    [Senate Hearing 114-854]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 114-854

                             SUDDEN PRICE SPIKES IN
                         OFF-PATENT DRUGS: PERSPECTIVES
                              FROM THE FRONT LINES

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

                                    HEARING

                                   BEFORE THE

                           SPECIAL COMMITTEE ON AGING

                              UNITED STATES SENATE

                        ONE HUNDRED FOURTEENTH CONGRESS

                                 FIRST SESSION
                                   __________

                                 WASHINGTON, DC
                                   __________

                                DECEMBER 9, 2015
                                   __________

                               Serial No. 114-16

             Printed for the use of the Special Committee on Aging

                      [GRAPHIC NOT AVAILABLE IN TIFF FORMAT]

            Available via the World Wide Web: http://www.govinfo.gov

                                  ___________

                        U.S. GOVERNMENT PUBLISHING OFFICE

    48-531 PDF                WASHINGTON : 2022

                           SPECIAL COMMITTEE ON AGING

                       SUSAN M. COLLINS, Maine, Chairman

    ORRIN G. HATCH, Utah                 CLAIRE McCASKILL, Missouri
    MARK KIRK, Illinois                  BILL NELSON, Florida
    JEFF FLAKE, Arizona                  ROBERT P. CASEY, JR., Pennsylvania
    TIM SCOTT, South Carolina            SHELDON WHITEHOUSE, Rhode Island
    BOB CORKER, Tennessee                KIRSTEN E. GILLIBRAND, New York
    DEAN HELLER, Nevada                  RICHARD BLUMENTHAL, Connecticut
    TOM COTTON, Arkansas                 JOE DONNELLY, Indiana
    DAVID PERDUE, Georgia                ELIZABETH WARREN, Massachusetts
    THOM TILLIS, North Carolina          TIM KAINE, Virginia
    BEN SASSE, Nebraska
                                  ----------
                   Priscilla Hanley, Majority Staff Director
                     Derron Parks, Minority Staff Director

                             C  O  N  T  E  N  T  S

                                  ----------

                                                                       Page

    Opening Statement of Senator Susan M. Collins, Chairman..........     1
    Opening Statement of Senator Claire McCaskill, Ranking Member....     3

                               PANEL OF WITNESSES

    Erin R. Fox, Pharm.D., Director, Drug Information Service,
      University of Utah Health Care and Adjunct Associate Professor,
      University of Utah College of Pharmacy, Department of
      Pharmacotherapy, Salt Lake City, Utah..........................     6
    David W. Kimberlin, M.D., Professor and Vice Chair for Clinical
      and Translational Research; Co-Director, Division of Pediatric
      Infectious Diseases, Department of Pediatrics, University of
      Alabama, Birmingham, Alabama...................................     8
    Gerard Anderson, Ph.D., Professor, Health Policy and Management,
      Medicine, and International Health, Johns Hopkins University,
      Baltimore, Maryland............................................     9
    Mark Merritt, President and Chief Executive Officer,
      Pharmaceutical Care Management Association, Washington, D.C....    11

                                    APPENDIX
                          Prepared Witness Statements

    Erin R. Fox, Pharm.D., Director, Drug Information Service,
      University of Utah Health Care and Adjunct Associate Professor,
      University of Utah College of Pharmacy, Department of
      Pharmacotherapy, Salt Lake City, Utah..........................    39
    David W. Kimberlin, M.D., Professor and Vice Chair for Clinical
      and Translational Research; Co-Director, Division of Pediatric
      Infectious Diseases, Department of Pediatrics, University of
      Alabama, Birmingham, Alabama...................................    46
    Gerard Anderson, Ph.D., Professor, Health Policy and Management,
      Medicine, and International Health, Johns Hopkins University,
      Baltimore, Maryland............................................    51
    Mark Merritt, President and Chief Executive Officer,
      Pharmaceutical Care Management Association, Washington, D.C....    59

                             SUDDEN PRICE SPIKES IN
                         OFF-PATENT DRUGS: PERSPECTIVES
                              FROM THE FRONT LINES

                                  ----------

                          WEDNESDAY, DECEMBER 9, 2015

                                           U.S. Senate,
                                    Special Committee on Aging,
                                                        Washington, DC.
        The Committee met, pursuant to notice, at 2:29 p.m., Room
    G50, Dirksen Senate Office Building, Hon. Susan Collins,
    Chairman of the Committee, presiding.
        Present: Senators Collins, Cotton, Perdue, Tillis,
    McCaskill, Whitehouse, Blumenthal, Donnelly, Warren, and Kaine.

                      OPENING STATEMENT OF SENATOR
                       SUSAN M. COLLINS, CHAIRMAN

        The Chairman. The Committee will come to order. Good
    afternoon. Before I begin my formal comments this afternoon, I
    want to recognize that this is the last hearing for the
    Committee on Aging Staff Director Priscilla Hanley. Priscilla
    and I have worked together for literally decades as our paths
    first crossed when we were both working for Senator Bill Cohen
    of Maine. When I was elected in 1996, Priscilla was one of the
    first people, if not the first person, to whom I turned and
    asked her to come and work with me, so 19 years after that, she
    has decided, for reasons I cannot understand, that she would
    like to retire from the Senate, so I just wanted to thank
    Priscilla for her leadership, friendship, and hard-work and
    commitment to good Government and good policy all these many
    years.
        [Applause.]
        Senator Donnelly. David, it is not for you.
        The Chairman. Today is the first hearing in this
    Committee's bipartisan investigation into the sudden and
    dramatic price increases charged by certain pharmaceutical
    companies for off-patent prescription drugs that they have
    acquired.
        Prescription drugs are vital to the health and well-being
    of all Americans, especially our Nation's seniors, 90 percent
    of whom take at least one prescription drug in any given month.
    For many Americans, access to prescription drugs is not only
    critical to their quality of life, but can literally be a
    matter of life and death.
        Developing these medicines is usually an enormously time-
    consuming, expensive, and uncertain process. It often takes
    more than a decade to bring a new drug from the laboratory to
    the market, and estimates of the average costs of doing so
    range from hundreds of millions of dollars to upwards of $5
    billion.
        Moreover, the chance that a new drug will succeed is highly
    uncertain. Studies show that for drugs that do reach the
    clinical trial stage, just one in seven will ultimately receive
    FDA approval. If we want new medicines to reach consumers, the
    companies that invest in the research and development and take
    the risks necessary to bring these drugs to market must see a
    fair return on their investment.
        At the same time, we cannot be blind to the cost of these
    drugs to individuals, health systems, and the Federal
    Government. Americans are expected to spend more than $328
    billion on prescription drugs this year alone, of this amount,
    individuals will pay about $50 billion out-of-pocket. The
    Federal Government will pick up another $110 billion in
    payments through Medicare, Medicaid, the Veterans' Affairs
    programs, and others.
        For many decades, Federal policy has sought to strike the
    right balance between maintaining the incentives needed to
    promote innovation and the development of new drugs and keeping
    medicines affordable. One way that we have done so is by
    granting pharmaceutical companies exclusive rights through our
    patent system to sell the prescription drugs that they have
    developed for approximately 20 years.
        When these patents expire, other companies can seek
    approval to offer generic versions of these drugs. This
    increases competition and helps to put downward pressure on
    prices. That balance that we have struck never anticipated
    companies acquiring off-patent drugs and then jacking up their
    prices to enormous heights and doing so, as one executive
    essentially put it, because I can, but that is exactly what we
    have seen in recent months. Four companies in particular have
    come to our attention and are the focus of our investigation so
    far, Turing Pharmaceuticals, Valeant Pharmaceuticals, Retrophin
    Incorporated, and Rodelis Theraputics. Each of these companies
    has hiked the price of off-patent drugs they recently acquired
    by 20, 30 or even 40 times the prior price, at time putting
    these medicines out of reach for patients and for the doctors
    who treat them.
        Keep in mind that these companies did not bear the R&D
    costs of developing these drugs. In fact, some of these
    companies appear to do comparatively little or no R&D or
    expensive clinical trials for prescription medicines. The
    information this Committee has received in the initial phase of
    our investigation is striking. For example, doctors at the
    Cleveland Clinic have told us that the price hikes on just two
    drugs supplied to Valeant increased that health system's total
    drug costs by $8.6 million.
        Erin Fox, who will testify today, has seen a similar impact
    on the University of Utah Health System. As the director of the
    hospital's Drug Information Service, she has told us that these
    price increases have required her to literally put a critical
    drug under lock and key, pulling it from crash carts where it
    has long been available for emergency use.
        In North Carolina, doctors for a child diagnosed with
    toxoplasmosis were unable to get Daraprim, the drug needed to
    treat that disease, because Turing Pharmaceuticals had hiked
    its price by more than 40 times its original cost, forcing the
    local pharmacy to drop it from its inventory. As a consequence,
    the child had to be treated with an alternative that had not
    been rigorously tested in children.
        The Turing and Valeant price spikes have been egregious,
    but these are not the only two companies to acquire the rights
    to off-patent brand name drugs and then jack up the price.
    Rodelis did the same with a medicine that has been on the
    market since 1955 that is used to treat drug resistant
    tuberculosis, and Retrophin did the same thing with a drug used
    to treat serious kidney disease.
        What explains these dramatic price increases? Well, that is
    what our investigation is intended to answer, but one factor
    each of these drugs has in common is that they are needed by a
    relatively small number of people compared to so-called
    blockbuster drugs that are taken by millions of Americans.
    Another factor is that they have been off-patent for many
    years, and yet, there is currently no generic competition,
    likely because of the relatively small number of patients who
    require these drugs.
        This investigation is not about the legitimate incentives
    to create, test, and market new drugs. After the patent on a
    prescription drug expires, however, our system traditionally
    has relied upon competition to bring more affordable generics
    to the marketplace, but when competition breaks down, when
    there has been a market failure, as may be the case here, the
    discipline that keeps prices in check and protects consumers
    can disappear.
        Let me close by noting that some of the companies that have
    been the focus of our investigation look more like hedge funds
    than they do traditional pharmaceutical companies. As one
    industry expert I recently spoke with put it, these companies
    are to ethical pharmaceutical companies as the loan shark is to
    a bank. One goal of our bipartisan investigation is to
    understand why such companies can impose egregious price
    increases on off-patent drugs that they have acquired and what
    policies we should consider to counter this disturbing
    practice.
        I look forward to hearing the testimony of our Ranking
    Member, Senator McCaskill, who has been extremely active in
    this investigation, as well as the testimony of our witnesses.
        Senator McCaskill.

