Androgel Case Study Final

Economic Analysis of the Firm- Case Study 4 27/11/2023
BAD 315: Economic Analysis of the Firm

Pay for Delay: AndroGel Avoids Competition
The Case Study is submitted in Partial Fulfillment of the

Requirements of BAD 315 and
Presented to Mr. Garabed Boghossian
By:
Angie Kirejian
Sara Derian
Sally Bakiragha
Palig Siroun Kelian
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Table of Contents
I. Introduction:......................................................................................................................................3
II. Identification of issues:..................................................................................................................4
III. Stakeholder Perspectives:.............................................................................................................5
IV. Connection to Theoretical and Empirical Research:..................................................................6
A. Theoretical Research:....................................................................................................................6
1. Game Theory Analysis:.............................................................................................................6
2. Contract Theory:.......................................................................................................................7
3. Antitrust and Competition Theory:.........................................................................................8
B. Empirical Research:....................................................................................................................10
1. Trade off – Opportunity Cost Analysis:.....................................................................................10
2. Market Concentration and Competition:..................................................................................10
3. Long-Term Effects on Innovation:.............................................................................................11
V. Evaluation and Analysis:................................................................................................................12
VI. Action Plans:................................................................................................................................21
VII. Evaluation of Consequences:......................................................................................................23
VIII. References:...............................................................................................................................24
IX. Case:.............................................................................................................................................25
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I. Introduction:
The case examines the legal battle surrounding a "pay for delay" arrangement with Solvay
Pharmaceuticals about the medication AndroGel between the US Federal Trade Commission
(FTC) and Watson Pharmaceuticals. The 2003 patent for the testosterone replacement therapy
AndroGel was given to Solvay. To sell generic versions, Watson and Paddock, makers of generic
drugs, applied for FDA permission. Solvay negotiated a deal with both firms to avoid possible
competition, which may have resulted in lower competition and higher medicine costs. The
Federal Trade Commission asserted that these agreements contravene antitrust laws, particularly
those that prohibit trade constraints. The Hatch-Waxman Act, which aims to strike a balance
between encouraging generic competition and providing incentives for medication discovery, is
examined in this case in addition to the conditions surrounding the heavily regulated U.S.
pharmaceutical business. The resulting legal dispute raises concerns about how these agreements
affect customer welfare, market dynamics, and pharmaceutical sector regulation in general.
The matter at hand entails a legal dispute between the United States Federal Trade Commission
(FTC) and Watson Pharmaceuticals, which sheds light on the contentious practice of "pay for
delay" agreements in the pharmaceutical sector. The medicine Androgel, which is a testosterone
replacement treatment created by Solvay Pharmaceuticals, is at the heart of this issue. This case
investigates the complex interaction between patent protection, antitrust laws, and the balance of
innovation and competition within the highly regulated pharmaceutical sector in the United
States.
In the 1990s, Solvay Pharmaceuticals and a partner created AndroGel, the first testosterone-gel
medication approved by the Food and Drug Administration (FDA) to treat hypogonadism, or low
testosterone levels in men. The FDA approved AndroGel in 2000, along with a term of statutory
exclusivity given under the Hatch-Waxman Act—a major federal statute meant to govern generic
drugs while balancing competition and incentives for medicinal research.
As the popularity of AndroGel grew, attracting the interest of generic medication producers such
as Watson Pharmaceuticals and Paddock Laboratories, legal disputes erupted. Watson and
Paddock submitted Abbreviated New Drug Applications (ANDAs) with the FDA, claiming that
Solvay's patent was invalid. In early 2006, the FDA granted Watson final clearance to launch a
generic version of AndroGel amidst pending patent infringement cases, posing a substantial
threat to Solvay's lucrative market position.
Solvay chose settlement agreements with Watson and Paddock to avoid the introduction of
generic competition and the probable loss of significant earnings. These arrangements, dubbed
"pay for delay," entailed Solvay paying payments to generic manufacturers in exchange for their
agreeing to delay the sale of generic AndroGel until 2015. Concerns were raised regarding the
effects of such arrangements, sometimes known as reverse payment agreements, on competition,
consumer welfare, and the larger regulatory framework specified in the Hatch-Waxman Act.
The Federal Trade Commission contends that these agreements violate antitrust laws by
impeding competition, resulting in higher drug costs for consumers. The case explores the
intricacies of the pharmaceutical industry's regulatory landscape, the role of patent protection,
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and the ethical considerations surrounding the strategies employed by both brand-name and
generic drug manufacturers in navigating the delicate balance between innovation and market
competition.
This legal struggle, with far-reaching effects, necessitates a critical evaluation of the
pharmaceutical industry's methods and the possible consequences for stakeholders ranging from
regulatory authorities to consumers, physicians, and the larger healthcare system. As the case
moves through the American legal system, its outcome will affect the future dynamics of patent
battles and settlement agreements in the pharmaceutical industry.
II. Identification of issues:

The central issues in this case include:
 "Pay for Delay" Agreements: The main issue is the legitimacy and significance of the
settlement agreements reached between Solvay Pharmaceuticals and generic medication
makers Watson and Paddock. Solvay makes incentives to generic producers in exchange
for their agreement to postpone the debut of generic versions of AndroGel.
 Antitrust Violation: The Federal Trade Commission (FTC) claims that these "pay for
delay" arrangements are an illegal trade restriction. According to the FTC, such
agreements limit competition by delaying generic pharmaceuticals from entering the
market on time, resulting in higher drug costs for consumers.
 Impact on Consumer Welfare: The case highlights concern about the possible harm to
consumer welfare caused by delayed generic competition. The FTC claims that these
arrangements keep prescription costs higher than they would be in a competitive market,
depriving consumers of the cost-saving benefits associated with generic alternatives.
 Regulatory Framework and the Hatch-Waxman Act: The case also raises concerns
about the regulatory structure that governs the pharmaceutical business in the United
States, including the Hatch-Waxman Act. This federal statute seeks to strike a balance
between encouraging generic medicine competition and giving incentives for
pharmaceutical innovation. The question is whether the agreements in question are
consistent with the intent of the legislation.
 Role of Patent Protection: The presence of a patent on AndroGel complicates the case.
The patent was first challenged by generic producers Watson and Paddock, and the
following settlement agreements raised difficulties regarding the interaction between
patent rights and antitrust concerns.
 Co-Promotion and Reverse Payment Agreements: A key concern is the form of the
settlement arrangements, which include co-promotion deals and reverse payment
agreements. The fact that the patent holder is paying possible generic competitors rather
than potential generic rivals paying the patent holder presents legal and ethical concerns.
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The resolution of these issues will likely have broader implications for the pharmaceutical
industry, antitrust regulation, and the balance between innovation and competition in the market.
III. Stakeholder Perspectives:

