At the Intersection of Health, Health Care and Policy

Cite this article as:

Ernst R. Berndt, Richard Mortimer, Ashoke Bhattacharjya, Andrew Parece and Edward
Tuttle
Authorized Generic Drugs, Price Competition, And Consumers Welfare
Health Affairs, 26, no.3 (2007):790-799
doi: 10.1377/hlthaff.26.3.790

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M a r k e t Watc h
Authorized Generic Drugs, Price Competition,
And Consumers Welfare
On balance, authorized generics are likely to benefit consumers.
by Ernst R. Berndt, Richard Mortimer, Ashoke Bhattacharjya, Andrew
Parece, and Edward Tuttle
ABSTRACT: The growing frequency of authorized generics has important implications for
the welfare of prescription drug consumers. Authorized generic entry could affect the timing of generic entry, brand-name and generic prices, and generic penetration. We reviewed
19992003 data and found that generic entry in the absence of short-run exclusivity restrictions benefits consumers through lower short-run prices. We suggest that these benefits likely also result from authorized generics. We posit that long-run prices and shares are
likely essentially unaffected by authorized generics and that potential costs to consumers
from any delayed generic entry are likely small. [Health Affairs 26, no. 3 (2007): 790799;
10.1377/hlthaff.26.3.790]

o n s i d e r a b l e i n t e r e s t has focused recently on the effects that authorized generic prescription drugs
have on competition among generic and
brand-name drugs and on consumers welfare. Authorized generics are prescription
drugs whose U.S. marketing approval derives
from the brand manufacturers new drug application (NDA) yet are marketed and sold as
generic versions of the brand.1
Authorized generics can benefit consumers
if they increase competition and lower prices.
However, some argue that the increased shortrun competition they create might undermine
incentives created by the 1984 Hatch-Waxman
Act for generic manufacturers to challenge
patentsincentives designed to foster long-

run competition and earlier generic entry. Although authorized generics likely reduce these
incentives to generic manufacturers, the ultimate impact on consumers through drug
prices and the timing of generic entry is unclear. Here we outline issues and review data
on generic entry between January 1999 and
December 2003 (as authorized generic entry
began to increase), and case studies of authorized generic introductions from 2003 and
2004, to assess the impact of generic entry on
consumers under different market conditions.

Background
n Hatch-Waxman legislation and its aftermath. To foster competition, the HatchWaxman Act allowed generic manufacturers

Ernst Berndt (erberndt@mit.edu) is the Louis B. Seley Professor in Applied Economics, Sloan School of
Management, Massachusetts Institute of Technology (MIT) and National Bureau of Economic Research (NBER),
both in Cambridge, Massachusetts. Richard Mortimer is a vice president of the Analysis Group in Boston,
Massachusetts. Ashoke Bhattacharjya is executive director, Health Outcomes and Policy, Johnson and Johnson
MedicalAsia Pacific, in New Delhi, India. Andrew Parece is a managing principal of the Analysis Group in
Boston. Edward Tuttle is a managing principal of the Analysis Group in Menlo Park, California.

790

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to file an abbreviated new drug application

(ANDA) demonstrating bioequivalence to an
innovator drug, rather than an NDA, which requires more data establishing safety and efficacy. The ANDA could be filed before the innovators patents expired. Moreover, the first
generic manufacturer to file an ANDA with a
successful paragraph IV certification (a patent
challenge or claim of noninfringement) is
awarded a 180-day marketing exclusivity period during which no other ANDA filers can
market their version of the drug dose.
The frequency of paragraph IV certifications has greatly increased. Between 1984 and
1989, only 2 percent of ANDA submissions
contained certifications. This share increased
to 12 percent between 1990 and 1997 and then
to 20 percent between 1998 and 2000.2 Granting of 180-day exclusivity by the Food and
Drug Administration (FDA) also increased,
from none between 1992 and 1998 to 31 drugs
between 1998 and 2002.3
Authorized generics rely on the brand manufacturers NDA and have been allowed to
compete against ANDA-based generics even
during the 180-day exclusivity period (if there
is one). The recent increase in authorized
generics enables brand manufacturers to capture some of the postpatent generic sales when
only one independent generic is present.4 Authorized generics have long existed and have
attracted policy concern in the past.5 In the
early 1990s, several brand manufacturers created subsidiaries that marketed generics; some
of these have since closed.6
A highly publicized launch of an authorized generic occurred with the multibilliondollar drug Paxil (paroxetine) in 2003. In February 2004, Mylan filed a citizen petition requesting the FDA to prohibit the marketing of
any authorized generic drug during an ANDAgenerated exclusivity period.7 Watson and Par
supported the availability of authorized
generics, claiming that partnering with brand
manufacturers benefited consumers.8 The
FDA responded to Mylans arguments, stating:
Not only does FDA lack authority to justify
delaying the marketing of authorized generics
solely to protect 180-day exclusivity, the

