Product Line Extension: a Successful Marketing Strategy to Limit Market Cannibalization in a Therapeutic Segment

ijcrb.webs.com FEBRUARY 2012 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS VOL 3, NO 10

Product Line Extension: A Successful Marketing Strategy to Limit Market Cannibalization in a Therapeutic Segment

Riaz. H. Soomro Assistant Professor Hamdard Institute of Management Sciences Hamdard University Karachi, Pakistan.

Ayesha Mushtaq Regulatory Support Manager Bayer Pakistan (Pvt.) Limited Karachi, Pakistan.

Abstract This paper finds out whether or not to allow the firm to cannibalize the parent product or open a new segment of patents within the same therapeutic segment to limit market cannibalization. This paper also discusses whether or not the profitability of the firm is raised by introducing innovative version of the drug. The respondents of this study were doctors practicing in Karachi. A sample of 100 doctors was selected on the basis of purposive sampling procedure. Primary data for this research was collected through close ended questionnaire. Secondary data source was Integrated Management System (IMS). The data related to second quarter of 2005 and 2009 were taken from IMS. Data analysis was done with the help of MS Excel by using its Excel add-in option. The study was limited to the pharmaceutical industry. Evidences confirm that in pharmaceutical company’s profits are reduced substantially due to the introduction of its generic product quite before the patent expiry. This leads to snatching of market share from branded to generic product of a firm. The process of successful replacement of the branded product to the generic product to limit market cannibalization is successful marketing strategy. In order to hold the market leadership, the branded drug’s firm can prevent this process of market share snatching by introducing and promoting new form of drug with low price and the same concept of the molecule just prior to patent expiry of branded drug. The firms can capture the market by providing low price unbranded product to the loyal customers who already have good experience with the firm’s products. The process would not only help the firm to limit sales cannibalization but also the revenues of the firm would be retained if not increased quite before the patent expiry.

Key words: Product Line extension, cannibalization, Therapeutic Segment, patent expiry. 1. Introduction: The “unbranded products” are common in pharmaceutical industry, in general and in Pakistan’s Pharmaceutical industry in particular. When a firm introduces branded product with patent right it means it has already incurred a huge cost which is must be capitalized.

ijcrb.webs.com FEBRUARY 2012 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS VOL 3, NO 10

Firms start earning profits until capitalized cost is recovered. The problem starts when the branded product starts losing market share even before its capitalized cost is fully recovered which may be either because of self introduced unbranded products or competitors products then available in the market . The firms try to take back the profitability through product line extension. The question still remains unanswered that whether the product line extension is a successful market strategy to limit market cannibalization? This paper finds out whether to cannibalize the parent product or open a new segment of patents within the same therapeutic segment to limit market cannibalization. This paper also discusses whether or not the profitability of the firm is raised by introducing innovative version of the drug. The respondents of this study were doctors practicing in Karachi. A sample of 100 doctors was selected on the basis of purposive sampling procedure. Primary data for this research was collected through close ended questionnaire. Questions regarding disease treatment, motivator for prescribing a drug, preference of medication means advance or old version, brand and manufacturer image were included in the questionnaire. Secondary data source was Integrated Management System (IMS). The data related to second quarter of 2005 and 2009 were taken from IMS. Data analysis was done with the help of MS Excel by using its Excel add-in option. This study was limited to the pharmaceutical industry; and moreover IMS data does not reflect the exact profits and input factors which may vary from company to company therefore the results of the study might be affected. The focus of this study is to examine that product line extension is a successful marketing strategy in pharmaceutical industry. This analysis of the production line extension used as tool to limit market cannibalization in pharmaceutical industry was done.

The cannibalization is very common as in sales cannibalization the customers start switching from firms’ continuing product to a new product (Donald, Russell, Donald, & Winer, 2001) resulting decline in sales. In sales cannibalization innovations grasp the market share from the existing product. The other term related to cannibalization is the cannibalization of specialized investments in which the value of investments is reduced. Firms keep the option of cannibalization open right at the time of launching new product. The expected amount of losses, should be given due considerations in the older versions of the drug when budgeting sales for the forthcoming years. (Edwin, Bas, & P.A.M., 2005). Sometimes cannibalization becomes more harmful for the company itself because it makes very difficult for the top management strategic managers to adopt any marketing strategy against it. The recent studies show that diversification of intangible assets has negative implications and when rivalry firm introduces a new product against the firms’ older version of the product it has a significant impact on the market share of the firm, (Roberts & Susan, 2005).Some researchers claim that it is better to provide the substitute of firms own branded product in the form of generic product quite before the expiry of its patent and along with that firm should also decrease the price of its branded product which’s patent is near to expire, (Kamien & Zang, 1999). This strategy will benefit the firm in two ways first, the turnover of the firm would again improve due to force of law of demand and also the firm would allow its generic product to take position in the market. One other cause of increase in turn over would be that this strategy will attract

ijcrb.webs.com FEBRUARY 2012 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS VOL 3, NO 10 both the price conscious as well as brand cautious customers. It is quite possible that this strategy may allow other rivalry firms to enter into the market by then the firm must have taken the Stackelberg leadership role in the market.

