Branded drugs face generic entry by rival drugs that typically take 80% of sales

Question

Branded drugs face generic entry by rival drugs that typically take 80% of sales away from the branded drug within three years. This loss occurs because generic drugs are much cheaper than branded drugs, and most insurance companies won’t pay for a branded drug if a generic is available. But in one instance, the branded-drug maker sued the generic entrant for violating its patent. In the settlement negotiations that ensued, the branded-drug maker offered to pay the generic entrant $10 million to settle the patent dispute by staying out of the industry. Why would the branded drug offer to pay the generic drug to stay out of the industry?

Explanation / Answer

The branded drug manufacturer offered to pay the generic drug to stay out of industry to have following advantages

As in the above situation it is evident that the branded drug company has lost out on 80% of the sales within 3 years which is major blow considering the investments made in developing the drug and as it has the purchasing power it settled the dispute with one time payment so that it would be very convenient for them to get back the loss of sales that they have encountered in the 3 years. The profit from this 80% of the sales would be much higher in comparison of $100 million that they paid as settlement

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