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THREE ESSAYS ON MARKETING STRATEGY ELEMENTS
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THREE ESSAYS ON MARKETING STRATEGY ELEMENTS AND THE
BRAND LIFE CYCLE IN THE PHARMACEUTICAL INDUSTRY

By

Erin Cavusgil

A DISSERTATION

Submitted to
Michigan State University
in partial fulfillment of the requirements
for the degree of

DOCTOR OF PHILOSOPHY
Department of Marketing

2008

ABSTRACT

THREE ESSAYS ON MARKETING STRATEGY ELEMENTS AND THE
BRAND LIFE CYCLE IN THE PHARMACEUTICAL INDUSTRY

By
Erin Cavusgil

It is of critical importance to marketers to be able to demonstrate the value
of marketing efforts. The present study attempts to examine the impact of
specific marketing communication activities (advertising and sales force). The
pharmaceutical industry is chosen as the context of this study, focusing on one
therapeutic category, gastrointestinal drugs (GID). Several distinct promotional
channels are used in this industry, providing an interesting comparison of the
value of these various efforts.

Essay One examines the financial impact (specifically, return on
investment, or ROI) of pharmaceutical promotional activities. Furthermore, the
ROI of these efforts over the stages of a brand’s life cycle is examined. This
provides for a thorough examination of how the ROI for each promotional effort
varies over time. The results of this study provide guidance to managers as to
how to optimize the promotional mix over a product’s life cycle.

Essay Two investigates the effect of various promotional efforts (direct-to
consumer advertising, journal advertising, and sales force) on sales. Additionally,
the interaction effects between the promotional efforts are examined. The

incorporation of additional moderator effects (competitive intensity and number of

years on the market) reveals noteworthy contingencies with respect to these
relationships. The impact of these promotional efforts is rather complex, and is
dependent upon a number of factors.

Lastly, Essay 3 examines the impact of a late entrant market entry on
sales of incumbent brands. A significant portion of the market entry literature
suggests that, compared to market pioneers, late entrants face significant
disadvantages that must be overcome. This study explores the factors that
contribute to a late entrant’s success in achieving market leadership. Factors
such as innovative product offerings as well as significant marketing efforts can
contribute to a late entrant’s success in the marketplace. Results indicate that
late entrants can compete with incumbents by attempting to expand the existing
market as well as shift sales from existing competitors. The present study has a
number of important implications for managers in developing the optimal
marketing mix strategy when faced with a product’s late market entry.

Overall, this study reveals a number of noteworthy findings. The
importance of personal selling, in comparison to advertising, within the
promotional mix is noted. However, this research suggests that a number of
contingency factors must be accounted for in considering the impact of various
promotional efforts, such as the competitive environment and stage of the
product’s life cycle. This research also suggests that, contrary to a majority of the
marketing literature, late entrants into a market can overcome disadvantages

they face to become market leaders.

To my parents, Tamer and Judy Cavusgil,
and my brother, Emre Cavusgil

iv

ACKNOWLEDGEMENTS

I would like to express my gratitude to a number of individuals for their
guidance and support in the completion of my dissertation as well as during my
graduate studies at Michigan State University.

First and foremost, I would like to sincerely thank Dr. Roger Calantone, my
advisor and committee chair, for his years of guidance, wisdom, and advice
during my entire academic career at Michigan State University. I am indebted to
him for his support and direction as I progressed through the doctoral program.
The completion of this dissertation would not be possible without his assistance
and guidance. His faith in my abilities gave me the support and encouragement
to meet multiple challenges throughout my doctoral studies.

I would additionally like to thank my committee members: Dr. Tom Page,
for his helpful comments and suggestions throughout the progression of the
dissertation, Dr. Jeffrey Wooldridge, for his help with regards to the methodology
portion of the dissertation, and Dr. David Griffith, for his valuable comments and
suggestions. I am truly thankful for their kind input and constructive criticism.
Their insightful assistance has helped to greatly improve this dissertation
research.

I would also like to sincerely thank Dr. Chris Douglas for his invaluable
assistance with the completion of the data analysis for this dissertation. I am
indebted to him for assisting me in using the STATA software, and for his overall

guidance and assistance in the completion of this dissertation.

I would also like to thank my family for their guidance, patience, and
encouragement during my doctoral studies. Their support and encouragement
has helped me a great deal, and has played a vital part in helping me to achieve

my goals. For this I am truly grateful.

vi

TABLE OF CONTENTS

LIST OF TABLES ......................................................................... viii
LIST OF FIGURES ....................................................................... x
INTRODUCTION .......................................................................... 1
Distinct Aspects of the Pharmaceutical Industry ......................... 3
ESSAY ONE: Marketing Mix Variables and Return on Investment .......... 7
Introduction ........................................................................ 7
Conceptual Development and Hypotheses .............................. 10
Empirical Analysis ............................................................... 21
Results ............................................................................. 23
Discussion ........................................................................ 33
Conclusion ........................................................................ 35
ESSAY TWO: The Impact of Marketing Promotional Efforts on Sales.......37
Introduction ........................................................................ 37
Conceptual Development and Hypotheses ................................ 41
Empirical Analysis ................................................................ 56
Results .............................................................................. 59
Discussion .......................................................................... 63
Conclusion ......................................................................... 67
ESSAY THREE: Market Entry Issues in the Pharmaceutical Industry ....... 69
Introduction ......................................................................... 69
Background ......................................................................... 71
Conceptual Development and Hypotheses ................................. 76
Empirical Analysis ................................................................. 84
Results ............................................................................... 86
Discussion ........................................................................... 93
Managerial Implications .......................................................... 97
Conclusion ........................................................................... 98
CONCLUSION .............................................................................. 101
REFERENCES ............................................................................. 104

vii

LIST OF TABLES

Table 1: Summary of findings on Return on Investment (ROI) of

promotional activities ..................................................................... 12
Table 2: List of gastrointestinal drug products ..................................... 22
Table 3: Variable Definitions and Descriptive Statistics ......................... 22
Table 4: ROI for DTC advertising over life cycle stages ........................ 26
Table 5: ROI for Detailing (Det) over life cycle stages ........................... 27
Table 6: ROI for Journal Advertising (JA) over life cycle stages .............. 28

Table 7: ROI of all promotional elements (DTC advertising, Detailing,
Journal Advertising) over the life cycle .............................................. 29

Table 8: Standardized coefficient for DTC advertising variable
over life cycle stages ..................................................................... 30

Table 9: Standardized coefficient for Detailing (Det) variable over
life cycle stages ........................................................................... 31

Table 10: Standardized coefficient for Journal Advertising variable
over life cycle stages ..................................................................... 32

Table 11: Standardized coefficient for all promotional elements

(DTC advertising, Detailing, Journal Advertising) over the life cycle ......... 33

Table 12: Summary of findings on interaction effects ........................... 48

Table 13: Brand Sales Model .......................................................... 62

Table 14: Category Sales Model ...................................................... 63
Table 15: Results for Effect of Direct to Consumer Advertising on

Sales in the Over-the-Counter Market ................................................ 87
Table 16: Results for Effect of Direct to Consumer Advertising on

Sales in the Rx Market ................................................................... 87
Table 17: Results for Effect of Prilosec OTC Launch on Competitor

OTC Sales ................................................................................... 88
Table 18: Results for Effect of Prilosec OTC Launch on Rx Sales ............ 89

viii

Table 19: Results for Effect of Prilosec OTC Launch on Rx Nexium
Sales .......................................................................................... 89

Table 20: Results for Effect of Nexium market entrance on
competitor Rx sales ........................................................................ 92

Table 21: Results for Effect of DTCOTC Advertising on Prilosec
OTC sales .................................................................................... 93

ix

LIST OF FIGURES

Figure 1: DTC Advertising expenditures during first two years of

Prilosec OTC launch ................................................................ 83
Figure 2: DTC Advertising and Detailing expenditures of Proton

Pump Inhibitor drugs during first two years of Nexium launch ........... 84
Figure 3: Over-the-counter sales of gastrointestinal drugs ............... 90

Figure 4: Sales of Proton Pump Inhibitor Rx Gastrointestinal
Drugs .................................................................................... 92

INTRODUCTION

The present study examines the effects of various promotional efforts
conducted in the pharmaceutical industry. Like many other industries, the
pharmaceutical industry engages in various promotional activities to inform,
persuade, and convert potential customers. The ‘mix' of marketing strategies in
this industry consists of direct-to-consumer (DTC) advertising, sales force efforts
directed towards physicians (detailing), as well as other efforts such as journal
advertising, and physician meetings and events. In 2004, the industry spent $20
billion on marketing (Lam 2004). “Pharmaceutical marketing,” states David
Gascoigne of the promotion management practice at IMS Consulting, “ is about
total brand communications - all forms of promotional activity working together
across disciplines to develop synergy for the brand” (Lam 2004, p. 104). Indeed,
branding is critical for pharmaceutical firms, particularly upon patent expiration
when faced with generic substitution (Hallahan and Madell 1999; Laitin 2000).

Also critical to the pharmaceutical industry is effective management of the
brand life cycle. In view of the limited brand life, manufacturers must be able to
maximize profits during the drug’s life and/or extend the time period during which
sales can be generated. “If companies are to survive, they need to reshape the
lifecycle curve so that the profitability portion starts earlier and the maturity part
ends later. They need to find ways to provide greater value to patients while
selling more and to do so for a longer period of time” (Daly and Kolassa 2004, p.
8). Firms must also be able to appropriately modify their strategy throughout the

brand life cycle. Hofer (1975) contends that “the most fundamental variable in

determining an appropriate business strategy is the stage of the product life
cycle” (p.798).

Given the substantial resources invested in marketing activities, little is
known about their effectiveness in terms of generating expected outcomes. How
effective are the various marketing efforts used by pharmaceutical companies?
Does effectiveness vary across the life cycle of the brand? Do these strategies
have different effects on brand sales vs. total therapeutic category sales? The
present study addresses these fundamental questions. More specifically, the
following three broad research questions are examined:

1. (a) For a given therapeutic category, what is the return on investment of
DTC advertising, detailing, and journal advertising? (b) Does the ROI of
these marketing efforts vary over the life cycle of the drug product?

2. (a) What are the effects of DTC advertising and detailing on brand sales?
(b) What are their effects on overall sales of all brands within a particular
therapeutic category? (c) Do DTC advertising and detailing have different
roles? (d) What are the effects of the interaction of these strategies? (e)
How does competition impact these promotional efforts?

3. (a) What are the effects of DTC advertising on sales of over-the-counter
drugs compared to prescription drugs? (b) When a drug product switches
from Rx (prescription) to over-the-counter, what is the impact on sales of
other over-the-counter and Rx drugs?

Each set of research questions is addressed in a separate essay.

Research questions 1(a), 2(a-d), and 3(a) have been previously studied,
though not extensively, within certain therapeutic categories (Berndt et al. 2002b;
Narayanan et al. 2004). In particular cases, conflicting results have been found.
The therapeutic category chosen for this study is gastrointestinal drugs. These

drug products are most often used to treat the symptoms of acid reflux and

GERD (gastroesophageal relfux disease). There have been several drugs

approved in this therapeutic category over the last 30 years, with many going off
patent and being sold over-the-counter in the last decade. Since this study
examines both prescription and over-the-counter products, this therapeutic
category is appropriate to answer the research questions.
Distinct Aspects of the Pharmaceutical Industry

This section briefly attempts to highlight unique aspects of the
pharmaceutical industry, which distinguish this industry from others. In addition,
the nature of research conducted in this industry is compared to research
conducted in a general context with respect to marketing mix activities.
The Nature of the Pharmaceutical Industry

The pharmaceutical industry is unique in many ways. These are noted
here:

0 In the pharmaceutical industry, there exists a 3'“l party intermediary (the
physician) who controls the dispensing of prescription drugs to
consumers. Therefore, the consumer is not responsible for choosing
which drug he/she will ultimately receive, with the exception of over-the-
counter drug products.

. In the pharmaceutical industry, many consumers are not responsible for
paying for the entire cost of the drug themselves. In this case, insurance
companies cover a majority of the cost, while consumers pay a small co-
pay when receiving a prescription drug. Therefore, in this case, price is a
lesser issue when considering the choice of drug.

0 Ethical drug products have a limited brand life cycle due to an established
patent life (20 years). Pharmaceutical companies are therefore concerned
with maximizing sales during this patent protection period as well as
possibly generating additional sales post-patent.

. The pharmaceutical industry must follow extensive governmental _
regulations. This offers additional challenges when trying to bring drug

products to market as well as the manner in which the drugs are promoted
to physicians and consumers.

Due to the unique aspects of the pharmaceutical industry, the nature of
research conducted in this field is distinctive in several ways compared to
research conducted in the general context. The following highlights these
differences.

0 In a general context, the effect of advertising on brand outcomes (brand
choice, brand equity) is often the central focus. In the pharmaceutical
industry, the effects of advertising on both brand and therapeutic category
sales have been contrasted.

o In the pharmaceutical industry, more so than in other industries, the
varying effects of the two main types of promotional efforts: detailing (ie.,
sales force activities) and DTC advertising is of primary interest. The
physician, not the consumer, holds the responsibility as to the choice of
drug. As such, the differential effects of these efforts (for example,
generating awareness vs. increasing sales) are emphasized.

0 Because consumers generally do not pay full price for prescription drugs,
often the issue of price and consumer price sensitivity is less significant in
the pharmaceutical industry compared to other industries. Therefore,
issues surrounding price have been examined to a lesser extent in the
pharmaceutical context.

Background

The pharmaceutical industry is characterized by many unique features.
One such unique feature is the nature of its relationship with consumers. More
specifically, there exists a third party - the physician - who acts as an
intermediary between the pharmaceutical firm and the consumer. For the case of
prescription drugs, the consumer cannot obtain the drug without a physician’s
prescription. Consequently, pharmaceutical firms have long focused their
promotional activities on physicians. This changed somewhat in 1997 when the

Food and Drug Administration (FDA) relaxed its restrictions regarding advertising

to consumers. Over the last decade, direct-to-consumer advertising has grown

significantly, increasing at an annual rate of 13-20% since 1997 (Singh and Smith
2005).
History of Direct-to-Consumer Advertising

Prior to 1997, the FDA allowed restricted advertising of drug products to
consumers. Such advertising was limited to ‘reminder’ ads which could mention
the brand but not conditions, or ‘directive’ ads which could mention the conditions
but not the brand (Beltramini 2006). In 1997, after much deliberation, the FDA
relaxed its rules, allowing pharmaceutical manufacturers to mention the name of
the drug and related conditions. Additionally, the advertisement was to contain
information about the drug’s risks and provide sources of additional information,
such as lntemet addresses or phone numbers. With these relaxed restrictions
came an insurgence of DTC advertising over the last decade.
Promotional Efforts in the Pharmaceutical Industry

Pharmaceutical manufacturing firms readily use two traditional marketing
communication strategies: the 'push’ strategy, where the firm attempts to
influence the physician to push the product to the consumer, as well as the ‘pull’
strategy, in which case the firm attempts to influence the consumer by increasing
consumer demand (Parker and Pettijohn 2005). The pull strategy is carried out
through direct-to-consumer advertising campaigns. Such campaigns can be
directed toward a specific drug product or a particular disease or condition
(disease awareness campaign). The push strategy is carried out through direct
interaction between pharmaceutical sales force representatives and physicians,

also known as ‘detailing’. Such encounters generally take place in the physician’s

office or at meetings and events, during which the pharmaceutical representative
informs the physician about the firm’s product(s). Often, free drug samples are
left with the physician to distribute to patients. An additional method of
advertising to physicians is through the print media via medical journal
advertising. Overall, detailing accounts for approximately 29% of promotional
spending by pharmaceutical manufacturers’ spending, while sampling accounts
for 55%, DTC advertising accounts for 14%, and medical journal advertising
comprises 2% of spending (Rosenthal et al. 2003). Although DTC advertising
accounts for a minor portion of overall spending, DTC advertising to consumers
has steadily risen since 1997.

The remainder of this dissertation is organized as follows: Essay One
examines the ROI of pharmaceutical promotional efforts over the brand life cycle.
Essay Two investigates the impact of promotional efforts on sales, incorporating
additional moderator variables. Essay Three examines the impact of late entrant
market entry into the Rx and OTC markets on sales of competitor drug products.

This is followed by general conclusions summarizing the results the each study.

ESSAY ONE: Marketing Mix Variables and Return on Investment

Introduction

Recently, marketing scholars have devoted much attention to
demonstrating accountability of the marketing function by attempting to quantify
how marketing actions add to shareholder value (Day and Montgomery 1999;
Rust et al. 2004). These scholars claim that there is considerable need to
validate how marketing expenditures, such as marketing communications,
influence marketplace performance. As such, conceptual frameworks linking
marketing contributions to shareholder value have been proposed (Srivastava et
al. 1998). Moreover, empirical studies have demonstrated how the marketing
function contributes to perceptions of firm financial performance (Moorman and
Rust 1999) as well as the positive impact of marketing communications on
shareholder value (Luo and Donthu 2006).

