WP 2015-14 Innovation, litigation, and new drugs

AUTHOR: Ramsi A. Woodcock

ABSTRACT: A generic drug maker that has been sued for infringing a patent on a branded drug will sometimes promise, as part of an agreement settling the litigation, to delay selling its drug until as late as the expiration of the patent term. I adapt the standard optimal patent term model to determine whether the delay in competition caused by such agreements raises consumer welfare by increasing rewards for innovation. Calibrating the model with U.S. drug market data, I find that, for all but the patents with the greatest probability of surviving litigation, settlements that delay entry by more than fifteen months harm consumers. I find that generic drug makers are in some cases willing to agree to enough delay to harm consumers, even in the absence of a reverse payment, and that harm can reach $1.3 billion for the average drug.