Common use of Incumbency Advantage Clause in Contracts

Incumbency Advantage. In the FSC system discussed in the paper, the second challenger, were it to enter successfully in period one, does not have an advantage over other generics in post patent period who do not enter in the first period. For instance, in our payoff specification above, if the j-th generic wins the litigation and the brand launches AG (say via the first challenger), then the winning generic earns δ(ΠT0/(J 1)) in the post patent period, which is the same as what other non-entering generics earn in the second period (and the AG earns δΠT0). An alternative is that the winning generic earns more than other generics who do not enter, and in an extreme case captures the entire generic residual market. This may be an important factor for some drugs.22 Thus, we consider the other extreme where the incumbency advantage is at its maximum and the 22A report by FTC (2011, see graph on p.104) shows pronounced market shares for second generic (in their graph first-filer) relative to late entrants in post-exclusivity period when the AG and first-filer both enter in the first period. winning jth generic earns all of the δΠT0 in the post-patent period if it enters in period one, while other generics earn zero profits. This requires that the payoffs in Γj,G are adjusted accordingly as shown in Figure A-9 below for the case when a win by the jth generic implies that if it enters in the current period (after winning the case), it will have an advantage over other generics in the post-patent period. Figure A-9. Γj,G with an Incumbency Advantage Figure A-10. Agreement outcomes with Incumbency Advantage With this change in payoffs, note that the outcomes depicted for the first three panels in Figure 2 do not change (because δ = 0 in these cases). However, the payments Xj increase slightly. For instance, Xj for j ≥ 2 changes from X2 = πΠT1 − c2 as given in (8) to X2 = πΠT1 − c2 + πδ(ΠT0 − ΠT0) if κ ≥ κ∗ (10) ≤ but are the same for κ < κ∗ (and similar changes in X1 for the two subcases when θ θ∗∗). Thus, the second (or j-th challenger) must be paid an additional amount equal to the discounted expected value of incumbency, πδ(ΠT0 — ΠT0) with similar small increase in the X1 payment for relevant subcase. Compared to the no incumbency advantage case, this change increases the parameter space over which P4D deals are not possible (area marked as ‘IV - No Deal’ increases) since the threshold moves to the right. But more importantly, parameter space over which P4D deals with one challenger (region ‘III- P2D Pay Only First’) does not shrink as J increases as was the case when there was no incumbency advantage (and as in the previous case, region II shrinks and IV increases with J). Thus P4D deals are still possible under the FSC system, though less so if there is also an incumbency advantage. Figure A-11. Agreement outcomes with Risk Averse Challengers‌ j