Recognizing this need to demonstrate the value of marketing efforts,
the present study attempts to examine the return on investment of specific
marketing communication activities (advertising and sales force). Marketing
scholars also distinguish between ‘effectiveness’ and ‘efficiency’ of marketing
actions (Rust et al. 2004). The need to examine the efficiency of advertising has
been suggested (Luo and Donthu 2001). Existing research suggests differing
outcomes of these two marketing efforts, suggesting varying levels of
effectiveness. This research is designed to (i) demonstrate the value of these two
important marketing activities as well as (ii) assist managers in optimizing

resource allocation in an effort to maximize returns from these investments.

The present study focuses on communication efforts in the pharmaceutical
industry. Specifically, three types of promotional efforts are investigated: Direct-
to-Consumer (DTC) advertising, detailing (personal selling) directed at
physicians, and advertising in medical journals, also targeted to physicians. This
study compares the return on investment (ROI) of these types of efforts in a
particular therapeutic category: gastrointestinal drugs (GID). Our database
comprises nine drug products and includes promotional expenditures over
several years.

Furthermore, we additionally focus the analysis on various stages of the
brand life cycle. This allows us to examine how the ROI of these promotional
efforts vary over time. Because pharmaceutical drug products face a limited
patent life, managing the brand life cycle is particularly crucial in this industry.
Generally, a firm’s marketing strategies will vary over the life cycle. Because
marketing strategies, as well as the competitive environment, evolve over the
brand life cycle, researches have noted the treatment of the brand life cycle as a
contingency variable during strategy formulation (Anderson and Zeithaml 1984;
Day 1981). Marketing scholars agree that strategy and tactics should vary
depending on the stage of the brand life cycle (Kotler 1965; Parsons 1975;
Thietart and Vivas 1984).

Promotional Efiorts in the Pharmaceutical Industry

Pharmaceutical manufacturing firms readily use two traditional marketing

communication strategies: the ‘push’ strategy, where the firm attempts to

influence the physician to push the product to the consumer, as well as the ‘pull’

strategy, in which case the firm attempts to influence the consumer by increasing
consumer demand (Parker and Pettijohn 2005). The pull strategy is carried out
through direct-to-consumer advertising campaigns. Such campaigns can be
directed toward a specific drug product or a particular disease or condition
(disease awareness campaign). The push strategy is carried out through direct
interaction between pharmaceutical sales force representatives and physicians,
also known as ‘detailing’. Such encounters generally take place in the physician’s
office or at meetings and events, during which the pharmaceutical representative
informs the physician about the firm’s product(s). Often, free drug samples are
left with the physician to distribute to patients. An additional method of
advertising to physicians is through the print media via medical journal
advertising. Overall, detailing accounts for approximately 29% of promotional
spending by pharmaceutical manufacturers’ spending, while sampling accounts
for 55%, DTC advertising accounts for 14%, and medical journal advertising
comprises 2% of spending (Rosenthal et al. 2003). Although DTC advertising
accounts for a minor portion of overall spending, DTC advertising to consumers
has steadily risen in the last decade. This is due to the relaxation of FDA
regulations regarding DTC advertising in 1997.

Pharmaceutical companies devote significant investments to promoting to
consumers and physicians. In 2006, industry spending on DTC advertising was
$4.5 billion (Kelly 2007). The cost of sampling was $19 billion in 2006 and
detailing budgets were $7.7 billion in 2004 (Kelly 2007). Although considerable

efforts are made to promote pharmaceutical drug products, it is unknown whether

or not these efforts are worthwhile, particularly with regards to DTC advertising.
One purpose of the present study is to examine the return on investment of these
various types of promotional efforts. The second goal is to examine how the ROI
varies specifically over stages of the brand life cycle. Past research has
neglected this level of analysis. Examining the ROI at various stages of the brand
life cycle allows us to explore the variation in ROI of DTC advertising and
detailing over time.
Conceptual Development and Hypotheses

One area of interest to marketing researchers is examining the return on
investment of pharmaceutical promotional expenditures. Demonstrating the value
of marketing communication efforts is important in most, if not all, industries. In
the pharmaceutical industry, various researchers have specifically compared the
ROI of DTC advertising and detailing, and to a lesser extent, journal advertising
and advertising via physicians meetings and events. Table 1 provides an
overview of studies examining the ROI of these various types of promotional
efforts. This type of inquiry has been conducted for only a few therapeutic
categories. Neslin (2001) examines the ROI of DTC, detailing, journal
advertising, and physician meetings and events using a sample of 391 drugs
covering several therapeutic categories. Wittink (2002) examines the ROI for
DTC advertising, detailing, journal advertising, and physician meeting and events
for three therapeutic categories: arthritis, asthma, and hypertension. Narayanan

et al (2004) investigate the the ROI of DTC and detailing for antihistamine and

10

antiviral drugs. Chintagunta and Desiraju (2005) study the ROI of detailing for
antidepressants.

Examining these results on the whole, we observe: ROI appears higher for
journal advertising and detailing compared to DTC advertising and physician
meetings and events. Across therapeutic categories, ROI for DTC advertising
appears to be consistently low. However, for detailing, ROI ranges from $1.10 to
$9.19. Similarly, for journal advertising, ROI ranges from $2.50 to $15.60. Such
variability in results does not allow for firm conclusions to be drawn regarding the
overall effectiveness of these promotional efforts. This inconsistency may result
from differences across therapeutic categories or differences among life cycle
stages. Utilizing differing methods to calculate ROI may also account for
variability in results. Here, ROI is defined as the increase in prescription sales

resulting from a $1.00 increase in promotional spending.

11

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Direct-to-Consumer Advertising in the Pharmaceutical Industry

The purpose of DTC advertising is to generate awareness of a condition
and/or specific drug among consumers. The early advertising literature consists
of “hierarchy of effects” models (Lavidge and Steiner 1961) in which consumers
experience a sequence of effects when exposed to an advertisement. The first
step in this process is awareness of the product’s existence. A series of steps are
followed until the final ‘action’ step, purchase of the product. In the case of DTC
advertising in the pharmaceutical industry, the desired action by the consumer (in
the case of Rx drugs) is a visit to the physician, since the consumer is not able to
purchase the drug product directly. The DTC advertisement may or may not lead
to a visit to the physician, depending on the consumer’s interest in the advertising
message. Because such advertising does not lead directly to a purchase by the
consumer, it can be considered to be a less effective form of promotional effort
compared to other tools, such as detailing.
Detailing/Personal Selling in the Pharmaceutical Industry

While previous research offers limited conclusive results, one can expect
the ROI to be greater for promotional efforts directed at physicians (detailing and
journal advertising) compared to efforts directed at consumers (DTC advertising).
Detailing and journal advertising specifically target physicians, who are ultimately
responsible for choosing which drug to prescribe. It is estimated that, because of
their ability to write prescriptions, physicians control more than 80% of health
care expenditures (Weeks et al. 2001). A disadvantage of DTC advertising is that

it reaches unintended audiences since it is not a very targeted form of

13

communication (Breitstein 2004b). Also, detailing is a more personal, selectively
focused one-on-one form of communication compared to DTC advertising, and
as a result is more likely to have an impact on the choice of drug. Neslin (2001)
suggests that “A DTC ad effects the medication of only one patient, whereas
detailing, journal advertising, and physician meeting and events affect the
prescribing behavior of one physician, who has several patients. These activities
thus have a multiplier effect that DTC does not have." Previous research finds
the salesperson to be the physician’s most preferred source of information
(Bauer and Wortzel 1966). Weitz and Bradford (1999) describe the changing
role of the personal selling function as a type of relationship marketing, in which
the seller has “considerable influence on the buyer’s perceptions of the seller's
reliability and value of the seller’s services” (p.241).

The level of interaction between the pharmaceutical manufacturer
representative and physician during the sales call is much greater than between
the pharmaceutical firm and consumer. An examination of the sales force
literature reveals a number of studies describing important determinants in selling
effectiveness.NSuch individual determinants include motivation, skill, credibility,
and ability to adapt to the selling situation (Churchill et al. 1985; McFarland et al.
2006; Sharma 1990; Spiro and Weitz 1990; Szymanski 1988; Webster 1968).

Researchers highlight the relative advantage of personal selling over other
forms of communication in that it allows the intended message to “be adapted to
the specific customer’s needs and beliefs” (Weitz et al. 1986, p.174) therefore

maximizing the effectiveness of the interaction (Weitz 1981). Models of buyer

l4

seller interactions note the importance of communication during the exchange
(Sheth 1976; Williams et al. 1990). Empirical studies suggest that communication
styles are a determinant of success of the sales interaction (Williams and Spiro
1985). Weitz (1978) develops a model of five salesperson’s activities important in
influencing a consumer’s choice. He notes that elements of the model capture
features of “the salesperson’s attempts to influence a customer’s choice decision
that differentiates interpersonal influence from mass media advertising" (Weitz
1978, p.503). This body of literature underscores the close nature and ability for
one-on-one communication of the buyer seller interaction, in which the
salesperson can adapt his/her message as needed. This varies from mass media
advertising which is impersonal and is targeted toward a general audience. Fill
(1995) suggests that “advertising is better for creating awareness, and personal
selling is more effective at promoting action and purchase behavior” (p.12).
Therefore, one can expect detailing to be a more effective communication tool
compared to direct-to-consumer advertising due to (i) the personal nature of the
seller-physician interaction which allows for effective communication, and (ii) the
promotional effort being targeted toward the physician, rather than the consumer,
who ultimately is responsible for the choice of drug. Since journal advertising is
directed toward physicians, not consumers, this type of communication tool is
also expected to be more effective than direct-to-consumer advertising.
Literature also suggests that print advertising can be quite effective in increasing

brand and category sales (McPheters 1991). Therefore, H1 states:

15

H1: The return on investment will be greater for detailing and journal
advertising compared to direct-to-consumer advertising within the GID
therapeutic category.

The Effectiveness of Marketing Efforts Over the Brand Life Cycle

Prescription pharmaceutical drugs have a finite life cycle. Such drugs are
protected by a twenty-year government issued patent. The selling life cycle of
any particular drug, however, is generally less than twenty years since
manufacturers apply for patent during the drug development phase (generally
during clinical trials) before the drug enters the market. Upon patent expiration,
the manufacturer loses exclusive rights to the sell drug. Generic drugs are
allowed to compete with branded drugs, and generally capture a large portion of
the market given their significantly reduced price. Insurance companies advocate
the use of generics over more expensive branded drugs since they generally
endure a large portion of the drug’s cost.

Pharmaceutical marketers must carefully plan the distribution of various
marketing mix elements (DTC advertising, detailing, and journal advertising) over
the entire life cycle of the drug. Therefore, the brand life cycle plays an important
role in marketing strategy. The mix of such promotional efforts will depend upon,
to a certain extent, the competitive environment, as well as the stage in the life
cycle (Lancaster and Jobber 1986). One might expect these efforts to be
significant early in the brand life cycle in order to inform consumers and
physicians about new therapeutic treatments. In his review of the DTC
advertising literature, Roth (1996) finds that most drugs employing DTC

advertising were in the early stages of their brand life cycle. In their investigation

16

of antidepressant drugs, Currie and Park (2002) find that firms advertise heavily
during product introduction to provide information about experience
characteristics to consumers. In their review of the advertising literature,
Vakratsas and Ambler (1999) find that advertising elasticities are significant for
half of new brands and one-third of established brands, suggesting that
advertising is more effective in the beginning of the life of a product. Lastly, Cox
(1967) finds detailing and journal advertising to be highest during the growth
stage of the life cycle, compared to the introduction and maturity stages.

Unsurprisingly, other researchers have found a complementary trend - a
decline in advertising — at the end of the life cycle. For example, Caves et al
(1991) find that, anticipating generic entry upon patent expiration, branded
advertising begins to decline as patent expiration approaches. Such advertising
falls “roughly 10 percent in the two years before patent expiration and then
declines at a rate of roughly 25 percent a year between patent expiration and
entry of the first generic competitor” (Caves et al 1991, p. 39). Similarly, Berndt et
al (2002b) find a significant decrease in marketing efforts as branded drugs
approach patent expiration. Ellison and Ellison (2000) find that in the pre-patent
expiration period, firms in markets of intermediate size are most likely to reduce
detailing and journal advertising. The rationale for this finding is that firms in
intermediate markets may distort investments in an attempt to deter generic
entry. They propose that the incentive to deter entry is greater in intermediate
sized markets compared to small/large markets where entry deterrence is

unnecessary/impossible.

17

In their review of the literature on detailing, Manchanda and Honka (2005)
claim that research indicates a positive, but decreasing, effect of detailing over
the life cycle of a drug. Narayanan et al (2005) further investigate the effects of
detailing over the brand life cycle. Their research indicates that detailing has
primarily indirect (informative) effects early on in the life cycle (6-14 months post
launch) and direct (persuasive) effects dominate in later stages.

Given this modest body of literature, much remains to be explored
regarding the effects of marketing mix activities over the life cycle of the drug.
Specifically, are pharmaceutical promotional efforts equally effective over the
entire life cycle? Considering the evidence that DTC advertising decreases over
the brand life cycle, one would expect the effectiveness of such advertising to
diminish over time. A main objective of DTC advertising is to promote awareness
of the product and its usage context. If pharmaceutical manufacturers advertise
over the life cycle of the drug, most consumers would be aware of the product,
perhaps at an oversaturated level, as it nears patent expiration, limiting the
effectiveness of DTC advertising. An exception to this is when the Rx drug will be
sold over-the-counter upon patent expiration, and manufacturers’ attempt to
generate awareness of the drug’s over-the-counter status.

A number of important factors occur over the brand life cycle, such as
modifications to the combination of marketing strategy elements used as well as
new, sometimes improved, products entering the market. A comprehensive

understanding of the return on investment of these elements over time is crucial.

18

A review of the advertising literature (Vakratsas and Ambler 1999)
suggests, based upon existing research, diminishing returns over time to
advertising. For example, market response models indicate that advertising
effects dissipate after three to fifteen months (Clarke 1976). Individual level
theoretical explanations have been offered, such as Berlyne’s (1970) two-factor
theory and ngman’s (1972) three-exposure hypothesis. These theories suggest
that the advertising response function has an inverted U-shape, and after several
exposures, the effect of advertising decreases. Subjects initially respond
positively to an advertisement, but upon repeated exposure, eventually tire of
hearing the same message and subsequently generate a negative response.

Similarly, advertising “wearout” can occur, which refers to a decay in
advertising quality over time (Bass et al. 2007; Calder and Sternthal 1980). Two
sources of wearout exist: (i) repetition wearout, where the consumer is
repeatedly exposed to the advertisement and loses interest or becomes bored,
and (ii) copy wearout, which is a decrease in advertising effectiveness over time
(Naik et al. 1998). Wearout effects can depend on several factors, such as the
nature of the advertisement, consumer motivation to process the advertisement,
and level of competitive advertisements (Pechmann and Stewart 1990).
Consumers may experience such wearout effects upon repeated exposure to
advertisements over time, diminishing the effectiveness (thus lowering the ROI)

of advertising over the brand’s life cycle.

19

The Effects of Competition on Promotional Effectiveness

Another phenomenon generally occurring over the brand life cycle is an
increase in the level of competitive intensity. The competitive dynamics of the
marketplace are altered as new products enter (or leave) the market.
Researchers have suggested that “competitive reactions can have a major
impact on the effectiveness of the marketing variables” (Hanssens 1980, p.483)
and must be accounted for (Erickson 1985; Gatignon 1984). Models measuring
the impact of competitive entry on sales of incumbent firms have been developed
(Mahajan et al. 1993). It is expected that as the competitive intensity increases
over the brand life cycle, the effectiveness of marketing strategy elements will
decrease. For example, during the detailing process, pharmaceutical
representatives must compete with other manufacturers’ representatives for
limited time to meet with the physician. With less ‘face time’ to interact with the
physician, the effectiveness of the detailing effort will diminish.

Two forces can be observed over the brand life cycle: (i) diminished
effects of promotional activities, such as advertising, over time, as suggested by
theoretical explanations of the effects of repeated exposures to advertising and
wearout effects, as well as (ii) an increase in the competitive intensity as the
number of brands in a particular category increase. Due to these effects, one can
expect decreasing returns to advertising and detailing over the brand life cycle.
The following hypotheses are offered:

HZA: The ROI of direct-to-consumer advertising is greatest during the early

stages of the brand life cycle and diminishes over time within the GID
therapeutic category.

20

 

 

H23: The ROI of detailing is greatest during the early stages of the brand

life cycle and diminishes over time within the GID therapeutic category.
Empirical Analysis
Data

The data comprise observations on nine brands of drugs in the
gastrointestinal drug category. The drugs included in this study are listed in Table
2. The data were obtained from various secondary sources, described below.
DTC Advertising. Direct-to-consumer advertising data was obtained from TNS
Media. This variable covers monthly advertising expenditures by brand from
1995-2006.
Detailing Expenditures. This variable, obtained from Verispan, covers monthly
detailing expenditures from 1991-2006.
Journal Advertising. This variable, obtained from Verispan, covers monthly
journal advertising expenditures from 1999-2006.
Total number of prescriptions wn'tten / Total retail prescription sales. This
variable, obtained from Verispan, covers the number of prescriptions written as
well as total prescription retail sales on a monthly basis from 1991-2006.