                     OPENING STATEMENT OF SENATOR
                    CLAIRE McCASKILL, RANKING MEMBER

        Senator McCaskill. Thank you, Chairman Collins. You know, I
    have to think that my biggest challenge today is to not lose my
    temper. The facts that are underlying this hearing are so
    egregious that it is hard not to get emotional about it, but I
    know that our witnesses that are here today are here to help us
    understand why this has occurred and hopefully, enhance our
    ability to look at this problem in a reasonable and rational
    way that protects patients in this country.
        Daraprim, a drug originally developed to treat malaria, is
    the medicine doctors use today to treat toxoplasmosis, a
    disease that affects about 22 percent of the U.S. population.
    While the majority of toxoplasmosis cases do not require
    treatment, the disease can be deadly for babies and those with
    compromised immune systems like patients with cancer or HIV.
        Daraprim was developed in the 1950's and has no current
    patent or other exclusivity protections. In 2005, a patient
    infected with toxoplasmosis could expect to spend $70 on a
    typical course of Daraprim. In 2010, a company named
    CorePharma, which was later acquired by Impax, purchased the
    rights to Daraprim and raised the cost of a course of treatment
    to roughly $900. That was in 2010. In August of this year, the
    rights of Daraprim were once again sold, this time to Turing
    Pharmaceuticals. The new price tag for the average course of
    treatment, $50,000, an increase of more than 6,000 percent
    since 2005. Nothing changed but the label.
        At the time, Martin Shkreli, Chief Executive Officer of
    Turing, declared the new price his company set for Daraprim
    both reasonable and appropriate. More recently at a Forbes
    health care summit last Thursday, Mr. Shkreli lamented that he
    should have raised the price of Daraprim even more. I noticed
    in the morning paper this is the same guy who thought it was a
    great idea to pay millions of dollars for the only existing
    album of the Wu-Tang Clan.
        An almost 1,200 percent increase in 2010 was bad enough,
    but an additional 5,500 percent price increase on a 62-year-old
    drug shocks the conscience, and this type of price increase, in
    the absence of any improvements to the drug whatsoever, is not
    an isolated incident. In July, I had the chance at a hearing to
    question another pharmaceutical executive, Howard Schiller of
    Valeant Pharmaceuticals, about an 820 percent price increase
    his company took in February 2015 after acquiring another off-
    patent drug called Isuprel which is used to treat cardiac
    arrest in a hospital setting.
        When I asked Mr. Schiller at that hearing, in a different
    committee, how Valeant could justify such an increase on
    Isuprel, a drug to which no improvements had been made post-
    acquisition, Mr. Schiller could only tell me that Valeant had
    conducted a, "complex analysis" and had concluded that the drug
    was previously, "significantly underpriced." He further
    asserted that such a price increase on a Valeant drug was an
    anomaly.
        Following that hearing, I submitted questions for the
    record to Mr. Schiller requesting additional information from
    Valeant regarding the company's decision to hike the price of
    Isuprel so dramatically, as well as information on Valeant's
    312 percent increase on another off-patent drug called
    Nitropress, which is also used to treat cardiac arrest. In
    response, Valeant refused to answer my questions and instead
    downplayed my concerns, noting that Isuprel and Nitropress are
    only two Valeant drugs selected out of a portfolio of hundreds
    of medications.
        Unfortunately, over the past several months, we have
    learned that Isuprel and Nitropress are not an anomaly, as
    Valeant claimed. To the contrary, dramatic price hikes are
    seemingly business as usual for Valeant. This year alone,
    Valeant raised prices on its brand name drugs an average of 66
    percent, about five times as much as its closest industry
    peers. At the same time, as of October 2015, Valeant's research
    and development expenditures for the past 12 months were
    reportedly equal to only three percent of its sales.
        The American pharmaceutical industry leads the world in
    innovation and we rightly prize a system that allows discovery
    of medicines that save and improve lives, but it is imperative
    that we find out if that system is being taken advantage of by
    companies or individuals that seek deep profits while
    contributing little or nothing to advances in medical treatment
    through aggressive research and development. To me, there is a
    line at which these huge price increases on prescription drugs
    go from rewarding innovation to price gouging.
        In particular, when these price hikes occur without any
    therapeutic change or improvement to the drug, it raised
    troubling questions about whether companies like Turing and
    Valeant are taking advantage of the patients who depend on
    their products for survival. These price increases come at a
    time when Americans are more worried than ever about the
    affordability of prescription drugs, and what Daraprim,
    Isuprel, Nitropress and the other drugs in our investigation
    have in common is they do not have market competition from
    generic alternatives. There is no market.
        Therefore, they were ripe for companies and even investors
    and hedge funds to swoop in and snatch them up and charge
    whatever price they want regardless of the people who
    desperately rely on these medications every day, so even though
    these drugs no longer have a legal monopoly granted by a patent
    under our law, they end up having a defacto monopoly in the
    marketplace because if you need them, there is only one place
    you can get them. This is a market failure and when there is a
    market failure, the Government has a role in addressing it.
        I hope that this hearing and the future hearings we are
    planning can start the process of developing solutions to
    safeguard the health care system, protect the taxpayer, and
    ensure that patients have access to life-saving medications at
    a reasonable price. I also hope to make clear that this is not
    just an individual pocketbook issue for Americans. If our
    health care system is being cheated, that has consequences for
    all Americans in the form of higher premiums and higher costs
    to Medicare and Medicaid.
        We cannot sustain and improve these valuable programs if
    some bad actors are taking advantage of the system and
    extracting billions of dollars without adding value to the
    lives of patients or the system overall. This sort of action
    hurts the entire American economy.
        Finally, I want to note that I am lucky to be paired with
    Susan Collins on this investigation. First of all, she calms me
    down, and the second of all, in my experience, quality
    congressional work is far easier to do in a cooperative and
    bipartisan fashion. When the price of your medication
    quadruples, you do not care whether the folks looking into it
    are Republicans or Democrats. You just want somebody to fight
    for you. The best answers are likely to be found when many
    people are asking questions, and Senator Collins and I both
    think that this is an area that deserves more scrutiny from
    Congress, the media, and the American public.
        You can try to obfuscate, rationalize, or hide the truth,
    but if this is just greed, we have a duty to figure out how to
    protect patients who need this medicine. I thank the witnesses
    for being here today and I look forward to hearing their
    testimony.
        The Chairman. Thank you very much, Senator, and now we will
    turn to our panel of witnesses. First, we will hear from Dr.
    Erin Fox, the Director of Drug Information at the University of
    Utah Health Care. We will then hear from Dr. David Kimberlin,
    Professor and Vice Chair for Clinical and Translational
    Research and Co-Director of the Division of Pediatric
    Infectious Diseases at the University of Alabama at Birmingham.
    The University has also provided documents under subpoena about
    a case that Dr. Kimberlin will discuss which I am noting for
    the record, and we are protecting all of the patient
    identification information in those documents.
        Next we will hear from Dr. Gerard Anderson, a Professor of
    Health Policy and Management, Medicine and International Health
    at Johns Hopkins University, and finally, we will hear from
    Mark Merritt, the President and Chief Executive Officer of the
    Pharmaceutical Care Management Association.
        I thank you all for joining us at this initial hearing and
    we are going to start with Dr. Fox.

             STATEMENT OF ERIN R. FOX, PHARM.D., DIRECTOR,

              DRUG INFORMATION SERVICE, UNIVERSITY OF UTAH

              HEALTH CARE AND ADJUNCT ASSOCIATE PROFESSOR,

           UNIVERSITY OF UTAH COLLEGE OF PHARMACY, DEPARTMENT

                OF PHARMACOTHERAPY, SALT LAKE CITY, UTAH

        Dr. Fox. Good afternoon and thank you, Chairman Collins,
    Ranking Member McCaskill, and distinguished members of the
    Committee for holding this hearing. I am here today to provide
    perspectives on how sudden price increases of off-patent drugs
    have impacted our health care system. University of Utah Health
    Care is the only academic medical center in Utah and it is also
    in a region that comprises about 10 percent of the continental
    United States, including Idaho, Wyoming, Montana, much of
    Nevada, and western Colorado.
        In 2013, University of Utah Health Care paid approximately
    $50 for a dose of Nitroprusside and $50 for a dose of
    Isoproterenol. Those were sold by Hospira to us then. Marathon
    purchased those products from Hospira in 2014 and raised the
    price of a vial of Nitroprusside to about $215, and for two
    ampules of Isoproterenol to make one dose to about $440.
        In 2015, Valeant purchased these drugs from Marathon and
    prices again increased. Nitroprusside went from about $215 to
    $650, and Isoproterenol, for a dose of two ampules, went from
    about $440 to about $2,700. When we became aware of these new
    price increases, we calculated the potential impact to our
    pharmacy budget and we discovered that if we continued to
    purchase the same amount of each drug, no increases, just the
    same amount, it would cost our organization over $1.6 million
    for just two medications compared to what we had paid for the
    previous year, and actually, that $1.6 billion was just for
    Isoproterenol. It would be almost $300,000 for Nitroprusside.
        Recognizing that this type of arbitrary and unpredictable
    inflation is not sustainable for our hospital, especially when
    we receive capitated payments for most of our patients, we
    began to explore how we could minimize costs without impacting
    patient care. One of the key strategies that we used was to
    remove Isuprel from our approximate 100 crash carts. We store
    these throughout our system to make sure that essential
    emergency medications are available in case of a critical
    emergency, a cardiac arrest, or sometimes called a code.
        Our physicians reported that during a code, this is not the
    first medication they use. They do not always use this
    medication, but it can be very important in managing a critical
    emergency when a patient's heart rate is extremely low. With
    that in mind, our physicians agreed that we could store
    Isoproterenol just in our pharmacy backup boxes and take it out
    of the crash carts. In this way, physicians could still have
    access to the medication, albeit at some delay, but we would
    not face the full burden of $1.6 million for just one
    medication.
        We have not found a way to drastically reduce the use of
    Nitropress. For now, we are working on educating our physicians
    on potential alternatives, when they are available, but in many
    cases, Nitropress use is very clinically appropriate. Our
    physicians are extraordinarily frustrated by having to make
    decisions about whether to use these critically important but
    extremely expensive medications in emergency situations,
    especially when they have been using these medications for
    years.
        Why are there no generic competitors? I believe the reason
    is the same as the reason behind the ongoing drug shortages
    problem, namely, the supply chain for generic injectable, off-
    patent drugs is incredibly fragile. Most of the injections used
    in a hospital every day are manufactured by fewer than three
    companies and those companies are currently at capacity. Many
    of those companies are also still working through quality and
    manufacturing problems that have slowed or even halted
    production.
        Our organization works hard to provide the highest quality
    of care at the lowest cost. For the sixth year in a row,
    University of Utah Health Care was recognized for quality
    leadership and our organization continues to be ranked in the
    top ten of all academic medical centers. In order to provide
    this high-quality care at the lowest cost, our leadership team
    is tasked with closely reviewing our budget. We work hard to
    predict potential inflation for medications and assess new
    medications coming to the market. What we cannot predict are
    older, off-patent medications with exponential price increases.
    Our ability to provide high quality clinical care to our
    patients suffers with unpredictable costs.
        Thank you once again for holding this hearing and for the
    opportunity to appear before you to discuss how unpredictable
    price increases of off-patent drugs have impacted University of
    Utah Health Care. I look forward to learning more about
    potential solutions to this problem and offer my service if I
    can be of any assistance. I welcome any questions you may have.
        The Chairman. Thank you for your testimony.
        Dr. Kimberlin.

