[Senate Hearing 105-524]
[From the U.S. Government Printing Office]


                                                        S. Hrg. 105-524

 
     LEGISLATIVE PROPOSAL TO INCREASE FUNDING FOR MEDICAL RESEARCH

=======================================================================

                                HEARING

                                before a

                          SUBCOMMITTEE OF THE

            COMMITTEE ON APPROPRIATIONS UNITED STATES SENATE

                       ONE HUNDRED FIFTH CONGRESS

                             FIRST SESSION

                               __________

                            SPECIAL HEARING

                               __________

         Printed for the use of the Committee on Appropriations


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 senate

                                 ______

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                      COMMITTEE ON APPROPRIATIONS

                     TED STEVENS, Alaska, Chairman
THAD COCHRAN, Mississippi            ROBERT C. BYRD, West Virginia
ARLEN SPECTER, Pennsylvania          DANIEL K. INOUYE, Hawaii
PETE V. DOMENICI, New Mexico         ERNEST F. HOLLINGS, South Carolina
CHRISTOPHER S. BOND, Missouri        PATRICK J. LEAHY, Vermont
SLADE GORTON, Washington             DALE BUMPERS, Arkansas
MITCH McCONNELL, Kentucky            FRANK R. LAUTENBERG, New Jersey
CONRAD BURNS, Montana                TOM HARKIN, Iowa
RICHARD C. SHELBY, Alabama           BARBARA A. MIKULSKI, Maryland
JUDD GREGG, New Hampshire            HARRY REID, Nevada
ROBERT F. BENNETT, Utah              HERB KOHL, Wisconsin
BEN NIGHTHORSE CAMPBELL, Colorado    PATTY MURRAY, Washington
LARRY CRAIG, Idaho                   BYRON DORGAN, North Dakota
LAUCH FAIRCLOTH, North Carolina      BARBARA BOXER, California
KAY BAILEY HUTCHISON, Texas
                   Steven J. Cortese, Staff Director
                 Lisa Sutherland, Deputy Staff Director
               James H. English, Minority Staff Director
                                 ------                                

 Subcommittee on Departments of Labor, Health and Human Services, and 
                    Education, and Related Agencies

                 ARLEN SPECTER, Pennsylvania, Chairman
THAD COCHRAN, Mississippi            TOM HARKIN, Iowa
SLADE GORTON, Washington             ERNEST F. HOLLINGS, South Carolina
CHRISTOPHER S. BOND, Missouri        DANIEL K. INOUYE, Hawaii
JUDD GREGG, New Hampshire            DALE BUMPERS, Arkansas
LAUCH FAIRCLOTH, North Carolina      HARRY REID, Nevada
LARRY E. CRAIG, Idaho                HERB KOHL, Wisconsin
KAY BAILEY HUTCHISON, Texas          PATTY MURRAY, Washington
                      Majority Professional Staff
                  Craig A. Higgins and Bettilou Taylor

                      Minority Professional Staff
                              Marsha Simon

                         Administrative Support
                              Jim Sourwine


                            C O N T E N T S

                              ----------                              
                                                                   Page
Opening remarks of Senator Arlen Specter.........................     1
Statement of Scott Hallquist, Sr., vice president and general 
  counsel, Immunex International, Inc............................     1
    Prepared statement...........................................     3
Generics.........................................................     5
Statement of Daniel P. Perry, executive director, Alliance for 
  Aging Re- search...............................................     6
    Prepared statement...........................................     7
Letter from the Alliance for Aging Research......................     9
Letter from Dr. Robert L. Comis..................................     9
Letter from the Eastern Cooperative Oncology Group, Group Chair's 
  Office, Allegheny University, Cancer Clinical Trials Research 
  Center.........................................................    10
Statement of Kenneth W. Clarkson, Ph.D., director, Law and 
  Economics Center School of Law and Business, University of 
  Miami..........................................................    10
    Prepared statement...........................................    12
Statement of Gina Cioffi, national director, Cooley's Anemia 
  Foundation.....................................................    13
    Prepared statement...........................................    15
Statement of James Love, director, Consumer Project on 
  Technology, on behalf of the Center for Study of Responsive 
  Law, Washington, DC............................................    16
    Prepared statement...........................................    18
Taxol issue......................................................    20
Letter from June E. O'Neill, Director, Congressional Budget 
  Office.........................................................    27
Letter from Senator Paul Wellstone...............................    30
Prepared statement of Senator Richard J. Durbin..................    31
Prepared statements of Representatives Henry Waxman, Sherrod 
  Brown, Peter Deutsch, and Fortney Pete Stark...................    31
Prepared statement of R. Douglas Chiappetta, president, National 
  Alternative Fuels Association..................................    33
Questions submitted and responses of Gina Cioffi.................    34
  


     LEGISLATIVE PROPOSAL TO INCREASE FUNDING FOR MEDICAL RESEARCH

                              ----------                              


                       TUESDAY, OCTOBER 21, 1997

                           U.S. Senate,    
    Subcommittee on Labor, Health and Human
     Services, and Education, and Related Agencies,
                               Committee on Appropriations,
                                                    Washington, DC.
    The subcommittee met at 4:50 p.m., in room SD-138, Dirksen 
Senate Office Building, Hon. Arlen Specter (chairman) 
presiding.
    Present: Senators Specter, Gorton, and Harkin.
    Also present: Senator Bennett.

                       NONDEPARTMENTAL WITNESSES

STATEMENT OF SCOTT HALLQUIST, SR., VICE PRESIDENT AND 
            GENERAL COUNSEL, IMMUNEX INTERNATIONAL, 
            INC.

                opening remarks of senator arlen specter

    Senator Specter. We will now have a panel discussion 
examining a possible legislative proposal relating to medical 
research. Mr. Perry, Mr. Hallquist, Ms. Cioffi, Mr. Love, Mr. 
Clarkson, step forward, please.
    This panel will examine the possibilities of increasing 
funding for medical research by having the Government extend 
the period of exclusivity for certain pharmaceutical products 
in exchange for the company providing a dedicated royalty 
income stream to NIH. This is obviously a complex issue which 
would involve greater rights of exclusivity, which would impede 
upon the issue of generics. And the question is what will the 
impact be on the consumer? What will the help be to aid medical 
research?
    We will proceed at this time with our panel. First, we will 
hear from Mr. Hallquist, senior vice president and counsel of 
Immunex International, Inc., a research-based biopharmaceutical 
company headquartered in Seattle. Immunex markets products used 
in the treatment of cancer that temper the side effects of 
cancer therapy.
    We'll set the clock again at 4 minutes and the floor is 
yours.


                  summary statement of scott hallquist


    Mr. Hallquist. Thank you, Mr. Chairman. Good afternoon, Mr. 
Chairman, Members of the subcommittee.
    As you've introduced me, my name is Scott Hallquist and I'm 
the senior vice president and general counsel of Immunex Corp., 
a biopharmaceutical company based in Seattle, WA. I appreciate 
this opportunity to present my company's views regarding the 
proposed data exclusivity demonstration. With me today are Ruth 
Berkowitz and Bob Altop of the economic research firm, National 
Economic Research Associates, or NERA, whose analysis forms the 
basis for my testimony.
    I am summarizing my testimony and ask permission that the 
entire written statement be submitted to the record.
    Senator Specter. All statements will be made a part of the 
record without further request and the summaries will be 
appreciated.
    Mr. Hallquist. Thank you, Mr. Chairman.
    Biopharmaceutical research is at the core of Immunex's 
mission. We have spent nearly a half a billion dollars on 
research on R&D since the company was founded 16 years ago. We 
understand the need for research and we applaud the committee's 
interest in providing additional research dollars for NIH, but 
we strongly believe that this proposed demonstration vehicle is 
a flawed piece of legislation that will not achieve the 
objectives of the committee.
    We think it's the submarine that's going to put a torpedo 
into the Medicare budget several years down the road and needs 
to be very carefully analyzed in order to calculate what those 
added Medicare costs are going to be.
    The proponents of the demonstration contend that 5 years of 
market exclusivity under Waxman-Hatch does not provide adequate 
incentive for companies to conduct research to develop new 
drugs. Waxman-Hatch was carefully crafted to balance the 
interests of patients, drug companies and others. Combined with 
the benefits of our patent system, these incentives have made 
the U.S. pharmaceutical industry today the world's leader by 
any token.
    Whether the existing system provides sufficient incentives 
or whether it should be amended directly or indirectly are 
issues that require significant public debate and analysis. The 
appropriations process is not the right forum for that kind of 
critical decision.
    This demonstration will not incentivize new research 
because it applies only to existing drugs, drugs that are 
already available, and it actually would deter research by 
innovative companies that want to develop new modes of 
administration, new formulations or new forms of drugs that are 
protected under this bill.
    The other justification for this demonstration is that it 
will provide revenue for NIH. That's a laudable objective, but 
there is no free lunch. Let's look at Taxol, the primary drug 
beneficiary of this demonstration as a specific example. Taxol 
is the chemotherapy drug sold by Bristol-Myers Squibb and used 
to treat ovarian, breast and other cancers. The active 
ingredient in Taxol is a compound known as paclitaxel, which 
was discovered by the National Cancer Institute using taxpayer 
dollars.
    As a result of the cooperative research and development 
agreement, Bristol-Myers Squibb was granted exclusive rights to 
develop Taxol using NCI's data. Upon approval, Bristol 
qualified for 5 years of exclusivity under Waxman-Hatch. Their 
exclusivity expires at the end of this year.
    Under the Bristol monopoly, Taxol is a very expensive drug. 
A basic treatment can cost more than $2,000. The high price of 
Taxol and its 5 years of exclusivity were explicitly taken into 
account in the negotiated agreement between Bristol and the 
Federal Government. This deal has paid off richly for Bristol. 
Its U.S. Taxol sales in 1996 alone exceeded $500 million. 
Immunex and several other companies in this country would like 
to develop competitive products to the paclitaxel product. Our 
competing product is already available in Canada. A breast 
cancer patient in the United States pays $183 for a bottle of 
Taxol. Her Canadian counterpart can buy our competing product 
for $100.
    The NERA study, which we're providing as part of the record 
of this proceeding, compares--was actually developed to analyze 
the net Medicare and U.S. budget--or U.S. health care budget 
impact of extending the Taxol monopoly for just 2 years. Again, 
this particular proposal would extend it for 5 years. The 
bottom line numbers are an increased cost to the U.S. health 
care system of more than $1 billion for just a 2-year 
extension, of which $288 million is attributable to Medicare 
expense. So in other words, the increased costs to the health 
care system far outweighs the benefits that would be provided 
to NIH, however laudable by the 3-percent royalty that the 
companies are offering to pay.

                           prepared statement

    There needs to be further analysis of such a sweeping piece 
of legislation that would essentially block people and 
disincentivize people from doing research and providing better 
drugs for patients. Thank you.
    [The statement follows:]