Stakeholders in this case and their perspectives include:
1. Federal Trade Commission (FTC): The FTC is a regulatory agency whose aim is
to preserve and promote fair competition in the marketplace. Their viewpoint is
consistent with antitrust rules, and they contend that "pay for delay" arrangements
between Solvay and generic manufacturers impede competition, resulting in
increased prescription prices and harm to consumer welfare.
2. Solvay Pharmaceuticals: Solvay, as the AndroGel patent holder, risks losing

market exclusivity and significant income if generic competitors join the market.
The settlement agreements with Watson and Paddock, in their opinion, are a smart
business choice to safeguard their market share and earnings, allowing them to
continue selling AndroGel in the absence of rapid generic competition.
3. Watson Pharmaceuticals and Paddock Laboratories: The settlement

agreements favor Watson and Paddock, the generic manufacturers because they
receive compensation from Solvay in exchange for postponing the availability of
their generic equivalents. This offers them cash recompense as well as the option
for co-promotion arrangements, which contribute to their bottom line without
allowing generic competitors to enter the market immediately.
4. Consumers: Customers are concerned about obtaining inexpensive drugs. From

their perspective, the delayed arrival of generic alternatives may result in higher
drug costs for an extended period, reducing the potential cost-saving advantages
associated with generic pharmaceuticals. They may perceive the agreements as
anticompetitive actions that harm their financial well-being.
5. Health Insurance Companies and Medicaid: Insurers and Medicaid providers

are stakeholders who want to keep healthcare prices under control. They may be
harmed by rising medicine prices because of delayed generic competition. To cut
total healthcare costs, lower-cost generic alternatives are frequently favored.
6. U.S. Pharmaceutical Industry: The case's precedent may cause anxiety in the
larger pharmaceutical sector. Depending on the conclusion, it might have an
influence on future patent negotiations and tactics between brand-name and
generic medication makers, thereby changing the balance between innovation and
competition.
7. U.S. Courts (District Court, Eleventh Circuit Court, Supreme Court): Courts
are critical in interpreting and applying antitrust legislation. Their viewpoint entails
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evaluating the validity of the settlement agreements, considering the influence on

competition, and determining whether the agreements are in accordance with or
contradict current laws.
8. Physicians and Healthcare Professionals: Co-promotion partnerships including

the advertising of AndroGel may have an impact on healthcare practitioners. They
may, however, be worried about long-term drug costs and the influence on patient
access to treatment alternatives.
Understanding these diverse viewpoints is crucial for analyzing the ethical, legal, and business
implications of the case.
IV. Connection to Theoretical and Empirical Research:

A. Theoretical Research:
1. Game Theory Analysis:
A subset of game theory called “Repeated Game Dynamics” talks about a model where the
interactions between the players of the “game” are repeated. This suggests that as the number of
repetitions increase over time the players learn better ways to compromise and to adapt to the
change.
Unlike one-shot games, repeated games introduce a dynamic where players have the option to
cooperate, creating an incentive to compromise for sustained payoffs over time. The key
consideration is the reliability of cooperation or the threat to stop the cooperation. Each player
evaluates whether breaking an agreement for a one-time exceptional payoff outweighs the
benefits of continued cooperation with potentially lower payoffs, factoring in the opponent's
possible responses. The strategy space in repeated games is more extensive than in regular
simultaneous or sequential games. Players base their strategies on all prior moves, and since each
player anticipates the opponent's behavior, they must consider potential changes in the
opponent's actions when making decisions. In repeated games, payoffs vary at each repetition,
requiring the comparison of each player's discounted sum of payoffs. This is calculated using
different formulas for infinite and finite repetitions. (Policonomics)
Where:
-P: the discounted sum of payoffs;
-t: the number of the repetition being considered;
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-n: the total number of repetitions for finite repeated games;
-pt: the payoff at the repetition being considered;
-r: the discount rate.
Applying this concept to the case of brand-name pharmaceuticals vs. generic drugs involves
understanding how repeated game dynamics manifest in the ongoing interactions between these
players. The players, in this case, are the brand-name pharmaceutical companies and generic
drug manufacturers. The potential for repeated interactions allows for strategic considerations,
including cooperation through settlement agreements, as seen in the "pay-for-delay" scenarios.
Players must weigh the immediate gains from breaking agreements against the long-term
benefits of sustained cooperation. The credibility of threats and commitments in these repeated
interactions becomes a critical factor in shaping the strategic landscape of the pharmaceutical
industry.
2. Contract Theory:
Contract theory delves into the construction and development of legal agreements between
individuals and organizations. It explores how parties with conflicting interests establish formal
and informal contracts, drawing upon principles of financial and economic behavior. Contract
theory is essential for understanding various legal agreements, including forward contracts,
letters of intent, and memorandums of understanding. It plays a crucial role in analyzing the
implied trust between parties and the formation of contracts in the presence of asymmetric
information. (LIBERTO, 2022)
The agreement between Solvay and generic drug manufacturers can be analyzed through the lens
of contract theory, particularly focusing on the types or models within contract theory:
Moral Hazard Model: The agreement involved payments from Solvay to generic manufacturers
in exchange for delaying the launch of generic versions of AndroGel. This financial incentive
could be seen as a strategy to counteract moral hazard, ensuring that the generic manufacturers
act in Solvay's interest by not introducing competing products.
Adverse Selection Model: Asymmetric information is evident in this scenario, where Solvay,
the brand-name pharmaceutical company, likely possesses more information about the strength
of its patents and the ongoing patent infringement lawsuit. This information imbalance could
lead to an adverse selection scenario, influencing the terms of the agreement.
Signaling Model: The agreement involves signaling between Solvay and generic manufacturers.
Solvay, by making payments and forming co-promotion deals, signals its interest in avoiding the
entry of generic competitors into the market. This signaling is aimed at achieving mutual
satisfaction in the specific contract.
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Asymmetric Information and Consumer Impact: The consumers, representing the buyers in
this context, are unaware of the agreement between Solvay and generic drug manufacturers.
Asymmetric information is at play, as consumers lack knowledge about the behind-the-scenes
negotiations that delay the launch of more affordable generic drugs. This lack of transparency
may result in consumers paying higher prices for the brand-name drug, impacting their choices
and overall welfare. The agreement's confidentiality creates an information gap between sellers
(pharmaceutical companies) and buyers (consumers), influencing market dynamics and
potentially hindering competition.
3. Antitrust and Competition Theory:
 As previously discussed in the case of Whole Food VS Wild Oats, anti-trust laws offer a
legal framework which aim at ensuring a safe market environment which encourages
competition in an attempt to provide consumers with good and services of different price
ranges and different specifications.
 Antitrust laws, enforced by the Federal Trade Commission (FTC) and the Department of
Justice (DOJ), aim to regulate economic power concentration, prevent price collusion,
and curb the formation of monopolies. Advocates argue that these laws promote
consumer welfare by fostering competition and innovation. (Twin, 2023)
 Market Conditions Contributing to Pay-for-Delay Agreements:
Market Concentration: Market concentration refers to the degree of dominance by a

small number of companies in a specific market.
- In markets with high concentration, a limited number of pharmaceutical
companies may control a significant share of the market. This concentration can
lead to reduced competition as these dominant players hold substantial pricing
power. Which is the case with Solvay; It’s product Androgel grabbed a big share
of the market as it was for the first time this medication was introduced in gel
form.
- However high market concentration provides brand-name pharmaceutical
companies with more influence, making them more susceptible to generic
competition. Pay-for-delay agreements may be attractive to maintain their market
share and pricing control.
- High market concentration limits competition
Barriers to Entry: Barriers to entry include obstacles that hinder the entry and
competitive participation of new firms in a market. These barriers may originate from
government intervention or inherent market dynamics.
Companies, seeking to safeguard their market share and discourage new competitors,
frequently advocate for or gradually introduce these barriers.
Therefore, in addition to high concentration in the market barriers of entry also have a
role in limiting competition. (Hayes, 2023)
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Pharmaceutical markets often have high barriers to entry due to extensive research and
development costs, complex regulatory requirements, and the time-consuming process of
obtaining approvals for generic drugs.
Government Regulatory Barriers: Before a company can produce and market a

