. In cases where generic competition is
expected, manufacturers seek not to expand product lines, but to protect as much as
possible from competition. A highly successful reformulation may be able to defend
against such competitive threats for many months or even several years with only
minimal sales erosion.
Prerequisites for implementing a successful

reformulation
A successful reformulation, like a successful second generation launch, is heavily

dependent upon the ability of the manufacturer to develop an improved version of the
original drug. Reformulations intended to replace original drugs must provide clear
benefits over their predecessor, while line extensions may merely offer different
characteristics. In either case, however, excellent in-house R&D capabilities or access
to external technologies is essential. In addition, reformulations and particularly line
extensions must be promoted heavily for their benefits to be realized. This typically
involves significant advertising to both physicians and consumers. Therefore,
companies most successful in defending their brands through reformulation tend to be
large pharmaceutical companies with world class research teams and strong marketing.
Such companies also have significant budgets with which to acquire externally
developed technologies.
However, due to the long time frames and significant resource demands required for
drug development initiatives, even large companies must be fully committed to the
initiative. Developers whose strategic focus may be shifting to other products or
therapeutic areas are unlikely to be able to sustain the effort required to introduce a
successful reformulation.
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When reformulation is appropriate
In general, a drug reformulation is most appropriate for products with significant

market potential, when the reformulation meets an unmet need. In the case of line
extensions, this need may be important to just a small segment of the patient
population, such as a new delivery format. For reformulations intended to replace
original products, however, the improvement must be considerable and of value to the
majority of patients. When this occurs, acceptance in the marketplace is likely to be
high and cannibalization from generic products relatively low. For example, while
Shire’s Adderall XR (extended release amphetamine) for attention deficit hyperactivity
disorder (ADHD) was launched just months before the launch of Barr Laboratories’
generic version of the original drug, the reformulation received strong uptake as it met
a significant unmet need in the ADHD market – that of once daily dosing. Meanwhile,
Eli Lilly’s Prozac Weekly was launched similarly close to the date of entry of generic
fluoxetine, but the limited compliance benefits offered over the original daily
formulation severely hindered its uptake.
Because less frequent dosing is a benefit desired by many medication users, extended
release or controlled release formulas are a frequent type of reformulation that have
been utilized by a wide range of manufacturers for different indications, as shown in
Table 3.3.
In fact, it is not uncommon for competitors to introduce extended release formulations

once one drug in a particular class has done so. Occasionally, developers will introduce
other formats, such as a tablet format, to compliment a capsule formulation or vice
versa, as occurred with AstraZeneca’s prescription Prilosec before it switched to OTC
use. While manufacturers often try to introduce an oral version of an injectable drug to
increase usage, occasionally an oral medication will be introduced as an injectable.
This occurred with Johnson & Johnson’s introduction of an injectable form of
Sporanox for patients with difficult to treat, potentially life threatening infections, as
well as Wyeth’s launch of Protonix I.V. for ulcers. The injectable formulation provided
an alternative to oral therapy for patients unable to continue taking oral medications.
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Table 3.3: Selected reformulations for US commercialized drugs
Company Original drug Reformulation Indication Date of

launch
SA Ambien Ambien CR Insomnia Sep 2005

Pfizer Zithromax Zmax Infections Jul 2005
AZ Nexium Nexium I.V. Various GI conditions Apr 2005
Merck Fosamax Fosamax Plus D Osteoporosis Apr 2005
J&J Reminyl (twice daily) Razadyne (once daily) Alzheimer’s disease Dec 2004
TAP Prevacid Prevacid I.V. Various GI conditions Jun 2004
Wyeth Protonix I.V. with Protonix I.V. without Various GI conditions Apr 2004
in-line filter in-line filter
GSK Wellbutrin Wellbutrin XL Depression Sep 2003
Bayer Cipro Cipro XR Infections Jan 2003
SA Actonel (daily) Actonel (weekly) Osteoporosis May 2002
GSK Paxil Paxil CR Depression Apr 2002
TAP Prevacid (capsules) Prevacid (liquid) Various GI conditions Jan 2002
Shire Adderall Adderall XR ADHD Nov 2001
Pfizer Zyrtec Zyrtec D Allergies Aug 2001
Eli Lilly Prozac Prozac Weekly Depression Aug 2001
BMS Glucophage Glucophage XR Diabetes May 2001
Wyeth Protonix Protonix I.V. Various GI conditions Apr 2001
Organon Remeron Remeron SolTab Depression Feb 2001
Pfizer Detrol Detrol LA Incontinence Jan 2001
Merck Fosamax (daily) Fosamax (weekly) Osteoporosis Oct 2000
Novartis Lescol Lescol XL Cholesterol Oct 2000
SA Allegra (60 mg capsule) Allegra (30 mg, Allergies Feb 2000
60 mg, 180 mg tablets)
J&J Ditropan Ditropan XL Incontinence Jun 1999
J&J Sporanox (capsule, liquid) Sporanox (injectable) Infections Mar 1999
SA Allegra Allegra-D Allergies Sep 1997
SP Claritin Claritin-D Allergies Aug 1996
GSK Wellbutrin Wellbutrin SR Depression Aug 1996
AZ = AstraZeneca; BMS = Bristol-Myers Squibb; GSK = GlaxoSmithKline; J&J = Johnson & Johnson; SA =
Sanofi-Aventis; SP = Schering Plough
ADHD = attention deficit hyperactivity disorder; GI = gastrointestinal
CR = controlled release; XR = extended release; SR = sustained release; I.V. = intravenous; XL = extended
length ; LA = long acting; D = daily
74
Some reformulations, however, offer helpful but only incremental improvements over
earlier products. For example, in April 2004, Wyeth received approval for a
reformulated version of its intravenous Protonix I.V. The reformulation eliminated the
need for an in-line filter, a previously required extra step in an already time-sensitive
procedure to administer the medication to patients requiring immediate acid
suppression. The new formulation often reduces drug preparation time and
administration costs in hospitals because the intravenous admixture bag can be
replaced with a less expensive syringe for administration. Seven months later, Wyeth
obtained FDA approval for room temperature shipping and storage of the drug,
representing further improvement in convenience and cost savings for hospital
pharmacies.
Pricing
As with other product launch strategies, reformulations must be competitively priced

with careful consideration of the cost-benefit of the new product. As both European
regulators and US health care plans increasingly scrutinize drug prices and seek the
lowest possible prices for an acceptable therapeutic outcome, the incremental benefits
delivered by a reformulation will be examined ever more vigilantly and products that
appear to be over-priced in light of their new benefits will not be reimbursed. This is
particularly true for reformulations introduced prior to generic launch in an attempt to
preserve sales. Therefore, companies have somewhat restricted latitude in pricing a
reformulated product and may not always be able to set prices as high as they would
like to recapture development costs.
Timing
Timing considerations related to the introduction of a reformulation must take into

account the objectives of the reformulation. Manufacturers attempting to extend a
product line often introduce reformulations relatively early during the product’s
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lifecycle and continue to introduce new formulations to further expand the franchise.
These launches are typically less driven by timing concerns than those related to
competitive maneuvers. When directly competing products have been introduced in
newer, more patient-friendly formulations, however, manufacturers often try to
upgrade their own products as quickly as possible to avoid losing share. This often
occurs with extended release formulations, because consumers usually prefer less
frequent dosing and longer lasting effectiveness of active ingredient than medications
that wear off quickly so must be administered more often. It is not unusual, for
example, for drugs that address a particular indication to be reformulated in extended
release formats once the first long-acting drug in the class has been introduced.
When the reformulation is intended to counter an anticipated generic launch, however,

it is critical that the reformulated product is introduced at the correct point in the
declining sales curve of the product nearing patent expiry, to ensure that it does not
cannibalize the original product’s market share before maximum returns on investment
have been attained. However, at the same time, the reformulated product should be
introduced early enough before the introduction of generic competitors so that a
sufficiently large number of patients can be switched to the new product before generic
cannibalization ensues.
It is, however, not always possible to control timings for reformulation launches due to
delays that often occur in the development and/or regulatory approval processes. For
example, in July 2005, Pfizer introduced an extended release version of its blockbuster
antibiotic Zithromax (azithromycin) in an effort to mitigate the impact of Zithromax’s
US patent expiration in November of the same year. Zithromax is an immediate-release
dosage formulation taken during a five- to seven-day period, while Zmax’s single-dose
treatment is released into patients’ tissue three times faster that Zithromax, providing a
higher drug level earlier in the course of infection. This benefit may be significant
enough to stimulate patient switching, however four months’ lead time is typically not
sufficient for optimal conversion to reformulated product.
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Benefits and limitations of reformulation
The key benefits of a reformulation strategy are the ability to build a brand franchise
and/or maintain sales of a brand that is encountering competition by switching patients
to the improved product. However, reformulations must add significant value to the
treatment of a particular condition to be viable. Such value may be in the form of
improved ease of use or compliance, which may also reduce the need for
hospitalization. The efficacy of a reformulation strategy is shown in Figure 3.9.
Figure 3.9: Efficacy of reformulation based on product and owner

characteristics
Low sales
Side effects
Uncompetitiveness
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Benefits
Reformulation has several benefits. Proactive reformulation helps build a brand

franchise while reactive reformulation allows manufacturers to maintain sales of a
brand by switching patients to the improved product in the face of a competitive threat.
This threat may occur from either branded competitors or generic competition arising
from patent expiration of the product itself.
When generic competition occurs, a reformulation minimizes the effects of generic

competition. Similar to an indication expansion, second generation launch and Rx-to-
OTC switch, such a reformulation capitalizes on brand equity for a product, enabling a
manufacturer to leverage a drug’s established reputation to quickly build sales.
However, as shown in Figure 3.10, a reformulation allows a manufacturer to leverage
all three key elements of price, patient population and drug name, while indication
expansion, second generation launch and Rx-to-OTC switch allow the utilization of
only two of these three elements.
Although second generation drugs can often reference an original drug and may even
carry a similar name (as in the case of original Schering-Plough’s Claritin and follow-
on Clarinex), the drug is nonetheless marketed as a new and different entity. New
indications are marketed towards new patient groups and Rx-to-OTC switches must be
priced at a deep discount to prescription products.
In terms of patent protection, an improved drug delivery mechanism often prolongs the
original drug’s lifecycle. Although the patent on the product’s active ingredient
expires, exposing it to generic competition, the use of a new delivery mechanism to
administer the drug may add several more years of patent protection to the new
product, since a patent covering an advanced delivery system extends to any
pharmaceutical formulated with that system.
Furthermore, reformulations often require considerably lower investment in research

and development as well as post-launch sales and marketing than next generation
78
drugs. Because the reformulation is based upon an existing, cleared-to-market product,
the scientific complexity in developing an entirely new product is eliminated, as are
early stage clinical trials validating safety and efficacy. Promotional efforts may
piggyback on current campaigns, and without the need to educate consumers and
healthcare professionals on the benefits of the new product.
Figure 3.10: Comparative benefits of drug reformulation
Next
generation
launch
me
Pr
ice
Na
Reformulation
Indication Rx-to-OTC
expansion switch
Patient population
Limitations
The most significant limitation of reformulations is that they are only commercially
viable if they add significant value to the treatment of a particular condition. Such
value may be in the form of improved ease of use or compliance, which may also
reduce the need for hospitalization. These are clearly attractive features to prescribing
physicians and formulary decision-makers. As regulators and health plan
administrators in both the EU and the US become increasingly aware that patient
79
switching to lower priced brand reformulations shortly before patent expiry of the
original product will not be cost effective in the long term, the success of this strategy
will be limited to those reformulations that offer a significant advantage over the
original formulation in terms of efficacy and/or compliance. For example:
In Germany, reformulations are being included in new “jumbo” reference pricing

groups that do not differentiate between an original drug and a reformulated,
potentially better, version of the drug;
In the UK, regulators are advising physicians to consider long term cost benefits of
reformulations vis-à-vis generics;
In the US, the increasing use of tiered and/or restrictive drug plan formularies is
limiting uptake of reformulations.
However, there is a considerable downside for manufacturers attempting to introduce

new formulations that do not offer significant benefits over the original product.
Because it is possible to change the delivery mechanism of a product without adding
any significant extra value, a cheaper generic version of the off-patent product will
likely be preferentially prescribed by physicians. This occurred with Organon’s 2001
launch of Remeron SolTab (mirtazapine), a reformulation of the company’s Remeron.
Although SolTab was the first ever fast-dissolving antidepressant formulation, it was
relatively undifferentiated from original Remeron, which was formulated in a tablet
format, and consumers could see no clear benefit to the fast-dissolve tablets.
Furthermore, Organon did not maintain its promotional support of the drug. Remeron’s
patent had expired in 1998, but Organon had successfully delayed entry of generic
competition until 2003 by defending a patent covering use of mirtazapine in
combination with other SSRI’s. Launch of the reformulation was successful in boosting
the peak pre-generic sales of the Remeron franchise, and its timing nearly two years’
prior to generic launch is credited with enabling a relatively high level of patient
switching. However, following generic entry in January 2003 of mirtazapine, Remeron
experienced significant sales erosion.
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Reformulation strategies can also cause confusion the brand image of a product. For
example, producing multiple new formulations of an existing product, each with
marginally different brand names but no clearly defined benefits, could undercut sales
of the product range in question, since customers may be confused as to the therapeutic
benefits of individual products within the range.
Additionally, reformulations could also result in negative publicity for the company, as
AstraZeneca experienced following its introduction of a multiple unit pellet system
(MUPS) for its gastrointestinal drug, Losec (omeprazole). In a highly publicized
attempt to block generic entry, AstraZeneca took advantage of the fact that in the
European generic approval process, the reference product must be marketed in the
country in which generic approval is sought. When the company launched Losec
MUPS tablets in 1998, it also withdrew the original, soon to be patent expired, capsule
formulation from the market. Prior to withdrawal, Generics (UK) Ltd. had filed for
approval of its generic version of omeprazole capsules in Denmark. Approval was
actually granted after withdrawal of the reference product, and AstraZeneca therefore
sued the Danish authorities for granting the approval. The case was referred to the ECJ,
which ruled that a generic can be approved even if the marketing authorization (MA)
has been withdrawn in that country, provided the MA was valid when the generic
application was filed. The review of European pharmaceutical legislation published in
April 2004 included further provisions to prevent reformulations by introducing the
concept of a European Reference Product. Not only did AstraZeneca’s tactics mar its
corporate image, but generic omeprazole capsules were granted approval in certain
markets based on reference to the MUPS dossier, largely because of the very high cost
omeprazole represented to European health care authorities.
Over the next several years, questions of whether it is cost-effective to develop a new
formulation for an existing product that addresses an unmet therapeutic need will
become increasingly difficult to answer, as the use of more advanced drug delivery
mechanisms is incorporated into the initial R&D stage of more and more products,
rather than being a post-launch addendum. This is particularly true since generics
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manufacturers are increasingly acquiring the capabilities to develop their own non-
infringing reformulations, which may limit the appeal of a new branded reformulation.
In addition to the issue of cost versus benefit, there are several other important
limitations to the use of a reformulation strategy. As with many other lifecycle
management strategies, reformulation will usually not re-invigorate a product with low
sales, limited brand equity and/or limited market potential – although extended release
formulations may offer greater convenience and therefore enhance uptake. It is also not
appropriate for developers with significant resource constraints, lack of technological
expertise or those with a shifting strategic focus.
Case studies
The following case studies illustrate how reformulations can be used to expand a
brand’s franchise. The first describes how GlaxoSmithKline expanded Paxil’s usage by
introducing a controlled release version of the drug. The second discusses how Wyeth
introduced an orodispersable tablet version of its Prevacid to expand the product’s
patent protection, but was hindered by regulators in switching users to the new product.
Paxil (US) – successful reformulation
GlaxoSmithKline’s Paxil (paroxetine), indicated for the treatment of depression, panic

and anxiety disorders, is a selective serotonin reuptake inhibitor (SSRI), initially
launched by SmithKline Beecham in 1992. By 2001, the drug had become a
cornerstone of GlaxoSmithKline’s central nervous system franchise, accounting for
46.3% of the group’s total sales. Paxil’s 2001 sales of $2.6bn represented a 19.8%
increase from the previous year and the product was ranked second behind market
leader Prozac (fluoxetine).
Because of the drug’s importance to GlaxoSmithKline, the company proactively

managed Paxil’s lifecycle, expanding the drug’s indications beyond its initial use for
82
depression to eventually include obsessive compulsive disorder; panic disorder, with or
without agrophobia; social anxiety disorder; post-traumatic stress disorder; and
generalized anxiety disorder. These were important expansions, and although Lilly’s
Prozac, Pfizer’s Zoloft (sertraline) and Solvay’s Luvox (fluvoxamine) were
subsequently also approved for obsessive compulsive disorder, panic disorder, social
anxiety disorder, post-traumatic stress disorder; and/or generalized anxiety disorder,
Paxil had the advantage of establishing market share prior to the entry of the other
products as it was the first to obtain clearance to market for panic disorder in 1996.
However, in 2001 Barr Laboratories introduced generic fluoxetine, which caused an

immediate and significant impact to Prozac’s sales, suggesting that other SSRIs might
also be highly vulnerable to generic competition.
This was a concern for Paxil, due to the drug’s patent status. The last basic compound
patents on Paxil had expired in the EU in 1999. While GlaxoSmithKline had been able
to mount a legal challenge to patents protecting a stable crystalline salt product of
paroxetine (paroxetine hydrochloride hemihydrate), in May 2001, generics company
TorPharm succeeded in attaining an Abbreviated New Drug Application (ANDA) for
paroxetine from the FDA. Furthermore, a High Court ruling in the UK in December
2002 that Synthon’s version of paroxetine, paroxetine mesylate, did not infringe GSK’s
patent on paroxetine hydrochloride hemihydrate established a precedent for future
decisions in other countries, as several generics companies have developed different
versions of the paroxetine salts.
To counter this threat, GlaxoSmithKline introduced a controlled release version of the

