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CONCENTRATION AND COMPETITION IN THE
CHEMOTHERAPY DRUG
MARKET

Introduction
The pharmaceutical industry is comprised of companies that discover and sell drugs that require a doctor’s prescription. The pharmaceutical industryranks among the top industries in the United States in sales and research anddevelopment. This chapter considers competition in this industry and investi-gates the relationship between market structure, patent protection, and concen-tration.
To illustrate several basic propositions in the pharmaceutical industry I nar- row the focus of the analysis to the cancer drug market. According to estimatespublished in 1999 (Med Ad News, May, 1999), the cancer drug market is over$7.82 billion in annual sales. Within the cancer drug market I analyze theanti-cancer paclitaxel drug Taxol manufactured by the Bristol-Myers Squibbcompany.1 Taxol sales are over $1.2 billion per annum or over $3 million perday. Taxol is principally prescribed for breast cancer, lung cancer, and ovar-ian cancer. My analysis considers the market segment consisting of drugs soldto treat these three cancers. The breast cancer drug market has annual salesof $2.66 billion, the lung cancer drug market has annual sales of $125.9 mil-lion, and the ovarian cancer drug market has annual sales of approximately$643 million. Therefore the segment of the cancer drug market for these can-cers alone is over 40 percent of all cancer drug sales. More importantly thesethree cancers have very high incidences in the United States. Breast cancerand lung cancer have the top two incidence rates in the United States amongwomen (113.2 per 100,000 and 41.3 per 100,000 respectively) and breast, lung,and ovarian cancer represent over 60 percent of all cancer incidence in women 1Taxol is trademarked by the Bristol-Myers Squibb company.
EMPIRICAL STUDIES IN APPLIED ECONOMICS according to the National Cancer Institute SEER program. Among men, lungcancer is second only in incidence to prostate cancer with over 80.7 cases per100,000 men being diagnosed with lung cancer each year. Thus the breast,lung, and ovarian cancer drug market is both large in terms of annual sales andlarge in terms of incidence in the U.S. population. The common denominatorin the lung, breast, and ovarian cancer drug market is Taxol, which representsnearly 35 percent of annual sales of drugs supplied in this market segment. Onepurpose of this chapter is to define the relevant economic market for Taxol andto consider concentration in that market.
The remainder of the chapter is organized as follows. In Section 7.2, I dis- cuss the market structure of the pharmaceutical industry and consider researchand development, brand loyalty, and factors which lead firms to create andmaintain monopolies. In Section 7.3, I consider one important barrier to en-try in the pharmaceutical industry which is the statutory exclusivity providedby law in the United States. In Section 7.4, I discuss the history of pacli-taxel including its discovery and development by the Bristol-Myers SquibbCompany. In Section 7.5, I discuss various market power measures includingthe Herfindahl-Hirschman statistic and modifications to this statistic used in amulti-market setting. In Section 7.6, I discuss the relevant product market forpaclitaxel drugs and issues of demand and supply substitutability. I also cal-culate the various measures of concentration presented in the previous section.
Finally, in Section 7.7, I present conclusions.
Market Structure
In the pharmaceutical industry, companies face several difficult barriers to entering the market. First is the enormous research and development (R&D)cost in developing a drug and securing FDA approval for a drug. Second is themonopoly status sometimes conferred on a drug company by statutes. Addi-tional barriers to entry include brand loyalty, generic introduction by a patentholder, and an incumbent’s attempts to maintain its monopoly position. I dis-cuss each in turn below.
R&D Economies of Scale
The economies of scale in R&D combine with the difficult and time con- suming trials necessary to secure FDA approval for an “indication"—a treat-ment regimen for a new drug for a particular disease. A firm must maintaina portfolio of R&D projects because only 25 percent of new drugs that enterclinical testing are ever marketed. And of these, only 30 percent ever covertheir total costs.2 In a 1991 article, the chief executive officer of Glaxo noted 2See Viscusi, et al. (1998, p. 853).
Concentration in the Chemotherapy Drug Market that “to be a big player, a company must spend somewhere north of $500 mil-lion per year (on R&D) and grow it by more than 10 percent or 15 percent ayear. Those who can’t spend that will be left behind."3 The R&D process lends itself to traditional economies of scale. As noted by Viscusi, et al. (1998), “. . . the discovery process is characterized by sig-nificant fixed costs. Multidisciplinary teams of biologists, chemists, and otherscientists are engaged in research. . . . The clinical development process alsorecognizes significant regulatory and legal expertise, which is also character-ized by fixed costs and specialization.4 Thus, the enormous R&D costs pose asignificant barrier to entry." Those R&D costs combine with the cost and time necessary to secure the FDA approval for an indication. Without such approval, the drug cannot bebrought to market. Without doubt, the R&D costs and the difficulties in secur-ing FDA approval are significant barriers to entry.
Monopoly Power from Statutory Exclusivity
As I noted above, drug companies expend a great deal of money, time and effort in R&D in bringing a new drug to market. In order to protect a com-pany’s investment and prevent other companies from using its discoveries andwork, certain statutes, including the patent laws and the Hatch-Waxman Act,give companies varying degrees of exclusivity to market and sell their prod-ucts. For instance, in the pharmaceutical industry, awarding a patent to a phar-maceutical company for a drug with an approved indication erects the ultimatebarrier to entry during the patent’s life. During such a period of exclusivity,a drug company can price like a monopolist in order to recoup its investmentby charging prices above what they would likely have been in a competitivemarket.
Brand Loyalty
Intuitively, one would think that once a drug came off-patent and cheaper generic substitutes were made available, the branded drug would need to re-duce price to meet the generics or face losing all its market share. However,research has shown that this has not been the case and that the branded drugshave proven to be remarkably resilient. For example, among eighteen drugsstudied in 1992, generics were introduced at 61 percent of the branded drug’sprice. Over the course of two years, this price fell to 37 percent of the brandeddrug’s price. The price of the branded drug actually rose 11 percent in this 3The Wall Street Journal, June 25, 1991.
