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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.