The French healthcare system is considered one of the best in the world. But quality health care does not come cheap. Faced with soaring costs and an aging population, the French health authority is actively targeting areas for cost reductions. Among the low-hanging fruit are branded pharmaceuticals, which are significantly more expensive than generic drugs, their therapeutic equivalents.
In 1996, the French health management governing body (CNAM) specifically targeted SmithKline Beechams (SB) Clamoxyl, the original amoxicillin antibiotic and one of SBs jewel drugs. In an unusually aggressive move, it sent a letter sent to every doctor in France, arguing that prescribing a generic instead of Clamoxyl would save the health care system up to 26.5 million, more than any other drug. In the three months following the CNAM letter, Clamoxyl sales dropped by 29%. How should SB respond in the face of this direct attack?
According to Pierre Chandon, Assistant Professor of Marketing and Sarah Spargo, Research Associate, both from INSEAD; Jacques Lendrevie, Professor of Marketing and Marc Vanhuele, Associate Professor of Marketing, both from HEC; and Olivier Kovarski, Professor of Marketing at ESC Normandie, SBs marketing director weighed four specific responses:<UL>
<LI>Change nothing and hope Clamoxyls brand equity would be strong enough to protect it from generic competitors
<LI>Milk Clamoxyl and invest all SBs support in Augmentin, a more specialized and still patent-protected amoxicillin that was prescribed for specific therapeutic conditions and in cases of resistance to regular amoxicillin
<LI>Reduce the price of Clamoxyl
<LI>Strengthen Clamoxyls brand equity among doctors
Each response had its own set of advantages and disadvantages, and mitigating factors. One major category of concern is marketing regulations. Virtually every aspect of the marketing process from new product introduction to pricing, promotion and distribution is managed under strict government guidelines. For example, CNAM sets both drug prices and the level of reimbursement for prescription drugs, resulting in prices that are on average 20% cheaper than in countries where pricing is unrestricted (such as the UK, Germany, the US, and the Netherlands). In addition, direct-to-consumer promotion (which is common practice in the US) is illegal in France. Therefore advertising is limited to the specialized professional press and through direct mail to doctors, with the bulk of the promotional expenditures going toward drug reps, medically trained sales people who visit doctors to explain the advantages of a drug.
Another important aspect, however, is the decision-making process of doctors. The Case Study explores in detail how doctors decide which drug to prescribe. In particular, it examines how the relationship between the doctor, the brand, and the drug rep may influence this process and how this would influence how doctors respond to the CNAM letter.
In the end, SB responded to this crisis with a very bold and ultimately successful strategy: It continued to invest in the brand. But is this a portable strategy? Can it be used again in 2002 when Augmentin loses its patent protection in France? In the B case, the authors examine whether the regulatory and market changes that took place between 1996 and 2002 turn the Augmentin case into a whole new game and ask what GlaxoSmithKline (the product of the merger between Glaxo and Smithkline Beeacham) should do now.
This Case Study has been successfully taught in MBA courses on brand management. It can also be used in sessions on branding, private labels, or price competition in general marketing management courses, or in pricing sessions in courses on business strategy or industry analysis.