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


 
 H.R. 1706, THE PROTECTING CONSUMER ACCESS TO GENERIC DRUGS ACT OF 2009

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

                                HEARING

                               BEFORE THE

                    SUBCOMMITTEE ON COMMERCE, TRADE,
                        AND CONSUMER PROTECTION

                                 OF THE

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 31, 2009

                               __________

                           Serial No. 111-25


      Printed for the use of the Committee on Energy and Commerce

                        energycommerce.house.gov



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                    COMMITTEE ON ENERGY AND COMMERCE

                 HENRY A. WAXMAN, California, Chairman

JOHN D. DINGELL, Michigan            JOE BARTON, Texas
  Chairman Emeritus                    Ranking Member
EDWARD J. MARKEY, Massachusetts      RALPH M. HALL, Texas
RICK BOUCHER, Virginia               FRED UPTON, Michigan
FRANK PALLONE, Jr., New Jersey       CLIFF STEARNS, Florida
BART GORDON, Tennessee               NATHAN DEAL, Georgia
BOBBY L. RUSH, Illinois              ED WHITFIELD, Kentucky
ANNA G. ESHOO, California            JOHN SHIMKUS, Illinois
BART STUPAK, Michigan                JOHN B. SHADEGG, Arizona
ELIOT L. ENGEL, New York             ROY BLUNT, Missouri
GENE GREEN, Texas                    STEVE BUYER, Indiana
DIANA DeGETTE, Colorado              GEORGE RADANOVICH, California
  Vice Chairman                      JOSEPH R. PITTS, Pennsylvania
LOIS CAPPS, California               MARY BONO MACK, California
MICHAEL F. DOYLE, Pennsylvania       GREG WALDEN, Oregon
JANE HARMAN, California              LEE TERRY, Nebraska
TOM ALLEN, Maine                     MIKE ROGERS, Michigan
JAN SCHAKOWSKY, Illinois             SUE WILKINS MYRICK, North Carolina
HILDA L. SOLIS, California           JOHN SULLIVAN, Oklahoma
CHARLES A. GONZALEZ, Texas           TIM MURPHY, Pennsylvania
JAY INSLEE, Washington               MICHAEL C. BURGESS, Texas
TAMMY BALDWIN, Wisconsin             MARSHA BLACKBURN, Tennessee
MIKE ROSS, Arkansas                  PHIL GINGREY, Georgia
ANTHONY D. WEINER, New York          STEVE SCALISE, Louisiana
JIM MATHESON, Utah                   PARKER GRIFFITH, Alabama
G.K. BUTTERFIELD, North Carolina     ROBERT E. LATTA, Ohio
CHARLIE MELANCON, Louisiana
JOHN BARROW, Georgia
BARON P. HILL, Indiana
DORIS O. MATSUI, California
DONNA CHRISTENSEN, Virgin Islands
KATHY CASTOR, Florida
JOHN P. SARBANES, Maryland
CHRISTOPHER MURPHY, Connecticut
ZACHARY T. SPACE, Ohio
JERRY McNERNEY, California
BETTY SUTTON, Ohio
BRUCE BRALEY, Iowa
PETER WELCH, Vermont

                                  (ii)


        Subcommittee on Commerce, Trade, and Consumer Protection

                   BOBBY L. RUSH, Illinois, Chairman
JAN SCHAKOWSKY, Illinois             CLIFF STEARNS, Florida
    Vice Chair                            Ranking Member
JOHN SARBANES, Maryland              RALPH M. HALL, Texas
BETTY SUTTON, Ohio                   DENNIS HASTERT, Illinois
FRANK PALLONE, New Jersey            ED WHITFIELD, Kentucky
BART GORDON, Tennessee               CHARLES W. ``CHIP'' PICKERING, 
BART STUPAK, Michigan                    Mississippi
GENE GREEN, Texas                    GEORGE RADANOVICH, California
CHARLES A. GONZALEZ, Texas           JOSEPH R. PITTS, Pennsylvania
ANTHONY D. WEINER, New York          MARY BONO MACK, California
JIM MATHESON, Utah                   LEE TERRY, Nebraska
G.K. BUTTERFIELD, North Carolina     MIKE ROGERS, Michigan
JOHN BARROW, Georgia                 SUE WILKINS MYRICK, North Carolina
DORIS O. MATSUI, California          MICHAEL C. BURGESS, Texas
KATHY CASTOR, Florida
ZACHARY T. SPACE, Ohio
BRUCE BRALEY, Iowa
DIANA DeGETTE, Colorado
JOHN D. DINGELL, Michigan (ex 
    officio)
  


                             C O N T E N T S

                              ----------                              
                                                                   Page
Hon. Bobby L. Rush, a Representative in Congress from the State 
  of Illinois, opening statement.................................     1
    Prepared statement...........................................     3
Hon. Cliff Stearns, a Representative in Congress from the State 
  of Florida, opening statement..................................     5
Hon. Henry A. Waxman, a Representative in Congress from the State 
  of California, opening statement...............................     6
    Prepared statement...........................................     8
Hon. John D. Dingell, a Representative in Congress from the State 
  of Michigan, opening statement.................................    11
Hon. Joe Barton, a Representative in Congress from the State of 
  Texas, opening statement.......................................    12

                               Witnesses

J. Thomas Rosch, Commissioner, Federal Trade Commission..........    17
    Prepared statement...........................................    20
    Answers to submitted questions...............................   310
Scott Hemphill, Associate Professor of Law, Columbia University..    45
    Prepared statement...........................................    47
Joanne Handy, Board Member, AARP.................................   182
    Prepared statement...........................................   184
Diane Bieri, General Counsel, Pharmaceutical Research and 
  Manufacturers of America.......................................   194
    Prepared statement...........................................   197
Barry Sherman, Chief Executive Officer, Apotex, Inc..............   214
    Prepared statement...........................................   216
Ted Whitehouse, Willkie Farr and Gallagher, on Behalf of Teva 
  Pharmaceuticals................................................   230
    Prepared statement...........................................   232

                           Submitted Material

Paper entitled, ``An Economic Assessment of Patent Settlements in 
  the Pharmaceutical Industry,'' by Bret Dickey, Jonathan Orszag, 
  and Laura Tyson, dated March 2009, submitted by Mr. Stearns....   269
Letter of March 30, 2009, from Compass Lexecon to Subcommittee, 
  submitted by Mr. Stearns.......................................   309


 H.R. 1706, THE PROTECTING CONSUMER ACCESS TO GENERIC DRUGS ACT OF 2009

                              ----------                              


                        TUESDAY, MARCH 31, 2009

                  House of Representatives,
           Subcommittee on Commerce, Trade,
                           and Consumer Protection,
                          Committee on Energy and Commerce,
                                                    Washington, DC.
    The subcommittee met, pursuant to call, at 11:12 a.m., in 
Room 2123 of the Rayburn House Office Building, Hon. Bobby L. 
Rush (chairman) presiding.
    Members present: Rush, Schakowsky, Sarbanes, Sutton, 
Stupak, Barrow, Space, Dingell, Waxman (ex officio), 
Radanovich, Stearns, Whitfield, Pitts, Terry, Gingrey, Scalise, 
and Barton (ex officio).
    Staff present: Christian Tamotsu Fjeld, Counsel; Anna 
Laitin, Professional Staff; Michelle Ash, Counsel; Valerie 
Baron, Legislative Clerk; Shannon Weinberg, Minority Counsel; 
Will Carty, Minority Professional Staff; and Brian McCullough, 
Minority Senior Professional Staff.

 OPENING STATEMENT OF HON. BOBBY L. RUSH, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF ILLINOIS

    Mr. Rush. Good morning, everyone. I want to thank you for 
coming to today's hearing. I will begin this hearing by 
recognizing myself for 5 minutes for the purposes of an opening 
statement. This hearing is on the bill H.R. 1706, Protecting 
Consumer Access to Generic Drug Act of 2009.
    Today's legislative hearing is on a bill that Chairman 
Waxman and I introduced last Congress, and this subcommittee 
held a legislative hearing on our bill on May 2, 2007. We have 
introduced the bill again with the intent that it becomes law. 
H.R. 1706 bans what are known as exclusion payments, reverse 
payments or reverse consideration in patent settlements between 
name brand and generic drug companies. This is a practice in 
which the brand name company pays or provides value to the 
generic company, and the generic company agrees to delay the 
marketing of its generic drug product.
    First the bill is fully supported on a bipartisan basis by 
the FTC. The commission believes that a legislative fix is 
needed because the courts have thwarted their enforcement 
efforts. Both Republican and Democratic chairman and 
commissioners have historically supported congressional action 
cracking down on these uncompetitive settlements. This is not a 
partisan issue.
    Second, the bill does not ban all settlements in all patent 
cases. Quite the contrary. H.R. 1706 only bans exclusion 
payments and legal settlements. Brand name and generic 
companies are still free to settle their differences. In fact, 
before the court invalidated the FTC's enforcement efforts, 
drug companies were selling their patent disputes without any 
exclusion payments. It wasn't until the courts struck down the 
FTC's enforcement action in 2005 that these very unique type of 
settlements came back from the dead.
    Third, these types of settlements were completely unique to 
the drug industry. They do not appear in any kind of patent 
dispute other than this drug industry. In all other patent 
disputes, the litigants settle in two ways. One, they enforce 
or the accused pays a patent holder a royalty to market its 
products. Or two, the parties agree to an early entry date.
    Only in the drug industry do we see the unusual behavior of 
a patent holder, which is the brand name company, suing the 
accused infringer, the generic company, and then settle by 
paying the infringer to stay off the market. These unique 
settlements are the result of the equally unique regulatory 
framework of Hatch-Waxman.
    I don't believe that the drug companies are acting in bad 
faith. I believe that they are perfectly logical under their 
fiduciary duty to their shareholders. They are being 
responsible, and they are simply responding to the incentives 
they face under Hatch-Waxman.
    Lastly, H.R. 1706 will save taxpayers, businesses, and 
consumers tens of billions of dollars. That is the ultimate 
purpose of this bill. Congress is currently considering ways to 
save money in order to provide affordable health insurance to 
all Americans. I believe that H.R. 1706 can play an important 
role in reducing prescription drugs costs in our economy.
    We cannot afford to do nothing on this unique uncompetitive 
way of doing business that costs consumers millions of dollars. 
I want to thank our witnesses for appearing before this 
committee in this first step in the legislative process.
    [The prepared statement of Mr. Rush follows:]

    [GRAPHIC] [TIFF OMITTED] T7822A.001
    
    [GRAPHIC] [TIFF OMITTED] T7822A.002
    
    Mr. Rush. And I will now yield back the balance of my time, 
and now I want to recognize the ranking member of this 
subcommittee, my friend Mr. Stearns from Florida.

 OPENING STATEMENT OF HON. CLIFF STEARNS, A REPRESENTATIVE IN 
               CONGRESS FROM THE STATE OF FLORIDA

    Mr. Stearns. Good morning, and thank you, Mr. Chairman. I 
am glad we are having this hearing on H.R. 1706, Protecting 
Consumers' Access to Generic Drugs Act. On this side of the 
aisle we perhaps see this bill a little differently. We see it 
as a solution looking for a problem. The Hatch-Waxman Act of 
1984 we think is working, and we are not sure. Maybe a little 
bit of steering might be implied but not necessarily 
eliminating with a brand new bill with this H.R. 1706.
    You know when you look at the history of the availability 
of generic drugs over the past 25 years, which have helped 
millions of people live healthier lives and most importantly 
reduce the cost of health care, in the face of ever increasing 
health care costs for families, I asked my staff to pull up 
some statistics. And since the Hatch-Waxman passage, the 
generic industry share of the prescription drug market has 
jumped from around 19 percent to over 70 percent today. So 
again I say let us be careful. Do no harm.
    It is clear that the Hatch-Waxman Act and current practices 
have been successful in bringing low-cost alternatives to 
families and to the market. So I do have a few concerns which I 
will outline here. This bill addresses two facets of the 
generic pharmaceutical trade: reverse-payment settlement, which 
I am going to use the word payment settlement. I notice the 
chairman used the words exclusion payments and reverse 
payments, but I think the actual term which is payment 
settlements. And the other issue is the 180-day exclusivity 
period granted to first filers under the Hatch-Waxman Act.
    This latter consideration is really there as a incentive 
for generic drugs who take the risk to sue. So I am not sure 
that it should be changed. Now, opponents of the payment 
settlement argue that this practice delays the introduction of 
generic drugs to market and permit drug innovators to continue 
their patent protection and market exclusivity, even if it is 
for a shorter period of time than the patent allows.
    In reality though, the opposite is true. These settlements 
often bring drugs to market sooner than would otherwise be 
permitted by the completion of the brand drug's patents.
    Critics also argue these settlements encourage patent 
challengers to abandon their claims in litigation when an 
alleged 70 to 80 percent of challenges succeed. This statistic 
can be misleading and does not take into account that while a 
challenger may win on four out of five claims, it is the 
invalidation of just one of those challenges that is necessary 
to prevent the launch of a generic drug.
    Now, according to recent studies, the success rate of 
challenges that lead to the early introduction of a generic 
drug is actually closer to 45 percent, not the 70 percent that 
people talk about. Furthermore, patent litigation is expensive, 
unpredictable, and can last for many years. The emphasis in 
patent litigation, as in any other litigation area, is to 
settle. In many cases, it is a win-win situation. The brand 
company wins by saving money on protecting its patent. The 
generic company wins by saving money on litigation expenses and 
gaining earlier market entry. And the consumer wins with early 
access to a less expensive generic product.
    Now, unfortunately this legislation that we are talking 
about this morning would outlaw anything of value to be 
exchanged in a patent settlement. Therefore, an innovative drug 
company would have no incentive to do anything but defend its 
patent until expiration, inadvertently creating a chilling 
effect on early generic drugs introductions which the consumers 
would enjoy.
    Given this reality, generic companies could be discouraged 
from investing capital in patent prosecutions until it is 
assured of a success, a virtual impossibility in any patent 
litigation scenario. If longer, drawn-out litigation was not 
enough of a disincentive to challenge a patent, eliminating a 
generic company's ability to recover its litigation costs to 
the 180-day exclusivity period is enough to put the final nail 
in the casket of generic challenges.
    As a carrot to encourage patent challenges, the Hatch-
Waxman Act provides the first filer 180 days of exclusivity as 
the only generic drug permitted on the market, simply enabling 
a successful generic company challenger to recoup its 
significant litigation costs. It is this reward that encourages 
the risk of challenging a patent. If this exclusivity is no 
longer granted, the result will be the opposite of what this 
bill intends. Fewer drugs patients will be challenged, and 
consumers will have to wait much longer until patents expire or 
litigation come to conclusion before cheaper generic drugs can 
be made available.
    So I look forward to the testimony of our witnesses today, 
and thank you again, Mr. Chairman, for having this hearing.
    Mr. Rush. The chair thanks the gentleman. The chair now 
recognizes the chairman of the full committee, the gentleman 
from California, Mr. Waxman, for five minutes for the purposes 
of opening statement.