                 Prepared Statement of Scott Hallquist

    Mr. Chairman and Members of the Subcommittee: On behalf of 
the employees and stockholders of Immunex Corporation, I am 
grateful to the Subcommittee for affording me the opportunity 
to present Immunex's views about the proposed demonstration 
project to fund biomedical research through extensions of 
market exclusivity for approved drugs. If implemented, this 
proposal would deprive our company of the ability to provide an 
important cancer drug to patients. Using this drug as an 
example, I will illustrate for the Subcommittee the punitive 
and anticompetitive impact of the proposed demonstration on 
private sector research, health care expenditures, the federal 
Medicare budget, and patient access to affordable drug 
therapies.
    Immunex is a research-based biopharmaceutical company 
headquartered in Seattle, Washington. We have approximately 900 
employees throughout the U.S. Our mission is to develop 
innovative treatments for patients with serious medical needs. 
Since the company was founded sixteen years ago, we have spent 
$483 million on research and development--approximately one-
half of the company's revenues over that same period of time. 
In 1996, our total research investments exceeded $100 million.
    Immunex markets seven products in the U.S. All are used in 
the treatment of cancer or to temper the side effects of cancer 
therapy. As one example, we received FDA approval to market a 
chemotherapy drug called Novantrone for the 80,000 men who 
suffer from advanced hormone refractory prostate cancer. Until 
Novantrone received clearance, there were few treatment options 
for these patients. In addition to the development of innovator 
drugs like Novantrone, Immunex has developed a generic form of 
paclitaxel, a chemotherapeutic agent used to treat metastatic 
ovarian and breast cancers that have not responded to first 
line therapies. We intend to market this drug as soon as the 
exclusivity period granted to Bristol-Myers Squibb for its 
brand, Taxol, expires.
    Thus, we are able to consider the proposed demonstration 
project from a unique perspective--that of a company that is 
fiercely committed to research and development, that develops 
and markets innovator drugs, and that also has an interest in 
generics. In our view, the proposed demonstration runs counter 
to sound public policy and would not achieve its stated 
objectives.
    Proponents of the demonstration offer two principal 
justifications: (1) five years of market exclusivity is not 
sufficient to provide adequate incentive for companies to 
conduct research to develop new drugs; and (2) the 
demonstration would provide a source of revenue needed to 
maintain support for NIH research. Unfortunately, the proposal 
fails on both counts.
    Perhaps there should be a reexamination of the purpose and 
effect of the Waxman-Hatch market exclusivity law. But the 
appropriations process is not the proper forum for that debate. 
It requires the same level of scrutiny and consideration that 
was applied when the law was first adopted. This is 
particularly true in light of the anti-competitive nature of 
the demonstration and its likely adverse impact on patient 
access to lifesaving therapies. Moreover, the proposed 
demonstration does nothing to incentivize new drug development 
since it would extend, by up to five additional years, market 
exclusivity for existing drugs only. It actually would deter 
research to develop new formulations of drugs that qualify for 
the additional protections. Simply put, other companies that 
otherwise might produce new versions with fewer side effects, 
easier delivery systems, or greater efficacy would be unable to 
receive approval and would have no incentive to conduct the 
research necessary to achieve these kinds of breakthroughs. 
Depriving patients in this way goes well beyond current market 
exclusivity policy.
    The projected revenue stream to NIH is another fallacy. As 
illustrated in the Taxol example below, the cost to the 
government of extending exclusivity periods under this 
demonstration would far exceed the projected $750 million of 
new revenue for NIH. It also is important to note that the 
proposed ``royalty'' would not be absorbed by the 
pharmaceutical companies but would be passed on to patients, 
private insurers, and government health care programs in the 
form of higher prices for drugs that are shielded from 
competition. A tax on sick and dying patients is an 
inappropriate and unnecessary way to fund biomedical research.
    Conservatively, at least 21 drugs would receive protection 
under the demonstration. But one drug, Taxol, presents the most 
egregious case study on why the demonstration would be a 
horrible investment for taxpayers and a setback for cancer 
patients.
    The active ingredient in Taxol is the anticancer compound 
paclitaxel. It was discovered, formulated, and introduced into 
human clinical trials by the National Cancer Institute using 
federal funding. As a result of a cooperative research and 
development agreement, or CRADA, Bristol-Myers Squibb was 
granted exclusive rights to the NCI paclitaxel research, 
continued the clinical trials of Taxol, and obtained FDA 
approval in December 1992. In return for its investment, 
Bristol received five years of marketing exclusivity under the 
Waxman-Hatch Act. This term of exclusivity is scheduled to 
expire on December 27, 1997.
    Taxol is an expensive drug. A basic treatment costs a 
cancer patient more than $2,000. Taxol pricing was the subject 
of a negotiated agreement between NIH and Bristol following a 
House subcommittee hearing in 1991 at which a senior Bristol 
executive testified that the drug ``is neither patented nor 
patentable; therefore, we do not have exclusive intellectual 
property rights to Taxol.'' Taxol's high price and five years 
of marketing exclusivity were part of the bargain that Bristol 
struck with the government.
    The bargain paid off for Bristol. Bristol does not 
separately report U.S. Taxol sales, but the market research 
firm IMS America estimated U.S. Taxol sales for 1996 alone to 
total $519 million. Other firms have estimated them to be as 
high as $590 million. In August of this year, Bristol reported 
worldwide Taxol sales of $813 million and sales in the first 
half of 1997 of $444 million. Taxol is well on its way to 
becoming a billion dollar drug and certainly needs no 
additional legislative preference to ensure its success.
    Four years ago, Immunex began working with paclitaxel. We 
have a supply arrangement with an innovative Colorado company, 
Hauser, Inc., that pioneered paclitaxel manufacturing processes 
when NCI research on paclitaxel first began. Immunex and Hauser 
each have invested heavily to prepare stockpiles of bulk drug 
for formulation and sale. Hauser also has developed a 
manufacturing process based on renewable biomass that can 
assure continued supplies of paclitaxel. In undertaking this 
effort, we relied upon the Waxman-Hatch law and have every 
intention of introducing on the market a competitive paclitaxel 
product in the U.S. upon the expiration of Bristol's initial 
exclusivity period for Taxol. Several other companies have 
expressed the same intent.
    The positive impact of generic competition to Taxol is 
occurring in Canada where Immunex has introduced a competitive 
paclitaxel injection product. The prices for Taxol in Canada 
are already declining as the market adjusts to competition. 
Whereas a breast cancer patient in the U.S. pays $183 for a 
vial of Taxol, her Canadian counterpart is able to obtain the 
competitive product for less than $100 (U.S. dollars).
    NCI has indicated its expectation that generic competition 
for Taxol will occur upon the expiration of Bristol's initial 
term of exclusivity. In a letter to Senator Ben Nighthorse 
Campbell, dated February 26, 1997, Alan Rabson, Deputy Director 
of NCI, discussed the Bristol CRADA and stated, ``* * * [N]ew 
anti-cancer indications for paclitaxel that hopefully will 
arise from research under the extended CRADA may increase 
market opportunities for generic manufacturers of paclitaxel 
once they are able to enter the market in January, 1998.''
    Nevertheless, Bristol continues to pursue efforts to obtain 
extensions of its Taxol exclusivity. At one point, Bristol was 
seeking a two-year extension. To better understand the economic 
impact of such an extension, Immunex commissioned a study by an 
independent economic research firm, National Economic Research 
Associates (``NERA''). NERA estimated that a two-year extension 
would cost the U.S. health care system in excess of $1 billion 
and would cost the Medicare program alone $288 million.
    The proposed demonstration would provide not two, but five 
years of additional exclusivity to Bristol for Taxol. In 
exchange, NCI would receive a mere three percent royalty. Based 
upon the approximately $500 million in U.S. sales now recorded 
by Bristol, NCI would receive about $15 million in royalties in 
the first year. Comparing the estimated Medicare cost impact of 
a two-year extension with two years worth of royalty payments 
under the demonstration, taxpayers would spend an extra $10 on 
Medicare for every $1 invested in the demonstration. When one 
considers the over $1 billion in added costs to all federal 
health programs and private sector plans, the taxpayer cost 
balloons to nearly $30 for every one dollar spent with regard 
to Taxol alone. The numbers are even more astounding when all 
drugs covered by the demonstration are taken into account.
    The sweeping protections granted to certain drugs under the 
proposal actually would deter other companies from researching 
and developing new formulations of paclitaxel or new methods of 
using and administering this anticancer compound, since any 
drug application relating to this active compound (even new 
drug applications directed to uses, indications, or 
formulations that are not researched or developed by Bristol or 
included in Taxol labeling) would be frozen for five years.
    Thus, the proposed demonstration actually would cost the 
federal government billions of dollars that otherwise could 
have been dedicated, at least in part, to NIH research. It 
would discourage important research, deny patients access to 
lower-cost drugs, impose a hidden tax on the sick, and 
adversely impact companies that have made significant 
investments in researching new uses for drugs that are reaching 
the end of their exclusivity periods.


                                GENERICS


    Senator Specter. Your company, Mr. Hallquist, is Immunex 
Corp. So you market generics as well as patented products?
    Mr. Hallquist. Yes; Mr. Chairman, we have seven cancer 
drugs in the United States now.
    Senator Specter. It would impact on your company by raising 
the prices, you are saying, and, therefore, raise the cost to 
Medicare center?
    Mr. Hallquist. Well, essentially extending the period in 
which the first approved drug has exclusivity keeps us from----
    Senator Specter. What I am looking for is just your 
company's approach on it. I understand your intention. I am 
just trying to understand your own position of interest.
    Mr. Hallquist. We do research and we develop new drugs 
which qualify either for patent protection or if they have no 
patent protection for Waxman-Hatch. But since we have a family 
of cancer drugs, we're also interested in developing additional 
drugs to add to that portfolio and paclitaxel is one of those.
    Senator Specter. Thank you very much.

STATEMENT OF DANIEL P. PERRY, EXECUTIVE DIRECTOR, 
            ALLIANCE FOR AGING RESEARCH

    Senator Specter. We turn now to Mr. Daniel Perry, founding 
executive director of the Alliance for Aging Research.
    Mr. Perry, the floor is yours.
    Mr. Perry. Thank you, Mr. Chairman. Mr. Chairman, you have 
a copy----
    Senator Specter. You may have been out of the room, but the 
lights will function on 4 minutes leaving us more time for 
dialog.
    Mr. Perry. Thank you.
    You have a copy of my testimony, as do the members of the 
committee and the subcommittee. Rather than try to read that 
testimony or to summarize it, I would just like to underscore a 
couple of key points.
    Senator Specter. That is fine.
    Mr. Perry. My organization is a not-for-profit advocacy 
organization that seeks to increase the priority of biomedical 
and scientific research in aging and chronic diseases of the 
elderly. Not surprisingly, we see that the greatest challenge 
to the United States and, indeed, to the world is the graying 
of nations.
    It is the greatest medical, economic, social, and political 
challenge that we face. We believe that only by finding 
interventions and means to modify chronic, very costly long-
term conditions that now accompany aging will we be able to 
navigate with success the aging of today's current 
unprecedentedly large populations of older people and the baby 
boom generation still to come.
    It will only be if we can coax forward new innovations in 
diseases such as Alzheimer's, osteoporosis, stroke, diabetes 
related to aging that we will be able to see the success of 
that generation. The Federal Government's responsibilities in 
this area are key to--in supporting the National Institutes of 
Health and research, the Veterans' Administration and 
elsewhere. As Mr. Chairman, you and others in this committee 
know all too well, the current appropriations process, in all 
due respect, is broken when it comes to being able to provide 
long-term insurance that we're going to be able to grow the 
enterprise of medical research in this country. We're faced 
with kind of a cruel zero sum game.
    First of all, with the laudable effort to move toward a 
balanced budget but with firewalls and the shrinking 
discretionary funds, we find that medical research is pitted 
against education, job training, low income energy assistance, 
a zero sum kind of format. And even more cruel, we're in a 
situation where we are having to pit breast cancer research 
advocates against research for aids, diabetes against spinal 
cord injury, diseases of the young against Alzheimer's disease. 
We have heard the appropriators say to the health advocacy 
community help us find new streams of revenue, help us find 
public-private partnerships that can supplement what we are 
currently trying to do at NIH.
    The Alliance for Aging Research has endorsed in recent 
months and years the Harkin-Specter legislation that would do 
this. We've endorsed Harkin-Hatfield, we have supported levy on 
tobacco taxes, on tobacco to increase funding for medical 
research. We have supported moving savings from Medicare into 
this area and a $1 per insurance policy in health. We have 
tried all sorts of ways and today you have a proposal that I 
think has some unique attractiveness in that it underscores 
incentives for companies to invest private-sector money in 
research. It provides a direct royalty feedback to NIH, and it 
moves toward greater harmonization globally with our trading 
partners.
    Biomedical research is already providing a huge payoff. We 
released a study from Duke University earlier this year that 
showed that already disability among the Americans aged 80 and 
older has declined some 15 percent from the early 1980's to the 
present. This has already saved the Medicare system between $25 
and $44 billion, according to this study from Duke University.

                           PREPARED STATEMENT

    The benefits for Medicare are enormous in the savings we 
will provide if older people stay out of nursing homes and stay 
out of the need for hospital care as long as possible. This is 
a mechanism that will underscore the current pipeline of 
research, both public and private. We think it deserves your 
consideration.
    Senator Specter. Thank you very much, Mr. Perry. I am going 
to have to take a very brief absence to return a call. Senator 
Bennett will preside in the interim.
    [The statement follows:]

                   Prepared Statement of Daniel Perry

    Mr. Chairman and Members of the Subcommittee: Thank you for 
the opportunity to testify before this subcommittee today. I am 
Daniel Perry, Executive Director of the Alliance for Aging 
Research, an independent, not-for-profit organization working 
to stimulate academic, government and private sector research 
into the chronic diseases of human aging. I am here today to 
discuss the general need for continued increases in biomedical 
research funding, and specifically to urge your careful 
consideration of a proposed Demonstration Project to Fund 
Biomedical Research at the National Institutes of Health.
    The research that is carried out at virtually every 
institute within the NIH has the potential to shed light on the 
chronic diseases of aging. The benefit of biomedical research 
at the NIH--namely, the ability to achieve longer, healthier 
lives--accrues not only to older people, but to all Americans. 
The processes of aging increases the risk of heart disease, 
cancer, stroke, arthritis, osteoporosis, depression, diabetes, 
and Alzheimer's disease, to name but a few. The cost of 
treating those eight diseases alone is staggering, over $573 
billion each year. Unless we discover better ways to treat, 
prevent or postpone these diseases, this figure will grow 
exponentially in the coming years, as our population grows 
older.
    The growing tide of older adults is just now beginning its 
sharpest rise, as the members of the first wave of the ``baby 
boom'' generation are turning 50 years of age. In just fourteen 
years, these individuals will be collecting Medicare old age 
benefits from the federal government. The Health Care Financing 
Administration has projected that half of all health care 
dollars spent in the U.S. will soon be used for treating 
unsolved medical problems of the elderly. It is therefore 
imperative that resources be dedicated today to research and 
reduce the costs associated with the chronic diseases of aging.
    Older Americans, aging Americans, their families, and the 
nation as a whole, are benefited by discoveries in health care 
that come from biomedical research. These innovations have the 
potential to decrease significantly the need for, and cost of, 
hospital and nursing home care. We are already seeing the 
payoff in Medicare spending of past investments in research. A 
study conducted by Duke University's Center for Demographic 
Studies, released earlier this year, found that chronic 
disability rates among older Americans declined nearly 15 
percent from 1982 to 1994, resulting in savings for the 
Medicare program of between $25.4 billion and $33.3 billion. 
Finding ways to keep Americans healthy longer through medical 
research simply has to be central to our efforts to keep 
Medicare solvent. Even a brief delay in the incidence of age-
related disability can translate into dramatic savings for our 
economy. We estimate that postponing physical dependency for 
older Americans by just one month would save the nation $5 
billion a year in health care and nursing home costs. 
Postponing the onset of Alzheimer's disease by five years 
would, in time, save $50 billion a year in health care costs. 
And a five-year delay in the onset of cardiovascular disease 
could save an estimated $69 billion a year.
    The need for greater national biomedical research efforts 
cannot be denied. Unfortunately, severely limited and shrinking 
federal discretionary funding has left the American biomedical 
research enterprise in jeopardy on many fronts. While we 
appreciate Congressional support for increased NIH allocations, 
we also understand that competing interests, budget 
constraints, and the vagaries of the political process have 
left the NIH budget in jeopardy and have removed the certainty 
that NIH will be able to sustain ongoing high quality research.
    At present, nearly 4 out of 5 peer-reviewed research 
projects deemed worthy of funding by the NIH are forced to go 
unfunded. No one can be satisfied when eighty percent of worthy 
research projects cannot be funded. Not only does this cheat 
the American public of the results of that research, the 
funding crisis for medical research undermines the pipeline of 
medical discoveries we will need in the future. Moreover, the 
biomedical research rate of inflation has reduced research 
funding in real terms, and has eroded the technology 
infrastructure required for groundbreaking research and 
discovery.
    Mr. Chairman, no one knows better than you, Senator Harkin, 
and the other members of the subcommittee how very difficult it 
will be to increase direct federal funding for research in the 
coming years. There are simply no remaining non-Defense 
discretionary funds available to put into research. The 
commitment to eliminate the deficit leaves medical research 
funding in a cruel, double zero-sum game.
    The first zero sum is within the context of the overall 
discretionary budget. Any increase in funding for research must 
come at the expense of some other worthy program. The second, 
and frankly, more cruel, zero-sum game is the way in which an 
increase in funding for research on any specific disease or 
disability has to come at the expense of another disease or 
disability. Pitting diabetes against spinal cord injury, AIDS 
against breast cancer, diseases which predominate in women 
against those which strike more men, is hardly a rational or 
desirable way to function. Clearly, the current means of 
funding medical research are broken and new ways must be found, 
especially if there is to be any hope of realizing the Senate's 
goal of doubling the amount spent by NIH over the next five 
years.
    In light of the current situation, it is critical for 
Congress to explore creative and novel ways to increase 
funding, including added incentives for private sector 
contribution to biomedical research. The Alliance over the 
years has supported various efforts to get more dollars into 
research--such as an increase in tax on tobacco, or redirecting 
Medicare savings, or a per capita fee on health insurance 
premiums. The Demonstration Project to Fund Biomedical 
Research, which is the subject of today's hearing, is another 
example of an opportunity to boost research efforts which will 
benefit the public both today and in the future. The 
demonstration project's provision of limited extended periods 
of market exclusivity for eligible new drug products in 
exchange for royalty payments to further biomedical research at 
the NIH would provide substantial off-budget revenues to 
maintain the preeminence of American biomedical research and 
deserves your careful consideration.
    The Demonstration Project to Fund Biomedical Research is a 
voluntary, time-limited demonstration project which would 
generate funds in excess of $750,000,000 over five years for 
increased NIH funding of peer-reviewed biomedical research on 
serious or life-threatening diseases and conditions. As 
cooperative partners, private industry would commit at least an 
equivalent amount of funds to private sector research and 
development efforts in these areas. Funds would be generated 
from the extension of new data exclusivity for previously 
approved drugs; the maximum possible extension would be five 
years. During the extended period, the pharmaceutical company 
would pay NIH a royalty on net U.S. sales of the product and be 
obligated to invest an equivalent amount in private sector 
research. No product would have more than 10 years of 
exclusivity.
    It is important to note that this additional five years of 
exclusivity brings the United States up to the 10 year period 
of exclusivity already granted in countries such as France, 
Germany and Great Britain. Harmonizing the United States' 
provision of 5 years of new drug exclusivity with the European 
standard of 10 years is necessary to keep the United States 
competitive in biomedical research and to maintain the ability 
of Americans to access the most innovative research for the 
treatment of chronic disease.
    As a demonstration project, authority for this program 
would expire in five years, at which time the benefits of this 
boost in research funding may already be evident.
    As a nation, we have choices. We can choose to make an 
increased investment in finding new ways to prevent, cure and 
treat age-related diseases now, or we can choose to wait and 
pay for an unparalleled increase in the cost of caring for our 
oldest citizens later. Clearly, the choice should be funding 
the needed research. But we must be realistic and acknowledge 
that we cannot rely solely on government financing for the 
effort.
    In closing, let me reiterate the paramount importance of 
biomedical research to the health--both physical and economic--
of our nation. Dramatically increased funding for the American 
biomedical research enterprise is good for the health of the 
American people, good for the future of the Medicare program, 
and good for the nation's economy. The challenge of funding 
biomedical research requires the need to pursue creative 
solutions, including the Demonstration Project before you 
today. Failing to adequately fund biomedical research will 
result in the continued precipitous rise in health care costs 
for the American people.
    Thank you for the opportunity to testify before you today. 
I would be happy to respond to any questions which you may 
have.
                                ------                                

