Pay-for-Delay:

How Drug Company Pay-Offs 

Cost Consumers Billions

Federal Trade Commission | ftc.gov

An FTC Staff Study

January 2010

1

Summary

● Brand-name pharmaceutical companies can delay generic competition that lowers 

prices by agreeing to pay a generic competitor to hold its competing product off the 

market for a certain period of time. These so-called “pay-for-delay” agreements have 

arisen as part of patent litigation settlement agreements between brand-name and 

generic pharmaceutical companies.

● “Pay-for-delay” agreements are “win-win” for the companies: brand-name 

pharmaceutical prices stay high, and the brand and generic share the benefits of the 

brand’s monopoly profits. Consumers lose, however: they miss out on generic prices 

that can be as much as 90 percent less than brand prices. For example, brand-name 

medication that costs $300 per month might be sold as a generic for as little as $30 per 

month. 

● The Federal Trade Commission’s (FTC) investigations and enforcement actions against 

pay-for-delay agreements deterred their use from April 1999 through 2004.1 In 2003, 

an appellate court held that such agreements were automatically (or per se) illegal.2 

● Since 2005, however, a few appellate courts have misapplied the antitrust law to uphold 

these agreements.3 Following those court decisions, patent settlements that combine 

restrictions on generic entry with compensation from the brand to the generic have reemerged. 

2004 2005 2006 2007 2008 2009

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Agreements with Delay and Compensation4

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● Agreements with compensation from the brand to the generic on average prohibit 

generic entry for nearly 17 months longer than agreements without payments, where 

the average is calculated using a weighted average based on sales of the drugs.6

 Most of 

these agreements are still in effect. They currently protect at least $20 billion in sales of 

brand-name pharmaceuticals from generic competition.7 

● Pay-for-delay agreements are estimated to cost American consumers $3.5 billion per 

year – $35 billion over the next 10 years.8

Recommendation

Pay-for-delay agreements have significantly postponed substantial consumer savings from 

lower generic drug prices. The Commission has recommended that Congress should pass 

legislation to protect consumers from such anticompetitive agreements.
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Background

Pay-for-delay agreements appear in some settlements of patent litigation between brand-name 

and generic pharmaceutical companies. That patent litigation usually takes place within the 

framework for generic entry established by the Hatch-Waxman Act.9 Under that Act, a generic 

competitor may seek entry prior to expiration of the patents on a brand-name drug. Generic 

drug entry before patent expiration can save consumers billions of dollars. Generics have an 

incentive to challenge brand patents because the first generic to file its application can obtain 

180 days of marketing exclusivity during which it is the only generic on the market. To seek 

FDA approval for entry before patent expiration, a generic must declare that its product does 

not infringe the relevant patents or that the relevant patents are invalid.

Typically, brand-name pharmaceutical companies challenge the generic’s declaration, and 

litigation ensues between the brand-name and generic pharmaceutical manufacturers to 

determine whether the relevant patents are valid and infringed. For the brand to prevail and 

block entry, it must successfully defend the validity of its patents and demonstrate that the 

generic’s product would infringe those patents. In 2002, the FTC issued a study showing 

that generics prevailed in 73% of the patent litigation ultimately resolved by a court decision 

between 1992 and June 2002.10

Given the costs and potential uncertainty of patent litigation, brand-name and generic 

pharmaceutical companies sometimes settle their patent litigation before a final court 

decision. For example, the parties may agree that the generic can enter at some time before 

the patent’s expiration date, but not as soon as the generic seeks through its litigation. Absent 

compensation to the generic for the delay in its entry, such settlement agreements are unlikely 

to raise antitrust issues.