Table 3 includes the variable definitions as well as descriptive statistics.

21

Table 2: List of gastrointestinal drug products

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gastrointestinal Drug Information
Rx OTC Patent
Drug Launch Launch Expiration
Date Date Date

Tagamet (cimetidine) 08 1977 08 1995 05 1994

Zantac (ranitidine hydrochloride) 06 1983 04 1996 07 1997

Pepcid (famotidine) 11 1986 06 1995 O4 2001

Axid (nizatidine) 05 1988 07 1996 04 2002

Prilosec (omeprazole) 10 1989 09 2003 10 2001
Prevacid (lansoprazole) 05 1995
Aciphex (rabeprazole sodium) 09 1999
Protonix (pantoprazole sodium) 04 2000
Nexium (esomeprazole sodium) 02 2001

 

Table 3: Variable Definitions and Descriptive Statistics

 

 

 

 

 

 

 

 

 

 

 

 

Variable Definition Mean" Standard
DeViation
DTC" DTC advertising expenditures
DTCRx DTC advertising expenditures 1159 4018
in prescription (Rx) market
DTC advertising expenditures
DTCOTC in over-the-counter (OTC) 826 2009
market
Detailing Deta"'"9 a‘ivemsm 2417 3292
expenditures
J A Journal advertisrng 79 203
expenditures
RxSales*** Retail prescription sales 62016 88658
Totale Total number of prescriptions 551 698

 

 

 

* Note: DTC advertising expenditures were classified into the Rx as well as
OTC markets

** All variables are in thousands (000)

***Primary dependent variable

Model
We employ OLS regression to test the hypotheses. We account for time-
constant unobserved effects (0:) in our analysis using a first differencing

transformation (Wooldridge 2002). Such unobserved effects could include, for

22

example, physicians who frequently write prescriptions. Pharmaceutical firms will
naturally detail more heavily to these physicians, thus causing the unobserved
effect to be correlated with the detailing variable. The following model is used for
each brand:

RxSalesit = I50 + [I1DTCit + BzDetailingit + B3JAit + 23th + c,- + u"
where, for brand i, DTC denotes direct-to-consumer advertising expenditures,
Detailing denotes detailing expenditures, JA denotes journal advertising
expenditures, and RxSaIes denotes Rx retail sales. dM denotes monthly dummy
variables and u is the error term. The following equations denote the appropriate
model applying the first differencing transformation:

ARxSalesn = [30 + [31ADTCit + BzADetailingit + BgAJAn + 25th + u“
The ROI of each type of promotional effort is given by the B coefficient In the
sales equation. This represents the increase in sales if the promotional
expenditure is increased by $1.00.
Results

The ROI for each brand across life cycle stages (provided by the

unstandardized coefficient in the regression equation) is given in Tables 4, 5, and
6. These stages include Introduction, Growth, Maturity, and Decline. Each stage
was determined by inspection of slope changes on the brand’s life cycle curve.
Results are also provided for the time period after patent expiration, during which
competition from generic products is present. In some instances, life cycle stages
were combined. (This was done when the distinction between stages was not

clear, and also allowed for examination of a longer time period, therefore

23

including more data points). Table 7 provides the ROI for each promotional
variable across the entire time period. Specifically, for brands 1-5, this includes
the time period from Jan 1991 (the initial time point of the data set) until the
brand’s patent expiration date. For brands 6-9, this includes the time period from
each brand’s market entry until Nov 2006 (the final time point in the data set).
Tables 8-11 provide the standardized coefficients for each analysis, allowing for
comparison of the magnitude of the coefficients.

Hypothesis 1, which states that the ROI is greater for detailing and journal
advertising compared to DTC advertising, is partially supported. We observe
from Table 4 that the coefficient for DTC, in all cases, is not significant. In Table
5, we observe that the coefficient for detailing, in several cases, is positive and
significant. We also observe from Table 7 that the coefficient for detailing is
positive and significant for five brands. The coefficient for DTC advertising is
positive and significant for only one brand, and is negative for one brand. These
results, as a whole, suggest that the ROI is greater for detailing compared to
DTC advertising.

The results in Table 7 also suggest that the ROI for journal advertising is
not necessarily greater than the ROI for DTC advertising. The coefficient for
journal advertising is significant and negative for one brand ([3 = -21.344 for
Brand 3) whereas the coefficient for DTC advertising is significant and negative
for one brand (8 = -2.039) and is significant and positive for one brand ([3 =
0.572). In comparing Table 4 and Table 6, we find that while the coefficient for

DTC advertising in not significant in any cases, the coefficient for journal

24

advertising is positive and significant for only one case, and is negative and
significant for two cases. Therefore, we cannot conclude that the ROI is greater
for journal advertising compared to DTC advertising.

HypothesiSZA suggests that the ROI for DTC advertising is greatest during
the early stages of the brand life cycle and diminishes over time. This hypothesis
is not supported. Observing Table 4, we find that the coefficient for DTC
advertising is not significant in any case over the stages of the life cycle.
Hypothesiszg states that the ROI of detailing is greatest during the early stages of
the brand life cycle and diminishes over time. This hypothesis is not supported.
The results presented in Table 5 indicate that the coefficient for detailing is
positive and significant in many cases during the maturity stage, and
nonsignificant in other stages of the life cycle. Additionally, with Brand 3, we see
that the ROI for detailing is greater in later stages (BMamrity = 2.909, Bpost-patem

Expiration = 11.940) compared to earlier stages ([33,th = 0.701 ).

25

Table 4: ROI for DTC advertising over life cycle stages.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

I3 B B l3 l3
DTCIntro DTcGrowth DTcMaturity DTCDecline DTCPPE
Brand 1
(Tagamet)
Brand 2 9.918 0.158 22.988
(Zantac) (6.458) (1 .377) (86.277)
Brand 3 -41.512
(Pepcid) (52.377)
Brand 4
(Axid)
Brand 5 -0.268 -0.882 380.75
(Prilosec) (1.718) (0.860) (382.46)
Brand 6 -0.572 -0.093
(Prevacid) (0.668) (0.174)
Brand 7 -14.043 1.213
(Aciphex) (22.019) (2.205)
Brand 8 45.360 -1.040
(Protonix) (29.090) (0.929)
Brand 9 0.241 0.374
(Nexium) (0.196) (0.412)

 

 

PPE = Post — Patent Expiration

Standard errors are in parentheses

26

 

Table 5:ROI for Detailing (Det) over life cycle stages.

 

 

 

 

 

 

 

 

 

 

 

 

 

I3 B I3 I3 DetPPE
Detlntro DetGrowth DetMaturltL DetDecline
Brand 1 0.240 9-2.811“'“‘
(Tagamet) (0.274) (1 .329)
Brand 2 1.369 0.301 5.493
(Zantac) (1.104) (1.447) (3.920)
Brand 3 0.701* 2.909“ 4.010 11.940*
(Pepcid) (0.363) (1.313) (3.530) (6.476)
Brand 4 0.133 0.633 0.958 -0.446
(Axid) (0.190) (0.805) (0.605) (0.706)
Brand 5 0.730 3.261 4.967* 6.552
(Prilosec) (0.448) (2.603) (2.412) (8.896)
Brand 6 -0.141 0.923 3.136***
(Prevacid) (0.417) (1.827) (0.538)
Brand 7 0.495 0.359
(Aciphex) (0.359) (0.437)
Brand 8 0.370 1.765*
(Protonix) (0.760) (0.970)
Brand 9 -1.782 0.259
(Nexium) (1.493) (1.008)

 

 

 

 

 

9 including OTC launch dummy variable in regression
PPE = Post — Patent Expiration

Standard errors are in parentheses

*** Significant at 1% level
** Significant at 5% level
* Significant at 10% level

27

 

Table 6: ROI for Journal Advertising (JA) over life cycle stages.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

B B B
JAlntro JAGrowth JAMaturity JADecline JAPPE
Brand 1
(Tagamet)
Brand 2
(Zantac)
Brand 3 -20.888*
(Pepcid) (1 1.743)
Brand 4 9.953
(Axid) (15.860)
Brand 5 -34.337 -4.700 -28.139
(Prilosec) (33.045) (13.204) (46.19)
Brand 6 -3.332 -2.044
(Prevacid) (6.821) (6.963)
Brand 7 4.481 18.199*
(Aciphex) (3.988) (9.780)
Brand 8 -0.447 -69.667**
(Protonix) (3.902) (24.711)
Brand 9 -22.343 0.940
(Nexium) (14.951) (17.767)

 

 

PPE = Post - Patent Expiration
Standard errors are in parentheses
** Significant at 5% level
* Significant at 10% level

28

 

Advertising) over the life cycle.

Table 7: ROI of all promotional elements (DTC advertising, Detailing, Journal

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

B DTC [3 Det [3 JA Time Period
Brand 1 0.240 Jan 1991 —
(Tagamet) (0.274) May 1994§
Brand 2 0.813 -0.054 Jan 1991 —
(Zantac) (1.002) (0.895) July 1997§
Brand 3 -34.279 1.510*** -21.344** Jan 1991 —
(Pepcid) (35.211) (0.523) (9.688) April 2001§
Brand 4 0.280 Jan 1991 —
(Axid) (0.230) April 2002§
Brand 5 0.512 2.320" 8424 Jan 1991 —
(Prilosec) (0.537) (1.165) (8.420) Oct 2001§
Brand 6 -0.024 2.990*** -7.198 Rx launch —
(Prevacid) (0.186) (0.525) (4.877) Nov 2006
Brand 7 0.604 0497* 3.218 Rx launch -
(Aciphex) (1.917) (0.274) (2.245) Nov 2006
Brand 8 -2.039** 1.097** -3.859 Rx launch —
(Protonix) (1.002) (0.501) (2.988) Nov 2006
Brand 9 o.572*** 0.731 -7.756 Rx launch —
(Nexium) (0.197) (0.766) (12.524) Nov 2006

 

SIPatent expiration date
Standard errors are in parentheses

*** Significant at 1% level

** Significant at 5% level

* Significant at 10% level

29

 

Table 8: Standardized coefficient for DTC advertising variable over life cycle

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

stages.
B B B B B
DTCIntro lDTGGrowth DTCMaturity DTCDecline DTCPPE
Brand 1
(Tagamet)
Brand 2 0.206 0.016 0.027
(Zantac) (p=0.159) (p=0.909) (p=0.790)
Brand 3 -0.137
(Pepcid) (p=0.442)
Brand 4
(Axid)
Brand 5 -0.020 -0.153 0.149
(Prilosec) (p=0.877) (p=0.319) (p=0.325)
Brand 6 -0.124 -0.030
(Prevacid) (p=0.401) (p=0.597)
Brand 7 -0.180 0.064
(Aciphex) (p=0.529) (p=0.586)
Brand 8 0.214 -O.121
(Protonix) (p=0.129) (p=0.278)
Brand 9 0.195 0.127
(Nexium) (p=0.235) (p=0.375)

 

 

PPE = Post — Patent Expiration

3O

 

Table 9: Standardized coefficient for Detailing (Det) variable over

 

 

 

 

 

 

 

 

 

 

 

 

 

life cycle stages.
B B B
Detintro Detcrowrh DetMaturity DetDecline DetPPE
Brand 1 0.043 9-0.158**
(Tagamet) (p=0.389) (p=0.036)
Brand 2 0.186 0.032 0.141
(Zantac) (p=0.246) (p=0.837) (p=0.164)
Brand 3 0.176* 0.304“ 0.195 0.242*
(Pepcid) (p=0.062) (p=0.033) (p=0.276) (p=0.071)
Brand 4 0.102 0.123 0.159 -0.137
(Axid) (p=0.491) (p=0.437) (p=0.121) (p=0.531)
Brand 5 0.187 0.172 0.341* 0.125
(Prilosec) (p=0.112) (p=0.219) (p=0.054) (p=0.465)
Brand 6 -0.110 0.090 0362*“
(Prevacid) (p=0.740) (p=0.618) (p=0.000)
Brand 7 0.210 0.101
(Aciphex) (p=0.180) (p=0.417)
Brand 8 0.072 0.255*
(Protonix) (p=0.629) (p=0.087)
Brand 9 -0.402 0.039
(Nexium) (p=0.248) (p=0.800)

 

 

 

 

 

9 including OTC launch dummy variable in regression
*** Significant at 1% level
** Significant at 5% level
* Significant at 10% level

31

 

Table 10: Standardized coefficient for Journal Advertising variable over life cycle

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

stages.
B B B
JAlhtro JAGrowth JAMaturlty JAoecline JAPPE
Brand 1
(Tagamet)
Brand 2
(Zantac)
Brand 3 -0.251*
(Pepcid) (p=0.099)
Brand 4 0.140
(Axid) (p=0.534)
Brand 5 -0.128 -0.055 -0.091
(Prilosec) (p=0.306) (p=0.726) (p=0.546)
Brand 6 -0.075 -0.018
(Prevacid) (p=0.630) (p=0.770)
Brand 7 0.291 0238*
(Aciphex) (p=0.272) (p=0.072)
Brand 8 -0.017 -0.295**
(Protonix) (p=0.910) (p=0.012)
Brand 9 -0.226 0.007
(Nexium) (p=0.152) (p=0.958)

 

 

** Significant at 5% level
* Significant at 10% level

32

 

Table 11: Standardized coefficient for all promotional elements
(DTC advertising, Detailing, Journal Advertising) over the life cycle.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

B DTC B Dot 8 JA Time Period

Brand 1 0.043 Jan 1991 —
(p=0.389) May 1994§

Brand 2 0.069 -0.0056 Jan 1991 —
(p=0.420) (p=0.952) July 1997 §

Brand 3 -0.061 0.196*** -0.138** Jan 1991 —
(p=0.332) (p=0.005) (p=0.030) April 2001 5

Brand 4 0.085 Jan 1991 —
(p=0.225) April 2002§

Brand 5 0.071 0.165** -0.076 Jan 1991 —
(p=0.343) (p=0.049) (p=0.319) Oct 2001 §

Brand 6 -0.007 0.359*** -0.087 Rx launch -
(p=0.898) (p=0.000) (p=0.143) Nov 2006

Brand 7 0.026 0.160* 0.117 Rx launch —
(p=0.754) (p=0.074) (p=0.156) Nov 2006

Brand 8 -0.167** 0.236“ -0.137 Rx launch —
(p=0.046) (p=0.032) (p=0.201) Nov 2006

Brand 9 0279*“ 0.124 -0.060 Rx launch -
(p=0.005) (p=0.344) (p=0.538) Nov 2006

 

 

9Patent expiration date
*** Significant at 1% level
** Significant at 5% level
* Significant at 10% level

Discussion

Consistent with previous studies, the results presented here suggest
greater returns from detailing compared to DTC advertising. Past research finds
low ROl’s for DTC advertising, and in some cases the ROI is in fact negative
(Breitstein 2004b). Our results indicate a positive and significant effect of DTC
advertising for only one brand, Nexium. This result is not particularly surprising
considering the significant advertising campaign accompanying the launch of
Nexium (Bazell 2007). Our results also indicate that the magnitude of the return
on investment for detailing is comparable to previous results. Summarizing

previous studies, Table 1 suggests that the ROI for detailing is in the $1.00 -

33

$4.00 range in most cases, although higher for certain categories, such as
antidepressants. Our study finds that the ROI for detailing ranges from $0.50 -
$2.99.

Interestingly, we do not find journal advertising to provide a significant
return on investment. Tables 6 and 7 suggest that the ROI for journal advertising
is actually negative in some cases, although it is positive and quite large for
Brand 7 during the maturity stage (8 = 18.199). Previous studies suggest a large
range ($2.50 - $15.60) in the magnitude of ROI for journal advertising over
various therapeutic categories. It is probable that the return on this type of
promotional effort varies across therapeutic categories, and possibly across
stages of the life cycle. Inconsistencies in results may be attributed to utilization
of different methods to calculate the ROI values.

We do not find evidence of declining returns on DTC advertising or
detailing. In fact, we find that the ROI for detailing is, in several cases, positive
and significant during the maturity stage of the brand life cycle. This finding is
encouraging for pharmaceutical marketers. This suggests that continued
marketing efforts, as brands progress through their life cycles and new
competitors enter the market, are worthwhile. This result is also somewhat
consistent with that of Narayanan et al (2005) who find that detailing has
persuasive effects in later stages of the life cycle. The insignificant results
associated with DTC advertising suggest that, in general, this type of promotional

effort generates lesser returns compared to detailing. Overall, these results

34

emphasize the importance of detailing compared to advertising efforts in the
pharmaceutical industry.

The results reveal an interesting trend occurring as new products enter the
gastrointestinal category, and the performance of the drug products change. For
example, Prilosec was the first proton pump inhibitor to enter the market (these
types of drugs are thought to be superior to the previous H2 receptor antagonist
drugs). We see a larger overall ROI of detailing (B = 2.320, p < 0.05) for Prilosec
compared to several competitor products. We also see a high ROI of detailing for
Prevacid (8 = 2.990, p < 0.01) which entered the market after Prilosec. It is likely
that drug attributes (such as effectiveness or side effects) also play a role in the
success of promotional efforts in generating new prescriptions, particularly when
new and improved drugs are introduced into the market.