4See Viscusi, et al. (1998, pp. 853–54).
EMPIRICAL STUDIES IN APPLIED ECONOMICS period and retained about 50 percent of the market share.5 There are severalexplanations for this phenomenon.
First, drug companies have successfully bifurcated the market into price sensitive and price insensitive segments. With the introduction of much lessexpensive generics, the non-branded bio-equivalent product successfully cap-tures the price sensitive market segment. One would suspect that as managedhealth organizations grow and other cost containment measures gain in popu-larity and importance, the price sensitive segment will grow. However, giventhe price insensitivity exhibited by some market segments, drug companiesfind it more profitable to raise prices, sell less product and cut production costsfor the branded product than to compete with generics head-to-head on price.
Additionally, doctors bolster the resilience of the price insensitive group.
Often doctors are risk averse, insensitive to cost, creatures of habit and willprescribe a brand name drug without concern or even knowledge of its cost,even when lower cost generic substitutes are available.6 Doctors become ac-customed to prescribing the brand name drug during its patent tenure and otherperiods of exclusivity. Consequently, doctors typically are slow to switch togenerics. Partly, this is due to the fact that as the prescriber, and not the con-sumer, there is no price consequence to the doctor. Additionally, pharmaceu-tical companies spend a great deal of money in promoting their branded drugsto doctors. This process is known as “detailing." This promotion during theperiod the drug enjoys exclusivity also strengthens the ties the doctor has to aparticular branded drug.7 Consumers also often lack the knowledge to evaluate alternatives. This ren- ders them unable to weigh the small risk associated with substituting awayfrom a prescribed brand-name drug to an equivalent generic. Pharmacists ap-parently do not substitute the generic for the brand drug even when they havethe legal ability to do so.8 These factors all present a barrier to entry to genericdrug manufacturers once a drug loses its exclusivity.
Generic Drug Introduction
An additional barrier to entry can occur when the brand drug producer intro- duces its own generic version of the drug before its exclusivity expires. Whileit may at first seem counterintuitive to bifurcate the market before it is neces-sary to do so, there are good economic reasons to do so. The relation of priceto marginal cost level may be less important than the price required to providedecreased incentives for rivals to enter the market. Thus, a company fore- 5See Viscusi, et al. (1998, p. 853).
6See Scherer (1993) and Temin (1980).
7See Leffler (1981).
8See Kralewski, Pitt, and Dowd (1983).
Concentration in the Chemotherapy Drug Market goes some short-term monopoly profits for long-term generic market powerand profits.
This strategy is related to first-mover advantage, which is the competitive advantage a firm has by being the first to introduce a product into the mar-ket. By beating competitors to the market, the first-mover enjoys a monopolyperiod. A first-mover in the market can make binding commitments that ad-versely affect its competitors’ ability to profit in the market. This is particularlytrue in the pharmaceutical industry, where almost all first-movers are the mar-ket share leaders.9 When the brand drug producer introduces a generic drug during the period of exclusivity, it is not only a first-mover, it is an only-mover. Thus, by intro-ducing a generic drug while the exclusivity is still in effect, the incumbent cansecure a large share of the generic market before others are legally entitled toenter and compete. This establishes a formidable barrier to entry.
Creating and Maintaining a Monopoly
A firm may become or remain a monopolist by several distinct methods.
First, a firm may have special knowledge or trade secrets that allow it to pro-duce a new or superior product that others cannot imitate. This differentiatedproduct results in a differentiated demand for that firm, and allows the firm toexercise monopoly power with respect to that unique product.
Second, a firm may have specialized knowledge about production that al- lows it to produce a given product at lower costs, and therefore to be moreefficient. Again, the cost structure may allow the firm to set a superior pricefor the product, resulting in an effective barrier to entry.
If, on the other hand, the product’s cost structure or uniqueness can be im- itated, a third method by which a firm can create or maintain its monopolyis through a patent. As I discussed above, a valid patent will prevent otherfirms from copying the product and also protect the firm from competition fora given period of time.
A fourth mechanism that allows a firm to create and maintain monopoly power is through government restrictions on entry. These include the part-nerships created under the CRADA, the additional exclusivity that a firm isafforded under the Orphan Drug Act, or the protection that a firm receives un-der the Hatch-Waxman Act for five years of exclusion from ANDAs (genericapplicants).
Fifth, firms may be prevented from entering a market by a firm’s strategic actions. These might include controlling essential inputs or being sufficientlylarge in size to dominate a market where there is room for one large firm and EMPIRICAL STUDIES IN APPLIED ECONOMICS little room for multiple firms. Typically, this occurs in local geographic mar-kets, but may also occur in specialized sub-markets for chemotherapy agents.
Strategic actions taken by a firm to keep out other firms may, in fact, be violations of Section 2 of the Sherman Act.10 Statutory Exclusivity in the United States
The pharmaceutical industry is comprised of the companies that discover, manufacture and sell drugs that require a doctor’s prescription. Although it isa relatively young industry, it ranks at the top of American industry in termsof spending on R&D. In order to encourage pharmaceutical companies to con-tinue their research, several laws provide exclusive rights to those individualsor companies that invent a product or process. I discuss these below.
Pure Food and Drug Act of 1906 and Food, Drug
and Cosmetic Act of 1938

The pharmaceutical industry’s birth and growth was accompanied by the government’s interest in regulating new drugs. This interest resulted in Con-gress passing the Pure Food and Drug Act of 1906. This was followed withthe Food, Drug and Cosmetic Act of 1938. This statute required drugs to beapproved by the FDA prior to their introduction into interstate commerce. Thisact was amended in 1962 by the Kevfauver-Harris Amendments.
