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The effect of international ties on launch sequence and launch pricing decisions in the pharmaceutical industry

Final Report Summary - INTTIES (The effect of international ties on launch sequence and launch pricing decisions in the pharmaceutical industry)

Marketing scholars have always posed a strong interest in the launch of innovations. However, research on the launch of new products in the international realm is scarce. Rare exceptions focus:

(1) on the choice between a waterfall and a sprinkler strategy in international entry; and
(2) whether products diffuse faster in lead countries (in which the product was introduced first) than in lag countries (in which the product was subsequently introduced).

The lack of attention to international product entry decisions contrasts sharply with the high relevance that international launch time decisions have for today's globally operating firms. The commercialization or launch phase is an important phase for a company, in which it makes decisions on launch time and price, both of which have large implications for future profits. In essence, launch time and price are important determinants of the evolution and distribution of cash flows across time and countries. In the pharmaceutical market - the context of the project - regulatory bodies such as the FDA (the food and drug administration) and EMEA (the European medicines evaluation agency; the European counterpart of the FDA) review and approve a new drug's effectiveness and safety.

After scientific approval, the firm negotiates about market access with local health regulators (typically, at the country level), to jointly determine launch time and launch price, even though they potentially may have opposite interests. Ethical drug firms (firms that sell 4 prescription drugs) aim to recoup research and development (R&D) investments through early access (i.e. a long life cycle under patent protection) and a high price, both of which have an important impact on ethical drug companies’ bottom line. Health regulators wish to contain health costs, but at the same time make new life-enhancing and life-saving drugs available to the population.

To contain health budgets, many countries have introduced some form of regulation that restricts a firm in setting prices freely. For instance, Spain has set a threshold (12-18% of allowable cost) that regulates the profit margins ethical drug firms can make, which may put downward pressure on prices in Spain and make manufacturers less keen to enter Spain promptly.

Prior studies have examined launch timing, without accounting for launch price. Other authors have studied launch price, without accounting for launch timing. The present paper examines how launch timing and launch price interrelate and how regulation affects both decisions. In terms of launch timing, this project focused on launch window, which is the difference in months between the first worldwide launch and the subsequent launch in a specific country. The fellow gathered monthly launch windows and launch prices for 58 new drugs launched by ethical drug companies, across 29 different therapeutic categories and 50 - both developed and developing - countries worldwide, yielding a rich dataset, on both the drug- and country level. In the project a launch window equation and a launch price equation were simultaneously estimated, capturing the endogeneity of these decisions.

Among the finding were that launch price has a U-shaped effect on launch window, while launch window has an inverted U-shaped effect on launch price. In the sample, the fastest launch occurs when the launch price is moderately high and the highest price occurs at a launch window of about 85 months. It was also found that health regulators act strategically as the launch window increases with the price of the new drug. Overall, it was found that regulation increases launch window.

Contrary to expectation, it was not found that regulation directly influences launch prices. Interestingly, such regulations may serve to reduce prices faster over the life cycle, rather than the launch price per se. The findings are new to the literature, are based on a large sample of new pharmaceutical drugs, and have high relevance for both firms and regulators. Within the bounds of the data, the model developed in the project can give insights into hypothetical situations, such as, how a further delay in the entry of a new drug may affect launch price. The descriptive information on average launch window and launch price and the interconnection between launch window and launch price allows managers in ethical drug companies to build more informed decisions for international market entry. This study also provides public policy analysts with more quantitative evidence regarding launch window and price on a broad sample of countries and categories.