Conclusion

A number of important findings are revealed in this study. We observe that
the level of return on investment varies among the various types of
pharmaceutical promotional efforts. Direct to consumer advertising does not
appear to generate significant returns. Interestingly, pharmaceutical companies
continue to invest heavily in this type of promotional effort. Perhaps other
contingency factors play a greater role in effecting the ROI of DTC advertising.
For example, the competitive intensity within the category may have a greater
impact than life cycle stage in influencing the ROI.

It appears that detailing is more effective in generating positive returns

compared to DTC advertising and journal advertising. This finding is consistent

35

with much of the literature, demonstrating the importance of this type of
promotional effort. Interestingly, we do not find that the ROI of detailing tends to
diminish over the life cycle of the brand. Therefore, pharmaceutical companies
should continue to use this promotional channel throughout the stages of the

product’s life cycle.

36

ESSAY TWO: The Impact of Marketing Promotional Efforts on Sales
Introduction

Examining the value of promotional efforts is of fundamental concern to
marketers. In fact, promotion is one of the essential components of the 4 P’s of
marketing. Therefore, marketing managers are continually concerned with
maximizing outcomes (ie, sales revenues) from their investments in promotional
efforts. Furthermore, an additional concern is how to optimally manage the mix of
promotional efforts, which may include advertising, personal selling, etc.

The focus of the present study examines the impact of promotional efforts
in the pharmaceutical industry. This industry provides a unique setting for such
an inquiry. Promotional efforts in the pharmaceutical industry encompass multiple
approaches, targeted to diverse groups.

Two primary marketing communication strategies are used in the
pharmaceutical industry: the ‘push’ strategy, where the firm attempts to influence
the physician to push the product to the consumer, as well as the ‘pull’ strategy,
in which case the firm attempts to influence the consumer by increasing
consumer demand (Parker and Pettijohn 2005). The pull strategy is carried out
through direct-to-consumer (DTC) advertising campaigns. Such campaigns can
be directed toward a specific drug product or a particular disease or condition
(disease awareness campaign). The push strategy is carried out through direct
interaction between pharmaceutical sales force representatives and physicians,
also known as ‘detailing’. Such encounters generally take place in the physician’s

office or at meetings and events, during which the pharmaceutical representative

37

informs the physician about the firm’s product(s). Often, free drug samples are
left with the physician to distribute to patients (known as sampling). An additional
method of advertising to physicians is through the print media via medical journal
advertising. Overall, detailing accounts for approximately 29% of promotional
spending by pharmaceutical manufacturers, while sampling accounts for 55%,
DTC advertising accounts for 14%, and medical journal advertising comprises
2% of spending (Rosenthal et al. 2003).

Over the last decade, there has been a significant increase in DTC
advertising spending in the pharmaceutical industry. In 1997, the Food and Drug
Administration relaxed regulations regarding advertising to consumers. As such,
DTC advertising expenditures have risen from $1.1 billion in 1997 to $3.3 billion
in 2005 (Fischer and Albers 2007). Furthermore, debates have recently occurred
regarding the societal impact of DTC advertising. For example, some question
whether or not DTC advertising leads to excessive drug utilization, particularly for
newer drugs with unknown safety profiles (Finlayson and Mullner 2005). In fact,
many physicians support a DTC advertising moratorium for all new drugs
(Anonymous 2007). Given this recent attention surrounding the impact of DTC
advertising, it is of value to further investigate its role among the mix of
promotional efforts used in the pharmaceutical industry.

In the present study we examine the impact of DTC advertising, detailing,
and journal advertising on both brand as well as therapeutic category sales. In
doing so, we determine the return on investment (ROI) of various promotional

efforts. In other words, we calculate the impact on sales of a $1.00 increase in

38

promotional spending. We choose to focus our analysis on one particular
therapeutic category — the gastrointestinal drug category. Table 2 summarizes
the products in this category. While studies that aggregate data among
numerous product categories may be useful in some cases, we believe that our
approach is preferable for the present analysis. Promotional efforts, such as DTC
advertising, may be more effective for certain product categories. Aggregating
data across categories results in a loss of important information specific to
particular categories and/or brands. Industry insiders agree that “DTC is not
performing as strongly across all brands as people think. For some it works
brilliantly. But half the time it fizzles” (Lam 2004, p. 102).

In addition to investigating the main effects of these promotional efforts,
we examine how the interaction of these promotional efforts impact sales as well.
These efforts are generally conducted simultaneously, though often targeted to
various groups (consumers and physicians). Therefore, we wish to explore the
synergistic effects of these promotional mechanisms.

Previous research has examined the effects of pharmaceutical
promotional efforts on sales in particular therapeutic categories (see Fischer and
Albers (2007) for a brief overview). In certain cases, conflicting results have
been found. We wish to add to these few studies by incorporating additional
moderating effects. Specifically, the two additional variables we include are: (i)
number of competitors in the category, and (ii) the number of years the product is
on the market. One advantage of our dataset is that it includes nine drug

products (both prescription (Rx) as well as over-the-counter (OTC)) in one

39

category, which is greater than most previous studies that have only included
three or four products in a particular category. This therefore allows us to
investigate broader issues such as competitive effects. Additionally, our data
encompasses several years, providing the opportunity to examine effects over
time.

The present study offers a number of important contributions. First, we
explore the impact of two distinct, yet important, promotional channels in the
pharmaceutical industry. This allows us to specifically compare the contribution
to sales of these promotional efforts. Secondly, we further explore the interaction
effects of these promotional variables. Lastly, we examine contingency effects by
including additional moderator variables in the analysis.

An advantage of the present study is that we use an extensive data set
covering a number of brands over several years. The data, which was obtained
from several secondary sources, covers nine brands in the gastrointestinal drug
category. This category (specifically, proton-pump inhibitors) is the second
largest therapy class in the US, with prescription sales of $14.1 billion in 1997
(Longwell 2008). Our data set includes monthly data on promotional
expenditures as well as data covering retail sales and total number of
prescriptions. The majority of the data spans the years 1991-2006. This rich data
set provides the opportunity to examine the impact of additional contingency

variables omitted in previous studies.

40

Conceptual Development and Hypotheses

An issue of interest to marketing managers is the effects of promotional
efforts on brand sales. In a general context, the impact of advertising on brand
sales or brand choice has been studied extensively. In the pharmaceutical
industry, much of the literature has examined the following questions: does DTC
advertising increase sales of a particular brand or does such advertising simply
increase category sales, affecting sales of all brands in a therapeutic category?
How does DTC advertising compare to detailing? One premise that has been put
forth is that DTC advertising induces patients to visit their physicians, yet the
physician may prescribe a brand other than that advertised. This may happen for
several reasons, such as the advertised brand may not be covered by the
patient’s insurance, or may interact with other drugs the patient is taking, etc.

A recent study by Rosenthal et al (2003), encompassing five different
therapeutic categories found that DTC advertising does not appear to affect the
relative market share of individual drugs within a therapeutic class. Iizuka and Jin
(2005) similarly find that DTC advertising has little effect on brand choice in their
study of three antihistamine prescription drugs. A previous study by these
researchers examine two therapeutic categories, antihistamines and cholesterol
medications, finding that DTC advertising leads to a large increase in the number
of outpatient visits, yet does not effect specific choice among prescription drugs
in a particular therapeutic class (Iizuka and Jin 2002). They conclude that “DTC
advertising is primarily market expanding rather than business-stealing” (Iizuka

and Jin 2002, p.4). In their study of cholesterol-reducing drugs, Calfee et al

41

(2002) find that DTC advertising does not have a significant effect on new
prescriptions or renewals. They did, however, find evidence that advertising
increased the proportion of cholesterol patients who had been successfully
treated, suggesting that advertising fosters drug compliance. Wosinska (2005)
also finds evidence that DTC advertising increases patient compliance of
cholesterol-lowering medications. However, the effects of own-advertising were
positive for two brands and negative for one. Donohue and Berndt (2004), in
their study of antidepressant medications, find that DTC advertising does not
influence drug choice for people diagnosed with depression, but does have a
significant effect on those diagnosed with anxiety disorders. Bradford et al (2006)
examine the effects of DTC advertising of two pain-relieving COX-2 inhibitors,
Vioxx and Celebrex. Their results indicate that DTC advertising increases the
number of prescriptions for both Vioxx and Celebrex; however, advertising of
Celebrex had a significant effect on the rate of prescribing of Vioxx. On the
whole, these studies suggest that DTC advertising has a total market-expanding
effect, but does not significantly augment brand sales. Nonetheless, the precise
effects of DTC advertising on brand sales remains unresolved.

Contrary to these findings, 3 limited number of researchers have found
evidence that DTC advertising does impact brand sales. A few studies have
examined such effects with respect to detailing. Wosinska (2002) finds that DTC
advertising of cholesterol lowering drugs increases choice probability of a
particular drug, but only for drugs listed on the insurer’s formulary. Results also

indicate that the impact of detailing is larger than the impact of DTC advertising

42

(approximately five times greater). Furthermore, DTC advertising has a
temporary effect on choice, while the effects of detailing wear out slowly over the
course of a year. Donohue and Berndt (2004) similarly find a significant positive
impact of detailing on drug choice. Narayanan et al (2004) find that detailing and
DTC advertising affect brand shares, though detailing has a greater effect than
DTC advertising. Additionally, they find that DTC advertising has a significant
effect on category sales while detailing does not. Hurwitz and Caves (1988) find
that physician-directed promotion has a positive effect on the market shares
between branded and generic drugs. Manchanda and Chintagunta (2004) find
that detailing has a positive and significant impact on number of prescriptions
written, though it has diminishing effects. Mizik and Jacobson (2004) also find a
significant effect of detailing on new prescriptions. Berndt et al (20023) show that
marketing efforts (detailing and journal advertising) have a significant impact on
relative market shares and total category sales of antidepressants. Berndt et al
(1997) find that, at the market share level, relative sales of products are positively
related to detailing efforts. Lastly, in their study of antihistamines, Iizuka and Jin
(2005) find that detailing and medical journal advertising have significant and
long term effects on prescription choice.
Direct-to-Consumer Advertising in the Pharmaceutical Industiy

It appears from this modest body of research that DTC advertising has an
overall market expanding effect, although there is limited evidence that such
advertising has a significant impact on brand sales. Thus, DTC advertising

seems to impact consumers by increasing awareness and perhaps compliance.

43

A recent Kaiser Family Foundation study (2001) finds that “prescription drug ads
prompt many people to talk to their doctor about medicines they have seen
advertised, and a small but significant minority of people say they received
prescriptions for the drugs as a result” (p.12). Also, such advertisements may act
as reminders for consumers already taking the drug to remain compliant with
recommended therapy. Such effects of DTC advertising correspond to the
‘informative’, rather than ‘persuasive’, role of advertising in this context.
Generating a clear understanding of the effects of DTC advertising
involves recognizing its purpose, which is to create awareness of a condition
and/or specific drug among consumers. Much of the early advertising literature
includes “hierarchy of effects” models (Lavidge and Steiner 1961) in which
consumers experience a sequence of effects when exposed to an advertisement.
The first step in this process is awareness of the product’s existence. A series of
steps are followed until the final ‘action’ step, purchase of the product. In the
case of DTC advertising in the pharmaceutical industry, the desired action by the
consumer (in the case of Rx drugs) is a visit to the physician, since the consumer
is not able to purchase the drug product directly. The DTC advertisement may or
may not lead to a visit to the physician, depending on the consumer’s interest in
the advertising message. Because such advertising does not lead directly to a
purchase by the consumer, it can be considered to be a less effective form of
promotional effort compared to other tools, such as detailing. Consistent with the

literature, DTC advertising appears to initiate the hierarchy of effects generating

44

awareness by consumers and serving to inform them of the drug and/or
condition.
Personal Selling (Detailing) in the Pharmaceutical Industry

Detailing seems to have a significantly larger effect on brand sales,
providing evidence for the importance of this type of promotional effort. An
examination of the personal selling and sales force literature reveals the benefits
of personal selling over other forms of communication. The personal selling
situation allows the intended message to “be adapted to the specific customer’s
needs and beliefs” (Weitz et al. 1986, p.174) therefore maximizing the
effectiveness of the interaction (Weitz 1981 ). Models of buyer seller interactions
note the importance of communication during the exchange (Sheth 1976;
Williams et al. 1990). Empirical studies suggest that communication styles are a
determinant of success of the sales interaction (Williams and Spiro 1985). Weitz
(1978) develops a model of five salesperson’s activities important in influencing a
consumer’s choice. He notes that elements of the model capture features of “the
salesperson’s attempts to influence a customer’s choice decision that
differentiates interpersonal influence from mass media advertising” (Weitz 1978,
p.503).

This body of literature underscores the close nature and ability for one-on-
one communication of the buyer seller interaction, in which the salesperson can
adapt his/her message as needed. This varies from mass media advertising
which is impersonal and is targeted toward a general audience. Fill (1995)

suggests that “advertising is better for creating awareness, and personal selling

45

is more effective at promoting action and purchase behavior” (p.12). Therefore,
one can expect detailing, in which the one-on-one interaction between the
pharmaceutical sales rep and physician occurs, to be a more effective
communication tool compared to direct-to-consumer advertising due to (i) the
personal nature of the seller-physician interaction which allows for effective
communication, and (ii) the promotional effort being targeted toward the
physician, rather than the consumer, who ultimately is responsible for the choice
of drug.

The literature to date provides conflicting empirical evidence as to the
effects of DTC advertising on brand sales. Specifically, some researchers have
found that DTC advertising has a positive impact on brand choice, while others
have found no significant effect of this type of promotional effort on brand choice.
Additional investigation regarding the effects of DTC advertising and detailing on
brand vs. category sales is warranted. We wish to further examine the overall
impact of these two different types of promotional efforts on total sales. H3 states:

H3), Direct-to-consumer advertising will have a positive and significant

effect on total category sales, but not individual brand sales within the GID

drug category.

H33 Detailing will have a positive and significant effect on total category
sales and individual brand sales within the GID drug category.

Interaction Among Promotional Efforts

Given that the pharmaceutical industry uses various types of promotional
efforts directed at distinct groups (detailing and journal advertising are directed at
physicians, while DTC advertising is directed toward consumers), one question of

interest involves the interaction of these different promotional efforts. In other

46

words, what is the impact of the combined efforts? Considering that most
pharmaceutical companies use a combination of these efforts to promote their
products, clarification of these interaction effects is of crucial interest to marketing
researchers. Yet little research has been carried out to examine the interaction
effects of different types of promotional strategies.

Narayanan et al (2004) find significant interactions between detailing and
DTC advertising as well as detailing and OME’s (other marketing efforts, such as
journal advertising and meetings and events), and DTC advertising and OME’s.
However, Iizuka and Jin (2005) do not find a significant interaction of either DTC
advertising and detailing or DTC advertising and journal advertising. Similarly,
Donohue and Berndt (2004) do not find a significant interaction between DTC
advertising and detailing. Interestingly, Manchanda and Chintagunta (2004) find
a negative interaction effect of detailing and sampling to physicians. However,
Parsons and Vanden Abeele (1981) find a positive interaction effect of detailing
and sampling. Thus, there is incomplete and conflicting evidence as to the
interaction of different types of promotional strategies. See Table 12 for a

summary of these studies and their findings.

47

Table 12: Summary of findings on interaction effects.

 

Therapeutic

Time Period

 

 

 

 

 

 

Reference Category Studied Findings
Parsons and Steroid . Positive interaction
Vanden prophylactic 1973-1974 effect of detailing and
Abeele (1981) medication sampling
0 Category sales: no
significant interaction
effects
0 Brand share: (1)
Narayanan et . . . Apr 1993 — detailing x DTC
al (2004) Ant'h'Stamm Mar 2002 advertising positive &
sig., (ii) detailing x
OME’s negative &
sig., (iii) DTC x OME’s
negative & sig.
Mangrl‘ignda Dec 1996- 0 Significant negative
Chintagunta Not specrfied Nov 1998 giégfiifit'ognzfiggnofim
(2004) 9 P 9
o No significant
Donohue and . Jan 1997- interaction between
Berndt (2004) Ant'dep’essants Dec 2000 DTC advertising and
detailing
o Insignificant
interaction effects for:
Iizuka and Jin . . . _ (i) DTC advertising x
(2005) Antihistamlne 1997 2001 detailing, (ii) DTC

 

 

 

advertising x journal
advertising

 

48

 

While one might intuitively expect positive interaction effects of these
strategies due to the expected positive effect of each individual type of
promotional effort by itself, some research contradicts this judgment. Narayanan
et al (2004) offer a possible explanation for the negative interaction effect
between detailing and DTC advertising. They suggest that the combined efforts
produce a ’jamming’ effect, stating “detailing is typically a scientific source of
information for the physicians and DTC swamps the positive effect, perhaps
when physicians generate counterarguments to the claims in the advertisements”
(Narayanan et al. 2004, p.92). Further examination is necessary to help reconcile
the varying results found in the literature. Given the hypothesized positive effects
of each strategy alone (H4), we propose that the combined effects of DTC
advertising and detailing/joumal advertising to be more pronounced. As such, H4
states:

H4A; There are positive and significant interaction effects between DTC
advertising and detailing within the GID drug category.

