Using Stock Price Movements to Estimate the Harm from Collusive Drug Patent Litigation Settlements

The tradeoff between incentives to invest in R&D and efficient pricing takes a special form in the pharmaceutical sector. Brand drugs command high prices until generic competition begins, the timing of which usually depends on the outcome of patent infringement litigation. One potential outcome is a collusive agreement between the brand and a potential generic competitor that delays competition, with the brand sharing the profits from the delay by paying the generic challenger. Collusive patent settlements have plagued competition in pharmaceutical markets globally and especially in the U.S., the world’s largest market. This paper estimates the cost of these collusive settlements to U.S. drug purchasers using stock price movements. If the brand firm’s increase in profits from collusion is capitalized into stock prices, the change in value upon a settlement announcement can be used to estimate the new profit flows from higher prices to purchasers. We assembled data on 64 settlements reached during 2014-2023 and used the announcement descriptions and information that surfaced later to identify 17 potentially collusive settlements. We applied event study methods and found, consistent with prior research, that settlement announcements with no indication of collusion had no significant effect on the stock prices of brand firms implying that they tended to meet traders’ expectations. Stock prices increased by approximately 3.5%, on average, after settlements with an indication of collusion, implying they increased brand profits by delaying generic entry. These increases correspond to a total increase in U.S. purchaser spending of $3.1-$3.2 billion per year during 2014-2023. Factoring up our estimate to the entire industry implies the increase in spending may be closer to $12 billion per year.