The FTC’s 2002 study determined, however, that some brand-name and generic 

pharmaceutical companies had settled their patent litigation through agreements that 

compensated generics for substantial delays in generic entry. The FTC recommended that 

Congress pass legislation to require pharmaceutical companies to file certain agreements 

with the FTC. The intent of the legislation was “to put an end to this exploitation of the 

provision in Hatch-Waxman that grants a short-term protection from competition to the first 

manufacturer to bring a generic version of a brand name drug to market.”11

Congress acted on the FTC’s recommendation. Under the Medicare Prescription Drug, 

Improvement, and Modernization Act of 2003 (the “MMA”), pharmaceutical companies must 

file certain agreements with the FTC and the Department of Justice within ten days of their 

execution.12
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Findings from Pharmaceutical 

Agreement Filings from FY2004 

through FY2009

h How Many Final Agreements Have Involved Compensation from the Brand to the 

Generic Combined with Restrictions on Generic Entry?

From FY2004-FY2009, 66 final agreements involved some form of compensation 

from the brand to the generic combined with a delay in generic entry.

h Can Pharmaceutical Companies Settle Patent Litigation without Pay-for-Delay 

Agreements?

Yes. From FY2004-FY2009, pharmaceutical companies filed a total of 218 final 

settlement agreements involving brand and generic companies. Seventy percent of 

those patent settlements – 152 – did not involve compensation from the brand 

to the generic combined with a delay in generic entry. This large number of 

settlements not involving compensation from the brand to the generic undermines 

brand and generic firms’ arguments that compensation is the only way to settle 

patent litigation. In fact, there are a variety of ways to settle litigation that do not 

involve these payments.

h Do Agreements with Compensation from the Brand to the Generic Postpone 

Generic Entry Significantly Longer than Other Patent Settlement Agreements?

Yes. Staff analysis of patent settlements restricting generic entry finds that 

agreements with compensation on average prohibit generic entry for nearly 17 

months longer than agreements without payments, where the average is calculated 

using a weighted average based on sales of the drugs.13 This difference in time to 

entry is very unlikely to be caused by random variation in the agreements. In fact, 

there is less than a 1% chance that this large a difference in average time to entry 

would be observed if the amount of delay from the two types of agreements were 

drawn from the same statistical distribution. 

A hypothetical consumer paying $300 per month for a brand-name drug, instead of 

a generic price as low as $30 per month, could pay as much as $270 per month more 

for prescription drugs. Over a 17-month period, this could total additional expenses 

of $4,590 resulting from the extra delay that occurs, on average and weighted for 

sales. 
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h Is the First Generic to Seek Entry Prior to Patent Expiration Involved in Most of 

the Potential Pay-for-Delay Settlements?

Yes. Out of the 66 agreements that combined compensation from the brand to the 

generic with deferred generic entry, 51 agreements (77%) were between the brand 

pharmaceutical company and the generic company that was the first to seek entry 

prior to patent expiration for the relevant brand-name drug.

Settlements with first-filer generics can prevent all generic entry. Those agreements 

place a “cork in the bottle” that typically ensures the brand-name drug’s lock on the 

market. This cork-in-the-bottle effect occurs because every subsequent generic 

entrant has to wait until the first generic has been marketed for 180 days. 14

h Do All Pay-for-Delay Agreements Involve Dollar Payments from the Brand to the 

Generic?

No. Brand-name pharmaceutical companies have found a wide variety of techniques 

through which to compensate generic companies for delaying their entry.

Recently, brand-name pharmaceutical companies have sometimes compensated 

generics by agreeing not to compete through a so-called “authorized generic.” Under 

the Hatch-Waxman Act, the generic that is first to file its approval application can 

be entitled to market its generic product for 180 days with no competition from 

other generics.15 This rule, however, does not protect the first-filer generic from 

competition from an “authorized generic” or “AG” during those 180 days. 

AGs are brand-name pharmaceutical products marketed as generics. AG 

competition can substantially reduce the revenues a first-filer generic earns during its 

180 days of marketing exclusivity.16 

About 25% of patent settlement agreements from FY2004-FY2008 that were with 

first-filer generics involved an explicit agreement by the brand not to launch an 

AG to compete against the first filer, combined with an agreement by the first-filer 

generic to defer entry past the date of the agreement.17 In effect, by agreeing not to 

launch an AG, the brand agrees not to subtract from the generic’s profits during the 

180-day period.

h Has the FTC Given Up Litigating Pay-for-Delay Cases under the Antitrust Laws?

