Gatekeeping Pharmaceuticals: The Consumer Welfare Consequences of "Pay-for-Delay" Settlements

Following the passage of the 1984 Hatch-Waxman Act, a pharmaceutical manufacturer must file an abbreviated new drug application (ANDA) when seeking FDA approval for a generic drug. Within the ANDA, the filer must demonstrate that the generic drug is equivalent to its branded counterpart and certify that the generic will not infringe on any current patents. Noninfringement can be attested to through several patent certifications, including the Paragraph-IV certification. A Paragraph-IV certification asserts that the patent on the branded drug is invalid and is usually contested by the brand name manufacturer in the form of patent litigation. Through assessing the patent's validity, patent litigation determines whether the branded drug's patent exclusivity continues or generic entry occurs. However, many of these lawsuits are settled before a decision is made. These settlements ("reverse settlements") involve a payment from the patent-holding brand manufacturer to the would-be generic entrant on the condition that the generic manufacturer forestalls entry. In recent years, reverse settlements have faced regulatory scrutiny, with critics arguing that the resulting delays in generic entry and higher drug prices lower consumer welfare. By examining a class of drugs within the high-cholesterol pharmaceutical market, I estimate the welfare effects of the settlement of Paragraph-IV patent litigation. Using data from 1996-2020, I estimate a demand model and assess the welfare effects of reverse settlements. I find that Para-IV facilitated expedited generic entry increased consumer welfare by $392 million. From these results, I conclude that reverse settlements in Paragraph-IV pharmaceutical litigation reduce consumer welfare.