            STATEMENT OF DAVID W. KIMBERLIN, M.D., PROFESSOR

             AND VICE CHAIR FOR CLINICAL AND TRANSLATIONAL

              RESEARCH; CO-DIRECTOR, DIVISION OF PEDIATRIC

             INFECTIOUS DISEASES, DEPARTMENT OF PEDIATRICS,

               UNIVERSITY OF ALABAMA, BIRMINGHAM, ALABAMA

        Dr. Kimberlin. Madam Chair and members of the Committee,
    thank you for the opportunity to address the impact of recent
    changes in drug pricing for pediatric and adult health care.
    For the past 21 years, I have been a pediatric infectious
    diseases physician at the University of Alabama at Birmingham
    and Children's of Alabama where I serve as Co-Director of
    Pediatric Infectious Diseases Division and Vice Chair of
    Clinical and Translational Research for the Department of
    Pediatrics.
        UAB is one of the top academic medical centers in the
    country, ranking in the top 25 of all institutions and the top
    ten of public institutions in NIH funding. That UAB Department
    of Pediatrics practices in Children's of Alabama which is the
    third-largest children's hospital in the country in physical
    size and is consistently among the top pediatric programs
    nationally.
        I am the immediate past President of the Pediatric
    Infectious Diseases Society which is dedicated to the treatment
    and control of infectious diseases affecting children. I am
    also the editor of the American Academy of Pediatrics Red Book
    which is often referred to as the Bible describing infectious
    diseases for pediatricians across the country and throughout
    the world. The views I am expressing in this testimony are my
    own.
        I personally treat and provide advice to physicians caring
    for babies and immuno-compromised patients who are infected
    with Toxoplasma gondii. This is a parasitic infection that
    causes life-threatening disease in patients whose immune
    systems are not strong. Specifically, when pregnant women
    acquire Toxoplasma infections, they can transmit the parasite
    to their fetus resulting in brain damage, blindness, deafness,
    and even death.
        The Toxoplasma organism is carried by cats, and this is the
    reason that pregnant women are not supposed to change the
    litter box. Up to 4,000 babies are born each year in the United
    States with congenital toxoplasmosis. Toxoplasma gondii also
    can cause life-threatening brain and vision threatening eye
    infections in children and adults with weakened immune systems
    including cancer patients and patients with HIV.
        The good news is that this infection can be successfully
    treated with a combination of two very old and well understood
    drugs, Pyrimethamine and Sulfadiazine. However, recently the
    price of Pyrimethamine has increased more than 5,000 percent
    and restrictions have been placed on where physicians can
    obtain it for their patients. I am very concerned that these
    changes will directly put the lives of patients with this very
    severe infection at risk.
        I first became aware of the sale of Pyrimethamine to Turing
    Pharmaceuticals in late August. A pregnant woman at my
    institution had just been diagnosed with toxoplasmosis. Knowing
    that the baby would be delivered in early September, my team
    and I began seeking access to Pyrimethamine and Sulfadiazine
    for the baby. The barriers that we were facing, though, were
    twofold. One, the massively increased cost of the drug
    following Turing's purchase, and two, the fact that a liquid
    compounded Pyrimethamine could not be acquired in the
    outpatient setting through Turing's distribution system using a
    specialty pharmacy.
        The reason that the pharmacy issue was a challenge was
    because babies cannot swallow pills, but Pyrimethamine is only
    available in 25 milligram tablets. In order to get the medicine
    into a liquid formulation, the tablets must be compounded in a
    pharmacy. Prior to the Turing purchase of Pyrimethamine, the
    outpatient community pharmacy that we use in Birmingham could
    acquire the drug from the previous manufacturer. However, our
    pharmacy cannot acquire the drug from the distribution system
    set up by Turing due to restrictions in the sale of medications
    from one pharmacy to another which threatened to block our
    access to a liquid formulation that we would need.
        When we contacted the specialty pharmacy, we had concerns
    about its experience in doing--with compounding with
    Pyrimethamine, so we were really facing a situation where we
    might not be able to acquire the drug in a form that the baby
    could take.
        The other challenge that we faced was the price of
    Pyrimethamine. Initially, my patient required four tablets to
    make a 1-month supply of Pyrimethamine. Prior to Turing's
    purchase of the drug, this would cost approximately $54 per
    month. After Turing's purchase of Pyrimethamine, the cost is no
    less than $3,000 per month and probably more. Babies with
    congenital toxoplasmosis need to be treated for 12 months and
    the dose of the drug increases as the baby grows, so the total
    treatment cost before the Turing purchase was approximately
    $1,200, but now is estimated to be no less than $69,000 and
    probably significantly more.
        Looked at from another angle, the total 12-month cost
    before the Turing purchase now would buy less than 2 weeks of
    Pyrimethamine at the new price. For HIV-infected adults with
    Toxoplasma brain and eye disease who require two or three
    tablets per day, the total cost now would approach no less than
    $500,000; whereas, in mid-summer before the price increase, it
    would have been approximately $8,500.
        The key issue for this Committee, from my perspective, is
    the order of magnitude of this change. On behalf of babies
    being devastated by this infection, their mothers and families,
    I thank you for your consideration of these challenges. Babies'
    lives literally hang in the balance here and it is encouraging
    to me to see the Senate take up this important issue.
        The Chairman. Thank you, Doctor.
        Dr. Anderson.

                  STATEMENT OF GERARD ANDERSON, PH.D.,

                PROFESSOR, HEALTH POLICY AND MANAGEMENT,

               MEDICINE, AND INTERNATIONAL HEALTH, JOHNS

                HOPKINS UNIVERSITY, BALTIMORE, MARYLAND

        Dr. Anderson. Thank you, Senator Collins, McCaskill, and
    members of the Aging Committee for this opportunity to testify
    this afternoon. I too share in your outrage. In 2007, I had the
    opportunity of testifying before this Committee about the
    millions of Americans who have chronic conditions, and
    specifically the 15 percent of Medicare beneficiaries who have
    five or more chronic conditions and take an average of 50
    different prescriptions during the year. I did not have quite
    as many attendees at that last hearing.
        The problem today, of course, is that high drug prices
    significantly restrict access to drugs leading to much poorer
    outcomes. For many years, the generic drug market worked
    reasonably well. Senator Hatch, a member of this Committee, did
    a wonderful job in developing the Hatch-Waxman act, although at
    Johns Hopkins for this year we are calling it the Waxman-Hatch
    Act because Congressman Waxman is working with us at Johns
    Hopkins.
        Central to the whole issue of generic drugs is competition.
    The empirical studies suggest that every time a new drug
    company enters a particular market, the price goes down by
    about 20 or 25 percent. The first indication we had of problems
    in the generic market were not prices, they were shortages.
    Hospitals were having serious problems filling prescriptions,
    and you heard Erin Fox talk about this already.
        The second manifestation that we are getting now is the
    higher prices for certain generic drugs. These two are very
    much related. They have the same root cause, a lack of
    competition in certain parts of the generic market. It is
    really hard to remember a recent month where we were not
    hearing about generic companies consolidating. These mergers
    and consolidations have resulted in less price competition,
    higher prices, and shortages for certain generic drugs. Without
    competition, companies like Turing can raise their prices
    several thousand percent simply overnight, so I am glad that
    you are taking a look at ways to increase competition.
        What I would like to do is take this opportunity to suggest
    two different ways that the Committee should consider. The
    first one is to have the Department of Health and Human
    Services establish priority reviews for plate times when there
    is no competition. In the brand space, what you have are
    priority reviews when there is a very clinical compelling
    argument for a brand company, but what we do not have is
    something for the generic market where there is not
    particularly--it is not a clinical compelling market, it is
    really an economic argument when they have raised the prices.
        You could also make it much easier to do compounding where
    there is competition. It is not an FDA thing, but we could do
    compounding, and finally, as a last resort, we can take a look
    at going to Canada and other places to import these drugs
    because they are being sold at much lower rates in other
    countries.
        My second option is you have got to take a very close look
    at how pricing works in the generic market, not just for these
    drugs but broadly. The generic pricing market begins with a
    generic company announcing a price that no one pays. It is much
    higher than anybody pays and this behavior is peculiar to an
    industry. I mean, why would your grocery store announce a price
    that is ten times what anybody else would, in fact, pay?
        The reason why they do this is the way most insurers
    reimburse pharmacies. The insurers are trying to reimburse the
    pharmacy the cost of acquiring the drug and then they pay them
    a dispensing fee in addition to that. The problem is, the
    insurers do not often know what the price that the pharmacy is,
    in fact, paying because there are confidential agreements
    between what the generic company is paying and the pharmacy,
    and although insurers work very hard to get this information,
    it is really difficult.
        I was working with the State of Wisconsin, their Medicaid
    program, and they had to go to veterinarians to find out what
    some prices of certain drugs were because they could not find
    it out any other way. The difference between what the insurer
    pays the pharmacy for the drug and what the pharmacy pays the
    manufacturer for that same drug in the industry is known as
    marketing the spread. The greater the spread, the greater the
    profit to the pharmacy, the more likely the pharmacy is going
    to buy the drug from that particular drug company.
        I have actually seen internal drug memos where they
    essentially lower the price to the consumer and they raise the
    announced price at the same time, so they are trying to
    increase the spread in order to get their drug on the
    particular pharmacy's market.
        The obvious question is why do issuers not ask them and
    some do, but insurers are under no legal obligation to tell an
    insurer what the prices are. Fortunately, there is a data base
    that allows you to do this, that reflects the true price. It is
    called the average manufacturer's price and it is already being
    calculated by the drug companies. It is already being sent to
    the states' Medicaid programs because that is determined how
    they get the rebates, so we know the actual prices that are
    there.
        The problem is that Federal law prohibits the states from
    using these AMPs from being publicly available, so if this AMP
    information was publicly available, we would know the actual
    prices that are paid. We would have true price transparency.
    Thank you very much.
        The Chairman. Thank you.
        Mr. Merritt.

                STATEMENT OF MARK MERRITT, PRESIDENT AND

              CHIEF EXECUTIVE OFFICER, PHARMACEUTICAL CARE

                MANAGEMENT ASSOCIATION, WASHINGTON, D.C.

