Working Paper: NBER ID: w31018
Authors: Keith M. Drake; Thomas McGuire
Abstract: In agreements settling patent challenges in the drug industry, the plaintiff brand commonly licenses the defendant generic to sell prior to patent expiry. Some agreements require the generic to pay the brand royalties. Despite the superficial flow of profits, royalty terms may function as part of an anticompetitive “reverse payment” made to the generic in exchange for delayed entry. Typically, the brand launches its own authorized generic (AG) during the first-to-file generic’s 180-day exclusivity period so there are two initial generic competitors. A royalty structure that deters the brand’s AG launch reduces the number of entrants to one, conveying net value to the generic and potentially inducing it to delay its entry. Our simple model shows that royalties usually have no place in a brand-generic agreement between rational actors. However, when royalties are conditioned on the brand’s AG launch, a range of royalty rates exists that both conveys net value to the generic and deters the brand from rationally introducing an AG. Declining royalty terms in a brand’s settlement with a first-to-file generic thus raise a red flag that the agreement is a pay-for-delay. Although the numbers are small, empirical analysis based on publicly available materials corroborates this conclusion.
Keywords: No keywords provided
JEL Codes: D22; D43; K21; L41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| royalty terms (D33) | delay in generic market entry (D45) |
| royalty structure deters AG launch (L49) | reduced number of generic entrants (L19) |
| declining royalty rates (D45) | reduced AG competition (L49) |
| royalty terms conditioned on AG launch (L24) | potential pay-for-delay agreements (L49) |
| royalty rates (L72) | deterring AG launch and increasing profits for generics (L49) |