OPENING STATEMENT OF HON. HENRY A. WAXMAN, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF CALIFORNIA

    Mr. Waxman. Thank you very much, Mr. Chairman. I want to 
thank you for holding this important hearing. This year is the 
25th anniversary of the Drug Price Competition and Patent Term 
Restoration Act, commonly known as Hatch-Waxman or Waxman-
Hatch, and that law established our generic drug approval 
system.
    Generic drugs play a critical role in promoting public 
health where they are available. They promote competition, 
which in turn lowers prices. Lowering drug prices reduces 
overall health care bills. More importantly though, lower drug 
prices mean access to important medications for many patients 
who might not otherwise be able to afford them.
    Today in the U.S. a remarkable 67 percent of prescriptions 
are filled with generic medicines, saving consumers and the 
federal and state governments tens of billion dollars annually. 
Unfortunately in recent years, we have seen that the vibrant 
competition we envisioned has not flourished as well as we had 
hoped.
    The Federal Trade Commission has highlighted a significant 
cause of this problem. Generic and brand name drug companies 
have increasingly been entering into patent settlement 
agreements that have an anti-competitive effect. These 
settlement arrangements frequently involve agreements in which 
the generic drug makers stay out of the market in exchange for 
some form of compensation from the brand-name drug makers.
    These settlements are beneficial to both the brand-name 
company and the generic challenger. The brand gets additional 
time to sell its drug at monopoly prices. The generic gets 
payments without any need to make or market the drug. Both the 
brand and generic firms profit, but they do so at the expense 
of the consumers who much continue to pay monopoly prices. This 
is the last thing Congress intended when we enacted Waxman-
Hatch.
    The law was intended to give consumers access to generics 
at the earliest possible opportunity, not to line the pockets 
of generic and brand-name drug companies. Some courts have 
erroneously concluded that these agreements were condoned by 
Hatch-Waxman. These courts are sorely mistaken. The use of our 
law to prevent generic competition is contrary to intent of 
that law.
    Now Congress must act to prevent the continued erosion of 
these principles, the Protecting Consumer Access to Generic 
Drugs Act of 2009, the bill under discussion today, is a 
sensible solution that will help put an end to the practice of 
paying generic drug companies to stay out of the market. I 
recognize we need to proceed with care. Some patent settlement 
agreements can provide benefits across the board. Settlements 
can allow the parties involved to avoid expensive protracted 
litigation. Consumers can sometimes gain access to generic 
drugs that might otherwise have been deferred by litigation.
    This legislation recognizes that reality and permits 
settlements in which nothing more than the date of entry is 
negotiated. And if FTC decides that other exceptions need to be 
made to enhance competition and benefit consumers, then FTC can 
implement those changes through rule making.
    In effect, it is designed to rid us of the bad settlements 
and leave us with the good ones. I look forward to the 
testimony of the witnesses today and working with all the 
members of the committee to get this bill enacted into law. 
Thank you, Mr. Chairman.
    [The prepared statement of Mr. Waxman follows:]

    [GRAPHIC] [TIFF OMITTED] T7822A.003
    
    [GRAPHIC] [TIFF OMITTED] T7822A.004
    
    Mr. Rush. The chair thanks the chairman of the full 
committee. Now the chair recognizes the gentleman from 
Kentucky, Mr. Whitfield, for the purposes of opening statement 
for 2 minutes.
    Mr. Whitfield. Mr. Chairman, thank you very much. We look 
forward to this hearing on H.R. 1706, Protecting Consumer 
Access to Generic Drugs Act. I think this legislation has the 
very best intents, and obviously we want to protect all sides 
in this debate. We want to be sure that innovative drug 
companies continue to spend money and research and developments 
come through with drugs that help curtail disease. We also want 
the consumer to be able to get generic drugs as soon as 
possible at a less cost to improve health care.
    And one of the issues that I am going to be interested in 
today is that it was my understanding that in all the legal 
actions filed by the FTC about these exclusion agreements that 
they had lost all of the lawsuits. But then in reading the 
memorandum, I see that in the Sixth Circuit Court of Appeals 
held that such agreements are per se violations of the Federal 
Anti-Trust Law. But in the Second and the Eleventh Circuit 
Court of Appeals, they have ruled that agreements do not 
violate anti-trust laws and merely reflect the give and take of 
legal settlements.
    So I hope that as we proceed with our witnesses today that 
we can certainly get some clarification on that issue as well 
as others. And I yield back the balance of my time.
    Mr. Rush. The chair thanks the gentleman. The chair now 
recognizes the gentleman from Maryland, Mr. Sarbanes, for 2 
minutes for the purposes of opening statements.
    Mr. Sarbanes. Thank you, Mr. Chairman. I am looking forward 
to the testimony today and anxious to see this proposal move 
forward, which I think is a very common sense solution to the 
distortion in the regime that has occurred as a result of the 
court conclusion that the FTC didn't have authority to regulate 
here and tries to remedy that.
    It is particularly important as we embark on looking at how 
to apply similar regimes to other arenas, which of course is a 
discussion that is going on now, we got to make sure we fix 
this one. Businesses and lawyers are clever in finding ways to 
get around impediments. That is what they have done here. And 
to use the vernacular, we just need to be cleverer and try to 
fix this. And that is what this legislation intends to do.
    So I look forward to the discussion today, and I yield back 
my time.
    Mr. Rush. The chair thanks the gentleman from Maryland. It 
is my pleasure to allow Mr. Pitts from Florida--I am sorry, 
from Pennsylvania to allocate 2 minutes to him for the purposes 
of opening statement.
    Mr. Pitts. Thank you, Mr. Chairman. I would like to thank 
you for convening a hearing on this bill. I think we all agree 
that our goal should be to make generic drugs available to the 
consumers who need them. I am somewhat concerned that the 
legislation will have a chilling effect on patent challenges by 
generic drug companies resulting in longer waiting periods for 
generic drugs for consumers who depend on them.
    This bill would place a total ban on all patent settlements 
in which the company that holds the patent on the brand-name 
drug gives anything of value to the generic company challenging 
the patent except for an early entry date into the market. What 
will the results be? With no incentive to settle, cases will be 
litigated to the very end as brand drug companies fight to hold 
onto their authorized monopoly on the drug, the only way they 
have to recoup the millions of dollars they have put into 
developing and testing new drugs.
    With millions of dollars of legal fees on the line, generic 
companies will only challenge a patent if they are virtually 
assured of a successful outcome. This goes completely against 
the incentives for generics to challenges patents that are 
built into Hatch-Waxman.
    Finally, since 2003, Congress has required that litigants 
notify federal anti-trust authorities of their pharmaceutical 
patent settlements. DOF and FTC are already notified of all 
patent settlements, and they can sue if they believe the 
outcome of a case is anticompetitive.
    FTC has filed suit in a number of cases, and in the vast 
majority, the courts have found these settlements acceptable 
and refused to strike them down. So, Mr. Chairman, the system 
is working. These settlements should be reviewed on a case-by-
case basis, and to ban these settlements will only keep 
generics off the market for a longer period of time, hardly a 
pro-consumer outcome.
    I would like to thank all of our witnesses for coming to 
testify today, and I yield back the balance of my time.
    Mr. Rush. The chair thanks the gentleman. The chair now 
will recognize the chairman emeritus of the full committee, my 
friend from Houston, Mr. Dingell, for 5 minutes for the purpose 
of an opening statement.

OPENING STATEMENT OF HON. JOHN D. DINGELL, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF MICHIGAN

    Mr. Dingell. Mr. Chairman, thank you, and I want to commend 
you for your leadership and for holding this hearing. At issue 
before the committee today is the very fundamental question of 
fairness. Should pharmaceutical companies be able to continue 
to enjoy the right to collude the legal settlements in order to 
stifle consumer access to generic drugs?
    As the cost of health care continues to increase, mainly 
due to the cost of drugs, we must dispose of this question with 
a view towards providing consumers with a greater choice and 
lower prices while at the same time preserving for the industry 
the inviolability of intellectual property rights for 
manufacturers of pharmaceuticals.
    At the root of this debate lie the Hatch-Waxman's 
amendments to the Federal Food, Drug, and Cosmetic Act, whose 
intent it is to promote the aggressive entry of generic drugs 
into the marketplace to benefit consumers. Curiously, this has 
not occurred. This intent has been undermined of late by the 
growing practices of the pharmaceutical industry in settling 
patent disputes by the so-called practice of ``exclusion 
payments'' in which a patent holder pays a generic challenger 
in exchange for delay in the generic drug's entry into the 
market.
    Who gets screwed here? The consumer. In my view, should a 
generic challenger prove its product does not infringe upon the 
patent held by a brand-name pharmaceutical manufacturer 
secretive agreements of a legal character between private 
parties should not prevent the generic drug's introduction into 
commerce.
    Clearly this goes well against the intent of the committee 
and the Congress when we passed Hatch-Waxman. This in mind, the 
exclusion payments strike me as a counter to the interests of 
consumers and more pointedly, an unfair method of competition, 
which would otherwise be prohibited under section five of the 
Trade Commission Act.
    At this juncture, I would like to note that prohibiting 
exclusion payments may have a beneficial effect for state 
budgets and indeed for the federal government because the 
budget of Medicare, Medicaid and S-CHIP roles are going to be 
stressed by both the depression that we now undergo and the 
awful situation we confront of the increased need of people 
from groups that were formerly benefited by health coverage 
which they had lost. So we have a very serious problem of 
widespread economic displacement that is increasing these 
costs.
    By acting proscribed uncompetitive practices like exclusion 
payments, we could reduce the strain on the states of providing 
their citizens with health care, something which I believe is a 
fundamental right of all Americans. I look forward to working 
with you, Mr. Chairman, to seeing this legislation through and 
to make it become law. And I urge my colleagues to be of 
assistance in this great undertaking. Thank you, Mr. Chairman. 
I yield back the balance of my time.
    Mr. Rush. The chair thanks the chairman emeritus. And now 
it is my pleasure to recognize the gentleman from Nebraska. I 
am sorry--recognize my friend--I didn't see him down there--my 
friend from Texas, the ranking member of the full committee, 
Mr. Barton, for 5 minutes for an opening statement.

