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Schering-Plough and the Antitrust Analysis of Patent Settlement Agreements in Pharmaceutical Markets

30 May 2007
Dr. Sumanth Addanki

In the United States, the growth in spending on prescription drugs has exceeded that of any other single category of health care spending. This is due, in large part, to increases in pharmaceutical research and development spending, which has led to new and sometimes more expensive medicines, as well as broader insurance coverage for prescription drugs, which is one of the main drivers of demand. To spur competition at the retail level without compromising manufacturers' incentives to innovate, the US Congress passed the Hatch-Waxman Act in 1984, which was designed to encourage the entry of generic drugs. Since the Act was passed, generic entry has played an increasingly important role in keeping drugs affordable.

In this chapter from Economics of Antitrust: Complex Issues In a Dynamic Economy, NERA Senior Vice President Dr. Sumanth Addanki tackles one of the most important economic, legal, and public policy issues surrounding competition in this industry -- the rationale and competitive effects of an agreement between a generic and branded drug manufacturer to settle a patent dispute, where the settlement involves a payment from the patent holder (i.e., the branded manufacturer) to the alleged infringer (i.e., the generic manufacturer). The US Federal Trade Commission (FTC) has challenged these types of agreements, claiming that these so-called reverse payments necessarily serve to delay generic entry. However, Dr. Addanki explains why the FTC's bright-line rule about such agreements is inappropriate, as it is based on a fundamentally invalid assumption, one that ignores the risks of litigation and the parties' desire to avoid or reduce these risks. Thus, as Dr. Addanki points out, the FTC's rule could invalidate procompetitive agreements as well as anticompetitive ones. The FTC's test, he argues, is no substitute for case-by-case analysis.