No. The FTC has multiple investigations underway and currently is litigating two 

cases in the trial courts.18 Over the past nine years, the FTC has invested substantial 

resources in investigating and, when necessary, litigating cases involving patent 

settlements in which brand-name pharmaceutical companies allegedly paid generic 

companies to stay off the market, thus depriving consumers of millions of dollars in 

cost savings that would otherwise have been available.19 
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Given the magnitude of consumer harm from pay-for-delay settlements – an 

estimated $35 billion over the next ten years – a legislative solution offers the 

quickest and clearest way to deter these agreements and obtain the benefits of 

generic competition for consumers. 

 
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Study Methodology

This study was prepared by staff from the FTC’s Bureau of Competition, Bureau of 

Economics, and Office of Policy Planning.

This study is based on patent settlement agreements filed with the FTC between January 1, 

2004 and September 30, 2009 pursuant to the Medicare Prescription Drug, Improvement, and 

Modernization Act of 2003, Pub. L. No. 108-173, 117 Stat. 2066, codified in relevant part at 

42 U.S.C. § 1395w-101 note (section 110), 21 U.S.C. § 355 note (sections 1111-1118), 21 

U.S.C. § 355(j)(5) (section 1102).

Staff identified agreements in which restrictions on generic entry were combined with 

compensation from the brand to the generic. The FTC has challenged some of these 

agreements as violating the antitrust laws, but the agency lacks sufficient resources to 

investigate and litigate the legality of all of these agreements.

How staff calculated the additional delay in generic entry 

associated with agreements that involved compensation 

from the brand to the generic.

To calculate how long (on average and weighted for sales) generic entry was delayed as 

a result of compensation from brand-name pharmaceutical companies to generic drug 

companies, staff compared agreements with and without compensation to the generic in 

terms of the sales-weighted average time between the date of the agreement’s execution and 

the date of generic entry.

To avoid double counting multiple settlements on the same drug, only the settlement that 

establishes the earliest date for generic entry was used in this calculation.

To better reflect the amount of consumer savings held up by the delay, staff used weighted 

averages of sales. 

This calculation established that, on average and weighted for sales, agreements with 

compensation from the brand to the generic delayed generic entry for nearly 17 months 

longer than agreements without compensation. Staff determined that the 17 month 

difference in time until generic entry was statistically significant at the 99% confidence level. 

Thus, this difference in time to entry is very unlikely to be caused by random variation in 

the agreements. In fact, there is less than a 1% chance that this large a difference in average 

time to entry would be observed if the amount of delay from the two types of agreements 

were drawn from the same statistical distribution. 
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How staff calculated the estimate of $3.5 billion annually 

that consumers lose due to pay-for-delay agreements.

The calculation below is a method of estimating the likely harm to consumers from the loss 

of competition when patent settlements delay generic entry.20 The analysis estimates that 

under relatively conservative assumptions, the annual savings to purchasers of drugs that 

would result from eliminating “reverse-payment” settlements would be approximately 

$3.5 billion. 

This calculation requires four factors:

1. the consumer savings that result from generic competition in any given month, 

2. the likelihood that a generic manufacturer and brand-name manufacturer will 

reach a settlement that delays entry in return for compensation,

3. the length of entry delay resulting from such settlement, and

4. the combined sales volume of drugs for which settlements are likely.

(1) Consumer savings from generic competition.

When generic entry occurs, purchasers immediately begin to benefit from the savings 

associated with lower generic drug prices. Following an initial entry period, the generic 

market matures and consumers receive the full savings from generic competition. Thus, 

any delay in entry results in a longer period of purchases at the full brand price and 

correspondingly fewer purchases at the mature competitive prices.21 This means that 

the costs to consumers (or what they would have saved but for the entry delay) are 

equal to the monthly savings from the mature generic market multiplied by the number 

of months of delay. 

Publicly available information about recent generic launches suggests that a generic 

market typically matures about one year after the first entrant comes on the market. 

