    [Senate Hearing 110-4]
    [From the U.S. Government Publishing Office]

                                                              S. Hrg. 110-4

       PAYING OFF GENERICS TO PREVENT COMPETITION WITH BRAND NAME DRUGS:
                            SHOULD IT BE PROHIBITED?

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

                                    HEARING

                                   before the

                           COMMITTEE ON THE JUDICIARY
                              UNITED STATES SENATE

                           ONE HUNDRED TENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                JANUARY 17, 2007

                                   __________

                               Serial No. J-110-4

                                   __________

             Printed for the use of the Committee on the Judiciary

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    _____________________________________________________________________________
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                           COMMITTEE ON THE JUDICIARY

                      PATRICK J. LEAHY, Vermont, Chairman
    EDWARD M. KENNEDY, Massachusetts     ARLEN SPECTER, Pennsylvania
    JOSEPH R. BIDEN, Jr., Delaware       ORRIN G. HATCH, Utah
    HERB KOHL, Wisconsin                 CHARLES E. GRASSLEY, Iowa
    DIANNE FEINSTEIN, California         JON KYL, Arizona
    RUSSELL D. FEINGOLD, Wisconsin       JEFF SESSIONS, Alabama
    CHARLES E. SCHUMER, New York         LINDSEY O. GRAHAM, South Carolina
    RICHARD J. DURBIN, Illinois          JOHN CORNYN, Texas
    BENJAMIN L. CARDIN, Maryland         SAM BROWNBACK, Kansas
    SHELDON WHITEHOUSE, Rhode Island     TOM COBURN, Oklahoma
                Bruce A. Cohen, Chief Counsel and Staff Director
          Michael O'Neill, Republican Chief Counsel and Staff Director

                                C O N T E N T S

                                  ----------

                        STATEMENTS OF COMMITTEE MEMBERS

                                                                       Page

    Feingold, Hon. Russell D., a U.S. Senator from the State of
      Wisconsin, prepared statement..................................    97
    Grassley, Hon. Charles E., a U.S. Senator from the State of Iowa.    40
        prepared statement...........................................    99
    Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah......    30
    Kohl, Hon. Herb, a U.S. Senator from the State of Wisconsin......     5
    Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont.     1
        prepared statement...........................................   116
    Schumer, Hon. Charles E., a U.S. Senator from the State of New
      York...........................................................    28
    Specter, Hon. Arlen, a U.S. Senator from the State of
      Pennsylvania...................................................     3

                                   WITNESSES

    Downey, Bruce L., Chairman and Chief Executive Officer, Barr
      Pharmaceuticals, Inc., Washington, D.C.,.......................    23
    Hirsh, Merril, Partner, Ross, Dixon and Bell, LLP, Washington,
      D.C............................................................    21
    Leibowitz, Jon, Commissioner, Federal Trade Commission,
      Washington, D.C................................................     6
    Tauzin, Billy, President and Chief Executive Officer,
      Pharmaceutical Research and Manufacturers of America (PhRMA)
      Washington, D.C................................................    18
    Wroblewski, Michael, Project Director, Consumer Education and
      Outreach, Consumers Union, the Non-Profit Publisher of Consumer
      Reports, Washington, D.C.......................................    16

                             QUESTIONS AND ANSWERS

    Responses of Bruce L. Downey to questions submitted by Senators
      Schumer, Feinstein and Kohl....................................    41
    Responses of Merril Hirsh to questions submitted by Senators Kohl
      and Feinstein..................................................    45
    Responses of Jon Leibowitz to questions submitted by Senators
      Kohl, Feinstein, Leahy and Hatch...............................    71
    Responses of Billy Tauzin to questions submitted by Senators
      Schumer, Feinstein and Kohl....................................    76
    Responses of Michael Wroblewski to questions submitted by
      Senators Kohl and Feinstein....................................    83

                           SUBMISSIONS FOR THE RECORD

    Downey, Bruce L., Chairman and Chief Executive Officer, Barr
      Pharmaceuticals, Inc., Washington, D.C., prepared statement....    87
    Hirsh, Merril, Partner, Ross, Dixon and Bell, LLP, Washington,
      D.C., prepared statement.......................................   100
    Leibowitz, Jon, Commissioner, Federal Trade Commission,
      Washington, D.C., prepared statement...........................   120
    Tauzin, Billy, President and Chief Executive Officer,
      Pharmaceutical Research and Manufacturers of America (PhRMA)
      Washington, D.C., prepared statement...........................   147
    Wroblewski, Michael, Project Director, Consumer Education and
      Outreach, Consumers Union, the Non-Profit Publisher of Consumer
      Reports, prepared statement, Washington, D.C...................   164

       PAYING OFF GENERICS TO PREVENT COMPETITION WITH BRAND NAME DRUGS:
                            SHOULD IT BE PROHIBITED?

                                  ----------

                          WEDNESDAY, JANUARY 17, 2007

                                           U.S. Senate,
                                    Committee on the Judiciary,
                                                       Washington, D.C.
        The Committee met, Pursuant to notice, at 10:02 a.m., in
    room SD-226, Dirksen Senate Office Building, Hon. Patrick J.
    Leahy, Chairman of the Committee, presiding.
        Present: Senators Leahy, Kohl, Schumer, Cardin, Whitehouse,
    Specter, Hatch, and Grassley.

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

        Chairman Leahy. Good morning. This hearing today is the
    continuation of a longstanding, bipartisan effort by several
    members of this Committee to provide consumers more choices and
    lower-cost medicines. My focus is on making lower-cost generic
    medicines available not only to our families but to our
    seniors. The existing law is being misused by some brand-name
    and generic drug companies. The fact we have scheduled this
    hearing so early in this new Congress is a sign, I hope, that
    people realize that this is going to be a high priority for
    this Committee. It deserves to be and consumers want it to be.
        We will examine the harmful effects of a type of collusion
    that limits consumer choices and that keeps consumer prices
    artificially high. Now, rarely do we have such a clear-cut
    opportunity to remove impediments that prevent competition and
    keep the marketplace from working as they should, to benefit
    consumers. Basically, as you know, we have had the situation
    where a drug company will actually pay a generic producer not
    to put a drug on the market so that they can keep the prices
    high.
        Now, Congress never intended for brand-name drug companies
    to be able to pay off generic companies not to produce generic
    medicines. We never intended that. That would be a sham, it
    would be harmful to consumers, and it would be a crime.
        In fact, the history and text of the Hatch-Waxman laws make
    it clear that the opposite of delay was the goal.
        Now, it is no secret that prescription drug prices are
    rising. They are a source of considerable concern to many
    Americans, especially senior citizens and working families. In
    a marketplace that is free of manipulation--free of
    manipulation--generic drug prices can be as much as 80 percent
    lower than the comparable brand-name version.
        In June of last year, I sponsored a bill that was
    introduced by Senator Kohl of Wisconsin, also sponsored by
    Senators Grassley, Schumer, Feingold, and Johnson, which would
    have stopped these payoffs to delay access to generic
    medicines. Working with Senators Kohl and Grassley and with
    many others, we will try to enact a new version.
        You know, it is unfortunate we even have to do this. As I
    said in June, there are still some companies driven by greed
    that may be keeping low-cost, life-saving generic drugs off the
    marketplace, off pharmacy shelves, and out of the hands of
    consumers by carefully crafted anticompetitive agreements.
        Since some of these deals used to be done in secret, behind
    closed doors, I am glad that because of a bill that was
    reported out of this Committee, Congress is now aware of this
    problem. In 2001, I worked with Chairman Hatch and later with
    Senator Grassley to make sure that our law enforcement
    agencies--the Federal Trade Commission and the Department of
    Justice--at least were made aware of the secret, sometimes
    potentially criminal deals.
        The New York Times and others published major investigative
    stories on how the manufacturer of a hypertension drug used to
    help prevent strokes and heart attacks--Cardizem CD--had made
    deals to pay a potential generic competitors $10 million every
    3 months to stop it from developing a generic version of
    Cardizem. Of course they did. They were making a fortune, and
    they did not want those people who needed that drug to be able
    to buy a lower-cost generic. This led to my introduction of S.
    754, the Drug Competition Act, which was reported out of this
    Committee and was finally passed as part of the Medicare
    Modernization Act Amendments with significant help from Senator
    Grassley.
        The concept of that law is simple: It requires if a brand-
    name company and a generic firm enter into an agreement that is
    related to the sale of either the brand-name drug or its
    generic version, then both companies must file copies of any
    agreements with the FTC and with the Department of Justice so
    those agencies can enforce the law. Incidentally, once the
    Cardizem deal was exposed and challenged, the U.S. Circuit
    Court held that the ``horizontal market allocation
    agreement...[was] per se illegal under the Sherman Act.''
        Now, Commissioner Leibowitz will testify about what the FTC
    has found regarding these deals--the deals between the brand-
    name companies and generic companies.
        I will once again strongly support a legislative effort led
    by Senator Kohl and Senator Grassley to allow the FTC to do its
    job. Two subsequent circuit court decisions have undermined the
    Cardizem approach and relied on the general rule favoring
    settlements between private litigants, even though private
    corporate litigants have duties to their shareholders, not
    consumers, to maximize profits. The problem with respect to
    deals not to compete is that the interests of millions of
    senior citizens, millions of children, and millions of others
    are not taken into account. Those cases ignore the decision in
    Associated General in which the U.S. Supreme Court noted that
    ``the Sherman Act was enacted to assure our customers the
    benefits of price competition....'' The focus is on consumers,
    not on whether private companies should be able to make back-
    room deals that harm consumers as part of a settlement of a
    lawsuit.
        Our bipartisan bill will solve that problem by making
    payments by brand-name companies to delay introduction of a
    generic drug unlawful. My initial position is to follow this
    bright-line approach. I will be interested in hearing from
    others, of course, and it will be a major priority of this
    Committee.
        [The prepared statement of Senator Leahy appears as a
    submission for the record.]
        With that, I would yield to the distinguished senior
    Senator from Pennsylvania.

    STATEMENT OF HON. ARLEN SPECTER, A U.S. SENATOR FROM THE STATE
                            OF PENNSYLVANIA

        Senator Specter. Thank you, Mr. Chairman.
        This Judiciary Committee is used to hearings on important
    competing values and complex conceptual matters, and today's
    hearing is a top-drawer illustration of the issues which we
    confront and which are confronted here.
        We have two very important values at issue here. One is to
    encourage pharmaceutical companies to develop life-saving
    drugs, and I can speak with some authority personally on that
    subject, having been the beneficiary of some very important
    drugs in battling Hodgkin's. Every 2 weeks I got a cocktail--
    not the kind of cocktail I would prefer. It was in the morning,
    and I did not like the ingredients, but it was life-saving. And
    the pharmaceutical companies take a decade or so to develop
    these drugs at a cost in the range, reportedly, of $1 billion.
    And only one out of thousands make it. They have a patent
    period no longer than 20 years to encourage them to develop
    further life-saving drugs. That is one very important value. On
    the other side of the issue is the matter of holding down costs
    so that these life-saving drugs in generic form can be
    available to more people to save their lives.
        There are three studies which I think are worth noting at
    the outset of our hearing. One is a study, published by the
    Food and Drug Administration in 2005, that determined that once
    generics begin competing, prices fall by almost 50 percent.
    Second, according to the Generic Pharmaceutical Association,
    generic drugs account for 56 percent of all drug sales in the
    United States, while revenues from generic drugs are only one-
    tenth that of brand-name manufacturers. A third study,
    Pharmaceutical Care Management Association recently published
    findings that Medicare would save over $23 billion between now
    and 2010 by purchasing newly available generic drugs instead of
    the brand-name drugs that are currently purchased.
        In my capacity as Chairman of the Appropriations
    Subcommittee dealing with the Department of Health and Human
    Services, I can attest to the grave difficulties of finding
    funding for very important medical matters like the National
    Institutes of Health and the Centers for Disease Control so
    that we deal with these kinds of savings that are very, very
    important.
        The legal issues here are conceptually very complicated. We
    have had one circuit court, the Sixth Circuit, conclude that
    these settlement agreements are so-called per se antitrust
    violations. That is fancy Latin for meaning all you have to
    show is the settlement agreement and there is a violation of
    the antitrust laws. Two other circuits--the Second and the
    Eleventh Circuit--have said that a rule of reason applies, so
    it is a balancing test. And the articulated rule of reason is
    this: that patent settlements are reasonable so long as the
    exclusionary effects of the settlement do not exceed the
    exclusionary effects of the patent.
        I do not think this hearing will be quite long enough to
    determine what that succinctly stated formula means. I have an
    expert in antitrust law, Ivy Johnson, and she has been trying
    to explain it to me for several days. And I have had experience
    in the antitrust field in the private practice of law before
    coming to the Senate and considerable experience here on this
    Committee.
        In reviewing the leading cases, Cardizem, where the Sixth
    Circuit said it was a per se violation, and Valley Drugs and
    Schering-Plough, where the Eleventh Circuit said it was rule of
    reason, and the Tamoxifen case, where the Second Circuit said
    it was rule of reason, involve extraordinarily complicated
    factual situations. One idea which occurs to me is whether when
    the lawsuits are settled where there is litigation between the
    generic maker and the patent holder, a condition of the
    settlement ought to be for the presiding judge to examine it
    and see if the settlement does or does not violate the
    antitrust laws, instead of inviting a later lawsuit where
    purchasers want lower costs and come in and sue the parties to
    the agreement.
        The distinguished representative from the Federal Trade
    Commission, who performed--he just raised his eyebrows. You
    must agree with that--a lot of service for this Judiciary
    Committee and for Senator Kohl's Subcommittee, is going to
    testify, according to his written presentation, that there
    ought to be a per se violation. And the thought crosses my
    mind, if the FTC thinks that, why doesn't the FTC act on it?
        There is a gesture of ``Who knows?'' And maybe it is more
    appropriately left to the Congress. Sometimes the gestures and
    the body language tell more than the long, verbose written and
    oral statements.
        But as I look at this field, it is fraught with complexity
    on the competing values and fraught with complexity on what the
    parties have entered into. And I do think there is a burden on
    people making these settlements to show that they are not
    anticompetitive, because why settle the case unless it is in
    the advantage of the patent holder and raises a question which
    I am not prepared to answer: Is the generic company being
    bought off to the detriment of the public? But I commend the
    distinguished Chairman for convening this hearing and the work
    that Senator Kohl has done, and I regret that I am going to
    have to excuse myself early to attend a meeting by the National
    Security Counselor, who has invited a group of Senators to meet
    on the Iraq issue. We are being buffeted on all sides by
    complex issues.
        Thank you, Mr. Chairman.
        Chairman Leahy. Thank you, Senator Specter, and I
    appreciate your being here for this because this will be a
    priority.
        Before introducing Commissioner Leibowitz and swearing him
    in, I did want to yield to Senator Kohl, who will also take
    over and chair this hearing when I have to leave for another
    one of those similar kinds of things. There seems to be a lot
    of discussion in Washington about the war in Iraq of late, and
    I think that is a very good thing.
        Senator Kohl?