drug, Paxil CR, in the US in April 2002. Paxil CR incorporates new, controlled release
Geomatrix technology licensed from SkyePharma. By the end of September 2002,
Paxil CR accounted for 25% of total Paxil prescriptions, indicating strong initial uptake
of the new version, and by early 2006, the controlled release formula comprised about
half of the franchise. Aside from easier dosing, the new formulation provides more
consistent delivery of active ingredient throughout the day so that symptoms longer
after drug consumption will be addressed as effectively as those occurring sooner. This
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may be more beneficial to some patients than others, depending upon the nature,
severity and typical timing of their symptoms.
This case study illustrates how a new formulation that delivers a significant benefit to
patients can help a manufacturer buoy sales even after the introduction of generic
competition.
Prevacid (UK) – unsuccessful reformulation
In Europe, Wyeth has introduced a new formulation of Prevacid (lansoprazole), the

popular heartburn and ulcer medication. However, the company has encountered
increasing difficulties in switching patients to the new formulation, particularly in the
UK market, where authorities have begun to frown upon the switching of patients to
new formulations of a brand if it does not represent a significant advancement in either
efficacy or patient compliance over the original formulation.
Takeda, Zoton’s original developer, has patent protection extending to January 2008 in
the UK on a product formulation involving spherical granules with a core. This
formulation of Prevacid is sold in the UK by licensee Wyeth as Zoton FasTabs, a
strawberry flavored orodispersible tablet that contains lansoprazole in the form of
enteric coated gastroresistant microgranules. The orally disintegrating formulation is
also known as “lansoprazole fast disintegrating tablet” (LFDT), and has the advantage
of being able to be administered without water, a benefit for travelers, commuters and
others on the go.
For its manufacturer, the importance of Prevacid orodispersible tablets in the UK lies
chiefly in the potential this new formulation provides for extending patent life. While
the SPC for Prevacid in the UK expired in December 2005, Prevacid orodispersible
tablets are protected by formulation patents that do not expire until January 2008. If
Wyeth is able to switch patients from the original capsules to the new tablets, the
company could enjoy patent protected sales for three more years than will otherwise be
possible. To this end, drug representatives from Wyeth had approached primary care
84
practices in the UK, encouraging them to switch Prevacid patients to the new
orodispersible tablets, which were priced at a 10% discount to original Prevacid
capsules.
However, to ensure that even lower priced Prevacid generics will not be foreclosed
from the market, some NHS local authorities have contacted primary care practices
advising them to consider the long term savings from generic products. In prescribing
advice issued in March/April 2004 notice to healthcare professionals in Nottingham,
the prescribing adviser at Nottingham City primary care trust warned practices of the
implications of switching between Prevacid capsules and tablets. In June 2004, Wyeth
suspended its program of offering to switch patients after a ruling by regulators.
Such occurrences demonstrate that in the mature generics markets of Germany and the
UK, increased levels of regulatory scrutiny may hinder the success of reformulation
strategies unless the reformulation addresses a significant unmet medical need. In the
Spanish, French and Italian markets, there may still be room for launch of a
reformulation that allows physicians to retain control over the product received by the
patient in the face of generic substitution by specifying the particular formulation on
the prescription. This is because physicians in France and Spain tend to resist giving up
full control of the dispensing decision to pharmacists. In other EU markets (excluding
the UK where substitution is not permitted), pharmacist opinions vary on the issue of
substitution.
This case illustrates the difficulty that manufacturers can encounter from healthcare
payers when attempting to switch patients to new formulations. Payers are often
reluctant to incur high costs for newly formulated drugs when generic equivalents are
available and may inhibit a company’s attempts to switch patients.
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Conclusion
Like indication expansion, reformulation is a commonly-used lifecycle management

strategy that may be employed either to proactively extend a brand’s reach or
reactively counter a competitive threat. From a drug development perspective, it is
considerably easier, faster and cheaper to reformulate a product than to develop an
entirely new next generation product; however, reformulations launched prior to patent
expiration can be a more profitable strategy than the launch of a manufacturer’s own
generic or an Rx-to-OTC switch, since the high original prices of the prescription drug
are preserved. Because of this, many manufacturers begin work on new formulations
early in a drug’s lifecycle, with an objective of introducing several reformulations that
will both extend the product’s franchise and help prevent against generic competition.
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CHAPTER 4
Second generation launch
87
Chapter 4 Second generation launch
Summary

populations as originator products; they may be chemically similar to the original
product, represent combination products or follow very different mechanisms of
action.
A second generation launch allows a manufacturer to leverage the market share

established by an earlier product by switching patients to the new drug. To aid the
rate of patient switching, companies sometimes remove the original product from
the market upon introduction of the second generation product.
Second generation launches are most appropriate for products with significant
market potential, particularly those in which the science continues to evolve and
developers believe they may be able to introduce new and improved products.
Therefore, the most important prerequisite for companies considering the strategy
is R&D capabilities, particularly in the therapeutic area of interest.
Ideally, a second generation product will yield sales at the same or greater level
than its predecessor, thereby preserving the original product’s brand equity.
Pricing plays a key role in the success of a second generation launch strategy, and
is largely based upon the therapeutic advantages offered by the new product
compared with both the originator product and other competitors. Increasingly,
new products must demonstrate clear advantages to be covered by health care
plans.
Second generation products allow developers to re-start the clock on patent

protection, leverage existing intellectual know-how and capitalize on brand
equity. Gains may be significantly greater than those from other lifecycle
management strategies. However, the strategy is also considerably more costly
and time consuming, requiring a significant commitment to a development
program.
88
Introduction

populations as originator products. They may be chemically similar to the original
product, representing a variation on the original molecule or even containing the
original drug as a component (such as in a combination product), or they may be
chemically dissimilar, following a very different mechanism of action.
In either case, launching a second generation product allows a manufacturer to leverage

the reputation and market share established by an earlier, maturing product. This
strategy is similar to reformulation, but involves a higher degree of investment in
research and development. If implemented successfully, innovator companies benefit
from a new period of patent protection associated with the new product and may even
grow sales to a higher level than those attained by the original product. This is
accomplished by switching as many patients as possible to the new product ahead of
generic entry. Assuming the second generation product offers a significant advantage
over the older drug, patients usually do not switch back to generic versions of the old
product following patent expiry. For example, a majority of the patients that switched
to AstraZeneca’s Nexium, which was introduced as a second generation product to its
original ulcer drug, Prilosec, did not return to Prilosec even though the product had
been switched to OTC use.
To aid the rate of patient switching, companies often remove the original product from
the market upon introduction of the second generation drug. For example, UCB
withdrew its allergy medication Zyrtec (cetirizine) from the French market in
September 2004, three months prior to patent expiration. Although the marketing
authorization was not withdrawn, and thus generic MAs would not have been
prevented from being approved (even before the introduction of a European reference
product to prevent this tactic), the move still hindered generic substitution. In removing
89
the drug from the market prior to generic entry, UCB effectively forced physicians to
prescribe its follow on product Xyzall (levocetirizine).
In some respects, removing a first generation drug from the market can be easier to
accomplish in the US rather than in Europe due to the country’s predominantly private
healthcare system and the ability of drug manufacturers to advertise directly to
consumers (DTC). US drug formularies have historically been less restrictive than their
European counterparts as they are funded by employers with somewhat greater
flexibility than the publicly-run healthcare programs financed in Europe through
collections from taxpayers. The free pricing system in the US also removes the need to
agree on pricing and reimbursement with regulators prior to product launch, speeding
time to market of second generation products compared to Europe, where pricing and
reimbursement negotiations can delay launch by months or even years. This can be an
important advantage, since success of the strategy is often dependent upon launching a
second generation product prior to the entry of a generic version of its predecessor.
Additionally, the extensive DTC advertising campaigns run in the US allow

manufacturers to quickly build brand equity and stimulate patient demand. The Center
for Health Policy & Research estimates that each $1 in DTC ad spending generates
more than $4 in new drug sales due to consumers’ propensity to see a drug ad then
schedule an appointment with their physician to request the product. Because of this,
use of DTC advertising has grown to more than $4bn in 2005 with continued annual
increases in the 5% to 8% range expected through 2010.
However, the ever increasing focus on cost containment among US health insurers is
likely to reduce the potential for a second generation launch strategy except in cases
where the new brand represents a significant improvement over the original. In
particular, the growing use of step-therapy and therapeutic substitution by certain
health plans represents a threat to the success of a second generation launch strategy.
Cost containment initiatives will result in the follow-on product being reserved for last-
line therapy, while step-therapy and therapeutic substitution will prevent the uptake of
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a second generation product even when the company has been successful in driving
physicians to prescribe the new product.
Objectives of second generation launch
Manufacturers that attempt to introduce a second generation product typically do so to

extend and prolong a successful franchise in a particular therapeutic application. Their
goal is to switch patients from a first generation product to a successor prior to patent
expiration, thereby minimizing the impact of generic competition. Ideally, a second
generation product will yield sales at the same or greater level than its predecessor,
thereby preserving the original’s brand equity.
Prerequisites for implementing a second generation

launch
Due to the intensive nature of the drug development process, the most important
prerequisite to implementing a second generation launch strategy is excellent in-house
R&D capabilities, particularly in the therapeutic area of interest, or access to external
R&D. This means that the strategy is most practical for:
The largest pharmaceutical companies with the biggest research teams;
Pharmaceutical companies with the greatest budgets to acquire externally

developed products;
Specialized developers with very specific expertise in certain therapeutic areas.
Due to the long time frames and significant resource demands required for drug
development, however, even these companies must be committed to a long term
development program and consider the initiative to be one of top priority. Developers
with many projects in different areas that are unable to allocate sufficient resources to
such a program are unlikely to be successful.
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After a product has been cleared to market, a manufacturer must also be able to commit
sufficient marketing resources to support the new brand. This will usually include
campaigns directed at both healthcare professionals and consumers, to clearly delineate
the advantages of the new product over the original. If the marketing message is not
delivered clearly, or if it is not disseminated widely enough, it is unlikely that a large
enough proportion of patients will switch to make the drug launch a success.
Furthermore, the medical community is growing increasingly distrusting of new
products introduced upon patent expiration merely as a tactic to preserve sales.
Therefore, a high degree of marketing skill, as well as a strong commitment to the new
product, is required to ensure that the new drug is positioned appropriately.
When second generation launch is appropriate
In general, second generation launches are most appropriate for products with
significant market potential, particularly those in which the science continues to evolve
and developers believe they may be able to introduce new and improved products. In
the past, the large antibiotic and anti-HIV drug classes have been subject to continuous
renewal, with manufacturers expert in these areas introducing a steady stream of new
products as patents on older drugs expired. This resulted in the creation and
exploitation of a broad range of product families within each area – antibiotics, for
example, include sulphonamides, penicillins, tetracyclines, cephalosporines, cephems,
aminoglycosides, macrolides, glycopeptides, quinolones, carbapenems, oxazolidinones,
streptogramins and others, while anti-HIV drugs include nucleoside reverse
transcriptase inhibitors (NRTIs), non-nucleoside reverse transcriptase inhibitors
(nNRTIs), protease inhibitors (PIs), reverse transcriptase inhibitors (RTIs), and
combination products. Several manufacturers have offered more than a dozen different
antibiotics and half a dozen anti-HIV drugs over the years. From a clinical perspective,
this continuous evolution helped address the growing problem of microbial resistance,
which increasingly rendered earlier medications ineffective.
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However, as drug development becomes ever more complex and clinical requirements
rise, subsequent launches have become more limited and manufacturers are focusing
such efforts on the largest applications in which they can leverage significant brand
equity. Table 4.4 shows selected second generation launches in the US All original
drugs addressed extremely large markets and most were blockbusters prior to patent
expiration.
Table 4.4: Selected second generation launches for US commercialized drugs
Company Original drug Second generation Indication Date of 2nd

drug generation launch
Pfizer Neurontin Lyrica Epileptic Seizures Sep 2005

Eli Lilly Prozac Cymbalta Depression Aug 2004
Forest Celexa Lexapro Depression Sep 2002
Pfizer Diflucan Vfend Fungal infections Jun 2002
SP Claritin Clarinex Allergies Jan 2002
Pfizer Celebrex Bextra Arthritis pain Apr 2002
AZ Prilosec Nexium Heartburn, ulcers Mar 2001
Merck Mevacor Zocor Cholesterol Jan 1992
AZ = AstraZeneca; SP = Schering Plough
Source: Company filings Business Insights Ltd
Other developers continue to work on second generation products, but many have not
yet commercialized products due to regulatory issues. For example, in October 2005,
the FDA extended the review period for Pfizer and Sanofi-Aventis’s diabetes drug,
Exubera. The orally inhaled insulin product would extend Sanofi-Aventis’s diabetes
franchise, following the 2005 expiration of its patent on Amaryl (glimepiride). Merck’s
Arcoxia (etoricoxib), a second generation version of its COX-2 arthritis pain reliever,
Vioxx (rofecoxib), is unlikely to be approved in the US at all following the company’s
withdrawal of Vioxx in September 2004 on safety issues. This indicates that launching
second-generation products is getting harder, and as a result, second-generation
launches are likely to become less frequent.
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Combination products
Some second generation products, such as GlaxoSmithKline’s asthma medication

Advair and diabetes drug Avandamet, are combination products. Advair contains two
widely used and efficacious products in one asthma inhaler – GlaxoSmithKline’s
Serevent (salmeterol), which addresses bronchoconstriction, and the company’s
Flovent (fluticasone), a corticosteroid that helps reduce lung inflammation, irritation
and swelling. Similarly, Avandamet represents the first combination therapy for the
treatment of type II diabetes, and combines GlaxoSmithKline’s Avandia (rosiglitazone
maleate) with generic metformin in one tablet. Metformin works primarily on the liver
to lower the blood sugar level while Avandia directly targets insulin resistance, an
underlying cause of type II diabetes. The company introduced both Advair and
Avandamet proactively to capitalize on new opportunities when it found that some
patients were taking several medications separately. In addition to convenience,
combination products can also at times offer therapeutic benefits neither component
can provide individually. While Eli Lilly’s older Zyprexa and Prozac had been cleared
to market for a range of indications related to depression, Symbyax became the first
FDA-approved medication for the treatment of bipolar depression. Table 4.5 shows
selected combination products introduced in the US.
Table 4.5: Selected combination products introduced in the US, 1999-2004
Company Original drugs Combination drug Indication Date of 2nd

generation launch
Merck, SP Zocor, Zetia Vytorin Cholesterol Jul 2004

Pfizer Lipitor, amlodipine Caduet High cholesterol, Mar 2004
hypertension
Eli Lilly Zyprexa, Prozac Symbyax Depression Feb 2004
TAP Prevacid, naproxen Prevacid NapraPAC NSAID-associated Nov 2003
gastric ulcers
GSK Avandia, metformin Avandamet Diabetes Oct 2002
BMS glyburide, metformin Glucovance Diabetes Sep 2000
GSK Serevent, Flovent Advair Asthma, COPD Aug 2000
TAP Prevacid, amoxicillin, Prevpac Duodenal ulcers Aug 1999
clarithromycin
BMS = Bristol-Myers Squibb; GSK = GlaxoSmithKline; SP = Schering Plough
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As with other second generation products, however, the development of a combination
product can be complex and time consuming. Some products have been cleared to
market in Europe but not yet approved in the US. For example, AstraZeneca’s
Symbicort is a direct competitor to Advair, combining the company’s patent-expired
Pulmicort (budesonide) with Oxis (eformoterol). Following its European launch in year
2000, AstraZeneca has twice filed with the FDA, most recently in late 2000, but the
drug is not expected to become available in the US until after 2007 due to delays in
regulatory review.
There have been several other attempts to develop combination products that have not
proven successful, including Schering-Plough and Merck’s development of a
combination tablet containing Claritin and Singulair (montelukast) for the treatment of
allergies. Clinical results of the combination product proved disappointing and in
January 2002, Schering-Plough reported that phase III trials of the combined pill did
not demonstrate a statistically significant improvement in the treatment of seasonal
allergic rhinitis compared with each product administered separately. The initiative
would have built upon the company’s success introducing a combination product for
cholesterol called Vytorin.
As the cost of drug development continues to rise and regulatory scrutiny increases,
such combination products are likely to be come more common as companies attempt
to leverage existing products to the fullest possible extent.
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Pricing
Pricing considerations play a key role in the success of a second generation launch
strategy, and are largely based upon the therapeutic advantages offered by the new
product compared with both the originator product and other competitors. If the
strategy’s return on investment depends upon launching the follow-on product at a
premium price to the original brand – which is often the case for drugs that have
proven expensive to develop and/or address smaller target markets – clinical
superiority of the new product must be established.
This is particularly important in Europe, since regulatory authorities will be reluctant to

approve a premium price for the product in the absence of clear therapeutic advantage
when the original molecule is available (or is soon to be available) as a low-cost
generic product. Lundbeck, for example, faced long delays in the launch of its anti-
depressant Cipralex (escitalopram), a follow-on product to Cipramil (citalopram), in
the French market. After receiving approval for the product in 2002, pricing and
reimbursement negotiations delayed product launch by several years. In other European
markets, Lundbeck was able to establish superiority of the second generation product
and institute premium pricing. This helped offset volume declines in France, as well as
other countries where introduction was delayed such as Spain and Germany.
Pricing also plays a role in reimbursement in the US. Although many managed care
plans discourage usage of new medications even when they demonstrate clinical
advantages – particularly for therapeutic classes in which generics are available – US
healthcare plans tend to be somewhat more flexible than European plans and extended
review periods are uncommon.
In the case of combination products, competitive pricing can be particularly effective