Agency does not believe their marketing

should be delayed in this manner, as this marketing appears to promote competition in the
pharmaceutical marketplace, in furtherance of
a fundamental objective of the HatchWaxman amendments.9 Several court decisions have since upheld the right for authorized generics to be marketed during the 180day exclusiv ity period. 1 0 Senators Jay
Rockefeller (D-WV), Charles Schumer (DNY), and Patrick Leahy (D-VT) introduced a
bill banning the marketing of authorized generics during this period.11
n Effects on consumers. Here we focus
on the effects of authorized generics on consumers, and only indirectly on potential implications for brand and independent generic
manufacturers. Implications for consumers
depend on the effects of authorized generic entrant on four developments: (1) the timing of
independent generic entry; (2) relative generic
and brand shares of the molecule; (3) relative
generic-to-brand price; and (4) perceived
quality of the authorized generic relative to the
brand and independent generics.
A possible impact from item 1 could be to
increase long-run costs for consumers if paragraph IV certifications were less aggressively
filed and resulted in some brands facing generic competition later than they would have
in the absence of an anticipated authorized generic entrant. The combined effect of items 2
and 3 is likely to benefit consumers in the
short term when generics are sold at lower relative prices; over a longer time period, the
combined effects are not as clear. The effect of
item 4, if material, likely would be to increase
generic share further, benefiting consumers to
the extent that the price of the authorized generic is less than that of the brand.
n Previous literature. Few peer-reviewed
publications discuss authorized generic entry.
David Reiffen and Michael Ward investigate
the effects of authorized generic entry on generic and branded segments but do not focus
on potential consumer impacts. They calculate
that anticipated authorized generic entry may
raise long-run prices by roughly 12 percent
for small to medium-size drugs, with a smaller

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effect on prices of blockbusters.12 An IMS Consulting study, supported by Pharmaceutical

Research and Manufacturers of America
(PhRMA), reports that drugs experiencing authorized generic entry during an exclusivity
period had generic discounts to the brand
price that were sixteen percentage points
larger than those with no authorized generic
entry.13

Market Features Relevant To

Authorized Generic Entry
We categorized market features relevant to
authorized generic entry into two stages: first,
whether the branded drug encounters an
ANDA filing with a successful paragraph IV
certification; and second, the extent of independent generic entry with and without authorized generic entry. Under these market
scenarios, below we examine the subsequent
impact of authorized generic entry on consumers through the timing dynamics of generic entry, pricing, and market shares.
n Paragraph IV certifications. Consumer benefits from generic entry are typically
more limited during the exclusivity period,
with the sole generic entrant usually offering
on average only a modest (1020 percent) discount off the brand. Authorized generic entry
allows for an additional generic product during the exclusivity period, potentially further
lowering generic prices and benefiting consumers.14 For independent generics, the anticipation of an authorized generic entrant reduces the expected profitability during the
exclusivity period, thereby possibly deterring
patent challenges by independent generics. If
some of those forgone challenges had been
successful, then independent generic entry
might be delayed in the absence of the challenge, harming consumers.
Changes in FDA administrative law awarding 180-day exclusivity offer one possible reason for the greater frequency of recent patent
challenges and awarding of exclusivity.15 The
increase in patent challenges could also reflect
greater speculative behavior by generic manufacturers, as a result of the number of top-selling drugs that face patent expiration and the

