The Distribution of Surplus in the US Pharmaceutical Industry: Evidence from Paragraph (iv) Patent Litigation Decisions

Abstract

In Paragraph (iv) pharmaceutical cases, a patent-litigation decision often determines whether a brand-firm monopoly continues or generic entry occurs. Using unique patent litigation data and an event-study approach that accounts for probabilistic district court decisions and an appellate process, we estimate that brand-firm stakes in such cases average $4.3 billion while generic-firm stakes average $204.3 million. After the Schering-Plough vs. FTC decision in 2002 that upheld a settlement where the brand firm paid the generic in return for delayed entry, we find settlement is more likely and stakes are significantly lower, despite greater average brand sales for the drugs in the cases. Based on this evidence, we conclude that pay-for-delay settlements led to less within-market competition after 2002.

Keywords: Paragraph (iv), generic entry, deterrence, event study, patent litigation, pay for delay

JEL Classification: L51, I10, I18, K23