pharmaceutical drug in the U.S., it must obtain special authorization from the FDA. The
approval process is lengthy, complex, and costly, creating a significant barrier to entry.
The political nature of each application further complicates this process.
High Entry Costs: Developing and bringing a new drug to market requires substantial
financial investment, often running into billions of dollars. The costs associated with
research, development, and regulatory compliance serve as a considerable deterrent for
new entrants, favoring established pharmaceutical companies.
Time Constraints: The time it takes for a drug to be approved for prescription use can
extend up to 10 years. This extended timeline poses a significant barrier for startups, as
they may not generate revenue for an extended period, even if they have the capital to
navigate the complex FDA approval process.
Uncertain Success: The probability of a drug successfully progressing through the

development stages is low, with a mere 7.9% likelihood of approval for Phase I
candidates from 2011 to 2020. This uncertainty adds another layer of risk, dissuading
potential new entrants.
These barriers significantly limit the ability of new players to enter the market,
reinforcing the dominance of established pharmaceutical companies.
When facing the expiration of patents, brand-name companies like Solvay in our case,
may resort to pay-for-delay agreements to continue their market dominance by
compensating generic manufacturers for delaying the launch of competing products.
 Overall Impact: The combination of high market concentration, challenging barriers to

entry, and strong patents can create an environment where competition is limited. Pay-
for-delay agreements exploit this situation, enabling brand-name companies to maintain
higher prices and profits, to the disadvantage of consumers who might otherwise benefit
from generic alternatives.
B. Empirical Research:
1. Trade off – Opportunity Cost Analysis:
 In weighing the trade-off between short-term market exclusivity secured through the pay-
for-delay agreement and the long-term implications for market competition, Solvay must
meticulously assess the benefits derived from this exclusivity.
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 The critical question is whether these short-term gains outweigh the necessity to share
profits with generic drug manufacturers, necessitating a careful evaluation of the overall
financial impact.
 It is important for Solvay to analyze the advantages gained during the exclusivity period.
While the company may experience a surge in profits in the short term, it is crucial to
determine if these gains surpass the costs associated with sharing profits with generic
manufacturers. This evaluation is pivotal in determining whether sacrificing a portion of
its substantial profits is a strategic trade-off that aligns with Solvay's long-term
objectives.
 Moreover, an essential component of this assessment lies in conducting a longitudinal
analysis of drug prices. By comparing pricing trends for both branded and generic drugs
in markets with and without pay-for-delay agreements, Solvay can gain valuable insights
into the impact on consumer welfare over time. This analysis is fundamental for
understanding the evolving dynamics of the market and the choices available to
consumers.
 Beyond the immediate financial considerations, it is important to recognize the broader
opportunity cost borne by consumers. While the benefits of the pay-for-delay agreements
may currently outweigh losses for Solvay, there exists a heavier opportunity cost in terms
of consumer welfare. The exclusive availability of the high-cost branded drug, as
opposed to more affordable generic alternatives, may lead to consumer dissatisfaction.
This dissatisfaction could prompt consumers to seek alternatives, including exploring
generic versions or sourcing drugs from international markets.
 The potential decline in sales volumes resulting from consumer dissatisfaction introduces
a significant risk. It threatens the delicate balance Solvay has achieved between the short-
term benefits of pay-for-delay agreements and the long-term consequences on consumer
welfare. Consequently, Solvay must carefully navigate this trade-off, considering both
immediate financial gains and the long-term impact on its market position and consumer
relationships.
2. Market Concentration and Competition:
 The Concentration Ratio and Herfindahl-Hirschman Index (HHI) is a tool that is used to
measure market concentration usually before and after merger-acquisition transactions.
To better understand the risks imposed on the competitive landscape before and after the
pay-for delay agreement it is important to study the impact of this agreement on the
market concentration, to better understand whether the agreement is in fact leading the
market into monopolistic competition. (BROMBERG, 2023)
 A high Herfindahl-Hirschman Index (HHI) in the context of market concentration
suggests that the market is less competitive and is dominated by a smaller number of
firms. The HHI is a measure of market concentration that takes into account the market
shares of all firms operating in a particular industry. The index ranges from 0 to 1, with
higher values indicating higher concentration.
Here's a general interpretation of HHI values:
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1. Low Concentration (HHI < 0.1): Indicates a highly competitive market with many
firms. There is likely to be little market power held by any single firm, and competition is
robust.
2. Moderate Concentration (0.1 < HHI < 0.25): Suggests moderate market concentration.
There may be some dominant firms, but the market is still relatively competitive.
3. High Concentration (0.25 < HHI < 0.5): Indicates a high level of market concentration.
A few firms likely dominate the market, and there may be concerns about reduced
competition and potential market power.
4. Very High Concentration (HHI > 0.5): Represents an extremely concentrated market.
A small number of firms have a significant share of the market, and there may be
significant antitrust concerns related to reduced competition.
5. Monopoly (HHI = 1): In the extreme case where one firm has a complete monopoly, the
HHI would equal 1.
HHI Interpretation in Solvay's Context:
 Before Pay-for-Delay Agreement: The pre-agreement HHI suggests low concentration
(HHI < 0.1), it implies a highly competitive market. Examining this period helps establish
the baseline competitiveness.
 After Pay-for-Delay Agreement: Evaluate the post-agreement HHI to discern changes. A
substantial increase may indicate a shift toward higher concentration, potentially
signaling reduced competition and antitrust concerns.
In our case the pay-for-delay agreement has a big impact on the HHI since the number of generic
drug manufacturers are in fact limited. Therefore, with this agreement Solvay is putting an end to
the threat if competition once and for all. We can therefore conclude that market structures that
have limited number of competitors are more prone to such agreements.
3. Long-Term Effects on Innovation:
Innovation is crucial for economic growth, and policymakers often use competition policy to
encourage innovation in industries like pharmaceuticals.
Legal Mechanism and Market Power: Pay-for-delay agreements allow name-brand
pharmaceuticals such as Solvay to maintain market power by reducing competition from generic
drugs entering the market.
Name-brand pharmaceuticals secure a period of marketing exclusivity for their drugs (as per the,
The Hatch-Waxman Act) and pay-for-delay agreements help extend this exclusivity.
Innovation Response to Competition:
Initially, brand name pharmaceutical companies respond to potential competition by reducing
innovation activities, such as initiating fewer new drug trials. Because given the time-consuming
and resource-intensive nature of the processes involved in coming up with a new drug and
undergoing the process of approvals by the FDA, coupled with the significant investment and
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effort required to bring a new drug to market, name brand pharmaceutical companies may be
disincentivized to go on board on the development of entirely new products. Instead, they may
opt to maximize the exclusivity and profitability of their existing top-selling products through
various legal and regulatory strategies.
This scenario underscores the intricate balance between incentivizing innovation and ensuring
market competition in the pharmaceutical industry. While regulations like the Hatch-Waxman
Act aim to strike this balance, the potential for extended exclusivity and legal schemes such as
the pay for delay agreement introduces complexities that impact the introduction of new
pharmaceutical products to the market leading to lack of innovation in the pharma world.
(Thakor, 2021)
V. Evaluation and Analysis:

 What is the market structure prior to entry by Watson Pharmaceuticals and Paddock
Pharmaceuticals? How would it change if Watson and Paddock entered with their
generic versions?
The AndroGel market initially exhibited characteristics of a monopoly, with Solvay

