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[Senate Hearing 107-450]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 107-450
 
CLOSING THE GAPS IN HATCH-WAXMAN: ASSURING GREATER ACCESS TO AFFORDABLE 
                            PHARMACEUTICALS
=======================================================================

                                HEARING

                               BEFORE THE

                    COMMITTEE ON HEALTH, EDUCATION,
                          LABOR, AND PENSIONS
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                                   ON

  EXAMINING CERTAIN PROVISIONS OF THE 1984 DRUG PRICE COMPETITION AND 
 PATENT TERM RESTORATION ACT, KNOWN AS THE HATCH-WAXMAN ACT, ASSURING 
              GREATER ACCESS TO AFFORDABLE PHARMACEUTICALS

                               __________

                              MAY 8, 2002

                               __________

 Printed for the use of the Committee on Health, Education, Labor, and 
                                Pensions

                          U.S. GOVERNMENT PRINTING OFFICE
79-636                             WASHINGTON : 2002
_____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512-1800  
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001

          COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS

               EDWARD M. KENNEDY, Massachusetts, Chairman

CHRISTOPHER J. DODD, Connecticut     JUDD GREGG, New Hampshire
TOM HARKIN, Iowa                     BILL FRIST, Tennessee
BARBARA A. MIKULSKI, Maryland        MICHAEL B. ENZI, Wyoming
JAMES M. JEFFORDS (I), Vermont       TIM HUTCHINSON, Arkansas
JEFF BINGAMAN, New Mexico            JOHN W. WARNER, Virginia
PAUL D. WELLSTONE, Minnesota         CHRISTOPHER S. BOND, Missouri
PATTY MURRAY, Washington             PAT ROBERTS, Kansas
JACK REED, Rhode Island              SUSAN M. COLLINS, Maine
JOHN EDWARDS, North Carolina         JEFF SESSIONS, Alabama
HILLARY RODHAM CLINTON, New York     MIKE DeWINE, Ohio

           J. Michael Myers, Staff Director and Chief Counsel

             Townsend Lange McNitt, Minority Staff Director

                                  (ii)

  

                            C O N T E N T S

                               __________

                               STATEMENTS

                         Wednesday, May 8, 2002

                                                                   Page
Kennedy, Hon. Edward M., a U.S. Senator from the State of 
  Massachusetts..................................................     1
Gregg, Hon. Judd, a U.S. Senator from the State of New Hampshire.     5
McCain, Hon. John, a U.S. Senator from the State of Arizona......     6
Schumer, Hon. Charles E., a U.S. Senator from the State of New 
  York...........................................................     7
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah......    11
Johnson, Hon. Tim, a U.S. Senator from the State of South Dakota.    15
Janklow, Hon. Bill, Governor of South Dakota, and co-chairman, 
  Business For Affordable Medicine Coalition; and Bruce E. 
  Bradley, Director, Health Plan Strategy and Public Policy, 
  General Motors Corp............................................    19
Glover, Gregory J., M.D., on behalf of the Pharmaceutical 
  Research and Manufacturers Association (PhRMA); and Kathleen D. 
  Jaeger, President and CEO, Generic Pharmaceutical Association 
  (GPhA).........................................................    33

                          ADDITIONAL MATERIAL

Statements, articles, publications, letters, etc.:
    Governor William Janklow.....................................    46
    Bruce E. Bradley.............................................    48
    Gregory J. Glover, M.D.......................................    50
    Kathleen Jaeger..............................................    56

                                 (iii)

  

CLOSING THE GAPS IN HATCH-WAXMAN: ASSURING GREATER ACCESS TO AFFORDABLE 
                            PHARMACEUTICALS

                              ----------                              

                         WEDNESDAY, MAY 8, 2002

                                       U.S. Senate,
        Committee on Health, Education, Labor and Pensions,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 2:31 p.m., in 
room SD-430, Dirksen Senate Office Building, Senator Kennedy 
(chairman of the committee) presiding.
    Present: Senators Kennedy, Wellstone, Murray, Edwards, 
Clinton, Gregg, Frist, Hutchinson, and Collins.

                  Opening Statement of Senator Kennedy

    The Chairman. If we could have your attention, please, 
today's hearing focuses on a rising tide of anti-competitive 
abuses, misleading patent filings, and sham litigation which is 
driving up the cost of prescription drugs. Each and every day, 
pharmaceutical companies exploit loopholes in the law to 
maintain their monopoly over their drugs and keep more 
affordable generic drugs off the market. America's consumers 
are paying the price.
    This chart over here is an indication of the difference 
between the increase in the cost of drugs and also what drugs 
cost versus the CPI for 1996 through the year 2000.
    Although it has been a tremendous success in promoting 
competition and innovation, there are clearly weaknesses in the 
Hatch-Waxman Act, and today, of the top 15 best-selling drugs 
potentially subject to generic competition, the basic patents 
on at least five of them have long expired. Their exclusive 
rights to market their drugs have long expired. Yet there is no 
generic competition. Clearly, the system needs to be repaired.
    Prescription drugs are spiraling out of reach of the 
elderly and uninsured. They are draining the health care 
budgets of State Governments, employers, and labor unions--and 
all because brand-name drug companies can exploit loopholes in 
the law to pocket the windfall profits.
    Generic drugs are clearly part of the answer. Simply put, a 
1 percent increase in generic use can decrease the Nation's 
yearly bill for drugs by $1 billion. And ensuring the timely 
approval of generic drugs could save the consumers over $71 
billion over the next 10 years. This chart indicates what the 
savings could be if we had the timely approval of generic drugs 
in terms of the consumers.
    Prozac is clearly an example. This anti-depressant clearly 
went off-patent after generic companies challenged and defeated 
a Prozac patent. Today, you can buy 30 generic Prozac tablets 
for nearly a third of what the brand-name Prozac will cost. 
These charts indicate the difference, obviously, between the 
generic and the brand name.
    But somehow the pharmaceutical companies game the system by 
listing spurious patents with FDA--patents on unapproved uses, 
unapproved compounds, or formulations that they don't even 
market. Then they get automatic 30-month stays delaying 
approval of generic drugs.
    One company blocked general competition with the 30-month 
stay triggered by a patent for simply adding a water molecule 
to its basic drug. That is months of delay in which the company 
enjoyed huge profits while preventing affordable generic 
versions from reaching the market. This single water molecule 
will cost consumers at least $1.4 billion in savings for their 
prescription drugs, and we still don't know when a generic will 
come to market.
    Senator McCain and Senator Schumer propose eliminating 
these 30-month stays and would require the drug industry to 
defend its patents the same way any other industry does.
    A second tactic used by the drug companies is to collude 
with a generic drug manufacturer to block other generic 
versions of the drug from getting to consumers. Under the 
Hatch-Waxman Act, the first generic drug company which gets to 
market has that exclusive right for 6 months before any generic 
can compete. In some cases, brand drug companies have agreed 
with such a generic drug company not to exercise its 6-month 
right, thereby blocking other generic versions of the drug.
    The McCain-Schumer bill closes this loophole and ensures 
open generic challenges to invalid patents, a provision which 
will save consumers nearly $10 billion on high-priced 
blockbuster drugs.
    The Hatch-Waxman Act has been a tremendous success in 
stimulating both competition and innovation, but there are 
weaknesses in this law which are being exploited to delay 
competition and shore up the bottom lines of the drug companies 
with empty pipelines. Drug companies are entitled to fair 
profits on their research and innovation. But when the patents 
expire, these companies must innovate to succeed and help 
patients, not block competition to their old drugs.
    We must restore the balance of the original Hatch-Waxman 
Act, end the abuses which block competition, and close the gaps 
in the Hatch-Waxman Act. This is an important task and will be 
a matter of continuing inquiry by this committee.
    [The prepared statement of Senator Kennedy follows:]

                 Prepared Statement of Senator Kennedy

    Today's hearing focuses on a rising tide of anti-
competitive abuses, misleading patent filings, and sham 
litigation which is driving up the cost of prescription drugs. 
Each and every day, pharmaceutical companies exploit loopholes 
in the law to maintain their monopoly over their drugs, and to 
keep more affordable generic drugs off the market. And 
America's consumers are paying the price.
    Although it has been a tremendous success in promoting 
competition and innovation, there are clearly weaknesses in the 
Hatch-Waxman Act. Today, of the top fifteen best-selling drugs 
potentially subject to generic competition. the basic patents 
on at least five of them have long expired. Their exclusive 
rights to market their drugs have long expired. Yet there is no 
generic competition. Clearly, the system needs to be repaired.
    Prescription drug costs are spiraling out of reach of the 
elderly and uninsured. They are draining the health care 
budgets of State governments, employers and labor unions. And 
ail because brand-name drug companies can exploit loopholes in 
the law to pocket windfall profits.
    Drug spending rose almost 25 percent annually between 1996 
and 1999, and experts expect the growth in prescription drug 
spending to continue to outpace the growth in health care 
spending. To be sure, some of this increase is due to increased 
use of drugs. But experts agree that spiraling drug prices have 
accounted for almost two-thirds of growth in drug spending--
especially the higher prices of new, aggressively promoted 
drugs.
    Generic drugs are clearly part of the answer. Simply put, a 
one percent increase in generic use can decrease the Nation's 
yearly bill for drugs by a billion dollars. And ensuring the 
timely approval of generic drugs could save consumers over $71 
billion over the next 10 years.
    These savings are easy to understand. For patients and 
health plans alike, the costs for a brand drug are 4 times 
higher than for a generic equivalent That difference is even 
higher for the elderly and uninsured, who must often pay hill 
price for their medicines. On average, a month's supply of a 
generic drug costs a patient $4 and the health plan $16; the 
costs for a brand drug are 4 times higher: $16 for the patient, 
$64 for the plan. For the uninsured, and seniors who lack 
prescription drug coverage, the hull costs are either $20 for 
the generic or $20 for the brand drug.
    Prozac is a clear example. This anti-depressant recently 
went off-patent after generic companies challenged and defeated 
a Prozac patent. Today, you can buy 30 generic Prozac tablets 
for less than $30--less than a third of what brand-name Prozac 
will cost you.
    But some pharmaceutical companies game the system by 
listing spurious patents with the FDA--patents on unapproved 
uses, unapproved compounds, or formulations that they don't 
even market. Then they get automatic 30 month stays delaying 
approval of generic drugs.
    For example, Neurontin is a drug approved by FDA to treat 
epilepsy. In 2001, Neurontin sales exceeded $1.1 billion. The 
basic patent on the drug compound expired in 1994, and the 
patent on the approved method of use expired in 2000. But the 
company had listed two additional patents on the drug that the 
generic companies had to certify were invalid or not infringed. 
These two patents were on an unapproved compound--just the 
addition of a water molecule to the basic compound--and on an 
Unapproved use, the treatment of neurogenerative disease.
    The first 30 month stay needlessly delayed generic 
competition for half a year. But before that stay was up. 
Neurontin's manufacturer listed a third formulation patent with 
FDA. The generic applicant had to certify to that patent as 
well and another 30 month stay will delay generic approval 
until December 2002. In total, a generic version of this drug 
will be delayed 30 months, at a cost to consumers of $1.4 
billion.
    In effect, Neurontin's manufacturer blocked generic 
competition by simply adding a water molecule to its basic 
drug. That's months of delay in which that company enjoys huge 
profits while preventing affordable generic versions from 
reaching the market. This single water molecule will cost 
consumers at least $1.4 billion in savings for their 
prescription drugs--and we still don't know when a generic will 
get to market.
    Senator McCain and Senator Schumer propose eliminating 
these 30 months stays and would require the drug industry to 
defend its patents the same way any other industry does.
    A second tactic used by the drug companies is to collude 
with a generic drug manufacturer to block other generic 
versions of the drug from getting to consumers. Under the 
Hatch-Waxman Act, the first generic drug company which gets to 
market has that exclusive right for 6 months before any other 
generic can compete. In some cases, brand drug companies have 
agreed with such a generic drug company not to exercise its sit 
month right, thereby blocking other generic versions of the 
drug.
    For example, Cardizem is used to treat high blood pressure 
and chest pain. Consumers used nearly $900 million dollars of 
the drug in 1999. A generic was supposed to have gotten to 
market in July 1998, but Hoechst Marion Roussel reached a 
sweetheart deal with a generic company, Andrx, to keep Andrx's 
generic Cardizem off the market. That in turn blocked other 
generics from getting to market for almost a year. Hoechst 
Marion Roussel paid Andrix nearly $90 million under the 
agreement. The Federal District Court in Michigan held that the 
agreement was per se illegal under antitrust laws. That ruling 
is on appeal. The result has been consumers paying hundreds of 
millions more than they should have because generic competition 
was delayed.
    The McCain-Schumer bill closes this loophole and ensures 
open generic challenges to invalid patents--a provision will 
save consumers nearly $10 billion on high-priced blockbuster 
drugs.
    The Hatch-Waxman Act has been a tremendous success in 
stimulating both competition and innovation. But there are 
weaknesses in this law which are being exploited to delay 
competition and shore up the bottom lines of drug companies 
with empty pipelines. Drug companies are entitled to fair 
profits on their research and innovation. But when patents 
expire, those companies must innovate to succeed and help 
patients--not block competition to their old drugs.
    We must restore the balance of the original Hatch-Waxman 
Act, end the abuses which block competition and close the gaps 
in the Hatch-Waxman Act.
    This is an important task, and will be a matter of 
continuing inquiry by this Committee.
    I welcome our witnesses and look forward to their 
testimony.
    The Chairman. I recognize my friend and colleague, the 
Senator from New Hampshire, Senator Gregg.

                   Opening Statement of Senator Gregg

    Senator Gregg. Thank you, Mr. Chairman. I appreciate your 
holding this hearing, and I think it is a topic which needs to 
be visited, and I obviously appreciate Senator Hatch, who is 
the author of the original bill, being here and Senator Schumer 
and Senator McCain and Senator Johnson, all of whom have strong 
opinions, and in Senator Schumer's and Senator McCain's case, a 
piece of legislation which has some very redeeming qualities to 
it on this issue.
    The issue, as I see it, is how do we make Hatch-Waxman 
continue to fulfill its original goals. Obviously, Senator 
Hatch can maybe express those better than I can, but as I 
understand them, they were essentially twofold: number one, to 
make generics more readily available to the American public 
and, thus, reduce the cost of drugs; but at the same time not 
undermine the fundamental incentive that the primary drug 
company has in actually putting the dollars necessary to 
develop those drugs initially.
    We all know that the cost of bringing a new drug online is 
extremely high. It is estimated between $300 and $500 million, 
with a period of 7 to 12 years involved. And we recognize that 
if people are going to be willing to make those investments, 
they have to have a reasonable right to use the product that 
they have produced.
    At the same time, we recognize that after a certain period 
of time, a generic drug which is identical to the one that has 
been put forward by the initial drug company, when brought to 
the market, can dramatically reduce the price to the consumer. 
And that is appropriate in the context of reducing price, but 
also in the context of recovery--when it is done in the context 
that gives reasonable recovery to the initial inventor of the 
drug.
    And so this is the balancing act which we have to pursue 
and which Hatch-Waxman has done an extraordinary job of 
pursuing. It is, in fact, a tremendous success story. We have 
seen a dramatic expansion in the activity of generics since it 
was put in place, with a huge increase in the amount of 
generics on the market, and at the same time, we are continuing 
to see a very significant expansion in the investment into the 
production of new drugs. So those being the two goals, 
obviously it is successful.
    As the chairman has alluded to, there are some areas, 
however, where the initial bill is being gamed, it appears. The 
180-day rule and also the 30-month stay are two examples of 
that. The best way to address those two issues is still to be 
determined, and that is obviously what this hearing is about, 
or part of what this hearing is about.
    So I look forward to moving forward as we try to tweak the 
Hatch-Waxman bill. I don't think we need to radically change 
it, but to tweak it to make sure that it continues to produce 
the strong results which it has produced so far.
    The Chairman. Thank you very much.
    We had the hearing on McCain-Schumer, and so in this 
situation, I know Senator McCain has an appointment, so we 
would recognize him, then Senator Schumer, then Senator Hatch.
    Senator Hatch. Recognize Senator Schumer next.
    The Chairman. Generally we recognize by seniority, but 
since this hearing is focused on their legislation, I will 
proceed in that way, if that is agreeable.

 STATEMENT OF SENATOR McCAIN, A U.S. SENATOR FROM THE STATE OF 
                            ARIZONA

    Senator McCain. I thank you, Mr. Chairman, and since I was 
here, unlike my three colleagues, to hear your entire 
statement, I will make mine brief because I wouldn't want to--I 
think you laid out the situation very well, so I would just 
like to make a couple of additional remarks.
    As you said, Mr. Chairman, the cost of prescription drugs 
is skyrocketing. Just last month, the Nation's largest provider 
of health care, CalPERS--California Public Employee Retirement 
System--announced it would have to increase its members' 
premiums by 25 percent next year. According to CalPERS' 
assistant executive officer for health benefits, Allen Feezor, 
and I quote, ``In two of the past 3 years, pharmaceutical costs 
have increased more than any other component in our CalPERS 
health rates. In our Medicare-Choice supplemental plans, 
pharmacy trend can account for over 50 percent of the increase 
in premium rates that we see in our retiree plans 1 year to the 
next.''
    CalPERS, the largest provider of health care, announced a 
25 percent increase in their premiums, said that the major 
cause of that was the increasing cost of pharmaceutical drugs.
    The other point I would like to make, sir, is that none of 
us here want to weaken Hatch-Waxman. It is a wonderful piece of 
legislation. Thanks to Senator Hatch and Congressman Waxman, it 
has done wonderful things. But obviously people have ``gamed 
the system.''
    I have a letter that I would ask be made part of the record 
with unanimous consent, Mr. Chairman, from Mr. Timothy Muris, 
who is the chairman of the Federal Trade Commission, and in his 
letter he says, ``The Hatch-Waxman amendments have also been 
abused with the effect of preventing American consumers from 
obtaining low-cost generic drugs. Although many drug 
manufacturers, including both branded and generics, have acted 
in good faith, some have attempted to game the system, securing 
greater profits for themselves without providing corresponding 
benefits to consumers.''
    [The letter referred to was not received by press time.]
    Senator McCain. The Chairman of the FTC has it exactly 
right, Mr. Chairman, that the large majority of pharmaceutical 
companies in America are doing a fine job. There are some 
pharmaceutical companies and generic companies that are gaming 
the system at great cost to the consumer, and it is that 
simple. And we think we have some pretty simple and elementary 
fixes.
    I want to thank you, Mr. Chairman. I want to thank you for 
having this hearing. I know how heavy your schedule is and how 
busy we are, particularly this time of year. But I believe that 
all Americans, particularly seniors, need immediate relief, and 
they need to be able to procure a prescription drug at the 
least cost. And they are not doing that today. We think we have 
got a fix, and there is hardly anybody in America outside of 
the drug companies themselves who don't believe this isn't a 
good fix. And we would welcome improvements so that we can make 
this more effective.
    I thank you, Mr. Chairman, and thank you for allowing me to 
appear before you today.
    The Chairman. Well, I want to thank both Senator McCain and 
Senator Schumer for the work you have done in this area, your 
longstanding commitment in terms of not just accessibility, but 
accessibility and affordability. And I think you are to be 
commended for the thoughtfulness of the recommendations that 
you make.
    I know that you have got other responsibilities. We are 
very grateful to you for being here personally and speaking on 
this issue, and we will look forward to working with you as we 
move the process along.
    Senator McCain. Thank you, Mr. Chairman.
    The Chairman. Thank you very much for being here.
    Senator Schumer, we are glad to have you here, and we know 
how strongly you feel about this legislation. You have spoken 
to me I think just about every day, morning, afternoon, 
evening, weekends, on planes, on trains. We know you wanted 
this hearing, and we welcome the chance to hear from you on 
this. We thank you for being here.