H43: There are positive and significant interaction effects between DTC
advertising and journal advertising within the GID drug category.

H40: There are positive and significant interaction effects between detailing
and journal advertising within the GI D drug category.

The Moderating Effect of Competition on Brand Sales

Marketers have long acknowledged that competition can significantly
impact market performance on a number of levels. Firms do not operate in an
isolated environment, and must continually adapt to a dynamic competitive
environment. Porter’s (1980) seminal work in the area of competition has

contributed significantly to the marketing strategy literature. In this study, we aim

49

to investigate the role of competition in the effectiveness of promotional efforts.
Specifically, we examine how the intensity of competition in our therapeutic
category influences the impact of DTC advertising, detailing, and journal
advertising among competing brands.

Marketing scholars have acknowledged that the impact of marketing can
depend on how a firm’s activities compare to those of competitors (Gatignon et
al. 1990; Reibstein and Wittink 2005; Weitz 1985). These scholars also suggest
that more attention is warranted toward issues such as examination of the effects
of competitive intensity on marketing activities (Weitz 1985) as well as modeling
the effect of competitive advertising (Bass et al. 2007). Previous empirical
analyses do indeed demonstrate an influence of competition on promotional
effectiveness. For example, Naik et al. (2005) examine competition across five
brands in the detergents market. Their study indicates that advertising and
promotion affect own as well as competitors’ brand shares, and that each activity
can attenuate the effectiveness of the other activity. Gatignon (1984) shows that
competitive reactivity affects the relationship between advertising and price
elasticity. We contribute to this literature by exploring the moderating effect of
competition on different types of promotional efforts in the pharmaceutical
industry.

While mathematical models within the marketing strategy literature do
acknowledge competitive effects, we can gain deeper insight into specifically how
competitors’ advertisements can influence consumer processing of advertising

information by examining the consumer behavior literature. This literature

50

suggests that competitive advertising can influence how consumers process
information as well as consumer memory and recall. It is believed that the
presence of competitive advertisements may produce interference effects in
memory (Bagozzi and Silk 1983; Bettman 1979). Keller (1987) states that “when
multiple brands advertise within a product category, unconnected ad memory
traces may result such that consumers find it more difficult to remember which ad
is associated with which brand in the product category” (p. 318). Empirical
studies have validated the effects of competitive advertising. Burke & Srull (1988)
demonstrate that advertising by competitors can lead to “brand-attribute
interference,” in which the brands interfere with each other in the consumers’
memory. Their results also indicate that competitive advertising has a significant
inhibitory effect on cued recall of brand information.

Research by Keller (1991) also provides evidence for interference effects
of competitive advertising. Results from Keller’s study suggest that the greater
the number of competing brands advertising in a product category, the lower the
recall of brand claims for a target ad. These interference effects result from
confusion with competing advertisements. The presence of competing ads make
communication efforts, such as brand claims and cognitive responses stored in
memory, less accessible. Dahaner et al. (2008) demonstrate that increased
levels of competitive advertising can negatively impact brand sales. These
studies provide theoretical explanations as well as empirical support for the
competitive effects of advertising on consumer response. It appears from this

research that ‘competitive clutter’ (Kent 1995) has a negative impact on

51

advertising effectiveness. As the number of competitors in a product category
increases, the ability of consumers to process and recall information from brand
advertisements is inhibited. Therefore, we hypothesize:

H5A: The impact of DTC advertising on brand sales is negatively

moderated by the competitive intensity within the GID therapeutic

category.

H53: The impact of journal advertising on brand sales is negatively

moderated by the competitive intensity within the GID therapeutic

category.

We also wish to examine how competition influences another form of
promotional effort: detailing to physicians. Though scholars suggest that
salesforce effectiveness is a function of the competitiveness of the sales
environment (Gatignon and Hanssens 1987), little empirical research has
investigated the relationship between competition and salesforce effectiveness.
While research conducted by Ryans and Weinberg (1979) empirically
demonstrates lower sales in territories with greater competition, this relationship
has not been extensively investigated.

lntuitively speaking, one might expect similar competitive effects in a sales
environment, compared to advertising. When physicians are visited by
pharmaceutical sales representatives they are often presented with a large
amount of complex information regarding a drug’s benefits, efficacy, and other
attributes. This information must be processed and retained in memory in a
similar manner to consumers’ processing of advertising information. The

difference lies in the form of communication. For physicians, communication is

direct and occurs verbally with a pharmaceutical representative whereas for

52

consumers, the information is presented in some type of advertisement form,
such as television or print. Additionally, information presented to physicians is
more detailed and complex. Ease of processing of this information by physicians
may decrease with greater levels of communication occurring with numerous
pharmaceutical representatives.

Greater competitive intensity within a category results in more visits to a
given physician from various pharmaceutical representatives, and therefore more
drug attribute information to process and later recall. Additionally, this can likely
result in less time spent with individual reps, and therefore less “face time” and
interaction with the physician, leading to fewer opportunities to convey
information. As the level of competition increases, the amount of information
processing necessary by the physician (via more representative visits) also
intensifies. Representatives from competing firms have less of an opportunity to
communicate information to the physician. We expect such competition to impair
a given firm’s detailing efforts. We hypothesize the following:

H53: The impact of detailing on brand sales is negatively moderated by the

competitive intensity within the GID therapeutic category.
The Moderating Effect of Market Longevity on Brand Sales

The effectiveness of promotional efforts may additionally vary over the
brand life cycle of the product. We wish to examine this impact by including an
additional moderator variable, years on the market, to the analysis. Specifically,
we investigate the moderating effect of this variable on the impact of promotional

efforts on brand sales.

53

One stream of research within the advertising literature has examined the
long-term effects of advertising. The majority of these studies conclude that
advertising does not have a long-term impact. For example, previous research
suggests that advertising effects can dissipate within months (Assmus et al.
1984; Leone 1995). Other studies support the notion that short-term advertising
effects are limited (Deighton et al. 1994; Dekimpe and Hanssens 1995;
McDonald 1971; Tellis 1988). A review of the advertising literature (Vakratsas
and Ambler 1999) suggests, based upon existing research, diminishing returns
over time to advertising.

Individual level theoretical explanations have been offered, such as
Berlyne’s (1970) two-factor theory and Krugman’s (1972) three-exposure
hypothesis. These theories suggest that the advertising response function has an
inverted U-shape, and after several exposures, the effect of advertising
decreases. Subjects initially respond positively to an advertisement, but upon
repeated exposure, eventually tire of hearing the same message and
subsequently generate a negative response. Further repetition of the
advertisement has no beneficial effect, and may be detrimental.

Similarly, advertising “wearout” can occur, which refers to a decay in
advertising quality over time (Bass et al. 2007; Calder and Sternthal 1980). Two
sources of wearout exist: (i) repetition wearout, where the consumer is
‘ repeatedly exposed to the advertisement and loses interest or becomes bored,
and (ii) copy wearout, which is a decrease in advertising effectiveness over time

(Naik et al. 1998). Wearout effects can depend on several factors, such as the

54

nature of the advertisement, consumer motivation to process the advertisement,
and level of competitive advertisements (Pechmann and Stewart 1990).
Consumers may experience such wearout effects upon repeated exposure to
advertisements over time, diminishing the effectiveness of advertising over time.

This body of research suggests reduced effects of advertising over time.
This implies that as the product matures, the effectiveness of advertising efforts
may lessen. When a product enters the market, the consumer may be less
informed and more likely to depend on advertising to inform themselves (Tellis
and Fomell 1988). However, as time passes, consumers may experience
wearout upon repeated exposures to advertising. Therefore, we hypothesize:

Hat: The impact of DTC advertising on brand sales is negatively

moderated by the number of years on the market within the GID

therapeutic category.

H53: The impact of journal advertising on brand sales is negatively

moderated by the number of years on the market within the GID

therapeutic category.

Less attention has been given to examining the long-term effects of
personal selling efforts. Detailing is a more personal type of communication effort
compared to advertising. Therefore, salesforce efforts may be readily modified
over time in order to prevent the wearout effects observed upon repeated
exposure to advertising. For example, pharmaceutical sales reps may be able to
present new information to physicians regarding the latest news about a drug’s
benefits or new indications. Persistent interaction with physicians over the years

should continually remind the physician about the drug product, therefore

generating new prescriptions.

55

Narayanan et al (2005) find evidence for varying effects of detailing efforts
on physician prescribing behavior during different stages of the life cycle. They
find that during the introductory phase (6-14 months after introduction), detailing
has a primarily indirect (informative) effect followed by direct (persuasive) effects
during subsequent stages. However, additional studies find diminished effects of
detailing efforts over time (Manchanda and Chintagunta 2004; Manchanda and
Honka 2005). We argue that continued detailing efforts should have a positive
impact on brand sales throughout the life of the product. Therefore, a positive
interaction effect is hypothesized:

Hag: The impact of detailing on brand sales is positively moderated by the
number of years on the market within the GID therapeutic category.

Empirical Analysis
Data

The data comprise observations on nine brands of drugs in the
gastrointestinal drug category. The drugs included in this study are listed in Table
2. The observations are for the entire US. market on a monthly basis. The data
was obtained from two secondary sources, Verispan and TNS Media.
DTC Advertising. Direct-to-consumer advertising data were obtained from TNS
Media. This variable covers monthly advertising expenditures for each drug from
1995-2006.
Detailing Expenditures. This variable, obtained from Verispan, covers monthly
detailing expenditures from 1991-2006.
Journal Advertising. This variable, obtained from Verispan, covers monthly

journal advertising expenditures from 1999-2006.

56

Total number of prescriptions written / Total retail prescription sales. This
variable, obtained from Verispan, covers the number of prescriptions written as
well as total prescription retail sales on a monthly basis from 1991-2006.
Model
Brand Sales

We employ OLS regression to test the hypotheses. We account for time-
constant unobserved effects (CI) in our analysis using a first differencing
transformation (Wooldridge 2002). Such unobserved effects could include, for
example, physicians who frequently write prescriptions. Pharmaceutical firms will
naturally detail more heavily to these physicians, thus causing the unobserved
effect to be correlated with the detailing variable. We also include lagged
independent variables to account for previous efforts having an effect on current
period sales. The following model is used to examine brand sales:

RxSalesu = I30 + B1DTCit + BzDetaiIingu + B3JAit + B4DTCW + BsDetailinng
+B6JAi,t-1 + Oth + ‘YdBt 'I' C] + uit

where, for brand i, DTC denotes direct-to-consumer advertising expenditures,
Detailing denotes detailing expenditures, JA denotes journal advertising
expenditures, and RxSales denotes Rx retail sales. dM denotes monthly dummy
variables, dBi represents brand dummy variables, and u is the error term. The
following equation (Model 1 in Table 13) denotes the appropriate model applying
the first differencing transformation:

ARxSalesit = I30 + [31ADTCir + BzADetailingit + 83AM“ + B4ADTCW + 85ADetailingi,t-1
'I' BGAJAIJJ 'I' Oth + 'YdBt + “it

57

Interaction Effects
We additionally examine the interaction effects among the promotional
variables as well as the contingency effects of competitive intensity and the
number of years the product has been on the market. The interaction effects are
sequentially added to the previous equation. The following model (Model 4 in
Table 13) includes the full set of variables:
ARxSalesu = I30 + B1AD‘TCu + BgADetailingtt + B3AJAit + 84ADTCW + BsADetailingi't-
1 + BGAJAW + 87A(DTC*DetaiIing) + 83A(Detailing*JA) + BgA(DTC*JA)
+ BtoA(DTC*Comp) + B11A(Detailing*Comp) + B12A(JA *Comp) +
B13A(DTC*Mrkt) + [314A(Detailing*Mrkt) + B15A(JA *Mrkt) + £5th + ydBt
"’ Uit
The interaction of DTC advertising and detailing, detailing and journal
advertising, and DTC advertising and journal advertising are denoted by
DTC*Detai/ing, Detailing*JA, and DTC*JA respectively. The competitive intensity,
Comp, is the total number of Rx and OTC competitors in the market at a given
time. The number of years the product has been on the market is represented by
Mr”. To resolve the issue of multicollinearity, the interaction terms are mean
centered. Again, dM denotes monthly dummy variables, dBt represents brand
dummy variables, and u is the error term.
Category Sales
The following model (Model 1 in Table 14) is used to examine category

sales:

ARxSalestota/t = Bo + B1AtotalDTCt + BzAtotaIDTCt-1 + BgAtotaIDetailing +
B4AtotalDetaiIingM + BsAtotalJAil + pgAtotalJAi,t-1+ ut

where RxSalestotaI is the total Rx retail sales, totalDTC denotes DTC advertising

expenditures for all brands, tote/Detailing denotes detailing expenditures for all

58

brands, and totaIJA denotes journal advertising expenditures for all brands. We

also examine the interaction effects of the promotional efforts by adding

additional interaction terms. To resolve the issue of multicollinearity, the

interaction terms are mean centered (Model 2 in Table 14):

ARxSa/estotalt = Bo + [31AtotalDTCr + BzAtotalDTCt-1 + [33AtotalDetailingt +
B4AtotalDetailingH + BsAtotalJAir + BBAtotalJAW +

87A(totalDTC*totalDetailing) + 83A(totalDetailing*totalJA) +
BgA(totaIDTC*totalJA) + 25th + ut

To test for serial autocorrelation, the residuals from the OLS regression were

regressed against the lagged residual values. The coefficient was close to zero

([3 = -0.246), indicating that serial autocorrelation is not a major problem.

Results

Table 13 summarizes the results of the brand sales model‘. Model 1
includes the effects of promotional variables, excluding interaction effects. Model
2 includes interaction effects of the promotional variables. Model 3 additionally
includes the interaction of competitive intensity with the promotional variables.
Model 4, which represents the full model, also includes the interaction of the
promotional variables with the number of years the product has been on the
market. Table 14 contains the results of the category sales model. Model 1
excludes interaction effects, while Model 2 includes interaction effects of the
promotional variables.

H3 and H4 involve the impact of DTC advertising and detailing on brand

and category sales. H3A is partially supported. With regards to brand sales, we

59

see in Models 3 and 4 that DTC advertising does have a positive and significant
impact on brand sales. DTC advertising is insignificant in Models 1 and 2.
However, we do not see a significant impact of DTC advertising on category
sales. We also find partial support for H13. Detailing is positive and significant in
Models 1, 3, and 4 of the brand sales equations. Detailing also has a positive and
significant impact on category sales.

H4 concerns the interaction effects of DTC advertising, detailing, and
journal advertising. While H4), and H43 are not supported, Models 2, 3 and 4 do
provide support for H4c, suggesting a positive and significant interaction effect
between detailing and journal advertising. The coefficient for this interaction term
is similar for each model ([3 = 0.00197, 8 = 0.0021, [3 = 0.0020, and p < 0.01 for
Models 2, 3, and 4 respectively).

H5 involves the interaction between competitive intensity and the
promotional variables. The results provide support for H5A, while H53 and H50 are
not supported. Examining Models 3 and 4, we observe a negative and significant
interaction between DTC advertising and competitive intensity ([3 = -0.2021 for
Model 3 and [3 = -0.208 for Model 4, p < 0.05). Though not significant, the
interaction of detailing and journal advertising with competitive intensity is also
negative, as hypothesized.

H5 concerns the interaction of the promotional variables with the number

of years on the market. While HGA and H63 are not supported, Model 4

 

‘ This analysis was additionally conducted excluding the months after patent expiration
for Brands 1-5. However, the results do not change significantly.

60

demonstrates a positive and significant interaction effect between detailing and
the number of years on the market ([3 = 0.2024, p < 0.01), providing support for

Hec.

61

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62

Table 14: Category Sales Model

 

 

 

 

 

 

 

 

 

 

 

 

 

Model 1 Model 2
Variable Coefficient [ p value Coefficient I p value
DTC adv 0.208 0.599 0.143 0.815
DTC ath-1 -0.044 0.914 -0.090 0.824
Det 2.322*** 0.005 2629*" 0.007
DetH -2.300*** 0.001 -3.241*** 0.001
JA 9.982 0.244 8.159 0.352
JAM -1.993 0.805 -0.679 0.935
DTC*Det -0.0000174 0.673
Det*JA -0.000377 0.219
DTC*JA 0.000467 0.522
R-squared 0.794 0.800
Adj. R-
squared 0.747 0.743

 

 

 

 

 

N = 92; coefficients are unstandardized

DTC adv = Direct-to-Consumer advertising, Det = detailing, JA = journal

advertising

*** Significant at 1% level
Discussion

The present study reveals interesting findings regarding the contribution to

sales of various promotional efforts in the pharmaceutical industry. We find
partial support for a positive and significant impact of DTC advertising on brand
sales. It should be noted that previous studies have revealed conflicting results
regarding the impact of DTC advertising on brand sales. Our results indicate that,
when including certain moderator variables into the brand sales model, DTC
advertising is positive and significant. However, the impact is small ([3 = 0.510 in
Model 3; 8: 0.454 in Model 4), suggesting that returns from DTC advertising
investments are not substantial. These findings also highlight the complexity in

the present analysis. It is difficult to draw generalized conclusions regarding the

impact of DTC advertising on brand sales; most likely, the impact of DTC

63

advertising differs among categories and is dependent upon various contingency
factors.

