[Senate Hearing 107-359]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 107-359
 
 COMPETITION IN THE PHARMACEUTICAL MARKETPLACE: ANTITRUST IMPLICATIONS 
                         OF PATENT SETTLEMENTS
=======================================================================




                                HEARING

                               before the

                       COMMITTEE ON THE JUDICIARY
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION
                               __________

                              MAY 24, 2001
                               __________

                          Serial No. J-107-21
                               __________

         Printed for the use of the Committee on the Judiciary









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                       COMMITTEE ON THE JUDICIARY

                     ORRIN G. HATCH, Utah, Chairman
STROM THURMOND, South Carolina       PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa            EDWARD M. KENNEDY, Massachusetts
ARLEN SPECTER, Pennsylvania          JOSEPH R. BIDEN, Jr., Delaware
JON KYL, Arizona                     HERBERT KOHL, Wisconsin
MIKE DeWINE, Ohio                    DIANNE FEINSTEIN, California
JEFF SESSIONS, Alabama               RUSSELL D. FEINGOLD, Wisconsin
SAM BROWNBACK, Kansas                CHARLES E. SCHUMER, New York
MITCH McCONNELL, Kentucky            RICHARD J. DURBIN, Illinois
                                     MARIA CANTWELL, Washington
                      Sharon Prost, Chief Counsel
                     Makan Delrahim, Staff Director
         Bruce Cohen, Minority Chief Counsel and Staff Director













                            C O N T E N T S

                              ----------                              

                    STATEMENTS OF COMMITTEE MEMBERS

                                                                   Page

Brownback, Hon. Sam, a U.S. Senator from the State of Kansas.....    38
Cantwell, Hon. Maria, a U.S. Senator from the State of Washington    45
Feingold, Hon. Russell D., a U.S. Senator from the State of 
  Wisconsin......................................................    46
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah......     1
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont.    36
Schumer, Hon. Charles E., a U.S. Senator from the State of New 
  York...........................................................     6

                               WITNESSES

Boast, Molly, Director, Bureau of Competition, Federal Trade 
  Commission, Washington, D.C....................................    14
Buehler, Gary, R.Ph., Acting Director for Generic Drugs, Food and 
  Drug Administration, Washington, D.C...........................     9
Griffin, James M., Deputy Assistant Attorney General, Antitrust 
  Division, Department of Justice, Washington, D.C...............    24
Shurtleff, Mark, Attorney General, State of Utah, Salt Lake City, 
  Utah...........................................................    27

                       SUBMISSIONS FOR THE RECORD

Aventis Pharmaceuticals Inc., Bridgewater, New Jersey............    40
Pharmaceutical Research and Manufacturers of America, Washington, 
  D.C............................................................    46














 COMPETITION IN THE PHARMACEUTICAL MARKETPLACE: ANTITRUST IMPLICATIONS 
                         OF PATENT SETTLEMENTS

                              ----------                              


                         THURSDAY, MAY 24, 2001

                                       U.S. Senate,
                                Committee on the Judiciary,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 2:07 p.m., in 
room SD-226, Dirksen Senate Office Building, Hon. Orrin G. 
Hatch, Chairman of the committee, presiding.
    Present: Senators Hatch, Schumer, Cantwell, and Leahy.

 OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM 
                       THE STATE OF UTAH

    Chairman Hatch. Good afternoon. I hate to tell you, but I 
have just gotten through arguing for Ted Olson over on the 
floor and I have to go back there, then to the tax conference, 
and I cannot imagine a more important hearing than this one. 
So, as you can imagine, I am under a lot of pressure, but good 
afternoon.
    Today, we are examining the antitrust implications of 
recent settlements relating to pharmaceutical patents. As the 
co-author, along with Henry Waxman, of the Drug Price 
Competition and Patent Term Restoration Act of 1984, I have 
long been interested in the laws and competitive forces that 
underpin the American pharmaceutical industry. If there is 
interest in revisiting these laws, I am willing to play the 
same type of facilitator role that I did 17 years ago.
    Indeed, there is a good deal at stake here. We want to make 
available today's medicines at the most competitive and 
affordable prices, but we also want to provide the necessary 
incentives to encourage the development of tomorrow's 
breakthrough drugs. Those are two very important goals and they 
sometimes seem conflicting.
    My preference is to develop a comprehensive consensus 
legislative package that provides incentives for all segments 
of the industry to better produce their products that have so 
many benefits for the American public. We need to find ways to 
just grow the pie, not just to slice it, or perhaps reslice it 
would be a better word.
    This is, of course, a very tall order that will demand a 
good deal of bipartisan spirit, hard work, and leadership. I 
commend Senator Leahy for his work in introducing legislation 
aimed at helping to promptly identify any possible anti-
competitive pharmaceutical patent settlements. I believe there 
is great merit in his notification approach and would like to 
work with him on that legislation.
    I must also commend our colleagues. Senator Schumer, who 
has taken a great interest in this area and with whom I enjoy 
working, has offered legislation with Senator McCain in some of 
the areas that I have just outlined. And while I would prefer 
to take a broader and more balanced approach than that 
reflected in their bill, I want to recognize them for their 
work. They are the catalysts in bringing this to everybody's 
attention.
    Now, let me focus on the specific issue before the 
Committee today. The public deserves the effective and 
affordable drugs that competition can bring, not elaborate 
legal machinations that identify or create and then exploit 
anti-competitive loopholes. Some have already concluded that 
the 1984 law as implemented by the FDA regulation and 
interpreted by the courts presents a legal framework that 
invites improper anti-competitive settlements. The 1984 law 
provides incentives for generic drug applicants to challenge 
the validity of, or invent around the patents of pioneer drugs. 
Each time a patent is found to be deficient or can be legally 
circumnavigated, consumers can benefit from speedier access to 
generic products.
    In order to encourage such pro-consumer activities, the 
1984 law awarded 180 days of marketing exclusivity for the 
first generic firm to meet certain conditions. My friend, Bill 
Haddad, helped negotiate this provision on behalf of the 
generic industry. For many years, FDA practice provided that 
exclusivity be awarded only to the first applicant to file a 
substantially complete drug application, be sued by the pioneer 
firm under the special terms of the statute, and win the suit. 
However, due to the series of Federal court decisions, the 
successful defense requirement has been struck down.
    As the Senate author of the 1984 law, I am afraid, to 
paraphrase the great philosopher Pogo, this may be a case of 
``We have met the enemy, and he is me. Mea culpa.'' Mea culpa, 
is all I can say. Many have observed that the blocking position 
that the statute grants to first filers creates perverse 
incentives for patent settlements. While as a general matter 
the law smiles upon patent settlements under the joint DOJ-FTC 
guidelines, not all such patent settlements will automatically 
survive antitrust scrutiny.
    Several recent pharmaceutical patent settlements have 
triggered antitrust actions. The Committee needs to know if 
these cases represent a few outliers or a pattern. We will get 
more information about a major study that the FTC has recently 
initiated to gauge the frequency and the nature of these 
settlements. I am more interested in examining the pattern of 
cases and whether the law needs to be changed than I am in 
conducting a, ``Who struck John?'' analysis of the cases that 
have triggered governmental involvement. I would hope that my 
colleagues on the Committee will also step back and focus on 
the forest rather than any particular tree.
    While no parties to these settlements are testifying today, 
in the interest of fairness, I will hold the record open until 
Friday to allow the Committee to receive their written 
testimony or the testimony of any other interested parties who 
may take interest in these proceedings.
    In closing, I want to remark again upon the tremendous 
advances that we are making in scientific research and 
discovery. I wish each of you could experience the sheer 
excitement that Dr. Al Rabson conveys to me when discussing the 
latest developments in cancer research. Dr. Rabson is one of 
America's unsung heroes. He has long served as the Deputy 
Director of the National Cancer Institute and we are fortunate 
to have had him in government for the past 46 years. Al Rabson 
tells me that cancers that have been virtually untreatable are 
now succumbing to medications like the recently announced 
leukemia drug STI-571, and that, in his 46 years, he has never 
been so excited.
    We are literally at the doorstep of a revolution in biology 
that promises to benefit mankind in profound ways. With the 
stakes so high, it is imperative that our intellectual property 
laws provide the proper incentives to facilitate a new era in 
our understanding of human biology, health, and disease. At the 
same time, we must be sure that the pharmaceutical marketplace 
is highly competitive so that patients and their families can 
obtain their medicines at the most affordable prices.
    These are the challenges before us today, challenges I hope 
we will be able to meet as the Congress continues consideration 
of these issues.
    [The prepared statement of the Chairman follows:]

Statement of Hon. Orrin G. Hatch, a U.S. Senator from the State of Utah

    Good afternoon. I am pleased that the Committee is holding this 
hearing today on the antitrust implications of recent settlements 
relating to pharmaceutical patents.
    Not only is this a matter squarely within the jurisdiction of the 
Judiciary Committee, but as a coauthor with Rep. Henry Waxman of the 
Drug Price Competition and Patent Term Restoration Act of 1984, I have 
long been interested in the laws and competitive forces that underpin 
the American pharmaceutical industry. And as I have stated on 
occasions, if there is interest in revisiting these laws, I am willing 
to play the same type of facilitator role that I did in 1984.
    The American public has a great stake in achieving the twin ends of 
the 1984 law. These goals are:

         First, making available today's medicines at the most 
        competitive and affordable prices; and,
         Second, encouraging the development of tomorrow's 
        breakthrough cures.

    We should all take pride in the fact that the United States is the 
world's leader in biomedical research. Through a public/private 
partnership that has grown steadily since World War II, it is our 
country that is on the cutting edge of medicine. Just this year alone, 
there has been a combined $50 billion investment in life science 
research. It is America's scientists and technology that have led the 
way for the mapping of the human genome. We stand poised to unravel the 
mysteries of the human genetic code and translate this knowledge to 
advance the health of public.
    A1 Rabson is one of America's unsung heroes. Dr. Rabson has long 
served as the Deputy Director of the National Cancer Institute. He 
started his distinguished career at NIH 46 years ago. I wish all of you 
could experience first hand the sheer excitement that Dr. Rabson 
conveys to me when discussing the latest developments in cancer 
research. He tells me that cancers that have been virtually untreatable 
are now succumbing to medications like the recently announced leukemia 
drug, STI-571.
    We are literally at the doorstep of a revolution in biology that 
promises to benefit mankind in profound ways. But this progress will 
not come easily; nor will it come cheaply. When factoring in the costs 
of false starts and blind alleys, it can take literally several hundred 
million dollars to bring an effective new drug to market. Some estimate 
that for every product that makes it through the complex scientific and 
regulatory screening systems, five thousand failures fall by the 
wayside--and do so with great expenditures of time, expense, and 
talent.
    When we speak about competition, we must not forget that, in 
addition to critical price competition between pioneer and generic 
firms, it is the competition among pioneer firms for the next 
generation of diagnostic and therapeutic products where the future of 
medicine resides. But we must never lose sight of the hard fact of life 
that an unaffordable medication may be the same as no medication at 
all.
    With the stakes so high, it is imperative that our intellectual 
property laws provide the proper incentives to facilitate a new era in 
our understanding of human biology, health, and disease. At the same 
time, we must be sure that the pharmaceutical marketplace is highly 
competitive so that patients and their families can obtain their 
medicines at the most affordable prices.
    Congress is debating the question of developing a Medicare drug 
benefit for one simple but powerful reason: too many of our seniors 
have a hard time making ends meet when paying the out-of-pocket costs 
of prescription drugs. For those of us who also serve on the Finance 
Committee, the estimates of providing a Medicare drug benefit have 
skyrocketed over the last several months. CBO tells us that it may take 
at least $368 billion over ten years to pay for catastrophic drug 
coverage alone; and these estimates, in my opinion, will continue to go 
up.
    I mention these staggering costs in part because of the growing 
therapeutic importance of biological products which can sometimes be 
very expensive. Therefore I think it is imperative, and frankly 
inevitable, for policymakers to examine whether there ought to be 
alternative regulatory pathways for biological products to enter the 
market once patents have expired.
    I know there are formidable scientific questions regarding the 
wisdom of even beginning down the path of a fast track approval system 
for equivalent biologics. But, as was evidenced yet again in the mad 
dash to complete the mapping of the human genome, properly motivated 
scientists have away of overcoming scientific obstacles. I just raise 
the question of whether Congress can, or should, enact and sustain over 
time a Medicare drug benefit in parallel with a FDA regulatory system 
that acts like a secondary patent by barring bioequivalent biological 
products. At some point, the forces of economics will compel discussion 
of science and legal issues involved in the consideration of fast track 
biologicals.
    Also at the intersection of science and law are questions 
pertaining to the patenting of human genes. We must also examine how 
much science has changed since 1984 and whether our patent laws 
facilitate both basic research and appropriate commercial development 
of genetic discoveries.
    I am proud of the Drug Price Competition and Patent Term 
Restoration Act--CBO estimates that it contributes to consumer savings 
of $8 to $10 billion annually. We have had a substantial success on 
both fronts: we have helped stimulate the development of many new drugs 
all the while fostering an environment in which the generic segment of 
the market has about tripled and now comprises almost half of all new 
prescriptions in the United States. Some experts have projected that 
each additional percentage point of generic drug usage represents over 
$1 billion in consumer savings.
    To those who would propose to change the 1984 legislation, I would 
urge you to consider that this is a carefully balanced bill and caution 
against making changes that tilts the balance. Yet no law is so perfect 
that it cannot stand improvement as it gets tested by the realities of 
a changing marketplace and society. There have been several 
unanticipated and unintended consequences of the 1984 Act and other 
changes in the landscape that need attention.

         In this regard, I believe this Committee should 
        examine in detail the operation of the 30 month stay provision 
        of the 1984 law. Over the last several months, there have been 
        a number of controversial cases of late-issued patents that 
        have been entered into the FDA Orange Book. There are powerful 
        arguments that justify the 30 month statutory period to allow 
        pioneer firms a fair chance to attempt to resolve the status of 
        patents. Yet, there may be grounds to treat patents differently 
        that suddenly appear in the Orange Book so late in the day that 
        there are literally approved generic products on the loading 
        docks that must be destroyed. As well, the 30 month stay 
        provision has an effect on the nature of the patent settlements 
        we explore today although we want to concentrate on the 
        settlements themselves and the 180 day rule at today's hearing.
         Similarly, the Committee should explore the 
        ramifications of the First Amendment and the U.S. Supreme 
        Court's Noerr-Pennington Doctrine as they relate to suggestions 
        to remedy the alleged abuses of the citizens' petition process 
        with respect to challenges to generic drug applications. 
        Sometimes, legitimate questions of science are raised by those 
        who might directly benefit from FDA delay. Maybe the 10 year 
        battle over premarin fits this model.
         There has also been concern that FDA's bioequivalence 
        standards should be examined and that perhaps we should codify 
        the FDA guidelines in this area. Certainly this issue should be 
        fully examined.
         As well, on the R&D side of the industry, there are 
        those who argue for day for day patent term restoration, 
        harmonization of U.S. law with European marketing exclusivity 
        rules, and for changes in the current limitations on the type 
        of patents and products that may receive partial patent term 
        restoration. Frankly, I think the Committee would be well 
        advised to put these issues on the table and learn about their 
        merits and down-sides. I believe it might be a worthwhile 
        inquiry to examine the implications of the fact that the 1999 
        American Inventors Protection Act generally permits all patents 
        to be restored up to 17 years of patent life if there is undue 
        delay at the PTO but under the 1984 HatchWaxman law, patent 
        term restoration in recognition of the lengthy FDA review of 
        new drugs is capped at 14 years. Why should PTO review time be 
        treated differently than FDA review time?

    So there are many areas relating to pharmaceutical development that 
Congress should examine.
    My preference is to see if we can develop a comprehensive consensus 
legislative package that addresses all of the issues I have just 
outlined. Such a bill would provide incentives for all segments of the 
industry to better produce their products that have so many benefits 
for the American public. We need to find ways to grow the pie, not just 
re-slice it.
    This is, of course, a tall order. It will take a bipartisan spirit, 
hard work, and leadership to craft legislation that can help usher in 
the next generation of treatments and do so at more affordable prices.
    I commend Senator Leahy for his work in introducing legislation 
aimed at helping to promptly identify any possibly anti-competitive 
pharmaceutical patent settlements. These settlements are the subject of 
our hearing today and I believe there is great merit in his 
notification approach and would like to work with him on this 
legislation.
    I must also commend our colleague from New York, Sen. Schumer, who 
with my friend, Sen. McCain, has offered legislation on some of the 
areas that I just outlined. While I personally would prefer to take a 
broader and more balanced approach and have some reservations about how 
they resolve some of the issues, I want to recognize them for their 
work.
    Having said that, I would like to focus in on the important matters 
before the Committee today. The 1984 provides incentives for generic 
drug applicants to challenge the validity of, or invent around, the 
patents of pioneer drugs. Each time a patent is found to be deficient 
or can be legally circumnavigated, consumers can benefit from speedier 
access to generic products.
    In order to encourage such pro-consumer activities, the 1984 law 
awarded 180 days of marketing exclusivity for the first generic firm to 
meet certain conditions. For many years, FDA practice provided that 
this exclusivity be awarded only to that applicant first to file a 
substantially complete drug application, be sued by the pioneer firm 
under the special terms of the statute, and win the suit.
    However, due to a series of federal court decisions, that FDA will 
further explain in its testimony, the successful defense requirement 
has been struck down. The courts in the Mova and Granutec decisions, 
strictly construing the language of the law, awarded the exclusivity to 
the first filer. As a drafter of the 1984 law, I am afraid that, to 
paraphrase the great philosopher Pogo, this may be a case of ``We have 
met the enemy, and he is me. Mea Culpa. Mea Culpa.''
    Once the courts struck down the successful defense requirement 
there has been a potential mismatch of the first filer and the party 
who actually defeats the patent. Many have observed that the blocking 
position the statute grants to first filers creates perverse incentives 
for patent settlements.
    As a general matter, the law smiles upon patent settlements. For 
example, the 1995 joint DOJ-FTC Antitrust Guidelines for the Licensing 
of Intellectual Property state:
    ``Settlements involving cross-licensing of intellectual property 
rights can be an efficient means to avoid litigation and, in general, 
courts favor such settlements.''
    Yet, according to these guidelines not all such patent settlements 
will automatically survive antitrust scrutiny:
    ``(w)hen such [settlement] involves horizontal competitors, [the 
government] will consider whether the effect of the settlement is to 
diminish competition among entities that would have been actual or 
likely potential competitors.''
    As the FTC will explain, several agreements in the last few years 
have triggered antitrust actions. The Committee needs to know if these 
cases represent a few outliers or a pattern. The Committee needs to 
know if the existing antitrust laws are sufficient to police this 
situation. We need to know if there are ways to improve Sen. Leahy's 
legislation that is designed to help solve the problem by assisting FTC 
and DOJ to respond more quickly and effectively in this area.
    The FTC will tell us about a major study that they have recently 
initiated to gauge the frequency and nature of these settlements. This 
will help the Administration and Congress examine whether there is a 
pattern of behavior that requires a comprehensive legislative response 
rather than the current case by case approach.
    The public deserves the effective and affordable drugs that 
competition can bring, not elaborate legal machinations that identify 
or create then exploit anti-competitive loopholes. Some have already 
concluded that the 1984 law, as implemented by FDA regulation, and 
interpreted by the courts, presents a legal framework that invites 
improper, anti-competitive settlements.
    For example, as former FTC official, David Balto, has assessed the 
situation:
    ``The competitive concern is that the 180-day exclusivity provision 
can be used strategically by a patent holder to prolong its market 
power in ways that go beyond the intent of the patent laws and the 
Hatch-Waxman Act by delaying generic entry for a substantial period of 
time.''
    In short, the questions we face at today's hearing are 
straightforward: Is the 180 day exclusivity law broken and, if it is, 
how should we fix it?
    I am pleased that the FTC, DOJ, and FDA will help us start to think 
through these issues. I am also pleased that Attorney General Mark 
Shurtleff from my home state of Utah will explain how a group of states 
have responded to the current environment.
    I am more interested in examining the underlying law, pattern of 
cases, and whether the law needs to be changed than I am in conducting 
a ``Who Struck John'' analysis of the cases that have triggered 
governmental involvement. I would hope that my colleagues on the 
Committee will also step back and focus on the forest rather than the 
trees.
    While no parties to these settlements--either pioneer or generic 
firms--requested to testify today, I understand there may well be 
interest in how these agreements may be characterized. Without 
objection, I will hold the record open until next Friday to allow the 
Committee to receive comments from all parties interested in today's 
hearing.
    I look forward to learning from the testimony we will receive 
today.

    Chairman Hatch. Senator Leahy is not here. Would you care 
to represent the Democrats on the committee?
    Senator Schumer. Thank you, Mr. Chairman.
    Chairman Hatch. I need to say Democrats, not minority, 
anymore.
    Senator Schumer. We still are, for the last few hours.
    Chairman Hatch. Well, we wish you well when you take over.
    Senator Schumer. Thank you. Thank you. And seriously, you 
have always been fair in the majority----
    Chairman Hatch. Thank you.
    Senator Schumer.--and we will try to be just as fair.
    Chairman Hatch. Thank you.

