Barriers to entry, brand advertising, and generic entry in the US pharmaceutical industry

Abstract

This paper examines the entry decisions of generic pharmaceutical manufacturers into markets opened by patent expiration. In particular, I examine the role of pre-expiration brand advertising to see if it deters generic entry. Other drug characteristics affect the number of entrants; the most important of these is pre-expiration brand revenue. Drugs that treat chronic conditions and drugs that are oral solids attract more entry. The previous literature has assumed advertising is exogenous to the entry decision when analyzing the role of advertising. The results under this hypothesis indicate that brands may affect generic entry very slightly by advertising before patent expiration, but two opposing effects render the result nearly insignificant. When instrumented, the coefficient on advertising is completely insignificant. I conclude that brand advertising is not a barrier to entry by generic firms into the US pharmaceutical market.