Should Generic Industry Payoffs be Outlawed?

GoozNews reports that “the Senate Judiciary Committee…passed legislation prohibiting brand name drug manufacturers from paying off generic manufacturers in patent disputes.  They get the money in exchange for not bringing the cheaper drug to market.” Is this a wise move for Congress?

The main question one should ask is why brand name manufacturers pay off generic manufacturers to not bring their drug to market in the first place.  In a competitive market, a firm could pay off a competitor not to introduce a new product.  However, paying off one competitor is likely counterproductive, because another competitor could also bring the product to market.  Further, because generics drugs are not really innovations, but rather cheaper versions of the brand name drug, paying off any single generic company would certainly not prevent the drug from coming to market.  

This leaves a few possibilities.  

  • Making a generic may be more complicated than I assume and it take significant resources to produce a generic.  If the lag in generic development is long, paying off one generic company could buy the brand name drug extra time (months? years?) to continue their monopoly.   
  • There are few generic drug makers thus paying off a handful of companies may be cost effective.  However, if entry into the generic drug making business is possible, this would still not be a useful tactic.  Thus, it must be the case that entering the generic drug making market is very costly.  
  • I believe there are many international generic drug makers, especially in India.  However, regulation concerning drug importation, and FDA approval may mean that it is difficult for these companies to bring their generic products to the U.S. market. I had thought that the FDA could fast-track generic approvals, but this may not be the case.

Any other explanations of why a brand name drug manufacturer would pay off a generic manufacturer?


  1. The most common reason is that the first generic company to get an approval receive six-months of exclusivity. The brand name company can therefore pay the generic company for an additional six months of brand exclusivity. With huge margins this can be profitable for both companies.

    Occasionally, only one generic company has figured out how to mimic a complicated brand name product.

  2. Not to mention that the regulatory structure typically does take several months to work through to make sure that the drugs, facilities, and manufacturing inputs are up to spec.

  3. I would guess that barriers to entry (related to your first point and the second part of RxCxar’s comment) contribute to making this a cost effective move for name-brand produces. These barriers may be due to the costs associated with building the manufacturing facility and getting it FDA approved (FDA Development & Approval Process). Even an existing facility probably has to be evaluated for identity, strength, quality, purity and potency whenever a new drug is produced.

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