    [House Hearing, 110 Congress]
    [From the U.S. Government Publishing Office]

            PROTECTING CONSUMER ACCESS TO GENERIC DRUGS ACT OF 2007

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

                                    HEARING

                                   BEFORE THE

                        SUBCOMMITTEE ON COMMERCE, TRADE,
                            AND CONSUMER PROTECTION

                                     OF THE

                        COMMITTEE ON ENERGY AND COMMERCE
                            HOUSE OF REPRESENTATIVES

                           ONE HUNDRED TENTH CONGRESS

                                 FIRST SESSION

                                       ON

                                   H.R. 1902

                                   __________

                                  MAY 2, 2007

                                   __________

                               Serial No. 110-39

          Printed for the use of the Committee on Energy and Commerce

                            energycommerce.house.gov

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                        COMMITTEE ON ENERGY AND COMMERCE

                      JOHN D. DINGELL, Michigan, Chairman

    HENRY A. WAXMAN, California          JOE BARTON, Texas
    EDWARD J. MARKEY, Massachusetts          Ranking Member
    RICK BOUCHER, Virginia               RALPH M. HALL, Texas
    EDOLPHUS TOWNS, New York             J. DENNIS HASTERT, Illinois
    FRANK PALLONE, Jr., New Jersey       FRED UPTON, Michigan
    BART GORDON, Tennessee               CLIFF STEARNS, Florida
    BOBBY L. RUSH, Illinois              NATHAN DEAL, Georgia
    ANNA G. ESHOO, California            ED WHITFIELD, Kentucky
    BART STUPAK, Michigan                BARBARA CUBIN, Wyoming
    ELIOT L. ENGEL, New York             JOHN SHIMKUS, Illinois
    ALBERT R. WYNN, Maryland             HEATHER WILSON, New Mexico
    GENE GREEN, Texas                    JOHN B. SHADEGG, Arizona
    DIANA DeGETTE, Colorado              CHARLES W. ``CHIP'' PICKERING,
        Vice Chairman                    Mississippi
    LOIS CAPPS, California               VITO FOSSELLA, New York
    MIKE DOYLE, Pennsylvania             STEVE BUYER, Indiana
    JANE HARMAN, California              GEORGE RADANOVICH, California
    TOM ALLEN, Maine                     JOSEPH R. PITTS, Pennsylvania
    JAN SCHAKOWSKY, Illinois             MARY BONO, California
    HILDA L. SOLIS, California           GREG WALDEN, Oregon
    CHARLES A. GONZALEZ, Texas           LEE TERRY, Nebraska
    JAY INSLEE, Washington               MIKE FERGUSON, New Jersey
    TAMMY BALDWIN, Wisconsin             MIKE ROGERS, Michigan
    MIKE ROSS, Arkansas                  SUE WILKINS MYRICK, North Carolina
    DARLENE HOOLEY, Oregon               JOHN SULLIVAN, Oklahoma
    ANTHONY D. WEINER, New York          TIM MURPHY, Pennsylvania
    JIM MATHESON, Utah                   MICHAEL C. BURGESS, Texas
    G.K. BUTTERFIELD, North Carolina     MARSHA BLACKBURN, Tennessee
    CHARLIE MELANCON, Louisiana
    JOHN BARROW, Georgia
    BARON P. HILL, Indiana

                                     ______

                               Professional Staff

                     Dennis B. Fitzgibbons, Chief of Staff

                       Gregg A. Rothschild, Chief Counsel

                          Sharon E. Davis, Chief Clerk

                     Bud Albright, Minority Staff Director

                                      (ii)
            Subcommittee on Commerce, Trade, and Consumer Protection

                       BOBBY L. RUSH, Illinois, Chairman
    JAN SCHAKOWSKY, Illinois             CLIFF STEARNS, Florida,
        Vice Chairman                         Ranking Member
    G.K. BUTTERFIELD, Georgia            J. DENNIS HASTERT, Illinois
    JOHN BARROW, Georgia                 ED WHITFIELD, Kentucky
    BARON P. HILL, Indiana               CHARLES W. ``CHIP'' PICKERING,
    EDWARD J. MARKEY, Massachusetts          Mississippi
    RICK BOUCHER, Virginia               VITO FOSSELLA, New York
    EDOLPHUS TOWNS, New York             GEORGE RADANOVICH, California
    DIANA DeGETTE, Colorado              JOSEPH R. PITTS, Pennsylvania
    CHARLES A. GONZALEZ, Texas           MARY BONO, California
    MIKE ROSS, Arkansas                  LEE TERRY, Nebraska
    DARLENE HOOLEY, Oregon               SUE WILKINS MYRICK, North Carolina
    ANTHONY D. WEINER, New York          MICHAEL C. BURGESS, Texas
    JIM MATHESON, Utah                   MARSHA BLACKBURN, Tennessee
    CHARLIE MELANCON, Louisiana          JOE BARTON, Texas (ex officio)
    JOHN D. DINGELL, Michigan (ex
        officio)

                                 C O N T E N T S

                                  ----------
                                                                       Page
    Hon. Bobby L. Rush, a Representative in Congress from the State
      of Illinois, opening statement.................................     1
    Hon. Cliff Stearns, a Representative in Congress from the State
      of Florida, opening statement..................................     3
    Hon. John D. Dingell, a Representative in Congress from the State
      of Michigan, prepared statement................................     4
    Hon. Marsha Blackburn, a Representative in Congress from the
      State of Tennessee, opening statement..........................     6
    Hon. Henry A. Waxman, a Representative in Congress from the State
      of California, opening statement...............................     7
    Hon. G.K. Butterfield, a Representative in Congress from the
      State of North Carolina, prepared statement....................     9
    H.R. 1920, To prohibit brand name drug companies from
      compensating generic drug companies to delay the entry of a
      generic drug into the market, and for other purposes...........    13

                                   Witnesses

    Jon Leibowitz, Commissioner, Federal Trade Commission,
      Washington, DC.................................................    20
        Prepared statement...........................................    23
    Barry Sherman, Ph.D., chief executive officer, Apotex,
      Incorporated...................................................    61
        Prepared statement...........................................    64
    C. Scott Hemphill, associate professor of law, Columbia
      University Law School, New York, NY............................    69
        Prepared statement...........................................    71
    Phillip A. Proger, partner, Jones Day, Washington, DC............    89
        Prepared statement...........................................    91
    Michael Wroblewski, project director, Consumer Education and
      Outreach, Consumers Union......................................   120
        Prepared statement...........................................   122
    Theodore C. Whitehouse, partner, Willkie Farr & Gallagher LLP,
      Washington, DC.................................................   136
        Prepared statement...........................................   138

       H.R. 1902, PROTECTING CONSUMER ACCESS TO GENERIC DRUGS ACT OF 2007

                                  ----------

                             WEDNESDAY, MAY 2, 2007

                  House of Representatives,
                Subcommittee on Commerce, Trade
                               and Consumer Protection,
                              Committee on Energy and Commerce,
                                                        Washington, DC.
        The subcommittee met, pursuant to call, at 3 p.m. in room
    2123, Rayburn House Office Building, Hon. Bobby L. Rush
    (chairman) presiding.
        Present: Representatives Butterfield, Barrow, Hill,
    Gonzalez, Matheson, Dingell, Stearns, Pitts, Bono, Burgess, and
    Blackburn.
        Staff present: Angela Davis, Valerie Baron, Consuela
    Washington, Christian Fjeld, Judith Bailey, Shannon Weinberg,
    Brian McCullough, Will Carty, and Matthew Johnson.

     OPENING STATEMENT OF HON. BOBBY L. RUSH, A REPRESENTATIVE IN
                  CONGRESS FROM THE STATE OF ILLINOIS

        Mr. Rush. The Subcommittee on Commerce, Trade and Consumer
    Protection will come to order. We are convening this hearing to
    discuss H.R. 1902, Protecting Consumer Access to Generic Drugs
    Act of 2007.
         I will recognize myself for 5 minutes for an opening
    statement, and then we will proceed with the ranking member Mr.
    Stearns. And as Members come in, then they will be recognized
    for opening statements also.
        Today's hearing focuses on an alarming practice in the
    pharmaceutical industry that is costing American consumers
    billions of dollars. Brand name drug companies are paying
    generic drug companies to stay out of the marketplace.
    Consequently, they are denying consumers the considerable
    savings they should otherwise receive from generic competition
    in their prescription drug costs. This practice of pay for
    delay is known as exclusion payment or reverse consideration,
    and they are features in legal settlements between brand name
    and generic drug companies in their patent disputes.
        It is worth noting from the outset that these exclusion
    payments are unique to the U.S. pharmaceutical industry. In the
    commercial world, outside of drugs, patent disputes are settled
    by the accused infringer paying a royalty fee to the patent
    holder in order to legally market a product. Exclusion payments
    in the pharmaceutical world turned this concept on its head.
    The patent holder or the brand name drug company is paying the
    accused patent infringer, the generic, to stay off the market.
        It is no accident that these types of anticompetitive,
    anticonsumer agreements are prevalent in the pharmaceutical
    industry, but absent everywhere else. The unique regulatory
    framework of the groundbreaking Hatch-Waxman Act set the table
    for drug companies to game the system and thwart the law's
    intent.
        By design Hatch-Waxman is supposed to strike a balance.
    Brand name drug companies retain incentives for innovation, but
    generic challenges are encouraged to aggressively challenge
    weak patents and bring their products to market.
        The first generic company to successfully challenge a brand
    name's patent and bring its product to market is rewarded with
    a 180-day period of exclusivity in which only that generic
    company is allowed to compete with the brand name company. As
    such, it is easy to see why the brand name and generic
    companies would settle their dispute. The brand name and
    generic companies can simply stop competing with each other,
    take the savings that consumers will receive from their
    competition, and divide it up among themselves. It is easy
    money.
        In response to these unique anticonsumer agreements,
    Chairman Waxman and I have introduced a bill to crack down on
    exclusion payments and ensure that the purpose of Hatch-Waxman
    is fulfilled. H.R. 1902, the Protecting Consumer Access to
    Generic Drugs Act, creates a bright line solution and bans
    reverse consideration agreements in drug patent settlements.
    This is the legislative approach recommended by the Federal
    Trade Commission.
        I want to emphasize that this bill does not in any way
    affect any other kind of legal settlement. So the complaint
    that the Rush-Waxman bill somehow squashes the ability of brand
    name and generic drug companies to settle their disputes is
    simply not true. Our bill zeroes in on a very specific type of
    legal settlement that is completely unique to the
    pharmaceutical industry. Moreover, we are addressing a problem
    that is not trivial and is costing the consumers and Government
    programs billions upon billions of dollars.
        Let me note here that since the FTC started challenging
    these anticonsumer practices, every single commissioner, 11 in
    all, Republican, Democrat and Independent, have supported these
    enforcement efforts. Under this bill drug companies are still
    free to settle their disputes like all other companies do. The
    bill provides exceptions to the ban and authorizes the FTC to
    promulgate interpretive rules and additional carve-outs if the
    Commission believes that such exemptions serve consumer
    interest. As such, this is in no way a radical bill, and we are
    attempting to legislate with a scalpel and not a meat ax.
        Lastly, let me briefly address the issue of the regulatory
    bottleneck. Currently under Hatch-Waxman a generic company can
    park its 180-day exclusivity and effectively preclude other
    generic companies from seeking approval from the FDA and
    entering the market. The Rush-Waxman bill deals with this
    bottleneck provision as part of a larger solution to the
    anticompetitive nature of reverse consideration legal
    settlements. However, I have pledged to work with my colleague
    and friend Chairman Pallone of the Health Subcommittee to
    address effectively this issue since it technically falls under
    the Health Subcommittee's jurisdiction.
        While I believe that clearing the regulatory bottleneck is
    an important part of the overall solution, I want to work
    constructively with Chairman Pallone to ensure that we craft a
    careful and thoughtful piece of legislation.
        Lastly, I want to welcome our guests who are appearing
    before us today. As chairman of the subcommittee, I intend for
    this hearing to serve as a serious policy discussion and as a
    first step toward correcting a market failure that is costing
    American consumers billions of dollars in prescription drug
    calls.
        Thank you.
         And now I'll recognize the ranking member of the
    subcommittee Mr. Stearns.

     OPENING STATEMENT OF HON. CLIFF STEARNS, A REPRESENTATIVE IN
                   CONGRESS FROM THE STATE OF FLORIDA

        Mr. Stearns. Thank you, Mr. Chairman. And it is nice that
    we are here to discuss this bill. And I understand the Federal
    Trade Commission, Mr. Leibowitz, is endorsing this idea. He has
    endorsed the bill, so to speak.
        I think the intent of the legislation, I think, as ranking
    member and my colleagues on this side would say that we support
    that intent to bring generic drugs to market sooner, benefiting
    our customers with greater choices and lower prices. But
    between the cup and the lip, there are some things that we
    think are some problems. And I do have some concern, Mr.
    Chairman, about this bill, and I thought I would just outline
    these two concerns.
        These two pieces of legislation in concert will create
    disincentives for generic pharmaceutical companies to challenge
    brand drug patents. There is a strong incentive built into the
    Hatch-Waxman Act. That incentive was designed for a reason. The
    generic pharmaceutical companies needed strong encouragement to
    take on the financial burden of litigating a patent challenge.
    We know how expensive that is.
        Litigation on patent challenges can last for years, and
    legal fees reach into the millions of dollars for both parties.
    For a generic pharmaceutical company it is an impossible
    financial burden without a mechanism to ensure that they can
    recoup their investment if there is a successful patent
    challenge.
        In 1984, our colleagues wisely devised a 180-day marketing
    exclusivity period for the first patent challenger. Now, this
    180-day period is a carrot for generic pharmaceutical companies
    to challenge brand drugs. The first patent challenger will be
    the only generic pharmaceutical product on the market for 6
    months, an opportunity to recoup legal costs and an award of
    sorts for being the first company to put its neck out there.
        My colleagues, without this carrot, fewer generic
    pharmaceutical companies would be willing to bring a patent
    challenge, opting instead to wait until a brand drug's patent
    expires. This legislation will effectively nullify, in our
    opinion, that carrot. By triggering the countdown clock to a
    forfeiture of this 180 days by just a dismissal of a frivolous
    or meritless lawsuit by another generic pharmaceutical company,
    a first filer will be forced to launch their product at risk or
    lose a 180-day exclusivity period, which is their assurance for
    recouping their legal fees.
        If a generic pharmaceutical company launches their product
    prior to a court's determination that their challenge is
    successful or prior to a settlement with a brand pharmaceutical
    company permitting prepatent expiration marketing, then the
    generic pharmaceutical company is liable for triple damages for
    patent infringement. This would simply be too much risk for a
    publicly traded generic pharmaceutical company to challenge a
    patent without a guarantee for a return on their investment.
        The second part of this legislation bans cash or other
    compensation in settlements. I will admit such trades sound
    bad, but if we dig deeper, we find that these settlements are
    actually beneficial to consumers. Bear with me. Brand companies
    are not keeping generic companies off the market altogether.
    They are actually giving up some of their guaranteed monopoly
    time under their patent and bringing generic drugs to market
    much sooner than would otherwise occur. Just because money or
    other compensation is involved does not make the deal
    anticonsumer. Patent litigation is expensive. The outcomes are
    often uncertain, and the odds for success or failure are about
    even when you consider whether a generic drug launched results.
    Without additional compensation a generic pharmaceutical
    company would not settle for anything less than an immediate
    launch of their product in order to recoup their investment.
    However, brand drug companies have no reason to give an
    immediate launch date and would prefer to litigate to the end,
    delaying even further a launch of a generic drug.
        To interfere in private litigants' ability to settle is
    dangerous territory. Obviously we want to balance this interest
    with the consumer's best interest, but Congress has done that.
    Both the FTC and the Department of Justice have tools that
    challenge suspect settlements in court. The courts have
    reviewed so many settlements and have refused, refused, to
    throw out so many settlements sends a clear signal that we
    should not look at drug patent settlements as anticompetitive
    on their face. Furthermore, our goal should be to encourage
    settlements in any area of the law, not force cases to the
    bitter end, wasting not only limited judicial resources, but
    also wasting precious dollars in legal fees that could
    otherwise be used for research and development of new
    treatments and drugs.
        So I look forward to hearing from our distinguished panel
    of witnesses, and I thank you, Mr. Chairman, for holding this
    hearing.
        Mr. Rush. Thank you.
         I now recognize the chairman of the full committee Mr.
    Dingell.

