Assessing Whether Reverse Payment Settlements Delay Generic Entry, and by How Much

Abstract

Patent disputes between branded and generic pharmaceutical manufacturers are often settled with financial compensation from the brand (the patent holder) to the generic (the alleged infringer), along with restrictions on the generic's entry date. Such agreements are known as settlements. To quantify the effect of reverse payment settlements on the timing of generic entry, we propose using bargaining theory to infer the unobserved patent strength from the firms' observed settlement choice. The estimated patent strength can then be used to construct a counterfactual world without reverse payments. Applying our framework to the specific case of the drug Lamictal (lamotrigine), we find that the settlement the firms reached likely delayed generic entry, costing buyers of lamotrigine tablets more than $100 million in the form of higher drug prices.