 STATEMENT OF HON. CHARLES E. SCHUMER, A U.S. SENATOR FROM THE 
                       STATE OF NEW YORK

    Senator Schumer. This is not Senator Leahy's statement, 
this is my own. I have been very interested in this issue, but 
I do want to commend him for his leadership. He is on the floor 
right now dealing with another issue that has been before this 
committee, the nomination of three Justice Department 
appointees.
    But Mr. Chairman, I want to first thank you for holding 
this hearing, and more importantly, for your longtime 
dedication to the important issue of pharmaceutical 
competition. Because of Senator Hatch's leadership, consumers 
have saved billions of dollars on pharmaceuticals in the two 
decades since the Hatch-Waxman Act was enacted, and you are, as 
I told you privately, Mr. Chairman, I think this is one of the 
most important pieces of legislation that this Congress has 
passed in the last 20 years and you should be awfully proud to 
have your name attached to it.
    Chairman Hatch. Thank you.
    Senator Schumer. Hatch-Waxman, as we know, reformed patent 
laws and created a blueprint that provided additional patent 
protection for research-based brand name drugs in conjunction 
with a timetable to allow less-expensive generic equivalents on 
the market. The law did two things. It preserved intellectual 
property rights for the pharmaceutical companies that have put 
lots of effort and produced wonder drugs that keep people 
alive, but at the same time, it created competition after that 
reward for the intellectual property was granted and it saved 
consumers billions of dollars, still allowing brand name 
companies to stay profitable and innovative. It was an 
exquisite balance that worked.
    Unfortunately, the balance has been thrown out of whack in 
recent years. The large pharmaceutical companies basically have 
been playing by their own rules. As the stakes and profits have 
become higher, lawyers for that industry have picked the Hatch-
Waxman law clean. Again, I believe in intellectual property, 
but we came up with a formulation, and to now extend patent 
after patent after patent when that was never envisioned in the 
Hatch-Waxman law for the reasons that they were is the reason 
that we are here today and is the reason that we need real 
reform once again.
    The Drug Competition Act that Senator Leahy has introduced, 
and which I am proud to cosponsor, is an important first step 
in ensuring the full potential of the Hatch-Waxman Act. It 
would provide the very cornerstone to ensuring fair competition 
in the pharmaceutical marketplace. Too often, the agreements 
between pharmaceutical companies are brokered with an anti-
competitive spirit. In requiring these agreements to be 
disclosed to the FTC and DOJ, the legislation ensures anti-
competitive efforts on the part of these companies, both 
generic and brand name, are identified and resolved quickly so 
that consumers do not suffer unjustly. I find these agreements 
outrageous. I am even more angry at the generic companies that 
do them than the pharmaceutical companies because they are 
basically selling their birthright for a few silver coins and 
it is just awful.
    But, Mr. Chairman, we have to do more than close just the 
loopholes which allow the pharmaceuticals to too easily enter 
into agreements that are not in the best interests of 
consumers. Dovetailing with Senator Leahy's efforts, Senator 
McCain and I reintroduced a bill last month called the GAAP 
Act, the Greater Access to Affordable Pharmaceutical Act. Our 
bill seeks to breathe new life into the Hatch-Waxman law, not 
by redrawing ideological battle lines--that is for a different 
day and time--but by restoring the intent of our patent laws. 
In doing so, it will save consumers $71 billion over the next 
10 years on their drug costs.
    Our intention is not to cut innovators off at the knees. We 
want to protect their rights. Our bill is not a freebie for the 
generic drug industry, either. It only makes the approval 
process fair and brings lower-cost alternatives to the market. 
The bill would eliminate the 30-month stay automatically handed 
to brand companies who file suit against a generic challenger, 
regardless of the merits of the case. Another 30 months, way 
out of line from what you, good sir, intended, simply by filing 
a case. What could be more abusive and outrageous than that? 
Whether the case has merits should be determined in the courts 
before any 30-month extension is granted.
    The GAAP Act also strengthens the citizen petition process, 
intended to allow average people to express concern over a 
drug, which has become a back door way for pharmaceutical 
companies, both brand name and generic, to delay a competitor's 
entry in the market. Today, the test to prove that a generic 
drug is truly bioequivalent to the original drug is a contest 
of exploiting loopholes in Hatch-Waxman to ensure that the 
generic never sees the light of day, a total 180-degree turn 
from what was intended in the law.
    The GAAP Act reforms the so-called 180-day rule by closing 
the loophole that enables a brand name company to pay a generic 
manufacturer to stay off the market. We do not just ask for 
disclosure. We prohibit these nefarious type agreements. 
Closing the loophole would prevent problems like the cases we 
are discussing here today, the Hytrin case, where Abbott 
Laboratories paid Geneva Pharmaceuticals $4.5 million a month 
to keep their hypertension drug off the market, or the recent 
KDur 20 case, where Schering-Plough allegedly paid Upsher-Smith 
and American Home Products millions of dollars to delay 
launching a generic potassium chloride supplement. Again, these 
are outrageous.
    Now, I know some of the brand name large pharmaceutical 
companies say, well, we have no choice, because sometimes there 
are injustices done at the other end. In other words, it takes 
too long for the drug to come on the market. I have no problem 
with correcting those abuses, but one abuse--those are really 
not abuses, but those injustices, if you want to elevate it to 
probably a higher level than I would, given the level of 
profitability of the industry, but these wrongs should be 
corrected. I am open to correcting them, but not in the ad hoc 
way that they are done in the way that people file petitions 
and things like that, and they do them for drugs whether they 
have been on the market 2 years, 4 years, 10 years, 8 years, 12 
years. One has nothing to do with the other in the specific 
case of each drug.
    So, Mr. Chairman, as Congress wrestles with the complexity 
of crafting and paying for a Medicare prescription drug 
benefit, we must not overlook a straightforward solution to 
escalating drug prices facing seniors, businesses, insurers, 
and consumers. If we can ensure fair competition in the 
pharmaceutical marketplace, a level playing field for both 
brand and generic companies, everyone will win. For the 
consumer, cheaper drugs. The generics can be out and the 
pharmaceuticals' attempts at price controls and other type of 
non-economic behavior will not have as much pointed weight.
    So I thank you, Mr. Chairman, for holding this important 
hearing and look forward to working with you, Senator Leahy, 
and with the FDA and the FTC to encourage fair marketplace 
practices while preserving both safety and intellectual 
property rights to provide customers with affordable 
pharmaceutical alternatives.
    Chairman Hatch. Thank you, Senator.
    Let me introduce today's witnesses. First, we will hear 
from Mr. Gary Buehler, the Acting Director of FDA's Office of 
Generic Drugs. Mr. Buehler will describe some of the key 
statutory and regulatory provisions that have colored the 
patent settlements under discussion today.
    Next, we will get the perspective of the Federal Trade 
Commission, the lead Federal agency in antitrust enforcement 
for the pharmaceutical industry. Ms. Molly Boast is the 
Director of the Bureau of Competition. We are surely glad to 
have both of you with us today. Ms. Boast will tell us about 
some recent pharmaceutical patent settlement cases and a major 
survey into the industry's practices.
    To fill out the first panel, we have Mr. James Griffin, 
Deputy Assistant Attorney General for the Antitrust Division at 
the Department of Justice. He will explain how the Department 
of Justice and FTC divide the responsibility for antitrust 
enforcement and how the Department retains the sole authority 
for any criminal matters in the antitrust area.
    Now, without objection, I think we can expedite today's 
hearing by collapsing the witnesses into one panel. We have 
only one witness on the second panel, Attorney General Mark 
Shurtleff from my home State of Utah. Attorney General 
Shurtleff will tell us what the States are doing in the area of 
pharmaceutical patent settlement. So if we could get you to 
take your seat there, as well, General Shurtleff.
    If you could, please confine your oral testimony to 5 
minutes. I know this is pretty complex stuff. If you need more 
time, I have always been courteous about that. You will be able 
to place your complete remarks in the record, but if you could 
try and keep it to 5 minutes, it will help us, and especially 
me today since I have so much pressure to do these other 
things. I have just been told I have to be at leadership 
meeting at four o'clock, as well.
    Because of the interest in this hearing, I think we should 
hold the record open for 1 week so that interested parties will 
have a chance to provide their views, and although no company 
involved in these settlements asked to testify today and I do 
not plan to parse each paragraph of these settlements, they may 
have some useful perspectives on these issues. Certainly, 
consumer groups and purchasers of drugs will have views, too, 
so we are hopeful that we will hear from all of you.
    We will turn to you first, Mr. Buehler, and take your 
testimony, and then we will just go across the table.

 STATEMENT OF GARY BUEHLER, R.PH., ACTING DIRECTOR FOR GENERIC 
     DRUGS, FOOD AND DRUG ADMINISTRATION, WASHINGTON, D.C.

    Mr. Buehler. Thank you, Mr. Chairman. Mr. Chairman and 
members of the committee, my name is Gary Buehler. I am a 
registered pharmacist and Acting Director of the Office of 
Generic Drugs at FDA. I am here today to discuss FDA's 
implementation of the exclusivity provisions of the Drug Price 
Competition and Patent Term Restoration Act of 1984, the Hatch-
Waxman amendments, which govern the generic drug approval 
process.
    These amendments are intended to balance two important 
public policy goals. First, drug manufacturers need meaningful 
market protection incentives to encourage the development of 
valuable new drugs. Second, once the statutory patent 
protection and market exclusivity for these new drugs has 
expired, the public benefits from the rapid availability of 
lower-price generic versions of the innovator drug.
    The FD&C Act requires that an ANDA contain a certification 
for each patent listed in the Orange Book for the innovator 
drug. The certification relevant to exclusivity is a Paragraph 
IV certification that states that such patent is invalid or 
will not be infringed by the generic drug for which approval is 
being sought. If the NDA sponsor or patent owner files a patent 
infringement suit against the ANDA applicant within 45 days of 
the receipt of notice, FDA may not give final approval to the 
ANDA for at least 30 months from the date of notice. This 30-
month stay will apply unless the court reaches a decision 
earlier in the patent infringement case or otherwise orders a 
longer or shorter period for the stay.
    The statute provides an incentive of 180 days of market 
exclusivity to the first generic applicant who challenges a 
listed patent by filing a Paragraph IV certification and 
running the risk of having to defend a patent infringement 
suit. The 180-day period of exclusivity will begin either from 
the date the generic applicant begins commercial marketing or 
from the date of a court decision finding the patent invalid, 
unenforceable, or not infringed, whichever is first. These two 
events, first commercial marketing and a court decision 
favorable to the generic, are often called triggering events, 
because under the statute, they can trigger the beginning of 
the 180-day exclusivity period.
    Approval of an ANDA does not trigger exclusivity. Until an 
eligible ANDA applicant's 180-day exclusivity period has 
expired, FDA cannot approve subsequently submitted ANDAs for 
the same drug, even if the latter ANDAs are otherwise ready for 
approval and the sponsors are willing to immediately begin 
marketing. Therefore, an ANDA applicant who is eligible for 
exclusivity is often in the position to delay all generic 
competition for that innovator product.
    The 180-day exclusivity provision has been the subject of 
considerable litigation and administrative review in recent 
years as the courts, industry, and the FDA have sought to 
interpret it in a way that is consistent both with the 
statutory text and with the legislative goals underlying the 
Hatch-Waxman amendments. In light of the court decisions 
finding certain FDA regulations inconsistent with the statute, 
the agency proposed new regulations in August 1999 to implement 
the 180-day exclusivity. Since then, many comments have been 
submitted and there have been additional court decisions 
further interpreting the statute and complicating the 
regulatory landscape.
    The agency has not yet published a final rule on 180-day 
exclusivity. As described in the June 1998 guidance for 
industry, until new regulations are in place, FDA is addressing 
on a case-by-case basis those 180-day exclusivity issues not 
addressed by the existing regulations.
    One of the most fundamental program changes is the 
determination by the courts that a district court decision 
favorable to the generic applicant will trigger the 180-day 
exclusivity period. This interpretation means that if 180-day 
exclusivity is triggered by a decision favorable to the ANDA 
applicant in the district court, the ANDA sponsor who wishes to 
market during that exclusivity period now may run the risk of 
treble damages if the district court decision is reversed on 
appeal to the Federal circuit. As a practical matter, it means 
that many generic applicants may choose not to market the 
generic and, thus, the 180-day exclusivity period could run 
during the pendency of an appeal.
    FDA continues to implement the Hatch-Waxman amendments' 
exclusivity provisions in the best manner possible, given the 
text of the legislation, the history of the legislation, and 
the numerous court challenges. FDA has tried to balance 
innovation and drug development and expediting the approval of 
lower-cost generic drugs.
    Thank you, Mr. Chairman. I would be pleased to answer any 
questions if I can.
    Chairman Hatch. Thank you, Mr. Buehler.
    [The prepared statement of Mr. Buehler follows:]

  Statement of Gary Buehler, RPh, Acting Director, Office of Generic 
     Drugs, Center for Drug Evaluation and Research, Food and Drug 
        Administration, Department of Health and Human Services

                              Introduction
    Mr. Chairman and Members of the Committee, I am Gary Buehler, RPh, 
Acting Director of the Office of Generic Drugs in the Center for Drug 
Evaluation and Research (CDER), at the Food and Drug Administration 
(FDA or Agency). I am here today to discuss FDA's implementation of 
provisions of the Drug Price Competition and Patent Term Restoration 
Act of 1984 (HatchWaxman Amendments) which govern the generic drug 
approval process. These provisions give 180 days of marketing 
exclusivity to certain generic drug applicants. The 180-day generic 
drug exclusivity provision is one component of the complex patent 
listing and certification process, which also provides for a 30-month 
stay on generic drug approvals while certain patent infringement issues 
are litigated.
    The Hatch-Waxman amendments are intended to balance two important 
public policy goals. First, drug manufacturers need meaningful market 
protection incentives to encourage the development of valuable new 
drugs. Second, once the statutory patent protection and marketing 
exclusivity for these new drugs has expired, the public benefits from 
the rapid availability of lower priced generic versions of the 
innovator drug.
                          Statutory Provisions
    The Hatch-Waxman Amendments amended the Federal Food, Drug, and 
Cosmetic (FD&C) Act and created section 5050). Section 5050) 
established the abbreviated new drug application (ANDA) approval 
process, which permits generic versions of previously approved 
innovator drugs to be approved without submission of a full new drug 
application (NDA). An ANDA refers to a previously approved new drug 
application (the ``listed drug'') and relies upon the Agency's finding 
of safety and effectiveness for that drug product.
    The timing of an ANDA approval depends in part on patent 
protections for the innovator drug. Innovator drug applicants must 
include in an NDA information about patents for the drug product that 
is the subject of the NDA. FDA publishes patent information on approved 
drug products in the Agency's publication ``Approved Drug Products with 
Therapeutic Equivalence Evaluations'' (the. Orange Book) (described in 
more detail below). The FD&C Act requires that an ANDA contain a 
certification for each patent listed in the Orange Book for the 
innovator drug. This certification must state one of the following:

        (I) that the required patent information relating to such 
        patent has not been filed;
        (II) that such patent has expired;
        (III) that the patent will expire on a particular date; or
                (IV) that such patent is invalid or will not be 
                infringed by the drug, for which approval is being 
                sought.

    A certification under paragraph I or II permits the ANDA to be 
approved immediately, if it is otherwise eligible. A certification 
under paragraph III indicates that the ANDA may be approved on the 
patent expiration date.
    A paragraph IV certification begins a process in which the question 
of whether the listed patent is valid or will be infringed by the 
proposed generic product may be answered by the courts prior to the 
expiration of the patent. The ANDA applicant who files a paragraph IV 
certification to a listed patent must notify the patent owner and the 
NDA holder for the listed drug that it has filed an ANDA containing a 
patent challenge. The notice must include a detailed statement of the 
factual and legal basis for the ANDA applicant's opinion that the 
patent is not valid or will not be infringed. The submission of an ANDA 
for a drug product claimed in a patent is an infringing act if the 
generic product is intended to be marketed before expiration of the 
patent, and therefore, the ANDA applicant who submits an application 
containing a paragraph IV certification may be sued for patent 
infringement. If the NDA sponsor or patent owner files a patent 
infringement suit against the ANDA applicant within 45 days of the 
receipt of notice, FDA may not give final approval to the ANDA for at 
least 30 months from the date of the notice. This 30-month stay will 
apply unless the court reaches a decision earlier in the patent 
infringement case or otherwise orders a longer or shorter period for 
the stay.
    The statute provides an incentive of 180 days of market exclusivity 
to the ``first'' generic applicant who challenges a listed patent by 
filing a paragraph IV certification and running the risk of having to 
defend a patent infringement suit. The statute provides that the first 
applicant to file a substantially complete ANDA containing a paragraph 
IV certification to a listed patent will be eligible for a 180-day 
period of exclusivity beginning either from the date it begins 
commercial marketing of the generic drug product, or from the date of a 
court decision finding the patent invalid, unenforceable or not 
infringed, whichever is first. These two events--first commercial 
marketing and a court decision favorable to the generic--are often 
called ``triggering'' events, because under the statute they can 
trigger the beginning of the 180-day exclusivity period.
    In some circumstances, an applicant who obtains 180-day exclusivity 
may be the sole marketer of a generic competitor to the innovator 
product for 180 days. But 180-day exclusivity can begin to run--with a 
court decision--even before an applicant has received approval for its 
ANDA. In that case, some, or all, of the 180-day period could expire 
without the ANDA applicant marketing its generic drug. Conversely, if 
there is no court decision and the first applicant does not begin 
commercial marketing of the generic drug, there may be prolonged or 
indefinite delays in the beginning of the first applicant's 180-day 
exclusivity period. Approval of an ANDA has no effect on exclusivity, 
except if the sponsor begins to market the approved generic drug. Until 
an eligible ANDA applicant's 180-day exclusivity period has expired, 
FDA cannot approve subsequently submitted ANDAs for the same drug, even 
if the later ANDAs are otherwise ready for approval and the sponsors 
are willing to immediately begin marketing. Therefore, an ANDA 
applicant who is eligible for exclusivity is often in the position to 
delay all generic competition for the innovator product.
    Only an application containing a paragraph IV certification may be 
eligible for exclusivity. If an applicant changes from a paragraph IV 
certification to a paragraph III certification, for example upon losing 
its patent infringement litigation, the ANDA will no longer be eligible 
for exclusivity.
                    Court Decisions and FDA Actions
    This 180-day exclusivity provision has been the subject of 
considerable litigation and administrative review in recent years, as 
the courts, industry, and FDA have sought to interpret it in a way that 
is consistent both with the statutory text and with the legislative 
goals underlying the Hatch-Waxman Amendments. A series of Federal court 
decisions beginning with the 1998 Mova \1\ case describe acceptable 
interpretations of the 180-day exclusivity provision, identify 
potential problems in implementing the statute, and establish certain 
principles to be used by the Agency in interpreting the statute.
---------------------------------------------------------------------------
    \1\ Mova Pharmaceutical Corp. v. Shalala, 140 F.3d 1060, 1065 (D.C. 
Cir. 1998).
---------------------------------------------------------------------------
    In light of the court decisions finding certain FDA regulations 
inconsistent with the statute, the Agency proposed new regulations in 
August 1999 to implement the 180-day exclusivity. Since then many 
comments have been submitted and there have been additional court 
decisions further interpreting the 180-day exclusivity provision and 
complicating the regulatory landscape. The Agency has not yet published 
a final rule on 180-day exclusivity. As described in a June 1998 
guidance for industry, until new regulations are in place, FDA is 
addressing on a case-by-case basis those 180-day exclusivity issues not 
addressed by the existing regulations.
    One of the most fundamental changes to the 180-day exclusivity 
program that has resulted from the legal challenges to FDA's 
regulations is the determination by the courts of the meaning of the 
phrase ``court decision.'' The courts have determined that the ``court 
decision'' that can begin the running of the 180-day exclusivity period 
may be the decision of the district court, if it finds that the patent 
at issue is invalid, unenforceable, or will not be infringed by the 
generic drug product. FDA had interpreted the ``court decision'' that 
could begin the running of 180-day exclusivity (and the approval of the 
ANDA) as the final decision of a court from which no appeal can be or 
has been taken--generally a decision of the Federal Circuit. FDA's 
interpretation had meant that an ANDA applicant could wait until the 
appeals court had finally resolved the patent infringement or validity 
question before beginning the marketing of the generic drug. FDA had 
taken this position so that the generic manufacturer would not have to 
run the risk of being subject to potential treble damages for marketing 
the drug, if the appeals court ruled in favor of the patent holder. The 
current interpretation means that if the 180-day exclusivity is 
triggered by a decision favorable to the ANDA applicant in the district 
court, the ANDA sponsor who wishes to market during that exclusivity 
period now may run the risk of treble damages if the district court 
decision is reversed on appeal to the Federal Circuit. As a practical 
matter, it means that many generic applicants may choose not to market 
the generic and thus the 180-day exclusivity period could run during 
the pendency of an appeal.
    In one of the cases rejecting FDA's interpretation of the ``court 
decision'' language in the statute, the court determined that the 
applicant who relied in good faith on FDA's interpretation of the 180-
day exclusivity provision should not be punished by losing its 
exclusivity. The court, therefore, refused to order FDA to begin the 
running of 180-day exclusivity upon the decision of the district court 
in the patent litigation at issue. FDA has taken a similar approach in 
implementing the courts' decisions: the new ``court decision'' 
definition will apply only for those drugs for which the first ANDA was 
submitted subsequent to March 30, 2000. In adopting this course, a 
primary concern for the Agency was to identify an approach that would 
minimize further disruption and provide regulated industry with 
reasonable guidance for making future business decisions.
    To advise the public and industry of this position, FDA published a 
Guidance for Industry in March 2000. FDA intends to incorporate the 
courts' interpretation of the ``court decision'' trigger for 180-day 
exclusivity into the final rule implementing the changes in 180-day 
exclusivity.
                          Orange Book Listings
    There have been concerns expressed over FDA's role in the listing 
of patents in the Orange Book which can have an impact on generic drug 
approvals by delaying approval and 180-day exclusivity. Under the FD&C 
Act, pharmaceutical companies seeking to market innovator drugs must 
submit, as part of an NDA or supplement, information on any patent that 
1) claims the pending or approved drug or a method of using the 
approved drug, and 2) for which a claim of patent infringement could 
reasonably be asserted against an unauthorized party. Patents that may 
be submitted are drug substance (active ingredient) patents, drug 
product (formulation and composition) patents, and method of use 
patents. Process (or manufacturing) patents may not be submitted to 
FDA.
    When an NDA applicant submits a patent covering the formulation, 
composition, or method of using an approved drug, the applicant must 
also submit a signed declaration stating that the patent covers the 
formulation, composition, or use of the approved product. The required 
text of the declaration is described in FDA's regulations. FDA 
publishes patent information on approved drug products in the Orange 
Book.
    The process of patent certification, notice to the NDA holder and 
patent owner, a 45-day waiting period, possible patent infringement 
litigation and the statutory 30-month stay mean there is the 
possibility of a considerable delay in the approval of ANDAs as a 
result of new patent listings. Therefore, these listings are often 
closely scrutinized by ANDA applicants. FDA regulations provide that, 
in the event of a dispute as to the accuracy or relevance of patent 
information submitted to and subsequently listed by FDA, an ANDA 
applicant must provide written notification of the grounds for dispute 
to the Agency. FDA then requests the NDA holder to confirm the 
correctness of the patent information and listing. Unless the patent 
information is withdrawn or amended by the NDA holder, FDA will not 
change the patent information listed in the Orange Book. If a patent is 
listed in the Orange Book, an applicant seeking approval for an ANDA 
must submit a certification to the patent. Even an applicant whose ANDA 
is pending when additional patents are submitted by the sponsor must 
certify to the new patents, unless the additional patents are submitted 
by the patent holder more than 30 days after issuance by the U.S. 
Patent and Trademark Office.
    FDA does not undertake an independent review of the patents 
submitted by the NDA sponsor. FDA does not assess whether a submitted 
patent claims an approved drug and whether a claim of patent 
infringement could reasonably be made against an unauthorized use of 
the patented drug. FDA has implemented the statutory patent listing 
provisions by informing interested parties what patent information is 
to be submitted, who must submit the information, and when and where to 
submit the information. As the Agency has stated, since the 
implementation of the 1984 HatchWaxman Amendments began, FDA has no 
expertise or resources with which to resolve complex questions of 
patent coverage, and thus the Agency's role in the patent-listing 
process is ministerial. The statute requires FDA to publish patent 
information upon approval of the NDA. The Agency relies on the NDA 
holder or patent owner's signed declaration stating that the patent 
covers an approved drug product's formulation, composition or use. 
Generic and innovator firms may resolve any disputes concerning patents 
in private litigation. As noted above, if the generic applicant files a 
paragraph IV certification and is sued for patent infringement within 
45 days, there is an automatic stay of 30 months, substantially 
delaying the approval of the generic drug and, thus, the availability 
of lower cost generic drug products.
                               Conclusion
    FDA continues to implement the Hatch-Waxman Amendments exclusivity 
provisions in the best manner possible given the text of the 
legislation, the history of the legislation and the numerous court 
challenges. Again, as previously noted, FDA has tried to balance 
innovation in drug development and expediting the approval of lower-
cost generic drugs.