              Letter From the Alliance for Aging Research
                                                  October 21, 1997.
Hon. Arlen Specter,
Chairman, Subcommittee on Labor-HHS-Education, Committee on 
        Appropriations, U.S. Senate, Washington, DC.
    Dear Senator Specter: It is our understanding that the Alliance for 
Aging Research has suggested an innovative demonstration program to 
increase funding for the National Institutes of Health, a goal we all 
share.
    As you well know, and in spite of your outstanding work on the 
subcommittee, nearly four of every five peer-reviewed, approved 
research projects at NIH remain unfunded. With the additional pressures 
placed on domestic discretionary spending by the Balanced Budget Act, 
there is clearly a need for creative and innovative sources of revenues 
for NIH that will permit research to continue to advance.
    The Alliance's demonstration program would extend the period of 
data exclusivity for certain pharmaceutical products for up to five 
years in exchange for royalty payments to the NIH, as well as a 
requirement for an equal private investment in research. It is a 
concept with a great deal of merit.
    Your leadership in the field of biomedical research funding has 
been critical in the progress we have made to date. We respectfully 
encourage you, through your subcommittee, to move forward on a proposal 
such as that advanced by the Alliance for Aging Research.
                    Alliance for Aging Research; Beckwith-Wiedemann 
                            Support Network; Charcot-Marie-Tooth 
                            Association; Cooley's Anemia Foundation; 
                            Cystic Fibrosis Foundation; Depression and 
                            Related Affective Disorders Association 
                            (DRADA); Dysautonomia Foundation, Inc.; 
                            International Patient Advocacy Association; 
                            International Rett Syndrome Association; 
                            Jeffrey Modell Foundation; Malignant 
                            Hyperthermia Association of the U.S. (M-
                            HAUS); MPS Society, Inc.; National 
                            Osteoporosis Foundation; Purine Research 
                            Society; PXE International, Inc.
                                 ______
                                 
                    Letter From Dr. Robert L. Comis
                                                  October 20, 1997.
Hon. Arlen Specter,
U.S. Senate,
Washington, DC.
    Dear Senator Specter: The undersigned organizations represent 
people with cancer and the health care professionals who treat them. We 
understand that you are conducting a hearing on a legislative proposal 
to increase research funding for the National Institutes of Health 
(NIH) through royalties paid in exchange for additional marketing 
exclusivity for certain products. We are writing to express our support 
for this provision.
    If patients are to receive the benefit of basic biomedical 
discoveries, there must be.more innovative approaches to encourage both 
the public and private sectors to pursue greater clinical research 
opportunities. The legislative proposal would provide incentives for 
companies not only to contribute to NIH funding, but also to conduct 
their own privately sponsored research in the same therapeutic area as 
the drug receiving additional exclusivity.
    Thus, the proposal fosters the sort of public-private collaboration 
that is most likely to advance both basic and clinical cancer research. 
In addition, enactment of this legislative proposal would bring U.S. 
law into greater conformity with exclusivity provisions in Europe, 
where ten years of exclusivity are generally available, in contrast to 
five in this country.
    While we support the package of incentives represented by this 
legislation, we believe that it would be greatly enhanced if there were 
a mechanism for ensuring that current levels of appropriated NIH 
research funding would be maintained so that the royalty payments 
supplement rather than simply replace public funds.
    We appreciate your attention to this issue of great importance to 
people with cancer and look forward to your hearing and subsequent 
introduction of the legislation.
            Sincerely,
                    National Coalition for Cancer Survivorship; Cancer 
                            Care, Inc.; Candlelighters Childhood Cancer 
                            Foundation; National Alliance of Breast 
                            Cancer Organizations (NABCO); US TOO 
                            International, Inc.; Y-ME National Breast 
                            Cancer Organization (Y-ME); American 
                            Society of Clinical Oncology; Alliance for 
                            Lung Cancer Advocacy, Support and 
                            Education; Oncology Nursing Society.
                                 ______
                                 
 Letter From Eastern Cooperative Oncology Group, Group Chair's Office, 
      Allegheny University, Cancer Clinical Trials Research Center
                                Philadelphia, PA, October 14, 1997.
Hon. Arlen Specter,
U.S. Senate,
Washington, DC.
    Dear Senator Specter: As president of a not-for-profit foundation 
which represents the interests of the Eastern Cooperative Oncology 
Group (ECOG), a National Cancer Institute clinical teals cooperative 
group, and a practicing oncologist, I know first hand the vital role 
biomedical research plays in battling life-threatening disease. I am 
compelled to write at this time in support of the novel proposal for 
increasing NIH finding for biomedical research currently scheduled for 
hearings before the Senate Appropriations Labor, Health and Human 
Services Subcommittee on October 24, 1997.
    Over the last few decades federal dollars have been shrinking, 
making it more and more difficult to carry out innovative cancer 
clinical teals. In ECOG, as well as other national cancer cooperative 
groups, funds are being stretched to encompass current projects and 
trials. This allows little remaining resources to devote to planning 
and execution of future trials. In fact, ECOG as well as the other U.S. 
cooperative groups are funded at only about 50 percent of the level 
approved by the peer review process. In order to survive, the nation's 
cancer cooperative groups need to find ways to increase and diversify 
their funding base, as does the entire research support structure of 
the NIH.
    The proposed legislation would create a 5-year demonstration 
project in which pharmaceutical companies could agree to pay a royalty 
on U.S. sales of certain eligible products in exchange for an extension 
of up to 5 years of market exclusivity. The millions of dollars that 
would be generated by this proposal would make an enormous impact on 
the abilities of research organizations such as ECOG and other National 
Cancer Institute funded programs to find better, more effective cancer 
therapies. The developments made in research, as you may know, 
ultimately impact standard care nationwide, thereby affecting the lives 
of millions of Americans.
    Assuming that such an innovative agreement can be made with 
industry, it will be extremely important for the bill to be written in 
such a way that the new dollars actually go to fund research, land not 
other endeavors.
    Research is the key to improving patients' quality of life now and, 
ultimately, finding a cure for this disease. Without this type of 
creative funding the limited federal funds currently available will 
cause stagnation of treatment development and drastically affect 
patient care. I, therefore, strongly urge you land your colleagues in 
Congress to lend your support to this effort.
            Sincerely,
                                           Robert L. Comis,
                                        President, ECOG Foundation.


STATEMENT OF KENNETH W. CLARKSON, Ph.D., DIRECTOR, LAW 
            AND ECONOMICS CENTER SCHOOL OF LAW AND 
            BUSINESS, UNIVERSITY OF MIAMI

    Senator Bennett. Whom do we go to next, Mr. Chairman? Or do 
I get to decide that?
    Senator Specter. Yes.
    Senator Bennett. Dr. Clarkson.
    Mr. Clarkson. Good afternoon, Mr. Chairman, as you're 
leaving, members of the subcommittee. Thank you for the 
opportunity to testify before the subcommittee today. My name 
is Ken Clarkson and I'm a professor of law and economics and 
director of the law and economics center at the University of 
Miami where my areas of research and publication focus on 
regulating markets, public policy legislation, among other 
topics.
    I have conducted economic analyses of the pharmaceutical 
industry for over 20 years and have published extensively on 
the outcomes of alternative incentive systems, including the 
relationship of incentives, financing and outcomes for 
biomedical research. I also have a prepared statement which I 
will submit and at this time and I'd like to just briefly 
summarize.
    Senator Bennett. By all means.
    Mr. Clarkson. Clearly the central issue before the 
committee today is how to best achieve reductions in the rates 
of morbidity and mortality for the U.S. population in a 
fiscally responsible manner. It involves a tradeoff between the 
early introduction of lower prices and additional dollars for 
NIH, increased company R&D, higher information infusion rates 
and improved global incentives for American companies.
    The demonstration project to fund biomedical research is a 
novel mechanism to create additional research and development 
efforts to address compelling health problems first, while 
establishing extension of exclusivity to induce continued R&D, 
the project provides off budget financing to the National 
Institutes of Health. This will help reduce the four out of 
five rejection rate at NIH.
    Second, the demonstration project provides additional 
research dollars for completion of existing clinical trials.
    Third, it also provides incentives for examining a wide 
spectrum of new indications, including potential spinoff 
treatments and compounds, optimizing dosing amounts and 
schedules, exploring the use with other compounds, 
investigating the application to pediatric populations, and 
developing improvements in drug formulation.
    In the absence of incentives created by data exclusivity, 
it is highly unlikely that the appropriate commitment to 
conduct these activities will exist. When incentives are 
improved, as they were in the Patent Restoration Act, R&D by 
research intensive firms rose by 36 percent in the decade 
following the passage of that act.
    While controversial, the exclusivity for AZT caused 
innovator companies to develop or discover other compounds, 
creating an environment where cocktail therapy is now possible. 
If AZT had been initially available as a generic, prices would 
have been lower and innovation limited. As a result, morbidity 
and mortality would have been higher.
    The lower price of aspirin has significantly delayed 
research and development for an improved indication for the 
prevention of heart attacks, an example where the absence of 
exclusivity has limited infusion and innovation.
    Fourth, the demonstration project creates proper incentives 
for more rapid information infusion and patient uptake.
    And finally the demonstration project data corrects an 
international imbalance between the rewards for conducting the 
research and development in the United States versus major 
European countries.

                           PREPARED STATEMENT

    In conclusion, the expected societal benefits of increased 
revenues to NIH, additional company R&D, more rapid information 
infusion and the correction of international R&D incentives 
compared to the projected limited cost savings generated by 
earlier introduction of generic goods is more than sufficient 
to undertake this demonstration project.
    Thank you.
    Senator Bennett. Thank you.
    [The statement follows:]

             Prepared Statement of Kenneth Clarkson, Ph.D.