792

relatively large profits associated with exclusivity (reflecting policies encouraging greater
generic penetration during the exclusivity period and developments in patent law).16
The Federal Trade Commission (FTC) has
reported that of fifty-three ANDA submissions
containing paragraph IV certifications challenged by the patent holder and for which a litigated resolution was reached, twenty-two
(42 percent) resulted in the generic applicants
prevailing at trial.17 Another possible explanation for increased patent challenges is that
patents protecting the brand manufacturers
drugs might have been weaker than in the
past, making such challenges more likely to
succeed. In the context of weak patents, some
argue that settlements (rather than litigated
resolutions), particularly those involving payments by the brand to the potential exclusive
generic entrant (negative fixed fees), are especially harmful to consumers.18
n Extent of generic entry. A sizable literature considers generic entry, brand and generic prices, and generic penetration for traditional small-molecule drugs. One recent study
relies on data from the late 1980s and early
1990s.19 Several other studies examine price
trends and patterns of generic entry; almost all
are based on data ending before or up to the
late 1990s.20
This literature generally finds that having
more generic entrants for a drug is associated
with lower generic-to-brand price ratios and
higher generic shares. However, it also suggests that after the first few entrants, the marginal effect of each entrant on generic prices
and shares tends to be negligible.21
Using a data set on drugs experiencing
more recent generic entry, we found empirical
evidence consistent with these earlier findings.22 Based on 19992003 data, Exhibit 1 documents that the impact of an additional generic is negligible after the fourth or fifth
entrant. Specifically, at twenty-four months
since initial generic entry, only one drug with
fewer than five generic entrants (out of seven)
had a generic-to-brand price ratio below 0.37;
all ten drugs with more than five generic entrants had generic-to-brand price ratios falling

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EXHIBIT 1
Generic-To-Brand Price Ratio Versus Number Of Generics, Twenty-Four Months
Following Initial Generic Entry, 19992003
Generic-to-brand price ratio
0.8
0.6
0.4
0.2
0.0
0

10
Number of generics

15

20

SOURCE: Authors analysis based on IMS Retail and Non-Retail Sales Perspective data and IMS Retail National Prescription
Audit (NPA) data for drugs that experienced generic entry between January 1999 and December 2003 and for which data were
available twenty-four months following initial generic entry.

below 0.25, and no discernible downward

trend in ratios appeared as the number of generic entrants increased further.23
Although we relied primarily on descriptive
statistics, these results are essentially similar
to those reported by Reiffen and Ward using a
more rigorous statistical approach on data for
an older set of drugs. An important implication of this common finding is that a reduction
in the long-run number of independent
generics as a result of authorized generic entry
is unlikely to harm consumers by raising longrun generic prices unless it results in fewer
than four or five generic entrants.

Impact On Consumers
The primary effects on consumers of authorized generic entry relate to the timing and extent of generic entry, through the dynamic impacts of authorized generic entry on generic
share and generic/brand relative prices.
n Timing of generic entry. By increasing
expected competition during the exclusivity
period, anticipated authorized generic entry
reduces expected profits for successful paragraph IV certifications, in turn reducing the
incentives to pursue such certification. For
some drugs, this could delay generic entry if it
resulted in no successful paragraph IV certifications under anticipated generic entry when

otherwise there would have been at least one

successful certification.
Below we outline theoretical arguments
that led us to conclude that for most drugs, the
prospect of authorized generic entry during
the exclusivity period is unlikely to greatly decrease incentives for paragraph IV certification. Moreover, a reduction in such certifications does not delay generic entry or harm
consumers if the deterred certifications would
have been unsuccessful or if other timely and
successful certifications were not deterred.
For many drugs, the expected profits accruing to an exclusive independent generic
might be sufficient to recoup the costs of patent challenges even with authorized generic
entry. Both Reiffen and Ward and Aidan Hollis
place the typical cost of filing an ANDA at less
than $1 million.24 This estimate does not include legal costs/gains if the paragraph IV certification is challenged.25 Paragraph IV certifications have historically been submitted
despite the presence of several factors diminishing their expected value, including multiple
generic manufacturers being awarded exclusivity for the same drug because their ANDAs
were submitted on the same day or for different doses; competition to be the first ANDA
filer; and the probability that the paragraph IV
certification will be unsuccessful even if the

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generic manufacturer is the first ANDA filer.