Pharmaceuticals as the only provider. The entry of Watson Pharmaceuticals and Paddock
Pharmaceuticals transformed the market into an oligopoly or a monopolistically
competitive market, introducing competition among multiple companies offering generic
versions of the medicine. The classification would depend on the extent of competition
among the generic pharmaceutical firms. This shift would lead to increased rivalry and
lower costs for the medicine.
Market Structure Prior to Entry: Monopoly
 Number of Firms: Solvay Pharmaceuticals was the only major company

manufacturing AndroGel. During the period of exclusivity granted by Solvay's
patent ownership of AndroGel under the Hatch-Waxman Act, Solvay was the sole
authorized company for the production and marketing of AndroGel, creating a
scenario similar to a monopoly where it held exclusive rights as the only supplier
of the medication.
 Product Differentiation: As the first testosterone gel to get FDA approval,

AndroGel was a distinctive product. Solvay had a unique market position and
lacked any close substitutes.
 Barriers to Entry: The exclusivity period granted by Solvay's patent on

AndroGel acted as a legal barrier, effectively preventing generic competitors from
entering the market. This legal protection limited the possibility of competition
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during the specified period, establishing a barrier for other companies seeking to
introduce generic versions of AndroGel.
 Pricing Power: Solvay held significant pricing power in the market due to its
exclusive status as the sole provider of AndroGel. With no direct competition
during the period of exclusivity granted by the patent, Solvay had the flexibility to
adjust prices in response to demand without being constrained by rivalry. This
lack of competition allowed Solvay to influence pricing based on its evaluation of
market conditions and customer demand for AndroGel.
Market Structure After Entry: Oligopoly or Monopolistic Competition

 Number of Firms: With the entry of Watson and Paddock Pharmaceuticals, the market
structure would shift. Depending on the level of competition between them and other
potential entrants, the market could resemble an oligopoly, where a few large firms
dominate, or it might remain monopolistically competitive if multiple generic firms
entered.
If Watson and Paddock establish a dominant position in the market, with limited
competition from other generic manufacturers, the market could resemble an oligopoly.
In this case, a small number of large firms (Watson, Paddock, and potentially others)
would exert significant influence over the market.
If multiple generic firms enter the market, each providing slightly different versions of
the generic drug, the market structure could remain monopolistically competitive. In this
scenario, various firms would compete by offering similar yet distinguishable products,
and consumers might have choices among different generic versions of AndroGel.
 Product Differentiation: Generic versions would have the same active pharmaceutical
ingredient as AndroGel, providing a similar product with no significant difference in
quality, safety, and efficacy. In this case, the generic versions aimed to provide the same
active ingredient as AndroGel, ensuring therapeutic equivalence. The market would
become more homogeneous.
In a market characterized by homogeneity, competition often shifts towards pricing
strategies and marketing efforts rather than product differentiation. Consumers may be
more inclined to choose based on price, availability, or brand reputation. This can lead to
increased price competition among the generic versions, potentially driving down prices
as competitors seek to gain market share. Therefore, the market dynamics could evolve
based on how these firms position themselves and compete for consumer attention.
 Barriers to Entry: The entry of generic competitors would break the legal barrier
created by Solvay's patent. However, barriers like high initial costs for generic drug
development and manufacturing could still exist.
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If a few dominant firms, like Watson and Paddock, hold a substantial market share and
influence pricing, the market could resemble an oligopoly. These firms might engage in
strategic interactions, closely monitoring each other's actions, and potentially
coordinating pricing strategies.
Simultaneously, the market might maintain elements of monopolistic competition, as

there are still multiple firms offering similar but not identical products. Each generic
version may have its own brand, pricing strategy, and marketing approach to distinguish
itself from others, within a more homogeneous product category.
The persistence of barriers to entry, even after breaking the legal barrier, contributes to
shaping the competitive landscape. High initial costs for generic drug development create
a situation where only well-established or well-funded companies can enter the market.
These dynamic influences the degree of competition, pricing strategies, and overall
market structure in the pharmaceutical industry.
 Pricing Power: The entry of generics would introduce price competition, leading to
lower prices for AndroGel due to increased options for consumers. Pricing power would
shift from Solvay to the competitive forces in the market.
The introduction of generic versions by Watson Pharmaceuticals and Paddock

Pharmaceuticals disrupted Solvay's monopoly-like pricing power. With multiple
companies offering similar generic alternatives, the market became more competitive,
leading to increased options for consumers. This intensified competition typically exerts
downward pressure on prices as companies strive to attract consumers. Consequently,
consumers benefit from lower prices, as they now have alternatives to the branded
AndroGel. In addition, companies must consider their pricing strategies strategically to
remain competitive. The entry of generics not only lowers prices but also contributes to a
more dynamic and consumer-oriented pharmaceutical market.
Therefore, the pricing power shift reflects the broader changes in the pharmaceutical
market structure with the introduction of generical equivalents. It highlights the balancing
act business must do to maintain their competitiveness, enhance their product offerings,
and satisfy customer expectations in an environment where pricing power is distributed
among multiple competitors rather than concentrated in a single monopoly.
Overall, the entry of Watson and Paddock would disrupt the monopolistic competition
structure, introducing more competitive dynamics, potentially benefiting consumers
through lower prices and increased choices.
 What would happen to prices, sales, and consumer surplus if the generic drug makers
entered the market?
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If generic drug makers such as Watson Pharmaceuticals and Paddock Pharmaceuticals entered
the market with their generic versions of AndroGel, several outcomes would likely occur,
affecting prices, sales, and consumer surplus:
 Price Reduction:
If generic drugmakers such as Watson Pharmaceuticals and Paddock
Pharmaceuticals joined the market with generic versions of AndroGel, competition
would rise. Generic medications are often less expensive than brand-name drugs
since generic producers do not incur the same research and development
expenditures. As a result, overall pricing for testosterone-gel treatments, including
both the brand-name AndroGel and the new generic variants, are projected to fall
significantly. This price decrease benefits patients by providing affordable
alternatives, and it contributes to a more competitive pricing environment in the
testosterone-gel industry.
 Increased Sales:
With the entry of generic versions of AndroGel by Watson Pharmaceuticals and
Paddock Pharmaceuticals, the market dynamics would likely witness an expansion
in overall sales. Generic drugs are typically more affordable than their brand-name
counterparts, making them accessible to a broader consumer base. This increased
affordability could lead to a surge in demand for testosterone-gel products, as more
consumers, including those who may have been deterred by higher prices, could
now afford the medication.
The increased sales would not only benefit the generic manufacturers but could also
stimulate market growth for testosterone-gel products as a whole. It's important to
note that increased sales might be distributed between the brand-name AndroGel
and the generic versions, depending on factors such as brand loyalty, marketing
strategies, and perceived product effectiveness. Overall, this scenario would likely
contribute to a more dynamic and competitive market environment.
 Shift in Market Share:

Upon the entry of generic versions by Watson Pharmaceuticals and Paddock
Pharmaceuticals, there would likely be a redistribution of market share within the
testosterone-gel product market. The brand-name AndroGel, which previously held
a monopoly-like position due to its patent and exclusivity, would face increased
competition.
Factors influencing the shift in market share include:

o Pricing Strategies: The pricing strategies adopted by generic manufacturers
would play a crucial role. If the generic versions are priced significantly
lower than AndroGel, cost-conscious consumers may choose the more
affordable alternatives, leading to a decline in AndroGel's market share.
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o Marketing Effectiveness: Effective marketing by generic manufacturers

could influence consumer perceptions and preferences. Marketing efforts
that highlight the comparable quality and lower cost of generic versions may
attract a significant portion of the consumer base.
o Consumer Perceptions: The perception of generic drugs' efficacy and safety

compared to the brand-name product is essential. If consumers perceive the
generic versions as equally effective and safe, they may be more inclined to
switch, contributing to a shift in market share.
 Consumer Surplus Increase:

Consumer surplus, which represents the difference between what consumers are
willing to pay for a product and what they actually pay, would likely increase.
Lower prices for both brand-name and generic versions benefits consumers directly,
thus contributing to greater consumer surplus.
In addition, as prices decrease, the product becomes more accessible to a broader

segment of the population. Individuals who may have found the brand-name
AndroGel too expensive may now find the generic alternatives within their budget,
expanding the consumer base.
Moreover, with the availability of generic options, consumers have more choices.
The increased competition encourages companies to offer competitive pricing,
promotions, or other incentives to attract consumers. This competition-driven
flexibility contributes to higher consumer surplus.
Finally, the concept of consumer surplus aligns with economic efficiency. When
consumers can obtain a product at a price lower than what they are willing to pay, it
indicates that resources are allocated efficiently, contributing to the overall welfare
of consumers.
 Cost Savings for Consumers:

The introduction of lower-priced generic versions of AndroGel offers crucial
affordability for consumers, especially those relying on testosterone replacement
therapy. This enhanced affordability ensures ongoing healthcare accessibility for
individuals with long-term medical needs. Moreover, the cost savings contribute to
improved treatment adherence, fostering better health outcomes, particularly in
conditions where consistent therapy is needed. The reduced economic burden on
individuals and healthcare systems not only benefits individual healthcare
expenditures but also alleviates financial strain on public and private healthcare
programs. For instance, according to the IMS Health Institute, generic drugs saved
the U.S. healthcare system nearly $2.2 trillion from 2009 to 20192. Finally, the
16 | P a g e
availability of affordable treatments enhances the overall quality of life for

individuals requiring testosterone replacement therapy, promoting effective health
management and well-being.
 Market Dynamics and Innovation:

The competitive landscape would encourage innovation in marketing and product
offerings. Manufacturers, both brand-name and generic, might introduce new
features or formulations to distinguish their products in the market. The drive to
stand out in the market would promote innovation, creating a dynamic environment
where companies seek to improve their products to gain a competitive edge. This
increased competition could lead to enhancements in the formulation, delivery
methods, or other aspects of testosterone-gel products, benefiting patients with
improved options and potentially driving further improvements in the industry.
So, the entry of generic drug makers into the market would likely lead to lower prices, increased
sales, a shift in market share, enhanced consumer surplus, and overall cost savings for
consumers. The dynamics of the pharmaceutical market would evolve, driven by the forces of
competition and consumer choice.
 Why was it beneficial for Watson and Paddock to accept the settlement instead of
competing with AndroGel?
Watson and Paddock found it beneficial to accept the settlement with Solvay
Pharmaceuticals instead of competing with AndroGel for several reasons:
 Profitable Arrangement:
The settlement introduced co-promotion deals, allowing Watson and Paddock to
generate revenue without an immediate entry into the market with their generic
versions. Rather than launching their generics right away, the companies agreed to
actively promote AndroGel to physicians. In return, they received a share of the
profits generated by the brand-name product. This approach provided a lucrative
alternative to immediate competition, offering a strategic and financially beneficial
arrangement for both generic manufacturers and Solvay Pharmaceuticals.
 Avoidance of Legal Costs:

Accepting the deal with Solvay Pharmaceuticals was a wise decision for Watson
and Paddock since it spared them the high legal bills that come with prolonged
patent infringement lawsuits. Getting into a legal battle may be a costly and time-
consuming procedure that requires large outlays for court-related costs and lawyer
fees. Watson and Paddock deliberately avoided these possible financial liabilities by
selecting the settlement, selecting a more economical and effective way to resolve
the patent infringement concerns. This decision underscored a practical approach to
dispute resolution, prioritizing financial efficiency and resource allocation for the
generic manufacturers.
17 | P a g e
 Revenue Stream from Settlement Payments:

Watson and Paddock found the settlement with Solvay Pharmaceuticals
advantageous because it introduced a reliable revenue stream through settlement
payments. Structured as co-promotion deals, the agreement entailed Solvay making
regular payments to Watson and Paddock. This consistent financial compensation
provided a steady income for the generic drug manufacturers. By deferring the
launch of their generic versions of AndroGel, Watson and Paddock secured ongoing
financial support from Solvay, creating a strategic and mutually beneficial
arrangement that increased their revenue without the immediate need for direct
market rivalry.
 Delay in Market Entry:

The decision by Watson and Paddock to accept the settlement with Solvay
Pharmaceuticals, particularly the provision delaying the market entry of their
generic versions of AndroGel until 2015, was strategically advantageous for various
reasons. Firstly, this delay granted Solvay an extended period of exclusivity in the
market, allowing the company to maintain its dominant position without the
immediate threat of generic competition. Secondly, for Watson and Paddock, the
deferred market entry provided a crucial timeframe to generate revenue through the
settlement terms, including co-promotion deals and payments from Solvay. This
approach allowed them to benefit financially without entering into direct
competition immediately, giving them the opportunity to prepare and strategize for
a more controlled and potentially successful market entry in the future.
 Risk Mitigation:
The decision of Watson and Paddock to accept the settlement with Solvay
Pharmaceuticals was driven by strategic considerations, including risk mitigation.
The settlement offered a level of certainty by avoiding the uncertainties associated
with the ongoing patent infringement lawsuit. By agreeing to co-promotion deals
and receiving settlement payments, Watson and Paddock reduced the risks linked to
potential legal challenges. This risk mitigation strategy provided them with a more
stable and predictable path, allowing them to navigate the complexities of the
pharmaceutical market with greater confidence and financial security.
 Cooperative Promotion Efforts:

The inclusion of cooperative promotion efforts in the settlement was a strategic
move that created a mutually beneficial relationship between Watson and Solvay
Pharmaceuticals. Through the co-promotion aspect, Watson actively participated in
promoting AndroGel to physicians. This collaborative effort not only contributed to
increased sales for AndroGel but also established a cooperative dynamic where
18 | P a g e
Watson played a role in supporting the branded drug. This cooperative promotion
approach allowed both parties to leverage their strengths, thus enhancing the market
presence and performance of AndroGel.
This cooperative arrangement was advantageous for Watson as it provided an

opportunity to generate revenue through the promotion of AndroGel without
immediate competition from generic versions. Additionally, it benefited Solvay by
tapping into Watson's promotional capabilities, potentially reaching a broader
audience of physicians and consumers. The delay in market entry coupled with
cooperative promotional efforts created a win-win scenario, allowing both
companies to navigate the competitive landscape more strategically
 Favorable Financial Projection:

The inclusion of favorable financial projections in the settlement made it a
strategically sound decision for Watson and Paddock. The agreement outlined
expected payments ranging from $19 million to $30 million per year. This
predictable and substantial income stream offered financial stability and exceeded
the potential profits that could be gained from immediate generic competition.
The settlement's financial terms provided a degree of certainty and assurance for
Watson and Paddock, mitigating the risks associated with the uncertainties of the
legal and market landscape. By opting for the settlement, the generic drug makers
secured a steady revenue source, ensuring a favorable and stable financial
projection over the agreed-upon period.
In essence, the favorable financial terms were a key factor that contributed to
Watson and Paddock's decision to accept the settlement rather than immediately
introducing their generic versions of AndroGel. The settlement's financial benefits
outweighed the potential gains from early market entry, aligning with the
companies' strategic goals and financial objectives.
 Focus on Other Opportunities:

The decision to accept the settlement with Solvay Pharmaceuticals instead of
immediate competition with generic AndroGel provided Watson and Paddock with
the strategic advantage of focusing on other opportunities within their business. By
deferring the launch of their generic versions until 2015, both companies gained the
flexibility to explore and invest in alternative ventures.
This strategic move allowed Watson and Paddock to diversify their business
activities, potentially engaging in new product developments, partnerships, or
market expansions. The delay in entering the generic AndroGel market freed up
resources, both financial and managerial, which could be redirected towards
19 | P a g e
initiatives that promised growth and innovation beyond the testosterone-gel

segment.
Finally, the decision to delay market entry through the settlement not only secured
financial benefits but also strategically positioned Watson and Paddock to explore
and capitalize on diverse business opportunities, creating long-term sustainability
and growth.
 Could other potential entrants seek payments from Solvay to stay out of the market?
Yes, the settlement between Solvay Pharmaceuticals and Watson Pharmaceuticals,

involving payments to delay the entry of generic versions of AndroGel, raises the
possibility that other potential entrants could seek similar payments to stay out of the
market. A common term for this technique is "pay-for-delay" or "reverse payment
agreements."
If other generic drug manufacturers perceive that they have strong legal arguments and a
credible threat of entering the market with a generic version, they might negotiate with
the brand-name pharmaceutical company, which is Solvay Pharmaceuticals, for financial
compensation or other incentives to delay their entry. This could lead to a situation where
Solvay is paying generic drug makers to stay out of the market, thus artificially
maintaining the exclusivity of AndroGel and limiting competition in the market. This
strategy can be attractive to both parties under certain circumstances:
For Generic Drug Manufacturers, like Watson and Paddock Pharmaceuticals:
 Financial Gain:
By negotiating a settlement with Solvay, potential generic entrants can secure

financial compensation or other benefits. This immediate influx of funds provides a
source of revenue without the need to invest in the development, manufacturing,
and marketing of a generic version. It allows them to generate income without
incurring the risks and costs associated with litigation and market entry.
 Risk Mitigation: Avoiding legal battles and uncertainties related to patent

infringement cases, potential legal costs, and the challenges associated with
launching and marketing a generic product, can be advantageous for generic
manufacturers. Accepting payments from Solvay helps potential entrants avoid
these risks, providing a level of financial certainty and risk mitigation.
20 | P a g e
 Cooperative Arrangements: Similar to the Watson and Paddock case, generic

manufacturers may negotiate cooperative arrangements, such as co-promotion
deals, to participate in the profits of the branded drug.
For Brand-Name Pharmaceutical Companies:

 Delay in Generic Competition: Payments to generic manufacturers create a delay in
the entry of generic versions, extending the period of exclusivity for the brand-name
drug in the market. Exclusivity is crucial for brand-name companies as it allows
them to be the sole provider of the drug, maintaining higher pricing power and
maximizing profits during this extended period.
 Cost Savings: Avoiding protracted legal battles can result in cost savings associated
with legal fees, court expenses, and the potential for damages in the event of a loss
in court.
 Revenue Sharing: Cooperative agreements, like co-promotion deals, allow the

brand-name company to share in the profits generated by its drug, even if faced
with generic competition in the future. Such revenue-sharing arrangements provide
a continued source of income for the brand-name company, offering financial
stability amid the changing market dynamics.
However, it's important to note that pay-for-delay agreements have been subject to legal
scrutiny, and regulatory bodies such as the Federal Trade Commission (FTC) in the
United States have expressed concerns about antitrust implications. Such agreements may
be viewed as anticompetitive practices that harm consumers by delaying the availability
of lower-cost generic alternatives. Legal interpretations and regulations may vary by
jurisdiction, and the acceptability of these agreements can depend on specific
circumstances and legal considerations.
VI. Action Plans:

 Regulatory Reforms:
o Review and Strengthen Antitrust Laws: Conduct a thorough evaluation of current
antitrust legislation, with a particular focus on "pay-for-delay" settlements, to
enhance and fortify the existing laws. Explore potential additions that can
effectively challenge anticompetitive behaviors within the pharmaceutical sector.
o Enhance FTC Oversight: Empower the Federal Trade Commission (FTC) to
effectively investigate possible antitrust breaches within the pharmaceutical
industry by providing additional resources and enforcement powers.
 Periodic Review of Patent Validity:
21 | P a g e
o Establish Patent Review Panels: Create independent panels responsible for

periodically reviewing the validity of pharmaceutical patents. This could help
prevent the misuse of patents to delay generic competition and ensure that only
deserving patents receive exclusivity.
o Expedited Patent Challenges: Develop a mechanism to expedite the resolution of
patent challenges, allowing generic manufacturers to challenge patents efficiently
and bring their products to market sooner.
 Public Awareness Campaigns:

o Launch public awareness campaigns to educate consumers, healthcare
professionals, and policymakers about the impact of "pay for delay" agreements
on drug prices and market competition.
o Encourage public discourse on the importance of fair competition in the
pharmaceutical industry and its direct impact on healthcare costs.
 Transparency Measures:
o Public Reporting of Settlements:
Companies should be required to publicly disclose the details of any settlement
agreements related to the entry of generic drugs. This will promote transparency
and discourage any potential anticompetitive behavior by allowing for public
scrutiny.
o Generic Drug Pricing Transparency: Implement measures to ensure transparency
in the pricing of generic drugs, making it easier for consumers, healthcare
providers, and insurers to understand the cost structures and potential savings
associated with generic alternatives.
 Encourage Competition:
o Incentivize Generic Entry: Develop financial incentives or expedited approval
processes for generic drug manufacturers to encourage timely market entry,
especially when patent disputes are involved.
o Promote Competitive Practices: Promote a competitive environment in the
pharmaceutical industry by promoting collaboration between generic and brand-
name manufacturers that benefits consumers while still allowing for healthy
competition.
 International Collaboration:
o The pharmaceutical industry can benefit greatly from international collaboration.
One way to achieve this is through global regulatory cooperation. By working
with regulatory bodies from around the world, consistent standards for generic
drug approval and competition can be established. This can involve sharing best
practices, aligning regulatory processes, and addressing anticompetitive practices
on a global level. Another important aspect of international collaboration is
information sharing. Regulatory agencies can exchange information and
experiences to identify and address emerging issues related to pharmaceutical
22 | P a g e
competition and patent disputes. This can help to ensure that the industry operates
in a fair and competitive manner, benefiting both consumers and businesses alike.
VII. Evaluation of Consequences:

 Regulatory Reforms:
o Review and Strengthen Antitrust Laws:
Overly strict antitrust laws may restrain legitimate collaborations and agreements
within the pharmaceutical industry, hindering innovation and research
partnerships.
o Enhance FTC Oversight:
Granting additional powers to the FTC may raise concerns about overreach and
the potential for regulatory abuse. Striking a balance between oversight and
industry autonomy is crucial.
 Periodic Review of Patent Validity:

o Establish Patent Review Panels:
The establishment of additional panels may introduce governmental complexities
and potential delays in the patent review process. Striking a balance between
efficiency and thoroughness is crucial.
o Expedited Patent Challenges:
Expedited processes may compromise the thorough examination of patent
challenges, leading to incorrect decisions that could negatively impact the
interests of both innovators and generic manufacturers.
 Public Awareness Campaigns

o Reduced Trust in Medications:
Overemphasis on the negative aspects of pharmaceutical practices might lead to
reduced trust in medications, including both brand-name and generic drugs. This
lack of trust could have implications for patient adherence to prescribed
treatments and may impact public health outcomes.
o Misinterpretation and Fear:
Public awareness campaigns may lead to misunderstandings about complex legal
and economic issues. There is a risk that consumers and the public might fear all
settlement agreements between pharmaceutical companies, including those that
may be legitimate and beneficial.
 Transparency Measures:
o Public Reporting of Settlements:
Mandatory public reporting may discourage companies from reaching
settlements, potentially leading to prolonged legal battles that could delay both
generic entry and innovation.
o Generic Drug Pricing Transparency:
23 | P a g e
Transparent pricing may limit a company's ability to negotiate effectively and