   OPENING STATEMENT OF HON. JOE BARTON, A REPRESENTATIVE IN 
                CONGRESS FROM THE STATE OF TEXAS

    Mr. Barton. Thank you, Mr. Chairman, and I look forward to 
the day we have a hearing on your bill and my bill to reform 
the BCS football championship series.
    Mr. Rush. Will the gentleman yield for a moment?
    Mr. Barton. I would be happy to yield.
    Mr. Rush. I talked about our bill this morning. I want you 
to know.
    Mr. Barton. Very good. Well, the Senate is beginning to 
steal our thunder, Mr. Chairman, so we----
    Mr. Rush. We can't let that happen.
    Mr. Barton [continuing]. Don't let that happen.
    Mr. Rush. They wouldn't know what to do with it.
    Mr. Barton. But I do want to thank you, Mr. Chairman, for 
this hearing on generic drugs, which is part of this committee 
and this subcommittee's jurisdiction. Access to lower cost 
drugs has not only helped Americans beat diseases, it has been 
a boon for health care in a world that depends on the drugs 
that we, the United States, manufacture. We need to recognize 
that it won't be all good news if we don't weigh the pros and 
cons of generics competing with brand names.
    Sick people depend on affordable drugs, but they also 
depend on innovation and research to create the drugs that they 
need. Without adequate reward, innovation fades, research 
declines, and life-saving medicine doesn't happen. The framers 
got it right in Article 1, Section 8 of the Constitution, and I 
quote ``promote the progress of science by securing for a 
limited time the exclusive right to discoveries.'' We should 
heed Section 8. It has worked well for over 200 years.
    American innovation is a cornerstone of intellectual 
property rights, and we need to ensure that our domestic 
industry continues to get the benefits of these property 
rights, especially in dealing with our trading partners 
overseas.
    Pharmaceutical companies should have the opportunity to 
pursue constitutionally protected inventions. We should not 
diminish the incentive to undertake the substantial risk 
involved. As everybody here knows, the risk associated with new 
drug approvals are significant. First comes the R&D component, 
followed by a lengthy FDA approval process, both of which 
require large amounts of money, which may not be recouped if 
the R&D falters or the FDA approval doesn't happen. At no point 
does anybody guarantee any drug innovator that the competition 
won't invent a similar drug first and get to the market first.
    I believe that when a new drug successfully makes it to 
market, we need to provide the innovator with intellectual 
property protection. It is important to get the balance right. 
In that spirit, Congress has always recognized the necessity of 
providing these protections. We have also recognized obviously 
the benefits of generic drug competition in the marketplace, 
which lowers cost and increases access.
    Congress made the wise decision 20 years ago when we passed 
Hatch-Waxman. I started to say Waxman-Hatch. I have always 
supported this concept of providing a balanced incentive for 
both sides of the industry because it works. Inevitably, 
however, patent disputes arise between generic firms and brand 
manufacturers. Litigation can and often does take years to 
reach a final verdict.
    However, both sides decide sometimes to settle a case when 
the outcome isn't certain and the parties have a negotiated 
settlement based on the possible benefits and the probabilities 
of winning the case outright. To be very clear, consumers 
should have the best drugs available at the cheapest possible 
price. But I think the best way to achieve that is to provide 
innovators with their strong intellectual property protection 
while providing a clear path for generics to enter the market.
    I have a serious concern about imposing a ban on the 
exchange of anything of value in a private patent litigation 
settlement. Limiting the options of private litigants to settle 
out of court should be avoided if at all possible. The right to 
depend or challenge patents should be preserved.
    Unfortunately, Mr. Chairman, I think the bill that you have 
introduced, H.R. 1706, would remove incentives parties have to 
settle, could force many more cases into lengthy litigation 
where years may elapse before a decision is reached.
    Forcing drug companies down this path probably would erode 
any benefit to the consumer. Since the FTC seems to me to have 
adequate authority to challenge these improper settlements in 
court, I am anxious to hear from the witnesses as to why the 
judicial system is not the appropriate venue to resolve these 
issues.
    Finally, Mr. Chairman, as I said almost two years ago at 
our last hearing on this issue, I am very interested in the 
economics of the industry and whether changing the structure of 
incentives and rewards, including some of the changes 
contemplated by your bill, will ultimately benefit consumers in 
the long run.
    I want to hear from the witnesses their views of this issue 
and also whether they feel that there are anti-trust concerns 
with these settlements, given the fact that the courts and the 
federal anti-trust authorities don't seem to agree on the 
issue.
    But in any event, Mr. Chairman, this is an important 
hearing. I am very pleased that you are holding it, and I look 
forward to hearing from the witnesses and also the questions 
from our distinguished members of the subcommittee. And I yield 
back.
    Mr. Rush. The chair thanks the ranking member, and now it 
is my pleasure to recognize the gentleman from Michigan, Mr. 
Stupak, for 2 minutes for the purposes of an opening statement.
    Mr. Stupak. Mr. Chairman, I am supportive of the bill, and 
I will waive my 2 minutes. And I will ask that it be added on 
for questioning later.
    Mr. Rush. The chair thanks the gentleman. Now, the chair 
recognizes my friend from Ohio, Mr. Space, for 2 minutes for 
the purposes of an opening statement.
    Mr. Space. Thank you, Mr. Chairman, for holding this 
important hearing on an issue that, at its core, is designed to 
provide inexpensive and effective prescriptive medications to 
the people that we serve.
    I think in addressing this issue, like so many other issues 
that affect the pharmaceutical world, we have to walk a 
delicate line between fostering innovation and providing 
inexpensive access to constituents. Particularly the latter 
issue becomes important in light of the fact that so many 
people are hurting financially right now and actually making 
conscious decisions between purchasing prescription medication 
and buying food.
    I hope that we will consider these issues of intellectual 
property and patent settlements in a very deliberate process, 
being very careful and mindful to maintain that balance between 
fostering innovation while protecting consumers. And I am 
hopeful that today's testimony will shed some important light 
on this topic. I yield back.
    Mr. Rush. The chair thanks the gentleman. Now for the 
second time now the chair recognizes the gentleman from 
Nebraska, Mr. Terry, for 2 minutes for the purposes of opening 
statement.
    Mr. Terry. Well, I appreciate you asking me twice.
    Mr. Rush. I am trying to get to you.
    Mr. Terry. I will waive.
    Mr. Rush. All right, the chair thanks the gentleman. Now it 
is my pleasure to recognize the gentleman from Louisiana, Mr. 
Scalise, for 2 minutes for the purposes of an opening 
statement.
    Mr. Scalise. Thank you, Mr. Chairman. I will waive as well 
and hold that time for questioning.
    Mr. Rush. Well, we thank you. Now, it is my pleasure to 
recognize the gentleman from Georgia, Mr. Gingrey--Dr. Gingrey 
for 2 minutes for the purposes of an opening statement.
    Mr. Gingrey. Mr. Chairman, the third time is the charm. I 
want to thank you for calling this hearing today on H.R. 1706, 
The Protecting Consumer Access to Generic Drugs Act of 2009. I 
believe that it goes without saying how valuable generic drugs 
have been for consumers in the prescription drug market. And 
this hearing will pick up where the subcommittee left this 
issue back in 2007 when I was not a member.
    As a physician for nearly 30 years and a member of this 
health subcommittee, I know that access to generic drugs 
provides proven medical remedies and improvements to the 
quality of life and often at a much lower cost. As this 
subcommittee examines such an important issue for consumers 
across the country, we must act in a way that preserves and 
bolsters access to generic drugs.
    However, Mr. Chairman, despite the intent of H.R. 1706 to 
expedite the process by which generic drugs get to the 
consumer, I am concerned that this legislation may indeed have 
unintended consequences causing consumers to wait even longer 
to get access to generic versions of brand-name drugs. At the 
very heart of this legislation is the legitimacy of an out-of-
court settlement between a drug company holding a patent on a 
drug and one seeking to create the generic version.
    Mr. Chairman, patent law in this area is very unique. When 
companies are able to settle their disputes out of court, 
consumers are the ultimate winners. Unfortunately H.R. 1706 
would prohibit the practice, thus reducing the incentive for a 
generic company to take on financial burden of challenging 
patents and potentially delaying some generics from actually 
coming to the market.
    Mr. Chairman, for the sake of all health care consumers, I 
urge we use the utmost caution and care as we move forward on 
this legislation. I certainly look forward to hearing the 
thoughts of our panel this morning on such an important issue, 
and I yield back the remaining 30 seconds.
    Mr. Rush. The chair thanks the gentleman. Now, the chair 
recognized my friend from Georgia, Mr. Barrow, for 2 minutes 
for the purposes of an opening statement.
    Mr. Barrow. I thank the chair. In the interest of time, I 
will waive an opening.
    Mr. Rush. Thank you very much. Now the chair recognizes my 
friend from Illinois, Ms. Schakowsky, the vice chair of the 
subcommittee for 2 minutes for the purposes of an opening 
statement.
    Ms. Schakowsky. Thank you, Mr. Chairman. I am an original 
cosponsor of H.R. 1706, the Protecting Consumer Access to 
Generic Drugs Act of 2009, because I believe that the 
availability of generic drugs is a critical component to 
lowering health care costs for the consumer, for businesses, 
for the taxpayer.
    The legislation would prohibit patent settlements in which 
a brand-name drug maker pays off a generic drug maker to 
prevent the generic medicine from entering the market. These 
payments are known as reverse or exclusion payments, and it 
strikes me as incredibly disingenuous that those who would tout 
the importance of free markets and competition would also take 
exclusive action to prevent fair competition in the case of 
necessary and sometimes lifesaving prescription medications.
    Settlements that include exclusion payments may be good for 
the brand-name manufacturer that gets to keep its monopoly, and 
it may be a good thing for the generic company that gets paid 
not to produce a drug, but such settlements are a bad deal for 
consumers.
    My state of Illinois has joined others in successfully 
taking on anti-trust actions by brand-name drug companies. In 
2003, Illinois was part of a multi-state settlement of an 
action against Aventis for entering into an exclusion payment 
settlement with a generic challenger which delayed competition 
with its heart drug Cardizem.
    However, the Cardizem case predated recent circuit court 
decisions that have made it more difficult for anti-trust 
enforcers to challenge reverse payments. The case which 
garnered millions of dollars for Illinois consumers might not 
have been successful in the current environment.
    According to a 2004 FDA analysis, the average patient 
taking several medications could save 14 to 16 percent on drug 
costs if they can replace some of their prescriptions with 
generics. If they were taking medications that could be 
completely replaced with generics, their prescription drug 
costs could be reduced by 52 percent.
    I think that ensuring lower cost generics on the market is 
a key component of reigning in health care spending, and I 
believe that setting the bar any lower would be irresponsible 
on the part of this Congress. Thank you, Mr. Chairman.
    Mr. Rush. The chair thanks the gentlelady. Now, the chair 
wants to exercise a moment of personal privilege this morning 
by recognizing the chairman of the Federal Trade Commission who 
has come here to be with us this morning. I am not sure, Mr. 
Chairman, how long you will be able to stay, but you are always 
welcome here. We want you to know any time you want to drop in, 
just drop in, all right. Mr. John Lebowitz is recognized. We 
thank you so much for your presence.
    And now we would like to welcome our expert and esteemed 
panel that have come. I want you to know that you are the 
finest panel that have ever assembled before us this morning, 
all right. And we recognize you so much, and we thank you so 
much for being here with us.
    I want to recognize from my left to right, beginning with 
the Honorable J. Thomas Rosch, who is the commissioner of the 
Federal Trade Commission. And I want to recognize you, 
Commissioner Rosch. I think that is how you pronounce your last 
name. Thank you so much.
    Next to him is Mr. Scott Hemphill, who is an associate 
professor of law at Columbia University. Welcome, Mr. Hemphill. 
Next to Mr. Hemphill will be Ms. Joanne Handy. She is a board 
member of an organization I just recently joined, AARP. 
Welcome, Ms. Handy.
    Next to her is Ms. Diane Bieri. She is a general counsel 
for PhRMA. Welcome, Ms. Bieri. And next to Ms. Bieri is Dr. 
Barry Sherman, who is a chief executive officer for Apotex 
Incorporated. Dr. Sherman, you have been here before and you 
are familiar. And we welcome you once again.
    And next to Dr. Sherman is Mr. Ted Whitehouse of the firm 
Willkie Farr and Gallagher, who has been before the committee 
before. And he is here on behalf of Teva Pharmaceuticals. We 
certainly want to again welcome each and every one of you and 
thank you for taking out moments of your important day to be 
here with us.
    And now we will recognize Commissioner Rosch for 5 minutes 
for the purposes of an opening statement.

  STATEMENTS OF J. THOMAS ROSCH, COMMISSIONER, FEDERAL TRADE 
    COMMISSION; SCOTT HEMPHILL, ASSOCIATE PROFESSOR OF LAW, 
 COLUMBIA UNIVERSITY; JOANNE HANDY, BOARD MEMBER, AARP; DIANE 
      BIERI, GENERAL COUNSEL, PHARMACEUTICAL RESEARCH AND 
   MANUFACTURERS OF AMERICA; BARRY SHERMAN, CHIEF EXECUTIVE 
  OFFICER, APOTEX, INC.; AND TED WHITEHOUSE, WILLKIE FARR AND 
          GALLAGHER, ON BEHALF OF TEVA PHARMACEUTICALS

                  STATEMENT OF J. THOMAS ROSCH

    Mr. Rosch. Thank you, Chairman Rosch, Congressman Stearns, 
and members of the subcommittee.
    Mr. Rush. Turn the mike on please. Pull it closer to you.
    Mr. Rosch. OK, I appreciate the chance to appear before you 
today. The written statement that we submitted represents the 
views of the commission as a whole. My oral testimony is my 
own, and it doesn't necessarily reflect the views of any other 
commissioner.
    There are several compelling reasons why it is imperative 
that Congress enact legislation in this area. Reverse payment 
agreements strike at the heart of the special statutory 
framework Congress created in the Hatch-Waxman Act. That 
framework was designed to balance two policy goals that are 
critically important to the pharmaceutical industry.
    Hatch-Waxman gave branded companies a longer patent life. 
The tradeoff was the generic companies were given a strong 
incentive to challenge questionable brand patents and start 
competing with the branded companies if they win. And that 
tradeoff was 180 days of generic exclusivity. In that way, 
generic companies were supposed to protect consumers from 
unwarranted patent monopoly pricing by branded companies.
    But reverse payment settlements frustrate the purpose of 
Hatch-Waxman in two ways. First, the settlements incentivize 
the generic to abandon the patent challenge, leaving a suspect 
patent intact for the entire extended patent period.
    Second, they can incentivize the generic to challenge 
patents that shouldn't be challenged in hopes of getting paid 
off for settlement. In other words, the anticompetitive 
settlements have ended up vesciating the incentives for 
generics to protect consumers and instead can result in 
generics feathering their own nests. By virtue of the reverse 
payment settlement agreement, the brand stops the generic's 
challenge and so it doesn't lose its patent monopoly even if 
its patent is invalid or not infringed.
    The generic meanwhile gets a share of the brand's monopoly 
profit in the form of the reverse payment, but the consumer, 
including the federal government as has been pointed out, ends 
up being a huge loser since consumers continue to pay monopoly 
profits until the generic starts to compete.
    This is demonstrated by the pie chart on page 12 of the 
commission's written remarks, and a good example is our 
Cephalon case where the CEO of the brand boasted that his deals 
generated an additional $4 billion in sales. Most of the 
profits from those sales will come from consumers pockets. Now, 
imagine if there are 10, 15 or even more of these settlements 
each year.
    Beyond that, on their face reverse payment agreements are 
market division agreements between potential competitors. That 
is why the Sixth Circuit in the Cardizem case held that they 
were per se illegal, and that holding is consistent with the 
1990 Supreme Court Palmer decision, which held that market 
division agreements between potential competitors are per se 
illegal. So reverse payment agreements not only violate the 
purpose of Hatch-Waxman but also seemingly violate the Palmer 
holding.
    So why am I here supporting congressional legislation? 
Well, recent circuit court decisions have ignored Palmer and 
Cardizem, substituting their own judicial policy judgments. The 
market division agreements should be permissible to settle 
patent litigation.
    For example, the 11th Circuit's Schering decision in which 
the circuit court declined to follow Palmer or Cardizem 
emphasized that its decision was based on ``policy.'' But 
Congress is the body with the responsibility to set patent 
policy.
    In short, the courts have disturbed the balance that 
Congress struck in Hatch-Waxman by permitting reverse payment 
settlement agreements and Congress should correct that 
imbalance. Congress shouldn't wait for the Supreme Court to 
review these erroneous judicial decisions either. There is no 
reason to think that the court will set things right any time 
soon. It has decided to review both Schering and Tamoxifen, 
which followed Schering. That is the Second Circuit decision 
and the petition currently before the case in the Cipro case, 
the most recent of these decisions.
    In that petition, the petitioner actually suggests that the 
Supreme Court defer ruling on the petition until the parties 
file a petition in a parallel action.
    More important, however, Cipro represents the extreme case. 
It holds that reverse payment settlements are in effect per se 
legal, not illegal, but per se legal. Even if the court 
concludes that Cipro is wrong and that reverse payment 
agreements are not per se legal, that still leaves open the 
question of whether, as Schering and Tamoxifen held, the 
strength of the patent is a threshold issue that has to be 
litigated before the public or private plaintiff can litigate 
the anti-trust merits.
    I have said publicly, Mr. Chairman, that litigating the 
strength of the patent may be one way to avoid Schering and 
Tamoxifen, but I will be the first to admit that that may be 
costly and duplicative. Hatch-Waxman contemplated that the 
generic would litigate the strength of the patent.
    Mr. Rush. Mr. Rosch, would you please bring your comments 
to a close? You are a minute and 47 seconds over your time.
    Mr. Rosch. OK, can I just conclude by saying----
    Mr. Rush. Please.
    Mr. Rosch [continuing]. Mr. Chairman that at the commission 
at least, this is not a partisan issue. Eleven members of the 
commission over the years that this has been at issue, all the 
Republicans, all of the Democrats have joined in these cases, 
and all four of us, two Republicans and two Democrats who are 
currently on the commission, strongly support the legislation 
that is before the committee. Thank you.
    [The prepared statement of Mr. Rosch follows:]

