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Do "Reverse Payment" Settlements Constitute an Anticompetitive Pay-for-Delay?

Listed author(s):
  • Keith M. Drake
  • Martha A. Starr
  • Thomas G. McGuire

Brand and generic drug manufacturers frequently settle patent litigation on terms that include a payment to the generic manufacturer. The Federal Trade Commission contends that these agreements extend the brand's market exclusivity and amount to anticompetitive market division. Involved parties defend the settlements as normal business agreements that reduce business risk. The anticompetitive hypothesis implies brand stock prices should rise with settlement announcements. We classify 68 brand-generic settlements into those with and without indication of a "reverse payment," and conduct an event study of the settlement announcement's influence on the brand's stock price. For settlements with 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. 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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Article provided by Taylor & Francis Journals in its journal International Journal of the Economics of Business.

Volume (Year): 22 (2015)
Issue (Month): 2 (July)
Pages: 173-200

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Handle: RePEc:taf:ijecbs:v:22:y:2015:i:2:p:173-200
DOI: 10.1080/13571516.2015.1045744
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