Even for those drugs where authorized generic entry discourages some patent challenges, the timing of generic entry would not
necessarily be affected, and consumers would
not necessarily be harmed. To the extent that
independent generic firms are not risk-loving,
when authorized generic entry deters patent
challenges, it is likely to do so where a challenge has the least likelihood of success and
thus entails the lowest expected profits.
Finally, for anticipated authorized generic
entry to delay independent generic entry, it
must discourage paragraph IV certifications
that would be successful, and it must do so for
every generic manufacturer that would file a
timely certification for a given drug.26 If a successful certification is deterred by the prospect
of authorized generic entry, the timing of generic entry will still be unaffected as long as at
least one generic with the resources to support
a certification (including any legal challenges)
chooses to file as early as those that might have
been deterred and devotes comparable resources to filing and litigation.27

To date, there is no reliable empirical evidence on the effect of anticipated authorized

generic entry on the propensity to file successful paragraph IV certifications and on the timing of independent generic entry. What data
are available suggest that thus far, the frequency of paragraph IV certifications remains
high. For example, although contemporaneous
authorized generic entry has increased, the
number of drugs facing their first certification
averaged 4.3 per month between March 2004
and April 2005, compared with 4.5 between
May 2005 and May 2006.28 Over the same time
periods, our estimated average number of
drugs that could receive certification declined
from 267.1 to 261.7. Hence, first filings increased even as the potential number of targets
declined (Exhibit 2).29
We tentatively conclude, therefore, that in
the long run, authorized generics are unlikely
to materially harm consumers through delayed
generic entry. Indeed, a recent case suggests
that the mere threat of authorized generic entry likely induced independent generic entry
before paragraph IV litigation was resolved.30

EXHIBIT 2
Drugs Facing And Available For First Paragraph IV Certification, As Of May 2006
Number of drugs facing first certification

Est. drugs available for first certification

275

12
10

250

Stock of drugs available

Drugs facing Paragraph IV
certification

225

200

175

150

125
3/04

6/04

9/04

12/04

3/05

6/05

9/05

12/05

3/06

SOURCES: Food and Drug Administration, Paragraph IV Patent Certifications as of January 18, 2007, http://www.fda.gov/
cder/pgd/ppiv.htm (accessed 6 February 2007); and FDA data on new molecular entities (NMEs).
NOTES: Some drugs facing paragraph IV certification may be counted more than once if the abbreviated new drug applications
(ANDAs) containing paragraph IV certifications for different doses of the drug are filed in separate submissions. Stock of drugs
available for certification is the sum of drug approvals between the previous four and twelve years. Data on drugs facing
certification are shown as bars and relate to the left-hand y axis. Data on the stock of drugs available are shown as a line and
relate to the right-hand y axis.

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n Generic share and price. For drugs

with paragraph IV certifications, the added
competition introduced by the authorized generic during the exclusivity period will generally result in lower generic prices, benefiting
consumers. Beyond the exclusivity period, the
key issue for determining the overall impact on
consumers is whether the prospect of authorized generic entry could change the long-run
number of generic entrants and, if so, whether
this would affect long-run generic prices and
shares. Any changes in the long-run number of
generics are unlikely to affect generic price
and share for the many drugs with more than
four or five generic entrants (Exhibit 1).
Based on recent data on patent expirations,
we found that the exclusivity period appears
to significantly increase short-run generic-tobrand price ratios but has little or no longterm effect on these price ratios and generic
shares. Exhibit 3 reports the average genericto-brand price ratios for drugs with and without successful paragraph IV certifications at
various points following initial generic entry.
In the third month following initial generic entry, drugs not subject to an exclusivity period