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    Mr. Rush. Thank you very much. Now the chair recognizes the 
gentleman, Mr. Scott Hemphill, for 5 minutes or thereabouts for 
purposes of an opening statement.

                  STATEMENT OF SCOTT HEMPHILL

    Mr. Hemphill. Thank you. Chairman Rush, Congressman 
Stearns, and members of the subcommittee, I am Scott Hemphill, 
an associate professor at Columbia Law School. My scholarship 
and teaching focus on the balance between innovation and 
competition, established by anti-trust law, intellectual 
property and regulation.
    I thank you for the opportunity to testify today about 
anti-competitive, pay-for-delay agreements between brand name 
drug makers and their generic rivals. These remarks draw upon 
my ongoing academic research into the economic effects of these 
settlements and their appropriate legal treatment. Most 
recently an article forthcoming in the ``Columbia Law 
Review''--I hope these articles might be included in the 
hearing record.
    Mr. Rush. So ordered.
    Mr. Hemphill. Advise the Federal Trade Commission on the 
anti-trust issues raised by pay-for-delay settlements, but the 
views I express today are mine alone.
    For 25 years, the Hatch-Waxman Act has provided a way for 
generic drug makers to introduce a competing version of the 
patented brand name drug even before the relevant patent or 
patents expire by arguing that the patent is invalid or not 
infringed. The generic firm has a large incentive to do this: 
180 days of exclusive sales free from generic competition when 
it later enters the market. Usually the brand name firm files a 
patent infringement suit in response. Often, the generic firm 
wins the suit, and when it does, drug prices fall.
    But sometimes the brand name firm, instead of taking that 
chance, decides to settle the suit. The parties dismiss the 
suit and agree on a particular date when the generic firm can 
enter the market. That date is the result of a hard bargain 
between the two companies. The brand name firm pushes for as 
late a date as possible, arguing that it is likely to win the 
case at trial if put to the test. The more persuasive that 
argument is, the later the entry date.
    Now, such a settlement which rests solely upon the inherent 
strength of the patent is properly permitted, but now think 
what happens when a brand name firm instead makes a payment to 
the generic firm, rather than relying solely on its prospects 
at trial. In that case, the payment secures a later date than 
is warranted by the likely validity of the patent alone. That 
payment to a rival made to secure additional delay in the 
generic entry ought to be prohibited.
    This pay-for-delay settlement problem is growing. To get a 
better sense of the problem, I collected a data set using 
public information of 143 brand generic settlements between 
1984 and August 2008. Of these, 60 settlements raised pay-for-
delay issues. Settlements as to just 10 drugs, whose form is 
particularly troubling and which currently block generic entry, 
account for U.S. sales of about $17 billion each year.
    The problem is not just growing worse. It is also getting 
harder. In the early days of pay-for-delay settlements, the 
brand name paid cash, a couple hundred million dollars in the 
case of the antibiotic Cipro. These deals are, relatively 
speaking, easy to understand. But today firms also pay by 
making contemporaneous side deals that help to disguise the 
payment, and they can even use the 180-day period I mentioned a 
moment ago as a source of payment.
    Let me explain. A generic firm gets 180 days if it fights 
the patent and wins. It loses 180 days if it fights the patent 
and loses. But what if it settles? In that case, it keeps the 
180 days. Now, this is important because it means that a brand 
name firm can approach the generic and say let me keep my 
patent and in exchange, I will let you have the 180 days, just 
much later.
    For a blockbuster drug such as Lipitor, such forbearance is 
worth hundreds of millions of dollars to a generic firm. The 
current approach to pay-for-delay settlement is just not 
working. H.R. 1706 is an important step forward in identifying 
and determining pay-for-delay settlement. Section 2A of the 
bill prohibits a settling brand name firm from providing a 
generic firm with ``anything of value beyond a negotiated entry 
date'' and with a few specified exceptions.
    It is important that the subcommittee recognize that 
anything of value, properly understood, includes all forms of 
compensation that induce delay, including effective guarantees 
of exclusivity. The subcommittee might wish to make this point 
explicit in the bill.
    To conclude, the pay-for-delay problem is getting worse as 
new deals are made and as deal structures become more and more 
complicated. Congress can help by prohibiting these anti-
competitive arrangements. Thanks are due to the subcommittee 
for taking a leadership role on this important issue. I look 
forward to hearing your questions and concerns.
    [The prepared statement of Mr. Hemphill follows:]

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    Mr. Rush. The chair thanks the gentleman. Now, the chair 
recognizes Ms. Joanne Handy for 5 minutes for the purposes of 
an opening statement.

                   STATEMENT OF JOANNE HANDY

    Ms. Handy. Mr. Chairman, members of the subcommittee, I am, 
as you know, Joanne Handy, a member of the AARP board, also a 
nurse and a health care provider. On behalf of our more than 40 
million members, thank you for the chance to testify about H.R. 
1706. AARP has endorsed this legislation, and we call on 
Congress to enact this legislation this year.
    Older Americans, as has been referred to several times by 
members of the subcommittee, use prescription drugs more than 
any other segment of the U.S. population. Unfortunately the 
cost for brand name drug products continue to rise at rates 
that far exceed inflation, causing a strain on the budgets of 
both consumers and other health care payers, including the 
government.
    Spiraling drug costs are particularly for older adults who 
are disproportionately affected by chronic disease and more 
likely to need multiple medications. When faced with higher 
drug costs, they frequently skip doses, reduce doses, and let 
prescriptions go unfilled. The result is preventable and 
expensive hospitalizations and adverse health outcomes.
    This occurs far less often for those taking generic drugs, 
which have proven to be one of the safest and most effective 
ways for consumers to lower their prescription drug costs. AARP 
encourages its members to use generic drugs whenever possible. 
AARP strongly supports efforts that provide timely market entry 
of generic drugs. We are concerned, however, about the recent 
trends in reverse payments, which occurs when generic 
manufacturers receive anything of value in exchange for 
agreeing not to research, develop, manufacture, or sell its 
generic products.
    These reverse payments delay market entry of new generic 
drugs, and thus increase the odds that older Americans will be 
forced to cut back or go without needed medicines because of 
the rising cost. AARP believes that H.R. 1706 is an appropriate 
remedy to end the problem of reverse payments. This legislation 
is needed because when brand and generic pharmaceutical 
companies engage in conduct that delays market entry of generic 
drugs, consumers and other health care payers pay higher 
prices. And as a result, older Americans are more likely to go 
without the drugs they need because of the higher costs.
    Stopping or delaying market entry of the first generic drug 
prevents all the other generic drugs from competing and 
ultimately extends the brand name manufacturer's market 
exclusivity. This creates a powerful incentive for companies to 
negotiate, to collude with the first to file generic 
manufacturer to delay market entry of the generic product.
    Legislation is necessary because, as you have heard, there 
have been recent court decisions that have held that reverse 
payment agreements do not violate the antitrust laws. These 
decisions have unquestionably lead to an increase of such 
agreements and hampered the Federal Trade Commission's ability 
to prevent these abuses.
    In fact, the FTC has reported a marked increase in the 
number of questionable settlements. 50 percent of the 2006 
settlement agreements between brand and generic manufacturers 
included some form of payment as well as an agreement to delay 
market entry. Ending these costly patient abuses is one 
essential component in our efforts to reduce skyrocketing brand 
name drugs prices and provide affordable comprehensive health 
care options to all Americans.
    Again AARP strongly supports H.R. 1706. We are pleased to 
see the committee and members from both houses of Congress and 
both sides of the aisle moving forward on this issue. Thank you 
for inviting us to be here.
    [The prepared statement of Ms. Handy follows:]

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    Mr. Rush. Thank you. Now, the chair recognizes Ms. Diane 
Bieri who is the general counsel for PhRMA for 5 minutes for 
the purposes of opening statement. Welcome.

                    STATEMENT OF DIANE BIERI

    Ms. Bieri. Thank you. Chairman Rush, Congressman Stearns, 
and members of the subcommittee, thank you for the invitation 
to participate in today's hearing on legislation that could 
have a significant impact on pharmaceutical company settlements 
of patent disputes. My name is Diane Bieri, and I am the 
executive vice president and general counsel of PhRMA.
    In 2008 alone, PhRMA members including both large and small 
biotech and pharmaceutical companies invested more than $50 
billion in discovering and developing new medicines. What is 
more, roughly 70 percent of this research was made right here 
in the United States, representing a significant number of 
American jobs and other contributions to the economy.
    In the past 10 years, over 300 new medicines have made it 
through the increasingly complex FDA review process and into 
the hands of physicians and patients. These new medicines are 
increasing life expectancy, decreasing disability, and 
providing hope to patients and their loved ones who are 
fighting life-threatening and debilitating diseases such as 
cancer, cardiovascular disease, diabetes, rheumatoid arthritis, 
and many others.
    America's biopharmaceutical companies are facing more 
challenges than ever in terms of bringing new medicines to 
market. It takes on average 10 to 15 years and more than $1 
billion to bring one new medicine to patients. That is why 
research-based companies and their investors need to be 
confident that the law will respect and uphold the critical 
role of intellectual property, including patents, in providing 
the opportunity to recoup these substantial investments.
    Patent protection is the engine that allows America's 
research-based biopharmaceutical companies to take risks and 
strive to develop the next generation of life-saving and life-
enhancing treatments.
    Of course, it is important to remember that pharmaceutical 
products effectively have a shorter period of patent life than 
other types of products. Pharmaceutical companies must obtain 
FDA approval before marketing their products, and much of the 
patent term is spent before the medicine actually comes to 
market. Recognizing these challenges, the Hatch-Waxman Act of 
1984 attempted to balance the interests of both innovative and 
generic companies.
    The law made it easier for generics to come to market but 
also restored to innovators some of the patent time lost during 
the clinical research and regulatory review process. But even 
after Hatch-Waxman, the useful patent life of a pharmaceutical 
product is limited. For example, one study showed that for 
medicine whose generic competitors entered the market between 
2002 and 2005, the average time on the market before generic 
competition was only 11.2 years.
    In addition, you have to look at the tremendous increase in 
competition between brand medicines, but particularly between 
brand medicines and generics. Since passage of Hatch-Waxman, 
the generic industry share of the prescription drug market has 
jumped from less than 20 percent to over 71 percent today. This 
is, of course, due in part to the fact that Hatch-Waxman has 
spawned more patent challenges as it was meant to do.
    Hatch-Waxman gives generic companies incentives to 
challenge patents as soon as four years after the brand 
medicine receives FDA approval, without requiring the generic 
to take the risk of actually marketing the product before the 
patent challenge is resolved.
    Given this construct, patent challenges have become 
commonplace, but patent litigation is still lengthy, expensive, 
and risky for all concerned. Generic companies do not have 
perfect information when they bring challenges, and brand 
companies cannot be sure their view of the strength of their 
patents will carry the day at trial.
    The rapid expansion in generic utilization has been fueled, 
in part, by the fact that innovators and generics have had the 
flexibility to resolve some of these patent suits in fair and 
appropriate ways without taking every case the whole way 
through trial and appeal.
    There is no doubt that H.R. 1706 would significantly reduce 
that flexibility. Courts and experts tell us that patents 
settlements between brand and generic companies, even those 
that include some payment from the brand to the generic, can 
benefit consumers. Yet H.R. 1706 would prohibit a wide variety 
of patent settlements just because the brand company transfers 
something of value to the generic.
    This kind of broad ban would chill all patent settlements 
and is likely to reduce innovation and also reduce the number 
of patent challenges filed. Broad limits on options for patent 
settlements would force both sides to spend valuable resources 
litigating rather than developing new medicines or bringing 
generic versions to market. Statistics from recent years show 
that innovators are likely to win over 50 percent of the cases 
litigated through appeal, which means that generic entry in 
those cases could not come until the patent expires.
    In contrast, a settlement might include provisions allowing 
a generic product to come to market well before the patent 
expires and could produce other collateral benefits such as 
licenses for generics to market products unrelated to the 
patent dispute. Instead of a blanket rule banning certain types 
of patent settlements, enforcement agencies and courts should 
continue to evaluate settlements on a case-by-case basis to 
determine whether on the whole they benefit consumers.
    The Medicare Drug Improvement and Modernization Act of 2003 
enhanced the FTC and Department of Justice's ability to make 
those determinations. The approach preserves the delicate 
balance between intellectual property protection that fosters 
innovation and competition principles that encourage access to 
generic medicines and a strong healthy generic industry.
    I look forward to answering any questions you may have, and 
PhRMA looks forward to working with you on this legislation. 
Thank you again for your attention to these important policy 
issues.
    [The prepared statement of Ms. Bieri follows:]

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    Mr. Rush. The chair thanks Ms. Bieri, and it is now my 
honor to introduce and to allow Dr. Barry Sullivan 5 minutes 
for the purposes of opening--Sherman, I am sorry--Sherman 5 
minutes for the purposes of opening statement. Dr. Sherman, you 
are recognized for 5 minutes.