when combined products are priced below the cost of their individual components
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when those components are commonly used together. When GlaxoSmithKline
introduced Advair/Seretide, it priced the combined product less than the total of its two
components, Flovent and Serevent, in all major markets. In the UK, prices were
discounted from 19% to 25% compared with the individual drugs; German prices were
discounted from 14% to 27%; and French prices were discounted by about 12%. This,
along with data demonstrating significant clinical advantages to using the combined
drug rather than Flovent and Serevent individually, stimulated strong usage and in
2005, global sales of the drug exceeded $4bn.
Timing
As with other lifecycle management strategies, the timing of a second generation

launch is critical to ensure that the new product does not cannibalize the original
product’s market share yet allows the maximum number of patients to be switched
prior to the introduction of generic products. Unlike reformulations and line extensions,
which may be introduced considerably earlier in a product’s lifecycle, second
generation drugs are often launched a year or two prior to patent expiration and/or
genericization.
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Benefits and limitations of second generation launch
In Figure 4.11 the efficacy of a second generation launch strategy is evaluated based on
various product and manufacturer characteristics.
Figure 4.11: Efficacy of second generation launch based on product and owner
characteristics
Low sales
Side effects
Uncompetitiveness
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Benefits
Unlike other lifecycle management strategies that attempt to minimize the damage
caused by patent expiration, the proactive launch of a second generation product can
result in significant gains for a drug developer that match or even surpass those of a
successful original product. The strategy allows companies to:
Gain both patent protection and exclusivity;
Leverage existing intellectual know-how;
Capitalize on brand awareness and reputation associated with the original brand;
Maintain brand sales when patients are switched to a new product ahead of patent
expiry.
Even though it may be chemically similar to its predecessor, a next generation product
is effectively an entirely new product with de novo patent protection. Therefore, it may
be marketed exclusively for many years before its developer will face generic
competition. However, while marketers must typically build sales for new products
from scratch, a second generation drug may leverage the brand equity associated with
its predecessor to quickly capture sales by shifting patients of the first generation
product to the second. This works particularly well in the US, where DTC advertising
is often used to stimulate interest among consumers, inducing them to visit their
physician and request a particular medication.
Additionally, the development effort required to identify a second generation product

for a particular therapeutic application is often less significant than that needed to
develop a product from scratch, since researchers already have an understanding of the
chemical, biological and pharmacological issues involved and may be able to leverage
prior work. This gives them a considerable advantage over competitors attempting to
enter the field with no such prior knowledge. Because of this, many drug developers
maintain standing research programs in key areas that represent large and established
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markets such as arthritis, cholesterol reduction, gastrointestinal disease, and
hypertension, for example. Promising candidates emerging from these activities may
represent novel compounds as well as next generation products, depending upon
clinical viability.
Limitations
Despite these benefits, second generation launch is among the more technologically
complicated lifecycle management strategies and one that is heavily dependent upon
luck in the laboratory. Due to long drug development times, it requires that a
manufacturer begin work on a follow-up product very early in an original product’s
lifecycle and commit significant resources to this initiative. Although research
previously conducted for the original drug may shorten the average 14-year time span
and $800m budget typically required to take a new medicine from concept through
regulatory approval, the effort is nonetheless likely to be considerably more significant
than that required to develop a new formulation or indication for a current product.
These development efforts may sometimes be optimized through the exploration of

combination products rather than entirely novel compounds. Combination products
incorporate two or more existing medications into a single formulation, which may
provide greater convenience or therapeutic benefit than the products would offer if
used on their own. However, such combinations can also be technologically
challenging, as was the case with Leo Pharmaceuticals’ psoriasis treatment, Dovobet.
The topical product, which has been launched in Europe but has not yet received
approval in the US, combines calipotriol with a steroid – a common first-line treatment
for mild psoriasis. However, prior to Dovobet’s launch, these two products were unable
to be applied together because of differing pH levels which eroded the efficacy of the
other product. Leo developed a novel technology that allowed for the two products to
be delivered simultaneously.
A second generation launch is also not guaranteed to yield a commercially viable

result, as clinical testing often reveals safety and efficacy problems with compounds
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that appear theoretically sound. This is a particular problem for second generation
products, since to be competitive, they must demonstrate an advantage over their
predecessor. In the absence of such an advantage, they will quickly be overtaken by
low cost generic versions of the first generation product.
This occurred with Bristol-Myers Squibb’s Glucovance (glyburide, metformin), which

the company introduced in 2000 in anticipation of the patent expiration of its
blockbuster diabetes drug, Glucophage (metformin). Although Glucovance was shown
in clinical trials to provide better blood sugar control than glyburide or metformin
separately, the added benefit was not sufficient to outweigh the significantly lower cost
of generic metformin and in 2005, the company’s total sales of Glucovance remained
under $200m.
Healthcare plan providers will also limit usage of second generation products that do
not demonstrate clear advantages over predecessors. In the UK, for example, regulatory
scrutiny of second generation launches as a product protection strategy is rising and
reimbursement will increasingly be limited to those follow-on products that offer a
significant advantage over the original product.
In other markets, even clear therapeutic advantages may not be sufficient to stimulate
usage over lower cost products as plan providers continue to implement cost control
measures. In the US, tiered and/or restrictive drug plan formularies are increasingly
used to encourage participants to utilize lower cost medications. These structures
provide various disincentives for participants to use higher priced medications,
including higher co-payments and physician approvals. Similarly, the brand reference
pricing groups implemented in Germany in 1989 set maximum reimbursement levels
for products based upon their chemical composition, mode of action or therapeutic
effect. As lower cost generics are introduced, pricing pressure is exerted upon the
group and manufacturers are not able to command as high prices for next generation
products. This is also occurring in France with the establishment of partial reference
pricing.
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Furthermore, as shown in Figure 4.11, original products with low sales or only niche
appeal are typically poor candidates for a second generation product, reflecting limited
market potential. Even in a large market, first generation products with limited brand
equity cannot generally be leveraged to promote a second generation launch.
A second generation launch strategy may also be affected by the implementation of

other lifecycle management strategies, such as an Rx-to-OTC switch. For example, the
January 2002 US launch of Schering-Plough’s Clarinex (desloratadine) was
cannibalized by the company’s Rx-to-OTC switch of its predecessor, Claritin
(loratadine), just two months earlier. The switch made Claritin the first non-sedating
antihistamine to be sold over-the-counter for treatment of allergies. The product’s
strong popularity as a prescription drug, combined with a significant promotional
program that included both DTC advertising and heavy promotion through healthcare
plans, encouraged many prescription allergy users to switch to OTC medications and
thereby shrunk the overall size of the prescription allergy drug market. Although
Schering-Plough’s promotion of Clarinex emphasized the fact that, unlike some other
prescription antihistamines such as Sanofi-Aventis’s Allegra (fexofenadine), Clarinex
is indicated for treatment of both indoor and outdoor allergies, the drug suffered from a
limited perception of increased effectiveness and/or potency over Claritin and was
hindered by its considerably higher price compared with the new OTC drug. In the first
nine months of 2005, Clarinex recorded US sales of just $249m, less than one quarter
Claritin’s $1.4bn in US sales prior to the drug’s loss of patent protection in 2002. It is
unlikely that Schering-Plough would have pursued the switch, given its imminent
introduction of the potentially more profitable Clarinex, had several managed care
organizations not petitioned the FDA and other manufacturers not submitted
applications for an OTC version of the drug.
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Case studies
The following case study describes the successful US launch of Nexium, a second
generation product for AstraZeneca to build upon its highly successful Prilosec.
Nexium (US) – successful next generation launch
One of the most significant second generation launches in recent years is that of
AstraZeneca’s Nexium (esomeprazole). The company introduced the heartburn and
ulcer drug as a follow-on to its blockbuster first generation proton pump inhibitor,
Prilosec/Losec, as a means to protect its highly successful gastrointestinal franchise.
However, Nexium’s success has varied considerably from market to market and has
largely been based upon its timing with regard to launches of generic Prilosec/Losec.
In the US, AstraZeneca introduced Nexium in March 2001. The drug was called the
“new purple pill” to capitalize on brand loyalty built for the company’s original purple
pill, Prilosec, but positioned competitively in terms of price and efficacy. Nexium was
priced at a discount to Prilosec, and AstraZeneca conducted an extensive, $126m DTC
promotional campaign touting the greater efficacy of Nexium compared to Prilosec.
Furthermore, Nexium was introduced with a wider range of indications and clinical
data demonstrated higher healing rates of erosive esophagitis and a shorter time to
sustained resolution of heartburn compared with Prilosec. After Kudco launched the
first generic version of omeprazole in December 2002, AstraZeneca continued to
promote Nexium heavily to build share. Through the first nine months of 2005,
Nexium achieved US sales of more than $2.2bn, up 18% over the first three quarters of
the prior year. In contrast, AstraZeneca’s sales of prescription Prilosec were down
nearly 40% in 2005.
Similarly, AstraZeneca introduced Nexium into the UK market well ahead of the
launch of generic omeprazole. Promotion of the drug to physicians was strong and
focussed on Nexium’s superior cost-effectiveness compared with Losec. As in the US,
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this permitted patients to switch to the second generation product before cheaper
generic omeprazole became available and Nexium became one of the fastest-prescribed
new medications in the country. As a result, generic penetration of the Losec franchise
was below both the UK average and the average generic penetration found in similarly-
sized brands.
However, the strategy was not as successful in Germany, where generic penetration of
omeprazole was much higher. In Germany, Nexium was launched post generic entry
when switching consumers from a lower-priced drug was much more difficult.
Furthermore, AstraZeneca failed to prove to the German authorities that Nexium was
sufficiently differentiated from Losec for the purposes of the new “jumbo” reference
price groups in Germany, so Nexium was classed in the same reference price group
with Losec and generic omeprazole. The groups were first introduced in Germany in
early 2005 and contain both on- and off-patent medicines. This forced AstraZeneca to
either cut the price of Nexium to the reference pricing group level or rely on patients
paying out of pocket for the drug – both of which significantly impact the company’s
return on investment.
Other companies have also failed to win share for second generation products when
their introduction has occurred after the launch of generic versions of a first generation
product. For example, Lundbeck’s anti-depressant Cipralex (escitalopram), which is
marketed in the US as Lexapro by Forest Laboratories, was introduced in Germany
only after generic versions of the company’s first generation product Cipramil
(citalopram) had been launched. As a result, generic citalopram achieved above
average penetration in the German market while Cipramil’s prescription volume has
suffered. To counter this trend, Lundbeck implemented a premium pricing strategy for
Cipramil. However, while this premium pricing strategy has helped offset the drug’s
low usage, overall sales in Germany continue to suffer as the generic brand gains
acceptance.
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Conclusion
The development of a second generation product is a high risk, high reward strategy
that could significantly extend a successful originator’s product franchise if an
improved product is effectively commercialized. Developers often have expertise in a
particular technology or therapeutic area which can be leveraged to give them an
advantage in the development of a new product. However, as drug development and
clinical testing becomes increasingly complex, time-consuming and expensive, and
scrutiny of safety issues continues to rise, a successful outcome may be difficult to
achieve. Because of this, researchers often begin work on next generation products
early in a new drug’s lifecycle and rarely rely exclusively on second generation launch
as a lifecycle management strategy. Rather, second generation launch is more likely to
be pursued in tandem with one or more other options, which may or may not be
abandoned if a more lucrative second generation launch becomes a viable possibility.
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CHAPTER 5
Rx-to-OTC switching
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Chapter 5 Rx-to-OTC switching
Summary
Rx-to-OTC switching refers to the process of moving a prescription drug to the

over-the-counter (OTC) market for use by consumers without physician
supervision. In some countries such as the US, this allows the drug to be broadly
available in any retail outlet and in others, such as the UK and Germany, it must
be requested from a pharmacist.
Switched products are more convenient for consumers and considerably less
expensive for healthcare plan providers; after a drug switches to OTC use, many
plans implement disincentives for participants to use medicines in the same class.
Ideal switch candidates are those that address conditions patients can self-
diagnose, not require ongoing monitoring by a physician or pose a significant risk
of unacceptable side effects, and possess a dosing regimen and/or labelling
instructions that patients can readily understand. However, switching drugs for
therapeutic uses new to the OTC market is difficult, particularly in the US
Rx-to-OTC switches forced by healthcare payers are a new phenomenon, but are
rarely pursued due to the considerable time and resources required to accomplish
them, as well as the potential ill will that can be generated within the industry.
Switching provides a revenue stream for a maturing product whose sales would
otherwise be cannibalized by generics. It also offers new product opportunities
for companies’ OTC divisions. In Europe, companies may build brands for
switched products by advertising to consumers, a practice that is not permitted for
prescription drugs. However, because OTC drugs are considerably lower priced,
switched drugs offer significantly lower revenue opportunities than prescription
medicines.
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Introduction
Rx-to-OTC switching refers to the process of moving a prescription (Rx) drug to the
over-the-counter (OTC) market for use by consumers without physician supervision. In
the US, non-prescription drugs are available directly to consumers through any retail
outlet over-the-counter. In several European countries, however, there is another
classification in addition to Rx and generally available OTC – a class of drugs that is
kept behind the counter (BTC) at pharmacists, and may be requested by consumers or
recommended by pharmacists without a physician’s prescription. When Rx drugs
switch in Europe, they often do so into this BTC class. This allows for a greater degree
of supervision of the products’ usage while broadening availability. Table 5.6 shows
OTC drug classifications by country.
Table 5.6: Non-prescription drug classification structure by country
Country Drug classes Restrictions
US Prescription (Rx) Requires doctor’s prescription

OTC Available on the floor of any retail outlet
France Prescription Obligatoire Requires doctor’s prescription

Prescription Facultative Prescription is optional; includes OTCs
Germany Prescription Requires doctor’s prescription

Pharmacy bound May be used under pharmacist’s
supervision
Self-medication OTC wherever medications are sold
Italy Prescription Class A Requires doctor’s prescription; reimbursed

Prescription Class C Requires doctor’s prescription; not reimbursed
Nonprescription Class C SP Not reimbursed; not allowed to advertise
Nonprescription Class C Not reimbursed; not allowed to advertise
self-medication
UK Prescription Only Medicine (POM) Requires doctor’s prescription

Pharmacy (P) May be used under pharmacist’s
supervision
General Sales List (GSL) OTC wherever medications are sold
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Switching drugs offers several key benefits to consumers and healthcare payers.
Because OTC products are more readily available and often less expensive (even
compared with healthcare plan co-payments) than Rx medicines, they offer greater
access to consumers. Equally important, OTC products generally shift the cost burden
from healthcare payers to patients, removing the costs of expensive prescription drugs
from healthcare payers, who continue to struggle with rising healthcare costs. In
addition to saving on the cost of the switched drug, many healthcare plans also
implement disincentives for participants to use similar prescription products that
address the same condition, creating even greater savings. This may involve removing
products from formularies and/or raising the co-payments for them. Rising pressures to
contain healthcare spending in both Europe the US are therefore making switches
increasingly attractive.
In the US, more than 90 drugs have been switched from prescription to OTC status
since September 1976. Despite this, the switch market has been very slow lately, with
just two recent major switches – Schering-Plough’s Claritin and AstraZeneca’s Prilosec
– as shown in Table 5.7. Pepcid and Zantac, both in 150mg strength, were also
switched over the past 36 months, although these were not as significant as the Claritin
and Prilosec switches. Antacids, general pain relievers and feminine yeast infection
medicines have been among the most popular types of products switched.
The OTC market
The US OTC market was estimated at about $16bn in 2005, with a total world market
at approximately three times this level. The largest segments of the OTC market
include oral pain relievers, such as those for headaches and migraine, for example;
cough and cold medications; digestive products including laxatives and anti-diarrheals;
and allergy products. The market is fairly mature, with little true innovation from year
to year, and slow growth. This is due in part to the increasing utilization of low-cost
private label products instead of higher priced branded OTC products. As usage of
these lower-cost store brand products rises, sales growth of more costly branded OTC
products slows.
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Rx-to-OTC switch regulation
Although the US and European medicines regulators have different criteria that
explicitly outline the conditions under which a drug is appropriate for switch, all follow
four general principles. The switch candidate should:
Address a condition that need not be diagnosed by a physician;
Not require ongoing monitoring by a physician;
Not pose a significant risk of unacceptable side effects;
Possess a dosing regimen and/or labeling instructions that patients can understand.
Drugs that address asymptomatic conditions such as hypertension, osteoporosis, and

ulcers, for example, are therefore not good switch candidates, although it should be
noted that the rising availability of novel home-use diagnostic tests, such as those for
high cholesterol, and increasing public screening initiatives are making it easier for
consumers to identify some conditions that in the past have required physician
diagnosis. However, safety concerns particular to a certain drug that either require
ongoing medical monitoring of use or pose a relatively high risk of adverse reactions
may render a product completely unacceptable for OTC distribution. Similarly, patients
must be able to understand how to take the drug, and FDA has, on several occasions,
delayed switch approvals pending labeling revisions. Because of this, injectable drugs
are often not considered switch candidates.
In addition to these criteria, US regulators tend to favor drugs that address conditions
that are non-chronic; that is, the condition resolves over a certain time frame rather
than lasting throughout the patient’s life. This reduces the risk that the condition could
worsen without detection and require another type of treatment, or that prolonged use
of the drug could result in adverse reactions. For example, in January 2005, the FDA’s
Nonprescription Drugs Advisory Committee and its Endocrinologic and Metabolic
Advisory Committee voted against the switch of Merck’s cholesterol reducer,
Mevacor, expressing concerns about whether consumers would appropriately self-
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select the medication and self-manage their condition with visits to physicians at
appropriate intervals, since patients with high cholesterol must typically take the drugs
throughout their lives. However, several of the drugs recently switched address
conditions that are, for many sufferers, chronic. These include Claritin for allergies and
Prilosec for recurring heartburn. Table 5.7 shows products switched in the US between
1995 and 2005.
Table 5.7: US switches, 1995 - 2005
Brand Company Type of Product Switch year
Pepcid AC Johnson & Johnson-Merck Antacid 1995