have significantly lower generic-to-brand

price ratios.31 In the twenty-fourth month, the
average generic-to-brand price ratio for drugs
with successful paragraph IV certifications is
0.27, compared with an average of 0.29 for
drugs without successful certifications.32
Exhibit 4 documents the average generic
share for drugs with and without successful
paragraph IV certifications at the same time
intervals following initial generic entry. In the
twenty-fourth month, the average generic
share for drugs with successful certifications
is 85 percent compared with an average of 83
percent for drugs without them.33 Interestingly, even in the third and sixth months following initial generic entry, when there are
significant differences in the generic-to-brand
price ratios between drugs with and without
successful paragraph IV certifications, the
shares for these two groups of drugs are very
similar; this similarity might reflect state and
private-sector managed care policies mandating automated generic substitution even when
there is only a small price differential between
the generic and the brand.
The comparisons in Exhibits 3 and 4 do not

EXHIBIT 3
Average Generic-To-Brand Price Ratios, With And Without Successful Paragraph IV
Filings, 19992003
With successful paragraph IV filings
Without successful paragraph IV filings

Generic-to-brand price ratio

7
0.8
7
0.6
5
0.4

21
22

21

0.2
13
0.0
3

12

15

18

21

24

Months following initial generic entry

SOURCES: IMS Retail and Non-Retail National Sales Perspective data and IMS Retail National Prescription Audit (NPA) data for
drugs that experienced generic entry between January 1999 and December 2003.
NOTES: Number of drugs constituting the average drugs with successful paragraph IV filings are shown above the data points;
those constituting the average drugs without successful paragraph IV filings are shown below the data points. Eulexin was
excluded from the calculation of average generic share and generic-to-brand ratio for the third month following initial generic
entry because of a single outlier month where the calculated generic-to-brand price ratio was greater than 1. Difference in
means between drugs with and without successful paragraph IV filings is statistically insignificant for twelve and twenty-four
months following initial generic entry.

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EXHIBIT 4
Average Generic Share Of Prescription Units, With And Without Successful Paragraph
IV Filings, 19992003
Generic share (percent)

With successful paragraph IV filings

80

Without successful paragraph IV filings

13

7
60
40

21
7

22

21
20
3

12

15

18

21

24

Months following initial generic entry

SOURCES: IMS Retail and Non-Retail National Sales Perspective data and IMS Retail National Prescription Audit (NPA) data for
drugs that experienced generic entry between January 1999 and December 2003.
NOTES: Number of drugs constituting the average drugs with successful paragraph IV filings are shown above the data points;
those constituting the average drugs without successful paragraph IV filings are shown below the data points. Eulexin was
excluded from the calculation of average generic share and generic-to-brand ratio for the third month following initial generic
entry because of a single outlier month where the calculated generic-to-brand price ratio was greater than 1. Difference in
means between drugs with and without successful paragraph IV filings is statistically insignificant for each point in time
compared.

control for inherent differences among drugs

with and without successful paragraph IV certifications. They are also based on a relatively
small sample of drugs facing successful certifications. However, the results are consistent
with the finding that high generic penetration
and low generic-to-brand price ratios are
achieved in the long run, regardless of whether
successful paragraph IV certifications occurred. These findings are suggestive of the potential impact of authorized generic entry during the 180-day exclusivity period.

Authorized Generic Entry: A

Recent Example
We examined data on generic shares and
prices for three brand-name drugs that recently experienced authorized generic entry:
Paxil (paroxetine), Cipro (ciprofloxacin), and
Ortho Tri-Cyclen.34 For all three products, authorized generics competed aggressively
against independent generics on price, and
both the authorized and independent generics
captured substantial market share from the
brand. Exhibit 5 plots quantity shares over
time for authorized and independent generics
following initial generic entry for Paxil
(paroxetine). Generics captured about 70 per-