        Mr. Merritt. Thank you, Senators Collins, McCaskill, the
    other members of the Committee. I appreciate you having me here
    today in addressing this important issue. Just by way of
    introduction, my name is Mark Merritt. I am President of the
    Pharmaceutical Care Management Association, the PBM industry's
    trade group, pharmacy benefit managers who administer drug
    benefits for 250 million Americans to employers, unions, State
    employee programs, TRICARE, FEHBP, probably most notably in
    this town anyway, and across America, Medicare Part D. We work
    for those who pay for the drugs and the patients they serve and
    use our marketplace presence and expertise to negotiate lower
    costs from drug companies, drug stores, and others in the
    supply chain.
        Like you, we are concerned about the recent spikes in some
    drugs and the dubious practices that surround them. The most
    egregious of these, as has been mentioned, are surrounding the
    older off-patent brands that have no competitors and serve
    small populations. Manufacturers typically avoid these markets
    because they are unprofitable and the FDA approval process can
    take three years or more to complete. As a result, the pricing
    power of the one remaining drug in that space becomes so strong
    that some hedge funds and others see a chance to acquire the
    drug, resell it at ridiculously high prices, as we all know.
        Although this is, fortunately, limited to a small number of
    drugs and a relatively small population, and it is not
    indicative of the overall marketplace, it is a real problem, we
    take it seriously, and we are confronting it in real time. In
    many ways, it is a corollary of the drug shortage issue that
    was mentioned earlier that has been building up for several
    years, and here is the basic problem. What most people would
    see as a public health challenge, some see as a chance to
    exploit the lack of competition to profiteer. Some companies
    require the rights to resell these drugs, use abusive pharmacy
    and distribution practices in order to subvert formularies and
    other cost-saving tools that encourage people to start
    treatment with generics or even lower-cost brands instead of
    the most expensive product.
        Some of these pharmacies also use fake names, alternative
    pharmacy licenses, and other sketchy tactics to distribute
    their products. In other cases where generic competitors are
    available, some companies use pharmacies that operate with
    bait-and-switch co-pay assistance programs to lure patients to
    start on the most expensive brand by offering to pay their co-
    pay, say $50, which is sometimes the only price people know,
    but they do not pay the cost of the actual drug which may be
    another $700 or $800 or $1,000, depends on what the drug is.
        Those costs, hundreds, thousands, however much, are then
    put on the back of the payers which, of course, leads to higher
    premiums, and the same people who got the co-pay discount or
    co-pay assistance end up paying for it through higher premiums,
    and these co-pay assistance programs are banned in Federal
    programs under the Anti-Kickback statute, but they flourish in
    the commercial marketplace.
        Now that I have outlined the problem and everybody else
    here has as well, the key is what can we do about it. Well,
    obviously, there is a role for the private sector and the
    Government, policymakers as well. First, PBMs are working to
    combat this in real time. A good example is with the Turing
    drug Daraprim whose prices, as we all know, have skyrocketed.
    Well, we have not found a silver bullet. We did recently find a
    compounding pharmacy, one of our companies did, and now many of
    those are companies who are using these. It sells the same drug
    for one dollar and that now is providing access to thousands of
    people around the country, or hundreds in this case.
        We are also working to root out corrupt pharmacies and
    distributors like Philidor from our networks, essentially
    putting them out of business, and in that mode, I would like to
    thank policymakers for resisting so-called any willing pharmacy
    mandates that would force payers like us to include bad actors
    like Philidor in our pharmacy networks, whether they are good,
    bad or indifferent.
        There is also an important role for Government. We all know
    FDA needs to approve generics faster. There is a 3-year
    backlog, 4,000 drugs there. That needs to be speeded up. I
    think we all know that, and I agree with the notion that there
    should be a special fast-track for ANDAs that are trying to
    compete with these off-patent products. We need to get them in
    the marketplace, we need incentives to do that for them because
    businesswise, it is not going to make sense. If we wait for
    that to happen, it is not going to happen, and also in the
    interim, you might want to consider creating sort of a watch
    list of every off-patent drug that faces no competition in its
    class, just simply to let the owners of these products, the
    owners of these rights who have the rights to these products,
    and the potential hedge fund acquirers that are watching, we
    know these are the targeted products. There is going to be a
    lot of scrutiny on it and that they are going to have to deal
    with that.
        The hedge funds have these lists; the Government might as
    well, too, so thank you for your time. I look forward to any
    questions you may have.
        The Chairman. Thank you very much. Dr. Fox, I want to start
    with you and I want to ask you some questions about the
    justifications, and I put that word in quote, or excuses that
    manufacturers that are the subject of our investigation have
    given us to justify these extraordinarily high price hikes.
    Some of the manufacturers have claimed that these dramatic
    price increases are necessary to offset their research and
    development costs.
        Well, I happen to know that in the case of Daraprim, that
    it has been around since the 1950's and Turing was founded in
    2015, this year, so it is hard for me to see how there could
    possibly be a link between the R&D costs of developing Daraprim
    and the price increases that Turing imposed, but talk to me
    about the Valeant drugs that you mentioned, Isuprel and
    Nitropress.
        Dr. Fox. Thank you for that question. That is a really good
    question, and I think one thing that is important to think
    about is, we have a system of contract manufacturing in the
    United States where one company makes a product or a medicine
    and another company just puts their sticker on it, and that is
    exactly what we have going on right now with those two
    products. Isuprel and Nitropress are not manufactured by
    Valeant. Valeant is not reinvesting in a factory. They are not
    spending that money to have a high-quality manufacturing
    system. They are simply putting their sticker on somebody
    else's manufactured item.
        The Chairman. That is very helpful. When I saw that some of
    the drugs were older than the current company owning them, it
    seemed hard to see how there possibly could be a link to the
    R&D side. You gave us really extraordinary statistics on how
    much the University of Utah pays per vial of Isuprel. You said
    in 2013 it was $50 per vial; 2014 it was $440, which was a huge
    increase, but then when Valeant bought the drug in 2013, it
    increased the price to the current rate of, I think you said,
    $2,700 per vial.
        Let me ask you an obvious question here. Did anything
    change about the drug during that short period of time? Was it
    compounded differently? Were improvements made? Or is it the
    exact same drug that you paid a lot less for just two years
    ago?
        Dr. Fox. To my knowledge, the only thing that has changed
    is the label.
        The Chairman. Thank you. Dr. Kimberlin, prior to Turing's
    acquisition of Daraprim, and I know you used the scientific
    name for Daraprim when you were giving your testimony, did you
    ever have any problems with promptly acquiring Daraprim at an
    affordable price?
        Dr. Kimberlin. No, Senator. Pyrimethamine, or Daraprim, the
    brand name for it, were readily available and we never had any
    issues when we had an urgent situation of a patient needing to
    start on it prior to this past summer. This is a new
    phenomenon.
        The Chairman. How important is it that you be able to
    administer this drug promptly when it is needed?
        Dr. Kimberlin. It is very important. The Toxoplasma
    parasite destroys brain tissue, it destroys eye tissue, it can
    cause, obviously, massive problems if your immune system cannot
    keep it in check or if a baby is infected in utero, and the
    sooner that treatment is started, the better the outcome, so
    this is something--it may not be truly ours in terms of
    urgency, but certainly within a day or two you want to be able
    to start treatment instead of having delays while you are
    working through these newly identified problems that we have
    been having over the last handful of months.
        The Chairman. You have been a real leader in infectious
    diseases. You have headed an association, so you have had
    contact with other physicians. Are they experiencing similar
    problems?
        Dr. Kimberlin. Yes, they are. The HIV Medical Association,
    the Infectious Diseases Society of America, the Pediatric
    Infectious Diseases Society have all, working together as
    sister societies, queried members of those three groups and
    asked, Are you having issues getting access to Pyrimethamine?
    We have had more than 30 responses from at least 21 states. I
    suspect that if not more than that now, there will be virtually
    every State in the union affected by this. At least 30-plus
    cases where people could not, in a timely fashion, get
    Pyrimethamine given the new constraints on access as well as
    the cost issues.
        The Chairman. Dr. Fox, when the price of the two drugs made
    by Valeant that your hospital uses went sky high, did you
    contact the company to try to negotiate since you, as a
    hospital, might have some purchasing power that you could
    bring?
        Dr. Fox. Yes, I did, and each time I called, I was referred
    back to my wholesaler for the purchase price. Even after I saw
    that Reuters had reported that Valeant might be decreasing the
    price, that prompted me to call again, and each time the answer
    was, talk to your distributor.
        The Chairman. So no luck at all?
        Dr. Fox. No luck.
        The Chairman. Thank you. I have many more questions, but we
    have many members here today.
        Senator McCaskill.
        Senator McCaskill. Dr. Fox, you will get a kick out of the
    fact that when I asked Mr. Schiller at that hearing about the
    cost of this drug he said, Well, patients do not pay back, the
    hospital pay that, as if there was some magic fairy that took
    care of the costs that land on your bottom line. I think he is
    a sophisticated enough CEO, at least I would hope so, to
    understand that when you have those costs, they must be passed
    on and recovered. I am not aware of anybody who pays for that
    other than the taxpayers of this country or the patients of
    your hospitals. Are you aware of anyone else who would be
    paying for it?
        Dr. Fox. I am not aware.
        Senator McCaskill. Okay. I am confused a little bit about
    this restricting distribution to thwart generics. I want to
    come back to you, Dr. Kimberlin, on the constraints on access
    as it relates to the form of the drugs you could obtain for
    babies, but Mr. Merritt, or Dr. Anderson, I do not understand.
    Are they trying to keep this away from companies that can
    figure out how to make the generic to compete with them?
        Mr. Merritt. Yes.
        Senator McCaskill. How are they doing that? Do I need to
    figure out a doctor to write me a script for one of these and
    get a bunch of them and give them to somebody so they can start
    getting after Mr. Wu-Tang?
        Mr. Merritt. You could try. I think it goes like this.
    There a lot of pharmacies that work, and sometimes an
    individual pharmacy, a small limited set of pharmacies, that
    work on the very high potent specialty products where there is
    a reason to have a good limited distribution network where they
    can collect data and so forth.
        What Turing appears to have done is made a contract with
    Walgreens to be the exclusive distributor and not allow any
    sales to those who would test the drug for, you know, to try to
    get a generic approval. In other words, you can only get it at
    Walgreens, if I understand it, through a prescription, so it is
    kind of a weird--I have never heard of that contract provision
    before, but it does seem as though it was an active effort to
    keep a generic from coming onto the market to compete.
        Senator McCaskill. Are you able to--you talked about
    compounding. Are you able to work on compounding to provide
    some competition to these drugs and does that--are there the
    same barriers on compounding that there is on getting a generic
    approved?
        Mr. Merritt. No, because a compounder can just put out the
    drug, and this is not our optimal way of doing things. This was
    just an egregious situation that we needed to deal with quickly
    because, as we have heard, people are getting hurt, and so we
    found a way to get a compound pharmacy to sell it for one
    dollar and, you know, that is what we do. We have 60,000
    pharmacies in our network. We know what they all can do. We saw
    an opportunity here and took it to help us get us through this
    particular situation, but for compounding, they do not have all
    the restrictions that FDA does. It would be great if they did
    go through all that, but for this particular situation, we
    simply monitored the sites, monitored how these drugs were
    being produced for safety and so forth, for high standards, and
    then made the decision to go forth.
        Senator McCaskill. It would be important for this
    Committee, through this investigation, to ferret out from--did
    you say it was Walgreens that got this contract?
        Mr. Merritt. I believe so, yes.
        Senator McCaskill. It would seem to me that it would be
    important for us to determine whether or not this restriction
    has something to do with the safety of prescribing the drug and
    making sure someone has education about how properly to dose
    the drug or access the drug versus, ah-health, hedge fund finds
    drug to buy, ah-health, hedge fund figures out way to keep
    generics from being developed by artificially limiting access
    through one of these specialty pharmacies. In other words, the
    reason that Walgreens would be used here is not for safety of
    the patient, but rather, to artificially keep the price of that
    drug very high.
        Mr. Merritt. Yes, and in Walgreens' case, I cannot speak
    for them.
        Senator McCaskill. I do not mean to be throwing Walgreens
    under the bus here. It could be anybody.
        Mr. Merritt. Yes.
        Senator McCaskill. Really, if the company that is using his
    specialty pharmacy, it typically would be because of the unique
    nature of the dosage or the application that you would need as
    a specialty pharmacy. What you are saying is it appears that
    these specialty pharmacies are being used for other purposes.
        Mr. Merritt. Yes. Some of these manufacturers have either
    created pharmacies, illegitimate pharmacies, to serve as----