Tagamet HB GlaxoSmithKline Antacid 1995
Children’s Motrin Johnson & Johnson Pain reliever 1995
Orudis KT Wyeth Pain reliever 1995
Nicorette GlaxoSmithKline Smoking cessation 1996
Zantac 75 Pfizer Antacid 1996
Rogaine Pfizer Hair regrowth treatment 1996
Nicoderm CQ GlaxoSmithKline Smoking cessation aids 1996
Femstat 3 Bayer Group Feminine yeast infection 1996
Nicotrol Johnson & Johnson Smoking cessation 1996
Axid AR Wyeth Antacid 1996
Actron-p Bayer Group Pain reliever 1996
Children’s Advil Wyeth Pain reliever 1996
Monistat 3 Johnson & Johnson Feminine yeast infection 1996
Nasalcrom Pfizer Allergy reliever 1997
Nizoral AD Johnson & Johnson Antidandruff medication 1997
Vagistat 1 Bristol-Myers Squibb Feminine yeast infection 1997
Monistat 1 Johnson & Johnson Feminine yeast infection 1998
Lamisil AT Novartis Fungicide 1999
Habitrol Novartis Smoking cessation 1999
Lotrimin Ultra Schering-Plough Fungicide 2001
Claritin/Claritin D Schering-Plough Allergy reliever 2002
Prilosec OTC Procter & Gamble Antacid 2003
Pepcid AC 150 Johnson & Johnson-Merck Antacid 2003
Zantac 150 Pfizer Antacid 2005
Although a product’s manufacturer usually discontinues a prescription product that is

switched to OTC use, in some cases a manufacturer may retain dual regulatory status,
as AstraZeneca did for Prilosec. The OTC product is indicated for heartburn, a
condition that can be readily identified by consumers, while the Rx product is indicated
for ulcers, a condition related to the presence of H. pylori bacteria that must be
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diagnosed by a physician. Although the formulation (capsule vs. tablet) differs between
the Rx and OTC products, both contain exactly the same amounts of active ingredient.
Such dual status can extend the market exclusivity period of the OTC product when it
carries a different indication on its label than the original prescription drug, but can risk
companies spreading resources too thinly across the OTC and Rx markets.
Objectives of switch
The decision to pursue a switch is often made at the end of a maturing Rx product’s
lifecycle, and may be weighed against the launch of a generic. A switch is typically
preferred for products with relatively strong brand equity that are appropriate for self
medication. Originating companies may pursue an Rx-to-OTC switch to:
Achieve a greater return than what may be realized from the introduction of a
generic brand or a divestiture;
Expand product usage by broadening availability;
Exploit a unique characteristic to capture share in the OTC market;
Preserve revenues in the face of a forced switch;
Enhance their over-the-counter business.
Most often, the main objective is to maximize returns, particularly for products that
may be subject to significant generic competition and offer unique benefits that would
allow them to quickly capture OTC market share.
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When a switch is appropriate
Switching is a favored strategy for products that are appropriate for self-medication
such as allergy medications, antacids, analgesics, feminine yeast infection remedies,
topical antifungals and smoking cessation aids. These types of drugs have a long
history of safe use, and consumers are generally able to self-diagnose and self-
administer products without physician supervision. Within these categories, however,
switches of new types of products with more effective mechanisms of action are
particularly attractive, as they possess strong competitive advantages over incumbents.
Many recent US switches represent such products, for example:
The September 2003 switch of Prilosec represented the first OTC proton pump
inhibitor for heartburn;
The September 2003 and January 2005 switches of Pepcid AC 150 and Zantac 150,
respectively, doubled the active ingredient in OTC H2RA antacids;
Switched in December 2002, OTC Claritin offered the first non-sedating

antihistamine for treatment of allergies;
The March 1999 and December 2001 switches of Lamisil AT and Lotrimin Ultra,
respectively, represented the first time that fast-acting, one week treatments were
available over-the-counter for athlete’s foot and jock itch;
Vagistat-1 and Monistat-1, which were switched in 1997 and 1998, respectively,
offered one-day treatment of feminine yeast infection medications for the first time.
Switching drugs for new OTC therapeutic uses is considerably more difficult,
especially in the US, where an Rx-to-OTC switch candidate that represents a new
therapeutic category rarely receives an initial recommendation for approval. For
example, the FDA reviewed switch applications for Merck’s Mevacor and Bristol-
Myers Squibb’s Pravachol cholesterol reducers in July 2000 and recommended against
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their approval. The FDA rejected Mevacor again in January 2005 in a 20-3 vote, citing
a number of reasons and concerns, including the potential for the drug to cause birth
defects in pregnant women, and whether consumers would appropriately self-select the
medication and self-manage their condition with visits to physicians at appropriate
intervals. Switches are approximately three times more common in Europe; however,
as shown in Table 5.8, the switch environments in each country are quite different.
Table 5.8: Switch environment by country
Country Switch environment
US OTC drug market is large and well established.

Recent switches have demonstrated strong sales growth.
FDA has indicated it wants to step up switch volume.
France There is no formalised OTC switch procedure, although efforts are being made to
reduce timelines as part of government cost containment initiatives.
Patients generally have a low willingness to self-medicate, with low out of pocket
payments for prescription drugs.
Only about half of French physicians encourage self-medication.
Germany Registration procedure is well structured, taking a minimum of 9 months, although a

switch for new indications can be difficult.
No provision exists for dual Rx/OTC status.
Italy Use of OTCs is very low since few drugs are allowed to be OTC, but market growth
is expected following a government-led educational campaign in 2003.
Dual Rx/OTC status is possible.
Spain Consumers exhibit moderately high willingness to self-medicate and relatively low
sensitivity to associated out-of-pocket payment.
Switch procedure is reasonably well structured.
UK PCT budgets have led to increased cost awareness among physicians and support of
self-medication.
As part of a government initiative to promote self-medication, the registration
process has recently been shortened to 5-7 months.
Consumer willingness to self-medicate is influenced by the £6.40 co-payment for
prescription drugs.
PCT = Primary Care Trust
For example, while Germany and the UK have very vibrant markets for OTC products
and switched medications, the self-medication market in Italy has been slow to
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develop. This is due in part to the fact that in some drug classes, identical medicines are
available in both Rx and OTC versions but the prescription products continue to be
reimbursed and are therefore widely prescribed by physicians. Furthermore, there is
little encouragement from the government to register new OTC products. On the other
hand, the UK actively encourages switches and was the first to switch several products
in therapeutic classes new to OTC use, including Pfizer’s antifungal for feminine yeast
infections, Diflucan (fluconazole), and Merck’s cholesterol reducer, Zocor
(simvastatin).
Industry pressure to switch
Forced Rx-to-OTC switches are a new phenomenon, although there have been very few
such occurrences to date. Forced Rx-to-OTC switches occur in the absence of a
manufacturer’s request but are allowed as part of many regulators’ OTC drug review
processes. However, forced switches are rarely pursued due to the considerable time
and resources required from those forcing the switch to accomplish them, as well as the
potential ill will that can be generated within the industry.
Table 5.9: Key events leading to Claritin’s switch in the US
Date Event
July 1998 Wellpoint submits a Citizen’s Petition to FDA asking to switch 4 non-sedating
antihistamines from Rx to OTC use
January 1999 FDA replies to Wellpoint that the issue requires further review
April 2000 USA Today publishes a report on switch, stimulating public interest in the
issue
June 2000 FDA holds a hearing on switches
May 2001 FDA reviews the Wellpoint petition and approves the switch
November 2001 Johnson & Johnson’s McNeil Consumer Healthcare files an NDA with the
FDA for an OTC version of Claritin
January 2002 Wyeth files an NDA to produce OTC Claritin
February 2002 Schering-Plough files lawsuits against Johnson & Johnson and Wyeth to delay
an FDA decision on the switches
April 2002 Schering-Plough files an NDA with FDA to sell Claritin OTC
November 2002 FDA approves Schering-Plough’s OTC Claritin. J&J abandons its plans to
launch its OTC loratadine
December 2002 Schering-Plough launches OTC Claritin
January 2003 FDA approves Wyeth’s Alavert (generic Claritin) for OTC sale
September 2003 FDA approves Leiner’s private label loratadine for OTC sale
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The most high profile forced switch was that of Claritin in the US, which was initiated
by several health management organizations rather than by the drug’s manufacturer,
Schering-Plough: a 1998 petition from managed care group Wellpoint asked the FDA
to move the entire family of Rx non-sedating antihistamines to OTC status. Schering-
Plough eventually gave its approval for the switch, as shown in Table 5.9.
In France, the government similarly imposed a switch of levonorgestrel in 1999 and in

so doing became the first country to switch a hormone-based emergency contraception
product. The move was intended to help prevent unwanted pregnancies. France has not
undertaken other forced switches.
Prerequisites for competing in the OTC market
The OTC capabilities of leading drug makers are shown in Table 5.10.
Table 5.10: In-house OTC capabilities of major pharmaceutical companies
Company OTC Division
Abbott None
AstraZeneca None
Bayer Bayer Consumer Care
Bristol-Myers Squibb Divested in 2005
GlaxoSmithKline GlaxoSmithKline Consumer Healthcare
Johnson & Johnson Johnson & Johnson Consumer Healthcare
Johnson & Johnson – Merck McNeil
Merck & Co. McNeil
Novartis Novartis Consumer Health
Pfizer Pfizer Consumer Healthcare
Roche Divested in 2004
Sanofi-Aventis None
Schering Schering-Plough
Wyeth Wyeth Consumer Healthcare
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Although several major drug developers also have large consumer products divisions
with strong product lines, many of the leading pharmaceutical companies focus on
higher margin prescription drugs. When these manufacturers seek to switch a product,
therefore, they must identify an appropriate marketing partner. This often requires not
only a strong OTC player with nationally recognized brands, but specific expertise in
the segment of interest and/or switches.
Pricing
Frequently, the direct cost to the patient of buying a drug OTC is less than a typical
health plan co-payment. This pricing strategy encourages use of the OTC product, but
also imposes significant margin constraints on manufacturers, who must determine if
the anticipated volume of sales will be sufficient to justify the somewhat significant
investment in the development and promotion of an OTC product. Typically, the first
product in its class to achieve OTC status gains a large first-to-market advantage.
Cost plays an even more important role in the pricing strategy of OTC products for
chronic conditions (as opposed to those for acute or recurring conditions), since the
patient is more likely to consider the long term cost implications of purchasing the
product OTC instead of visiting a physician. For example, patients who use competing
Rx brands may be reluctant to stop using a medication with which they are satisfied
and switch to a lower cost OTC product with which they have no experience. The
greater the cost benefit to the patient of switching brands, therefore, the higher the
likelihood that the OTC product will gain share.
In some markets, however, price will likely not significantly affect usage. In France,
where the patient does not pay out-of-pocket for prescription drugs, there is no
incentive to utilize OTC products strictly due to cost. Success in these markets,
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therefore, will be based on other factors such as convenience to the user and ability to
promote.
Timing
The timing of an Rx-to-OTC switch is not as critical as with other lifecycle

management strategies, as switched drugs do not generally compete directly with
generics. However, switches that occur prior to patent expiration allow the product to
leverage DTC advertising and/or brand recognition for a drug. Therefore, switching
prior to patent expiration is often preferable.
Benefits and limitations of Rx-to-OTC switch
In Figure 5.12 the efficacy of an Rx-to-OTC switch strategy is evaluation based on

various product, therapeutic and manufacturer characteristics.
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Figure 5.12: Efficacy of Rx-to-OTC switch based on product, condition and
owner characteristics
Low sales
Side effects/drug safety
Uncompetitiveness
Condition characteristic
Inability of consumers to self

diagnose
Chronic
Requires on-going physician

monitoring
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Benefits
Rx-to-OTC switching provides an additional source of revenue once a prescription

product’s sales begin to decline. As the OTC market is much more consumer driven,
less stringently regulated and more reliant on the development of a strong brand image
than the Rx market, a company can generate brand loyalty among consumers and thus
take market share from competitors marketing ethical products for the same indication.
This is particularly true for marketers with strong expertise in the consumer segment
and less strength promoting to physicians.
An Rx-to-OTC switch also can provide an opportunity to access new revenue streams.
Reclassification of a drug not only creates potential new business in the OTC market
but can indirectly promote the ethical equivalent if the product is simultaneously
available on prescription, such as for another indication. This was the case with
Prilosec – AstraZeneca continues to sell the prescription drug in the US for treatment
of ulcers, while its OTC marketing partner, Procter & Gamble, promotes Prilosec OTC
for heartburn. Similarly, Pfizer’s Diflucan was switched in the UK for treatment of
feminine yeast infections but retains its prescription status for treatment of
oropharyngeal and esophageal candidiasis and cryptococcal meningitis.
To optimize the success of a switch, a manufacturer should switch its product to OTC
status as it approaches patent expiry, rather than afterwards. This is exemplified by one
of the highest profile switches ever, the former Glaxo Wellcome’s Zantac 75
(ranitidine) for heartburn. The switch was approved by the US FDA in December 1995,
but Zantac did not lose patent protection until July 1997. In 2005, the Zantac line
achieved manufacturers’ sales of more than $85m in the US, which is high for the OTC
market. Although this tactic means that sales from the prescription market are reduced
for the period until patent expiry, it ensures that the OTC brand is established before
any competing OTC products can be launched with the same active ingredient, such as
private label products.
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In the US, a switch can result in three years’ market exclusivity, such as when the OTC
version is approved under a new indication. This allows a manufacturer time to build
brand equity before competitors, and particularly low cost private label brands, enter
the market. Many switches do not receive any exclusivity period, though, and soon
become subject to competition from low cost private label brands which captures share.
The determining factor as to whether an OTC switch receives patent exclusivity is the
amount of new clinical research conducted to launch the OTC drug. This may involve,
for example, studies on consumer label comprehensiveness to make sure that users of
the switched product understand when and how it should be administered.
Switching a product to OTC status in Europe has the added advantage that it can then
be advertised direct to patients, a practice which is prohibited for prescription
medicines. This gives the originator the advantage of high levels of patient brand
awareness, which is more important in the consumer market than in the ethical
pharmaceuticals market.
Limitations
As with other lifecycle management strategies, however, an Rx-to-OTC switch has

certain limitations.
First, a switch requires increased marketing spend at the end of a drug’s patent life and
beyond, and initial cannibalization of the original brand is likely. For large OTC
categories with a high degree of competition, the level of marketing spend can be
significant. For example, in the allergy drugs, antacids, cold medications and general
pain relievers categories, annual advertising spend often exceeds $100m in the US
alone for all manufacturers in total. To pursue a successful OTC switching strategy,
companies either need an internal OTC arm or must out-license the OTC process to a
specialist. Such licensing arrangements are common, since relatively few drug
developers have strong consumer healthcare divisions. Even with a significant
promotional campaign, however, uptake is often reduced for products that are not first-
in-class to switch to OTC use.
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Furthermore, because OTC products generally have considerably lower price points
than prescription pharmaceuticals, revenue potential can be significantly less. Even
drugs that were blockbusters as prescription products often do not reach $200m in
annual OTC sales.
Also, although switching prescription drugs to OTC status is driven primarily by the
commercial interests of individual pharmaceutical companies, regulatory and/or
national healthcare considerations often affect whether a drug will be favorably
considered for switch. For example, in the UK, government taxation finances the
National Health Service (NHS), which provides healthcare to the majority of UK
citizens, and annual spending on prescription drugs is estimated at about £700m. As a
result, the country has one of the most liberal environments for Rx-to-OTC switches, as
the government recognizes self-medication as a valuable form of cost containment.
This includes the availability of an intermediate class of drugs, which are available
from pharmacists without a doctor’s prescription and thereby offer greater safety than a
product broadly available to consumers without a healthcare professional’s
recommendation. In contrast, the approval procedure for Rx-to-OTC switches in the
US is significantly more stringent since most healthcare in the US is provided by
private healthcare insurers, rather than the government. Therefore, there is little
incentive in terms of cost containment for the US government to encourage switching
or reform the laws that govern OTC drug classification. Furthermore, the US does not
have a pharmacist category of drugs, so any drug approved for OTC sale in the US will
be freely available across any retail counter and not just within pharmacies. Therefore,
the FDA tends to be cautious when considering a new drug or indication for switch
approval, as every drug that is approved can be obtained without the guidance of a
pharmacist.
The presence of a “behind the pharmacists’ counter” category of drugs facilitated the
recent switch of Merck’s Zocor (simvastatin) to OTC status in the UK, and its absence
in the US has similarly inhibited other cholesterol-reducing statins from switching.
Although branded manufacturers have attempted to gain OTC status in the US for the
statins Mevacor (lovastatin) and Pravachol (pravastatin), these applications have so far
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been rejected by the FDA. According to a report by the Tufts Center for the Study of
Drug Development, Europe experienced three times as many Rx to OTC switches as
the US over the period 1983 to 2002. However, with the introduction of an FDA policy
in 2003 to increase switches in the US by 50%, this is set to change, opening the
possibility for increased use of this strategy in the future.
Nonetheless, in both the US and Europe, medications available for sale without a
doctor’s prescription are limited to those appropriate for self-medication. They must
demonstrate a higher standard of safety than prescription drugs. Therefore, OTC
medicines usually consist of ingredients that have long and established safety records.
As patients are diagnosing and treating themselves, OTC labels must carry all the
information the typical consumer needs to use a drug safely and effectively and be
easily understandable.
Therefore, the best candidates for Rx-to-OTC switch are limited to a few therapy areas
in which consumers have demonstrated the ability to self-diagnose the condition and
utilize medications without physician supervision. These include allergy drugs,
digestives and oral contraceptives. Some manufacturers, however, have announced
intentions to pursue a switch for a product that is not among these ideal candidates. In
July 2004, for example, GlaxoSmithKline announced that it obtained the US OTC
rights to Roche’s anti-obesity drug Xenical (orlistat) and would work with Roche on a
switch. Although Xenical offers a considerably more favorable side effect profile than
its chief competitor, Abbott’s Meridia (sibutramine), it has very low US sales and has
suffered negative publicity related to the entire class of diet drugs following the market
discontinuations of several products. It remains unclear whether FDA would approve a
switch of an anti-obesity drug.
Also, the switch strategy is likely to be of limited success in markets where patients are
not exposed to the cost of prescription medicines, as in France, and are therefore more
inclined to visit their physician for a prescription than to pay out-of-pocket for the
convenience of self-medication.
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An Rx-to-OTC switch is very useful for mature products with expiring patents but is
not as effective for brands that address niche markets or that suffer from lagging
efficacy or safety. Rx brands with relatively low sales may still prove successful in a
switch if they are the first in a new class to switch. This occurred with the smoking
cessation products that were switched in the mid 1990s. However, me-too products
tend to fare very poorly, due to the significantly lower unit prices in the OTC market
compared with the Rx market.
Case studies
The following case studies describe several Rx-to-OTC switches, all of which were
conducted to offset expected losses from patent expiration. The first details the US
switch of Schering-Plough’s Claritin, which was one of the largest and most successful
switches in US history. The second describes the US switch of AstraZeneca’s Prilosec,
which similarly resulted in strong growth in OTC sales and market share. The third
discusses the UK switch of Merck’s Zocor, which has not resulted in strong sales
growth despite the fact that Zocor is the first OTC cholesterol reducer.
Claritin (US) – successful Rx-to-OTC switch
The December 2002 launch of OTC Claritin (loratadine) in the US marked one of the
largest switches in history when measured by sales and has had a significant impact on
the country’s OTC allergy market, nearly doubling it in size from about $400m in 2002
to more than $800m in 2005.
Faced with the patent expiration of the active ingredient in Claritin, Schering-Plough
implemented several lifecycle management strategies including the introduction of
long-acting Claritin D and the development of a second generation product, Clarinex.
However, the company faced increasing pressure from the managed care industry to
switch the non-sedating antihistamine to OTC status due to its high cost and
widespread use. Furthermore, Claritin was already available OTC in some European
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countries, including Germany and the UK, with an established history of safe and
effective nonprescription use. In May 2001, prompted by a petition brought by the
health insurance company WellPoint/Blue Cross of California, the FDA’s
Nonprescription Drugs Advisory Committee and the Pulmonary-Allergy Drugs
Advisory Committee examined questions relating to the possible use of Claritin in an
OTC setting and determined that loratadine had an acceptable safety profile for OTC
marketing. Although the recommendation was non-binding, this was the first occasion
that a drug had been reviewed for OTC suitability without the permission of its
manufacturer.
At first, Schering-Plough issued a statement outlining its objection to a shift to OTC