796

cent of unit sales within two months and

about 85 percent within sixteen months.
Exhibit 6 portrays the generic-to-brand
price ratios over time for Paxil (paroxetine),
along with the number of independent generic
entrants. Although the reported price of the
authorized generic is higher than the average
independent generic price during the first year
following initial generic entry, after that, both
the authorized and independent generic prices
are roughly 50 percent of the brand price for
Paxil. The higher Paxil authorized generic
price in the first year might reflect a consumer/
physician preference for the authorized generic over the independent generic paroxetine.
However, for Cipro and Ortho Tri-Cyclen, the
authorized generic price discount was within
one percentage point or less of the independent generic price discount in all months. Reasons for price differences among these drugs
are likely idiosyncratic but could reflect differences in the characteristics of the generic entrants, rebates not observed in the data, marketing, and other factors.
Moreover, the IMS price and quantity data
used in these calculations are from wholesale
transactions; an implicit assumption is that on
average, retail margins for brands, authorized

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EXHIBIT 5
Generic Unit Shares For Paxil (Brand), Authorized Generic, And Independent
Paroxetine, 20012004
Authorized generic share
Independent generic share
Brand-name share

Market share (percent)

100
80
60
40
20

0
0

6
8
10
Months following initial generic entry

12

14

16

SOURCE: IMS Retail National Prescription Audit (NPA) data, January 2001 and December 2004.
NOTES: Market shares are based on extended units from IMS data. Numbers on the graphic are the number of independent
generics.

downward pressure on overall generic prices.

Lower generic prices during exclusivity also
reduce expected profits from successful paragraph IV certifications. Some argue that as a
consequence, authorized generics will deter
paragraph IV certifications, potentially delaying generic entry and resulting in higher longrun generic prices.
Although reliable long-run data are not yet
available, we posit that authorized generic

generics, and independent generics are proportionally similar and that the wholesale
price ratios provide reasonable proxies for relative consumer price impacts.35

Concluding Comments
We report evidence consistent with authorized generics benefiting consumers of drugs
sold during 180-day exclusivity periods, by introducing additional competition that places

EXHIBIT 6
Generic (Paroxetine)-To-Brand (Paxil) Price Ratios Versus Number Of Months After
Generic Entry, 20012004
Generic-to-brand price ratio

Authorized generic-to-brand price

1.00

Independent generic-to-brand price

1

0.75
1

0.50

3
2

3
3

12

13

14

15

16

0.25
1

6
8
10 11
7
9
Months following generic entry

SOURCE: IMS Retail National Prescription Audit (NPA) data, January 2001 and December 2004.
NOTES: The generic-to-brand price ratio in the first month is constrained to 1.00 as an apparent mismatch in the timing of
revenues and units results in unreasonable average generic revenue (price) in that month. Prices are calculated monthly based
on revenues and extended units as reported in IMS data. Numbers on the graphic are the number of independent generics.

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entry will disproportionately deter what otherwise would be unsuccessful paragraph IV

certifications. Even when a successful certification is deterred, generic entry is delayed by
anticipated authorized generic entry only if all
timely and successful certifications for a drug
are deterred. In the absence of extensive data
on paragraph IV filings, we put forth reasons
why, in our judgment, anticipated authorized
generic entry is unlikely to delay independent
generic entry for most drugs and why any impact on consumer prices from delayed entry is
likely to be small.
We also find that should anticipated authorized generic entry reduce the long-run number of generic entrants for a drug, it still might
have little effect on long-run generic prices
and shares. Our analysis of recent data demonstrates that additional generic entrants after
the first four or five do not appear to significantly affect long-run generic-to-brand price
ratios. Furthermore, although our analysis is
preliminary, we find that 180-day exclusivity
does not appear to lower long-run generic-tobrand price ratios or increase long-run generic
penetration. Hence, any effect of authorized
generics on the incentives created by 180-day
exclusivity is unlikely to greatly affect consumers through delayed generic entry or
higher long-run generic prices. Finally, we
note that no studies to date have provided evidence of authorized generics affecting the
number of paragraph IV certifications or the
timing of generic entry. In future research, we
intend to address these issues.
Funding support from Johnson and Johnson is
gratefully acknowledged. The opinions expressed herein
are those of the authors and do not necessarily reflect
those of the institutions with which they are affiliated,
or of the research sponsor.
NOTES
1.