    OPENING STATEMENT OF HON. JOHN D. DINGELL, A REPRESENTATIVE IN
                  CONGRESS FROM THE STATE OF MICHIGAN

        Mr. Dingell. Mr. Chairman, I begin by commending you and
    our colleague Mr. Waxman for introducing H.R. 1902 upon which
    we are having hearings today. Legislation is sorely needed.
    Consumers no longer receive full benefits that Congress
    intended when it passed the Hatch-Waxman Act in 1984. It
    appears that in instances drug companies may be making deals
    that thwart the goals of Hatch-Waxman and cost consumers
    billions of dollars in savings which the Congress intended that
    they should have.
        When Congress passed this legislation, it appreciated the
    growing importance of pharmaceuticals for treating a host of
    physical and mental conditions. The statute struck a careful
    balance between drug innovation and drug affordability.
        Mr. Chairman, there is more in my statement that I ask be
    put in the record by extension of remarks. I simply observe
    this is good legislation. Your leadership is of great value in
    this matter. I look forward to working with you to see to it
    this becomes law at an early time. And I thank you for your
    leadership again, Mr. Chairman.
        I yield back the balance of my time.
        [The prepared statement of Mr. Dingell follows:]

        Prepared Statement of Hon. John D. Dingell, a Representative in
                      Congress from the State of Michigan

         Let me begin by commending Chairmen Rush and Waxman for
    introducing H.R. 1902, the Protecting Consumer Access to
    Generic Drugs Act of 2007. It is sorely needed. Consumers no
    longer receive the full benefits that Congress intended when it
    passed the Hatch-Waxman Act in 1984. It appears that, in
    certain instances, drug companies may be making deals that
    thwart the goals of Hatch-Waxman and cost consumers billions of
    dollars in intended savings.
         When Congress passed Hatch-Waxman, it appreciated the
    growing importance of pharmaceuticals treating a host of
    physical and mental conditions. The statute struck a careful
    balance between drug innovation and drug affordability.
         On the one hand, it extended the patent protection for
    pharmaceuticals to encourage ``branded'' manufacturers to
    research and develop new drugs, given the lengthy Food and Drug
    Administration approval process. On the other hand, it crafted
    incentives to induce generic manufacturers to enter the market
    sooner to make lower-cost alternatives available to consumers.
    Among those incentives, the legislation encouraged generic
    companies to challenge potentially dubious patents and
    withstand infringement litigation by a branded company.
        The legislation has been successful. Consumers Union
    estimates that in 2006 the appearance on the market of new
    generic drugs as alternatives to just five ``blockbuster''
    drugs saved consumers over $6 billion.
        For some years now, however, we have learned that instead
    of continuing litigation, some generic entrants are accepting
    cash payments and other transfers of value to settle and stay
    out of the market. These settlements, called ``exclusionary
    payments'' or ``reverse payments,'' are a sweetheart deal for
    both brandeds and generics. Generics get paid even when they
    bring no product to the market. The brandeds pay less to the
    generics than the revenues they would lose when competing
    against a lower-cost rival.
         These settlements are bad deals for consumers. Drug
    companies are essentially pocketing the savings that Hatch-
    Waxman intended for consumers.
         Let's focus on some of the consumers left behind by these
    deals.
        One is the taxpayer. Through programs such as Medicare and
    Medicaid, the Government spends billions on drugs every year.
    In 2006, Government expenditures for prescription drugs were
    estimated to be $68 billion. By 2016, these estimates rise to
    more than $200 billion.
        Other consumers include employer heath plans sponsored by
    U.S. industry. Government and industry would save enormous sums
    if more generics were made available earlier in the
    marketplace, as the Hatch-Waxman Act had intended.
        H.R. 1902 endeavors to fix this problem. It will prevent
    exclusionary payments and restore Hatch-Waxman's goal of
    putting generic drugs on the market more quickly.
         Chairman Rush, I look forward to working with you as this
    legislation moves through the committee and the Congress.
                                  ----------

        Mr. Rush. Thank you, Mr. Chairman.
         We now recognize the gentleman from Texas Mr. Gonzalez.
        Mr. Gonzalez. Waive opening.
        Mr. Rush. The Chair now recognizes the gentleman from
    Georgia Mr. Barrow.
        Mr. Barrow. And I waive the opportunity to make an opening.
        Mr. Rush. Mr. Matheson is now recognized.
        Mr. Matheson. I waive opening.
        Mr. Rush. Now we will recognize the gentle lady from
    Tennessee Mrs. Blackburn.

    OPENING STATEMENT OF HON. MARSHA BLACKBURN, A REPRESENTATIVE IN
                  CONGRESS FROM THE STATE OF TENNESSEE

        Mrs. Blackburn. Thank you, Mr. Chairman. I want to thank
    you and our ranking member for holding today's hearing so that
    we can continue to explore the merits of H.R. 1902, the
    Protecting Consumer Access to Generic Drugs Act of 2007. The
    American people have greater access to lifesaving, low-cost
    prescription drugs today than at any other time in our modern
    history, and though my colleagues share strong opinions and may
    disagree on many issues surrounding prescription drugs, I truly
    think we can all agree that generic drug access is a net
    positive for our constituents and the consumers. And given the
    title of the legislation under consideration today and the fact
    that they are all cosponsors of H.R. 1902, I am sure that my
    colleagues on the other side of the aisle believe they are
    doing just that.
        What I want to point out is that sometimes the devil is in
    the details, Mr. Chairman, and I want to make certain that this
    committee acts deliberately before amending the landmark Hatch-
    Waxman Act patent dispute amendments of 1984. After all, the
    Hatch-Waxman Act amendments are largely responsible for the
    proliferation of generic pharmaceuticals in the marketplace.
    And without them many of our constituents would not enjoy the
    benefits of competition that are available to them today.
        These considerations guide my thinking with respect to the
    bill, and I do not take them lightly. That is not to say,
    however, that the relative proliferation of out-of-court
    settlements and patent disputes between generic and brand name
    pharmaceutical companies does not warrant attention. Far from
    it. The American people do have a right to understand why a
    patent holder, in this case the drug companies, would pay a
    settlement fee to a potential patent infringer, in this case a
    generic manufacturer, during a patent dispute. Such reverse
    payments, if you will, might defy logic to a casual observer
    given the fact they do not happen in any other American
    industry, something that is unique to the pharmaceutical
    industry. It might even appear that such settlements allow
    large drug companies to game the system or prevent generic
    drugs from coming to the market.
        If that is the case, as several of today's witnesses will
    suggest, the American people have a right to gripe. Yet my
    experience teaches me to remain cautious before jumping to such
    conclusions, Mr. Chairman, and I look forward to the expert
    testimony of our witnesses and their shedding some light on the
    situation.
        Thank you. And I yield back.
        Mr. Rush. I want to thank the gentle lady.
         It is the rule of this subcommittee that a nonmember will
    have an opportunity to testify before this committee after all
    members of the subcommittee have testified.
        And now it is my honored privilege to recognize the co
    sponsor of this bill and the Waxman of the original Hatch-
    Waxman Act, none other than our colleague from California Mr.
    Waxman, for an opening statement for 5 minutes. And I want to
    commend him on his unparalleled leadership in this particular
    endeavor.

    OPENING STATEMENT OF HON. HENRY A. WAXMAN, A REPRESENTATIVE IN
                 CONGRESS FROM THE STATE OF CALIFORNIA

        Mr. Waxman. Thank you very much, Mr. Chairman, and my
    colleagues. I want to thank you for holding this very important
    hearing. In 1984, when we drafted the Drug Price Competition
    and Patent Term Restoration Act, commonly known as the Hatch-
    Waxman law, we were trying to benefit consumers by lowering
    drug prices, and we did this by creating competition where
    there was none and ending the permanent monopolies that drug
    companies had enjoyed until that point.
        By almost any measure this law worked. It worked very well.
    It promoted competition, lowered drug prices. In fact, generic
    drugs, when they are available, lower drug prices by as much as
    90 percent.
        But there is evidence that the law could function more
    effectively for consumers. The fact is that in 2005 we still
    spent 10 times as much on brand name drugs, $229.5 billion,
    over the $22 billion we spent on generics. This simply
    illustrates we can do more to get generics on the market
    faster.
        The Federal Trade Commission, and I thank them very much
    for their excellent work, they highlighted a significant cause
    of this problem. In recent years generic and brand name
    companies have increasingly been entering into patent
    settlement agreements that the FTC believes have an
    anticompetitive effect. These settlement arrangements now
    frequently include agreements under which the brand companies
    pay the generic firms to keep their product off the market.
        Well, this averts the objectives of the law. One of the
    unique aspects of Hatch-Waxman is that it was intended not only
    to speed up generic drug approval, but to speed up resolution
    of patent disputes. Rather than wait until after approval to
    litigate patent infringement actions, Hatch-Waxman encourages
    patent challenges to begin before approval. The law also
    provides incentives for generic companies to undertake this
    protracted litigation.
        We gave the first generic company to challenge the brands
    patents 180 days of exclusive marketing. Our goal, our whole
    reason for this, was to hasten generic market entry for the
    benefit of the consumers. By rewarding generic companies to
    challenge patents that had no business blocking market entry
    either because they were invalid or not infringed, consumers
    could have access to low-cost generic drugs at the earliest
    possible moment.
        Anticompetitive settlements turned this fundamental goal of
    Hatch-Waxman on its head. We established an abbreviated
    regulated pathway to encourage generics to enter the market as
    soon as possible, not to authorize the companies to use that
    regulatory pathway as a means for sharing the brands' monopoly
    profits.
        The impact of these settlements is that they are contracts
    between two parties, generic and brand companies, to share the
    profits that are entirely paid by a third party. And the third
    party are the consumers, the insurance companies, the
    Government, and they pay those profits in the form of higher
    drug prices, yet consumers have no say in the terms of these
    contracts. As long as consumers bear the full cost of the later
    marketing date, there is little incentive for the parties to
    negotiate an earlier date. And economics is sometimes referred
    to as the moral hazard, an agreement in which parties are
    motivated to spend more money as long as it is someone else's
    money. Some courts have erroneously concluded that these
    agreements were condoned by Hatch-Waxman. They say that since
    the law created a situation in which generic firms could
    extract the settlement payments in exchange for delayed entry,
    that this was somehow the intent.
        Well, those courts are sorely mistaken. The use of Hatch-
    Waxman to prevent generic competition was very obviously not
    the intent of the law. As a result of their misunderstanding of
    the underlying intent of the law and the Supreme Court's
    refusal to look at this issue, Congress is now in a position in
    which we need to act to prevent the continued erosion of the
    principles of the law.
        I recognize we need to proceed with care. Some patent
    settlement agreements can provide benefits across the board.
    Settlements can allow the parties involved to avoid expensive
    protracted litigation. But it strikes me as a much more prudent
    thing to do to pass this legislation. If the Federal Trade
    Commission decides that other exceptions to this bright line
    test need to be made to enhance competition and benefit
    consumers, then FTC can implement those changes through
    rulemaking. In effect, the bill is designed to rid us of the
    bad settlements and leave us with the good. And I look forward
    to the testimony of the witnesses today, and I hope we can move
    expeditiously on this legislation.
        Thank you very much, Mr. Chairman and my colleagues.
        Mr. Rush. Thank you very much. This concludes opening
    statements. Any other statements for the record as well as the
    text of H.R. 1902 will be accepted at this time.
        [The prepared statement of Mr. Butterfield and H.R. 1902
    follows:]

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         Mr. Rush. And now the subcommittee will hear from the
    first panel. And the first panel is the Honorable Jon
    Leibowitz. He is a Commissioner of the Federal Trade
    Commission. Commissioner Leibowitz will testify on behalf of
    the FTC, which favors a strong legislative response to
    exclusion payment agreements. The Commission has been very
    aggressive in pursuing legal action against these agreements,
    and Commissioner Leibowitz will inform the subcommittee on why
    they are anticompetitive and bad for consumers.
        Before we hear testimony from the Commissioner, I will ask
    for unanimous consent to allow Commissioner Leibowitz to
    testify for 8 minutes instead of the usual and customary 5
    minutes. Without objection, so approved.
        Welcome, Commissioner.