    Good afternoon Mr. Chairman, Members of the Subcommittee. 
Thank you for the opportunity to testify before this 
subcommittee today. My name is Kenneth Clarkson. I am Professor 
of Law and Economics and Director of the Law and Economics 
Center at the University of Miami, where my areas of research 
and publication focus on regulated markets and public policy 
legislation, among other topics. I have conducted economic 
analyses of the pharmaceutical industry for over twenty years, 
and have published extensively on the outcomes of alternative 
incentive systems, including the relationship of incentives, 
financing, and outcomes for biomedical research and 
development.
    The proposal before the subcommittee today, the 
Demonstration Project to Fund Biomedical Research, relies upon 
the extension of market exclusivity for a limited number of 
pharmaceutical products to generate funds for both federal and 
private sector research on serious or life-threatening 
diseases. This is a novel mechanism by which to provide off-
budget financing to the National Institutes of Health, our 
nation's premier biomedical research facility.
    My objective today is twofold. First, I would like to help 
you understand that market exclusivity is a necessity for 
incentivizing further commitment of private research dollars 
for pharmaceutical products, and that our system's current 
provision of five years of exclusivity is insufficient to keep 
the American biomedical research industry globally competitive. 
Second, in your considered deliberations, I would like to ask 
that you weigh the future reductions in societal morbidity and 
mortality which will result from today's investments in 
biomedical research against the short term costs associated 
with prolonging the entrance of generic competitors into the 
market.
    Today, it is estimated that the amount of research and 
development expense necessary to bring a significant new drug 
to market exceeds several hundred million dollars. Yet while 
this number continues to rise to reflect increasing research 
costs, the life cycle over which these costs can be recovered 
is shortening and new payor practices are preventing broader 
use and full price reimbursement for innovator drugs.
    Financial constraints imposed by more restrictive 
reimbursement policies from both private and public insurance 
programs have diminished the ability of pharmaceutical 
innovators to recover the costs of research, development, and 
market information dissemination for their products. This has 
resulted in a slower rate of uptake for innovative drugs, as 
well as shrinking aggregate payments for those drugs. These 
factors, when combined with a too-short exclusivity period, 
tend to drive innovator prices higher during the shortened 
exclusivity period and create disincentives for further drug 
development. Thus, under today's conditions of discouraged use 
of innovator compounds, it is all the more imperative that 
pharmaceutical firms be encouraged to increase their 
expenditure on research and development, as well as on the 
market-expanding information diffusion efforts critical to 
spreading information--and costs--on innovative treatments as 
broadly and quickly as possible.
    Extension of periods of market exclusivity, as under the 
proposed Demonstration Project, would help to counter the 
current condensed rush to recover costs and the abandonment of 
further research on these compounds that occurs at the end of 
the prevailing five year period of market exclusivity. 
Ultimately, under the Demonstration Project proposed today, 
providing market exclusivity successfully capitalizes on 
private industry to attain public goals of reducing morbidity 
and mortality as well as resolving budgetary inadequacy and 
uncertainty for the NIH. Increasing the period of market 
exclusivity to a maximum of ten years also corrects a 
competitive imbalance which exists, since the major European 
nations have concluded that ten years of data exclusivity are 
necessary to fully develop promising new drugs.
    Extending the period of market exclusivity for drugs which 
would qualify under the Demonstration Project does raise the 
possibility of delayed lower prices for those drugs in the 
short run. However, any objective evaluation of the relative 
merits of extending market exclusivity for drugs must weigh the 
potential social benefits gained from continuing to incentivize 
development against the potential social loss due to higher 
product prices. Moreover, higher prices during exclusivity 
would provide increased royalty payments to NIH.
    Allowing exclusivity on these drugs to expire threatens the 
funding and completion of their associated clinical trials and 
research programs, reduces the chance of gaining new 
understanding about efficient treatment methods or novel 
applications of these drugs, and prevents wider information 
dissemination concerning the drugs and their therapeutic areas 
of application. Loss of exclusivity strongly reduces the 
probability of further investment on compound development or 
information diffusion activities. Diffusion or dissemination of 
information broadens the exposure and use of a compound, 
thereby making it more available to help patients requiring 
treatment, and is more effectively accomplished by continued 
marketing expenditures. A strong correlation exists between a 
high level of pharmaceutical information diffusion and added 
social welfare.
    With extended exclusivity, the benefits which would occur 
with further research on these drugs include widening the 
spectrum of indications in which these drugs are known to be 
effective, examining potential spin-off treatments and 
compounds, optimizing dosing amounts and schedules, exploring 
their sequential use with other compounds, investigating their 
application to pediatric populations, and permitting 
improvements in drug formulations. I hope you will consider 
each of these benefits and their potential contributions to 
societal welfare in your analysis of this proposal.
    My experience in this field has led me to conclude that the 
economic incentive established by an extension of exclusivity 
is likely to generally produce societal benefits which outweigh 
the limited cost savings generated by earlier introduction of 
generic goods. The added benefit of off-budget financing for 
the NIH under this Demonstration Project shifts the balance 
even further in favor of exclusivity. Particularly in a time of 
governmental fiscal restraint, providing economic incentives to 
achieve social objectives is a prudent alternative to higher 
federal spending.
    Thank you for your time, and I would be happy to answer any 
questions which you may have.
STATEMENT OF GINA CIOFFI, NATIONAL DIRECTOR, COOLEY'S 
            ANEMIA FOUNDATION
    Senator Bennett. Ms. Cioffi.
    Ms. Cioffi. Thank you. My name is Gina Cioffi. I'm the 
national executive director of the Cooley's Anemia Foundation. 
The foundation has been working for more than 40 years to 
provide services to anemia patients, to provide educational 
prevention programs and fund medical research.
    At the outset, I just want to thank the committee for their 
support for medical research, for innovative proposals, and 
count on our support for the proposal here today.
    You're asked to consider extending the market exclusivity 
period of certain pharmaceutical products in a limited 5-year 
demonstration product. We believe it is an incredible proposal. 
We have 16 chapters throughout the country working to raise 
medical research dollars. They have dinners, they have fashion 
shows, they have done very, very well.
    We have been able to increase this past year by 50 percent 
the amount per fellowship. We're proud of our success, but 
we're also limited in our resources and what we're able to do. 
We're a rare disease, we're a small patient population.
    In June we had an international symposium. We know that 
there's a cure, that there's better treatment within our reach, 
but we need the money, and the money has got to come from 
somewhere, and this is an innovative proposal that we think 
will be very helpful.
    A number of the pharmaceutical products involved are for 
conditions related to the blood. Many of our patients are 
dealing with the effects of infection by HIV, hepatitis C and 
other viruses. The deactivation of these viruses is important 
to us. We think that the infusion of research funds in a given 
area, as we all know, will lead to the discovery of new uses of 
an existing product or a new compound or sometimes something 
tangentially related.
    For example, many of our patients would benefit 
immeasurably from development of a way to deactivate the 
viruses in the blood that they're receiving blood every 2 
weeks.
    At a meeting of the special emphasis panel last year, NIH 
cited five areas of high priority research. They include: The 
need for medication that can be taken orally to remove iron 
from their organs; development of a noninvasive way of 
measuring the iron in their body; development of medications to 
treat fetuses in utero; and development of appropriate hormonal 
therapies.
    Our patients are suffering. They're in serious need of 
medications and treatments identified by NIH last year. An oral 
drug to help remove iron from their body would free them from 
12 hours of daily painful drug infusion. Fetal and gene therapy 
treatments could help relieve a lifetime of suffering.
    The potential for breakthrough exists, just not the money 
to make it happen. We understand that there's no guarantees 
that there will be a breakthrough that will help our patients 
as a result of this action, but we know that there could be.
    With less than 25 percent of approved peer review research 
products receiving funding, every additional dollar that can be 
generated for research increases the possibility that someone 
will find the means to relieve the suffering of our patients.
    Funding has to come from the Government acting through the 
NIH and it has to come also from the private sector. This 
proposal embodies both of these elements. With NIH and an equal 
investment in private research in the same therapeutic area, 
you're creating additional opportunity for discoveries that 
will cure disease, relieve symptoms and improve the lives of 
your constituents.
    When a baby is born with Cooley's anemia, it has a life 
expectancy that's much more improved than 25 years ago; these 
children didn't live past 10 years old. But just over the 
horizon, we hope for a time that a baby can have the life 
expectancy of any other and to reach that point will require a 
commitment of research dollars.

                           PREPARED STATEMENT

    And I just want to add that in terms of a generic drug, 
Desferal is the only drug available for our patients right now, 
and there hasn't been anybody stepping up to come up with a 
generic drug because we're such a small patient population so 
that's not an area where they can really avail themselves.
    I just want to thank you all for your leadership and your 
vision and thank you for inviting me to be here today.
    Senator Bennett. Thank you.
    Now Mr. Chairman, I must step out. We've heard from 
everyone but Mr. Love, but I should be back as shortly as you.
    Senator Specter. OK. We will put Ms. Cioffi's prepared 
statement in the record at this point.
    [The statement follows:]
                   Prepared Statement of Gina Cioffi
    Mr. Chairman and Members of the Subcommittee, my name is Gina 
Cioffi and I am the National Executive Director of the Cooley's Anemia 
Foundation, which is headquartered in Flushing, New York.
    At the outset, Mr. Chairman, I would like to thank you for the 
invitation to testify before your subcommittee this afternoon. But, 
even more importantly, I would like to thank you for your leadership in 
supporting biomedical research in our country. Your efforts related to 
the Senate's appropriations bill for the 1998 fiscal year in which you 
obtained a 7.5-percent rate of growth for NIH is truly extraordinary.
    Likewise, Mr. Chairman, your active stewardship, along with Senator 
Harkin, of the Specter-Harkin Health Research Trust Fund, has firmly 
established your credentials as the leader of this body in supporting 
NIH and biomedical research. On behalf of my organization, and many 
others like us, I thank you for the vision and the leadership you have 
exhibited.
    Cooley's anemia is a genetic blood disease. For our patients to 
survive, they are required to have their blood transfused red blood 
cells every ten to fourteen days. When a person has blood transfusions 
that frequently, there is a life-threatening side effect that develops 
silently and, initially, without symptoms. Iron accumulates in the 
liver, the heart, and in other internal organs. If no steps are taken 
to remove the iron, the patient will die.
    Twenty-five years ago, a drug was developed which helps to remove 
the iron from the internal organs. That drug is called Desferal, and it 
remains today as the only effective treatment for this condition. But, 
there is a terrible downside to the use of Desferal. It is not a pill 
or a liquid that can be taken by mouth. It cannot even be given in the 
form of a shot, like insulin. Desferal must be infused.
    Cooley's anemia patients have this drug infused into their bodies 
for ten to twelve hours a day, every day of their lives. It is painful; 
it is severely limiting; it is their only option.
    It is that lack of options that brings us to the legislative 
proposal that is pending before the subcommittee this afternoon and 
that is the subject of this hearing.
    Mr. Chairman, the subcommittee is being asked to consider the 
creation of a limited, five-year demonstration program. A 
pharmaceutical company could receive up to five years of new market 
exclusivity for a drug that has been previously approved by the FDA. In 
exchange for that provision, the company would be obligated to pay a 
three percent royalty on net U.S. sales of that product during the new 
exclusivity period to the National Institutes of Health. At the same 
time, it would also be required to invest not less than an equal amount 
in research and development efforts in the general therapeutic area of 
the eligible product.
    It is my understanding, Mr. Chairman, that there are about sixty 
pharmaceutical products that would potentially be eligible to 
participate in this demonstration. It is my further understanding that 
this demonstration program will result in more than a half billion 
dollars in additional NIH funding over the next five years, with an 
equal amount of private investment.
    A half dozen or more of the products that are eligible for coverage 
by this provision are related to blood and that has certainly caught 
our attention. The infusion of research funding in a given area, as we 
all know, often leads to the discovery of new uses for an existing 
product. Similarly, it can lead to the development of a completely new 
compound in an unexpected, but related area. That is why the Cooley's 
Anemia Foundation is supportive of this proposal.
    Last year, the NIH convened a Special Emphasis Panel to determine 
the most promising areas of research for thalassemia, the formal name 
for Cooley's anemia. They identified five:
  --Support for clinical trials of more effective iron chelators and 
        measurement of patient compliance with drug therapy.
  --To support clinical trials of fetal hemoglobin enhancing drugs.
  --To support research on improved technology for non-invasive 
        measurement of iron deposits in human tissue.
  --To develop plans for research into the need for hormonal therapy 
        and its long-term effects on patients with Cooley's anemia.
  --To support clinical studies of the phenotype vs. genotype of beta-
        thalassemia intermedia.
    Our patients are suffering, Mr. Chairman. There is a serious and 
critical need for the research and development that will result in the 
medications and treatments that the NIH identified last year. An oral 
drug to help remove iron from the body can free a patient from 12 hours 
of daily, painful infusions with Desferal. Fetal and gene therapy 
treatments hold the potential to relieve a lifetime of suffering. The 
potential for a breakthrough exists. What we are lacking today is 
sufficient resources to make it happen.
    All of us that are involved in the voluntary health agency 
community understand how medical research works. We know that there are 
no guarantees that the adoption of this proposal, or any other, will 
guarantee a breakthrough that will assist the patients that we care so 
deeply about. However, we also recognize that there could be.
    With 25 percent of approved, peer-reviewed research projects 
currently receiving funding (in spite of the outstanding work of this 
subcommittee), we know that every additional dollar that can be 
generated for research increases the possibility that someone will find 
the means to relieve the suffering of our patients.
    We also understand that, in 1997, money has to come from more than 
one source. Public/private partnerships are the way things get done 
today. Funding has to come from the government, through the NIH, but it 
also has to come from private industry. By requiring the payment of a 
royalty to the NIH and equal investment in private research in the same 
therapeutic area, this proposal creates the environment within which 
there are additional opportunities for discoveries that will cure 
diseases, relieve symptoms, and improve the lives of your constituents.
    Mr. Chairman, twenty-five years ago, a baby born with Cooley's 
anemia rarely lived much beyond ten years of age. Today, thanks to 
treatment improvements that have been made, life expectancy is much 
better. But, just over the horizon, we hope for a time when that baby 
can have the same life expectancy as any other child. In order to get 
to that point, however, will require a strong and unwavering commitment 
of research dollars.
    Everyone in this room, Mr. Chairman, knows that you have made that 
commitment throughout your legislative career. The support of this 
proposal by the subcommittee will go a long way toward furthering that 
commitment, finding cures, and relieving human suffering. I 
respectfully urge you to move forward with it.
    Again, Mr. Chairman, I want to thank you for the opportunity to 
address the subcommittee this afternoon. I would be pleased to try to 
respond to any questions you may have.


STATEMENT OF JAMES LOVE, DIRECTOR, CONSUMER PROJECT ON 
            TECHNOLOGY, ON BEHALF OF THE CENTER FOR 
            STUDY OF RESPONSIVE LAW, WASHINGTON, DC

    Senator Specter. Mr. Love.
    Mr. Love. Thank you very much. I passed out my statement 
kind of late. I hope you all got it. I'm not going to read my 
statement but, rather, summarize a few points.
    First of all, as I understand the proposal that is being 
considered today, there's this idea that linking these R&D 
percentage royalties or commitments on behalf of pharmaceutical 
companies on the one hand to increase biomedical research with 
an extension of their exclusive rights to data on the other 
hand, and I think it's appropriate for the committee to hear 
praise about one-half of the plan and to reject the other half.
    That is to say, I think there's a lot of interest and I 
think it's very innovative, the idea that you would impose 
obligations on companies to sell drugs and reinvest in research 
and development in the United States and impose research 
royalties to help fund biomedical research by the NIH. That's a 
completely separate issue which should be severed and 
considered on its own merits, wholly apart from whether you 
decide to extend rights in data.
    Now, the health registration issue has to be looked at in 
the sense it's not the only way innovation in drugs is growing, 
protected. Companies that invent drugs or invent uses for drugs 
get patents on drugs. And companies which bring drugs to market 
which have small client populations are protected under 
exclusive provisions of the Organ Drug Act.
    What's left over is drugs where the company does not claim 
to be the inventor, drugs which are not for small client 
populations, in fact for big client populations where there are 
over 200,000 patients in the United States. And often, in the 
case of the drug that was discussed earlier, they're 
Government-funded drugs.
    That's precisely why there are no intellectual property 
rights assigned to the drugs or why the issue of data 
exclusivity becomes the only way that the company marketing the 
drug can prevent competition from bringing the price down to a 
more affordable level.
    Now, it's a shame that Bristol-Myers Squibb is not on this 
panel to explain to the committee why, after making a billion 
dollars in this next year on a drug invented by the Government, 
for which it charges a very high amount, a very extremely high 
markup over its own cost of manufacturing, producing the drug, 
how it can justify a continued monopoly beyond the 5 years that 
it's had which has generated literally billions for the 
company.
    Now, I attached to my testimony a copy of a bill from a 
patient who contacted me about Taxol. This is a woman with 
breast cancer. This is for one office visit. It was $4,200 for 
an injection of Taxol and carboplatin. The Taxol injection 
alone for a single office visit was $2,324.70. Her husband 
contacted me. They're uninsured and she had to get these 
treatments about once every 3 weeks or once a month for a 
really long time. People, women that take Taxol for breast 
cancer can easily run up $50,000 in bills at current prices.
    Now, Bristol-Myers Squibb was able to acquire Taxol from 
Hauser Chemical, which was the Government's own contractor, for 
25 cents a milligram in bulk quantities, costs about 15 cents 
to finish it. They sell it for almost $5 a milligram. This 
patient paid nearly $9 a milligram.
    My time's up. I just think to close, one thing I want to 
mention is that we have worked--we're very active right now in 
discussions with South Africa, The Netherlands, Canada, and 
other countries which are trying to get Taxol on the market. In 
discussions with U.S. trade negotiators over what norms are for 
the protection of clinical trial data, and the alternatives, 
even the current 5-year Waxman-Hatch provision, which many 
people in the public health community and the world health 
community believe are excessive and do not represent 
appropriate international norms, let alone in 10 years, which 
is the maximum in the countries currently provided.

