The Social Costs of Portfolio Diversification: Evidence from Patent Challenges in the Pharmaceutical Industry

Posted: 29 Jun 2020

See all articles by Jin Xie

Jin Xie

The Chinese University of Hong Kong (CUHK)

Date Written: June 5, 2020

Abstract

The FDA grants a 180-day period of marketing exclusivity to reward the first generic manufacturer challenging the monopoly status of patent-protected drugs. Institutional horizontal shareholdings --- the generic shareholders' ownership in the brand-name incumbent relative to their ownership in the generic manufacturer --- are positively associated with the likelihood that the first generic enters into a settlement agreement with the brand. The results are not driven by systemic differences between private and public firms, and survive from a panel instrumental variable strategy that exploits the combination of the two largest investors. Horizontal shareholdings are positively associated with the brand’s abnormal daily stock returns around the settlement agreement. Following settlements, the first generic manufacturers are more likely to delay the sale of generic substitutes if they have higher horizontal shareholdings with the brand. These delays preclude other generic manufacturers from entering the market. Generic manufacturers with higher horizontal shareholdings are more likely to be the first patent challengers. The findings suggest commonly owned incumbent and competitors coordinate in response to the threat of entry.

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

JEL Classification: L41, L12, G23, G30

Suggested Citation

Xie, Jin, The Social Costs of Portfolio Diversification: Evidence from Patent Challenges in the Pharmaceutical Industry (June 5, 2020). Available at SSRN: https://ssrn.com/abstract=3619675 or http://dx.doi.org/10.2139/ssrn.3619675

Jin Xie (Contact Author)

The Chinese University of Hong Kong (CUHK) ( email )

Shatin, N.T.
Hong Kong
Hong Kong

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