        STATEMENT OF JON LEIBOWITZ, COMMISSIONER, FEDERAL TRADE
                               COMMISSION

        Mr. Leibowitz. Thank you, Chairman Rush; thank you,
    Chairman Waxman, Ranking Member Stearns, members of the
    subcommittee, so much for inviting the FTC to testify here on
    this lovely afternoon.
        Simply put, we believe H.R. 1902 is a fundamentally sound
    approach to eliminate the pay-for-delay settlement tactics
    employed by the pharmaceutical industry that could cost
    American consumers and the Federal Government billions of
    dollars annually. Obviously the Federal Government is a major
    purchaser of drugs.
        But let me start with the usual disclaimer. The written
    statement we submitted today represents the views of the
    Commission. My oral testimony does not necessarily reflect the
    views of any other Commissioner. And I ask unanimous consent to
    put the Commission's written statement into the record. And I
    thank you for the 8 minutes. I won't use all of it.
        There is particular urgency to pharmaceutical competition
    issues today. Recent appellate decisions are making it
    difficult, as Chairman Waxman pointed out, to challenge so-
    called exclusion payments and reverse payments; that is patent
    settlements in which the brand name drug firm pays the generic
    to stay out of the market. If these decisions are allowed to
    stand, drug companies will enter into more and more of these
    agreements, and prescription drug costs will continue to rise.
        Indeed, in the past year we have seen a dramatic increase
    in the types of deals, from none in fiscal year 2004 to more
    than a dozen in fiscal year 2006. These increased costs will
    burden individual consumers, they will burden American
    businesses, and they will burden the Federal Government, which,
    with a new Medicare Part D program, paid an estimated $68
    billion or 32 percent of the Nation's $215 billion in annual
    drug purchases last year.
        Now, when Congress enacted the Hatch-Waxman statute in
    1984, and we heard from one of the authors, this committee
    promoted speedy introduction of generics by encouraging
    challenges of invalid or narrow patents on branded drugs by
    providing additional protections for innovator firms. This
    statutory framework ensured that our pioneer drug companies
    remain the envy of the world, and they are, while also
    delivering enormous consumer savings.
        Generic entry prior to patent expiration has played an
    instrumental role in allowing Americans to find and to get the
    medicines that they need. The first generic usually enters the
    market at a 20 to 30 percent discount off the brand price. When
    other generic companies enter, the price can drop by 80 percent
    or more. Indeed, according to the Generic Pharmaceutical
    Association's own study, generic competition following
    successful patent challenges to just four, Prozac, Zantac,
    Taxol and Platinol, is estimated to save consumers more than $9
    billion alone. All those savings could be lost, however, if
    brands are given a green light to pay generics to sit it out
    until the patent expires. As you pointed out, Chairman Rush, it
    can be easy money.
        Sadly, the incentives to enter into these pay-for-delay
    deals are substantial because generic entry causes the branded
    drug firm to lose far more in sales than the lower-priced
    generic could ever possibly earn by competing. So it is a win-
    win deal for the companies, but it is a lose-lose profit for
    consumers who are left holding the bill.
        Over the past decade a unanimous Commission, six
    Republicans, four Democrats and one Independent--and by the
    way, in response to your very good point, Mrs. Blackburn, a
    bipartisan companion bill to this legislation came out of the
    Senate Judiciary Committee by unanimous consent. Chuck Grassley
    is one of the cosponsors. A bipartisan Federal Trade Commission
    has made stopping these harmful settlements a priority.
        In 2000 and 2001, the Commission obtained two major consent
    decrees preventing anticompetitive payments from brands to
    generics, and our actions stopped this conduct cold. The
    Commission set forth rules that everyone understood. If you
    settled a case by paying off a generic, we would not let you
    get away with it. And there were dozens of settlements between
    2000 and 2005, as you can see from the chart--well, I'll go to
    the chart later--but no exclusion payments.
        Recent court decisions, though, have changed this dynamic.
    In 2003, the Commission ruled 5 to 0 that a 1997 settlement
    involving a payment from Schering-Plough, the brand, to Upsher-
    Smith, the generic, violated the antitrust laws. The case
    involved a drug widely used by older Americans. The Eleventh
    Circuit reversed us in 2005. Later that year, the Second
    Circuit, in a 2 to 1 decision in the tamoxifen case, issued a
    similar holding. These decisions essentially allow a patent
    holder to compensate a generic, except under very limited
    circumstances.
        As a result, the exclusion payment problem is almost
    certainly growing. And, Mr. Chairman, how do we know this to be
    true? Well, thanks to the reporting requirement that this
    committee included in a 2003 Medicare Monitorization Act, and
    presumably you did so because you were troubled by these
    agreements, the FTC now reviews each and every Hatch-Waxman
    settlement. And tellingly, here's what the data for the last
    few years reveals. As you can see from the chart, for fiscal
    year 2004 and the early part of fiscal year 2005, none of the
    nearly 20 agreements reported between brands and generics
    contain both a payment from the brand and an agreement to defer
    generic entry, but data from fiscal year 2006, which reflects
    agreements after the Schering and tamoxifen decisions, is far
    more disturbing. Half of all the settlements, 14 out of 28,
    involve some form of compensation to the generic and an
    agreement by the generic not to market its product for a period
    of time. And almost all the settlements with first filers, I
    think it is 9 out of 11, you can see the charts better than I
    can, involve similar restrictions.
        As you know, Mr. Chairman, these settlements with first
    filers can create a bottleneck that may make it impossible for
    other generics to enter.
        In sum, just before Schering and tamoxifen, there were no
    reverse payments. Now it is becoming the new way of doing
    business.
        Mr. Chairman, it is not hard to predict what will happen if
    nothing changes. No longer will generic companies vie to be the
    first to bring a drug to market. Instead they will vie to be
    the first to be paid not to compete. Now, from our perspective
    we are going to be vigilant in looking for ways to challenge
    anticompetitive deals. It is public knowledge that we are
    looking to bring a case or cases that will create a clear split
    in the circuits. And we are hopeful that the Supreme Court will
    review the tamoxifen decision, which is a cert petition before
    the Supreme Court now. But the Court only takes a handful of
    cert petitions annually, and a litigation strategy could take
    years. A legislative approach could provide a swifter and
    cleaner solution.
        For that reason we strongly support legislation to prohibit
    these anticompetitive payments. Both your approach, Chairman
    Rush and Chairman Waxman, and the bipartisan measure reported
    out of the Senate Judiciary Committee would ensure that
    consumers continue to have access to low-price generics. But we
    also recognize that these issues are complex, so we want to
    work with you and other interested parties as the bill moves
    forward.
        Mr. Chairman, we do have great respect for the
    pharmaceutical industry. Brand firms pursue hundreds of drug
    candidates for each one that comes to market, and these
    companies have brought enormous health benefits to consumers.
    And for their part, generic companies have produced low-cost
    drugs and really pushed the brands to innovate even further.
    But we do not and we cannot support settlements when brands and
    generics resolve their disputes at the expense of consumers and
    at the expense of the American taxpayers.
        Thank you so much. I am happy to answer questions.
        Mr. Rush. Thank you, Commissioner.
        [The prepared statement of Mr. Leibowitz follows:]