These amendments required the drug company that wished to introduce the new drug to prove that, in addition to being safe, the drug was effective. Thisrequired extensive controlled scientific experiments before the FDA wouldgrant approval to any new drug. These amendments proved to be extremelycostly to the drug companies, both in time and money. The FDA eventuallyapproves only one in four drugs that begin clinical trials. This lengthy processalso ate into the effective patent protection enjoyed by a new drug, decreas-ing the potential profits for the drug company. This shortened period of profitmade it more difficult for the drug companies to recoup their R&D investmentcosts.
1983 Orphan Drug Act
The Orphan Drug Act provides an exclusive seven-year right to market a drug that is used to treat a disease that affects less than 200,000 people. TheFDA must decide whether the drug would be brought to market without theprotection offered by this exclusive right (and the tax benefits discussed be- 10Section 2 of the Sherman Antitrust Act, Title 35 of the United States Code, provides that: “Every personwho shall monopolize, or attempt to monopolize, or combine or conspire with any other person or personsto monopolize, any part of the trade or commerce among the several States, or with foreign nations, shallbe deemed guilty of a felony. . . ." Concentration in the Chemotherapy Drug Market low). The Orphan Drug Act grants the FDA the authority to grant exclusiveapproval for treating the specific disease. This exclusivity is virtually indis-tinguishable from a patent, except that it is shorter in duration. In addition tothe exclusivity granted under this Act, a subsidy to the pharmaceutical compa-nies was considered necessary to encourage drug companies to develop suchnew drug treatments because the small markets would not likely be profitable.
Thus, the Act also provides a 50 percent tax credit for clinical trial expenses.
Drug Price Competition and Patent Restoration Act
of 1984

In 1984, Congress enacted the Drug Price Competition and Patent Restora- tion Act (Hatch-Waxman). This statute simultaneously lengthened patent lifeand lowered the barriers faced by generic drugs after the patent expires. Patentsare granted to provide temporary exclusivity to the patent holder. Generally,patents are considered to encourage three things: (1) R&D, and investment;(2) widespread dissemination of technology; and (3) provide a viable basis forfurther technology transfer to third parties.11 However, pre-1984, the clinicaltesting and trial stage necessary to secure FDA approval consumed 12 years ofa patent’s life, reducing the average effective patent period, post-FDA approval,to only seven or eight years. This shortened period of exclusivity negatively af-fected the three things that patents were intended to accomplish. The 1984 Actremedied this problem by extending the effective patent life by a time equalto the sum of the FDA review time plus one-half of the clinical testing period.
These extensions are limited to a maximum of five years, and a maximum 14years of effective patent life.12 The act also lowered barriers to entry for the generic drug manufacturers.
Before the Act, generic drug manufacturers were required to duplicate manyof the clinical tests that the patent holder had originally performed in securingFDA approval for the drug. Under the 1984 Act, the generic drug manufactureronly must prove that its drug is bio-equivalent to the patented drug. Thus, thegeneric drug manufacturer needs only to submit an Abbreviated New DrugApplication (ANDA). However, the Act also provides five years of limitedexclusivity for companies that secure an NDA approval from the FDA.
11See Yorke (1984).
12For example, prior to the Act, if a company filed for a patent for a new drug in 1980, but took 12 yearsto secure FDA approval for the drug’s use, there would be only 8 years of exclusivity left. After the Hatch-Waxman Act, this same company would enjoy the 8 remaining years of exclusivity under the patent plus anadditional five years, for a total of 13 years.
EMPIRICAL STUDIES IN APPLIED ECONOMICS Exclusive Government Agency Licenses
The government itself often undertakes research in developing new drugs.
In such instances, government research can be transferred to commercial com-panies only under certain licensing requirements. Generally, a governmentalagency cannot grant an exclusive license if such a grant would tend to sub-stantially lessen competition anywhere in the country in any relevant area ofcommerce. The Federal Technology Transfer Act creates a limited exception tothese requirements when the license is granted under a CRADA. The CRADAtypically contains the terms and conditions under which a private party canobtain clinical data and other fruits of government research in exchange forcommercializing the government-developed technology and other considera-tion.
History of Paclitaxel
Paclitaxel is a complex plant alkaloid originally derived from the bark of the mature Pacific Yew tree, Taxus brevifolia, a slow-growing and long-livedtree sparsely distributed in the old growth forests of the Pacific Northwest. Inthe late 1960s, the National Cancer Institute (NCI)13 commenced a screeningprogram involving 35,000 natural materials. Paclitaxel was discovered throughthis process. There was much controversy in the early years of development,as environmentalists sought to protect the yew.
Paclitaxel works by disrupting cancer cell growth and shrinking tumors. It has proven effective in late-stage ovarian and breast and lung cancer. It also isbeing used off-label to treat other cancers. Over 200,000 people die each yearfrom ovarian, breast and lung cancer.14 Thus, paclitaxel has potentially greatsocial and economic significance.
The U.S. government spent $30 million to develop economically feasible methods to extract paclitaxel from Yew tree bark and create a clinically ef-fective formulation that could be used to treat humans. In the early 1980s,NCI began to conduct clinical trials designed to test the efficacy of using pa-clitaxel for ovarian cancer treatments. Phase I testing, to introduce paclitaxelto humans, began in 1983. NCI started Phase II testing to examine paclitaxel’seffectiveness in 1985. NCI began Phase III testing, the expanded, controlledclinical tests under expected medical conditions, in 1990. At about this time,NCI sought a commercial partner to bring paclitaxel through the FDA approvalprocess, and to manufacture and distribute the drug. NCI sought a commercialpartner, in part, because it did not have the resources to bring a paclitaxel 13NCI is an institute of the National Institutes of Health (NIH), which is in turn, a U.S. Government researchinstitute that conducts and supports research for determining the cause, diagnosis, prevention and treatmentof cancer.
14See Day and Frisvold (1993).