Surprisingly, we do not find a significant impact of DTC advertising on
category sales. Perhaps this is due to the particular therapeutic category
examined. For example, this result could be due to carryover effects of DTC
advertising to the over-the-counter market. Perhaps DTC advertising of these Rx
drugs (Brands 1-5) is enhancing over-the-counter sales, rather than Rx sales.

Consistent with previous literature, we do find partial support for a positive
and significant impact of detailing on brand sales. The impact of detailing is
greater compared to DTC advertising (for detailing, [3 = 1.004 in Model 1; [3 =
1.131 in Model 3; B = 2.237 in Model 4). This finding suggests that detailing
generates a greater return on investment compared to DTC advertising.

Interestingly, we also note a negative and significant lagged effect of
detailing. This could be due to a sampling effect. It is likely that pharmaceutical
reps deliver samples to physicians during detailing visits. Often, physicians will
provide new patients with drug samples to first observe a patient’s response to
the drug. If the patient responds positively to the drug, a prescription will then be
given (during a later visit). Therefore, there may be an elapsed time period
between the detailing visit and the writing of the prescription. Alternatively, if the
patient does not respond well to the drug, a prescription will not be given, and no
new sales will result.

Similarly, we find a positive and significant effect of detailing on category

sales, with a negative and significant lagged effect. Detailing generates positive

64

returns to both brand sales, as well as sales of competitor drugs within the
category. Although not formally included in the hypotheses, we do find a
significant and negative impact of journal advertising and a significant and
positive lagged effect of journal advertising. This suggests that the Impact of this
type of advertising is not observed immediately, but accumulates with time.

The results reveal a significant interaction effect for detailing and journal
advertising with regards to brand sales. This particular interaction has not been
examined in previous studies. Both these types of promotional efforts are
directed toward physicians. This reveals the positive synergistic effect of
advertising and personal selling to physicians. However, the effect is quite small
(8 = 0.00197 for Model 2; B = 0.0021 for Model 3; B = 0.0020 for Model 4).

We do not find significant interaction effects for DTC advertising and
detailing as well as DTC advertising and journal advertising. These results are
consistent with previous studies (Donohue and Berndt 2004; Iizuka and Jin 2005)
who also find insignificant interaction effects. Consistent with Narayanan et al.
(2004), insignificant interaction effects are found for the promotional variables
with regards to category sales. Although it seems intuitive that promotional efforts
directed at consumers (DTC advertising) and physicians (detailing and journal
advertising) should have a significant synergistic effect, our study provides
further evidence for the lack of such an effect.

This study also examines the contingency effects of competitive intensity
and the number of years the product has been on the market. Results reveal a

negative and significant (though small) interaction effect of DTC advertising and

65

competitive intensity ([3 = -0.2021 in Model 3; B = -0.208 in Model 4). This result

is intuitive, suggesting that as the number of competitors in a category increase,
the impact of DTC advertising on brand sales is hindered. It is possible that the
more brand advertisements consumers are exposed to, the less likely they are to
remember a particular brand name upon a visit to a physician. Pharmaceutical
marketers agree that DTC advertising is “responsive to the competitive
environment” (Lam 2004, p. 102).

The results also reveal a positive and significant (though small) interaction
effect between detailing and the number of years on the market ([3 = 0.2024 in
Model 4). This suggests that personal selling efforts continue to generate a
positive and significant contribution to brand sales over the life of the product.
The positive returns from this type of investment appear to have a continued
impact, even in later stages of the brand’s life cycle. This particular result is
consistent with findings by Narayanan et al. (2005) who find that detailing has
direct (persuasive) effects during later stages of the life cycle.

Both of these results have important implications for pharmaceutical
managers. Overall, this suggests that DTC advertising investments should be
dependent upon the level of competition in the category. If a brand is one of few
in a particular category, DTC advertising may be a worthwhile investment.
However, if there are several brands in a category, marketing investments should
perhaps be devoted to other channels. It also appears that investments made in
personal selling remain of value throughout the life of the brand, and managers

should continuously dedicate funds to this particular effort.

66

Conclusion

Overall, the present study reveals a number of noteworthy findings. In
general, we can conclude that the impact of pharmaceutical promotional efforts
on brand sales is rather complex. Our results indicate that the effect of DTC
advertising varies, and is likely dependent upon a number of contingencies. This
is consistent with the notion that DTC advertising may work better for some
brands and/or therapeutic categories (Lam 2004). Given the complex nature of
this relationship, it is not surprising that previous studies have obtained
conflicting results. Our results also indicate that DTC advertising may prove to be
more beneficial in smaller categories with less competitors, compared to
categories with a greater competitive intensity. This is suggested by the negative
interaction between DTC advertising and the number of competitors within the
category.

We also find detailing to have a positive impact on brand and therapeutic
category sales. Additionally, detailing generates a greater return on investment
compared to DTC advertising. This underscores the importance of the personal
selling function in this industry. It is important to note that this type of promotional
effort continues to generate positive returns as the drug product progresses
through its life cycle. Also, we note the synergistic effect of detailing and journal
advertising targeted to physicians.

Overall, it appears that promotional efforts directed towards physicians
have a greater impact (ROI) compared to those directed towards consumers.

Physicians, not consumers, are ultimately responsible for choice of drug (in the

67

Rx market). Therefore, pharmaceutical firms should focus their investments in
these channels, particularly for competitive therapeutic categories. Although we
have seen a large increase in spending on DTC advertising over the last decade,
it may be fruitful for pharmaceutical firms to first obtain a better understanding of
what brands and categories might actually benefit from such advertising before

dedicating such investment.

68

ESSAY THREE: Market Entry Issues In the Pharmaceutical Industry
Introduction

A significant body of literature has accumulated in recent years
surrounding the study of market pioneering, or first-mover, advantages. (See
Kerin et al. (1992) for a review). The majority of this literature suggests that
market pioneers, and occasionally early entrants, posses significant advantages
over late market entrants (Kalyanaram et al. 1995; Lambkin 1988; Lieberman
and Montgomery 1988). A number of empirical studies have substantiated the
earIy entrant - market share relationship (Kalyanaram and Wittink 1994; Lambkin
1988; Parry and Bass 1989). While much of this research has focused on
pioneering advantage, a lesser number of empirical studies have investigated
how late entrants into a market can overcome the disadvantages they
traditionally face, even though a number of industry cases exist in which late
entrants were able to become market leaders. For example, In the
pharmaceutical industry, Zantac surpassed sales of first entrant Tagamet as a
result of a “shrewd, multifaceted marketing strategy” (p.25) and superior drug
attributes (a more convenient dosing schedule and superior drug interaction
profile) (Wright 1996). Schnaars (1994) offers numerous examples of later
entrants who surpassed pioneers In a variety of product categories.

While much of the scholarly literature acknowledges multiple market
pioneering advantages, Kerin et al. (1992) argue that a number of contingency
effects can moderate the order of entry-competitive advantage relationship. They

suggest that achieving and sustaining first mover advantage is rather complex,

69

and one must consider more than simple entry order effects. For example, Brown
and Lattin (1994) show that a brand’s length of time in the market can also lead
to a greater market share advantage, while Huff and Robinson (1994)
demonstrate that a greater lead time increases a pioneers advantage. The type
of product (Incremental vs. really new) introduced into the market can also
influence the level of the pioneer’s success (Min et al. 2006). Szymanski et al.
(1995) also propose a contingency perspective for examining the order of entry-
market share relationship. A number of factors can affect new entry performance,
such as the capabilities of the entrant firm as well as the strategy they employ
(Gatignon et al. 1990).

We believe that exploring these contingency effects is important in gaining
a better understanding of market pioneer vs. late entrant market dynamics. This
can potentially provide insight into an equally important question: How do late
entrants overcome the disadvantages they typically face to become market
leaders? The present study addresses this particular question.

This research question is investigated in the context of the pharmaceutical
industry utilizing panel data designed to uncover long-term effects. More
specifically, we examine the effects of a late entrant drug product entry into two
key markets in this Industry: the over-the-counter (OTC) market as well as the
prescription (Rx) market. This study focuses on one specific therapeutic
category: gastrointestinal drugs. Proton pump inhibitors (a particular type of
gastrointestinal drug used to treat acid reflux symptoms) are the second largest

therapy class in the US, with prescription sales of $14.1 billion in 2007

70

(Longwell 2008). Over the last thirty years, nine drug products in this category
have entered the Rx market. During this time, five of these products have
switched to the OTC market as their patents have expired. The unique market
dynamics occurring in the gastrointestinal therapeutic category across these two
related markets over three decades allows us to examine a number of interesting
market entry issues.

Our results indicate that late entrants can surpass incumbents to become
market leaders; however, we find that this is accomplished via two different
mechanisms In both markets (OTC and Rx). Furthermore, we show that entrance
into the focal (OTC) market can have a secondary effect on a related (Rx)
market. This unique secondary effect has not been readily acknowledged in the
market entry literature. Our research has additional important implications In that
we provide insight into the benefits derived from switching a drug product from
Rx-to-OTC. Lastly, by examining product switching behaviors, our research
highlights differences between physician and consumer choice characteristics.
Background
First Mover Advantages

First mover, or pioneering, advantages can accrue from a number of
different mechanisms. Both economic and behavioral perspectives have been
offered. The economic perspective suggests that various entry barriers contribute
to such advantages, such as experience effects, reputational effects,
technological leadership, and buyer switching costs, among others (Karakaya

and Stahl 1989; Kerin et al. 1992; Lieberman and Montgomery 1988). Han et al.

71

(2001) suggest that entry barriers can provide value to incumbents by preventing
new competitive entry as well as allowing a greater lead time to develop
innovations. This suggests that late market entrants must expend significant
efforts to overcome these entry barriers.

The behavioral perspective offers additional support for the pioneering
advantage. Research In this area has shown that consumers generally have
positive attitudes and positive perceptions toward pioneer brands (Alpert and
Kamins 1995). A proposed mechanism for this effect is offered by Kardes and
Kalyanaram (1992) who suggest that information that consumers learn about first
entrants is perceived as novel and interesting, whereas information related to a
later entrant is perceived as redundant. Therefore, information pertaining to the
early entrant Is more likely to be encoded into long-term memory, and repeated
exposure to information will increase knowledge of the pioneering brand.

Carpenter and Nakamoto (1989) also argue that a pioneering advantage
can arise from the process by which consumers learn about brands and form
preferences. These authors suggest that an early entrant can significantly
influence how attributes are valued, shifting an individual to favor the pioneer.
Additionally, the pioneer can become strongly associated with the product
category, becoming “the standard.”

Nevertheless, there is evidence for late entrant advantages as well. Zhang
and Markman (1998) show that later entrants with superior attributes can, under
certain circumstances, come to be preferred over market pioneers. Late entrant

advantages include: (1) “free-rider” effects on the investments of market

72

pioneers, (2) shifts in technology or consumer tastes, (3) capitalizing on pioneers
mistakes, (4) incumbent Inertia, and (5) the ability to successfully influence and
shape consumer preferences (Cho et al. 1998; Kerin et al. 1992; Lieberman and
Montgomery 1988; Schoenecker and Cooper 1998). The ability to capitalize on
these advantages may allow late entrants to achieve greater market share
compared to incumbents.

In contrast to the pioneering advantage literature, fewer studies have
examined how late entrants can effectively compete with Incumbents to achieve
marketplace success. Recent studies suggest that innovative product offerings
and considerable resources may contribute to a late entrant’s success In the
market, essentially overcoming the disadvantages associated with late market
entry (Shamsle et al. 2004; Shankar et al. 1998).

In the present study, we investigate if such firm-specific abilities
(innovative products as well as marketing resources) can contribute to a late
entrant’s marketplace success. The next section provides background on the
pharmaceutical industry, which provides a unique context for such inquiry. We
then present our hypotheses, followed by the results and conclusions. We
demonstrate that late entrants can indeed, via varying mechanisms, achieve
market leadership. Additionally, we demonstrate that market entry can have both
primary effects (on the market Into which it enters) as well as secondary effects

(on related markets).

73

The Pharmaceutical Industry

Our study explores a unique market entry situation - switching an existing
drug product from Rx to over-the-counter upon patent expiration. This Rx-to-OTC
switch marketing strategy is used by pharmaceutical companies in order to
continue to generate sales (as an OTC version of the original Rx drug) once the
patent on the drug product has expired, after which the branded drug faces
competition from cheaper generic versions. Due to the limited patent life of
pharmaceutical drug products, management of the brand life cycle is particularly
crucial in this industry. Therefore, selling a drug product OTC can be a beneficial
mechanism to continue to generate sales (and recoup investments made during
the development phase) once the drug patent has expired. Potential OTC drug
candidates include those that have demonstrated long-term safety profiles and
that are used to treat mild ailments which are easy to diagnose by the consumer.

The Rx-to-OTC switch strategy has been increasingly used by
manufacturers, particularly in therapeutic categories such as gastrointestinal and
antihistamine drug products. US sales of OTC drugs are forecasted to be $29.3
billion in 2010, up from $13.7 billion in 1996 (Bradley 1999). Successful OTC
brands can produce sales from $20 million to greater than $200 million per year
(Mahecha 2006). Despite the popularity of this approach by pharmaceutical
manufacturers to gain additional revenues from its branded products, few
empirical studies have examined the Rx-to-OTC switch strategy.

This examination allows us to compare two different markets crucial to the

pharmaceutical industry - the Rx and OTC markets. These two markets differ

74

 

significantly. For example, in the Rx market, consumers must first visit a
physician and obtain a prescription before he/she can obtain the drug product.
Therefore, physicians, not consumers, are responsible for the drug product
choice. Conversely, in the OTC market, consumers can freely purchase the drug
product without a prescription.

The types of promotional efforts conducted for Rx and OTC drugs differ as
well. In the OTC market, consumers are the primary target of marketing efforts.
The main type of promotional effort for OTC products is DIrect-to-Consumer
(DTC) advertising. However, in the Rx market, promotional efforts are geared
toward both physicians and consumers. The primary promotional effort directed
toward physicians is detailing, or personal selling conducted by pharmaceutical
representatives. While DTC advertising is a form of mass advertising, detailing,
which occurs at the individual level, involves a one-on-one Interaction between
the pharmaceutical representative and physician, and is a more targeted form of
promotional effort.

This study provides the unique opportunity of comparing market entry
effects in two distinct (Rx and OTC), yet important, markets. We are able,
therefore, to gain insight into what factors play a role in achieving success in
each market. Secondly, we are able to examine both the primary and secondary
effects of a late entrant market entry into the OTC market. We additionally
examine the differential impact of DTC advertising on sales in the Rx and OTC

markets. This study also exposes differential choice behaviors among consumers

75

l“—

and physicians. Lastly, this investigation explores the value of the Rx-to-OTC
switch marketing strategy.
Conceptual Development and Hypotheses

Examination of the Impact of Direct-to-Consumer Advertising in the Rx and OTC
Markets

Few studies have directly compared the impact of DTC advertising in the
Rx and OTC markets. Given the different purchasing situations in both markets,
one might expect a differential impact of this type of advertising in each market.
Ling et al (2002) examine the effects of DTC advertising on sales of OTC and Rx
antiulcer and heartburn medications. They also examine interactions between Rx
and OTC DTC advertising for a particular brand. They find that DTC marketing of
OTC brands impact its own share in the OTC market. They also find that DTC
marketing of Rx brands positively impacts the share of same-brand OTC
products. Advertising of OTC products does not impact market shares of Rx
products. Ling (1999) finds that DTC marketing of OTC brands has positive and
long-lived Impacts in the OTC market. Furthermore, OTC drugs have price
elasticity similar to that for Rx drugs. This suggests that consumers may not be
price sensitive and that brand loyalty may play a role in the sales of OTC drugs.

The overall purpose of DTC advertising is to generate awareness of a
condition and/or specific drug among consumers. This is consistent with
“hierarchy of effects” models (Lavidge and Steiner 1961) introduced in the early
advertising literature. These models suggest that consumers experience a
sequence of effects when exposed to an advertisement. The first step in this

process is awareness of the product’s existence. A series of steps are followed

76

 

(for example, Attention —> Interest —> Desire —> Action) until the final ‘action’ step,
purchase of the product.

In the case of DTC advertising in the pharmaceutical industry, the desired
action by the consumer (in the case of Rx drugs) Is a visit to the physician, since
the consumer is not able to purchase the drug product directly. However, In the
OTC market, the role of the physician is removed, and the consumer is directly
responsible for purchasing the drug. Therefore, the intended effect of DTC
advertising in the OTC market is for the consumer to advance through the
hierarchy of effects sequence to the final step, purchase of the drug.