     STATEMENT OF HON. HERB KOHL, A U.S. SENATOR FROM THE STATE OF
                               WISCONSIN

        Senator Kohl. I thank you, Mr. Chairman, for calling this
    hearing here today. This hearing will examine legislation that
    you and I have sponsored, along with Senators Grassley and
    Schumer, that will end an anticompetitive abuse which denies
    millions of consumers access to generic drugs. Our bill does
    this by forbidding the collusive payoffs between brand-name
    drug companies and generics which are designed to keep low-cost
    alternatives off the market.
        As health care costs continue to spiral upwards, the high
    price of prescription drugs leads the way. A recent independent
    study found that prescription drug spending has more than
    quadrupled since 1990. One way to tame the cost of prescription
    drugs is to promote the introduction of generic alternatives.
    Consumers realize substantial savings once generic drugs enter
    the market. One study estimates that every 1-percent increase
    in the use of generic drugs could save $4 billion annually in
    health care costs in our country.
        Unfortunately, recent years have seen the growing practice
    of collusion between some brand-name drug manufacturers and
    generic manufacturers to prevent competition. This collusion
    consists of payments, often as much as hundreds of millions of
    dollars, made by brand-name companies to generic companies to
    settle patent litigation. In return for this money, the generic
    company promises to keep its competing drugs off the market.
    The brand-name company profits so much by delaying competition
    that it can easily afford to pay off the generic company. The
    losers, of course, are the American people who continue to pay
    unnecessarily high drug prices for years to come.
        Just two examples of the benefits of early generic entry
    prior to patent expiration. No. 1, the generic version of
    Prozac, which entered the market in 2001, approximately 3 years
    before the patent expired, resulted in consumer savings of
    about $2.5 billion. No. 2, generic competition to Paxil in
    2003, 3 years before the last patent would have expired, saved
    consumers about $2 billion.
        The patent settlements targeted by our bill would eliminate
    such practices. The FTC has found that these agreements violate
    antitrust law. However, two circuit court decisions in 2005
    allowed these agreements, regardless of their obvious
    anticompetitive impact, and the effect of these court decisions
    has been stark. In the year after these decisions, the FTC has
    found half of all patent settlements, 14 of 28, did involve
    payments from the brand-name to generic manufacturer in return
    for an agreement by the generic manufacturer to keep its drug
    off the market. In the year before these decisions, not a
    single patent settlement reported to the FTC contained such an
    agreement.
        So I believe the time has now come to forbid these
    anticompetitive, anticonsumer, reverse payment patent
    settlements. The bill that we are introducing today does just
    that. It will state clearly and simply that it is unlawful
    under the antitrust laws for any drug maker to settle patent
    litigation by paying off a competitor in return for an
    agreement to keep a competing product off the market.
        So I urge my colleagues to join us in supporting this
    legislation to end this anticompetitive practice that enriches
    drug companies at the expense of consumers. Offering consumers
    generic alternatives is essential to bringing high drug prices
    down, and we ought to have zero tolerance for efforts by big
    brand-name drug companies to pay off their competitors to keep
    competition off the market. These payoffs help big drug
    companies maximize their profits while ordinary consumers pay
    the price.
        I am very pleased that we have a distinguished group of
    witnesses here today, and we are looking forward to their
    testimony.
        Thank you, Mr. Chairman.
        Chairman Leahy. Thank you, Senator Kohl. And I know our
    first witness, Commissioner Leibowitz of the Federal Trade
    Commission, has had a long and distinguished public service. He
    was Democratic chief counsel and staff director for the U.S.
    Senate Antitrust Subcommittee from 1997 to 2000. He served as
    chief counsel and staff director for the Senate Subcommittee on
    Terrorism and Technology from 1995 to 1996 and the Senate
    Subcommittee on Juvenile Justice from 1991 to 1994. And very
    important to this Committee, he served as chief counsel to
    Senator Herb Kohl from 1989 to the year 2000. In the private
    sector, Mr. Leibowitz served most recently as vice President
    for Congressional affairs for the Motion Picture Association of
    America from 2000 to 2004. He is a Phi Beta Kappa graduate of
    the University of Wisconsin with a B.A. in American History,
    and he also graduate from the New York University School of Law
    in 1984.
        Mr. Leibowitz, would you please stand so I can swear you
    in? Do you swear that the testimony you are about to give is
    the truth, the whole truth, and nothing but the truth, so help
    you God?
        Mr. Leibowitz. I do.
        Chairman Leahy. Thank you. And, Mr. Leibowitz, please go
    ahead with your testimony. I am going to switch seats with
    Senator Kohl because I will be leaving shortly after you
    finish.

        STATEMENT OF JON LEIBOWITZ, COMMISSIONER, FEDERAL TRADE
                      COMMISSION, WASHINGTON, D.C.