        Senator McCaskill. As part of their company.
        Mr. Merritt [continuing]. as part of their company to
    distribute the drugs, and here is what a real pharmacy does,
    for instance, if there is a generic available. You come in with
    an expensive brand, there is a big co-pay on it, the pharmacist
    says, Well, there is a generic alternative. Some of these
    pharmacies will not do it. They will just try to push you right
    to the brand and then they will use the drug company's
    patient's assistance program to cover any co-pay and then dump
    the rest of the cost on the insurer or the hospital.
        I do not want to speak for Walgreens. I am sure they were
    not as familiar with Turing as we all are right now, but from
    what we understand so far and from the patterns we can see from
    Turing, it looks like the kind of thing that they would do to
    just try to prevent the competition from happening.
        Senator McCaskill. I have lots more questions, too. Thank
    you.
        The Chairman. Senator Tillis.
        Senator Tillis. Thank you, Chairman Collins. I have to go
    off to another meeting. I wanted to come over here just to
    underscore my own interest and concern with some of the
    practices that we have seen out there, so I will just ask a
    quick question for you all to respond to before I have to
    leave.
        When we are considering certain policies to deal with sort
    of the hedge fund folks play, where I think they are very
    clearly abusive, what advice would you give us in terms of
    making sure that we do not overreact and then sweep in a number
    of good players? I do not believe that we should cast all
    pharmaceutical companies in the same light. There are egregious
    practices. We need to have a thoughtful discussion about what,
    if anything, we should do about it. What advice would you give
    this panel as we are going through to be careful about
    unintended consequences of overreaction? And we will start from
    right to left.
        Mr. Merritt.
        Mr. Merritt. Well, I think we have to--this is a limited
    problem, it is a real problem. It is not indicative of normal
    manufacturer processes. We work with all the drug manufacturers
    or work with billions of prescriptions. This is an anomaly. It
    is a new development and it is just kind of vulture business
    practices that we have not seen before.
        I think the key is, I think we open ourselves up to these
    kinds of hedge fund folks when there is no competition, when we
    slow down competition through the FDA process, when we do not
    provide enough incentives to see it as a national priority to
    take care of these small pockets of drugs, small population
    drugs that do not have any competition.
        I see this as a problem limited particularly to that and
    solutions in that regard about getting competing generics to
    market faster to help bring these guys some discipline. One
    other thing I might add is, the key is we do not want to bring
    the price down if there is a Turing doing this. We want to pay
    zero. We want to have people go to another drug that is just as
    good and pay them a small part instead of paying Turing, you
    know, some discount of what they are already doing, but you
    cannot do that unless there is a competitor in the marketplace.
    Thank you.
        Senator Tillis. Thank you. Mr. Anderson or Dr. Anderson.
        Dr. Anderson. Either one is fine, so essentially, when
    there is competition, basically the system works. When there is
    no competition, the system does not work, so we can tell you
    which drugs have no competition. There is a number of ways to
    do it. The FDA knows those and the Medicare and Medicaid
    programs know those, too, so we know what the targets are that
    the hedge funds are going to use to identify those specific
    drugs, and then we have got to figure out what is the
    alternative to that.
        One of them, as I said in my testimony, is to try to give
    an expedited review by the FDA because there is this backlog,
    but that is going to take 6 months to a year to get that done,
    so in the interim, you do more compounding, you allow
    compounding to occur, and if we cannot figure out that or they
    bought the compounding companies, then we might have to take a
    look at getting some of these drugs in a very narrow market in
    from Canada or someplace else.
        Senator Tillis. Thank you. Dr. Kimberlin.
        Dr. Kimberlin. Senator, my comfort with policy issues is a
    bit more limited. I will say this, though. In terms of thinking
    about different policy options, what I really would encourage
    is that the patient, the individual child in my case, or adult
    with my adult colleagues who were physicians taking care of
    these patients, that those patients remain, first and foremost,
    in everyone's sight. We need access to these drugs. We need the
    distribution system to work and we need to have the price not
    be a barrier or an impediment to trying to get these drugs to
    the patients who so desperately need them.
        Senator Tillis. Thank you. Dr. Fox.
        Dr. Fox. I am not going to offer you advice on your policy
    areas, but I would ask that you keep one thing in mind and that
    would be around transparency. Right now our labeling laws do
    not require the disclosure of which company manufactured a
    product versus which company is labeling it, and so, purchasers
    actually have no way to even avoid purchasing from a company
    they would like to avoid because of that lack of transparency.
        Senator Tillis. Thank you. Thank you, Madam Chair.
        The Chairman. Thank you. Senator Warren.
        Senator Warren. Thank you, Madam Chair. The system is
    rigged in a lot of ways and this Committee is right to open an
    investigation into drug practices, and we are very lucky to
    have Chairwoman Collins and Senator McCaskill leading us on
    this.
        This is a no-competition problem. Drug manufacturers that
    are the sole source of a medicine and patients who are
    desperate for these medicines create market failures and a
    recipe for disaster here. In fact, the Senate Finance Committee
    published the findings of their bipartisan investigation of
    Sovaldi, the $84,000 Hepatitis C drug, and found that the
    manufacturer set the price solely to jack up profits with no
    regard for whether families would be able to afford it or
    whether patients would be denied a cure because they could not
    afford it, so it is time for Government to step in on the side
    of the American people to stop this extortion.
        Dr. Anderson, I think we need to think broadly here.
    Rapidly increasing generic prices are the initial focus of this
    investigation and they are obviously a very serious problem,
    but the majority of drug costs are not for generics. We have
    seen price spikes across the industry, but more of the cost is
    for brand name drugs, so what can Congress do? Let us focus
    first to make sure that patients are protected from high drug
    costs and high co-pays for both brands and generics.
        Dr. Anderson. You mentioned that whole issue Sovaldi and
    that is for Hepatitis C patients. There is about three million
    of them in the United States. Only about 300,000 people with
    Hepatitis C are right now getting that drugs because of the
    high cost, so it is a problem of access in the brand area and
    it is the problem that we are talking about today in the
    generic area.
        Senator Warren. We have a cure and 90 percent of the people
    who have this disease cannot to get cured because they cannot
    afford the drug?
        Dr. Anderson. Well, there is a public side and a private
    side. On the public side is Medicaid, the VA, DoD are having
    trouble paying for the drug because the drug budgets is getting
    exceeded. In the Medicare program, it went from--just taking
    care of this it went from $300 million to $4.5 billion
    essentially overnight.
        Senator Warren. All right, so you were just going to give
    us a couple of ways in which we can make sure that patients
    stay protected here, things that we can look at.
        Dr. Anderson. Well, essentially, we have got a whole series
    of ways and it is very different for generics and brands, so in
    the generic area, it is very important to have competition, and
    we have talked about that a lot. In the brand area, it is very
    important to take a look at the patents, when they are
    appropriate, when they are not appropriate, and essentially how
    long they should be.
        Because right now--the patent law was originally
    established during the George Washington administration and it
    was originally for 14 years for two indentured servants. Now it
    is 17 and 20 years and it is not reflective of the investment
    that a drug company may make. Sometimes they invest a lot,
    sometimes they invest a little. We need to support the
    investments and we might want to figure out how to do that
    differently.
        Senator Warren. Mr. Merritt, would do you like to add to
    that, please?
        Mr. Merritt. Well, I think Government has a real important
    role here. Obviously, it is a huge purchaser and we think the
    role is more in ensuring competition, making sure that there
    are safe products on the market, that people are getting the
    products they think they are getting, insurance that they think
    they are getting and so forth, and on the purchasing side, I
    think the challenge that we see is that it is such a
    complicated, fast-moving market. Just like what we did with
    Imprimis, this little pharmacy, compounding pharmacy, we found
    out kind of in real-time and helped drop the price of the
    product significantly, and the challenge--I mean, if you look
    at price controls or price inventions, direct negotiation,
    there are kind of two ways to do it.
        One you could kind of peg it to the market prices and then
    get a discount on it, which does save money for public
    programs, will increase costs elsewhere, or you can just kind
    of try to make the price kind of drug by drug, and the danger
    there, ironically, is you could end up overpaying as we saw in
    this Turing thing. I know it is a temporary solution, but if a
    drug is $5,000 a day, it might seem good to charge $2,500
    tomorrow or maybe even 100, but little did anybody know you
    could get the same drug basically for one dollar, and so, I
    think we all want to find ways to reduce costs and there are
    ways Government can help.
        Senator Warren. You know, no matter how the drug industry
    sugarcoats it, America pays the highest drug prices in the
    world, and it is not impossible to fix and it does not have to
    be partisan. Just last month, Congress passed legislation that
    created a new Medicaid inflation rate for generic drugs, which
    will require drug companies to rebate money when their prices
    go up faster than the inflation rate, so we have got a lot that
    we could be doing here.
        I want to talk more about other countries. The Chairwoman
    rightly is trying to hold us to our five minutes, so I will
    just say thank you very much. You have laid out good steps,
    things we need to investigate, and again, thank you for
    starting this.
        The Chairman. Thank you. Senator Casey.
        Senator Casey. Madam Chair, thank you for the hearing. We
    are grateful for the work that you are doing and Ranking Member
    McCaskill. I wanted to start, Dr. Anderson, with you with
    regard to the question of a priority review pathway, and I know
    you point to that as a potential remedy here. We are talking
    about a priority review pathway to speed the approval of new
    generic competitors.
        One of the basic defects here, or potential defects or
    problems, is there is no or very limited economic incentives.
    In light of that, but in light of the issue you raised with
    regard to this pathway, how would you think that if we could
    achieve that, that this kind of a pathway would help on the
    question of competition?
        Dr. Anderson. Well, essentially what you have is sometimes
    a two or a 3-year waiting period to get the drug to market, so
    I am a generic company. I want to engage in competition and I
    have to wait two or three years. That is a long time. I do not
    know who else is going to enter the market at the same time, so
    there is a lot of uncertainty. Am I going to spend the million
    dollars or so to try to go through the FDA to do it?
        If I can find out very quickly that I am going to get
    approval, because it is pretty routine to get approval, then I
    am much more likely to engage in competition here, so saying to
    somebody, if there is no competition and you want to have a
    drug, go for it and we will get it through the system very
    quickly. That, I think, would go a fairly long way to solving
    this problem.
        Senator Casey. I appreciate that. Senator Isakson and I
    worked on a priority review strategy for another context, in
    the context of young children, and we are working now to extend
    that. We are going to be running out of time by mid-March, so
    we are working on that together, but I appreciate that as a
    potential remedy.
        The other question I have for you, Doctor, was one of the
    fundamental questions here is the issue of consolidation among
    generic manufacturers. Describe for us, and I know you have to
    a certain extent already, but describe for us what you think is
    driving that.
        Dr. Anderson. Well, essentially, if you have fewer
    companies, you have less competition, so if I buy up all of my
    competitors, I do not have any competition, so what you are
    seeing is the number one company buying the number three
    company and the number two company buying the number five
    company, so the whole system has been predicated on having a
    lot of reasonably small companies all wanting to get a share of
    the market, and when these large companies buy them up, that
    does not happen any longer.
        Senator Casey. Dr. Fox, I was going to ask you, do you have
    anything to add to that question about what is driving it?
        Dr. Fox. I completely agree with Dr. Anderson. I would
    suggest, when you are thinking about priority approvals, FDA
    does not have a rubric right now for approving manufacturers
    based on quality, and that would be something good because when
    FDA spends their time to approve a product from a company and
    then a year later has to do an import ban because that
    manufacturer really was not doing a good job after all, it
    wastes time in the system.
        Senator Casey. I appreciate that. Dr. Kimberlin, I was
    going to ask you, in the remaining time I have, about
    compounding which is, for a lot of Americans, rather new. I
    guess I would ask you as a physician, when would you choose a
    compound versus a--I should say a compound version of a drug
    rather than FDA approved drug. How would you assess that
    determination?
        Dr. Kimberlin. Well, there are a couple of different ways
    that we are using the term, I think, this afternoon. The way
    that I used it in terms of this particular patient is simply
    taking a pill form and making it into a liquid form, so
    essentially you crush it up, you add some liquid flavoring, you
    get it suspended, and there are recipes or well-defined
    stability testing that has taken place with the Daraprim
    product for Pyrimethamine suspension preparation, so that is
    done in the situation I described simply from a practical
    standpoint. You cannot get a pill into a baby, and so you have
