This paper – which can be found here – focuses on the incentives to enter into pay for delay agreements. A pay-for-delay deal involves a `reverse payment’ from a patent holder to a generic manufacturer (the challenger) seeking entry for its generic equivalent. In return for the payment, the generic firm may abandon its challenge, but often also acquires a right from the patent holder to enter the market at a later date, but before the patent expiration, as an authorized licensed generic with an exclusive license. The question is then, if the originator can pay the generic producer to refrain from challenging its patent and to stay out of the market for some time, how much do they have to pay, and why do other generic challengers not grab the same opportunity to also get paid off?
The paper’s second section discusses the relevant literature. Section three develops a stylized game between a branded firm and several challengers seeking entry. Section four compares (equilibrium) profits and payoffs for firms under different market structures. This is followed by a section on policy options.
A point worth making here is that generics may benefit from first-mover advantages even if they are not granted exclusivity periods as in the US: “The first mover advantage for the first generic is in part due to the fact that it enters and serves the market for a longer period of time compared to other generics, but also because it captures and sustains a much larger share of the generic market over a period of several years (…) [it can also arise] due to patients’ unwillingness to switch between generic medications, the search and persuasion costs on the part of doctors, and the additional administrative costs of pharmacies when stocking several identical generic drugs with no real monetary incentives due to reference pricing.”
The last section helpfully summarises the previous discussion. Basically, the authors’ model demonstrates that pay-for-delay agreements are possible regardless of whether the first generic entrant has an exclusivity monopoly period or not – but that such a period increases the likely stability of pay for delay agreements. The model also shows that the payment to stay out increases not only with the `weakness’ of the underlying patent, but also with the extent of the first mover advantage. If the first mover advantage is large enough, the branded firm can make a credible threat to later challengers of launching an authorized generic via the first challenger. This, in turn, can deter later generics from contesting entry until patent expiration, even if the patent is weak.
Both the US and EU cite the size of the payment as a workable surrogate for the weakness of the underlying patent. However, the authors’ model shows that payment to the first challenger is correlated not only to the weakness of the patent, but also to the extent of the first mover advantage. This should be taken into account in antitrust assessments.
While containing far too much mathematics to allow me to comfortably comment on the model, it sounds plausible to me. I’m not sure there is any way to measure the first-mover advantage (or for the parties to an agreement to be able to assess it), so that raises some doubts about the practical usefulness of the authors’ insight. In any event, the paper also contains a good overview of the regulatory framework for the entry of generics into the US and EU markets in one of its appendixes.