status for Claritin. Its arguments were based on the following:
A switch would force patients to self-diagnose and self-treat, minimizing

interaction with their physicians;
Patients would have to pay the entire cost of their allergy medications;
A variety of legal and public policy issues would be raised if the FDA were to
require a switch without drug-sponsor support.
The other two leading second-generation antihistamine drug manufacturers, Pfizer and
Aventis, whose products had also been considered by FDA’s joint advisory board for
OTC suitability, supported Schering-Plough’s objections. Furthermore the American
Academy of Asthma, Allergy and Immunology, the American Academy of Otolaryngic
Allergy, and the patient advocacy group Allergy and Asthma Network/Mothers of
Asthmatics also expressed their support for maintaining the prescription status of the
second-generation antihistamines, including loratadine, on concerns for patient safety.
Despite its initial strong objections to a switch, Schering-Plough announced in March

2002 that the FDA had accepted its NDA to switch all indications (and market all
formulations) of Claritin to OTC products. Schering-Plough’s shift in position was
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prompted by Abbreviated New Drug Applications (ANDAs) submitted by Wyeth and
Johnson & Johnson subsidiary McNeil Consumer Healthcare to market generic OTC
versions of Claritin. In December 2002, Schering-Plough announced that the FDA had
approved Claritin as an OTC product. The switched drug was subsequently launched in
the same month and priced competitively with health care plan co-payments, to
encourage usage.
Within days, many insurance companies altered their policies with regard to non-
sedating antihistamines, placing the remaining prescription allergy drugs in the highest
co-pay category. Some, such as Aetna, required doctors to document that the use of
Claritin failed before the cost of a prescription product was reimbursed. As OTC
Claritin did not benefit from market exclusivity (no additional trials were required for
the switch), generic OTC loratadine was launched shortly thereafter.
Schering-Plough supported the switch with a marketing and consumer education

campaign on allergies and allergy management, relying heavily on patient brand
loyalty. National broadcast advertising focused on the new generation of non-drowsy
allergy relief represented by the Claritin family of products. It introduced consumers to
the concept of non-drowsy allergy relief for “clarity of mind, body and spirit” and
featured a multi-generational cast that emphasized the brand’s efficacy in children and
adults of all ages. Schering-Plough also worked closely with many of the leading
managed care organizations, providing plan participants who used allergy medications
informational materials about Claritin along with discount coupons.
This resulted in strong growth for Claritin OTC but shrinking sales of the prescription
product, which resulted in a net loss to Schering-Plough. However, in the absence of
the switch, the company would have still lost prescription sales but would have lost all
of the partially-offsetting OTC sales to competitors McNeil and Wyeth. In 2002, the
year prior to OTC switch, US sales of prescription Claritin totaled $1.4bn. These sales
declined to $25m the following year and by 2005 had virtually disappeared. As this
occurred, OTC sales of Claritin reached an estimated $430m in 2005, little changed
from 2003 and 2004 levels on pressure from the introduction of lower-cost private label
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loratadine. Sales of other prescription antihistamines also fell, as consumers
increasingly shifted to the OTC products.
It should be noted that the introduction of Schering-Plough’s second generation drug,

Clarinex, did not appear to significantly impact sales of Claritin OTC or other
loratadine products. In fact, the lack of differentiation between Claritin and Clarinex
indicates that Claritin’s switch undermined the value of the follow-on product to a
certain extent. Had other manufacturers not submitted ANDAs to introduce non-
prescription loratadine, it is likely that Schering-Plough would have focused on
maximizing its higher potential Rx allergy franchise through the launch of Clarinex,
and not switched Claritin.
Prilosec (US) – successful Rx-to-OTC switch
Faced with patent expiration of its blockbuster heartburn and ulcer drug, Prilosec
(omeprazole), AstraZeneca licensed rights to the US OTC version of the drug to
Procter & Gamble, a company with a strong line of OTC gastrointestinal products.
AstraZeneca retained the ulcer indication for prescription use, as ulcers are a bacteria-
related condition which must be diagnosed by a physician. P&G was given the rights to
market the drug for heartburn, a condition easily identified by consumers and therefore
appropriate for OTC treatment. After clinical trials to establish both therapeutic benefit
and ability of consumers to understand labelling, Prilosec OTC was launched in the US
in September 2003. P&G retained market exclusivity through June 2006.
Unlike Claritin, Prilosec OTC has not hindered uptake of AstraZeneca’s follow-on
drug, Nexium, which is being positioned as a more potent treatment. In 2005, US sales
of the new Prilosec OTC product exceeded $300m, making it the highest selling OTC
digestive.
Compared with Claritin, AstraZeneca and P&G benefited from several key factors:
A longer period between launch of the follow-on product and OTC Prilosec;
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Clearer differentiation of the two products, due to differing indications;
Limited competition from generic omeprazole (due to ongoing legal action) and no
competition from OTC private label brands.
This last factor has been particularly important, since Claritin and other major switches
have experienced significant pressure from private label products.
Zocor (UK) – unsuccessful Rx-to-OTC switch
Merck’s cholesterol reducer Zocor (simvastatin) was approved for sale as an OTC
product by the UK’s Medicines Control Agency (MCA) in July 2004. It is marketed as
Zocor Heart-Pro by Johnson & Johnson’s McNeil Ltd. subsidiary, one of the UK’s
leading OTC manufacturers. Because the switch represents the first time a cholesterol-
reducing statin has been approved for OTC sale, it sets a significant precedent for
marketers attempting to switch cholesterol reducers in other countries.
Zocor lost patent protection in the UK and Germany in 2003. Merck employed various
strategies to maintain product sales, including the launch of a single-pill combination
containing Zocor and Schering-Plough’s complimentary cholesterol reducer, Zetia
(ezetimibe). Given the amount of long-term efficacy and safety data available for
Zocor, pursuing the OTC market seemed reasonable and could assist with Merck’s
previously unsuccessful attempts to switch its first generation statin, Mevacor, in other
markets.
However, although the product can be advertised for the prevention of heart attacks,
uptake of Zocor Heart-Pro has been slow. This may be due to several factors. First, the
potential patient population (those with a 10 year coronary heart disease risk of 10%-
15%) for OTC statins in the UK has been estimated at about eight million, which is
significantly less than the patient population for prescription statins. Also, the cost of
Zocor Heart-Pro is £12.99 for a month’s supply, compared with a £6.40 patient co-
payment for Rx medications, creating a disincentive for consumers to try the OTC
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product. Many physicians are also against the switch and are advising their patients to
continue taking prescription cholesterol reducers, saying that without thorough testing,
it is not possible to determine whether the dosage of Zocor Heart-Pro is appropriate.
Conclusion
Rx-to-OTC switch is usually considered upon patent expiry, as an alterative to generic

launch. Products with significant advantages over current OTC remedies are
particularly attractive, as they are most likely to capture share and establish brand
equity after a switch. However, there are many limitations to switching, including
regulatory restrictions, considerably lower OTC price structures and the need for
strong, ongoing marketing of a switched product. Certain therapeutic classes, due to the
nature of the conditions they treat or effects related to the drugs themselves, are not
appropriate for switch. Because of this, switching is employed selectively.
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CHAPTER 6
Launch of a branded generic
131
Chapter 6 Launch of a branded generic
Summary
The aim of a branded generic launch is to maintain a revenue stream from an off-
patent brand by competing in the generics market. Although the originator
company could simply reduce the price of its branded product without
introducing a separate generic product, this is often perceived as “cheapening” of
the brand.
Companies with a generics division typically introduce their own generic through
this group, while pharmaceuticals without a generics business could acquire all or
part of a generics company, although this is often impractical so most enter into
agreements with generics companies pursuant to particular products. Such
friendly generics agreements are an increasingly common way for originator
companies to introduce generic brands, especially in the US, as they can benefit
from their partner’s sales and distribution relationships.
A generic launch is most appropriate for top selling drugs that are nearing patent
expiration. However, trailing drugs in large markets and specialty products that
are not expected to face significant generic competition also offer opportunities.
Originator companies may proactively introduce a generic after other more
lucrative lifecycle management strategies have failed; or they may reactively
launch a generic as competition from other generic versions emerges. In the US,
originator companies benefit most from a generic launch during the 180-day
exclusivity period granted to a successful patent challenger. During this time, an
originator may team up with a competing generics company to take advantage of
the limited competition.
Key benefits of generic launch include relatively low investment and ability to
utilize manufacturing capacity. However, companies must be able to accurately
predict the impact of competition from other generics; also, the strategy will not
significantly benefit declining products that suffer from low sales, lack of brand
equity or other problems.
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Introduction
As a strategy to compete post-patent expiry, it is possible to launch a branded generic

(or “second brand”) at a lower price point than the original product. The aim of this
strategy is to maintain a revenue stream from an off-patent brand by competing in the
generics segment. Ideally these revenues would be gained at the expense of sales of
other generic versions of the drug sold by other manufacturers. Although the originator
company could simply reduce the price of its branded product without introducing a
separate generic product, this is often perceived as “cheapening” of the brand and
therefore is not preferred.
For a company that does not already have a generics division, there are three ways in
which it can launch a branded generic:
Establish a new generics subsidiary;
Acquire an interest in a generics manufacturer;
Enter into a licensing agreement with a generics company.
The generics market
As healthcare costs continue to rise, the generics market has grown dramatically as a
means to contain spending. Currently at about $45bn, the global generic drug market is
expected to reach about $80bn by 2008. Growth is particularly strong in the US, where
healthcare is funded primarily through the private sector. (In Europe, healthcare is
largely government funded but the level of generic drug usage varies considerably with
the regulations of each country).
In 2004, the average price of a generic prescription drug in the US was $28.74, but the
average price of a brand-name prescription drug was $96.01, according to the National
Association of Chain Drug Stores. During 2004, the FDA reviewed a record 569
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original ANDAs, up from 449 ANDAs in 2003. FDA officials expect another annual
record number of generic submissions in 2005. The increase in filings has been driven
largely by rising usage of generics – in January 2005, generics accounted for 50.3% of
all prescriptions filled in the US according to NDCHealth Corp., up from 47.9% in
2004, and 44.9% in 2003. Virtually all healthcare plan providers are attempting to
contain spending on prescription drugs, which has been rising at double-digit rates for
the past several years, implementing incentives for plan participants to use generics
rather than branded products. This may take the form of step therapy (sequential use of
least expensive medications before more expensive drugs), or as a formulary
alternative for which plan participants make the lowest co-payment or in some cases, or
as the only medicine in a given therapeutic category that the plan will cover.
Use of generics has also been rising in Europe, due to initiatives in France, UK and
Germany over the past several years to reduce government drug spending. This
includes, for example, a partial reference pricing system established in France in 2003
under which branded products off patent are only reimbursed at the level of the
generics, forcing patients to pay the difference for the branded version. In Germany, a
2003 mandate for “aut idem” prescription writing required pharmacists to fill
prescriptions with one of the five cheapest generic versions for all drugs off patent.
Branded products can only be used if the physician specifically indicates not to use a
generic. This has resulted in generics accounting for about 40% market share by
volume within a year of their launch and nearly 70% within three years.
Over the next five years, more than two dozen drugs with global sales of $500m or
more will lose patent protection, creating significant new product opportunities for
generics manufacturers, and stimulating further growth in generics usage. This is
particularly true for biological or biotech engineered large molecule proteins, which are
now just beginning to come off patent and represent substantial opportunities in the US
and Europe once regulators in those regions clarify rules regarding biogenerics.
(Current rules do not address variations in manufacturing processes, which can trigger
changes in biological activity for biological compounds but not the small molecule
drugs that have been genericized to date).
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Objectives of generic launch
Manufacturers that launch a generic version of a branded product may have several
objectives, depending upon whether the launch involves a friendly generic company or
the manufacturer’s own generic division. These include:
Harvesting additional revenues in the face of imminent generic competition;
Adding a new product and revenue opportunity to a generics business.
From a lifecycle management perspective, the first objective is more commonly

expressed, however, companies that are actively building their generics divisions may
also view maturing branded products as new opportunities.
Prerequisites for competing in the generics market
Several major pharmaceutical companies, such as Novartis, own or have interests in

generics subsidiaries that provide a launch platform for branded generics of products
coming off patent. Novartis’ Sandoz subsidiary is one of the world’s largest generics
companies with annual revenues of more than $3.5bn and has a broad therapeutic
focus, consistent with the focus of its ethical division. Sandoz markets many of
Novartis’ products that have lost patent protection, with a particular focus on
antibiotics. This is the preferred route to introducing a generic, since the developing
company owns the patent on the branded product and, therefore, is not contravening the
Waxman-Hatch Act if it launches the generic prior to patent expiry. In so doing, the
generic can gain an important first-to-market advantage. If the ethical product were
particularly successful, its originator would benefit from transferring its brand image
and credibility from the ethical to the generic product. Consequently, the drug’s owner
will win the revenues that, in other circumstances, would accrue to other generics
manufacturers, effectively prolonging the economic viability of the initial patent.
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However, while Novartis has been steadily building its generic business with a series of
acquisitions, this strategy is the exception rather than the rule, since most of the largest
pharmaceutical companies either do not have generics divisions, as shown in Table
6.11, or have very small generics operations.
Table 6.11: In-house generics capabilities of major pharmaceutical companies
Company Generics Division
Abbott None*
AstraZeneca None
Bayer Bayer
Bristol-Myers Squibb Apothecon
GlaxoSmithKline None
Johnson & Johnson None
Merck & Co. None
Merck KGaA Merck Generics Group
Novartis Sandoz
Pfizer Greenstone
Roche None
Sanofi-Aventis Winthrop Pharmaceuticals
Schering Warrick Pharmaceuticals
Wyeth None
* Abbott’s generics were included in Hospira, a hospital products company it spun off in 2005
Bristol-Myers Squibb’s Apothecon, for example, focuses largely on the Dutch market.
Bayer divested most of its generics business in 2001 and 2002 after it had
underestimated the investment required and the importance of cultural issues. And
although Pfizer continues to operate its Greenstone generics subsidiary, in June 2005 it
divested its $60m German generic subsidiary, Heumann Pharma Generics, to India-
based Torrent Pharmaceuticals Ltd. and previous to that, in 2004, Pfizer also sold its
Dorom generics unit.
Establishing a generics subsidiary is the least common option for companies wanting to
launch a branded generic product, since it is difficult to gain sufficient return on
investment from a generics subsidiary that is set up solely for the purpose of protecting
a single high selling product. For this option to be cost-effective, companies must have
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a range of products that can benefit. Otherwise, the costs of setting up and running a
generics business will not be recouped.
Similarly, acquiring a stake in or an entire generics company is a relatively rare

strategy and essentially serves to build in-house generics expertise. It is a
comparatively expensive strategy to pursue, with a correspondingly low return on
investment.
The best and most widely applicable option for companies wishing to launch a branded
generic as part of a lifecycle management program is to form alliances with generics
companies prior to patent expiry. In this way, an originator company can retain control
over product promotion, while a generics partner provides low cost manufacturing
capabilities. Also, while generics makers that challenge a patent are granted six months
of marketing exclusivity in the US, manufacturers of authorized copies are not subject
to such restrictions and can therefore begin marketing immediately. Therefore, US
players pursuing this strategy not only benefit from being one of a limited number of
generics on the market for six months, during which time a significant amount of
revenue can be earned, but also limit the reward earned by generics companies for
challenging patents. The key difference between introducing an authorized copy and
launching an “own-generic” is that the branded company need not make any
investment in setting up generics operations, or repackaging its product as a generic,
and can also benefit from the relationships the partner generics player has with
wholesalers and pharmacists. Manufacturers of branded products are increasingly
pursuing this strategy in the US, with selected alliances shown in Table 6.12.
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Table 6.12: US alliances between branded and generic manufacturers, 2001 –
2005
Manufacturer Drug Generic marketing partner Date
GlaxoSmithKline Paxil Par Pharmaceuticals 2001