    to make it into a liquid that then can be measured up in a
    syringe and administered through the baby's mouth.
        Now, the other way that we are talking about it is to take
    a chemical, a powder, and put it into a capsule, and in this
    case with the Imprimis, it also is adding Leucovorin, which is
    a vitamin that is used to kind of offset some of the toxicities
    that can occur with Pyrimethamine, so it is a different kind of
    an approach, and it is not so much to get it into a liquid form
    as it is being done, as I understand it from Imprimis, but
    rather simply to get another product on the market.
        Senator Casey. I appreciate that. Thank you.
        The Chairman. Senator Donnelly.
        Senator Donnelly. Thank you, Madam Chair, and thank you so
    much for hosting this and having this hearing. I think it is
    critically important. This is a tale of two worlds, it seems in
    many ways. Some pharmaceutical companies spend billions to do
    research and try and find cures for Alzheimer's, cancer,
    diabetes, and now we are looking at companies that have done
    little or no R&D, act as a hedge fund, and have essentially
    jacked up their prices holding patients and health care
    hostage.
        We need to break loose from the stranglehold, not only for
    our patients, but for our patients and the costs they pay and
    for the costs the whole system pays. Mr. Merritt, one of the
    questions I wanted to ask you about was in regards to
    compounding as to when can you determine that this can be used
    and cannot be used.
        For instance, with Valeant you have Nitroprusside and
    Isoproterenol. Can those be compounded as well? How do you make
    that decision? When your organization decides to take a stand
    like you did with the Turing drug, all of a sudden, the game is
    over, so how do we make it game over on all these other
    products?
        Mr. Merritt. Well, sure. I am not a pharmacist so I do not
    know the exact answer, but I do know there are lots of checks
    you can do, lots of audits you can do to make sure that best
    practices are being used in these pharmacies. Again, the ideal
    is to go all the way through FDA approval, but right now that
    is not an option in some cases, so I am not sure if a doctor or
    anybody else would have any specifics on that, but there are
    ways to ensure quality practices are taking place.
        Senator Donnelly. Do you have, as an organization, like a
    game plan to push back against this? More compounding?
    Obviously, we are going to try to work with the FDA to help
    change the way this moves forward, but do you have a game plan
    where you look and you go, Here are the top ten abusers, here
    are the top ten abused products, we have got to change this?
    Then it also sends a message to anybody who is sitting in an
    office right now thinking about doing this on another off-
    patent product.
        Mr. Merritt. Sure. On that particular issue, we are looking
    into a lot of different options. That is an option that worked
    right now, but in and of itself, it sent a strong message to
    the rest of these guys that this is not a free ride, just to
    raise prices as much as you want. Just like this hearing today
    is doing the same thing, and that is why I mentioned the
    importance of getting some sort of list or registry that you
    keep of these off-patent brands that are going to be subject to
    this kind of acquisition.
        What we will do is go case-by-case. If we find competition
    in the market, if we see that there are drugs in the same class
    that can be prescribed, as I said, we will look into that, but
    it will really be a case-by-case thing. This is really a pretty
    new development that we have had to deal with rapidly and we
    are really on the front end of it.
        Senator Donnelly. I think that across the country, there
    was a loud cheer when we read the article that you had found a
    compounder who would do it for a dollar. People looked and
    said, "You know, I am going to have a few bucks in my pocket
    instead of being completely broke, and for the insurers, for
    our own Government programs, the same thing." The real-world
    consequences of this, not only on the financial end, but Dr.
    Fox, you had mentioned this, how does this impact your patients
    and your operations, that a patient looks and says, This week I
    can afford it, next week I get sick?
        Dr. Fox. Well, when patients cannot afford their
    medications or when hospitals cannot afford to stock
    medications, it basically creates a drug shortage, and so
    patients may not be adherent to their medicines. They may not
    get the full benefit if they cannot afford to continue taking
    their therapy, and hospitals have to treat these high prices
    exactly as they do a drug shortage and think about rationing,
    think about stocking less, and think about the huge hours of
    manpower it takes to manage those situations.
        Senator Donnelly. Dr. Anderson, do you know if any of the
    drugs currently under review for generic approval would create
    a competitor for some of these single source drugs?
        Dr. Anderson. We would not have access to that because all
    that is confidential within the FDA, who has got the--who is
    applying and who is not applying, so we would not actually know
    that.
        Senator Donnelly. Do you have any suggestions as to how we
    can better expedite the review for generics with the FDA? You
    have given some. Especially on those where there is little
    competition.
        Dr. Anderson. I think that is essentially--going through
    the process takes about six months to a year, but if you have
    to wait for two years, it is two-and-a-half years, so you are
    not going to enter the process if you know you are going to
    have to wait two-and-a-half years and you are going to enter
    the process if you have to wait six months, so having a
    priority review makes it much more likely for a company to
    decide that they are going to be a competitor, because what you
    do not know is how many other companies are going to enter the
    market in that period of time. It is great to be the second
    competitor. It is not so good to be the third, fourth, and
    fifth competitor, so you want to make sure that your
    competition, when the price was $13 and they raised it to
    $5,000 or $3,000, you jump in, you do not want to it when it
    was $13 and now it is going to be 10.
        Senator Donnelly. Well, we want to continue to work with
    all of you because we have a responsibility to taxpayers to not
    pay $750 for a pill that should actually cost a dollar, and we
    have a responsibility to the people of this country that they
    can get the care they need to be able to stay in good health.
    Thank you very much for being here.
        The Chairman. Thank you. Senator Kaine.
        Senator Kaine. Thank you, Madam Chair, and thank you all
    for this important testimony, so we are dealing with market
    failures and I am trying to kind to figure out the variety of
    market failures we are dealing with. Traditional market theory
    would be arms' length transaction between a disinterested buyer
    and seller with perfect information.
        It seems like maybe the first market failure that has
    driven this is some geniuses realized patients equal hostages.
    I mean, is that not kind of the sickening part of it, that it
    is not an arms' length transaction between a disinterested
    buyer and seller. It is people who are in these extreme
    conditions. They are hostages.
        I mean, they are not customers in the traditional market
    sense, and so some of this, the opening comments of both the
    Chair and Ranking Member kind of focused on a hedge fund
    mentality. We are not talking about health care here. We are
    talking about ransom to be paid by hostages, is what these
    folks are doing, which is shocking.
        It strikes me that a second market failure is this
    informational transparency. I cannot remember which it was, it
    was either Dr. Fox or Dr. Kimberlin, you talked about, oh, no,
    wait, who cares about this? The patient does not pay the whole
    cost. There is a cost, but we do have a system, the health care
    system, that has not been transparent on the price side. I
    noticed that, Dr. Fox, some of your testimony, written
    testimony, you cite efforts that your hospital system is made
    to increase transparency so that staffers are more aware of the
    higher costs associated with services and medications.
        Now, we wish the costs were not so high, but nevertheless,
    you guys are trying to make folks more aware. Have you seen a
    change of behavior in physicians and in practices at the
    hospital, the more information that you provided, and are those
    changes sometimes kind of negative in the sense that you feel
    like patient care gets impacted?
        Dr. Fox. Absolutely. Our physicians were appalled. They
    were so frustrated to learn that these old medications that
    they had been using forever had just skyrocketed in price, and
    so they were very willing to sit down with us and think about
    solutions, how to keep the patients safe, and one of the ways
    was let us take this medicine out of the crash carts.
        A part of me wonders and kind of wants the entire kitchen
    sink available in a code and to have everything right there
    ready, but our physicians said, "You know what, this price, it
    is not worth it. You guys can bring it as a backup and it will
    be okay." We have not been doing this for that long so I do not
    have any data to see if any patients have been harmed. I am not
    aware of any, but it is concerning when we have to make changes
    based on cost alone.
        Senator Kaine. Well, price transparency is something that I
    am a big fan of across the entire system. Just trying to
    understand a little bit more about the way the business works,
    and this is for Mr. Merritt, I understand that insurance
    companies normally share a portion of the price burden of
    pharmaceuticals. How is the ratio of the insurance company to
    the constituent determined? How much of the cost is
    traditionally borne by the patient? How much of the burden
    falls on the PBM companies and is that consistent across drug
    categories or does it kind of vary?
        Mr. Merritt. Well, I think generally speaking, the
    employer, union, whoever we are representing will pay about
    two-thirds of the cost and the patients will pay the other
    third through premiums and cost-sharing, and of course, we will
    have higher cost-sharing on products where there is a less
    expensive competitor to try to encourage people to use that
    less expensive competitor, but we look at a whole basket of
    drugs. We do not look at just one particular drug. We look at
    what is this going to cost the employer, what is it going to
    cost the patient, and in terms of transparency, transparency is
    important, but it has to be the right kind of transparency. I
    think the best transparency is really what end price is and
    getting the competitors in there to show us that. For instance,
    with Turing, and Senator Collins asked, well, I guess there is
    no R&D here, I think one way to measure whether there is any
    R&D is if the drug is older than the founder of the company,
    there was no R&D. That is what we have in this case, but
    transparency, we know Turing's cost, they make no bones about
    R&D. They did nothing, but they are still charging it, so the
    question is what do you do. Going back to the doctor's point
    and the point I made, if you have even--if there was a law that
    put an expedited review for these particular products, even
    before the first review is approved, it would put this whole
    business practice out of business because nobody would want to
    get in the business where they knew a generic was coming online
    a year later.
        Senator Kaine. I want to follow-up, so if there was a law
    that said what, in the event of a price spike there would be an
    expedited review to be able to develop a competitor, or how
    would you set up the threshold in the law?
        Mr. Merritt. I would say for off-patent drugs that do not
    have any competition, there will be an expedited review at FDA.
        Senator Kaine. I see.
        Mr. Merritt. Then before that first review went through,
    that business practice would basically fold. There would be no
    point in it, because right now, they just see free rein and we
    have seen some of the responsible statements where people just
    see this as an arbitrage opportunity. They do not care. They
    are not health care people.
        Senator Kaine. The public health justification for the
    expedited review, it is off-patent so we know what it is in it,
    so you do not need the full review that you would need for a
    first-time drug.
        Mr. Merritt. No, and the good thing is, this does not get
    involved in any of the innovation challenges that we have about
    stifling innovation by lowering the patent years, although I do
    think there should be a lower patent year for biologics down to
    seven years which would improve access there, but this would
    only affect drugs where there is no R&D. I think most
    manufacturers--this is not common practice and I am not here to
    defend the manufacturers. We cross swords with them all the
    time, but they do not like this business either. This is not
    the way business is usually done, so for this kind of outlier,
    I think there would be support for something like that.
        Senator Kaine. Great, great. Thank you. Thanks, Madam
    Chair.
        The Chairman. Senator Whitehouse.
        Senator Whitehouse. Thank you, Chairman. Like I think a lot
    of Americans, I have been fuming at reading these stories about
    these price hikes and I am really grateful to you for joining
    with Senator McCaskill in leading this hearing. I think it is
    really important.
        I had written down the same word that Senator Kaine just
    used in reaction to listening to this testimony which was
    ransom. We have, it seems for starters, when you are dealing
    with health issues, it is really not just open consumer choice
    any longer. You really do have hostages and ransom. Second, you
    have got the somebody-else-is-paying situation which also fouls
    up this being a proper market decision.
        Third, you have got these pricing strategies that are
    designed not to meet competition because there is not any
    there, but to maximize the ransom for the maximum number of
    hostages you can let through, and then fourth, you have got the
    strange problem that you mentioned about the co-pays where the
    incumbent will reimburse the co-pay to the patient and sock the
    payer, the insurer, the Government, with the rest of it.
        It strikes me that that is not being done just out of a
    charitable spirit. That is being done--I am seeing smiles and
    nods. That is being done, it strikes me, as a way to deter
    competitors from entering because you have found a way to make
    every patient want to come to your product, so when you look at
    that whole thing, it seems to me that the solution that most of
    you are proposing is a challenging one, which is how does the
    Government against a really determined incumbent who is using
    every pricing strategy to defeat competition, create
    competition against their wishes when they win by defeating
    those efforts?
        It seems to me that once a finding is made that there is
    not competition for this drug, that there is some very old and
    established techniques that worked when the railroads were