                           PREPARED STATEMENT

    There is no reason why U.S. consumers should be paying far 
more for a drug like Taxol, which was invented in the United 
States, than other consumers throughout the world, and the only 
reason we're here is because companies want to make these big 
profits on Government-funded drugs.
    Thank you.
    [The statement follows:]

                  Prepared Statement of James P. Love

    Thank you for the opportunity to testify today on proposals dealing 
with data exclusivity and funding of biomedical research. My name is 
James Love. I am the Director of the Consumer Project on Technology 
(CPT), which is a non-profit organization created by Ralph Nader. CPT 
is engaged in a wide range of projects involving intellectual property 
and pharmaceutical drugs. Much of this work is accessible through our 
home page on the Internet is http://www.cptech.org (no period).
    CPT shares the view of Representative Henry Waxman that the 
proposal to tie a 10 year extension of market exclusivity to a 3-
percent royalty for biomedical research is an outrageous and cynical 
proposal to exploit patients, under the color of addressing an 
important public health need.
    Pharmaceutical drugs marketed in the United States benefit from 
several different forms of protection from competition. A firm that 
invents a drug or a use for a drug can obtain a 20 year patent, not 
including patent extensions. The U.S. Orphan Drug Act provides an even 
broader form of market exclusivity for a very large class 
pharmaceutical drugs. After a series of amendments which liberalized 
the definition of an Orphan Drug, firms can now obtain seven years of 
market exclusivity when the client population for a drug is less than 
200,000 patients for any single indication. The subject of this hearing 
is the 1984 Waxman-Hatch act provision concerning the use of health 
registration data.\1\

---------------------------------------------------------------------------
    \1\ 21 U.S.C. Sec. 355(c)(3)(D)(ii) (1996).
---------------------------------------------------------------------------

    The current provisions regarding health registration data prevent a 
new entrant from relying upon the evidence already presented to the FDA 
to establish whether a drug is safe and effective, for five years, 
without the permission of the ``owner'' of those research data. After 
five years, a generic drug manufacturer can ``rely upon'' these data to 
support an application to market a generic version of a drug. Of 
course, this is only important in those cases where the drug is not 
already protected by a patent or by the Orphan Drugs Act.
    When we talk about drugs which are not protected by patent, we are 
often talking about drugs which were invented by the U.S. Government, 
such as Taxol, an unpatented cancer drug invented by the National 
Institutes of Health (NIH).\2\ When we talk about drugs not protected 
by the Orphan Drug Act, we are talking about drugs which have large 
client populations.

---------------------------------------------------------------------------
    \2\ At the National Cancer Institute.
---------------------------------------------------------------------------

    Many health care experts believe the current five years of market 
exclusivity for health registration data is excessive, and perhaps even 
unnecessary, given the opportunities for market protection which are 
available under patent and Orphan Drug laws. However, if one assumes 
that unpatented drugs deserve special protections from competition, the 
current open ended protections are excessive. The best evidence of this 
is the current situation with Taxol, the unpatented drug invented by 
the NIH, and marketed by Bristol-Myers Squibb (BMS).
    From the very beginning, BMS was able to acquire Taxol in bulk from 
Hauser Chemical, the former NIH contractor, for $.25 per milligram. 
Industry experts say that bulk Taxol can be prepared for human use for 
less than $.15 per milligram, for a total finished cost of less than 
$.4. BMS says it sells Taxol in wholesale markets for $4.87 per 
milligram. I am attaching a bill to an uninsured breast cancer patient. 
The patient was asked to pay $2,324.70 for nine 30 mg vials of Taxol, 
or $8.61 per milligram. The cost of the entire office visit, including 
$1,171 for an injection of Carboplatin, another NIH funded cancer drug 
now sold by BMS, was $4,200. Breast cancer patients are often expected 
to repeat these treatments every three weeks or so for 18 months or 
more, making the total cost of the treatment a great burden.
    BMS's Taxol sales are expected to be about $1 billion this year, 
making the drug an enormous profit center for the company.
    Following a 1991 CRADA between NIH and BMS, NIH agreed to give BMS 
exclusive rights to use NIH funded research on Taxol for commercial 
purposes. The initial CRADA did not require BMS to provide the 
government with any royalties. This agreement has been amended several 
times, and NIH has also licensed a number of Taxol related parents to 
BMS, including controversial patents on the doses used to treat cancer 
patients. BMS hopes to use these additional NIH patents on recommended 
doses to argue that generic entrants will infringe on the BMS ``use'' 
patents for Taxol, triggering automatic delays in the introduction of 
generic versions of Taxol.
    BMS's role in the events leading up to the FDA marketing approval 
for Taxol was quite modest, as reported in BMS's own histories of the 
development of Taxol.
    For example, in an April 8, 1997 ``Application for Exclusive 
License to NIH Taxol-Related Patent Portfolio,'' BMS describes its pre-
NDA role as taking over the production and manufacture of Taxol used in 
the NIH sponsored clinical trials, and the collection of data for the 
NDA application. BMS originally offered to provide NCI with 17 kilo's 
of Taxol for use in government sponsored clinical trials, and to 
investigate methods for harvesting and manufacturing Taxol. The amount 
of money actually spent by BMS on Taxol prior to FDA marketing approval 
was very modest. After the drug was approved for marketing, BMS has 
increased its investments in a variety of technologies which relate to 
the manufacture of the drug, which is a normal cost of businesses, and 
it supported a variety of clinical trials, either by providing NIH with 
Taxol for trials that would be ``owned by'' BMS, or by conducting its 
own trials.
    In one case BMS rushed an application to the FDA to qualify Taxol 
as an Orphan Drug, for treating Karposi's sarcoma, after BMS determined 
that another firm was about to seek marketing approval for its own 
version of Taxol, on the basis of its tests on Karposi sarcoma 
patients. As a consequence, BMS was able to use the Orphan Drug Act to 
block the introduction of a competitor's versions of Taxol, even though 
Taxol could not qualify as an Orphan Drug for breast cancer, the most 
common prescribed use for Taxol.
    CPT recommends that Congress reexamine current 5-year period of 
health registration data exclusivity, to determine if a lesser level of 
protection is appropriate, given the consequences to consumers of high 
drug prices. It is important to appreciate the fact that this is only 
an issue for drugs not protected by patent or by the Orphan Drug Act. 
When drugs are not protected by patent, it is because the company does 
not own the rights to the discovery of the drug, or the key inventions 
relating to uses of the drug. What is at stake is a ``sweat of the 
brow'' claim to protection from unfair competition.
    Since exclusive rights to data can be an enormous barrier to entry, 
as evidenced by the Taxol case, CPT recommends congress introduce 
safeguards to protect consumers, such as a sunset provision after a 
drug grosses a target of gross sales, or a provision for compulsory 
licenses of the data, to protect consumers from monopoly power. This is 
particularly appropriate given the fact that in most cases, unpatented 
drug discoveries were invented by the government, or the invention was 
funded by a government grant.
    We are supportive of the suggestion that Congress impose R&D 
royalty obligations on pharmaceutical companies, in order to promote a 
higher level of biomedical research in the United States. We have 
recommended this approach elsewhere. However, there is no need to tie 
this proposal to a higher monopoly profits on unpatented pharmaceutical 
drugs. The proposal for matching contributions for R&D has merit. 
because society benefits from a mix of public and private R&D 
investments.
    Since January, 1997, CPT has been involved in several disputes 
involving health registration data as a barrier to entry for 
pharmaceutical drugs. Bristol-Myers Squibb is lobbying the United 
States government to take trade sanctions against South Africa, Canada, 
Australia, Argentina, the Netherlands and other countries which have 
approved generic versions of Taxol, the NIH developed cancer drug 
currently sold by Bristol-Myers Squibb. The United States government is 
taking the position in International trade negotiations that Article 
39.3 of the TRIPS agreement requires countries to provide 5 years of 
data exclusivity, such as is currently the case in the United States, 
under the Waxman-Hatch Act. The TRIPS language follows:
            section 7: protection of undisclosed information
Article 39--
    1. In the course of ensuring effective protection against unfair 
competition as provided in Article 10 bis of the Paris Convention 
(1967), Members shall protect undisclosed information in accordance 
with paragraph 2 and data submitted to governments or governmental 
agencies in accordance with paragraph 3.
    2. Natural and legal persons shall have the possibility of 
preventing information lawfully within their control from being 
disclosed to, acquired by, or used by others without their consent in a 
manner contrary to honest commercial practices (see footnote 10) so 
long as such information:
    (a) is secret in the sense that it is not, as a body or in the 
precise configuration and assembly of its components, generally known 
among or readily accessible to persons within the circles that normally 
deal with the kind of information in question;
    (b) has commercial value because it is secret; and
    (c) has been subject to reasonable steps under the circumstances, 
by the person lawfully in control of the information, to keep it 
secret.
    3. Members, when requiring, as a condition of approving the 
marketing of pharmaceutical or of agricultural chemical products which 
utilize new chemical entities, the submission of undisclosed test or 
other data, the origination of which involves a considerable effort, 
shall protect such data against unfair commercial use. In addition, 
Members shall protect such data against disclosure, except where 
necessary to protect the public, or unless steps are taken to ensure 
that the data are protected against unfair commercial use.
    We are telling foreign governments and the USTR that the U.S. law 
is too protective of the pharmaceutical industry, and that compromises, 
as were suggested above, are more appropriate international norms.