    Chairman Hatch. Ms. Boast, we will turn to you now.

  STATEMENT OF MOLLY BOAST, DIRECTOR, BUREAU OF COMPETITION, 
           FEDERAL TRADE COMMISSION, WASHINGTON, D.C.

    Ms. Boast. Thank you, Mr. Chairman and members of the 
committee. It is a true privilege for me to be able to 
participate in this hearing today on a topic that I think is 
fundamentally important, the ready availability of 
pharmaceutical products at competitive prices.
    The Commission has been very active in the pharmaceutical 
area generally, and in particular in considering the 
relationship between pioneer and generic drug manufacturers as 
their relationship has evolved under the Hatch-Waxman Act. And, 
frankly, speaking for myself, since I am here as the Director 
of the Bureau of Competition, not as a spokesman for the 
Commission itself, I think this is among the Commission's most 
important work. We know that generic products, once they are 
introduced to the marketplace, tend to bring prices down in the 
range of 20 to 50 percent within a very few months. It is quite 
a dramatic change. I would estimate that over the last 2 years, 
approximately 25 percent of the resources of the Bureau of 
Competition have been devoted to the pharmaceutical industry. 
So you are able to see the high degree of importance we assign 
to this.
    My comments here are going to highlight the three recent 
enforcement actions the Commission has taken challenging 
settlement agreements between branded and generic drug 
manufacturers.
    Chairman Hatch. Did you say 25 percent of your time is 
spent on----
    Ms. Boast. Twenty-five percent of the Bureau of 
Competition's resources have gone----
    Chairman Hatch. Is that right?
    Ms. Boast. This is an estimate, Mr. Chairman, to the 
pharmaceutical industry generally. That includes----
    Chairman Hatch. The important thing, I am just showing how 
important this is, though.
    Ms. Boast. It is very important.
    Chairman Hatch. Even I am amazed.
    Ms. Boast. It includes our merger enforcement work in this 
industry, as well.
    Chairman Hatch. Sure. Sorry to interrupt you. I apologize.
    Ms. Boast. I am always happy when I capture someone's 
attention with that kind of information.
    [Laughter.]
    Chairman Hatch. I know I look tired, but I am not that 
tired.
    [Laughter.]
    Ms. Boast. Let me briefly try to summarize what the 
Commission's recent enforcement actions challenging these 
settlement agreements between branded manufacturers and generic 
firms are about, and then talk very briefly about the 
Commission's Section 6(b) study.
    The Commission's enforcement initiatives address settlement 
agreements reached between the branded and generic firms in the 
context of the patent litigation that is spurred by the Hatch-
Waxman Act. Now, I agree with both Chairman Hatch and Senator 
Schumer's characterization of Hatch-Waxman. This was a 
remarkable creation, an effort to bridge our interest in 
encouraging innovation through protection of intellectual 
property rights and our interest in competition introduced 
through generic entry.
    But as Mr. Buehler has described, Hatch-Waxman provides a 
mechanism pursuant to which the generic firm can certify to the 
branded manufacturer that its proposed product does not 
infringe the pioneer's patent or that the patent is invalid, 
and this often triggers patent litigation between the two 
firms.
    Settlements have been reached in this context, and it is 
not the fact that settlements have taken place that is our 
concern. Rather, the Commission has become concerned that there 
are incentives created quite inadvertently under Hatch-Waxman 
that have led to settlements on anti-competitive terms. The 
agreements in question share two things in common.
    First, the Commission has alleged in each of these three 
cases that payments have been made by the branded manufacturer 
who has a strong incentive to discourage generic entry to the 
generic firm to delay the date of entry, rather than letting 
litigation resolve the question of the patent validity, which 
would, if resolved favorably in the generic's favor, trigger 
the 180-day exclusivity and begin the process of generic entry, 
and rather than allowing the generic to come to market on the 
date at which it might absent the payment.
    The second feature that links these cases is a provision, 
or variations of a provision, that preclude entry with non-
infringing products, that is, products entirely outside the 
scope of the patent litigation in which the settlement takes 
place. In light of these provisions, in all three cases, the 
Commission has found reason to believe that the arrangements 
constitute unreasonable restraints of trade.
    To give you a sense of the magnitude of the potential harm, 
we can take an example such as was involved in the Commission's 
case against Hoechst and Andrx. The product there was called 
Cardizem CD. This is a product that is used to treat angina and 
other heart-related disease. It is very widely prescribed. In 
1998, Cardizem CD enjoyed sales of $700 million in 1 year 
alone, and over 12 million prescriptions were written. So you 
can see that if you allow generic entry and this substantial 
price decrease I described earlier, the benefits to consumers 
are quite substantial.
    Let me turn quickly with my remaining time to the 
Commission's 6(b) study which is underway. This study was 
undertaken by the Commission in its unique role as an advisor 
to Congress and specifically at the request of Representative 
Waxman, who is interested in using the study vehicle to 
determine whether the problems we have identified in the 
Commission's recent cases are prevalent or just isolated and 
whether there are other features of the statutory and 
regulatory framework that need to be addressed.
    The study will shed light on issues such as how pervasive 
are these agreements? How do the exclusivity provisions operate 
to affect the incentives of the generic firms? Is the Orange 
Book listing process being abused? Are the stay provisions of 
Hatch-Waxman being abused? And how frequently is the citizen 
petition process being used to delay entry? I hope it will make 
a substantial contribution to this committee's work and to the 
work of Congress in general.
    I would be very happy to answer any questions, Mr. 
Chairman, and I look forward to the Commission's further work 
with you.
    Chairman Hatch. Thank you, Ms. Boast. When do you project 
that your survey will be completed, the data analyzed and 
distributed to the Congress and the public?
    Ms. Boast. The responses are due from the firms next month 
and it is our hope that the report will be given to Congress by 
the end of the year, end of the calendar year.
    Chairman Hatch. Can we have some advance things?
    Ms. Boast. I would need to confer with my colleagues about 
that, but----
    Chairman Hatch. Some of us might want to know as much as we 
can in advance of the end of the year distribution.
    Ms. Boast. I am unaware of what legal constraints might 
exist----
    Chairman Hatch. I understand.
    Ms. Boast.--but I certainly have no principled objection to 
some consultative process, if that is----
    Chairman Hatch. If we could, I would like to be kept up to 
speed because we do need to do some things in this area and I 
would like to do them right.
    Ms. Boast. I completely agree.
    Chairman Hatch. Thank you.
    [The prepared statement of Ms. Boast follows:]

  Statement of Molly Boast, Director, Bureau of Competition, Federal 
                    Trade Commission, Washington, DC

    Mr. Chairman and Members of the Senate Judiciary Committee, I am 
Molly Boast, Director of the Federal Trade Commission's Bureau of 
Competition. I am pleased to appear before you to present the Federal 
Trade Commission's (``Commission'' or ``FTC'') testimony on our 
activities involving the pharmaceutical industry in general and patent 
settlement cases in particular.\1\ The benefits to consumers from 
generic competition are dramatic. A Congressional Budget Office 
(``CBO'') report estimates that consumers saved $8 billion to $10 
billion on prescription drugs at retail pharmacies in 1994 by 
purchasing generic drugs instead of brand name products.\2\ The CBO 
also noted that the 1984 Hatch-Waxman Act had ``greatly increased the 
number of drugs that experience generic competition and, thus, 
contributed to an increase in the supply of generic drugs.'' \3\
---------------------------------------------------------------------------
    \1\ The views expressed in this statement reflect the views of the 
Commission. My oral statement and responses to questions are my own and 
are not necessarily those of the Commission or any individual 
Commissioner.
    \2\ Congressional Budget Office, How Increased Competition from 
Generic Drugs Has Affected Prices and Returns in the Pharmaceutical 
lndustry (July 1998) .
    \3\ 3 Id
---------------------------------------------------------------------------
    The surging cost of prescription drugs is a pressing national 
issue. Recent reports suggest expenditures for retail outpatient 
prescription drugs rose in the year 2000 to $131.9 billion, an 18.8% 
increase from the previous year.\4\ This dramatic increase has helped 
focus attention on the need to ensure competition in pharmaceutical 
markets. The Commission is encouraged that Congress, and particularly 
the members of this Committee, have shown a strong interest in this 
issue, both in Chairman Hatch's decision to convene this hearing and in 
recent bills introduced by Senators Leahy, Schumer, Kohl, Durbin and 
McCain, among others.\5\
---------------------------------------------------------------------------
    \4\ See National Institute for Health Care Management Research and 
Educational Foundation, ``Prescription Drug Expenditures in 2000: The 
Upward Trend Continues'' at 2 (May 2001) (available at www.nihcm.org).
    \5\ See S. 754, ``Drug Competition Act of 2001,'' introduced by 
Senators Leahy, Kohl, Schumer, and Durbin; S. 812, ``Greater Access to 
Affordable Pharmaceuticals Act of 2001,'' introduced by Senators 
Schumer and McCain.
---------------------------------------------------------------------------
    The Commission has gained substantial recent experience concerning 
competition in the pharmaceutical industry from its antitrust 
enforcement activities affecting both the branded and generic drug 
industries.\6\ In 1999, the staff of the FTC's Bureau of Economics 
released a report on competition issues in the pharmaceutical 
industry.\7\ In addition, the Commission's staff has submitted comments 
over the past two years in connection with the Food and Drug 
Administration's (``FDA'') regulation of generic drugs,\8\ and has 
recently filed a Citizen Petition with the FDA seeking clarification of 
certain issues relating to patent listings with the FDA.\9\
---------------------------------------------------------------------------
    \6\ E.g., Federal Trade Commission v. Mylan Laboratories, Inc. et 
al., 1999-2 Trade Cas. (CCH) para.72,573 (D.D.C. 1999); 
Roche Holding Ltd, C-3809 (February 25, 1998) (consent order); 
CibaGeigy, Ltd, 123 F.T.C. 842 (1997) (consent order); Hoechst AG, 120 
F.T.C. 1010 (1995) (consent order). For a discussion of recent FTC 
pharmaceutical enforcement actions, see FTC Antitrust Actions Involving 
Pharmaceutical Services and Products, ; 
see also David A. Balto & James Mongoven, Antitrust Enforcement in 
Pharmaceutical Industry Mergers, 54 Food & Drug Law Journal 255 (1999).
    \7\ Staff of the Federal Trade Commission, ``The Pharmaceutical 
Industry: A Discussion of Competitive and Antitrust Issues in an 
Environment of Change'' (March 1999) . The report reviews significant 
informational, institutional, and structural changes that have 
influenced price and non-price competition strategies of brand-name 
pharmaceutical companies, particularly during the last 15 years. The 
study considers the possible antitrust implications of these changes by 
examining alternative anticompetitive and procompetitive explanations 
for the pricing, vertical contracting, and vertical and horizontal 
consolidation strategies that have emerged in this environment of 
change.
    \8\ Comment of the Federal Trade Commission Staff, In the Matter of 
Citizen Petitions; Actions That Can be Requested by Petition; Denials, 
Withdrawals, and Referrals for Other Administrative Action, Docket No. 
99N-2497 (Mar. 2, 2000), ; Comment 
of the Federal Trade Commission Star, In the Matter of 180-Day Generic 
Drug Exclusivity for Abbreviated New Drug Applications, Docket No. 85N-
0214 (Nov. 4, 1999), .
    \9\ The Bureau of Competition and Policy Planning Staff of the 
Federal Trade Commission's Citizen Petition to the Commissioner of Food 
and Drugs pursuant to 21 C.F.R. Sec. Sec. 10.25(a) and 10.30 concerning 
certain issues relating to patent listings in the FDA's Approved Drug 
Products with Therapeutic Equivalence Evaluations (the ``Orange Book'') 
and requesting that the FDA clarify these issues via industry guidance 
or other means that the FDA considers appropriate (May 16, 2001).
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    The Commission's recent activity includes three challenges to 
alleged anticompetitive agreements between pioneer pharmaceutical 
manufacturers and generic manufacturers. These actions address 
agreements reached in the context of the 1984 Hatch-Waxman Act. The Act 
was crafted to balance the legitimate but different interests of the 
pioneer and generic manufacturers. Recently, however, the Commission 
has observed conduct suggesting that some firms may be exploiting the 
statutory and regulatory scheme by reaching agreements to delay the 
introduction of generic drugs to the market. Pioneer firms have strong 
incentives to delay generic entry.
    Delaying or preventing the generic entry that Hatch-Waxman seeks to 
promote could preserve millions of dollars of ongoing profits for 
pioneer drug companies. The typical steep price decline upon generic 
entry results in an enormous drop in market share and profits for the 
pioneer firm. The Commission has reason to believe the agreements it 
has challenged were designed to forestall that result.
    The complexity of the strategies prompted by the operation of the 
Hatch-Waxman Act and the regulatory framework for introducing new drugs 
to the market cannot be fully comprehended through any particular 
enforcement action. Accordingly, the Commission is undertaking a study, 
pursuant to its authority under Section 6(b) of the FTC Act, of 
pharmaceutical industry practices relating to the Hatch-Waxman Act. The 
study will examine:

         the extent to which agreements between brand-name 
        pharmaceutical manufacturers and generic drug firms may have 
        delayed generic competition;
         the operation of provisions in the Hatch-Waxman Act 
        that award a 180-day period of market exclusivity to a generic 
        firm;
         the impact of provisions in the Act on the listing of 
        patents by brand-name pharmaceutical companies in the FDA 
        ``Orange Book,'' and of provisions that trigger a stay on FDA 
        approval of a proposed generic drug; and
         the use of the FDA's Citizen Petition process by 
        brand-name drug companies to oppose potential generic entrants.

    The Commission hopes that this study will provide valuable 
information to Congress as it considers possible reform of the Hatch-
Waxman Act.
    This testimony provides an overview of the significance of generic 
drugs in the pharmaceutical industry and a brief description of the 
statutory and regulatory schemes governing generic drugs, and then 
turns to a discussion of recent FTC enforcement actions challenging 
settlement agreements between certain branded pharmaceutical 
manufacturers and their generic competitors. The testimony also briefly 
describes the generic drug study currently underway at the agency.
                             I. BACKGROUND
                    a. significance of generic drugs
    Generic drugs contain active ingredients that are the same as their 
branded counterparts, but typically are sold at substantial discounts 
from the branded price. Generic drugs account for approximately 40% of 
all prescriptions, but for only about 9% of total prescription drug 
expenditures.\10\ The first generic manufacturer to enter a market 
typically charges 70% to 80% of the brand manufacturer's price. As 
additional generic versions of the same drug enter the market, the 
price continues to drop, sometimes decreasing to a level of 50% or less 
of the brand price.\11\
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    \10\See National Institute for Health Care Management Research and 
Educational Foundation, ``Prescription Drug Expenditures in 2000: The 
Upward Trend Continues'' at 2 (May 2001).
    \11\ Congressional Budget Office, How Increased Competition from 
Generic Drugs Has Affected Prices and Returns in the Pharmaceutical 
Industry (July 1998), .
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    Within the next 5 years, patents on brand-name drugs with combined 
U.S. sales approaching $20 billion will expire.\12\ This provides an 
enormous opportunity for the generic drug industry. Presumably the 
brand-name industry views the situation in quite the opposite way. The 
successful entry of generic versions of these drugs should affect 
dramatically the amount consumers pay for the drugs they need.
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    \12\ 12 Id at 3. See also Amy Barrett, ``Crunch Time in Pill 
Land,'' Business Week 52 (Nov. 22, 1999).
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                   b. statutory and regulatory scheme
    In 1984, Congress passed the Drug Price Competition and Patent Term 
Restoration Act, known as the HatchWaxman Act,\13\ to accomplish a 
delicate balancing of two policy goals:\14\ (1) to facilitate and 
encourage the introduction of generic drugs, and (2) to protect the 
incentives of brand-name drug companies to invest in new drug 
development.\15\
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    \13\ Pub. L. No. 98-417, 98 Stat. 1585 (1984), codified at 21 
U.S.C. 355, 360cc, and 35 U.S.C. 156, 271, 282.
    \14\ See Tri-Bio Labs, Inc. v. United States, 836 F.2d 135, 139 (3d 
Cir. 1987), cert. denied, 488 U.S. 818 (1988). See also Eli Lilly and 
Co. v. Medtronic, Inc., 496 U.S. 661, 15 USPQ2d 1121 (1990); and 
Bristol-Myers Squibb Company v. Royce Laboratories, Inc., 69 F.3d 1130, 
1132, 1133-34, 36 USPQ2d 1641 (Fed. Cir. 1995).
    \15\ See H.R. Rep. No. 98-857(1), at 14-15 (1984), reprinted in 
1984 U.S.C.C.A.N. 2647-48 (stating that the purposes of the Hatch-
Waxman Act are ``to make available more low cost generic drugs [and] to 
create a new incentive for increased expenditures for research and 
development of certain products which are subject to premarket 
approval'').
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    The Hatch-Waxman Act permits pharmaceutical manufacturers to seek 
FDA approval of generic versions of previously approved drug products 
\16\ by submitting an ``abbreviated new drug application'' 
(``ANDA'').\17\ Under the abbreviated procedure, an ANDA applicant that 
demonstrates bioequivalency with a pioneer drug may rely upon FDA 
findings of safety and efficacy for the relevant drug.\18\ The Food, 
Drug and Cosmetics Act (``FDCA'') \19\ requires the ANDA applicant to 
provide a certification showing one of the following for each patent 
that ``claims the listed drug'' or the method of the drug's use for 
which patent information is required to be filed: \20\
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    \16\ 21 U.S.C. 3550).
    \17\ The relevant statutory and regulatory framework for the ANDA 
approval process has been described in Eli Lilly and Co. v. Medtronic, 
Inc., 496 U. S. at 676-78; Mova Pharmaceutical Corp. v. Shalala, 140 
F.3d 1060, 1063-65, 46 USPQ2d 1385 (D.C. Cir. 1998); and Bristol-Myers 
Squibb Company v. Royce Laboratories, Inc., 69 F.3d at 1131-32, 1135.
    \18\ 21 U.S.C. 3550)(2).
    \19\ 21 U.S.C. 355(a), (b).
    \20\ 21 U.S.C. 3550)(2)(A)(vii). By regulation, the FDA has defined 
the ``listed drug'' to mean the approved new ``drug product.'' 21 C. F. 
R. 314.3(b).