Concentration in the Chemotherapy Drug Market drug to market. To effectively accomplish this would require “forward link-ages to pharmaceutical production and marketing and backward linkages intothe forest products sector."15 NCI had neither. Thus, to effectuate commercialpaclitaxel production and marketing, NCI published, on August 1, 1989, its no-tice seeking a partner to enter into a Cooperative Research and DevelopmentAgreement (CRADA). A CRADA is used for joint research projects betweenprivate industry and public research institutions.16 In 1991, BMS and NCI en-tered into a CRADA to develop a paclitaxel drug to treat refractory ovariancancer. Under the terms of the CRADA, BMS received the exclusive rights toall U.S. NIH funded research done under the CRADA. BMS agreed to provideNIH with 17 kilos of Taxol and use its best efforts to commercialize Taxol.
Subsequent agreements with the USDA and Department of Interior gave BMSthe exclusive right to harvest Yew trees on Forest Service lands.
In 1992, the FDA approved BMS’ New Drug Application (NDA) 20–262 seeking approval to market Taxol for treating refractory ovarian cancer. Allthe data produced by BMS was apparently based on NIH sponsored researchand clinical trials. With the FDA’s approval, BMS also received a five-yearperiod of non-patent exclusivity to market Taxol.
On December 3, 1996, NCI and BMS entered into an agreement to extend the CRADA until December 1997 and exclusive license agreements. Theseagreements gave BMS the exclusive rights to three NCI inventions involvingTaxol, including a patent for a 96-hour infusion therapy using a paclitaxel drugto treat breast cancer.
BMS has been extremely successful in marketing Taxol. In 1999, BMS held nearly 100 percent of the market share drugs used to treat ovarian cancer,the indication for which Taxol was first approved. BMS has also made sig-nificant inroads into other cancer treatments, where it holds 48 percent of themarket share for drugs used to treat breast cancer, and 96 percent of the marketshare for drugs to treat lung cancer. Thus, by obtaining under the CRADA thegovernment research data, BMS was able to file an NDA for ovarian cancer.
Subsequent FDA approval provided them with limited exclusivity by statute(which I discuss in greater detail below). BMS has subsequently secured amonopoly position with regards to cancer treatments for breast cancer, lungcancer and Kaposi’s sarcoma through off-label sales of Taxol.17 Undeniably,BMS did invest substantial time and money in getting FDA approval for thedrug and marketing the drug. However, in exchange for bringing the drugthrough the FDA approval process and to market, BMS received limited exclu- 15See Day and Frisvold (1993).
16CRADAs are authorized by the Federal Technology Transfer Act of 1986.
17Off-label uses of Taxol and other anti-cancer drugs are well documented. Some 70 to 80% of all approvedoncology therapies are used outside an indication.
EMPIRICAL STUDIES IN APPLIED ECONOMICS sivity for Taxol to treat ovarian cancer, exclusive rights to harvest Yew trees onfederal land, and exclusive rights to a huge array of knowledge generated fromNCI’s investment of public funds. BMS has leveraged these advantages intosignificant monopoly power in the paclitaxel market for treating cancers otherthan the one for which it first received an FDA indication.
Market Power Measures
Herfindahl-Hirschman Index (HHI)
The HHI is a widely accepted method to measure market concentration. It involves first determining the relevant geographic and product markets, marketparticipants, and each participant’s market share. The HHI is calculated bysquaring the market share possessed by each participant firm selling a partic-ular good in a specific, well-defined geographic market and then summing thesquares across all firms in the market.
At one extreme is an industry with a single firm selling all the output. The HHI for a pure monopoly is calculated by taking the market share of 100 per-cent and squaring it. Thus, a pure monopoly yields an HHI of 10,000. At theother extreme is a pure competitive industry where each participant firm’s mar-ket share is about zero.18 Accordingly, the possible HHI results range from 0to 10,000.
A great deal can be learned by calculating a specific firm’s market share.
When the market share is close to zero, the firm would not be able to manip-ulate price to increase profits because it would be too small. When marketshare is close to 100 percent, the firm would generally be able to set or, ata minimum, greatly influence prices in the market. This is generally accom-plished by using its market size to control output. A dominant supplier mightbe able to reduce output to drive up prices and maximize its profit without fearof encouraging competitive entry or response.
This interest in overall competitiveness (or lack thereof) is also related to concern over the prospect for collusion. In general, an industry with manysmall suppliers would not likely have the ability to collude by controlling sup-ply or entry in order to drive up price. However, collusion can be relativelyeasy in an industry with a small number of firms, each with a significant mar-ket share. And, even a small firm might collude with a dominant, quantity-controlling, price-setting segment of the industry. Accordingly, the market’soverall concentration is an important factor used to determine the potential forpricing above marginal cost, or the competitive market standard.
large (pure competition), the HHI approaches zero.
Concentration in the Chemotherapy Drug Market By itself the HHI does not determine whether or not anti-competitive be- havior is actually taking place by a particular firm or a group of firms in aparticular market. Instead, the statistic is used to establish ranges, which insome cases suggest the need for additional analysis. Generally, an HHI of 0to 1,000 or less is used to conclude that a market is competitive.19 An HHI of1,000 to 1,800 is usually thought to represent a workably competitive market.
Regulators and anti-trust enforcers often presume that an HHI over 1,800 indi-cates the potential for a firm to exercise market power.20 The HHI should becoupled with analyses (such as mitigation or residual regulation) to ensure thatanti-competitive behavior does not take place. Other factors, therefore, maybe considered to establish that a firm lacks market power even if HHIs appearrelatively high.
There are significant practical problems with market share and market con- centration measures. In practice, defining the relevant geographic and productmarkets can be somewhat ambiguous and is nearly always controversial. Ad-ditionally, not all markets have a homogeneous product. Nevertheless, com-petition can be fierce. Consider clothing. Defining the product as blouses willnecessarily yield different firm share and market concentration measurementsthan when the product is defined alternatively as ladies’ apparel, clothing, de-partment stores, etc. Some analysts may include mere substitutes such as nat-ural gas and fuel oil, in the same market. Other analysts may exclude them. Acertain degree of arbitrariness and subjectivity inevitably enters into the firmshare and market concentration calculations.