The generic penetration rate at that point is about 90% on average, i.e. pharmacists fill 

90 of every 100 prescriptions for the molecule with an AB-rated (or bioequivalent) 

generic. Recent information also shows that in a mature generic market, generic prices 

are, on average, 85% lower than the pre-entry branded drug price.22

Using the above figures and assumptions, the average consumer savings from a mature 

generic market relative to pre-generic levels are approximately 77% (85% savings 

multiplied by 90% of market demand). If purchasers discount future savings at the 

same rate as they expect drug prices and quantities to increase, then all future savings 

can be expressed in terms of today’s dollars without complicated net present value 

calculations. Thus, the costs of delay are the average discount (77%) times the length 

of the delay times the pre-generic entry revenues of the branded drugs that will reach a 

settlement with delay. 
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(2) Likelihood of Settlements with Payment to Delay, and the Length of Delay 

It is more difficult accurately to estimate how much delay is likely to result from 

settlements that have not yet been reached, especially because future legislative or 

judicial actions could alter the types of settlements that are likely. Therefore, the 

calculation assumes that recent settlements provide the best information about what 

may happen in the future. Data on settlements reported to the FTC from FY2004 to 

FY2008 show that of all patent settlements resulting from a Paragraph IV (invalidity 

or non-infringement) challenge, approximately 24% included both restrictions on 

timing of generic entry and a payment to the generic firm. 

The additional length of the delay that is attributed to the payments in these 

settlements can be calculated by taking the universe of Paragraph IV settlements that 

have restrictions on entry, then comparing the average number of months between 

the execution of the agreement and the date of generic entry in agreements with and 

without payments to the generic entrant. Agreements with payments on average allow 

entry nearly 17 months (1.42 years) later than agreements without payments. 

This does not mean that we are assuming that all settlements with payments would 

“become” settlements without payments if the former were banned. Some would; 

others might involve litigation of the patent. But since settlements without payments 

will tend to reflect patent strength, they can provide a benchmark for the consumer 

impact of either alternative. 

(3) Sales Volume of Drugs for which Settlements are Likely 

Staff relied on recent history as a guide to the settlements likely to be seen in the future. 

The analysis starts with the FDA’s list of all drugs that have received a Paragraph IV 

filing.23 It then uses information from the FDA’s Orange Book, IMS NPA retail sales 

data, and the settlement filings to determine whether there had been a generic version 

of a challenged drug launched before 2004. If a generic had entered, it was removed 

from the list of drugs that could have settled between FY2004 and FY2008. The 

analysis next uses the IMS data to determine the total dollar sales associated with 

those drugs remaining in the sample for each year. It adjusts these annual totals by 

removing drugs that reached a settlement or experienced generic entry due to a nonsettlement event such as a court victory or patent expiration. 

By the end of FY2008, the above method estimates that there were $90 billion of 

branded drug sales still facing a Paragraph IV challenge. Since the IMS data used 

does not cover all purchasing channels and excludes injectable drugs, $90 billion is a 

conservative estimate of the total branded dollars affected by possible settlements. 

The next step is to look at the number of settlements per year as a percentage of all 

Paragraph IV-challenged drugs that could possibly settle. Over the FY2004 to FY2008 

time period, the percentage of drugs that settled per year (not including injectables) 

increased from 7 percent to 18 percent, with most of the increase following the 

Eleventh Circuit’s Schering decision. Since this post-Schering era is probably a better 
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reflection of likely future settlement patterns, it seems appropriate and conservative to 

use the 15 percent per year average from this period in the estimate calculations. 

Multiplying $90 billion by 15 percent yields $13.5 billion in drug purchases that are 

predicted to be affected by settlements each year. Multiplying this $13.5 billion total by 

24 percent (an assumption based on the percentage of past settlements with payment 

and delayed entry), leads to a prediction of $3.2 billion in drug sales that will be 

affected by reverse payment settlements in a given year. 