        (I) that the required patent information relating to such 
        patent has not been filed;
        (II) that such patent has expired;
        (III) that the patent will expire on a particular date; or
        (IV) that such patent is invalid or will not be infringed by 
        the drug for which approval is being sought.

    The Commission's recent enforcement actions involve agreements 
between pioneer manufacturers and ANDA applicants that filed a 
certification under paragraph IV of these provisions.\21\ A 
certification under paragraph IV requires the ANDA applicant to give 
notice of the ANDA filing to the patent owner and the firm that 
obtained the new drug approval for the listed drug (typically the 
pioneer manufacturer). This notice must include a detailed statement of 
the factual and legal basis for the ANDA applicant's opinion that the 
patent is not valid, is unenforceable, or will not be infringed.\22\ An 
applicant whose ANDA is pending when additional patents are listed must 
certify to the new patents, unless the patent owner or NDA holder fails 
to submit the additional patents within 30 days after their issuance by 
the Patent and Trademark Office.\23\ In addition, if the ANDA applicant 
does not seek approval for a use of the drug claimed in a listed 
patent, the FDCA allows the ANDA to include a statement (commonly 
referred to as a ``Section viii Statement'') that the ANDA does not 
seek approval for such a use.\24\
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    \21\ If a certification is made by the generic manufacturer under 
paragraph I or II indicating that patent information pertaining to the 
drug or its use has not been filed with FDA or the patent has expired--
the ANDA may be approved immediately, and the generic drug may be 
marketed. 21 U.S.C. 355(j)(5)(B)(i). A certification under paragraph 
III indicates that the ANDA applicant does not intend to market the 
drug until after the applicable patent expires, and approval of the 
ANDA may be made effective on the expiration date. 21 U.S.C. 
355(j)(5)(B)(ii).
    \22\ 21 U.S.C. 355(j)(2)(B); 21 C.F.R. 314.95(c)(6).
    \23\ 21 C.F.R. 314.94(a)(12)(vi).
    \24\ 21 U.S.C. 355(j)(2)(A)(viii); 21 CYR 314.94(a)(12)(iii). In 
the event of a dispute as to the accuracy or relevance of patent 
information submitted to the FDA and subsequently listed in the Orange 
Book, the FDA may request the NDA holder to confirm the correctness of 
the patent information and listing. Unless the patent information is 
withdrawn or amended by the NDA holder, however, the FDA will not 
change the patent information listed in the Orange Book. Id.
---------------------------------------------------------------------------
    The filing of a paragraph IV certification triggers an important 
process that reflects the Hatch-Waxman Act's core purpose of 
encouraging generic competition while protecting pioneer companies' 
incentives to innovate. If an action for patent infringement is brought 
against the ANDA applicant within 45 days of the date the patent owner 
receives notice of the paragraph IV certification,\25\ final approval 
of the ANDA cannot become effective until 30 months from the receipt of 
notice. That timing cannot be changed unless a final court decision is 
reached earlier in the patent case or the patent court otherwise orders 
a longer or shorter period.\26\
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    \25\ 21 U.S.C. 355(j)(5)(B)(iii); 21 C.F.R. 314.107(f)(2). The 
statute also states that ``[u]ntil the expiration of forty-five days 
from the date the notice made under paragraph (2)(B)(i) is received, no 
action may be brought under section 2201 of Title 28, for a declaratory 
judgment with respect to the patent.'' Id
    \26\ 21 U.S.C. 355(j)(5)(B)(iii). A court may shorten or lengthen 
the period if either party to the action fails to reasonably cooperate 
in expediting the case. Id
---------------------------------------------------------------------------
    The Hatch-Waxman Act also provides an incentive for generic drug 
companies to bear the cost of patent litigation that may arise when 
they challenge allegedly invalid patents or design products they 
contend are non-infringing. The Act grants to the first ANDA filer a 
180-day period during which it has the exclusive right to market a 
generic version of the brand name drug. The 180-day exclusivity period 
begins running on the earlier of (1) the date the first ANDA filer 
begins commercial marketing of its generic drug, or (2) the date a 
court decides that the patent addressed by the paragraph IV 
certification is invalid or not infringed. No other generic 
manufacturer may obtain final FDA approval to market its version of the 
relevant product until the first filer's 180.-day exclusivity period 
has expired.\27\
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    \27\ 21 U.S.C. 355(j)(5)(B)(iv).
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                 II. FTC CASES CHALLENGING SETTLEMENTS
    The FTC has taken a lead role in promoting competition in the 
pharmaceutical industry and has been significantly involved in 
antitrust cases arising in the context of the Hatch-Waxman regulatory 
framework. In three recent cases, the Commission challenged agreements 
between brand-name and generic drug companies that allegedly delayed or 
were intended to delay generic drug competition in order to maintain 
higher prices.\28\ In each case the Commission alleged that as part of 
a settlement agreement, the branded firm made payments to the generic 
firm in exchange for delayed entry. The Commission further alleged in 
each case that the agreements in question also delayed or were intended 
to delay entry of generic manufacturers other than those to which 
payments were made.
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    \28\ It is important to note that the first two cases discussed 
below, Abbott-Geneva and Hoechst-Andrx, were resolved by settlement, 
while the third, Schering-Upsher-ESI Lederle, is pending administrative 
trial. Thus, although the Commission found reason to believe that there 
was a violation of the antitrust laws in each case, there has been no 
admission or final determination of unlawfulness in any of these 
matters.
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A. AbbottlGeneva
    In May 2000, the Commission issued a complaint and consent order 
against Abbott Laboratories and Geneva Pharmaceuticals, Inc.\29\ The 
complaint charged that Abbott paid Geneva approximately $4.5 million 
per month to keep Geneva's generic version of Abbott's proprietary drug 
(Hytrin) off the U.S. market, potentially costing consumers hundreds of 
millions of dollars a year. Hytrin is used to treat hypertension and 
benign prostatic hyperplasia (BPH or enlarged prostate)--chronic 
conditions that affect millions of Americans each year. BPH alone 
afflicts at least 50% of men over 60. In 1998, Abbott's sales of Hytrin 
amounted to $542 million (over 8 million prescriptions) in the United 
States. Abbott projected that Geneva's entry with a generic version of 
Hytrin would eliminate over $185 million in Hytrin sales in just six 
months.\30\
---------------------------------------------------------------------------
    \29\ Abbott Laboratories, C-3945 (May 26, 2000) (Analysis to Aid 
Public Comment), .
    \30\ Id (complaint).
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    According to the complaint, Geneva agreed not to enter the market 
with any generic version of Hytrin, even if it were non-infringing, 
until the earlier of (1) the final resolution of the patent 
infringement litigation involving Geneva's generic version of Hytrin 
tablets, including review through the U. S. Supreme Court; or (2) entry 
of another generic Hytrin product. Geneva also agreed not to transfer, 
assign, or relinquish its 180-day exclusivity right. These provisions 
ensured that no other company's generic version of Hytrin could obtain 
FDA approval and enter the market during the term of the agreement, 
because Geneva's agreement not to launch its product meant the 180-day 
exclusivity period would not begin to run.\31\
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    \31\ Abbott Laboratories, C-3945 (May 26, 2000) (complaint).
---------------------------------------------------------------------------
    Under the terms of the Commission's consent order, Abbott and 
Geneva are barred from entering into agreements pursuant to which a 
first-filing generic company agrees with a manufacturer of a branded 
drug that the generic company will not (1) give up or transfer its 
exclusivity or (2) bring a non-infringing drug to market. In addition, 
agreements to which Abbott or Geneva is a party that involve payments 
to a generic company to stay off the market must be approved by the 
court when undertaken during the pendency of patent litigation (with 
prior notice to the Commission), and the companies are required to give 
the Commission 30 days' notice before entering into such agreements in 
other settings. In addition, Geneva was required to waive its right to 
a 180-day exclusivity period for its generic version of Hytrin tablets, 
so other generic tablets could immediately enter the market.
B. Hoechst Marion Roussel'Andrx
    In a second matter, the Commission charged that Hoechst Marion 
Roussel (now Aventis), the maker of Cardizem CD, a widely prescribed 
drug for treatment of hypertension and angina, paid Andrx Corporation 
over $80 million to refrain, during the pendency of patent litigation, 
from bringing to market any competing generic drug, without regard to 
whether it was allegedly infringing.\32\ Hoechst's Cardizem sales in 
1998 exceeded $700 million, and over 12 million prescriptions were 
sold. Hoechst forecasted internally that a generic version of Cardizem 
CD, sold at 70% of the brand price, would capture approximately 40% of 
Cardizem CD sales within the first year.
---------------------------------------------------------------------------
    \32\ Hoechst Marion Roussel, Inc., Docket 9293 (March 16, 2000) 
(complaint), .
---------------------------------------------------------------------------
    The complaint further alleged that Andrx's agreement not to market 
its product was intended to delay the entry of other generic drug 
competitors, thereby denying consumers access to lower priced generic 
drugs.\33\ As in Abbott, the ability to preclude other generic 
competitors flows from the exclusive 180-day marketing right granted to 
the first generic to file an ANDA.\34\ This case was settled before 
trial, and the Commission issued final consent orders on May 11, 2001. 
The orders entered against Hoechst and Andrx contain relief similar to 
that in the Abbott and Geneva orders.
---------------------------------------------------------------------------
    \33\ 33 Id
    \34\ In each of the cases brought by the Commission--Abbott, 
Hoechst, and Schering--it is not the general principle of the 180-day 
exclusivity that is at issue; rather, the complaints alleged that the 
parties entered into agreements that delayed or prevented the 
triggering of the first ANDA filer's exclusivity period, thereby also 
blocking other generic firms from entering.
    The Commission's cases challenging settlement agreements also do 
not mean that parties to patent litigation cannot settle their 
disputes. Indeed settlement of litigation can serve important public 
purposes. But the antitrust laws have long condemned settlements that 
unreasonably limit competition. See, e.g., United States v. Singer Mfg. 
Co., 374 U. S. 174 (1963).
---------------------------------------------------------------------------
C. Schering-Plough/Upsher-Smith/ESI Lederle
    In its most recent case, the Commission issued an administrative 
complaint on March 30, 2001, against Schering-Plough Corporation and 
two generic pharmaceutical manufacturers Upsher-Smith Laboratories, the 
first ANDA filer, and ESI Lederle, Inc. (a division of American Home 
Products Corp.). The complaint charges the three companies with 
entering into agreements aimed at delaying the entry of generic 
versions of Schering's product--KDur 20, a widely prescribed potassium 
chloride supplement used to treat patients with insufficient levels of 
potassium, a condition that can lead to serious cardiac problems.\35\ 
Schering's K-Dur products (in two different strengths) had 1998 sales 
of over $220 million. In 1997, Schering allegedly projected that the 
first year of low priced generic competition would reduce branded K-Dur 
20's sales by over $30 million.\36\
---------------------------------------------------------------------------
    \35\ In the Matter of Schering-Plough Corporation, et al., Docket 
No. 9297 (Mar. 30, 2001).
    \36\ K-Dur 20 is the 20 mg version of the product and is the 
product version at issue in this matter. Schering also makes a 10 mg 
version.
---------------------------------------------------------------------------
    The Commission alleged in its complaint that Schering and Upsher-
Smith settled a patent infringement lawsuit by agreeing that Schering 
would pay Upsher-Smith not to enter the market. Upsher-Smith allegedly 
agreed not to sell either the product for which it had filed an ANDA, 
or any other generic version of Schering's K-Dur 20 (regardless of 
whether Schering had any basis to claim infringement), until September 
2001.\37\ In exchange, Schering paid Upsher-Smith $60 million. Upsher-
Smith also licensed five of its products to Schering but, according to 
the complaint, the $60 million had little relation to the value of 
those products. It is alleged that Schering's agreement with Upsher-
Smith created a bottleneck by preventing other potential generic 
competitors from entering the market because of the 180-day exclusivity 
granted to Upsher-Smith as the first generic company to file an ANDA.
---------------------------------------------------------------------------
    \37\ Upshur-Smith received final FDA approval in November 1998 to 
market a generic version of K-Dur 20.
---------------------------------------------------------------------------
    The Commission complaint alleges that Schering entered into a 
second agreement with ESI Lederle to delay further the marketing of a 
generic version of K-Dur-20. Schering and ESI Lederle allegedly settled 
a patent infringement case with an agreement by which ESI Lederle, in 
exchange for payments from Schering, promised not to market any generic 
version of K-Dur 20 until January 2004, and thereafter to market only 
one generic version until September 2006 (when Schering's patent 
expires). In addition, ESI Lederle allegedly agreed that it would not 
help any other firm with studies in preparation for an ANDA for a 
generic version of K-Dur 20 until September 2006. The Commission 
complaint alleges that Schering agreed to pay $30 million in exchange 
for these agreements and for licenses to two ESI Lederle products that 
the complaint alleges were not as valuable as the $15 million 
designated for them.
    The Commission complaint alleges that the Schering/Upsher and the 
Schering/ESI Lederle agreements are unreasonable restraints of trade 
and that the companies conspired to monopolize the market for potassium 
chloride supplements, in violation of Section 5 of the FTC Act. In 
addition, the complaint charges Schering with unlawful acts of 
monopolization. The case is now in a pretrial stage before an 
Administrative Law Judge.
                     III. OTHER COMMISSION ACTIONS
A. FTC v. Mylan
    Although competition between manufacturers of branded and generic 
drugs is critical and a continuing focus of Commission resources, the 
Commission also is concerned about maintaining competition among 
generic firms. In FTC v. Mylan Laboratories, Inc., the Commission, 
along with several states, sued Mylan Laboratories, one of the nation's 
largest generic pharmaceutical manufacturers, charging Mylan and other 
companies with monopolization, attempted monopolization, and conspiracy 
in connection with agreements to eliminate much of Mylan's competition 
by tying up supplies of the key active ingredients for two widely-
prescribed drugs--lorazepam and clorazepate--used by millions of 
patients to treat anxiety.\38\
---------------------------------------------------------------------------
    \38\ CV-98-3115 (D.D.C., filed Dec. 22, 1998; amended complaint 
filed Feb. 8, 1999). Over 20 million prescriptions are written for 
these drugs each year.
---------------------------------------------------------------------------
    The FTC's complaint charged that Mylan's agreements allowed it to 
impose enormous price increases--over 25 times the initial price level 
for one drug, and more than 30 times for the other. For example, in 
January 1998, Mylan raised the wholesale price of clorazepate from 
$11.36 to approximately $377.00 per bottle of 500 tablets, and in March 
1998, the wholesale price of lorazepam went from $7.30 for a bottle of 
500 tablets to approximately $190.00. The price increases resulting 
from Mylan's agreements allegedly cost American consumers more than 
$120 million in excess charges.
    The Commission filed this case in federal court under Section 13(b) 
of the FTC Act seeking injunctive and other equitable relief, including 
disgorgement of ill-gotten profits. In July 1999, the U. S. District 
Court for the District of Columbia upheld the FTC's authority to seek 
disgorgement and restitution for antitrust violations. In settlement of 
the Commission's case Mylan agreed to pay $100 million for disbursement 
to qualified purchasers of lorazepam and clorazepate.\39\ On April 27, 
2001, the federal court granted preliminary approval to a distribution 
plan for these funds.\40\
---------------------------------------------------------------------------
    \39\ The Commission approved the settlement on November 29, 2000. 
FTC v. Mylan Laboratories, Inc., FTC File No. X990015 (Nov. 29, 2000). 
The Commission vote to accept the proposed agreement was 4-1, with 
Commissioner Thomas Leary dissenting in part and concurring in part.
    \40\ FTC v. Mylan, et al., CV 1:98CV03114(TFH), Order Preliminarily 
Approving Proposed Settlements (Apr. 27, 2001).
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B. FTC Pharmaceutical Industry Study
    In light of the serious questions raised by its various generic 
drug investigations, in October 2000 the Commission proposed a focused 
industry-wide study of generic drug competition. This study is designed 
to examine more closely the business relationships between brand-name 
and generic drug manufacturers in order to better understand the extent 
to which the process of bringing new low-cost generic alternatives to 
the marketplace--and into the hands of consumers--is being impeded in 
ways that are anticompetitive. The study will provide a more complete 
picture of how generic drug competition has developed under the Hatch-
Waxman Act, including whether agreements between brand-name 
pharmaceutical manufacturers and generic drug firms of the type 
challenged by the FTC are isolated instances or are more typical of 
industry practices. In addition, the Commission will examine whether 
particular provisions of the Hatch-Waxman Act have operated as 
intended--to balance the legitimate interests of pharmaceutical 
companies in protecting their intellectual property and the legitimate 
interests of generic companies in providing competition--or whether 
some provisions unintentionally have enabled anticompetitive strategies 
that delay or deter the entry of generic drugs into the market.
    In April, the Commission received clearance from the Office of 
Management and Budget to conduct the study.\41\ The Commission has 
since issued 75 special orders to brand-name pharmaceutical 
manufacturers and generic drug companies to provide the Commission with 
information about certain practices that were outlined in the Federal 
Register notices that preceded OMB clearance to pursue the study.\42\ 
The Commission staff focused each special order on specific name-brand 
drug products that were the subject of paragraph IV certifications 
filed by potential generic competitors, and, for generic companies, on 
specific drug products for which they had filed an ANDA containing a 
paragraph IV certification. Responses from the companies are expected 
by June 25, 2001.
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    \41\ The Commission obtained OMB clearance because the number of 
Special Orders being sent triggered the requirements of the Paperwork 
Reduction Act of 1995, 44 U.S. C. Ch. 35, as amended.
    \42\ See 65 Fed. Reg. 61334 (Oct. 17, 2000); 66 Fed. Reg. 12512 
(Feb. 27, 2001).
---------------------------------------------------------------------------
    The Commission plans to compile the information received to provide 
a factual description of how the 180-day marketing exclusivity and 30-
month stay provisions of the Hatch-Waxman Act have influenced the 
development of generic drug competition. For example, the Commission 
staff anticipates analyzing how often the 180-day marketing exclusivity 
provision has been used, how it has been triggered (by commercial 
marketing or court orders), the frequency with which innovator 
companies initiate patent litigation, and the frequency with which 
patent litigation has been settled or litigated to a final court 
decision. The Commission will use the agreements provided, along with 
underlying documents related to the reasons for executing the 
agreement, to examine whether it appears that agreements between 
innovator and generic companies (or between generic companies) may have 
operated to delay generic drug competition.\43\
---------------------------------------------------------------------------
    \43\ Commission staff commented to the FDA on the 180-exclusivity 
issue in connection with a proposed rulemaking. See Comment of the 
Federal Trade Commission Staff, In the Matter of 180 Day Generic Drug 
Exclusivity for Abbreviated New Drug Applications, Docket No. 85N-0214 
(Nov. 4, 1999), .
---------------------------------------------------------------------------
    In addition, the study will provide evidence about innovator 
companies' patent listings in the Orange Book, the timeliness of the 
listings, and how frequently challenges are made to those listings by 
generic companies. Some have raised concerns that manufacturers of 
pioneer drugs are listing additional patents shortly before the 
expiration of previously listed patents, thereby starting procedures 
through which branded manufacturers can sue ANDA applicants who have 
filed a paragraph IV certification and can thus invoke the automatic 
30-month stay for generic approval under the Hatch-Waxman Act.\44\
---------------------------------------------------------------------------
    \44\ See, e.g., Mylan v. Bristol-Myers Squibb, Civ. Action OOCV2876 
(D.D.C. Mar. 13, 2001) (case alleging last-minute Orange Book listing 
by Bristol-Myers Squibb (``BMS'') of another patent in connection with 
BuSpar, a leading anti-anxiety drug produced by BMS, just as BMS's 
patent exclusivity for BuSpar was about to expire; the propriety of 
that listing and the issue of whether the potential generic competitor 
can challenge the listing are currently the subject of this 
litigation).
---------------------------------------------------------------------------
    The study also will provide information about innovator companies' 
use of Citizen Petitions in connection with generic versions of their 
brand-name drug products. In March 2000, FTC staff provided some 
preliminary input to FDA in connection with its proposed rule 
concerning Citizen Petitions. The proposed rules are aimed at improving 
the efficiency of FDA's Citizen Petition process and narrowing the 
types of actions that can be requested of FDA through the Citizen 
Petition process.\45\ Concerns have been raised about the potential for 
abuse, for example, by companies filing petitions to keep a rival drug 
product or medical device off the market for as long as possible. The 
FTC is concerned about the potential for abusing the regulatory 
process, but recognizes that some of this activity may implicate First 
Amendment rights that may present a barrier to antitrust 
enforcement.\46\ Thus, the staff supported the FDA's attempt to 
maintain the Citizen Petition process for legitimate purposes, while 
limiting the ability of firms to use the process solely to hinder 
competitors.\47\
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    \45\ In the Matter of Citizen Petitions; Actions That Can be 
Requested by Petition; Denials, Withdrawals, and Referrals for Other 
Administrative Action, Docket No. 99N-2497, 64 Fed. Reg. 66822 (Nov. 
30, 1999).
    \46\ Eastern Railroad Presidents Conference v. Noerr Motor Freight, 
Inc., 365 U. S. 127 (1961); United Mine Workers v. Pennington, 381 U. 
S. 657 (1965). The Noerr-Pennington doctrine shields private parties 
from antitrust liability when they engage in certain concerted and 
genuine efforts to influence governmental action, even though the 
conduct is undertaken with an anticompetitive intent and purpose. For a 
further discussion of the Noerr-Pennington doctrine, see James D. 
Hurwitz, ``Abuse of Governmental Processes, the First Amendment, and 
the Boundaries of Noerr,'' 74 Geo. L.J. 601 (1985). There are some 
exceptions to the application of the Noerr-Pennington doctrine. The 
Supreme Court has made clear that where one uses ``the governmental 
process--as opposed to the outcome of that process as an 
anticompetitive weapon,'' the protection of the Noerr doctrine may not 
apply. Indeed if litigation or regulatory intervention is ``objectively 
baseless in the sense that no reasonable litigant could realistically 
expect success on the merits,'' a party's behavior may not be immune 
from antitrust challenge. As an example, the Supreme Court identified 
as unprotected conduct ``the filing of frivolous objections to the 
license application of a competitor,'' with no real expectation of 
achieving denial of the license, ``in order to impose expense and 
delay.'' See Professional Real Estate Investors, Inc. v. Columbia 
Pictures Indus. Inc., 508 U.S. 49, 61 (1993); Columbia v. Omni Outdoor 
Advertising, Inc., 499 U. S. 365, 380 (1991) (quoting California Motor 
Transport Co. v. Trucking Unlimited, 404 U.S. 508 (1972)).
    \47\ See Comment of the Federal Trade Commission Staff, In the 
Matter of Citizen Petitions; Actions That Can be Requested by Petition; 
Denials, Withdrawals, and Referrals for Other Administrative Action, 
Docket No. 99N-2497 (Mar. 2, 2000), .
---------------------------------------------------------------------------
    Finally, the study will examine whether the size of a drug 
product's sales influences the use of strategies to delay generic 
competition. The Commission expects to complete the study by the end of 
2001.
                             IV. CONCLUSION
    The Commission appreciates the opportunity to share with the 
Committee its observations about the pharmaceutical industry. The 
Commission looks forward to working with the Committee to address 
problems that may arise in this important sector of the U.S. economy. 
Thank you.

