Institutional Horizontal Shareholdings and Generic Entry in the Pharmaceutical Industry

Abstract

Brand-name pharmaceutical companies often file lawsuits against generic drug manufacturers that challenge the monopoly status of patent-protected drugs. Institutional horizontal shareholdings, measured by the generic shareholders' ownership in the brand-name company relative to their ownership in the generic manufacturer, are significantly positively associated with the likelihood that the two parties enter into a settlement agreement in which the brand pays the generic manufacturer to stay out of the market. Horizontal shareholdings are also positively associated with the brand's daily abnormal stock returns around the settlement agreement. Generic manufacturers who settle with the brand-name company are more likely to delay the sale of generic substitutes if they have higher horizontal shareholdings with the brand-name firm. These delays preclude other generic firms from entering the market.

Keywords: Common ownership; Institutional investor; Product market entry; Pharmaceutical industry; Patent infringement lawsuit; Settlement agreement; Antitrust

JEL Classification: L41, L12, G23, G30