Do "Reverse Payment" Settlements of Brand-Generic Patent Disputes in the Pharmaceutical Industry Constitute an Anticompetitive Pay for Delay?

45 Pages Posted: 24 Jul 2014 Last revised: 14 Apr 2021

See all articles by Keith Drake

Keith Drake

Greylock McKinnon Associates

Martha Starr

American University - Department of Economics

Thomas G. McGuire

Harvard University - Department of Health Care Policy

Date Written: July 2014

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.

Suggested Citation

Drake, Keith and Starr, Martha and McGuire, Thomas G., Do "Reverse Payment" Settlements of Brand-Generic Patent Disputes in the Pharmaceutical Industry Constitute an Anticompetitive Pay for Delay? (July 2014). NBER Working Paper No. w20292, Available at SSRN: https://ssrn.com/abstract=2471185

Keith Drake (Contact Author)

Greylock McKinnon Associates ( email )

75 Park Plaza
4th Floor
Boston, MA 02116
United States

Martha Starr

American University - Department of Economics ( email )

4400 Massachusetts Avenue, N.W.
Washington, DC 20016-8029
United States
202-885-3747 (Phone)

Thomas G. McGuire

Harvard University - Department of Health Care Policy ( email )

180 Longwood Ave
Boston, MA 02115
United States

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