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        Mr. Rush. The Chair recognizes himself for 5 minutes of
    questioning.
        Commissioner, in your testimony on behalf of the
    Commission, you stated that the FTC believes the Rush-Waxman
    bill is a fundamentally sound approach to solving the problem
    of exclusion payment settlements. Can you please tell the
    committee why the Commission prefers our approach as opposed to
    the approach suggested by the pharmaceutical industry, which
    proposes a solution in which the FTC and courts review
    settlements on a case-by-case basis?
        Mr. Leibowitz. Well, I would make this point, Mr. Chairman.
    We think your approach is fundamentally sound. That is a bright
    line approach to the reverse payment problem and a solution to
    the bottleneck problem, because during the period of 2000 to
    2005, when everyone believed that these payments were illegal,
    we still saw plenty of settlements, dozens of settlements
    actually, but we didn't see any anticompetitive settlements. A
    bright line approach will allow settlements to continue. And
    you saw settlements in 2006. Some were ones that weren't
    troubling to us; others were problematic. About half of each.
    But it will also make the potentially anticompetitive
    settlements migrate towards the nonanticompetitive side.
        And with the approach I have seen different drafts of
    different proposals from the generic industry. Most of them
    take a case-by-case approach. Some of them take a sort of Hart-
    Scott-Rodino prereview approach. And as I heard one of the
    members of this committee say, the devil is in the details. We
    do want to solve a problem, but some of the drafts we have seen
    might not reverse, for example, the Schering decision. And if
    you are not changing the substantive standard in a case-by-case
    approach, then you are really not going to solve the problem.
    There are going to be more and more of these deals, consumers
    are going to be harmed, and those deals will push entry out, of
    course, back to almost the expiration of the patent.
        Mr. Rush. You know that after the FTC began cracking down
    on exclusion payments, they disappeared, and a drug company
    settled their patent disputes, just like the rest of the
    commercial sector, without these exclusion settlements,
    payments. You just noted that. Then when the courts intervened
    and invalidated the Commission's enforcement efforts,
    settlements with exclusion payments came back to life and now
    are accelerating in their frequency.
        Is there a reason that we only see these types of
    settlement in the drug industry, and why don't we see these
    type of settlements in other commercial sectors of our economy?
        Mr. Leibowitz. Well, I think we only see these reverse
    payments or these exclusion payments in Hatch-Waxman
    settlements. And we only see side-bar deals, which we are very
    concerned about, because it is not always a straight cash
    payment. Sometimes it is a payment that is refraining from
    introducing an authorized generic, sometimes it is a side-bar
    deal.
        Why do we see them only in Hatch-Waxman deals? Well, I
    think it is the economics of the industry. When the first
    generic comes in, prices go down by 20 or 30 percent. When
    multiple generics come in, sometimes as early as 6 months after
    the first generic, certainly if you will solve the bottleneck
    problem with your legislation, prices can go down by 80
    percent. So there is a giant sweet spot in which the brand can
    pay the generic, the generic can receive more compensation by
    not competing than by competing, and the brand will make more
    money by keeping its monopoly rent essentially. So it is a win-
    win deal for the companies; it is a losing proposition for
    consumers.
        Mr. Rush. My final question on this round is if we don't
    pass this bill, how will the FTC be able to act and protect
    consumers against these anticompetitive agreements?
        Mr. Leibowitz. Well, look, if the legislation doesn't pass,
    we are still going to keep at it. This is a bipartisan priority
    for the Commission. It has been, as you pointed out. Since
    1999, we have had 11 Commissioners, 6 Republicans, 4 Democrats
    and 1 Independent, and we are all committed to doing this. So
    it is public knowledge we have investigations going on. We are
    hoping the Court takes it, the tamoxifen case, to reverse
    Schering and tamoxifen in the Second Circuit. But what is going
    to happen is that companies are going to migrate to the more
    lenient standard. So there will be more and more of these
    deals, and they are going to push out the entry date of the
    first generic in the market. And so instead of having entry, as
    the GPHA said, long before patent expiration, you are going to
    have entry at the end of the patent or 6 months before, which
    will give the first generic 6 months of exclusivity, and you
    won't have all those benefits that Hatch-Waxman intended.
        It turns Hatch-Waxman on its head. It really does. And
    consumers will be the ones who pay, and the taxpayers as well,
    because obviously the Federal Government pays a third of all
    prescription drug costs. So if somehow the current lenient
    standard isn't modified, and we think your bill is a
    fundamentally sound approach for doing so, we are all going to
    pay more.
        Mr. Rush. I thank you.
        The Chair now recognizes Ranking Member Stearns.
        Mr. Stearns. Thank you, Mr. Chairman.
        Mr. Leibowitz, I am just coming at this as an outsider just
    looking at it. Do all the Commissioners agree with you, or are
    you pretty much the strongest proponent of this bill?
        Mr. Leibowitz. No. You know, unlike, say, the FCC, when the
    FTC submits testimony, all of the Commissioners vote on it, all
    of us have a hand in writing it.
        Mr. Stearns. So the chairwoman has signed off on it?
        Mr. Leibowitz. Yes, she has. And I think what we say is we
    fundamentally support the approach of this legislation.
        Mr. Stearns. When you look at this just as an outsider, it
    looks like the free market is working in its own way. You don't
    think it is working right, so you want the Government to step
    in with mandates. Is that a fair way to put it?
        Mr. Leibowitz. I wouldn't characterize it exactly that way,
    Mr. Stearns. Look, Hatch-Waxman has been a wonderful statute.
    It gave the brands patent term restoration. It gave them
    something. It gave the generics early entry. It has given
    consumers enormous benefits, as I think Mrs. Blackburn said.
        Mr. Stearns. But you have been arguing here, and the
    chairman mentioned it, too, that you don't seem to have the
    tools. I mentioned in my opening statement the Federal Trade
    Commission, the Department of Justice, I thought had the tools.
    And according to your reports and settlements, there has been
    over 50 settlements filed with the FTC in the last 3 years.
    Your testimony noted that a large number of them have side
    agreements. Yet of these 50 settlements, the FTC has not filed
    legal challenges against any of them. And private plaintiffs
    have brought suits against only two of the settlements.
        The question is why has the FTC not challenged any of these
    settlements, and particularly in light of the fact that
    Commissioner Tom Roche suggested the FTC could successfully
    challenge these settlements under the standards in the Schering
    case? Why should the law be changed if you can't litigate
    changes under the Schering standard?
        Mr. Leibowitz. There are several good questions embedded in
    that one question. Let me see if I can answer some of them. If
    I miss one, you can come back and ask me again.
        Mr. Stearns. You got two there.
        Mr. Leibowitz. Let me start with Commissioner Rosch.
    Commissioner Rosch supports a legislative approach of fixing
    this problem. Commissioner Rosch believes that Schering and
    tamoxifen were wrongly decided and should be reversed.
        Mr. Stearns. It is fair to say he indicated the FTC could
    successfully challenge that, is our understanding; he has said
    that publicly?
        Mr. Leibowitz. He has said that, and I will put the Rosch
    statement into the record if there is no objection.
        Mr. Stearns. Sure.
        Mr. Leibowitz. Yes. And I think we all agree that we have
    investigations going on now. You want to make sure you get your
    investigations right. We don't believe we are entirely
    precluded from bringing a case. And, in fact, Mr. Stearns, as
    you may know, one of the reasons why the bright line test is a
    good one is it will bring some certainty to this rule. In the
    Eleventh Circuit the rule is very lenient; fraud, sham, or
    beyond the actual scope of the patent, that is the end of the
    patent.
        Mr. Stearns. But the Department of Justice hasn't filed
    anything, have they?
        Mr. Leibowitz. Let me get to the Department of Justice. You
    are asking all really good questions.
        Mr. Stearns. I know. And the problem is I have only 5
    minutes, so if I interrupt you, it is not because I am being
    impolite.
        Mr. Leibowitz. In the Sixth Circuit they have a rule of per
    se illegality. All these reverse payments are per se illegal,
    as these kind of deals would be if they were outside of the
    Hatch-Waxman context. The Justice Department in the Schering
    case, the Justice Department in the Schering case did not
    support the FTC's position.
        Now, I have a lot of respect for the Solicitor General. We
    worked together on the Senate Judiciary Committee. He is a
    wonderful, decent, incredibly bright person. I think that at
    the time of Schering, I think part of the reason why the
    Justice Department didn't support our petition was because we
    said this was a problem that was we couldn't show that it was
    anything but theoretical. In other words, we thought there
    would be more reverse payments. Since then, as you can see from
    our settlement report in fiscal year 2006, and again it was
    your committee that gave us these settlement agreements to
    review, we can see that it is not just a theoretical concern,
    because after Schering and tamoxifen, half of the deals we have
    seen, 14 out of 28, now have a payment from the brand to the
    generic and deferred generic entry. And even more important,
    because of the bottleneck problem, 9 out of 11----
        Mr. Stearns. But isn't it true that you say it is difficult
    for the FTC to litigate this case because of the Court's
    decision in a case like Schering? But there seems to be several
    courts that have ruled similarly. Why shouldn't we rely on
    their decisions?
        Mr. Leibowitz. Again, you want certainty in the law.
        Mr. Stearns. Can you ever get permanent certainty in the
    law?
        Mr. Leibowitz. Well, Hatch-Waxman is a law that people have
    tried to undo certainly from time to time.
        Mr. Stearns. Well, the mandate from the Federal Government
    is permanent certainty, and I agree with that.
        Mr. Leibowitz. I would sort of look at Chairman Rush's bill
    and Chairman Waxman's bill.
        Mr. Stearns. One other thing. You indicated the money lost,
    the extra money that is going to come from the prescription
    drug benefit part D. But actually that has come down, the cost
    has come down.
        Mr. Rush. The gentleman's time is up.
        Mr. Leibowitz. Well, my understanding is that prescription
    drug costs, the rate of increase went down in 2005. It may well
    go up in 2006. And, of course, with the new Medicare Part D
    program, which started in 2006, the Federal Government's costs
    are obviously going to go up.
        Mr. Rush. The Chair recognizes the gentleman from Texas Mr.
    Gonzalez.
        Mr. Gonzalez. Thank you very much, Mr. Chairman.
        Welcome, Commissioner. I guess one of your observations was
    this reverse exclusionary payment settlement under the present
    guise and interpretation by courts and such is perfectly legal.
    We understand that, and that is why we are attempting to
    address it legally through legislation. Only because something
    is legal does not necessarily make it right or best practice.
        Mr. Leibowitz. Well, I think that is absolutely true. And
    again, it is legal in the Eleventh Circuit. It is legal by a 2-
    to-1 decision in the Second Circuit. It is per se legal in the
    Sixth Circuit.
        And I just want to be read something that Senator Hatch
    said on the Senate Floor in 2002 about these reverse payments.
    He called these types of deals, reverse payments, collusive
    arrangements, appalling. And, of course, we heard from one of
    the authors of Hatch-Waxman. This is the coauthor, and he is
    very, very concerned, because I testified on the Senate side
    about the bottleneck problem.
        And so I think you are absolutely right, Mr. Gonzalez. It
    is permissible under certain circuits' interpretations. And, of
    course, if it is permissible, businesses are going to want to
    do it. They have a responsibility to their shareholders. And
    you will see, these are really good businessmen, and these are
    really good lawyers, and they are doing what is in the best
    interest of their shareholders. That is why we believe that
    either through Supreme Court reversing those bad decisions or
    through the bright line approach and the solution to the
    bottleneck that this bill entails you can solve this problem.
        Mr. Gonzalez. Commissioner, you earlier alluded to the
    resulting lack of savings that would be realized by the
    introduction of generics in the competition. This is
    anticompetitive. If you don't get the generics out there, you
    said there is obviously some cost to the consumer. But you
    pointed out something that is of great importance to us up
    here, and that is a third of the cost of the drugs is borne by
    the United States Government, Medicare and Medicaid. Can you
    put a dollar figure on that?
        Mr. Leibowitz. Yes. I put a dollar figure in my oral
    statement. I think it is $68 billion, or 32 percent of the $214
    billion spent in annual drug purchases last year by Americans.
    That adds up to about $800 per American citizen or per American
    citizen or resident, $800 per American, and about $230 paid by
    taxpayers, by the Federal Government. And then that percentage
    is expected to go up, I think it is in our written statement,
    considerably in coming years, the amount that is paid by the
    Federal Government, and the overall amount that Americans will
    pay.
        Mr. Gonzalez. And one last question, because I think when
    we enter these debates, and it comes to patents and patent
    litigation, and we start making distinctions between the type
    of patent being held, is it in the telecommunications or is it
    pharmaceutical, and it seems to me that when we get into the
    pharmaceuticals, there are different factors and
    considerations, and some will advance the argument that it is
    so unique, the factors and the elements in that business sector
    is so unique, that you need special arrangements, or the laws
    should treat them differently.
        Is there anything so unique in that particular industry or
    entity, business arrangement, business model, that should take
    it out of the norm and have a situation as we have presently?
        Mr. Leibowitz. Well, I guess I would say this. Hatch-
    Waxman, it is unique in the sense that when the first generic
    enters, the price goes down considerably. When other generics
    enter, and it is anticipated by Hatch-Waxman by this
    committee's product that you will have early generic entry,
    pricing can go down by 80 or 90 percent. And so I think the
    fact that you have passed this law, and there was a
    congressional intent to it, meaning that it should be part of
    what you think about along with the antitrust laws, and along
    with the patent laws, too, which have a presumption of validity
    as this legislation moves along--but, yes, it is a unique
    industry. It is an industry that has done wonderful things for
    consumers. The generics have brought down prices for consumers,
    but you are going to see no more early generic entry if these
    lenient rules continue to apply. And again lenient rules in two
    circuits, per se rule against in another.
        Mr. Gonzalez. Thank you very much, Commissioner.
        Mr. Rush. The Chair wanted to remind the Member that he has
    an additional 3 minutes because he waived his opening
    statement. Do you want to yield?
        Mr. Gonzalez. I guess one last point, and that is you
    always hear, and I think there is some validity to this, that
    when it comes to the pharmaceutical companies, that is a
    tremendous investment that they make in the research, in the
    development and the trials and so on. And I have to appreciate
    that. But should we go ahead and attempt to fix what we
    perceive as a shortcoming in Hatch-Waxman? Does it really
    impact that particular industry in the innovation, in bringing
    new products to the market and, again, being able to protect
    that investment?
        Mr. Leibowitz. Look, I would say in some tangential way--
    well, I agree with you, the innovator firms, the brands, they
    look at hundreds of different, maybe thousands of different
    chemical compounds before they bring one to market. And when
    they have to pull a product--and Pfizer had to pull a
    cholesterol drug, Torcetrapib; they lost $18 billion in market
    capitalization in a single day. But that is not an excuse for
    violating the antitrust laws, or for doing something that we
    all believe should be illegal, or for turning Hatch-Waxman on
    its head. So I agree with your thoughts.
        Mr. Gonzalez. Thank you very much.
        I yield back.
        Mr. Rush. The Chair recognizes now the gentle lady from
    Tennessee Mrs. Blackburn for 5 minutes.
        Mrs. Blackburn. Thank you Mr. Chairman.
        Commissioner, I am not a lawyer. Usually I say thankfully I
    am not. When we get into hearings like this, and when I am
    working with my creative community in Tennessee, all of my song
    writers, my auto engineers, a lot of our biotech innovators, I
    find myself always wishing I knew a little bit more about these
    issues. And as my colleague was just talking about, there are
    two sides to this coin. And I think that those of us who are
    passionate about being certain that we meet the needs of our
    constituents, when it comes to health care, looking at drugs
    getting to the marketplace, we realize the desire that is
    there. When we look at innovators and their right to take an
    idea and a concept and take it through R&D, and take it through
    commercialization, and move it to the marketplace, and then to
    be fairly and justly compensated, we realize the need for that
    also.
        And you all have argued, the Commission has argued that the
    recent court decisions do make it difficult to bring the
    antitrust cases to stop these exclusion payment settlements and
    that the settlements are uncompetitive, all the things that we
    have talked about. And we are looking at, tying back into Mr.
    Gonzalez's question, you know, people are concerned about this
    having a chilling effect. What is it going to do? What is it
    going to do long term? Especially when we are tying back into
    the hearing we had this morning with our Health Subcommittee
    and looking at the biosimilars and the new products that are
    there and that can be coming to the market. It is a concern
