Working Paper: NBER ID: w22194
Authors: Eric Helland; Seth A. Seabury
Abstract: The use of “pay-for-delay” settlements in patent litigation – in which a branded manufacturer and generic entrant settle a Paragraph IV patent challenge and agree to forestall entry – has come under considerable scrutiny in recent years. Critics argue that these settlements are collusive and lower consumer welfare by maintaining monopoly prices after patents should have expired, while proponents argue they reinforce incentives for innovation. We estimate the impact of settlements to Paragraph IV challenges on generic entry and evaluate the implications for drug prices and quantity. To address the potential endogeneity of Paragraph IV challenges and settlements we estimate the model using instrumental variables. Our instruments include standard measures of patent strength and a measure of settlement legality based on a split between several Circuit Courts of Appeal. We find that Paragraph IV challenges increase generic entry, lower drug prices and increase quantity, while settlements effectively reverse the effect. These effects persist over time, inflating price and depressing quantity for up to 5 years after the challenge. We also find that eliminating settlements would result in a relatively small reduction in research and development (R&D) expenditures.
Keywords: patent litigation; generic entry; settlements; consumer welfare; pharmaceuticals
JEL Codes: I1; K0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| paragraph IV challenges (L49) | generic entry (Z00) |
| settlements (D47) | generic entry (Z00) |
| settlements (D47) | prices (P22) |
| settlements (D47) | quantities (C39) |
| eliminating settlements (D74) | R&D expenditures (O32) |
| settling paragraph IV challenges (Y20) | consumer surplus (D46) |
| settling paragraph IV challenges (Y20) | deadweight loss (H21) |