        Mr. Leibowitz. Thank you, Mr. Chairman.
        Chairman Leahy, Ranking Member Specter, Senator Kohl,
    Senator Cardin, other members of the Committee, we applaud your
    early hearing on legislation to ensure that consumers continue
    to have access to low-priced generic drugs. It is critical to
    eliminate the pay-for-delay settlement tactics employed by the
    pharmaceutical industry. Simply put, companies should not be
    able to play ``Deal or No Deal'' at the expense of American
    consumers.
        Mr. Chairman, I am particularly honored to return to the
    Committee for which I worked for so many years. In the
    introduction, you made me sound much more impressive than I
    know myself to be, but I do appreciate it. I am honored to come
    back here.
        But let me start with the usual disclaimer. The written
    statement that we submitted represents the views of the
    Commission. My oral testimony reflects my own views, and not
    necessarily the views of any other Commissioner.
        There is a particular urgency to pharmaceutical competition
    issues today. Recent appellate decisions make it difficult to
    challenge so-called exclusion payments--that is, patent
    settlements in which the brand-name drug firm pays the generic
    firm 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, which slowed in 2005
    after years of precipitous growth, will begin to rise again.
    These increased costs will burden not only individual
    consumers, but also the Federal Government's new Medicare
    program, State governments, and American businesses striving to
    compete in a global economy--like General Motors, which reports
    that employee health care costs add $1,500 to the price of each
    and every car that rolls off its assembly line.
        Mr. Chairman, as our 2006 Patent Settlement Report released
    today confirms, this is not just a theoretical concern. In the
    past year, we have seen a dramatic increase in these types of
    settlements.
        Now, when Congress enacted the Hatch-Waxman statute in
    1984, you encouraged speedy introduction of generics by
    establishing mechanisms to challenge invalid or narrow patents
    on branded drugs. This statutory framework ensures that our
    pioneer drug firms remain the envy of the world--and they are--
    while also delivering enormous consumer savings. When the first
    generic enters the market, it generally does so at a 20- to 30-
    percent discount off of the brand price. Prices drop even
    further, by 80 percent or more, after other generic competitors
    go to market, usually 6 months later. Generic competition
    following successful patent challenges in just four products--
    and, Senator Kohl, you alluded to some of these--Prozac,
    Zantac, Paxil, and Platinol--is estimated to have saved
    consumers more than $9 billion alone.
        But these benefits will be at risk, as will the legacy of
    Hatch-Waxman itself, if companies are able to settle litigation
    through arrangements in which brands can pay generics to sit it
    out. Sadly, the incentives to enter into such pernicious pay-
    for-delay agreements 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. As a result,
    with these agreements both firms are better off than they would
    be if they competed. Of course, consumers are left holding the
    bag or, more appropriately, footing the bill.
        For the past decade, the FTC has made challenging these
    pharmaceutical patent settlements a bipartisan priority. In
    2000 and 2001, the Commission obtained two major consents
    involving anticompetitive payments between brands and generics.
    We put companies on notice that we would consider all available
    remedies, including disgorgement of profits, against this
    behavior in the future, and our actions stopped this conduct
    cold.
        The Commission set forth rules that everyone understood. If
    you settle a case by paying off a generic to stay out of the
    market, we will not let you get away with it. As a result, to
    the best of our knowledge, there were plenty of settlements
    between 2000 and 2004 and no exclusion payments.
        In 2003, the Commission ruled that a 1997 settlement with a
    payment from Schering-Plough, which is the brand, to Upsher-
    Smith, the generic, violated the antitrust laws. The case
    involved a potassium supplement widely used by older Americans
    taking medication for high blood pressure. The Eleventh Circuit
    reversed us in 2005, and the Second Circuit, in a 2-1 decision
    in the Tamoxifen case, which Senator Specter alluded to, issued
    a similar holding later that year. These decisions, which
    essentially allow a patent holder to compensate a generic
    except under very limited circumstances, have dramatically
    altered the legal landscape--and, we believe, to the detriment
    of consumers.
        Mr. Chairman, how do we know this to be accurate? Well,
    thanks to the reporting requirement that you, Senator Leahy,
    and Senator Grassley included in the 2003 Medicare
    Modernization Act, the FTC reviews each and every Hatch-Waxman
    settlement. Tellingly, here is 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 contained both
    a payment from the brand and an agreement by the generic to
    defer entry. In other words, the parties could--and they did--
    settle patent litigation without money flowing to the generic.
        But data from fiscal year 2006 is far more disturbing. The
    report that we released this morning shows that half of all
    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. Almost all the settlements with
    first filers, 9 out of 11, involve similar restrictions. In
    other words, just before Schering and Tamoxifen, there were no
    such payments. Just after these decisions, it appears to be the
    new way of doing business.
        Mr. Chairman, given how profitable these agreements are for
    both the brands and the generics, it is not surprising that the
    industry has reacted so quickly to recent court decisions.
    After all, they do have responsibilities to their shareholders.
    Nor should it be hard to predict what will happen if nothing
    changes. There will be more and more of these settlements with
    later and later entry dates. 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.
        From our perspective, we will continue to be vigilant in
    looking for ways to challenge anticompetitive settlements. It
    is a matter of public knowledge that we are looking to bring a
    case that will create a clearer split in the circuits and
    encourage the Supreme Court to resolve this issue. But that
    could take years and the outcome is uncertain.
        A legislative approach could provide a swifter, more
    certain, and more comprehensive solution. For that reason, we
    strongly support legislation to prohibit these anticompetitive
    payments, and we strongly support the intent of the bipartisan
    bill to be introduced by Senators Kohl, Leahy, Grassley, and
    others, which takes a bright-line approach to prohibiting these
    deals. Drafting such a measure is challenging. The deals are
    obviously very difficult or complex, so we are happy to work
    with you as the bill moves forward.
        Mr. Chairman, we do have enormous respect for the
    pharmaceutical industry, both brands and generics. Brand drug
    companies pursue hundreds, perhaps thousands, of unsuccessful
    candidates for each one that comes to market, and these
    companies have brought significant health benefits to
    consumers--as Senator Specter said, life-saving drugs. For
    their part, generic drug companies have produced low-cost
    pharmaceuticals and pushed the brands to innovate even further
    and faster. And we are not opposed to all settlements. Let me
    try to briefly dispel that urban myth. We have brought only a
    handful of cases involving pharmaceutical agreements and none
    involving deals between 2000 and 2005--that is, before the
    Schering decision. But we do not and we cannot support
    settlements when brands and generics resolve their disputes at
    the expense of consumers.
        Mr. Chairman, at a time when our Nation faces the challenge
    of rising health care costs, the antitrust laws and the Hatch-
    Waxman Act should be used to ensure innovation and lower
    prices. They should not be used to undermine competition, nor
    to evade congressional intent--though, of course, ultimately
    that is for you to decide.
        Thank you so much. I am happy to answer questions.
        Chairman Leahy. I will be leaving now, as I said, turning
    over to Senator Kohl. I will submit some questions for the
    record. I am especially interested in your views on why the
    Justice Department declined the FTC's request on cert. after
    Schering-Plough to find out--to get some clarity. I would have
    thought that clarity would be in the interest of all of us, and
    I was surprised that they did not agree with you on that.
        So, Senator Kohl, thank you very much.
        Mr. Leibowitz. Thank you, Senator.
        Senator Kohl [Presiding.] Thank you, Chairman Leahy.
        Commissioner Leibowitz, patent settlements between brand-
    name and generic drug manufacturers in which brand-name
    companies pay generic companies many millions of dollars to
    keep their product off the market, how does this harm
    consumers? And are you in a position to quantify in any way the
    amount of higher drug prices that consumers have had to pay as
    a result of some of these settlements?
        Mr. Leibowitz. Well, there was a CBO study from 1994 that
    said consumers save $8 to $10 billion a year from generic
    drugs. But now there are many, many more generics on the
    market, many more drugs on the market, and so we think the
    savings are substantially greater.
        It is hard to quantify the harm that we see from what we
    believe are these anticompetitive exclusion payments, but what
    they tend to do, essentially, the brand will pay the generic
    some form of consideration--it could be a cash payment; it
    could be not offering an authorized generic; it could be a
    licensing deal--and the generic will stay out of the market
    longer. It will not enter sooner. And the longer it stays it
    out of the market, of course, the more consumers are forced to
    pay higher prices for their drugs.
        There is a huge incentive, obviously, to make these deals
    because the price goes down so much after the first generic
    and, really, subsequent generics enter. So there is always
    really a large ``sweet spot'' where the brand can pay the
    generic and the generic will earn more by not competing than by
    competing. And the brand will earn more by not having
    competition in the market, notwithstanding it has made this
    reverse payment.
        Senator Kohl. Potentially, what will happen to the whole
    generic movement, in your opinion, if brand-name manufacturers
    are in a position to pay off generics to keep their product off
    the market and recognize how profitable this is to them, this
    whole generic movement which is saving consumers so much money,
    what will happen to it?
        Mr. Leibowitz. Well, I don't think you will see the end to
    the generic industry. Obviously, there are a number of generic
    drugs--hundreds, thousands--that are already out there. But
    what you would see is generic entry will be pushed back to the
    end of the patent of the brand--or 6 months before the patent
    of the brand--so it can retain that exclusivity. And I do not
    believe--although, again, this is for the three of you and the
    Committee to decide--we do not believe that that was the intent
    of Hatch-Waxman. The intent of Hatch-Waxman was to allow
    generics--when they were not infringing on the patent, or if
    the patent of the brand was invalid--to enter the market sooner
    and to bring these low-cost drugs to consumers.
        Senator Kohl. Thank you.
        Senator Specter, do you have questions?
        Senator Specter. Yes, thank you very much, Mr. Chairman.
        Commissioner Leibowitz, is there any latitude under
    existing law for a brand holder and a generic manufacturer to
    enter into an agreement which can be kept secret and not
    disclosed to the FTC or otherwise be made public, any latitude
    at all?
        Mr. Leibowitz. If it is a pharmaceutical patent settlement,
    under Hatch-Waxman, I do not believe that is possible. They
    must notify us under the Medicare Modernization Amendment that
    Senator Leahy, Senator Hatch, and this Committee passed in
    2003.
        Senator Specter. Commissioner, why not have the court which
    has the litigation on the underlying patent issue, litigation
    between the patent holder and the generic, make a decision as
    to whether there is an antitrust violation? We have a
    proliferation of cases in the Federal court. The dockets are
    very, very heavy. There are many illustrations where there is a
    public interest involved. If two private parties are involved
    and they come to a settlement, that is between them. But when
    there is a public interest involved, it is not unusual for the
    court to examine the public's interest and see if the public
    interest is being respected. Why not short-circuit all of this
    complex antitrust litigation by requiring the court to approve
    the settlement, taking into account the public interest?
        Mr. Leibowitz. Well, I think that is a very interesting
    approach, and I suppose you could--if you are interested in
    writing legislation to require the court to do that. Of course,
    we would want to work with you. But the courts have been very
    reluctant, as you point out, to look into the merits of the
    patents themselves, in part because they are interested in
    settlement.
        Senator Specter. But the courts are looking into it in
    extraordinarily complicated cases to read these decisions in
    Schering-Plough v. FTC or the Tamoxifen case or Valley Drugs,
    you have to have a chart to diagram it to figure out all the
    parties. And the patent is recognized in many cases right up to
    the expiration date. There are very complex considerations. Why
    burden another court? Why not have the court making the
    settlement make that part of its duty? They have already got
    the issues before them.
        Mr. Leibowitz. Well, I would make a couple of points in
    response to that. I mean, I think it is an interesting idea,
    and obviously you are troubled by these settlements, as I think
    the whole Committee is.
        First of all, it is partly the substantive standard that
    courts are applying. As you pointed out, the Sixth Circuit in
    Cardizem applies a sort of per se illegality approach. The
    Tamoxifen court--the Second Circuit in a 2-1 decision--and the
    Schering court apply I would almost say something that is less
    than rule of reason--almost sham, fraud on the Patent Office or
    beyond the scope of the patent in years. So I think--
        Senator Specter. Well, wait a minute. If the court says it
    is rule of reason, you call it sham?
        Mr. Leibowitz. Well, it also says that they are looking to
    see whether there is a sham or fraud. In the Commission's
    decision in Schering, the FTC decision that was reversed on
    appeal by the Eleventh Circuit, we took a rule-of-reason
    approach.
        Senator Specter. Let me interrupt you to ask you two more
    questions because I only have 5 minutes. When the Congress
    intervenes to declare conduct a per se violation of the
    antitrust laws, an automatic violation, we do so where we have
    substantial certainty as to the anticompetitive effects as to
    what went on. When I read these cases and you have very
    distinguished courts--the Eleventh Circuit on two occasions and
    the Second Circuit on one occasion--examining these complex
    factual situations--which we can't anticipate. No way we can
    anticipate in the law the varieties of what will come up. And
    they come to a conclusion that it is not anticompetitive after
    going through it on a detailed case-by-case analysis. Is it
    wise for the Congress to make a sweeping generalization to have
    a per se violation?
        Now, the second question before my red light goes on. Once
    the red light goes on, you are not limited. I would like you to
    address, after you answer that question, what is meant by
    patent settlements are reasonable so long as the exclusionary
    effects of the settlement do not exclude the exclusionary
    effects of the patent?
        Mr. Leibowitz. The exclusionary effects of the settlement
    and the exclusionary effects of the patent. All right--
        Senator Specter. Well, that is not my phraseology. That is
    what the courts have said.
        Mr. Leibowitz. Well, I think it points out how to answer
    your second question first--you said that you and your staffer
    had been trying to figure out exactly what the court was trying
    to say--and we have been trying to figure out the meaning of
    that case for quite some time ourselves. It is a very, very
    complicated decision, and these settlement agreements are also
    very complicated.
        Jumping back to your first question on per se illegality,
    the way I read Senator Kohl's bill--I have not seen the newest
    iteration, but I read the bill that was introduced last year--
    it does not really call these deals per se illegal. It is a
    bright-line approach to say you can have settlements, but what
    you cannot do is have compensation flowing from the brand to
    the generic and an agreement by the generic which inherently
    pushes the generic toward a later entry date. And you can see,
    based on the chart, from 2004, before Schering and Tamoxifen,
    we did not see any of these deals which we would label as sort
    of exclusionary payments. In 2006, fiscal year 2006, after
    Schering and Tamoxifen, 14 out of the 28 final settlements we
    have looked at have resulted in what we would all call an
    exclusionary payment, compensation from the brand to the
    generic, agreement by the generic to defer entry. In terms of
    the first filer--and if you can lock in the first generic who
    files, you can often--you can pretty much--ensure subsequent
    generics will not be able to enter. The settlements with first
    filers have gone from 0 out of 8 in fiscal year 2004 before
    Schering and Tamoxifen, to, I think, 9 out of 11, more than 80
    percent of the time.
        Senator Specter. Well, Mr. Chairman, I am going to have to
    excuse myself, as I said earlier. The National Security
    Counselor has scheduled a meeting with Senators to talk about
    Iraq. But I leave this side of the podium with the
    distinguished Senator Hatch, who is the author of Hatch-Waxman,
    1984. He is a real veteran around here, having chaired the
    Committee, and he knows this field backward and forwards. So I
    leave our side in Senator Hatch's hands.
        Mr. Leibowitz. Thank you, Senator Specter.
        Senator Hatch. Thank you very much.
        Senator Kohl. Thank you very much, Senator Specter.
        Senator Hatch? Then Senator Whitehouse following you.
        Senator Hatch. Thank you.
        Well, Jon, welcome back to the Committee.
        Mr. Leibowitz. Thank you.
        Senator Hatch. We are happy to have you here. We appreciate
    your service. In my view, the principal concern regarding
    settlement practices identified--
        Senator Kohl. Your speaker, Orrin? Your speaker is not on.
        Senator Hatch. I am sorry.
        Mr. Leibowitz. That is OK.
        Senator Hatch. Did you hear me?
        Mr. Leibowitz. Yes.
        Senator Hatch. OK. Other witnesses, they appear to raise
    two distinct sets of policy issues. Now, the first set of
    issues arises from the core concern that settlements predicated
    on an agreement in which the brand-name companies confers
    something of value to a generic company, a generic drug
    company, in exchange for a promise not to enter the market
    until some future date precludes the consumer benefits that
    would result from earlier entry by the specific generic drug
    company that would be a party to the litigation.
        The second set of issues arises from the operation of a
    principle that grants the first generic company to file an
    ANDA, an Abbreviated New Drug Application, a 180-day period of
    marketing exclusivity which generally precludes the FDA from
    granting approval to competing generics until after the 180-day
    period has ended.
        Mr. Leibowitz. That is right, Senator. Sometimes we call
    that the ``bottleneck problem.''
        Senator Hatch. Right. Thus, a settlement in which the
    generic company entitled to the exclusivity period agrees to
    delay its entry into the market can effectively prevent
    competitive entry by any other generic company. Now, while the
    majority of today's witnesses favor addressing one or both of
    these problems, there are significant differences of opinion
    regarding the approaches that have been proposed by members of
    the panel, as well as by academic experts and various Members
    of Congress.
        Now, the principal difference voiced here today involves
    whether a bright-line rule prohibiting reverse payments is
    appropriate or whether some form of case-by-case analysis is
    necessary to allow litigants the flexibility to enter into
    settlements that potentially allow competitive entry prior to
    expiration of the patent at issue, which arguably provides
    consumer benefits that would be less certain if more cases were
    litigated to conclusion due to restrictions on the ability of
    litigants to settle prior to final judgment.
        Now, it seems to me that, in addition to the options of
    engaging in case-by-case review of settlements or adopting a
    bright-line rule prohibiting reverse payments, there is a third
    potential approach to resolving this issue. Now, this third
    approach would involve removing some of the unintended
    consequences and perverse incentives arising from the manner in
    which the grant of the 180-day exclusivity period currently
    operates.
        As nearly as I can tell, the most serious antitrust
    implications arise from the scenario where a settlement
    agreement not only prevents a single generic company from
    entering the market, but by virtue of the 180-day exclusivity
    period effectively prevents entry by any other generic
    competitor.
        Now, a variety of suggestions have been made regarding how
    do you resolve or how to resolve this problem. For example,
    some suggest conditioning the exclusivity period on the ability
    of the generic company to mount a successful defense in court.
    This would preclude any other or any generic company that
    enters into a settlement from getting the benefit of the
    exclusivity period. Others have suggested a stronger ``use it
    or lose it'' provision that would ensure forfeiture of the
    exclusivity period if the first generic to apply for approval
    did not enter the market within a reasonable period of time.
    And, of course, the whole purpose of Hatch-Waxman was to get
    them into the market quickly and without having to pay
    practically $1 billion per drug approval that the PhRMA company
    has had to pay, which caused PhRMA during the negotiations on
    this tremendous angst, as you can imagine. They felt like--it
    was a very, very serious set of negotiations.
        Mr. Leibowitz. Sure.
        Senator Hatch. Conducted in my office.
        Now, Commissioner, if as many allege a significant portion
    of a reverse payment settlement is predicated on the ability to
    deter entry, then my question is whether it is sufficient to
    remove the ability of the parties to the settlement to obtain
    an exclusionary benefit from such an agreement or whether an
    outright prohibition of reverse payments is necessary. And I
    would like your opinion on that.
        Mr. Leibowitz. Well--
        Senator Hatch. Now, let me just add one other thing.
        Mr. Leibowitz. Sure.
        Senator Hatch. Additionally, if you would expand on your
    discussion of the benefits of a bright-line rule as opposed to
    a case-by-case analysis, I think all of us up here would
    appreciate it as well.
        Mr. Leibowitz. Well, Senator, we appreciate your concern
    about these exclusionary payments and the thoughtful way that
    you are trying to sort of look at stopping them. I read your
    statement from 2003 where you called some of these deals
    ``appalling,'' and we want to work with you on whatever
    approach you want to take.
        The benefits of a bright-line approach are fairly simple.
    First of all, you stop the problem, right? There will not be
    any payments from a brand--compensation flowing from a brand to
    a generic--and the generic deferring entry. And we have seen
    from 2004 to 2006 a sea change--
        Senator Hatch. That also stops legitimate deals, too.
        Mr. Leibowitz. Well, I would not say that. We have a period
    of time from 2000 to 2004 where most of the industry--or the
    industry--believe--that all of these deals were illegal, and
    there were plenty of settlements during that time. I think that
    there were 18 in 2004 and 2005 alone before the Schering
    decision. We do not believe you would stop legitimate deals.
    What you would have is sort of a migration of a delayed entry
    date plus--from a delayed entry date plus money--to a less
    delayed entry date, to a different entry date, shorter, and
    consumers getting the benefits sooner.
        The other benefit you get from the bright-line test is
    certainty because businesses know what they can and cannot do.
    And those, it seems to me, are the principal benefits of a
    bright-line test.
        Now, I want to think a little bit about your approach and
    get back to you on it.
        Senator Hatch. Would you?
        Mr. Leibowitz. It is an interesting idea, but keep in mind
    that there is always going to be--there may still be a huge
    incentive for the brands to pay the generics and the generics
    to stay out of the market, even if they are paying multiple
    generics, because of the economics of this industry. So let us
    get back to you on that, and we want to work with your staff.
        Senator Hatch. Well, I have to admit I don't think either
    side would very much like that suggestion either.
        Mr. Leibowitz. Well, we have managed to unify the brands
    and generics, but only in opposition to our position on
    exclusion payments. So welcome to the club, Senator.
        Senator Hatch. I have been there. I am in the club.
        [Laugher.)
        Mr. Leibowitz. We are happy in our lonely eminence, though.
        Senator Hatch. Thank you, Mr. Chairman.
        Senator Kohl. Thank you, Senator Hatch.
        Senator Whitehouse?
        Senator Whitehouse. Thank you, Mr. Chairman.
        I had a question in response to your description of the
    manner in which the financial incentives of these transactions
    operate on the generics and on the brands, and the conclusion
    that they encourage anticompetitive effects and really not
    legitimate purposes from a consumer perspective.
        To turn that on its head, can you think of any legitimate
    purpose for these types of pay-to-delay settlements that would
    cause public harm if there were to be an outright prohibition?
        Mr. Leibowitz. Well, again, there is a legitimate purpose
    to these payments. The legitimate purpose is to settle cases.
    But what we think in these instances in the aggregate--not
    necessarily with respect to each individual instance, but in
    the aggregate--they inherently give the patent holder, the
    brand, more protection than the brand ought to have. That is
    the problem. If you take the money or the compensation out of
    the equation and you make companies pick a date, an entry date
    based on the strength of their case--which is what happened in
    dozens of agreements between 2000 and early 2005--we think that
    consumers will be served because they will get earlier entry
    and cheaper drugs; drugs will go down by 20 or 30 percent with
    the first generic and up to 80 or 90 percent 6 months later
    when multiple generics come in.
        We think in the aggregate the public is not served by these
    deals. If you take a bright-line approach--and we are, of
    course, willing to look at other approaches--but if you take a
    bright-line approach, you will encourage early generic entry,
    and consumers will be able to get more affordable drugs sooner
    rather than later. And we really do believe, as Senator Hatch
    alluded to, that this is really what Hatch-Waxman was all
    about, which has been a wonderful piece of legislation that has
    allowed profits for the brands and the generics, but has
    created a vibrant generic industry.
        Senator Whitehouse. Other than the public purpose of
    allowing cases to settle more rapidly, is there any other
    public purpose served by these agreements?
        Mr. Leibowitz. For these exclusionary agreements? No, I do
    not believe there is another public purpose. That is my sense,
    at least.
        Senator Whitehouse. OK. Thank you.
        Mr. Leibowitz. Thank you, Senator.
        Senator Whitehouse. Thank you, Chairman.
        Senator Kohl. We thank you so much, Commissioner Leibowitz.
    You have added a lot to the discussion, and we appreciate your
    being here today.
        Mr. Leibowitz. Thank you so much, Senator.
        [The prepared statement of Mr. Leibowitz appears as a
    submission for the record.]
        Senator Kohl. We have a second panel, and we would like to
    call the four witnesses on that panel to step forward.
        Our first witness is Hon. Bill Tauzin, who is President and
    Chief Executive Officer of PhRMA. Prior to joining PhRMA, Mr.
    Tauzin was a 12-term member of the U.S. House of
    Representatives representing Louisiana's 3rd Congressional
    District. Mr. Tauzin served as Chairman of the Energy and
    Commerce Committee from 2001 to 2004, and Mr. Tauzin graduated
    from Nicholls State University and earned his law degree from
    LSU.
        Our second witness is Mr. Merril Hirsh. Mr. Hirsh is a
    partner at Ross, Dixon and Bell, LLP, in Washington. He has
    also worked as a trial attorney in the Civil Division of the
    U.S. Department of Justice, and he has authored several well-
    known articles on antitrust law.
        Also joining us today is Mr. Bruce Downey, Chief Executive
    Officer of Barr Pharmaceuticals. Mr. Downey has received
    several awards for special achievements during his time in
    Government service, and he is Chairman of the Board of
    Directors for the Generic Pharmaceutical Association. Mr.
    Downey graduated with honors from Miami University in Ohio, and
    he received his law degree from Ohio State.
        Finally, we will hear from Mr. Michael Wroblewski of
    Consumers Union, the non-profit publisher of Consumer Reports.
    Prior to joining Consumer Reports, Mr. Wroblewski acted as
    Assistant General Counsel for Policy Studies at the FTC and as
    attorney adviser. Mr. Wroblewski is a graduate of Loyola
    College and received his J.D. from the University of Texas
    School of Law and his MPA from the Lyndon Baines Johnson School
    of Public Affairs in 1992.
        We hope, gentlemen, that you will limit your testimony to 5
    minutes, and before you begin, I would like you to rise and
    take the oath of office, please. Please raise your right hand,
    and do you swear that the testimony you are about to give is
    the truth, the whole truth, and nothing but the truth, so help
    you God?
        Mr. Tauzin. I do.
        Mr. Hirsh. I do.
        Mr. Downey. I do.
        Mr. Wroblewski. I do.
        Senator Kohl. We thank you so much.
        We will start with you, Mr. Wroblewski.