(4) Final Estimate Calculation 

The final steps in calculating the savings to be gained by eliminating pay-for-delay 

settlements are to factor in the discount consumers would receive from matured generic 

entry and the length of delay. From the 77 percent savings and 1.42 year delay figures 

above, the calculation is therefore: 

In sum, the calculation yields a conservative estimate of $3.5 billion per year of 

potential savings from eliminating pay-for-delay settlements. 

Results with Varied Assumptions 

The $3.5 billion figure represents staff ’s best estimate of the effect based on what staff 

believes to be the most reasonable assumptions. Nonetheless, this estimate is sensitive 

to changes in the assumptions.24 Reasonable estimates about the length of delay and 

the sales of drugs likely to be affected by the legislation can vary. The calculations 

below present high and low estimates of savings derived from the data ranges. 

 77% savings 

x $1.5 billion (7% per year settling) 

x 0.5 years (low of interquartile distribution of delay) 

$0.6 billion of annual purchaser savings

 77% savings 

x $3.9 billion (18% per year settling) 

x 2.5 years (high of interquartile distribution of delay) 

$7.5 billion of annual purchaser savings

 77% savings 

x $3.2 billion (15% per year settling) 

x 1.42 years (median delay) 

$3.5 billion of annual purchaser savings
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Endnotes

1 See Generic Drug Entry Prior to Patent Expiration: An FTC Study, Exec. Summary at viii ( July 

2002), available at http://www.ftc.gov/os/2002/07/genericdrugstudy.pdf. This study covered 

the period through June 2002. The FTC began receiving patent settlement agreements in January 

2004 pursuant to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. 

Although there is a gap between July 2002 and December 2003, we are unaware that brand and 

generic firms entered into any pay-for-delay settlement agreements during this time period.

2 See In re Cardizem CD Antitrust Litigation, 332 F.3d 896 (6th Cir. 2003).

3 See Schering-Plough Corp. v. Fed. Trade Comm’n, 402 F.3d 1056 (11th Cir. 2005); see also In re 

Tamoxifen Citrate Antitrust Litigation, 466 F.3d 187 (2d Cir. 2006); In re Ciprofloxacin Hydrochloride 

Antitrust Litigation, 544 F.3d 1323 (Fed. Cir. 2008). But see Brief For the United States In 

Response To the Court’s Invitation, In re Ciprofloxacin Hydrochloride Antitrust Litigation, 

No. 05-cv-2851(L) (2d Cir. July 6, 2009), available at

http://www.justice.gov/atr/cases/f247700/247708.htm.

4 These agreements were filed with the FTC pursuant to the Medicare Prescription Drug, 

Improvement, and Modernization Act of 2003, Pub. L. No. 108-173, 117 Stat. 2066 (codified 

in relevant part 42 U.S.C. § 1395w-101 (2009) note (section 110), 21 U.S.C. § 355 (2009) note 

(sections 1111-1118), 21 U.S.C. § 355(j)(5) (2009) (section 1102)). All of these agreements 

involved patent settlements that combined restrictions on generic entry with compensation from 

the brand to the generic. The FTC has challenged some of these agreements as violating the 

antitrust laws, but the agency lacks sufficient resources to investigate and litigate the legality of all of 

the agreements represented in this chart.

5 These years represent fiscal years.

6 The 17-month delay attributed to payments was calculated by comparing the sales-weighted 

average time between the date of the agreement’s execution and the date of generic entry for 

agreements with and without compensation to the generic. 

7 This dollar amount represents the prior-year total sales of the brand-name pharmaceuticals that 

are currently covered by agreements with delay and compensation and thus indicates the order of 

magnitude of brand-name pharmaceutical sales for which generic competition (with lower prices) 

has likely been delayed. 

8 See Jon Leibowitz, Chairman, Fed. Trade Comm’n, “Pay-for-Delay” Settlements in the Pharmaceutical 

Industry: How Congress Can Stop Anticompetitive Conduct, Protect Consumers’ Wallets, and Help Pay 

for Health Care Reform (The $35 Billion Solution) at 8 ( June 23, 2009), available at 

http://www.ftc.gov/speeches/leibowitz/090623payfordelayspeech.pdf.