                   STATEMENT OF BARRY SHERMAN

    Mr. Sherman. OK, Mr. Chairman, members of the subcommittee, 
thank you for the opportunity to testify again today. Apotex 
Inc. is very eager to do its jobs of challenging weak patents 
and bringing to the market products as quickly as possible for 
the benefit of our customers, who are the pharmacy industry of 
America and through them to American consumers.
    We are therefore eager to help elucidate the fundamental 
problem that is blocking generic entry, and that, in our view, 
is settlements by first filers that whereby they accept unduly 
late, very late entry dates, cheap their exclusivity and 
thereby block market entry to others such as us who would 
continue to fight and thereby gain much earlier market entry.
    And the cost to the American consumer is enormous. Billions 
of dollars for individual products and certainly many tens of 
billions of dollars in total. One example is the drug Modafanil 
whereby the Cephalon settled with four generic suppliers 
challengers some years ago and thereby got delayed generic 
entry until the year 2012. The patent is very weak. We would be 
prepared to launch the product now if we could, and indeed, in 
Canada, we have already succeeded in the patent challenge. And 
the product is on the market in Canada as a generic sold by 
Apotex. So the problem is quite enormous.
    There have been legislative initiatives including this one 
to address the problem by trying to prohibit reverse payments, 
settlements that include reverse payments. In our view, reverse 
payments per se are not the problem. They are simply a symptom 
of a problem.
    Why are brand companies prepared to make large payments? It 
is not because they are fair payments to the particular company 
with whom they are settling. It is because when they settle 
with the first filer, they know the first filer retains the 
exclusivity and blocks all others. So they are paying not to 
get the one settlement, to get the entire block of the market 
until near patent expiry, and that is the fundamental problem.
    In our view, there are two flaws that need to be addressed 
and can easily be addressed. The first is that the first filer 
who settles and doesn't do what was intended by the Hatch-
Waxman gets to keep that exclusivity to block all others.
    And the second problem is that these agreements almost 
always contain poison pill provisions whereby if a subsequent 
filer does succeed to get early entry, the settler simply 
accelerates entry and takes away the benefit to the subsequent 
filer who actually succeeded.
    One example that brings the point home is the case of 
Altace Ramapril. The first filer was Cobalt. They settled for 
very late entry, but in 2007, Lupin won--even though they were 
not the first filer, won in the court of appeal. What then 
happened? Cobalt used its poison pill provision to accelerate 
its entry, launch the product, and Lupin could not launch even 
though they were the ones who invested and won. So all of the 
benefit went to Cobalt, who had settled. None of the benefit 
went to the successful litigant who was not the first filer.
    The message from that case is clear to all who would 
subsequently challenge a patent. Don't do it. It isn't worth 
it. You can't succeed. So the effect is that the litigation by 
those who would actually fight to win is paralyzed.
    In our view, there are two simple amendments that are 
needed to fix this problem. The first amendment is to give a 
shared exclusivity to a subsequent filer who does fight and 
wins. And the second provision that is needed is to override 
the poison pill provisions which would, in essence, provide 
that if a first filer settles for very late entry, FDA can then 
not give final approval to that first filer until that date. 
And that date can then not be accelerated by reason of a 
subsequent win by a subsequent filer.
    These two provisions would accomplish two very important 
things. Number one, it would give--when there is an 
anticompetitive settlement whereby a first filer has agreed to 
defer to a very late entry date, it would given an incentive to 
a subsequent filer to pick up the battle, challenge the patent 
and win and get earlier entry.
    And the second effect would be that it would eliminate the 
anticompetitive settlements because if these provisions were 
enacted, a brand company would no longer make a reverse payment 
to a first filer because it wouldn't have the effect of 
blocking all challengers. It would only block the one, and 
therefore there would be no reason to make that big payment.
    And secondly, it would tell the first filer they couldn't 
settle for too late a date because if it does, it will be stuck 
with that date. And then we will lose the opportunity launch if 
a second filer, subsequent filer, wins an earlier entry date.
    So in our view, the attacking or trying to eliminate 
reverse payments really will not solve the problem. 
Anticompetitive settlements will continue with the same 
anticompetitive effect only without the reverse payments. And 
what is necessary to address the problem is to give shared 
exclusivity to a subsequent filer who does take up the battle 
and wins and to eliminate the poison pill provisions whereby a 
first filer who agrees to late market entry can then accelerate 
that entry on the basis of an earlier win by someone who does 
invest in the challenge and wins.
    We very much urge the committee, subcommittee, to consider 
our suggestions because we have been at this a very long time. 
We understand what the issues are. We are fighting the battles 
every day. We are most eager to do the job, which the Hatch-
Waxman provisions incentivized used to do, to fight, to win, to 
bring our products to market early.
    We are blocked by these anticompetitive settlements, and 
these are the challenged that we are convinced are needed to 
solve the problem. Thank you very much.
    [The prepared statement of Mr. Sherman follows:]

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    Mr. Rush. The chair thanks the gentleman. Now the last 
witness, the chair recognizes for 5 minutes Mr. Whitehouse. You 
are recognized now for 5 minutes for the purposes of opening 
statement.

                  STATEMENT OF TED WHITEHOUSE

    Mr. Whitehouse. Thank you. Chairman Rush and Congressman 
Stearns and members of the subcommittee, good morning. I am Ted 
Whitehouse. Now it is good afternoon. I am a partner at Willkie 
Farr and Gallagher and appearing today on behalf of Teva 
Pharmaceuticals, which, as you know, is the leading 
pharmaceutical company that participates both on the generic 
and the brand sides of the industry. Teva and I appreciate the 
opportunity to appear and be heard on these important issues.
    As I think you know, Teva has been an active participant in 
the last Congress and in the current Congress in the 
deliberations on the matters at issue in this hearing. We hope 
it has been apparent to everyone that Teva is very concerned 
about this and similar legislative proposals but also very 
willing to work constructively with Congress and the FTC in an 
effort to ensure that the concerns being raised here are 
addressed without doing harm to the vital concerns and 
incentives at the heart of Hatch-Waxman.
    Teva believes that the intricately crafted Hatch-Waxman 
process that Congress put in place 25 years ago has worked and 
is working very well. Teva's basic position is that no new 
legislation is needed. Teva is therefore opposed to H.R. 1706. 
Teva believes the ability to reach reasonable, timely and pro-
consumer settlements in Hatch-Waxman paragraph four litigations 
is absolutely essential to Teva's efforts to bring low-cost 
generic drugs to market as soon as possible. And that is Teva's 
fundamental business, to work to bring products to market as 
soon as possible.
    From the perspectives of consumers, settlements that result 
in bringing products to market sooner with more certainty than 
might otherwise be the case are a very good thing. Teva 
believes that the members and staff should give particular 
attention to a recent paper written by three prominent 
economists including Dr. Laura D'Andrea Tyson, a professor of 
economics at Berkeley who served as a chair of the counsel of 
economic advisors and is director of the National Economic 
Counsel in the Clinton Administration. She is joining the Obama 
Administration to advise on tax policy as we understand it.
    This paper, copies of which we believe have been 
distributed to all members and their staff, confirms on the 
basis of economic analysis and theory some of the conclusions 
that Teva reached from this practical experience. First, that 
settlements can be good for consumers. Second, that reasonable 
settlements are more likely to be achieved if parties have more 
than one or two issues over which to bargain. And third the 
paper emphasized the importance of case-by-case analysis of 
settlements rather than a blanket ban on particular terms.
    As Dr. Tyson's coauthor said in a letter sent yesterday to 
the chair and ranking member, ``a broad ban on certain types of 
patent settlements, such as that considered in the proposed 
legislation, will likely make American consumers worse off.''
    Teva does not contend that all Hatch-Waxman settlements are 
necessarily good for consumers, but it takes strong issue with 
the legislation that would have prevented Teva from engaging in 
any of the recent settlements that Teva reached that produced 
real benefits for consumers. For example, 10 settlements 
entered into by Teva between 1999 and 2007 took approximately 
80 years of the lives of the patents at issue and will end up 
saving consumers more than $67 billion.
    Teva believes that more serious considerations should be 
given to legislative alternatives that were extensively 
discussed in the last Congress, such as mandatory expedited 
review by the courts or a more formal expedited FTC pre-
effective review process. If the subcommittee determines to 
proceed with the approach embodied in H.R. 1706, Teva strongly 
urges that the exceptions or carveouts in the bill be broadened 
to make clear that at least the kinds of terms that Teva has 
successfully employed in the past to reach settlements that 
produced real benefits for consumers remain permissible.
    And those provisions include, among other things, early 
generic entry on other products in addition to the one in suit, 
a full release for damages and a covenant not to sue on all 
patents on the generic products involved in the settlement, a 
limited exclusive license, and case-by-case authority for the 
FTC.
    Now, most of H.R. 1706 is directed to patent settlements; 
however, section four addresses a different set of issues not 
tied or limited to patent settlements. Essentially section four 
would broaden the circumstances under which the first generic 
company to challenge a brand company's patents could lose or 
forfeit the 180 days of marketing exclusivity provided to first 
filers under Hatch-Waxman.
    As you have heard today, there are people in the industry 
who don't like the 180-day exclusivity provisions, but it is 
important to be very clear that those provisions have been in 
Hatch-Waxman from the start and are absolutely essential to the 
incentive structure that has brought this country the vibrantly 
competitive and publicly beneficial generic drug industry from 
which consumers, third-party payers, and the federal and state 
governments benefit every day.
    I respectfully invite your attention to my written 
statement for a full explanation of Teva's concerns relating to 
these complex provisions in section four. But very briefly, by 
way of example, as written, subsection CC would result in 
forfeitures of exclusivity before anyone has been cleared to 
enter the market. Proposed subsection DD, we believe, is 
confusingly unclear and potentially very overbroad.
    On all of these issues, Teva hopes to continue an active 
and constructive dialogue with members of Congress and their 
staff and with FTC commissioners and the FTC staff, all with a 
view of trying to address any legitimate concerns while 
carefully preserving all that is good and necessary about the 
existing and highly successful Hatch-Waxman process.
    Thank you very much, and I would be pleased to answer any 
questions that you may have.
    [The prepared statement of Mr. Whitehouse follows:]

