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Business Articles Awards > Intellectual Property

Interpreting Stock Reactions to Reverse-Payment Settlements

Laarni Bulan, Zoya Marriott and Maria Salgado, Law360, February 2015

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When branded drug companies settle patent litigation (known as Paragraph IV or Hatch-Waxman litigation) with would-be generic competitors, they sometimes enter into contemporaneous business agreements with the generic companies. There is a concern that such agreements may constitute payments from the brand company to the generic company (so-called “reverse payments”) in exchange for the generic company agreeing to delay entry beyond the date that would be expected were the patent case litigated. In a July 2014 working paper, Keith M. Drake, Martha A. Starr and Thomas McGuire examine a sample of event studies that measure stock price reactions to Paragraph IV settlement announcements and suggest that an increase in the stock price of a branded company following the announcement of a “reverse payment” settlement is evidence of a delay in generic entry beyond the expected date were the case litigated. In this article, we consider reasons other than a delay in generic entry that may explain why settlements with “reverse payments” can lead to a positive stock price reaction.

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