    shared by a lot of our manufacturers.
        So let us talk about the discrepancy in the claims. Don't
    the generic manufacturers have an incentive to make sure that
    they can sell their product to the public? Let us talk just a
    little bit more about that. And before you begin, because I am
    going to let you just talk for the rest of the time, I want you
    to touch on the difference in your opinion and the Department
    of Justice statement and why they have argued back against the
    position that you all hold.
        And, Mr. Chairman, if you would, I think that for the sake
    of debate, and I have that DoJ argument with me. I would love
    for us to submit that into the record for the sake of
    discussion as we move forward on the bill, and then I will
    yield to our guest to answer the question.
        Mr. Rush. So ordered.
        Mr. Leibowitz. Well, I mean, you make a very important
    point, Congresswoman. We have issued two reports on patents in
    the last 3 years for our intellectual property. We issued one
    last month. We believe strongly in the importance of
    intellectual property. I worked at the Motion Picture
    Association for 4 years, and we worked very much with the music
    industry to protect intellectual property.
        But a patent is an absolute. A patent is a presumption. And
    what we have found in these deals, this is the Commission's
    position, is that you are buying extra protection. And the
    incentives, because of Hatch-Waxman, because of its uniqueness,
    are so great, there is this giant sweet spot where the brand
    can pay the generic. The generic makes more money by not
    competing before the patent expires. And again, the generic can
    only get into the market if it is not infringing on the brand's
    patents or if the brand's patent isn't valid.
        But here what you are doing is you are buying extra
    protection with these lenient court decisions, because the
    court decisions are out there. But it means that a brand will
    pay the generic. The generic will earn more by not competing
    before the patent expires or maybe 6 months, or by not coming
    in before the patent expires. Because of the bottleneck
    problem, nobody else can jump in in front. And that is a
    problem for consumers; that is a problem for the Federal
    Government which pays for so much of the prescription drugs in
    America.
        Now, as to the DoJ position in Schering, we found by a 5-
    nothing, 5 to 0, that Schering had violated the antitrust laws
    by paying a generic $60 million in a side deal for a license.
    They never used the license. We thought it was a fig leaf for
    the anticompetitive payment.
        The Eleventh Circuit reversed us. And we appealed to the
    Supreme Court, because we have the authority. I think the FCC
    is one of the other agencies that can do that, too. The Supreme
    Court asked the Solicitor General for his opinion. And again,
    Paul Clement, the Solicitor General, is a brilliant, wonderful,
    decent guy and a former colleague of mine, and I admire him
    enormously.
        The brief will speak for itself, and we put it in the
    record.
        I think the Justice Department was concerned about a couple
    of things. One is they were concerned that the ruling wouldn't
    be cabined off only to Hatch-Waxman, which we know is unique.
    The pharmaceutical in this is really unique because it is under
    Hatch-Waxman. That is, of course, not a problem with the bright
    line approach of the Rush bill, of the Kohl-Grassley-Leahy-
    Schumer bill in the Senate, because it would only apply to
    Hatch-Waxman.
        And the other reason, and I am speculating a little bit
    here, the other reason I think is at the time of Schering, it
    was before our 2006 report, and so what we said was a problem
    was only a theoretical problem. They sort of acknowledged at
    some level in the brief that it was a problem, but we could
    only show it was theoretical.
        Now, if you look at first filers in fiscal year 2006, which
    goes through, I think, the end of October 2006, 9 out of 11
    times when there is a first filer, the brand has been able to
    pay the filer, there has been a delay in generic entry, and
    that leaves all the other generic companies lining up behind
    them for a later entry date. They can't get in until 180 days
    after the first filer does.
        If you look at all the deals, 14 out of 28. So now we
    believe there is a very real problem. And the Supreme Court has
    actually asked the Solicitor General for his opinion about
    whether it takes cert on the tamoxifen decision. And obviously
    we are having discussions with the Solicitor General, his staff
    and the Antitrust Division.
        Mr. Rush. The gentle lady's time is up.
        We will now recognize the gentleman from Texas Mr. Burgess.
        Mr. Burgess. Mr. Leibowitz, I am having a little bit of
    trouble understanding the concept of bottlenecking. Can you
    explain that to me in simple declaratory sentences with a
    subject and verb?
        Mr. Leibowitz. I will try my best. You can ask me a couple
    of times.
        What basically happens is the first generic to enter has
    180 days' exclusivity. But sometimes a brand and a generic will
    settle for a later entry date, possibly because there is a
    reverse payment, possibly because both the brand and the
    generic think there is a 50 percent chance of the generic
    winning, and so they split the difference. If there is 10 years
    left, it is a 5-year delay.
        Mr. Burgess. So that is a business arrangement that they
    make between themselves?
        Mr. Leibowitz. It is a business arrangement they make
    between themselves. Now, if there is a reverse payment
    involved, we would be concerned about it.
        Mr. Burgess. But the business arrangement itself is
    legitimate?
        Mr. Leibowitz. It may or may not be. It depends on the
    nature of the business arrangement. But to explain the
    bottleneck problem, let's say the first generic is entering 5
    years later. Well, maybe the first generic didn't have the best
    case against the brand. Maybe the first generic's product
    infringes, but the other generics who filed a little bit later,
    maybe they have a product that is less likely to infringe or a
    better product, and they have to wait. Under current
    interpretations of the law and FDA rule, they have to wait
    until the first generic goes to market.
        Now, Hatch-Waxman has a forfeiture provision that says if
    the first generic doesn't come in for a period of time, if it
    comes in on a much later entry date, other generics can force
    the first generic either to use it or lose it. But that
    forfeiture provision hasn't worked because of a glitch in the
    law, and so it has created a bottleneck. It really allows the
    first generic to park its exclusivity, and everybody else is in
    a bottleneck behind that first generic.
        So there are different approaches for solving this. We
    think Chairman Rush's approach is a good one. I know that Dr.
    Sherman, the CEO of Apotex who is testifying on the next panel,
    has a slightly different approach, and we want to think a
    little bit about his concerns as well. But that is basically
    it.
        Mr. Burgess. Just in layman's terms, what is the solution
    proposed by the bill before us today?
        Mr. Leibowitz. The solution in the bill would allow
    generics, if they receive a covenant not to sue from the brand,
    they would treat your covenant not to sue as a forfeiture event
    and would allow them to go to court to get a declaratory
    judgment action. And if it is dismissed for lack of subject
    matter jurisdiction, that would also be a forfeiture event.
        Right now under the current law, to make that a forfeiture
    event, you would need probably to litigate that case to the
    end. And this would basically say if it is dismissed for lack
    of subject matter jurisdiction, it would be a forfeiture event.
    And what would really happen as a practical matter, because I
    think that is what you are interested in, is companies, the
    brands, would then litigate, I believe, against the second
    generics. And so they would litigate, and they decide whether
    the second generic had a valid or an invalid claim.
        Mr. Burgess. And that would be a streamlined process over
    what we see today?
        Mr. Leibowitz. It would be a streamlined process over what
    we see today. Yes. I don't know that this is entirely a statute
    that involves lots of streamlining. And, in fact, the tamoxifen
    case which is now pending on circuit before the Supreme Court,
    patent cases started on that--it is now an antitrust case--in
    1987. So we are talking 20 years. It is like the Bleak House of
    pharmaceutical litigation, and so part of the reason why a
    bright line approach is a good approach is it solves the
    problem quickly.
        Mr. Burgess. Let me ask you this. We have been in another
    hearing about similar drugs all morning, so forgive me if I
    wander from the jurisdiction over which we preside in this
    committee. But just in general, on generic drugs--and you
    talked about 70 to 80 percent savings that are available to
    consumers by going to a generic drug. But at some point with a
    drug that has been out there for a while, and all the research
    and development costs have been recouped, and all the costs of
    this expensive litigation have presumably been recouped or
    written off somewhere, at some point it is just the cost of
    manufacture that is borne for things that have been out there
    for a long time. I am thinking about things like Phenergan. I
    am thinking about things like erythromicin and penicillin.
        Has the FTC looked at the amount of markup that some of
    those generics--you know, we talk about the percentage markup
    on a brand name, but over the cost of production, over the cost
    of manufacturing, which may be pennies or tenths of pennies----
        Mr. Leibowitz. And the cost of research, of course.
        Mr. Burgess. Well, the research is now gone. It has all
    been recovered. Is there anything that you or your office does
    to look at--is the price too high for what we are paying for
    generics that have been around for a long time?
        Mr. Leibowitz. Well, I would say this. We are mostly an
    enforcement agency, so if we see collusive arrangements even
    after patent expiration between a branded and generic, we
    actually have one case pending now. But have we looked at the
    mark----
        Mr. Burgess. What case is that?
        Mr. Leibowitz. That is the Warner Chilcott-Barr case
    settled with Warner and Chilcott, not with Barr.
        Mr. Burgess. Would you make that information available?
        Mr. Leibowitz. Absolutely. We don't look at the markups. We
    are an enforcement agency, we are not really a regulatory
    agency. But I will try to get you some information,
    Congressman. I am happy to do that.
        Mr. Rush. The Chair recognizes the gentle lady from
    California Mrs. Bono for 5 minutes.
        Mrs. Bono. Thank you, Mr. Chairman. I appreciate very much
    the spirit of this bill before us today. I think it is a very
    important issue, and I appreciate our panelists being here. But
    I have good news. I don't have any questions, so I will yield
    back.
        Mr. Leibowitz. Thank you. I want to continue to work with
    you on spyware matters.
        Mr. Rush. Mr. Pitts is recognized for 5 minutes.
        Mr. Pitts. No questions.
        Mr. Rush. Mrs. Blackburn.
        Mrs. Blackburn. Thank you. Mr. Leibowitz, I have to tell
    you, sitting here making some notes and listening to you, I
    feel like as you are using the terms well, speculation of this
    and the theoretical problems of this, I have a feeling you are
    the thought police kind of going on me here just a little bit.
    I mentioned my industry in Tennessee. And in light of that, can
    you give me any examples with any other industry where the
    Congress has specified that there should be certain industry-
    specific settlement practices that are per se illegal?
        Is there anywhere else that this is happening?
        Mr. Leibowitz. The courts have certainly said that there
    are certain settlements or certain deals are per se illegal.
    You can't pay your competitor to stay out of the market, right,
    outside of this. But in terms of industries, let me get back to
    you. I don't know that there is again, but again----
        Mrs. Blackburn. What we would like to know, and one of the
    things that concerns me, is we look at intellectual property,
    and as we look at making certain that intellectual property is
    a private property right, and as we look at patent law, what I
    want you to do is give me any example--as I said, I am not a
    lawyer. I am not an intellectual property lawyer.
        Mr. Leibowitz. To your credit.
        Mrs. Blackburn. Yes, I do believe it is to my credit. But
    if there is some other industry that is doing this, where
    Congress is coming in and saying, all right, this is the
    settlement practices, and then if there is not another industry
    where this is standard practice, then I would like to hear from
    you why we should make an exception and apply that only to
    pharmaceuticals. So that would be my two-pronged question for
    you, if you will, sir.
        Mr. Leibowitz. All right. As to the first prong, the courts
    have declared a lot of types of agreements per se illegal, and
    they have declared reverse payments per se illegal in the Sixth
    Circuit. That is the Cardizem decision. So the courts are sort
    of split about this.
        The second question, could you just give me the second
    question one more time? I want to make sure I have it right.
        Mrs. Blackburn. If you can tell us why we should make an
    exception for this industry. And there again you are talking
    about the courts are split on this, and that is where I feel
    like we are kind of morphing over in here into more or less a
    thought police. And I am just not real comfortable. The more I
    have listened, the less comfortable I have gotten. How about
    that?
        Mr. Leibowitz. We don't want to police them in any way.
    Again, here is why. And maybe I just haven't done a good job of
    explaining it. Because of the unique nature of this industry,
    because there is such a giant sweet spot between the brands'
    revenues and profits, if there is no one competing with it, and
    the brands' revenues of generics are entered--particularly
    multiple generics--there is a huge incentive here that you
    don't see in other industries. Maybe it is because you don't
    see in other industries for the brand to pay the generic some
    form of compensation to stay out of the market. The generic can
    make more by taking this payment of some sort, by taking the
    payment, than it would by competing. That is not what we want
    in America. That is not what we want under Hatch-Waxman.
        And so that is why I think--and what you see--and because
    these lenient rules that a couple of courts have come up with,
    they are allowed to do it legally. So they should do it. I
    shouldn't say they should do it; so they have an incentive to
    do it. They have to represent their shareholders. They are good
    business people.
        Mrs. Blackburn. I appreciate that, and the last time the
    Federal Government, and I think the only time the Federal
    Government, has jumped into an industry and said, let us help
    you out with this, we are going to set in Federal statute the
    maximum that you can earn, it was for song writers. And we are
    still trying to straighten this out, Mr. Leibowitz. And I know
    you are very familiar with that industry.
        So what you need to do is say, this isn't going to lead us
    down that road, so that we look at losing an industry like we
    are looking at losing a lot of our creative community right
    now.
        Mr. Leibowitz. Let me say this. And I think that is so
    important, and creators need to be paid value--you need to
    maintain those incentives for creators, music, movies, of
    patent holders.
        But having said that, we do believe in this industry, and
    calving off only to this industry, right, that the incentives
    are so much that a permissive rule encourages those deals to
    happen. They harm consumers. And that is why we support a
    legislative approach or a court overturning of the permissive
    rules.
        So thank you. Those are good questions. We will continue to
    have this discussion, I hope.
        Mr. Rush. I want to point out to the gentle lady from
    Tennessee that no other industry is governed by a law like
    Hatch-Waxman. And this is the congressional will that has been
    in effect for some time now, and this practice is certainly
    absent in all other sectors of our economy. So I just wanted to
    point that out to her.
        Thank you so much, Commissioner.
        Mr. Rush. And now we will proceed with our next panel.
        I want to recognize and welcome all the witnesses for panel
    2. I want to recognize specifically Dr. Bernard Sherman, who is
    is CEO of Apotex, Incorporated, and Apotex is a generic
    pharmaceutical company that opposes legal settlements with
    exclusion payments. Dr. Sherman will testify why his company is
    successful without these agreements and how reverse
    consideration legal settlements are anticompetitive and bad for
    consumers.
        Our next witness is Mr. C. Scott Hemphill, J.D., an
    associate professor of law at the Columbia University Law
    School. Professor Hemphill has devoted considerable academic
    work to the issue of exclusion payments and agreements and will
    testify in favor of the bill. He will explain how the
    regulatory structure of Hatch-Waxman gives rise to such
    agreements and how they are anticompetitive.
        It is worth noting to my Republican friends that Professor
    Hemphill is a former clerk to Judge Richard Posner and Justice
    Antonin Scalia, so he should have a lot of street credibility
    with our conservative friends.
        The next witness will be Mr. Phillip Proger. He is a J.D.,
    a partner in Jones Day. Mr. Proger is a prominent expert on
    intellectual property law and will provide his insights on the
    issue of reverse consideration legal settlements and drug
    patents disputes. He will testify that the problem of reverse
    payments is overstated, and that the FTC and the courts are
    already well equipped to handle any potential problems through
    the antitrust laws.
        Michael Wroblewski, J.D., is a project director for the
    Consumer Education and Outreach Division of the Consumers
    Union. Of course, Consumers Union is one of the Nation's most
    prominent consumer advocacy groups. Mr. Wroblewski will testify
    that these agreements adversely affect consumers and should be
    banned. Consumers Union, as an organization, supports this
    bill.
        Finally, our witness is Mr. Theodore Whitehouse, who is
    also a distinguished juris doctor. He is a partner in the firm
    of Willkie Farr & Gallagher LLP, representing Teva
    Pharmaceuticals. Teva is the Nation's largest generic drug
    company, and Mr. Whitehouse will present the generic industry's
    side of this particular issue. While Teva believes that there
    is room for reform, Mr. Whitehouse will assert that certain
    legal settlements will reverse consideration provisions
    unnecessary and beneficial to consumers.
        I want to welcome all of our witnesses, and we will
    recognize now Mr. Sherman for 5 minutes.

