Settlement of Brand-Generic Patent Disputes in Pharmaceuticals: Risk Mitigation or Anticompetitive Pay-for-Delay?

In recent years, the Federal Trade Commission (FTC) and private parties have challenged “pay-for-delay” settlements of pharmaceutical patent disputes, in which companies selling brand drugs compensate generic challengers for delaying their entry into the market for the drug. In the FTC’s view, such deals lengthen the period of the brand drug’s exclusivity, keeping drug prices paid by consumers higher than they would have been in the absence of the deal. Pharmaceutical companies claim to make such deals for lawful business reasons, such as the desire to reduce risks to future profits and avoid litigation costs. In 2013, the Supreme Court ruled that such deals may deserve antitrust scrutiny and be judged according to a rule-of-reason standard.  

This paper examines empirically whether stock price movements are consistent with settlements that reflect firm risk aversion and are competitively neutral. Under standard assumptions about financial markets, the share price of the brand company impounds the expected value of the outcome of the patent litigation for the company’s future profit stream. We show that if brand companies’ settlement payments are a form of risk premium paid as part of a competitively neutral agreement, announcement of the settlement should reduce stock prices. The alternative (FTC) hypothesis is that settlements secure monopoly profits for longer periods for the brand, which should lead to an increase in the stock price. We test the risk-aversion hypothesis with data on approximately 25 settlements (from 1993 forward) that would be classified as “pay-for-delay” by FTC standards, as well as, in a sensitivity analysis, an additional 50 other settlements that might be pay-for-delay according to broader criteria.

We conducted an extensive review of legal, regulatory and news sources to identify patent disputes that were settled, and devised rules for classifying settlements that potentially involved some form of pay-for-delay. We then compiled data on brand companies’ stock prices in periods leading up to and including announcements of settlements, and estimated a series of event-study models to discern whether companies’ share prices realized abnormal negative returns in periods around announcement dates. Contrary to the risk-aversion hypothesis, preliminary results show that stock prices of brand companies in our sample increased by an average of 7% when settlements were announced, and this effect is statistically significant. This finding is not consistent with the claim that the settlements reflect companies’ lawful efforts to reduce risks to profits, and instead implies that the settlements increased brand profits by extending the period of patent exclusivity beyond that which would have been expected had the firms continued with patent litigation.