Innovation and Reverse Payments

Settlements of patent litigation between branded and generic drug makers that include a promise by the generic maker to stay out of the market, sometimes in exchange for a ‘reverse’ payment, increase the profits of drug makers at the expense of consumers. Some commentators argue that drug makers will invest these profits in innovation, ultimately making consumers better off. Drug market data suggest, however, that the resulting gains to consumers may still be insufficient to offset consumer losses from delayed access to generics. Even when innovation is taken into account, antitrust can most efficiently eliminate the risk of consumer harm from delayed access to generics only by banning all settlements that fix a date of generic entry, including all reverse payment settlements.

If antitrust seeks to maximize consumer welfare, rather than merely to eliminate the risk of consumer harm, then antitrust should instead intervene directly in settlement negotiations to defend the interests of consumers, because only intervention both preserves the innovation benefits of settlement while minimizing the opportunity of drug makers to settle for delayed generic entry. In no case, however, should antitrust challenge only settlements involving large reverse payments, as other commentators have suggested antitrust should do.