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drugs. When generic drugs enter a market, they are offered at a much
lower price than is the branded drug, and they typically capture a large
market share. For these reasons, generic entry results in considerable
savings to consumers and to the health care system. The delay of generic
entry due to pay-for-delay settlements greatly reduces those savings.
The ability of incumbent patent holders to enter into pay-fordelay
settlements, and to thereby maintain their patent protection for a
longer period, might be viewed as increasing the value of pharmaceutical
patents, and hence increasing the incentive to invest in discovering new
drugs. However, the value of any increased innovation arising from these
settlements may be relatively small. The most socially valuable drug patents
are often those covering new molecular entities. These patents are
relatively unlikely to be successfully challenged, which means the generic
entrant has little prospect of victory at trial or of a lucrative pay-for-delay
settlement. As a result, banning such settlements may not significantly
affect the incentive to invest in inventing new molecular entities. Instead,
pay-for-delay settlements often involve patents on incremental improvements
to existing drugs, often ones that make the drug just different
enough that a prescription for the new version cannot be filled with an
existing generic equivalent of the old version. The ability to enter into
pay-for-delay settlements does encourage this type of innovation, but the
social benefits are likely to be comparatively small in many cases.
Pay-for-delay settlements have been the subject of a considerable
amount of litigation, culminating in a 2013 Supreme Court decision
in FTC v. Actavis, involving a drug called AndroGel. The Court ruled
that “pay for delay” settlements are not presumptively unlawful, but
are also not immune from antitrust scrutiny, partially resolving earlier
conflicting rulings by lower courts (see FTC v. Actavis 2013). The Court
did not establish a concrete rule regarding how such settlements should
be treated, however, so substantial uncertainty remains about how these
lawsuits will be adjudicated in practice.
The Administration has proposed legislation that gives the Federal
Trade Commission explicit authority to stop companies from entering
into pay-for-delay agreements. For the reasons described above, such
authority would likely generate billions of dollars in savings for consumers,
and also for the Federal Government through lower pharmaceutical
prices paid by Medicare, Medicaid, the Department of Defense, and the
Veterans Administration (see CBO 2011 and FTC 2010).
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