Specialty drug prices and utilization after loss of patent exclusivity, 2001-2007

This paper examines the impact of entry on the prices and utilization of drugs between 2001 and 2007 in the United States (U.S.); we focus on specialty drugs affected by shortages in 2009 and thereafter. We limit our empirical cohort to drugs commonly used to treat cancer and base our analyses on nationally representative data from IMS Health on specialty molecule firm monthly manufacturing volume and 2012 inflation adjusted sales. Our paper contributes to the literature by describing the average number of manufacturers entering specialty drugs undergoing LOE in the first year after patent expiration and thereafter, and comparing raw counts of generic firm entrants to those observed among studies of specialty and non-specialty drugs in a contemporaneous cohort. Yet, we do not derive welfare implications from these results since our review of the organization of specialty drug production suggests the substantial presence of time-varying and unobservable contract manufacturing practices. Such practices complicate and may even obviate the definition of “manufacturers” entering this market. Instead, we examine whether the neo-classical relationship between presumed price declines upon LOE and generic entry and volume increases holds among these drugs using pooled cross-sectional methods. First, to establish the plausibility of the presumed price drop we examine the extent to which estimated prices of these drug undergoing LOE fall with generic entry. Second, we document raw trends in inflation adjusted sales and utilization after LOE. We then estimate reduced form fixed effect models of utilization after generic entry accounting for drug differences. Our results suggest the number of firms entering the production of newly generic specialty drugs ranges between 2 and 5 per molecule in the years following patent expiration.   We find evidence of substantial price erosion after generic entry. In all models, volume appears to go up increase following generic entry, consistent with usual assumptions regarding the negative relationship between prices and quantity demanded. We do not find evidence to suggest the presence of tighter administered pricing policies overall specialty drugs or for drugs clearly targeted by MMA reforms negatively affected the number of manufacturers entering into generic drug markets as they became available.  In fact, we document robust and increasing entry after MMA implementation among new opportunities.     The results of our analyses are used to discuss the probable extent of generic entry, its likely determinants and price and use trends after LOE leading up to but not including shortage reports.