Another complication arises in those industries in which firms might simul- taneously compete in multiple markets. The traditional HHI measures marketpower for firms selling a product in a single market. This analysis does not helpdetermine an industry’s competitiveness if the various markets do not functionas a single market. The traditional HHI also does not help determine a singlefirm’s market power across the various markets in which it competes.
The Federal Energy Regulatory Commission (FERC) Staff21 has suggested variations on the traditional HHI analysis for industries where firms compete in 19“The Agency divides the spectrum of market concentration as measured by the HHI into three regions thatcan be broadly characterized as unconcentrated (HHI below 1000), moderately concentrated (HHI between1,000 and 1,800), and highly concentrated (HHI above 1,800)." Horizontal Merger Guidelines. See also,O’Neill, et al. (1991).
20It is generally acknowledged that the 1,800 threshold recommended in the Merger Guidelines is used asa level of concentration that triggers intensive scrutiny. The Merger Guidelines explain that, although thereis a presumption of market power, it may be overcome by showing that factors set forth in the Guidelinesmake it unlikely that the merger will create or enhance market power or facilitate its exercise, in light ofmarket concentration and market shares.
21“On Developing a Framework for Assessing Competition in Natural Gas Transportation," Appendix C—A Further Discussion of Market Power and Competition Measures of Firms Within Connected Multi-MarketIndustries"; July 1989.
EMPIRICAL STUDIES IN APPLIED ECONOMICS several markets simultaneously. The pharmaceutical industry fits this scenario.
These analytic extensions are the Weighted HHI, the Weighted Market Shareand the Market Share Weighted HHI. The following describes these three con-cepts.
Weighted HHI
This measure can be used to estimate the overall concentration of a set of markets. It can be used to analyze the entire industry, or particular parts (e.g.,the concentration of markets served by any particular firm). For example, whena pharmaceutical firm ( ) competes across HHI can be used to determine the overall concentration of the combined marketin which the firm competes. The Weighted HHI is measured by summing theHHIs for each market in which the th firm operates, weighting by the percent of the th firm’s sales made in each product market. This statistic describes the overall competitive conditions faced by the th firm across the Weighted Market Share Statistic
This measure can be used to estimate the overall degree to which any in- dividual company tends to dominate its markets. The Weighted Market Share Concentration in the Chemotherapy Drug Market HHI, which is used in multi-market conditions, determines the weighted mar-ket share for the th firm across the markets in which it operates. This statis- tic is calculated by summing the th firm’s market share in market , weighted by the th firm’s share of overall sales in sub-market This statistic explains the th firm’s overall market power across the Market Share Weighted HHI
This measure has been proposed by FERC Staff to estimate the overall de- gree to which a firm might benefit from its specific market share combinedwith the overall market concentration in the specific markets it serves. TheMarket Share Weighted HHI measures the potential for anti-competitive be-havior confronting the th firm across multiple markets by investigating the firm’s share of overall market concentration in each of the markets in whichthe firm competes. The FERC Staff recommends combining the Weighted HHIand Weighted Market Share concepts to measure the market power confrontingor exerted by the th firm operating across the The weighted average of market specific HHIs multiplied by the firm’s mar- ket share in each sub-market is taken across each of the the th firm competes. The square root of this calculation is taken to return the estimate to a range similar to the traditional HHI calculation. This approachproduces results similar to market power measures under the polar cases ofpure monopoly and perfect competition. Implicitly, it also establishes a marketpower measure for the intermediate stages of competition.
Under some conditions, it can be shown that the FERC staff’s proposed multimarket measure is related to the weighted average mark-up in the marketsin which a specific firm operates. While the HHI acts as a screen to ascertainwhether further inquiry is necessary, the weighted average mark-up calculationcan be used in a similar fashion to determine whether there is any market powerabuse across markets. Analysis of the multi-market HHIs demonstrates thecentral role of the firm’s price elasticity of demand in determining the potentialfor supra-competitive price markups above marginal cost.
Demand elasticities, if they can be ascertained, will provide a more exact measure of any rationale for such mark-ups. Thus, the HHI and the multi-market HHI, while important as screening tools, and useful as measures ofsupply substitutability, can be complemented with a more detailed analysis ifdemand elasticities can be determined.
The Relevant Product Market for Paclitaxel Drugs
The extent to which a firm has market power for a particular product in a specified market area is determined by demand substitutability, supply substi-tutability, and firm entry. Demand substitutability refers to buyers’ ability to EMPIRICAL STUDIES IN APPLIED ECONOMICS substitute away from the marketed good in the relevant market and replace itwith another product. Supply substitutability and entry both generally referto a firm’s ability to supply a product in a relevant market even if it currentlydoes not supply that market. Supply substitutability refers to actions taken byexisting firms not currently selling in a relevant market.22 Entry refers to aform of supply substitutability that requires significant investment and distri-bution. However, the U.S. Department of Justice and FTC merger guidelineshave indicated that supply substitutability that takes longer than one year tooccur is not actually a form of entry. Therefore, such firms are not consideredas competitors for evaluating market power.
Antitrust Markets
For antitrust purposes, a market is defined as a “product or group of prod- ucts, and a geographic area in which it is produced or sold such that a hypothet-ical, profit-maximizing firm, not subject to price regulation, that was the onlypresent and future producer or seller of those products in that area likely wouldimpose at least a small, but significant and non-transitory increase in price,assuming the terms of sale of all other products are held constant."23 Thisdefinition reflects the separation between demand substitutability and supplysubstitutability. The relevant market for antitrust purposes may be only one ofseveral overlapping and intersecting markets. Thus, the relevant market is “thesmallest group of products and geographic area that constitutes a market."24The main condition constituting a market is that a hypothetical monopolistcould successfully raise price by a “small but significant and non-transitory"amount above current and likely future price levels.25 In evaluating the extent to which a price increase would be possible for a monopolist, it is therefore necessary to consider both demand and supplysubstitution possibilities.