     STATEMENT OF BARRY SHERMAN, CHIEF EXECUTIVE OFFICER, APOTEX,
                                  INC.

        Mr. Sherman. Thank you, Mr. Chairman, Ranking Member
    Stearns and Members of the committee. Thank you for the
    opportunity to testify.
        Apotex is very much opposed to anticompetitive settlements,
    and therefore we are generally in favor of the bill as
    proposed, but we have to add a big caveat to that, and that is
    we believe that there are problems more fundamental than the
    reverse payments, and that focusing solely on reverse payments
    without taking into account the more essential problem is
    likely to not accomplish very much. And I would like to try to
    explain.
        The fundamental problem that, as far as we can see, with
    the settlements is that the settler retains the Hatch-Waxman
    exclusivity and continues to block market access from all
    others who would continue the patent battle and would bring the
    products to market much earlier. It is a fundamental problem
    that needs to be addressed.
        And indeed that is also what distinguishes this industry
    from all others. That question was asked of the previous
    witness. And I think the real answer is that this industry is
    different because here the alleged infringer has the power to
    stop all others from entering the market, and by settling with
    one, the first to file the patent keeps everybody out of the
    market for the entire patent life essentially.
        Apotex operates on the principle that it has a duty to
    always work and fight for the earliest possible market entry.
    That is a commitment we make to our customers, and it is
    something we honor. We do not enter anticompetitive
    settlements.
        Indeed we find it frustrating that so many times our
    ability to bring products to market is obstructed by the very
    Hatch-Waxman provisions that are intended to give us an
    incentive. And there is one fundamental problem, and that is
    that the incentives don't necessarily go to the right people.
    What happened is the Hatch-Waxman provisions, the regime was
    intended to give a reward to the first person to file with a
    Paragraph IV certification and to win the litigation and bring
    the product to market. That made sense. But the courts have
    determined that the exclusivity is earned merely by being the
    first to file, which means that someone could be first to file,
    earn the exclusivity, and do nothing else, not win, not even
    litigate, and even enter into a settlement where it agrees not
    to litigate, and it agrees to delay market entry for years, and
    yet it still keeps that exclusivity it has not earned.
        The exclusivity was given as a reward because litigation is
    expensive, and to earn it the first to file is supposed to
    litigate to win and to bring early entry, not to settle and
    collude to delay market entry.
        The effect of this exclusivity going only to the first to
    file regardless of whether or not he wins has two implications.
    Number 1 is the reward is going to someone who hasn't earned
    it, but even worse is the flip side. That exclusivity prevents
    someone else from coming to market who would litigate and win.
    And this is not just a theoretical problem, it is a real,
    practical problem.
        And there have been examples. There is one very big
    example. Just last month in the case of amlodipine, which is a
    blockbuster product, Apotex won and defeated the patent in the
    court of appeals last month, but was unable to launch because
    it was not first to file. Instead the first to file, another
    generic firm, launched and is making hundreds of millions of
    dollars not earned by it, but we earn nothing as a result of
    our investment.
        And one may say, so what; Apotex is not getting the reward
    that it earned. But the practical problem is we can't keep
    doing it. Generic applicants were not first to file--as
    happened in this case--can't litigate, can't afford to litigate
    to bring about market entry if there is no reward at the end of
    the day, and if all they will get is legal costs with no
    benefit.
        This is the fundamental problem, and it is very easily
    fixed. All that needs to be done is provide shared exclusivity
    to the person that is first to win and to break the patent
    monopoly. There is already a concept of shared exclusivity. If
    several people are first to file on the same day, they should
    share exclusivity even if they don't do anything to earn it.
    There is no reason exclusivity can't also be shared by being
    the person who actually earns it by being the first to litigate
    and to win. And that is an essential fix that we think is
    needed to resolve the problem.
        I also want to comment on the bottleneck provisions in this
    bill. As you have heard, someone who is not first to file can
    be stuck in a bottleneck where it can't trigger an exclusivity
    because it isn't sued by the patentee. And the bill proposes to
    fix that by having exclusivity forfeited if there is a judgment
    stopping a DJ, declaratory judgment, action from proceeding for
    lack of jurisdiction or a covenant not to sue.
        Mr. Rush. Dr. Sherman, would you please bring your
    testimony to a conclusion?
        Mr. Sherman. Yes, I will.
        The problem with that is that it will only replace one
    bottleneck with another because the result will be that the
    patentees will now sue everybody and put them in the same
    position that we were in with respect to amlodipine. The second
    filer won't be able to afford to litigate because if it wins,
    it still can't come to market unless it is a provision of this
    bill that anyone who settles loses the exclusivity.
        Mr. Rush. Thank you so very much.
        [The prepared statement of Mr. Sherman follows:]

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        [GRAPHIC] [TIFF OMITTED] T8992.043

        Mr. Rush. I just want that point out your solution of
    relating to the exclusivity period is not within the
    jurisdiction of this committee. It is within the jurisdiction
    of another subcommittee, the Health Subcommittee. Thank you so
    very much.
        The Chair now recognizes Mr. Hemphill for 5 minutes of
    testimony.

      STATEMENT OF C. SCOTT HEMPHILL, ASSOCIATE PROFESSOR OF LAW,
              COLUMBIA UNIVERSITY LAW SCHOOL, NEW YORK, NY

        Mr. Hemphill. Chairman Rush, Ranking Member Stearns and
    members of the subcommittee, I am Scott Hemphill, an associate
    professor at Columbia Law School. My scholarship in teaching
    focuses upon the balance between innovation and competition
    established by antitrust law, intellectual property and sector-
    specific regulation. I welcome this opportunity to testify
    today about anticompetitive pay-for-delay agreements between
    brand name drugmakers and their generic rivals. These remarks
    draw upon ongoing academic research into the economic effects
    of these settlements and their appropriate legal treatment.
        For more than 20 years, the Hatch-Waxman Act has provided a
    way for generic drugmakers to introduce a competing version of
    a brand name drug even before a patent expiration by arguing
    the relevant patents are invalid or not infringed. The patent
    litigation which often results has become the norm with respect
    to the most important brand name drugs. These challenges often
    succeed in securing early generic entry. For example, of the 10
    best-selling drugs of 2000, 9 attracted challenges of which at
    least 4 led to early entry.
        In some cases the innovator, rather than take a chance the
    generic firm might win the patent suit, settles litigation. The
    parties dismiss the suit and agree to a particular date for
    generic entry. The entry date is a result of a hard-fought
    bargain between rivals. The innovator pushes for a later entry
    date by arguing that if the litigation proceeds to judgment, a
    court is likely to hold the patent is valid and infringed. The
    likelier that judgment is, the later the entry date.
        Now, a settlement that relies solely upon the inherent
    strength of the patent is properly permitted, but the situation
    is different when an innovator makes a payment to its rival
    rather than relying solely upon its prospects at trial. In that
    case the payment secures a later entry date than is warranted
    by the likely validity of the patent alone. That payment to a
    rival made to secure additional delay--in effect a privately
    arranged patent term extension--is properly prohibited.
        These settlements have become a major tool of life-cycle
    management. It is not uncommon for settlement to account for
    more than one-third of the time between brand name product
    introduction and generic entry scheduled under the settlement.
    Brand name sales during the settlement period--considering just
    six drugs whose settlements have attracted pending antitrust
    suits or FTC investigations--total more than $16 billion.
        The current approach to pay-for-delay settlement is not
    working. A case-by-case judicial evaluation has failed to
    identify and remedy the consumer harm. A new wave of
    settlements, moreover, as we heard earlier, will make the
    problem worse. Even though the new settlements exchange payment
    for delay, they do so in ways the courts are unlikely to
    recognize through complex arrangements that disguise the
    payments by converting them to other forms.
        H.R. 1902 takes an important step forward in identifying
    and deterring pay-for-delay settlement. The bill adopts a
    bright line prohibition carefully limited to those settlements
    that combine payment by the innovator with delay by the generic
    firm; whereas here, anticompetitive activity is frequent, and
    courts have demonstrated difficulty distinguishing if such a
    rule is justified.
        Taken alone, this proposed rule might prohibit on occasion
    a competitively harmless settlement, but that in itself is no
    vice. In price-fixing and bid-rigging, for example, two
    settings that pay-for-delay settlements resemble, a ban is well
    justified by the severe harm to consumer welfare,
    notwithstanding the possibility that rule has a somewhat
    overinclusive effect.
        The real issue is whether any procompetitive justification
    for settlement is sufficiently important as a practical matter
    so as to justify an exception in a well-defined class of cases.
    And here the bill places the identification of such exceptions
    in the hands of the entity best positioned to recognize them:
    the FTC. The FTC has developed a deep expertise in evaluating
    settlements, and thanks to the foresight of Congress, which in
    2003 required drugmakers to file all such settlements with the
    agency, it is in an excellent position to make comprehensive
    evaluations of settlement practice.
        To conclude, the pay-for-delay problem appears to be
    worsening as courts continue to permit the settlements and as
    settlements evolve in a way that makes effective judicial
    intervention unlikely. Congress has a vital role to play here
    in prohibiting anticompetitive settlements while maintaining
    agency flexibility to recognize exceptions where they are
    practically justified. The subcommittee is to be commended for
    taking up this important issue, and I look forward to your
    questions and further thoughts.
        [The prepared statement of Mr. Hemphill follows:]

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        Mr. Rush. Mr. Proger. You are recognized for 5 minutes.