                              TAXOL ISSUE

    Senator Specter. Ms. Cioffi, Dr. Clarkson, would you care 
to respond to the Taxol issue?
    Ms. Cioffi. The iron overload for our patients, that our 
patients suffer from, they have iron overload and they have as 
a result a lot of secondary conditions, diabetes, heart 
disease, hepatitis, all kinds of things besides the primary 
condition. So----
    Senator Specter. The question is why should exclusivity be 
granted to Taxol which is so expensive when it is a Government-
originated drug. Dr. Clarkson?
    Mr. Clarkson. That's a more difficult question than I think 
the first one you posed. Let me just make a couple of comments. 
One, there was reference to a NERA study that I believe points 
to something like $1 billion cost over several years.
    If you look behind the numbers, the way they were 
generated, about $3 out of every $4 are attributed to new 
patients coming into the system, as opposed to higher prices. 
So the overall effect really is something in the neighborhood 
of $1 out of every $4 in terms of higher prices.
    And that also gives you some good information about what 
are the consequences of extended exclusivity? Because behind 
those dollars is essentially an increased effort to find new 
populations, a much higher rate of diffusion of information.
    Senator Specter. Is it your contention that the increase in 
exclusivity will enable the companies to spend more money on 
more research to find better products?
    Mr. Clarkson. Absolutely, and also to find more patients.
    Senator Specter. Mr. Perry, you represent the people who 
are in the aging population and you are supporting this 
legislative concept. What is the impact on your clientele with 
respect to higher costs when the generics would be past this 
extended period of exclusivity?
    Mr. Perry. I don't think there's any question that we're 
talking about a conflict of values. There is a value for early 
access to less expensive generic drugs. There is also a value 
both to today's elderly and those tomorrow to see an investment 
in research so that we have better treatments, better means to 
prevent, postpone the diseases of aging tomorrow. From our 
perspective, the benefits that will come from helping people 
avoid Alzheimer's disease and Parkinson's and stroke or greatly 
diminish those in the future far outweighs the near-term 
benefit for lower cost drugs.
    Senator Specter. We are searching for ways to increase 
funding for NIH, and I do not accept what you said, Mr. Perry, 
that we cannot find more money for NIH. This subcommittee found 
$952 million more this year for NIH. And my own sense is if we 
have a presentation from NIH as to what it will cost for all of 
the unawarded grants, we could find more money. We have a 
budget of one trillion, seven hundred billion dollars, and you 
can fit $900 million into that quite a few times.
    The concern that I have is the tradeoff. I'm apprehensive 
about more money for NIH in exchange for a greater period of 
exclusivity. If the period of exclusivity is warranted because 
it will generate more research and find more products, help 
more people live longer lives, then I think that is a very 
powerful argument if that can be quantified, and I would be 
looking for that quantification to the extent it can be 
demonstrated.
    When you start talking about the greater period of 
exclusivity in return for payment to NIH, then I wonder about 
the cost to the consumers and have a hard time with that kind 
of an exchange. We have to deal with the public interest when 
we consider the longer period of exclusivity, which means more 
research products with the higher cost on generics. That is the 
overall layout I have. To the extent you can address these 
factors, in advance of Senator Bennett's questions and Senator 
Harkin's questions, they will not like it but I will.
    Senator Harkin?
    Senator Harkin. Mr. Chairman, thank you. Again, this is an 
intriguing proposal. I share the chairman's statement that we 
are trying to find new funding for NIH, trying to get the money 
we need for more biomedical research which in the long run is 
going to save us lives and save us money. I am sure you all 
agree with that. That seems to be like God, mother and apple 
pie. The question is where do we come up with the money?
    This seems to be a novel approach. Although, again I agree 
with the chairman that we are here to represent the public 
interest in trying to figure out what all the varying balances 
are. I was intrigued by the testimony on Taxol, and what the 
taxpayers would have to pay over 5 additional years if the 
price were kept up rather than having market exclusivity expire 
at the end of this year. That testimony indicated we would wind 
up spending more than we would invest in NIH.
    Is that correct? Is that what you are saying?
    Mr. Hallquist. Yes, Senator.
    Senator Harkin. What assurances do we have that if the 
patent expires that the price really is going to come down?
    Mr. Hallquist. I would submit almost any study that's done 
of the price erosion of branded pharmaceuticals after generics 
are introduced, almost in every case--in fact, I can't think of 
a single case that has ever been cited to me where the price 
hasn't gone down and it hasn't gone down precipitously. 
Typically the price will decline by more than 50 percent within 
the first 3 months after the introduction of generic 
competitors.
    Senator Harkin. But your company is what, Immunex?
    Mr. Hallquist. Immunex Corp.
    Senator Harkin. And you have developed or you have gotten 
the ingredient in Taxol that is the anticancer agent. I forget 
what the name of it is.
    Mr. Hallquist. Senator, we use the same supplier that 
originally supplied NCI and supplied Bristol. We picked up the 
supply contract after Bristol let it lapse, and so we have a 
very high quality product. My chairman has authorized me to 
offer a royalty to NIH directly if we're allowed to sell our 
product.
    Senator Harkin. How much?
    Mr. Hallquist. I think we can do better than 3 percent, 
I'll put it that way. But we've been relying upon the Waxman-
Hatch compromise, we've been relying on the dialog that Bristol 
had with the government several years ago and we just want our 
chance to compete.
    Senator Harkin. Mr. Love?
    Mr. Love. If you want to selloff market exclusivity to one 
company so they can charge high prices to consumers to fund 
biomedical research, why not make it a competitive process? Why 
not put a notice in the Federal Register and say whoever will 
bid the highest amount of money will get the market exclusivity 
for this drug? And then you can fund medical research. That, 
and we can let the market determine what is the appropriate 
royalty, instead of having Bristol-Myers Squibb or somebody 
offer 3 percent.
    Senator Harkin. Dr. Clarkson?
    Mr. Clarkson. Let me try to put this a little bit more in 
perspective. In 1971, it was an NIH grant, I think, that helped 
isolate the paclitaxel drug, which is the basis for--or the 
same thing as Taxol. 20 years later, you still had a 
significant supply problem. And at this time, there was an 
arrangement made with NIH to develop an adequate supply to 
submit to NDA's and other commitments with respect to spending 
research dollars.
    And what happened after that is that the agreement resulted 
in an expansion from about 15 trials up to over 500. It moved 
from a roughly 400, 500 patient population to several thousand, 
around 40,000. The dollars spent exceeded are over $500 
million, as opposed to $170 million set forth in the contract, 
and they still have just touched the tip of the iceberg. There 
are three approved indications now. There are many more cancers 
out there. And no one can guarantee what the future is.
    But if we compare the roughly 5 years that Taxol is under 
this agreement with the outcomes with the 20 years beforehand 
when everybody had access to that information, you get 
startling results. And that's why I think that it's important 
to look at what are the incentives of exclusivity? If you have 
exclusivity, you get action.
    Senator Harkin. I am not opposed to exclusivity and I see 
that being a necessary thing to do and to give certain 
exclusive rights for a certain period of time. What I am 
worried about is extending a period of time when other 
companies have relied upon the time and invested money and 
research, ready to bring a product out. All of a sudden the 
Congress says bang, no, you cannot. That is a concern of mine. 
I mean, companies relied upon this, I would think. I do not 
know anything about your company but I would think----
    Mr. Clarkson. I think that you're at the end of a cycle of 
discovery with respect to new indications and you've already 
identified the populations, I think that's a very real concern.
    I'm an economist, and I support competition and I think 
competition ultimately is the best outcome. The question is 
when?
    Senator Harkin. I agree with that. I worry about when there 
has been a set time and the company has relied on it and they 
have put money into research and they are getting toward coming 
out with their generic product.
    Senator Specter. Suppose we did it prospectively from this 
point forward?
    Senator Harkin. You could do it prospectively, I suppose, 
for anything in the future. Senator Bennett's future.
    Excuse me, Mr. Perry, I wanted to ask him a question.
    Senator Specter. Just one last one?
    Senator Harkin. Just one last one.
    Mr. Perry. This is--both the generic and the name brands 
industries is a highly regulated area. And the downside to 
finding legislation like this that would affect one company, I 
think, has to be considered against the public interest, not 
only in the short run but in the long run. And the long-term 
public interests that I believe members of this committee have 
very close to their hearts is the need for more research.
    I'm looking right now at some of the strongest 
Representatives in the Congress, and I take second to no one in 
praising the work of this subcommittee in helping make sure the 
research is there. But from 1970, when 1 out of 2 NIH 
applications that were peer reviewed and passed peer review 
were funded, to 1997, when it's 2 out of 10 and we know the 
competitions within that limited funding pool for discretionary 
funding is going to lead to a smaller NIH in the out years than 
what we have today, and what a tragedy at a time when the 
innovations are waiting to be discovered and when the public 
health needs need those breakthroughs, and what a time to lose 
that momentum.
    This is just one more--this demonstration project, which is 
time limited and voluntary, is one more lever under that big 
rock, Senator, one more effort to try to get it and see if it 
works in 5 years. And I think we'll be able to better weigh the 
impact on the legitimate interest of lower prices for consumers 
and the complementary interest of more research.
    Senator Specter. Senator Bennett?
    Senator Bennett. Thank you, Mr. Chairman.
    First, Mr. Hallquist, I do not in any sense accuse you of 
bad faith. I think you gave us your numbers in perfectly good 
faith. But I have and will make available to the committee for 
the record other numbers, and I think ultimately this means 
this thing is going to have to be scored by CBO. A former CBO 
employee was asked to score this, and he says that this 
proposal would yield for the Federal Government $824 million in 
royalty revenue, lose $254 million in Medicare costs for a net 
gain to the Government of over half a billion dollars, $570 
million.
    So I just put that on the table to indicate that we better 
be careful before we start making sweeping statements, let us 
get this thing properly scored.
    Now, the other thing that I want to make clear from my 
understanding and let you comment, and correct me if I am 
wrong, I hear all of the conversation about research and 
focusing on NIH as if NIH is the only place where research is 
going to be done here. And as I understand this proposal, this 
is the way it works.
    A company develops a drug for disease A and the clock 
starts ticking, the 5 years start running. And in that 5-year 
period, they discover, as they bring the drug to market, that 
it possibly has an application for B, C, D, and E, and they put 
some research dollars into that. Well, if they are putting the 
research dollars in in the first year, they will get a return 
for them because they have 4 years in which that research can 
come to fruition.
    Say that they discover in the first year with their 
research that B, which they had not thought of, when the 5 
years started running, does respond to the drug, maybe C will, 
and so they start to put some money in research for C, and then 
there are indications out of the market experience that D and E 
also will respond. But now the 5 years are gone and someone 
says look, if we put in another $100 million, $200 million, 
whatever, into research, we may have the application of this 
drug for D and E. But no, the 5 years are up. It is now going 
to go generic, at which point the company says we are going to 
stop all research on D and E and probably not even launch the 
research on C because it is not going to go forward.
    So this is research that the company has to put up its own 
money to do. And it is an incentive not just to have royalty 
for--for NIH. Mr. Love, I agree with you if that were the only 
issue, we might as well put this up for bid. It is for the 
company itself to say we are going to put our own money at risk 
based on our own experience, and we think the payoff is 
sufficiently great that we will gamble the extra $100 or $200 
million or whatever it is that we will do that for D and E.
    And as I understand the process, what we are saying in this 
demonstration project is if a company is willing to pledge 
those additional moneys, the company does not just 
automatically pledge the royalty. The company has to pledge the 
research dollars, as well. If the company is willing to pledge 
the additional research dollars plus the royalty, it can get 
the extra 5 years. It is taking a gamble, because if in that 5-
year period D and E don't pay off, they have lost the money 
that they put into research. But if D and E pays off, we have--
you are an economist, Dr. Clarkson, we have a return on our 
investment from a public point of view that is really quite 
substantial.
    Now, have I categorized correctly? I see some people 
shaking their heads no and some people shaking their heads yes.
    Mr. Clarkson. Yes.
    Senator Bennett. Can we get a response as to----
    Mr. Hallquist. Senator, in the specific example you just 
cited, under U.S. patent law, the company doing the research on 
indications B, C, D, and E would be entitled to apply for 
method of use patents that would extend to 17 to 20 years 
covering that research and the benefits of that research 
provided that it was inventive. As Mr. Love pointed out, the 
specific legislation that's on the table today only covers this 
narrow spectrum of specialty favored drugs which don't qualify 
for patent protection and for which the 5 years of exclusivity 
has already expired.
    So you know, you can't look at Waxman-Hatch as though it 
were the only form of exclusivity available to U.S. drug 
researchers and manufacturers. There also is the patent system. 
There's also the orphan drug act. So it can't be looked at in a 
vacuum.
    With respect to your comments on our financial analysis, we 
can only address Taxol, it's the biggest pig in the litter. 
It's a huge drug and the economics, to our mind, disfavor this 
proposal.
    Senator Bennett. The numbers I have were also based on 
Taxol.
    Mr. Hallquist. I'd be happy to comment on it. Our analysis 
definitely does show that growth in the Taxol market for the 
precise reasons that Mr. Perry talked about, the U.S. 
population is getting grayer, older, and we have more cancer 
patients.
    Senator Bennett. Anyone else want to comment on--Mr. Love, 
you do?
    Mr. Love. The situation described happened once before with 
the same company Bristol-Myers with another cancer drug that 
was a Government-funded drug. In the early 1980's, Syspat was 
the largest selling cancer drug in the world as Taxol is today. 
There used to be, you could only get 5 years of exclusivity 
even under a patent if it was from a university. And so when 
the 5 years ran out, Bristol-Myers Squibb came to the 
Government and they said we can't justify more research on 
Syspat unless you extend our monopoly another 5 years. And it 
was like five or six companies which asked the Government to 
let them sell Syspat, too, and compete against Bristol-Myers 
and drive the price down.
    So Bristol-Myers made a proposal that they would pay $35 
million to fund cancer research that was supervised by the NIH. 
This is back in the early 1980's and they--and that they would 
lower the price of the drug 30 percent, which was the other 
part of the proposal, maybe they forgot about this time around.
    In any event, though, what happened is one of the companies 
that came said, lookit, if this is about money for research, if 
that's all we're talking about, you name the number, we'll make 
the contribution. It's just like that gentleman there said, he 
said if you want research on biomedical research, tell all the 
new entrants that they pay 5 percent, 10 percent. They don't 
really care what the number is as long as everybody pays the 
same percent. It could be a dollar amount per drug sold, it 
could be a percentage of revenue. The Government could take the 
money, put it in a foundation or give it to NIH or have the 
company set up its own research funds.
    The point they were making is that it is a problem when you 
eliminate monopolies because all the R&D profits disappear 
because the generic competition prices moves prices down to 
cost. But if you want to preserve that cushion for R&D, you 
don't want to have one company have a monopoly. You can put, as 
Senators Harkin and Specter proposed in the past, some kind of 
guideline like a royalty or something like that that has to go 
into research. And that was proposed in the area of Syspat. The 
Government rejected that advice.
    They gave the monopoly to Bristol-Myers, just like it's 
being proposed right here. It's just like a deja vu. And you 
know, so we've been down that road before. As a result, 
patients in the United States pay a lot more for Syspat than 
they do in other parts of the world.
    Senator Specter. Anybody else want to respond to Senator 
Bennett? Because we want to wrap up here.
    Senator Bennett. Before, Mr. Love, you stopped the story, I 
was waiting for the punch line and you never gave it to me. Did 
in fact Bristol-Myers do more research and was there a medical 
benefit that came out of that deal?
    Mr. Love. They did spend portions of the research, we have 
the documents that they submitted in terms of the reports. But 
later on in the Reagan administration, the reporting basically 
petered off, and the fellow that was supervising the research 
for Bristol-Myers Squibb, Dr. Wittest went to work for Bristol-
Myers Squibb and helped organize their application for the 
Taxol patent. I mean Taxol CRADA. Dr. Wittest was an employee 
of Bristol-Myers Squibb and it was under his direction that 
they got the Taxol CRADA. Now Dr. Wittest is back with NIH.
    Senator Bennett. You were not answering my question.
    Mr. Love. The answer is they did spend some money, but it 
was not as much money as the consumers paid to Bristol-Myers 
Squibb.
    Senator Bennett. You are still not answering my question. 
Was there a medical benefit that came out of the money that 
they spent?
    Mr. Love. There was a medical benefit. It was not as big as 
what the consumer cost was, but there was indeed a medical 
benefit for medical research.
    Senator Specter. Ms. Cioffi, you want to respond? Go ahead.
    Ms. Cioffi. Yes; just to take it away from Taxol and speak 
about my patient population for just a second, I would suspect 
that there's very much a medical benefit that was involved 
here, but I can speak from experience in a new drug for oral 
kelation that's through a company where they do have the 
exclusivity and they've been able to spend this extra time on 
the drug, to find out that the application of the drug is 
broader than what they suspected and will have more benefit for 
a larger patient population. So that's an experience that's 
worked really well in this kind of proposal.
    The other thing is that for our small patient population, 
again, even after all the credits and that experience, you get 
to a point where a company is not going to invest in generic 
drugs for this small population. So I need any additional 
amount of research for our patients to cure this.
    Mr. Clarkson. Just a couple quick comments. One, a 
footnote. NERA also did a study on that earlier grant where 
they came to the opposite conclusion, they were supporting 
exclusivity, and I urge the committee to try to get a copy of 
that report.
    I wish you could teach my class because you have it right. 
You're right on in terms of the sequencing. And since it is 
focusing on this particular drug, Taxol, I do think that with 
so many other cancers that still exist, there's research going 
on in small lung and several other activities that I suspect--I 
wouldn't be able to predict for any particular country, but I 
would suspect would be curtailed substantially if not 
eliminated.
    Mr. Perry. Senator Bennett, I believe the explanation that 
you gave is exactly correct. As I understand the proposal, it 
rewards in three ways. It strengthens patent and nonpatent 
incentives for research, provides a royalty mechanism back to 
NIH, and it requires the companies that opt for this to match 
that with an equal amount of additional R&D and perhaps 
another--in other applications of the particular drugs.
    It is a novel benefit that I think meets and perhaps in 
some ways exceeds some other ways that we're trying to find 
additional research. Let me remind the audience at least that 
the Senate is on record calling for a 100-percent increase in 
National Institutes of Health over the next 5 years. I think 
we're all going to put our shoulder to the wheel to see if we 
can't help achieve that. But unless we can find some creative 
public-private partnerships, instead of relying on the 
appropriations process and the non--and the nondefense 
discretionary fund which is so squeezed right now, I don't see 
how we're going to get there and I salute those of you that are 
helping us to get there.
    Senator Specter. Thank you all very much. This is the 
beginning of a process on considering a very complex issue. 
Also, we will include the CBO cost estimate on this issue, when 
it is received, in the record at this point.
    [The information follows:]
                      Letter From June E. O'Neill
                                     U.S. Congress,
                               Congressional Budget Office,
                                 Washington, DC, November 18, 1997.
Hon. Arlen Specter,
Chairman, Subcommittee on Labor, Health and Human Services, and 
        Education, Committee on Appropriations, U.S. Senate, 
        Washington, DC.
    Dear Mr. Chairman: At the request of your staff, the Congressional 
Budget Office has prepared the enclosed cost estimate for a proposed 
demonstration project that would grant up to 10 years of additional 
market exclusivity for certain drugs and antibiotics in exchange for 
royalty payments to the Federal Government.
    If you wish further details on these estimates, we will be pleased 
to provide them. The CBO staff contact is Anne Hunt, who can be reached 
at 226-9010.
            Sincerely,
                                           June E. O'Neill,
                                                          Director.
    Enclosure.
                                 ______
                                 
     Congressional Budget Office--Cost Estimate--November 18, 1997
       proposed demonstration project to fund biomedical research

Summary

    CBO estimates that the proposed demonstration project would 
increase both federal outlays and federal revenues over the 1998-2002 
period, with the increase in revenues exceeding the increase in 
outlays. During the 2003-2007 period, however, outlays would increase 
more than revenues, and the deficit would rise. Because the bill would 
affect direct spending and receipts, pay-as-you-go procedures would 
apply.
    Beginning in 1999, the proposal would increase costs for Medicaid, 
the Federal Employees Health Benefits Program (FEHBP), and Medicare. 
Outlays would increase by $12 million in 1999 and $236 million over the 
1998-2002 period. The proposal would increase revenues through 
collections of royalty payments, but it would reduce federal income and 
payroll tax revenues by raising the costs of employer-sponsored health 
insurance and correspondingly reducing the amount of taxable 
compensation. On balance, revenues would increase by $19 million in 
1998 and $458 million over the 1998-2002 period.
    The proposal contains no intergovernmental mandates as defined in 
the Unfunded Mandates Reform Act of 1995 (UMRA). However, extending 
market exclusivity for certain drugs would increase costs for state 
Medicaid programs, other programs that provide prescription assistance, 
and employee benefit programs at the state, local and tribal level.
    The proposal would constitute a private-sector mandate as defined 
in UMRA because it would prohibit the production of generic versions of 
the brand-name drugs eligible to participate in the demonstration. CBO 
estimates that the cost of this mandate would surpass the $100 million 
statutory threshold established in UMRA.

