Working Paper: NBER ID: w20292
Authors: Keith M. Drake; Martha A. Starr; Thomas McGuire
Abstract: Brand and generic drug manufacturers frequently settle patent litigation on terms that include a payment to the generic manufacturer along with a specified date at which the generic would enter the market. The Federal Trade Commission contends that these agreements extend the brand's market exclusivity and amount to anticompetitive divisions of the market. The parties involved defend the settlements as normal business agreements that reduce business risk associated with litigation. The anticompetitive hypothesis implies brand stock prices should rise with announcement of the settlement. We classify 68 brand-generic settlements from 1993 to the present into those with and without an indication of a "reverse payment" from the brand to the generic, and conduct an event study of the announcement of the patent settlements on the stock price of the brand. For settlements with an indication of a reverse payment, brand stock prices rise on average 6% at the announcement. A "control group" of brand-generic settlements without indication of a reverse payment had no significant effect on the brands' stock prices. Our results support the hypothesis that settlements with a reverse payment increase the expected profits of the brand manufacturer and are anticompetitive.
Keywords: reverse payment settlements; brand-generic patent disputes; anticompetitive behavior; pharmaceutical industry; event study
JEL Codes: I11; L41; L65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| reverse payment settlements (L42) | increase in brand stock prices (M37) |
| reverse payment settlements (L42) | extend brand's monopoly period (D42) |
| extend brand's monopoly period (D42) | increase in brand stock prices (M37) |
| settlements without reverse payments (D47) | no significant price effect (D41) |
| reverse payment settlements (L42) | harm consumers (D18) |