    Chairman Hatch. Mr. Griffin, we will go to you.

   STATEMENT OF JAMES M. GRIFFIN, DEPUTY ASSISTANT ATTORNEY 
GENERAL, ANTITRUST DIVISION, DEPARTMENT OF JUSTICE, WASHINGTON, 
                              D.C.

    Mr. Griffin. Thank you, Mr. Chairman. It is a pleasure to 
be here and I appreciate the opportunity to speak to you and 
the Committee today.
    As a starting point, I thought it would be helpful if 
perhaps I simply describe in general terms the division of 
labor between the Antitrust Division and the Federal Trade 
Commission in the enforcement of the antitrust laws.
    The Department of Justice and FTC, of course, share Federal 
responsibility for antitrust enforcement, but that shared 
enforcement is limited to civil enforcement, including merger 
cases. Section 1 of the Sherman Act prohibits contracts, 
combinations, and conspiracies in restraint of trade. Criminal 
prosecution under that section is vested exclusively in the 
Department of Justice and those criminal prosecutions under 
that section are generally confined to that class of agreements 
that have been found to be unambiguously harmful to consumers 
and are considered per se unlawful. Examples of those kinds of 
agreements are agreements among competitors to fix prices, rig 
bids, allocate markets, and such agreements are generally 
secret. Businesses and consumers are defrauded and misled 
because the conspirators continue to hold themselves out as 
competitors.
    The Division places a very high priority on criminal 
enforcement of the antitrust laws, and in recent years, we have 
aggressively pursued price fixing, bid rigging, market 
allocation, and customer allocation conspiracies in both 
international and in domestic markets.
    Let me just summarize briefly some of the things that we 
have done on the international side. The division has 
prosecuted international cartels operating in a broad spectrum 
of commerce, including products found in household goods, such 
as vitamins and food preservatives; also in products used in 
manufacturing, such as graphite electrodes, which are used in 
the manufacture of steel; products used in the agricultural 
sector, such as animal and livestock feed additives; as well as 
a variety of services ranging from auctioning fine art to 
marine transportation and construction. We estimate that these 
international cartels, those that we have prosecuted over the 
last few years, have affected over $10 billion in U.S. 
commerce, and perhaps more disturbingly, this cartel activity 
in these cases has cheated U.S. businesses and consumers of 
many hundreds of millions of dollars annually.
    On the domestic side of our docket, the Division recently 
has prosecuted bid rigging cases, cartels affecting hundreds of 
millions of dollars in contracts to supply food to such 
institutions as schools, hospitals, and other public 
institutions, rigging of contracts to provide relief 
construction projects in disaster areas, real estate 
foreclosure auctions, and contracts for the construction of 
water treatment plants, as well as price fixing conspiracies 
involving metal, building insulation, and numerous anti-
competitive schemes in the graphics display markets.
    Now, not all Section 1 violations, of course, rise to the 
level of criminal conduct, but may be subject to civil 
antitrust enforcement. Because we share Federal antitrust 
enforcement responsibility with the FTC, we have developed a 
clearance protocol with the Commission to determine which 
agency will investigate a particular matter or a particular 
civil matter. That determination is based primarily on which 
agency has the greater expertise in the area, in the product 
market as a result of recent antitrust investigations.
    The clearance protocol enables the two agencies to most 
effectively use our resources as well as to avoid duplicative 
investigatory requests on private parties. Under this clearance 
protocol, the FTC has handled the recent civil investigations 
involving patent disputes and the delay of generic competition 
in the pharmaceutical industry, and as Ms. Boast just 
mentioned, the FTC is currently undertaking a broad 
investigation into this activity and we are all looking forward 
to the results of that study.
    However, because the Division has sole responsibility for 
criminal antitrust enforcement, if the FTC were to uncover 
evidence of potential criminal violations relating to the 
pharmaceutical industry, under our clearance procedure, the FTC 
would refer that matter to us for prosecution. Likewise, if at 
the very outset of an investigation it appeared that the 
violation likely would turn out to be criminal, the Division 
would investigate the matter regardless of which agency had the 
greater expertise.
    In fact, in this very market, the pharmaceutical market, 
the Division recently prosecuted the largest criminal antitrust 
conspiracy ever uncovered, the international vitamin cartel. To 
date, we have prosecuted 11 companies, 13 individuals for 
cartel activity in ten separate vitamin markets. The companies 
prosecuted were headquartered in Switzerland, Germany, Canada, 
Japan, and the United States, and to date, we have obtained 
almost $1 billion in fines in this investigation, including the 
largest fine ever imposed in a Federal criminal prosecution in 
the United States, the $500 million fine against the Swiss 
company Hoffman-LaRoche. In addition, we have obtained the 
first jail sentences ever imposed against European business 
executives for violating U.S. antitrust laws, and that 
investigation, Mr. Chairman, is continuing.
    I hope this information will be helpful to the Committee 
and I look forward to answering any questions you may have.
    Chairman Hatch. Thank you so much, Mr. Griffin.
    [The prepared statement of Mr. Griffin follows:]

   Statement of James M. Griffin, Deputy Assistant Attorney General, 
               Antitrust Division, Department of Justice

    Good afternoon, Mr. Chairman and members of the Committee. I 
appreciate being invited here to testify.
    The issues raised by today's hearing on the antitrust implications 
of patent settlements in the pharmaceutical marketplace are currently 
the subject of investigations being conducted by the Federal Trade 
Commission (``FTC''). As a starting point I thought it would be helpful 
to the Committee if I were to describe in general the division of labor 
between the Antitrust Division and the FTC in the enforcement of the 
antitrust laws.
    The Department of Justice and the FTC share federal responsibility 
for antitrust enforcement, but that shared responsibility is limited to 
civil antitrust enforcement, including merger enforcement. The 
Department of Justice has exclusive responsibility for criminal 
antitrust enforcement.
    Because criminal investigations are highly sensitive, I cannot 
comment on any specific investigation. However, I can describe 
generally what distinguishes conduct subject to criminal prosecution 
from conduct subject to a civil enforcement action.
    Section 1 of the Sherman Act prohibits contracts, combinations, and 
conspiracies in restraint of trade. Criminal prosecution is generally 
confined to a class of agreements that have been found to be 
unambiguously harmful and are considered per se unlawful. Examples of 
such conduct include naked agreements among competitors to fix prices, 
rig bids, or allocate customers, territories, or sales. Such agreements 
are generally secret, and businesses and consumers are defrauded and 
misled because the conspirators continue to hold themselves out as 
competitors.
    I should note, however, that there are some situations in which 
criminal investigation or prosecution may not be considered 
appropriate, even though the conduct may appear to be a per se 
violation of law. Such situations may include cases in which (1) there 
is confusion in the law; (2) there are truly novel issues of law or 
fact presented; (3) confusion reasonably may have been caused by past 
prosecutorial decisions; or (4) there is clear evidence that the 
subjects of the investigation were not aware of, or did not appreciate, 
the consequences of their action. In these instances, as well as in 
other cases where the conduct does not rise to the level of a criminal 
violation of Section 1, the conduct may be subject to civil antitrust 
enforcement.
    Individuals criminally convicted of violating the Sherman Act are 
subject to fines up to $350,000 and prison sentences up to three years, 
and corporations are subject to fines up to $10 million. Under the 
alternative sentencing provision found in 18 U.S.C. Sec. 3571, a 
convicted defendant is subject to higher fines equaling twice the gain 
resulting from the violation, or twice the loss caused to the victims, 
whichever is higher.
    The Antitrust Division places a high priority on criminal antitrust 
enforcement. In recent years, the Division has aggressively pursued 
price-fixing, bid-rigging, and market- and customer-allocation 
conspiracies in both international and domestic markets.
    On the international side, the Division has prosecuted 
international cartels operating in a broad spectrum of commerce, 
including: products found in household goods, such as vitamins and food 
preservatives; products used in the manufacturing sector, such as 
graphite electrodes used in steel making; products used in the 
agricultural sector, such as animal and livestock feed additives; and a 
variety of services, ranging from auctioning fine art to marine 
transportation and construction. The Division estimates that the 
international cartels it has prosecuted over the last few years 
affected well over $10 billion in U.S. commerce. More importantly, the 
cartel activity in these cases cheated U.S. businesses and consumers of 
many hundreds of millions of dollars annually.
    On the domestic side, the Division recently has prosecuted bid-
rigging cartels affecting hundreds of millions of dollars in contracts 
to supply food to schools, hospitals, and other public institutions; 
typhoon relief projects; real estate foreclosure auctions; and 
contracts for the construction of water treatment plants, as well as 
price-fixing conspiracies involving metal building insulation and 
numerous anticompetitive schemes in the graphics display industry.
    Because we share federal antitrust enforcement responsibility for 
civil violations with the FTC, we have a clearance protocol with the 
FTC to determine which agency will investigate a particular civil 
matter. That determination is based primarily on which agency has the 
greater expertise in the product market as a result of recent antitrust 
investigations conducted by that agency. The clearance protocol enables 
the two agencies to make the most effective use of enforcement 
resources, as well as to avoid duplicative investigatory requests on 
private parties. Under this clearance protocol, the FTC has handled 
recent civil investigations involving patent disputes and the delay of 
generic competition in the pharmaceutical industry.
    However, because the Division has sole responsibility for criminal 
antitrust enforcement, if the FTC were to uncover evidence of a 
potential criminal violation relating to the pharmaceutical industry, 
under our clearance protocol the FTC would be required to refer that 
evidence to us for criminal investigation. Likewise, if at the outset 
of an investigation, the evidence suggested a potential criminal 
violation, the Division would investigate the matter, regardless of 
which agency had greater expertise in the product market.
    In fact, in the pharmaceutical market, the Division recently 
prosecuted the largest criminal antitrust conspiracy ever uncovered--
the international vitamin cartel. To date, we have prosecuted eleven 
companies, headquartered in the United States, Switzerland, Germany, 
Canada, and Japan, and thirteen individuals for cartel activity in ten 
vitamin markets. We have obtained nearly $1 billion in fines, including 
the $500 million fine imposed against F. HoffmannLa Roche, the largest 
fine ever imposed in a U.S. criminal prosecution of any kind. In 
addition, we obtained the first jail sentences ever imposed against 
European business executives for violating U.S. antitrust laws. The 
investigation is continuing.
    Mr. Chairman, I hope this information is helpful to the Committee. 
I would be happy to answer questions if I can.

    Chairman Hatch. General Shurtleff, let us hear from you 
now.

 STATEMENT OF MARK SHURTLEFF, ATTORNEY GENERAL, STATE OF UTAH, 
                      SALT LAKE CITY, UTAH

    Mr. Shurtleff. Thank you very much, Mr. Chairman. It is 
truly an honor and a privilege to be here to testify today 
regarding competition in the pharmaceutical marketplace, and 
more specifically on the antitrust implications of settlements 
in patent litigation between brand name and generic drug 
manufacturers.
    As you know, on May 14, 15 State Attorneys General filed a 
Federal antitrust lawsuit alleging that drug companies 
conspired to keep cheaper generic alternative to the high blood 
pressure drug Cardizem CD off the market. That case was filed 
in Federal district court in Michigan. Now, as the chief legal 
officers of our States, attorneys general have a sworn mandate 
to enforce the laws passed both by Congress and those of our 
respective State legislatures. The decision to pursue legal 
action against alleged unlawful conduct is made more difficult 
when different laws intended to protect and benefit the public 
apparently conflict.
    There are those who believe that litigation is the 
desirable method of resolving those conflicts, and, in effect, 
using the courts to legislate. I do not share that belief. To 
the contrary, it is the most expensive and the least effective 
method of resolving apparent conflicts in the law and closing 
loopholes. But until the law is changed by the legislative 
branch and we, as representatives of the executive branch, have 
substantial evidence that existing laws have been violated to 
the injury of our States and our citizens, we must move to hold 
the offenders accountable.
    Today, I am wearing a pin that the Attorney General of 
Delaware gave me. It represents the scales of justice. You know 
that signifies balance and equity and fairness in both creating 
and administering the laws of the land. Today, I am here to 
address, and I apologize that some of it is repetitive, the 
balance between the two canons of law, which are intended in 
different ways to benefit and protect consumers, and I speak of 
patent laws on the one side of the scale and antitrust laws on 
the other side.
    The purpose, of course, of the former, the patent law, is 
to benefit the consumer by encouraging innovators and risk 
takers to invest, to invent, develop, and create products that 
better our lives by granting these industrial, commercial, and 
medical pioneers temporary monopolies. The latter, the 
antitrust law, was passed on the other side to protect the 
consumer from those who unfairly act in restraint of trade or 
to monopolize the marketplace to their financial benefit at the 
expense of the consuming public.
    I read the 1984 Hatch-Waxman amendments to the Federal Food 
and Drug and Cosmetic Act as an example of this balancing task 
between these two very important laws. On the one side of the 
scale, on the patent, Hatch-Waxman encourages innovation by 
confirming or extending that patent right, exclusive right to 
market protection to those pioneering name brand and generic 
drug companies. Millions of Americans have been blessed in the 
last 17 years by the tremendous advances in pharmaceuticals 
available to us. Lives have been saved. Lives have been 
enriched. So these innovators and pioneers, which also have 
been enriched substantially. The past decade has seen a huge 
increase, also, as you are very aware, in the cost of 
prescription drugs, which has a major impact primarily on our 
senior citizens, who most often need and are most benefited by 
those advances, but who again most often are on fixed incomes 
and can least afford these important medicines.
    On the antitrust or consumer protection side of the scales 
of justice, Hatch-Waxman was intended to and has succeeded in 
getting more low-cost generic or bioequivalent drugs to 
consumers faster. Pioneer innovators have been protected and 
encouraged to develop and market better medicines by the 30-day 
prohibition on generics going to market after a patent 
infringement suit is filed. Cost saving generic innovators are 
protected and encouraged to get cheaper bioequivalence to the 
public by the 180-day exclusive marketing grant should a court 
rule against the brand name company in the patent infringement 
action.
    So, in theory and for the most part in practice, Hatch-
Waxman has balanced that scale. Consumers and producers are in 
harmony, and again, millions are the better for it.
    However, as sometimes occurs with the best laid plans, 
something happens to upset that balance and tip the scales. 
Throughout history, unscrupulous businessmen or shopkeepers 
have at times been found to have put a thumb on one side of the 
scale or to otherwise manipulate the weights and measures with 
the intent to cheat their customers and make a few extra bucks. 
When accused, those shopkeepers often would--their first 
defense was to say, well, I did not have my thumb on there. The 
problem is in the scale. The scale must be malfunctioning. This 
is not a problem of their making, so they say, why should we be 
punished for taking advantage of that problem, that loophole, 
perhaps, without notifying the buyer? We are not talking about 
a few bucks here. We are talking about millions and millions of 
dollars today in this pharmaceutical industry.
    Hatch-Waxman is silent on the question of what happens in a 
patent infringement action if it is resolved by settlement as 
opposed to going to the judge. Some have called this a loophole 
in the law. They have rushed to take advantage of it, thereby 
tipping the scale against the consuming public.
    FTC Chairman Robert Pitofsky has reportedly called this 
burgeoning ``sue, then settle'' practice ``private treaties 
that rob consumers.'' The president of one drug company 
admitted in a press release that, ``There are clear abuses that 
are occurring in the industry that are actually delaying 
generic products from reaching consumers.'' He also said that 
settlement agreements do not per se so delay and may, in fact, 
``get lower price product to them faster.'' However, if brand 
name and generic companies are, again in the words of Chairman 
Pitofsky, ``gaming the rules to their financial benefit by 
delaying the availability of cheaper alternatives to the 
consuming public, then it is my responsibility to protect the 
public, right the scales, and hold the cheaters liable.''
    As stated before, some would argue that ``sue, then 
settle'' arrangements are unlawful per se. I do not believe so. 
I think the jury is out on that.
    At this point in time, with the evidence currently 
available on a number of these deals, it appears as if some 
companies have acted unreasonably in the restraint of trade 
under a rule of reason approach. Unless and until Congress acts 
to close the loophole, State attorneys general will be required 
to continue to scrutinize and bring enforcement actions.
    As I stated at the beginning, I would prefer that you, the 
Congress, act to balance the scale. I appreciate you have asked 
me here today as an executor of the law. I disagree with some 
of those who would suggest that the answer is tipping the scale 
over altogether and doing away with the protections that have 
been in place for so many years. I think a more reasoned 
approach is that the Department of Justice or if the FTC have 
noticed an approval of settlement agreements, and again, I 
thank you for the opportunity to address you, Senator Hatch, 
and your committee. I look forward to answering any questions 
you might have.
    Chairman Hatch. Thank you, General. We appreciate it.
    [The prepared statement of Mr. Shurtleff follows:]