AstraZeneca Nolvadex Barr Pharmaceuticals 2003
Bristol-Myers Squibb Glucophage XR Par Pharmaceuticals 2003
GlaxoSmithKline AZT, Epivir Cosmos Pharmaceuticals 2003
Pfizer Glucotrol XL Andrx Pharmaceuticals 2003
Johnson & Johnson Ortho Tricyclen Watson Pharmaceuticals 2004
Sanofi-Aventis Allegra Prasco Laboratories 2005
Source: Company reported information Business Insights Ltd
Some of these relationships, however, are established only after a generic company
achieves some success in a patent challenge. For example, AstraZeneca and Barr
reached an agreement pursuant to cancer drug Nolvadex (tamoxifen) in 1993 only after
a court found AstraZeneca’s patent on the drug to be unenforceable. Barr had filed its
ANDA for tamoxifen in 1992, and AstraZeneca filed suit alleging patent infringement.
While on appeal, the two companies reached a settlement: Barr agreed to abandon its
challenge of the patent, and refrain from marketing its own generic for 10 years;
AstraZeneca agreed to pay $21m and supply Barr with tamoxifen for sale as a generic.
Barr sold tamoxifen at a 5% discount and was the only US supplier apart from
AstraZeneca itself until more generics entered the market following the February 2003
expiry of tamoxifen’s patent and pediatric exclusivity. Although Barr’s generic took a
greater share of the market than AstraZeneca’s branded product, by entering into the
settlement agreement with Barr, AstraZeneca gained revenue from sale of the product
to Barr, and escaped early price competition that typically arises when multiple
generics enter the market. This scenario is likely to become increasingly common,
since it is not unusual for a leading generics firm to have one or two dozen such patent
challenges outstanding at any given time.
Other relationships are established even though the originator company may have some
in-house generics capabilities. For example, Sanofi-Aventis entered into a partnership
with Prasco Laboratories to market authorized generic versions of Allegra tablets in the
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US, a country in which Sanofi-Aventis’ did not have a strong generics presence. In
2005, the company operated its generics business in seven regions – the UK, France,
Portugal, Colombia, Germany, the Czech Republic, and South America – and plans to
extend operations to at least 15 countries by the end of 2006.
Ongoing lobbying by the US pharmaceutical manufacturers and trade associations may

eventually revoke the use of this strategy during another generics’ 180-day exclusivity
period. Currently though, regulators maintain that the practice is pro-consumer and
have so far refused to block it. For example, in April 2004, Pfizer launched a generic
version of its epilepsy drug Neurontin during the 180-day exclusivity period shared by
Alpharma and Teva, but no action was taken despite legal protests by the two
companies.
There are no legal barriers to implementation of an authorized generic strategy in

Europe, although it is somewhat less common than in the US. It is not expected to be a
particularly lucrative strategy in regions where the generics market is split between a
very large number of generics players, but in France and Germany, where the generics
market is tightly held, this may be a feasible strategy for a branded company to extend
the revenue potential of a product without additional investment. GlaxoSmithKline
successfully employed this technique in France, when it licensed rights to Augmentin
to three generics manufacturers six months ahead of the drug’s patent expiration in
2002.
The strategy may also be effective in markets where dispensation of a particular

manufacturer’s (the licensee’s) generic can be guaranteed such as Spain, where
pharmacists generally respect a physician’s choice of a generic; conversely, it is often
not effective in markets where pharmacist substitution is permitted, as the physician’s
prescription can then be substituted for the manufacturer of pharmacists’ choice, with
cost being the prime consideration of most pharmacists.
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It should also be noted that in some cases, manufacturers of branded drugs pursue this
strategy for other reasons not directly related to maximizing return on investment. For
example, in September 2004, GlaxoSmithKline entered into an agreement with Kenya-
based generic pharmaceutical manufacturer Cosmos to produce generic forms of the
antiretroviral drugs zidovudine and lamivudine, for distribution in East Africa. The
number of East African users of the drugs is currently low, due to affordability
constraints. The issue of medicine affordability in Africa has received widespread
media attention and calls to establish new pricing structures for developing nations, so
GlaxoSmithKline entered into this agreement in order to more cost-effectively supply
anti-retroviral drugs to African nations. The agreement also generated positive press for
GlaxoSmithKline, who, like other manufacturers of anti-retrovirals, is coming under
increasing pressure from public interest groups to lower its prices in developing
countries.
When a generic launch is appropriate
In general, a generic launch is most appropriate for attractive drugs that are nearing
patent expiration. An earlier launch would be counterproductive, as it would
unnecessarily cannibalize sales of a higher-priced branded product. Many
manufacturers use five years before patent expiry as a cut-off, since generics makers
often file applications and begin development of a competing product around this time.
Determining the attractiveness of a potential generic
Five key factors determine the attractiveness of a particular product to genericization:
Market size of the drug and its therapeutic area;
Competition;
Formulation;
Propensity of physicians and pharmacists to switch patients to a generic;
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Consumer attitudes.
The market potential of a drug is based upon both the drug’s sales and total sales within
the therapeutic area. Blockbuster drugs clearly are extremely attractive candidates for
genericization, due to their strong brand equity. Indeed, Figure 6.13 shows that the
greater a branded drug’s sales, the more generic competitors are introduced after patent
expiry over time.
Figure 6.13: Average number of generics by market size
25
$1000m+ brand
20
Number of generics
15
10 $100m-$500m brand
500m-$1000m brand
5
$50m-$100m brand
0
0 2 4 6 8 10 12
Quarters from patent expiration
However, even trailing products in large therapeutic markets such as central nervous
system, diabetes and endocrinology products may offer considerable potential as a
generic, particularly if the category is dominated by branded products. This is
particularly true in the US, as extensive cost containment initiatives by healthcare
payers often drives uptake of generics upon launch. The vast majority of managed care
organizations, for example, offer participants incentives to utilize lower cost generic
products over branded ones and the Medicare and Medicaid programs have both
broadly adopted cost containment initiatives for medicines. The opportunity is
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somewhat smaller in Europe and varies by country with generic usage. In countries like
Italy where generic usage is relatively low, the originator companies tend to utilize this
strategy less frequently.
In smaller markets, the competitive environment often plays a key role in decision
making. Where a specialty brand is expected to face competition from a limited number
of generics players, an originator company introducing a generic, either on its own or
with a partner, can expect to take a significant share of the market. However, even
some small generics markets become crowded when the larger generics companies
introduce products to fulfill customers rather than capitalize on a profitable
opportunity. In these cases, originator companies often achieve only small shares for a
genericized product, which may not be sufficient to justify investment in this strategy.
Formulation may also affect the attractiveness of a branded drug to genericization.

Since many generics manufacturers do not possess the technology required to produce
injectable drugs, these products usually encounter significantly less generic
competition after patent expiration than oral medicines and are also less amenable to a
friendly generic agreement. Dosage may also play a role, particularly for generic
candidates with high dosing requirements that compete in a market dominated by
products with lower dosing requirements such as once-daily or extended release
formulations. Drugs that require more than once-daily administration are considerably
less appealing to consumers and therefore less likely to gain share.
Additionally, the nature of the conditions treated varies in terms of severity and
chronicity across therapy areas, and this can influence the willingness of physicians
and pharmacists to switch patients to generic versions of efficacious drugs.
Consumers may also object to the use of a generic for certain types of conditions, but
these views are based more on opinion than medical criteria. For example, a study
conducted for Medco Health Solutions in April 2004 found that while 79% of the 1,000
US consumers surveyed would take a generic medication for unserious conditions such
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as a cold or flu, only 56% would use a generic for asthma, 52% for diabetes and just
50% said they would accept a generic treatment for heart disease.
Proactive versus reactive launch decisions
Ultimately, a company’s decision to introduce a generic version of a branded drug may

be either proactive or reactive. Proactive launch decisions are typically based upon
long term lifecycle management strategies, in which developers seek to optimize return
on investment for a particular product and compare various alternatives. In such cases,
a generic launch will be considered for a maturing drug along with other options such
as indication expansion, reformulation, second generation launch, Rx-to-OTC switch
and divestiture. These first three options are typically based on research and
development efforts – therefore, if clinical efforts do not produce desired results, these
strategies are not viable. Rx-to-OTC switch is also not possible for many products that
address chronic conditions or whose use requires ongoing monitoring by a physician,
and divestiture typically yields a very low return. Therefore, the choice for most drug
manufacturers with maturing products becomes one of doing nothing or introducing a
generic product to compete in the generics market that will inevitably emerge for off
patent medicines with healthy market potential.
Reactive generic launches are often undertaken as patent expiration approaches, when
competitors begin to move into the market and particularly after successful patent
challenges. For example, Pfizer launched a generic version of its epilepsy drug
Neurontin (gabapentin) through its generics subsidiary Greenstone only after generics
companies Alpharma and Teva introduced gabapentin in October 2004. Similarly,
Schering-Plough introduced a version of its anti-viral Rebetol (ribavarin) through its
Warrick generics subsidiary after Sandoz and Three Rivers had introduced their
ribavarin products, in April 2004.
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Opportunities arising from the US patent system
In European markets, the key aim of a generic launch by a branded drug’s

manufacturer is to maintain a revenue stream from an off-patent brand by competing in
the generics segment, and to discourage additional generics from entering the market.
However, in the US there may be an additional benefit to implementation of this
strategy, and this has led to an increase in its use over the past several years.
By licensing versions of its product to another generics player during the six month
exclusivity period awarded to the first generics player to successfully challenge the
innovator’s patents, a US drug maker benefits from being one of a limited number of
players in a particular generics market for six months, during which time a significant
amount of revenue can be earned.
The strategy can also limit the reward earned by generics companies for challenging
patents, thereby discouraging the practice. Going forward, continued use of this
strategy by the branded pharmaceutical industry is likely to further reduce the threat of
patent challenges, especially for smaller products with limited sales potential. A
common benchmark is $100m in sales of the branded drug prior to patent expiration.
At lower levels, many generics company executives believe that any advantage they
would gain from a six-month exclusivity period would be cannibalized by sales of an
authorized generic and they would be unlikely to recoup their legal expenses related to
the patent challenge.
Therefore, many generics companies will become increasingly interested in

collaborations involving an authorized generic and branded players will find no
shortage of potential partners with which to implement this strategy. This is
particularly true since overall, generics players with 180-day exclusivity periods have
been unsuccessful in challenging the launch of authorized generics during those
periods.
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Pricing
The potential pricing structure for a generic product is often a key consideration in the
decision to move forward as it directly affects return on investment. Although the price
of a generic product is often related to the price of its branded equivalent, with higher
priced branded products generally providing for higher priced generic versions, the
presence or absence of a patent challenge can significantly affect prices, as shown in
Figure 6.14. Since competition is limited during an initial 180-day exclusivity period,
successful challengers can charge higher prices.
This presents an opportunity for originator companies considering either their own
generic product or a licensed generic version of patent challenged brands, as they could
launch during the exclusivity period of the first-to-file company, and potentially gain
greater share and maintain a higher price than would be possible with non-patent
challenged brands.
Furthermore, in markets where limited generic competition is expected, or where the

branded product enjoys high levels of brand loyalty, an originator company may
maintain or even raise the price of a branded product prior to the introduction of a
generic. This often results in generic prices being set at a higher level upon entry.
Implementing a price decrease at patent expiration allows brands to compete more

favorably with generics, and may help the company maintain its relationships with
wholesalers and pharmacists. However, brand companies that adopt this strategy are
increasingly facing a corresponding decrease in price of the generic. The rise of Indian
generics players with extremely low cost bases has increased the level of price
competition, particularly within the commodity generics sector, where brand price
reduction is unlikely to be an attractive strategy for branded companies.
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Figure 6.14: Average generic price relative to brand by patent challenge
situation, 2003 - 2005
80%
Generic price relative to brand (%)
70%
60%
Average price ratio for challenged product
50%
40%
30% Average price ratio for unchallenged product
20%
10%
0%
0 2 4 6 8 10 12
Quarters from generic entry
Source: IMS Health; Business Insights Business Insights Ltd
Timing
As with pricing considerations, appropriate timing of a generic launch is critical to

maximizing the sales of both the original branded drug and the new generic, and often
depends heavily upon the competitive landscape prior to launch. This is particularly
true in the US, where generics makers that challenge a patent receive six months of
marketing exclusivity. Although other generics companies cannot introduce a similar
product during this time, the original drug maker can and often benefits from the
limited scope of competition. Therefore, in situations in which a drug’s patent has been
challenged, originator companies are often best served by introducing their own
generic at the beginning of the exclusivity period to capture as much share as possible
before other generic products are introduced. With appropriate marketing, a large
portion of patients taking the original drug can often be switched to the new product on
the basis of the drug’s reputation.
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This ability to switch patients is also important for drugs that are not subject to patent
challenges, although in these cases timing is less critical. Such drugs often include
products that are undesirable for generics manufacturers and thus will be subject to
lower generic competition upon patent expiration. (Patent challenges occur frequently
for top-selling products that address large markets – although in some cases, the patents
of highly desirable drugs are not challenged but generic competition following
expiration emerges strongly). In cases where generic competition is expected to be
lower, originator companies may wait before introducing a generic product, or may not
introduce a generic at all, to maximize sales of the branded drug.
Benefits and limitations of generic launch
In Figure 6.15 the efficacy of a friendly generic launch strategy and own generic launch
strategy are evaluated based on a number of product and manufacturer characteristics.
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Figure 6.15: Efficacy of generic launch based on product and owner
characteristics
Efficacy of friendly Efficacy of own

Product characteristic
generics launch generics launch
Low sales
Side effects
Uncompetitiveness
Benefits
A generic launch can deliver benefits for a relatively low investment, even when
undertaken fairly late in a product’s lifecycle, and offer the ability to gain a first to
market advantage over competing generic products. It is often, therefore, an ideal
strategy for a mature product with an expired patent, particularly as a friendly generic
launch (one that is authorized by the originating company) or the launch of a
company’s own generic by an established generic division do not usually require
significant capital expenditure. However, there are some significant differences in the
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advantages offered by a friendly generic launch compared with the launch of a
company’s own generic product. A friendly launch provides:
Lower investment than launching own generic;
Some ability to gain revenues from the manufacture and sale of the product to the
generics manufacturer, depending upon the agreement;
Greater ability to distance the generic from the branded product and its developer,
enabling clearer boundaries between businesses;
Expanded marketing and distribution resources from the partner, which could lead
to higher sales;
Some potential to deter generics companies from challenging patents of lower-

selling brands.
The launch of a company’s own generic, however, offers:
The ability to compete on a price basis with generics without being seen as
cheapening the brand image;
Utilization of existing manufacturing capacity at a time when demand for the brand
has declined;
Potentially wider profit margins, in the absence of a partner.
Limitations
There are several limitations to the usage of generic launch as a lifecycle management
strategy. For companies that attempt to launch their own generic, as well as those who
enter into agreements with external generics manufacturers, companies must be able to
accurately model the likely impact of generic competition to be confident that this
strategy is more profitable than continuing to market the branded product themselves
post-patent expiry; additionally, the participation in both a branded and a generic
product may create conflict in US Medicaid best-price negotiations. The strategy will
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not significantly benefit declining products that suffer from low sales, lack of brand
equity, poor efficacy and/or unacceptable side effect profiles.
Also, returns from a generic launch are typically not as great as returns from other
lifecycle management strategies such as indication expansion and/or second generation
launch due to the very low prices of generics vis-à-vis branded products. Returns may
be even lower for companies partnering with established generics players in the launch
of an authorized generic product.
Additionally, there may be problems specific to both a licensed generic and an own
generic strategy. The pharmaceutical industry continues to lobby against the practice of
friendly generic launch, and although regulators continue to favor the practice on
grounds that it is consumer-friendly, these protests may eventually lead to some
limitations on its use. On the other hand, companies that launch their own generic may
face internal conflicts arising from the significant differences in the research,
development and business focuses between their branded and generics products. These
include:
Local versus international business focus;
Timing and investment aspects (short versus long term);
Approach to patents (challenging versus filing);
Cultural differences (entrepreneurial versus corporate).
In its decision to dismantle much of its newly formed generics group, for example,
Bayer found that its multitude of stand alone generics companies that operated
independently in each local market did not brand across companies in a manner
compatible with its more cohesive branded drug business.
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Case studies
The following case study describes Bristol-Myers Squibb’s successful launch of a

