Reverse Payments: An EU and US Perspective

Posted by Social Science Research Network

Reverse Payments: An EU and US Perspective

Frank P. Maier-Rigaud, Nathan Blalock & Oliver Gannon (NERA Economic Consulting)

Abstract:       In recent years, reverse payment settlements in the pharmaceutical industry have attracted the attention of US and European competition authorities. Originator pharmaceutical companies facing patent challenges from generic companies may be incentivized to reach terms of settlement prior to a ruling at trial. Reverse payment settlements occur when the terms of settlement contain a transfer of value from the originator to the generic company. Competition authorities in particular are interested in reverse payment settlements that potentially delay the entry of the generic company’s competing pharmaceutical product. The chapter reviews and compares the approaches of the US and European competition authorities in investigating reverse payment settlements.

It also examines the economic incentives faced by originators and generic companies that result from the patent system and pharmaceutical regulatory framework in which they operate. When combined with originators’ and generic companies’ diverging beliefs as to the validity of the patent in question, these incentives lead to a set of feasible reverse payment settlement outcomes that include both a transfer of value and a specified date of generic entry. Economic theory indicates that, under certain circumstances, a set of reverse payment settlements that result in the delay of generic entry can be beneficial to the health systems and patients that pay for pharmaceutical products. This kind of beneficial settlement allows litigating parties to avoid costly and time consuming litigation and establishes a generic entry date that is earlier than the counterfactual (probability weighted) expected date of entry.

Given the potential benefits from certain reverse payment settlements, it is that competition authorities investigating reverse payment settlements should use an effects based approach to ensure that potential benefits of such settlements to health care systems and patients are not overlooked in the analysis.