[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
U.S. GOVERNMENT PRINTING OFFICE
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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
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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.]