“Playing Both Sides?” Branded Sales, Generic Sales and Patent Policy

In this article, we explore a phenomenon we call “playing both sides”: companies that participate in pharmaceutical markets as both brand owners and generics. We hypothesize that companies that earn a significant amount of their revenue from patented drugs may have less incentive to aggressively pursue a generic agenda, since patented drugs generate far more revenue for firms than generic drugs do. To investigate this phenomenon, we built a comprehensive database of all major pharmaceutical companies, evaluating where their revenue comes from and how that relates to their behavior in court. We find that the phenomenon of playing both sides has been real and common, but is actually in decline in much of the industry. Large pharmaceutical companies are increasingly separating into one set that relies almost entirely on branded drugs, a second set that produces mostly generic drugs, and a smaller third set that relies on a more diversified “mixed” model. We also find that the branded drug business is quite lucrative. Despite periodic claims that brand companies face a “patent cliff” and will soon lose revenue, we found that in the past two decades, brand revenues have risen enormously. Our data show that when companies with significant generic sales do play both sides they behave differently than firms with a purer generic revenue stream. In particular, accounting for firm revenue, the pure generic firms in our study were consistently parties in more ANDA lawsuits over time as patent challengers than the mixed firms. Further, companies with growing brand sales (or share of their revenue from brand sales) are more likely to settle the patent challenges they bring; companies with growing generic share are less likely to settle and more likely to take those cases to judgment. And when they do go to judgment, patent challengers with a greater generic share are more likely to win those challenges while companies with higher brand sales are less likely to win. In short, we find evidence to support the hypothesis that generic companies that make more of their sales from patented drugs are less likely to pursue challenges to judgment and less likely to win when they do. Playing both sides may reduce the incentive of generic challengers to fight as hard as possible to win the case before them. That may be especially true of the sorts of challenges that affect not just the patent in the instant case but might change legal doctrines that may ultimately hurt the generic challenger’s brand business