                ESTIMATED COST TO THE FEDERAL GOVERNMENT

    The estimated budgetary impact of the proposed amendment is shown 
in the following table. The costs of this legislation fall within 
budget functions 550 (Health) and 570 (Medicare).

                                ESTIMATED BUDGETARY IMPACT OF PROPOSED AMENDMENT                                
                                    [By fiscal year, in millions of dollars]                                    
----------------------------------------------------------------------------------------------------------------
                                       1998   1999   2000   2001   2002    2003    2004    2005    2006    2007 
----------------------------------------------------------------------------------------------------------------
Direct spending:                                                                                                
    Medicaid........................  .....  .....      1     28     123     185     191     206     199     190
    FEHB............................  .....  .....  .....      1       3       8      13      20      27      34
    Medicare........................  .....     12     21     24      24      25      12       2  ......  ......
                                     ---------------------------------------------------------------------------
      Total.........................  .....     12     22     52     151     219     216     228     226     224
Revenues:                                                                                                       
    Royalty payments................     19     34     59    177     219     203     224     202     207      53
    Income and payroll taxes........  .....  .....  .....     -6     -44     -76     -86     -91     -87     -88
                                     ---------------------------------------------------------------------------
      Total.........................     19     34     59    171     175     127     138     111     120     -35
----------------------------------------------------------------------------------------------------------------


Basis of estimate

    The proposed demonstration project to fund biomedical research 
would grant up to 10 years of additional market exclusivity for certain 
drugs and antibiotics. In return for the extension of market 
exclusivity, manufacturers would make royalty payments to the federal 
government to help fund biomedical research--subject to authorization 
and appropriation--and agree to spend an equal amount on biomedical 
research.
    Products eligible to be included in the program are those for which 
a new drug application (NDA) was filed and approved under sections 
505(b)(1) or 507 of the Food Drug and Cosmetic Act (FD&CA) during the 
five years preceding enactment of the proposal. Manufacturers of these 
drugs could elect to participate in the demonstration project through 
the end of fiscal year 2002. For the purposes of this estimate, CBO 
assumes that a manufacturer would not elect to participate in the 
program until the patent on its product was about to expire.
    The proposal would prohibit the Food and Drug Administration (FDA) 
from accepting, reviewing, or approving any application for a drug 
containing the active ingredient(s) of an eligible product. This 
prohibition would extend for ten years after the approval of the NDA 
filed under section 505(b)(1) or 507 of the FD&CA.
    To obtain extended market exclusivity, the manufacturer of an 
eligible product would agree to pay the Secretary 3 percent of its net 
U.S. sales of the eligible products--including all forms and dosages--
and to spend an equal amount of money on biomedical research. Subject 
to authorization and appropriation, the royalty payments would be 
available to the Secretary of Health and Human Services to fund 
biomedical research projects approved by the Director of the National 
Institutes of Health (NIH).
    It is unclear how the proposal would affect abbreviated new drug 
applications (ANDAs) that have already been filed under the FD&CA and 
are pending FDA approval. The proposal does not address whether the FDA 
could continue reviewing these ANDAs or whether it would have to stop 
work on them until the end of the ten-year exclusivity period. It is 
clear, however, that manufacturers of generics who were preparing to 
submit ANDAs--but have not yet done so--would be penalized financially 
if the proposal were enacted.
Outlays
    The award of additional years of market exclusivity would increase 
costs for Medicaid, FEHBP, and Medicare by delaying the availability of 
generic products. Medicaid currently has a very high generic 
substitution rate because the program requires pharmacists to dispense 
lower-cost generic products once they are available, unless the 
prescribing physician specifies otherwise. Additionally, many states 
have laws permitting generic substitution with the patient's consent. 
Therefore, CBO assumes that Medicaid would usually substitute generic 
for brand-name products. Generic substitution would probably occur at a 
slower rate among health plans participating in FEHBP and in Medicare.
    Under the proposal, spending for Medicaid, FEHBP, and Medicare 
would increase by $236 million over the 1998-2002 period. CBO estimated 
this increase in spending by comparing the level of spending that would 
occur in the absence of generic entry with projected spending under 
current law. To estimate payments by Medicaid, FEHBP, and Medicare 
under current law for the set of drugs that would be affected by the 
proposal, CBO adjusted 1995 spending to account for projected inflation 
and the reduction in prices that would occur as generic entry took 
place. Using information from Approved Drug Products With Therapeutic 
Equivalence Evaluations (the ``Orange Book''), CBO determined when 
patents would expire under current law for affected drugs and 
calculated the incremental period of exclusivity. For Medicaid, the 
estimate takes into account rebates paid by manufacturers.
    For Medicare, the estimate takes into account the change in payment 
rates under the Balanced Budget Act of 1997.

Revenues

    The proposed demonstration project would affect revenues in two 
ways. First, it would increase revenues because of the royalty payments 
made by participating drug manufacturers. CBO estimates that these 
payments would total $19 million in 1998, and just over $500 million 
over the 1998-2002 period. For the purposes of this estimate, CBO 
assumed that a manufacturer would not choose to participate in the 
demonstration until the patent on its product was about to expire and 
that it would stop participating at the end of the exclusivity period. 
Because the federal government's collection of the royalties would stem 
from its sovereign powers, these funds would be classified as 
governmental receipts.
    Second, the proposal would affect income and payroll tax revenues. 
By delaying generic entry for eligible drugs, it would increase the 
prices insurers paid for pharmaceuticals, leading to higher premiums 
for employer-sponsored health insurance. Correspondingly, the amount of 
employee compensation subject to income and payroll taxes would 
decrease. CBO estimates federal income and payroll tax revenues would 
fall by $50 million through 2002.

Pay-as-you-go considerations

    The Balanced Budget and Emergency Deficit Control Act of 1985 sets 
up pay-as-you-go procedures for legislation affecting direct spending 
or receipts. Because the proposal would affect direct spending and 
receipts, pay-as-you-go procedures would apply. For purposes of 
enforcing pay-as-you-go procedures, only the effects in the budget year 
and the succeeding four years are counted.
Estimated impact on State, local, and tribal governments
    The proposal would place no enforceable duty on state, local, or 
tribal governments, and thus it contains no intergovernmental mandates 
as defined in the Unfunded Mandates Reform Act of 1995. However, the 
delayed availability of generic drugs would result in increased costs 
for health care. State and local governments would thus face higher 
costs both in the Medicaid program and in their employee health 
insurance programs.
    CBO estimates that the state government portion of Medicaid costs 
would increase by $114 million over 5 years. In addition, any state, 
local or tribal government that offers health insurance coverage to its 
employees would face increased pharmaceutical costs. Based on the 
number of these employees who receive pharmaceutical benefits, CBO 
estimates that governments would face additional costs of approximately 
$23 million over 5 years. Economists generally believe, and CBO's cost 
estimates have long assumed, that workers as a group bear most of the 
cost of employers' health insurance premiums. The primary reason for 
this conclusion is that the supply of labor is relatively insensitive 
to changes in take-home wages. Because most workers continue to work 
even if their take-home pay declines, employers have little trouble 
shifting most of the increase for health care costs to workers' wages 
or other fringe benefits. Consequently, after the first few years, 
state and local governments would likely shift these costs to their 
employees.
    Also, some states provide assistance for low-income individuals who 
are not eligible for Medicaid. States that provide this type of 
prescription assistance would face additional costs for these programs. 
At this time, CBO does not have sufficient information on the number of 
states that provide this type of assistance and on the types of 
prescriptions covered to provide an estimate of these costs.
Estimated impact on the private sector
    The proposal contains a private-sector mandate over the statutory 
threshold ($100 million in 1996, adjusted annually for inflation) in 
2001 and 2002 because it would prohibit generic manufacturers from 
producing copies of certain brand-name drugs containing an active 
ingredient that was initially approved by the FDA during the last 5 
years. CBO estimates that prohibition would cost the generic drug 
industry over $500 million in lost profits (after taxes) between 1998 
and 2002. Also, many purchasers would pay more for certain prescription 
drugs because of the reduced competition from generic manufacturers. 
CBO estimates that those indirect costs to prescription drug purchasers 
would total $1 billion over the 1998 to 2002 period, net of the 
increased costs to the Medicare, Medicaid and FEHBP.
Estimate prepared by:
    Federal Cost Estimate: Anne Hunt (226-9010).
    Impact on State, Local, and Tribal Governments: Leo Lex (225-3220).
    Impact on the Private Sector: Anna Cook (226-2940).
    Estimate approved by: Paul N. Van de Water, Assistant Director for 
Budget Analysis Division.

                    ADDITIONAL SUBMITTED STATEMENTS

    Senator Specter. But this is the start of a debate which I 
think we will have. And these figures are not immutable as to 3 
percent, et cetera, et cetera. This is something that we are 
searching for in trying to find more research dollars. We thank 
you for coming. And if you take a look at those questions, we 
would appreciate it.
    For the record, we are inserting statements from Senator 
Wellstone, Senator Durbin and a statement of Congressmen 
Waxman, Brown, Deutsch, and Stark. We will also include a 
statement from the National Alternative Fuels Association.
    [The statements follow:]
                   Letter From Senator Paul Wellstone
                                               U.S. Senate,
                                  Washington, DC, October 20, 1997.
Hon. Arlen Specter,
Chairman, Subcommittee on Labor, Health and Human Services, and 
        Education and Related Agencies, Washington, DC.
    Dear Senator Arlen Specter: I am writing to express my concern 
about the proposal to include language concerning patent extensions for 
certain drug products in the Labor HHS appropriations conference. As 
you know, I have worked diligently in the past to retain the provisions 
that are in the 1984 Hatch-Waxman Act. That Act provides an equitable 
process for providing patent extensions when they are warranted.
    The proposal that has been brought forth would grant branded 
pharmaceutical companies unearned, windfall profits at the expense of 
American consumers. Drugs such as Claritin, which has had an increase 
in U.S. sales of over 50 percent in the past 2 years, would receive 
this benefit. The manufacturer of this drug is expected to see even 
higher sales in the next few years than the $1.2 billion it saw in 
1996. It is likely that a generic equivalent of this drug will be ready 
to go to market at the time the drug is due to come off patent in 2002. 
The availability of the generic will greatly decrease the cost of this 
drug to consumers, who rely on the product for treatment of allergies. 
This is important not only for consumers, but for health plans that pay 
for drug benefits for their members.
    It is interesting that the latest proposal includes an attempt to 
decrease the controversy surrounding patent extensions by creating a 
demonstration project that would require that a manufacturer pay a 3 
percent royalty to the Secretary in exchange for a patent extension, in 
order to fund research. While it is certainly beneficial to increase 
health research funding, I am not convinced that this method is the 
appropriate one. The proposed strategy appears to be a buy-off, with 
significant implications for consumers and others who pay for health 
care.
    In addition, I am concerned about changing provisions of the Hatch-
Waxman Act without fully understanding the implications of doing so. 
Major changes such as the one that is proposed should be fully vetted 
with those affected by them.
    I am hopeful that you will understand the need to proceed 
cautiously with any attempt at patent extensions, and will make certain 
that any proposals to do so are fully and properly vetted.
            Sincerely,
                                            Paul Wellstone,
                                                      U.S. Senator.
                                 ______
                                 
            Prepared Statement of Senator Richard J. Durbin
    Mr. Chairman, I want to thank the Subcommittee for this opportunity 
to submit testimony on this new proposal for NIH funding which is tied 
to extending prescription drug market exclusivity.
    I have long been a supporter of increased NIH funding. I have also 
cosponsored bills to set up a trust fund for the National Institutes of 
Health (NIH) to supplement their appropriations. However this proposal 
under consideration today will be costly to those that its proponents 
claim to help, namely patients.
    This proposal is extremely misleading. It masquerades as a means of 
supplementing NIH resources to increase research for new cures. As 
currently drafted the three percent royalty could merely substitute for 
current NIH funding. This proposal is really nothing short of a highly 
profitable quid pro quo for the drug companies who will reap billions 
of dollars in additional revenue by shutting out of the market new, 
cheaper generic drugs.
    Unlike the Orphan Drug Act, this increased market exclusivity is 
not tied to developing new drugs. Instead extended exclusivity goes to 
companies that already have drugs on the market. This proposal in fact 
stifles the production of new second generation drugs that would be 
more affordable to patients.
    This proposal could conservatively cost American consumers $10 
billion in higher drug costs, based on the proponent's own estimates 
that it will increase revenue to NIH by $750 million over five years. 
For one drug alone, Taxol, this special interest provision would cost 
consumers $1.3 billion, including $288 million for Medicare for the 
period of 1999-2005. Up to 350 drugs potentially are eligible for this 
special treatment. Consumers of some of the drugs targeted for this 
lucrative patent extension include breast cancer patients, AIDS 
patients and seniors. They would be forced to pay billions in higher 
prices while taxpayers will pay more in Medicare and Medicaid costs.
    While the proposal calls for the drug companies who would benefit 
from the measure to pay a percentage for NIH research, the expense to 
patients and taxpayers and the companies' windfall profits would far 
exceed any corporate payout to the government. It is also highly likely 
that the companies will pass the price of the royalty on to patients in 
the form of higher prices for these drugs. The cost to the federal 
government of this provision is likely to be far greater than the $750 
million that proponents estimate will be added to NIH's budget. CBO is 
currently analyzing the cost to the government of this proposal.
    This morning I was joined by U.S. Rep. Henry Waxman and consumer 
and patient groups at a Capitol Hill news conference, to discuss the 
possibility that this provision might find its way into the Labor-HHS 
spending bill. The Consumer Federation of America, AARP, Public Citizen 
and the Women's Health Network spoke out strongly about how harmful it 
would be to consumers to give certain drug companies an extra five to 
ten years of patent exclusivity.
    Similar to the secret $50 billion windfall for the tobacco industry 
that was snuck in to the tax cut bill, this proposal is another 
``moonlight mackerel'' being floated on Capitol Hill that could cost 
consumers and taxpayers billions of dollars, and it similarly, to 
paraphrase John Randolph, ``shines and stinks like rotten mackerel by 
moonlight.''
    Special interest groups will always try to sneak in a backdoor deal 
and call it a benefit. But not all benefits are public benefits. The 
odor emanating from this provision can't be masked by a flower for the 
NIH. I urge the committee to reject this proposal and protect consumers 
from unnecessarily inflated drug costs.
                                 ______
                                 

Prepared Statements of Representatives Henry A. Waxman, Sherrod Brown, 
                 Peter Deutsch, and Fortney Pete Stark