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    Mr. Rush. The chair thanks Mr. Whitehouse, and now the 
chair will begin the round of questioning by recognizing 
himself for 5 minutes for the purposes of questioning the 
witnesses. And I just want to ask the witnesses if we need to 
go into a second round of questions, the chair is willing to do 
that if the witnesses can make themselves available for an 
additional round of questioning from the members of the 
subcommittee.
    Chair recognizes himself for 5 minutes. Exclusion payment 
settlements are unique to the pharmaceutical industry. In all 
other industries, as I stated in my opening statement, patents 
are usually settled in two ways. One, the accused infringement 
pays a royalty to the patent holder or two, the two parties 
agree to an early entry date. It is my belief and has been 
stated earlier that only in the pharmaceutical industry do we 
see a very unusual behavior of a patent holder, which the brand 
name drug company suing the accused infringer, the generic 
company, and then paying the accused infringer to stay off the 
market. Only in the pharmaceutical industry.
    I am going to ask Commissioner Rosch, do these types of 
settlements happen in any other sector? And while you are 
answering that, think about this question: why are these 
settlements unique to the drug industry? And what keeps them 
from occurring in other industries or commercial sectors? And 
how does the framework of Hatch-Waxman impede or enhances this 
kind of activity? Those are the questions I have for you.
    Mr. Rosch. Thank you, Mr. Chairman. Let me take them up one 
by one. First of all, yes I do believe that these kinds of 
settlements, that is to say the kinds of settlements with which 
this legislation is concerned, are unique to the pharmaceutical 
industry.
    I think I take issue with characterizing them as payment 
settlements. They are not that. They are reverse payment 
settlements. They are settlements in which the holder of the 
patent actually pays the person who is alleging infringement 
some money or other thing of value. We do not frankly see that 
kind of settlement in any other industry. So that is the answer 
to the first question.
    Second, why don't we see it in any other industry? It is 
not because we consider either the branded or the generics to 
be nefarious. It is simply a matter of economics. Now what am I 
talking about in terms of economics? First, state substitution 
laws as well as various kinds of formularies very much 
encourage switching, switching to a lower cost drug from a 
branded drug that is under patent.
    Second, because of that encouragement, generic drugs are 
inclined and incentivized to switch their drugs as quickly as 
possible. And to do that, they are willing to actually take a 
haircut on their prices, well below that that the brand charges 
because the brand is able to charge monopoly prices.
    Third, that threatens however the brand tremendously 
because the brand's drug is still under patent, and it is able 
to avail itself of monopoly pricing, brand monopoly pricing, as 
well as brand monopoly profits.
    Fourth, because it is so threatened, the brand is willing 
and incentivized to go ahead and share some of those profits 
with the generic. And that is what happens when it offers a 
reverse payment. It is, in fact, a sharing some of those 
profits with the generic.
    So finally, the reverse payment settlement is a win-win 
proposition for both the brand and the generic. It helps the 
brand on the one hand maintain its patent monopoly. And 
secondly however what it does is to incentivize the generic to 
abandon its challenge to the patent monopoly and therefore to 
eschew the kind of pro-consumer activity that the Hatch-Waxman 
Act was originally designed to encourage.
    There is nothing wrong with the original Hatch-Waxman Act. 
To the contrary, its incentives were perfectly aligned. It gave 
the brands something. It gave the generics something for 
challenging the brands. The problem is not with the Act. The 
problem is with the court decisions, which have ignored the 
teaching of the Supreme Court as well as what the framers of 
the Act had in mind in enacting the Act to begin with.
    Mr. Rush. The chairman's time has ended, and now the chair 
recognizes my friend from Florida, Mr. Stearns, for 5 minutes 
for the purpose----
    Mr. Stearns. Thank you, Mr. Chairman. I ask unanimous 
consent that the letter that was sent to you and Mr. 
Radanovich, the academic study that draws reference by--that 
Mr. Whitehouse mentioned, draws out the complexity of 
determining whether reverse payment settlements are anti-
consumer and demonstrate that these settlements are actually 
pro-consumer in most cases be made part of the record.
    Mr. Rush. Hearing no objection, so ordered.
    [The information appears at the conclusion of the hearing.]
    Mr. Stearns. This is an interesting hearing, Mr. Chairman. 
You have the pharmaceutical industry, and as I understand it, 
the generic drug industry is aligned together. It is the most 
unlikely alliance here. Mr. Whitehead and others I represent--I 
mean as I understand it from my staff, Dr. Sherman, that you 
are alone here. That most of the generics--isn't that true, Dr. 
Sherman, that most of the generics are supporting--are not 
supporting this bill. Is that true, Mr. Whitehead? Most of the 
generic companies are not supporting this bill?
    Mr. Whitehouse. That is correct.
    Mr. Stearns. OK, and then the pharmaceuticals obviously, 
Ms. Bieri, do not support it. So I say to Mr. Rosch, you have 
here the pharmaceuticals against the bill, the generics against 
the bill in this case, you pointed out, pretty in detail how 
the courts have ruled that the Hatch-Waxman bill is working and 
that these reverse payments that you use--you don't like my 
term the settlement payment--that they actually are acceptable 
legal remedy and they are not anticompetitive. Isn't that true, 
Mr. Rosch?
    Mr. Rosch. Some of the courts have done that.
    Mr. Stearns. No, but in general, didn't all the courts show 
that these agreements are not anticompetitive?
    Mr. Rosch. No, that is not correct. The Sixth Circuit in 
the Cardizem case held that they were in fact per se illegal. 
The Eleventh Circuit and the Second Circuit however have held 
otherwise as a matter of policy. And as I said before, I think 
it is Congress's authority to make policy, not----
    Mr. Stearns. Did you say the Supreme Court wouldn't even 
rule on this because it was decided by the lower courts?
    Mr. Rosch. No, the Supreme Court did not rule on it 
because, as you know, the Supreme Court doesn't take--doesn't 
review all circuit court decisions.
    Mr. Stearns. Well, wouldn't you say the majority of courts 
have ruled that this is not anticompetitive?
    Mr. Rosch. Two to one, you are correct.
    Mr. Stearns. Two to one, OK. So we establish two to one the 
courts. So what this bill is trying to do is circumvent the 
courts where the courts have heard legal arguments on both 
sides and a two-to-one majority have said that this reverse 
payment that you use, which I say is a settlement payment, is 
not anticompetitive. Is that a true statement?
    Mr. Rosch. No, it is not correct. First of all, because the 
Supreme Court has held in other contexts, that is to say when 
they are not part of a settlement, that exactly----
    Mr. Stearns. But not in this context?
    Mr. Rosch. No, the Supreme Court has not addressed this----
    Mr. Stearns. That is what I am saying, OK. You know I think 
when you look at the statistics that before the Hatch-Waxman 
only 19 percent of the generic industry share the prescription 
drug benefit was only 19 percent. After the Hatch-Waxman, it 
went up to 70 percent. So that would show that it is working. I 
hear no evidence that if we pass this bill that you are going 
to go from 70 to 80 to 90 percent. In fact, you might go lower. 
And, Mr. Whitehead, if this bill passes, the statistics I just 
gave you before the Hatch-Waxman went to 70 percent, do you 
think the statistics will go lower if this bill is passed?
    Mr. Whitehouse. We believe it is documented in this 
economic study that----
    Mr. Stearns. Yes.
    Mr. Whitehouse [continuing]. There is a very real risk that 
there will be disincentive to the generic companies.
    Mr. Stearns. So why would we want to do harm then with 
something that the court says is not anticompetitive? We have 
both people involved have indicated they don't want it to 
happen, and we have a study to say the overwhelming statistic 
that it is going up to 70 percent is working. And we have a 
study that says in fact, if you pass this bill, that consumers 
will have less choice. And so it is a little interesting to me. 
Mr. Rosch, here is a question for you.
    Mr. Rosch. Thank you.
    Mr. Stearns. When you have statistics where it says that a 
study claims that in all patent litigation initiated between 
1992 and 2000, the generic prevailed in 73 percent of the 
challenged drug products. But I don't think that is telling the 
whole story. How many of these wins resulted in actual generic 
products coming on the market?
    Mr. Rosch. Well, let us assume that it is 45 percent as----
    Mr. Stearns. No, let us just take 73 percent as the----
    Mr. Rosch. OK.
    Mr. Stearns [continuing]. Statistic that is used. Of that 
73 percent, how many of those resulted in actual products being 
put on----
    Mr. Rosch. I can't----
    Mr. Stearns. You know what? I can tell you it is probably 
low because if a product consists of color, shape, compound, 
and dissolution, and they might win three of the cases. They 
say OK, we won on color, shape and dissolution, dissipation let 
us say, but the actual content of that, the compound itself 
they lose on, they can't do anything.
    Mr. Rosch. Well, let us assume it is 45 percent as you 
suggested earlier.
    Mr. Stearns. OK.
    Mr. Rosch. Let us assume it is 45 percent. That means that 
in 45 percent of the cases, these reverse payments are actually 
operating to hurt consumers. If it is----
    Mr. Stearns. No, well ultimately with reverse payment, 
settlement payment, my terms, with that means that generic drug 
finally comes on. Otherwise, it would be, I think you 
mentioned, 80 years or somebody in the panel said it would take 
80 years of litigation. So you suddenly have this litigation 
abruptly stopped. You have in six months the possibility of 
generic coming on the market, and this whole litigation process 
ends.
    Mr. Rosch. Well, there is nothing in the bill that would 
chill settlements at all. There were lots of settlements that 
were made before the court ruled. And Schering, there have been 
a number of settlements recently.
    Mr. Stearns. OK, I just want--there is no evidence of 
reverse settlements have actually reduced cost.
    Mr. Rush. The time of the gentleman has ended. The chair 
now recognizes Mr. Stupak for 7 minutes for the purposes of 
questioning the witnesses.
    Mr. Stupak. Thank you, Mr. Chairman. Dr. Sherman, let me 
ask you this question. In June of 2008, Pfizer reached a 
settlement with Ranbaxi concerning Lipitor, the world's top 
selling drug. According to press reports, the settlement 
delayed the entry of generic here in the United States until 
November of 2011, up to 20 months later than many analysts had 
been anticipating.
    The settlement of litigation here in the United States was 
part of a global settlement in which Pfizer granted licenses to 
Ranbaxi authorizing Ranbaxi to sell generic Lipitor in seven 
other pharmaceutical markets, Australia, Canada, Belgium, 
Germany, Italy, the Netherlands, and Sweden. The deal is 
reported to allow Ranbaxi to sell generic in those seven 
countries two to four months earlier than the patents expire. 
It was also reported that the deal would make generic Lipitor 
available in Canada earlier than in the U.S.
    Pfizer also dropped its challenge to Ranbaxi's current sale 
of generic Lipitor in four countries, Brunei, Malaysia, Peru, 
and Vietnam. Both Pfizer and Ranbaxi said the agreement did not 
involve any payments. It seems to me that this global deal was 
full of payments. Under the settlement, market entry for 
Lipitor appears to have been permitted earlier in a host of 
countries than here in the United States, which coincidentally 
happens to be the largest market in the world.
    So I have three questions if I may. If we pass legislation 
solely banning reverse payments, will we see more arrangements 
like this where delayed entry in United States is tied to 
settlement of litigation permitting earlier access to generic 
in markets outside the United States? Secondly, won't companies 
attempt to evade the payment ban by taking the position that 
settlements outside the United States are not subject to U.S. 
requirements that settlement reported to the Federal Trade 
Commission? And third, that the Federal Trade Commission 
prosecutes them for any such effort, won't the length of time 
it takes to do so be so long that any opportunity for savings 
from generic competition really be lost?
    Mr. Sherman. Yes, I have to say that----
    Mr. Stupak. I would ask you to turn on your mike please.
    Mr. Sherman. I am sorry. My concern is not only that 
reverse payments are not the fundamental problem. It is the 
ability to block other generics by reason of keeping the 
exclusivity. That is the fundamental problem. But there is no 
question in my mind that no matter how one tries to stop 
reverse payments by legislation, not only is it--even if it 
worked, it wouldn't have the significant effect.
    But it can't work because the creative minds of thieves are 
without limit, and there is no question that deals can be 
simultaneously done outside of the United States, and Lipitor 
is not the only example. For example, Ben Lefaxine, Effexor XR 
is another example. Some years ago, Teva settled with Wyeth and 
agreed to a very late entry in the United States. And at the 
same time, they settled the Canadian litigation allowed them on 
the market in Canada through their Nova Pharm division. So 
Canadian consumers have had low-cost generic Effexor XR for 
years, where it is delayed in the United States under two 
agreements that were entered simultaneously, one outside of the 
United States. And that probably is beyond the purview of the 
American courts because the American courts don't have 
jurisdiction over foreign countries operating abroad. And there 
is no way to stop simultaneous signature of agreements that 
appear to be unrelated or that can be said to be unrelated.
    Also attempts to block anticompetitive agreements by the 
FTC taking action will be futile because they will become mute 
by the time it is decided. It may be decided five years after 
an agreement is signed that it is improper, but in the 
meantime, there is no other generic firm because that agreement 
is there, able to justify investing to challenge the patent or 
bring the product to market. So even if a challenge to an 
agreement were to work, it would be moot by the time it 
happened.
    So the concern that we have is not only that attempts to 
block anticompetitive deals by banning reverse payments won't 
be affected, but it is not really addressing the fundamental 
problem. That is not the payment itself but the fact that these 
deals, whereby the subsequent filers who would fight, can't 
fight because they can't get on the market. That is the problem 
that has to be addressed. Give shared exclusivity with 
subsequent filer who wins. That solves the whole problem. The 
problem disappears, and consumers will get the benefit.
    Mr. Stupak. Well, let me ask this one. I am going to ask 
Professor Hemphill if he could answer this one. H.R. 1706 only 
prohibits a very specific type of provision exclusive payments 
in drug patent settlements. That is the bill only prohibits the 
brand name drug from paying or providing value to the generic 
company in exchange for the generic company delaying market 
entry.
    The bill does not ban legal settlements in general. History 
has shown us that drug companies are perfectly capable of 
settling their patent disputes without exclusion payments. When 
the Federal Trade Commission and states crack down on these 
types of settlements in 2000, they disappeared, and drug 
companies settled their cases just like any other companies do 
