Essays on Entry and Market Profitability in the UK Pharmaceuticals

UNIVERSITY OF EAST ANGLIA DOCTORAL THESIS Essays on entry and market profitability in the UK pharmaceuticals Author: Supervisors: Weijie YAN Dr. Farasat BOKHARI Dr. Franco MARIUZZO A thesis submitted in fulfillment of the requirements for the degree of Doctor of Philosophy in the School of Economics January, 2019 iii Declaration of Authorship I, Weijie YAN, declare that this thesis titled, “Essays on entry and market profitability in the UK pharmaceuticals” and the work presented in it is my own. I confirm that: • This work was done wholly or mainly while in candidature for a research degree at this University. • Where any part of this thesis has previously been submitted for a degree or any other qualification at this University or any other institution, this has been clearly stated. • Where I have consulted the published work of others, this is always clearly attributed. • Where I have quoted from the work of others, the source is always given. With the exception of such quotations, this thesis is entirely my own work. • I have acknowledged all main sources of help. • Where the thesis is based on work done by myself jointly with others, I have made clear exactly what was done by others and what I have contributed myself. Signed: Date: iv ©This copy of the thesis has been supplied on condition that anyone who consults it is understood to recognise that its copyright rests with the author and that use of any information derived there from must be in accordance with current UK Copyright Law. In addition, any quotation or extract must include full attribution. v Abstract This thesis applies economic methods developed in industrial organization to assess entry barriers and profitability of the pharmaceutical market in the UK. The thesis has two parts. The first part investigates whether incumbent firms strategically proliferate product varieties to delay and deter entry of competitors, and whether such strategy is effective to be a barrier. Three sets of regressions are employed: a non-monotonicity test between number of products and market size, as proposed by Ellison and Ellison (2011); a hazard rate model of entry probability, with focus on whether entry can be influenced by product varieties; and a regression of incumbent’s market share post entry to test whether their share is positively correlated with product varieties built prior to entry. The results suggest that product proliferation can be a barrier to entry in the UK, however, evidence on incumbents’ strategic incentive is inconclusive. The second part of the thesis focuses on antibiotic market. With the use of antibiotics, bacteria start to develop resistance, which has became a global crisis in healthcare. Despite the need for new entries because old molecules are losing effec- tiveness, research firms are leaving this market. We use nested logit and random coefficients logit model to estimate the price elasticity of demand between drugs in order to assess the profitability of the market and to evaluate policy interventions of shifting consumption away from molecules that cause higher resistance. We find that price-cost margin of this market is 35.2% on average but varies by molecules and drug types (branded/generics). We also find that some interventions can be effective to shift demand but with prices to pay. vii Acknowledgements I would like to sincerely thank my supervisors Dr. Farasat Bokhari and Dr. Franco Mariuzzo for their excellent and grateful advises throughout my entire student life as a PhD candidate. The thesis can not complete without their efforts. I would like to thank Professor Stephen Davies, Professor Bruce Lyons and Dr. Subhasish Modak Chowdhury, who taught industrial organization courses in my master years and developed my interests in this area. I would also like to thank Professor Peter Moffatt, who permitted my transfer from other economic modules to Industrial Economics at the beginning of my master, probably he already forgot it, but that was the start of my study in this field. I would like to thank my parents Professor Yongqiang Yan, BM, and Mrs. Rong Ma for their understanding and support. Last, a special thank is given to Mr. Ming- pei Li. ix Contents Declaration of Authorship iii Abstractv Acknowledgements vii 1 Introduction1 2 Product proliferation as entry deterrence7 2.1 Introduction..................................7 2.2 Literature review............................... 11 2.2.1 General approaches in IO...................... 11 2.2.2 Entry deterrence in pharmaceuticals................ 14 2.3 Legal protection in the EU and UK..................... 18 2.4 Model of entry and strategic entry-deterrence............... 20 2.5 Data....................................... 23 2.5.1 Market, originator and entrant................... 