Clearly, the process consumers follow to obtain a drug product differs In
the Rx and OTC markets. In the Rx market, the DTC advertisement may Induce
the consumer to visit his or her physician. However, the physician may or may
not prescribe the drug whose advertisement the consumer was exposed to. In
the OTC market, access to OTC drugs is much simpler; consumers need not
obtain a prescription from a physician before obtaining a drug. Therefore, one
might expect that DTC advertising has a greater impact on brand sales of OTC
drugs vs. Rx drugs. H7 thus states:

H7: The impact of DTC advertising on sales of over-the-counter drugs is

positive and significant, while the Impact of DTC advertising on sales of Rx

drugs is insignificant in the GID therapeutic category.
Examination of the Impact of OTC and Rx Market Entry on Drug Sales

The over-the-counter switch phenomenon observed In the gastrointestinal
therapeutic category allows us to examine how market entry affects sales of

existing competitor drug products. We focus on two specific events. First, we

77

examine how the entry of a late entrant, previous Rx product (Prilosec OTC) into
the over-the-counter drug market affects sales of existing OTC as well as Rx
drugs. The effect on sales of existing OTC drugs is referred to as a “primary
effect”. The effect on sales in a related market (Rx) is referred to as a “secondary
effect”. Secondly, we investigate how the entry of a late entrant (Nexium) into the
Rx market affects the sales of existing competitor Rx drugs. Table 2 provides an
overview of the Rx and OTC market entry dates for the nine products in the
gastrointestinal therapeutic category.
Late Entrant OTC Market Entry

We chose to examine the impact of a late entrant (Prilosec OTC) market
entry on incumbent sales for several reasons. First, this Rx-to-OTC switch
captured much attention due to the enhanced efficacy (as well as safety profile)
of this drug compared to other over-the-counter remedies (Anonymous 2003;
Nelson 2003), therefore providing a great benefit to those who suffer from
heartburn and related gastrointestinal ailments. Prilosec OTC is In a class of
drugs known as “proton-pump inhibitors,” or PPI’s. (Prevacid, ACiphex, Protonix,
and Nexium are also PPI drugs). These drugs are generally thought to be more
effective than other OTC drugs such as the “H2 blocker” drugs Tagamet, Zantac,
Pepcid, and Axid as well as antacid remedies. Prilosec OTC was the last drug
product in the category to enter the OTC market. Therefore, we are able to
examine the effect of this late market entry on sales of all other previous Rx-to-

OTC switch products, which include Tagamet, Zantac, Pepcid, and Axid. We can

78

also examine the Impact of this late entrant market entry on sales within a related
market, the Rx market (Prevacid, Aciphex, Protonix, and Nexium).
Late Entrant Rx Market Entry

We additionally examine the effect of the entrance of a late entrant
(AstraZenica’s Nexium) into the Rx market. Like Prilosec OTC, the entry of
Nexium into the market also received much attention, but was not without
controversy (Baxter 2006; King 2004). The launch of Nexium was accompanied
by a substantial marketing campaign (Bazell 2007), and some questioned the
benefit of Nexium over the similar and significantly less expensive OTC product
Prilosec, also manufactured by AstraZenica. Nexium did, however, show some
Improved efficacy over other Rx PPI drugs (Anonymous 2005; Anonymous
2006). Since Nexium is the most recent drug product in our category to enter the
Rx market, our analysis allows us to examine competitive entry effects in this
market.
Competitive Market Entry

The competitive effects of market entry are a vital area of examination in
marketing strategy (Carpenter and Nakamoto 1990; Gatignon et al. 1990;
Mahajan et al. 1993). A number of issues can be investigated, such as the
impact of entry on Incumbent sales, order of entry effects (ie, first mover
advantages, etc.), as well as market expansion effects. Several factors can affect
the success of a product as it enters the market. One such factor is the timing of
the product’s entry into the market. Generally, it is believed that market pioneers

accrue significant benefits compared to later entrants (Kerin et al. 1992;

79

Robinson 1988; Robinson and Fomell 1985; Robinson and Min 2002; Urban et
al. 1986). Sources of advantage include, for example, technology leadership, a
stronger relative marketing mix, direct cost savings compared to competitors, and
consumer information advantages due to product experience (Lieberman and
Montgomery 1988; Robinson and Fornell 1985). Urban et al. (1986) empirically
demonstrate the inverse relationship between order of entry and market share.
The benefits derived from early entrance into a market make it difficult for later
entrants to capture a significant share of the market.

A limited number of recent studies suggest that late entrants into a market
may be able to overcome the disadvantages traditionally associated with late
market entry (Shamsle et al. 2004; Shankar et al. 1998). With the appropriate
strategy, it may be possible for later entrants to effectively compete with market
incumbents. Brands that demonstrate superior attributes or benefits to the
consumer may offer advantages to the consumer not present in competing
brands. Also, substantial marketing efforts may help later entrants effectively
compete with existing firms (Carpenter and Nakamoto 1990; Cho et al. 1998;
Golder and Tellis 1993; Schnaars 1994). Robinson and Fomell (1985) suggest
that advertising can be viewed as a source of consumer information, and may
induce switching for late-entrant brands. Green et al. (1995) suggest that a firm’s
early investments In R&D and marketing expenditures can affect the success of a
product entry. They empirically demonstrate a link between a firm’s relative
investment in advertising during entry and long-term performance. These authors

also show that the perceived value of the product can affect long-term

80

performance. Green and Ryans (1990) also find that the magnitude of marketing
Investment upon entry is positively associated with performance. Additionally,
these authors find that later entry into a market allows firms to develop a product
that Is more suited to consumer needs and therefore Is In a better competitive
position. Bowman and Gatignon (1996) show that later entrants must
demonstrate enhanced product quality and promotional efforts to compete with
incumbents.

Empirical studies have found evidence for late entrant success given
innovative product offerings and considerable promotional efforts. In their study
of two prescription drugs, Bond and Lean (1977) found that later entrants whose
products offered therapeutic novelty were able to achieve substantial sales
volumes with significant promotional expenditures. Shankar et al. (1998) show
that innovative late movers grow faster than the pioneer, slow its diffusion, and
reduce its marketing mix effectiveness. Additionally, they have greater market
potential compared to noninnovative late entrants. Shamsie et al. (2004) find
empirical support for late entrant success provided that they offer high quality,
Innovative products and possess considerable resources. These studies suggest
that, with a competitive marketing investment and product offering, late entrants
into a market may be able to achieve success despite the disadvantages they
encounter.

In the present study, we wish to explore the effects of late entrant
(Prilosec OTC and Nexium) market entry on sales of incumbent drug products.

The relevant literature suggests potentially different outcomes of these product

81

entries in terms of their levels of market success. Both drug products were last to
enter the OTC and Rx markets, respectively, suggesting these drugs faced
greater obstacles compared to their early entrant rivals. However, both products
demonstrated enhanced therapeutic benefits over earlier drugs. In comparison to
prescription drugs, the launch of Prilosec OTC offered easy access to an
effective and safe drug without the requirement of a physician’s prescription. In
addition, Prilosec OTC’s market entry was unique in that many consumers were
familiar with the brand within the Rx market. Both market launches were
supported by significant marketing and promotional investments, as can be seen
in Figures 1 and 2. These figures demonstrate that within the first two years of
the product launches of each drug, the promotional expenditures dedicated to
these drug products were greater compared to competitors. Nexium was
recently ranked as one of the top DTC-advertising-promoted brands (Yuan and
Duckwitz 2002). With the launch of Nexium, AstraZenica had significant
experience and familiarity with the marketplace due to its earlier launch of
Prilosec In 1989, which can enhance market entry success (Green et al. 1995).
Additionally, the launch of Prilosec OTC could have benefited from the brand
familiarly accumulated during the time It competed in the Rx market (Kerin et al.
1996; Sullivan 1991). Given the superior product benefits offered by late entrants
Prilosec and Nexium, as well as significant promotional investments associated
with the market entry of each, we propose the following hypotheses:

HBA: The market entry of a late entrant, previous Rx product (Prilosec

OTC) into the over-the-counter market will have a significant negative
impact on sales of existing competitor OTC drugs.

82

H33: The market entry of a late entrant (Nexium) into the Rx market will
have a significant negative Impact on sales of existing competitor Rx
drugs.

In addition to examining the primary effects of market entry of these two

products, we also examine the secondary effects of Prilosec OTC market entry.

That is, we explore the Impact of Prilosec OTC’s market entry on product sales in

a related market — the Rx market. This provides further insight into the overall

market dynamics upon entry into the OTC market.

l
l
l

l

DTC Advertising ($000)

 

 

DTC Advertising Expenditures During
First Two Years after Prilosec OTC Launch (8/03-7/05)

160000 .4... -
140000 I
120000 I
100000 ..--
80000 I

60000 -0.
40000 I

20000 ‘7

 

      

O 4* " ’ i if 'W"-——’il

Prilosec OTC Zantac OTC Pepcid OTC TagametOTC

Figure 1: DTC Advertising expenditures during
first two years of Prilosec OTC launch

83

DTC Rx and Detailing Promotional Expenditure During
First Two Years of Nexium Launch (02/01 -01I03)

        

; 400000 . 7 -
E 350000 .

.2 300000 . ,
§8250000 .

11‘ 8200000 . . g 7
§3150000 ' 1

E 100000

2 50000 . 7

‘n' 0 . “W

l Prevacid Aciphex Protonix Nexium Prilosec
. [:1 Detailing I DTCRx l ‘
I i v_ .- - 7 l

 

Figure 2: DTC Advertising and Detailing expenditures of
Proton Pump Inhibitor drugs during first two years of Nexium launch

Empirical Analysis
Data

The data comprise observations on nine brands of drugs in the
gastrointestinal drug category. The drug products included in this study are listed
in Table 2. The data was obtained from various secondary sources.
DTC Advertising. Direct-to-consumer advertising data was obtained from TNS
Media. This variable covers monthly advertising expenditures by brand from
1995-2006.
Total number of prescriptions written / Total retail prescription sales. This
variable, obtained from Verispan, covers the number of prescriptions written as

well as total prescription retail sales on a monthly basis from 1991-2006.

84

Over-the-counter sales. OTC sales data was collected for the five drugs In this
category that have switched from Rx-to-OTC: Tagamet, Zantac, Pepcid, Axid,
and Prilosec. Monthly OTC sales data from 1995-2001 was obtained from IMS
Health. OTC sales data for 2002-2006 was obtained from AC Nielsen, and is
categorized in 4-week time Intervals. This data does not represent 100% of all
available US. retail outlets. However, it does represent a significant portion of
total sales (69.8%). The data was therefore adjusted accordingly.
Model

We employ OLS regression to test the hypotheses. Included In the model
are the effects of DTC advertising, which typically is employed in both the Rx and
OTC markets. We also include lagged independent variables to account for
previous efforts impacting current period sales. The following model is used to
examine the effects of DTC advertising on brand sales in the Rx market:

RxSalesit = Bo + B1DTCint + BQDTCRXLM + Sth + ydBt + c,- + uit

where, for brand i, DTCRX denotes direct-to-consumer advertising expenditures
for the Rx drug and RxSaIes denotes Rx retail sales. dM denotes monthly
dummy variables, dB denotes brand dummy variables, 0,- represents unobserved
effects, and u), is the error term.

The following model is used to examine the effects of DTC advertising on
brand sales in the OTC market:

OTCSaIesit = [30 + B1DTCOTCn + BZDTCOTCW + 23th + ydBt + c,- + u“

where, for brand i, DTCOTC denotes direct-to-consumer advertising

expenditures for the OTC drug and OTCSa/es denotes over-the-counter sales.

85

dM denotes monthly dummy variables, dB denotes brand dummy variables, 0,-
represents unobserved effects, and u” Is the error term. To examine market
entry effects, we include an additional dummy variable into the appropriate sales
equation denoting the drug product entry date. For example, in order to examine
the effects of Prilosec OTC market entry, we include a dummy variable that takes
on the value of “0” before OTC market launch (Sep 2003) and “1 ” afterwards.
We account for time-constant unobserved effects In our analysis using a

first differencing transformation (Wooldridge 2002). This transformation
eliminates c,-, the unobserved effects. The following equations denote the
appropriate models applying the first differencing transformation:

ARxSa/esn = [30 + [31ADTCRxn + BzADTCinM + 5er + ydBt + uit

AOTCSGIGS“ = Bo 4" B1ADTCOTCit ‘I' BzADTCOTCi'M + Oth + ‘YdBt + Uit

Results

Examination of Effects of DTC Advertising in Rx vs. OTC markets

We see from Tables 15 and 16 that DTC advertising has a positive and
significant (though small) impact on sales in the OTC market ([3 = 0.520, p <
0.01), while the impact is Insignificant in the Rx market. These results support H7.
This suggests that the physician plays an important intermediary role in drug
choice in the Rx market. DTC advertising seems to have a greater impact when

the consumer Is responsible for the choice of drug, as in the OTC market.

86

Results for Effect of Direct to Consumer Advertising on Sales
in the Over-the-Counter Market

Table 15:

 

 

 

 

 

 

 

Variable I Coefficient I p value
DTCOTC 0.520*** 0.0
DTCOTCH 0.185*** 0.001
R-squared = 0.171; coefficients are unstandardized
*** Significant at 1% level
Table 16:
Results for Effect of Direct to Consumer Advertising on Sales
in the Rx Market
Variable I Coefficient I p value
DTCRX 0.143 0.210
DTCRXM -0.035 0.759

 

 

 

R-squared = 0.489; coefficients are unstandardized

Examination of Effects of Late Entrant (Prilosec OTC) Market Entry on Rx
and OTC sales

HypothesisgA examines the Impact of the OTC market entry of a late
entrant, previous Rx product (Prilosec OTC) on sales of other competitor OTC
drugs. Prilosec OTC was a late entrant into the OTC gastrointestinal drug
category. The market launch of this drug involved significant marketing efforts.
Additionally, Prilosec OTC is considered to be therapeutically superior compared
to other OTC drugs (Anonymous 2003; Nelson 2003). Therefore it Is of interest to
examine this late entrant’s primary effects: that is, its impact on existing OTC
drug sales. Surprisingly, the market entry of this late entrant did not have a
significant impact on sales of competitor OTC drugs.2 (See Table 17). Therefore,

H8). is not supported.

 

2 A test of Granger causality was performed to ascertain the endogeneity of this event. A
lack of such bias was obtained.

87

We also examined the secondary effects of Prilosec OTC market entry on
sales of existing Rx drugs: Prevacid, Aciphex, Protonix, and Nexium. Although
each of these drugs is within the same class (PPI’s), a benefit of Prilosec OTC is
that it offered consumers a simple-to-obtain alternative to existing Rx drugs, for
which a prescription is necessary. Interestingly, we do observe a negative impact
of Prilosec OTC market entry on sales of existing Rx drugs (8 = -2544.7, p<0.01).
This indicates that this late entrant market entry had a negative impact on sales
in a related market — the Rx market. Specifically, the market entry of Prilosec
OTC reduced sales of the existing Rx drugs by approximately $2,544,700 (per
month). The results are presented In Table 18.

We further investigated the impact of Prilosec OTC market entry on
Nexium sales only. Nexium Is the 2nd generation follow-up drug to Prilosec. Both
drugs are manufactured by the same firm, AstraZenica. These results are
presented in Table 19. We do not observe a significant impact of Prilosec OTC
market entry on Nexium sales. Therefore, this suggests that cannibalization did
not occur in this case. The market entry of Prilosec OTC shifted sales away from
competitor Rx drugs, but not own-firm Rx sales.

Table 17: Results for Effect of Prilosec OTC
Launch on Competitor OTC Sales

 

 

Variable I Coefficient I p value
DTCOTC 0.492*** 0.0
DTCOTCM 0.101* 0.088

Prilosec OTC launch
dummy variable 83'15 0'699

R-squared = 0.137; coefficients are unstandardized

*** Significant at 1% level

* Significant at 10% level

 

 

 

88

Table 18: Results for Effect of Prilosec OTC
Launch on Rx Sales

 

 

Variable I Coefficient I p value
DTCRX 0.130 0.250
DTCRXM -0.049 0.664

Prilosec OTC launch ***
dummy variable '2544'7 0-002

R-squared = 0.503; coefficients are unstandardized
*** Significant at 1% level

 

 

 

Table 19: Results for Effect of Prilosec OTC
Launch on Rx Nexium Sales

 

 

Variable I Coefficient I p value
DTCRX 0536*“r 0.009
DTCRXM -0.031 0.877

Prilosec OTCIaunch -3600.1 0.106
dummy variable

R-squared = 0.644; coefficients are unstandardized

*** Significant at 1% level

 

 

 

Interestingly, we find that Prilosec OTC market entry only impacted sales
of competitor Rx drugs, but not competitor OTC drugs. This result is consistent
with literature that states that Prilosec OTC did not erode sales of traditional
antacids and histamine H2 receptor antagonists (Tagamet, Zantac, Axid, and
Pepcid). Prilosec OTC did, however, become the market leader in the OTC
market. The market entry of this product enlarged the size of the OTC market by
attracting previous Rx users to the OTC market (Mahecha 2006). (Figure 3
compares OTC sales of Prilosec to competitor products.) Prilosec OTC, although
it was a late entrant into the market, was able to become the market leader,
capturing approximately 50% market share shortly after entry. This was primarily
via market expansion effects as well as by shifting sales from a related market —

the Rx market. Also noteworthy is the observation that consumers did not switch

89

 

from existing OTC drugs to Prilosec OTC, even though Prilosec OTC is believed
to be superior to these drugs (Anonymous 2003; Nelson 2003). This finding
provides insight into consumer choice behavior. These results suggest that if
consumers are satisfied with their existing medications, they may be unlikely to

switch to a new drug with improved attributes.