in other industries. However, when the courts then invalidated 
the FTC's enforcement efforts in 2005, exclusion payment 
settlements came back with a vengeance.
    So, Professor, doesn't this show that drug companies are 
perfectly capable of settling their patent disputes like any 
other company? And is there any evidence from the settlements 
from 2000 to 2005 which did not contain reverse payments, were 
they any more costly or difficult to achieve than settlements 
with reverse payments?
    Mr. Hemphill. That is a terrific question. It is difficult 
to get to the very bottom of the question using publicly 
available information, though based on the work that I have 
done as to settlements--with respect to information that it is 
the public domain, the answer does seem to be yes, that is, 
just as you have suggested, drug companies during that 
interregnum when the FTC rules seem to be in effect did seem 
able to settle, just not able to settle in a anticompetitive 
manner.
    Mr. Stupak. Right, OK. Commissioner Rosch, did you care 
to--did you find the settlements during this period to be more 
costly or more difficult to achieve by drug companies during 
that 2000/2005 period when your enforcement mechanism was 
there?
    Mr. Rosch. No, we did not.
    Mr. Stupak. Anyone else care to comment on that? Ms. Bieri, 
did your companies find it more difficult or more costly to 
sell when we did not have that five-year period of time?
    Ms. Bieri. Thank you, Congressman. I would just say that I 
think Mr. Hemphill is right, that the publicly available data 
aren't sufficient to show that for a fact. And I would----
    Mr. Stupak. How about your internal data on behalf of 
PhRMA? You must track that, do you not?
    Ms. Bieri. No, we do not track the number of settlements 
each year.
    Mr. Stupak. OK.
    Mr. Rush. The gentleman's time has ended.
    Mr. Stupak. Thank you, Mr. Chairman.
    Mr. Rush. The chair now recognizes the gentleman from 
Nebraska, Mr. Terry, for 5 minutes.
    Mr. Terry. Thank you, Mr. Chairman. I am one of the, I 
think, maybe two or three trial attorneys on this side of the 
aisle. Omaha, you are right. I knew there was something I liked 
about you. And settled hundreds of cases, wrote, read 
settlement agreements. But I got to tell you this one is a 
little out of the box for me, so I am going to have to kind of 
take some small steps and ask you some generic questions, pun 
intended. That is as good as it gets up here, folks, so----
    Mr. Rosch, just so I understand the scope of things, how 
many--just take in the last five years, how many of these 
reverse settlements have occurred? 5, 10, 500?
    Mr. Rosch. At least 103 that I know about, Congressman. Our 
staff reviewed that many at least, including, I should add, 
reverse payment settlements in which there were side deals plus 
a date certain for entry. So they were not always just payments 
of money, but there were 103 of them. And our staff found that 
all but a couple of them were very suspect.
    Mr. Terry. Now, I am sorry, out of the 103, you found that 
103 of them were suspect?
    Mr. Rosch. No, two of them were not suspect.
    Mr. Terry. Were not? So 101 of them----
    Mr. Rosch. Were.
    Mr. Terry [continuing]. Fell into the category of being 
suspect?
    Mr. Rosch. I guess that is why I have some problems with 
Teva's thesis because they would like to exempt a lot of side 
agreements.
    Mr. Terry. OK, now as I understand, when the brand name 
files their patent, I mean there is a date certain there of 
when that patent ceases to exist and a generic can come in. I 
mean that is very easy to find that information, right?
    Mr. Rosch. Yes, but----
    Mr. Terry. OK, what is the but?
    Mr. Rosch. The but is that there is also provision in the 
statute that, for a certain period of time after the brand is 
entered, it will basically get a free pass. Normally, that is 
five years, but it can go up to seven years in the case of some 
pediatric drugs where there are relatively few sales.
    In addition to that, they get something that you and I 
never saw in our lifetimes as litigators, and that is that they 
get a certain period of stay time with respect to an automatic, 
if you will preliminary injunction. And there is nothing like 
that----
    Mr. Terry. How long----
    Mr. Rosch [continuing]. In any other patent----
    Mr. Terry [continuing]. Would that stay time average?
    Mr. Rosch. I believe----
    Mr. Terry. And who gives that stay time? That is not 
statutory.
    Mr. Rosch. It is statutory.
    Mr. Terry. That is statutory?
    Mr. Rosch. That is.
    Mr. Terry. So statutorily, they get an extra amount of time 
because of----
    Mr. Rosch. It is 30 months.
    Mr. Terry. Thirty months. So I guess is there then not 
clarity on when the dates that the patent runs out that the 
generic can just jump into the market without legal issue?
    Mr. Rosch. No, again this is a matter of the statute. The 
statute allows what is called the first filer----
    Mr. Terry. Right.
    Mr. Rosch [continuing]. Who goes to the FDA first, and 
certifies that it is not infringing or that the patent is 
invalid.
    Mr. Terry. That is where--can I interrupt there?
    Mr. Rosch. Yes.
    Mr. Terry. Because that is where part of my confusion is 
coming in. If the date for the patent has run out, why do they 
have to declare or somehow adjudicate that there is something 
wrong with the patent?
    Mr. Rosch. Because the statute contemplates that before the 
patent runs out the generic will be incentivized to challenge 
patents which are not valid or infringed or in which validity 
or infringement is questioned.
    Mr. Terry. Well, even though they may be incentive, they 
still have to find something wrong with the patent.
    Mr. Rosch. Correct.
    Mr. Terry. Unless they want to wait until the end of the 
patent date. So it seems to me that if they are incentivized to 
attack the validity of the patent because we want to have a 
policy that gets those generics out there sooner than the end 
date.
    Mr. Rosch. Yes.
    Mr. Terry. I am not sure if I would agree with the premise 
that these are reverse payments. Out of the 103 then, let me 
just jump to my conclusion for my--I am out of time but----
    Mr. Rosch. Surely.
    Mr. Terry [continuing]. Let me ask this question. How many 
out of the 101 nefarious reverse settlements actually made the 
date that the generic got to the market sooner than the clear 
date that the name brand patent ran out?
    Mr. Rosch. The answer is, I believe, in almost all of those 
cases, it was sooner, but I would suggest most respectfully 
that that is not the question. Brand names do not pay tens or 
hundreds of millions of dollars in reverse payments to generics 
in order to accelerate their entry into the market. They don't 
do that. What instead they are doing is they are paying to keep 
that--to skew if you will the incentives of the generic to 
prevent the generic from actually challenging a patent that 
should be challenged. So that is the pernicious part.
    There is nothing wrong--I want to emphasize that. There is 
nothing wrong with the incentives created by Hatch-Waxman. The 
problem is created by the reverse payment settlement.
    Mr. Rush. The gentleman's time has expired. The chair now 
recognizes the gentlelady from Illinois, Ms. Schakowsky, for 
five minutes.
    Ms. Schakowsky. Let me just say that over 30 years ago, I 
was involved in, because I was a director of a senior citizen 
organization, working to get the state of Illinois to pass 
generic drug legislation in the hopes that it would reduce the 
cost, which has proven to be true. My colleague and friend Mr. 
Stearns was talking about how incredible it was that the 
generic drug, or at least the first filers anyway, and the 
pharmaceutical companies were on the same side.
    Obviously the problem is that they are because both are 
benefiting to the detriment, it seems, of the consumers. Mr. 
Whitehouse, you were probably citing this study, and you 
certainly didn't mean to imply that because Laura Tyson was an 
author that the Obama Administration is supporting this point 
of view, did you?
    Mr. Whitehouse. Not at all. I----
    Ms. Schakowsky. OK, and who paid for this study?
    Mr. Whitehouse. My understanding is that it was--funding 
was provided by Ms. Bieri's association, PhRMA.
    Ms. Schakowsky. PhRMA.
    Mr. Whitehouse. But they make clear that they express their 
independent views.
    Ms. Schakowsky. I just think that is important to note for 
the record, that the study that is being cited was paid for by 
the pharmaceutical industry. Let me ask the commissioner, 
Rosch--is it Rosch, I am sorry?
    Mr. Rosch. That is perfectly fine.
    Ms. Schakowsky. What is it really though?
    Mr. Rosch. Rosch.
    Ms. Schakowsky. OK, Rosch.
    Mr. Rosch. Like the chairman's.
    Ms. Schakowsky. No, you should accept your real name. OK, 
sorry. That the suggestions made by Dr. Sherman, he proposed 
that maybe we would consider two amendments to the legislation. 
Do you--or Mr. Hemphill, if you want to comment on that--think 
that would improve the legislation and why?
    Mr. Rosch. Well, again I am just speaking for myself, 
Congresswoman, but I am very reluctant to reduce the 180-day 
exclusivity period or to water it down at all or to dilute it 
at all because I think that is the carrot. That is the 
incentive for the generic to challenge.
    Ms. Schakowsky. Yes, but if this first filer makes a deal 
and then the second filer--well, maybe you can explain it 
better----
    Mr. Rosch. That is why I don't want--that is why I want to 
ban reverse payments because that----
    Ms. Schakowsky. Period?
    Mr. Rosch. Period.
    Ms. Schakowsky. OK. Well, why is your suggestion preferable 
then, Dr. Sherman?
    Mr. Sherman. We are not suggesting that the 180 days be 
reduced. We are suggesting that it go to or be shared by the 
person who actually earns it, the one who actually carries the 
challenge and succeeds in invalidating the patent. Right now, 
the first filer can settle and keeps the 180 exclusivity, which 
is a huge reward, for doing nothing, for agreeing not to 
challenge a patent and for agreeing with the brand company to 
defer generic entry until just before patent expires at 
enormous cost to consumer. They are not earning it.
    So we are saying in a case where a first filer has settled, 
it is not entitled to that exclusivity, but let them keep it 
anyway. Let us just give a shared exclusivity to the person who 
then picks up the challenge, does what Congress intended, 
invests in challenging the patent, and succeeds. If you don't 
do that, there is no incentive for anybody to pick up the 
challenge and to get early entry into the market in the face of 
a settlement by a first filer who has agreed to undermine the 
system and accept very late----
    Ms. Schakowsky. OK, Mr. Hemphill, does that make any sense?
    Mr. Hemphill. So the underlying policy concern is a real 
one that a first filer could settle, retain the exclusivity, 
and that that would create public policy problems. Perhaps a 
simpler solution, a solution actually suggested by Apotex two 
years ago would be that upon settlement, the exclusivity is 
simply forfeited.
    My concern about adding a new layer of exclusivity in 
addition to the possibly of diluting existing incentives is 
this is an extremely complicated scheme as it is. A lot of the 
problems result from manipulation of the 180 days. Doubling the 
set of possible--or multiplying the set of possible holders of 
exclusivity, I think, promises some confusion and complexity.
    To forfeit your alternative, which Apotex in the past 
suggested in response to the same policy concerns, strikes me 
as a simpler and maybe easier to implement alternative.
    Ms. Schakowsky. OK.
    Mr. Sherman. May I answer that? We did propose that two 
years ago, and it certainly would be better than what we have 
now, simply a forfeiture of exclusivity. But the problem there 
is then there is no incentive for a subsequent filer to take up 
the advantage, to take up the battle. And that is the very 
thing that the full regime is intended to incentivize. So 
giving a shared exclusivity to a subsequent who does take up 
the battle is better because then you are going to have someone 
investing to do it, and that will result in earlier entry into 
the market for generics. It is very----
    Ms. Schakowsky. OK, I appreciate this back and forth. Thank 
you.
    Mr. Rush. The chair now will recognize the ranking member 
of the subcommittee, Mr. Radanovich, for 5 minutes for 
questions.
    Mr. Radanovich. Thank you so much, Mr. Chairman, and I beg 
the forgiveness of the committee. I had a prior constituent 
water issue that needed to be addressed. I am a little bit late 
to this hearing. But I want to thank the panel for being here. 
I do have a couple of quick questions.
    First of all, to the honorable Mr. Rosch, Ms. Handy 
testified that H.R. 1706 creates two safe harbors. The first 
that the only value allowed for a generic is the right to 
market a drug prior to patent expiration. Second, the generic 
cannot be sued for infringement, thereby insulating them from 
any damages. A settlement is usually an agreement where both 
parties receive consideration. However, it seems that the 
considerations are entirely one-sided. What would be the 
benefit to the brand company to settle in this situation, 
number one? And number two, why would a brand company ever 
choose not to prosecute their patent to the fullest to see 
litigation through to the bitter end?
    Mr. Rosch. Well, with respect to the first issue, I think 
it really goes to whether or not side agreements should be or 
are covered by this legislation. And the answer is, as I 
indicated earlier, based on our own studies internally, side 
agreements can indeed end up being a part of the problem. So 
that is the answer to the first part of the question.
    The answer to the second part of the question really goes 
to the extent to which you want to incentivize--it seems to me 
you want to incentivize the generic to actually challenge what 
may be an invalid or a patent that is not being infringed. And 
again my view is that you want to give the--my own personal 
view is you want to give the generic the broadest possible 
incentive in that regard, which is what I think you do with the 
180 days.
    Mr. Radanovich. Um-hum, thank you very much. Ms. Bieri, is 
it? Ms. Bieri?
    Ms. Bieri. Yes.
    Mr. Radanovich. Thank you. Why is it so important for 
innovative pharmaceutical companies to retain the ability to 
settle patent litigation with generic companies?
    Ms. Bieri. Thank you, Congressman. Litigation is risky and 
expensive, and to--it incurs significant cost for both the 
brand companies and the generic companies. Companies have to 
have a way to resolve their disputes without taking them the 
whole way to trial. And so for both parties to this litigation, 
it is important to have the flexibility to be able to come to 
mutual arrangements that are still within the scope of the 
patent and therefore beneficial to consumers and ultimately 
which will bring these medicines, generic medicines, to the 
market before the patent expires but still be a fair 
arrangement for both parties to the settlement.
    Mr. Radanovich. Wouldn't the brand companies be better off 
if they successfully defended their patents in court?
    Ms. Bieri. That would be true if, in fact, the outcome of 
litigation were always certain. But litigation is risky, 
expensive, and uncertain. And businesses like certainty as you 
well know. So it is often better for the brand company to, 
within the scope of its patent, have a date certain by which it 
knows that the generic will come on the market.
    Mr. Radanovich. I see. Yes. Question for the panel, anybody 
who cares to respond. Our government and our American companies 
engage in daily fights against intellectual property theft. It 
seems, however, that a number of our witnesses are arguing for 
less stringent IP protections when it comes to pharmaceuticals. 
I think that we could agree that life-saving innovation must be 
encouraged, but it seems, however, that you are arguing that 
the IP rights of some innovators are less worthy of protection 
afforded by the law than perhaps Hollywood or Silicon Valley or 
Nashville.