generic version of its blockbuster Capoten in Germany after the drug’s patent expired.
Capoten (Germany) – successful generic launch
Bristol-Myers Squibb successfully launched its own generic version of its blockbuster
Capoten (captopril) in several European generics markets when the drug lost patent
protection. In Germany, BMS collaborated with another generics manufacturer and in
the UK, it launched the generic drug itself.
Capoten is indicated for mild to moderate hypertension and was the first angiotensin
converting enzyme (ACE) inhibitor when it was launched in 1980. Its patent was
originally due to expire in 1995 but BMS obtained a one-year extension under the
General Agreement on Tariffs and Trade (GATT). Capoten generated over $1bn in
worldwide sales in 1996, but its sales fell by 27% to $795m in 1997 after US patent
expiry when a dozen companies including Royce, Geneva, Novopharm, Copley, Endo,
Mylan, Biocraft, Duramed and Schein launched generic versions of captopril. The
branded drug’s sales continued to fall, reflecting both significant price cutting by
generics (which were reported to be selling for as little as 10% of the original Capoten
price) and growth of the angiotensin II antagonists (AIIA) class of drugs. The AIIAs
eventually relegated Capoten to a therapy used only on a cost basis.
The German patent on captopril expired in February 1995, prior to which BMS and the
German company Schwarz Pharma held nearly 50% of the German ACE inhibitor
market with their respective captopril brands, Lopirin and Tensobon. To dampen the
impact of forthcoming generic competition, BMS launched two second captopril
brands, Acenorm and Capto-ISIS, a year before the patent was due to expire,
collaborating with Azupharma and Schwarz Pharma’s generics subsidiary, ISIS
Pharma. This relationship allowed BMS to leverage Schwartz’s strong distribution and
brand equity in the market.
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In 1994, the two second brands were introduced at a 26% discount to the original
brand. Before the German patent expired, the second brands were able to capture a
significant proportion of the generics market, which proved to be highly competitive
once the patent on captopril had expired. Competition was so fierce that the 45% price
discount of the first generics was soon beaten by discounts of 75% compared to the
original brands. However, in the long term, BMS’s strategy in Germany proved to be
worthwhile since, nearly two years after the patent had expired, the original and second
brands still had more than 80% market share. Since BMS did not have an in-house
generics business, it benefited significantly from collaborating with Schwarz Pharma’s
generics group.
Conclusion
A generic launch is typically undertaken for products with expiring patents that have
high sales, address large markets or are likely to be subject to limited competition from
other generic drugs. The incremental investment in a generic launch is often low,
particularly when the originator company partners with an established generic
manufacturer, although returns tend to lag behind those from other lifecycle
management strategies due to the very low prices of generic products. Because of this,
generic launches are used selectively.
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CHAPTER 7
Divestiture
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Chapter 7 Divestiture
Summary
Divestiture refers to the selling off of all or part of the rights to a product. It may
occur at any point in the product lifecycle, involve either exclusive or non-
exclusive rights to the product; and may encompass the rights to the product in all
worldwide markets or just selected markets. Manufacturers may also discontinue
products entirely when an acquirer with an acceptable transaction cannot be
found, but this happens less frequently.
External drivers of divestiture include anti-trust considerations, competitive

pressures and declining market conditions. Internal drivers, which are more
common, include lack of strategic fit, lack of sufficient sales and/or lack of
marketing resources.
The objectives of divestiture typically revolve around eliminating a product with

lagging sales or growth potential and/or reallocating resources to products with
greater potential.
Benefits typically include the ability to implement a divestiture on short notice

with minimal investment, applicability to mature products with expired patients
and the generation of cash that can be used to fund other activities. However,
striking deals can be challenging since many acquirers seek to invest in entire
product lines, technologies or companies and only consider individual products
that address very specific markets. Also, divestiture can be difficult for products
with intrinsic problems, such as declining competitiveness, insufficient efficacy
or unfavourable side effect profiles.
Due to these limitations, divestitures typically occur for very mature products
with expired patents and products with limited potential. Sometimes, an acquiring
company can harvest latent potential in a product that was divested for lack of
strategic fit. However, these cases often involve reformulation or other product
changes.
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Introduction
Divestiture is a complicated process, referring to the selling off of all or part of the
rights to a product. It may occur at any point in the product lifecycle, from early stage
development through introduction, growth and maturity. In general terms, divestiture
may involve either exclusive or non-exclusive rights to the product; and may
encompass the rights to the product in all worldwide markets or just selected markets.
These markets may be either geographic or therapeutic, for products that address
multiple applications. Furthermore, manufacturers may retain the right to produce the
drug, divesting only the marketing and distribution rights.
In this report, the term “divestiture” will be used to mean the substantial selling off of a
product after it has been commercialized, while “out-licensing” will be used to describe
situations in which a development-stage product is sold off, or only a portion of the
rights of a commercialized product are sold off, with some rights retained.
Additionally, although firms may also divest entire divisions (such as OTC businesses),
regional operations or technologies, this report will focus on the divestiture of
individual products as a lifecycle management strategy.
Out-licensing
Out-licensing can be used as a means of managing project flow and the product
portfolio. As such, it is an integral part of overall portfolio management as it enables a
manufacturer to focus resources on selected areas and products of strategic importance.
Out-licensing allows smaller manufacturers to optimize the usage of limited resources.

In June 2005, for example, FemmePharma, a developer of women’s healthcare
products with no commercialized products and therefore limited cash flow, divested the
rights to a promising Phase II drug for the treatment of endometriosis. Although the
compound had demonstrated excellent results in clinical trials, commercialization
would likely have required several more years of testing and significant budgetary
155
commitments that would have constrained the company’s ability to fund development
of other projects.
Furthermore, smaller manufacturers typically do not have sufficient sales, marketing

and distribution resources to compete with the established global pharmaceutical
players, even with new products that offer demonstrable advantages over existing
therapies. Out-licensing offers a means to maximize drug sales, and royalties obtained
from such arrangements are often considerably greater than the sales revenues the drug
developer would earn conducting sales and marketing on its own.
Out-licensing also offers an opportunity for larger pharmaceutical companies with too
many projects to support. If the available resources are not sufficient to be distributed
among all promising projects, out-licensing offers financial returns on projects which
otherwise would have to be terminated. With regards to the marketed portfolio,
companies may choose to out-license smaller products which do not fit into the core
portfolio, as Eli Lilly did when it out-licensed rights to Axid (nizatidine) to Norgine in
France, Spain, Switzerland, Belgium, The Netherlands and Luxembourg, ahead of the
product’s European SPC expiry in 2002/2004. (These represented small markets for the
product, with sales declining due to the maturity and genericization of the product
class). Thus, resources could be focused on optimizing the revenue potential of major
products.
In-licensing
From the point of view of a company acquiring a divested product, such deals often
represent a unique opportunity to gain access to a high-potential product that a licensee
could not replicate on its own. For example, Pfizer’s blockbuster antibiotic, Zithromax,
was originally developed by Croatia-based Pliva and sales of the drug began their
exponential growth after Pfizer took over its distribution in 1991. Such deals are
particularly common between drug developers located outside the US and Western
Europe, which do not have significant sales forces in these important regions, as a large
156
number of Japan-based companies, including Eisai, Toyama, and others have also out-
licensed US and/or European marketing rights to products.
Firms with specialized marketing capabilities in certain therapeutic areas, but without
significant R&D capabilities, may also seek divested products as an avenue for growth.
Shire Pharmaceuticals, which focuses on central nervous system drugs, gastrointestinal
medications and human genetic therapies, has utilized this approach to in-license a
range of products including Reminyl for Alzheimer’s disease and Adderall for attention
deficit hyperactivity disorder (ADHD). Biovail has also used in-licensing as a means to
quickly grow its product portfolio, acquiring then reformulating a series of off-patent
brands. Each of these products had strong brand equity that could be leveraged in a
reformulated version, however, reformulation was not a viable strategy for the
originator company either because of lack of technological capability or a focus away
from the therapeutic area.
Discontinuation
Occasionally, manufacturers may also discontinue products entirely when an acquirer

with an acceptable transaction cannot be found. This occurs infrequently, mainly for
products with extremely low sales and no identifiable growth potential. For example, in
August 2004, Chattem discontinued sales of its Dexatrim and Appedrine OTC diet aids
in Canada when sales of the products fell below CN$1million. With an overall OTC
diet aids market of about CN$6m in Canada and several significant competitors,
Dexatrim and Appedrine offered limited opportunity for growth, which other players in
the market correctly realized.
Discontinuation may also occur for reasons not directly related to lifecycle
management, such as for products that become associated with important safety risks.
In 1997, Wyeth discontinued its popular diet drug Fen-Phen, a combination of the
company’s Pondimin (fenfluramine) and phentermine, after researchers linked it to
heart damage and a fatal lung disease. The recall affected the health and safety of more
than 25m consumers who had been using the drugs. Through 2005, obesity drug
157
litigation continued, and as of January 2006, Wyeth had taken charges of more than
$14bn related to lawsuit settlements, underlining the significance of the public safety
risk. Similarly, Merck discontinued its arthritis pain reliever, Vioxx (rofecoxib), in
September 2004 after it was associated with a series of adverse cardiovascular events.
The company is also involved in litigation, with total legal bills expected to exceed
$25bn.
Objectives of divestiture
In the broadest sense, companies that pursue a strategy of product divestiture typically
do so either to:
Eliminate products with lagging sales or low profit potential from the portfolio; or
Enable the more effective allocation of resources to higher potential products.
The determination of product potential may be made using any of a variety of criteria,
including current sales, sales growth, margin, margin growth, strategic fit or other
considerations. To this end, the objective of divestiture for the divesting company is to
arrive at an agreement that will maximize the value (return on investment) of the
product being sold with the least expenditure of resources to achieve that agreement.
Many times, companies accomplish both goals with a divestiture. For example, in July
2004, Eli Lilly sold the US rights of its antibiotic Keflex (cephalexin) to Advancis for
$11m. With the product’s patent having expired in 1987, US sales of the drug in 2003
were just $4m, representing less than 10% of Keflex’s total global sales of $52m.
Advancis sees potential in the development of a once-daily formulation of the drug, but
for Lilly, whose therapeutic focus now lies elsewhere, embarking on such a strategy
would not have provided significant return on investment. With sales declining due to
the maturity and genericization of the entire product class, out-licensing represented the
158
optimal strategy as it allowed Lilly to focus its resources in other areas in which it had
established considerable expertise, such as diabetes.
When divestiture is appropriate
Divestiture of a drug may be considered for a variety of both internal and external
reasons, as shown in Figure 7.16.
Figure 7.16: Drivers of drug divesture
External Anti-trust
Declining Competitive
drivers requirements
market pressures
Divestiture
Internal Lack of Insufficient Insufficient

drivers strategic sales marketing
fit resources
Size & color of arrow relates to its importance – larger & warmer colors mean more important
External drivers of divestiture include competitive pressures that significantly impact

the product’s position in the marketplace, as well as declining markets. The former
often arises from the introduction or proliferation of new products that offer greater
benefits. These may include, for example, greater efficacy, easier dosing or
administration, improved safety profile, lower cost (particularly in the case of new
159
generic products) or other advantages. In some cases, competing products may enhance
their position through increased advertising or promotion. Declining markets occur less
frequently, but may arise through the introduction of new classes of drugs or
preventative products (such as vaccines).
Anti-trust requirements are related to merger or acquisition activity, and may require
product divestitures to ensure that newly combined firms do not hold a monopoly in a
particular area or application. They have been required by the US Federal Trade
Commission in a large number of pharmaceutical deals including the mergers of Pfizer
and Pharmacia; Glaxo Wellcome and SmithKline Beecham; Sanofi-Synthelabo and
Aventis; Novartis/Sandoz and Eon Labs, and others. Like safety-related
discontinuations, these are typically not related to lifecycle management
considerations.
Internally driven divestitures are even more common than externally driven divestitures
and are often the result of disappointing product sales. Despite a manufacturer’s best
attempts to forecast demand then market and sell a product to maximize its potential,
actual sales may lag expectations for a variety of reasons. For example, the product
may:
Not be effective enough to provide a sufficient cost-benefit to consumers;
Be associated with higher incidence of side effects than initially believed;
Address applications that are mature and therefore heavily genericized;
Address applications with low levels of unmet medical need.
Many divestitures associated with lagging sales are related to insufficient efficacy. For
example, although hair growth inhibitor Vaniqa was initially forecast to generate
annual sales of more than $350m, the product was divested by its developer, Bristol-
Myers Squibb, in year 2000 then subsequently divested several times again by
acquirers who found that although a large proportion of consumers sought hair
160
removal, Vaniqa did not offer sufficient benefits compared with the vast array of other
hair removal products.
In an attempt to optimize the usage of their resources, companies may also divest
products that no longer fit strategic goals. Questcor Pharmaceuticals did this in October
2005 when it divested three products that lay outside its new strategy of developing
drugs for central nervous system (CNS) disorders. In addition to allowing the company
to focus exclusively on CNS products, the $28.3m sale also provided capital to further
this effort. Similarly, generic drug maker Andrx divested rights to its Altoprev and
Fortamet in March 2005 when it disposed of its branded product business. This strategy
is most effective for products that still have significant sales, as healthy revenues
enable a higher transaction price. Once companies pull support from non-core products
and sales decline, attractiveness to potential acquirers is also diminished.
Pharmaceutical companies that have pursued a strategy of growth through acquisitions

may find that as they added key products to their portfolios, they also acquired
tangential products that diverted attention from core brands. Elan Pharmaceuticals, for
example, acquired 15 different companies between 1996 and 2001 that provided
products or technologies to further Elan’s position in the neurology, pain management
and autoimmune disease markets. However, several of the acquired company portfolios
also contained smaller products with more limited potential. Many of these did not fit
Elan’s core focus, causing it to subsequently embark on a broad program of divestiture.
On the other hand, even products with strong market potential may be divested if a
manufacturer does not have sufficient resources to capitalize on this potential. This
occurred with Taro Pharmaceutical’s March 2005 divestiture of its novel OTC cough
medication, ElixSure. Selected recent divestures are shown in Table 7.13.
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Table 7.13: Selected recent divestitures of US commercialized drugs, 2003 -
2005
Divesting Company Drug/s Date Reason
Pfizer Cardura XL November 2003 Low product sales

Women First Healthcare Vaniqa June 2004 Low product sales
Aventis Arixtra, Estorra July 2004* Required for Sanofi
merger
Eli Lilly Keflex July 2004 Low product sales
Élan Myobloc July 2004 Low product sales,
lack of strategic fit
Ilex Campath December 2004* Required for
Genzyme merger
Taro ElixSure March 2005 Insufficient
resources
Andrx Altoprev, Fortamet March 2005 Lack of strategic fit
InterMune Amphotec/ Amphocil May 2005 Lack of strategic fit
Questcor Pharmaceuticals Nascobal, Ethamolin, Glofil October 2005 Lack of strategic fit
* Agreement to divested entered with US FTC
Pricing
Many companies seek to recoup as much as possible of their investment in the product,
which may be different for products that have been developed in-house compared with
those that have themselves been acquired. Although divestiture often does result in an
initial cash inflow, this is often not sufficient to fully offset the company’s total
investment in the product, and rarely provides a profit over and above this investment.
Therefore, the objective of many divestitures is merely to salvage as much ROI as
possible from the product, as the alternative of product discontinuation would result in
no returns at all. Because of this, divestiture is often undertaken only after other,
potentially more lucrative lifecycle management strategies have failed.
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Benefits and limitations of divestiture
Figure 1.1 outlines the efficacy of divestiture as a strategy depending upon various
characteristics of a product and its corporate owner.
Figure 7.17: Efficacy of divestiture based on product and owner

characteristics
Low sales
Side effects
Uncompetitiveness
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Benefits
Unlike more complicated lifecycle management strategies that require relatively long
lead times, significant planning, and heavy resource commitments, product divestiture
can be undertaken on short notice and with minimal investment. It may be considered
for mature products approaching or past patent expiration, and may also be utilized as a
backup strategy when other lifecycle management approaches have failed. Depending
upon the product and deal struck, divestiture may also generate income in the form of
immediate cash payments, ongoing royalty streams, or both. This may offer greater
overall rewards than the net present value (NPV) of future sales of a mature product.
Wyeth’s 2003 divestiture of anxiety drug Ativan (lorazepam), angina medication
Isordil (isosorbide), anti-epileptic Diamox (acetazolamide), hypertension drugs Ziac
(bisoprolol fumarate and hydrochlorothiazide) and Zebeta (bisoprolol fumarate),
amenorrhea medication Aygestin norethindrone acetate and insomnia remedy Sonata
(zaleplon), for example, resulted in a gain of approximately $265.8m. Immediately
prior to the divestiture, sales of all of the drugs were low – in 2002, Sonata’s sales were
about $93m, while US sales of Ativan and Isordil were about $50m and sales of the
other products were even lower.
Divestiture may also free resources to invest in other business areas such as sales,
marketing, operations or new product development. In November 2003, Pfizer divested
the rights to Cardura XL (doxazosin mesylate) to generic manufacturer Andrx. Pfizer
had introduced the extended release formulation of the hypertension and congestive
heart failure drug ahead of Cardura’s patent expiry in the European market, in what
proved to be a successful brand defense strategy. However, generic competition entered
the US market in October 2000, before the XL version was approved, cannibalizing
share. Licensing the drug to Andrx removed the need for Pfizer to invest in the
product’s launch, which could have proven significant given the strong inroads that
generic versions of the drug had already made.
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Limitations
Despite these benefits, however, divestiture is a limited strategy that is generally

appropriate for only a small proportion of products. This is particularly true of
divestitures involving individual products, since acquiring companies often seek an
entire product line, technology or company. These tend to offer broader associated
resources that can be leveraged for success, such as goodwill, brand equity, name
recognition, technical know-how and intellectual property, operational capabilities, and
distribution relationships. When acquirers consider individual products, they tend to be
very selective, seeking:
Very specialized products that will fit a unique niche;
Products with untapped potential that they can optimize; or
Products with strong demonstrated potential.
However, these opportunities tend to be limited since the number of specialized niche
products is often small. Products with unrealized potential that can be harvested in a
relatively straightforward manner are also difficult to find, since their current owners
typically attempt to maximize sales prior to considering a divestiture, and companies
usually do not want to divest products that are realizing their full potential.
In fact, striking a deal that includes lagging products can pose challenges, since
acquirers will use current product performance as a starting point for estimating their
likely success with it. Therefore, this factor can significantly affect transaction terms as
well as whether or not a deal will be done at all. If the product is intrinsically
problematic, an acquirer may not hope to have any more success with it than its
developer. This can particularly occur when a product is divested for reasons relating to
lack of effectiveness, side effect profile, and declining competitiveness, for example. In
such cases, it is not uncommon for products to be divested several times by successive
acquirers, particularly when the acquisition occurs as part of a “package” deal
including a more desirable product.
165
In some cases, acquirers are able to breathe new life into a product with untapped
potential. This often occurs with divestitures related to strategic fit and availability of
support resources. For example, Biovail acquired the rights to several off-patent
hypertension drugs, including Sanofi-Aventis’ Cardizem (dlitiazem HCL), Solvay’s
Teveten (Eprosartan), and Merck’s Vasotec (enalaprilat), as well as GlaxoSmithKline’s
herpes medication Zovirax (acyclovir) and Wyeth’s anti-epileptic Artivan (lorazepam)
and angina medication Isordil (isosorbide dinitrate). In each case, Biovail recognized
the value of the drug’s brand equity and the potential to create a reformulated version
of the product. Reformulation had not been a viable strategy for the originator company
either because of lack of technological capability or a focus away from the therapeutic
area. Elan Pharmaceuticals also attempted to use this strategy in its acquisition of
Wyeth’s sleeping aid Sonata, and is continuing to work on an extended release version
of the product despite having divested Sonata to King Pharmaceuticals. In 2004, the
company began Phase II clinical trials.
Case studies
The following case study describes Taro Pharmaceutical’s US out-licensing of