Market Delineation—Demand Substitutability
Several fairly general factors may be relevant in delineating a product mar- 1. Evidence reflecting buyers’ perceptions that the products are or are not sub- stitutes. This is particularly relevant if those buyers have shifted purchases 22Firms that can easily enter a relevant market are considered to be competitors in the market and areassigned market shares in HHI calculations even if they currently have no sales in the relevant market. Theexamination of demand substitutability revealed by demand elasticity and cross-elasticity as well as theexamination of supply substitutability allow a careful delineation of a relevant market.
23Horizontal Merger Guidelines (1992).
24See Werden (1981).
25Horizontal Merger Guidelines (1992).
Concentration in the Chemotherapy Drug Market between the products in response to changes in relative price or other com-petitive variables; 2. Similarities or differences in the products’ price movement over time; 3. Similarities or differences in the products’ customary usage, design, physi- cal competition, and other technical characteristics; and, 4. Evidence of sellers’ perceptions that the products are or are not substitutes, particularly a change in a company’s business plan that has been based onthose perceptions.
Market Delineation—Supply Substitutability
The degree to which the market constrains a firm’s ability to act monop- olistically depends in part on short-term entry. To analyze the potential forcompetitive supply response, I consider the concentration of the relevant mar-kets, as measured by the Herfindahl-Hirschman Index (HHI).
The HHI measures the degree of competition and the potential for a com- petitive response to monopolistic behavior via supply substitution. Also, asdiscussed above, the elasticity of demand measures the substitutability of prod-ucts in consumption as prices are increased. The two concepts are related: as-suming that the interaction of firms is Cournot competition in market shares,constant marginal costs, and constant elasticity of demand, the mark-up abovemarginal cost in an industry (Lerner’s index) will be equal to the HHI dividedby the market demand elasticity. Concentrated markets or markets with smallelasticity of demand (few substitutes) will have predictably higher mark-upsabove incremental cost. Conversely, unconcentrated markets or markets withlarge elasticity of demand (many substitutes) will have low mark-ups and there-fore approximately competitive outcomes.
The Relevant Product Market for Taxane Drugs
In defining the relevant product market for taxanes and related anti-cancer drugs, it is helpful to consider the manner in which anti-cancer drugs are allo-cated.26 One way to divide the anti-cancer drug market is by therapeutic indi-cation or use. As discussed above, paclitaxel drugs are principally used againstseveral major cancers, including lung cancer, breast cancer, ovarian cancer,and Kaposi’s sarcoma. The oncology literature suggests that anti-cancer drugtherapy for a patient with one type of cancer is not necessarily substitutablefor the anti-cancer drug therapy for a patient with a different type of cancer.
26The taxane market consists of antineoplastic drugs in the taxoid family. Currently, this includes onlydocetaxel (Taxotere) and paclitaxel (Taxol). See Nicolaou, et al. (1996).
EMPIRICAL STUDIES IN APPLIED ECONOMICS Therefore, those treatments and drugs that are appropriate for lung cancer maybe inappropriate for treating ovarian cancer.
Chemotherapy regimens broadly include cytotoxic chemotherapies and hor- monal chemotherapies. Cytotoxic chemotherapies provide a toxic action tocells. Hormonal chemotherapies target a tumor’s hormonal sensitivity. Onesuch example is tamoxifen, which is used against estrogen sensitive tumorsin breast cancer. Within the cytotoxics, various chemotherapies include an-timetabolites, anthracyclines, alkylating agents, mitotic inhibitors, and miscel-laneous antineoplastics.
The manner in which each drug class acts on cancer differs. For instance, taxanes are classified by 1999 Drug Facts and Comparisons as miscellaneousantineoplastics. Taxanes affect cell division by a specific mechanism. Con-versely, mitotic inhibitors will affect cell division by different actions or mech-anisms. Thus, although mitotic inhibitors and other antineoplastics affect celldivision, each does so using a different mechanism.27 Certainly, there can be substitution between chemotherapy drugs in clinical application. However, the substitution is limited by the type of cancer, thechemotherapy regimen, and the type of chemotherapy chosen. For instance,those molecules appropriate to treating a recurrent or refractory form of breastcancer are likely to be a subset distinct from the molecules that can treat allcancer forms of any degree of severity. Relevant product markets must reflectthis differentiation. Thus, the relevant product market should reflect only thosemolecules appropriate to treat a specified type of cancer and therapy.
Arguably, a relevant product market could reflect only those molecules ap- propriate for treating breast cancer for third line or salvage therapy. Withinsuch a market segment, the first and second line drugs have been exhausted,patients have developed resistance to first and second line therapies, and onlya subset of molecules are available for treating these recurrent or refractorybreast cancers. Similarly, those molecules appropriate for treating breast can- 27Alkylating agents are compounds with the ability to replace hydrogen atoms of certain organic compoundswith alkyl groups. The alkalation of nucleic acids such as DNA produces breaks in the DNA molecules orcross-linking of DNA strands which interfere with DNA replication. The classic alkylating agents includecyclophosamide. Cisplatin and carboplatin are considered alkylating agents although their mechanism ofaction is more complex.
Antibiotics (including Doxorubicin (Adriamycin)) produce their tumoricidal effects by binding to DNA usu-ally by interposition between base pairs. Anthracyclines form a subset of the antibiotics. Plant Alkaloidsinclude both the antimitotic and miscellaneous antineoplastic class of molecules. These agents bind to themicrotubular proteins found in dividing cells. Since these microtubules are essential for cell division, thebinding leads to mitotic arrest (antimitotic action). The antineoplastic class of agents have different cytoxiceffects on the cells. Paclitaxel is unique among the antineoplastics because it promotes the assembly ofmicrotubules that inhibit the reorganization required during cell division.
