We think we know generic drug companies. They challenge patents held by brand firms. They litigate vigorously to overturn those patents. And they often win these challenges.
But what about “generic” companies that play both sides, earning revenue from generic and brand drugs? Do they have less incentive to do what generic firms should be doing?
To learn more about the differences between “pure generic” and “mixed generic” companies, we built a comprehensive database of all major drug companies, both branded and generic. We evaluated where their revenue comes from, how that has changed over time, and how it relates to their behavior in court. Despite broad industry trends towards specialization, we found that about one-third of the firms we studied, such as Allergan, Bausch Health (formerly Valeant), the Sandoz division of Novartis, and Teva, have opted for mixed business models over time.
Writing in the Hastings Law Journal, we showed that when companies with significant generic sales play both sides, they behave differently than those with purer generic revenue streams:
- The pure firms challenged more patents as invalid or not infringed than the mixed firms.
- When mixed companies with growing brand sales challenged patents, they were more likely to settle those challenges. In contrast, companies that focused on generics were more likely to take those cases to judgment.
- Further, when patent challengers with a greater generic share — such as Apotex, Reddy, and Lupin — went to court rather than settle, they were more likely to win those challenges.
Playing both sides of the market may reduce the incentive for generic challengers to fight as hard as possible to win the cases before them. That may be especially true of the sorts of challenges that not only affect the patent at issue but also change legal doctrines in a way that ultimately hurts the generic challenger’s brand business. For example, “generic” company Mylan acted more like a brand company in its conduct related to the EpiPen as it obtained patents on technology known about for decades, significantly increased the price for this widely used medication, and employed generic-delaying settlements, questionable citizen petitions, and exclusive contracts with schools.
Our findings have implications for antitrust law in the pharmaceutical industry. How “pure” a company is could affect how courts and antitrust agencies evaluate the settlements by which brand firms pay generic companies to delay entering the market.
Our findings could also affect the assessment of mergers, suggesting that antitrust agencies should more closely scrutinize transactions and require more robust remedies for those that could result in pure generic companies losing their incentive to challenge and litigate patents that might wrongfully be blocking competition.
Antitrust agencies should encourage pure generic companies that have the incentive to bring robust challenges to drug patents and discourage mergers that drive companies to play both sides. The payoff is clear, as such actions would ensure that generic companies play the role they were intended to play: lowering high drug prices.
Michael A. Carrier is a professor of law at Rutgers Law School. Mark A. Lemley is a professor of law at Stanford Law School and founding partner of Durie Tangri LLP. Shawn Miller is a professor in residence at the University of San Diego School of Law and a CodeX Fellow at Stanford Law School.