24 2.5.2 Market at risk and entry events................... 25 2.6 Conclusions.................................. 29 3 Empirical tests on entry deterrence 31 3.1 Introduction.................................. 31 3.2 Summary statistics.............................. 32 3.3 Empirical testing on entry-deterrence incentive.............. 35 3.3.1 Parametric approach......................... 36 3.3.2 Non-parametric approach...................... 39 3.4 Entry probability............................... 41 3.5 Share of incumbent.............................. 47 3.6 Robustness check............................... 50 3.7 Conclusions.................................. 50 4 Demand of antibiotics in the UK 53 4.1 Introduction.................................. 53 4.2 Literature review............................... 56 4.2.1 Optimal use of drugs with externalities.............. 56 4.2.2 Policy interventions to promote proper use of antibiotics.... 57 4.2.3 Empirical studies on antibiotic use and GP’s incentives..... 59 x 4.2.4 Over- and mis-use of antibiotics.................. 60 4.3 Antibiotic market and data.......................... 60 4.4 Structural modelling of demand...................... 67 4.5 Conclusions.................................. 73 5 Demand of antibiotics: empirical results 75 5.1 Introduction.................................. 75 5.2 Estimation and identification........................ 76 5.3 Estimation results............................... 79 5.4 Profitability of antibiotics market...................... 83 5.5 Price elasticity of demand.......................... 89 5.6 Demand shifting and welfare change.................... 92 5.7 Tax evaluation................................. 96 5.8 Conclusions.................................. 98 6 Concluding remarks 101 A Appendix for chapter 1 and 2 103 B Appendix for chapter 3 and 4 107 Bibliography 111 xi List of Figures 2.1 Trend of product proliferation by originators before and after entry by the first competitor. ................................. 10 2.2 Trend of product proliferation by originators since launch. .......... 10 2.3 Strategic investment and entry model ..................... 20 2.4 An illustration of non-monotonicity between number of products by incumbent and market size .............................. 23 2.5 Difference in quarters between real product launch date in IMS and MA date in EMEA for matched originators. ....................... 25 2.6 Difference in entry years between the originator and the first competitor. .. 26 2.7 Number of molecules launched, number of molecules experienced entry and the average effective monopoly years over time between 1986 and 2015. ... 28 3.1 Number of products by incumbent along market size. ............. 36 3.2 Predicted extra number of products against market size. ........... 38 3.3 Survival distribution of being monopoly by market size. ........... 43 3.4 Predicted entry probability (left) and marginal effects (right) against number of products by market size group. ....................... 46 4.1 Antibiotic consumption by molecule group and UK population ....... 62 4.2 Tree structure for nested logit model ...................... 69 5.1 Histogram of the distribution of taste on price ................. 82 5.2 Histogram of the distribution of taste on spectrum .............. 82 5.3 Estimated marginal cost by branded/generics ................. 88 5.4 Estimated marginal cost by spectrum range .................. 88 5.5 Estimated product level own-price elasticities and weighted average of cross- price elasticities by molecule spectrum ..................... 91 5.6 Estimated product level weighted average of cross-price elasticities by spectrum group ................................... 91 5.7 Estimated product level own-price elasticities and weighted average of cross- price elasticities by molecule age ........................ 92 5.8 Estimated new market equilibrium price for broad- and narrow-spectrum molecules .................................... 94 5.9 Estimated sales volume for broad- and narrow-spectrum molecules ..... 94 xiii List of Tables 2.1 Molecules at risk and entry events by ATC classes............ 26 3.1 Summary statistics.............................. 33 3.2 Regression results of entry-deterrence incentive. Dependent variable: Drugs f ..................................... 38 3.3 Non-parametric testing of monotonicity.................. 41 3.4 Effect of product proliferation on entry probability. C-loglog regressions. Dependent variable: log (− log(1 − lkt)) .............. 45 3.5 Change of incumbent market share post-entry.............. 48 3.6 Effect of product proliferation prior to entry on originators’ market share post entry................................ 49 4.1 Market information by molecule group.................

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