Antimetabolites (including Methotrexate, and 5-fluorouracil) interfere with normal cell functions by inter-acting with or replacing normal cellular enzymes. Hormonal agents function by interacting and binding tospecific cell receptors. The target of hormonal agents is endocrine manipulation. For further discussion seeHaskell (1995).
Concentration in the Chemotherapy Drug Market cer are often different from the molecules appropriate for treating lymphomaor prostate cancer. Here, the distinction lies in the type of chemotherapy or inthe chemotherapy’s action on the cancer.
I would expect the HHI that ignores the chemotherapy regimen to be a con- servative estimate of the HHIs that do reflect the chemotherapy regimen, (i.e.,by differentiating between first line and second line treatments). In the analysiswhich follows, the HHIs I calculate do not differentiate between chemotherapyregimen. However, this does not change the fact that these sub-markets arerelevant for antitrust purposes, and do exist within the types of cancer beingtreated. Importantly, the HHIs I calculated are lower than those I would expectfor relevant sub-markets.
HHIs—Market Concentration Results
The HHI analysis is based on data taken from the IMS Price/Quantity Re- port on Oncology Drugs 1999, the 1999 Drug Facts and Comparisons28 andCancer Chemotherapy Pocket Guide.29 I took the annual sales data for eachdrug from the IMS study. As discussed above, I am primarily interested inbreast, lung, and ovarian cancers as they are the major targets of the taxanefamily. The IMS sales data do not specify the type of cancer the drug was usedto treat. Thus, in order to separately identify a “Breast Cancer" market froman “Ovarian Cancer" market I allocated annual sales dollars by cancer types.
The allocation is based on a survey of physicians conducted annually by IMSknown as the U.S. Appearance data. Doctors are asked to record their uses ofall drugs and for what applications the drug was prescribed. Combination ther-apies (multiple drugs) are also recorded. The survey is a random probabilitysample and is used to produce national estimates. Tables 7.1.1 through 7.1.3show the type of chemotherapy agent, the relevant molecule, the drug namesfor that molecule, the sales in 1999 by company and the various percentages ofsales allocated to breast, lung, ovarian, and other cancers. The latter percent-ages were derived from the IMS U.S. Appearance Data. I recorded all drugsindicated for treating neoplasms of the lung, breast or ovary. I excluded anydrug whose sales were sufficient to be included in the U.S. Appearance Databut for which the indicated treatment was other than breast, lung or ovarian.
In some cases, I assumed that the percentage recorded in the U.S. Appear- ance Data for a specific drug was representative of all drugs for the “family"molecule. For instance, I assumed that the surveyed sales of VePesid penetra-tion were characteristic of all etoposides. In cases when a specific drug showed 281999 Drug Facts and Comparisons was used principally for the assignment of chemotherapy types aswell as to determine off-label uses.
29Cancer Chemotherapy Pocket Guide, Ignoffo (1998) was used to determine indicators for anti-cancerdrugs and to identify the relationships between the trade and molecular names of drugs.
EMPIRICAL STUDIES IN APPLIED ECONOMICS more specific information, I did not apply this assumption. For example, I ex-tended the relevant penetration percentages for Fluorouracil to the fluorouracilfamily of molecules, with the exception of the topical Efudex which separatelyrevealed zero penetration for the treatment of breast, lung, or ovarian cancer.
The total sales represented in Tables 7.1.1 through 7.1.3 are $2.969 billion. Thesales allocated to the breast, lung, and ovarian cancer market, are $1.4 billion.
The breast cancer, lung cancer, and ovarian cancer drug markets have es- timated annual sales of $2.65 billion, $125.98 million, and $642.67 millionrespectively according to Med Ad News (May, 1991). Their estimate for thecombined segment is therefore $3.42 billion in annual sales. However, I amaware that some drugs with small sales amounts (too small to appear in thesurvey of physicians) are not included in my analysis. Since the HHI analysisrelies on shares, this omission is not significant.
The HHI results are presented in Tables 7.2.1 through 7.2.6. The analy- sis is presented for the top six firms based on 1999 sales in the sub-marketsfor breast, lung, and ovarian cancer drugs. The second column of these tablesdemonstrates the pharmaceutical company’s total sales in 1999 within the mar-ket segments. The third column demonstrates the firm’s market share acrossthe relevant sub-market. For instance, in this column I observe that BMS’ salesfor treating breast cancer represent 18.9 percent of its total chemotherapy drugsales used to treat breast, lung, or ovarian cancer. Additionally, 20.4 percent ofBMS’ sales are for treating lung cancer, 38.2 percent are for treating ovariancancer, and 22.5 percent are for treating other cancers. These rounded percent-ages total 100 percent.
Within a category such as the breast cancer market, I first identified all drugs indicated for treating breast cancer by their appearances in the IMS survey. Ithen identified all drug manufacturers that supply either branded or genericdrugs to this sub-market. To calculate a firm’s market share within a market(the column labeled “Market Share Within Market"), I first totaled all manufac-turers’ sales in that sub-market and then determined the specific firm’s marketshare in the sub-market. The last column identifies the firm’s market sharewithin a sub-market. For example, in the breast cancer market, I estimated thatBMS provides 47.8 percent of all drugs for treating breast cancer. Recall thatI previously noted that BMS’ drug sales for breast cancer treatment represent18.9 percent of its supply of drugs. Thus, while BMS supplies roughly half ofall drugs in this sub-market, only 20 percent of its drug sales were used to treatbreast cancer.
I used the sales information for all manufacturers in the various sub-market segments to calculate market shares within markets. I then estimated the HHIfor each market segment. Within the breast cancer market, for instance, I es-timate the HHI to be over 3,700. Importantly, BMS’ 48 percent market shareindicates that the breast cancer market is very concentrated, and that BMS is a Table 7.1.1.
Alkylating Agents, Anthracyclines, Antibiotics Alkylating Agents
1999 Dollars
Molecule
Anthracyclines
1999 Dollars
Molecule
Antibiotics
1999 Dollars
Molecule
Table 7.1.2.
