NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Keith M. Drake, Martha A. Starr, Thomas McGuire

NBER Working Paper No. 20292
Issued in July 2014
NBER Program(s):   HC   LE

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.

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Document Object Identifier (DOI): 10.3386/w20292

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