      STATEMENT OF MICHAEL WROBLEWSKI, PROJECT DIRECTOR, CONSUMER
        EDUCATION AND OUTREACH, CONSUMERS UNION, THE NON-PROFIT
            PUBLISHER OF CONSUMER REPORTS, WASHINGTON, D.C.

        Mr. Wroblewski. Mr. Chairman, members of the Committee,
    thank you for the invitation to testify today. Consumers Union
    is the independent non-profit publisher of Consumer Reports. We
    investigate and report extensively on the issues surrounding
    the costs, safety, and effectiveness of prescription drugs so
    that we can provide our 7.3 million subscribers with expert
    advice to help them manage their health. Consumers Union
    publications carry no advertising, and we receive no commercial
    support.
        The hearing today asks the question, ``Should paying
    generics to prevent competition with brand drugs be
    prohibited?'' Consumers Union responds with an emphatic
    ``Yes.'' We strongly support prompt Congressional action to
    create a bright-line rule to end the use of patent settlements
    in which a brand-name company compensates a generic applicant
    to delay market entry. These settlements can deny consumers
    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 inflation, in part due to the high cost and
    rate of inflation of brand-name prescription drugs. Generic
    drugs can dampen health inflation because they cost up to 70 or
    80 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 drug available. We
    currently provide information for 16 different classes of
    medicine, and we will expand to more classes in the future.
    Consumers can use this information to check to see if there is
    a safe, effective, and low-cost alternative to any medicine
    that they are taking. We encourage consumers to talk to their
    doctors about this information. Access to these low-cost
    generic drugs saves consumers substantial sums.
        The second reason we support legislation is to counter the
    incentives that we heard about this morning that brand-name and
    generic companies have to enter lucrative settlement
    agreements. It is an economic fact that the brand company's
    total profits from sales of its brand drug prior to generic
    entry exceed the combined profits of the brand and the generic
    company after generic entry occurs. The upshot is that the
    brand-name company has a powerful incentive to pay the generic
    to delay entry. The payment is still less than the amount it
    would lose if the generic applicant entered the market.
        The generic applicant, on the other hand, also gains by
    earning more from the settlement than it would by competing in
    the market. These incentives are inadvertently exacerbated by
    the 180-day marketing exclusivity provision of the Hatch-Waxman
    Act. Any settlement with the first filer blocks any subsequent
    generic entrants from coming into the market. So the brand-name
    company can forestall generic competition for years by settling
    with just the first-filed generic. And the generic who is first
    in line has powerful incentives to ask for a payment because
    not only will it get the payment, but it also retains its 180
    days of marketing exclusivity. The irony, of course, is that
    the intent behind the act was to speed generic entry, not to
    provide the generic a windfall to delay its market entry.
        The third reason we support legislation is because the
    courts, we believe, will not fix this in a timely manner. Two
    recent appellate court decisions have taken a lenient view, in
    our view, of these patent settlements. 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. These
    rulings, in our view, are based on two fault premises.
        First, the courts seemed to require that unless the patent
    can be proved to be invalid or not infringed, a court cannot
    declare a settlement illegal. This test, we believe, as the FTC
    discussed in its Schering opinion, may sound good in theory,
    but it is nearly impossible to make work from a practical point
    of view.
        Second, these courts have elevated the generally held
    principle that public policy favors settlements above the
    statutory incentives in the act that encourage generic
    applicants to challenge weak patents. 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, and I would be happy to take any
    questions that you have now or at the end of the panel.
        [The prepared statement of Mr. Wroblewski appears as a
    submission for the record.]
        Senator Kohl. Thank you, Mr. Wroblewski. We will first hear
    testimony from Mr. Tauzin and then Mr. Hirsh and then Mr.
    Downey.

       STATEMENT OF BILLY TAUZIN, PRESIDENT AND CHIEF EXECUTIVE
     OFFICER, PHARMACEUTICAL RESEARCH AND MANUFACTURERS OF AMERICA
                       (PhRMA), WASHINGTON, D.C.

        Mr. Tauzin. Senator Kohl, thank you. This is my first
    opportunity to testify before Congress, and I welcome the
    chance to be before your Committee. Senator Hatch, Senator
    Whitehouse, I also thank you for the chance.
        Let me first acknowledge something. I am not only the
    President of PhRMA; I also a cancer survivor, like Senator
    Specter. Just 2 years ago, I finished chemotherapy following a
    cancer that left me with about a 5-percent chance of survival.
    And yet, after that year of chemotherapy, with a brand-new
    miracle drug that came out of this industry, I am with you
    today and with my family, and I have them to thank for that.
        And so, like Senator Specter, I am deeply concerned not
    only from my position as a representative of this industry but
    also as a patient who is still next week going through another
    cancer test, as I have to go through it every 4 months.
        I am interested in making sure that the process by which
    these new miracle drugs are brought to market is not severely
    damaged by changes in public policy, that we take very careful
    concern for the patent protection that is provided, the
    incentive to spend the $50 billion that was spent last year in
    trying to find a new cancer drugs that saves lives today.
        So let me start by doing what Senator Specter did in his
    opening statement, which is to illustrate that this is about a
    14.2-year process. When a company that is inventing a new drug
    that is going to save our lives or battle disease for us first
    files for its patent and it gets its patent approved, it needs
    another 14.2 years of that patent life just to bring it to
    market, to do all the testing, the clinical analysis, the proof
    to the FDA, the proof to itself that it has a product that is
    both efficacious and also worth the risk, because every drug,
    every medicine, has certain risks attached to it, certain side
    effects. It has got to make sure before it brings it to market
    that it is safe and effective, in effect. So it uses about 14
    years of its patent life and spending about $1 billion to bring
    that drug to market so that my life could be saved 2 years ago.
        That is the story. But that is not the end of the story.
    The next chart shows you what happens next in comparison to
    other products that are invented in our society. What happens
    next is that after the final market approval, there is only
    about 5 or 6 years left, generally, on the patent life of a
    brand-new drug, a cancer-fighting drug. And if you get the
    benefit of patent term restoration that comes from Hatch-
    Waxman, the maximum ever you can have on your patent life is
    about 14 years. The average today is 11 to 12 years.
        Now, I am going to ask one of my colleagues to pass out a
    pen to you. It is a little cheap pen. It does not violate your
    rules so you can keep it as a gift. There are some words on it.
    It says, ``This pen's patents have more protection than those
    for cancer medicine.'' And I am going to illustrate to you how
    true that is.
        By the way, unfortunately, this pen is made in Mexico, like
    so many products that we buy in America. But it was patented
    here in this country.
        I am going to prove it to you. This pen and other products
    we manufacture, invent and manufacture in this country, go
    through the same patent approval process as a drug, except they
    do not have to go through 14 years of testing to see whether
    they are safe and effective. They go to market immediately. So
    the guy who invents this pen starts selling it the day after he
    gets his patent approved, protected by the patent. The drug, on
    the other hand, has to spend about 14 years in testing. And so
    the effective protection for this pen is about 17\1/2\ years.
    The protection for the patent on a new medicine that saves my
    life and saves yours is about 11 to 12 years.
        Now, the settlements we are talking about, Senator Kohl,
    involve challenges to those patents. Hatch-Waxman allows that
    challenge to come as early as 4 years after the drug goes to
    market. It involves a challenge to the patent. It involves
    somebody saying, ``Your patent is invalid. You did not do it
    right.'' It involves somebody saying, you know, ``We are going
    to copy your work, copy your drug, and put it on the market as
    a generic product because we think our drug does not infringe
    on your patent,'' or, ``Your patent is invalid.'' Start with
    that proposition. It is a challenge to the patent, and a desire
    to enter the marketplace before you would ordinarily be
    entitled to enter the marketplace.
        Now, Hatch-Waxman encourages that, and before Hatch-Waxman,
    about 20 percent of the drugs sold in America were generic
    drugs. Today 60 percent are generic drugs, according to the
    latest numbers. The utility and usefulness of generic drugs in
    America exceeds that of any country in the world. Generic drugs
    are very important to the marketplace of health care in this
    country. We can see that. We admit that. We support that.
        What we are asking today is, however, to think very
    carefully about whether or not you interfere with, in a broad
    and overreaching way, the ability of generic drugs and patent
    drugs to settle these kind of cases that challenge the validity
    of patents.
        Now, why do we ask you to be careful? One, I am not here to
    defend bad or ugly settlements that do not meet a test of
    antitrust law. They ought to be discarded, and the FTC has that
    authority today to invalidate any of those settlements. Every
    settlement has to be turned over to the FTC and the Justice
    Department. Somebody gets a second look at it, and they can
    say, ``No, sorry. That settlement violates antitrust law. We
    turn it down.'' The FTC does that. It is hard work. They do not
    like to do it. I understand that.
        Sometimes the courts will overturn them, as they did in
    Schering-Plough. Sometimes the courts will agree with them. But
    this Congress several years ago declared that any one of these
    settlements have to go through that test. If you want to put
    them through a different test, fine. But to outlaw them
    completely does something I hope we don't do for the sake of
    consumers, not just for drugs companies, but for patients like
    me. What those settlements very often do is bring generic drugs
    sooner to the marketplace than they would be allowed to if
    those patents were respected until the end of their patent
    term.
        What very often a good settlement does is end costly
    litigation that consumers pay for in the end and end
    uncertainty in the marketplace, which is critical for this
    model to work, and allow generic drugs on the marketplace
    sooner than later.
        Now, you heard a number saying, well, the companies lose 73
    percent of the cases. That is not true. Seventy-three percent
    of the cases represents the times the company lost, including
    the times the company settled. If you look at current rates,
    you will see that companies are winning more cases than losing
    them now. And the reason they are winning them more is they are
    learning from their past mistakes. They are learning how to
    write better patents and defend them more properly.
        So if you don't allow settlements, if you don't allow the
    good settlements that are in the interest of the consumer to go
    forward, the ones the FTC would approve, the ones the Justice
    Department would approve, you may have the reverse effect of
    hurting consumers by denying them the chance to get a generic
    into the marketplace even during a valid patent term. That is
    what settlements do.
        So here I am at the Clint Eastwood moment. Clint Eastwood
    made some great films. One I love is ``The Good, The Bad and
    the Ugly.'' Now, he was like you. He was a law keeper--a law
    maker and a law keeper and a law enforcer. And he rode into
    town, and his job was to kill the bad and the ugly, but to
    protect the good. And so I ask you one thing on behalf of
    patients like me and all of us who depend upon this process to
    keep these miracle drugs flowing, and there are 2,000 more in
    the pipeline right now, 600 new cancer medicines in the
    pipeline right now. If we are going to keep this model working
    and new cancer drugs patented and approved and the new drugs
    for diabetes and heart failure and everything else, I ask you
    please not to shoot the good while you are trying to kill the
    bad and the ugly.
        The process ought to pick the bad settlements out and kill
    them. It ought to pick the bad and the ugly and say you cannot
    go forward. But you ought not sweep away the good settlements
    that end unnecessary litigation that is very expensive. Some
    expert testified 27 cents of every dollar spent in research and
    development is spent in court fighting over this stuff instead.
    You ought not throw out the good settlements that work to bring
    generics sooner to the marketplace than later because it ends
    the disputes, ends the litigation, ends the payment to lawyers,
    and instead flows these products to patients who need them.
        Don't shoot the good. Let's just keep shooting the bad and
    the ugly.
        Thank you, sir.
        [The prepared statement of Mr. Tauzin appears as a
    submission for the record.]
        Senator Kohl. Thank you, Mr. Tauzin.
        Mr. Hirsh?

