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

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  • Keith M. Drake
  • Martha A. Starr
  • Thomas G. McGuire

Abstract

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.

Suggested Citation

  • Keith M. Drake & Martha A. Starr & Thomas G. McGuire, 2015. "Do "Reverse Payment" Settlements Constitute an Anticompetitive Pay-for-Delay?," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 22(2), pages 173-200, July.
  • Handle: RePEc:taf:ijecbs:v:22:y:2015:i:2:p:173-200
    DOI: 10.1080/13571516.2015.1045744
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    References listed on IDEAS

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    1. Ernst Berndt & Murray Aitken, 2011. "Brand Loyalty, Generic Entry and Price Competition in Pharmaceuticals in the Quarter Century after the 1984 Waxman-Hatch Legislation," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 18(2), pages 177-201.
    2. Shapiro, Carl, 2003. "Antitrust Limits to Patent Settlements," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 391-411, Summer.
    3. Ellison, Sara Fisher & Mullin, Wallace P, 2001. "Gradual Incorporation of Information: Pharmaceutical Stocks and the Evolution of President Clinton's Health Care Reform," Journal of Law and Economics, University of Chicago Press, vol. 44(1), pages 89-129, April.
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    5. Panattoni, Laura E., 2011. "The effect of Paragraph IV decisions and generic entry before patent expiration on brand pharmaceutical firms," Journal of Health Economics, Elsevier, vol. 30(1), pages 126-145, January.
    6. Karan Girotra & Christian Terwiesch & Karl T. Ulrich, 2007. "Valuing R& D Projects in a Portfolio: Evidence from the Pharmaceutical Industry," Management Science, INFORMS, vol. 53(9), pages 1452-1466, September.
    7. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
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    Cited by:

    1. Henry Grabowski & Carlos Brain & Anna Taub & Rahul Guha, 2017. "Pharmaceutical Patent Challenges: Company Strategies and Litigation Outcomes," American Journal of Health Economics, MIT Press, vol. 3(1), pages 33-59, Winter.

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