Authorized generic drugs may be produced and

sold by the brand manufacturer (perhaps
through a subsidiary) or through a licensing
agreement with another company that independently distributes and prices the product.
2. Federal Trade Commission, Generic Drug Entry
Prior to Patent Expiration: An FTC Study, July 2002,

798

3.
4.

5.

6.

7.

8.

9.

10.

11.
12.

13.

14.
15.
16.

17.

http://www.ftc.gov/os/2002/07/genericdrug
study.pdf (accessed 7 October 2005).
Ibid.
An independent generic entrant is a generic entrant whose ability to be sold derives from its
FDA-approved ANDA.
FDA, Guidance for Industry, June 1998, http://
www.fda.gov/cder/guidance/2576fnl.pdf; March
2000, http://www.fda.gov/cder/guidance/3659fnl
.pdf; and July 2003, http://www.fda.gov/cder/
guidance/5710fnl.pdf (accessed 18 August 2006).
M. Freudenheim, All about Generic Pharmaceuticals; Now the Big Drug Makers Are Imitating
Their Imitators, New York Times, 20 September
1992.
Mylan Laboratories, Form 8-K, Citizen Petition,
pp. 1317, 30 June 2004, http://ccbn.10Kwizard
.com/xml/download.php?format=pdf&ipage=
2869681 (accessed 16 March 2007).
M. Sipkof, Battle over Authorized Generics
Grows Increasingly Heated, Drug Topics, 1 April
2005, http://www.drugtopics.com/drugtopics/
article/articleDetail.jsp?id=152726 (accessed 14
September 2005).
U.S. Department of Health and Human Services,
Docket nos. 2004P-0075/CP1 and 2004P0261/CP1, 2 July 2004, http://www.fda.gov/
ohrms/dockets/dailys/04/july04/070704/04p0075-pdn0001.pdf (accessed 24 August 2005).
See, for example, Teva Pharmaceutical Industries v.
FDA, no. 05-5004, U.S. Court of Appeals, D.C.
Circuit, 3 June 2005.
See S. 3695, 109th Cong., 2d sess. (19 July 2006).
D. Reiffen and M.R. Ward, Branded Generics
as a Strategy to Limit Cannibalization of Pharmaceutical Markets, Working Paper, May 2005,
http://www.uta.edu/faculty/mikeward/branded
generics.pdf (accessed 7 October 2005).
See Pharmaceutical Research and Manufacturers
of America, Authorized Generics Can Lead to
Lower Drug Prices, Press Release, 20 July 2006,
http://www.phrma.org/news_room/press_
releases/authorized generics_can_lead_to_lower_
drug_prices (accessed 6 February 2007).
Here we consider a single authorized generic entry, although in principle there could be more.
FDA, Guidance for Industry, June 1998, March
2000, and July 2003.
Grabowski suggests that generic firms are prospecting in patent challenges for very large payoffs
from 180-day exclusivity periods should they be
successful. H. Grabowski, Competition between Generic and Branded Drugs (Unpublished paper, Duke University, May 2005).
FTC, Generic Drug Entry. Of the remaining thirty-

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18.

19.

20.

21.

22.

23.

24.

25.

