[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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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.]