Strategic Considerations Regarding Line Extension Introduction

The pharmaceutical sector is both profitable and highly regulated. Pharmaceutical companies develop business strategies in response to profit opportunities in the regulatory environment. It is common for innovative pharmaceutical firm to have monopoly periods due to patents and exclusivity protections, though when these end, so do profit flows. One strategy for pharmaceutical firms to continue to profit from an active ingredient that is nearing the end of its patent and exclusivity monopoly period is to reformulate the original formulation (OF) of the active ingredient into a follow-on product or line extension (LE), which receives a new exclusivity period once approved. In this paper, I develop a theoretical model of firm’s decision on the timing of LE launches. The firm faces a tradeoff between launching a LE early to maximize switches from the OF to the LE before the OF goes generic, or delaying the LE to maximize LE exclusivity time. Among other implications, the model suggests there is an incentive for strategic LE launch delay in cases where the LE cannibalizes the OF. In cases where the LE has clinical value beyond the OF, this delay hurts consumers. I test the model using a unique dataset of over 500 OF-LE pairs approved in the US from 1986 to 2016. I find that LE entry tends to occur prior to OF patent expiry suggestive of strategic LE launch timing, and in some instances strategic delay. My results shed light on the dynamics of pharmaceutical innovation, with implications for consumer welfare and regulatory policy.