Zantac – protected and profitable

Here we examine how Glaxo (now Glaxo-SmithKline) found itself in a sustainably profitable situation with its drug Zantac.

One in ten adults develops a stomach ulcer at some time in their lives, a sizeable target market with clearly defined pain in need of relief. In the late 1970s, the leading anti-ulcer medication was SmithKline Beecham’s Tagamet, but researchers at Glaxo, the British pharmaceutical firm, had developed a new but chemically different drug in the same class as Tagamet. Both drugs reduced the secretion of stomach acid, thereby allowing the ulcer to heal.

With a huge market in its sights, Glaxo wanted to be sure it offered doctors and their patients a clear advantage over Tagamet. The drug that Glaxo developed and patented was Zantac, introduced in Europe in 1981 and in the USA in 1983. Glaxo’s pitch to prescribing physicians was that Zantac was new, had fewer side effects, and was more convenient to take – twice each day, rather than four times a day – than Tagamet.

Glaxo shareholders wanted to know that these advantages could be sustained for long enough to reap sufficient rewards for the R&D investments already incurred. The answer was patent protection.

Winning a patent

Glaxo won a 17-year US patent in 1978 and secured Food and Drug Administration (FDA) approval to market Zantac in 1983. With patent in hand, Glaxo decided to price the new drug at a 20 per cent premium to Tagamet.

So, how did Zantac fare?

• Just three years after it received FDA approval, Glaxo’s sales of Zantac reached $1 billion, making it the largest selling prescription drug in the world.
• By 1989, Zantac had far surpassed Tagamet, winning 53 percent of the market for prescription ulcer remedies compared with Tagamet’s 29 percent.
• In 1994, Zantac generated $3.6 billion in sales, $2.1 billion of that in the USA.
• By 1995, 240 million people worldwide had Zantac prescriptions.

By then, however, Zantac’s patent was about to expire, and generic manufacturers would be ready with copycat drugs at far lower prices. But Glaxo wasn’t finished with Zantac just yet.

Glaxo had prepared itself for the day when Zantac no longer had proprietary protection from generic imitations. To improve its chances of discovering another winning drug, the company had increased its number of research scientists from 2000 in 1986 to 5000 in 1989, funded in part from the profits Zantac generated during the life of its patent.

But betting on new drugs wasn’t all that Glaxo did. Any product that delivers genuine value to 240 million customers and enjoys 12 years without competition is going to develop a very powerful brand. But even a powerful brand won’t be enough to protect you when chemically identical products become available at a fraction of the price – especially when the purchasing decision for prescription drugs is taken not by the consumer but by increasingly priceconscious insurance companies and governments. So, in 1996, as Zantac’s patent expired, Glaxo won FDA approval to market a milder version of the drug called Zantac 75, available over the counter without prescription. Ulcer sufferers could now purchase a milder version of the drug themselves. Even if an identical generic product became available for a lower price, many consumers were probably less likely to trust an unbranded generic over the powerful and trusted brand of Zantac.

The Zantac case history offers a specific example of why the pharmaceutical industry is so attractive and shows that the music need not stop when the patent expires. Zantac’s outcomes – resulting from a superior product that enjoyed 12 years of patent protection and was difficult to imitate – were good for Glaxo employees, good for Glaxo shareholders, and good for patients, who benefited not only from Zantac’s ulcer relief but also from subsequent products that the drug’s success made possible. Zantac’s sustainable advantage is a straightforward story, one that’s been repeated frequently in the pharmaceutical industry.

Lessons learned from Zantac

Companies with strong proprietary patent protection enjoy a comparatively benign competitive environment and relative freedom to set prices at levels that generate substantial profits, profits that may be reinvested in developing future winners, or simply taken to the bank. Zantac enjoyed 12 generic-free years on the market (the other five were spent getting FDA approval). By 1995, Zantac had been prescribed to 240 million people worldwide and had reaped over $3.6 billion in sales. If you’ve got a superior product with patent protection that’s not easily circumvented, it’s a licence to print money.

But entrepreneurs must consider not only whether their product or idea can win patent protection. It’s also crucial to know whether that protection will be sufficient to ward off rivals. Doing so typically takes a deep understanding of the technology involved as well as in-depth understanding of how one’s industry works.