    Many can defensively disagree, but I would like to hear any 
of your thoughts on the issues of intellectual property in 
general. Mr. Hemphill?
    Mr. Hemphill. Yes, I guess just to start, I think it is not 
true at all that the proposed bill here runs any risk of 
treating pharmaceutical companies, brand or generic as second 
class citizens. As the matters stand, we have a very 
complicated regime that is already very different from what 
anybody else gets. Commissioner Rosch mentioned a few moments 
ago the special 30-month stay granted to a brand name firm, 
even if the patent is extremely trivial. A patent term 
extension, of course, is another example.
    There are examples on the other side, but to think of this 
as an example of second class citizenship for PhRMA companies, 
I think, is far from the fact here.
    Mr. Radanovich. OK, anybody else care to comment? Dr. 
Sherman?
    Mr. Sherman. Yes, what distinguishes pharmaceuticals from 
other industries is this unique provision whereby the first 
filer has exclusivity to block others. So what you have when 
you have, under this regime, a brand company and the first 
filer negotiating, the parties that are not at the table are 
the public and the other generic firms who would be prepared to 
continue to fight. And the settlement to which they are not a 
party, affects them because it precludes the other generics 
from fighting to win because they are blocked by the continuing 
exclusivity. And the consumers aren't at the table, and they 
are the ones who are paying the billions of dollars of extra 
money as a result of the settlement.
    So sure, this bill would treat pharmaceutical differently 
because it would ban reverse payments, but the question that 
should be asked is why are they happening in this industry? And 
it is happening because the present regime permits a first 
filer to settle on behalf of all of the generic industries and 
consumers who are not at the table.
    So the way to fix it is not to have special provisions that 
bar reverse payments but to stop--to fix the regime so that a 
first filer who settles is settling only for himself and is not 
blocking another generic who would, in fact, continue to invest 
and fight for earlier entry.
    Mr. Radanovich. Thank you.
    Mr. Rush. The gentleman's time has concluded.
    Mr. Radanovich. Thank you, Mr. Chairman.
    Mr. Rush. The chair now recognizes the gentleman from 
Louisiana, Mr. Scalise, for 5 minutes.
    Mr. Scalise. Thank you, Mr. Chairman. The first question 
just open up to the whole panel. If you can explain or give an 
example of a case where Congress has actually specified that a 
certain industry specific private settlement would be illegal. 
Start with Mr. Whitehouse and work down.
    Mr. Whitehouse. We are certainly not aware of any, and we 
think in fact it is important to recognize and these economic 
papers do point out, make the important point, that this isn't 
unique to PhRMA, that every settlement and any litigation, as 
any litigator will tell you, involves some mutuality of 
consideration, or there wouldn't be a deal. And so it is the 
technicality of how the money or the compensation moves in any 
particular transaction. It is an artifact, but it is in the end 
of any interest because a settlement is not going to happen 
unless both sides are getting something out of it.
    Mr. Scalise. Mr. Sherman?
    Mr. Sherman. Well, again, the problem is that this industry 
is unique because the first filer in this case who settles is 
settling on behalf of everybody and entering into an agreement 
which blocks all others from getting to market. That is what 
distinguishes this industry, and that is what is wrong. That is 
what should be fixed.
    Mr. Scalise. Do you know of any other cases in other 
industries where this type of proposal that is brought forward 
is----
    Mr. Sherman. No, because there is no other industry where 
somebody gets an exclusivity by reason of doing a challenge and 
can block all others. That is the problem.
    Mr. Scalise. Not sure that that is the case, but Ms. Bieri?
    Ms. Bieri. Congressman, I am not aware of any other 
industry in which a bill target settlements of a particular 
type. I would say that the courts, when they look at these, and 
to some extent the agencies, have approached these on a case-
by-case basis so that they start from the proposition that 
settlements are pro-competitive if, in fact, they would allow 
the generic to enter prior to the expiration of the patent. And 
if in fact they don't, then they may be anticompetitive. So 
they pursue a case-by-case analysis which to us is more 
sensible than a per se ban.
    Mr. Scalise. Ms. Handy.
    Ms. Handy. Respectfully, Congressman, I don't know the 
answer, but I think whether or not it occurs, the issue is 
whether it is good for consumers.
    Mr. Scalise. And we will get into that later in the 
questioning. Thanks. Mr. Hemphill.
    Mr. Hemphill. Yes, the litigation, the settlements, and the 
proposed fix are all industry specific and unusual.
    Mr. Scalise. Unusual. Thank you. Mr. Rosch?
    Mr. Rosch. That is correct.
    Mr. Scalise. All right. Well, thank you.
    Mr. Rosch. But the----
    Mr. Scalise. First round. Well, let me ask Mr. Rosch and 
then----
    Mr. Rosch. As has been pointed out, however, Congressman, 
this industry is very unusual as well.
    Mr. Scalise. I am sure, and many are in their own rights. 
Many industries are. According to your reports on settlements, 
there have been over 50 settlements filed with the FTC in the 
last three years. Your testimony, I think, said a large number 
of them have side agreements, yet of those 50, the FTC has not 
filed legal challenges against any of them. And private 
plaintiffs have brought suits against only two of them. Why has 
the FTC not challenged any of those settlements?
    Mr. Rosch. It is quite simple, Congressman. We are trying 
to pick those settlements which we think are more pernicious 
and we think we can win. We want to win one of these cases 
because we feel that we are not only the guardians of consumers 
in this fight but also the guardians of you folks who enacted 
Hatch-Waxman.
    Mr. Scalise. I guess that means you don't feel you could 
have won the other ones that have been filed.
    Mr. Rosch. No, I don't mean to leave that impression. What 
I do mean to leave is the impression that the ones that we have 
challenged, we think, are the ones that are most obviously 
pernicious to consumers and most----
    Mr. Scalise. But obviously you make a calculated decision 
then if you don't--you only bring a suit if you feel that you 
can win.
    Mr. Rosch. No, that is not necessarily----
    Mr. Scalise. But that is what you just said.
    Mr. Rosch. If we had unlimited resources, we would probably 
be challenging all of them, but we don't.
    Mr. Scalise. Well, the same is the case with the generic 
company that brings a case to court as well. They don't have 
unlimited resources either, but obviously they feel they have 
merit. And that is why they bring the case, and then this bill 
would remove their ability to settle. Several settlements, 
including those involving Prozac and Tamoxifen have saved 
consumers and taxpayers billions of dollars. Looking back, do 
you believe such settlements were anticompetitive merely 
because they contained some type of settlement or reverse 
payment as you call it?
    Mr. Rosch. Do I think that Tamoxifen and----
    Mr. Scalise. Well, do you feel that those settlements were 
anticompetitive? They were legal. They would be illegal under 
this bill, yet they did save consumers billions of dollars. So 
how do you justify trying to take away that ability to save 
consumers billions of dollars, as has been the case in past 
settlements?
    Mr. Rosch. We certainly thought Tamoifen was a bad 
settlement. We thought that was an anticompetitive settlement, 
and we saw nothing, no data whatever, that would suggest to us 
that it could save consumers billions of dollars.
    Mr. Scalise. Mr. Whitehouse--I know I am running out of 
time--experts have testified that collateral agreements, side 
business deals like these licenses or co-promotion agreements 
on products unrelated to the patented product in dispute can 
help the litigants in the patent suit bridge the gap and reach 
a settlement on patent litigation. Have you experienced that? 
You have taken some of these cases before.
    Mr. Whitehouse. Yes, absolutely. That is crucial to the 
point that we have made in our testimony is that the ability to 
reach these settlements and bring these products to market 
sooner in cases that we must not forget we could have lost. I 
mean everybody sort of assumes if we didn't settle, we would 
have won. It is very important to remember that something else 
could have happened. We could have lost, and the consumers 
would not have any benefit until the expiration of the patent. 
And so the opportunity to come up with these alternative or 
additional terms that enable the parties to bridge their 
different perceptions of the case bring about a settlement that 
on average and typically will bring these products to market 
sooner to the benefit of consumers.
    Mr. Scalise. I see I am out of time. I yield back.
    Mr. Rush. Chair now recognizes Dr. Gingrey for 5 minutes.
    Mr. Gingrey. Mr. Chairman, thank you very much, and direct 
my question to Commissioner Rosch. Commissioner Rosch, I think 
you have been very forthright in your response to the questions 
throughout the hearing. Having said that, I guess you are 
anticipating I am fixing to blast you.
    Mr. Rosch. Yes.
    Mr. Gingrey. Not really but----
    Mr. Rosch. I call it piling on.
    Mr. Gingrey. Yes.
    Mr. Rosch. That is fine.
    Mr. Gingrey. But in a number of ways, I do find your 
testimony to be counterintuitive. You say that the reverse 
payment settlements negatively impact consumers by delaying 
entry of generic drugs to the market. Based on the testimony of 
the other witnesses, many times these reverse payment 
settlements, they actually allow the patent holding company and 
the generic company to negotiate terms by which the generic can 
begin being marketed before the expiration of the patent. 
Presumably because of the unique nature of patent law in this 
area, the settlements actually help consumers, it would seem to 
me.
    But what then is anticompetitive or anti-consumer about 
this kind of settlement? And before you respond to that, a 
quick second. I think it was Mr. Radanovich that was asking you 
about the question about side deals, and you may have talked 
about other consideration in a settlement not including reverse 
payments.
    Mr. Rosch. Payment of dollars, correct.
    Mr. Gingrey. Yes, but this bill, as I understand it, would 
prohibit any of that, not just dollar payments, reverse 
payments, but any other side deals. So if this bill passes, 
then what incentive would the brand name company have to 
settle? Certainly it would appear none whatsoever to negotiate 
with the generics. So two questions, and go ahead.
    Mr. Rosch. OK, I think you are correct about the bill. As I 
read it, it would indeed go to side deals as well as to direct 
payments of money. As I said before, that doesn't really 
trouble me because our staff has taken a look at these 
agreements, including side deals, and they have concluded that, 
except in a very small number of instances, those side deals 
are anti-consumer and they are anticompetitive.
    And incidentally, Congressman, there is nothing at all 
unique about banning this kind of deal within the context of a 
settlement. The United States Supreme Court said that an 
anticompetitive aspect of a settlement agreement could be 
struck down as per se illegal many, many years ago in the 
Singer case. So this is not brand new.
    But let me get to sort of the first part of your question. 
Why, I ask myself, if indeed the effect of a reverse payment 
settlement would be to stifle entry, early entry, to delay 
early entry, why are these deals occurring? We are seeing them. 
Why is the brand willing to pay, as I say, millions of dollars 
in these settlements? And I would suggest to you that the 
reason is to delay entry because the brand is enjoying patent 
monopoly profits and prices. It is kind of as simple as that.
    Now, should we be litigating these cases on a case-by-case 
basis? I would suggest to you that we should not. There is 
already in the bill sort of a safety net if you will in our 
rulemaking authority. If we find that some of these deals 
shouldn't--that we shouldn't be challenging them on a case-by-
case basis, we can carve those out as a safe harbor.
    Mr. Gingrey. Commissioner, reclaim my time, and I am down 
to 45 seconds because this is going to segue----
    Mr. Rosch. I didn't mean to----
    Mr. Gingrey. No, I appreciate your response. Segue into my 
question that I wanted to ask Ms. Bieri and Mr. Whitehouse. As 
representatives of PhRMA and the generic drug companies 
respectively, you know through practical implementation that 
both the FTC and the Department of Justice already had the 
ability to challenge any settlements that--and I think that is 
what the commissioner was about to say--that are 
anticompetitive and thus harm consumers.
    If the blanket ban on settlements, and H.R. 1706 is 
implemented, what incentive do your respective industries have 
to settle patent litigation out of court? And how would that 
affect consumers?
    Ms. Bieri. Thank you. I will begin by saying that I think 
because litigation is risky and expensive, I think there would 
still be incentives for companies to try to settle patent 
litigation even if H.R. 1706 were to pass. Unfortunately the 
options for them to do so are what would be very limited. And 
so you would be left in a situation where the brand and the 
generic company would be only able to negotiate over the date 
of entry for the generic.
    This is the heart of the patent dispute and obviously the 
parties are going to have very different views on that point. 
And so in many of these cases we think it would be unable to 
reach an agreement, and the case would then have to proceed to 
litigation. And recent statistics show that in most of those 
cases, at least the majority, the brand company would 
ultimately be able to defend its patents. And so generic entry 
would be delayed.
    Mr. Gingrey. And, Mr. Whitehouse--Mr. Chairman, if you 
would bear with me, if Mr. Whitehouse can respond to that 
question as well.
    Mr. Whitehouse. Yes, Congressman. And the important point 
to focus upon here is that if you make it harder to settle, you 
are going to reduce the incentive to bring these cases in the 
first place. And the whole point of Hatch-Waxman was to 
precipitate litigation over doubtful patents and bring generic 
products to market sooner, if you diminish in any way the 
incentive in the generic companies to initiate those 
litigations, which is an inevitable consequence of making it 
harder to settle them, that is inherently anti-consumer and 
undesirable. And that is why we are opposed to this mechanism.
    Mr. Rush. The chair initially offered that we would go into 
a second round of questioning, but there is a vote on the 
floor, and in light of this fact, the chair wants to call this 
subcommittee hearing to an adjournment. But before he does 
that, he wants to make sure that the witnesses recognize the 
fact that we are indebted to you so deeply because of your--the 
investment of your time into this matter. You have really shed 
some tremendous light on this issue, and we will be referring 
to your statements more so in time for the duration of this 
legislative process on this particular matter.
    I just want to also alert you that we ask that you should 
be prepared to receive and respond to written questions 
submitted by members of the subcommittee, and I want for the 
record to remain open for 10 days to receive additional 
statements.
    And the final matter is that the ranking member of the 
subcommittee, Mr. Radanovich, has an opening statement that he 
wants to place into the record, and with hearing no objection, 
it is so ordered.
    [The information was unavailable at the time of printing.]
    Mr. Rush. This subcommittee is now adjourned. Thank you 
very much.
    [Whereupon, at 1:20 p.m., the subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]

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