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





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

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

                                HEARING

                               BEFORE THE

                       SUBCOMMITTEE ON COURTS AND
                           COMPETITION POLICY

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                              JUNE 3, 2009

                               __________

                           Serial No. 111-105

                               __________

         Printed for the use of the Committee on the Judiciary


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





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                       COMMITTEE ON THE JUDICIARY

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

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

             Subcommittee on Courts and Competition Policy

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

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

                    Christal Sheppard, Chief Counsel

                    Blaine Merritt, Minority Counsel











                            C O N T E N T S

                              ----------                              

                              JUNE 3, 2009

                                                                   Page

                           OPENING STATEMENTS

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

                               WITNESSES

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

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

                              ----------                              


                        WEDNESDAY, JUNE 3, 2009

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

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

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

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




                               __________

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

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

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




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

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

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




                               __________

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

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

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




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

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

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



                               __________

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

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

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




                               __________

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

                                 
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