9 The Drug Price Competition and Patent Term Restoration Act of 1984, Pub. L. No. 98-417, 98 

Stat. 1585 (1984) (codified as amended 21 U.S.C. § 355 (2009)) governs how generics may enter 

the marketplace to compete with brand-name pharmaceuticals.

10 See supra note 1.

11 See S. Rep. No. 107-147 at 4 (2002).

12 See Pharmaceutical Agreement Filing Requirements, available at

http://www.ftc.gov/os/2004/01/04106pharmrules.pdf.
12

13 The delay attributed to payments was calculated by comparing the sales-weighted average time 

between the date of the agreement’s execution and the date of generic entry for agreements with 

and without compensation to the generic. The distribution of annual sales figures for drugs covered 

by these pay-for-delay agreements is not discernibly different from the distribution of annual sales 

figures for drugs covered by agreements that restrict generic entry with no payment to the generic.

14 Later-filing generics cannot enter the market until they win their own patent litigation at the court 

of appeals level and the first filer generic either markets its product for 180 days or forfeits its right 

to do so. 21 U.S.C. § 355(j)(5)(D) (2009) (forfeiture provisions). 

15 There may be more than one “first-filer” if more than one generic firm files its application on the 

same, “first” day.

16 Authorized Generics: An Interim Report, Fed. Trade Comm’n at 3 ( June 2009); available at 

http://www.ftc.gov/os/2009/06/P062105authorizedgenericsreport.pdf.

17 Id.

18 See Fed. Trade Comm’n v. Cephalon, No. 08-cv-2141-RBS (E.D. Pa. May 8, 2008) (transfer order); 

Fed. Trade Comm’n v. Watson, No. 09-cv-00598 (N.D. GA Feb. 9, 2009) (transfer order). 

19 See In re Hoechst Marion Roussel Inc., Carderm Capital L.P. and Andrx Corp.; 131 F.T.C. 927 (2001) 

(consent order); In re Abbott Laboratories and Geneva Pharmaceuticals, Inc., C-3945, C-3946 

(consent orders issued May 22, 2000); In re Schering-Plough Corp., et al, D. 9297, Initial Decision 

issued June 27, 2003; rev’d by Commission Decision and Order, December 8, 2003(136. F.T.C. 956 

(2003)); rev’d 402 F.3d 1056 (11th Cir. 2005); In re Bristol-Myers Squibb, 135 F.T.C. 444 (2003) 

(consent order); Fed. Trade Comm’n v. Cephalon, No. 08-cv-2141-RBS (E.D. Pa. May 8, 2008) 

(transfer order); Fed. Trade Comm’n v. Watson, No. 09-cv-00598 (N.D. GA Feb. 9 2009) (transfer 

order).

20 This calculation first appeared as an Appendix to Chairman Leibowitz’s speech. See supra note 8.

21 If one assumes some future end-point in the drug’s life on the market, delayed entry means that, by 

that end-point, consumers will have had less time buying in the mature competitive market.

22 The calculation assumes that the total demand for the drug/molecule (market size in unit sales) 

remains the same after generic entry occurs. It also assumes that the brand’s price stays the same 

after generic entry occurs. Data show that branded prices often rise following generic entry, but 

there are also instances when brand price declines. Assuming the price stays the same simplifies the 

analysis.

23 This is based on a version downloaded from the FDA’s website on May 19, 2009.

24 In addition, a possible effect in the other direction could arise if a future legislative or judicial action 

made pay-for-delay agreements illegal. To the extent that such an action would reduce generic 

firms’ incentives to file Paragraph IV challenges, it could reduce the sales volume of drugs facing 

such challenges. Any such deterrent effect would likely be very low, however. As noted above, only 

24% of all cases settled with both payment and delay, so presumably generic drug firms do not 

assume that they will be able to settle their patent litigation through compensation for deferred 

generic entry. Moreover, a generic would still have a strong incentive to challenge a weak patent in a 

large market.

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