STATEMENT OF SENATOR SCHUMER, A U.S. SENATOR FROM THE STATE OF 
                            NEW YORK

    Senator Schumer. Thank you, Chairman Kennedy and Ranking 
Member Gregg. I really thank both of you, and I particularly do 
want to thank you, Chairman, for listening to my long, heart-
felt pleas about why it would be a good idea to have such a 
hearing.
    More importantly, I want to thank you for your leadership 
on this issue. You have been leading the fight to add a 
meaningful prescription drug benefit to Medicare, and as you 
know, our proposal, the proposal of Senator McCain and I, would 
make it a little easier to do that because it would reduce the 
cost to Medicare. And your willingness to hold a hearing on 
this issue and kicking off this committee's consideration of 
our GAAP Act is really important.
    He had to go, but I want to thank Senator McCain for his 
leadership on this issue and for being a great partner as we 
try to reduce the costs of drugs for everybody in a free market 
way. And I want to also thank our House colleagues, Congressman 
Brown of Ohio, Democrat of Ohio, Congresswoman Emerson, 
Republican of Missouri, for their leadership as well in helping 
us focus attention.
    Now, Mr. Chairman, we have heard time and time again from 
the big pharmaceutical companies that patent protection is the 
key to innovating new drugs. I have said numerous times--and I 
heard you just say it as well, and I couldn't agree more--when 
drug companies innovate new drugs which benefit the patient, 
they are indeed preventing disease and saving lives. And they 
should be rewarded for doing so with a period of time to 
exclusively market the drug, and that is how the system is 
supposed to work.
    But over the 20 years since Hatch-Waxman was passed--and I 
want to praise my colleague. I have said this to him privately 
and I have said it publicly. I think that the proposal that he 
and Congressman Waxman put together, which was keenly and 
exquisitely balanced, has done more for people--it is one of 
those quiet things that passes and just does a world of good. 
There are literally, I think, tens of thousands, if not more, 
people alive today because of Hatch-Waxman, because drugs are 
within their reach, and they are not avoiding drugs that they 
need. And I thank him for that. And the balance that that bill 
had was just fine and had broad bipartisan support.
    The trouble is the balance is out of whack, and that is 
what we are seeking to restore, Senator McCain and I. And today 
I would like to just debunk some of the myths that the drug 
companies are perpetuating about the way they are using patent 
laws and how the bill that Senator McCain and I have introduced 
will impact innovation.
    Now, PhRMA has been circulating a list of claims it has 
been calling a reality check. If a bank tried to cash that 
check, it would bounce.
    Today I want to shine light on some of the PhRMA claims and 
ensure that the public knows the truth about what is going on 
in the drug industry. The reality is that drug companies are 
not spending enough time innovating new drugs, and they are 
spending too much time innovating new patents. The whole 
purpose of the law is getting new, wonderful, miracle drugs on 
the market, not spend all your time rearranging the chairs and 
saying if we can get a new patent on the same old drug. But 
that is what has been happening, and that is how they spend too 
much of their time and energy.
    I would like to say to the pharmaceutical industry they 
have done great things and they have saved so many lives, and I 
don't begrudge them their success or their profits. But, you 
know, it goes in cycles, and there is a whole huge bunch of 
wonderful drugs that have been under patent for a long time. 
And they are going to come off the market, and the 
pharmaceutical industry ought to accept that and go back and 
design new drugs. And if it means they have a few years of 
lower profitability for the public good, then they will have 
the higher profitability when the new drugs come out.
    Instead, what they are spending too much of their time 
doing is figuring out how to extend the patents on the existing 
drugs way out of the spirit, in my judgment, of the Hatch-
Waxman Act.
    So our bill is not about robbing pharmaceutical companies 
of legitimate patent protection. It is not about theft of 
innovation. It is not about taking steps to enact laws that are 
not in the best interest of consumers. It is about the 
opposite. It is about examining competition in today's 
marketplace and revisiting a compromise, an exquisite 
compromise, as I mentioned, that was struck 18 years ago.
    In recent years, as the profits and stakes have become 
higher, drug industry lawyers have picked the Hatch-Waxman law 
clean. Companies are aggressively pursuing extended monopolies 
through filing weak or invalid patents and engaging in deals 
which the FTC is increasingly scrutinizing for anti-competitive 
motives. They are going to kill the goose that laid the golden 
egg as they push this too far. So we are trying to save them 
despite themselves, and we want to put an end to these abuses.
    The GAAP Act does not intend to cut innovators off at the 
knees, and it isn't a freebie for the generic drug industry. As 
Senator McCain mentioned, we come down on the generic drug 
companies that engage in collusive practices as well.
    Let me tell you what the bill would do. It would eliminate 
the automatic 30-month stay handed to brand companies who file 
suit against a generic challenger. I know of no person, no 
objective observer, who thinks there is a justification for an 
automatic 30-month stay. We would instead require these 
companies to allow a court to decide whether the case merits a 
stay.
    It would prevent abuses like we are discussing, reducing 
incentives to list patents that are not truly innovative, but 
instead are intended to solely extend monopolies. The GAAP Act 
reforms the so-called 180-day rule by closing the loophole that 
enables a brand-name company to pay a generic manufacturer to 
stay off the market, putting a kibosh on competition.
    Now, PhRMA will tell you the law is not broken. They will 
tell you that the generic share of the prescription market has 
increased from 18 percent in 1984 to 45 percent today. That is 
true. What they won't tell you is that generics have been stuck 
around 45 percent for the last 8 years, and it should keep 
going up as new drugs come off patent and come on the market.
    PhRMA will tell you patents on new products never delay 
generic versions of old ones, and if we are talking about 
patents on new drugs, that would be a true statement. But that 
is not what we are talking about, and please listen to this. 
What we are talking about here is new patents on old drugs. 
That is what they are doing: new patents, old drugs, not new 
drugs, not new innovation, not new people's lives saved.
    The drug companies are coming up with different 
formulations or dosage forms or other unapproved uses for old 
drugs whose patents have either expired or are about to expire 
in order to keep the low-cost generic competitor off the 
market.
    Since the generic has to show that it doesn't infringe on 
these new patents before it can enter the market, the drug 
companies buy extra time and extend their market exclusivity. 
The changes Senator McCain and I have proposed protect the 
brand companies from having their patents infringed upon, but 
they also prevent the brand companies from abusing their 
patents and keeping generics off the market.
    Our bill would require a name-brand drug company to first 
prove to a judge that a case has merit before the delay is 
triggered. Now, let's look at some of the innovations, so-
called innovations, that the brand companies are listing in the 
FDA's Orange Book. It is these kinds of patents which can 
automatically delay competition.
    For Ultram, the first one on the chart, the brand company 
has come up with a new dosing schedule. Because it is a strong 
medication, they suggest you could take the pill, take a 
quarter of the pill at a time and slowly build up to taking the 
whole pill. That is a dosing method which doctors and 
pharmacists have used on many drugs in many instances, yet 
somehow J&J got a patent on it. In other words, they just say 
take a quarter of a pill at a time, build up to the new use, 
new patent. That is not what Hatch-Waxman was intended to do.
    How about the next one on the chart, Fosamax? It is a drug 
for osteoporosis. It is a very fine drug. Well, here the 
company has come up with a kit inside which the pills are 
arranged. They are rearranging the pills. This may be a great 
little kit, but its patent shouldn't be listed in the Orange 
Book where it can delay generic competition.
    The next one is Pulmicort, an asthma medication. The 
company has a patent on the container the drug is in, and that 
patent is listed in the Orange Book where, again, you get 
another 30-months against the generic.
    On Thalomid, a cancer drug, the company has come up with 
not one but two computer programs that pharmacists can use when 
doling out prescriptions. Same drug, new computer program. That 
is what we are talking about here to get a new patent. Not a 
new drug, a new computer program.
    Give me a break.
    Finally, Cyclessa. This is similar to Fosamax. there is a 
patent on it, on the kit which reminds you how to take the 
medication. Generics can make their own kit, I assure you. A 
new piece of plastic shouldn't keep an old pill off the market.
    These patents are real. They may be on things that are 
novel, but they have nothing to do with the drug substance that 
is helping the patient. They are put in the Orange Book for the 
sole purpose of extending a company's monopoly.
    PhRMA says the automatic 30-month stay never extends a 
patent. Well, it may not extend the amount of time a company 
can exclusively sell its particular container, but it certainly 
extends the amount of time that the brand can keep its 
competition away from the customers.
    And brand companies are getting better and better at timing 
the filing of their patent applications so that their new 
patents are issued just as the original patents are expiring. 
This practice causes a delay in generic competition, which is 
nothing less than de facto extension of the original patent.
    What has happened with these drugs is that the drug 
companies saw the original patents about to expire and created 
new ones simply to maintain the control over the market, and 
these practices, Mr. Chairman, which should raise everyone's 
eyebrows, have become the norm. Companies figure out new ways 
to keep the dollars rolling in, stooping to new lows every day 
to maintain their exclusivity rights.
    So I will ask that the rest of my statement be read into 
the record, Mr. Chairman, but I want to thank you for holding 
this hearing. I think you all get the point. What our bill 
tries to do is go back to the good old days. You make a new 
drug, you get a new patent. And God bless you, you deserve it. 
You deserve the money for the innovation. You deserve the money 
for saving lives. But not this kind of stuff. This doesn't 
belong, and the bill that Senator McCain and I have introduced 
will restore the balance.
    And I thank you, Mr. Chairman, for the--I know I have taken 
a bit of time. I get kind of excited about this subject. 
[Laughter.]
    The Chairman. We thank you. Thank you very much, Senator 
Schumer.
    We will hear from an old friend, Senator Hatch, former 
chairman of this committee.

 STATEMENT OF SENATOR HATCH, A U.S. SENATOR FROM THE STATE OF 
                              UTAH

    Senator Hatch. Well, thank you, Mr. Chairman.
    The Chairman. We look forward to having you back.
    Senator Hatch. Thank you, sir.
    The Chairman. Wish you hadn't left.
    Senator Hatch. Well, I kind of wish I hadn't left, too, 
when I see what you guys are doing around here. [Laughter.]
    Senator Hatch. I think you are doing a great job, and I 
want to thank you, Mr. Chairman, Senator Gregg, Senator 
Hutchinson, and other members of the committee.
    I am pleased today to give you my perspective on the 
operation of the Drug Price Competition and Patent Term 
Restoration Act of 1984. This carefully crafted balance 
promotes the development of tomorrow's innovative therapies and 
allows today's off-patent drug products to be sold by generic 
manufacturers at the most competitive prices to patients very 
concerned about the ever rising costs of health care.
    No law with the complexity of the 1984 Act is so perfect 
that it cannot be improved as it faces the test of time and 
changing conditions. In my view, there have been several 
unintended and unanticipated consequences of the 1984 law and 
other changes in the pharmaceutical sector that bear attention 
by Congress. Today I wish to share my perspective on how the 
1984 Act has worked, how the science of drug discovery and the 
pharmaceutical marketplace have changed, and to comment upon 
the process and some proposals for changing the law.
    When we adopted the 1984 law, we were in an era of small-
molecule medicine and large-patient-population blockbuster 
drugs. We are now rapidly entering an era of large-molecule 
medicine and small patient populations, or should I say small-
patient-population drugs. In fact, we may be entering an age of 
literally single-patient, person-specific drugs.
    Over the next decade or two, a great deal of inventive 
energy will be concentrated on developing biological products. 
The future of the drug industry may 1 day be dominated by 
biological products. As we enter this new era of drug 
discovery, certain policy questions should be considered by 
Congress. Are our pharmaceutical intellectual property laws 
adequate to promote the large-molecule, small-patient-
population medicines? Does Hatch-Waxman as a general matter of 
policy adequately value pharmaceutical intellectual property 
relative to other fields of discovery? Is the current lack of 
Waxman-Hatch authorization of generic biologicals sound policy? 
How can Congress enact and sustain over time a Medicare drug 
benefit unless we seriously explore what steps must be taken to 
end an FDA regulatory system that acts like a secondary patient 
for biological products?
    The last overarching question I will raise for the benefit 
of my colleagues is whether we need to think about ways to 
increase the strength of America's research-based industry. I 
have made it clear that my vision and preference on how to 
approach Waxman-Hatch reform is to help facilitate a dialogue 
among interested parties on a comprehensive range of innovator 
generic drug issues, including the matters that I have just 
outlined.
    I recognize that the members of this great committee and 
other Senators may have your own views on the proper scope of 
inquiry. Proponents of the McCain-Schumer bill, S. 812, have a 
somewhat narrower but, nevertheless, extremely important 
agenda. There is no question that pharmaceutical prices are an 
issue of concern to each of us and our constituents, especially 
to many seniors, but we must proceed in a thoughtful fashion.
    Many of us would be very interested in the results of the 
extensive FTC survey of the drug industry that will examine 
many key aspects of the 1984 law. Let's get the facts before we 
change the law.
    Now, I would like to refer to S. 812, the GAAP Act. let me 
make a few comments about this McCain-Schumer bill.
    First, I want to commend the efforts of my colleagues, 
Senators Schumer and McCain. To make drugs more affordable is 
their goal to those many citizens who have had a hard time 
paying for their medications. They have done an impressive job 
of building support for this legislation. Unfortunately, in its 
current form, I cannot support the GAAP Act. In fact, with all 
due respect to its cosponsors, both of whom I admire and both 
of whom are friends, I oppose adoption of this bill. In the 
interest of time, I will concentrate my remarks today on two 
central features of the bill: the 180-day marketing exclusivity 
rule and the 30-month stay.
    Perhaps no single provision of the 1984 law has caused so 
much controversy as the 180-day marketing exclusivity rule. The 
statute contains this incentive: to encourage challenges that 
test the validity of pioneer drug patents and to encourage the 
development of nonpatent-infringing ways to produce generic 
drugs.
    The Judiciary Committee held a hearing on this issue last 
year and reported Chairman Leahy's bill, S. 754, which I 
supported. The FTC has settled several antitrust cases and is 
investigating other possible violations pertaining to pioneer 
generic 180-day rule settlements.
    The McCain-Schumer bill addresses the 180-day situation by 
adopting a so-called rolling exclusive policy. If the first 
filer does not go to market within a specified time period, the 
180-day exclusivity rolls to the next filer. I do not favor 
rolling exclusivity.
    As Mr. Gary Buehler, then Acting Director of FDA's Office 
of Generic Drugs, testified before the Judiciary Committee last 
year, ``We believe that rolling exclusivity would actually be 
an impediment to generic competition.''
    In 1999, FDA proposed a rule which embraced a ``use it or 
lose it'' policy whereby if the first eligible ANDA--
abbreviated new drug application or applicant--did not promptly 
go to market, all other approved applicants could commence 
sales. If our goal is to maximize consumer savings after a 
patent has been defeated, it is difficult to see how rolling 
exclusivity achieves this goal.
    Now I certainly prefer FDA's ``use it or lose it'' policy 
over the McCain-Schumer brand of rolling exclusivity. I would 
also note that there are those who have suggested that the 180-
day exclusivity may not even be necessary given the incentive 
to attack pioneer drug patents. One of FDA's top legal experts, 
Liz Dickinson, has asked, ``I suggest we look at whether 180-
day exclusivity is even necessary.''
    I think it appropriate for Congress to consider whether 
there is a need to retain any marketing exclusivity reward for 
successful patent challenges, or at least to ask whether the 
reward should continue in the present 180-day form.
    We need to examine further if identical rewards should be 
granted for successful invalidity and noninfringement claims. 
At present, I am of the mind to preserve at least some sort of 
financial incentive to encourage vigorous patent challenges by 
generic drug firms. While I think changes to the current system 
may be in order, I am opposed to McCain-Schumer rolling 
exclusivity.
    Now, with regard to the 30-month stay, my preliminary view 
at this point is that the provisions of the McCain-Schumer bill 
related to the 30-month stay may overcorrect a problem that 
may, in fact, be somewhat overstated in the first place. We 
just need to find out more about the facts, and we should wait 
until these facts are brought forward, because they are under 
study and they are going to be brought forward.
    As I understand S. 812, the current statutory 30-month stay 
would be eliminated in favor of a system of case-by-case 
application for injunctive relief. Now, I hope that this 
hearing and the forthcoming FTC study shed some light on the 
facts of the matter concerning improper and consecutive 30-
month stays.
    I also want to see what the FDA concludes with respect to 
the scope of the alleged consecutive stay problem and what its 
recommendations are to address this situation.
    What is often left unsaid by advocates of changing the law 
is that the Hatch-Waxman bill created a unique provision in the 
patent code that essentially allowed generic drug firms to 
infringe pioneer firm patents. This was a huge change. I don't 
think people realize who aren't familiar with this bill and 
this area what a huge change that was in the last, a change 
that no other industries enjoy.
    That is a point I cannot overemphasize. As a general rule, 
Title 35 provides that no one can make, use, or sell a product 
while it is under patent. There is one exception to this 
general rule against patent infringement. This provision, the 
so-called Bolar amendment of the Hatch-Waxman bill, is codified 
at 35 U.S.C. 271(e). Here is what it says. Do we have the chart 
there? OK.
    ``It shall not be an active infringement to make or use a 
patented invention solely for uses reasonably related to the 
development and submission of information under a Federal law 
which regulates the manufacture, use, or sale of drugs or 
veterinary biological products.''
    What this means is that the generic drug firms and only 
generic drug firms among all other generic product industries 
gets statutory protection from activities that would otherwise 
constitute blatant acts of patent infringement. This is the 
only case, and it is Hatch-Waxman that gave that right.
    Anyone involved in the negotiations will tell you that the 
Bolar provision was a significant factor in striking the final 
balance that led to the passage of Hatch-Waxman. In my mind, 
the Bolar amendment is directly related to the 30-month stay 
which allowed what was thought of as a reasonable time for 
courts to act responsibly on patent changes initiated by 
generics.
    The reason why no one would simply buy the argument that 
the changes in the 30-month rule proposed by S. 812 only 
leveled the playing field on patent challenges is because 
generic drug firms enjoy the unique and unprecedented 
protection of Section 271(e)(1) and get a head start that no 
other type of patent challenger is afforded.
    Now, I am concerned that simply throwing the matter of 
injunctive relief to Federal district courts absent a period to 
allow the court to sufficiently familiar itself with the issues 
at hand not only disrupts a justified internal check and 
balance of Hatch-Waxman, but also sort of creates something of 
a crap shoot in the district courts with respect to these 
injunctions.
    While I can see how some enterprising generic firms and 
their attorneys might be able to turn this new, potentially 
unpredictable environment into leverage for settling patent 
challenges, I am not sure that this instability is either fair 
to pioneer drug firms or in the long run to the interests of 
the American public. It seems to me that one of the most 
beneficial steps that this committee as well as the Judiciary 
and Commerce Committees can play is to get the facts of the 
matter on how many times and under what circumstances the 30-
month stay provision has been used in an abusive fashion. And 
we don't have those facts right now. We have the allegations, 
but we don't have the facts.
    Now, once we have the relevant facts, Congress may well 
decide to make some appropriate adjustments in the 30-month 
stay. It could be that the potential for abuse under the 
current statement may justify some statutory refinement. But 
based on what we know today, I think that S. 812 goes too far 
by eliminating the 30-month stay and upsets the carefully 
balanced dynamic with the Bolar provision.
    Now, I lived through this for 18 days day and night, 18-
hour days, with both the pioneer firms and the generic 
industry. And it was no fun, I will tell you. In fact, at one 
time I had a root canal right in the middle of it, and I 
threatened to kill them if they didn't get this thing done the 
next day. And they did, by the way. So maybe my threats make 
some sense every once in a while.
    In closing, let me commend you, Chairman Kennedy. I have 
great respect for you, as you know. Senator Gregg, I have great 
respect for you. You are doing a great job on this committee. 
And the committee, you other members, I am really pleased with 
you for holding its first hearing on this very important 
subject.
    I commend Senators McCain and Schumer for helping to raise 
some important issues, even though I do not agree with how 
their legislation resolves these matters at this time. I 
maintain my longstanding interest in this law and intend to 
continue to work with all Members of Congress and other parties 
who are interested in this legislation, including my esteemed 
colleague, Henry Waxman. And although I no longer have the 
power of the gavel, I urge those who wield that power to 
engender a broad and thoughtful discussion of how Congress can 
achieve consensus in how to revise our pharmaceutical laws to 
best assist in ushering in this new era of molecular medicine.
    It will be vitally important that we legislate in a manner 
that is driven by the facts rather than from the emotion of an 
election year. Our goals remain the same as in 1984. How can we 
help bring the American people the best medicine in the world 
but do so in a fashion that makes their prescriptions as 
affordable as possible? This bill has saved consumers between 
$8 and $10 billion every year since 1984, and the reason it has 
is because of the delicate balance that encourages the 
pharmaceutical pioneer firms to spend up to $800 million for 
every blockbuster drugs and go through as much as a 15-year 
safety and efficacy process, while at the same time bringing 
those patented drugs off patent in the most efficient, quick 
way we can possibly do it so that the generic firms can bring 
the prices down. That should be our goal. That was the goal of 
Hatch-Waxman. We accomplished it. If there are faults with the 
bill--and I suspect there may be--we should at least get the 
facts before we go off half-cocked and lean everything toward 
the generics or everything toward the pioneers.
    Now, nobody is arguing to lean the things toward the 
pioneers, but I tell you this: If the pioneers don't have the 
incentives to go through this safety and efficacy process that 
is a lengthy and costly process that costs up to $800 million 
per drug, then there won't be any generics in the future. We 
want to get that delicate balance so it works, and I intend to 
work with both Senators McCain and Schumer and all of you on 
this committee and all on the Judiciary Committee to see that 
we do it right. But I think we are a little premature until we 
get all the facts.
    Sorry I took so long, Mr. Chairman, but I felt like I 
needed to cover that subject.
    The Chairman. Well, thank you very much, Senator Hatch, for 
your comments on it. Obviously as an author, we take your 
experience very--pay a great deal of attention to what you have 
said on this. We thank you very much.
    Senator Hatch. Well, I appreciate it. If there are any 
flaws, Mr. Chairman, then, of course, they have to be Henry's 
fault, not mine. [Laughter.]
    Senator Hatch. I am only kidding. I better make that clear. 
Henry did it.
    The Chairman. Since you brought up Henry, I will include 
his statement of support for McCain-Schumer in the record. 
[Laughter.]
    You gave me that opening on that. I wasn't going to----
    Senator Hatch. I understand. That is only fair.
    Senator Schumer. Mr. Chairman, don't worry. I was.
    The Chairman. Oh, you were. Good. Fine. But thank you very 
much.
    Senator Johnson is here. We would welcome him. I know you 
have spoken eloquently about the cost of prescription drugs and 
the potential for generics, and I know it has some particular 
relevancy in terms of your State, so we would welcome any 
comments you would like to make.

