Activating Actavis with a More Complete Model

Antitrust, Forthcoming

22 Pages Posted: 31 Jan 2014

See all articles by Michael G. Baumann

Michael G. Baumann

Economists Incorporated

John Payne Bigelow

Compass Lexecon

Barry C Harris

Economists Incorporated

Kevin M. Murphy

University of Chicago; National Bureau of Economic Research (NBER)

Janusz A. Ordover

New York University (NYU) - Department of Economics

Robert Willig

Princeton University - Princeton School of Public and International Affairs

Matthew B. Wright

Economists Incorporated

Date Written: January 29, 2014

Abstract

In FTC v. Actavis, Inc. the Supreme Court asked whether a patent settlement agreement involving a so-called “reverse payment” from a patent holder to an alleged infringer of a pharmaceutical patent “can sometimes unreasonably diminish competition in violation of the antitrust laws.” Edlin, Hemphill, Hovenkamp, and Shapiro (2013) propose a method of evaluating the competitive effects of reverse payment settlement agreements that compares the magnitude of the reverse payment to the sum of the patent holder’s prospective litigation costs and the value of services provided by the alleged infringer to the patent holder. This paper shows that the method proposed by Edlin et al. holds only under limited conditions. This paper also identifies conditions where a reverse payment in excess of litigation costs may lead to earlier generic entry and would be procompetitive. In addition to avoided litigation costs, relevant factors in evaluating patent settlements involving a reverse payment may include inter alia the risk-tolerance of the parties, the level of the drug’s sales, the parties’ expectations and information asymmetries related to future competition for the drug, the parties’ subjective views of the likely outcome of the litigation, the parties' differences in time-values of money, the applicability of Hatch-Waxman first-filer exclusivity, the relative size of the alleged net reverse payment, and the extent of the alleged delay and associated diminution of competition.

Keywords: antitrust, pharmaceuticals, generic entry, patent policy, Hatch-Waxman, reverse payments

JEL Classification: K21, L4, L5, L65, O34

Suggested Citation

Baumann, Michael G. and Bigelow, John Payne and Harris, Barry and Murphy, Kevin M. and Ordover, Janusz A. and Willig, Robert D. and Wright, Matthew B., Activating Actavis with a More Complete Model (January 29, 2014). Antitrust, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2387863

Michael G. Baumann

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John Payne Bigelow

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Barry Harris (Contact Author)

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Kevin M. Murphy

University of Chicago ( email )

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Janusz A. Ordover

New York University (NYU) - Department of Economics ( email )

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Robert D. Willig

Princeton University - Princeton School of Public and International Affairs ( email )

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Matthew B. Wright

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