[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.]

                                 
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