    STATEMENT OF PHILLIP A. PROGER, PARTNER, JONES DAY, WASHINGTON,
                                   DC

        Mr. Proger. Thank you, Mr. Chairman. At the outset I would
    like to express my appreciation to the Chair, the ranking
    member and the other members of the committee for inviting me
    to testify.
        My name is Phillip Proger. I am a practitioner specializing
    in antitrust law. I am here speaking for myself today. And I do
    have clients in this area. I have represented clients in
    antitrust class actions against settlements and in FTC
    investigations. But I am here today just speaking for myself.
        H.R. 1902 addresses issues important to the welfare of the
    American public, and I am pleased to have an opportunity to
    address some of these issues. I have submitted a written
    statement, and I would like to address in my oral comments just
    one core issue, and that is, is it appropriate or necessary to
    supplant the antitrust laws for particular conduct in a
    particular industry? H.R. 1902 appears to do so.
        I am concerned about the precedent that is created by doing
    so. In answer to the question of Congresswoman Blackburn
    earlier in the hearing, I have looked for an example of whether
    Congress has ever expressly chosen a particular practice in a
    particular industry to enact special legislation outlawing that
    practice in that industry.
        Now, there are examples where Congress carves out
    industries for regulatory oversight, but in answer to your
    question, Congresswoman, I have not been able to find an
    example where Congress has done so. Perhaps there are, but they
    are few and far between as far as I can tell.
        I believe that the application of the antitrust laws and
    the general standard of prohibiting conduct that restrains
    competition still is the appropriate way to address the effect
    on consumer welfare of drug patent settlements. The patent laws
    and the antitrust laws both promote consumer welfare, but in
    the short run, each do it differently by different means.
    Patent laws encourage innovation and invention by giving the
    patent holder an exclusionary grant for a period of time. After
    all, we would not be here today if the drug map had not been
    invented in the first place. The antitrust laws, on the other
    hand, referee our free markets to ensure that the American
    public receive the benefits of the competitive market.
        Some settlements may be anticompetitive. Settlements that
    go beyond the scope or time of the patent raise concern under
    existing antitrust laws, and the courts, as Commissioner
    Leibowitz has pointed out, have attacked those settlements. But
    settlements that are within the scope of the patent, both in
    time and scope, pose a more difficult question.
        If the settlement is within the exclusionary grant of the
    patent, I don't see why there is a presumption that the
    settlement is unlawful. Any settlement, by definition, does
    result in payments from one side to another. It is a
    settlement. It is an adjudication of risk. But there appears to
    be a presumption by those who believe that these settlements
    are a problem that the existence of a settlement means that the
    patent holder believes its patent is weak.
        I believe that presumption is not valid. The Hatch-Waxman
    Act, which is laudatory, and, as I said in my written
    statement, is working--generic drugs are much more widely
    available today--does alter the balance of power in anti-drug-
    patent litigation. The patent holder has much to lose. The
    generic has comparatively little to lose. Consequently it is
    not surprising that even a patent holder with a valid and
    enforceable patent that it believes to be strong may still
    settle. Given the economics, even if you believe you have a
    virtually sure right to prevail, there is some chance that you
    could lose, and therefore it may make sense for you to settle.
        The antitrust laws balance the laws of innovation with the
    laws of competition on a case-by-case basis and permit the
    courts and the FTC to make such an evaluation in that
    circumstance, not a broad, blunt rule.
        Settlements that are bad for society are those that go
    beyond the scope of the patent. Settlements that merely split
    the rents given by the exclusionary grant are not necessarily
    anticompetitive and, in fact, may be procompetitive. Society's
    interest is best served by keeping the good settlements that
    balance the interest of patent innovation with competition and
    prohibiting the bad settlements that are anticompetitive.
        I believe that that balance is best accomplished by a case-
    by-case, fact-intensive analysis that is the essence of the
    antitrust laws, and we are uniquely situated here to do so. The
    Medicare Act of 2003 requires that settlements between a drug
    patent holder and a generic challenger be notified to the
    Federal Trade Commission. The Federal Trade Commission has
    demonstrated that it is a vigilant and able enforcer. The
    threat of FTC enforcement alone is a powerful deterrent. And
    for those that settle, the FTC has the right to investigate and
    challenge the conduct.
        Moreover, private plaintiffs have brought class actions
    against a number of settlement. Each settlement involves its
    own unique set of facts, own unique circumstances, own unique
    industry, and unique terms and conditions of the settlement.
        No one rule fits all. The antitrust laws have been
    judicially developed for the past 117 years to deal with these
    type of cases, factually intensive, unique facts. The antitrust
    standard of outlawing only conduct that is anticompetitive is
    most appropriate when, as you do have here, the law has to
    govern factually intensive and unique conduct. A blunt
    instrument prohibiting virtually all settlements does not
    distinguish between those that harm consumer welfare and those
    that do not.
        Thank you, Mr. Chairman.
        [The prepared statement of Mr. Proger follows:]

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        Mr. Rush. Thank you.
        Mr. Rush. Our next witness would be Mr. Wroblewski.
        Mr. Wroblewski, you are recognized for 5 minutes.

      STATEMENT OF MICHAEL WROBLEWSKI, PROJECT DIRECTOR, CONSUMER
                EDUCATION AND OUTREACH, CONSUMERS UNION

        Mr. Wroblewski. Thank you, Mr. Chairman, members of the
    subcommittee. Thank you for the invitation to testify this
    afternoon.
        Consumers Union is the independent nonprofit publisher of
    Consumer Reports. We investigate and report extensively on
    issues surrounding the cost, safety and effectiveness of
    prescription drugs so that we can provide our 7.3 million
    subscribers with expert advice on how to manage their health.
        Consumers Union's publications carry no advertising and
    receive no commercial support.
        Consumers Union strongly supports H.R. 1902, the Protecting
    Consumer Access to Generic Drug Act of 2007. This legislation
    ends the use of patent settlements in which the generic
    applicant receives anything of value in exchange for agreeing
    not to research, develop, manufacture, market or sell its
    generic product. These settlements can deny consumer access to
    lower-priced generic drugs for many years. They also jeopardize
    the health of millions of Americans who have difficulty
    obtaining safe and effective medicines at competitive prices.
        I would like to highlight three reasons for our support.
    First, generic drugs are critical to managing health care costs
    today. Health care costs continue to surge at double or triple
    the rate of general inflation, in part due to the high costs
    and rate of inflation of brand name drugs. Generic drugs can
    dampen health inflation because they cost up to 70 percent less
    than the brand name drug.
        We have started a free public education initiative,
    Consumer Reports Best Buy Drugs, to provide consumers with
    reliable, easy-to-understand advice about the safest, most
    effective and lowest-cost prescription drugs available. We
    currently provide information for 17 different classes of
    medicine and will expand to more classes in the near future.
    Consumers can use this information to check to see if there is
    a safe, effective and low-cost alternative to any medicine they
    are taking.
        We encourage consumers to talk to their doctors about this
    information. Access to these low-cost generic drugs saves
    consumer substantial sums.
        The second reason we support legislation is to counter the
    incentives that brand name and generic companies have to enter
    lucrative settlement agreements. It is an economic fact that
    the brand companies' total profits from sales of its brand drug
    prior to generic entry exceed the combined profits of the brand
    name and generic company after generic entry occurs. In
    Commissioner Leibowitz's testimony he referred to that as the
    sweet spot.
        The upshot is that the brand name company has powerful
    incentives to pay the generic applicant to delay in entry. This
    payment is still less than the amount it would lose if the
    generic entered the market. The generic applicant, on the other
    hand, also gains by earning more from the settlement than it
    would otherwise competing in the market. Indeed, legal
    sanctions of these agreements have the potential to encourage
    generic companies to challenge otherwise strong patents with
    the hope of obtaining at least some payment.
        These transfers from brand to generic companies to not
    serve any public interest. These economic incentives are
    inadvertently exacerbated by the 180-day marketing exclusivity
    provision of the Hatch-Waxman Act. Any settlement with the
    first filer that delays entry blocks any subsequent generic
    from entering the market. So the brand company can forestall
    generic competition for years by settling with just the first
    filed generic. And the generic who is first in line also has
    powerful incentives to ask for payment because not only will it
    get the payment, but it retains the 180 days of marketing
    exclusivity.
        The irony, of course, is that the intent behind the act was
    to speed generic drug entry, not provide the generic a windfall
    to delay its market entry.
        The third reason we support legislation is because we
    believe it is a legislative question as to how to balance the
    competing consumer interests of speeding generic entry with
    providing incentives for continued pharmaceutical innovation.
    We believe that the use of these exclusionary payments has
    upset the finely crafted balance that Congress struck in 1984
    and reaffirmed in 2003 in the Medicare Modernization Act
    between these two objectives.
        We believe the courts won't fix this problem in a timely
    manner. Two recent appellate court decisions have taken a
    lenient view of these patent settlements. These courts have
    ignored the specific statutory incentives in the act that
    encourage generic applicants to challenge weak patents and to
    obtain court rulings on these suits. As a result of these
    rulings, a patent holder can now pay whatever it takes to buy
    off a generic applicant during the life of the patent.
        Industry experience shows that Congress struck the right
    balance when it established these statutory incentives. Between
    1992 and 2000, generic companies that challenged weak patents
    won their cases 73 percent of the time. Indeed these challenges
    have resulted in generic entry earlier than what otherwise
    would have occurred absent the generic challenge.
        For all three of these reasons, we urge Congress to act now
    so that consumers get the benefit of timely generic
    competition.
        Thank you very much.
        [The prepared statement of Mr. Wroblewski follows:]

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        Mr. Rush. Thank you.
        Mr. Rush. Final witness is Mr. Whitehouse.
        Mr. Whitehouse, you are recognized for 5 minutes.

     STATEMENT OF THEODORE C. WHITEHOUSE, PARTNER, WILLKIE FARR &
                     GALLAGHER LLP, WASHINGTON, DC

        Mr. Whitehouse. Thank you, Chairman Rush, members of the
    subcommittee, and good afternoon. Teva and I appreciate the
    opportunity to be heard on the important issues that you are
    considering today.
        As I think you all know, Teva has been an active
    participant in the process leading up to this hearing.
    Representatives of Teva have had numerous meetings with
    Chairman Rush's staff and staff of other sponsors of this bill,
    as well as meetings with Members and staff on the Senate side.
    We have also had what we believe have been very constructive
    discussions with some of the Commissioners of the Federal Trade
    Commission as well as several members of the Federal Trade
    Commission's staff.
        We hope that it has been apparent to everyone that Teva is
    very concerned about this and similar legislative proposals,
    but also very willing to work constructively with Congress and
    the FTC in an effort to ensure that the concerns being raised
    here are addressed without doing harm to the vital incentives
    at the heart of the Hatch-Waxman process.
        The basic principle in health care since ancient times has
    been first do no harm. That sums up the message Teva wants to
    convey today. Teva believes that the intricately crafted Hatch-
    Waxman process that Congress put in place more than 20 years
    ago has worked and is working very well. Teva's basic position
    is that no new legislation is needed. Teva is therefore opposed
    to H.R. 1902.
        As we had some advocacy this morning on the bright line, we
    can say the bright line may be quick and simple, as
    Commissioner Leibowitz said, but that doesn't make it right.
    Teva believes that the ability to reach reasonable, timely and
    proconsumer settlements in Hatch-Waxman in Paragraph IV
    litigation is absolutely essential to Teva's ability to bring
    low-cost generic drugs to market as soon as possible. That is
    Teva's fundamental business, to work to bring products to
    market as soon as possible.
        One of the things that a company like Teva has to consider
    in deciding what its options may be when it takes an action
    that has the probability of starting an expensive lawsuit is
    what options it may have to settle if circumstances change or
    it turns out the case was not as good as it initially appeared
    to be.
        It is important to keep in mind that Teva has to make that
    decision not just as to one case in isolation, but as a
    balancing of resources among many simultaneous cases. That is
    an important point that seems to be missing in some of the
    academic analysis, such as that Dr. Hemphill has presented.
        Today Teva knows it has the option to settle a case on
    proconsumer terms and to redirect its resources to other
    products if circumstances warrant doing that. All of that is to
    the benefit of consumers. The proposed legislation would change
    that by making settlements much more difficult to accomplish.
    It would do that by prohibiting Teva and others from using
    procompetitive provisions that have proved necessary to getting
    settlements done and that have resulted in settlements that
    were good for consumers.
        Teva does not contend that all Hatch-Waxman settlements are
    necessarily good for consumers, but takes strong issue with
    legislation that would have prevented Teva from engaging in any
    of the 10 settlements that Teva has reached since 1999 that
    produced real benefits for consumers. Those 10 settlements have
    taken approximately 83\1/2\ years off the lives of the patents
    at issue and will end up saving consumers more than $67
    billion.
        Teva believes that more serious consideration should be
    given to legislative alternatives that have been discussed,
    such as mandatory review by the courts, or more formal FTC
    preeffectiveness review process. If this subcommittee
    determines to proceed with the approach embodied in H.R. 1902,
    Teva strongly urges that the exceptions or carve-outs in the
    bill be broadened to make clear that at least the kinds of
    terms that Teva has successfully employed in the past to reach
    settlements that produced real benefits for consumers remain
    permissible.
        Those provisions include early generic entry on other
    products, a full release for damages in the covenant not to sue
    going forward on all patents on all generic products involved
    in the settlement, limited exclusive license during the
    exclusivity period, and case-by-case authority for the FTC to
    address individual settlements without rulemaking formality and
    delay.
        Most of H.R. 1902 is directed to patent settlements;
    however, section 4 addresses a different set of issues not tied
    or limited to patent settlements. Essentially section 4 would
    broaden the circumstances under which the first generic company
    to challenge the brand company's patents could lose or forfeit
    the 180 days of marketing exclusivity provided to first filers
    under Hatch-Waxman.
        As you have heard today, there are people in the industry
    who don't like the 180-day exclusivity provisions, but it is
    important to be very clear that those provisions have been in
    Hatch-Waxman from the start and are absolutely central to the
    incentive structure that has brought this country to the
    vibrantly competitive and publicly beneficial generic drug
    industry which we have today, and which benefits consumers,
    third-party payers, and the Federal and State governments.
        I respectfully invite your attention to my written
    statement for full explanation of Teva's concerns regarding
    section 4.
        Very briefly, Teva believes that proposed subsection CC
    addresses an obsolete issue, and that proposed subsection DD is
    unclear and potentially severely overbroad.
        Those observations bring me back to where I started. On all
    of these issues Teva hopes to continue an active and
    constructive dialogue with Members of Congress and their staffs
    and with FTC Commissioners and the FTC staff all with a view to
    trying to address any legitimate concerns while carefully
    preserving all that is good and necessary about the existing
    and highly successful Hatch-Waxman process.
        Thank you very much. I will look forward to answering your
    questions.
        Mr. Rush. Thank you very much.
        [The prepared statement of Mr. Whitehouse follows:]

