The Price of Delay: Pharmaceutical Competition and Innovation Following FTC v. Actavis

Abstract

In 2013, the Supreme Court ruled in FTC v. Actavis that reverse payment settlements between brand and generic drug manufacturers can violate antitrust law. The decision was intended to promote competition in the pharmaceutical industry by subjecting reverse payments to greater antitrust scrutiny. Using a joint difference-in-differences and event study framework to assess the effect of Actavis on drug prices and generic competition, I find Actavis led to no sustained competitive improvements beyond a temporary decline in average market prices from 2016 to 2018. While this finding suggests Actavis had a positive effect on consumer welfare, the modest gain may be outweighed by the reduction in innovative activity following the ruling. Specifically, I examine the effect of Actavis on company-level patent counts. I find that firms with a history of reverse payments filed 53.1% fewer patents than their unexposed counterparts following Actavis, suggesting Actavis reduced innovation incentives and may have been a net negative to consumer welfare. The observed tradeoff between a temporary decline in average market prices and a persisting decrease in patent counts indicates Actavis was unable to promote competitive gains while maintaining innovation incentives, which is of increasing concern as reverse payments evolve into new implicit forms and legislative reform stalls.