STATEMENT OF SENATOR JOHNSON, A U.S. SENATOR FROM THE STATE OF 
                          SOUTH DAKOTA

    Senator Johnson. Well, thank you, Mr. Chairman and members 
of the committee. I will be very brief this morning, but thank 
you for allowing me an opportunity to appear before the 
committee today, in part to introduce Governor Bill Janklow 
from my home State of South Dakota. On behalf of Senator 
Daschle and myself, it gives us great pleasure to have the 
Governor of South Dakota appear before your committee providing 
testimony on behalf of our citizens on an issue of enormous 
importance to every one of us here.
    I also want to thank the committee for its leadership on 
the prescription drug debate and for bringing issues of 
reforming the 1984 Hatch-Waxman Act to the forefront by holding 
today's hearing. While I regret that I have got to depart 
almost immediately in order to president on the Senate floor, I 
believe Governor Janklow's testimony will provide the committee 
with very valuable insight as to the direct financial impact 
that delays in being able to access generic alternatives which 
are prompted by pharmaceutical manufacturers' tactics have on 
State Medicaid programs and consumers alike.
    Efforts to increase utilization of general drugs as a cost 
containment method for consumer and other drug purchasers could 
only be strengthened by addressing some of the concerns raised 
with existing loopholes in the Hatch-Waxman Act. We all know 
that using lower-priced generic drugs when possible helps 
reduce overall drug costs. However, it does little good if our 
current laws further promote the ability of drug manufacturers 
to use methods to keep the lower-priced competition from 
entering the market in the first place.
    Along with Governor Janklow, I have supported legislative 
efforts such as the bill introduced by Senators Schumer and 
McCain that seeks to address generic drug reform issues. I want 
to commend Governor Janklow for his efforts that he has 
undertaken in the State of South Dakota to increase utilization 
of generic drugs which have mirrored some of the efforts that 
Senator Daschle and I have promoted at the Federal level. 
Governor Janklow has been implementing creative programs at the 
State level designed to maximize the savings associated with 
increased generic drug use.
    Together, these types of initiatives at the Federal and the 
State level along with closing the gaps in the Hatch-Waxman Act 
can help us turn an important corner as we strive to enhance 
the quality of life for all Americans.
    Again, I thank the chairman and members of the committee 
for allowing me the opportunity to present this statement and 
the introduction of Governor Janklow. Thank you, Mr. Chairman.
    The Chairman. Thank you very much. We are glad you are all 
here. Appreciate it. We will move ahead with our panel.
    Senator Gregg. Could I ask Senator Schumer a question?
    The Chairman. Yes.
    Senator Gregg. First off, I was very interested in what 
Senator Hatch said about your bill, and I am obviously 
interested in your language. I do think there is an issue here 
with regard to the 180 day exclusivity period and the 30 month 
stay, but another area which your bill raises a question on, 
and that I am trying to get clarified in my own mind, is this 
issue of bioequivalency. And it appears that your bill creates 
a new standard for approval. You seem to have added a new test 
for establishing generic bioequivalency, which is, as I 
understand it, therapeutic equivalency.
    That is a new standard, and it implies, to me at least, 
that rather than requiring that the drug be basically identical 
with a 20 percent variable on either ends, it is no longer 
necessary for the drug to be identical; it just has to have a 
therapeutic equivalency, which means only the end has to be the 
same.
    This is a huge issue because I think it gets into the 
public health question of whether a generic drug is safe. So I 
was wondering if you could just address that.
    Senator Schumer. No, we don't intend to change the standard 
of bioequivalency. What we are trying to do is sort of meet the 
opposition in a certain sense--well, that chart isn't up there 
anymore--and deal with situations where you have the same drug 
in terms of bioequivalency and they just sort of say, well, it 
is a different drug because of nonbioequivalent changes. That 
is the bottom line.
    Senator Gregg. So this therapeutic equivalency, you are not 
trying to set a new standard for generic----
    Senator Schumer. No. Even if it were a totally different 
drug chemically----
    Senator Gregg. --that gives them a new----
    Senator Schumer. Yes, if it were a different drug 
chemically and did the same thing, but, you know, all the 
hydrogen and oxygen and carbon atoms and all these others were 
rearranged totally differently, it would not qualify under our 
bill.
    Senator Gregg. Thank you. I think that is an issue, and I 
hope we can work on that language.
    The Chairman. Could the Senator yield? As I understand, the 
ones that have been changing it have been the drug companies. 
What you are trying to do is put it in statutory form.
    Senator Schumer. That is exactly right.
    The Chairman. You are the one that is trying to regularize 
the process based upon--the companies have been the ones that 
are--as I understand.
    Senator Schumer. While the Senator was out of the room, I 
pointed--if we could put that other little chart up there. 
These are the new patents. They don't change the 
bioequivalency. They don't change the drug. They change the 
dosing schedule, the kit, the container. They put a new piece 
of plastic in the kit, and they say, ``We want a whole new 
patent.''
    Well, I can't believe--and I know Congressman Waxman agrees 
with me, and I am going to ask Senator Hatch about it, you 
know, when I get to see him next. I can't believe that that was 
ever the intent of Hatch-Waxman that you change the kit or 
change the dosage and you get a brand-new patent. And yet that 
is what is happening now, and that is what is getting people so 
frustrated.
    We have a huge coalition. We have General Motors and the 
UAW on the same side on this issue. We have all of the HMOs, or 
many of them and their organizations, and the hospitals and the 
doctors, all of whom have seen that the law is being eroded. 
And we are just trying to restore the balance.
    You know, I respect Senator Hatch enormously and, as he 
said, we are good friends, but he says the 180 days would 
inhibit generic competition. Then why is the generic drug 
industry for it? I mean, I don't think they want to inhibit 
generic competition.
    And on the 30 months, his argument was, well, it was good 
back then, let's keep it the same way, that the drug companies 
made a deal and we have got to stick by it. Well, the drug 
companies are doing fabulously under the present law.
    Senator Gregg. My point didn't go to those two issues.
    Senator Schumer. Oh, I know.
    Senator Gregg. Your language says ``any other methodology 
that demonstrates that no significant difference in the 
therapeutic effects of an active ingredient are expected.''
    Currently, there is no comparable FDA regulation which 
allows approval of a generic drug based on therapeutic 
equivalency--that is a whole new standard for the FDA. I guess 
my question is: What is your intent there?
    Senator Schumer. That is presently--the therapeutic clause 
that you mention, as I said, does interfere with 
bioequivalency. In fact, it is part of FDA regulations right 
now. We are just codifying it. Because what has happened, as 
Senator Kennedy said, the drug companies are trying to get rid 
of it as a way of expanding patents even further beyond any 
dimension that Hatch-Waxman had asked for. But that is not new. 
That would not change the present situation at all because it 
is in existing FDA regulations.
    Senator Gregg. No, it is not. But we can talk about that.
    Senator Schumer. I think it is, but we will.
    Senator Frist. Mr. Chairman, I do share Senator Greggs 
concern. As I look through the bill, this is one of the more 
egregious things to me because it looks to me, based on page 10 
of the bill that Senator Gregg commented on, it looks like to 
me that we are giving FDA a blank check to do whatever they 
want to, and that may not be the intent, but to me that is the 
interpretation.
    Senator Schumer. I would say this to you, Senator, and to 
Senator Gregg: That is not the intent. As I said, we are 
codifying existing regulation. The intent is to not get--to 
keep the bioequivalency standard, to stick with it, to not end 
up with all of these kinds of things. But what I would say to 
you is I would be happy to work with--I mean, if you have some 
sympathy for the 180-days problem and the 30-months problem, I 
would be delighted to work with you to make sure, because that 
is what the focus--those are the two major focuses of this 
proposal. There is not an intent to change the bioequivalent 
standard. It is to keep it where it is now.
    Senator Frist. The reading to me is that you are giving the 
FDA more discretion--and I don't think there is any evidence 
that we need to give the FDA more discretion, allowing more 
variations in bioequivalence for generic drugs by concentrating 
just on the therapeutic effect. That to me is potentially very 
dangerous.
    Again, we don't need to piecemeal the bill now, but since 
the issue was brought up----
    Senator Schumer. But what happens now, because there is a 
discrepancy between the regulatory standards and the statutory 
standard, it opens it up to more lawsuits, more 30-month 
situations, more delay. And so we wanted to harmonize the 
regulations with the statute in a way that restores the old 
balance. That is the intent of this proposal.
    Senator Gregg. Well, there is sympathy for----
    The Chairman. Well, as I understand, the bioequivalence has 
been established, but there are--under Hatch-Waxman it defines 
the bioequivalence. And the definition is, as I understand, 
inadequate for certain drugs, topical drugs that are applied to 
skin, inhaled drugs. And the FDA has defined bioequivalence 
further in regulations, but the drug industry sues when FDA 
applies these regulations. And FDA, as I understand, has never 
lost. What you are attempting to do is codify the regulations 
so that it will no longer be able to be used as a sham. That is 
what, as I understand, you were intending to do on this.
    Senator Schumer. That is the purpose. But if somebody has 
come up with an interpretation----
    The Chairman. If there is a better way of doing it----
    Senator Schumer. You bet. I am willing to look at that.
    The Chairman. That is what your point is. That is what your 
intention is, which is completely consistent with the rest of 
your testimony about trying to reduce these kinds of loopholes.
    Senator Schumer. Litigation.
    The Chairman. And litigation.
    Thank you very much.
    Senator Schumer. Thank you, Mr. Chairman. I thank the 
members of the committee for their attention, and particularly, 
I noticed in the corner there when I came in, my colleague 
Senator Clinton.
    Senator Clinton. Some moral support.
    Senator Schumer. Thank you.
    The Chairman. Good. Thank you for being here.
    I am privileged to welcome Governor Bill Janklow of South 
Dakota and Bruce Bradley of General Motors to share their views 
on abuses of Hatch-Waxman and the impact on health care costs. 
We are delighted to have the Governor here, who has given this 
great attention and focus and study, and Mr. Bradley currently 
serves as director of Health Plan Strategy and Public Policy, 
General Motors health care initiatives, founding member and 
Chair of the Leapfrog Group Steering Committee, and a board 
member of the National Forum on Health Care Quality Measurement 
and Reporting.
    So we will start with the Governor.

STATEMENTS OF HON. BILL JANKLOW, GOVERNOR OF SOUTH DAKOTA, AND 
 CO-CHAIRMAN, BUSINESS FOR AFFORDABLE MEDICINE COALITION; AND 
  BRUCE E. BRADLEY, DIRECTOR, HEALTH PLAN STRATEGY AND PUBLIC 
               POLICY, GENERAL MOTORS CORPORATION

    Governor Janklow. Thank you very much, Senator Kennedy and 
members of the committee, and I would request permission to 
take my written testimony and make it a part of the record, and 
that way I won't have to read through it all.
    The Chairman. That is fine.
    Governor Janklow. If I could, I would like to make the 
statement that I am here today to represent a group called 
Business for Affordable Medicine, which includes 10 Governors 
of the United States, labor unions of the United States, and 
many private companies, including General Motors, Weyerhaeuser, 
Wal-Mart, Kmart, Kodak, Georgia Pacific, Motorola, Verizon, and 
a very significant number of large and small companies.
    At the National Governors Association annual meeting 
earlier this year, the Governors unanimously adopted a 
resolution. All the Governors who voted voted in favor of a 
resolution asking the Congress to please look at Hatch-Waxman 
in order to try and fix the parts of it that are broken.
    If I could, there is a chart missing. Unfortunately, I 
didn't bring one. But there is a chart missing. When PhRMA 
talks, they talk about the fact that over the course of the 
last 20 years, 20-some years, 18 years since Hatch-Waxman was 
passed, that utilization of generics has gone from 18 to 45 
percent. But you really need to have two charts because the 
increase from 18 to 45 percent took place the first 9 years, 
and in the last 9 years, for all practice purposes, the line 
would be flat. Because of the loopholes that have been 
discovered by the pharmaceutical companies, they have been able 
to exploit the continuation of their patents.
    The fact of the matter is today, on a serious drug, it is 
not a 17-year patent. It is a 19\1/2\-year patent. Just add the 
30 months to it, because the 2\1/2\ years that you add to it is 
really what the patent protection is. So if we put up a chart 
today, we would have to put up two charts to address the 
question of the increase from 18 percent to 45 percent, which 
is what PhRMA tried to explain to me when they came to South 
Dakota to tell me why we should leave the legislation as it 
was.
    In addition to that, they talk about 6 percent of all the 
drugs that are expiring are drugs that face delays. Again, that 
is throughout the history of the 18-year period before they 
figured out the loopholes. So what we really have to do is look 
at that 6 percent figure but ask what has gone on the last 
couple years.
    Well, let's take the year 2000: 50 percent of all the brand 
drugs, if I can call them that, 50 percent of all the brand 
drugs that expired, that should have expired at their 17-year 
period in the year 2000, still have not been approved today. 
And with respect to 2001, 70 percent of the drugs that were set 
to expire in 2001 have still not expired today. That is an 
incredible--that is just an incredible opportunity or 
indictment, depending on one's perspective, as to how good-
faith legislation passed by this Congress has been figured out 
how to be exploited.
    You know, in athletics, when people figure out a loophole, 
generally after the season--they let it continue until the end 
of the season, and then afterwards the rules committee gets 
together and addresses those kinds of problems. This problem is 
costing the American people a fortune.
    Today, I am here to speak on behalf of other Governors with 
respect to Medicaid expenditures, but let me tell you, my 
friends, that is the smallest part of the problem because 
Government pays for Medicaid by taking people's money, and then 
in a partnership between the Federal and State Governments, we 
fund Medicaid.
    What about that poor soul out there that is making $10, $11 
an hour and they don't have any coverage and they are not 
eligible for Medicaid and they are not getting a benefit 
through their employer because they are not able to be provided 
for one reason or another? That poor sucker is getting the 
shaft all the time. They are paying more money--the person that 
pays cash for their drugs pays more money than Medicaid, 
Medicare, the military, the tell drugs or the one that are 
mail-order drug companies, the chain drug companies, and the 
sole proprietor pharmacy. The person that pays cash pays more 
than anybody, and that is just ludicrous with respect to 
allowing that kind of thing to happen.
    This 30-month loophole is almost unheard of. My good 
friend--and he is a friend of mine for many years--Senator 
Hatch, alluded to that one chart that talked about these unique 
protections that the generic drug companies have. As I 
understand that protection, what it really means is they can 
manufacture, they just can't sell it. It gives them a 
protection to manufacture it, but no protection to sell it. So 
they are unable to sell the drug.
    Even Napster was able to--they figured out how to be able 
to deal with Napster through the normal judicial process. There 
is no legitimate reason in the world why anybody should be 
entitled to an automatic stay without any kind of judicial 
review.
    My State just sued the Army Corps of Engineers, 2 weeks ago 
received a temporary restraining order. The last thing the 
judge determined before he had the hearing was what would be 
the bond that South Dakota has to post, and he has the 
discretion on whether or not to impose a bond. Why isn't there 
any discretion here? If these companies stretch their patent 
for 2\1/2\ years and then at the end of it it is determined 
that they shouldn't have been able to stretch it for 2\1/2\ 
years, people say, well, yes, the FDA will come in and make 
them refund the money. The people, the little guy out there on 
the street that paid the bill will never get their money back, 
ever. It will go to all the middlemen and -women, middle 
companies. But the little people on the street will never get 
their money back.
    It is unheard of under the Federal Rules of Procedure, 
under State Rules of Procedure, that you can get a 30-month 
extension without having to show something other than your word 
that you are entitled to a continuation.
    So I realize my time is up. I would just like to close by 
saying that this is--I don't have an opinion on the whole bill 
because, frankly, I don't know it. I do know this 30-month 
provision is costing billions of dollars to the people of 
America and the world, because that patent protection that they 
are entitled to here carries with it the intellectual property 
rights throughout the world. And so it is--they have discovered 
a way to legitimately extend a patent, not what was ever 
intended by you folks and your predecessors. You need to now as 
a rules committee come together and change it back to what the 
original intent of the Congress and the American people was. 
Every Senator--I have got to believe every Governor in America 
is calling ever one of you to tell you Medicaid is breaking 
them. Let's bring the playing field back to what was intended 
to make sure that these companies have marvelous patent 
protection, but that they have it for the 17-year period of 
time, and anything over that takes some kind of showing to 
somebody, whether it is the FDA, the courts, or someone.
    And I close by saying this: If there is one other thing 
that is preventing States from moving forward to do something 
about the cost of drugs, every time a State attempts to do 
anything, there is a lawsuit filed against that State by 
PhRMA--the drug industry, I should say. And they say that the 
States are violating interstate commerce, which is left 
exclusively to the Congress to regulate.
    My friends, if you are going to give them the continued 30-
month period, then pass a law that says the States are entitled 
to pursue their own approaches. As Justice Brandeis envisioned 
almost 100 years ago, he said the States are laboratories of 
democracy. Allow the States to do creative practices and run 
the risk of confrontation with these companies, but not let us 
have our statutes thrown out because they say it violates the 
Commerce Clause.
    Senator Kennedy and members of the committee, you have been 
very generous with your time, and I appreciate it. Thank you.
    The Chairman. Very compelling testimony.
    [The prepared statement of Governor Janklow may be found in 
additional material.]
    The Chairman. Mr. Bradley?
    Dr. Bradley. Thank you, Senator. Mr. Chairman, Ranking 
Member Gregg, and distinguished committee members, I am Bruce 
Bradley, director of Health Plan Strategy and Public Policy at 
General Motors. Today I am testifying on behalf of RxHealth 
Value, a coalition of more than 20 organizations representing 
consumers, employers, unions, health plans, and providers. Our 
broad, diverse membership includes numerous prominent consumers 
and purchasers of pharmaceuticals such as AARP, Families USA, 
the Midwest Business Group on Health, Ford, Daimler-Chrysler, 
the United Auto Workers, the AFL-CIO, Kaiser Permanente, the 
Alliance of Community Health Plans, and Blue Cross and Blue 
Shield Association.
    It is an honor to appear before your committee to share our 
experience regarding prescription drug cost increases and to 
underscore our belief that Federal policy reforms are necessary 
to restore the balance between pharmaceutical competition, 
consumer choice, and innovation.
    Consumers, businesses, unions, the Federal Government, and 
health plans throughout the Nation are aggressively, and most 
unsuccessfully, attempting to manage soaring prescription drug 
costs. These expenditures are increasing at annual rates of up 
to 20 percent and are unsustainable. That is why GM is working 
with three coalitions--RxHealth Value, Business for Affordable 
Medicine, and the Coalition for a Competitive Pharmaceutical 
Market--to highlight this issue and advocate for Federal policy 
changes.
    These broad-based, diverse, and respected organizations all 
represent purchasers who are growing increasingly concerned 
that the Hatch-Waxman law contains loopholes that allow the 
pharmaceutical industry to delay more competition and choice of 
high-quality, cost-effective generic drugs.
    Collectively, RxHealth Value's members represent over 100 
million Americans. These consumers spend billions of dollars 
each year on prescription drugs. The business and insurer 
purchasers that comprise RxHealth Value are reporting 
prescription drug cost growth trends of as much as 20 percent 
per year.
    At GM, we insure 1.2 million workers, retirees, and their 
families and are the largest private provider of health care 
coverage in the Nation. We spend over $1.3 billion a year on 
prescription drugs alone. Our pharmaceutical bill continues to 
grow at the rate of 15 to 20 percent per year, more than 
quadrupling the general inflation rate. Such drug cost 
increases are driven by a host of factors, including higher 
utilization, direct-to-consumer advertising, price increases of 
existing pharmaceutical products, and the delay of generic 
competition.
    Today's hearing appropriately focuses on barriers to 
generic entry into the marketplace. From our perspective, this 
problem has grown worse in recent years and, if not addressed, 
will almost certainly force companies and all other purchasers, 
public and private, to make extraordinary and painful benefit 
and cost-shifting decisions. Global companies and their 
suppliers--small businesses--simply will be unable to 
effectively compete in the world marketplace without relief 
from rising prescription drug costs.
    Mr. Chairman, in the last several years, as the patents of 
prescription drugs have expired, purchasers have planned and 
budgeted for generic drug competition to reduce costs and 
increase enrollee choice. Such competition is critical to 
effective pharmaceutical benefit management programs as generic 
competition reduces costs by 50 to 60 percent or more. Time and 
again, however, purchasers have underestimated their liability 
as many pharmaceutical companies effectively extend their 
market exclusivity through inappropriate Orange Book patent 
listing, triggering the automatic and repeated use of the 30-
month market exclusivity stay.
    Since the enactment of Hatch-Waxman, the average number of 
patent extensions filed for blockbuster drugs has increased by 
five-fold--from two to ten patents filed. This trend has a very 
real and all too frequently devastating financial impact on GM 
and the other members of RxHealth Value.
    Our concerns about inappropriate practices in the 
marketplace are not limited to the brand-name industry. We are 
troubled by and strongly opposed to brand-to-brand and brand-
to-generic settlements that are designed to delay market entry 
of generic competition.
    There have been cases when generic companies who initially 
filed to challenge a brand-name patent and thus were eligible 
for the no-generic-competition 180-day exclusive period have 
reached an agreement with the brand-name company to not enter 
the marketplace. Such agreements, which benefit both brand name 
and generic companies, are costly for purchasers and especially 
consumers of prescription drugs.
    Within the last several years, RxHealth Value members have 
literally had to increase our budgets for pharmaceuticals by 
hundreds of millions of dollars a year. For example, without 
new legislation, we now estimate that if five blockbuster 
medications whose original compound patents should have already 
expired continue to avoid competition, GM will see increases in 
our prescription drug bill well in excess of $200 million 
during the projected period of delay of generic market entry.
    Mr. Chairman, when access to lower-cost generics is 
inappropriately delayed, consumers and other purchasers have no 
remedy or recourse. We have no way to recoup the excess costs 
paid for pharmaceuticals. We are appearing before you today to 
highlight the tremendous challenge confronting us and to seek 
legislative relief.
    We believe that this is the time for Congress to intervene 
and pass legislation that will restore the balance between 
competition and innovation that was initially intended by the 
Congress in the Hatch-Waxman Patent Restoration Act of 1984. 
For this reason, GM, as well as members of our RxHealth Value, 
support the Greater Access to Affordable Pharmaceuticals Act 
and other legislation designed to eliminate these barriers to 
generic drug entry into the marketplace.
    We greatly appreciate the bipartisan leadership of Senator 
Schumer and Senator McCain in raising this issue and in 
developing thoughtful legislation. We hope this will serve as a 
critical foundation for constructive legislation to be reported 
out of this committee and passed in a bipartisan fashion by the 
Congress.
    I do want to make clear, however, that GM, the auto 
industry, and the coalitions we have partnered with, including 
RxHealth Value, are strongly committed to and supportive of 
pharmaceutical research and development. We believe that 
innovative products should be strongly protected by patent law. 
We fear, however, that certain practices currently employed in 
the industry have effectively misdirected its attention away 
from true innovation and new product development and toward the 
preservation of old innovations.
    Finally, notwithstanding our concerns about pharmaceutical 
cost increases, we regard coverage of prescription drugs as a 
basic, necessary benefit for all Americans. Prescription drugs 
used wisely are frequently the most clinically appropriate and 
cost-effective treatment. We strongly support bipartisan 
legislation that will enhance competition and choice while also 
encouraging meaningful innovation.
    Mr. Chairman, we appreciate your leadership in holding this 
hearing. We look forward to working with you and providing any 
assistance possible in developing legislation in this area. I 
would be happy to answer any questions you may have.
    Thank you.
    [The prepared statement of Mr. Bradley may be found in 
additional material.]
    The Chairman. OK. We will have 6-minute rounds. I will ask 
the staff to remind the Senators.
    Mr. Bradley and Governor, how do you respond to the point 
that, well, this was a balance? You have pointed out at least 
some of the concerns you have about different provisions, but 
this is a balance between the generics and the drug companies, 
and you are just highlighting some of the provisions in here 
that appear to work to the disadvantage of generics to the 
consumers. If you start tampering with this, we are going to 
unravel something that was very important in terms of the 
development of the generic industry.
    Just quickly, how do you answer that?
    Dr. Bradley. Senator, we believe that the balance was very 
carefully crafted, and it was mentioned earlier that there were 
changes in circumstances and unanticipated interpretations of 
the law and actions from the law that were not part of that 
carefully crafted balance. And our belief is that we just need 
to go back to that very, very carefully crafted balance, which 
we believe is very, very important. We need new drugs. We need 
the great innovations. They have done wonderful things for our 
people. But we also need at the end of the patents the 
legitimate patent life to make cost-effective drugs available 
to consumers and our employees. The cost issue here is very, 
very large.
    The Chairman. Governor?
    Governor Janklow. Thank you very much. Senator, you hit it 
right on the head. There was a carefully crafted balance, and 
somebody figured out how to find a loophole in it. Nobody 
envisioned that loophole. I bet you could back and check every 
single word of congressional testimony that ever took place by 
the witnesses and by the Members of the Senate and the House, 
and you won't find anybody that envisioned that it would be 
used like it is being used now.
    And so an opportunity was found, and what you have to do is 
level the playing field back. The chart that Senator Hatch put 
up I think speaks for--that is what he emphasized, the good 
Senator did, with respect to the balance, the one that talks 
about how you can't be charged with infringement and the other 
one that gives you the protection.
    And I think Senator Hatch hit it right on the head. They 
are given that protection, but they can't sell the drug. All 
they are allowed to do is manufacture it and warehouse it. So 
that just means that if and when the 30-month period expires or 
the litigation ends or the FDA decides to deal with it and the 
courts are then done with it, then they can sell out of the 
warehouse. But who is going to run that kind of risk? That is 
not what was intended, so you have got to fix the rules.
    The Chairman. Governor, I have the survey about Medicaid, 
the State Medicaid survey, expenditures in 2001 $1,231,000,000. 
As I understand you, Mr. Bradley, the coalition asked each 
agency in the States to report in 2001 the expenditures for 17 
prescription drugs that face patent expiration in 2002, 2003, 
and 2004. Forty-six States responded. Forty-six Medicaid 
agencies paid $1.2 billion for drugs. Nearly half the 
expenditures, $520 million, were for drugs that face patent 
expiration this year. States should be able to anticipate 
savings for the drugs up to 60 percent. This means that States 
should save up to $600 million with generic alternatives to the 
17 drugs.
    Governor, why in the world aren't they doing this?
    Governor Janklow. Because the States aren't allowed to, 
Senator. We can only live or die under Hatch-Waxman. We are 
prohibited because we can't interfere with interstate commerce.
    But, Senator, the point you make is eloquent, and let me 
tell you why. Medicaid drug costs are the lowest, so this 
number that you have just used, the $1.229 billion, and then 
you talk about what it would be less for those coming off 
patent, that is a drop in the bucket compared to the real costs 
out there for the General Motors of this world and, you know, 
Roy's Blacksmith Shop and everything in between or some 
individual retired person that is paying for their own on 
Social Security or a working person.
    The point is they all pay more. General Motors pays more 
than any State in the Union does for Medicaid. You will pay 
more than any State in the Union. Medicaid is the lowest.
    The Chairman. Not under the Senate health insurance.
    Governor Janklow. Pardon me?
    The Chairman. Not under the Senate health insurance bill.
    Governor Janklow. OK.
    The Chairman. That every Member of the Senate checks in. 
Not one of them refuses it. Not a single Member, not a 
Republican nor Democrat refuse it.
    Governor Janklow. Good point.
    The Chairman. Mr. Bradley, would you respond to what the 
Governor said? If this is understating it, what is your sense 
or can you tell us factually what you think are closer to the 
figures that could be saved?
    Dr. Bradley. Well, we have taken a look at just our current 
costs, the current situation, and let me just give you an 
example of going forward where the potential savings are.
    We believe that we can save over $200 million--and that is 
a conservative estimate--if five drugs--we did an analysis of 
them: Neurontin, Wellbutrin and its sister product Zyban, 
Paxil, and Prilosec--and pardon me for mispronouncing some of 
these drugs--which are right now being marketed without generic 
competition. We did a projection essentially that examined the 
impact based on our estimate and a conservative estimate of the 
difference between what we are projecting to pay for these 
drugs and what we would actually pay should the generic become 
available. And we see easily $200 million.
    The Chairman. Well, this is the company--the fact is, with 
this legislation passed, we would be saving billions of dollars 
a year. And there is the issue of cost. There is the issue of 
access. We have to address both in this Congress. But we know--
and you have given us very, very important information about 
what is happening out there in the real world in terms of the 
States. And we should find ways to be able to achieve it.
    Senator Hutchinson?
    Senator Hutchinson. Thank you, Mr. Chairman. I appreciate 
your calling this hearing today on a very important subject, 
the Hatch-Waxman law. As important as this is, achieving access 
to affordable pharmaceuticals by providing a Medicare 
prescription drug benefit for our seniors is even more critical 
for Congress to act upon this year. With that in mind, I have 
written Chairman Baucus asking him to schedule a markup of 
Medicare prescription drug legislation before we leave for the 
July 4th recess. At the same time, it is important that we also 
move ahead with hearings and examination of the Hatch-Waxman 
law.
    Governor, thank you for your testimony and thank you for 
your passionate statement. It is obvious that you feel very 
strongly about this. A couple things came to my mind. You 
mentioned, as did Senator Schumer, the growth in the percentage 
of the market attributable to generics since the enactment of 
Hatch-Waxman. Over a period of 18 years, the generic market-
share has grown from 18 percent to 45 percent. Both you and 
Senator Schumer also made the point that the problem is not 
that there has been this dramatic increase, but that the growth 
all happened in the first 9 years and has leveled off because 
drug companies have discovered loopholes in the law.
    We have heard the Hatch-Waxman Act described as finely 
balanced legislation. We have seen a dramatic increase in the 
percent of the market that has gone to generics. How high 
should it go? And when drug companies, pharmaceutical companies 
are spending $800 million to develop a new drug, at what point 
is their role in the marketplace so diluted that they can't, or 
they won't make those kinds of investments? Is it 70 percent or 
75 percent? Where should the generic market-share be at what 
point have we reached the point that you think is a sufficient 
movement upward?
    Governor Janklow. Senator, I don't know what the dollar 
figure is, but, Senator, let me explain something, if I can. 
What we need in life is a set of rules. That is what we do when 
we legislate: we make rules.
    I have never heard of legislation that was passed 22 years 
ago and people would say, well, let's pass a constitutional 
amendment saying this one can never be changed. When 
circumstances change, legislation has to change. And I am a 
passionate free enterpriser. I will guarantee you I am the most 
conservative person in this room. But I believe that if the 
game----
    The Chairman. Now, wait a minute. [Laughter.]
    Senator Hutchinson. Senator Kennedy will question----
    Governor Janklow. And Senator Frist is a friend of mine. I 
know Senator Frist. I am the most conservative person in the 
room.
    But you have got to play by the rules, and that is what is 
not happening--they are playing by the rules. They are not 
cheating. I don't say they cheat. I am saying they found a 
loophole, and when you find a loophole, you have just got to 
close it. That is all.
    Senator Hutchinson. Certainly I believe that the abuses you 
refer to are why we need to re-examine the Hatch-Waxman law. We 
may need to change the rules, and that is exactly the proper 
purpose of this hearing. My question is, though: If our 
objection is that this 45 percent market share leveled off, how 
high should it have gone? I mean, is that really evidence, is 
that clear evidence that the law is broken?
    Governor Janklow. The clear evidence is the incredible 
change that has taken place, that it went from that smaller 
percentage to 48, and then in the last 9 years, I think 
actually what they have told me in preparation for testimony 
today, it has actually started to dip down a little bit. And so 
it has actually regressed ever so slightly, maybe.
    But I am just willing to concede it has been flat, but for 
something to be flat for 9 years after a meteoric rise, we have 
to ask ourselves the question: What happened the second 9 years 
that didn't happen the first 9 years?
    Senator Hutchinson. It could be that it reached the right 
balance, that it reached the level at which the market would 
dictate.
    But let me ask you also, Senator Hatch in his testimony--I 
think I quoted this correctly--said eliminating the 30-month 
stay overcorrects a problem that may be overstated. And if I 
recall his testimony, it was not that we don't need to change 
the rules or that we may not need to refine Hatch-Waxman, but 
that we don't have enough evidence yet to do that. He 
recommended that we take a look at the FTC report, which is 
expected this summer, lest we overcorrect a problem when we 
don't know how great that problem is.
    Could you respond to his contention as one of the authors 
of that original bill?
    Governor Janklow. Sure. I think very seldom should people 
make legislation without good evidence. It is no different to 
me than a jury verdict. You need all the facts to make a 
sensible decision.
    Now, having said that, Senator, I think what is really 
important in this whole thing is that there is no penalty in a 
practical way. In a legal way there is, but in a practical way 
there is no penalty if a company abuses the 30-month 
continuance that they are entitled to because of the difficulty 
in getting the FDA and all the Attorneys General or whoever 
files all this litigation to go after the horses are out of the 
corral and you have got to round them up and get them back.
    One of the things you may want to consider, I am like where 
Senator Schumer was at. He said if his idea doesn't work, let's 
figure out another one. That is what I am saying. And one thing 
you may want to consider is let them have their 30-month 
continuance, but if it is later determined by a court of 
competent jurisdiction or the FDA or some combination, they 
have to pay all the money back a couple times over at their 
expense to get it all the way down to the last person who got 
the shaft and the 30-month deal.
    Senator Hutchinson. I am very pleased that there is some 
openness as to what kind of remedies or what kind of 
refinements are made in the bill.
    I think also in your written testimony, you recommended 
that Congress restore integrity to the FDA Orange Book so drug 
companies can only list patents for new drugs and new drug 
uses.
    In your view, does the McCain-Schumer bill address that 
issue of restoring integrity to the FDA Orange Book?
    Governor Janklow. I really don't know, sir, but I know it 
is abused now legally. When I used the word ``abuse'' in my 
testimony, we are letting them do it. We as Americans passed a 
law that lets them do what they are doing. We need to stop 
letting them do what they are doing in that small respect.
    Senator Hutchinson. My understanding is that it is not 
really addressed in this legislation.
    Governor Janklow. I don't know, sir.
    Senator Hutchinson. I do think that is one of the very 
important issues that should be examined and addressed.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much.
    Senator Murray?
    Senator Murray. Well, thank you, Mr. Chairman, for having 
this hearing and for this really important discussion. I think 
the intent of the 1984 Hatch-Waxman legislation was to ensure a 
fair balance between protecting intellectual property rights 
and ensuring timely access to lower-cost generic drugs for 
consumers. And, overall, that 1984 law struck a good balance 
that overall has proven very successful.
    Unfortunately, I think we have seen that there have been 
costly abuses by drug manufacturers that have jeopardized 
access to affordable prescription drugs for all consumers, and 
those allegations trouble all of us, including me, a great 
deal.
    However, Mr. Chairman, I think it is important to point I 
think it is important to point out that abuses or potential 
abuses of Hatch-Waxman are not the reason Congress hasn't acted 
on a prescription drug benefit within Medicare. Clearly, drug 
pricing is going to be an issue when we move to a prescription 
drug benefit, but the challenges to achieving a prescription 
drug benefit go well beyond simply the pricing issue.
    I also think we have to be really clear on what has driven 
this increase in prescription drug costs. I think it is clear 
that today prescription drugs play a much greater role in the 
delivery of health care than they did 15 years ago when the 
Hatch-Waxman legislation was written. Prescription drugs to 
reduce blood pressure or cholesterol rates have replaced 
extensive hospitalization and acute-care costs. So the 
increasing use of prescription drugs in itself is not bad, and, 
in fact, many of today's innovative drugs have reduced health 
care costs in other areas and have dramatically improved the 
quality of life for many Americans, including our children.
    I want to, as we work through this, again, find the balance 
between protecting and encouraging innovation while ensuring 
timely access to affordable prescription drugs for all 
consumers. And I think our question before this committee is 
whether S. 812, the Schumer-McCain bill, represents that kind 
of balance. So, Mr. Chairman, I hope we have additional 
hearings on this as well, as we try and work through those 
questions.
    One of the concerns I think we are attempting or I am 
attempting to balance in closing loopholes in Hatch-Waxman is 
the issue of innovation. We don't want to discourage companies 
from bringing innovative new treatments to patients, and I 
recognize that some companies may be misusing the innovation 
incentives in the current law. Changing the color of a pill or 
the color of a package, I think we all recognize, is not 
innovation and shouldn't be rewarded with a 30-month patent 
extension. But I don't think we should trivialize real 
innovation. Creating a new formula of a large-molecule drug, 
allowing it to be dispensed in a liquid form, is a huge benefit 
for our children. Developing new techniques to allow for 
changes in dosage from perhaps four a day to one a day is 
especially beneficial for our children, for any of you who have 
tried to make your child take four pills a day.
    So I believe that kind of innovation does need to be 
rewarded, and I would ask our panelists whether allowing a 
generic alternative for a larger pill or a four-times-a-day 
treatment would discourage companies from moving innovation 
along to improve how a drug is dispensed or how many times it 
must be taken each day.
    Dr. Bradley. My response is that the carefully crafted 
Hatch-Waxman Act was designed very much to stimulate innovation 
at what I would call the front end, giving the patent period a 
longer period of time.
    It is my belief that extending a patent at the back end is, 
if anything, counterproductive to innovation because the 
incentive for the pharmaceutical company would be to get 
working on new breakthrough, wonderful improvements rather than 
focusing its time, energy, and resources on extending the 
patent at the back end. And, in fact, expiration of the patent 
may be one of the most powerful incentives for the 
pharmaceutical companies to invest in new breakthrough 
improvements.
    Governor Janklow. Senator, I would like to just pick up 
right where he leaves off. I think he makes an elegant point, 
and that is that, to the extent the company is spending their 
time and resources trying to figure out how to manipulate the 
current 30-month period, they are not spending it on 
innovation. And if there is a concern about what you address--
and what you say is perfect. I mean, your comments are perfect. 
I think what you need to do is just write it into law. Just say 
that this shall not be deemed to not be in compliance. I mean, 
to the extent--let them come forward and tell you the list. I 
mean, they always talk about PhRMA. Then I find out that Eli 
Lilly, Merck, and Pharmacia don't even agree with PhRMA's 
position on this 30-month extension. They are three of the top 
ten drug companies, and they are not in agreement with what 
PhRMA says when they come before the Congress all the time on 
that issue.
    But just let all the players come before you and explain 
all these little nuances, and then take the ones you like and 
put them into law, and that gives them a protection, instead of 
leaving it so general. Where you know it is general and a 
problem, the only way to solve it is to be specific. Otherwise, 
let it be general. What you found is by being general, people 
after 9 years figured out how to game it. So for 9 years it 
worked. The last 9 years it hasn't.
    Senator Murray. I appreciate the comments, and I do have 
some questions for our second panel. I know we are going to 
have a vote, Mr. Chairman, so I would retain the balance of my 
time so I can ask those questions--the third panel, actually.
    The Chairman. Senator Collins?
    Senator Collins. Thank you, Mr. Chairman. I know both you 
and I need to be at the Armed Services Committee for a markup 
as well, and with the vote ending, this may cause me to rethink 
my opposition to human cloning. I think it would be very 
valuable today to have a clone. [Laughter.]
    I want to, in all seriousness, thank you for holding this 
hearing. I think this is an incredibly important issue. Both of 
our witnesses before us have described very eloquently the cost 
implications of spiraling prescription drug costs on a large 
corporation and on a State's Medicaid budget. And I know that 
the Governor of Maine would second many of the comments of the 
Governor representing many other Governors here today.
    I would also say that it seems to me that the Hatch-Waxman 
bill has been a success in encouraging innovation and striking 
a balance. Unfortunately, however, it appears, as Governor 
Janklow has said, that there are abuses of certain of the 
provisions in the Hatch-Waxman law. And, in particular, I 
really think we need to substantially tighten up or eliminate 
the automatic 30-month stay. I just think that the evidence is 
overwhelming that that has been abused. And it is not just the 
witnesses before us who have said that. The Chairman of Federal 
Trade Commission has testified about a number of examples where 
drug manufacturers have gamed the system and attempted to 
restrict competition beyond what Hatch-Waxman intended.
    I also think that the evidence calls out for taking a close 
look at the 180-day exclusivity period in cases where there is 
essentially a deal between the generic manufacturer and the 
brand-name manufacturer.
    So those are issues that I think we need to take a close 
look at. But at the same time, there are important issues on 
the other side. We do want to make sure that we are continuing 
to promote innovation, and I do share the concerns that were 
raised by Senator Gregg about the bioequivalency issue in the 
bill. I think that is a real issue, and we have to be very 
careful how we proceed.
    So I think this hearing is an excellent first step in 
taking a look at this. I do think we need to come up with 
legislation, but that we have to carefully balance it. And I 
thank the chairman for the opportunity to comment.
    [The prepared statement of Senator Collins follows:]

                 Prepared Statement of Senator Collins

    Mr. Chairman, thank you for calling this afternoon's 
hearing to examine the landmark 1984 Hatch-Waxman Act and to 
determine whether legislation is needed to close any 
``loopholes'' that might have reduced its effectiveness in 
bringing lower-cost generic drugs to market more quickly.
    The last twenty years have witnessed dramatic 
pharmaceutical breakthroughs that have helped reduce deaths and 
disability from heart disease, cancer, diabetes, and many other 
diseases. As a consequence, millions of people around the world 
are leading longer, healthier, and more productive lives. These 
new medical miracles, however, often come with hefty price 
tags, raising vexing questions of how both patients and public 
and private health plans can continue to pay for them.
    Prescription drug spending in the United States has 
increased by 92 percent over the past 5 years to almost $120 
billion. These soaring costs are a particular burden for the 
millions of uninsured Americans as well as for those seniors on 
Medicare who lack prescription drug coverage. Many of these 
individuals are simply priced out of the market, or forced to 
choose between paying the bills or buying the prescription 
drugs that keep them healthy.
    The 1984 Hatch-Waxman Act made significant changes in our 
patent laws that were intended to encourage pharmaceutical 
companies to make the investments necessary to develop new drug 
products, while simultaneously enabling their competitors to 
bring lower-cost generic alternatives to the market.
    To that end, the legislation has succeeded to a large 
degree. Prior to Hatch-Waxman, it took three to 5 years for 
generics to enter the market after the brand-name patent 
expired. Today, lower-cost generics often enter the market 
immediately upon the expiration of the patent. As a 
consequence, consumers are saving anywhere from $8 to $10 
billion a year by purchasing generic drugs. At the same time, 
the brand-name companies have increased their research and 
development spending from $3.6 billion in 1984 to more than $30 
million this year.
    Moreover, there are even greater potential savings on the 
horizon. Within the next 4 years, the patents on brand name 
drugs with combined sales of $20 billion are set to expire. If 
Hatch Waxman works as it was intended, consumers can expect to 
save an average of 50 percent on these drugs as lower-cost 
generic alternatives become available after these patents 
expire.
    Despite its apparent success, concerns have been raised 
recently that the Hatch-Waxman Act has been subject to abuse. 
While many pharmaceutical companies have acted in good faith, 
there is increasing evidence that some brand and generic drug 
manufacturers have attempted to ``game'' the system in order to 
maximize their profits at the expense of consumers.
    I read with some alarm a recent Washington Post article 
detailing how AstraZeneca, whose patent on the lucrative drug 
Prilosec was set to expire last Fall, used the automatic 30-
month stay to keep a cheaper generic version of the drug off 
the market. In 2000, Prilosec was the bestselling drug in the 
world and generated an estimated $4.7 billion in U.S. sales. 
Moreover, according to the article, at least 12 other drug 
companies have used that strategy to extend the patents on 
lucrative drugs.
    This has understandably prompted a huge backlash on the 
part of the Governors, insurers, businesses, organized labor 
and individual consumers who are footing the bill for these 
expensive drugs and whose costs for popular drugs like Prilosec 
could be cut in half if generic alternatives were available.
    I was also disturbed by the testimony last month of the 
Chairman of the Federal Trade Commission, Timothy Muris, before 
the Commerce Committee. Mr. Muris' testimony cites a number of 
examples where branded and generic drug manufacturers have 
``gamed'' the system and attempted to restrict competition 
beyond what the Hatch-Waxman Act intended.
    One case cited in Mr. Muris' testimony involved the 
producer of the heart medication Cardizem CD which brought a 
lawsuit for patent and trademark infringement against the 
generic manufacturer Andrx in early 1996. Instead of asking the 
generic company to pay damages, however, the brand name 
manufacturer offered a settlement to pay the generic company 
more than $80 million in return for keeping the generic drug 
off the market. Meanwhile, users of Cardizem--which treats high 
blood pressure, chest pains and heart disease--were paying 
about $73 a month when the generic would have cost about $32 a 
month.
    Mr. Chairman, the original Hatch-Waxman Act was a carefully 
constructed compromise that balanced an expedited FDA approval 
process to speed the entry of lower-cost generic drugs into the 
market with additional patent protections to ensure continuing 
innovation. If we find that there are loopholes in the current 
law that have allowed the brand-name and generic manufacturers 
to game the system to restrict competition and secure greater 
profits, it is Congress' responsibility to take the action that 
is necessary to restore the original intent of the law.
    Once again, I thank you for your leadership in calling this 
hearing, and I look forward to working with my Senate 
colleagues to address this issue.
    The Chairman. I want to thank both of you for your 
testimony and responses, very knowledgeable, very helpful, and 
very compelling. I thank you very much, Governor, Mr. Bradley, 
for appearing before the committee. And we will be talking with 
you as we consider this legislation. You are obviously experts 
and have thought through this, so we are very, very grateful 
for your insights.
    Governor Janklow. Senator, thank you for the courtesy in 
letting me appear today. I appreciate it.
    The Chairman. Thank you very much.
    Dr. Bradley. Thank you very much for inviting me.
    The Chairman. Our second distinguished panel, two notable 
experts to share their respective views on their respective 
industries on Hatch-Waxman. Gregory Glover is currently a 
partner at Ropes & Gray. He is here today on behalf of the 
Pharmaceutical Research and Manufacturers of America. I look 
forward to his testimony on the impact of Hatch-Waxman on the 
pharmaceuticals. And Kathleen Jaeger currently serves as the 
CEO of General Pharmaceutical Association, previously served as 
the national practice leader at Kirkpatrick & Lockhart, food 
and drug practice. Ms. Jaeger is intimately familiar with the 
pharmaceutical industry, and I look forward to her testimony.
    Dr. Glover, we will recognize you. I ask my staff just to 
remove the tabs here as we are moving through, if you will be 
good enough.

    STATEMENTS OF GREGORY J. GLOVER, M.D., ON BEHALF OF THE 
PHARMACEUTICAL RESEARCH AND MANUFACTURERS ASSOCIATION (PhRMA); 
      AND KATHLEEN D. JAEGER, PRESIDENT AND CEO, GENERIC 
               PHARMACEUTICAL ASSOCIATION (GPhA)

    Dr. Glover. Mr. Chairman and members of the committee, on 
behalf of the Pharmaceutical Research and Manufacturers of 
America, I am pleased to appear at this hearing on the Hatch-
Waxman Act. My testimony will demonstrate that the Hatch-Waxman 
Act has promoted pharmaceutical innovation and competition and 
that S. 812 would undermine this carefully crafted, delicately 
balanced regime.
    As a result of the balance achieved in the Hatch-Waxman 
Act, consumers are receiving the benefits of access to low-cost 
generic copies as well as an expanding stream of more 
effective, precise, and sophisticated medicines. Advocates of 
change have a heavy burden to show that revisions are needed 
and that such revisions would not upset the equilibrium of the 
existing statute.
    S. 812 is not about closing loopholes. What is a loophole 
in the eyes of the generics is a fundamental procedure that 
protects the intellectual property rights of the innovators. 
The Hatch-Waxman Act left the pioneer pharmaceutical industry, 
the source of virtually all new drugs in the United States, 
with only limited incentives to innovate. Instead of the 
protections afforded to every other U.S. patent holder, Hatch-
Waxman altered the rights of the pioneer pharmaceutical 
industry and took away two of the three principal elements of 
patent protection.
    Normally, a patent holder can prevent others from making, 
using, or selling a patented invention. However, after Hatch-
Waxman, the generic manufacturer can make and use our invention 
from the day the patent is issued. The only element of patent 
rights that remains for the pioneer under the Hatch-Waxman Act 
is the protection against a generic selling our product.
    The litigation procedures of the Hatch-Waxman Act 
counterbalance the elimination of the patent rights by 
establishing litigation procedures that include the 30-month 
stay of FDA approval to allow the patent disputes to be 
resolved. One of the underlying principles of the Hatch-Waxman 
Act is that the generic drug should not be able to enter the 
market until the pioneer's patent has expired or until the 
patent has been determined to be invalid or not infringed.
    The 30-month stay is a critical component of the procedures 
that satisfy this fundamental principle of the act. Advocates 
of change would have you believe the 30-month stay extends a 
patent. They are wrong. The 30-month stay must occur during the 
life of a patent, and if the patent expires before the 30-month 
stay is over, the stay of approval is terminated. We must 
remember that if there is a 30-month stay, it is because the 
generics have attempted to market a copy of the pioneer's 
product that is covered by a presumptively valid patent before 
that patent has expired.
    Advocates of change would also have you believe that 
multiple 30-month stays are commonplace and that they provide 
evidence of needed change. However, there are fewer than ten 
circumstances of nonconcurrent 30-month stays. Even where there 
are multiple patents listed for a product, in the great 
majority of the cases the 30-month stays will run concurrently 
so that there will be a single 30-month period in which FDA 
cannot give final approval to the generic product.
    The claim that eliminating the 30-month stay is closing a 
loophole is, in fact, disingenuous, dangerous, and damaging 
because it takes away our ability to defend our intellectual 
property rights. Although the number of patent disputes is 
small, the advocates of change complain that these disputes 
occur for top-selling drugs. A drug is a commercial success 
because it provides substantial benefits to consumers and to 
the public health. These are the only drugs the generics want 
to copy. These are the only drugs whose patents are challenged 
early in the patent life. Accordingly, there should be no 
surprise that the patent disputes initiated by the generic 
manufacturers focus on top-selling drugs.
    Despite the complaints, the generic industry has flourished 
since Hatch-Waxman eliminated major barriers to market entry. 
It is today much easier, far less costly, and quicker for low-
cost generic manufacturers to get their copies of innovative 
medicines to the market following patent expiration. In fact, 
analysts predict that generics will make up 57 percent of the 
market in 2005. And as we project generic market shares 
exceeding 50 percent, we should bear in mind that no one should 
want 100 percent of the market to be in products that are mere 
copies, because that would mean that there are no more 
innovations to medicines, no more benefits to consumers, and no 
more improvements to the public health.
    In summary, the Hatch-Waxman is one of the most successful 
pieces of consumer legislation in history. The law works. The 
proposed changes would undermine the act's few critical 
protections for innovator intellectual property rights. Without 
these protections, there will be less innovation, fewer new 
drugs for generics to copy, and, more importantly, fewer new 
drugs to enhance treatments for patients.
    I would be pleased to answer any questions the committee 
may have.
    [The prepared statement of Dr. Glover may be found in 
additional material.]
    The Chairman. Ms. Jaeger?
    Ms. Jaeger. Mr. Chairman, distinguished members of the 
committee, thank you for your leadership in holding this 
hearing, and thank you for the opportunity to testify. My name 
is Kathleen Jaeger. I am the president and CEO of Generic 
Pharmaceutical Association.
    Today, I would like to present testimony that I believe 
clearly illustrates why Congress should close the gaps in 
Hatch-Waxman, assuring consumers greater access to affordable 
pharmaceuticals.
    In the years immediately following the passage of Hatch-
Waxman in 1984, competitive markets were formed and the system 
worked reasonably well. However, during the last 5 years, 
unintended loopholes in the system have been exploited to delay 
generic competition. Unfortunately, this trend has increased 
with each passing month. Consumers, Governors, employers, 
unions, pharmacists, and other interested parties are raising 
concerns about the lack of accessible, affordable 
pharmaceuticals.
    These groups understand the need to expand access to 
generic medications, but they have all too frequently been 
blocked from the market, and these groups are now calling on 
Congress to act. Clearly, there is cause for concern.
    Yet PhRMA charges the generic industry is overstating its 
case and argues that the current system works well. Clearly, 
they have not put this argument to a vote by consumers, 
businesses, or other purchasers. And as to PhRMA's definition 
of ``works well,'' it flies in the face of the real-life 
experiences of too many Americans across this Nation.
    PhRMA's argument ignores the older American who had to pay 
more for his medication, Desyrel, because there was a patent on 
Desyrel's tablet design, which had nothing to do with the 
drug's chemical make-up or its effect.
    PhRMA's argument ignores the single mother of an asthmatic 
child requiring the drug Maxair, who can't get an affordable 
equivalent today because a patent is listed, not on Maxair but 
on the new container that houses Maxair.
    PhRMA's argument also ignores the cancer patient who will 
have to pay the higher brand prices for years to come because 
the brand company listed two patents that define how the 
product information should be inserted into pharmacy computers.
    And PhRMA's argument further ignores the recent views of 
the FTC Chairman Timothy Muris before the Senate Commerce 
Committee on April 23rd that the 30-month stay is a serious 
problem.
    These and other misuses of the Hatch-Waxman would be 
addressed by Senate bill 812, introduced under the bipartisan 
leadership of Senator Schumer and Senator McCain, a bill 
designed to restore the intended balance between innovation, 
competition, and consumer access.
    PhRMA advances countless arguments against the closing of 
the loopholes in the current system, and I would like to take 
this opportunity, if I may, to set the record straight with a 
few of these.
    First, PhRMA claims that the 30-month stay provision never 
extends a patent. Yet this statement not only is completely 
irrelevant to the consumers and health care providers, it 
ignores the real question. The issue is: Should an automatic 
30-month stay block generic competition when a new patent is 
listed that in no way covers the brand or the generic product? 
This is like saying a patent covering a red light bulb should 
be able to block other manufacturers from marketing white light 
bulbs to consumers.
    Second, PhRMA argues that Senate bill 812 would severely 
impair, if not eliminate, effective remedies for patent 
infringement. PhRMA is wrong. The bill in no way alters the 
U.S. patent code. Simply put, the rights of the brand industry 
to commence patent litigation which could result in treble 
damages remain unchanged under the bill. Instead, the bill 
would merely eliminate the automatic stay, the current 
standard, and replace it with a merit-based system, a system 
used by every other industrial sector in the United States.
    Third, PhRMA claims that since 1984, only a small number of 
applications involve patent challenges. But PhRMA conveniently 
ignores the fact that the average number of patents listed for 
a blockbuster product has increased from two in 1984 to ten 
today, and that generic competition has been delayed for at 
least one-third of the 15 leading worldwide brand products as a 
result of a system abuse. Without policy intervention, this 
trend will only get worse.
    The brand industry refuses to acknowledge that long overdue 
refinements of Hatch-Waxman will actually refocus the brand 
industry on true innovation and away from legal loophole 
innovation. Legal loophole innovation is not true innovation 
and does little for this country in terms of overall health 
care. Legal loophole innovation certainly does little for the 
83 million Americans who take prescription drugs each day. We 
urge this committee to take action and mark up Senate bill 812, 
and we look forward to working with you on a bipartisan basis 
to pass this legislation.
    We thank you for the opportunity to speak on behalf of the 
generic industry and the consumers we serve, and, again, we 
thank Chairman Kennedy and Senator Gregg for holding this 
hearing. We would also like to extend our appreciation to 
Senator McCain, Senator Schumer, Senator Rockefeller, Senator 
Edwards, Senator Clinton, and others for their leadership in 
addressing the lack of affordable medicines, one of the great 
social problems of our time.
    I would be happy to answer any questions.
    [The prepared statement of Ms. Jaeger may be found in 
additional material.]
    The Chairman. Thank you very much. We will have a 5-minute 
rule here.
    Dr. Glover, you were here when Governor Janklow made his 
presentation. What do you make of his presentation about what 
is happening out there in the real world in terms of the Hatch-
Waxman and the kind of costs and expenses that are taking place 
in the States?
    Dr. Glover. Governor Janklow had many of the facts about 
the Hatch-Waxman incorrect, but that is not really the 
principal concern that he had. His principal concern was the 
cost of pharmaceutical health care that his State has to 
provide, and that is not an issue that one can address solely 
through the Hatch-Waxman Act. You have to address that through 
Medicare prescription drug benefits and other things of that 
nature.
    With respect to his concerns about the specific issues of 
the Hatch-Waxman Act, he was wrong, among other things, that 
the 30-month stay provides an extension of a patent. That is 
not correct. He was incorrect also about the term of a patent. 
It is not 17 years. Since 1995 in the United States it has been 
20 years from filing.
    What he needs to be aware of is that, regardless of the 
concerns that he has about the cost, the supposed changes in 
the Hatch-Waxman Act that are embodied in S. 812 might provide 
some short-term benefits because you basically take the work 
that has been done by the pioneer companies and give it to the 
generics who will sell it cheaper; but in the long run, the 
health care costs for his State and every other State will 
increase because they will not longer have cost-effective new 
medicines to keep people out of hospitals, to keep them on 
their jobs, and to help them live healthier lives.
    The Chairman. In terms of what he was talking about, he 
also made a very powerful point that these kinds of activities 
by many of the drug companies in terms of resubmitting these 
various patents had never been anticipated at the time of the 
passage of the legislation, and that this contributed to the 
companies' sort of gaming the system.
    Given your sort of knowledge about what is happening out 
there in the industry, what kind of weight should we give that?
    Dr. Glover. You should give that very little weight, but 
what you also want to do is make sure you understand the 
definition of terms. Some people view gaming the system as 
developing an improvement in a drug that will take it from an 
IV dosage to an oral dosage, from four times a day to one time 
a day, and removing side effects. Our view is that that is not 
gaming the system in any such way because each of those 
improvements, to the extent that they get to be labeled and 
marketed for those additional benefits, has to require 
additional approval by FDA. If there are additional patents 
associated with those, we believe those patents are 
appropriately listed, and it is appropriate that those new 
patents prevent the generics from marketing those new and 
improved drugs.
    But what the generics will not tell you is that when there 
is an improvement in a product that takes it from four times a 
day to once a day or from IV to oral that there is nothing 
about the new patent that prevents them from making the 
original version of the product.
    The Chairman. And you sat in here, and that is the theme 
that you thought the Governor was really talking about?
    Dr. Glover. That is correct.
    The Chairman. That is what your conclusion was.
    Dr. Glover. Absolutely.
    The Chairman. Well, I must say, I sat here and thought he 
was talking about an entirely different way that many of the 
drug companies were gaming the system.
    Federal Trade Commission Chairman Timothy Muris testified 2 
weeks ago that some drug companies have attempted to--he uses 
the words--``game the system, securing greater profits for 
themselves without providing corresponding benefit to 
consumers.'' Obviously, like us, the FTC is investigating and 
worried about the extraneous patent listings, multiple 30-month 
delays, and collusive agreements. That is what the Governor was 
talking about. That was his case that he made, I thought very 
powerfully, but that is what you have been rather dismissive 
of.
    Dr. Glover. Absolutely. Let's go back to the Muris 
testimony.
    The Chairman. OK. Well, you----
    Dr. Glover. Commissioner Muris reported on five 
circumstances in which the Federal Trade Commission had 
investigated alleged anti-competitive behavior in the 
pharmaceutical industry. Three of those were pioneer generic 
settlements; one of those settlements, and perhaps more, the 
Federal Trade Commission stated in closing the case and 
announcing their settlement that there was no evidence that the 
activities of the pharmaceutical company had delayed for 1 day 
the introduction of a generic pharmaceutical product.
    Of the remaining two issues, one was a circumstance in 
which the Federal Trade Commission filed an amicus brief in the 
context of a summary judgment motion, and their amicus brief 
was accepted in large part by the court. But as you will 
recall, a summary judgment motion is not a circumstance where 
all the issues get fully litigated.
    The final circumstance is the case of Biovail, and Biovail 
is a member of the Generic Pharmaceutical Association 
masquerading as a pioneer patent holder, and in that case there 
was a settlement reached with the FTC regarding Biovail's abuse 
of the patent-listing procedure.
    The Chairman. Well, I appreciate your response. I will put 
in the record, because I have limited time, his response to 
just the kind of cases that you have given and the rebuttal to 
your comments.
    [The information referred to was not received by press 
time.]
    The Chairman. A recent analysis by the University of 
Minnesota shows that drug companies list an average of 4.9 
patents on their drugs with annual sales over $1 billion, which 
is twice the average number of patents listed on the smaller 
market of drugs. The analysis shows that considering all these 
patents, these blockbuster drugs can be expected to have at 
least 19.2 and probably more than 20 years of actual market 
exclusivity. By contrast, the smaller selling drugs average 
about 15 years.
    The data show that drug companies list more patents on the 
blockbuster drugs and these extra patents extend their 
monopolies on their products. They draw the conclusion that the 
drug companies are gaming the system under Hatch-Waxman.
    Dr. Glover. I would simply point out, Senator, that the 
mere fact that innovation continues after a drug is discovered 
and some of that innovation results in new patents and some of 
those new patents get listed in the Orange Book does not in any 
way suggest that the system is being gamed.
    The Chairman. All right. And how they are using those new 
drugs and the timing of those new drugs and the way that they 
are able to effectively keep the generics off the market, don't 
you think we ought to take that into consideration as well as 
the questions of innovation?
    Dr. Glover. Absolutely not. If what you are suggesting is 
that there should be no innovation and that there should be no 
additional----
    The Chairman. That isn't what I am suggesting.
    Dr. Glover. But let's make sure I can answer your question. 
That is, it cannot be the case that we must be concerned about 
improvements to products that pharmaceutical companies make, 
and as long as those improvements to products do not prevent 
the generic from making a copy of the original version of the 
product, that is exactly what we want to happen in the system. 
And we cannot also take the view that certain types of 
innovation are ``better'' than other types of innovation. 
Sequential innovation is the nature of this industry, and 
sequential innovation is what allows us to make substantial 
improvements to benefit the public health, and over time we 
will make the substantial quantum leap in innovation that will 
make everyone happy.
    The Chairman. You know, my time is up, but, Mr. Glover, you 
are representing the industry, and we are here to try and help 
people. I would have thought that as the spokesman for the 
industry and what is happening out there in real terms across 
America on this, that you would be forthcoming, give us some 
ideas, give us some recommendations rather than effectively 
denying every--that this is even a challenge or not.
    Dr. Glover. Senator, I cannot----
    The Chairman. Wait a minute now. Wait----
    Dr. Glover. I cannot----
    The Chairman. --just a minute. Wait a minute. I am going to 
let you give a response.
    Dr. Glover. OK.
    The Chairman. I am going to let you give a response on it. 
But I just want to express this Senator's--as we are finding, 
as you have heard from Republicans and Democrats, both access 
and cost, and we have heard very eloquent, thoughtful 
commentaries from a number of Republicans, Democrats, Senators 
on all sides about this particular kind of abuses in Hatch-
Waxman, and not to recognize that there are these kinds of 
abuses or not to even come in here and make recommendations in 
ways that can be useful and helpful for not only our seniors 
but for people to have some way of getting some relief in terms 
of cost is disappointing.
    That is my statement, and I would welcome any comment that 
you want to make on it.
    Dr. Glover. Senator, I cannot accept your statement that 
the industry is not being forthcoming and that we do not help 
people. That is not correct.
    Our concern is that where you start with a balanced act 
that everyone agrees was initially balanced, or at least the 
attempt was in 1984, you cannot in the environment that is 
exemplified by your statement, where one party is deemed to be 
a villain and the other party is deemed to be an angel, come 
out of that process whereby you will continue to have a 
balanced statute. That is our position.
    The Chairman. Senator Hutchinson?
    Senator Hutchinson. Thank you, Mr. Chairman. Well, that is 
kind of my concern, that we start making villains and we say 
industry is because they are industry or they don't care about 
people. I don't think any reasonable person could look at the 
pharmaceutical industry and conclude that they aren't helping 
people, and that while this is, can be, if we have fair and 
honest hearings, can be a very productive process that will 
result in making the kind of refinements that are going to help 
more people and make pharmaceutical drugs more affordable, more 
accessible, if we go about this wrong, we can do a lot of 
damage, I think.
    I have the utmost respect for Senator Hatch, who said that 
he didn't think we had enough information to pass the proposed 
legislation; that, in fact, we might overcorrect a problem that 
may be overstated. We don't even have the FTC reports yet. And 
patients diagnosed with Parkinson's and Alzheimer's and cancer 
and other diseases for which there are no cures today, they 
have got a pretty important stake in this debate.
    Now, Dr. Glover, the figures that I have been presented 
from Med Ad News say that generic R&D expenditures in the year 
2000 amounted to $613 million, that innovator R&D expenditures 
in the year 2000 amounted to $41 billion.
    So I would like you to respond to the criticism or the 
concern that some have expressed about McCain-Schumer on its 
potential impact on research and development for new drugs. How 
would this kind of legislation impact the willingness of 
innovator companies, pioneer drug companies, to make the kinds 
of investments, $800 million on average, to bring a new drug to 
market? What kind of impact do you see this kind of legislation 
having when we are talking about the stake that patients with 
Parkinson's, Alzheimer's, cancer, and other very serious 
diseases have?
    Dr. Glover. Senator, it would have a substantially negative 
impact in the following way: We first start with what the 
Hatch-Waxman Act actually does. It takes away the ability of 
patent holders, who are pioneer pharmaceutical companies in 
this case, to enforce their patents against generics who start 
making and using the pioneer's product before--during the term 
of the patent. Every other industry--if the generic starts 
making and using the pioneer's product, the pioneer can 
actually stop that as an act of infringement. So as a result of 
allowing the generics to do that, because in theory it is part 
of the system, you want them to do that so that as soon as the 
patent expires, they will have done all the things they need to 
do for FDA to be able to approve the product and they can get 
on the market. Those things include actually having to 
formulate the drug, prove to FDA that they can scale up on a 
commercial manufacturing scale, and other things that are 
necessary but are, nevertheless, acts of infringement.
    In exchange for that, when the generic files their 
abbreviated new drug application and a paragraph IV 
certification is made and the pioneer brings suit, you get 30 
months to try to resolve the patent issue before the generic 
drug is approved by FDA. But during that 30 months, FDA 
continues to review the product. They can even issue a 
tentative approval. The 30-month stay does not delay anything 
going on at FDA other than the final approval.
    And bear in mind that the underlying premise of the Hatch-
Waxman Act is that the generics should not be able to get on 
the market until the pioneer's patent has expired. Even with 
the 30-month stay, FDA approves the product at the end of the 
30 months regardless of the circumstance or status of the 
patent infringement suit.
    So if you change the ability to have 30 months in which you 
can conduct discovery and at least move the case along so that 
it might become clear to the generic that the pioneer's case is 
quite good and they ought not go on the market, then you do 
not--you are not able to understand nor able to predict that 
you will have any meaningful protection to your intellectual 
property and, therefore, making that decision to put the $800-
plus million into a drug has to be a much more cautious 
decision.
    Senator Hutchinson. Thank you.
    Ms. Jaeger?
    Ms. Jaeger. Yes, I would like to just respond to some of 
the comments that Dr. Glover just mentioned.
    What he is talking about is the fact that, yes, the generic 
industry is allowed to do the research and development during 
the patent time. And for some of those, that is called the 
Bolar amendment. But what he is failing to tell you is that the 
Bolar amendment also applies to other products that are 
regulated by the Food and Drug Administration. So medical 
devices that have to go through the premarket approval 
situation, they have a Bolar amendment, food additives, animal 
drugs, and the like. So it is not just unique to, I would say, 
the generic industry. This actually crosses over all segments 
with respect to health care products that are regulated by the 
Food and Drug Administration.
    Second, when it comes to the 30-month stay, all the generic 
industry is saying is that we have no problem with respect to 
innovation. If the patent covers the drug product, the actual 
product, then the patent is properly lifted, and if we went to 
a merit-based system, which is what McCain-Schumer would do, 
then most likely the judge would issue an injunction against 
FDA actually approving that product. But what is happening 
today, as we have actually illustrated, I think, a number of 
different times, is that patents are being lifted in the Orange 
Book that do not cover the drug product. They may cover an 
unapproved use, an unapproved formulation, a computer program. 
I mean, what does a computer program have to do with a drug? 
Why is generic competition even delayed 1 day because a 
computer program is listed in the Orange Book?
    And that is what we have concern about, and that is what 
consumers have concern about. And so what we are asking for is 
to basically restore the intended balance, pull back, go to a 
merit-based system, don't make it a free windfall which creates 
a perverse incentive to go out and innovate patents, as Senator 
Schumer said, so they can go list them in the Orange Book to 
delay generic competition. What we are saying and what we are 
proposing and why we support McCain-Schumer is go to a merit-
based system.
    So, indeed, if that patent covers the drug product, then 
most likely, again, the judge would issue an injunction. And, 
again, this is a standard that is used by every other 
industrial sector in the United States. So it would infuse some 
legal discipline and accountability into the current system.
    Dr. Glover. Every other industrial sector in the United 
States allows the patent owner to bring suit against someone 
who makes and uses their patented invention for a commercial 
purpose.
    Senator Hutchinson. That was the trade-off.
    Dr. Glover. That was the trade-off.
    Senator Hutchinson. Mr. Chairman, my time has expired, but 
thank you.
    The Chairman. Do you want to say a final word?
    Ms. Jaeger. Yes, Mr. Chairman. We actually would disagree 
with the trade-off. As Justice Scalia pointed out in the case 
of Eli Lilly v. Medtronic, there were two distortions in the 
marketplace going on at the same time: a distortion with 
respect to the value of the patent, the fact that the industry 
wasn't getting a full value because they had to do that 
research and development, and they had to go through a very 
lengthy approval process. And so Congress in its wisdom gave 
them 5 years of patent restoration time.
    At the same time, Congress realized what they wanted to do, 
of course, was to give consumers access, immediate access upon 
the patent expiring. So, in turn, they allowed the companies to 
do the research and development during the time period. And as 
Justice Scalia stated in the case, those two were the offsets 
for one another and that the ANDA approval process and the 30-
month stay was an independent function of that analysis.
    Dr. Glover. Although Justice Scalia is not here, Senator 
Hatch has been here, and Senator Hatch agreed with our 
position, which is that the 30-month stay was a trade-off for 
the exemption for patent infringement under the Bolar 
amendment.
    The Chairman. And Congressman Waxman differs with you as a 
cosponsor.
    Dr. Glover. Moreover, we know that Justice Scalia----
    The Chairman. Listen, I am glad to have you, Dr. Glover, 
but, I mean, we have got time here and I am going to 
recognize----
    Dr. Glover. I was simply trying to answer the question.
    The Chairman. They have answered it. I think you have 
answered it. If you want to give us further answer on it, you 
can file it, like every other witness does before our 
committee.
    Senator Edwards?
    Senator Edwards. Thank you very much, Mr. Chairman.
    Mr. Chairman, I have a couple of comments and then some 
questions for the witnesses, and I think we have about 9 
minutes left on the vote, so we are going to be on a tight time 
here.
    Reforming our drug patent system this year should be one of 
Congress' top priorities. The reason is simple: If we are going 
to have and be able to afford a prescription drug benefit, we 
need to get the costs of prescription drugs under control. And 
we need patent reform to do that.
    I am going to be working very hard on this committee to 
make sure we get a reform bill this year. Drug companies, 
including drug companies that we are proud of located in the 
State of North Carolina, have every right to profit from their 
breakthrough research, just as all Americans profit from it. 
But drug companies do not have the right to use legal loopholes 
and legal maneuvers to extend patents at the expense of 
patients, businesses, and taxpayers. We need to encourage 
innovation in the laboratory, but not in the patent process.
    I was a lawyer for many years before I came to the Senate, 
and people often would ask me what I think of frivolous 
litigation. I think it is wrong. But what is happening today is 
that some drug companies have become powerful engines of 
frivolous litigation. It ought to stop.
    I want to mention three reforms that I intend to work very 
hard for on this committee: first, to stop the abuse of these 
30-month stays, and this is the issue addressed by the Schumer-
McCain legislation. And I want to mention in this context a 
document that came, I believe from Pfizer, which addresses this 
whole issue of what has happened to patents and how patents 
have changed, and this came in 1998 from the Research Division 
of Pfizer. They say, first, the nature of patent protection 
around pharmaceutical products changed markedly over the past 
decade, which is roughly equivalent to the time since Hatch-
Waxman has been in place. And they say, second, while the core 
patents still afford tremendous protection, newer claims can 
afford substantial market positions or, at a minimum, slow 
generic entry by a matter of years--talking specifically about 
the protection of market position and talking about preventing 
the entry of generics which would increase competition.
    And then they have a comparison between pharmaceutical 
patents, the changing landscape, and in the 1980s, which is the 
time during which Hatch-Waxman came into play, there were five 
kinds of patents listed. And then the 1990s, there are 18 kinds 
of patents listed, including one for packaging.
    Now, of course, the pharmaceutical companies knew in the 
1980s about packaging and packaging being an issue. What 
changed as a result of Hatch-Waxman is using packaging to 
obtain new patents and market protection.
    The second reform is to cut down on the mistaken issue of 
patents and listing of drugs in the Orange Book. We should beef 
up staffing at the Patent and Trademark Office and require more 
meaningful standards to get into the Orange Book. This is one 
way to stop patent litigation before it ever starts.
    And, third, to make the 3-year market exclusivity for drug 
patents work the way it was supposed to work, so you can 
effectively get an extra 3 years on your patent when you make a 
real improvement that helps people, not when you add mint to 
gum, which is one thing that happened recently. Consumers 
should not lose access to cheap generics for 3 years because a 
company has added mint to gum.
    Dr. Glover, if you are willing to work with us--as you 
know, the flow of breakthrough drugs has declined in recent 
years, and companies are increasingly varying their existing 
drugs. If we need to take real steps to encourage genuine 
breakthroughs in the context of real reform, we ought to look 
at that. At least I believe we should look at that.
    The bottom line, though, is if we are going to get a real 
prescription drug benefit, we need to get real reform in the 
drug patent system. I am going to make it a priority to do that 
this year. And let me just say, Dr. Glover, I have a couple 
questions for you, specific examples, but it seems to me--I 
have been listening to your testimony. It is now the second 
time I have heard you testify. And I agree with those who have 
said up here, and you said it a few minutes ago, that there are 
no villains. I can tell you without any question that as 
between the pharmaceutical companies and the generics, I have 
no favorite in this. My only favorite are the people out there 
who are trying to pay for their medicine.
    So I am just trying to find a way to try to get these 
prescription drug costs under control. It is just that simple 
from my perspective.
    And I am sure that you are right, I am sure there are cases 
where, after many years of a product being on the market, that 
a genuine change occurs, a genuine innovation that has been 
discovered in the laboratory that makes the product 
significantly more beneficial, and as a result sometime before 
the patent expires a new patent is filed. I have no doubt that 
that occurs. But we also know in trying to be fair and 
reasonable about this, we also know that there are a number of 
examples of cases where abuse has occurred.
    When somebody has a product on the market for many, many 
years, a pill, and then says they need a new patent because it 
needs to go in a brown bottle, I mean, it doesn't take a lot of 
common sense to figure out that most medicine, in fact, comes 
in brown bottles, and that is probably an abuse of the process. 
And, in fact, as you well know, the courts have found that, in 
fact, in that particular case that was an abuse of the process.
    So my concern is we have some cases that are legitimate, no 
question about that, and then, on the other hand, we have cases 
where abuses are occurring. And when the abuses occur, it is 
not the pharmaceutical companies or the generics that pay the 
price. It is American consumers who pay the price. That is the 
problem we have here. And if it is an abuse, if, in fact, as we 
know, it has occurred in the past, it is an abuse of the patent 
system where someone files a new patent, they get listed in the 
Orange Book based on the color of the bottle or some other 
ridiculous basis, and then a lawsuit is filed. I mean, you are 
right. It is not an extension of the patent. It is a new 
patent. That is what it is. But sometimes these new patents are 
not legal, they are not legitimate.
    And what happens is they get an automatic 30-month stay in 
a situation where the patent they have filed and that has 
gotten listed in the Orange Book was never real, never 
legitimate to start with. And when that occurs--and that is 
what our concern is. I hope you understand that. When that 
occurs, then it is not the pharmaceutical companies I am 
worried about, and it is certainly not the generic companies 
that I am worried about. I am worried about the people out 
there who, during that 30 months that the stay is in place, are 
stuck. They are stuck with the high price. We know that 
competition brings the prices down. And during that 30-month 
period, there is no competition. The patent is maintained, this 
new patent is maintained, and in some cases it is on the basis 
of the color of the bottle or being able to--I heard Senator 
McCain talking about being able to sprinkle the product on 
oatmeal. I don't know about that particular case, but there are 
a series of these cases involving the drug Buspar, Platinol--I 
am not sure I am pronouncing these right--Wellbutrin. And you 
know about these cases where abuses have occurred.
    The problem is we have to do something about those 
situations where, in fact, abuses are occurring. And that is 
the concern I have. I think it would be unfair and unreasonable 
to say that every time near the end of a patent period the drug 
companies come up with an innovation or a new patent that is 
bogus. That is not true. I don't think that is fair, and I 
don't think that is true. But there are occasions where that is 
clearly happening. And when it does happen, American consumers, 
people who have to go to the drug store and pay for their 
medicine and are having such a terrible time doing that, are 
having to pay the price.
    So that is the concern I have, and I have now used up all 
my time talking. I wanted to ask you questions, but I am going 
to have to go vote. But I hope both of you understand that that 
is our perspective on this. Our perspective is not trying to 
advantage the generics or the pharmaceutical companies vis-a-
vis each other. Our perspective is we want to provide 
protection during the time that there is a legitimate patent. 
We want to stop this abuse that is clearly occurring and the 
protections that are in place for abuse of illegitimate patents 
that, in fact, drive up costs for consumers. That is our 
concern about this whole process.
    I have 30 seconds left to vote. I apologize. I would love 
to continue to talk to both of you about this issue. I think it 
is a legitimate issue. I don't think it should be good versus 
bad or that anybody in this fight is evil. But I do think that 
there are concerns here that need to be addressed.
    Thank you all very much for being here.
    The hearing is adjourned.
    [Whereupon, at 4:41 p.m., the committee was adjourned.]
    [Additional material follows.]

                          ADDITIONAL MATERIAL

             Prepared Statement of Governor William Janklow
    Good afternoon, Mr. Chairman and members of the committee. I am 
Bill Janklow, Governor of the State of South Dakota. I am honored to 
have the opportunity to offer testimony on the need to reform the 1984 
Drug Price Competition and Patent Term Restoration Act, better known as 
the Hatch-Waxman Act.
                              introduction
    First, let me express my appreciation to you, Mr. Chairman, and to 
other members of this committee for taking time to explore ways in 
which we might improve the Hatch-Waxman Act. At our February meeting, 
the National Governors Association unanimously passed a resolution 
encouraging congressional review of the Act. We realize that you are 
making a great effort to respond to our concerns.
    Second, let me also express appreciation to Senators Schumer and 
McCain for working hard over the past year to draft legislation that 
attempts to address many of the concerns we have regarding the Hatch-
Waxman Act.
    I appear before you today in two roles: representing South Dakota 
and representing 10 other Governors who are members of Business for 
Affordable Medicine. As Governor of South Dakota, I am concerned about 
the escalating cost of prescription drugs and the effect of these costs 
on consumers, seniors, taxpayers, hospitals, and employers in my State 
and on the State and Federal programs in South Dakota. We are doing 
everything we can think of to keep our prescription drug costs under 
control. A few examples are: 1) in the State Medicaid program paying 
for the least costly drug unless a physician specifies otherwise; 2) 
requiring Medicaid recipients to obtain prior authorization for 
specific high costs drugs; 3) providing incentives to pharmacists to 
obtain permission from physicians to prescribe a generic alternative in 
our State employee health plan; and 4) reducing co-payments for State 
employees purchasing less expensive but equally effective brand name 
drugs or generics. Unfortunately, the growing trend by pharmaceutical 
companies to prevent competition from lower-cost generic alternatives 
is defeating most of the gains we have made as a result of these 
initiatives.
 barriers to generic prilosec are costing state medicaid programs $135 
                            million annually
    For example, South Dakota's Medicaid program spent $1.4 million 
last year to purchase the ulcer medication Prilosec. The patent on 
Prilosec expired in October, which means South Dakota should save half 
that amount or $700,000 this year by purchasing generic alternatives. 
The problem is, the manufacturer of Prilosec has tied generic 
manufacturers up in litigation over secondary Prilosec patents in order 
to prevent competition. $700,000 in the State of South Dakota is a 
great deal of money, money that could be spent on other equally 
important health care issues.
    As I indicated earlier, I am also appearing today on behalf of 10 
other Governors who share my concerns about the ability under the 
Hatch-Waxman Act of pharmaceutical manufacturers to delay competition. 
Together, with several of the Nation's largest employers including 
General Motors who is with us today and a number of labor 
organizations, we have formed Business for Affordable Medicine, or BAM. 
BAM is committed to helping Congress close loopholes in the Hatch-
Waxman Act so that all pharmaceutical purchasers can have certainty 
about their ability to save when brand patents expire. Let me give the 
committee a specific example from my State. In fiscal year2000, South 
Dakota's Medicaid program expenditures for Prozac were $817,990. In 
fiscal year2001 they were $878,946. Prozac went off patent this past 
August. As a result, our projected expenditures for fiscal year2002 for 
Prozac will decrease by $350,000. Expenditures will decrease even 
further as physicians become more comfortable with prescribing the 
generic alternatives.
    Imagine this, Mr. Chairman: While every member of this committee is 
hearing from his or her Governor about the Medicaid funding crisis back 
home, states could be saving millions of dollars right now if generics 
for Prilosec, that should be available, were actually on the market. I 
have provided a list to the committee of the amount each State could be 
saving, but let me summarize: The Medicaid programs just in the states 
represented by members of this committee would save $135 million this 
year if timely competition would have been assured for just this one 
drug. All State Medicaid programs would have saved $332 million this 
year if they had access to generic Prilosec.
 closing hatch-waxman loopholes will save state medicaid programs $600 
                            million annually
    This is a huge concern for Governors because State Medicaid 
agencies spent $1.2 billion last year on 17 other drugs that face 
patent expiration in the next two and a half years. Under the original 
intent of the Hatch-Waxman Act, states should expect to save an average 
of 50 percent or $600 million on these drugs as lower-cost alternatives 
become available after patents expire.
    Here is a question for you, Mr. Chairman, and for our friends from 
the brand pharmaceutical industry who are with us today: Will we get 
generic alternatives to these 17 drugs on time?
    I suspect that the answer to that question is ``no.'' In fact, the 
only certainty provided today under the Hatch-Waxman Act is that the 
manufacturers of these drugs have ways to delay competition from 
generic alternatives.
    As a result, members of BAM encourage this committee to close the 
Hatch-Waxman Act loopholes.
               end the 30-month stay of generic approvals
    Specifically, we hope you will question the wisdom of providing 
automatic 30-month stays on generic drug applications whenever brand 
manufacturers sue for infringement. While this provision in the Act may 
have been sound in 1984, today it is routinely used to simply stifle 
competition. A more sound approach, as incorporated in the Schumer-
McCain bill, would be to require drug patent holders to pursue the same 
injunctive relief process required of all other patent holders.
          restore congressional intent to the ``orange book''
    In addition, drug companies should only be allowed to list patents 
for new drugs and new drug uses in the FDA `` Orange Book.'' This was 
the intent of the authors of the Act in 1984, according to everyone 
except the brand pharmaceutical industry.
    Whether it was the intent or not, it should have been and Congress 
should make it clear in the statute that the secondary patents used to 
unfairly prevent competition can no longer be listed.
    Finally, let me be very clear about an important point: Neither I 
nor any other member of the BAM coalition seeks to undermine the 
critical safeguards that are provided to intellectual property owners. 
We support strong patent laws and do not propose that they be weakened 
in any way.
    But that is not what our effort or today's hearing is about. Our 
focus is on improving pharmaceutical competition for the benefit of 
consumers and the pharmaceutical industry. We know that pharmaceutical 
innovation is driven by competition, and that incentives to innovate 
are lessened when competition is impeded. The Hatch-Waxman Act embraced 
this concept and led to a long period of robust competition and big 
increases in drug research and development. We encourage this committee 
to fine-tune the law so the competition intended by the Act is restored 
for the benefit of consumers and all other pharmaceutical purchasers.
  congress should ensure consumers will have timely access to generics
    Our friends in the brand drug industry have indicated that, because 
only six percent of generic drug applications since 1984 have faced 
approval delays, we should not think there are significant barriers to 
competition. In fact, while few generics faced approval delays in the 
early years, the majority face delays today. It is also a fact that 
brand manufacturers delay competition for virtually all blockbuster 
drugs. As a Governor who must figure out how to pay for these extra 
costs in our State programs, I hope the committee will focus on the 
brand drug industry's intentions for the 17 drugs that face patent 
expiration soon.
    At the State and Federal level, we have struggled to find ways to 
reduce prescription drug costs for seniors. Although closing the 
loopholes in the Hatch-Waxman Act is not the only answer, it certainly 
would offer some relief to senior citizens who must take a prescription 
drug that should go off patent. I don't know a single senior citizen in 
South Dakota who wouldn't appreciate paying 50% less for one of their 
prescriptions and who couldn't use that savings elsewhere.
    I truly want to thank you again, Mr. Chairman and the members of 
the committee for the opportunity to offer my views on behalf of the 
citizens of South Dakota and the members of the BAM coalition. I look 
forward to answering any questions you may have.
                 Prepared Statement of Bruce E. Bradley
    Mr. Chairman, Ranking Member Gregg, and distinguished Committee 
members, I am Bruce Bradley, Director of Health Plan Strategy and 
Public Policy at General Motors.
    I am testifying today on behalf of RxHealth Value, a coalition of 
more than 20 national organizations representing consumers, employers, 
unions, health plans and providers. Our membership is broad and 
diverse, and includes numerous prominent consumers and purchasers of 
pharmaceuticals, such as AARP, Families USA, the Midwest Business Group 
on Health, Ford, Daimler-Chrysler, the United Auto Workers, the AFL-
CIO, Kaiser Permanente, the Alliance of Community Health Plans and 
BlueCross and BlueShield Association. It is an honor to appear before 
your Committee to share our experience regarding prescription drug cost 
increases and to underscore our belief that Federal policy reforms are 
necessary to restore the balance between pharmaceutical competition, 
consumer choice, and innovation.
    As the Senate Committee with primary jurisdiction over many 
elements of this issue,prescription drug development, use, and 
marketing, we want to particularly thank you for your leadership in 
holding this hearing. It is our hope that today's hearing will foster a 
bipartisan effort to develop legislation that would bring relief to 
consumers, as well as public and private purchasers of prescription 
drugs.
                     pharmaceutical cost challenge
    Consumers, businesses, unions, the Federal government and health 
plans throughout the Nation are aggressively, and mostly 
unsuccessfully, attempting to manage soaring prescription drug costs. 
These expenditures are increasing at annual rates of up to 20 percent, 
and are unsustainable.
    That is why GM is working with three coalitions--RxHealth Value, 
Business for Affordable Medicine (BAM), and the Coalition for a 
Competitive Pharmaceutical Market (CCPM)--to highlight this issue and 
advocate for Federal policy changes. These broad-based, diverse and 
respected organizations all represent purchasers who are growing 
increasingly concerned that the Hatch-Waxman law contains loopholes 
that allow the pharmaceutical industry to delay more choice and 
competition and choice of high-quality, cost-effective generic drugs. 
We believe that inappropriate Orange Book patent listing and repeated 
use of the automatic 30-month market exclusivity provision granted to 
the pharmaceutical industry has led to exposure to unpredictable, 
unaffordable and unmanageable pharmaceutical costs.
    Collectively, RxHealth Value's members represent over 100 million 
Americans. These consumers spend billions of dollars each year on 
prescription drug expenditures. The business and insurer purchasers in 
that comprise RxHealth Value are reporting prescription drug cost 
growth trends of as much as 20 percent per year.
    At GM, we insure over 1.2 million workers, retirees, and their 
families, and are the largest private provider of health care coverage 
in the Nation. We spend over $1.3 billion a year on prescription drugs. 
Despite our use of State of the art management techniques that assure 
the most appropriate and cost effective use of prescription drugs, our 
pharmaceutical bill continues to grow at a rate of 15 to 20 percent a 
year-more than quadrupling the general inflation rate. Such drug cost 
increases are driven by a host of factors, including higher 
utilization, direct-to-consumer advertisements, price increases of 
pharmaceutical products currently on the market, and the delay of 
generic competition. The other members of the RxHealth Value have 
experienced the same disturbing and unsustainable cost increases.
                    barriers to generic competition
    Today's hearing appropriately focuses on barriers to generic entry 
into the marketplace. From our perspective, this problem has grown 
worse in recent years and, if not addressed, will almost certainly 
force companies and all other purchasers, whether public or private, to 
make extraordinary and painful benefit and cost shifting decisions. 
Global companies simply will be unable to effectively compete in the 
world marketplace without relief from rising prescription drug costs.
    Mr. Chairman, in the last several years, as the patents of 
prescription drugs have expired, purchasers have planned and budgeted 
for generic drug competition to reduce costs and increase enrollee 
choice. Such competition is critical to effective pharmaceutical 
benefit management programs as generic competition reduces costs by 
between 50 to 60 percent. Time and again, however, purchasers have 
underestimated their liability, as many pharmaceutical companies 
effectively extend their market exclusivity through the automatic and 
repeated use of the 30-month market exclusivity stay, included in the 
Hatch-Waxman Act.
    At this point, it is important to make clear that the extended 
market exclusivity or patent extensions utilized by the pharmaceutical 
industry occurs only after the underlying patent for the initial 
product has expired. In other words, by listing unapproved and 
unmarketed uses or altering nonactive ingredient components of the 
product in the Orange Book or through the U.S. Patent and Trademark 
Office, the industry has successfully protected their older products 
from generic competition.
    For many of these product listings, however, independent experts 
have raised serious questions about whether such product changes really 
are true innovations meriting such protections. And when a 
pharmaceutical company contests a generic's challenge of a questionable 
patent or exclusivity claim, the pharmaceutical company routinely is 
granted a 30-month market exclusivity extension, regardless of the 
merits of the case.
    We are aware of no other industry that has such an automatic 
protection against competition and we are virtually certain that 
Congress never intended that this provision to be repeatedly utilized. 
We believe that the expiration of patents after their intended 
statutory term creates a strong incentive for companies to develop 
innovative new products.
    As a consequence of the practices of many in the pharmaceutical 
industry, GM and other members of RxHealth Value have seen our 
prescription drug costs skyrocket. Since the enactment of Hatch-Waxman, 
the average number of patent extensions filed for ``blockbuster'' drugs 
have increased by five-fold--from two to ten patents filed. And this 
trend has a very real and all-to-frequently devastating financial 
impact.
    Our concerns about inappropriate practices in the marketplace are 
not limited to the brand-name industry. We are troubled by and strongly 
opposed to brand-to-brand and brand-to-generic settlements that are 
designed to delay market entry of generic competition.
    There have been cases when generic companies who initially filed to 
challenge a brand-name patent and thus were eligible for the no generic 
competition 180-day exclusivity period have reached an agreement with 
the brand-name company to not enter the marketplace. Such agreements, 
which benefit both brand name and generic companies, do nothing for 
purchasers and consumers of prescription drugs.
                 cost impact on rxhealth value members
    Within the last several years RxHealth Value members have literally 
had to increase our budgets for pharmaceuticals by hundreds of millions 
of dollars a year. At GM the so-called ``evergreening'' of the patents 
of five products designed to treat ulcers, cholesterol, diabetes, 
allergies and depression has increased GM's pharmaceutical costs for 
these five drugs alone by over $142 million.
    Even more ominous is our fear that this trend will continue and 
likely grow worse. For example, without new legislation, we now 
estimate that, if just five pharmaceutical ``blockbuster'' product 
patents that are currently scheduled to expire are extended, GM will 
see increases in our prescription drug bill in excess of $204 million 
during the period of delay of generic market entry.
    Mr. Chairman, when access to lower cost generics is inappropriately 
delayed, consumers and other purchasers have no remedy or recourse--no 
way to recoup the excessive costs paid for pharmaceuticals.
    We are appearing before you to highlight the tremendous challenge 
confronting us and to seek legislative relief.
              support for bipartisan hatch-waxman reforms
    We believe that this is the time for Congress to intervene and pass 
legislation that will restore the balance between competition and 
innovation that was initially intended by the Congress in the Hatch-
Waxman Patent Restoration Act of 1984.
    We agree with the growing bipartisan consensus that it is time to 
Congress should eliminate the 30-month stay and transfer the 180-day 
generic exclusivity protection away from any generic company who has 
agreed to such a settlement and to the next generic competitor who will 
enter the marketplace. For this reason, GM, as well as members of 
RxHealth Value, support the Greater Access to Affordable 
Pharmaceuticals Act and other legislation designed to eliminate these 
barriers to generic drug entry into the marketplace.
    We greatly appreciate the bipartisan leadership of Senator Schumer 
and Senator McCain, as well as Congressman Brown and Congresswoman 
Emerson, in raising this issue and developing thoughtful legislation. 
We hope this will serve as a critical foundation for constructive 
legislation to be reported out of this Committee and passed in a 
bipartisan fashion by the Congress.
    I do want to make clear, however, that GM, the auto industry and 
the coalitions we have partnered with, including RxHealth Value, are 
strongly committed to and supportive of pharmaceutical research and 
development. We believe that innovative products should be strongly 
protected by patent law. We fear, however, that certain practices 
currently employed in the industry have effectively misdirected its 
attention away from true innovation and new product development and 
toward preservation of old innovations.
                               conclusion
    Mr. Chairman, pharmaceutical cost increases clearly cannot be 
sustained. Notwithstanding our concerns about these costs, we regard 
coverage of prescription drugs as a basic, necessary benefit for all 
Americans because prescription drugs, used wisely, are frequently the 
most clinically appropriate and cost-effective treatment.
    Unfortunately, this Nation is not using prescription drugs wisely 
and is not even making them available to millions of Americans. We are 
not adequately encouraging either competition or true breakthrough 
innovation. We can and we must do better.
    RxHealth Value believes that Hatch-Waxman reforms--such as the 
Greater Access to Affordable Pharmaceuticals Act--can enhance 
competition and choice while also encouraging meaningful innovation.
    Mr. Chairman, we appreciate your leadership in holding this 
hearing. We look forward to working with you and providing any 
assistance possible in developing legislation in this area. I would be 
happy to answer any questions you may have.
             Prepared Statement of Gregory J. Glover, M.D.
    Mr. Chairman and Members of the Committee: On behalf of the 
Pharmaceutical Research and Manufacturers of America (PhRMA), I am 
pleased to appear at this hearing today on the Hatch-Waxman Act. I am a 
physician and an attorney with the law firm of Ropes & Gray, 
specializing in intellectual-property and food and drug regulatory 
issues. PhRMA represents the country's major research-based 
pharmaceutical and biotechnology companies, which are leading the way 
in the search for new cures and treatments that to enable patients to 
live longer, healthier, and more productive lives.
    Today, I would like to offer testimony on the importance and 
success of the Hatch-Waxman Act for promotion of both pharmaceutical 
innovation and competition, and on why S.812, as currently drafted, 
would undermine this carefully crafted, delicately balanced regime.
    PhRMA strongly believes that the U.S. pharmaceutical market is 
robust, competitive, and working to the benefit of consumers and 
patients-is working, in fact, as Congress intended when it passed the 
Drug Price Competition and Patent Term Restoration Act of 1984 
(commonly known as the Hatch-Waxman Act after its principal sponsors). 
We believe that advocates of change face a substantial challenge to 
show that change is needed and would not upset the careful balance 
achieved by Congress. The facts speak for themselves. The Hatch-Waxman 
Act works. It has promoted generic competition while affording 
sufficient protection to innovation, and the proposed changes would 
serve only to undermine this highly successful compromise.
    The U.S. pharmaceutical industry continues to lead the world in 
pharmaceutical innovation and makes a significant contribution to the 
country's economy. It is a substantial contributor to the $1.3 trillion 
health-care sector, which, overall, accounts for about 13% of the 
Nation's economic output, is expected to reach 16% of output by 2010, 
and could exceed 20% by 2040.
    Over the past 100 years, pharmaceutical research has helped 
transform health care, contributing substantially to an increase of 
nearly thirty years in life expectancy (from 47 years in 1900 to 76.5 
years today). The death rate from disease has fallen by a third from 
1.2 deaths per 1,000 individuals in 1920 to 0.8 deaths per 1,000 
individuals in 1993, even as people live longer (sometimes succumbing 
to disease in later life, having benefited from control or elimination 
of diseases that previously struck earlier in life).
    Pharmaceuticals have also brought better lives, conquering 
infection, making mental illness highly treatable, enhancing 
independence in old age, and making impressive inroads against cancer, 
heart disease, stroke and many other diseases. Pioneer pharmaceutical 
companies continue to play a critical role in addressing old and new 
challenges, including AIDS and Alzheimer's disease.
    Not only are pharmaceuticals worth the cost, they are also cost-
effective, adding little to the cost of health care and replacing less 
effective, more expensive treatments. Over nearly thirty years, total 
GDP spent on drugs rose little from only 0.84% in 1965 to 0.86% in 
1992. In 2000, drug costs accounted for 9% of overall healthcare costs, 
while hospital care accounted for 32% and physician care for 22%. 
Further, as stated in the President's 2002 Economic Report, there is 
``a growing body of evidence that, for a wide range of diseases, the 
additional money spent on treatment is more than offset by savings in 
direct and indirect costs of the illnesses themselves. Indirect costs 
include lost productivity and, especially, poor health . . .
    The cumulative value of medical innovation is, in fact, in the 
trillions of dollars. Estimates by the Congressional Joint Economic 
Committee quoted by the National Institutes of Health show annual net 
gains of $2.4 trillion a year resulting from increased life expectancy 
alone. In particular, studies have shown that replacing older with 
newer medicines reduces illness, death, and total medical spending. 
Further, in a survey concluded in April, funded by PhRMA, of 400 
physicians from throughout the country, over 90% considered the 
continuing development of new prescription drugs vital to patient care. 
In addition, 84% believed that prescription drugs have reduced the need 
for surgery, and 95% of these physicians thought that prescription 
drugs have shortened hospital stays.
    The research-based pharmaceutical sector in the United States is 
the single largest global player in the research and development of new 
drugs, both in terms of new drugs brought to market, and R&D 
expenditures. The research-based pharmaceutical industry in the United 
States is responsible for the discovery and development of over 90 
percent of new drugs worldwide.
    New drug development is a lengthy process, and total drug 
development time has grown significantly. Average total drug 
development time has increased from approximately 8 years as of 1960, 
to over 14 years in the 1980s and 1990s. New drug development is also 
very risky. Most drugs do not survive the rigorous development 
process--only 20 in 5,000 compounds that are screened enter preclinical 
testing, and only 1 drug in 5 that reaches human clinical trials is 
approved by the FDA as being both safe and effective. Further, for 
those drugs that do reach human clinical trials, more and far larger 
trials are now typically performed. Accordingly, the average cost to 
develop a new drug has been estimated to now be approximately $800 
million.
    Enormous investments are needed to encourage further pharmaceutical 
innovations, investments as large or larger than those that have 
supported the extraordinary progress from which individual patients, 
the public health, and society as a whole now benefit.
    PhRMA companies spend an estimated 17.7% of sales on R & D, the 
highest percentage of any major U.S. industry. The pharmaceutical 
industry is more research intensive than the electronics, 
communications or aerospace industries. The typical PhRMA company 
spends more on research each year than such companies as Microsoft, 
Boeing, and IBM, as evidenced by a comparison of average research 
outlays reported publicly by PhRMA member companies and by Microsoft, 
Boeing, and IBM as stated in their annual reports. National Science 
Foundation studies have shown that while the pharmaceutical industry 
recorded only 2.5% of the domestic sales of companies that conducted 
R&D in 1998, it accounted for 8.7% of all company-funded R&D, 18.7% of 
all company-funded basic research, and 4.8% of all research scientists 
and engineers. Contrary to some claims, PhRMA companies' research 
expenditures substantially exceed their marketing expenses, including 
direct-to-consumer advertising.
    Research-based pharmaceutical companies allocate nearly 78.5% of 
their R&D expenditures to research and evaluation for new drug 
products. The remaining 21.5% is devoted to research into significant 
improvements and/or modifications to existing products. Such 
significant adjustments can include enhanced efficacy, improved dosage 
and delivery forms and patient-tailored therapies. These repeated 
incremental innovation also lead to major breakthroughs in therapy. 
Sequential product innovation is an important feature of the innovative 
process for the pharmaceutical industry, expanding the variety of 
therapeutic choices available for consumers and their doctors to 
consider.
    The Hatch-Waxman Act has played a critical role. On the one hand, 
the generic industry has flourished since the passage of the 1984 
compromise law eliminated major barriers to market entry and made it 
much easier, far less costly, and quicker for low-cost generic drug 
manufacturers to get their copies of innovator medicines to market 
following patent expiration.
    Since 1984, the generic industry's share of the prescription-drug 
market has jumped from less than 20% to almost 50%.
    Before 1984, it took three to 5 years for a generic copy to enter 
the market after the expiration of an innovator's patent. Today, 
generic copies often come to market as soon as the patent on an 
innovator product expires, and sales of pioneer medicines typically 
drop by 40% or more within weeks after generic copies enter the market.
    Prior to 1984, only 35% of top-selling innovator medicines had 
generic competition after their patents expired. Today, almost all 
innovator medicines face such competition.
    On the other hand, the Hatch-Waxman Act provided the research-based 
pharmaceutical industry-the source of virtually all new drugs in the 
U.S.-limited incentives to innovate, by restoring part of the patent 
life lost by pioneer medicines as a result of regulatory review by the 
Food and Drug Administration (FDA) and establishing litigation 
procedures to decrease the likelihood of patent infringing market entry 
of generic drug products. The research-based industry, spurred by 
accelerating scientific and technological advances, continues to 
increase its investment in R&D and to develop new, more advanced, and 
more effective medicines.
    The research-based industry's investment in pharmaceutical R&D has 
jumped from $3.6 billion in 1984 to more than $30 billion this year.
    During the 1990s, the research-based industry developed 370 new 
life-saving, cost-effective medicines--up from 239 in the previous 
decade.
    The research-based pharmaceutical industry now has more than 1,000 
new medicines in development, either in human clinical trials or at FDA 
awaiting approval. These include more than 400 for cancer; more than 
200 to meet the special needs of children; more than 100 each for heart 
disease and stroke, AIDS, and mental Illness; 26 for Alzheimer's 
disease; 25 for diabetes; 19 for arthritis; 16 for Parkinson's disease, 
and 14 for osteoporosis.
    These data on generic market entry and pharmaceutical innovation 
demonstrate that the Hatch-Waxman compromise is both promoting 
competition and encouraging innovation. As a result, consumers are 
receiving the benefits of early access to low-cost generic copies and 
of an expanding stream of ever more effective and precise, 
sophisticated medicines.
    How precisely has the Hatch Waxman compromise both promoted 
competition and preserved incentives for innovation? A little history 
helps to explain.
    Following amendments made to the Federal Food, Drug, and Cosmetic 
Act (``FCDA'') in 1962, all new drugs had to satisfy strict pre-market 
approval requirements for both safety and efficacy, and, as a 
consequence, submit to lengthy FDA approval processes. The substantial 
safety and efficacy data needed to support the approval of a drug were 
considered to be trade-secret information that could not be used to 
approve competing, generic copies. Apart from repeating the long, 
costly clinical studies performed by an innovator company, a generic 
applicant could, for the most part, obtain approval only by using a 
literature-based (so-called ``paper'') New Drug Application (NDA), 
which was possible only when published scientific literature 
demonstrated a drug's safety and effectiveness. As a consequence, prior 
to 1984, there were few generic copies of pioneer drugs.
    To permit the approval of generic copies of all post1962 drugs, the 
Hatch-Waxman Act compromise in effect revoked the trade-secret status 
of innovators' safety and effectiveness information. Instead of proving 
safety and effectiveness, a generic manufacturer was allowed to show 
the bioequivalence of its copy to a pioneer product. Bioequivalence 
means that a copy's active ingredient is absorbed at the same rate and 
to the same extent as that of the pioneer medicine. Upon such a showing 
of bioequivalence, FDA could rely on the pioneer's safety and efficacy 
data to approve the copy.
    As a result of the Hatch-Waxman Act, generic manufacturers are able 
to avoid incurring the huge cost (estimated at over $800 million on 
average) of discovering and developing a new drug. It costs only a very 
small fraction of that amount for generic manufacturers to demonstrate 
bioequivalence--which is why they can market their copies at reduced 
prices. The Act retains only a very limited vestige of the pioneer 
companies' former, complete proprietary rights in these extremely 
valuable data. Under the Act, FDA is prohibited from approving generic 
copies of a pioneer drug for 5 years after approval of an innovator 
product using a new chemical entity and for 3 years after approval of 
other pioneer drugs and innovations in existing drugs.
    The Hatch-Waxman Act compromise also helped generic manufacturers 
by overruling the patent infringement standard articulated in a 1984 
Court of Appeals decision in Roche Products, Inc. v. Bolar 
Pharmaceutical Co., the Bolar case. In line with prior judicial patent 
law decisions, the Court had held that it constituted patent 
infringement for a generic company to manufacture and test a medicine 
before its patent expired, including for the purpose of preparing a 
marketing application to submit to FDA. In a unique exception to patent 
law, the Hatch-Waxman compromise allows generic manufacturers to use 
innovator medicines still under patent to obtain bioequivalency data 
for their FDA applications so they can be ready to market their copies 
as soon as the pioneer patents expire.
    The Hatch-Waxman Act also sought to increase the number of generic 
copies by providing an incentive for generic manufacturers to challenge 
pioneer patents. The first generic manufacturer to certify to FDA that 
a patent on an innovator medicine is invalid or is not infringed by its 
product obtains 180 days of exclusive marketing rights. During that 
180-day period, the FDA cannot approve any other copies.
    To attempt to balance the generic provisions, the Hatch-Waxman Act 
compromise also provided limited incentives to pioneer companies to 
help spur innovation. The law restores part of the patent life--but not 
all--lost by innovator products as a result of FDA review:
    A pioneer drug receives a half-day in restored patent life for 
every day the product is in clinical trials prior to review by FDA.
    A pioneer drug receives day-for-day restoration of patent life for 
the time it is under FDA review.
    However, the effective patent life of a drug cannot exceed 14 
years, regardless of how much time is lost in clinical testing and 
review. And the total time restored is limited to no more than 5 years 
(even if more than 5 years is lost during drug development and review).
    As a consequence, innovator drugs introduced in the 1990s, even 
with patent restoration, enjoyed an average effective patent life of 
less than 11.5 years-substantially less than the 18.5 years enjoyed by 
inventors of other products. (The full patent term in the U.S., as with 
all member nations of the World Trade Organization, is now 20 years 
from the date a patent application is filed with the Patent and 
Trademark Office).
    In addition to partial patent restoration, the law also creates 
procedures to facilitate the efficient resolution of patent disputes 
before FDA approves an allegedly infringing generic copy.
    One of the fundamental principles of the Hatch-Waxman Act is that a 
generic drug should not be able to enter the market if it infringes a 
valid patent. Under U.S. law, patents are presumed to be valid, and 
this presumption can be overcome only by clear and convincing evidence 
to the contrary. Moreover, under the Hatch-Waxman Act, the generic 
applicant is proposing to market a drug that is the same as the 
pioneer's. Indeed, that ``sameness'' is the basis for the generic 
applicant to use the pioneer's data to demonstrate safety and 
effectiveness. If there is a patent infringement suit, it is based on 
an effort to market a generic copy of a pioneer product that is covered 
by a presumptively valid patent before the patent expires.
    Failure to resolve patent issues prior to generic product approval 
presents problems for pioneer and generic manufacturers alike. The 
marketing of a product that is later determined to be infringing will 
severely and irreparably injure the pioneer's market at a magnitude 
that generally cannot be compensated by the infringing generic 
manufacturer. At the same time, the generic manufacturer is faced with 
the risk of having to pay crippling actual and enhanced damages for 
intentional infringement if it decides to market the approved product 
before the resolution of the patent infringement claim. In short, (in 
addition to being in the interest of physicians and patients who might 
otherwise have to address the difficulties associated with switching 
from the pioneer to the generic product and back again) it is in the 
interest of both the pioneer and the generic company to resolve all 
patent issues before the generic product goes to market.
    Congress recognized that it would be preferable to resolve patent 
infringement disputes prior to FDA product approval. Accordingly, the 
Act establishes the following patent litigation provisions to benefit 
both pioneer and generic manufacturers. These provisions provide for: 
(1) patent listing to notify generics of patents that claim the 
pioneer's product; (2) patent certification to inform pioneers of 
proposed generic products that may infringe their patents; (3) up to a 
30-month stay of product approval to allow for resolution of patent 
infringement claims; and (4) the grant of a 180-day period of market 
exclusivity to the first generic that challenges a listed patent.
    An applicant who submits a New Drug Application (``NDA'') must 
submit information on each patent that ``claims the drug or a method of 
using the drug . . . and with respect to which a claim of patent 
infringement could reasonably be asserted if a person not licensed by 
the owner of the patent engaged in the manufacture, use, or sale'' of 
the drug.
    FDA publishes the submitted patent information in its official 
publication, Approved Drug Products with Therapeutic Equivalence 
Evaluations (the ``Orange Book''). The purpose of the Orange Book 
listings is to provide clear notice to potential generic developers of 
the patents (other than process patents) that cover the product and may 
reasonably be asserted by the innovator against the generic drug 
manufacturer. In doing so, it serves to protect the interests of both 
pioneer and generic manufacturers.
    Correspondingly, the need for patent certifications arises from the 
legislative intent: (1) to permit the marketing of generic copies of 
pioneer products immediately upon the expiration of any relevant 
patents; (2) to encourage generic challenges of innovator patents; (3) 
to provide a timely, effective mechanism for patent holders to protect 
rights in patents alleged to be invalid or not infringed by the generic 
product; and (4) to prohibit FDA's approval of any abbreviated 
application whose marketing would infringe a valid patent covering the 
pioneer product, until the parties have had a meaningful opportunity to 
attempt to resolve the issue.
    The certification requirements determine the date on which approval 
of an ANDA can be made effective and, therefore, the date on which 
commercial marketing may begin. If the applicant makes either the first 
certification (no patent information has been filed) or the second 
certification (the patent has expired), approval can be made effective 
immediately. Under the third certification (generic applicant does not 
intend to market the generic drug until the patent expires), approval 
of the application can be made effective on the date the patent 
expires. If, however, the applicant challenges the innovator's patent 
and makes the fourth certification (a ``Paragraph IV'' certification), 
the applicant is required to give notice to the holder of the patent 
alleged to be invalid or not infringed.
    Approval of an ANDA containing the fourth certification may become 
effective immediately only if the patent owner has not initiated a 
patent infringement suit within 45 days of receiving notice of the 
certification. If the patent holder initiates a patent infringement 
action in response to a Paragraph IV certification within 45 days of 
receiving notice of the certification, FDA cannot approve the ANDA for 
30 months, unless either the action is resolved in favor of the generic 
applicant or the patent expires before that time.
    The first follow-on (generic) product approved through an ANDA 
containing a Paragraph IV certification receives 180 days of market 
exclusivity during which no subsequent ANDA for the same product can be 
approved. The purpose of the 180-Day ANDA exclusivity is to reward a 
generic drug manufacturer for the expense and effort involved in 
challenging a listed patent of the pioneer company. Despite these 
intentions, however, the 180-day provision has been at the heart of 
most controversies under the Hatch-Waxman Act.
    In short, although the Hatch-Waxman compromise stimulates 
competition and provides only limited incentives for the innovation 
upon which pioneer and generic pharmaceutical companies alike depend on 
innovation for new products to offer to consumers. Nevertheless, 
generic manufacturers, among others, are advocating major changes in 
the legislation. In view of the balanced nature of the law, any 
proponent of change faces a substantial challenge to show that change 
is necessary and would not upset the delicate compromise achieved in 
1984. Adoption of changes advocated in current proposals is neither 
necessary nor wise. We strongly oppose changes that would unfairly skew 
the law in favor of generic manufacturers and impede the ability of the 
research-based industry to realize in a timely way the promises that 
accelerating biomedical advances hold for patients in all parts of the 
world.
    In particular, S. 812 as it stands, reflects unfounded arguments in 
support of amendment of the Hatch-Waxman Act. We understand the intent 
of the bill to be to speed approval of generic drugs and enhance 
pharmaceutical competition. However, the bill is unlikely to promote 
either of these objectives, and, if adopted, would substantially 
undermine the Hatch-Waxman compromise that has proven so successful.
    Specifically, as elaborated more fully below, S.812 would: (1) deny 
effective remedies to holders of patents infringed by generic drugs; 
(2) change the standards to allow FDA to approve generic drugs that 
could not be approved under current law because they are not, in fact, 
the same as the innovator drugs for which FDA has the data necessary to 
assess safety and efficacy; and (3) create new requirements designed to 
deter outside parties from submitting scientific information to FDA 
that could be adverse to generic drugs. In addition, the bill would 
revise the current system for rewarding generic companies that 
challenge patents on innovator drugs in a way that would result in 
unnecessary litigation and likely delay most generic competition an 
additional 6 months or more.
    As an initial point, it is critical to understand that, despite 
arguments to the contrary, data compiled by FDA conclusively show that, 
in the overwhelming majority of cases, generic applications have not 
raised or encountered any patent issues that have delayed their 
approval. The facts speak far themselves:
    From 1984 through January 2001, 8,259 generic applications were 
filed with FDA.
    Of these applications, 7,781--94 percent--raised no patent issues.
    Only 478 generic applications--5.8 percent--asserted a patent 
issue, either challenging a patent's validity or claiming 
noninfringement of a patent.
    Further research shows that:
    Only 58 court decisions involving just 47 patents have been 
rendered resolving generic challenges to innovator patent's-a tiny 
fraction of the number of generic applications.
    In only 5 patent disputes has the FTC reportedly challenged either 
the actions of the innovator or the settlement between the innovator 
and generic company-an infinitesimal percentage of the applications.
    Ample means exist to assess any potentially inappropriate practices 
and to deter abuses. There is simply no reason to weaken or abandon a 
compromise that has worked so well. As to our specific concerns 
regarding the proposals made in S. 812, they are as follows:
    First, the bill would severely impair, if not eliminate, effective 
remedies for patent infringement.
    As explained above, under current law, FDA is barred for up to 30 
months from approving a generic drug that is involved in timely 
initiated patent litigation. The Hatch-Waxman Act made it no longer an 
act of patent infringement for a generic company to use a pioneer 
company's patented product in preparing the marketing application for 
its generic copy of that product. (Such otherwise-infringing testing is 
not, in fact, permitted in any other U.S. industry.) Patent holders are 
not permitted to assert their rights against generic applicants during 
this period. As a result, a claim for patent infringement now cannot be 
brought until the generic company actually files its application. The 
30-month stay increases the likelihood that a pioneer company will 
still be able to defend its patent rights before FDA approval enables 
an allegedly infringing generic product to come onto the market.
    S. 812 would simply abolish the innovator's right to litigate 
patent disputes prior to FDA approval. Although an innovator could 
still theoretically seek a preliminary injunction from the court 
against the generic product, courts rarely grant preliminary 
injunctions in patent litigation, and such injunctions are especially 
difficult to obtain in the pharmaceutical patent context due to the 
highly complex and technical, fact-intensive claim analysis required. 
As a result, generic companies would continue to enjoy the benefits of 
the Hatch-Waxman Act that were created at the expense of innovator 
companies. Innovators, on the other hand, would no longer have 
appropriate, corresponding means to protect against patent 
infringement, made necessary by the unique exemption from patent 
infringement granted to generic companies.
    The bill would also permit the approval of generic drugs that do 
not, in fact, duplicate their reference drugs. Present law requires the 
submission of bioequivalence data to support an abbreviated new drug 
application for a generic drug. The premise of the law is that the 
generic drug must be the same as the innovator drug in all material 
respects and, therefore, that the generic copy must be absorbed by the 
body at the same rate and to the same extent as the innovator drug. S. 
812 would loosen the standards and allow FDA to approve generic drugs 
that are not the same as the reference innovator drugs, substituting 
FDA judgment that some unspecified differences don't matter for the 
current objective requirement that generic drugs must be the same as 
the reference innovator drugs.
    In light of problems that have arisen even with application of the 
existing bioequivalence standard, we are quite concerned by this 
proposal. In this regard, we would note that two-thirds of physicians 
surveyed, as discussed above, considered changing bioequivalence 
standards to be a bad idea, primarily because of the importance of 
maintaining the quality of the drugs and protecting the safety of their 
patients. This provision would officially sanction FDA's policy of 
approving generic drugs that are not duplicates of the innovator drug 
as contemplated by Hatch-Waxman.
    In addition, the bill would inhibit the submission of citizen 
petitions offered in good faith to inform the Agency of legitimate 
concerns regarding a proposed drug product.
    S. 812 would impose new burdens on use of the citizen petition, 
which is the mechanism by which an outside party can request an 
official FDA decision on scientific or other issues. Under the bill, it 
appears that the Federal Trade Commission (FTC) may be required to open 
an investigation of any person submitting a citizen petition to FDA if 
anyone alleges that the citizen petition has been submitted for an 
improper purpose.
    Such mechanisms would deter persons from submitting citizen 
petitions to the FDA containing scientific or other relevant 
information regarding a competing product, since an FTC investigation, 
accompanied by a subpoena for documents, would seem to be the 
inevitable and immediate result. Congress and FDA should welcome a 
process for airing relevant issues, rather than trying to inhibit 
discussion. If a party were to submit a baseless citizen petition to 
achieve an anti-competitive effect, the existing anti-trust laws would 
provide ample bases for the FTC, or a private party, to bring an 
enforcement action. S. 812 would serve only to chill legitimate 
petitioning, to the detriment of the FDA approval process, undermining 
the legitimate economic interests of competitors and, potentially, 
putting consumers at risk.
    The bill would as well revise the requirements for obtaining 
generic drug exclusivity in a manner that would likely keep more rival 
generic products off the market longer and promote unnecessary 
litigation. In an apparent inconsistency with its stated objective of 
speeding generic drug approvals, S. 812 would enhance the ability of 
generic drug companies that challenge an innovators patent to keep all 
other generic products off the market for 6 months.
    In summary, the Hatch-Waxman Act is one of the most successful 
pieces of consumer legislation in history. The law works. Contrary to 
the assertions of others, S. 812 would not close loopholes; it would 
undermine the Act's few, critical protections for innovator 
intellectual property rights. Without these protections, there will be 
less innovation, fewer new drugs for generics to copy and, more 
importantly, fewer new drugs to enhance treatment for patients.
    This concludes my written testimony. I would be pleased to answer 
any questions or to supply any additional materials requested by 
Members or Committee staff on these or any other issues.
                 Prepared Statement of Kathleen Jaeger
    Mr. Chairman. Distinguished Members of the Committee. My name is 
Kathleen Jaeger, and I recently became President and CEO of the Generic 
Pharmaceutical Association. I am a pharmacist; an attorney, who 
specializes in FDA-regulatory law; and a long-time consumer and 
industry advocate. As a pharmacist and coming from a family-owned 
pharmacy background, I understand the need consumers have for choice, 
and the challenge of placing affordable medicine in their hands.
    On behalf of GPHA and its more than 140 members, I want to thank 
you for convening this hearing to discuss pharmaceutical cost, the need 
for increased consumer access, and opportunities to close existing 
loopholes in the approval of more affordable prescription drugs.
    The GPHA represents manufacturers and distributors of finished 
generic pharmaceutical products, manufacturers and distributors of bulk 
active pharmaceutical chemicals, and suppliers of other goods and 
services to the generic pharmaceutical industry. The GPHA membership 
manufacturers more than 90% of all generic drug doses dispensed in the 
United States. Our products are used in more than one billion 
prescriptions every year. We are a significant segment of America's 
pharmaceutical manufacturers. No other industry has made, nor continues 
to make, a greater contribution to affordable health care than the 
generic pharmaceutical industry.
    Today, I want to discuss several issues that are critical to 
understanding the challenge of how to provide increased access to 
affordable medicines while simultaneously lowering costs and preserving 
the incentives that promote new product discovery and innovation. I 
will discuss the current landscape of the pharmaceutical industry both 
generic and brand, and debunk some myths that have arisen in the 
current debate.
    Then, I want to turn my attention to how modest legislative reforms 
of the landmark Hatch-Waxman Act can restore the intended balance that 
served consumers well for more than a decade, but now is subject to 
manipulations that take money out of consumers' pockets. To accomplish 
this, I will describe the loopholes that are being exploited in the 
current law, and outline the ways that GPHA members believe that 
reforms could be made.
    Signed into law in 1984, the Drug Price Competition and Patent Term 
Restoration Act, also known as Hatch/Waxman established the process 
that created the modern generic pharmaceutical industry.
    Among all the pharmaceutical manufacturers, the generic 
pharmaceutical industry is unique. Every day, the use of our products 
saves millions of dollars for consumers and taxpayers. This daily 
savings amounts to more than $10 billion dollars in lower health care 
costs each year.
    According to the latest available data, total health care costs 
reached $1.3 trillion in 2000. This represents a per capita health care 
expenditure of $4,637. The total prescription drug expenditure in 2001 
was $172 billion, or approximately $601 per person. That represents an 
increase of 17% over the previous year. Of that total, approximately 
$13 billion, or approximately $48 per person, was spent on generic 
pharmaceuticals.
    Last year, 47% of all prescriptions were filled with generic drugs. 
But while nearly one in every two prescriptions was filled with a 
generic drug, only approximately 8% of all dollars spent on drugs were 
spent on generic medicines. Brand name prescription drugs, conversely, 
represented 53% of all prescriptions but consumed approximately 92% of 
all drug therapy dollars spent. The top ten brand pharmaceutical 
companies accounted for 61% of all pharmaceutical sales. These numbers 
reveal a stark reality: brand name prescription drugs exceed the cost 
of generics by almost ten-fold, and brand companies dominate the 
marketplace.
    Let's look at these same statistics from another perspective; 
namely, that of the patient or payer. The average price of a 
prescription dispensed with a generic drug in 2000 was $19.33. The 
average price of a prescription dispensed with a brand name drug in 
2000 was $65.29. The difference was $45.96 per prescription, or 238%.
    Expressed another way, brand name prescription drugs represent 
about 22% more prescriptions than generic drugs yet consume almost 500% 
more retail sales dollars. No single generic drug has ever achieved an 
annual sales revenue of $1.0 billion. This compares with 19 brand-name 
patent-protected drugs that had annual retail sales in excess of $1.0 
billion each last year alone.
    PhRMA is currently distributing a chart that purports to show the 
steady growth in generic substitution: from 19% in 1984 to 47% in 2000. 
Our brand colleagues would suggest that this demonstrates that Hatch-
Waxman is working, that generics continue to prosper, and that Hatch-
Waxman does not need to be reformed. But what PhRMA does not tell you 
is that while generic substitution increased from 43% to 47% over the 
past 5 years, the amount of money spent on generic prescriptions 
declined five percentage points, from 12% to 7.5% over that same 
period. So, consumers used more generics, and spent less on them, but 
at the same time the cost of prescription drugs continued to increase 
at double-digit rates.
    Despite the indisputable savings to be gleaned from generics the 
Nation's prescription drug bill continues to show double-digit annual 
increases. And consumers, employers, insurers and government agencies 
are feeling the effects.
    Although a majority of Americans have some form of insurance that 
helps defray the direct costs of prescription medicines, for an 
increasing number of consumers, the burden of rising prescription costs 
lands directly on their pocketbooks. The uninsured population, which 
currently exceeds 40 million people and could reach 30% of the labor 
force by 2009 (up from 23% in 1999), is hit the hardest.
    It is well documented that the high cost of prescription medicines 
has a direct effect on patient usage. Look at the statistics. A recent 
survey of 1,010 adults by Harris Interactive revealed some very 
disturbing drug trends. Of surveyed patients, 22% did not purchase at 
least one prescription issued by their doctor in the previous year 
because of cost. Additionally, 14% of patients reported taking a drug 
in smaller doses than prescribed and 16% reported taking their 
prescribed medication less frequently than prescribed to save money. 
Such statistics can hardly be said to be consistent with our society's 
goal of adequate health care. Clearly, cost is central to the issue of 
compliance.
    Major employers, such as GM, are feeling the profound effect of 
escalating pharmaceutical costs, and are actively encouraging generic 
drug utilization. Physicians are increasingly aware of the impact that 
rising drug prices are having on their patients. The AMA has a policy 
statement that ``supports programs whose purpose is to contain the 
rising cost of prescription drugs.'' The policy specifically encourages 
physicians to be aware of prescription drug prices and the availability 
of generic versions of brand name drugs. Health plans such as CIGNA, 
Well Point, Aetna, and others are engaging in more and more programs to 
foster generic drug utilization. A coalition of leading governors, 
businesses, and labor leaders has also asked Congress to revisit Hatch-
Waxman. The coalition, Business for Affordable Medicine, feels that 
loopholes in the current legislative scheme are undermining the intent 
of the law, and are being exploited to extend patents at considerable 
expense to employers and consumers/taxpayers.
                    brand pharmaceutical innovation
    It is important to understand that the position of GPHA on 
reforming Hatch-Waxman recognizes the value of brand innovation, and 
the need for preserving incentives that promote innovation. Let me 
start by emphatically stating that the generic pharmaceutical industry 
supports patent rights, intellectual property protection, and the right 
of any pharmaceutical company--brand or generic--to recoup its 
investment and make a reasonable profit for its shareholders.
    In fact, all publicly owned pharmaceutical companies, including 
generic companies, have a responsibility to achieve a reasonable return 
on the shareholders' investment. However, the best way to promote 
innovation, to provide an incentive to develop the next, medical 
breakthrough product, is to foster competition. Allowing a brand 
product to have unlimited monopoly protection distorts the incentive, 
and results in the adoption of a brand preservation strategy, rather 
than an innovation strategy.
    It is interesting to note that America recognizes the dangers of 
monopolies in virtually every other area of our economy. The intent of 
Hatch-Waxman was to define and establish a natural and limited period 
of monopoly protection, in recognition of the value of brand 
innovation. But today, loopholes in the Act are being manipulated to 
expand this protection well beyond what Hatch-Waxman intended. It is 
time to recognize that these efforts--quote--``life cycle management'' 
practices, are nothing more than attempts at monopoly extensions, which 
harm innovation and penalize consumers.
    In 2000, the National Institute for Health Care Management (NICHM) 
released a study that analyzed the issue of brand innovation and patent 
extensions. The study suggested that changes in the law over the last 
two decades have increased by at least 50 percent the effective patent 
life for new drugs. That means drug companies have an extra four or 5 
years to reap profits before low-priced generics enter the market. The 
NIHCM study concluded that delays in generic competition are forcing 
customers to incur billions of dollars in prescription drug costs they 
otherwise may not have paid.
    PhRMA has been using a chart to bolster its case. This chart 
allegedly indicates that reform of Hatch-Waxman is not necessary by 
showing the cumulative value of brand products coming off patent in the 
next 10 years. What PhRMA neglects to mention is twenty (20) of the 
thirty (30) possible products that should have gone off patent in 2000 
failed to have generic competition during that year. This represented 
$5.4 billion in sales. Likewise, in 2001, generic competition did not 
commence for twenty-three (23) of the twenty-six (26) products, 
representing $11.4 billion in sales.
                    brand patents and generic drugs
    PhRMA members use several tactics, and the combination thereof, to 
delay consumer access to affordable medicines. To understand these 
loopholes, it is first necessary to understand facts about 
pharmaceutical patents.
    When we speak of pharmaceutical patents, the typical person would 
assume that a single patent protects the drug product and its usage. 
However, the fact is that pharmaceutical companies seek, and are 
granted, patents on a number of different aspects of each product and 
related products (secondary patents), in an effort to maintain monopoly 
product sales far beyond the 20 years of original protection. In fact, 
the average number of patents listed for a blockbuster product has 
increased from 2 to about 10 as a means to indefinitely extend their 
market exclusivity.
    It is important to note that the patent application process at the 
U.S. Patent and Trademark Office is not an adversarial system. When a 
company files for a patent there is no consumer ombudsman or other 
party that questions the impact or validity of the patent. The decision 
regarding the validity of a patent is based generally on the data that 
is filed by the company seeking the patent. Moreover, once a patent is 
issued by PTO, it is presumed to be valid. Thus, the patent process 
does not automatically protect the interests of consumers.
                         restoring hatch-waxman
    The Generic Pharmaceutical Association believes that modest 
legislative fixes could stop abuses and restore the balance between 
innovation, competition and access originally sought in the Hatch-
Waxman Act. Enactment of legislation could help restore the type of 
fair competition that the authors of Hatch-Waxman originally intended 
while ensuring that the brand pharmaceutical companies have every 
ability to enforce and protect their innovations prior to the launch of 
competing products. Legislation could achieve this balance through 
elimination of the loopholes and the clarification of current law. 
Specifically any legislative solution should consider the following:
    Reform the 30 Month Stay Provisions
    Restore Hatch-Waxman Exclusivity Provisions
    Reform the FDA Citizen Petition Process
    Reaffirm the 180-Day Exclusivity Incentive
    Interestingly, depending on the day, PhRMA seems to contradict 
itself on the impact of reforms such as those proposed by our 
association, and the coalition of people speaking on behalf of Hatch-
Waxman reforms. On one hand, PhRMA says that 30 month stays are rare; 
late listed patents are rare; and that only 5.8% of generic 
applications have raised a patent issue since 1984. But they also say 
reform legislation, such as Schumer-McCain, which is compatible with 
our positions on this issue, would destroy the balance of Hatch/Waxman. 
So which is it? If all these issues are rare then changing them should 
not have a significant impact.
    Let's look at each loophole, and proposals to address the issue.
                        reform the 30-month stay
    To understand the need to reform the 30-month stay, let's look at 
the Hatch-Waxman generic drug approval process. Under the Hatch-Waxman 
system, brand companies ``list'' the patents with FDA that claim their 
drug. When a generic manufacturer files an application with FDA, it 
must tell the agency whether it is challenging any of the patents 
listed by the brand. If so, the brand company is given 45 days to sue 
the generic for patent infringement. Once a suit is filed, FDA is 
barred from approving the generic drug for 30 months, or until the 
litigation is resolved. The merits of the patent infringement suit have 
no effect upon the affect of the stay. A suit that is completely 
without merit enjoys the same 30-month stay as a meritorious one.
    From a brand company's perspective, the 30-month stay, and its 
consequent windfall is almost too good to be true. If a brand company 
strategically manages the timing of its patent applications, it can 
stack multiple 30-month stays on top of each other and keep competition 
out of the market indefinitely, regardless of the merits of the patent 
case.
    The potential for a free 30-month stay creates an irresistible 
incentive for brand companies to list more and more secondary patents 
with FDA. Many times these patents do NOT claim the approved marketed 
drug product or its approved medical uses. The patents are listed 
solely for the purpose of getting a free 30-month stay and extending 
the brand company's monopoly.
    It is hard to imagine that the founders and negotiators of Hatch-
Waxman would have fully anticipated the creative ways in which the 
patent challenge process could be manipulated to prevent competition.
    One good example is represented by the anticonvulsant drug, 
Neurontin . By listing patents with FDA that do not claim the FDA 
approved form of the drug or its approved uses, the brand manufacturer 
of this $1.1 billion per year drug has been able to delay generic 
competition for 18 months past the expiration of the drug's basic 
patent. The potential lost savings to Americans by this delay has 
already amounted to approximately $825 million. Furthermore, by 
strategically timing the submission of patents to FDA, the brand 
company effectively converted the automatic 30-month stay of generic 
approvals into 54 months of additional market exclusivity.
    Another example of similar abuse occurred with the antidepressant 
drug Wellbutrin. Affordable generic versions of the $113 million per 
year drug were effectively stalled for 5 years by the brand company's 
listing of 6 unapproved medical uses of Wellbutrin. These patents, as 
well as the Neurontin patents mentioned above, were unrelated to the 
FDA-approved form and use of the brand-name drug. Rather, they were 
listed simply to preserve exclusivity, and to reap the windfall of 
hundreds of millions of dollars.
    These are just a two of the examples that demonstrate that in the 
brand industry's eyes, anything can, and will be, considered suitable 
for monopoly extension.
    The 30-month automatic stay that frequently prevents generic entry 
must be eliminated in order to prevent gaming of the system. If this 
financial windfall to brand industry were eliminated, patent holders 
would still be entitled to sue generic companies but--like all other 
industries--they would have to obtain a preliminary injunction from the 
court to stay generic drug approvals. Eliminating the 30-month stay 
provision also reduces the incentive to list patents that the innovator 
knows are invalid. Accordingly, eliminating the 30-month stay provision 
would infuse legal discipline and accountability into the system.
              restore hatch-waxman exclusivity provisions
    Blockage of generic competition can also occur by inappropriate 
manipulation of Hatch-Waxman exclusivity protections. Brand name 
manufacturers delay generic entry by distorting the intended purpose of 
the Hatch-Waxman 3-year exclusivity provision. FDA has granted 
exclusivity to brand manufacturers for minor product and labeling 
changes that present no therapeutic benefit over the predecessor 
product. These changes are hardly the ``innovation'' that Congress 
intended to reward when it enacted Hatch-Waxman, and are clearly not 
worth the price that the public is paying for them.
    A recent example involves labeling changes that resulted after 
Bristol Myers Squibb conducted pediatric clinical trials on Glucophage 
(for adult onset diabetes). Information derived from these limited 
studies yielded minor labeling changes. BMS used the outcome of minor 
pediatric studies to delay a generic version of this product. Bristol 
argued that FDA's pediatric labeling regulation requires the 
``pediatric information'' to be disclosed in drug product labeling; 
yet, this data is protected by 3 years of exclusivity which precludes 
generic firms from having that information on their product label. The 
limited Glucophage pediatric studies (72 subjects) resulted in the 
development of certain pediatric information. Bristol had received 6 
months of exclusivity for conducting the study. Bristol also received 3 
years of exclusivity for changing its labeling to include this ``new'' 
pediatric information, which in turn yielded a second 6 month pediatric 
extension for the labeling change. By preventing generic products from 
coming to the market consumers were denied significant savings offered 
by affordable generic products. Generic firms ultimately prevailed in 
fighting this abuse, but the brand's tactics delayed generic 
competition for 6 months, creating a windfall for them on a drug with 
annual sales in excess of $1 billion a year.
    GPHA proposes limiting 3-year exclusivity to only meaningful 
product innovations that are supported by substantial clinical studies. 
Minor labeling changes, rather than true innovations, should not be 
allowed to block the access by consumers, employers, insurers and 
taxpayers to the substantial savings offered by generic products.
                reform the fda citizens petition process
    Questionable timing and use of FDA citizen petition process is an 
issue. A Citizen Petition ``stops the clock'' on the approval of a 
generic product, often for a minimum of several months. Brand Citizen 
Petitions are typically filed late in the review process and frequently 
raise highly questionable scientific issues and, as a consequence, 
these petitions can delay market entry of legitimate high quality 
generic competitors.
    A good example of the opportunity to use the Citizen Petition 
process to delay generic competition, while switching patients to a 
newer, patent protected product, is seen in the recent activities 
surrounding generic Adderall.
    Widely used for attention deficit disorder, the brand version of 
this product had annual sales of approximately $350 million. Waxman/
Hatch
    exclusivity protecting Adderall ended in February 2001. In December 
2001, the brand company filed a citizen petition on the eve of generic 
competition that asked the FDA to require more stringent bioequivalence 
standards for generics to Adderall because of the addictive nature of 
the drug. The petition, which was ultimately rejected, delayed generic 
competition for several months.
    And just last week, the brand announced that it had sued the 
generic manufacturer charging generic Adderall uses trade dress that 
brand claims is similar in appearance to it's Adderall product. This is 
despite the fact that numerous products have the same shape and color 
as Adderall, and despite the fact that the shape of the generic tablet 
is different, the generic logo is imprinted on each tablet and is 
clearly different from the logo on the brand product, and all labeling 
and packaging is different
    Citizen petitions filed with FDA should be subject to requirements 
similar to those that govern Federal court filings. For example, a 
petitioner should have to certify that it (i) has submitted a document 
that is well grounded in fact and law; (ii) has not submitted a 
petition for an improper purpose, such as to harass or delay; and (iii) 
has not knowingly included any false, misleading, or fraudulent 
statement in the petition. Further, an entity submitting a petition 
should have to provide written notice to the FTC if the person received 
any consideration for submitting the petition, as does an amicus curiae 
submitting a brief to the U.S. Supreme Court. Finally, Congress should 
provide FDA or another Federal agency, such as the FTC, with authority 
to investigate allegations of bad faith filing of a citizen petition.
               reaffirm the 180-day exclusivity incentive
    Some opponents of reforming Hatch-Waxman have focused on the 180-
day generic exclusivity provision related to patent challenges, arguing 
that this incentive is unnecessary. We believe that there are several 
reasons why this incentive should be protected, and why some in the 
brand industry might want this incentive to be abolished.
    There are many examples of how the 180-day exclusivity provision 
has benefited consumers. Perhaps the most visible, and recent example, 
involves Prozac. In August 2001, a generic firm successfully concluded 
a patent challenge as prescribed under Hatch-Waxman, and introduced a 
generic version of this blockbuster drug. The company enjoyed 6 months 
of exclusivity. On January 29, 2002, the firm's period of exclusivity 
ended, and multiple generic versions of Prozac entered the marketplace. 
Rapidly and predictably, the price of Prozac dropped from approximately 
$2.70 per dose for the brand to less than ten cents per dose for 
generic versions at the wholesale level.
    That challenge ultimately opened the market to generic competition 
2\1/2\ years early, at a savings to U.S. consumers of over $2.5 
billion. Those cost savings from generic Prozac competition have 
benefited all Americans, and reduced costs to insurers, employers, and 
government health care programs. Over the past several years, a total 
of 11 patent challenges, including Prozac, have created more than $27 
billion in savings for consumers. These patent challenges include:
    Buspar: 17 Years early at a cost savings of $8.8 Billion
    Terazosin: 13 Years early at a cost savings of $4.6 Billion
    Taxol: 11 Years early at a cost savings of $3.5 Billion
    Zantac: 4 Years early at a cost savings of$2.45 Billion
    Procardia: 8 Years early at a cost savings of $2.4 Billion
    Plantinol: 11 Years early at a cost savings of $1.0 Billion
    Ticlid: 3\1/2\ Years early at a cost savings of $492 Million
    Lodine: 7 Years early at a cost savings of $414 Million
    Relafen: 2 Years early at a cost savings of $413 Million
    Climara: 7 years early at a cost savings of $378 million
    The 180-day generic exclusivity provision works for consumers. 
Clearly it provides the incentive that Congress intended for the 
generic company.
    Removing the 180-day exclusivity provision will hurt consumers by 
removing the incentive for generic companies to provide the adversarial 
check and balance that the U.S. Patent and Trademark Office does not 
provide.
    Conversly, creating a rolling generic drug exclusivity will 
increase incentives for more timely generic entry. The 180-day 
exclusivity provision now available to the first generic challenger 
should become available to any other subsequent challenger if--for 
whatever reason--the initial challenger does not go to market. In 
addition, reform should ensure the forfeiture of the exclusivity period 
for a range of other actions by the first challenger that effectively 
delays market access to generics.
    GPHA believes that these reforms will help achieve the objective of 
restoring the balance to Hatch-Waxman, and revitalizing it for the 21st 
century.
    Why is reform critical now? Twenty blockbuster drugs, with sales 
greater than $500 million, are scheduled to lose patent or market 
exclusivity in the next 10 years. A total of 45 of the 100 most 
prescribed drugs should face first-time generic competition within the 
next 5 years. Financial analysts project that brand products accounting 
for more than $40 billion in annual sales should lose patent protection 
and should be available for generic competition. This should generate 
consumer and system savings in excess of 30 billion dollars. The 
operative word is ``should.'' Of course, the brand industry would like 
to forestall this event as long as possible. Without modernizing the 
system, there is no guarantee that the Nation's health care system and 
consumers can realize these benefits.
    The battle over modernization of Hatch-Waxman must be understood in 
the context of the huge windfall profits currently enjoyed by the brand 
industry, and the enormous savings available to the American public 
through generic utilization. The brand pharmaceutical industry would 
have Congress believe that the system isn't broken, so it doesn't need 
fixing. The brand industry would have Congress and the American public 
believe that the patent challenge provisions of Hatch-Waxman, with its 
180-day generic exclusivity incentive, results in increased litigation 
and deserves to be discarded. The brand pharmaceutical industry would 
have Congress and the public believe that generic competition is a 
threat to the next cure or blockbuster treatment.
    We must consider the source of these arguments. They are made by 
international and domestic corporations that recognize that billions of 
dollars in sales and windfall profits are at stake because generic 
competition works at lowering drug costs. The fact is that competition 
spurs true innovation.

                               

      
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