Anti-Metabolites
1999 Dollars
Molecule
IMX, MHL, MJR, MNSMYN, PRL, QLT, RKGROX, SEI, SUP, INRWTS, Z/G Antineoplastics
1999 Dollars
Molecule
Mitotic Inhibitors
1999 Dollars
Molecule
Table 7.1.3.
Hormones
1999 Dollars
Molecule
MHL, MJR, MNS, MTCP.H, PME, PRL, QLTRKG, ROX, RSM, SEISUP, TEV, UNR, WTSZ/G EMPIRICAL STUDIES IN APPLIED ECONOMICS major source of that concentration. Also, Barr labs supplies over 36.6 percentof the market share, providing another major source of the market concentra-tion.
Market Share Weighted HHI
As I discussed above, I also calculate a market share weighted HHI that re- flects a sub-market’s concentration, a manufacturer’s share in that market, andthe relative weight to give the sub-market from the manufacturer’s perspec-tive. This measure is larger whenever (i) the HHI for the market is larger, (ii)the share of a market is larger in that sub-market relative to other sellers or(iii) when a firm has a greater proportion of its sales in that sub-market. Tocalculate this market share weighted HHI, I multiply a manufacturer’s marketshare within the sub-market and the HHI, and then take a fraction representingthe importance of that sub-market to the manufacturer compared to the othersub-markets in which it supplies product.
Thus, to calculate the market share weighted HHI for the combined breast, lung, and ovarian cancer market, I first take BMS’ 18.9 percent of sales inthe breast cancer market (among breast, lung, ovarian, and other cancers inthis sub-market). I then multiply this percentage by the sub-market’s HHI of3,744. The product is then multiplied by BMS’ market share within the market(47.8 percent) to arrive at the first component of the market share weightedHHI. Similar calculations are then performed for the other market segments(lung cancer, ovarian cancer, and other cancers). Next, I sum the results anduse the square root of the resulting sum to derive the overall market shareweighted HHI in this sub-market. Using this technique, I calculate the overallmarket share weighted HHI to be 7,787.
Tables 7.2.1 through 7.2.6 demonstrate the degree of concentration enjoyed by BMS in this market segment. Not only do BMS’ market shares withinthe sub-markets demonstrate that these markets are concentrated, they alsodemonstrate that the concentration primarily arises due to BMS’ dominancewithin the market segments. In fact, the markets all uniformly concentrated.
The HHI for the breast cancer market is 3,744; the HHI for the lung cancermarket is 9,279; the HHI for the ovarian cancer market is 9,915; and the HHIfor the other cancer market is 2,899. The weighted market share across marketsis 71.3 percent, the weighted HHI is 7,039, and the market share weightedHHI is 7,787. These statistics indicate large market power in the relevant sub-market and even larger market power in the relevant sub-market for each cancertype.
Concentration in the Chemotherapy Drug Market Table 7.2.1.
Concentration—Bristol-Myers Oncology (1999 Dollars) Summary Statistics:
Wtd Market Share
Table 7.2.2.
Concentration—TAP Pharmaceuticals (1999 Dollars) Summary Statistics:
Wtd Market Share
Conclusion
The pharmaceutical industry is an extremely complex, high stakes industry.
The R&D costs and costs associated with securing FDA approval for a newdrug are enormous. Conversely, the profits that can be made by introducing anew blockbuster drug can be equally huge. Statutes providing exclusivity topharmaceutical companies attempt to create a balance between the companies’incentives in bringing a new drug to market and the public’s ability to get thebenefit of competitively provided generic substitutes to branded drugs. The re-sult is a complex system of statutory exclusivity, including patents, CRADAs,and special protections accorded to orphan drugs.
EMPIRICAL STUDIES IN APPLIED ECONOMICS Table 7.2.3.
Concentration—Zeneca Pharmaceuticals (1999 Dollars) Summary Statistics:
Wtd Market Share
Table 7.2.4.
Summary Statistics:
Wtd Market Share
It is within this context that BMS developed a relationship with NCI that re- sulted in a CRADA between NCI and BMS. Pursuant to that CRADA, BMS re-ceived exclusive access to NIH data, allowing BMS to obtain FDA approval forTaxol, initially for refractory ovarian cancer, and five years of Hatch-Waxmanexclusivity using the research and clinical trials that NCI had completed atpublic expense.
However, the pharmaceutical industry is unique in that once a drug has been approved for one indication, it is often prescribed by doctors for other treat-ments that have not been approved by the FDA. This off-label use allowedBMS to expand its Taxol sales for indications such as breast cancer, lung can-cer, and other cancers. While BMS received limited exclusivity in certain sub- Concentration in the Chemotherapy Drug Market Table 7.2.5.
Concentration—Pharmacia & Upjohn (1999 Dollars) Summary Statistics:
Wtd Market Share
Table 7.2.6.
Concentration—Glaxo Wellcome Oncology (1999 Dollars) Summary Statistics:
Wtd Market Share
markets and thus is entitled to market power in those sub-markets, it has man-aged to acquire market power in other therapeutic instances where it had notreceived such exclusivity. This is reflected by BMS’ large market share inthose sub-markets and the high concentrations determined in the HHI analysis.
Indeed, as I showed in the market share and HHI analyses, the breast, ovar-ian, and lung cancer markets are all uniformly concentrated with few firmssupplying the majority of drugs to this market segment.
The pharmaceutical system was designed to balance specific exclusivity in- centives with the benefits that competition brings to consumers and society.
However, as a result of the concentration in the paclitaxel market and relevantsub-markets, competition has suffered. Prices for Taxol are higher than they EMPIRICAL STUDIES IN APPLIED ECONOMICS would have been had generic or other branded paclitaxel drugs been allowedto enter the market. Taxol’s high price for both its indicated and off-label usesunquestionably denies some consumers access to the drug and its potentiallife-saving characteristics.

Source: http://www.pacificeconomicsgroup.com/jad/2047ch7.pdf

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