Incumbency Advantage. In the FSC system discussed in the paperabove, the second challenger, were it to enter successfully in period one, does not have an advantage over other generics in post patent period who do not enter in the first period. For instance, in our payoff specification above, if the j-j- th generic wins the litigation and the brand launches AG (say via the first challenger), then the winning generic earns δ(ΠT0/(J − 1)) in the post patent period, which is the same as what other non-entering generics earn in the second period (and the AG earns δΠT0). An alternative is that the winning generic earns more than other generics who do not enter, and in an extreme case captures 19In our model in case no generic firm challenges in period one, the order of entry among the J generics in the post patent period is randomly decided. In an alternative version of the model where we assign entry order in period two to be non-random and arbitrarily given to the first challenger, this new region never arises. the entire generic residual market. This may be an important factor for some drugs.22 drugs.20 Thus, we consider the other extreme where the incumbency advantage is at its maximum and the 22A report by FTC (2011, see graph on p.104) shows pronounced market shares for second generic (in their graph firstwinning j-filer) relative to late entrants in post-exclusivity period when the AG and first-filer both enter in the first period. winning jth th generic earns all of the δΠT0 in the post-patent period if it enters in period one, while other generics earn zero profits. This requires that the payoffs in Γj,G ΓjG are adjusted accordingly as accordingly, which are shown in Appendix C. Figure A-9 below for the case when a win by the jth generic implies that if it enters in the current period (after winning the case), it will have an advantage over other generics in the post-patent period. Figure A-9. Γj,G with an Incumbency Advantage Figure A-107. Agreement outcomes with Incumbency Advantage With this change in payoffs, note that the outcomes depicted for the first three panels in Figure 2 6 do not change (because δ = 0 in these cases). However, the payments Xj increase slightly. For instance, Xj for j ≥ 2 changes from X2 = πΠT1 − c2 as given in (8) 9) to X2 = πΠT1 − c2 + πδ(ΠT0 − ΠT0) if κ ≥ κ∗ (1011) ≤ but are the same for κ < κ∗ (and similar changes in X1 for the two subcases when θ ≤ θ∗∗). Thus, the second (or j-th challenger) must be paid an additional amount equal to the discounted expected value of incumbency, πδ(ΠT0 — − ΠT0) with similar small increase in the X1 payment for relevant subcase. Compared to the no incumbency advantage case, this change increases the parameter space over which P4D deals are not possible (area marked as ‘IV - No Deal’ increases) since the threshold moves to the right. But more importantly, parameter space over which P4D deals with one challenger (region ‘III- P2D Pay Only First’) does not shrink as J increases as was the case when there was no incumbency advantage (and as in the previous case, region II shrinks and IV increases with J). Thus P4D deals are still possible under the FSC system, though less so if there is also an incumbency advantage. Figure A-11. Agreement outcomes with Risk Averse Challengers‌ j20A report by FTC [2011b, see graph on p. 104] shows pronounced market shares for second generic (in their graph first-filer) relative to late entrants in post-exclusivity period when the AG and first-filer both enter in the first period.

Incumbency Advantage. In the FSC system discussed in the paper, the second challenger, were it to enter successfully in period one, does not have an advantage over other generics in post patent period who do not enter in the first period. For instance, in our payoff specification above, if the j-th generic wins the litigation and the brand launches AG (say via the first challenger), then the winning generic earns δ(ΠT0/(J 1)) in the post patent period, which is the same as what other non-entering generics earn in the second period (and the AG earns δΠT0). An alternative is that the winning generic earns more than other generics who do not enter, and in an extreme case captures the entire generic residual market. This may be an important factor for some drugs.22 Thus, we consider the other extreme where the incumbency advantage is at its maximum and the 22A report by FTC (2011, see graph on p.104) shows pronounced market shares for second generic (in their graph first-filer) relative to late entrants in post-exclusivity period when the AG and first-filer both enter in the first period. winning jth generic earns all of the δΠT0 in the post-patent period if it enters in period one, while other generics earn zero profits. This requires that the payoffs in Γj,G are adjusted accordingly as shown in Figure A-9 below for the case when a win by the jth generic implies that if it enters in the current period (after winning the case), it will have an advantage over other generics in the post-patent period. Figure A-9. Γj,G with an Incumbency Advantage Figure A-10. Agreement outcomes with Incumbency Advantage With this change in payoffs, note that the outcomes depicted for the first three panels in Figure 2 do not change (because δ = 0 in these cases). However, the payments Xj increase slightly. For instance, Xj for j ≥ 2 changes from X2 = πΠT1 − c2 as given in (8) to X2 = πΠT1 − c2 + πδ(ΠT0 − ΠT0) if κ ≥ κ∗ (10) ≤ but are the same for κ < κ∗ (and similar changes in X1 for the two subcases when θ θ∗∗). Thus, the second (or j-th challenger) must be paid an additional amount equal to the discounted expected value of incumbency, πδ(ΠT0 — − ΠT0) with similar small increase in the X1 payment for relevant subcase. Compared to the no incumbency advantage case, this change increases the parameter space over which P4D deals are not possible (area marked as ‘IV - No Deal’ increases) since the threshold moves to the right. But more importantly, parameter space over which P4D deals with one challenger (region ‘III- P2D Pay Only First’) does not shrink as J increases as was the case when there was no incumbency advantage (and as in the previous case, region II shrinks and IV increases with J). Thus P4D deals are still possible under the FSC system, though less so if there is also an incumbency advantage. Figure A-11. Agreement outcomes with Risk Averse Challengers‌ j