one resolutions, in two cases the patent expired

prior to a litigation resolution; in twenty, the litigation was settled; in eight, the brand-name
company won the litigation; and in one, the NDA
was withdrawn before litigation was resolved.
Unlike the twenty-two case decisions resulting
in a win for the generic, most of the settlements
instituted delays to generic entry.
See J. Farrell and C. Sharpiro, How Strong Are
Weak Patents? Working Paper, January 2007,
http://faculty.haas.berkeley.edu/shapiro/weak
.pdf (accessed 6 February 2007).
D. Reiffen and M.R. Ward, Generic Drug Industry Dynamics, Review of Economics and Statistics 87,
no. 1 (2005): 3749.
See, for example, R. Caves, M. Whinston, and M.
Hurwitz, Patent Expiration, Entry, and Competition in the U.S. Pharmaceutical Industry,
Brookings Papers on Economic Activity: Microeconomics
(1991): 167; Congressional Budget Office, How Increased Competition from Generic Drugs Has Affected
Prices and Returns in the Pharmaceutical Industry
(Washington: U.S. Government Printing Office,
July 1998); and F.M. Scott-Morton, Barriers to
Entry, Brand Advertising, and Generic Entry in
the U.S. Pharmaceutical Industry, International
Journal of Industrial Organization 18, no. 7 (2000):
10861104.
Using revenue divided by quantity as a measure
of average price, Reiffen and Ward found no statistically significant effect of additional generic
entrants on the generic-to-brand price ratio following the sixth generic entrant. Reiffen and
Ward, Generic Drug Industry Dynamics.
For a description of the data used here, see our
Online Supplement at http://content.health
affairs.org/cgi/content/full/26/3/790/DC1.
Bresnahan and Reiss found that in a number of
markets, it only takes three or four entrants to
approximate competitive conditions. T.
Bresnahan and P. Reiss, Entry and Competition
in Concentrated Markets, Journal of Political Economy 95, no. 5 (1991): 9771009.
A. Hollis, The Anticompetitive Effects of BrandControlled Pseudo-Generics in the Canadian
Pharmaceutical Market, Canadian Public Policy 29,
no. 1 (2003): 2131. Reiffen and Ward cite a cost
of $475 thousand in late 1980s/early 1990s dollars. Reiffen and Ward, Branded Generics.
Hollis cites a cost of roughly $1 million Canadian.
Generic manufacturers legal costs of defending a
challenged paragraph IV certification may be offset by countersuit litigation. For example, Mylan
received a $15 million settlement of allegations
that the brand manufacturer violated antitrust
laws by suing Mylan for alleged infringement of a
patent on the drug mirtazapine. Mylan Labora-

26.

27.

28.

29.

30.

31.

32.
33.

34.

35.

tories, Form 10-K (2004), 63.

Razadyne recently experienced paragraph IV
certifications filed by at least seven generic manufacturers. Par Pharmaceuticals, Form 10-K
(2006).
The effect on the timing of generic entry will depend on the respective ANDA filing dates, time
to approval, and the time to any relevant court
decisions for the independent generic manufacturer that was deterred from entering compared
to the one that was not deterred from entering
and is the first filer.
Calculated using FDA data on the date of the first
ANDA filing with a paragraph IV certification
for drugs experiencing these filings between
March 2004 and May 2006. FDA, Paragraph IV
Patent Certifications as of January 18, 2007,
http://www.fda.gov/cder/ogd/ppiv.htm (accessed
6 February 2007). Dates determined by data
availability.
Using FDA data on new molecular entity (NME)
approvals, and assuming an average twelve-year
time span between NME approval and initial generic entry, we calculated the stock of drugs potentially facing paragraph IV challenges as the
total number of NME approvals between the
previous four and twelve years (for example, the
2004 stock is the sum of NME approvals between 1992 and 2000). Results were similar
when ten- and fourteen-year time spans were
employed instead of twelve.
Launch of an independent generic version of
Allegra might have been accelerated to preempt
potential authorized generic entry. See FDA,
Teva Launches Generic Allegra At Risk under
Barrs Exclusivity, Pink Sheet 67, no. 37 (2005): 17.
In the third (sixth) month following initial generic entry, the average generic-to-brand price
ratio for drugs with successful paragraph IV certifications was 0.74 (0.64), compared with an average of 0.52 (0.47) for drugs without successful
certifications; the null hypothesis of no difference between these price ratios is rejected, p =
0.02 (marginally rejected, p = 0.09).
The null hypothesis of no difference between
these price ratios is not rejected (p = 0.90).
The null hypothesis of no difference between the
median (not mean) price ratios is also not rejected (p = 0.66). Similarly, the null hypothesis of
no difference between the median generic shares
is not rejected (p = 0.66).
Ortho Tri-Cyclen is a combination of three molecules and does not have a single generic molecular name.
Further data details are available in the online
supplement; see Note 22.

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