No Free Launch: At-Risk Entry by Generic Drug Firms

After receiving FDA approval, a generic drug manufacturer can launch “at risk” before conclusion of any patent infringement litigation, but it risks paying damages if it loses. The generic can eliminate the risk by waiting to launch until the appeals process is complete but waiting has downsides too. We develop a model that implies that, after the generic has won a district court decision, at-risk entry is generally profitable and will occur quickly unless the cost of waiting for the appeal is very low. We examine generic drug applications that have received FDA approval with “first-filer” status (which precludes later filing generics from entering before the first filer). In our data, the generic and brand usually settled prior to the conclusion of litigation. For the remainder, drugs that received FDA approval prior to a favorable district court decision were always launched at risk. Generics without FDA approval before a favorable district court decision launched upon approval unless the approval was close in time to the appeal decision or it had forfeited the first filer exclusivity (indicating a low cost of waiting). We also consider implications of at-risk entry for social welfare, arguing that at-risk entry is analogous to a “buy out” of the patent with favorable welfare implications in both the short run (consumer prices) and long run (efficient incentives for R&D).