         Statement of Mark L. Shurtleff, Utah Attorney General

    Mr. Chairman, Members of the Committee:
    It is an honor and a privilege to testify to you today regarding 
competition in the pharmaceutical marketplace; and more specifically on 
the antitrust implications of settlements in patent litigation between 
brand name and generic drug manufacturers. As you know, on May 14th, 
fifteen state attorneys general filed a federal antitrust lawsuit 
alleging that drug companies conspired to keep a cheaper generic 
alternative to the blood-pressure drug Cardizem CD off the market.
    As the chief legal officers of our states, attorneys general have a 
sworn mandate to enforce the laws passed by Congress and those of our 
respective state legislatures. The decision to pursue legal action 
against alleged unlawful conduct is made more difficult when different 
laws, intended to protect and benefit the public, apparently conflict. 
There are those who believe that litigation is the desirable method of 
resolving those conflicts and, in effect, using the courts to 
legislate. I do not share that belief. To the contrary, it is the most 
expensive and least effective method of resolving apparent conflicts in 
the law and closing loopholes. But until the law is changed by the 
legislative branch, and we, as representatives of the executive branch 
have substantial evidence that existing laws have been violated to the 
injury of our states, and individual citizens thereof, we must move to 
hold the offenders accountable. Today I am wearing a lapel pin 
representing the ``scales of justice,'' which as you know signifies 
balance, equity and fairness in both creating and administering the 
laws of the land. I am here today to address the balance between two 
cannons of law which are intended in different ways to benefit and 
protect consumers. I speak of Patent Law and Antitrust Law. The purpose 
of the former is to benefit the consumer by encouraging innovators and 
risk-takers to invent, develop and create products that better our 
lives, by granting these industrial, commercial and medical pioneers 
temporary monopolies. The latter was passed to protect the consumer 
from those who unfairly act in restraint of trade or to monopolize the 
marketplace to their financial benefit at the expense of the consuming 
public.
    I read the 1984 Hatch-Waxman amendments to the Federal Food, Drug 
and Cosmetic Act as a classic example of the aforementioned balancing 
task. On one side of the scales, Hatch-Waxman encourages innovation by 
confirming or extending the patent law's ``exclusive right to market 
protection'' to pioneering name brand and generic drug companies. 
Millions of Americans have been blessed in the last 17 years by the 
tremendous advances in pharmaceuticals available to us. Lives have been 
saved. Lives have been enriched. The innovators and pioneers have also 
been enriched. The past decade has seen a huge increase in the cost of 
prescription drugs which has had a major impact primarily on our senior 
citizens who most often need and are benefitted by the advances, but 
who again most often are on fixed incomes and can least afford these 
medicines.
    On the antitrust or consumer protection side of the scales of 
justice, Hatch-Waxman was intended to, and has succeeded in, getting 
more low-cost generic or bioequivelent drugs to consumers faster. 
Pioneer innovators have been protected and encouraged to develop and 
market better medicines by the thirty month FDA prohibition on generics 
going to market after a patent infringement suit is filed. Cost-saving 
generic innovators are protected and encouraged to get cheaper 
bioequivelents to the public by the 180 day exclusive marketing grant 
should a court rule against the brand name company in the patent 
infringement action.
    In theory, and in most part in practice, Hatch-Waxman balanced the 
scale. Consumer and producer are in harmony and, again, millions are 
better for it. However, as sometimes occurs with the ``best laid 
plans,'' something happens to upset the balance and tip the scales.
    Unscrupulous businessmen or ``shopkeepers'' have, throughout time, 
been found to have rested a thumb on one side of the scale, or 
otherwise to have manipulated the weights and measures with the intent 
to cheat their customers and make a few extra bucks. When accused, 
often their first defense was to claim there must be a malfunction in 
the scale itself. A problem not of their making, so why should they be 
punished for taking advantage of it without notifying the buyer?
    Hatch-Waxman is silent on the question of what happens when a 
patent infringement action is resolved by settlement rather than 
judicial ruling. Some have called this a ``loophole'' in the law and 
have rushed to take advantage of it, thereby tipping the scale against 
the consuming public. FTC Chairman Robert Pitofsky has called this 
burgeoning sue-then-settle practice: ``private treaties that rob 
consumers.'' The president of one drug company admitted that ``there 
are clear abuses that are occuring in the industry that are actually 
delaying generic products from reaching consumers.'' He also said that 
settlement agreements do not per se so delay, and may in fact ``get 
lower priced product to them faster.'' However, if brand name and 
generic companies are, again in the words of Chairman Pitofsky, 
``gaming the rules,'' to their financial benefit by delaying the 
availability of cheaper alternatives to the consuming public, then it 
is my responsibility to protect the public, right the scales and hold 
the cheaters liable.
    As stated, some would argue that sue-then-settle arrangements are 
unlawful per se. I believe the jury is, literally, still out on that 
argument. At this point in time, with evidence currently available on a 
number of these deals, it appears as if some companies have acted 
unreasonably in restraint of trade under a Rule of Reason approach. 
Unless and until Congress acts to resolve or close this ``loophole,'' 
state attorneys general will be required to continue to scrutinize and 
bring enforcement actions. As I stated at the beginning of my remarks, 
I would prefer that you act to balance the scale. I appreciate that you 
have asked me here today as part of an analysis of that possibility. As 
an ``executor'' of the law, I disagree with those who would suggest the 
answer lies in tipping the scale over completely. That will benefit no 
one. I think a much more reasoned approach of requiring notice and/or 
DOJ or FTC approval of settlement agreements, along the lines proposed 
in S. 754, is worthy of close consideration.
    Thank you again for the opportunity to address you on this issue of 
extreme importance to the states and our good citizens. I would be 
happy to respond to any questions.

    Chairman Hatch. Let me just go right to the belly of the 
beast of the 1984 law. Section 505(j)(2)(v), paragraph four, on 
this chart. As we've heard, applications for equivalent 
products who certify that a pioneer patent is invalid or 
infringed may, if successful, trigger a 180-day period of 
marketing exclusivity. Now, my first question is fact oriented 
and will, for a moment, leave aside the important question of 
which generic applicant, the first filer or the first to 
successfully defend the pioneer's lawsuit, should obtain such a 
potentially valuable exclusivity. The question is this, and any 
of you can answer if it you would like. Do any of your agencies 
have the precise fix on the number of times Paragraph IV 
certifications have been made, how many times the pioneer firms 
have elected to bring or not to bring suit, and the ultimate 
disposition of such suits and applications? I am particularly 
interested in the breakdown between the number of times patents 
have been held valid or invalid versus the number of times the 
contest has centered on non-infringement. If you do not have 
this information today, I would like to know in particular if 
the FTC would yield such data, and if it cannot, if it will 
not, can you help us get these facts so that we know where we 
are going and what we are talking about?
    Mr. Buehler. I do not have that information right now, Mr. 
Chairman. I believe we have provided some similar information 
to FTC, though.
    Ms. Boast. Mr. Chairman, this is precisely the kind of 
information that the Commission's study pursuant to Section 
6(b) of the FTC Act is designed to procure. You are exactly on 
point with the kinds of information that would be relevant to 
figuring out how severe a problem we have here and what are the 
points at which the severity is most obvious and, therefore, 
where we should direct our energy. We do not have that 
information in a systematic form today, to my knowledge, and as 
I said, subject to legal constraints that might exist on the 
confidentiality of the collection process, I do not see any 
reason why a consultation with members who are interested in 
this area would not be appropriate, but there may be legal 
constraints.
    Chairman Hatch. My second question is more policy oriented. 
Let us deconstruct Paragraph IV. If we look at the language of 
Paragraph IV, we see two very different concepts lumped 
together, patent invalidity and non-infringement. The former 
suggests a frontal assault on the patent while the latter 
suggests a careful navigation around protected intellectual 
property. The 1984 law wishes to encourage generic drug 
manufacturers to challenge weak patent claims and to invent 
around valid patents so that consumers can reap the benefits of 
generic competition as quickly as possible. But should these 
very different routes be treated to the identical 180-day 
marketing exclusivity benefit?
    That is a question I have. I am very concerned about that. 
Presumably, there may be cases where a non-infringer has some 
sort of trade secret or even patent technology not available to 
subsequent applicants so that the exclusivity can operationally 
extend beyond the 180 days. Conversely, if a second or third 
ANDA applicant comes up with a different non-infringing 
technology from the first applicant, why should these 
applicants and consumers be denied the benefits of more 
competition in the marketplace for the balance of the 180 days?
    Let me just say further, this invalidity, non-infringement 
distinction seems to be a proper topic for debate. One of the 
most brilliant lawyers I have ever come across is Al Engelberg, 
who played a key role in the compromises of 1984 and who has 
made out very well challenging patents. Here is what Al said on 
this issue, and I quote, ``In cases involving an assertion of 
non-infringement, an adjudication in favor of one challenger is 
of no immediate benefit to any other challenger and does not 
lead to multi-source competition. Each case involving non-
infringement is decided on the specific facts related to that 
challenger's product and provides no direct benefit to any 
other challenger. In contrast, a judgment of patent invalidity 
or enforceability creates an estoppel against any subsequent 
attempt to force the patent against any party. The drafters of 
the 180-day exclusivity provision failed to consider this 
important distinction,'' very critical of me but very accurate.
    So here is your----
    Senator Leahy. How dare he be critical.
    Chairman Hatch. I have wondered that myself, so here is 
your chance to take a shot at one of the drafters of the law, I 
think. I want to ask the witnesses from DOJ and FTC or from the 
FDA, if you want to join in, to comment upon the effects of 
equating invalidity and non-infringement in Paragraph IV. Now, 
this is a tough question. I realize you are in no position to 
render a final administration view today, but I ask you to help 
me reanalyze the impact of this law. So please help us think 
through the question of whether consumers might be better off 
and the marketplace more competitive if non-infringement was 
treated differently than claims of invalidity.
    I turn it over to you. That was a long question, but it is 
pretty hard to put out there without giving you that much 
information. Do you want to start, Mr. Buehler?
    Mr. Buehler. Mr. Chairman, you are correct. There is 
presently no distinction between the two, and obviously that is 
the way we regulate the statute, is there is no distinction 
between the two. Whether there should be or that should be 
changed, I am afraid that the Administration does not have a 
position on that particular issue at the present time, as you 
stated.
    Chairman Hatch. OK.
    Ms. Boast. Mr. Chairman, it was not only a long question 
but a very good question and a very difficult question. I 
certainly cannot speak for the Commission on this. I will say 
that I think the Commission in its enforcement actions has not 
focused on that distinction. Rather, the concern has been that 
once an agreement has been reached to delay entry by the first 
filer, that exclusivity provision time is not running and, 
therefore, no one else can enter. And, indeed, it is one of the 
reasons that I focused in my structural description of what 
links these three cases on the provisions of the settlement 
agreements that preclude entry with non-infringing products. 
That is fairly offensive, I think.
    I think you raise a very, very legitimate issue and it is 
something that, again, without the Commission having a position 
or having studied it directly, we clearly ought to be 
considering as we move forward in this area.
    Chairman Hatch. Will you make that recommendation and get 
that done for us?
    Ms. Boast. I certainly will.
    Chairman Hatch. I think it is pretty important.
    Ms. Boast. I certainly will, Mr. Chairman.
    Chairman Hatch. Let me just ask a final question. At last 
December's Food and Drug Law Institute conference on Hatch-
Waxman, Liz Dickinson, and I am told by my staff that she is 
one of the most able, dedicated, and respected members of the 
FDA General Counsel's Office, raised a fundamental question to 
us. Let me emphasize that Liz was participating in the FDLI 
Educational Conference and made clear she was not speaking in a 
way that would bind the agency or the Administration.
    As a good attorney and expert policy analyst, she should be 
applauded for raising some tough questions that bear further 
consideration by all of us in this matter. In fact, I encourage 
everyone interested in Hatch-Waxman reform to get a copy of and 
study Liz's remarks, along with the complete record of the 
December conference. I think it is important.
    As Liz said in December, ``I suggest we look at whether 
180-day exclusivity is even necessary, and I know that there is 
this idea that it is an incentive to take the risk. I say the 
facts speak otherwise. If you have a second, third, fourth, 
fifth generic in line for the same blockbuster drug filing at 
Paragraph IV certification, undertaking the risk of litigation 
without the hope of exclusivity, is that exclusivity even 
necessary?''
    Then she goes on. She said, ``We have got a provision that 
is supposed to encourage competition by delaying competition. 
It has got a built-in contradiction, and that contradiction, I 
think, is bringing down part of this statute.''
    So my question for the panel is the one raised by Liz, 
among others. Is it necessary or advisable to retain the 180-
day exclusivity period given the enormous financial incentives 
to challenge patents on blockbuster drugs?
    Ms. Boast. Mr. Chairman, again, speaking only for myself, I 
believe that the balance that was struck by Congress in the 
original Hatch-Waxman Act contemplated encouraging generic 
entry by giving them this 100-day [sic] exclusivity provision. 
What the Commission staff has said is in support of an FDA 
proposal to create a sort of use or lose regime, in which if 
the first filer did not take advantage of exclusivity within a 
certain amount of time, other firms would be able to enter, and 
that is one way of addressing the concern about exclusivity 
being misused by this, to say you have got to take advantage of 
it or you cannot have it.
    Chairman Hatch. OK. Anybody else?
    Mr. Buehler. Mr. Chairman, as Liz stated at the meeting, we 
often have the second, third, fourth, fifth challengers to the 
same patent, oftentimes when the challengers actually realize 
that they are not first and there is no hope for them to get 
the 180-day exclusivity. So with that in mind, I would agree 
with Liz's statement that generic firms will continue to 
challenge patents. Whether the 180-day exclusivity is a 
necessary reward for that challenge is unknown, but it does not 
appear that it is.
    Chairman Hatch. I would like answers to this. Right now, I 
personally favor the 180-day provision, but I would like to 
have the best expertise I can possibly get on this and you both 
have been very helpful here. In fact, all four of you have, but 
I seem to have had the two of you on the hot spot for most of 
these questions today. Mr. Griffin, I am not trying to ignore 
you.
    Let me just ask one more question and then I will turn to 
our Democratic leader on the committee. Please explain what, in 
your view, are the pros and cons of Congress adopting any of 
the following 180-day exclusivity regimes. First, a legislative 
override of Mova and a statutory reversion back to the old rule 
of first to file, first to be sued and win. Second, the type of 
ruling exclusivity embraced in the Schumer-McCain legislation. 
And third, the 180-day triggering period provision contained in 
the 1999 FDA proposed rule whereby if the first filer did not 
or could not start the use of the exclusivity within 180 days, 
all other filers could march in.
    Mr. Buehler. Mr. Chairman, all of these are somewhat 
related to pending legislation, and at this point----
    Chairman Hatch. I do not want any weasel excuses here. I do 
not want you weaseling out----
    [Laughter.]
    Mr. Buehler. OK. Let me just try to address the first part, 
the Mova part. Prior to Mova, prior to the Mova decision, from 
1984 through 1997, three generic firms were granted 180-day 
exclusivity. Post-Mova, 31 generic firms were granted 180-day 
exclusivity. Post-Mova, we have been barraged by lawsuits and 
various litigation.
    Chairman Hatch. You mean legislation that I write leads to 
lawsuits and litigation?
    [Laughter.]
    Chairman Hatch. Go ahead. I am sorry. The second one was 
the type of rolling exclusivity embraced in the Schumer-McCain 
legislation.
    Mr. Buehler. Well, again, pending legislation, the 
Administration does not have a position on that particular 
pending legislation.
    Chairman Hatch. How about you? What is your opinion?
    Mr. Buehler. I am the agency today.
    Chairman Hatch. Well, you can speak for yourself here. We 
will not hold the agency responsible.
    Senator Leahy. They will never notice what you say.
    [Laughter.]
    Mr. Buehler. I am also Acting Director, Mr. Chairman.
    Chairman Hatch. I have to say, a lot of them will not 
understand what you say, either.
    [Laughter.]
    Chairman Hatch. Go ahead. Just give us to the best of your 
ability. If it is too uncomfortable, that is OK with me.
    Mr. Buehler. Our preamble to our proposed rule for the 180-
day revision notes the number of lawsuits that we have had to 
defend and had to become involved in post-Mova in trying to 
sort out the, I guess, legislative difficulties right now with 
the Hatch-Waxman amendments.
    Chairman Hatch. So your concern is that the Schumer-McCain 
legislation might even lead to more litigation?
    Mr. Buehler. I did not say that.
    [Laughter.]
    Chairman Hatch. ``Might'' may be too small a word, is that 
right?
    Mr. Buehler. Can I go to rolling exclusivity?
    Chairman Hatch. Yes, go ahead.
    Mr. Buehler. Our present system does not provide for 
rolling exclusivity. We believe that rolling exclusivity would 
actually be an impediment to generic competition in that the 
exclusivity would continue to bounce from the first to the 
second to the third if, somehow or other, the first was 
disqualified. Right now, when the first is disqualified, there 
is no exclusivity. Everyone can come on the market and let the 
competition begin.
    Chairman Hatch. OK. Does anybody else care to comment?
    Ms. Boast. Mr. Chairman, I would simply reiterate what I 
had said before, and that is that at the staff level, at least, 
we have supported the use or lose approach to this. I would 
observe that, again, the Commission's study is the vehicle it 
proposes to use to try to help sort out some of these issues 
and to provide better advice to Congress on this. My other 
observation is that there seems to be in these three different 
approaches clear recognition that something needs to be done 
with exclusivity.
    Chairman Hatch. I have other questions I will submit in 
writing. I have one in particular for you, General Shurtleff, 
but I will submit it in writing. We would like the best 
analysis that you can give us.
    This has been very, very interesting to me, as you can 
imagine, and you have been particularly interesting witnesses. 
I want to commend you and compliment, all four of you, for what 
you have been able to say. This is a very important subject and 
it is very important that we refine this bill to make it even 
more effective than it has been, and everybody admits it has 
been pretty effective--almost everybody, I should say. I guess 
I had better not be universal in any statement.
    But to make a long story short, we would like all the help 
we could get on it because I would like it to work better. I 
would like more competition. I would like more innovation. I 
would like to see the two sides balanced and we need your help 
in order to know what is best to do in this particular area.
    I am going to head back over to the floor, so I am going to 
turn this hearing over to our soon-to-be Chairman who has a 
complementary bill and who, of course, is very interested in 
this issue, as well. If you could finish this hearing, I sure 
would appreciate it, and if you will forgive me for running 
off. I have about four conflicts right now and I apologize to 
you. He says he is going to praise me, so I had better stay for 
just a few minutes. This is such a rare occasion.
    [Laughter.]
    Senator Leahy. Now, now, now.
    Chairman Hatch. No, he has been pretty good for a 
Vermonter, is all I can say.
    [Laughter.]
    Chairman Hatch. I am just kidding. I am just kidding. Jim 
is a great----
    Senator Leahy. We Vermonters are the best thing that ever 
happened to the U.S. Senate.
    Chairman Hatch. There might be some dispute there, but I am 
willing to accept that.
    Senator Leahy. This could go on too far and get us both in 
trouble. But Mr. Chairman, you and I have always worked well 
together on patent, copyright, broadcast, and the other high-
technology issues, and I appreciate that. It is a mark of our 
legislative friendship on these issues, but also, I think, 
reflects our personal friendship, which goes back a quarter of 
a century.
    It was not long ago, Mr. Chairman, when you and I and the 
Committee hit a high-tech home run. We had passage of three 
major bills of enormous importance to consumers. In one fell 
swoop, we provided consumers with local-into-local satellite 
television, protected important patent rights and terms, and 
enhanced electronic commerce and trademark protection.
    Chairman Hatch. How does that equal a home run? There are 
only three hits there? A couple of them were doubles?
    Senator Leahy. The bases were loaded.
    Chairman Hatch. OK.
    [Laughter.]
    Senator Leahy. On the first one. They were all three home 
runs.
    Chairman Hatch. That is right. OK.

  STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR FROM THE 
                        STATE OF VERMONT

    Senator Leahy. [Presiding.] In light of the testimony we 
are going to hear today, I hope we can work together and 
quickly report out a bill which I introduced last Congress and 
reintroduced this year, S. 754, the Drug Competition Act. This 
bill, which has Senators Kohl, Schumer, Durbin, and Feingold on 
it, would put a stop to secret agreements made between drug 
companies which hurt our senior citizens and American families, 
that cheat health care providers and inflate Medicaid and 
Medicare reports.
    I am pleased that Attorney General Shurtleff is here to 
talk about this harm to families in his and other States. I 
appreciate the legal action you took with 14 other States, 
including Vermont. I know the high regard that Attorney General 
Sorrell has for you. It is just another example that Vermont 
and Utah work closely together and so on.
    But in General Shurtleff's prepared testimony, he says 
that, ``I think a much more reasoned approach requiring notice 
along the line proposed in S. 754 is worthy of close 
consideration.'' I want to thank you, General, and I also want 
to thank the Federal Trade Commission. They deserve a lot of 
credit for exposing this problem.
    What I want to do, and the reason for my bill is to say 
there will be no more secret deals to keep generic drugs off 
the market. If you want to boil it down to the basics, no more 
secret deals keeping generic drugs off the market. Any 
agreements have to be immediately provided to the law 
enforcers, in that case, the FTC and the Justice Department. So 
if you are going to notify the deals immediately, I think it is 
going to be a heck of a deterrent to making these kinds of 
illegal deals in the first place, and any such deal would be 
subject to immediate investigation and action by the Federal 
Trade Commission or the Justice Department. If you have 
something like that, people are going to think twice before 
they do a secret deal, an illegal deal, and it would solve the 
most difficult problem, that is, just finding out about the 
improper deals in the first place.
    It does not change the Hatch-Waxman Act. It does not amend 
FDA law. It does not slow down the drug approval process. It 
allows existing antitrust laws to be enforced because the 
enforcement agencies have the information they need.
    A New York Times editorial published last July, ``Driving 
Up Drug Prices,'' mentioned that the FTC is taking aggressive 
action to curb the practice. It needs help from Congress to 
close loopholes in Federal law. Well, my bill provides that 
help. It would slam the door shut on would-be violators. How? 
By exposing the deals to our enforcement agencies. So I think 
Congress should make sure the FTC and Justice look at every 
single deal that could lead to abuse, and only the deals that 
are consistent with the intent of the law will be allowed to 
stand. I will insert the rest of this for the record before I 
have to go to one of the same things that Senator Hatch had to.
    Ms. Boast, let me ask you, first, I want to thank the FTC 
for the outstanding job you do in helping protect both 
consumers and also to promote competition, which helps us all. 
I think the legal actions you have filed show a lot of very, 
very careful work. I can only imagine the amount of effort that 
went into crafting them. As a lawyer, I am in awe. But I am 
going to be very direct and ask you a few questions about the 
Drug Competition Act, my bill.
    The bill simply requires that agreements between branded 
drug manufacturers and potential generic competitors be 
provided to the FTC and the DOJ within 10 days after the 
agreements are signed. You would then confidentially--they 
would not be filed publicly, but you would confidentially 
review these documents and you would take any actions you deem 
necessary. So my first question is this. If the Drug 
Competition Act were enacted, would the FTC obtain additional 
documents, obtain them more quickly than under the current 
system, and if that is so, would that help you enforce the law?
    Ms. Boast. Senator Leahy--I hope I have the title right as 
of the moment----
    Senator Leahy. We are all struggling with titles, so 
Senator Leahy is great. Being a Senator from Vermont is 
something that gives me pride.
    Ms. Boast. First of all, let me thank you for your 
compliments for our work. These are, you are quite correct, 
very resource-intensive cases. They involve very difficult 
legal issues and intellectual property issues, and anything 
that could be done to help us be more effective in enforcing 
the law in this area would be helpful.
    I believe that a legal regime that gave us notice of 
agreement so that we did not have to find out about them by 
accident could be quite helpful in the enforcement mission, 
with due regard to the burdens on business that it might 
impose, which I am sure you have taken account of in your 
drafting.
    Senator Leahy. Do you think it is safe to say that it would 
deter branded name pharmaceutical companies from entering into 
written agreement with potential generic competitors that might 
violate our antitrust laws?
    Ms. Boast. Senator, I think it would be very likely to have 
that kind of effect. It might deter the agreements outright, 
but it also certainly would force the firms who were 
contemplating those agreements to give them much more careful 
scrutiny for potentially offensive provisions.
    Senator Leahy. You are doing a study, I understand, a very 
important study of the pharmaceutical practices relating to the 
Hatch-Waxman Act. If my bill became law, would the FTC have 
access to otherwise secret agreements between branded name 
companies and potential generic competitors? And if you had 
access to that, would that help you carry out the study you are 
doing regarding Hatch-Waxman?
    Ms. Boast. Senator, it certainly could enhance our work on 
the study that the Commission has underway, but I would like to 
note that the virtue of your approach is that it goes beyond 
the relatively time-bound request that is present in the study 
that is underway. Your proposal would create an ongoing 
obligation that would far exceed the scope of the study.
    Senator Leahy. Am I right in assuming these agreements are 
not routinely provided to the FTC now?
    Ms. Boast. You are quite right that they are not routinely 
provided.
    Senator Leahy. So how would you get access to these 
agreements?
    Ms. Boast. Senator, it is not that easy. I mean, detecting 
illegal conduct is part of what we are about. We sometimes hear 
about it from people in the industry. We have had a very, very 
close and cordial working relationship at the staff level with 
FDA, who I think has been interested in, let us say, our 
efforts in this area. But we have not had, short answer, a 
systematic tool such as you propose.
    Senator Leahy. You do not get them 10 days after the 
agreement is signed, I take it.
    Ms. Boast. That is exactly right, Senator.
    Senator Leahy. I am going to submit the other questions for 
the record so I can go back to this other matter. I will leave 
the record open until the close of business tomorrow--for a 
week, I have just been told. You see, Senators are merely 
constitutional impediments to the staff. The staff really knows 
what is going on around here.
    [Laughter.]
    Senator Leahy. We will leave it open for a week if anybody 
wants to submit questions, and I will include a statement from 
Senator Brownback in the record at this point.
    [The prepared statement of Senator Brownback follows:]