    STATEMENT OF MERRIL HIRSH, PARTNER, ROSS, DIXON AND BELL, LLP,
                            WASHINGTON, D.C.

        Mr. Hirsh. Thank you, Senator. I want to thank the
    Committee and its staff for affording me the opportunity to
    comment on the proposed Preserve Access to Generics Act.
    Although on this issue my law firm has generally represented
    the interests of companies who pay the cost of drugs through
    self-insurance, the views I express today are my own and not
    necessarily those of either my firm or any of its clients. In
    fact, my firm represents both plaintiffs and defendants in
    various types of litigation, and I hope that whatever thoughts
    I can convey to the Committee reflect the experience of having
    been on both sides.
        On March 20, 2006, the Philadelphia Business Journal
    reported on an interview with the chief executive officer of
    Cephalon, Incorporated. Cephalon had settled patent challenges
    to Provigil, a drug for sleep disorders, by paying a total of
    at least $136 million to several of its generic competitors. By
    settling, Cephalon avoided a ruling on the generics' arguments
    that Cephalon's patent was invalid and that the patent was not
    infringed in any event by the generic substitutes.
        As the CEO explained to analysts about the settlement, ``A
    lot of [Wall Street's enthusiasm for Cephalon's stock] is a
    result of patent litigation getting resolved for Provigil. We
    were able to get six more years of patent protection. That's $4
    billion in sales that no one expected.''
        Now, you would ordinarily think that paying off a
    competitor to obtain 6 more years of patent protection and $4
    billion more in sales than you expected would be viewed as
    anticompetitive, and there is currently a lawsuit pending
    arguing that this violates the antitrust laws. The defendants
    in that case, however, have moved to dismiss it. They are
    arguing that, even when the CEO admits that the payments
    achieve patent protection no one expected, these payments
    cannot, as a matter of law, violate the current antitrust laws.
        I think defendants should lose that motion, but honestly,
    illogical as the motion seems, it is not frivolous, given the
    current state of the law. The plaintiffs in the Tamoxifen case
    have petitioned the Supreme Court for a review of the Second
    Circuit's decision that people have discussed here that
    otherwise may effectively immunize brand and generic companies
    from paying any amount of money to resolve any patent case that
    was not a sham case to begin with. And, as the FTC has reported
    and Commissioner Leibowitz discussed today, a recent spate of
    reverse payment settlements shows companies clearly emboldened
    to make these settlements unless and until they are told not
    to. These reverse payment settlements are indeed
    anticompetitive, and they defeat the purposes of the Hatch-
    Waxman Act.
        Now, I think it is impossible not to be moved by
    Representative Tauzin's personal story and his basic point of
    attempting to capture the good and only deal with the bad and
    the ugly. The problem is that reverse payment settlements are
    the bad in this case, and, in fact, the preservation of reverse
    payment settlements doesn't preserve the type of protections he
    is talking about to the patents.
        What reverse payment settlements do is create a tremendous
    incentive to do two things: first, to have generic companines
    pick patent fights in the hopes of being able to be paid off
    for dropping them; and, second, to settle those fights in ways
    that do no justice to the Hatch-Waxman Act and provide no
    benefits to consumers.
        Brand companies are not made better off by a system that
    encourages people to sue them without the risk of putting drugs
    onto market in the hopes of being paid off with enormous
    amounts of money available to pay them. That does not lead to
    fewer lawsuits. It leads to more lawsuits. And more lawsuits
    are not better. In fact, not having lawsuits in the first place
    is better than settling lawsuits after they are brought.
        Second, once lawsuits are brought, reverse payment
    settlements are not the only way to settle them. They are a
    convenient way to settle them. They are convenient because
    there is an extraordinary incentive, as everyone has discussed
    today. A delay for some of these drugs involves a million
    dollars a day--a million dollars a day for each day the generic
    entry is excluded, a million dollars in additional sales. There
    is an enormous incentive for companies who legitimately are
    interested in profit for their shareholders to engage in a
    sharing of this money rather than a result that actually brings
    down the cost for consumers.
        If you eliminate the reverse payment settlements, and this
    is the reason you need a bright-line rule to solve this
    problem, you eliminate that possibility. You allow for lawsuits
    being brought where there are genuine patent challenges. This
    is where the generic genuinely intends to market the product
    and not just hold up the brand company. The brand and generic
    companies are forced to negotiate at arm's-length over when the
    generic can come in, and their agreement harnesses the market
    force of an arm's-length negotiation, not just to benefit the
    parties involved, but to benefit consumers.
        Courts are unable to deal with this problem because it
    involves a policy judgment that is Congress' to make. That is
    why I strongly support the legislation before the Committee.
        Thank you, Senator.
        [The prepared statement of Mr. Hirsh appears as a
    submission for the record.]
        Senator Kohl. Thank you, Mr. Hirsh.
        Mr. Downey?

      STATEMENT OF BRUCE L. DOWNEY, CHAIRMAN AND CHIEF EXECUTIVE
         OFFICER, BARR PHARMACEUTICALS, INC., WASHINGTON, D.C.