respond to market dynamics. Exposing sensitive pricing information could
compromise negotiating strategies, potentially placing companies at a
disadvantage in competitive markets. This lack of flexibility may hinder their
ability to navigate changing industry conditions and negotiate favorable terms in
the complex pharmaceutical marketplace.
 Encourage Competition:
o Incentivize Generic Entry:
Incentivizing generic entry must be carefully designed to avoid rushed approvals
that compromise safety and efficacy standards. Striking a balance is crucial to
prevent unintended consequences that could jeopardize the integrity of generic
drugs and their effectiveness for consumers.
o Promote Competitive Practices:
Excessive collaboration encouragement, without proper oversight, may lead to
industry consolidation, where larger companies dominate, and smaller players
struggle to compete. This consolidation could result in reduced innovation, as
fewer competitors may lead to decreased incentive for groundbreaking research
and development. The lack of diverse perspectives and ideas within a
consolidated industry may limit the introduction of novel solutions and
advancements. It is essential to strike a balance in promoting collaboration to
prevent unintended consequences that could negatively impact innovation and
overall industry.
 International Collaboration:
Achieving consistent standards for generic drug approval and competition across
multiple jurisdictions can be challenging due to differences in regulatory
frameworks, legal systems, and cultural norms. Attempts at harmonization may
face resistance or difficulties in reconciling diverse approaches to pharmaceutical
regulation.
VIII. References:
BROMBERG, M. (2023, 05 26). Investopedia. Retrieved from Investopedia Website:

https://www.investopedia.com/terms/h/hhi.asp
Hayes, A. (2023, 09 28). Investopedia. Retrieved from Investopedia Website:
https://www.investopedia.com/terms/b/barrierstoentry.asp
LIBERTO, D. (2022, 12 19). Invetopedia. Retrieved from Investopedia Website:
https://www.investopedia.com/terms/c/contract-theory.asp
Policonomics. (n.d.). Retrieved from Policonomics Website: https://policonomics.com/lp-game-theory3-
repeated-game/
24 | P a g e
Thakor, X. L. (2021, 08 11). CEPR. Retrieved from CEPR Website: https://cepr.org/voxeu/columns/how-

pay-delay-affects-competition-and-innovation-pharmaceutical-industry
Twin, A. (2023, 1 31). Investopedia. Retrieved from Investopedia Website:
https://www.investopedia.com/terms/a/antitrust.asp
IX. Case:
Pay for Delay: AndroGel Avoids Competition
The United States Federal Trade Commission (FTC) has filed suit against pharmaceutical company
Watson Pharmaceuticals over its agreement with Solvay Pharmaceuticals to not market a generic version
of Solvay’s drug AndroGel for nine years. In turn, Solvay paid millions of dollars to Watson (and another
generic drug maker, Paddock Laboratories). The FTC alleges that this “pay for delay” payment scheme
results in reduced competition and higher drug costs, and violates laws against the Restraint of Trade.
Case Summary
In the 1990s, a partner of Solvay Pharmaceuticals, Inc. developed a drug treatment for low testosterone
levels in males, a condition known as hypogonadism. Their development efforts resulted in AndroGel, the
first testosterone-gel product approved by the Food and Drug Administration (FDA). The FDA approved
the drug in 2000, and awarded Solvay with a period of statutory exclusivity under the Hatch-Waxman
Act. The Hatch-Waxman Act is a federal law dating back to 1984 outlining the process for generic drug
manufacturers to be able to enter and compete in the market, while also maintaining periods of exclusivity
to allow pharmaceutical companies to recoup investment in costly R&D. Solvay filed for a patent on the
drug, which was granted in 2003.
AndroGel’s success in the market drew the attention of generic drug manufacturers Watson
Pharmaceuticals and Paddock Laboratories. In 2003, both Actavis and Paddock filed applications with the
FDA for Abbreviated New Drug Applications (ANDAs). In so doing, they claimed that the patent issued
to Solvay was invalid, and that they should be allowed to market generic versions of AndroGel. These
generic drugs would have the same active pharmaceutical ingredient, and would be assured of providing
no significant difference in quality, safety, and efficacy as AndroGel. Solvay sued Watson and Paddock
for patent infringement.
By 2006, AndroGel was Solvay’s top-selling pharmaceutical product, with U.S. sales of over $300
million. However, in early 2006, the FDA gave Watson final approval to market a generic version of
AndroGel, which would have significantly reduced the profits Solvay was earning. The patent
infringement lawsuit was still pending, but Watson and Paddock would soon be able to market their
generic products.
25 | P a g e
Prior to a definitive legal outcome, the parties reached a settlement in which Solvay would make
payments to Watson and Paddock in exchange for their agreement to defer launching a generic form
AndroGel until 2015. These payments were in the form of co-promotion deals, whereby Watson would
agree to promote AndroGel to physicians, and earn a share of the profits. This sort of payment is referred
to as a reverse payment agreement, since the patent-holder agrees to a settlement in which it pays the
company it is suing (rather than the other way around). Solvay projected that the payments to Watson
would be anywhere from $19 million to $30 million per year over the life of the agreement.
Generic Drugs and the Regulation of the US Pharmaceutical Industry