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        Mr. Rush. The Chair recognizes himself for 5 minutes.
        My first question is directed to Mr. Hemphill. Mr.
    Hemphill, the FTC's deterrent impact has been greatly diluted
    as shown by the increased number of reverse payment
    settlements, particularly since the Eleventh Circuit ruled in
    Schering, which, by the way, was a 7-year battle. So isn't that
    why this legislation that we are considering today is essential
    and necessary?
        Mr. Hemphill. Mr. Chairman, that is correct. As was earlier
    mentioned, there is a division of opinion among the courts of
    appeals in the Sixth Circuit. There is a rule per se, a
    legality on the rather special facts of that case. But as you
    have noted, the Second Circuit and the Eleventh Circuit have
    come out quite sharply against the illegality of these
    settlements. That makes it an uphill battle for a private
    plaintiff or for the FTC to win litigation in the courts.
        And as a matter of resetting the system in a way, if you
    will, a bill like this is quite important.
        Mr. Rush. Mr. Whitehouse, in your testimony, you assert
    that brand name and generic drug companies will be hard pressed
    to settle their patent disputes if we would ban exclusion
    payments. Why is it that all other commercial sectors are able
    to settle patents without exclusion payments, and what makes
    the drug companies so unique and so special?
        Mr. Whitehouse. Mr. Chairman, I think we need to first
    recognize that when we say exclusion payments, that has become
    a term that may cover a lot or a little. And if it is talking
    about something like what is at issue in the Cardizem case in
    the Sixth Circuit, which is found to be per se unlawful, that
    is one end of the spectrum.
        We think there are other things that are being unfairly
    disparaged as exclusion payments that are, in fact, legitimate
    and necessary terms of settlements in patent cases that wind up
    producing very substantial benefits for consumers. And our
    fundamental point is that you can't lump all of these
    mechanisms into one basket.
        Mr. Rush. Professor Hemphill, in Mr. Whitehouse's written
    testimony, he states, and I quote, ``given that the parties are
    likely to disagree about their relative strengths of their
    respective cases, a negotiation for settlement limited to only
    one variable is highly likely to fail'', end of the quote.
        Mr. Whitehouse is referring to traditional patent
    settlements in which the two parties agree on an early entry
    date, and only on an early entry date, without any other
    payments.
        Now, referring to your testimony, you take almost the exact
    opposite stance from Mr. Whitehouse and assert that this is
    precisely the way that brand name and generics ought to settle.
    Can you explain your position, please?
        Mr. Hemphill. I would say that Teva and other generic firms
    remain free to reach procompetitive settlements as we saw
    during the period prior to the adverse decisions in tamoxifen
    and in Schering, and that they ought to be able to do so
    without conferring payment from the innovator to the generic
    firm.
        There is, I think, a related confusion, though, that bears
    mentioning here, which is that I think perhaps Teva, perhaps
    other generic firms, have taken the view, an erroneous view, I
    think, that the gambles that they make in engaging in ANDA-
    based litigation ought to always have a payoff, that in each
    and every case they ought to be able to receive some kind of
    compensation to justify their expenditure on the litigation.
        But the nature of a gamble is that that is just not so.
    Sometimes when you drill, you find a dry hole. And it is just
    not the case that the inability to even receive compensation in
    a particular case ought to be something that necessarily
    troubles us.
        Mr. Rush. Thank you.
        In my last few minutes I want to ask Mr. Proger. Mr.
    Proger, you characterize the bill I have introduced with Mr.
    Waxman as adopting a, quote, ``blunt instrument'', end of
    quote. Yet I see our bill as a scalpel that goes after a very
    specific practice that is totally and completely unique to the
    drug industry.
        Can you explain how is that being blunt, and especially
    since we create flexibility by authorizing the FTC to
    promulgate further exceptions to the rule? And I want to also
    ask Mr. Wroblewski and Mr. Hemphill to give me their comments.
        Mr. Proger. Mr. Chairman, I characterized the bill as being
    blunt because it doesn't go on a case-by-case basis, and the
    bill prohibits the generic challenger from receiving anything
    of physical value. We continue to talk in this session about
    payments as if payments are only cash. You can attain the exact
    same solution by licensing, by other forms of entry, and still
    have the same economic consequences. And as I read your
    legislation, absent action by the Federal Trade Commission, all
    of those would be prohibited. Some of those particular
    practices have been endorsed by proponents of Hatch-Waxman and
    proponents of your legislation. And so that is where my concern
    is.
        And I think one other thing, if I may, sir, we keep hearing
    Schering and tamoxifen as if those decisions somehow went
    against the American public and ruled that you can do whatever
    you want. That is not the case. The Second Circuit and Eleventh
    Circuit found that those settlements were not anticompetitive
    because the settlements were within the scope of the patent. We
    have to remember that there is a patent here.
        Mr. Rush. My time has ended.
        Mr. Hemphill or Mr. Wroblewski, if you all care to respond,
    please do so.
        Mr. Wroblewski. I think the approach is a reasonable
    approach given that Congress's intent in doing Hatch-Waxman in
    the first place was to provide an incentive to challenge
    patents.
        And so in response to Mrs. Blackburn, your question, in
    terms of was there any other industry in which there has been--
    the Federal Government is kind of dictating what the terms or
    not the terms could be of a particular settlement, I can't
    think of any. And I agree with Mr. Proger. I don't know if
    there are any, but I don't know of any other industry in which
    Congress has specifically incentivized generic companies to
    challenge patents and to get resolution of those patent issues,
    which I believe is just as important in terms of the public
    interest.
        And regardless of which way the resolution turns out, if
    the brand company wins, then that is good for innovation
    because strong--as we have known, pharmaceutical innovation
    depends on strong patents. So that is good. And on the other
    hand, if the generic wins, well, that is good for consumers
    because they will get a competitively priced generic drug.
        Mr. Rush. Thank you.
        Mr. Hemphill, I am going to ask the other Members for their
    questions. We will come back to you a little later.
        The Chair recognizes now the ranking member.
        Mr. Stearns. Thank you, Mr. Chairman.
        Mr. Sherman, I understand that your company and Bristol-
    Myers Squibb negotiated a settlement related to Bristol-Myers'
    drug Plavix, a deal which was subsequently rejected by the FTC.
        Now, once this deal was rejected, your generic version
    entered the market despite what seemed to be a blatant patent
    infringement. Indeed, after 3 weeks you were forced to pull the
    drug from the market. Did the consumer benefit more from 3
    weeks of availability in 2006, or would he or she have
    benefited more from the 6 months in 2011 as the settlement had
    called for? Does that make sense?
        Mr. Sherman. Well, you have to keep in mind the litigation
    is not over yet, and we think that there is a very high
    probability that we will win the litigation either in the first
    instance or on appeal.
        So, it was--and certainly also the--we did launch the
    product. We sold very large quantities for which the consumer
    certainly benefited very highly. And I think the benefit from
    our launching now is equal to what it would have been from a
    launch many years from now.
        But on top of that, as I said, there is a strong
    probability that we will yet be back in the market and save
    many billions of dollars for consumers by litigating and
    winning.
        Mr. Stearns. Is it possible that litigation will last
    longer than the patent time?
        Mr. Sherman. No. No. No. The decision in the district court
    will come within months, and then a decision on appeal will
    come probably a year later.
        Mr. Stearns. Isn't it true that a settlement can provide a
    certainty of early generic market entry before patent expiry,
    particularly in a difficult challenge?
        Mr. Sherman. Well, it depends on your frame of reference.
    If you assume that all patents are valid and would be
    infringed, then any settlement that gives any early entry
    beyond patent expiry is pro consumer. But large numbers of
    patents are invalid or would not be infringed. The very purpose
    of the Hatch-Waxman provisions was to put that to the test, as
    Mr. Wroblewski, I think, articulated very well.
        The incentive is you get a reward. You are supposed to get
    a reward from taking on the risk of litigating it. That is what
    you are supposed to do. And it is fundamentally wrong for a
    company to be able to be the first to file, take the reward and
    not litigate, and agree not only not to launch the product for
    years and not to litigate, but in so doing block everybody else
    from doing so.
        Mr. Stearns. Mr. Proger, this question is for you.
        If many of these settlements are pacts, end quote, to keep
    generics off the market early, as proponents of the bill have
    said, then in your view why have courts not adjudicated them as
    collusive behavior?
        Mr. Proger. Ranking Member Stearns, we have to start with
    the proposition that there is a patent that is presumed to be
    valid and enforceable. If the patent is valid and enforceable,
    and the settlement is within the scope and time of the patent,
    there is nothing wrong under our law today with the patent
    holder sharing that. We have to remember someone invented this
    wonder drug in the first place, and it is the patent holder,
    and we have given them certain rights.
        I am an antitrust lawyer. I am a past chair of the section
    of antitrust law of the American Bar Association. I believe in
    the antitrust laws; have been my whole life. But there are
    other equal dignities in our society, and the patent laws are
    one.
        Mr. Stearns. Mr. Wroblewski, your goal is to get cheaper
    generic drugs to market sooner; is that correct?
        Mr. Wroblewski. Actually consumers have two interests. I
    would say one would be for competitively priced generic drugs,
    but also continued pharmaceutical innovation.
        Mr. Stearns. If generic companies choose to stop
    challenging patents, delaying market entry, wouldn't that cost
    consumers millions of dollars?
        Mr. Wroblewski. But there is an incentive to challenge.
        Mr. Stearns. What is the incentive for generic companies to
    challenge a patent currently? If that incentive disappears, do
    you expect the same number of patent challenges that you see
    today?
        Mr. Wroblewski. I don't anticipate it disappearing.
        Mr. Stearns. Isn't it true products brought to markets
    through patent settlements have saved consumers a significant
    amount of money? I would think, ostensibly, yes.
        Mr. Wroblewski. I am not sure. Do you have an example in
    mind?
        Mr. Stearns. No, I am asking you the question.
        Mr. Wroblewski. Are there settlements in which there has
    been----
        Mr. Stearns. Isn't Prozac a good example, 2.5 billion?
        Mr. Wroblewski. Prozac was--they invalidated the patent. So
    they came in via the incentive, and it worked the way it should
    work.
        Mr. Stearns. Have any of the settlements that involved a
    reverse compensation component aided consumers, in your view?
        Mr. Wroblewski. Not that I am aware of.
        Mr. Stearns. Thank you, Mr. Chairman.
        Mr. Rush. The committee now recognizes Ms. Hooley from
    Oregon for 5 minutes.
        Ms. Hooley. Thank you, Mr. Chairman; and I thank our panel
    for your presentation.
        I have a few questions. Mr. Hemphill, we will start with
    you. Are these pay-for-delay settlements found in patent
    disputes outside the Hatch-Waxman framework? And, if not, why
    not?
        Mr. Hemphill. The situation in pharmaceuticals is quite
    special because of the fairly unique incentives that have been
    created by the scheme that Commissioner Leibowitz and others
    have said. So I would say they are highly special, which is why
    we see positive payments from the innovator to the generic firm
    in this industry but not in others and also why, when we pay
    attention to the interaction, as Mr. Proger mentioned, the
    equal dignity in antitrust and in patent law, we also have to
    think of the Hatch-Waxman Act, the sector-specific regulation
    that is in play here, which created this big push in the
    direction of litigation and in the direction of competition,
    which is being undermined by these settlements.
        Ms. Hooley. OK. Thank you.
        Why do you think--and I am going to stay with you, Mr.
    Hemphill, for another question. Why do you think it is
    preferable to enact legislation such as H.R. 1902, rather than
    have the FTC challenge these deals on a case-by-case basis?
        Mr. Hemphill. Well, if we were writing on a clean slate
    where there wasn't already a set of judicial opinions that have
    come out, to my view, the wrong way, perhaps the status quo
    would be fine. But in light of the fact that we have repeated
    cases that have failed to recognize and remedy the anti-
    competitive harm, under those circumstances I think stronger
    medicine is justified.
        Ms. Hooley. Mr. Sherman, as a generic manufacturer, you are
    testifying in support of this bill?
        Mr. Sherman. Yes, with qualifications.
        Ms. Hooley. With qualifications. While Teva, another
    generic manufacturer, does not support it as currently drafted,
    that is my understanding, why does your generic company seem to
    take a different position than another generic company on the
    bill?
        Mr. Sherman. Well, I think that it is fair to say that each
    person tries to serve the interest of his own company. In the
    case of most of our generic competitors, they see an enormous
    upside to be made through being first to file and settling
    litigation as opposed to litigating. But our view is that our
    proper role is to fight to bring the products to market as
    early as possible, and we have made a corporate decision to
    pursue that objective, and we have let our customers know. We
    hope that our customers will appreciate what we are doing in
    fighting to bring products to market and in opposing anti-
    competitive settlements that delay market entry.
        Ms. Hooley. OK. Thank you.
        Mr. Whitehouse, your testimony cites a need for flexibility
    to settle these cases, but doesn't this bill afford flexibility
    in section 3 where it authorizes the FTC to promulgate rules
    that permit settlement terms that are not anti-consumer or
    anti-competitive?
        Mr. Whitehouse. Well, the answer in short is no, because
    the rulemaking process is a particularly protracted and long-
    running process, and we are advocating that we need to have, at
    a minimum, a process whereby the FTC could, on a case-by-case
    basis, provide for exceptions where provisions seem obviously
    pro-competitive.
        Furthermore, in the interest of simple business planning
    and business certainty, it is important to know there are
    certain things you can do. So we also advocate there be
    specific carve-outs for other kinds of provisions beyond simply
    time off the patent that is now provided for in the introduced
    legislation that would enable business people to know there are
    certain kinds of things that have been demonstrably pro-
    competitive that should be permitted, and we have articulated
    those in our testimony.
        Ms. Hooley. OK. Thank you.
        Mr. Wroblewski, can the Consumers Union provide any figures
    on the loss to consumers because of these exclusionary payment
    settlements? Do you know how much of this loss is borne by the
    taxpayer through payments for prescription drugs under Medicare
    or Medicaid? And can we assume that any lack of available lower
    cost generic drugs increase the cost to the American industry
    through higher costs for employer health benefits or health
    plans?
        Mr. Wroblewski. It is difficult to put a number on what
    could have been, because the settlement agreements aren't made
    public. So we don't know what the terms of the settlements are.
    I know when we released our most recent best buy drug
    recommendations on cholesterol-reducing drugs we calculated
    that a consumer who takes the best buy drug, which in that
    particular case would have been a generic version, could have
    saved about $1,800 a year, which is substantial amounts of
    money, you know, for a particular consumer.
        Ms. Hooley. Thank you.
        Mr. Whitehouse, I know you have a note in your hand. Go
    ahead.
        Mr. Whitehouse. If I may, a couple of things. There was an
    important question left pending by Congressman Stearns that is
    relevant to the questions you are asking, which is are there
    savings from these settlements; and, of course, as I said in my
    oral statement and my written statement, there are. Settlements
    we think have taken about 83\1/2\ years off the patent life of
    the drugs where we have made settlements and have saved
    consumers about $67 billion, which is about the same as that
    annual amount which Mr. Leibowitz referred to for Medicare Part
    D. That is a lot of money. So there have been, we think, very
    real, substantial savings.
        The second thing is one needs to remember that a lot of
    these answers presume that we would have won the case, and of
    course that is exactly what is wrong here. There is a very high
    probability and a growing probability that you can't make that
    assumption. So you are faced with the need, again, if you are a
    substantial generic manufacturer, to decide among numerous
    cases and decide among those numerous cases which are the ones
    most likely to produce an imminent consumer benefit through
    litigating, which ones look weaker, we would be in a better
    position to settle, get something at least for the benefit of
    consumers, some time off the patent, and get an outcome that is
    still preferable to losing the case. And you have to be able to
    make those decisions.
        A one-dimensional negotiation with a brand company is not
    going to enable you to implement those decisions to the benefit
    of consumers with any confidence or predictability.
        Ms. Hooley. Thank you.
        Mr. Rush. The gentle lady's time is up.
        The Chair recognizes the gentle lady from Tennessee, Mrs.
    Blackburn.
        Mrs. Blackburn. Thank you, Mr. Chairman.
        I just wish I could take everybody's time and ask a lot of
    questions. I have lots of questions for all of them.
        Mr. Wroblewski, I, just listening to you, appreciate you
    and appreciate your magazine. But I am going have to tell you,
    sir, I just feel like you are kind of the cheerleader of the
    crowd. You want everybody to get it all and to get it all at a
    good price, but somebody has got to pay the price at some
    point, and that R&D has to be paid.
        I appreciate your position, as I said. I have been a long-
    term reader of your magazine. But I think we do have to realize
    these innovators and patent holders have to recoup their cost
    at some point.
        Mr. Proger, reading your background, your resume, you have
    worked with clinics, hospitals, a lot of the business process
    mergers. Antitrust you said was your kind of law. The
    settlements on first filers, is this something that innovators
    now look at just as the cost of doing business? Do they
    anticipate they are going to have to pay this? And is that
    adding to the overall cost of drugs?
        Mr. Proger. Well, certainly the innovator, the inventor of
    the drug, has to now consider the incentives of Hatch-Waxman,
    recognize that they may be challenged and there will be
    additional costs.
        Mrs. Blackburn. Did they set aside for that? As you are
    making your pro forma, do you say, well, and we are probably
    going to need X amount? Do you just write this in and consider
    it a cost of doing business, just a yes or no?
        Mr. Proger. I am not aware of whether they do so up front.
        Mrs. Blackburn. Would you advise people to?
        Mr. Proger. Yes.
        Mrs. Blackburn. You would?
        Mr. Proger. It is a very practical concern.
        Mrs. Blackburn. It would be a best practice action?
        Mr. Proger. It is certainly going to happen.
        Mrs. Blackburn. All right. So it would increase the cost of
    doing business.
        You know, sometimes I feel like we sit here, and it is easy
    for us to pick winners and losers, and it is unfortunate that
    many times that we do that. That is why I think, Mr. Hemphill,
    your statement about resetting the system and us doing that
    legislatively rather than the market doing that, that is of
    concern to me. That is kind of a red flag for me.
        We all think our kids are special, we think different
    things are special, and for you to say, you know, this is
    special, this is unique, it is still the process of innovation
    and doing business.
        And, let's see, I have 2 minutes left, so I am going to
    have to be quick. Mr. Sherman, very briefly, going back to the
    situation that you have been dealing with, I have got an
    article here, an August 9, 2006, article where, as you are
    talking about the regulatory review and the situation you have
    been in, you said you viewed efforts by brand name companies to
    extend monopolies through settlement negotiations as
    outrageous. Our focus was to get the concession that would
    enable us to launch when the FTC turned us down. That was your
    statement.
        OK, so let's say that is the case. So if that is the case,
    why don't we just get out of the way and let the private sector
    do its work? Very quickly.
        Mr. Sherman. Get out of the way in what sense, by repealing
    the Hatch-Waxman provisions?
        Mrs. Blackburn. I am asking you. Your best answer.
        Mr. Sherman. Well, my best answer would be that repealing
    the Hatch-Waxman provisions entirely would be better than a
    system in which the first to file can take the exclusivity and
    keep it while not moving to market and using it to keep others
    off the market.
        Mrs. Blackburn. OK. We have 1\1/2\ minutes left, and I want
    a yes or no from everybody down the line. Do you believe that
    it is going beyond our traditional jurisdiction or at least
    that it would be inappropriate for Congress to insert itself
    into the private legal negotiations between two parties and
    preventing them an avenue to redress their concerns? Yes or no?
        Mr. Whitehouse. Let me start at this end of the table. The
    answer is to the extent such a regulation sensors, the
    antitrust law is already provided as they presently stand.
        Mr. Wroblewski. No, because you already set up a structure
    to specifically encourage these types of patent challenges.
        Mr. Sherman. Yes.
        Mr. Proger. No, because Congress has already.
        Mr. Hemphill. I think Congress has to intervene, because it
    set up the Hatch-Waxman provisions, which provide a unique set
    of circumstances.
        Mrs. Blackburn. Very good. My time is gone. Thank you all
    very much.
        Mr. Rush. Mr. Burgess, you are recognized for 5 minutes for
    questioning.
        Mr. Burgess. Thank you, Mr. Chairman.
        Being a doctor, it has been kind of a life-long fantasy of
    mine to tell a lawyer answer the question yes or no, but I am
    going to resist doing that.
        Dr. Sherman, I just got to tell you, we hear all the time
    that Canada is a place where drugs are so cheap that they are
    literally jumping off the shelves into consumers' hands and
    that nobody ever has to worry about drug prices in Canada and
    we should do the same thing here in this country. So I was a
    little bit surprised to learn that you are even concerned about
    a generic and would spend all that money on a lawsuit. Are
    generics valuable to Canada as well?
        Mr. Sherman. Well, the situation is very similar in Canada
    to that in the United States. There is a brand market and a
    generic market, and we fight to bring products to the Canadian
    market as generics, just as we do in the United States.
        Mr. Burgess. But I thought you regulated prices in Canada.
        Mr. Sherman. The prices of brand name products are
    regulated, patented products.
        Mr. Burgess. So the patent price is regulated?
        Mr. Sherman. Patented products are regulated.
        Mr. Burgess. When the patent goes away, it would be the
    generic that could be competing with the brand name, is that
    not correct?
        Mr. Sherman. Yes. And there are usually several generics
    and the prices are much lower than the brands because prices
    are determined by competition.
        Mr. Burgess. Again, that was just for my general
    information. I thought Canada was completely different from
    where we live.
        Mr. Sherman. No.
        Mr. Burgess. Well, the bottleneck issue, though, for me
    keeps coming up; and I am concerned about the story that you
    told and the concept of forfeiting exclusivity. Do you think we
    go far enough in the bill that is before us? Has it addressed
    the problem sufficiently?
        Mr. Sherman. No, it hasn't addressed the problem.
        Mr. Burgess. It hasn't addressed it at all, has it?
        Mr. Sherman. No. I think what is important is not what the
    terms are of a settlement between a brand and a generic
    company. They should be free to settle as they wish. What is
    fundamentally wrong is that the generic in settling is
    blocking, continues to block all others from making a deal that
    is better for the consumer or from litigating and winning by
    retaining the exclusivity that it hasn't earned by not
    litigating.
        Mr. Burgess. This is such an important subject, and we have
    got such limited time.
        Mr. Proger, if I could ask you, if there were going to be
    one thing we were going to improve this legislation as it goes
    through, what approach should we take? What should we do?
        Mr. Proger. Obviously, Congressman, I have been pretty
    clear that I think the antitrust laws on a case-by-case basis
    would be far preferable to a broad ban on settlements. Many of
    the settlements contain pro-competitive aspects, and unless you
    know whether or not the patent is valid and enforceable you
    don't know whether there is a restraint in the first place.
        We keep presuming that the patent holder's patent is not
    valid. In many of these cases, it is. And because of Hatch-
    Waxman, which I would point out to the committee expressly says
    doesn't change the laws of patents, because of Hatch-Waxman,
    someone who may have a very valid, enforceable patent may still
    settle because they have so much at risk.
        Now, Hatch-Waxman has done a lot of good. It has brought
    generics to the market, and it cured a problem. The problem was
    that you could not even begin to start the generic process at
    FDA until after the patent expired; and the evidence was that--
    and Congressman Waxman pointed this out at the time of the
    legislation--that it was taking 3 more additional years to get
    the products to market. Now they come within 2 or 3 months.
        But in balancing the interest Hatch-Waxman also balanced
    the interest of getting someone to innovate and invent. We
    don't have these drugs in the first place if someone didn't
    invent them.
        Mr. Burgess. Mr. Whitehouse, would you have a thought if we
    were looking to improve this situation that we have in front of
    us going forward, do you have a suggestion for the committee?
        Mr. Whitehouse. Yes, Mr. Burgess. We have, in fact,
    proposed several suggestions that we would like to see changed.
    They include broadening the carve-outs, basically.
        If you are going to proceed down this path of having a
    prohibition with carve-outs, which we suggest may not be the
    best way to proceed, but if you are going to go down this path,
    that you ought to make sure that we can have arrangements for
    early entry on generic products other than the one that is the
    one in suit. That obviously is to the consumer's benefit when
    you can bring that about. That you be able to negotiate a full
    release for damages in a covenant not to sue going forward on
    all the patents on generic products that might be involved in
    the litigation or in the settlement; that you have a limited
    exclusive license during the exclusivity period when you come
    to market, again to preserve the incentives that Hatch-Waxman
    creates for generic companies; and, as we discussed earlier,
    that the FTC have case-by-case authority not just rulemaking
    authority--to exempt settlement provisions other than those
    specifically provided for in the carve-outs.
        Mr. Burgess. So more flexibility at the level of the FTC?
        Mr. Whitehouse. Yes, sir.
        Mr. Burgess. Let me ask you a question. The world is a
    little bit different place than in 1984 when Hatch-Waxman was
    first passed. Has it kept pace with the times?
        Mr. Whitehouse. Hatch-Waxman, generally, Mr. Burgess, has
    worked very, very well, we think. It has produced enormous
    benefits for consumers. It is intricate and complex in the
    interaction of its parts; and that is exactly why, as I think
    Mrs. Blackburn also recognized, there is an important need to
    be careful and not to make changes that have unintended
    consequences and upset an equilibrium that right now we think
    is working very, very well to the benefit of consumers, of the
    Government, of third-party payors and preserving the health of
    the pharmaceutical companies which are essential to making all
    those other things happen.
        Mr. Rush. The gentleman's time is up.
        Mr. Burgess. I thank the chairman.
        Mr. Rush. This concludes the testimony of our----
        Mr. Whitehouse. Mr. Chairman, may I have your indulgence to
    make two short points that I will try to take less than a
    minute to do? I would be grateful if you would. I am sorry for
    intruding on the committee's time.
        I would like to point out that the 70 percent success
    statistic Mr. Wroblewski referred to refers to a time period
    between 1992 and 2000, a time period in which patent challenges
    were very different from those, as my testimony makes clear in
    some length, had different characteristics and had different
    probabilities of success for the parties involved. And it is
    materially harder to win these cases now than it was then.
        And, second, it is very important to remember that generic
    pharmaceutical companies, their stock price isn't going to be
    helped by taking cash settlement payments in patent cases. They
    are going to benefit only in the marketplace, from bringing
    products to market as effectively and as quickly as they can.
    So their incentives are not to take cash or any other form of
    consideration in lieu of coming to market. So there is a
    fundamental assumption we made here that there is some
    nefarious or unwholesome incentive on the part of these
    companies and the very nature of these companies makes that
    improbable.
        Thank you very much.
        Mr. Rush. Thank you.
        Mr. Wroblewski, did you want to respond for 1 minute?
        Mr. Wroblewski. In terms of the 70 percent rate, that is
    the only statistic that is really out there that shows over a
    broad, you know, an 8-year period that looked at every case
    that was out there.
        And I think we get somewhat sidetracked when we concentrate
    on the actual number. As I tried to make the point earlier, and
    maybe I was unsuccessful, but the number, the success rate
    isn't really that important. Because if the generic wins, that
    is good for consumers because it allows a generic to come into
    the market at competitively priced. If the brand company wins,
    it validates their investment, which encourages additional
    innovation; and so that is good, too.
        So I think if it were 30 percent, it is neither here nor
    there. It is the fact that you have put an incentive in there
    to try to clear out the patents that are invalid. And if they
    are unsuccessful, then that is fine. You want to validate the
    brand company's patent rights.
        Thank you.
        Mr. Rush. Thank you very much. This concludes the
    testimony.
        I have in my hand an article from the Wall Street Journal
    dated May 1, 2007, under the title ``Patent Holder's Power is
    Curtailed''. I would enter this article into the record with
    unanimous consent.
         I also want to announce that there will be a period of 30
    days that the record will be open for parties to insert
    statements into the record. The witnesses, I will ask that you
    be prepared to receive written follow-up questions from members
    of this committee and to respond within the 30-day period of
    time. Thank you very much.
        I want to thank the witnesses for coming and for
    participating. You certainly have helped this committee
    tremendously, and thank you so very much for your sacrifices of
    your time. Thank you so very much.
        The subcommittee stands adjourned.
        [Whereupon, at 5:20 p.m., the subcommittee was adjourned.]