        Mr. Downey. Thank you, Senator. It is very nice to be here
    today appearing before the Senate Judiciary Committee again. I
    am the Chairman and Chief Executive Officer of Barr
    Pharmaceuticals, one of the largest generic companies in the
    country. We are also probably the most prolific challenger of
    brand patents. In my tenure at Barr, we have brought over 30
    cases challenging the patents protecting pharmaceutical
    products. We have completed about half of those cases; about
    half are still pending. Of those we completed, 14 were settled,
    and 13 of those settlements brought products to market prior to
    patent expiry--that is, that shortened patent life of the brand
    product allowed us to get into the market and compete earlier
    than we otherwise could.
        Now, we have also taken some cases to trial, and I think in
    the statements of the Senators and the testimony of my
    colleagues, two of our cases have been prominently mentioned.
    One is the Prozac case, and it has been the poster child of
    what should happen; that is, you should take a case to trial,
    win it, and bring a product to market. The second was our
    Tamoxifen case. It has been the poster child for what is wrong.
    You should not settle a case in exchange for consideration
    other than early entry. I want to examine those two cases in
    detail because both of those cases brought significant value to
    consumers, and both of those settlements would have been
    impossible if this legislation were to pass. Let me start with
    the Prozac case because I think that is the most misunderstood.
        We brought the case against the Prozac patent. There were
    three claims: one, it was invalid for double patenting; two, it
    was invalid because of the best mode rule; and, third, it was
    invalid because of the inequitable conduct of the Lilly Company
    at the Patent Office. We lost the double patenting and best
    mode arguments in summary judgment before the district court.
    We thought those were our best claims. The judge dismissed
    them, and we were stuck now with our inequitable conduct claim,
    which we thought was the weakest. The judge set it down for
    trial. To take that case to trial on appeal would have taken an
    additional year before we could get our other claims before the
    court of appeals. And we settled that claim on the eve of trial
    for a cash payment, which would have been prohibited by this
    legislation. But taking that payment, settling that claim,
    allowed us to appeal the best mode and double patenting claim
    to the court of appeals, which we ultimately won. It shortened
    the case by a year, allowed us to bring generic Prozac to
    market a year earlier than we could if we had gone to trial on
    inequitable conduct. And that reverse payment saved consumers
    about a billion and a half dollars. So in that case, the
    reverse payment actually had the exact effect that all of the
    other witnesses supporting the legislation want it to have.
        Now, in Tamoxifen, we tried the case and we won, and our
    opponents appealed. All of our strong arguments, in my opinion,
    we lost at trial, and we had one argument remaining for the
    court of appeals, and that was the inequitable conduct case. We
    settled that on appeal because we thought we were going to
    lose. We took payment, we took a license, and we entered the
    market early with Tamoxifen. And over the course of our
    license, we saved consumers about $300 million on that product.
        Now, this was a great laboratory experiment because,
    following our case where we accepted this payment, which others
    think is illegal, three other generic companies tried to
    challenge that patent. All three of them went to trial. All
    three of them lost. All three of them went to the court of
    appeals, and all three of them lost. I believe had we not
    settled the case and entered the product with our license from
    Zeneca, we also would have lost and consumers would have been
    harmed.
        So those two cases where we accepted what are called
    reverse payments saved consumers nearly $2 billion that
    otherwise would have been impossible. So I think the
    legislation will have very serious unintended consequences. It
    will reduce the number of patent cases we bring. It will force
    us to take each of the cases that are brought to trial and sort
    of fight to the death. And then, finally, it will prohibit
    settlements that shorten the patent life and bring products to
    market sooner than we otherwise could.
        You know, it is not really the reverse payment that keeps
    products off the market. It is the patent. The patent is a
    monopoly granted by the Government that is entitled to a
    presumption of validity. It can only be overturned by a showing
    of clear and convincing evidence. You know, we do not bring
    products to market in the face of a patent because of the
    damages we risk. And I also disagree with the success rate that
    has been given here. It is not 70 percent. Our success rate in
    cases that have gone to trial is like 40 percent, and that is
    in part because we have reached reasoned settlements that
    shorten the patent life, we get less than we would get if we
    win, we get more than we would get if we lose, and that benefit
    is transferred to consumers. They get more than they would get
    if we lose the case; they get less than if we would win it. I
    think that is the way all settlements are. They are a
    compromise. Each side gets something. In this case, we
    compromised on the length of the patent term. We shortened the
    patent life. We were in earlier. Other people can challenge the
    patent if they want.
        Now, there is an anomaly, Senator Hatch, and I will point
    to that in the 180-day exclusionary provision. The MMA of 2004
    does have sort of a loophole that makes it hard for second
    challengers to challenge the patent, and I would like to work
    with the Committee to help solve that problem. But it is not
    solved by the proposed legislation. The proposed legislation
    deals with settlements and not with the bottleneck loophole.
        I would be happy to take any questions that you have.
        [The prepared statement of Mr. Downey appears as a
    submission for the record.]
        Senator Kohl. Thank you.
        A questions for Mr. Tauzin. Your organization, as we all
    know, represents many large pharmaceutical companies. Isn't it
    just common sense, Mr. Tauzin, that if a brand-name drug
    company can forestall competition by paying a generic company
    some fraction of its profits on a drug that it will do so?
        Mr. Tauzin. Not necessarily. Again, remember, Senator Kohl,
    this is a patent dispute fight. If it has a great patent and
    that patent language has been tested and fought out in court
    before and proven to be valid, it has great incentive to go
    ahead and say, ``No, I am sorry. We are not going to settle
    with you. We are going to defend our patent all the way, and we
    are going to prevail because we have got a great patent.''
        Now, if there is any kind of question about it, the
    incentives flow in both directions. I think you have heard the
    arguments from the generic association about why they have an
    incentive to settle on some cases, where they think they might
    have a chance of losing, and yet they can get their generic
    drug to market a little quicker if they settle.
        In the case of the patent company, if they think there is
    some doubt about winning the case, they do what all lawyers do
    when fighting a case. You figure out whether your risk of
    losing merits the risk of settlement. In that case, very often
    in that discussion a settlement is reached where a generic does
    come into the market, even in the face of what otherwise they
    believe is a valid patent.
        But the incentives flow in both directions, and they are
    going to be different in every case. And in some cases, as you
    pointed out, as Mr. Leibowitz pointed out, those settlements
    need to be examined to see whether or not they reach a public
    interest standard. I agree with that.
        But the bottom line is that the incentives work in both
    directions, and in some cases, in some 50-some-odd percent of
    the cases lately, the patent companies go all the way to trial
    because they believe they have a valid patent and they have a
    right to depend upon it.
        Mr. Leibowitz, by the way, is not against patents, I do not
    believe. I do not believe he is against patent protection.
    Neither is this Committee. He worked for the Motion Picture
    Association and got a 95-year patent on Mickey Mouse. You know,
    on the other hand, a drug that saved my life and others' lives
    may get only 11 or 12 years of protection. That is our concern.
    If you mess with that model too much, you begin damaging the
    incentive to go out and spend the billion to invest in new
    medicine. That is happening all over the world. That is why 70
    percent of the new medicines invented in the world are invented
    here in America, because we still, to the extent we can, give
    some reward for somebody spending those billions of dollars to
    invent those new medicines.
        So all we ask is that whatever you do in this area--and we
    will work with you to try to find a solution that makes sense
    for everyone here--is that we do not end up throwing out the
    good with the bad.
        Senator Kohl. Mr. Downey, the FTC reports that in the year
    after the two court decisions that we have covered here today,
    allowing these reverse payment settlements, half of all patent
    settlements contained terms in which the brand-name company
    paid generic in return for the generic's agreement in keeping
    the drug off the market. And as we have discussed, in the year
    before that court decision, no patent settlements contained any
    such terms. So doesn't this data indicate that going forward,
    unless we do something about that by way of our legislation,
    increasingly there are going to be financial settlements
    arrived at?
        Mr. Downey. Well, I do not believe the data is exactly
    right. First, I would say the later settlements where there
    were payments, it is not the payment that keeps the product off
    the market. It is the patent. And in one of those cases--it
    happens to be ours I know about--there was a compromise where
    we entered the market years before patent expiry, but some
    number of years in the future, there was 12, 15 years left on
    the patent, and we compromised at a point sort of halfway in
    between.
        In addition to that, we had some other arrangement with the
    brand company. We think that is very pro-competitive--pro-
    competitive in two parts: one, because we shortened the patent
    life; and, two, because we got this collateral benefit in the
    other part of the deal--all of which was submitted to the FTC,
    and if they think it is improper, they could challenge it. I
    think they would lose, but that data has been made available as
    a requirement under existing law.
        Also, I disagree that the years before those cases there
    were not settlements that involved other consideration, because
    I know we had at least one.
        Senator Kohl. Mr. Wroblewski, would you like to comment on
    this question? Then Mr. Hirsh.
        Mr. Wroblewski. The only thing I would like to add is the
    statistic rate that I quoted in my testimony in terms of how
    frequently the generic challenger wins, that statistic comes
    from looking at all of the court cases--not including the
    settlements--but just the court cases. Between 1992 and 2000,
    there were 30 decisions of a court, and in 22 of those
    instances, the generic won. So that is the 73 percent. That
    study ended in 2000, 2001, and that has not yet been updated.
        I am familiar with a study by the American Intellectual
    Property Law Committee that has basically come up with the same
    70-percent number by looking at the defendant winning in patent
    litigations, the challenger basically, in a broader spectrum of
    industries, and it has been right around 70 percent.
        So I think I will stick with, you know, that the incentive
    has provided--has not been misused to challenge patents, as
    they are picking the right patents to challenge.
        Mr. Tauzin. Senator, if I could jump in, we are using data
    from 2004 to 2006. That is much later than this study which did
    not include settlements. And the data between 2004 to 2006
    indicates innovative companies prevailed at the appellate level
    52 percent of the time.
        Senator Kohl. All right. Mr. Hirsh, do you want to make a
    comment?
        Mr. Hirsh. Yes. I think where the disconnect is going on in
    this discussion is as follows: As a lawyer handling commercial
    cases and intellectual property cases, you are frequently faced
    with the situation where one of the possible outcomes you can
    negotiate is anticompetitive. Negotiations inherently look for
    win-wins between parties because there are ways of narrowing
    gaps between people who would otherwise disagree. And I don't
    know any commercial litigator who has not been in some
    situation where at some point you look at someone across a
    table and you say, ``Well, we could do that, but we can't
    because it violates the antitrust laws. We need to find another
    solution.''
        What happens in those circumstances is not that the case
    does not settle. What happens in those situations is it settles
    in a way that is lawful.
        In a Hatch-Waxman settlement, the question is what is the
    money part being paid for. As Commissioner Leibowitz talked
    about the question, nobody is against having cases brought that
    are legitimate. Nobody is against having brand companies defend
    patents to the end if they think they are right, or both
    parties bringing them to litigation and getting a litigated
    result if they think they are right, or settling those cases.
        If they settle the case on the basis that they cannot
    exchange money, the terms of the negotiation is over when can
    the generic enter the market, with the generic incentivized to
    enter the market sooner. The sooner the generic can enter into
    the market, the sooner the generic can share in some of the
    profits that come from the drug.
        If there is money that changes hands in addition to that,
    what is the brand company paying the generic the money for? It
    is understandable that the brand is willing to pay it. It is
    understandable that the generic is happy to take it. But the
    logical terms of the negotiation is that the brand is paying
    the benefit of having less competition, of moving the entry
    date back.
        Now, it is quite correct, as Mr. Downey points out, you
    have settlements that have components of both: there is a
    payment, and the generic can come in before the end of the
    patent. There are situations in which the generic may not feel
    that they have a 100-percent winning case and they would rather
    settle.
        The problem with the reverse payment is what you are paying
    for is to have that settlement have the effect of having the
    generic come in later. That is what the money is being
    exchanged hands for, and that is what is anticompetitive. If
    you eliminate that incentive, the case will still settle if the
    parties think they are weak, and the case will not settle if
    the parties think their cases are strong. What will happen is
    that the settlement will reflect the strength of the patent
    instead of ignoring that. That is why it is better.
        Senator Kohl. Thank you. Before we--I am sorry. Mr. Tauzin,
    go ahead.
        Mr. Tauzin. Can I just add one thing? There is a great
    dispute as to whether or not, when you eliminate the exchange
    of things of value, you are going to encourage or discourage
    settlements. I can tell you in the Schering-Plough case, for
    example, there was a licensing agreement that went along with
    the settlement. If you could not do that licensing agreement,
    our information is that settlement probably would not have gone
    forward. That is the one the FTC disapproved of and the court
    approved of. That is a case where the settlement did bring the
    generic product into the marketplace sooner.
        You are going to get a dispute over that, and you will
    always have that. That is our point, that case-by-case when you
    look at them, you are going to see some cases where a
    settlement made sense for the consumer and another case where
    it possibly did not, where you ought to say, sorry, that cannot
    go forward. That is a different matter.
        Senator Kohl. Last comment, Mr. Downey.
        Mr. Downey. Yes, a very important point here. The
    collateral agreements that narrow the gap are not always cash
    payments. In fact, they rarely are in our case. They involve
    some other asset that has a different value for us than it does
    the brand. Sometimes, for example, we have purchased a product
    from the brand at a price we think is favorable--it is an asset
    that is not key to them--as part of the settlement where we
    have shortened the patent life. In other cases, we have
    licensed a patent from a brand as part of a settlement where we
    have shortened the patent life. In other cases, we have agreed
    to co-promote products for the brand company as part of the
    settlement where we have shortened the patent life. In other
    cases, we have entered into an R&D agreement with a brand
    company as part of a settlement where we shortened the patent
    life.
        So these collateral agreements provide value to us, value
    to the brand, and simultaneously allow us to shorten the patent
    life. And the reason they are very important is the parties
    cannot always agree, in fact, seldom agree on the probability
    of success. And so you have some rough approximation--we might
    think it is 50 percent, they might think they are going to win
    70 percent of the time--and you bridge that gap through these
    agreements that provide value to both us and to the brand
    company and ultimately to the consumer as these things work
    their way through the system.
        It is very important that these other opportunities be
    allowed, or the settlements really are not going to happen.
    That is why I think the law as it is drafted would take every
    case to trial, every case to appeal, and there would be very,
    very few settlements.
        Senator Kohl. Very good. Before we turn to Senator Hatch,
    Senator Schumer has requested a minute or two to make some
    comments before he has to leave.

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

        Senator Schumer. Thank you, Mr. Chairman. I apologize.
    Finance is voting on the minimum wage, and they do not allow
    proxy voting. That is the only Committee I am on that does not
    allow proxy voting, so I apologize and thank you both for your
    indulgence. And thank you for having the hearing today.
        As you know, Mr. Chairman, I asked the Committee to hold a
    hearing on this issue last May, and I am very pleased that you
    in always your wisdom have chosen it as one of the first
    hearings in the new 110th Congress. Many of us in this room are
    strong proponents of competition that leads to lower drug
    prices for consumers, most notably my friend Senator Hatch, who
    paved the way in 1984 with the bipartisan Hatch-Waxman Act. And
    in 2003, I authored with Senator McCain a law that closed
    loopholes that had gradually been opened up since Hatch-Waxman
    was passed in 1984. I worked closely, as Mr. Barr knows, with
    the generic drug industry to try and close those loopholes.
    They helped restore the integrity of Hatch-Waxman and preserved
    access of consumers to generic drugs.
        But it seems that every time we close a door on ways to
    game the system, PhRMA opens up a window, and I really regret
    to say that in this one, they are joined by many of my friends
    in the generic drug industry.
        Hatch-Waxman was written to help consumers, to lower the
    price of drugs for everyday people, not to pad profits for
    company shareholders. When the law is allowed to function
    properly, consumers win, $8 to $10 billion a year worth. But
    time and time again, we have needed to amend this law because
    the industry, instead of spending its time innovating new
    drugs, comes up with new ways to exploit loopholes and
    increases its profit share at the expense of consumers.
    Usually, these loopholes pit brand drug companies against
    generics, but this time they are actually working together to
    leave consumers out in the cold. So now we are seeing instances
    where some brand drug companies are working with some generic
    drug companies to make anticompetitive deals that benefit
    everyone except the consumer. Give money to the generic company
    to go away so that the brand company can continue to enjoy a
    monopoly on the market. And, you know, I do not entirely blame
    the generic drug company. Being sued is no fun. Any company
    threatened with or actually faced with a lawsuit has good
    reason to find a quick way out. And these companies, face the
    facts, even though they do a lot of good and bring the cost of
    drugs down, are not public servants. You are supposed to serve
    your shareholders. And so if the company sees an opportunity,
    the generic company, to increase their profits, they are
    legally bound to do so. But we are not, and that is where the
    Government comes in, because we are the only player in this
    game who has the power to protect the consumer, preserve
    competition, and restore the playing field to its original
    condition.
        There is simply no reason to allow these anticonsumer
    settlements. Companies only utilize them when the opportunity
    exists, and otherwise they function as the Hatch-Waxman law had
    intended. For 5 out of the last 7 years, it has been illegal
    for generic companies to accept money, as Mr. Downey noted, in
    exchange for staying out of the market. Yet competition did not
    drop off. In fact, the number of patent challenges actually
    increased during the time these particular settlements were
    outlawed, from 35 challenges in 2001 to 97 in 2004. It was not
    until two courts suddenly legalized these payoffs in 2005 that
    all of a sudden the industry cannot survive without them. And
    let me reiterate: The Leahy-Kohl-Grassley-Schumer bill will not
    prohibit drug companies from reaching settlements. It only
    prohibits settlements in which a brand company pays a generic
    company to stay off the market, something that generic
    companies in every other instance fight tooth and nail. They
    want to get into the market. And here all of a sudden they are
    saying, Oh, no, give us some money and we will stay away. And
    who is hurt? The consumer.
        So there is no reason to make these specific settlements
    illegal. We just need to make sure that the bright line we all
    keep talking about is the right line and that we do not
    accidentally trap settlements that are pro-consumer in with the
    bad ones. When consumers have access to lower-cost drugs, we
    all win. But as long as we let stand the appellate court
    decisions that encourage brand and generic companies to split
    up the pie between them and not give the consumer even a
    forkful, we are accepting higher drug prices for the average
    American.
        Mr. Chairman, I am proud to have worked with you and your
    very capable staff over the last several months on this issue
    and proud to be a cosponsor of the act. I look forward to
    continue to working with you to prohibit settlements that harm
    the consumer, and I would ask unanimous consent, because now
    they are beeping me and I have got to go to vote, to submit
    written questions for the record.
        Thank you, Mr. Chairman. Thank you, Senator Hatch.
        Senator Kohl. Senator Hatch?