One important model proposed in literature is the introduction of generic drug which is substitute of firm’s own product even before the patent’s expiry. This action leads to bring top leadership of the firm in the upcoming markets of unbranded product. One other thing a firm can do is raising the price of its original product above the old prices which will ultimately raise the profitability of the firms when the patent is near to expire. The expansion in product line urges that goodwill of the firm plays very important role for the success of the firm. Experience suggests that a newer version of the drug should be brought into the market quiet before the patent rights of a firm expire because you need to recapture the market if any market cannibalization occurs. However, introducing a line extension in product portfolio can be risky as well, because in many cases product line extension affects on the parent product. So the success of a line extension must be evaluated not only in term of its own sales, but also in terms of cannibalization of the parent product and its overall impact on the company’s portfolio. One concern with adding a new product is current customers switching from the company’s existing product to the new product resulting in cannibalization of sales for the original product.” (Donald, Russell, Donald, & Winer, 2001)

3. Data Analysis and Findings

All respondents of the study not only agreed to prefer innovative drug but also they were willing to prescribe the innovative new drug to the old patients. It means brand is important for many doctors only in the case when innovative drug is not available. Generic drugs can capture the market share if it is innovative. The doctors gave due considerations to the parameters like concept of the molecule, quality of drug, safety and tolerability, manufacturer and price of the drug by the doctors while prescribing a drug.

Doctors gave top priority to concept of molecule and price has the second top priority while prescribing any drug. Twenty one doctors gave preference to the prices as compare to quality of drug, company image and safety and tolerance for which responses were fifteen, fifteen and eleven respectively as shown in figure 1. The importance to the concept of molecule and Price suggests that brand is least important for most of the doctors. So the product line extension would serve the purpose to recapture the market in case the patent expires. It means product line extension is a successful marketing strategy to limit market cannibalization.

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Doctors do consider experience with the old drug along with concept of new molecule while prescribing a new drug. This shows that if the patients have good experience with

ijcrb.webs.com FEBRUARY 2012 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS VOL 3, NO 10 old molecule from same company it opportunity becomes for the company. The firm can capitalize this opportunity and capture the market share by introducing the new version of same drug to the loyal customers of the company. This data also confirms that the advantage would be with the producer of branded drug in case of sales cannibalization of the old branded version of the drug. Researchers also found that establishment of concept of molecule in both parent and new version of the drug was the key considered by the doctors while prescribing a drug.

Since the brand name is least important for the doctors therefore generic drug introduction quite before the expiry of the product would serve the purpose. The research reveals that few doctors trust the manufacturers suggesting that the manufacturing firm should select the drug with lowest price and best quality so only price and quality of the drug can impress the doctors as shown in Figure 1. So the firm can reduce the price of the branded product in order to gain Stackelberg leadership in the market quite before the expiry of the patent rights of the branded drug.

Table 1: Innovative Version of Drugs Launched by Different Companies Old Fosamax Augmenten Renitech Capoten Cipram molecule Once daily 375mg Fosamax Advance Augmenten Novatech Monopril Cipralex Once molecule 1g weekly Source: Integrated Management System Data

Table1 shows selected drugs whose innovative version were launched by different companies and it was found that three out five drugs’ innovative version had been successfully replaced by parent product while in two cases company was unable to replace e parent product.

IMS provides the units sold of each brand with complete picture of growth and share of pharmaceutical product. The impact on the market share after the introduction of advance molecule in the form of either new molecule or product line extension was analyzed and it was noted that Novatech and Monopril was unable to replace Renitech and Capoten respectively. On the other hand Cipralex, Fosamax once weekly and Augmenten 1 gm came up with enormous success and brought huge revenue in the same therapeutic segment. The results suggest that the introduction of new version of the drug can help to increase the profits of the firm with in the same therapeutic class.

3.Conclusion Product line extension not only helps the pharmaceutical firms to lead the market in a particular patient’s segment but also the firms can gain extraordinary profits. If the Product Manager considers the variables such as concept of new molecule, establishing the attributes of drugs and advantages within the same therapeutic class etc. the firm

ijcrb.webs.com FEBRUARY 2012 INTERDISCIPLINARY JOURNAL OF CONTEMPORARY RESEARCH IN BUSINESS VOL 3, NO 10 would not only bring profits but also it can retain or acquire a market leadership. Evidences confirm that in pharmaceutical company’s profits are reduced substantially due to the introduction of its generic product quite before the patent expiry. This leads to snatching of market share from branded to generic product of a firm. The process of successful replacement of the branded product to the generic product to limit market cannibalization is successful marketing strategy. In order to hold the market leadership, the branded drug’s firm can prevent this process of market share snatching by introducing and promoting new form of drug with low price and the same concept of the molecule just prior to patent expiry of branded drug. The firms can capture the market by providing low price unbranded product to the loyal customers who already have good experience with the firm’s products. The process would not only help the firm to limit sales cannibalization but also the revenues of the firm would be retained if not increased quite before the patent expiry.

The proper marketing strategy should be devised for the new generic product in order to position its product in the market and additional attributes of the product should also be communicated very effectively through advertisements. It is also recommended that generic drug should be launched at least one year before patent expiry so that ample time is available to the firm to capture the market and limit the sales cannibalization. There is a need to analyze the input factors which are in fact the cause of success and failure of new generic drug of the firm.

References: Donald, L. R., Russell, W. R., Donald, L., & Winer, R. (2001). Product Management. McGraw Hill/Irwin.

Edwin, N., Bas, H., & P.A.M., V. (2005). Unraveling Willingness to Cannibalize: A Closer look at the Barrier to Radical Innovation. Technovation , 1400-1409.

Kamien, M. I., & Zang, I. (1999). Virtual Patent Extension by Cannibalization. Sothern Economic Journal , 117-121.

Roberts, W. P., & Susan, M. E. (2005). Product line expansion and resource cannibalization. Economic Behaviour and Organization , 57, 49-70.

Ward, M. R., & Reiffen, D. (2005). Branded Generics: As a Strategy to Limit Cannaibalization of Pharmaceutical Markets. Working Paper 0502, University of Texas at Arlington, Department of Economics.