[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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                       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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