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

        Senator Hatch. Well, Hatch-Waxman was not written just for
    consumers. It was written for consumers. It was written to
    create the modern generic drug industry, which it did. Like you
    say, it went from about 16 percent to now close to 60 percent.
        It was written to provide some of the solutions that Mr.
    Tauzin mentioned of loss of patent life that just was not fair.
    If you create a widget or a pen, you have got 20 years of
    patent life. Like you say, 17\1/2\ years and you can have
    market exclusivity for that pen that you used here today. Drug
    companies are spending up to $1 billion for every drug they
    create and lose up to 15 years of patent life, leaving them 5
    years left in some cases. So we did a classic compromise by--
    and the bill is called the Drug Price Competition Patent Term
    Restoration bill.'' And because of that, PhRMA has done very
    well. Generics have become dominant in the drug field without
    killing PhRMA, and consumers have benefited greatly.
        Now, what we are concerned about here is there are some
    things that are wrong with the way this works, and Mr.
    Wroblewski and Mr. Hirsh raise some issues here. And so do Mr.
    Tauzin and Mr. Downey.
        Now, interestingly enough, I know--I believe I know all
    four of you, but I specifically know Mr. Downey and Mr. Tauzin
    very well. Mr. Tauzin and I sat for hours and hours month after
    month on that Medicare Modernization Act, and I saw a real
    master in action there trying to bring about a way whereby
    consumers would benefit, which they certainly have.
        Mr. Downey has been one of the leaders, and he took a
    company that was not all that dominant to where it is not only
    dominant in the generic drug industry, but also becoming very
    influential in the area of the PhRMA industry as well. And I
    commend you for that.
        But, you know, let's be honest about it. This I don't think
    should be a question between a bright line and doing nothing.
    There may be some way that we can do this so that consumers
    benefit, generics benefit, brand-name companies benefit. If we
    take the incentives away, which the House bill just did a week
    ago--we are the leading pharmaceutical country in the world
    because we have--even with the fact that we lose so many years
    of patent life, because of a robust set of PhRMA companies and
    set of generic companies.
        Well, my principal question for the panel is the same, and
    I will start with you, Mr. Tauzin, and I for one know both of
    you have benefited from very important drug discoveries. And
    thank God for that. You are both tremendous people, leading
    your industries in what I consider to be tremendously
    influential ways. And I believe that you two consumer advocates
    are doing the same for your people.
        But my principal question for the panel is the same one
    that I focused on with Commissioner Leibowitz. I would like
    each of you to expand on the arguments regarding the relative
    merits of a bright-line rule versus a case-by-case review--you
    will notice I did not say do nothing, but a case-by-case
    review--and then I would like each of you to address the
    question of whether it would be sufficient to reduce the
    incentives to enter into settlements predicated on reverse
    payments by modifying the 180-day exclusivity period.
        Now, it seems to me that changing the way the exclusivity
    period operates would substantially reduce the incentives to
    agree to reverse payments agreements, or whether you believe
    adopting a bright-line rule--and I take it the two in the
    middle probably do agree with that--whether that bright-line
    rule is necessary.
        I would also be interested in hearing specific changes to
    the 180-day exclusivity period that you would support.
        Why don't we start with you, Mr. Downey, and then go across
    the table. And then I have a couple of questions for Mr.
    Downey, if I could, before this is over.
        Mr. Downey. Well, as I have testified, we oppose the
    bright-line rule. We think it has very serious unintended
    consequences that are negative for our company, for our
    industry, and for consumers, and I--
        Senator Hatch. Well, you have argued that the bill would
    prohibit several of the statements which occurred over the past
    decade, even those which have allowed generics to enter the
    market earlier than would have been possible had the lawsuit
    not been brought or lost.
        Mr. Downey. It probably would have prohibited half a dozen
    or more of the settlements that we have that brought the
    products to market earlier than patent--
        Senator Hatch. Would you provide the Committee with the
    cost to consumers if this legislation had been in effect in the
    last 10 years, this proposed legislation?
        Mr. Downey. Yes, we can provide that, and I have said just
    in the two cases--
        Senator Hatch. Could you do that for us?
        Mr. Downey. The two instances I testified about, Prozac and
    Tamoxifen, those two alone saved consumers over a billion and a
    half dollars, and clearly would not have been available had we
    not settled.
        Senator Hatch. Almost $2 billion, actually.
        Mr. Downey. Well, Prozac was decided a year early. We would
    have still gotten some benefit in Prozac, but the year
    accelerated would have been lost without the settlement.
        Senator Hatch. OK.
        Mr. Downey. Now, I also heard from Senator Specter what I
    thought was a very interesting idea in the case-by-case method,
    and that is to have the settlements presented to the court for
    approval at the time they are entered into. That is something
    that is very standard procedure in securities litigation and
    class action litigation to ensure that members of the class are
    adequately protected by the settlement. And I think it would be
    entirely appropriate to have those settlements presented to the
    court for the court's review. I think that would be an
    excellent suggestion or alternative to the proposed
    legislation.
        Senator Hatch. The court could decide at that time whether
    it was a violation--
        Mr. Downey. Yes, they could decide at the time whether it
    was a violation or not. You know, without taking too much time,
    I think there is a very clear area of the law--and this applies
    to patents all over, you know, whether it is electronics,
    automotives, plastics, whatever--and that is, patent holders
    have a monopoly that is granted by the Government, and they can
    settle cases so long as they do not expand that monopoly power
    that has already been granted; that is, they cannot expand its
    scope or the duration of the patent.
        If you take the Andrx case, the Sixth Circuit case, which
    ruled that something was per se legal, that case did expand the
    patent, and it was properly found to be unlawful under existing
    law. The Tamoxifen case and the Valley Drug case did not expand
    the scope of the patent and properly determined under existing
    law to be valid, and I think that kind of analysis could be
    handled by the court very readily and under existing law and
    then there is no need for legislation.
        Senator Hatch. Before I move across the table, let me just
    say while you are talking, why can't the money that is now paid
    as a pharmaceutical patent settlement--or pharmaceutical patent
    settlements, why can't that money always be translated into
    additional days of early market entry for the generic company?
        Mr. Downey. Because the parties generally have a different
    view of the case in two different respects: one, the strength
    of the case; and, second, the value of the entry for the
    generic and the cost of allowing that entry from the brand. And
    those variables change over time, as you learn more about the
    case or as new products get introduced or whatever. So there is
    a huge amount of uncertainty. Just restricting it to that one
    variable of early entry, I think it is very hard to bridge the
    gap on these variables. We have had settlement discussions in
    20- some cases that I have conducted and settled about three-
    quarters of them. And when we cannot settle, it is because you
    cannot bridge that gap.
        What these collateral arrangements do, whether it is an R&D
    partnership, whether it is buying a product, licensing a
    patent, these other exchanges of value have different--those
    assets have different value for the two parties, and you are
    able to bridge the gap that you cannot bridge on the early
    entry through these collateral agreements. In every case that
    we have settled, except Prozac, we got early entry, and that
    reduced the patent life, demonstrably pro-competitive, and many
    of the settlements had these other collateral issues. The only
    ones that get settled for early entry only are two kinds of
    cases: one, where the product itself is very small, or where
    the remaining patent life is very short. In those two cases, we
    have settled maybe a half a dozen times for early entry only
    without some collateral agreement. The rest of the time the
    complexity that I have just described makes it impossible to
    bridge the gap on early entry alone, and it is most readily
    bridged by these collateral agreements, which we have done a
    number of.
        Senator Hatch. All right. Thank you.
        Mr. Wroblewski?
        Mr. Wroblewski. Three thoughts to relate to you.
        First, in terms of why we support the bright-line rule,
    other than what we talked about in the testimony, in the
    written testimony, when you go back and you look at really the
    only comprehensive study of agreements in which each agreement
    has been examined, settlement agreement, which is in the FTC's
    Generic Drug Study, from the period 1992 through 2002 every
    settlement agreement that had some type of compensation being
    paid from the brand company to the generic company, in nearly
    every one of them the entry date was actually at the date when
    the patent expired. There may be anecdotal evidence in terms of
    maybe entry comes in 6 months before the patent expires. But if
    you look at the evidence--and the only evidence that is really
    out there in terms of an examination of each agreement--my
    concern is that in the future they will just push the generic
    entry basically in line with when the patent expires. That, of
    course, goes against the entire intent in my reading of Hatch-
    Waxman.
        Senator Hatch. But if the court had a right to review that,
    I think the court would find that offensive.
        Mr. Wroblewski. Sure. My only concern with having a court
    review it is, unlike the idea of when, say in an antitrust
    case, the judge is looking to see whether the class action
    settlement is fair, it is really applying the same law that it
    has just had the trial on. In this particular instance, you are
    asking a patent judge who has just been looking at the patent
    issues to now apply a whole different--a new set of laws. They
    are going to have to look at antitrust law to measure whether
    the settlement is in the public interest. And my concern with
    that is, with the split in circuits between the Sixth Circuit
    and the Second Circuit, which law, what law is the patent judge
    now going to apply when looking at the settlement agreement
    from an antitrust point of view?
        My concern with using kind of a case-by-case analysis is
    that my reading of Tamoxifen and the Schering decision, the
    Eleventh Circuit's Schering decision, I do not really believe
    that the courts have given sufficient deference to Congress in
    terms of the incentives that have been put into Hatch-Waxman to
    encourage early challenges.
        For what other purpose was the 180 days implemented but to
    encourage generic challenges? And so I do not think the
    Congress--or I do not think the courts have kind of given that
    deference to the law that has really kind of altered the
    balance of the way patents work in this particular industry.
    And it is within Congress's ability, and it is in your right,
    to alter the patent rights as you see fit.
        My last comment is on the 180 days, whether there are
    suggestions to change it. I think when Congress amended Hatch-
    Waxman back in 2003 and we had this whole discussion then, I
    think at the time, talking about whether to go back to the
    successful defense that the FDA had used or the use it or lose
    it, I think we can keep the use-it-or-lose approach to the 180
    days. I do agree with Mr. Downey in terms of making sure that
    there is a way to trigger--having a second generic being able
    to trigger that 180 days so, you know, it does not cause the
    bottleneck, the 180 does not cause the bottleneck. And I think
    we have put in our testimony, as I am sure he has in his, ways
    to amend that 180-day trigger. But I would not amend the entire
    structure that was settled in 2003.
        You know, the one thing I keep kind of looking back at,
    when Congress looked at that in 2003, the state of the world in
    terms of these types of settlement agreements was that you had
    two district courts who had basically said these are per se
    illegal. You know, these appellate courts in Tamoxifen and in
    the Schering case had not yet ruled, and Congress thought the
    only way to--it is my reading that Congress thought the only
    way--that we should keep that, that that is a fine balance to
    have. So the per se rule was actually in effect back in 2003.
    It is only subsequent events that have changed that through the
    two court decisions.
        So I would leave Hatch-Waxman as it stands with that one
    amendment to change the trigger to eliminate the bottleneck.
        Senator Hatch. Well, if you will recall, the Schumer-McCain
    bill passed overwhelmingly. It only had one vote against it in
    the Senate. Guess who that vote was?
        Mr. Wroblewski. I do remember, yes.
        Senator Hatch. And it never passed. To me it was a great
    overreach and would have screwed up Hatch-Waxman. This is a
    very complex bill, but it has worked very, very well. And it
    took a lot of time to negotiate this and a lot of fights. And
    one time I threatened to kill all of the people representing
    PhRMA and the generic industry. I literally did. I had a bad
    tooth that needed a root canal, and I was in no mood, and they
    were arguing and yelling around, and I just threatened to kill
    them all. Frankly, that seemed to bring them together a little
    bit.
        [Laughter.]
        Senator Hatch. Mr. Hirsh, you are next.
        Mr. Hirsh. Senator Hatch, I guess I should begin by saying
    I absolutely agree that this is a wonderful piece of
    legislation and has achieved a great deal, and I am not just
    saying that because you threaten to kill witnesses.
        [Laughter.]
        Senator Hatch. Well, I have not threatened you yet.
        Mr. Hirsh. Let me address what I think are the points that
    you are raising and that are being raised in response.
        The first issue really relates to a patent being a
    monopoly, and it goes back to Senator Specter's remarks at the
    beginning about what did the Eleventh Circuit mean when they
    had this phrase about, ``exceeding the scope of the patent''.
        The difficulty you have in these settlements is the
    following: Everybody agrees if a patent covers Drug A and you
    enter into a settlement where you also agree not to compete
    about Drug B, you are off the reservation. I mean, there is no
    case that is going to accept that result: that is beyond the
    scope of the patent. That is not really the issue, and it is
    not what we are here discussing.
        The issue is this: Suppose you have patents where
    privately, like the example I gave during my oral testimony and
    in my written testimony about Cephalon, where the companies
    believe there is a 30-percent chance that the brand company
    will prevail in this fight--or you can give it another
    percentage, 40, 50, 60. If the law says you can avoid that
    fight going to resolution by having the brand company pay the
    generic to drop the fight, what you are saying is if the cases
    went to resolution, the brand company would win whatever
    percentage, 3 out of 10, 4 out of 10--say there are 10 cases, 5
    or 6--and they would lose in the remaining number of cases.
        Let's take the number 5 for convenience. If you allow the
    payment from the brand to the generic, you are allowing a
    situation in which all 10 of those cases result in zero
    competition and zero benefits for the consumer. If you have
    those cases go to litigation, you end up with the result that 5
    of them expect to come to the result that there is competition
    and 5 not. If you have a settlement in which they cannot
    negotiate on the basis of money, but instead have to argue
    about the length of the time on the patent, you end up with an
    agreement in which at arm's--length the generic and the brand
    company have weighed the strength of the patent and come in
    with a time of entry that reflects the weakness of the patent.
        Now, Mr. Downey says, well, we have got these settlements
    with collateral agreements, and Representative Tauzin gave the
    example of Schering-Plough. Schering-Plough is really a good
    example on the collateral agreements of what I do not
    understand this legislation to raise as a problem, which is
    there may well be win-wins between brand and generics on other
    things. In Schering-Plough, there was a cross license. The
    generics had some drugs under patent, and the brand company--in
    that case, Schering-Plough--paid money and they said, ``We are
    paying for the cross license.''
        Now, there is a factual dispute in the case--and nobody
    here is going to be able to sort it out--as to whether that was
    a real payment or not--whether these cross licenses were worth
    it. But if those cross licenses are worth it, if they are
    legitimate, that is not a situation where the brand is paying
    off for the generic. The brand is paying the generic for a
    license. That is a legitimate deal. And if that is a win-win
    and that you helps you close the settlement, it helps you close
    the settlement, and there is nothing that I understand in this
    bill that necessarily prohibits that. The problem is when the
    money is not being paid for that. When it is not being paid for
    some other value, that is what creates the problem.
        Now, as for the 180-day provision, that is a glitch in the
    statute. It is something that should be fixed, but it does not
    solve this problem for a number of reasons. First of all, even
    if you have a situation where you can have multiple generics
    come in to challenge the patent, there is enough money to enter
    into settlements with all of the generics. That is exactly what
    happened in Cephalon, and there is not--it is in some ways
    worse to have--five sets of patent litigation settled with
    reverse payment settlements. It involves more litigation, more
    payments by the brand company, and no more competition in that
    scenario than any other scenario. So it does not really address
    the incentive to do it.
        Second, the 180-day provision really does create a special
    incentive for competition. It is one of the brilliant aspects
    of the legislation itself. Every other generic manufacturer has
    less incentive to compete than the one you are settling with if
    they are the ones holding the 180-day exclusivity provision. So
    you already enter into a deal that in any other setting--''Pick
    off your main competitor and pay them not to compete'' are
    words for an antitrust violation. There is no reason why you
    should permit that, and so the two are really different
    problems.
        The final point is the alternative of having a court review
    it. Conceptually, it is a conceivable resolution to the
    problem. It has some weaknesses. First of all, it does not get
    you the benefits of a bright-line rule in stopping the lawsuits
    in the first place and making the process legitimate. And it
    does not allow, ironically, the market solution of having the
    arm's-length resolution. Instead what you have is a
    superimposed solution of what the court thinks a resolution is
    right. And often per se rules are opposed for the opposite
    reason. We do not want courts to do that.
        But a second basic problem with it is the one that Mr.
    Wroblewski talked about, which is ``what standard should be
    applied? '' It does not solve the entire problem. If you simply
    say we will have courts look at it, look at it as they did in
    Tamoxifen, look at it as they are going to do in Cephalon, who
    knows what they are going to do with it; look at it as they did
    in Schering-Plough; look at it as they did in Cardizem. If the
    court does not have any guidance to do it, you solve no problem
    at all by saying let's have the court look at it. The court
    still needs to be instructed.
        Senator Hatch. Well, but one standard by making this a pro
    se violation--I mean per se, excuse me, violation, that may not
    work well either.
        Mr. Hirsh. I think it does because I think what you are
    eliminating by the reverse payment is what you want to
    eliminate. It is a situation in which a payment is the problem.
    It is not the settlement. Once you eliminate the payment, you
    have incentivized the brand and generic to reach a competitive
    settlement, and that is fine. And they can settle by saying,
    ``I have something of value to sell to you, and you are willing
    to pay for it.''
        Senator Hatch. So that just creates more litigation.
        Mr. Hirsh. No, it does not because, first of all, when--
    currently under the system, if you have a blockbuster drug, if
    you have a drug that is selling a billion dollars a year, there
    is an inherent incentive for a generic company to come up with
    any argument to file an ANDA-IV. It is true they have to show
    that it is a bioequivalent. It is not no work at all. But there
    is a huge incentive to come in there. Why? Because if they can
    pick any plausible fight at all, they have something that has
    potential value to it, which is $2 billion of potential sales
    of a competitor with an awful lot of money to pay off.
        Now, any plaintiff's lawyer will tell you if you have got a
    pot of gold to go after, if you look at securities suits with
    the market capitalization involved in securities suits, people
    bring them because there is an enormous amount of money at the
    end, and far less because there is tremendous merit in every
    single one of the cases that is being brought. We are
    incentivizing people to go after that money as opposed to a
    system that incentivizes people to come in when they really
    genuinely want to compete and settle the case by agreeing for a
    time for competition to start. If you take away the payment
    they will agree they will come in and genuinely compete.
        Imagine what would happen to securities litigation if you
    eliminated a damage remedy. You would not have more litigation.
    You would have vastly less if you had just injunctive relief.
        So the system creates a bad incentive for that type of
    litigation and less focusing on what the genuine disputes are,
    less teeing up the right issues for the right dispute with a
    resolution that harnesses the market.
        Senator Hatch. Let me hear from Mr. Tauzin, and I am sorry
    I have taken so longer here, but these are important questions,
    and your responses are very important to us.
        Mr. Tauzin. Senator Hatch, Senator Kohl, let me first set
    some records straight.
        One, we are not again generic companies. I am holding up a
    generic pill made by Teva that I take, that a half-hour before
    surgery prevented me from having to go through serious surgery
    this summer on my liver, and I proudly take it every day. It is
    a good drug. It is a copy of a patented drug that somebody else
    spent a lot of money to develop, and it is now on the market as
    a generic, and I am using it. You know, I have got some
    interest in this as well on a personal level.
        Second, we are not just talking about big brand companies
    and small generic companies. In some cases, we are talking
    about big generic companies and very small innovators who are
    members of our association. We have got some companies who just
    had their first drug approved in our association. And there are
    lots of small, innovative companies that haven't had their
    first drug approved, and they have been in business for 10 or
    12 years. They are still waiting for that first approval. And
    so these are contests very often over the patent life of those
    drugs that involve different size players. It is not just big
    and little, as you might, you know, think ordinarily.
        Third, we are talking about a patent life that the patent
    holder is entitled to unless his patent is invalid. We are not
    talking about settlements that extend the patent life beyond
    what the law gives them. So, you know, you hear comments in
    here that seem to indicate we are somehow settling cases to
    keep generic drugs of the market even longer than the patent
    life that the law allows for the inventor. That is not true. We
    are simply talking about whether or not the patent life is
    going to be shortened for the inventor because of a dispute
    over whether it is a valid patent, done properly, or the new
    generic company that wants to come in is not infringing. That
    is a debate. And in those cases, there are issues, obviously,
    that will yield to settlement rather than to litigation. So
    that is what we are talking about.
        Now, could we help make sure those settlements are in the
    public interest? Yes, I think there are some ideas that you
    have discussed today that we would love to talk to you some
    more about.
        I am a little concerned, Senator Hatch, about the 180-day
    provision. It was one of the beautiful elements of Hatch-Waxman
    that really encouraged generic companies to come in and test
    patents.
        Senator Hatch. It is a critical element.
        Mr. Tauzin. Yes, and it is part of the balance. That has
    produced 60-percent generic use in this country, bigger than
    any country in the world, again. So I would be concerned about
    messing with it too much.
        On the idea of letting the judge who is handling the
    dispute under whatever standard that makes sense review it,
    that is worth discussing. That might be an idea that works.
        First of all, even Senator Schumer indicated, you know,
    even though he favors a bright line, he has indicated there are
    good settlements, and we ought to have some review to see which
    one is a good one and which one is a bad one. My concern,
    again, is that if you begin saying what elements of a
    settlement you cannot ever have, you may make some of these
    settlements impossible. And, therefore, you may hurt consumers
    in the end, and you may require small innovators to stay in
    court longer than they should, at great expense, to protect
    their patents and, therefore, damage their viability.
        You may damage generic companies by forcing them to stay in
    court longer than they should to get a resolution of the legal
    issues involved.
        So, Senator Hatch, Senator Specter, I respectfully say we
    would love to sit down and talk some more and visit and see
    whether there is some other solution. Senator Kohl, I--
        Senator Hatch. Well, we would love to hear from all of you.
        Mr. Tauzin. I am just concerned about saying here is an
    element you cannot have in a settlement just because it looks
    bad. If it looks bad but it really is good for consumers, maybe
    the court ought to have the right to say that. If it just looks
    bad and it is bad, kick it out. It should not be there.
        In the end, the judgment ought to be that this helps
    resolve legal disputes that create uncertainty create legal
    fights that last too long, cost the companies, cost consumers
    unnecessarily and in favor of settlements that end these
    disputes, and let Hatch-Waxman work the way it was intended to
    by allowing generic companies to enter into the field when they
    should have a right to be there.
        Senator Hatch. Mr. Chairman, I love both sides of the
    industry and consumers, and, frankly, these matters are not
    simple matters. This is complex. Hatch-Waxman is complex. There
    are not too many people that understand it at all in the
    Congress of the United States. I have to say there are some
    very good staffers who do in many respects.
        But there has been a lot to think about here today, but I
    have got to tell you these two industries have done so much for
    America, no question about it. And I get tired of people
    picking on one or the other, to be honest with you. Both have
    served this country well.
        But there are wrongs, and when there are, current laws many
    times take care of them. But there needs to be some tinkering
    here. Even you admit, Mr. Tauzin, that there are bad deals
    sometimes, and I think you would agree with that, Mr. Downey,
    as well.
        Mr. Downey. We do.
        Senator Hatch. And if the law is not taking care of those
    bad deals, then we have to come up with a way of doing it.
        In the case of you, Mr. Wroblewski, and you, Mr. Hirsh, we
    would like your ideas on this. Personally, I am having some
    troubles with having a one-size-fits-all answer to this. I have
    got an open mind on it, and you have certainly--not that I mean
    that much, but the fact of the matter is that I would like to
    see if there is some way that we can bring everybody together
    still in the best interests of the two manufacturers and the
    consumers as well.
        Mr. Tauzin. Senator, would you indulge me just 1 second
    longer? I just want to give you an insight that came to me in
    the last several years since I have been in this job. I have
    had a chance to go visit a lot of the young scientists working
    on these new medicines. There is a guy in California, a young
    scientist working on a medicine for hepatitis B and C, and
    there are 500 million people on this planet who are going to
    die from those diseases, about 10 years before they effect on
    you, kill you. This guy is working on a solution. One guy.
        All I am asking you to consider is the long-term effects of
    what you do in terms of that process, because there are
    patients all over the world waiting for that scientists and
    others to invent the drug that eventually the generic companies
    will copy and bring in at a cheaper cost later on, but who are
    spending years and years of their life and who dream of nothing
    else but finding the answer to hepatitis B or C or whatever
    disease plagues us.
        There is a balance here. You talked about it. All we ask is
    that we make sure this model does not break down, because if it
    breaks down, for the sake of patients who are currently getting
    the benefit of a medicine, if we give up what is happening in
    terms of the incredible research to find the new medicines that
    are going to take care of those diseases that wreck us and ruin
    us, that you got to be a little careful that you do not damage
    that model to the point where it does not work anymore. We are
    on that brink right.
        Senator Hatch. Well, Mr. Chairman, I am sorry I have taken
    so long, but I do not want either of these industries hurt.
    There are some people here who think PhRMA is all big
    businesses. I think you have made a pretty good case that it is
    a wide variety of businesses, including big businesses. There
    are some very big generics right now. Yours is one of them,
    Barr, Teva, a number of others.
        In the end, if we hurt these companies by bad legislation,
    we are going to hurt the consumer in the end. On the other
    hand, if we allow really what is improper activities to
    continue--and I have to say I have been pretty forthright about
    some of what I consider to be improper activities--then we hurt
    the consumer even more.
        So we have to find some way of resolving these problems so
    that the system works, but we certainly do not want to kill our
    industry. I love the Washington Post coming out against the
    House bill over there, which seems to be a political
    retribution bill more than a bill to protect consumers. And the
    Post recognized, as I have noticed they do, they recognize that
    we do not want to kill these industries. We are the leaders in
    the world today, and our hope for the future of controlling
    health care costs is going to be just how successful you folks
    are and what we can do with stem cell research and bio as we go
    down through the years. And if we are successful in those,
    especially bio and stem cell research, if we are successful in
    individual therapies based upon genetics for individual people,
    I got to tell you, we might be able to avoid an awful lot of
    Medicaid and Medicare costs that are going to swamp the Federal
    budget in the future unless we can find some ways around it.
        So I want to commend you for the work that you do, and I am
    sorry I have taken so long, but--actually, you have taken most
    of the time. I have just been very reasonable.
        [Laughter.]
        Senator Hatch. But this has been an extremely interesting
    hearing to me, and I just want to compliment all of you, and
    compliment you, Mr. Chairman. I am going to really enjoy
    working with you, as I always have, and this is a very
    important hearing, and I hope we will hold some others as well
    on other matters.
        Senator Kohl. Thank you for your contribution, Senator
    Hatch.
        Senator Grassley?

    STATEMENT OF CHARLES E. GRASSLEY, A U.S. SENATOR FROM THE STATE
                                OF IOWA

        Senator Grassley. Mr. Chairman, I am not going to ask any
    questions. First of all, I did not think I was going to be able
    to be here at all. I am very interested in this subject and am
    a cosponsor of the bill, but I was working with Senator Baucus
    to get a small business tax provision out of the Finance
    Committee, which we just got done, so it would be ready for the
    minimum wage bill. But now that this Committee was still
    meeting, I wanted to stop by and let everybody know that I am
    going to continue working with the Chairman of the Committee
    and other members of this Committee on this legislation. I
    think it is needed. I would not preclude the possibility of
    compromise and listening to every point of view as just
    expressed by Senator Hatch. But I think there is a lot in this
    area that needs to be done, and I think the most important
    thing is to make sure that the marketplace works and is not
    frustrated from the standpoint of when patents have expired, we
    ought to expect generics to get to market as soon as possible.
        So in the process of doing that, I wanted to stop by and
    express my support and regret why I could not be here for the
    entire hearing. I will have a chance to be briefed on
    everything that was said. And I assume that it is Chairman
    Leahy's intent to move ahead with this legislation. I, at
    least, hope so.
        So I thank Senator Leahy and you for your work and for
    putting my statement in the record. Thank you.
        [The prepared statement of Senator Grassley appears as a
    submission for the record.]
        Senator Kohl. Thank you very much, Senator Grassley.
        Gentlemen, we appreciate your being here, as well as
    Commissioner Leibowitz. This has been a very good hearing on a
    very complicated and a very important topic. You have shed a
    lot of light with your discussion this morning. We appreciate
    the time you have given us and the wisdom that you have brought
    to the issue. Thank you so much.
        The hearing is adjourned.
        [Whereupon, at 12:10 p.m., the Committee was adjourned.]
        [Questions and answers and submissions for the record
    follow.]

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