Reverse payments, patent strength, and asymmetric information

Abstract Reverse payments (pay‐for‐delay) are payments from an originator to a generic pharmaceutical producer to settle a potential litigation. In many jurisdictions, these payments are banned. This study shows that when the parties' investments are considered and the information about the patent strength is asymmetric, reverse payments increase both the possibility of generic entry and the litigation rate—both of which increase consumer surplus and do not necessarily delay generic entry. Reverse payments typically increase consumer surplus when the asymmetry between the parties is low, the competitiveness in the market is soft, and their size is small. Results suggest that a ban per se may be suboptimal.