The pharmaceutical industry is a significant and heavily-regulated industry in the US economy. The Drug
Price Competition and Patent Term Restoration Act of 1984 (known as the “Hatch-Waxman Act” after its
sponsors), established the regulation of generic pharmaceuticals in the market. Prior to 1984, there were
relatively few generic drugs, and the Congress sought to facilitate competition from lower-priced generic
drugs, while maintaining incentives for pharmaceutical companies to invest in developing new drugs.
A company seeking to launch a new drug must file a New Drug Application with the FDA demonstrating
the safety and efficacy of the product. A company that is seeking to market a generic version of a drug
files an Abbreviated New Drug Application (ANDA). If the company that made the original drug holds a
patent, then as part of the ANDA the generic-maker must certify that the generic either does not violate
the patent, or that the patent is invalid. The patent holder can then file a patent-infringement lawsuit
against the generic manufacturer in order to prevent the generic drug from coming on the market.
Generic pharmaceuticals entering into the market are typically priced significantly lower than name-brand
pharmaceuticals. Prices then tend to fall even further when more than one generic producer provides a
drug. Due to the lower prices, many health insurance plans and Medicaid plans have adopted policies to
encourage the substitution of generic drugs over branded drugs in order to reduce healthcare costs. As a
result, generic drugs typically capture a significant market share in a relatively short amount of time.
Consumers save more than $10 billion per year by using generic drugs instead of the branded drugs. A
2007 study of retail drug stores indicated that the average retail price of a brand-name prescription drug
was $119, while retail price for a generic prescription was $34.
AndroGel
Solvay Pharmaceuticals markets AndroGel as a pharmaceutical gel containing synthetic testosterone.
Synthetic testosterone has been available in pharmaceutical form since the 1950s. Pharmaceutical gel
products had also been around for decades. However, AndroGel was the first application of synthetic
testosterone in gel form.
Solvay did not develop the formulation for AndroGel, but licensed it from the Belgian pharmaceutical
company Besins, which had developed its formulation. Besins licensed the exclusive rights to Solvay, and
also manufactured it for Solvay once the drug received FDA approval. AndroGel was approved by the
FDA in 2000 for treatment as a testosterone replacement therapy for men with low testosterone. Low
testosterone is associated with advancing age, certain cancers, diabetes, and HIV/AIDS, and can result in
fatigue, muscle loss, and erectile dysfunction.
26 | P a g e
AndroGel sold very well in the US market, with annual sales exceeding $400 million by 2007. AndroGel
was Solvay’s best-selling product, accounting for one third of Solvay’s U.S. revenue by 2007. The
prescription prices far exceeded Solvay’s cost of obtaining the product from Besins, even when factoring
direct expenses and marketing and selling costs. The result was that AndroGel was an extremely
profitable product.
In 2000, Solvay filed for patent protection relating to AndroGel. Since testosterone therapy had been
around for decades, the patent was specific to the use of a particular pharmaceutical gel formulation
containing testosterone and other ingredients in certain amounts. The US Patent and Trademark office
issued Patent No. 6,503,894 to Solvay on January 7, 2003, which provided patent protection for the
AndroGel formulation that would last until 2020.
In May 2003, Watson and Paddock filed for approval with the FDA to market a generic version of
AndroGel. As part of their application, they certified that the patent on AndroGel was invalid according
to the guidelines outlined in the Hatch-Waxman Act. Solvay sued Watson and Paddock for patent
infringement, a move which automatically delayed FDA approval of the generic drugs until January 2006.
Threat of Entry
By 2006, the lawsuits on the patent infringement case were still pending. Solvay was concerned that the
generic products would soon be launched. Solvay estimated that AndroGel would lose 90% of its sales
within a year of the launch of the generic product. The result would be that generic competition would cut
Solvay’s profits by $125 million per year.
Watson projected a similar outcome, forecasting that the price of the generic drug would be about 75%
lower than AndroGel within a year of entry, and that generics would capture 80% of the market. Paddock
estimated that the generic price would be as low as 15% of AndroGel’s retail price. Both Watson and
Paddock began making investments to prepare to launch the generic versions of their drugs, including
spending $750,000 on commercial manufacturing equipment to produce the drugs.
In spite of the dramatic impact of the marketing of the generic drugs, Solvay did not pursue a court
injunction against the competitors on the patent infringement case that would have prevented entry in the
market.
Settlement Negotiations
Aware that entry by generic firms would dramatically reduce profits from AndroGel, Solvay sought a
settlement with the two firms. In September 2006, Watson agreed to a “co-promotion agreement” in
which Watson would receive a high share of the profits generated on sales of AndroGel to urologists, a
group of doctors to which Watson would be responsible for marketing. In return, Watson would agree not
to introduce a generic version of AndroGel until August 2015. The agreement was projected to result in
expected payments of $19 million in 2007, and as much as $30 million per year by the end of the
contract. Both companies would then file an agreement ending their patent infringement litigation.
Similar negotiations occurred between Solvay and Paddock (who had joined in partnership with Par
Pharmaceuticals). Solvay agreed to pay Paddock $12 million per year for promoting various Solvay drugs
and serving as a back-up manufacturer to Besins. A Besins executive noted in an e-mail that the “backup
manufacturer strategy [was] a partial way to compensate [Paddock] for not entering the market.” In
addition, Paddock agreed to perform sales calls on physicians.
27 | P a g e
Litigation
The State of California and Federal Trade Commission filed a lawsuit in 2009 alleging that the
agreements between Solvay and Watson and Paddock constituted illegal restraint of trade. Since Watson
and Paddock were potential competitors prepared to bring generic competitors on the market, the
agreement was harmful to competition. Further, the effect of the settlement was that prices remained
significantly higher than they would have with entry, leading to significant consumer harm. The
defendants responded that the settlement was the result of a legitimate pending lawsuit – a settlement
which made all parties better off.
Following rulings in U.S. District Court of California and the Eleventh Circuit Court, the case would
eventually make its way to the Supreme Court of the United States.
Questions:
1. What is the market structure prior to entry by Watson Pharmaceuticals and Paddock
Pharmaceuticals? How would it change if Watson and Paddock entered with their generic
versions?
2. What would happen to prices, sales, and consumer surplus if the generic drug makers entered the
market?
3. Why was it beneficial for Watson and Paddock to accept the settlement instead of competing with
AndroGel.
4. Could other potential entrants seek payments from Solvay to stay out of the market?
28 | P a g e

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Economic Analysis of the Firm- Case Study 4 27/11/2023

BAD 315: Economic Analysis of the Firm

The Case Study is submitted in Partial Fulfillment of the

Presented to Mr. Garabed Boghossian

II. Identification of issues:

III. Stakeholder Perspectives:

2. Solvay Pharmaceuticals: Solvay, as the AndroGel patent holder, risks losing

3. Watson Pharmaceuticals and Paddock Laboratories: The settlement

4. Consumers: Customers are concerned about obtaining inexpensive drugs. From

5. Health Insurance Companies and Medicaid: Insurers and Medicaid providers

evaluating the validity of the settlement agreements, considering the influence on

8. Physicians and Healthcare Professionals: Co-promotion partnerships including

IV. Connection to Theoretical and Empirical Research:

-t: the number of the repetition being considered;

-n: the total number of repetitions for finite repeated games;

-pt: the payoff at the repetition being considered;

-r: the discount rate.

 Market Conditions Contributing to Pay-for-Delay Agreements:

Market Concentration: Market concentration refers to the degree of dominance by a

Government Regulatory Barriers: Before a company can produce and market a

Uncertain Success: The probability of a drug successfully progressing through the

 Overall Impact: The combination of high market concentration, challenging barriers to

V. Evaluation and Analysis:

The AndroGel market initially exhibited characteristics of a monopoly, with Solvay

Market Structure Prior to Entry: Monopoly

 Number of Firms: Solvay Pharmaceuticals was the only major company

 Product Differentiation: As the first testosterone gel to get FDA approval,

 Barriers to Entry: The exclusivity period granted by Solvay's patent on

Market Structure After Entry: Oligopoly or Monopolistic Competition

Simultaneously, the market might maintain elements of monopolistic competition, as

The introduction of generic versions by Watson Pharmaceuticals and Paddock

 Shift in Market Share:

Factors influencing the shift in market share include:

o Marketing Effectiveness: Effective marketing by generic manufacturers

o Consumer Perceptions: The perception of generic drugs' efficacy and safety

 Consumer Surplus Increase:

In addition, as prices decrease, the product becomes more accessible to a broader

 Cost Savings for Consumers:

availability of affordable treatments enhances the overall quality of life for

 Market Dynamics and Innovation:

 Avoidance of Legal Costs:

 Revenue Stream from Settlement Payments:

 Delay in Market Entry:

 Cooperative Promotion Efforts:

This cooperative arrangement was advantageous for Watson as it provided an

 Favorable Financial Projection:

 Focus on Other Opportunities:

initiatives that promised growth and innovation beyond the testosterone-gel

Yes, the settlement between Solvay Pharmaceuticals and Watson Pharmaceuticals,

For Generic Drug Manufacturers, like Watson and Paddock Pharmaceuticals:

By negotiating a settlement with Solvay, potential generic entrants can secure

 Risk Mitigation: Avoiding legal battles and uncertainties related to patent

 Cooperative Arrangements: Similar to the Watson and Paddock case, generic

For Brand-Name Pharmaceutical Companies:

 Revenue Sharing: Cooperative agreements, like co-promotion deals, allow the

VI. Action Plans:

 Periodic Review of Patent Validity:

o Establish Patent Review Panels: Create independent panels responsible for

 Public Awareness Campaigns: