    [House Hearing, 111 Congress]
    [From the U.S. Government Publishing Office]

      PAY TO DELAY: ARE PATENT SETTLEMENTS THAT DELAY GENERIC DRUG MARKET
                             ENTRY ANTICOMPETITIVE?

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

                                    HEARING

                                   BEFORE THE

                           SUBCOMMITTEE ON COURTS AND
                               COMPETITION POLICY

                                     OF THE

                           COMMITTEE ON THE JUDICIARY
                            HOUSE OF REPRESENTATIVES

                         ONE HUNDRED ELEVENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                  JUNE 3, 2009

                                   __________

                               Serial No. 111-105

                                   __________

             Printed for the use of the Committee on the Judiciary

          Available via the World Wide Web: http://judiciary.house.gov

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                           COMMITTEE ON THE JUDICIARY

                     JOHN CONYERS, Jr., Michigan, Chairman
    HOWARD L. BERMAN, California         LAMAR SMITH, Texas
    RICK BOUCHER, Virginia               F. JAMES SENSENBRENNER, Jr.,
    JERROLD NADLER, New York                 Wisconsin
    ROBERT C. ``BOBBY'' SCOTT, Virginia  HOWARD COBLE, North Carolina
    MELVIN L. WATT, North Carolina       ELTON GALLEGLY, California
    ZOE LOFGREN, California              BOB GOODLATTE, Virginia
    SHEILA JACKSON LEE, Texas            DANIEL E. LUNGREN, California
    MAXINE WATERS, California            DARRELL E. ISSA, California
    WILLIAM D. DELAHUNT, Massachusetts   J. RANDY FORBES, Virginia
    ROBERT WEXLER, Florida               STEVE KING, Iowa
    STEVE COHEN, Tennessee               TRENT FRANKS, Arizona
    HENRY C. ``HANK'' JOHNSON, Jr.,      LOUIE GOHMERT, Texas
      Georgia                            JIM JORDAN, Ohio
    PEDRO PIERLUISI, Puerto Rico         TED POE, Texas
    MIKE QUIGLEY, Illinois               JASON CHAFFETZ, Utah
    LUIS V. GUTIERREZ, Illinois          TOM ROONEY, Florida
    BRAD SHERMAN, California             GREGG HARPER, Mississippi
    TAMMY BALDWIN, Wisconsin
    CHARLES A. GONZALEZ, Texas
    ANTHONY D. WEINER, New York
    ADAM B. SCHIFF, California
    LINDA T. SANCHEZ, California
    DEBBIE WASSERMAN SCHULTZ, Florida
    DANIEL MAFFEI, New York

           Perry Apelbaum, Majority Staff Director and Chief Counsel
          Sean McLaughlin, Minority Chief of Staff and General Counsel
                                     ------

                 Subcommittee on Courts and Competition Policy

               HENRY C. ``HANK'' JOHNSON, Jr., Georgia, Chairman

    JOHN CONYERS, Jr., Michigan          HOWARD COBLE, North Carolina
    RICK BOUCHER, Virginia               JASON CHAFFETZ, Utah
    ROBERT WEXLER, Florida               BOB GOODLATTE, Virginia
    CHARLES A. GONZALEZ, Texas           F. JAMES SENSENBRENNER, Jr.,
    SHEILA JACKSON LEE, Texas            Wisconsin
    MELVIN L. WATT, North Carolina       DARRELL ISSA, California
    BRAD SHERMAN, California             GREGG HARPER, Mississippi
    MIKE QUIGLEY, Illinois

                        Christal Sheppard, Chief Counsel

                        Blaine Merritt, Minority Counsel

                                C O N T E N T S

                                  ----------

                                  JUNE 3, 2009

                                                                       Page

                               OPENING STATEMENTS

    The Honorable Henry C. ``Hank'' Johnson, Jr., a Representative in
      Congress from the State of Georgia, and Chairman, Subcommittee
      on Courts and Competition Policy...............................     1
    The Honorable Howard Coble, a Representative in Congress from the
      State of North Carolina, and Ranking Member, Subcommittee on
      Courts and Competition Policy..................................     2

                                   WITNESSES

    Mr. Richard Feinstein, Director, Bureau of Competition, Federal
      Trade Commission, Washington, DC
      Oral Testimony.................................................     5
      Prepared Statement.............................................     7
    Ms. Heather Bresch, Executive Vice President, Chief Operating
      Officer, Mylan Incorporated, Canonsburg, PA
      Oral Testimony.................................................    28
      Prepared Statement.............................................    30
    Mr. William P. ``Bill'' Kennedy, Chief Executive Officer,
      Orlando, Nephron Pharmaceuticals Corporation, Orlando, FL
      Oral Testimony.................................................    40
      Prepared Statement.............................................    42
    Mr. Guy Donatiello, Vice President, Intellectual Property, Endo
      Pharmaceuticals, Chadds Ford, PA
      Oral Testimony.................................................    48
      Prepared Statement.............................................    51
    Mr. William Vaughan, Senior Health Policy Analyst, Consumer
      Union, Washington, DC
      Oral Testimony.................................................    57
      Prepared Statement.............................................    59
    Mr. Bret M. Dickey, Senior Vice President, Compass Lexecon,
      Oakland, CA
      Oral Testimony.................................................    75
      Prepared Statement.............................................    78

      PAY TO DELAY: ARE PATENT SETTLEMENTS THAT DELAY GENERIC DRUG MARKET
                             ENTRY ANTICOMPETITIVE?

                                  ----------

                            WEDNESDAY, JUNE 3, 2009

                  House of Representatives,
                     Subcommittee on Courts and
                                     Competition Policy
                                    Committee on the Judiciary,
                                                        Washington, DC.

        The Subcommittee met, pursuant to notice, at 10:04 a.m., in
    room 2237, Rayburn House Office Building, the Honorable Henry
    C. ``Hank'' Johnson, Jr. (Chairman of the Subcommittee)
    presiding.
        Present: Representatives Johnson, Conyers, Gonzalez,
    Jackson Lee, Watt, Sherman, Coble, Sensenbrenner, and
    Goodlatte.
        Staff present: (Majority) Christal Sheppard, Subcommittee
    Chief Counsel; Elizabeth Stein, Counsel; Rosalind Jackson,
    Professional Staff Member; (Minority) Stewart Jeffries,
    Counsel; Johnny Mautz, Staff Member.
        Mr. Johnson. The hearing of the Subcommittee on Courts and
    Competition Policy will now come to order.
        Without objection, the Chair will be authorized to declare
    a recess for the hearing.
        Pay-to-delay settlements have been the subject of
    legislation introduced in both the House and the Senate. The
    House Energy and Commerce Committee has held numerous hearings
    on that issue in the 110th and the 111th Congresses. So this is
    clearly an issue of concern to the Judiciary Committee and, in
    particular, this Subcommittee.
        Pay-to-delay or reverse payment settlements only arise in
    the context of litigation over patents, and patent law is an
    important part of the full Committee's jurisdiction. The
    settlements also fundamentally affect competition in the
    pharmaceutical industry. This is a matter of deep concern to
    the Subcommittee--it is important to give our Members the
    opportunity to hear from the experts, both positive and
    negative, who are here today.
        And this issue is really about balancing two necessary but
    opposing interests: one, the need to promote the advancement of
    medicine and health care; and the need to make health care
    available to as many people--to everyone for as little money as
    possible. It is about balancing the artificial monopoly of a
    patent into the competitive pricing of generic drugs.
        On the other hand, we need to ensure that pioneer drug
    companies have the resources and incentives to continue
    developing--drugs--in order to continue developing new
    therapies for the benefit of mankind. But when entry of a
    generic drug into the market is unnecessarily or artificially
    delayed, consumers, patients and taxpayers are all harmed
    because they continue to pay premium prices for drugs. We need
    to be sure that we are doing everything we can to ensure that
    unnecessary delays do not happen.
        Today, ladies and gentlemen, we will look at the nature of
    these settlements. Usually settling a lawsuit is considered to
    be a good thing, an efficient and cost-saving way to resolve
    issues. The pioneer and generic drug companies, and to a large
    degree, the courts, tend to regard reverse payment settlements
    in that way.
        The Federal Trade Commission, on the other hand, sees them
    as per se anti-competitive and a violation of long-established
    antitrust laws.
        Our distinguished panel of witnesses will present both
    views today, and I am confident we will come away with a sound
    basis to make our further decisions on this topic fruitful, and
    to come up with a consensus about how we should move forward.
        There are a number of avenues to explore in looking for the
    best way to handle brand generic patent settlements. We can try
    to develop criteria that would signal whether a settlement is
    beneficial to consumers in keeping with the intent of the
    Hatch-Waxman act. We can provide a framework for reviewing
    settlements to ensure that the criteria for a competitive
    settlement are met.
        And another approach is that we may consider ensuring that
    the 180-day exclusivity period is awarded appropriately to a
    generic company that actually opens a market to generic
    versions of the challenged drug that would otherwise remain
    closed.
        In conjunction with that approach, we can take steps to
    ensure that the 180-day exclusivity period is of sufficient
    value to a generic drug company to provide a meaningful
    incentive to challenge the pioneer drug. One such step may be
    to prevent the pioneer company from marketing or authorizing
    the marketing of a generic version of its own drug.
        These are just some of the ways we might promote
    competition in the pharmaceutical market while maintaining the
    incentives to discover and develop new drugs. I am sure that
    others will come to light during the course of this hearing.
        And I will now recognize my colleague, Congressman Coble,
    the Ranking Member of this Committee, Subcommittee.
        Mr. Coble. Thank you, Mr. Chairman.
        I am sorry for my belated arrival. It started out as a
    hectic day. I am sure the panelists have never had hectic days
    plaguing them, I say with tongue in cheek. I have two other
    hearings, Mr. Chairman, that I will have to attend ultimately.
        But today's hearing, Mr. Chairman, is a homecoming of sorts
    for this Subcommittee. Prior to this Congress, you will recall
    the Subcommittee--Courts, Internet, and Intellectual Property
    Subcommittee, and it has jurisdiction over all things patent-
    related. And I am glad we are seeing the return of some of
    these important issues to this Subcommittee.
        That said, the subject matter--you touched on some of it,
    Mr. Chairman. But the subject matter for today's hearing is
    complex. It touches on antitrust, patent, and health care--feel
    that Hatch-Waxman, which was created in 1984, was and still is
    good policy. Without Hatch-Waxman, there would be no generic
    pharmaceutical industry, it seems to me.
        This delicate balance between permitting generics to
    challenge patents and providing them with exclusivity and
    permitting patent holders from molecular entities, usually one
    of the brand companies, to extend their patent terms to
    compensate for delays during FDA review has been very effective
    and is still widely supported.
        That said, there are some practices that have been called
    into question. And while I have not embraced or rejected any of
    the arguments that are being made, it goes without saying that
    efficiencies in our health care system are a top priority for
    everyone.
        The Federal Trade Commission feels very strongly that some
    settlements between brand and generic pharmaceutical companies
    which have survived the rule of reason test in our Federal
    courts should be prohibited because they inhibit innovation and
    are alleged to increase the cost of pharmaceuticals.
        On the other hand, proponents of the current system, most
    of the pharmaceutical industry, contend that these claims are
    patently false and that the settlements actually foster
    innovation and growth and ensure the future of many disease-
    curing drugs that are still being researched today.
        The pharmaceutical industry argues that, without
    settlements, there would be an incentive to litigate against
    each other, thereby increasing costs, delaying new products for
    the market, and creating enormous amounts of uncertainty that
    their investments, oftentimes in the billions, can be wiped out
    by a lawsuit. Furthermore, they argue that the notion of a
    settlement scheme of pay-to-delay is already prohibited by
    section five of the FTC Act.
        Our pharmaceutical industry leads the world. The Hatch-
    Waxman act has been successful. And before we move to tip this
    balance, one simple question we should address is how any
    change will affect the industry as a whole.
        I concur, Mr. Chairman, wholeheartedly with the effort to
    cut wasteful expenses from our health care system. And while I
    am very interested to know how intellectual property rights are
    being served and whether the market is operating freely, many
    of my constituents who rely upon medicines want to know how
    these settlements are either enhancing or impeding their daily
    lives.
        Finally, I am aware that this issue has generated some
    legislation which is being considered at the House Energy and
    Commerce Committee. And I feel very strongly, Mr. Chairman,
    that it is incumbent on the Judiciary Committee to also have a
    say in this matter. I look forward to hearing from our
    witnesses on this important topic, and I yield back the balance
    of my time.
        Mr. Johnson. I thank the gentleman for his statement.
        And without objection, other Members' opening statements
    will be included in the record.
        I am now pleased to introduce the witnesses for today's
    hearing. First is Mr. Richard Feinstein, who is the director of
    the Bureau of Competition at the Federal Trade Commission. He
    has previously been assistant director in the bureau's health
    care services and products division and worked as a trial
    attorney and supervisor in the DOJ's antitrust division. Mr.
    Feinstein has also been in private practice, primarily focusing
    upon antitrust litigation and counseling.
        Welcome, sir.
        Second is Ms. Heather Bresch, who is executive vice
    president and chief operating officer for Mylan, a supplier of
    generic and specialty pharmaceuticals. During the past 17
    years, she has worked in a kind of a graduated from entry-level
    to a top-level position for which she is to be congratulated,
    of course, as is Mr. Feinstein.
        And she is currently responsible for Mylan's global and
    technical operations. Ms. Bresch worked hard to pass the 2003
    Medicare Modernization Act and has served consecutive terms as
    chair of the Generic Pharmaceutical Association.
        Next, we will hear from Mr. William Kennedy, who is owner
    and CEO of Nephron Pharmaceuticals, a small generic
    manufacturer specializing in respiratory medication. He is a
    pharmacist who has previously owned a retail pharmacy and
    founded a home-care company specializing in respiratory medical
    equipment and care.
        Welcome, sir.
        Fourth is Mr. Guy Donatiello, who is the vice president for
    intellectual property for Endo Pharmaceuticals. At Endo, Mr.
    Donatiello is responsible for all aspects of intellectual
    property. Prior to joining Endo, he specialized in intellectual
    property issues for pharmaceutical and biotechnology companies
    as an in-house attorney and as external counsel. He has 20
    years of intellectual property experience and has been an
    adjunct professor at Villanova School of Law.
        Welcome, sir.
        And next will be Mr. William Vaughan, who, from 1965 to
    2001, worked for various Members of the House Ways and Means
    Committee and as staff director for the minority on the
    Subcommittee on Health. Since 2001, he has worked as a lobbyist
    for Families USA and in his current position as senior health
    policy analyst for Consumers Union.
        Welcome, sir.
        And, finally, we will hear from Mr. Bret Dickey, the senior
    vice president of Compass Lexecon, a consulting firm
    specializing in competition policy. Mr. Dickey earned a Ph.D.
    in economics from Stanford University and, prior to joining
    Compass Lexecon, was an economist--with LEGC, a company that
    conducts studies and provides expert testimony and strategic
    and financial advice services. He has written two academic
    papers on the topic of patent settlements.
        And we want to welcome you here, too, today, sir.
        I appreciate everyone's willingness to participate in
    today's hearing. Without objection, your written statement will
    be placed into the record, and we would ask that you limit your
    oral remarks to 5 minutes.
        You will note that we have a lighting system. It starts
    with the green light. At 4 minutes, it turns yellow, then red
    at 5 minutes. As each witness has presented his or her
    testimony, Subcommittee Members will be permitted to ask
    questions, subject to the 5-minute rule.
        Mr. Feinstein, are you ready to proceed with your
    testimony, sir?
        Mr. Feinstein. I am.
        Mr. Johnson. Alright.
        Ms. Bresch, will you begin your testimony, please?
        I am sorry. Mr. Feinstein, go ahead.

          TESTIMONY OF RICHARD FEINSTEIN, DIRECTOR, BUREAU OF
         COMPETITION, FEDERAL TRADE COMMISSION, WASHINGTON, DC

        Mr. Feinstein. Thank you, Mr. Chairman and Ranking Member
    Coble and Members of the Committee. I appreciate the
    opportunity to testify at this hearing.
        The issue of pay-for-delay settlements in the
    pharmaceutical industry is a worthy and very timely subject for
    this Subcommittee's attention. These anticompetitive agreements
    impose enormous costs on the U.S. health care system. For just
    a single drug, those costs can amount to billions of dollars.
    Consumers, businesses, and governments are footing the bill,
    and that bill will only get larger if pay-for-delay settlements
    are not eliminated.
        I should note for the record that the written statement
    that has been acknowledged represents the views of the agency.
    My oral testimony today represents my own views and not
    necessarily the views of the commission.
        I would like to begin by briefly describing the problem
    that we are here to discuss. Pay-for-delay settlements of
    patent litigation--are settlements of patent litigation in
    which the brand-name drug firm pays its potential generic
    competitor to abandon a patent challenge and to delay entering
    the market with a lower-cost generic product. These
    arrangements are also known as exclusion payment or reverse
    payment settlements.
        These settlements arise in the context of the special
    patent challenge system devised by Congress for the
    pharmaceutical industry, which is, of course, the Hatch-Waxman
    regime. When Congress enacted the 1984 Hatch-Waxman act, one of
    the key steps it took to encourage speedy introduction of
    generics was to establish mechanisms for firms seeking approval
    of generic drugs to challenge invalid or narrow patents on
    brand of drugs.
        Experience has shown the wisdom of that congressional
    action. When tested in the courts, the branded drug patents
    often did not withstand judicial scrutiny, and the savings have
    been enormous. Generic entry resulting from these successful
    patent challenges has played a key role in helping Americans
    afford the medicines they need.
        But while patent challenges can deliver big savings for
    consumers, the economics of brand-generic competition create a
    powerful incentive for brand and generic manufacturers to agree
    to terminate the patent case and instead avoid competition and
    share the resulting profits.
        The reason is simple: Because generic drugs are so much
    cheaper than the branded form, the profits that the generic
    expects to make will be much less than the profits that the
    brand stands to lose. The result is typically more profitable
    for both sides if the brand-new company pays a generic company
    to settle the patent dispute and agree to defer its entry. This
    is a win-win for the drug companies, but consumers and the
    Federal Government, who were, of course, not at the table when
    this deal was struck, are the losers.
        Agreements to eliminate potential competition and share the
    resulting profits are at the core of what the antitrust laws
    proscribe. Notably, since this issue first arose in 1998, every
    single member of the Federal Trade Commission, whether
    Democrat, Republican or independent, has supported the
    commission's challenges to anticompetitive pay-for-delay deals.
        But since 2005, the court decisions have taken a lenient
    approach to such agreements. As a result, it has become
    increasingly difficult to use antitrust law to stop pay-for-
    delay settlements. Some settlements have become a common
    industry strategy, and we observed a dramatic increase in the
    number of settlements that include compensation to the generic
    coupled with a restriction on generic entry.
        In other words, the pay-for-delay settlement problem is
    extremely costly and increasingly prevalent. As Congressman
    Waxman has observed, pay-for-delay settlements have turned the
    Hatch-Waxman act on its head. The law was designed to save
    consumers money by giving generic companies an incentive to
    challenge weak patents and to compete. Instead, generic
    companies are getting paid handsomely to sit on the sidelines.
        The FTC is not alone in its concerns. Consumer groups, the
    AMA, state attorneys general, and legal and economic scholars
    have all spoken out about this problem.
        The pharmaceutical industry has largely, though not
    entirely, defended pay-for-delay deals and asserted that they
    benefit, rather than harm consumers. Let me comment briefly on
    arguments often made.
        First, the suggestion that Hatch-Waxman patent cases cannot
    be settled without deals to pay a generic to delay entry was
    contradicted by actual market experience from 2000 to 2004,
    when the prospect of antitrust enforcement was deterring such
    settlements. Companies continued to settle, but they did so
    without exclusion payments.
        Second, just because a settlement permits a generic to
    enter before the patent expires does not necessarily mean the
    consumers benefit. Granted, firms do not pay generics to
    accelerate entry; they do so when it is the only--when it is
    the only way to get the generic to accept the brand's preferred
    entry date.
        The claim made by some that barring pay-for-delay
    settlements would reduce innovation and result in fewer life-
    saving drugs is a serious charge, but it glosses over what even
    defenders of these settlements have conceded: that the
    incentive to pay a generic to abandon its patent challenge is
    greatest for the weakest patents.
        Allowing pay-for-delay settlements gives holders of drug
    patents the ability to buy more protection from competition
    than congressionally granted patent rights afford. These deals
    disrupt the careful balance between patent protections and
    encouraging generic drug entry that Congress sought to achieve
    in the Hatch-Waxman act.
        Finally, some assert that barring pay-for-delay settlements
    will lead to fewer patent challenges by generic firms, but it
    is important to recognize that the measure of success of the
    patent challenge process is not the number of patent challenges
    filed, but the extent to which such challenges actually deliver
    savings to consumers.
        If generic firms file patent challenges that simply result
    in payments to drop the challenge, then the purpose of
    encouraging such challenges is defeated.
        As our written statement reflects, the agency supports a
    legislative solution that would eliminate pay-for-delay
    settlements. The FTC is continuing to investigate and bring
    cases to try to protect consumers from these anticompetitive
    settlements, but the enormous costs of these deals make waiting
    for a solution in the courts an expensive proposition,
    particularly at a time when the Nation is searching for ways to
    reform health care.
        H.R. 1706 offers a straightforward means to quickly combat
    anticompetitive conduct that is pervasive and costly to
    consumers, while also providing flexibility to protect
    procompetitive arrangements.
        Thank you very much. I would be happy to answer any
    questions the Subcommittee may have.
        [The prepared statement of Mr. Feinstein follows:]
                    Prepared Statement of Richard Feinstein

                                   __________

        Mr. Johnson [continuing]. If you could go ahead and wrap
    up----
        Mr. Feinstein. I just did. I have completed it. Thank you.
        Mr. Johnson. Thank you.
        Ms. Bresch, your turn, ma'am.

     TESTIMONY OF HEATHER BRESCH, EXECUTIVE VICE PRESIDENT, CHIEF
         OPERATING OFFICER, MYLAN INCORPORATED, CANONSBURG, PA

        Ms. Bresch. Thank you, Chairman Johnson, Ranking Member
    Coble, and Members of the Judiciary Subcommittee on Courts and
    Competition Policy.
        In particular, thank you, Chairman Conyers, for inviting us
    today to attend.
        My name is Heather Bresch, and I am chief operating officer
    of Mylan, Incorportated. We are the largest U.S.-based generic
    pharmaceutical manufacturer and the third largest generic
    pharmaceutical company in the world.
        In addition to my 17 years with Mylan, I have served as
    both chairman and vice chairman of the Generic Pharmaceutical
    Association, and I am currently a member of the executive
    committee of the Generic Pharmaceutical Association.
        I am pleased to be here this morning and fully appreciate
    the concerns that both Congress and the Federal Trade
    Commission regarding the number and type of patent settlements
    between brand and generic pharmaceutical manufacturers in
    recent years.
        When it comes to settlements, we believe Congress needs to
    look no further than the use and abuse of authorized generics
    by brand manufacturers. In fact, if authorized generics had
    been addressed in the 2003 Medicare Modernization act, we
    probably wouldn't be here today.
        We believe that the increase in settlements in recent years
    is directly related to the increase in the use of authorized
    generic by brand manufacturers. Mylan contends that barring the
    launch of A.G.s during the 180-day exclusivity period would
    simply resolve your concerns relative to settlements and at the
    same time restore the intended balance to Hatch-Waxman.
        In addition, the FTC has indicated that they will soon
    release the results of a comprehensive study of settlements in
    relation to authorized generics. We are optimistic that their
    findings will validate our contention and demonstrate that
    authorized generics and patent settlements go hand in hand.
        By way of background, 25 years ago, Hatch-Waxman act of
    1984 created a balance between encouraging innovation and
    promoting competition. The act provided brand companies
    numerous incentives, including patent extensions and other
    protections.
        The major incentives provided to generic companies who
    undertook the risk and expense of challenging questionable
    brand patents with 180-day period of marketing exclusivity. And
    for 25 years, ever since that act was passed, generic
    manufacturers have been fighting brand company tactics that
    continue to disrupt the critical balance that Hatch-Waxman
    provided.
        One such tactic, known as evergreening, resulted in a 64-
    month stay for the blockbuster depression product Paxil,
    preventing any competition during that time. This lucrative
    loophole and several others were closed by MMA in 2003. Since
    then, brand companies have been limited to one 30-month stay
    per product.
        Consequently, brands accelerated the use and abuse of
    authorized generics during the exclusivity period to counteract
    MMA and have continued to upset the balance of Hatch-Waxman. It
    is interesting to note that brand companies don't release an
    authorized generic until the first true generic begins its 180
    days of exclusivity. Furthermore, A.G.s can all but eliminate
    the incentive for a generic filer to challenge frivolous or
    invalid patents, invest in the R&D necessary to produce an
    affordable generic product, and accept the risk of expensive
    patent litigation.
        The intent of Hatch-Waxman was clear: 180-day exclusivity
    meant one generic on the market for 180 days, but brand
    manufacturers found a loophole in the statute that allows them
    to market a generic to compete during that 180-day period.
        U.S. District Court Judge Irene Keeley said on the record
    that the brands' ability to market authorized generics during
    this period is a gaping black hole in the law. She also stated
    that there needed to be a legislative fix, and a fast one.
        Since 2003, brand companies can used the threat of an
    authorized generic on almost every product facing patent
    litigation. This tactic gave the brand companies the powerful
    tool that all but forces generic companies to settle. It
    changed the dynamic of the negotiation in every sense.
        As a result, brands have eliminated the major benefit a
    generic manufacturer gained from Hatch-Waxman. As it stands,
    generic companies are forced to negotiate to get it back
    through settlements.
        I can sit here today and tell you unequivocally that Mylan
    has settled patent litigation that may not have settled if not
    for the threat of authorized generics being launched during the
    180-day period. And more broadly, in 2008, the FTC concluded
    that almost 80 percent of reported patent settlements involved
    an authorized generic during the 180-day period.
        As I mentioned in my opening, the FTC has indicated that
    they will be realizing the results of a study on authorized
    generics this month. We are confidently optimistic that these
    results will reveal a direct link from settlements to
    authorized generics and that this link will demonstrate that
    the use of authorized generics during the exclusivity period
    have a long-term detrimental effect on generics overall.
        We hope that this study will make it easier for Congress to
    take action and restore the proper balance to Hatch-Waxman by
    prohibiting the introduction of authorized generics during the
    180 days. Unless and until authorized generic problem is
    resolved, the patent settlement issue cannot rationally be
    discussed.
        In summary, we believe that Congress must ensure timely
    access to affordable generic medications as offered to patients
    when patents are invalid, unenforceable, or not infringed. This
    requires the restoration of the incentive of a true 180-day
    marketing exclusivity period that will enable generic companies
    to continue to challenge patents and appropriately pursue
    worthy products.
        Barring A.G.s during the 180 will also re-establish a level
    playing field for generic companies that they consider
    settlement options with a brand company during patent
    litigation without the threat of a looming authorized generic.
    Imposing certain restrictions on the ability of generic
    companies to settle expensive litigation without providing a
    ban on A.G.s will completely upend the balance between
    innovation and competition and result in further delays of
    affordable generic products for the American consumer.
        It is more important today than ever to close this
    loophole, because authorized generics will only be exacerbated
    when generic biologics become available.
        I want to thank the Subcommittee for your time and interest
    in making sure all patients have access to affordable and safe
    generic pharmaceuticals. And, as always, Mylan is willing to
    work with Congress and the FTC to restore balance to Hatch-
    Waxman.
        I would be happy to answer any questions.
        [The prepared statement of Ms. Bresch follows:]
                      Prepared Statement of Heather Bresch

                                   __________
        Mr. Johnson. Thank you, Ms. Bresch.
        Mr. Kennedy, proceed.

       TESTIMONY OF WILLIAM P. ``BILL'' KENNEDY, CHIEF EXECUTIVE
    OFFICER, ORLANDO, NEPHRON PHARMACEUTICALS CORPORATION, ORLANDO,
                                   FL

        Mr. Kennedy. Thank you, Mr. Chairman and Members of the
    Committee. My name is Bill Kennedy, and I am here to testify on
    behalf of our family-owned generic pharmaceutical business.
        Our company manufactures sterile generic respiratory
    medication using state-of-the-art Blow-Fill-Seal technology. I
    am a pharmacist by education and have 43 years of experience in
    health care.
        My recommendations to the Committee differ from a large-
    scale, publicly owned pharmaceutical company. I am here to show
    you how the American consumer can save 60 percent-plus of the
    cost of their prescribed medications.
        In recent years, patent settlement agreements, sometimes
    referred to as reverse settlement agreements between the
    patent-holder of a drug and the first to file generic
    competitors have stifled competition. These agreements allow
    the brand manufacturer to continue selling its drug at or near
    the original branded price, while paying the first to file
    generic manufacturer not to distribute its product or either to
    offer an authorized generic product priced just beneath the
    branded drug, which would amount to approximately a 20 percent
    savings for the consumer on an average.
        Large generic manufacturers often refer to their settlement
    agreements as pro-consumer. This is only slightly true,
    because, with a third or fourth competitor in the market, the
    generic drug pricing model takes over, allowing for pricing to
    reach truly pro-consumer levels.
        We, the generic drug manufacturer, feel pro-consumer
    generic prices should be not 20 percent lower, but 60 percent
    to 80 percent lower than the brand name, once competition gets
    involved.
        I will give you a couple examples of what I am speaking of.
    If you look on page four of my written statement, you will see
    that there was a drug that I competed against. The brand name
    was DuoNeb. When it first came off the patent, it only had the
    one competitor, and it was $1.60 per dose. And patients took
    four vials per day. You see, it is a lot of money for 1 month.
        After year 1, when you had two competitors in the market,
    the price dropped down to 87 cents. Okay, on year 2, we had
    three competitors who were in the market. The price dropped to
    50 cents. Year 3, which we are in now--and we have four
    competitors in the market--the pricing is at 25 cents a vial
    and still dropping.
        That is over an 80 percent savings since the time that we
    were able to get more than one generic competitor in the
    market. The prices do not start coming down drastically until
    you get two or three competitors in the market.
        An example of how a small generic company like we are,
    where we cannot get into the market, would be a product by the
    name of levalbuterol, which--the product, which is very similar
    to a generic product that we manufacture, which is glycemic
    albuterol.
        The company that manufactures that, just this week, has
    entered into its third arrangement or third reverse settlement
    agreement or whatever we decide to call it. I don't understand
    why a drug--and that is a very weak patent. I believe it is a
    weak patent, but all of the challengers that have gotten
    involved in a lawsuit with that patent have settled or there
    has been a reverse settlement, which means the product is still
    selling for approximately $2 a vial when, if the patent was
    challenged, this product could easily drop into the, you know,
    20 cent range, maybe the 15 cent range.
        So it is almost impossible for the third and fourth filer
    in the generic pharmaceutical business, especially if you are a
    small manufacturer and just living off generics, have to get to
    market. Your patent has to be defeated before that third or
    fourth filer is going to come to market. And with the reverse
    settlement, that is very difficult to happen. So this company
    will have, if these reverse settlements hold up in court, they
    will have until 2013 to keep charging, you know, a high price.
        So what does Nephron suggest that we do about this? We
    suggest that we eliminate the practice of patent settlement
    agreements, eliminate settlement agreements all together. Also,
    consider a major change in Hatch-Waxman by changing the first
    to file approach to a first to win the patent case without
    settling, which is much, much fairer. If you are going to put
    your money up to go to court and win the case, you should be
    allowed that time period.
        And, third, I wish the legislators would consider
    increasing that window of opportunity of the 180-day period,
    which is 6 months, to a 1-year period. I feel like this will
    create a lot more competition in time to get people to
    challenge the patent.
        I feel like, with the adoption of these recommendations, I
    believe it would be vital in helping to lower the cost of
    prescription medications in our health care system.
        Thank you. And are there any questions I may answer?
        [The prepared statement of Mr. Kennedy follows:]
               Prepared Statement of William P. ``Bill'' Kennedy

                                   __________

        Mr. Johnson. Thank you, sir.
        Mr. Donatiello?

       TESTIMONY OF GUY DONATIELLO, VICE PRESIDENT, INTELLECTUAL
            PROPERTY, ENDO PHARMACEUTICALS, CHADDS FORD, PA

        Mr. Donatiello. Thank you, Mr. Chairman and Members of the
    Subcommittee, for the opportunity to be here today. I am Guy
    Donatiello, vice president for intellectual property for Endo
    Pharmaceuticals.
        Endo is a midsized pharmaceutical company based in Chadds
    Ford, Pennsylvania, and employs nearly 1,500 people throughout
    the U.S. I am a patent attorney working in this field for more
    than 20 years. As a midsized pharmaceutical company that brings
    to market both branded and generic products, patents are
    critical to Endo's success.
        On the branded side, strong patents permit Endo to innovate
    and bring new medicines to market to treat unmet medical needs.
    On the generic side, patent expirations that were designed
    around branded medicines permit us to bring to market low-cost
    generics that benefit patients.
        Our ability to defend and to challenge patents underpins
    our continued success and fosters future medical innovation for
    tomorrow's cures. Legislation banning certain patent
    settlements is unnecessary and harmful. It would halt pro-
    consumer settlements, erode the value of patents, chill
    incentives for medical innovation, and reduce patient access to
    generic drugs.
        There are current mechanisms in place to handle truly
    anticompetitive settlements. To be clear, current law dictates
    that every settlement between a brand and a generic must be
    submitted to the FTC for review, and any settlement that is
    judged to be anticompetitive can be invalidated.
        This judgment is a result of fact-sensitive litigation that
    recognizes that every case is different and every case might
    result in a unique compromise. Under the proposed legislation,
    generic companies may bring fewer patent challenges if they
    have fewer options to resolve litigation without the cost and
    risk of going to trial.
        The rapid increase in generic utilization has been fueled
    in part by the fact that branded and generic manufacturers have
    been able to settle some patent suits in appropriate ways.
    Banning certain types of patent settlements would restrict the
    ability of both branded and generic companies to settle ANDA
    patent cases logically.
        As a result, it would force companies to engage in patent
    disputes that might otherwise be settled reasonably, quickly,
    and in the public interest. The parties involved could be
    forced to spend significant resources on litigation, diverting
    those resources from valuable re-investment in future
    innovation.
        In addition, statistics show that innovators are likely to
    win the majority of patent cases litigated through appeal, and
    these patents would otherwise bar generic entry until they
    expire.
        In contrast, a settlement might include a provision
    allowing the generic to come to market well before the patent
    expires and getting a low-cost generic into patients' hands
    sooner.
        There are circumstances where the impact of banning certain
    patent settlements could result in companies being forced out
    of business. Small companies are particularly vulnerable
    because they often rely on just one or two branded products for
    revenue. These products are often too small or specialized to
    be profitable for larger companies. It is the smaller companies
    that bring these medicines to patients who need them.
        When generic competition threatens these patented products
    through an ANDA filing, a patent dispute often results. Because
    the small branded company is so dependent on the product being
    disputed, losing the patent case threatens the company's very
    existence.
        Furthermore, if a generic company launches its product
    during litigation, it may ruin the branded company. Even if the
    branded company subsequently wins the case and generic is
    withdrawn, the harm has already been done; the genie cannot be
    put back in the bottle.
        On the generic side, the development of generics is not
    always smooth. A generic company may work on a project for
    years and never duplicate the brand to the FDA's satisfaction.
    By the time an ANDA is filed, significant resources have been
    invested.
        Allowing settlements where a generic can recoup some of
    this investment and then reinvest it allows them to develop
    more low-cost generics for patients. Conversely, adding new
    barriers to settlements will increase uncertainty, sap
    resources, and chill investment in these new generic medicines.
        In short, when a small company becomes involved in complex,
    lengthy, and expensive litigation with an uncertain outcome,
    the continued existence of that company is threatened.
    Resources for future R&D are inevitably squeezed and channeled
    into legal fees. Patients are the real losers because access to
    future branded and generic medicines will be delayed or denied.
        In conclusion, H.R. 1706 would add additional cost and
    uncertainty to bringing new branded and generic medicines to
    patients. Instead of an across-the-board ban, enforcement
    agencies and courts should continue to evaluate patent
    settlements on a case-by-case basis.
        While it is a delicate balance, the current system works;
    innovation is rewarded and competition is robust. H.R. 1706
    would restrict settlements, and competition between branded and
    generic manufacturers would suffer, and patients would suffer.
    There would be fewer medicines to treat diseases and also less
    price competition.
        I would be happy to answer any questions you might have.
        [The prepared statement of Mr. Donatiello follows:]
                      Prepared Statement of Guy Donatiello

                                   __________
        Mr. Johnson. Thank you, sir.
        Mr. Vaughan, proceed.

      TESTIMONY OF WILLIAM VAUGHAN, SENIOR HEALTH POLICY ANALYST,
                     CONSUMER UNION, WASHINGTON, DC

        Mr. Vaughan. Mr. Chairman, Mr. Coble, thank you very much
    for inviting us to testify.
        Consumers Union is the independent nonprofit publisher of
    Consumer Reports, and we don't just test tires and toasters. We
    try to help people with really good medical products. And we
    have an aggressive use of comparative effectiveness research to
    provide a free service to people in determining the most
    effective, safest, best buy drugs, and both brand and generic.
        And when a generic is available, we always find it is a
    better price. Sometimes it is better quality or safer and
    sometimes more effective. So we frequently recommend generics--
    not always, but we like to see a steady flow of new generics
    into the market without extra legislative or legalistic
    hassles, if you will.
        And it is particularly important right now. We polled about
    2,000 households this spring. And because of cost, 28 percent
    of your constituents are saying they are not filling their
    prescription, they are skipping a day's dose, or they are
    cutting a pill in half. And that is not good. And generics
    could help make drugs affordable for people.
        It is also important for the government. Gosh, we just, in
    Medicare Part D, picked up a new, $9.4 trillion 75-year
    liability. It would be neat to have as much savings in that as
    possible, especially since the Medicare folks are predicting
    that drug inflation is about to accelerate again.
        So to answer the Subcommittee's question, yes, we think
    these reverse settlements are anticompetitive. Now, I am not a
    lawyer, and I am kind of nervous sitting in a room full of
    lawyers on this pretty technical issue, but I think there is
    some common sense in here.
        I had a chance to see that wonderful Lincoln exhibit on his
    bicentennial at the Library of Congress. And he always used
    such commonsense words. He used this phrase: If slavery is not
    wrong, nothing is wrong. And I think American consumers sitting
    around their kitchen tables would say, ``If payments like this
    are not a violation of the spirit and meaning and intent of the
    Nation's antitrust laws, then nothing is, nothing is wrong.''
        We strongly support the FTC and, in my testimony on page
    five, use some charts from one of their previous testimonies as
    to how this system works. And I think it is very simple when
    you lay it out in charts.
        On page six of my testimony, continuing a couple of those
    charts. If I understand the argument of the industry, they are
    saying that it is only if you let the for-profit brand
    companies give some money to a for-profit generic--diagram
    one--only then will you speed up the day that the two parties
    will get together and lower their prices and reduce their
    profits so consumers can benefit voluntarily. I wish Jon
    Stewart or Colbert or the Onion were here, because that is a
    hard one to do with a straight face, in my opinion.
        And that is why we strongly endorse H.R. 1706. We hope you
    will include it in health care reform this year, because it
    should score for big savings. It has a little exception for
    that, blue moon case where the consumer could actually be
    helped, then the FTC could make an exception. It deals with the
    180-day issue, where a generic can block everybody else, but
    not actually market new pills.
        We hope you will deal with some of these other gimmicks. We
    agree with Mylan on the problem of authorized generics. That is
    really a buzzword for not having true generic competition.
        And there are plenty of other issues in the drug world that
    need addressing. One of the big ones, one of the real big
    monopolies out there is the unlimited monopoly in life-saving,
    very expensive biologics. And we hope as part of reform you
    will support a bill like Mr. Waxman's which will give us some
    sort of pathway to eventually getting biogenerics to market.
    That is an important cost saver.
        Mr. Chairman, we thank you and wish you good luck in this
    incredibly important consumer issue. Thank you very much.
        [The prepared statement of Mr. Vaughan follows:]
                     Prepared Statement of William Vaughan

                                   __________

        Mr. Johnson. Thank you, sir.
        Mr. Dickey, proceed.

      TESTIMONY OF BRET M. DICKEY, SENIOR VICE PRESIDENT, COMPASS
                          LEXECON, OAKLAND, CA

        Mr. Dickey. Chairman Johnson, Ranking Member Coble, and
    Members of the Subcommittee, I appreciate the opportunity to
    testify today.
        I have spent the last 10 years analyzing the economics of
    competition policy, with a particular focus on the
    pharmaceutical industry. Recently, I co-authored a paper with
    Laura Tyson, the former chair of President Clinton's National
    Economic Council, and Jonathan Orszag, a colleague at Compass
    Lexecon and also a former adviser to President Clinton, that
    presents an economic framework----
        Mr. Johnson. Mr. Dickey, if you would put that mike on and
    move it close to you so that everyone can hear you.
        Mr. Dickey. Is that better?
        Mr. Johnson. Thank you. Yes.
        Mr. Dickey [continuing]. That presents an economic
    framework for evaluating such settlements. I have included that
    paper as an appendix to my written testimony.
        Our paper demonstrates that patent settlements between
    branded and generic manufacturers, even settlements involving
    so-called reverse payments, can be procompetitive.
        Competition policy toward the pharmaceutical industry must
    represent a balance between protecting incentives for
    manufacturers of branded drugs to innovate and facilitating
    entry by manufacturers of lower-priced generic drugs.
        The current framework for patent litigation between branded
    and generic pharmaceutical manufacturers, established by the
    Hatch-Waxman amendments, is an important component of this
    balance.
        In recent years, settlements of Hatch-Waxman litigation
    involving reverse payments have received close antitrust
    scrutiny, driven by concerns that such settlements harm
    consumers by delaying the entry of lower-priced generic drugs.
    While some such settlements can harm consumers, economic models
    demonstrate that when the real-world complexities are accounted
    for, some such settlements can, in fact, benefit consumers.
        My paper with Dr. Tyson and Mr. Orszag presents a broad
    analytical framework for evaluating the competitive effects of
    these settlements. On the one hand, settlements of litigation,
    including patent settlements, can provide clear competitive
    benefits. Litigation imposes substantial costs upon the
    litigating parties and on society as a whole, costs which can
    be mitigated through settlement.
        Settlements also reduce risk associated with litigation.
    Because settlements can lower costs and uncertainty, economists
    widely agree that settlements in general can be procompetitive.
        On the other hand, under certain conditions, patent
    settlements between branded and generic manufacturers can be
    anticompetitive. Ultimately, the competitive effects of a
    particular settlement will depend importantly on the underlying
    strength of the patent.
        If the patent is strong and likely to be found valid and
    infringed, then even a settlement with an agreed-upon entry
    date well into the future but before patent expiration may
    bring generic drugs to market sooner than continued litigation
    and generate lower prices for consumers.
        In contrast, if the patent is weak and likely to be found
    invalid and/or non-infringed, then even a settlement with an
    entry date not far in the future may delay entry and harm
    consumers.
        Assessing the strength or weakness of a patent in real-
    world patent litigation is complex; indeed, the precise
    strength of a patent is subject to the uncertainties of the
    litigation system and is ultimately unknowable even to the
    parties themselves. Nevertheless, such an assessment is
    necessary at some level in determining whether a patent
    settlement is pro-or anticompetitive.
        Some analysts contend that reverse payments are on their
    face evidence that the settlements are nothing more than a
    payment by the brand manufacturer to delay generic entry, but
    reverse payment is a misnomer based on flawed logic.
        In contrast to a ``typical'' patent case, where the alleged
    infringer is already selling a product and the patent-holder is
    suing for damages, in patent suits between branded and generic
    pharmaceutical manufacturers, the generic has typically not
    entered the market and the branded manufacturer is suing for a
    remedy akin to injunctive relief. In this case, there is no a
    priori expectation that a payment should flow from the generic
    manufacturer to the branded manufacturer.
        The use of overly simple economic models can
    inappropriately lead to the conclusion that reverse payment
    settlements will always reduce competition. But these economic
    models ignore important economic realities that can make
    reverse payment settlements procompetitive.
        Such realities include, but are not limited to: risk
    aversion, that is, concern by one or both of the parties about
    the uncertainty surrounding the litigation process; information
    asymmetries, that is, information that is available to one of
    the parties but not to the other; differences in expectations,
    such as the parties' beliefs about their chances of winning the
    patent litigation; or differences in discount rates, that is,
    the relative value of future income relative to present income.
        More realistic economic models that consider these factors
    demonstrate that patent settlements involving reverse payments
    can be procompetitive. In fact, under certain conditions,
    without a payment from the branded manufacturer to the generic
    manufacturer, the parties will be unable to reach agreement on
    a settlement, even if that settlement would benefit consumers.
        A ban on all settlements where some compensation is
    provided to the generic manufacturer would deprive consumers of
    the benefits of such settlements.
        Moreover, competition policy toward patent settlements can
    have important effects on both the incentives of branded
    manufacturers to innovate and on the incentives of generic
    manufacturers to challenge branded patents. Importantly, a
    broad ban on reverse payment settlements would reduce the
    ability of generic manufacturers to settle patent cases and
    increase the risk and cost of litigation and, therefore, the
    risk and cost of bringing generic drugs to market prior to
    patent expiration. On the margin, this will lower the
    incentives of generic pharmaceutical manufacturers to challenge
    branded patents in the first place.
        Designing a workable framework that distinguishes
    procompetitive settlements from anticompetitive is difficult,
    in part because at its core it depends upon the validity of the
    patent claims.
        Mr. Johnson. Mr. Dickey, if you could sum up, I would
    appreciate it.
        Mr. Dickey. What is clear is that, under many
    circumstances, patent settlements between branded and generic
    manufacturers, even those involving reverse payments, can
    benefit competition and consumers. An outright prohibition of
    reverse payment settlements would harm consumer welfare in a
    range of circumstances.
        Thank you again for the opportunity to discuss this issue
    with the Subcommittee.
        [The prepared statement of Mr. Dickey follows:]
                      Prepared Statement of Bret M. Dickey

                                   __________

        Mr. Johnson. Thank you. Thank you, Mr. Dickey.
        And I will begin by affording myself appropriate amount of
    time to ask some questions.
        For the entire panel, do you think Hatch-Waxman intended
    brand drug companies to introduce authorized generics during
    the 180-day exclusivity period? Or are the brand companies
    exploiting this loophole in the law? If so, should the loophole
    be closed? And how should that be done?
        And we will start with Mr. Feinstein.
        Mr. Feinstein. Thank you, Mr. Chairman.
        As Ms. Bresch indicated in her statement, the commission is
    conducting a study of the authorized generic issue in real
    time. And we are hopeful that at least the preliminary results
    of that study will be released later this month.
        It would be, I think, both premature and inappropriate for
    me to offer a preview of that both because I don't know it and
    also because it is still a work in progress. But I can assure
    you that the issues relating to the competitive effects of
    authorized generics are being closely examined as we speak, and
    the FTC will be coming forward with at least a preliminary
    reaction to that analysis or report on that analysis very
    shortly.
        Mr. Johnson. Ms. Bresch?
        Ms. Bresch. Thank you. I absolutely believe that the intent
    of Hatch-Waxman did not mean for there to be able to be more
    than one person in the market during that first 180 days.
    Obviously, exclusive, I think, in most dictionaries means one.
    In fact, the Medicare Modernization Act of 2003 went so far to
    address shared exclusivity, which is also something that was
    somewhat of a compromise between the brand and generic
    companies in certain situations where we do end up coming to
    the market with several generics.
        So the term 180-day exclusivity, we absolutely believe the
    intent of the law was to mean one. And it definitely serves as
    a huge detriment to the generic industry and, as I said in my
    testimony, has affected negotiations in every way as we look at
    patent settlements.
        So as I had said, I don't think we would be here today had
    we closed that loophole in 2003. Unfortunately, we are sitting
    here years later and realizing that the effects that a generic
    and a brand company have and the leverage and how the table has
    been turned to really unbalance Hatch-Waxman has had a huge
    detriment.
        And as I said, I can honestly say that there would have
    been settlements that we would not have settled litigation had
    it not been for the threat of that authorized generic. And it
    would have allowed us to bring a generic perhaps sooner to the
    market had we won that litigation.
        Mr. Johnson. Thank you.
        Mr. Kennedy?
        Mr. Kennedy. As a small manufacturer and a family-owned
    business, I deal with this--I deal with this problem every day.
    It is my responsibility, as the head of the family, to try and
    be able to get another generic drug to market.
        The examples that I gave in my testimony of how prices were
    reduced when they are able to come to market, an example of how
    we cannot reduce prices on drugs if we are not able to get
    there. I feel like that definitely, you know, Hatch-Waxman has,
    you know, the intent was never to prevent generic companies
    from coming to market.
        But the more cases I read about every day and my
    involvement in this every day, I have come to realize that is
    the main weapon that a name-brand company has to be able to
    extend their patents. To file another patent, it may be a weak
    patent, but if you make the reverse settlement, then the
    smaller guy down the road is never going to get to market. And
    you have to have more than one or two people in the market to
    lower your prices.
        Mr. Johnson. Thank you, sir.
        Mr. Donatiello?
        Mr. Donatiello. Thank you, Mr. Chairman. Thank you, Mr.
    Chairman.
        I don't know what was contemplated when Hatch-Waxman was
    originally passed, but I think in general the presence of an
    authorized generic on the market during the 180-day period
    reduces the cost of the generic. And so, instead of being just
    one generic on the market, there are two. And when there are
    two generics, the cost is reduced.
        In general, therefore, I think that authorized generics are
    procompetitive or good for consumers because they reduce the
    cost of the generic during this period.
        Mr. Johnson. Thank you, sir.
        Mr. Vaughan?
        Mr. Vaughan. We don't think it was the intent of Mr. Waxman
    or Mr. Hatch. We think it is an abuse. Why not give the true
    generic 180 days and not let the authorized generic market
    during that period? There has got to be some way to stop this.
        Mr. Johnson. Last but certainly not least, Mr. Dickey?
        Mr. Dickey. I don't know to what extent Hatch-Waxman
    contemplated authorized generics. What I can say is, is that,
    as a matter of economics, there are two competing effects that
    authorized generics generate. One is the addition of a second
    generic competitor on the market during the 180-day period
    increases competition and lowers prices.
        There is also the potential that that authorized generic
    reduces incentives to bring patent challenges and to bring
    other generics to market. And so the ultimate effect is the net
    of those two competing effects. And I think the FTC study that
    will be coming out will be a useful first step in examining how
    these two effects net out.
        Mr. Johnson. All right. I will withhold any further
    questions myself.
        I will turn it over to our Ranking Member for questions
    that I am sure that he has about this.
        Mr. Coble. Thank you, Mr. Chairman. Good to have all the
    panelists with us this morning.
        Mr. Donatiello, if generics and brands could not settle,
    how would this effect innovation and the cost of
    pharmaceuticals for consumers?
        Mr. Donatiello. Thank you, Congressman Coble. We think that
    inability to settle will reduce--it will increase the business
    risk associated with these litigations. And, therefore, it
    will, in effect, make generics hesitate because, once you get
    into one of these litigations, when you reduce the incentive to
    settle, it becomes more of an all-or-nothing proposition.
        And so when you go into one of these, you really have to
    think hard about exactly what your exit strategy is. Instead of
    going all the way through the litigation, there is significant
    cost associated with the litigation, costs that could be put
    back into innovation for new generic products. There is
    significant risk associated with it.
        We had a situation where we were on the generic side of an
    issue. We took the case to trial and won at trial. We took the
    case to appeal and won at appeal.
        After getting to appeal and winning, we launched--because
    the law said that we needed to or we would lose 180 days, the
    court of appeals for the Federal circuit reversed itself
    without even taking further argument. And now we are looking
    down the barrel of possibly a very large damages award against
    us, when we thought that we had done everything right.
        And we ended up settling that case. Part of the settlement
    was the brand manufacturer's allowance for us to continue to
    sell out our stock for the rest of that year. That would have
    been illegal under the proposed legislation.
        So, instead, we would have had to take that through trial
    with the possibility of a very large verdict against us, and we
    are a small company. That very well might have ruined the
    company had we not been allowed to settle that litigation in
    some logical manner.
        And, therefore, I think that the inability to settle
    significantly increases the risk and makes a generic really
    think about whether they need to go forward with a particular
    project or not.
        Mr. Coble. And the second part of my question was the
    ultimate cost to consumers.
        Mr. Donatiello. Again, by reducing the incentive to bring
    these challenges because it becomes an all-or-nothing
    proposition, then in some instances those challenges may not be
    brought and the generics may not ultimately come to market
    because, with the increased risk of an all-or-nothing
    proposition, I think that in some instances those projects may
    not be undertaken and the generic may not end up challenging
    the patent in order to get that generic to market.
        Mr. Coble. Thank you.
        Mr. Dickey, if all Hatch-Waxman challenges had to be
    litigated to the end of case, that is, to final judgment of the
    validity of the patent, how would those increased transaction
    costs be absorbed by the companies, A? And, B, would those
    costs likely to be passed on to consumers during the initial
    exclusion period of the patent?
        Mr. Dickey. Being forced to litigate to conclusion would
    certainly increase the litigation costs and the risk associated
    with the litigation to the manufacturer, likely significantly,
    as patent litigation these days is quite expensive.
        And it is likely that some of that cost is borne by the
    manufacturers, but also that some of it is passed on to
    consumers in the form of higher prices. So that is why
    economists widely agree that, in general, settlements can be
    procompetitive, because they save these costs and reduce this
    uncertainty.
        Mr. Coble. Thank you.
        I yield back, Mr. Chairman.
        Mr. Johnson. Thank you.
        Next in line would be Mr. Gonzalez, out of Texas.
        Mr. Gonzalez. Thank you very much, Mr. Chairman.
        A question--we will go to Mr. Dickey. And I apologize. I
    had to leave the room as you were giving the last part of your
    testimony. And the question I had for you--in your analysis, in
    the paper that you prepared, were you able to come up with any
    figures as far as how many of these settlements resulted in
    getting generics into the marketplace sooner rather than later?
        Because I know Mr. Donatiello has testified that, in many
    cases, part of the settlement does allow the challenged generic
    to hit the marketplace earlier. So do we have numbers out
    there?
        Mr. Dickey. Our study didn't look at numbers of
    settlements. I think, in general, most of these settlements
    have brought a generic to market sooner than the expiration of
    the patent.
        The more difficult question is whether these settlements
    bring a generic to market sooner than the expected outcome of
    litigation would have. And in that case, I think, you know,
    some do and some may not, and that is why I think that we need
    to continue to scrutinize these settlements, but not paint them
    all with the same broad brush.
        Mr. Gonzalez. And maybe that is the distinction, is what is
    the benchmark? You know, sooner than the patent expired or so
    and--I mean, that is all part of the--of the litigation and the
    factoring in of the settlements. I think that is actually a
    little harder to quantify.
        And I will ask Mr. Donatiello to tell me why he believes
    that actually facilitates or accommodates marketplace
    availability of generics earlier rather than later.
        Mr. Donatiello. Thank you, Congressman Gonzalez.
        I think it is true that, in many of these settlements, a
    generic gets to market sooner than it would have had it waited
    until patent expiration--statistics that we have show that, in
    cases litigated through trial, half of those cases were won by
    brand companies.
        So if you extrapolate that into the settlement, then in
    those settlements, the generic is getting to market sooner than
    it would have otherwise. That gets the generic to market
    several years before patent expiration and gets it--and gets
    that savings into the hands of consumers that much sooner. And
    that is how we see it, it working there.
        Mr. Gonzalez. You could say that that would be the case
    because half of the time the brand prevails in lawsuits, so you
    could extrapolate, as you say. Of course, on the other hand,
    you could say that 50 percent--it is almost a wash if you think
    in those particular terms.
        I do have--and this is a question, Mr. Dickey. Is every
    patent lawsuit filed in good faith?
        Mr. Dickey. I don't think that is a question I can answer.
        Mr. Gonzalez. Well, I will tell you. I mean, any lawyer is
    going to tell you that. You know, lawyers are subject to all
    sorts of disciplinary action for filing something not in good
    faith, but we all know lawsuits are filed in America every day,
    in essence, to gain some sort of advantage or for delay.
        And it is just, that is the real world. And whether judges
    can, you know, wade through it, at some point in time, that
    does happen. But believe me, there is a whole lot of litigation
    costs involved, and many times settlements are extracted
    because of the disparity between the parties and their ability
    to defend a lawsuit.
        And that is the reality. And I think what we are doing in
    Energy and Commerce and at one Subcommittee level today with
    1706 that addresses a reality up there.
        Ms. Bresch, this thing about the 180 days and the
    authorized generics and such, obviously you don't agree with
    Mr. Donatiello who doesn't believe that it really in any way
    hinders the introduction of generics and such, but actually
    accommodates it. Do you want to respond to that again?
        Ms. Bresch. Sure.
        Mr. Gonzalez. And I missed the earlier question by the
    Chairman of the Subcommittee, and I apologize.
        Ms. Bresch. That is okay. Sure. I believe that it
    absolutely--if you look at the authorized generics, what really
    brings consumer savings is the entry of the first generic,
    because that is due to time. So, typically, whether it is
    through the patent settlement or through winning the litigation
    case, that generic is coming to market many, many years prior
    to the actual patent expiration in some cases.
        So what really affords the consumer that first bolus of
    savings is that first generic entrant. And what we are saying
    is that what the law very much intended was for that effort to
    give us 180 days. And then after that, on day 181, you can have
    anywhere from 2, 4, 10 competitors, which, as he notes, does
    reduce the price even further.
        But I think that if you look at the years of monopoly that
    a brand company has to recoup their costs in developing a
    product is the same that we are asking for in that 6-month
    period to recoup ours. So the idea that the brands now can put
    a generic in there to compete with us on day 1 through day 181,
    that is what has completely changed the negotiation table for
    us at patent settlements and litigation.
        Mr. Gonzalez. Thank you very much.
        Thank you, Mr. Chairman.
        Mr. Johnson. Thank you, Mr. Gonzalez.
        And, ladies and gentlemen, I have committed a cardinal sin
    today. I went to Mr. Gonzalez with Chairman Conyers seated
    right beside me. And so I am sure that he will have a few words
    for me at the conclusion of this hearing.
        And I thank Mr. Goodlatte for agreeing that this is
    appropriate. Thank you.
        Mr. Conyers. This is a funny kind of a hearing going on
    here. The Chairman doesn't know who--oh, this doesn't work?
    Okay. The Chairman doesn't know who I am. I have heard more
    delicate dancing around here. I am sure glad--well, I don't
    want to say I am glad I missed the witnesses statements.
        But, look, folks, drugs are too expensive. Generics are
    cheaper. Several months make drugs more expensive. The Rush-
    Waxman bill draws a bright line, because it abolishes
    settlement.
        Now, Mr. Vaughan, is that a fair description of what all
    these folks are sitting in the room about here today?
        Mr. Vaughan. I think so, sir. I thank you for inviting me,
    because I think you have given me a business plan I could go
    talk to my bosses in Yonkers about.
        You know, we evaluate and rate things. And I was thinking,
    we could go to the appliance makers at G.E. and we could say,
    ``This year, we were thinking about evaluating your
    refrigerator, but, gee, if you could pay us some money, we
    won't do it this year.'' And I know our readers might be
    disappointed at the blank pages in the magazine, but what a
    great way to make some money.
        So I think, sir, you are on to something.
        Mr. Conyers. Mr. Kennedy, what kind and friendly words
    would you have for Ms. Bresch if we weren't in a Committee
    hearing?
        Mr. Kennedy. Well--but I disagree on the savings of these
    generics and that first 180 days. Sure, there is going to be
    some savings from the name brand, as I said. And that may be
    approximately 20 percent.
        But the point that you are getting to, you know, drugs are
    expensive. Health care costs is expensive. What can we do to
    lower the cost? Well, your costs on generic medication does not
    drop drastically until you get three or four competitors in the
    market.
        As long as we permit these settlements, the original holder
    of the NDA or the patent will defend that patent for them. They
    will keep defending that. So I cannot come to market until the
    patent is defeated.
        So as a small generic company--manufacturer, I am out here
    waiting on somebody to defeat that patent before I can even get
    the market to create the savings.
        So I am the fourth or fifth person to come to market, but I
    can't get there until the patent is defeated. And so as long as
    you have these agreements, the patent is not defeated. That is
    why I feel like, if anybody is going to get 180 days, I feel
    like they should get 360 or get a year for the person that
    defeats the patent.
        Mr. Conyers. Do you agree, Mrs. Bresch?
        Mr. Kennedy [continuing]. You should have that.
        Mr. Conyers. You okay on that?
        Ms. Bresch. No. [Laughter.]
        No, I----
        Mr. Conyers. What is the slight problem?
        Ms. Bresch. I think that, well, if you talk about his
    first-to-win approach, it is very impractical. I think that,
    you know, as you all very well know, there are many different
    courts and many different jurisdictions. You would be having
    this race to docket, forum shopping. I don't think it promotes
    any certainty at all, which is what Hatch-Waxman has gone to
    great lengths to do.
        So I think that small generic companies, medium-sized
    generic companies, and large generic companies all have the
    same ability to be that first to file, which affords the 180-
    day exclusivity. So he has every much the ability to be the
    first generic filer, as he does to be the fourth generic filer.
        So, again, my contention is, getting that first generic to
    market is what brings consumer savings.
        Mr. Conyers. But Judge Gonzalez asked a very simple
    question. And I got lost on what the answer was. But you know a
    lot of lawsuits are filed, you know, not for very valid
    reasons. I mean, that is pretty elementary.
        Mr. Vaughan, how do we climb out of this mess?
        Mr. Vaughan. Sir, I think H.R. 1706 is pretty darn good,
    and it has that exception for the cases where Mr. Dickey may be
    right, for the FTC to work on it. And I would trust them with
    the public interest.
        We endorse a lot of generics, but we don't trust either
    industry further than we can throw them. And we need the FTC in
    there to help consumers on this.
        Mr. Conyers. Okay, last word to Mr. Feinstein.
        Mr. Feinstein. Thank you, Mr. Chairman.
        Let me first make it very clear that this legislation and
    the position of the FTC on this issue is not that parties
    cannot settle their patent lawsuits. Our position is that
    parties cannot enter into settlement agreements which have this
    pay-for-delay feature. That is the problem. That is what is
    causing delay of generic entry, and that is what is taking
    money from the pockets of consumers and the taxpayers.
        I just want to be clear: There have been some other panel
    members who have suggested that this legislation would ban all
    settlements. That is simply not correct. And I hope that that
    is well understood.
        Mr. Conyers. Well, I conclude drugs cost too much. I mean,
    this is the most profitable industry--you can make more profit
    on drugs, pharmaceuticals than you can on oil, the most
    profitable.
        And you have 47 million people without a dime's worth of
    insurance. You have Medicaid--doctors refuse to take Medicaid.
    As a matter of fact, some are getting a little iffy about
    Medicare. The President has ordered us to come up with a new
    health bill.
        Pharmaceuticals are a huge part of the problem here. And I
    guess I need to talk with Mr. Vaughan some more about this,
    because we have to make drugs prescribed more available to
    people. That is what this hearing should be about.
        And I don't know how well we are getting here today, Mr.
    Chairman. Where did you get these witnesses? [Laughter.]
        Mr. Feinstein. Mr. Chairman, might I just respond to that
    for a moment?
        I actually want to just say that I agree with you, that the
    goal here is to act in the best interests of consumers. And the
    FTC's position is that these--the deals--the pay-for-delay
    deals are contrary to the best interests of consumers. This
    legislation goes a long way to solving that problem.
        And I just--I don't want there to be any misunderstanding
    about where the FTC is coming from on this issue.
        Mr. Conyers. Thanks, Mr. Chairman.
        Mr. Johnson. Mr. Chairman, thank you.
        And, you know, we dug up these witnesses from the bottom of
    the barrel. We decided that just they are--you know, give the
    lesser of us an opportunity to come to Congress. I am sure that
    their families and everyone else are quite proud of them. And--
    -- [Laughter.]
        Mr. Feinstein. I suspect that quote will be used against me
    by my children, Mr. Chairman.
        Mr. Johnson. Okay.
        Mr. Goodlatte?
        Mr. Goodlatte. Thank you, Mr. Chairman. I find this panel
    to be very entertaining and very enlightening in most regards.
        However, Mr. Vaughan, I was taught in my debate and speech
    classes in college that analogy is the weakest form of
    argument. Consumers Union does not make refrigerators or
    microwaves or whatever. You sell information. You sell ratings.
        But brand manufacturers of pharmaceuticals and generic
    manufacturers of pharmaceuticals both sell drugs. And they have
    inevitably encountered for a variety of reasons disagreements
    about whether or not a patent is valid.
        And to me, to limit the ability of these entities to arrive
    upon settlements and both time of entry and payment for lost
    business opportunities are both very common elements of
    settlements of many different kinds.
        So let me ask Mr. Feinstein here: Why should the Congress
    adopt a policy, namely a per se ban on patent settlements,
    involving consideration other than the date of entry that three
    out of four Federal courts of appeal that have considered the
    matter have already rejected? Hasn't antitrust policy in this
    country largely shifted away from such per se rules?
        Mr. Feinstein. Well, with respect, Congressman Coble, we
    believe..
        Mr. Goodlatte. Goodlatte.
        Mr. Feinstein [continuing]. The courts that have decided
    this issue against the views of the FTC have gotten it wrong,
    candidly. We believe that they have adopted what amounts to a
    per se lawfulness----
        Mr. Goodlatte. But what do you say to Mr. Donatiello's
    observation that, at least in some of these instances--and
    perhaps in many of them, if half the time the brand-name
    manufacturer wins the lawsuit, and given the length of time the
    litigation itself can take, that in many instances these
    settlements may result in generic drugs getting to the market
    sooner rather than later?
        Mr. Johnson. Mr. Feinstein, before you commit your answer,
    I am going to just give you some basic information. I believe
    that you will not be confirmed by the Senate if they have to
    confirm you--probably makes you--that is, of course, for those
    who have no humor. [Laughter.]
        Mr. Goodlatte. I think he is saying that you can now answer
    my question.
        Mr. Feinstein. I was trying to figure out what I just did.
        The question focused on the argument that 50 percent of
    these cases are being won----
        Mr. Goodlatte. No, whatever the percentage is, there is
    certainly going to be a number of instances where either
    because of the length of time that the litigation takes or
    because of the fact that the brand-name manufacturer may win
    the litigation, that a settlement could result in the generic
    drug getting to market sooner.
        Mr. Feinstein. Yes, if you assume that the patent is iron-
    clad----
        Mr. Goodlatte. I am not assuming anything. I am just saying
    that parties that enter into these discussions--I would assume
    that the brand-name manufacturer, if he knew the patent was
    iron-clad, wouldn't even consider a settlement because it would
    allow him to--it would deprive him of market power for a longer
    period of time than if he just exercised his rights under the
    patent.
        Mr. Feinstein. Yes. And Hatch-Waxman was intended to both
    stimulate innovation and incentivize generic firms to challenge
    patents. The problem is not with that process. The problem is
    with the fact that settlements that include payments distort
    that process and will cause--if the parties could agree on a
    date, a settlement that is simply focused on an entry date,
    that date will always be earlier and, therefore, more
    beneficial for consumers than a date that is distorted by a
    payment to keep the potential competitor out of the market
    longer.
        Mr. Goodlatte. Why is it being distorted by a payment? The
    payment is a part of the settlement, recognizing the fact that
    the generic manufacturer may have a valid claim and that, by
    giving up a longer period of time, they are entitled to some
    recompense for their loss.
        It is just like a settlement that involves an employee
    getting their job back and also getting compensated for some of
    their wages that may have been lost. They don't know how much
    they may get when they go to court and see the judge. And,
    therefore, there are lots of different elements of a
    settlement.
        There is not one element, like what time you get to market.
    There is what time you get to market. There is how much
    compensation you may have lost as a result of giving up your
    potentially good claim. I mean, this is a very common thing
    that you have in any type of litigation where you are seeking
    to have the parties act in a reasonable fashion and avoid the
    cost to our judicial system of filling up our courts with cases
    that couldn't be settled because we passed laws that made it
    harder to settle them.
        Mr. Feinstein. And then the concern that we have, again, is
    that, in this somewhat unique circumstance involving the
    relationship between branded and generic pharmaceuticals and
    the impact on the price of the product that will occur when the
    first generic enters and when subsequent generic enters, that
    creates an incentive for the brand and the generic to settle in
    a way that they will share the profits of extending the period
    of the patent-holder's monopoly to the detriment of consumers.
    That is the problem.
        Mr. Goodlatte. Let me ask Mr. Donatiello if he would
    respond to this. The FTC advocates for a per se ban of these
    settlements, which both PhRMA and most generic manufacturers
    oppose. Aside from doing nothing in this arena, what would you
    suggest that Congress do to address this issue as an
    alternative to this legislation that others here have
    advocated?
        Mr. Donatiello. Well, thank you. I just want to point out
    that, under current law, it is illegal to settle in violation
    of the antitrust laws. That is already on the books. It is
    clear.
        And what we are--what this bill would do is even from--even
    if one dollar were paid from the branded to the generic, that
    would make the settlement illegal, any payment whatsoever.
        You know, if Congress feels it necessary to act in this
    area, the rule of reason has been applied, and it has been
    applied appropriately in most cases. And it might be
    appropriate to codify the current case law, make the rule of
    reason the proper analysis in these cases. That would be one
    possibility for action.
        Mr. Goodlatte. But there are more reasonable alternatives
    than what is being proposed here?
        Mr. Donatiello. I think that that is the case, yes.
        Mr. Goodlatte. Thank you.
        Thank you, Mr. Chairman.
        Mr. Johnson. Thank you, Mr. Goodlatte.
        Next, we will hear from Congresswoman Sheila Jackson Lee.
        Ms. Jackson Lee. Mr. Chairman, thank you for this, I think,
    crucial and important hearing. Interestingly enough, we have a
    double opportunity. Our friends and colleagues on the Energy
    and Commerce, I understand, may be looking at a proposed fix.
        And, Mr. Feinstein, let me ask you directly: What do you
    see as the value of H.R. 1706?
        Mr. Feinstein. The value of H.R. 1706 is very
    straightforward. It would establish a bright line that would
    eliminate a feature of settlements that occur only in the
    Hatch-Waxman context that inevitably delay generic entry and
    which, therefore, cost consumers and taxpayers more dollars
    than they shouldn't have to pay for needed pharmaceuticals.
        And I would note that there is also a provision for the FTC
    to consider the adoption of rules if it were to develop that
    these settlements can take some form that is more
    procompetitive.
        Ms. Jackson Lee. And that is specifically a provision in
    the legislation that allows the FTC to go forward, a regulatory
    scheme? Is that what you are saying?
        Mr. Feinstein. Yes. The legislation would create a bright
    line test for certain types of settlements, those which, in
    this context, which involve a payment. But they would also
    authorize the FTC to adopt rules going forward if it were to
    find that there were variations on these settlements that may
    be procompetitive.
        Ms. Jackson Lee. So, in essence, it would be a parallel
    initiative alongside of Hatch-Waxman? Is that your
    understanding? Or would you be amending Hatch-Waxman with H.R.
    1706?
        Do you--well, why don't--let me----
        [CROSSTALK]
        Mr. Feinstein. Amendment----
        Ms. Jackson Lee [continuing]. From your framework----
        Mr. Feinstein. Right.
        Ms. Jackson Lee [continuing]. Would it be that you would
    have H.R. 1706, if it were to pass, and then you would have
    Hatch-Waxman?
        Mr. Feinstein. Yes. And this would be at--technically, the
    bill that has been proposed is an amendment to the FTC act.
        Ms. Jackson Lee. All right. That is how you--because you
    are not--there is no provision for FTC or is there a provision
    for FTC in Hatch-Waxman?
        Mr. Feinstein. No.
        Ms. Jackson Lee. There is not, all right. And your idea--
    for example, when we look at the Court of Appeals for the Sixth
    Circuit, this 2003 case, are you familiar with--it found that
    an agreement that ended patent litigation between a brand and
    generic company and included a $40 million per year payment or
    payment of $40 million per year for the generic not to enter
    the market, it was found to be illegal per se under the Sherman
    act. And I didn't follow through as to whether or not it was
    ultimately appealed.
        But are you citing that kind of action as creating some of
    the problems of preventing consumers from getting as quickly to
    the market a generic drug that might be helpful to them?
        Mr. Feinstein. Actually, we cite that as a correct analysis
    of the relationship between the antitrust laws and the
    intellectual property laws, that case.
        Ms. Jackson Lee. But you cite----
        Mr. Feinstein. Yes, I am sorry. I misunderstood the
    question. Yes, that----
        Ms. Jackson Lee. There was a payment of $40 million per
    year?
        Mr. Feinstein. Yes, that is an example of a pay-for-delay
    settlement, yes.
        Ms. Jackson Lee. Mr. Donatiello, do you consider that an
    isolated incident? Or do you have an explanation for a concept
    of giving $40 million a year? I would probably be very much
    attracted to $40 million a year legally, of course, if I was a
    generic and begin to do my work a little slower. And I don't
    know how that would impact the health of Americans, but I am
    obviously concerned about that, even though I sit on the
    Judiciary Committee.
        So how do you respond? How can we handle--circumstance in
    the framework that we are presently operating in, Hatch-Waxman?
        Mr. Donatiello. Thank you. I think to some extent that we
    already have handled it. That case was pre-Medicare
    Modernization Act of 2003. In that case, the first generic that
    had filed was paid to stay off the market for an extended
    period of time. And while they were off the market, subsequent
    generics could not get in ahead of them. Medicare Modernization
    Act of 2003 has already done away with that scheme.
        Ms. Jackson Lee. Why don't you refresh our memories?
        Mr. Donatiello. Okay, so if a subsequent generic comes--
    challenges the patent and achieves either a court ruling in
    their favor that would invalidate the patent or shows that
    their generic is not infringing or a consent judgment----
        Ms. Jackson Lee. This is after Medicare 2003?
        Mr. Donatiello. Exactly. Exactly. And then the first
    generic either has to launch or the second generic is allowed
    to come to market.
        Ms. Jackson Lee. And that has been done by the 2003
    modernization? So how do you answer the question of a parallel
    bill that Mr. Feinstein is talking about?
        Mr. Donatiello. Well, as I mentioned earlier, it is already
    illegal to settle in violation of the antitrust laws. And all
    we are doing with this act would be to limit the flexibility
    that companies have in order to reach--what can be very
    appropriate settlements under the--in appropriate
    circumstances.
        You know, we have mentioned in a couple of cases weak
    patents and large payments for the first generic or generics to
    stay off the market in light of weak patents. That is actually
    a good example, because, in that case, we are looking at the
    underlying facts. Every case is fact-specific.
        And what we are advocating is--where the underlying case
    and the merits of the underlying case are taken into account in
    making a judgment as to whether the settlement is appropriate.
    And in those cases where it is a weak patent, it is a large
    payment for a generic to stay off the market where otherwise
    they would come to market, then action by the FTC is
    appropriate.
        Ms. Jackson Lee. But let me quickly--if the Chairman would
    indulge me--just ask Mr. Vaughan, Mr. Dickey, Mr. Kennedy, and
    Ms. Bresch quickly to the scheme that I just put forward, with
    the underlying premise that we should be advocating for better
    health care for all America and generic drugs contribute to
    that, this debate between Hatch-Waxman and a potential change
    in the law.
        Mr. Vaughan, your analysis?
        Mr. Vaughan. It is very important for advancing the cause
    and improving the health of all Americans. And I think the
    proof is in the pudding, and things are pretty bad out there.
    We have settlements. There is a Professor Hemphill out of
    Columbia who is estimating--and Mr. Feinstein can correct me--
    but I think about $12 billion a year in extra consumer costs
    for the delayed entries agreements that have been reached and
    that are out there.
        So things are bad, and we need you to fix them, please.
        Ms. Jackson Lee. Mr. Dickey, does that then eliminate the
    availability for brand and pharmaceuticals to invest a large
    amount of money to then not be competitive in trying to get
    their product to the market because they don't have this scheme
    that is in Hatch-Waxman?
        Mr. Dickey. Well, I think in some cases it can delay the
    entry of a generic drug. But as our paper indicates, there are
    circumstances where settlements with some sort of reverse
    payment compensation can actually facilitate a settlement
    between the companies and bring a generic to market sooner than
    it otherwise would have come.
        Ms. Jackson Lee. And would that be sooner than the format
    of 1706?
        Mr. Dickey. Yes, because 1706 would outlaw a settlement
    with a payment.
        Ms. Jackson Lee. And, quickly, can I get Mr. Kennedy in?
    Ms. Bresch, would you start, and then Mr. Kennedy?
        Ms. Bresch. So I think, just quickly, what I had said in my
    testimony is that to even consider anything on the patent
    settlement bill would be truly irrational without addressing
    authorized generics. I think that we develop--Mylan has been in
    business for almost 50 years. And I can tell you, we develop
    products to bring them to market.
        Generics have saved, over the last 10 years, consumers $740
    billion. So I think the idea that we don't want to bring the
    drugs to market and we want to settle is not the case. The
    problem is, with the use and abuse of authorized generics, the
    brand companies have all the leverage. They have stolen
    something that was given in Hatch-Waxman, and we have to
    negotiate to get it back.
        And it puts us in a very precarious position. And I do
    believe that we could bring generics even sooner to the market
    if we were evaluating the litigation truly on its face and not
    with the threat of the A.G.
        And just to address some of the issues I have heard today
    about the patents being sometimes frivolously gone after in the
    litigation, what I would say is that patents--the hurdle and
    the barrier to get a patent issued is much lower than to
    invalidate or find non-infringement on a patent.
        So when you think about the thousands and thousands of
    patents issued every year and the high hurdle or the lower
    hurdle there is to receive a patent versus what it takes for a
    generic company to invalidate or show non-infringement I think
    is very much the balance that was meant when Hatch-Waxman was
    struck.
        That is why us having the incentive to litigate and see
    that litigation to fruition and bring in generics sooner is
    what has saved the consumer $740 billion, and we are part of
    the solution going forward, especially in the light of
    biologics.
        Ms. Jackson Lee. Do you like 1706 or not?
        Ms. Bresch. No.
        Ms. Jackson Lee. And I am ending, Mr. Chairman. Thank you
    for your indulgence.
        Mr. Kennedy, quickly?
        Mr. Kennedy. I feel like if we--that I would like for
    Congress to think about and this Committee, it is not--we keep
    talking about the--we keep talking about the first one, to be
    able to be the first generic to market. Sure, that saves some
    money.
        But I want to remind everybody, the big savings in generics
    is when you get three, four and five manufacturers in the
    market. And right now the way Hatch-Waxman is set up and with
    the litigation processes going on and the reverse payments and
    the settlements, that keeps your third, fourth and fifth
    players out of the market.
        But the big savings is trying to get more generic
    manufacturers in the market, not just have one generic
    manufacturer with a name-brand manufacturer.
        Ms. Jackson Lee. So are you for Hatch-Waxman or----
        Mr. Kennedy. I am for it, yes.
        Ms. Jackson Lee. You are for 1706?
        Mr. Kennedy. I am for 1706, yes.
        Ms. Jackson Lee [continuing]. Person advertising for 1706,
    but I do want to get a framework for the Judiciary Committee to
    address. And I thank the Chairman very much for allowing me to
    pursue my line of questioning. Thank you all. And I believe you
    will all be Hollywood stars in the next couple of months.
        Thank you for your presence here today.
        Mr. Gonzalez. [Presiding.] Thank you very much,
    Congresswoman Jackson Lee.
        The Chair will recognize Mr. Sherman.
        Mr. Sherman. Thank you, Mr. Chairman.
        It is my understanding the FTC already has the authority
    under current law to review these patent settlements. Mr.
    Feinstein, why can't you stop the really bad ones, the ones
    where there is a very substantial delay in a generic coming to
    market because there is a frivolous patent that, both sides
    winking at each other, agree to treat seriously, and a big cash
    payment to one generic company? I mean, that is the poster
    child for the bill. How come you can't stop those kinds of
    blatant evasions of the system?
        Mr. Feinstein. Well, you are correct, of course, that the
    settlements have to be submitted to the FTC and Justice
    Department in advance. What has happened, though, as the case
    law has developed, we believe that the courts who have, in
    effect, gotten to a point where these settlements are per se
    lawful, have distorted the balance that is inherent in Hatch-
    Waxman.
        Mr. Sherman. Why did the judges screw it up so badly? And
    should we simply invalidate all of these agreements or just
    tell the judge--or just reverse some of the most erroneous of
    these decisions? Because----
        Mr. Feinstein. Well, the----
        Mr. Sherman [continuing]. We would never--you know,
    certainly it wasn't Congress's intention that these agreements
    be per se valid. There is supposed to be a review process.
        Mr. Feinstein. Right, and what is--the way the law has
    evolved is that, as long--and I am paraphrasing--but as long as
    the period of delay does not exceed the period of the patent,
    for all practical purposes, the remaining life of the patent,
    for all practical purposes, these agreements passed muster, as
    the cases have unfolded.
        What that fails to take into account is the reality that
    the payment will cause the delay to be later than it otherwise
    would have--that entry would be later than it otherwise would
    have been.
        Mr. Sherman. You could have a patent on the main element of
    the drug that is about to expire, then file another patent on
    the fact that it is blue with purple stripes, and then somebody
    agrees that, well, we will delay until that second patent
    expires, even though the drug would be just as effective
    without the purple stripes.
        Can your commission submit to this Committee proposed
    legislative language that wouldn't go per se you can never do
    these agreements, but would reverse what the courts have done
    in making them per se legal, and return to what Congress
    originally intended, which was a review process in which the
    benefits of the settlement for consumers and avoiding
    litigation are weighed against whether or not this is a real
    settlement of a real dispute involving a real patent?
        Mr. Feinstein. Well, I guess I would say, respectfully, we
    think that--we think that that is what 1706 does. It is not
    literally a--it is a bright line. It affords certainty to the
    participants in these settlements. But it also permits the FTC
    to develop rules that might permit exceptions.
        But we believe that there should be a presumption that it
    would be embodied in this legislation that payment for delay is
    unlawful.
        Mr. Sherman. That goes further than what Congress
    originally intended.
        Let's talk to Mr. Donatiello. The FTC already has this
    authority to review. They are saying it is not effective
    because courts have said these agreements are per se legal, as
    long as one of the many patents that are involved with the drug
    doesn't expire before the end of the delay period.
        Is that your experience? And do you think that your side
    can present legislation that would give us a reasonable balance
    here without it being per se legal or per se illegal or even
    per se illegal with exceptions?
        Mr. Donatiello. Thank you. I think that one issue here is
    that, in the settlements that we are talking about, generally I
    think that it is almost presuming that the patent is invalid.
    And when we go to----
        Mr. Sherman. The issue is not only whether the patent is
    valid, but also whether the patent is consequential.
        Mr. Donatiello. Well, that is--thank you. That is true. And
    that is precisely why we advocate a rule of reason test, so
    that each individual case can be evaluated on its merits and
    whether that patent really is consequential or not.
        Mr. Sherman. Now, does current case law give you the rule
    of reason test you are talking about? Or is Mr. Feinstein
    correct that the courts have gone all the way to basically
    saying, ``It is not a rule of reason. It is per se valid''?
        Mr. Donatiello. Well, I believe that current case law
    judges these settlements on a rule of reason analysis. So I
    think that----
        Mr. Sherman. Have any been thrown out?
        Mr. Donatiello. Have the settlements been thrown out?
        Mr. Sherman. Yes, where they just say, ``Hey, the generic
    company loves it. The brand-name company loves it. And we, the
    courts, are going to throw it out''?
        Mr. Donatiello. I think the only one that I can come up
    with or that I know of right now that has been thrown out has
    been--I think it was the Cardizem case. But on the other side,
    there has only been a handful of these that have gone through
    court and actually been adjudicated. That is my understanding.
        Mr. Sherman. And, Mr. Feinstein, if you just--has your
    agency only challenged a few of these in court?
        Mr. Feinstein. We have only challenged a few of them; that
    is correct. The Cardizem case was a Sixth Circuit decision that
    Ms. Jackson Lee was referring to earlier, which essentially
    adopted a per se unlawful approach to these kinds of payments.
        But the subsequent cases, the Schering case that was
    brought by the FTC--and there are several others that are in
    private--brought by private parties. And we also have several
    cases pending right now.
        Mr. Sherman. You do have--so you are by no means sure that
    the present law--and the courts have slammed the door on your
    agency's review? In fact, you haven't given up the game; you
    are playing several are on your schedule now.
        Mr. Feinstein. We haven't given up the game. We hope to
    get, if necessary, to get the Supreme Court to fix this
    problem. But we believe, candidly, that having Congress fix it
    is much more efficient and much better for consumers because it
    will be faster.
        Mr. Sherman. That is high and undeserved praise for the
    United States Congress. [Laughter.]
        I yield back.
        Mr. Gonzalez. Mr. Sherman, I was going to give you more
    time, but, with that last remark, your time is up.
        But seriously, we are going to be adjourning in a couple of
    minutes, but I wanted to touch on a couple of points. And the
    Chairman of the Subcommittee was gracious enough to allow me to
    preside, so I can ask a couple of questions.
        I think the bottom line is that the courts, basically,
    interpret and apply the law. And at this point, they are saying
    that the parties in the private capacities are within their
    rights to enter these agreements that result in, basically,
    pay-for-delay. I know that is not great as a characterization.
        But it is up to the legislature, to Congress to address the
    issue. And that seems to be the appropriate thing to do. That
    is going to be the crux of a huge debate that will be taking
    place over in the Senate side very soon during the confirmation
    process.
        And it appears what Mr. Feinstein is saying, as the
    regulatory agency to which Congress has delegated authority, in
    their attempts to do something about pay-for-delay has been
    frustrated by the court's recent judgment that the parties are
    within their rights.
        But it is also the opinion of many in Congress, as well as
    the FTC, that these private agreements are frustrating the
    public policy aspect of the law. And that is when we come in.
        I think Mr. Sherman's question has pointed out that payment
    as one of the provisions of settlement is not totally
    prohibited, but it does set a bar, and it does set a
    presumption, and we understand that. But it can still be part
    of the mix, is my understanding--as your response to both Ms.
    Jackson Lee and to Mr. Sherman.
        But the question really comes down to, are we having in
    private practice that which frustrates the public policy
    interests and goals of Hatch-Waxman? And that is what we have
    here.
        So I want to ask you, Mr. Donatiello, what other bargaining
    chips, positions, elements, factors would be incorporated in a
    settlement absent money, the payment for the generics to delay,
    withhold, or whatever? What else would be out there of such a
    dimension that you could still reach agreements? Or is it a
    question of paying somebody?
        Mr. Donatiello. Well, thank you. It is not always a
    question of paying someone. In some cases, you can reach
    agreement without a payment. I mean, I certainly have been
    party to those agreements in certain circumstances, but the
    issue is really whether payment should make it per se illegal,
    that whether any payment automatically makes it per se illegal.
        I just want to take the opportunity to point out that in
    the Schering case that we referred to, the FTC's own
    administrative law judge originally found that that settlement
    was proper. And then it was--a full commission voted that it
    was improper, and then it went to court.
        So the ultimate judge--the circuit court judge agreed with
    the administrative law judge that--the FTC's own administrative
    law judge in that case.
        And, again, just each of these--we continue to advocate
    that each one be evaluated on its own merits and that if there
    really is a problem, that if the patent is weak and the parties
    just winked at it, as was indicated earlier, that that is a
    problem, and that action should be taken in those cases.
        Mr. Gonzalez. Could I--Mr. Feinstein?
        Mr. Feinstein. Mr. Chairman, from our perspective, the
    principal dimension of a negotiation in this context is time.
    That is the time of entry, that the parties are always free to
    come to an agreement on when the generic could be permitted to
    enter in the course of settling their dispute.
        The concern that we have is that, when you add the
    additional dimension of money, it distorts that--it distorts
    that calculation and will always result in a later date. But
    they certainly can settle purely on the basis of time.
        Mr. Gonzalez. Well, thank you very much.
        And I want to thank all of the witnesses. It has been very
    enlightening. I want to assure you that other Members of the
    Subcommittee will have the benefit of your testimony, because,
    obviously, it is being written and we are taking it down, and
    will serve as a resource in future debates.
        Without objection, Members will have 5 legislative days to
    submit any additional written questions, which we will forward
    to the witnesses. And I will ask the witnesses to answer as
    promptly as you can. It will be made part of the record.
        Without objection, the record will remain open for 5
    legislative days for the submission of any other additional
    materials.
        With that, this hearing of the Subcommittee on Courts and
    Competition Policy is adjourned.
        [Whereupon, at 11:49 a.m., the Subcommittee was adjourned.]