Will “Pay for Delay” Ruling Cost Drug Companies?

The U.S. Supreme Court will review a case involving the drug industry and federal antitrust enforcers that could have multi-billion dollar implications.

Bloomberg reports, “The justices today said they will use a case involving Abbott Laboratories (NYSE:ABT) to scrutinize the “pay for delay” agreements that the Federal Trade Commission says cost drug buyers $3.5 billion each year. Under those accords, brand-name drugmakers pay other companies to hold off selling generic versions. The pharmaceutical industry says the agreements are legitimate settlements of patent disputes.”

Which Companies Will Be Affected?

Seemingly every major drug making company has used this “pay for delay” agreement over the past few years. Specifically Bayer AG (BAYN), Merck and Co. (NYSE:MRK) and Bristol-Myers Squibb Co. (NYSE:BMY), are just a few of the companies that have struck more than 100 “pay for delay” deals since 2005.

CHEAT SHEET Analysis: Trends Definitely Do Not Support the Drug-Making Industry

One of the core components of our CHEAT SHEET Investing Framework is whether trends support the industry in which a company operates. For companies like Abbot Laboratories and Bayer, their profit margins may become increasingly slimmer depending on the Supreme Court’s ruling, which will come by June.

If this “pay for delay” agreement is ruled illegal, the alleged $3.5 billion dollars per year that the American consumer overpays for medicine will evaporate, knocking down drug making companies’ profit margins. This is definitely a legal case we will keep an eye on, but until there is a ruling it would be prudent to stay away from the stock of any drug company.

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