[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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