   Statement of Hon. Sam Brownback, a U.S. Senator from the State of 
                                 Kansas

    Recently, there has been a great deal of publicity concerning 
possible antitrust violations in settlements of patent disputes between 
innovator and generic pharmaceutical companies. It's been alleged that 
these settlements have resulted in higher prescription drug prices to 
consumers. Companies have defended these agreements as procompetitive, 
arguing in part that they enable generic manufacturers to challenge 
patents of branded companies without incurring the risks of draconian 
liabilities or loss of the incentive to promote the development of 
generic drugs for which the Hatch-Waxman Act was intended. Be that as 
it may, there are efforts this year here in Congress to re-open the 
Hatch-Waxman Act, which was passed in 1984, and controls the entry of 
generic drugs into the market.
    During the past 17 years, the Hatch-Waxman Act has been 
extraordinarily successful in achieving its dual objectives--
encouraging research by innovator companies, and facilitating the entry 
of lower cost generic drugs into the market. I want to insure its 
continued success.

 The Act has created a strong generic drug industry whose share 
        of the prescription drug market has risen from 19% in 1983 to 
        nearly 50% today. Likewise, spending on research by innovator 
        companies is many times higher now than it was prior to Hatch-
        Waxman, and important new therapies continue to be introduced.
 Much of the concern over alleged abuses relates to a provision 
        of the law that provides 180 days of exclusivity to certain 
        generic applicants who challenge innovator patents. That 
        provision was added to the Act in 1984 to provide a reward for 
        generic manufacturers who challenge a patent on the innovator 
        drug it wishes to copy. It has been alleged, however, that in 
        some cases a generic manufacturer and the patent holder have 
        settled cases in a way that uses the 180-day exclusivity 
        provision to delay the approval of generic products of 
        manufacturers that were not party to the settlement . Those 
        allegations are being disputed.
 The purpose of our hearing is to review the situation and 
        elicit the facts. After 17 years, any statute, no matter how 
        successful, should be reviewed to see how it is working and 
        whether flaws have developed that need to be corrected. 
        Therefore, I look forward to today's witnesses and testimony.
 However, I must say that this statute should not be changed 
        lightly, even if we decide that there have been occasional 
        abuses. The statute has generally worked exceedingly well, and 
        it is highly complex. If we do change it, we seriously risk 
        triggering the law of unintended consequences, which could, 
        unless we are very careful, result in less research or fewer 
        generic drugs.
 It may be that after our hearings we will decided that changes 
        are essential. But at this point, it seems to me quite possible 
        that adequate remedies already exist in the law to deal with 
        any abuses which may exist. I note that the Federal Trade 
        Commission has brought actions involving some of the 
        settlements, which have resulted in consent decrees. There is 
        also private litigation involving some settlements. Further, I 
        understand that the FTC is undertaking an extensive 
        investigation stemming from patent dispute settlements and 
        related issues, and plans to issue a report later this year.
 In the case of the 180-day provision and its possible abuse, 
        the FDA issued a proposed rule in August 1999 to address the 
        issue. It would require the applicant with the 180 days of 
        exclusivity to begin marketing within 180 days after approval 
        of a second generic application. FDA's proposal is intended to 
        limit delays resulting from patent dispute settlements.
 Before Congress acts to change this important and complex law 
        by amending the 180-day provision, we should see whether the 
        FDA can resolve any problems through a revision of its rules 
        after due consideration of public comments on its proposal. In 
        addition, we should not pre-empt the FTC's investigation by 
        hurried Congressional action and should wait for the results of 
        that investigation.
 After the FTC has issued its report and FDA has issued its 
        regulations, I think it will be completely appropriate to hold 
        further hearings on this matter to see if legislative change is 
        necessary.

    Senator Leahy. General Shurtleff, you came the furthest 
here today and I appreciate you doing that. As I said, Bill 
Sorrell says very nice things about you.
    Mr. Shurtleff. Thank you. I look to returning to your State 
in a couple of weeks. The National Association of Attorneys 
General is meeting in Vermont next month, so I look forward to 
that.
    Senator Leahy. I understand that Bill passed out pictures 
of people in snowshoes for that time of year, but trust me, it 
has been gorgeous. We have had probably the warmest spring we 
have had since I was a child, and I hope you have a good time. 
I know where you are going. I know the area you are going to be 
in. I just hope the weather cooperates. I think you will enjoy 
it, just as I have always enjoyed the hospitality any time I 
have been in your State.
    Mr. Shurtleff. Thank you, Senator.
    Senator Leahy. Mr. Griffin, Ms. Boast, Mr. Buehler, thank 
you very much for being here.
    Mr. Buehler. Thank you, Senator.
    Ms. Boast. Thank you, Senator.
    Mr. Griffin. Thank you.
    Senator Leahy. The Committee is adjourned.
    [Whereupon, at 3:18 p.m., the Committee was adjourned.]
    [Submissions for the record follow:]

                       SUBMISSIONS FOR THE RECORD

   Statement of Aventis Pharmaceuticals Inc., Bridgewater, New Jersey

    These comments are submitted by Aventis Pharmaceuticals Inc. to be 
included in the formal record of the hearing of the Committee on the 
Judiciary of the United States Senate concerning ``Competition in the 
Pharmaceutical Marketplace: Antitrust Implications of Patent 
Settlements'' which was conducted on May 24, 2001. Aventis 
Pharmaceuticals Inc. conducts the U.S. business of Aventis Pharma AG, 
the pharmaceutical company of Aventis S.A. With headquarters in 
Bridgewater, N.J., Aventis Pharmaceuticals focuses its activities on 
important therapeutic areas such as cardiology, oncology, anti-
infectives, arthritis, allergy and respiratory, diabetes, and the 
central nervous system. Last year, Aventis Pharma spent approximately 
$2 billion dollars in research to develop new and innovative 
pharmaceutical products to help Americans live better, live longer and 
have happier and more productive lives.
          The Importance of Pharmaceutical Patent Settlements
                pharmaceutical patents benefit consumers
    At the outset, we endorse the views expressed by Senator Hatch and 
others acknowledging the critical role that pharmaceutical patents play 
in bringing new and innovative health care solutions to the market. 
Often lost in this debate is the fact pharmaceutical patents benefit 
consumers because they provide a necessary and irreplaceable incentive 
for research companies to develop new and innovative drug therapies to 
prolong and improve the quality of life. To bring a new pharmaceutical 
product to the market requires an investment of hundreds ofmillions of 
dollars \1\ and hundreds of person-years in testing, research, and 
product evaluation. A pharmaceutical patent provides the research 
company and its shareholders with a fair opportunity to recoup that 
investment. Without the patent system, innovation in the pharmaceutical 
industry and all other areas of science would suffer.
---------------------------------------------------------------------------
    \1\ In 2000, the aggregate investment in new pharmaceutical product 
by the nation's research pharmaceutical companies totaled more than $36 
billion.
---------------------------------------------------------------------------
    The importance of pharmaceutical patents for promoting innovation 
and rewarding innovators also requires that the rights of 
pharmaceutical patent holders to enforce their patents and exclude 
infringing products be protected and sustained. Yet too often, the 
legitimate efforts of pharmaceutical patent holders to enforce their 
patents against infringing goods are characterized as anticompetitive 
or illegal. When a patent holder files and prosecutes a patent 
infringement action, the presumption should not be that the company is 
engaged in some sort of suspect activity. Rather, absent clear and 
convincing evidence to the contrary, a patent holder's efforts to 
exclude an alleged infringer from the market should receive the same 
presumption of validity and regularity that the law extends to all 
patents. Pharmaceutical patents should not be treated differently.
                public policy favors patent settlements
    We also note that public policy favors the settlement of disputes 
without litigation. There is no special contrary rule for patent 
litigation. When a generic manufacturer decides to settle a case for 
less than an immediate right to market the allegedly infringing 
product, that decision reflects the generic company's subjective 
assessment of the value of its case and its likelihood of prevailing on 
the merits. Similarly, a decision by the patent holder to license its 
technology to the generic company at some future point within the 
patent term reflects the patent holder's uncertainty as to its ability 
to achieve a positive outcome from litigating the patent action. Thus, 
in reaching settlements, the parties make these internal risk 
assessments and then reach a compromise that maximizes the benefit and 
minimizes the risk that each otherwise would have to accept. In this 
regard, settlements of patent litigation also are generally ``win/win'' 
outcomes from the consumer's point of view.
          patent settlements often contain exclusionary terms
    Because patents exist to protect the patent holder from infringing 
products in the market, settlements of many patent cases, particularly 
those in which the patent holder is perceived to have a strong case, 
necessarily will include some limitation on the alleged infringer's 
post-settlement right to enter the market with its product. The right 
to settle a patent dispute by providing for a limited exclusion of an 
allegedly infringing good is a subset of the patent holder's statutory 
right to completely exclude infringing goods. Therefore, limitations on 
market entry are legitimate points of compromise in a patent 
infringement case. The federal and state antitrust agencies 
nevertheless seem too ready to presume that any post-settlement 
limitation on the right of the alleged infringer to enter the market is 
the product of anticompetitive motivation rather than a good faith 
compromise between both parties' assessments of the strength of the 
patent infringement claim.
    For similar reasons, we believe that interim settlements can be as 
procompetitive as final settlements. The prosecution of a motion for a 
preliminary injunction is not inconsequential; it can significantly 
delay the ultimate resolution of the merits of the patent case and 
dramatically increase the costs and burden of litigation for the 
parties and the courts alike.
    Interim settlements that manage the short-term risks posed to the 
parties by the unresolved patent litigation generally should be 
favored, as long as they do not discourage the parties from diligently 
prosecuting the case and seeking its ultimate resolution. Of course, 
where an interim settlement has the effect of significantly reducing 
the significance of the Court's ultimate ruling, that settlement is 
more akin to a final settlement and should be analyzed as such.
                 the hmr/andrx stipulation and the ftc
    As the Committee is aware, Aventis Pharmaceuticals Inc. recently 
resolved its dispute with the Federal Trade Commission which related to 
an interim Stipulation and Agreement that an Aventis predecessor, 
Hoechst Marion Roussel Inc. (``HMR'') had entered into with Andrx 
Pharmaceuticals Inc. as part of their patent litigation over Andrx's 
generic version of HMR's Cardizem ' CD product. Without 
admitting any wrongdoing, Aventis agreed, as part of this settlement, 
to notify the Commission in advance before entering into certain 
agreements in the future. Because the Committee may have drawn certain 
incorrect assumptions from the Prepared Statement that was submitted by 
the Commission and the oral comments of Ms. Boast, Aventis would like 
to take this opportunity to amend the record.
    the hmr/andrx stipulation and agreement caused no consumer harm
    The Commission's prepared statement accurately recounts that the 
Commission's Administrative Complaint, filed on March 16, 2000, alleged 
that HMR paid Andrx to refrain from bringing to market any generic 
version of Cardizem ' CD, ``without regard'' to whether such 
product infringed HMR's patents. Prepared Statement of the Federal 
Trade Commission, Competition in the Pharmaceutical Marketplace: 
Antitrust Implications of Patent Settlements: Before the Comm. on the 
Judiciary United States Senate, at 12 (May 24, 2001) (``FTC 
Statement''), In the Matter of Hoechst Marion Roussel, Inc., et al, FTC 
Docket No. 9293 (March 16, 2000) (``FTC Complaint'') at 
para. 32. The Administrative Complaint also alleged that the 
purpose and intended effect of the Stipulation and Agreement was to 
``delay the entry of other generic drug competitors'' and ``den[y] 
consumers access to lower priced generic drugs.'' FTC Statement at 12; 
FTC Complaint at para. 33.
    Regrettably, the Prepared Statement presented only half the story. 
Following the filing of the administrative complaint, the Commission's 
staff engaged in substantial discovery and conducted depositions that 
significantly enhanced the Commission's understanding of the case. As 
the completion of discovery neared, the Commission and respondents 
reached agreement on the Draft Consent Order that ultimately resolved 
the case. As to the potential for consumer harm, the Commission stated, 
in the Analysis in Aid of Public Comment that was released along with 
the Draft Consent Order on April 4, 2001, that:

        Based on the FTC's investigation, it does not appear that there 
        was any delay in the entry into the market of a generic version 
        of Cardizem CD by Andrx or any other potential manufacturer, or 
        that the conduct or agreement at issued delayed consumer access 
        to a generic version of Cardizem CD.

    Analysis in Aid of Public Comment, FTC Docket No. 9293 at 4 (April 
2, 2001) (``FTC Analysis'').
    While prepared remarks must necessarily distill a great deal of 
information into a brief and succinct statement, we respectfully submit 
that the Commission's assessment of the Stipulation and Agreement at 
the close of the Commission's investigation is at least as important as 
the allegations that were charged when the case was originally brought. 
By separate letter, we have provided the Committee with a copy of the 
Commission's Analysis in Aid of Public Comment and have asked that it 
be placed in the formal record of this Committee as well.
 the hmr/andrx stipulation and agreement did not block the sale of any 
       non-infringing generic version of cardizem ' cd
    The Commission's prepared statement also noted that the original 
Administrative Complaint charged that the HMR/Andrx Stipulation and 
Agreement had the effect of preventing Andrx from bringing to market 
``any competing generic drug, without regard to whether it was 
allegedly infringing.'' FTC Statement at 12. Again, we respectfully 
observe that the Analysis in Aid of Public Comment reveals a quite 
different result:

        The agreement terminated in June 1999. It was at that time that 
        Andrx received FDA approval to market, and commenced marketing, 
        a reformulated generic version of Cardizem CD that HMR 
        stipulated did not infringe any HMR patent.

    FTC Analysis at 4.
    Thus, the Commission's own statement acknowledges that the 
Stipulation and Agreement did not prevent Andrx from bringing a 
``competing generic drug'' to market. Instead, it recognizes that when 
Andrx perfected a reformulated product that HMR determined not to sue 
for patent infringement, and secured prompt FDA approval, Andrx entered 
the market with its reformulated product without interference from HMR 
or the Stipulation and Agreement. By recognizing Andrx's substantial 
efforts to ``work around'' HMR's patents, the statement in the 
Commission's analysis also tacitly acknowledges the reasonableness of 
HMR's initial patent infringement claims. Companies like Andrx do not 
spend millions of dollars and years of effort in the laboratories 
working around patent claims that are either clearly invalid or not 
potentially infringed.
    The fact that Andrx expended millions of dollars and years of 
research in an effort to invent around HMR's patent claims while the 
patent litigation was underway underscores the fact that no intelligent 
analysis of the potential competitive impact of these settlements can 
be undertaken without due consideration of the strength of the 
underlying patent claims. By definition, a patent confers upon the 
patent holder the power to completely exclude infringing goods from the 
market. It follows therefore that some patent settlements will 
necessarily include some limitations on the right of the alleged 
infringer to enter the market. We respectfully submit that if HMR had 
the right to permanently exclude Andrx's originally infringing 
formulation from the market, it should also have the right to try to 
prevent the sale of that same product until its patent rights are 
vindicated without running afoul of the antitrust laws.
 the hmr/andrx stipulation and agreement was not intended to delay the 
                entry of other generic drug competitors.
    The Commission's prepared statement recounts that the Commission's 
original complaint alleged that the intent of the Stipulation and 
Agreement was ``to delay the entry of other generic drug competitors, 
thereby denying consumers to lower priced generic drugs.'' The 
Commission's original allegation was premised on the assumption that by 
delaying market entry by Andrx, the ANDA first-filer, Aventis could 
take advantage of the first filer's 180-day market exclusivity rights 
under Hatch-Waxman to block the entry of second and third generic 
applicants.
    The problem with the Commission's theory is that it depends upon a 
judicial interpretation of the 180-day market exclusivity rights that 
had not been decided at the time that the HMR/Andrx Stipulation and 
Agreement was executed.
    As Senator Hatch noted in his opening remarks, until the D.C. 
Circuit decided the matter in Mova Pharmaceuticals Corp. v. Shalala, 
140 F.3d 1060 (D.C. Cir. 1998), the generally accepted FDA position was 
that the first generic filer was entitled to the 180-day exclusivity 
period only if it had successfully defended its position in the patent 
litigation before the second or third generics received final FDA 
approval. Under this pre-Mova interpretation of the statute, no 
agreement between the pioneer company and first-filer generic company 
prior to the conclusion of the patent litigation between them could 
have precluded the second or third generic filers from entering the 
market upon receiving final FDA approval for their products. (There are 
other reasons why such foreclosure could not have taken place in this 
case which are case- specific and therefore not pertinent to this 
Committee's concern).
    In charging that an intended effect of the HMR/Andrx Stipulation 
and Agreement was to block the second and third generic applicants, the 
Commission overlooked the fact that the Stipulation and Agreement was 
executed more than six months prior to the D.C. Circuit's decision in 
Mova and eight months before the FDA acquiesced in the Mova decision 
and agreed to apply it to companies like Andrx. As a result, the 
Commission's case essentially sought to charge the parties with 
anticompetitive intent premised upon the holding of a court decision 
that was rendered six months later and which overturned the FDA's long-
standing interpretation of its own statute. We respectfully submit that 
this charge is and was unfair and, in fact, the Commission itself 
acknowledged this change of law had occurred in its final Analysis.\2\
---------------------------------------------------------------------------
    \2\ ``Under current FDA regulations, the Act grants the first 
company to file an ANDA with a paragraph IV certification a 180-day 
period during which it has the exclusive right to market a generic 
version of the brand name drug. No other generic manufacturer may 
obtain FDA approval to market its product until the first filer's 180-
day exclusivity period has expired. At the time the Respondents entered 
into the challenged agreement in 1997, the governing FDA regulations 
required that an ANDA applicant successfully defend the patent holder's 
patent suit in order to be entitled to this exclusivity.'' FTC Analysis 
at 2 (Emphasis added).
---------------------------------------------------------------------------
    We also believe that the Commission's attempt to employ ex post 
facto legal precedent to charge the respondents with anticompetitive 
intent underscores the need for absolute clarity should this Committee 
consider making any significant revisions of existing law. It took 
fourteen years for Mova to arise from the seemingly clear and 
uncomplicated language of HatchWaxman. It would be a shame if, in 
attempting to clarify and simply Hatch-Waxman at this date, this 
Congress were to include language that might serve as a trap from the 
unwary in the future.
    aventis provided timely notice of the hmr/andrx stipulation and 
      agreement to the public and to the federal trade commission.
    During her oral remarks, Molly Boast, Director of the FTC's Bureau 
of Competition suggested in several different ways that it was 
difficult for the Commission to learn of settlements arising in 
pharmaceutical patent cases and that legislation was needed to address 
this problem. While Ms. Boast did not specifically suggest that Aventis 
or Andrx had been remiss in terms of providing timely public notice or 
not cooperating with the Commission, we feel it appropriate to note for 
the record Aventis' predecessor provided both the public and the 
Commission with timely notice of the HMR/Andrx Stipulation and 
Agreement.
    Regarding public disclosure, HMR issued a press release within 
hours of the execution of the Stipulation and Agreement on September 
24, 1997, generally describing the agreement. While the press release 
did not contain the competitively sensitive details of the agreement, 
it did recite the fact that Andrx had agreed to refrain from marketing 
its generic product during the pendency of litigation, that HMR had 
agreed to make substantial ``lost profits'' payments to Andrx in the 
event that it lost the patent case, and that non-refundable interim 
payments were also part of the transaction.
    Within days of the document's execution, the Commission received a 
copy of the Stipulation and Agreement. It is worth noting that the 
Commission had the Stipulation and Agreement in its possession for 
nearly ten months before the agreement became effective on July 9, 
1998. Neither the Commission nor its staff registered and indeed, it 
was not until after the parties to the stipulation had resolved their 
litigation, some nineteen months later, that the Commission staff first 
shared its preliminary concerns about the transaction with the parties.
    As a matter of corporate policy, Aventis adheres to the view that 
information concerning potentially significant events affecting the 
company should be promptly shared with its stockholders and the public 
and that reasonable requests for documents from federal regulatory 
agencies should receive an affirmative and timely response, providing, 
of course that appropriate safeguards are in place to protect the 
confidential and competitively sensitive terms of such transactions. To 
the extent that the Congress believes that some generally applicable 
codification of this policy might be in order, Aventis would not 
object, provided that such a notification system would not impose 
additional burdens on parties seeking to resolve patent litigation and 
that it contained a workable system to protect competitively sensitive 
materials from disclosure under F01A or other federal disclosure 
statutes.
     pharmaceutical patent settlements--looking towards the future
    Looking forward, we believe it unlikely that Congress or the 
federal agencies will see transactions in the future like those that 
have captured so many headlines over the past several years. 
Responsible pharmaceutical companies focus their attention on what is 
transpiring in the laboratory and in the marketplace. Right or wrong, 
pharmaceutical companies would prefer to avoid the time, expense, and 
distractions occasioned by a Commission investigation. For that reason, 
the Commission's docket remains focused on a group of transactions that 
arose before the preclusive effect of the first-filer's 180-day 
exclusivity rights were established by the D.C. Circuit in Mova in the 
spring of 1998.
    On a going forward basis, we believe that companies will 
consciously steer clear of the kinds of transactions that might provoke 
the Commission's interest. Doubtlessly, this caution likely will mean 
that some cases that should have been settled will not be settled and 
that consumer access to certain generic pharmaceuticals will be delayed 
as patent litigation grinds on. These are the unavoidable consequences 
of the enforcement decisions that have been made by federal and state 
agencies.
    We believe that the Commission's Pharmaceutical Industry Study 
likely will produce some information useful to Congress, the federal 
agencies, and the regulated community in understanding how changes in 
the legal and regulatory environment have affected the manner in which 
research pharmaceutical companies secure and defend their intellectual 
property rights. But while gathering this information is worthwhile, it 
is not enough. We believe that it is also important to review and 
reconsider some of the legal and economic assumptions that have 
heretofore driven much of this debate.
    For example, in the current version of the ``Antitrust Guidelines 
for the Licensing of Intellectual Property Rights,'' U.S. Department of 
Justice/Federal Trade Commission (April 6, 1995)(``IP Guidelines''), 
the relationship between a patent holder and a party not possessing 
patent rights is deemed to be vertical with respect to the patented 
technology, even though the patent holder and the party seeking to 
acquire rights to that patent are horizontal competitors in the market 
for their finished goods. See EP Guidelines, Section 3.3, especially 
Example 5. By correctly describing this relationship as vertical, the 
EP Guidelines expressly permit the patent holder to license his 
patented technology to his erstwhile competitor without running the 
risk of being accused of engaging in prohibited conduct with a 
horizontal competitor.
    Most often, a competitor will recognize his need to obtain a 
license from the patent holder only after patent infringement 
litigation has been threatened or initiated. In our view, the logic set 
forth in the IP Guidelines is as applicable to defining the 
relationship between a patent holder and a potentially infringing party 
when those parties are engaged in litigation as it is when they are 
not. By regarding litigants in a good-faith patent dispute as being 
vertically related, the IP Guidelines permit the parties to settle 
their dispute without being charged with engaging in illegal horizontal 
activity.
    However, at least one FTC staffer has publicly voiced his view that 
good-faith disputants in pharmaceutical patent cases must necessarily 
be viewed as horizontal competitors or at least potential horizontal 
competitors in assessing patent settlements. While we doubt very 
seriously whether this view is shared at the Commission level, this 
sort of statement leaves companies vulnerable to charges in private 
litigation that their good faith patent settlement represents nothing 
more than a market allocation agreement between horizontal 
competitors--a per se violation of the antitrust laws. Intended or not, 
this sort of half-baked policy statement creates a minefield for those 
who might otherwise be disposed to settle a pharmaceutical patent case. 
By increasing the potential costs and risks of settlement, policy 
statements like these make it more likely that marginal cases will 
remain in litigation--a result that serves no one's interests.
    Comparable challenges are presented on the economic front. For 
example, one widely-quoted former FTC staffer recently suggested in a 
paper on pharmaceutical patent settlements that:

        A payment flowing from the innovator to the challenging generic 
        . . . may indicate whether the generic firm has the incentive 
        or ability to enter the market or to pursue fully the 
        litigation. In essence, the generic firm may have chosen the 
        ``quiet life,'' at least temporarily, of an amicable 
        settlement, rather than the hard life of competition. This 
        situation would be troublesome particularly, where, as FDA 
        observed, ``the economic gains to the innovator from delaying 
        generic competition exceed the potential economic gains to the 
        generic applicant from 180 days of market exclusivity.''

    David A. Balto, Pharmaceutical Patent Settlements: The Antitrust 
Risks, 55 Food & Drug L.J. 321, 355 (2000) (quoting FDA Proposed Rule 
Regarding 180-Day Generic Drug Exclusivity for Abbreviated New Drug 
Applications, 64 Fed. Reg. 42,873, 42,882-3) .
    The problem with this statement is that in the real world, the 
economic value of a patent to the innovator will always exceed the 
potential economic gains that a generic company might enjoy were it 
able to enter the market with a non-infringing product. Where a generic 
sells at a price point 60% and 70% of the price of the branded product, 
the loss of revenue to the innovator is always much greater than the 
revenue gained by the generic company, regardless of whether the 
generic enjoys 180 days of market exclusivity or not. So the 
``particularly troublesome'' economic factor that causes this 
commentator particular concern is present in every patent infringement 
dispute involving a patent holder and a first-filer generic.\3\
---------------------------------------------------------------------------
    \3\ To address the problem of generic companies preferring the 
``quiet life'' of settlement to the ``hard life of competition,'' we 
believe that a proper focus for the antitrust agencies would include an 
examination of whether the generic company's receipts in settlement 
exceed what it could enjoy were it to enter the market with a non-
infringing good. If the generic company's settlement receipts approach 
what it might expect to receive in the market place, then some 
additional scrutiny may be warranted. On the other hand, if the 
receipts in settlement are but a fraction of what it would likely earn 
in the market, then the opposite presumption--that the generic company 
is concerned about the merits of the underlying patent case and that 
the settlement is not objectionable--should be drawn.
---------------------------------------------------------------------------
    In our view, these examples are good illustrations of the fact that 
many of the legal and economic assumptions informing the public debate 
and employed in reviewing these cases are inadequate and incomplete. We 
respectfully submit that working through these legal and economic 
issues in a reasoned and objective manner is as important to this 
process as the information gathering of the Commission's Pharmaceutical 
Industry Study. We hope that the Commission's study will be only the 
beginning of a more substantial effort on the part of the federal 
regulatory and law enforcement authorities to develop better tools to 
enforce the law, provide guidance to industry, and inform this 
important debate before the Congress.

                                

  Statement of Hon. Maria Cantwell, a U.S. Senator from the State of 
                               Washington

    Thank you, Mr. Chairman. Today's hearing is one of the most 
important--and most fascinating--consumer interest hearings before the 
Committee this year.
    Americans are becoming ever more reliant on more effective--and 
more complicated--drug therapies. Total health care spending in the 
United States totaled more than $1.2 trillion in 1999, an increase of 
5.6 percent from the previous year, according to a March report 
released by the Health Care Financing Administration. And prescription 
drug expenditures are the fastest growing segment of the health care 
market--with spending for drug therapies rising nearly 17 percent that 
year alone. Drug expenditures in the United States rose from about $5.5 
billion in 1970 to $100 billion in 1999, and the report predicts that 
prescription drug expenditures will continue to increase faster than 
any other category of health care spending throughout the next ten 
years. Those two factors--great dependency on drug therapies and 
skyrocketing drug prices--put us on a collision course in our efforts 
to provide affordable health care.
    There is no doubt in my mind that the patent rights and privileges 
enjoyed by the pharmaceutical companies fuel the drive for research and 
development in this area. And one day soon I hope to see a cure for 
Alzheimer's, cancer, or cystic fibrosis. Furthermore, this debate is 
not about pitting research and development against consumer protections 
because these issues should go hand-in-hand.
    This is why, almost 20 years ago, Chairman Hatch worked to create a 
balanced law to encourage innovation in the pharmaceutical industry 
while facilitating the speedy introduction of lower-cost generic drugs. 
But frankly, the reports that name-brand companies have exploited the 
law and allegedly paid-off their generic opponents, distress me.
    Congress is trying to take a reasoned and rational approach to drug 
price competition, and I am very concerned that companies may be taking 
the law Congress wrote for the benefit of both business and consumers 
for their advantage alone. It is outrageous that buying off generic 
settlements could be a calculated business expense in the 
pharmaceutical marketplace.
    Generic medicines account for 42 percent of all prescriptions 
dispensed in America and on average are put on the market at 75 percent 
of the cost of their name-brand rivals. Two hundred drug patents are 
set to expire over the next five years--representing a loss of 
approximately $28 billion to name-brand pharmaceutical companies. This 
is a key time for this Committee to examine actions by the 
pharmaceutical industry intended to prevent generics from becoming 
available at lower costs to consumers. We are beginning to see 
indications that the practice of using secret, and possibly illegal, 
deals is much more common within the industry than previously known.
    Despite the fact that ``Hatch-Waxman'' is truly landmark 
legislation, as with a lot of legislation, industry officials have 
learned over time how to get around the letter, if not the spirit, of 
the law. By extending FDA and FTC authority to investigate how wide-
spread this practice is, Senator Leahy's bill is certainly a step 
toward ending these collusive practices.
    Interject these facts into the political debate surrounding the 
need to provide Medicare coverage of prescription drugs for our elderly 
and disabled, and we have a debate to be rivaled by few others. Only 
thirty percent of Medicare beneficiaries have prescription drug 
coverage and the average senior spends $1,100 a month on prescriptions.
    Thank you, Mr. Chairman for convening this hearing so that we may 
learn more about this problem. I am hopeful we can work together to 
find a solution.

                                

Statement of Hon. Russell D. Feingold, a U.S. Senator from the State of 
                               Wisconsin

    Mr. Chairman, thank you very much for holding this hearing. This is 
a very important issue for consumers of prescription drugs in this 
country. It goes to the integrity of our antitrust laws and the Hatch-
Waxman Act, which I know you feel very strongly about.
    There is mounting evidence that drug companies are attempting to 
deprive consumers of the option of less expensive generic drugs by 
paying those companies to delay development or sales of competing 
drugs. The beauty of Sen. Leahy's bill, which I am proud to cosponsor, 
is that it doesn't change the substantive law in any way. It doesn't 
modify the Hatch-Waxman Act, or the antitrust laws, or reach any 
judgment about whether a particular agreement violates those statutes. 
It simply requires that agreements between brand name manufacturers and 
potential generic competitors that could limit the research, 
development, manufacture or marketing of a competing generic drug be 
provided to the Federal Trade Commission or the Department of Justice 
within 10 days of signing. It is my understanding that the agreements 
will remain confidential so there is no argument that companies will be 
forced to release trade secrets.
    I believe this simple step of throwing some sunshine on these 
agreements will be a significant deterrent to anti-competitive 
agreements. It will allow the FTC and DOJ to determine whether the 
agreements violate the antitrust laws or the Hatch-Waxman Act. And it 
will ultimately lead to lower prices for consumers.
    I hope today's testimony will shed some light on the kinds of 
agreements that might be exposed by this bill, and how this bill will 
assist the antitrust enforcement agencies to protect the public. And I 
hope that after the hearing, the Committee will move expeditiously to 
mark the bill up and send it to the Senate floor. This is a rare 
instance where the Congress can save consumers potentially hundreds of 
millions of dollars through simple, commonsense, legislation that poses 
no possibility of financial harm to law abiding drug companies.
    Again, I thank you, Mr. Chairman, for holding this hearing and 
beginning the process of enacting this legislation. And I congratulate 
Sen. Leahy and Sen. Kohl for this bill. I am proud to support it.

                                

 Statement of the Pharmaceutical Research and Manufacturers of America

    The Pharmaceutical Research and Manufacturers Of America (PhRMA) is 
pleased to provide a statement of its views in connection with the 
Committee's hearing on the antitrust implications of patent 
settlements. PhRMA represents the country's leading research-based 
pharmaceutical and biotechnology companies, which are devoted to 
inventing medicines that allow patients to lead longer, healthier and 
more productive lives. Investing over $30 billion this year in 
discovering and developing new medicines, PhRMA companies are literally 
leading the way in the search for cures, just as hoped for by Congress 
when Hatch-Waxman was passed in 1984.
                          The Hatch-Waxman Act
    The Hatch-Waxman Act had the dual objectives of encouraging 
pharmaceutical innovation and easing the entry of generic drugs into 
the market. In PhRMA's view, HatchWaxman has been successful in 
achieving its objectives. Spending on research by PhRMA members is now 
many times higher than it was before passage of the Act, and important 
new therapies continue to be introduced. At the same time, a generic 
drug industry has been created and is now thriving. The generics' share 
of the prescription drug market (by countable units) has grown from 18 
percent in 1984 to over 47 percent by 1999. Moreover, it must be 
underscored that the ``$71 billion'' in savings for consumers that some 
advocates of legislative change to Hatch-Waxman have touted (see press 
release of May 1, 2001 from the offices of Senators Schumer and McCain) 
were calculated based on coming patent expirations and generic 
applications provided for under the current provisions of Hatch-
WaxTnan.
    In his opening statement for this hearing, Chairman Hatch 
acknowledged that tine twin goals of the HatchWaxman Act have been 
achieved. Although the Chairman listed a number of issues that have 
been raised about the Act, and suggested that they need attention, he 
cautioned that the legislation was carefully balanced and that changes 
that tilt the balance should not be made. PhRMA concurs with that 
assessment.
    Of course, after 17 years, any statute, no matter how successful, 
should be reviewed to see how it is working and whether--flaws have 
developed that need correction. But many of the asserted flaws in the 
Hatch-Waxman Act can be addressed under existing law without amending 
Hatch-Waxmmi in ways that may lead to unintended and undesirable 
consequences. A prime example of an alleged defect that can be remedied 
without new legislation is the specific topic of this hearing--patent 
dispute settlements.
                       Patent Dispute Settlements
    Recently, there has been publicity concerning possible antitrust 
violations in settlements of patent disputes between generic and 
innovator pharmaceutical companies. It has been alleged that these 
settlements have resulted in higher prescription drug prices to 
consumers. As a result, there are efforts this yeas in Congress to 
reopen Hatch-Waxman.
    Much of the concern over alleged abuses centers on a provision in 
Hatch-Waxman related to generic drug exclusivity. That provision 
provides 180 days of exclusivity to certain generic applicants who 
challenge innovator patents. It has been alleged that, in some cases, a 
generic manufacturer and the patent holder have settled cases by using 
the 180-day provision in a way that delays the approval of generic 
products of manufacturers who are not parties to the settlement.
    PhRMA has no view on whether the particular cases that have been 
cited do or do not violate antitrust laws. That is a question best left 
to the agencies and the courts. But fhRMA does believe that the highly 
successful and highly complex Hatch-Waxman Act should not be changed 
lightly on the basis of a very small number of allegedly problematic 
cases. If Congress changes the statute because of the current clamor, 
it seriously risks triggering the law of unintended consequences, which 
could, unless great care is taken, result in less research or fewer 
generic drugs.
    Since 1984, there have been 8,259 generic applications submitted to 
the Food and Drug Administration (FDA). According to FDA, more than 94 
percent of these (some 7,781) involved no patent issues; less than 6 
percent involved a `paragraph IV'' certification. To place the subject 
of the May 24 hearing in perspective, only 3 innovator-generic 
agreements (involving less than 0.1 percent of generic applications) 
are reportedly alleged by the Federal Trade Commission (FTC) to be 
involved iii inappropriate patent dispute settlements--matters which 
the FTC has itself settled with consent decrees. There is also private 
litigation involving some settlements. Further, the FTC is undertaking 
an extensive investigation in this area, with a report due later this 
year. If there is a problem, there is reason to believe it is small and 
the iudicial and regulatory systems are dealine with it.
    Also, in August 1999, the FDA issued a proposed rule to address 
problems it perceived in the 180-day exclusivity rule. The proposal 
would require an applicant with the right to 180 days of exclusivity to 
begin marketing within 180 days of approval of a second generic or lose 
its exclusivity. FDA's proposal is designed to limit delays resulting 
from patent dispute settlements, among other purposes. To help resolve 
the issue of patent dispute settlements, FDA should finalize that rule 
in the near future after any appropriate changes based on the public 
comments.
    PhRMA urges the Committee to take great care when dealing with the 
Hatch-Waxman Act. Congress should not hurriedly act to change this 
important and complex law by amending the 180-day exclusivity rule or 
other provisions. The number of alleged abuses is very small, and the 
system seems to be dealing with the alleged abuses adequately. PhRMA 
encourages the Committee, and the Congress as a whole, to let the FDA 
and FTC actions take their course, and not rush to judgment.
                             The FTC Study
    Although PhRMA believes that Congress should await the FTC study 
before reaching mzy conclusions about the need for new legislation, we 
are concerned whether the design of the study, as outlined in the 
testimony in this hearing, will provide the kind of objective analysis 
that would assist Congress. Although Hatch-Waxman was designed to 
balance the public interest in both innovative research and lower drug 
prices--and the FTC testimony pays lip service to those objectives--the 
study seems slanted toward finding obstacles to the introduction of 
generic drugs.
    Thus, in examining the 30-month stay provision in Hatch-Waxman, 
which is the provision allowing innovator companies to protect their 
patent rights, the only stated objective of the FTC study is to 
determine whether the stprovision has influenced the development of 
generic drums competition. Obviously it has, since a statutory 
provision delayiiiFDA approval of generic drugs nendina patent 
litigation has that effect as its intended result. The value ofthe 
30month stav and its related procedure for patent litigation riot to 
FDA approval ofalle fnfringiL7g products cannot properly be analyzed 
solely by reference to their effect on generic drug competition; they 
must also be analvred by reference to the need to protect, patent 
holders until the courts have spoken. The procedure for patent 
litigation, including the 30-month stay, was included to prevent 
judgment-proof generic drug companies from incurring huge damages and 
destroying the innovator's market through sale of an infringing 
product.
    Similarly, the FTC testimony questions the filing of citizen 
petitions at the FDA related to generic drugs. Although the FTC 
acknowledges that First Amendment rights are implicated, it endorses 
FDA's pending proposed regulation to restrict the use of citizen 
petitions. Under the proposal, citizen petitions could be filed only if 
they proposed general policies and not if they raised scientific or 
other pertinent issues regarding specific products, such as proposed 
generic drugs. The FTC testimony characterizes FDA's inappropriately 
restrictive proposal as limiting the citizen petition process to 
``legitimate purposes'' and as ``limiting the ability of firms to use 
the process solely to hinder competitors.'' The FTC's conclusion, prior 
to completing its study, that the filing of a citizen petition 
addressing scientific issues raised by a particular product necessarily 
and invariably represents an illegitimate attempt to hinder competitors 
does not inspire confidence that the study will be an objective 
analysis. In our view, FDA should welcome, rather than reject, valid 
scientific data submitted via the petition process.
    The FTC testimony also announced that it had itself filed a citizen 
petition with FDA in connection with its study. The petition, in the 
form of a May 16 letter, seeks FDA's detailed interpretations of the 
regulations governing which patents are eligible for listing in FDA's 
Orange Book. This petition is also of concern. The FTC petition does 
not seek pre-existing interpretations from FDA--since there are few if 
any such interpretations in existence--but asks FDA to issue new 
interpretations consistent with the FTC's reading of the rules. If 
there are ambiguities in the regulations that have not been clarified 
by FDA, one would think that an objective FTC study would point to 
those ambiguities and suggest clarification if they have created 
problems. Instead, it appears that the study's authors want to develop 
a case, based on after-the-fact pronouncements from FDA, that certain 
patents were improperly submitted to FDA for publication in the Orange 
Book. This approach would not seem to be consistent with an objective 
review of the HatchWaxman procedures.
                               Conclusion
    PhRMA welcomes analysis of the Hatch-Waxmnan Act and its 
implementation. The possible problems that have been identified should 
be carefully anal objectively studied before any legislative solution 
is undertaken. Many of the problems can and are being addressed through 
existing mechanisms without the need for amending Hatch-Waxman. It is 
extremely important that the balance in this important legislation not 
be upset by ill-considered amendments.



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