    Mr. Chairman, we thank the Subcommittee for the opportunity to 
submit testimony on the subject of NIH funding and proposals to extend 
prescription drug market exclusivity.
    For many years, the Congress has increased this Nation's investment 
in biomedical research out of recognition of the important benefits it 
creates for ourselves and the entire world. Most remarkably, Congress 
has sustained this real growth in the budget of the National Institutes 
of Health (NIH) in an era of shrinking federal resources. That is a 
striking testament to the importance we in the House and the Senate 
attach to basic research.
    The proposal which is subject to this hearing has been clothed in 
the appearance of sustaining this worthy cause. It purports to provide 
additional resources to the NIH. It is being sold as a panacea to the 
difficult choices the Congress has had to make to sustain our country's 
scientific crusade against diseases like AIDS, cancer, diabetes and 
heart disease.
    In reality, this is a stark special interest deal which only serves 
the financial interests of a small number of prescription drug 
companies. The funds which this deal would generate for research would 
not appear painlessly and miraculously from the air. They would be 
taken directly from the pockets of American consumers and taxpayers.
    This special interest deal is breathtaking in its audacity. It 
boils down to a simple but profitable quid pro quo for the beneficiary 
companies--``give us up to 10 years of market exclusivity and we will 
give the U.S. government a 3-percent payoff.'' If this deal were to be 
enacted by the Congress, a handful of brand name drug companies would 
bar competition through lucrative market exclusivities, continue to 
charge exorbitant prices for drugs which will have already enjoyed full 
patent terms and exclusivities under existing law, and simply pass on 
the cost of the 3 percent government ``payoff'' directly to consumers.
    This special interest proposal is offensive to simple equity for a 
variety of reasons. First, it would delay access to affordable generic 
drugs and force consumers to subsidize higher prices on products which 
have already received the full extent of patent protections and market 
exclusivities which are already available under current law. Since this 
deal would include any drug approved in the past 5 years and any future 
drug approved in the next 5 years, the direct costs to consumers, 
health payers, hospitals and HMO's would be unimaginably high. 
Companies which have spent years to prepare competitive generic drugs, 
and even secured tentative FDA approval, by complying with current law 
would be barred overnight by this proposal from the market for another 
5 or 10 years, forcing them without warning to shutter plants, lay off 
workers and break contracts.
    Second, American consumers would be forced to pay twice for this 
special interest subsidy. Taxpayers pay for the Federal government's 
health care programs, such as Medicare, Medicaid, veteran's health 
programs, the Public and Indian Health Services, and Federal Employee 
Health Benefit programs. The government would be forced to pay much 
higher prices for the drugs which qualify for this special interest 
deal, undoubtedly costing taxpayers billions of dollars over and above 
their direct drug costs. Our colleague, Congressman Pete Stark, ranking 
member of the House Ways and Means Subcommittee on Health, has 
requested that the Congressional Budget Office (CBO) examine these 
questions. We all look forward with great interest to CBO's findings.
    Third, this proposal is a fraudulent effort to soften the choices 
the Congress must always make in allocating Federal resources. We would 
simply caution our colleagues that there is no such thing as a free 
lunch. Proponents of this measure claim that NIH could obtain $750 
million without dipping any deeper into the Federal budget. This 
conveniently ignores the additional costs to Federal health programs 
generated by this proposal, but even more egregiously dispenses with 
the cold reality that it would be consumers who pay out of pocket for 
their drugs, especially older Americans, who would bear the brunt of 
the $750 million bill for this special interest proposal.
    Congress should indeed explore imaginative ideas for expanding our 
country's biomedical research effort, not schemes sponsored by the 
prescription drug industry and intended to protect the market shares of 
drugs such as Bristol-Myers Squibb's cancer drug taxol, Glaxo's 
migraine drug Imitrex and HIV therapy Epivir, and Parke-Davis' 
Alzheimer's drug Cognex.
    Finally, as Congressman Waxman is one of the coauthors of the 1984 
Waxman-Hatch Act, we are deeply disturbed by the implications of this 
special interest proposal for the interests of consumers. This proposal 
would completely overturn the delicate balance of equities in the 1984 
Act, without any careful or systematic regard for the implications for 
all of the commercial interests at stake, as well as the public 
welfare. Our colleagues Senator Hatch and Congressman Waxman have 
publicly stated on numerous occasions that any revisions to the 1984 
Act must be made in the same spirit and to the same effect as the 
original statute. For this reason alone, we would strongly oppose this 
proposal and seek its defeat in the House of Representatives.
    There have been numerous efforts in recent years to obtain special 
patent extensions and special extensions of market exclusivity in 
direct contravention of the Waxman-Hatch Act and its underlying 
purpose. Some of these efforts have literally taken place in the dead 
of night. For example, one patent extension was smuggled into the 
conference report of the 1997 Kennedy-Kassebaum Health Care Reform Act. 
Only the strenuous, last minute efforts of Congressmen Stark and 
Waxman, and Senators Kennedy and Wellstone, prevented it from becoming 
law.
    We urge our colleagues in the Senate to reject any notion of 
adopting this special interest proposal. Biomedical research may be 
expensive, but it is among the most valuable activities undertaken by 
the government and should be defended and protected on this basis. We 
should strenuously resist efforts by certain industries to 
``piggyback'' their own interests on the cause of biomedical research.
                                 ______
                                 
   Prepared Statement of R. Douglas Chiappetta, President, National 
                     Alternative Fuels Association
    Chairman Specter and Members of the Senate Appropriations Health 
Subcommittee, my name is R. Douglas Chiappetta, President of the 
National Alternative Fuels Association (NAFA). Thank you for the 
opportunity to testify on the proposal to expand pharmaceutical patents 
(for up to 5 years). As noted, pharmaceutical companies are proposing 
to pay the Federal Government to extend their market monopolies on 
best-selling brand name drugs. In return for these extensions, (a 
percentage of) company monies would be used for national research on 
cancer, heart disease, AIDS and other diseases.
    Although NAFA is not a patient advocacy organization representing 
beneficiaries to this proposal, we applaud any effort to expand the 
Federal Government's commitment to reducing and eradicating life 
threatening illnesses. However, we believe our membership would be 
adversely impacted by the enactment of this proposal in its present 
form.
    For the record, the National Alternative Fuels Association was 
founded in 1992 to support public policy and federal legislation 
resulting in the advancement of pollution reducing technologies. Our 
membership comprises concerned citizens, research scientists and 
entrepreneurial alternative fuel manufacturers, committed to preserving 
and enhancing the earth's air quality through expanded use of 
alternative fuel technologies.
    Earlier this year, NAFA discussed (related) patent term extension 
concerns with staff to Senator Orrin Hatch, prime sponsor of omnibus 
patent legislation (S. 507) currently pending before the full Senate. 
(We have also convened discussions [on this issue] with some of the 
pharmaceutical companies in attendance at this hearing).
    NAFA supports ``a level playing field'' for alternative fuel 
manufacturers struggling with federal patent laws and environmental 
regulations in their attempts to enter the commercial fuel additive 
market in the United States. It is my understanding that alternative 
fuel manufacturers (like other patentees) are protected for a period of 
20 years from the filing of a patent application. However, due to 
regulatory delays, pharmaceuticals are accorded extensions to their 
patent monopoly.
    Alternative fuel companies are subjected to EPA regulatory and 
other delays which are perhaps much more onerous then pharmaceuticals, 
but are not accorded extensions. Several of our members (with promising 
air pollution abating alternative fuel technologies) will not be able 
to introduce pollution reducing technologies if federal legislation or 
regulation is not adopted to remedy this problem.
    NAFA has submitted (to Senator Hatch) draft legislation to address 
this matter. We are advocating amending Section 155 of Title 35 of the 
U.S. Code to insure extended patent protection for alternative fuel 
manufacturers subjected to regulatory review by the Federal 
Environmental Protection Agency pursuant to the Federal Clean Air Act 
(including Sections 211(f) and 211(k), such that sufficient motivation 
exists to encourage implementation of pollution reducing fuel 
technologies.
    Under this proposed amendment, Fuel manufacturers would, like 
pharmaceutical manufacturers, be granted extended patent protection to 
provide for the additional time to meet the requirements under EPA 
regulation. Alternative fuel manufacturers typically expend 4-15 years 
grappling for EPA regulatory approval [e.g. Section 211(f), 211(k) of 
the Clean Air Act]. (Ethyl Corporation, for example, spent 
approximately 15 years in it's recent effort to obtain a Section 211(f) 
waiver for a fuel additive).
    Although the enactment of this amendment will have a significant 
impact in ``leveling the playing field'' for alternative fuel 
manufacturers, its effect should not be overstated. Alternative fuel 
manufacturers will not begin to construct their physical plants until 
after final EPA approval is granted. Initial merchant facilities 
require a lead time (between 3-7 years) before a fuel can even enter 
commercial markets. Under this scenario, alternative fuel manufacturers 
find themselves with expired or substantially expired patent protection 
before they can generate revenues. Such facilities can only serve a 
fraction of the total market.
    It is my understanding that pharmaceutical companies, once FDA 
approval is granted, require anywhere from no lead time to 12 months to 
bring a product or drug to the marketplace to meet total world wide 
demand. Thus, alternative fuel manufacturers are greatly handicapped 
under today's regulatory environment, perhaps much more so then 
pharmaceuticals.
    The text of NAFA's proposal to Senate Hatch is as follows:
    Amend U.S. Code Annotated (Title 35, Section 155). Section 155 
(Patent term extension), the U.S. Code to read as follows: 
``Notwithstanding the provisions of section 154, the term of a patent 
which encompasses within its scope a composition of matter or a process 
for making or using such composition or a combination shall be extended 
for a period not less than the total time commencing with test relating 
to appropriate applications, until their ultimate EPA or FDA approval, 
or if such composition, [or] process or combination has been subjected 
to a regulatory review by the EPA, or Federal Food and Drug 
Administration pursuant to the Federal Food, Drug, and Cosmetic Act, 
related legislation or regulation thereof said term shall be 
accordingly extended, or if review leads to the publication of 
regulation permitting the interstate distribution and sale of such 
composition or process and for which there has thereafter been a stay 
of regulation of approval imposed pursuant to section 409 of the 
Federal Food, Drug, and Cosmetic Act which stay was in effect on 
January 1, 1981 by a length of time to be measured from the date such 
stay of regulation of approval was imposed until such proceedings are 
finally resolved and commercial marketing permitted.''
    NAFA invites Members of the Senate Appropriations Health 
Subcommittee to review this proposed legislation and consider drafting 
a letter of support (to Senator Hatch) in favor of this measure. As 
previously stated, expanded patent protection for alternative fuel 
technologies will usher in a new class of ``clean fuel'' technologies 
for the next century.
    While NAFA does not take issue with the merits of the proposal 
under review today, we strongly believe that the adoption of a proposal 
this narrow in scope would afford pharmaceutical manufacturers similar 
(preferential) treatment, already provided through the signing of the 
``Hatch/Waxman Act''. Moreover, congressional enactment of the 
aforementioned patent term extensions (to alternative fuel 
technologies) will not only improve our nation's air quality, but have 
its own corresponding impact on reducing and eradicating serious 
illnesses in the United States.
    Mr. Chairman, thank you for the opportunity to present testimony on 
this critical issue before yourself and Members of the Appropriations 
Health Subcommittee. I will be happy to respond to any questions.

                     Additional committee questions

    Senator Specter. We have prepared some questions which we 
would invite any panelist to respond to for the record.
    [The following questions were not asked at the hearing, but 
were submitted to the panelists for response subsequent to the 
hearing:]

    Questions Submitted by Subcommittee and Responses of Gina Cioffi

    Question. Under the proposed 5-year demonstration project, 
pharmaceutical companies would receive an additional 5 years of 
data exclusivity on a product in exchange for agreeing to 
provide a 3-percent royalty payment to NIH on all net U.S. 
sales of the product during the 5-year extension period.
    Why is this change in the law necessary? Who would be 
expected to benefit from this proposal? Who would be harmed?
    Answer. The National Institutes of Health (NIH) is the 
premier biomedical research facility in the world. It has 
reached that status, in large part, as a result of the 
consistent and strong support it has received from the United 
States Congress, in general, and this subcommittee, in 
particular. However, even with that support, nearly four out of 
five approved research projects remain unfunded.
    By changing the law in a manner consistent with this 
proposal, Congress will be generating additional funds for NIH 
which will be applied to research that will otherwise not be 
done. For any institute that is funding 20 or 21 or 22 percent 
of approved projects, who is to say that the research proposal 
that will result in the surprising breakthrough, or the 
unexpected--maybe even unrelated--discovery isn't just below 
the pay line. Maybe it is in the 23rd or 24th percentile.
    Cooley's anemia is a unrelenting genetic disease that 
afflicts children from birth, robs them of their childhoods, 
takes away their ability to live a ``normal'' life, and 
occupies much of theirs and their family's time. It requires an 
daily, 12-hour infusion of a drug called Desferal to help 
remove the iron that accumulates in the organs as a result of 
the 30-35 blood transfusions that patients receive every year.
    There has not been a new drug to treat this disease, or its 
symptoms, in a generation. Research is ongoing, but it is slow, 
it is under-funded, and every day another patient dies without 
ever having obtained the benefit of it. It is those little 
patients, having Desferal pumped into their bodies, who would 
benefit from the proposal. And, if I may be so bold, Mr. 
Chairman, the question is not who would be harmed by the 
proposal. The question to be considered by the subcommittee is, 
``Who is being harmed by not adopting the proposal?''
    Question. Opponents of this proposal argue that it would 
increase costs to consumers and state and federal governments 
by keeping cheaper generic substitutes off the market.
    How would consumers benefit from this proposal?
    Answer. Consumers of pharmaceutical products would benefit 
from the investment in research that would result both for the 
NIH and in private industry as a result of this proposal. That 
investment may result in a breakthrough in cancer research, or 
Parkinson's disease, or Alzheimer's disease, or Cooley's 
anemia. The breakthrough might come in the form of a new 
product, a new use for an existing product, the discovery of 
the perfect vector for gene therapy, or in some other way.
    Opponents who suggest that consumers' interests lie solely 
in obtaining pharmaceutical products at the lowest possible 
prices do a terrible disservice to millions of Americans who 
are suffering from disease and disorders. To carry that 
argument through to its logical conclusion, one would have to 
argue for no market exclusivity and, in fact, no patents. But, 
then there would be no pharmaceuticals, for who would do the 
research?
    Question. Proponents of this proposal argue that the 
current 5-year period of data exclusivity is insufficient to 
keep America's biomedical research global industry globally 
competitive.
    Do you agree or disagree with this statement and why?
    Answer. I agree. There are a number of European countries 
that currently provide ten years of market exclusivity. Given 
the global nature of companies today, there is nothing that 
would stop a major company from moving its production off-
shore. In fact, many of the large companies operating in the 
United States today are not even American companies. They are 
British, or Swiss, or German, or some other nationality. To 
keep our industry strong, our research well funded and our 
people supplied with the best products that are available, it 
is important that the United States remain a global leader in 
drug research and development.

                         CONCLUSION OF HEARING

    Senator Specter. Thank you all very much for being here, 
that concludes our hearing. The subcommittee will stand in 
recess subject to the call of the Chair.
    [Whereupon, at 5:50 p.m., Tuesday, October 21, the hearing 
was concluded, and the subcommittee was recessed, to reconvene 
subject to the call of the Chair.]

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