    trying to crush American farmers, when the electric utilities
    could jack up rates because there was only one wire that you
    could afford to put out to the house, when Ma Bell still had
    you buy wire and you could not have competition over phones,
    you had simple price regulation, and the company came in and it
    proved its costs and it was entitled to recover 100 cents on
    the dollar of its costs and it made an argument about the kind
    of risks that it took and it brought in experts to say, Here is
    the rate of return suitable for our investment, and you would
    get your costs back and a return for your shareholders.
        It seems to me that if we were to go straight to that only
    where there has been a finding of non-competitiveness, that
    would take away the motivation for the hedge fund that is
    playing in this market and arbitraging this market, to continue
    to defeat competition. It is much simpler, it is really
    established, everybody gets it. There is still regulatory
    commissions all over the country, and it just seems to me that
    that is an easier way to get at the problem than trying to
    create competition against a powerful, focused, relentless,
    clever incumbent who has all the strategies of price
    manipulation to discourage somebody from taking that chance.
    Even if you make it a short FDA procedure, they still have to,
    at some point, come up against the hedge fund character who is
    manipulating all the levers to try to keep them out and that
    makes it a dangerous proposition.
        If you take away the incentive for the hedge fund
    arbitrager who is in there playing this game by saying, "You
    know, when you create your perfect world of monopoly and you
    can charge hostage prices, actually we are changing the rules
    of the game at that point." We know how to handle that. It is
    railroad regulation, it is utility regulation, it is phone
    regulation, it is simple, you know, cost and rate of return
    pricing.
        Dr. Anderson. What you have to recognize is that for most
    of these generic companies, the cost of production is pennies
    per pill, so essentially, you would get pennies per pill as a
    cost of production, and many of these companies are not even
    producing the generic drugs themselves. They are hiring
    somebody else to do it and it is done in a batch system, so it
    is a very different model for generic companies than for
    brands.
        Senator Whitehouse. Do you agree that this is an analogy to
    those traditional things, to when the railroads were first
    breaking farmers by charging them super prices, when the--
    actually, the oil companies bought some of the railroads so
    they could put their competition out of business by not letting
    them travel, the utilities. This is not new. The idea that you
    take advantage of monopoly power to raise prices is as old as
    market failure.
        Dr. Anderson. Absolutely and it is just----
        Senator Whitehouse. We have solved it before.
        Dr. Anderson. You can and it is very easy to do that and
    you could put out a list of drugs that there is no competition
    for, because we already know those drugs there is no
    competition for, so if you put up those lists and said
    something like those prices should be stable for the next five
    years, or something like that when there is no competition----
        Senator Whitehouse. There is competition and you let the
    market do its thing. I have gone over my time. I appreciate it,
    Chairman. Thank you so much.
        The Chairman. Thank you. Senator Cotton.
        Senator Cotton. Thank you. I want to build on Senator
    Whitehouse's points about monopoly power over pricing and also
    on market failure. I know in prior questions we addressed the
    question of compounding, instances where it has succeeded in
    breaking that monopoly power, instances where it has not. Is
    there anything Congress can do to create more of the former and
    less of the latter to make compounding for these often very
    small, small batch limited demand drugs available through
    compounding pharmacists all around the country?
        Mr. Merritt. It is an interesting question. We could look
    into that and get back to you, and again, this is a new
    development that we responded to quickly and aggressively.
    Typically we would not use compounders for this, although they
    play a very valuable role, and we would need to look and see
    whether this is an interim solution or something that has more
    potential, but we are still looking into all of that.
        Senator Cotton. You basically--if you, you want the FDA to
    approve these drugs because the compounding does not go through
    the same rigorous testing that the FDA puts the generic
    companies through, so it is, at best, a second-best solution,
    but it is a solution in an emergency.
        Dr. Kimberlin. I would just say that it is not a solution
    for everyone, so if we take the Pyrimethamine or Daraprim
    example, the babies that I treat, we still have to get a powder
    or a tablet into a liquid formulation. We do not know what the
    stability is with this new Imprimis, I think it is, compounded
    material. We do know what it is and we know how long it is
    stable with the Daraprim product, so we cannot simply just swap
    out what we are adding the liquid to to make it a liquid
    formulation in the case of treating little babies, so it can be
    more complex.
        Senator Cotton. Okay. Dr. Fox, do you want to add anything?
        Dr. Fox. Thank you. I would add that compounding is not
    perfect. Patients have been harmed by poorly compounded drugs,
    but it also serves a very important option for some patients,
    so it is definitely a balance. I definitely echo my colleague.
        Senator Cotton. I asked about Congress and what about FDA.
    Is there anything that FDA could do internally to say expedite
    the use of compounding pharmacies in these kinds of situations
    where you might have market failure?
        Dr. Anderson. Again, it could, but I think it is just
    better to have a generic drug in there, so what I talk about is
    expedited review and putting that at the top of the queue for
    the FDA when there is no competition, and that, I think, would
    be better and really gives you those clinical safeguards that
    you would like to have.
        Senator Cotton. I am glad you raised that because I wanted
    to return to the point you had made earlier about expedited
    review. What could Congress or the FDA, for that matter, do to
    accomplish what you are describing, to expedite the time for
    approval of these generic drugs which have often been on the
    market for a long time and have very limited demand so they
    might have not have the same kind of priority as companies, but
    if the regulatory process were simpler, it might move along
    faster.
        Dr. Anderson. Essentially, there is a queuing problem and
    essentially if the FDA is essentially given that authority or
    that responsibility to say that there is no competition for
    this drug, we are going to put you at the top of the list to do
    the expedited review, then we would have competition in six
    months, but we would have competition, which was better than
    two-and-a-half-years which would probably be today.
        Senator Cotton. That is the scale difference you are
    looking at then, six months versus, say, 30 months?
        Dr. Anderson. Correct.
        Senator Cotton. A pretty big difference. I would also like
    to touch on the point of pricing. One common claim you hear
    about pricing of drugs is the R&D costs that are built into
    them. I know there is some dispute about how much the R&D cost
    depends. There is a front-page story in the Wall Street Journal
    about it today. Some companies have been acquiring the rights
    to drugs.
        Is there an economic difference between, say, a big
    pharmaceutical company spending $100 million to develop a new
    drug and then those costs being discounted into the price they
    are going to charge versus a big pharmaceutical company buying
    a company at $100 million price because that is the net present
    value they expect from that?
        Mr. Merritt. Well, yes. I mean, I think, obviously, you
    want the R&D costs to be part of it, but I think from our
    perspective, industries who get the transparency and so forth,
    we do not care so much about the inputs. Everybody has a great
    reason why they should be able to charge whatever they want for
    the drug.
        What changes things, you say, that is great. Now we have a
    competitor in which every one of you gives us the best prices
    on the formulary and the other one is out. That is how you get
    prices down, and then we find that to be much more clarifying
    and effective than trying to kind of figure out the cost of
    certain inputs and then adding this or adding that because I
    just do not think it would work.
        I mean, if there is a competitor in the market and a drug
    that is doing the exact same thing as the risk of not being on
    the formulary, we do not say, "Here is how much to pay." We
    say, "Whoever gives in the best offer wins, the other one
    loses." That is how to get really deep discounts.
        Dr. Anderson. There is a new system. We are talking about
    generics, but in the brand side, there is the idea--normally
    Pfizer does the research themselves and their own R&D, but
    there are now companies out there that just buy companies that
    are almost ready and have gotten all through the FDA process.
    They buy the company and then they jack up the price there. On
    the brand side, there is something that you are going to have
    to pay attention to in that regard as well because they are
    doing the same thing and they are essentially the hedge funds
    of the brand side.
        Senator Cotton. Okay. My time has expired, but I want to
    thank the Chairman and the Ranking for calling this very
    important hearing.
        The Chairman. Thank you. Senator Blumenthal.
        Senator Blumenthal. Thanks. Let me begin where Senator
    Cotton ended and thank you for having this hearing. The subject
    at hand here has absolutely sweeping ramifications because we
    are talking not only about price spikes in some drugs, whose
    names we can barely pronounce and that are used for very
    narrowly felt or impacting diseases, but also the workhorse
    drugs that are used in surgical suites and operating rooms
    across the country and aesthetics that are in short supply,
    Narcan, a life-saving drug, literally saves lives every day in
    the State of Connecticut when overdoses occur, now widely
    administered by police and firefighters.
        I was absolutely astonished to learn that the prices of
    Narcan have gone up by 50, 100, 150 percent so that local
    taxpayers are paying that much more, but also those drugs are
    in short supply. Very often, hospitals do a kind of triage, not
    medical triage, but drug market triage, exchanging drugs with
    each other, literally sending them to each other, and we are
    talking here not about the Turing drug or about some of the
    others that have been mentioned in the memo, Daraprim,
    Nitropress, Isuprel, they are not those esoteric drugs.
        They are the real workhorse medicines of modern hospitals
    and health care and they are in short supply even though they
    are generic, they are manufactured, not necessarily by one
    company, but maybe by two or three, and the question for me is
    what to do about the underlying market conditions that result
    in short supply of those medicines, not the ones that appear in
    the headlines. The newspapers have written about Turing, but
    about some of our major drug companies that also do the same or
    keep the drugs in short supply.
        Now, they have a variety of explanations, but I think to
    take Senator Whitehouse's very important and eloquent remarks
    on this subject, it is not only regarding these manufacturers
    as analogous to utilities, which produce something that is
    essential, these drugs are essential, but also to regard their
    products as we do energy and insurance, and the Government
    itself is not only a regulator, but it is also a provider in
    some instances. The railroads are regulated, but the Government
    is also semi in the business through Amtrak. The Government has
    a strategic oil reserve and it also, through the independent
    system operator and FERC, Federal Energy Regulatory Commission,
    has control over the grid. The Government is not only an
    overseer and scrutinizer, it also is a provider in the case of
    some of these essential services.
        When I respectfully suggest, and I ask for your comment is,
    should the Government play a more aggressive and proactive and
    involved role in this area? I have wrestled. I did a bill with
    Senator Burr, a bipartisan bill, that tried to address drug
    shortages. We knew at the time it would be limited in effect;
    it has been limited in effect and we need to do much more, so I
    invite your comments on that idea.
        Mr. Merritt. Well, I would say the Government has a huge
    role to play even in this hearing, even though it is not
    policy, it is very significant. It raises eyebrows. If I was a
    hedge fund guy and I saw this hearing going on, I would say, I
    do not think I want to buy one of those drugs and sell it at a
    higher price, so that is very significant.
        In terms of the railroad analogy--I am actually reading a
    book on the transcontinental railroad, but I am not far long
    enough in it to really follow-up on your eloquent remarks, but
    I think the opportunity we have with drugs is, let us take the
    railroad analogy. We can build a railroad right next to it run
    by the competitor, and that is the difference, that if we can
    get an expedited review of these products that do not have
    competition, there is a product that is going to be on the
    market in a year or so, that is something we can do that the
    railroad folks could not do, and there is competition in most
    drug classes, but when there is not, we are a sitting duck for
    those off-patent products. Unless these hedge fund folks know
    another drug is coming online, that is the problem we are going
    to face consistently.
        Dr. Anderson. There was a whole series of no competition
    for the railroads for a period of time and now there is a whole
    series of competition for them, other ways of transportation.
    They are no longer in the railroad business; they are in the
    transportation business, so essentially, the same idea here
    would be where there is no competition, you have got to
    intervene. Where there is competition, you probably do not have
    to intervene because the system for generics is generally
    working.
        Senator Blumenthal. Thank you, Madam Chairman.
        The Chairman. Thank you. Dr. Anderson, when I learned that
    Turing was restricting the distribution network for Daraprim,
    red flags went up for me. Could you comment in general about
    whether this could be a means of making it more difficult for
    generic companies to get enough of the drug to reverse engineer
    it, essentially, and produce a generic? Do you think there is
    any connection there? I am trying to figure out why Turing
    would do that.
        Dr. Anderson. Well, essentially, it is all about
    competition, so they want to make it more difficult for
    somebody to enter the market, and so they are going to do
    anything they can do to make it more challenging for you to
    enter the market, so that is one example. They could
