Preferred supplier contracts in post-patent prescription drug markets

Abstract

In recent years, the expiration of patents for large drug classes has increased the importance of post-patent drug markets. However, previous research has focused solely on patent drug markets. In this study, the authors evaluate the influence of preferred supplier contracts, the German approach to tendering, in post-patent drug markets using a hierarchical market share attraction model. The authors find that preferred supplier contracts are a powerful strategic instrument for generic manufacturers in a highly competitive environment. They quantify the effects of signing a preferred supplier contract and show that brand-name manufacturers are vulnerable to tendering. Therefore, brand-name manufacturers should readjust their strategies and consider including preferred supplier contracts in their marketing mix. In addition, the authors employ a simulation to demonstrate that a first-mover advantage might be gained from signing a preferred supplier contract. Furthermore, their results can be used as a blueprint for decision makers in the pharmaceutical industry to assess the market share effects of different contracting strategies regarding preferred supplier contracts.

Keywords: Generic drugs; Market share attraction model; Pharmaceutical market; Rebate contract; Strategic behavior; Tendering.