I OTC Sales of Gastrointestinal Drugs

Sales ($000)

 

 

o“ ,
83$”88388888 88 i
’ 858888888888888
I L _) LL W LL 1 LL 7 LL 7

PPE’PC|D(OTC) ’ —a—ZANTAC(OTC)

. ___TAGAMET (OTC) .5. PRILOSEC (OTC)
l . . AX|D(OTC)

WTFigure 3: Overgthe-cOunter sales of gastrointestinal drugs.

We also observe that Prilosec OTC launch did not affect sales of Nexium,
the second generation follow up drug to Prilosec. In other words, cannibalization
of AstraZenica’s Rx drug, Nexium, did not occur in this case. This may be partly
attributed to the sizeable marketing efforts by AstraZenica in promoting Nexium

(Bazell 2007). We also make note that in the case of Nexium (see Table 19 for

90

results), the DTC advertising variable is significant ([3 = 0.536, p<0.01). We do
not observe significant effects for DTC advertising across all Rx drugs. We do,
however, find that DTC advertising did have a positive and significant impact on
Nexium sales.
Examination of Effects of Late Entrant (Nexium) Market Entry on Rx sales
Hypothesisga examines the impact of a late entrant (Nexium) market entry
on sales of existing competitor Rx drugs (Prevacid, Aciphex, and Protonix). This
late entrant product was promoted as being superior to the other PPI drugs in the
market. Additionally, its launch was accompanied by substantial promotional
efforts. The results indicate that the market entry of Nexium had a significant

negative effect on sales of other PPI Rx drugs ([3 = -2734.5, p<0.01), supporting

H83. The results are presented in Table 20. Sales of competitor Rx drugs
decreased by $2,734,500 per month when Nexium entered the Rx market.

We observe that, in the Rx market case, physicians were willing to switch
patients from existing Rx drugs to an improved drug, Nexium. This suggests that,
compared to consumers, physicians may be more willing to consider drug
product attributes when making prescribing choices. We also find that, when
accompanied by substantial marketing efforts, an innovative late entrant into the
Rx market is able to strongly compete with incumbents and become the market
leader (see Figure 4 for PPI Rx drug sales). Within a few years of its entry into

the Rx market, Nexium became the market leader capturing slightly over one-

third market share.

91

Sales of PPI Gastrointestinal Drugs

 

, 400000

l 350000

is 300000 ,

lg 250000 -

l‘fi 200000 -

lg 150000 .

’w 100000 f

l 50000 , ‘ v, ‘

“ 0 \““'H #5283" 7‘ . I" Alma

l

l 5.8855385388588588 1

l EEfiEEEfiEEEEEfiEE%{

_) 3 fl 3 W '1 '1 5 -) ‘5 ’3 fl "‘3 1 5 _J

_+_ Nexium .fifi Prevacrd ‘

‘ _~ Aciphex o Prilosec l ,
“X. Protonix l ‘
— e

L ..

Figure 4: Sales of Proton Pump Inhibitor Rx Gastrointestinal Drugs

Table 20: Results for Effect of Nexium market entrance
on competitor Rx sales

 

 

Variable [ Coefficient [ p value
DTCRX —O.172 0.320
DTCRXM -0.230 0.183

Nexium launch dummy -2734,5*** 0004
variable

R-squared = 0.490; coefficients are unstandardized
*** Significant at 1% level

 

 

 

Contribution of Promotional Efforts to Sales
We contend that both late entrant (Prilosec OTC and Nexium) market

entries were accompanied by substantial marketing efforts (Bazell 2007; Neff

92

2003). Figures 1 and 2 illustrate that their promotional efforts were greater than
those of competitors during the products launches. We wish to further explore the
impact of these marketing efforts on brand sales to further verify that these
promotional efforts contributed to the performance of each product in their
respective markets. We can observe from a previous analysis (Table 19) that
DTC advertising efforts have a significant and positive impact on Nexium sales.
Additionally, we investigate the impact of DTC advertising efforts on Prilosec
OTC sales with only the Prilosec OTC brand. The results are presented in Table
21. We do indeed observe a positive and significant impact of DTC advertising
on Prilosec OTC sales ([3 = 0.747, p< 0.01). Taken together, these results
suggest that DTC advertising did positively impact sales of Prilosec OTC and
Nexium. These marketing efforts likely contributed to the success of these late

market entrants.

Table 21: Results for Effect of DTCOTC Advertising on Prilosec OTC sales

 

 

 

Variable ] Coefficient I p value
DTCOTC 0.747*** 0.0
DTCOTCH 0699*“ 0.001

 

 

R-squared = 0.632; coefficients are unstandardized
*** Significant at 1% level

Discussion

Although much of the marketing strategy literature suggests that market
pioneers accrue significant advantages compared to market followers, additional
research has shown that, in specific contexts, followers can overcome obstacles
to effectively compete with market pioneers. Our study supports the notion that,

with significant promotional investments and innovative product offerings, late

93

market entrants can achieve marketplace success. In our investigation, both
products were able to become market leaders, even though each was last to
enter its respective market.

We find that when Prilosec OTC entered the over-the-counter market, its
entry had a market expansion effect resulting from previous Prilosec Rx users
switching to Prilosec OTC. Prilosec OTC proceeded to gain approximately 50%
of the market share within the OTC gastrointestinal drug category. Prilosec OTC
did not significantly impact sales of other OTC drugs, but rather captured sales
from previous Rx users. Its switch from the Rx market to the OTC market,
however, did have a secondary effect in the Rx market. Prilosec OTC’s market
entry negatively impacted sales of existing competitor Rx drugs. Sales of Prilosec
OTC’s 2nd generation follow-up drug product, Nexium, were not significantly
impacted. Prilosec OTC did indeed have a market stealing effect with respect to
the Rx gastrointestinal market. Although Prilosec OTC was a late entrant, the
substantial promotional efforts surrounding its launch allowed the drug to become
a leader in the OTC market as well as capture sales from existing competitor Rx
drugs. Additionally, noting that previous Prilosec Rx users switched to Prilosec
OTC, it is likely that Prilosec OTC’s success was partially attributed to familiarity
with the brand name.

We also observe that Nexium, a late entrant into the Rx gastrointestinal
market, was able secure its position as a market leader. We attribute this to
successfully conveying the benefits the drug offered compared to competitors as

well as a substantial marketing campaign accompanying it’s launch. It is noted

94

that DTC advertising is positive and significant for Nexium (B = 0.536, p<0.01),
yet when examined across all brands, DTC advertising does not appear to have
a significant effect in the Rx market. This suggests that for Nexium, DTC
advertising did have a positive impact on sales.

It is interesting to note that users of existing OTC drugs did not switch to
Prilosec OTC, even though it was thought to be more effective compared to
competitor OTC drugs (Anonymous 2003; Nelson 2003). (Prilosec is the only
PPI available over-the-counter. These drugs are believed to be more effective !
than the competitor H2 receptor antagonists as well as OTC antacids). This is

particularly noteworthy since marketing efforts were targeted towards OTC

 

antacids users more so than prescription switchers (Neff 2003). Yet we observe
an opposite effect of its OTC market entry — previous Rx Prilosec users, rather
than existing OTC drug users, contributed to its success in the OTC market upon
launch.

This finding highlights an interesting observation regarding how
consumers behave - consumers in the OTC market (where the physician is
absent) are unlikely to switch to a new medication when their existing mode of
treatment is satisfactory. However, in the Rx case, physicians are willing to
switch patients when a more effective drug treatment is available, as was the
case with late entrant Nexium. This suggests that perhaps consumers and
physicians behave differently when making product choices. Additionally, we
offer another explanation for this finding. As previously noted, the literature

suggests that the ability to influence consumer preferences can help firms

95

compete with other players in the market (Carpenter and Nakamoto 1989; Kerin
et al. 1992). Perhaps DTC advertising (the primary promotional effort in the OTC
market) is ineffective in changing consumer preferences. However, detailing (the
primary promotional effort in the Rx market) may be effective in its ability to
change physician preferences. Perhaps pharmaceutical representatives were
able to convince physicians that Nexium is superior to other Rx competitor drugs.
This is reasonable, since DTC advertising is a form of mass advertising whereas
detailing is a more personal, targeted, one-on-one form of communication. In
comparison to DTC advertising, one might expect detailing efforts may be more
effective in shaping and forming physician preferences.

An additional explanation may provide insight into why consumers did not
switch brands in the OTC market, whereas in the Rx market sales of existing Rx
brands were negatively impacted by the entrance of Nexium. Price may have
played a role in consumers’ decision-making in the OTC market, whereas in the
Rx market this variable was of less importance. Previous studies suggest that
physicians are characterized by limited price sensitivity (Gonul et al. 2001). To
explore this possibility, we added price as a variable to our sales models, looking
at only (i) Prilosec sales in the OTC market, and (ii) Nexium sales in the Rx
market. (Prilosec OTC was priced higher than it’s OTC competitors). We find that
price is negative and significant for Prilosec OTC (B = -1141.2, p<0.01).
Additionally, we find price to be insignificant for Nexium in the Rx market. This
suggests that price does play a role in consumer choice in the OTC market, yet

does not appear to factor into physician choice behavior in the Rx market. The

96

 

latter finding is likely due to the fact that insurance companies typically cover the
majority of Rx drug costs.
Managerial Implications
Implications for Pharmaceutical Managers

These findings have significant implications for pharmaceutical marketing
managers. Managers must be aware of the challenges they face when marketing
to consumers vs. physicians. Our results indicate that consumers may be
reluctant to switch to alternative medications when they are satisfied with their
existing treatment, even if superior alternatives are available. Also perhaps DTC
advertising is not entirely effective in influencing consumer preferences. Lastly,
consumers in the OTC market may be fairly price sensitive.

When marketing to physicians, however, it is important to emphasize the
superiority of their product over competitors. Physicians are concerned with
providing the best treatment available to their patients. Our study underscores
the importance of detailing efforts in the Rx market. Because of the personal,
one-on-one nature of this type of promotional effort, detailing may be more
effective compared to DTC advertising. Both the Rx and OTC markets require
thoughtful examination in pursuit of achieving the optimal marketing mix strategy.
General Implications

In a general context, marketing managers must develop a suitable
strategy when facing a late product market entry. Considerable marketing efforts
may be required to effectively compete with market incumbents. Additionally,

managers must identify the most effective mechanism in convincing consumers

97

of the benefits of their product over competitors. Different types of promotional
efforts may vary in their levels of effectiveness. Late market entrants often face
substantial hurdles, which may be overcome with the appropriate marketing
strategy.
Conclusion

In the present study we examine the impact of late entrant market entry on
sales of incumbent firms’ competitor products. A unique context is chosen for this
inquiry - the pharmaceutical industry. Specifically, we examine late market entry
effects in two key market settings - the Rx and OTC markets. The idiosyncratic
nature of these two distinct markets allows us to explore the contributing factors
to marketplace success in each market. This study has a number of important
implications that can be applied to other industries in addition to the
pharmaceutical industry:

1. We observe that late entrants, in spite of the disadvantages they face
given their late entry into the market, can indeed become market leaders.
Innovative, superior product offerings as well as substantial marketing
efforts likely contribute to this success. Another potential contributing
factor is the product’s name brand association.

2. Late entrant market entry can have primary effects (impact on sales of
incumbent brands within the market it enters) separate from secondary
effects (impact on sales of brands in a related market).

3. A late entrant can impact marketplace dynamics in various ways.

Consistent with Mahajan et al (1993), we show that a new entrant into a

98

 

market can draw buyers away from incumbent brands and/or attract new

consumers to the market, resulting in market expansion. Either or both

strategies may be useful in aiding late entrants to effectively compete with
incumbent firms.

With respect to the pharmaceutical industry, this study suggests that
switching a drug from Rx-to-OTC upon patent expiration may be a worthwhile
strategy to pursue. In the case of Prilosec, its switch to OTC was successful, as it
was able to become the market leader in the OTC market by switching previous
Rx users as well as by drawing sales away from existing competitor Rx brands.
This allowed its manufacturer, AstraZenica, to continue to generate sales from
this drug product, despite generic competition. The brand equity associated with
the branded drug is likely a contributing factor to the success of the Rx-to-OTC
switch strategy. In her historical comparison of Rx-to-OTC switches, author Laura
A. Mahecha states “One wonders why some brands with the same active
ingredients and indications, and similar market entry dates, can have such
diverse outcomes and levels of success. In most cases, the answer lies in the
marketing and branding strategies, and how they differed” (Mahecha 2006, p.
382)

The results of this study also suggest that DTC advertising has a greater
impact on sales in the OTC market in comparison to the Rx market. In the OTC
market, consumers are responsible for the choice of drug, whereas in the Rx

market, physicians make the drug choice. Pharmaceutical firms should place a

99

greater emphasis on DTC advertising for OTC drugs compared to Rx drug
products.

Our findings also suggest differential choice characteristics between
physicians and consumers. In the Rx market, physicians may be more sensitive
to product attributes compared to consumers in the OTC market. Or perhaps,
detailing (in the Rx market) is more effective than DTC advertising (in the OTC
market) in forming physician preferences, inducing physician switching behavior.
This has a number of important implications for pharmaceutical managers in
terms of leveraging the entire marketing mix variables with respect to both the Rx

and OTC markets.

100

CONCLUSION

The uniqueness of the pharmaceutical industry provides ample
opportunity to study a number of important and interesting marketing
phenomena. The present study reveals a number of important insights as to the
role of various promotional efforts in the pharmaceutical industry as well as
market entry effects.

Existing research offers little assistance for pharmaceutical marketing
executives as to how to optimally allocate limited resources. The results of this
research provide such guidance. Rust et al claim (2004) that “(1) marketing
managers need to optimize investment-level decisions and the allocation of
resources across submarkets or customer segments to maximize profitability and
that (2) interaction between different marketing-mix instruments could lead to
differential allocation of resources across marketing channels” (p.84-85). The
importance of this knowledge is further demonstrated by the following quotes
from industry insiders:

. “Marketing teams are faced with high growth expectations despite flat
budgets, and must demonstrate the value of every dollar spent”
(Gascoigne 2006, p. 82).

. “Faced with the industry’s increasing reliance on DTC to drive preference
for the growing number of parity products, consumer marketers’ biggest
challenge — and opportunity — comes in leveraging the benefit of the whole

marketing mix” (Breitstein 2004a, p.46).

. “Top of mind are how marketers can find better ways to target patients
and improve the ROI of pharma’s DTC spend (Breitstein 2002, p.119)

101

 

. “Both DTC advertising and professional promotions are here to stay, and
companies must learn to successfully coordinate physician and patient
messages” (Berman and Duboff 2003, p.84)

Essays 1 and 2 compare the various promotional efforts used in the
pharmaceutical industry (Direct-to-Consumer advertising, as well as detailing and
journal advertising, directed toward physicians). The results of these two studies
highlight the positive impact of detailing on both brand as well as therapeutic
category sales. We also find evidence for a greater return on investment from
detailing (particularly during the maturity stage of the brand life cycle) compared
to DTC advertising and journal advertising. Furthermore, results from both
essays suggest that the positive impact of detailing continues to remain
throughout the life cycle of the product.

Overall, there is scant evidence that DTC advertising significantly impacts
sales in the Rx market. However, the relationship between DTC advertising and
sales is rather complex. It appears that competitive intensity within a category is
an important contingency variable when examining this relationship. The results
suggest that as the number of competitors within a category increases, the
impact is hindered. We can conclude that detailing seems to be a more valuable
and worthwhile promotional mechanism compared to DTC advertising in the Rx
market. However, in the OTC market, we do find evidence for a positive impact of
DTC advertising. Therefore, this type of advertising should be used to a greater

extent for OTC products compared to Rx products, particularly in highly

competitive therapeutic categories.

102

The results from Essay 3 suggest that late entrants into a market can be
successful (achieving market leadership) despite the challenges they face as late
entrants. This can be accomplished with substantial marketing efforts as well as
therapeutically superior products. We find that late entrants into both the OTC
and Rx markets have a market-stealing effect on sales of competitor Rx drugs.
Our results also suggest differential choice behaviors for consumers and
physicians. It may be more difficult to induce consumers to switch products in the
OTC market, compared to persuading physicians to switch in the Rx market.
Lastly, we find that the Rx-to-OTC switch appears to be a profitable and
worthwhile brand life cycle management strategy. Because pharmaceutical drug
products have a limited patent life, pharmaceutical companies are continually
attempting to extend sales beyond the patent life of the drug product. The Rx-to-
OTC may be one such viable strategy.

Future studies examining different therapeutic categories are required to
investigate category-specific contingency effects. For example, it is likely that
DTC advertising is more effective for some therapeutic categories. Additionally, it
would be "of interest to examine the impact of different advertising media types
(print, television, and radio) on sales. Lastly, examining the ROI of detailing, DTC
advertising, and journal advertising over the brand life cycle for additional
therapeutic categories would provide further insight into the variation on returns

of these promotional efforts over the life cycle.

103

REFERENCES

Alpert, Frank H. and Michael A. Kamins (1995), "An Empirical Investigation of
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