    essentially say, oh, we raised our price to $750, but if you
    enter the market, we will drop it to a dollar, and as soon as
    you do not enter the market, we will raise it back up to $750,
    so they are going to use a whole series of things to try to get
    at the most profit for the longest period of time that they
    can, and that is just one example of efforts they are going to
    use.
        The Chairman. You also talked, in your written testimony,
    about the administrative costs of going through the FDA generic
    process. You earlier talked, in response to a question about
    the length of time, but is the administrative costs and the
    trials, the clinical trials that are necessary to show that it
    is a bioequivalent also barriers to access to the market for a
    generic, particularly one that is making a drug that is going
    to serve a smaller population?
        Dr. Anderson. It is unlike the brand companies which have a
    huge undertaking for generics. It is a much more easier
    undertaking. It probably costs about one million to two million
    to actually go through the process, so that is a hurdle if you
    think that the market is only a few thousand people and you are
    only going to be able to charge a few dollars for the drugs.
        It is a bit of a burden, but I do not think it is a huge
    burden, and we have not seen the problem in the past and the
    FDA has not gotten more difficult to work with over the recent
    period of time, so this is a system that is different not
    because of the FDA, not because of the regulatory burden. It
    really is a change in the marketplace and these companies
    finding this niche market where they can price gouge.
        The Chairman. I would note that there is a big difference
    between what the generic drug association says is the backlog
    at FDA for processing generic drug applications versus what FDA
    says the backlog is, so that is something we are going to try
    to explore as well, but I have often thought, as I have learned
    more about this, that if there were a monopoly in pork bellies,
    they would be going after the pork belly market, that it truly
    is almost commodity-driven rather than--and it just happens to
    be life-saving, life and proving essential pharmaceuticals that
    have caught the attention of these individuals.
        Dr. Anderson. The one major difference is insurance.
        The Chairman. Correct.
        Dr. Anderson. Where for pork bellies you are paying for it
    yourself. With insurance, you have an insurer that is paying
    for it, and so they actually have an even better monopoly than
    they would in other industries.
        The Chairman. True, though I do want to emphasize the point
    because one of the arguments that these companies have given us
    is that, quote, real people do not pay these costs. Well, real
    people are paying insurance premiums, co-pays, deductibles. I
    mean, ultimately, as Senator McCaskill said, it either comes
    back to the consumer or the taxpayer one way or the other.
        I want, in my remaining time, just to touch on another
    issue that has come up several times, and that is whether
    compounding is the answer to this problem or a partial answer.
    We have a wonderful compounding pharmacy that I am familiar
    with in Maine that does the kind of work that Dr. Kimberlin has
    described where they are tailoring the medicine for the needs
    of a specific patient, but that is very different from what is
    going on here with Express Scripts and Imprimis where they are
    actually compounding two different drugs, the Daraprim plus the
    vitamin that helps to offset the negative effects, and that is
    a very different notion of compounding because it is not, I do
    not think, going through the kinds of trials and studies that
    would be required with a generic.
        I want to ask our two medical doctors to comment a little
    more on this issue. I would love if that were the answer, if
    they are selling it for a dollar a pill, but I think we are
    talking about two different things, so Dr. Kimberlin and then
    Dr. Fox.
        Dr. Kimberlin. Senator, I believe you are correct. These
    are separate things. They are both equally important, but they
    are not--I personally do not see the Imprimis compounding, at
    least as I understand it right now, announcements as the
    solution. Certainly not for the very young pediatric population
    that I take care of. They need a liquid form and for us as
    treating physicians to be able to ensure that they are getting
    a stable liquid form, we have got to use the data we have
    developed over many, many, many years with Daraprim. We cannot
    simply move to a new compounding formulation, make that into a
    liquid without doing those additional studies over again, so I
    welcome it. I think it is a good move personally, but I do not
    think it is the final answer.
        The Chairman. Thank you. Dr. Fox.
        Dr. Fox. Thank you, Senator. Compounding is really
    essential for some patients. We heard great examples from Dr.
    Kimberlin, but compounding should not be a blanket one-size-
    fits-all solution. These medications have not been rigorously
    tested and I really do not think it is a solution for many,
    many numbers of patients. For the one patient, one or two
    patients that need it, absolutely, critically important, but
    not a one-size-fits-all fix.
        The Chairman. Thank you. Senator McCaskill.
        Senator McCaskill. I understand the points on compounding.
    I know we have had some negative incidents that have occurred
    around compounding in this country, but I glanced through Mr.
    Shkreli's Twitter feed and I found it ironic that the very
    person who is jeopardizing the lives of babies by hiking up the
    prices of the drug he has a monopoly on, wants to cast
    aspersions on Express Scripts trying to compound that drug, and
    frankly, I think he is obviously not concerned about the safety
    or he would not have done what he did in the first place.
        What he is concerned about is competition, taking away the
    monopoly that he has. I agree with you, Doctor, that we have to
    be careful about compounding, but to me, this is a dire
    circumstance. What are you doing now, Dr. Kimberlin? What if
    you are presented--what if doctors call you from around the
    country because of your expertise? What happens to the babies
    right now that--and I do not really clearly understand why this
    liquid form, why has Shkreli cutoff the liquid form? Obviously,
    it must have something to do with making money, but why has he
    done that? Why has he closed off the avenue for you to be able
    to treat babies with a liquid form?
        Dr. Kimberlin. Senator, thank you for the opportunity to
    clarify briefly with that. There never was a liquid form of
    Pyrimethamine or Daraprim. Rather, there was years of
    experience within these pharmacies with turning it from a
    tablet form into a liquid form.
        Senator McCaskill. Right.
        Dr. Kimberlin. That is where the recipe had been well-
    developed and it works very well.
        Senator McCaskill. Well, what happened to it, though? I do
    not understand why it went away when Shkreli bought the
    company.
        Dr. Kimberlin. It has not. The challenge now is getting the
    tablets in the first place.
        Senator McCaskill. Oh, I see.
        Dr. Anderson. That is where the----
        Senator McCaskill. You cannot afford to get the tablets----
        Dr. Kimberlin. Yes, ma'am.
        Senator McCaskill [continuing]. in order to turn it into
    the liquid.
        Dr. Kimberlin. That is correct, and some pharmacies, this
    is a new development. That is the reason I am sure you all are
    bringing this before the American people now. Some pharmacies
    still have on their shelves stock that they purchased prior to
    the sale of the drug, so they have cheap medicine on their
    shelves and therefore they can pass along a cheap price to the
    patient or to the insurance company. What is going to happen a
    few months down the road, though, is those stocks are going to
    be depleted and then even for----
        Senator McCaskill. I am surprised he has not gone out and
    bought them.
        Dr. Kimberlin. He is not going to go out and buy them from
    hospitals.
        Senator McCaskill. Oh, that is true. He could not get them
    from there. Go ahead.
        Dr. Kimberlin. Well, I do think that over time--we are in
    kind of a window here where some people are really struggling
    to get access to this, you know, the 30-plus patients in 21
    states are good examples of that. My patient could be an
    example of that, but it is going to get even worse, so this is
    the right time to be having this conversation.
        Senator McCaskill. When that moment comes, what will you
    do?
        Dr. Kimberlin. We will beg for getting access to these
    drugs. As you guys have already heard, this is life-saving
    chemical interventions for these patients, and as treating
    physicians, we will do everything. We will fight tooth and nail
    to get them for our patients. I hope the system is modifiable
    in the meantime so that that struggle, the struggle to keep the
    patient at the center of all of this so that that struggle is
    easier for us.
        Senator McCaskill. Well, I certainly want to put out a
    public call to any doctors. I am tired of this. Well, we are
    going to give away to people who really need it and we are
    going to cut the price. That is all great as window dressing,
    but in reality, we know that--I mean, you gave an example, Dr.
    Fox. You called three times to try to renegotiate the price on
    Isuprel and the other drug you needed for cardiac arrest.
        I hope that this Committee will hear from doctors who are
    faced with life-threatening disease and they are not able to
    get this drug at a price that is even within reach of their
    patients, because we need to know the real-life consequences to
    this behavior.
        Let me finish up about the watch list of patent drugs. It
    seems to me a lot of what we are talking about today, and I
    think, Dr. Anderson, you may have mentioned it or Mr. Merritt,
    that hopefully this hearing may even have a deterrent effect.
    We are paying attention. Let the word go out to investors in
    hedge funds. We are paying attention to this practice, so if it
    is a matter of making a list of the off-patent drugs, I think
    that is a really good idea, and I am curious, does that list
    not exist somewhere? Does somebody not already have that list?
    Could we not get that list and maybe even publish it somewhere
    so that everyone would know that if somebody else thinks this
    is a brilliant idea, to create a monopoly at the expense of a
    patient that needs health care in this country, that we are
    going to be on it, so to speak?
        Mr. Merritt. Sure, we can help you with that.
        Senator McCaskill. I think that would be really helpful to
    know. How many are we talking about? How many other potential
    drugs are there out there that a hedge fund could buy, put a
    new label on it, and increase the price 6,000 percent?
        Mr. Merritt. We are trying to clarify the final number, but
    it could be a couple of hundred with a small population, so it
    is a significant problem, but it is a targeted----
        Senator McCaskill. Yes, you have to hit on all cylinders.
        Mr. Merritt. Yes.
        Senator McCaskill. Right? It has to be off-patent, it has
    to be a relatively small market that will not attract
    immediately a generic competitor.
        Mr. Merritt. Right, right, so it could be a couple hundred
    drugs, but the population is still pretty low and manageable.
    We will get you that information.
        Senator McCaskill. That would be great, and the other thing
    is, I think if we did the 6-month thing at FDA, that would be a
    deterrent.
        Mr. Merritt. Oh, yes.
        Senator McCaskill. If these companies knew that a generic
    could get approved within six months, that gives them a very
    small window to skim the cream, so to speak, and rip people off
    because it would not be enough time to recover the money they
    would need to recover that all these people have invested in
    this hedge fund.
        Dr. Anderson. There is a book called the FDA Orange Book
    which is approved drug products with therapeutic equivalence
    evaluations, which says, you know, these are approved for this
    drug, this drug and what companies are doing, so all you have
    to do is look on that list to say, there is no competitor on
    that list, so it is a fairly easy thing to do. In the
    reimbursement side, it is called MACS and folds, maximum
    allowable costs or folds where there is competition, these
    things are established, so we have got a lot of ways to
    identify these things if we can just stay one step ahead of the
    hedge funds.
        Senator McCaskill. That sounds great. I will try to help.
    Thank you. Thank you. I want to compliment the Chairman. I
    think this is--everyone gets a nervous when we take on subjects
    that could have broad economic impact in our country, and I am
    pleased to be able to serve on this Committee with the Chairman
    who is--her first allegiance is to the people of Maine and her
    second allegiance is to her fierce independence, and I am proud
    to serve with her.
        The Chairman. Thank you very much for those very kind
    comments and for your extraordinary contributions to the
    Committee and to this investigation in particular. The
    Committee members will have until Monday, December 21st, to
    submit additional questions for the record, so we may be
    bothering you right before the holidays.
        I do want to sincerely thank every member of this panel for
    enhancing our understanding of this problem. I find it so
    disturbing and, indeed, unconscionable that a company would buy
    up a decades-old drug that it had no role in developing, did
    not spend a dime on the R&D for it, and then would hike up the
    price to such egregious levels that it is having an impact on
    patient care. That is just plain wrong and that is why we have
    begun this investigation. We do want to proceed in a careful,
    thoughtful way.
        Just recently I met with a small pharmaceutical company
    that has the potential of a breakthrough on a neurological
    disease and is spending a billion dollars on the clinical
    trials alone, so there is a balance here and we do not want to
    stifle innovation or stop that pipeline of potentially life-
    saving drugs, but neither do we want a company to be able to
    take advantage of a monopoly situation where there is no
    competition and no alternative and no downward pressure on
    prices.
        It to me was so offensive when I saw some of the interviews
    with some of these CEOs and to hear them essentially say they
    were raising the prices, "because we can" and that is why we
    are working so hard to find the right balance, to fine-tune our
    laws, and I really appreciate the constructive suggestions that
    you have made today and sharing the experiences of practicing
    physicians, a hospital physician, a public health expert, and a
    pharmacy benefit manager, so thank you all for being here. This
    hearing is now adjourned.
        [Whereupon, at 4:28 p.m., the hearing was adjourned.]

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                                    APPENDIX

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                          Prepared Witness Statements

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