Elixsure, a line of award winning cough and cold syrups, in 2005. Because Taro has
not yet reported its 2005 results and its marketing partner, Alterna, is privately held, it
is too soon to evaluate whether or not the arrangement was beneficial for Taro.
ElixSure (US) – out-licensing
In March 2005, Taro Pharmaceuticals divested the US, Canadian and Mexican
marketing and distribution rights to its award-winning ElixSure cough and cold syrups
to Alterna, a company formed a year earlier to acquire and market novel OTC products.
The agreement provides for Taro to manufacture ElixSure while Alterna will be the
exclusive marketer and distributor the product, with an option to purchase the brands in
North America. In addition to payment for goods manufactured, Taro will receive
royalties on sales during the term of the agreement, and a warrant for a 5% common
166
equity position in Alterna. The deal also includes Taro’s Kerasal line of exfoliating foot
moisturizers.
The arrangement may be surprising due to ElixSure’s strong reception in the

marketplace. The line of syrups, which provide relief from fever, pain, coughs and
congestion, incorporate Taro’s NonSpil liquid drug technology. This prevents the
medication from spilling if the spoon containing it is shaken or inverted, considerably
simplifying pediatric administration. In 2004, ElixSure was one of seven products to
receive the Good Housekeeping Institute's "Good Buy" Award.
Although Taro, with estimated revenue of nearly $300m in 2005, offers a broad line of
prescription and OTC products, its marketing expertise lies in its more extensive Rx
brands, for which it has established new pediatric and dermatology sales teams. As
ElixSure is the company’s only truly novel OTC product, and since OTCs are not a
core focus for Taro, it is not able to build the promotional infrastructure required to
optimize ElixSure sales. Alterna, however, which is run by former executives of
several leading OTC manufacturers, offers these resources.
Conclusion
Divestiture is typically viewed as an appropriate strategy for products with very limited
sales and/or growth potential. This often occurs for products with expiring patents, but
may also occur for niche products with relatively long patent lives. Because its return is
relatively low compared with other lifecycle management strategies, divestiture is often
employed as a last resort, after other initiatives have failed. Nonetheless, there can be
many significant benefits to divestiture, including the inflow of cash to fund other
business projects and the termination of products that did not have a strategic fit with
the company’s goals. Occasionally, companies may also divest highly promising
products whose sales they are unable to optimize. In such cases, developers may seek
marketers with expertise in a particular therapeutic area, or global players with strong
resources.
167
168
CHAPTER 8
Appendix
169
Chapter 8 Appendix
Primary research methodology
Information in this report was compiled from a variety of primary and secondary
sources. This includes interviews with industry experts, comprising both regulatory
officials and pharmaceutical company executives, survey data collected from Business
Insights, as well as a broad range of secondary data obtained from:
Public company SEC filings, press releases and websites;
Articles in US and international trade journals;
Articles in US and international magazines, newspapers and other consumer

publications;
Data and reports from state and federal regulatory agencies.
170
Index
Abbott, 55, 124 Aventis, 93, 102, 126, 139, 160, 166
Abbreviated New Drug Application, 51, 83, Aygestin, 164

127
Barr Laboratories, 73, 83
Accolate, 64
Bayer, 136, 150
Acenorm, 151
Betapace, 54, 62, 63, 64
Adderall, 34, 73, 157
Bextra, 32
Advair, 94, 95, 97
Biocraft, 151
Advancis, 158
Biovail, 157, 166
Advil, 27
Blockbuster, 10, 18, 23, 141
Allegra, 102, 138
Blue Cross/Blue Shield, 27
Alpharma, 139, 143
Botox, 56
Alterna, 166, 167
Brand loyalty, 34
Altoprev, 161
Bristol-Myers Squibb, 22, 101, 114, 151, 160
Amaryl, 93
Capoten, 151
Amgen, 22, 55
Capto-ISIS, 151
ANDA, 51, 61, 83, 138, 175
Cardizem, 166
Andrx, 161, 164
Cardura, 164
Apothecon, 136
Celebrex, 32
Appedrine, 157
Chattem, 157
Arcoxia, 93
Cipralex, 96, 104
AstraZeneca, 64, 81, 95, 103, 104, 110, 112,
121, 128, 129, 138 Cipramil, 96, 104
Ativan, 164 Clarinex, 78, 102, 125, 128
Augmentin, 139 Claritin, 54, 64, 71, 74, 78, 93, 95, 102, 110,
112, 114, 116, 117, 125, 126, 127, 128, 129
Avandamet, 94
Composition patents, 20
Avandia, 94
Concor, 62
171
Copley, 151 Glucovance, 101
Cosmos, 140 Heumann Pharma Generics, 136
Dexatrim, 157 Indication expansion, 11, 19, 40, 42, 44, 49,
50, 53, 65
Diamox, 164
ISIS Pharma, 151
Diflucan, 116, 121
Isordil, 164, 166
Dorom, 136
Italy, 10, 18, 30, 31, 35, 36, 109, 115, 142
Dovobet, 100
Johnson & Johnson, 55, 56, 73, 127, 129
Duramed, 151
Kerasal, 167
Elan, 56, 161, 166
King Pharmaceuticals, 56, 166
ElixSure, 161, 162, 166, 167
Lamisil, 114
Endo, 151
Leo Pharmaceuticals, 100
European Reference Product, 70, 81
Lescol, 43, 56
Exubera, 93
Lexapro, 104
FemmePharma, 155
Lilly, 22, 73, 83, 156, 158
Fen-Phen, 157
Line extensions, 12, 70
Flovent, 94, 97
Lipitor, 23, 32, 33, 94
Forest Laboratories, 104
Lopirin, 151
Fortamet, 161
Losec, 81, 103, 104
Fosamax, 70
Lotrimin, 114
France, 29, 30, 31, 35, 36, 61, 69, 85, 96, 101,
109, 115, 117, 118, 124, 134, 139, 156 Lundbeck, 96, 104
Generic launch, 19 Luvox, 83
Generics (UK) Ltd, 81 Medco, 26, 34, 142
Geneva, 151 Medicaid, 24, 25, 141, 150
Germany, 10, 14, 18, 28, 29, 30, 80, 85, 96, Medicare, 24, 25, 26, 27, 51, 61, 141
101, 104, 108, 109, 115, 126, 129, 134, 139,
151, 152 Medicare Modernization Act, 25, 51, 61
GlaxoSmithKline, 82, 83, 94, 97, 124, 139, Merck, 22, 62, 64, 65, 70, 93, 95, 111, 114,
140, 166 116, 123, 129, 158, 166
Glucophage, 101 Merck KGaA, 62
172
Mevacor, 111, 114, 124, 129 Process patents, 20
Monistat, 114 Procter & Gamble, 121, 128
MRP, 52, 175 Product patents, 20
Mutual Recognition Procedure, 52, 175 Protonix, 74, 75
Mylan, 151 Prozac, 73, 82, 83
Neurontin, 139, 143 Pulmicort, 95
Nexium, 74, 89, 93, 103, 104, 128 Questcor Pharmaceuticals, 161
Nolvadex, 138 Ranbaxy, 32, 33
Norgine, 156 Rebetol, 143
Novartis, 43, 56, 135, 136, 160 Regulation, 38
Novopharm, 151 Remeron, 35, 80
Organon, 35, 80 Remicade, 56
Out-licensing, 155, 156 Reminyl, 157
Oxis, 95 Roche, 124
Par Pharmaceuticals, 63 Royce, 151
Patent, 20, 32, 40, 147 Rx-to-OTC switch, 10, 14, 18, 19, 34, 38, 40,
41, 42, 43, 45, 47, 58, 78, 86, 102, 107, 108,
Patent challenge, 147 109, 111, 113, 114, 116, 119, 120, 121, 122,
123, 124, 125, 128, 129, 130, 143
Paxil, 74, 82, 83, 138
Sandoz, 135, 143, 160
Pepcid AC, 114
Sanofi-Aventis, 93, 102, 138, 166
Pfizer, 22, 27, 32, 33, 40, 76, 83, 93, 116, 121,
126, 136, 139, 143, 156, 160, 164 Schein, 151
Pliva, 156 Schering-Plough, 64, 71, 78, 95, 102, 110, 125,
126, 127, 128, 129, 143
Prasco Laboratories, 138
Schwarz Pharma, 151, 152
Pravachol, 114, 124
Second generation launch, 13, 19, 38, 87, 88
Prevacid, 54, 74, 82, 84, 85, 94
Serevent, 94, 97
Pricing, 11, 13, 50, 57, 75, 88, 96, 118, 145,
162 Shire, 34, 73, 157
Prilosec, 73, 89, 93, 103, 110, 112, 114, 121, Singulair, 23, 54, 63, 64, 65, 95
125, 128, 129
Skelaxin, 56
173
144, 146, 150, 151, 156, 158, 160, 162, 164,
SkyePharma, 83 166, 170
Solvay, 83, 166 Use patents, 20
Sonata, 164, 166 Vagistat, 114
Spain, 31, 35, 37, 62, 85, 96, 115, 139, 156 Vasotec, 166
Sporanox, 73 Viagra, 27, 40
Strategic pricing, 10 Vioxx, 93, 158
Symbicort, 95 Vytorin, 95
Takeda, 84 Wyeth, 26, 73, 75, 84, 85, 127, 157, 164, 166
Taro Pharmaceuticals, 166 Xenical, 124
Tensobon, 151 Xyzall, 90
Teva, 139, 143 Zantac, 114, 121
Teveten, 166 Zebeta, 164
Timing, 11, 41, 50, 58, 75, 97, 119, 146, 150 Zetia, 129
Torrent Pharmaceuticals, 136 Ziac, 164
UCB, 89 Zithromax, 76, 156
UK, 10, 14, 18, 27, 28, 29, 30, 32, 33, 35, 38, Zmax, 76
62, 80, 81, 83, 84, 85, 97, 101, 103, 108,
109, 115, 121, 123, 125, 126, 129, 134, 139, Zocor, 23, 93, 94, 116, 123, 125, 129
151
Zoloft, 83
US, 1, 10, 11, 12, 14, 15, 18, 23, 24, 25, 26, 27,
32, 33, 34, 36, 40, 47, 50, 51, 53, 54, 56, 58, Zoton, 84
60, 61, 63, 64, 65, 66, 68, 69, 70, 71, 74, 75,
76, 80, 82, 83, 90, 93, 94, 95, 96, 99, 100, Zovirax, 166
101, 102, 103, 104, 108, 109, 110, 111, 112,
114, 115, 116, 117, 121, 122, 123, 124, 125,
128, 132, 133, 134, 137, 138, 139, 141, 142,
174
Glossary
ANDA Abbreviated new drug application (for FDA)
COX-2 Cyclo-oxygenase-2 enzyme
CR Controlled release
DTC Direct to consumer (advertising)
ECJ European Court of Justice
FDA Food & Drug Administration
IV Intravenous
LA Long acting
MA Market Authorisation
MRP Mutual Recognition Procedure
MUPS Multiple unit pellet system
NDA New drug application (for FDA)
R&D Research and development (of a drug)
SR Sustained release
175
SSRI Selective Serotonin Reuptake Inhibitors
XR Extended release
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Lifecycle Management Strategies Maximizing ROI Through Indication Expansion Reformulation and Rx-To-OTC Switching

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Lifecycle Management Strategies Maximizing ROI Through Indication Expansion Reformulation and Rx-To-OTC Switching

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H E A LT H C A R E

Lifecycle Management Strategies

Alison Sahoo is a pharmaceutical industry analyst with more than 10 years of

Copyright © 2006 Business Insights Ltd

While information, advice or comment is believed to be correct at the time of

Chapter 2 Indication expansion 50

Chapter 4 Second generation launch 88

Chapter 5 Rx-to-OTC switching 108

Chapter 6 Launch of a branded generic 132

Chapter 7 Divestiture 154

Chapter 8 Appendix 170

 Maximizing the return on investment of brands through appropriate lifecycle

 Leading lifecycle management strategies include indication expansion,

 Timing considerations are less of a concern with an indication expansion strategy

 Reformulation refers to the launch of a modified product involving either a change

 A drug reformulation is most appropriate for products with significant market

 Reformulations, particularly those related to extended release formulas, are often

 As with other product launch strategies, reformulations must be competitively

Second generation launch

 Second generation products address similar therapeutic applications and patient

 A second generation launch allows a manufacturer to leverage the market share

 Second generation products allow developers to re-start the clock on patent

 Rx-to-OTC switching refers to the process of moving a prescription drug to the

 Originator companies may proactively introduce a generic after other more

 External drivers of divestiture include anti-trust considerations, competitive

 The objectives of divestiture typically revolve around eliminating a product with

 Maximizing the return on investment of brands through appropriate lifecycle

 Leading lifecycle management strategies include indication expansion,

 Market protection actions defend against competitive erosion of sales.

 Second generation launch;

In the pharmaceutical industry, international patent legislation typically encompasses

 Process patents: Process claims refer to the method used to produce a

 Use patents: Use patents require utility, novelty and non-obviousness.

Protection of intellectual property through patenting provides the necessary incentive

Expiring patents on blockbusters

By 2008, an unprecedented number of blockbuster drugs will lose patent protection,

Table 1.1: Revenues and patent expirations for selected companies’

Company Drug 2005 % of total US patent

Merck Zocor 4,400 20.0% Jun 2006

Bristol-Myers Squibb Plavix 3,823 19.9% Nov 2011

Lilly Zyprexa 4,202 29.3% Jun 2011

Pfizer Lipitor 12,187 23.8% Jul 2011

Amgen Neulasta 3,528 29.9% Oct 2015

Source: Company annual reports Business Insights Ltd

The ultimate impact of patent expiration on branded drug revenues is directly

Cost containment and the rise of generics

To further encourage patient selection of generics, pharmacy benefit managers (PBMs)

However, the number of generic versions launched of injectable drugs in the UK is

Additionally, there is little impact of the formulation of a product (injectable versus

Case study: Lipitor (UK, US)

The recent challenges involving Pfizer’s blockbuster cholesterol reducer, Lipitor

Despite efforts of US managed care organizations and European healthcare providers to

 50% would use a generic for heart disease;

 52% would use a generic to control diabetes;

 56% would use a generic to address asthma;

Furthermore, pharmacists’ dispensing decisions can often be swayed by patient

Implementing a price decrease at or prior to patent expiry allows brands to compete on

Lifecycle management options

Figure 1.1: Efficacy of lifecycle management strategies based on product and

Product Indication Reformu- 2nd Rx-to- Own Divestiture

Source: Author’s Research & Analysis Business Insights Ltd

Figure 1.2: Timing considerations for lifecycle management strategies

Phase II Phase 0 - 3 years 4-8 years < 3 years

Source: Business Insights Primary Research Survey Business Insights Ltd

Maximizing the return on investment of brands through appropriate lifecycle

Leading lifecycle management strategies include indication expansion,

Timing considerations are less of a concern with an indication expansion strategy

Reformulation refers to the launch of a modified product involving either a change

A drug reformulation is most appropriate for products with significant market

Reformulations, particularly those related to extended release formulas, are often

As with other product launch strategies, reformulations must be competitively

Second generation products address similar therapeutic applications and patient

A second generation launch allows a manufacturer to leverage the market share

Second generation products allow developers to re-start the clock on patent

Rx-to-OTC switching refers to the process of moving a prescription drug to the

Originator companies may proactively introduce a generic after other more

External drivers of divestiture include anti-trust considerations, competitive

The objectives of divestiture typically revolve around eliminating a product with

Maximizing the return on investment of brands through appropriate lifecycle

Leading lifecycle management strategies include indication expansion,

Market protection actions defend against competitive erosion of sales.

Second generation launch;

Process patents: Process claims refer to the method used to produce a

Use patents: Use patents require utility, novelty and non-obviousness.

50% would use a generic for heart disease;

52% would use a generic to control diabetes;

56% would use a generic to address asthma;

An indication expansion broadens a drug’s usage beyond its original intended

Successful indication expansions require both strategic focus on the product as

Pricing considerations for new indications are important; if a drug is priced

The chief benefit of indication expansion is the gain of an additional period of

Extension of the drug’s usage to related indications, such as the approval of an

Addition of entirely new therapeutic indications, such as treatment of additional

To match competitive moves;

To protect a product from imminent generic competition.

Reformulation refers to the launch of a modified product involving either a

Reformulations intended to replace original drugs must provide clear benefits

A drug reformulation is most appropriate for products with significant market

As with other product launch strategies, reformulations must be competitively

Successful reformulations allow manufacturers to proactively build sales and/or

The most significant limitation of reformulations is that they are only

To extend the product line and capture additional sales;

To protect a product from imminent generic competition.