90–010

Calendar No. 431

107TH CONGRESS REPORT " SENATE ! 2d Session 107–167

THE DRUG COMPETITION ACT OF 2001

JUNE 20, 2002.—Ordered to be printed 

Mr. LEAHY, from the Committee on the Judiciary, submitted the 

following 

R E P O R T 

[To accompany S. 754]

The Committee on the Judiciary, to which was referred the bill 

(S. 754) to enhance competition for prescription drugs by increasing 

the ability of the Department of Justice and the Federal Trade 

Commission to enforce existing antitrust and competition laws regarding brand name drugs and generic drugs, having considered 

the same, reports favorably thereon, with an amendment in the nature of a substitute, and recommends that the bill, as amended, do 

pass.

CONTENTS Page

I. Legislative history ......................................................................................... 3

II. The need for S. 754 ........................................................................................ 4

III. Vote of the Committee ................................................................................... 5

IV. Section-by-section analysis ............................................................................ 5

V. Cost estimate .................................................................................................. 7

VI. Regulatory impact statement ........................................................................ 14

The amendment is as follows: 

Strike out all after the enacting clause and insert in lieu thereof 

the following:

SECTION 1. SHORT TITLE. 

This Act may be cited as the ‘‘Drug Competition Act of 2001’’. 

SEC. 2. FINDINGS. 

Congress finds that—

(1) prescription drug prices are increasing at an alarming rate and are a 

major worry of many senior citizens and American families; 

(2) there is a potential for companies with patent rights regarding brand 

name drugs and companies which could manufacture generic versions of such 

drugs to enter into financial deals that could tend to restrain trade and greatly 

reduce competition and increase prescription drug expenditures for American 

citizens; and 

2

(3) enhancing competition among these companies can significantly reduce

prescription drug expenditures for Americans.

SEC. 3. PURPOSES.

The purposes of this Act are— (1) to provide timely notice to the Department of Justice and the Federal

Trade Commission regarding agreements between companies with patent rights

regarding brand name drugs and companies which could manufacture generic

versions of such drugs; and

(2) by providing timely notice, to enhance the effectiveness and efficiency of

the enforcement of the antitrust and competition laws of the United States.

SEC. 4. DEFINITIONS.

In this Act:

(1) ANDA.—The term ‘‘ANDA’’ means an Abbreviated New Drug Application,

as defined under section 201(aa) of the Federal Food, Drug, and Cosmetic Act

(21 U.S.C. 321(aa)).

(2) ASSISTANT ATTORNEY GENERAL.—The term ‘‘Assistant Attorney General’’ means the Assistant Attorney General in charge of the Antitrust Division of the

Department of Justice.

(3) BRAND NAME DRUG.—The term ‘‘brand name drug’’ means a drug approved

under section 505(c) of the Federal Food, Drug, and Cosmetic Act (21 U.S.C.

355(c)).

(4) BRAND NAME DRUG COMPANY.—The term ‘‘brand name drug company’’ means the party that received Food and Drug Administration approval to market a brand name drug pursuant to an NDA, where that drug is the subject

of an ANDA, or a party owning or controlling enforcement of any patent listed

in the Approved Drug Products With Therapeutic Equivalence Evaluations of

the Food and Drug Administration for that drug, under section 505(b) of the

Food, Drug, and Cosmetic Act (21 U.S.C. 355(b)).

(5) COMMISSION.—The term ‘‘Commission’’ means the Federal Trade Commission.

(6) GENERIC DRUG.—The term ‘‘generic drug’’ means a product that the Food

and Drug Administration has approved under section 505(j) of the Federal Food,

Drug, and Cosmetic Act (21 U.S.C. 355(j)).

(7) GENERIC DRUG APPLICANT.—The term ‘‘generic drug applicant’’ means a person who has filed or received approval for an ANDA under section 505(j) of

the Federal Food, Drug, and Cosmetic Act (21 U.S.C. 355(j)).

(8) NDA.—The term ‘‘NDA’’ means a New Drug Application, as defined under

section 505(b) et seq. of the Federal Food, Drug, and Cosmetic Act (21 U.S.C.

355(b) et seq.).

SEC. 5. NOTIFICATION OF AGREEMENTS.

(a) IN GENERAL.—

(1) REQUIREMENT.—A generic drug applicant that has submitted an ANDA

containing a certification under section 505(j)(2)(vii)(IV) of the Federal Food,

Drug, and Cosmetic Act (21 U.S.C. 355(j)(2)(vii)(IV)) and a brand name drug

company that enter into an agreement described in paragraph (2), prior to the

generic drug that is the subject of the application entering the market, shall

each file the agreement as required by subsection (b).

(2) DEFINITION.—An agreement described in this paragraph is an agreement

regarding—

(A) the manufacture, marketing or sale of the brand name drug that is

the subject of the generic drug applicant’s ANDA;

(B) the manufacture, marketing or sale of the generic drug that is the

subject of the generic drug applicant’s ANDA; or

(C) the 180-day period referred to in section 505(j)(5)(B)(iv) of the Federal

Food, Drug, and Cosmetic Act (21 U.S.C. 355(j)(5)(B)(iv)) as it applies to

such ANDA or to any other ANDA based on the same brand name drug.

(b) FILING.—

(1) AGREEMENT.—The generic drug applicant and the brand name drug company entering into an agreement described in subsection (a)(2) shall file with

the Assistant Attorney General and the Commission the text of any such agreement, except that the generic drug applicant and the brand name drug company

shall not be required to file an agreement that solely concerns—

(A) purchase orders for raw material supplies;

(B) equipment and facility contracts; or

(C) employment or consulting contracts.

(2) OTHER AGREEMENTS.—The generic drug applicant and the brand name

drug company entering into an agreement described in subsection (a)(2) shall

3

file with the Assistant Attorney General and the Commission the text of any

other agreements not described in subsection (a)(2) between the generic drug

applicant and the brand name drug company which are contingent upon, provide a contingent condition for, or are otherwise related to an agreement which

must be filed under this Act.

(3) DESCRIPTION.—In the event that any agreement required to be filed by

paragraph (1) or (2) has not been reduced to text, both the generic drug applicant and the brand name drug company shall file written descriptions of the

non-textual agreement or agreements that must be filed sufficient to reveal all

of the terms of the agreement or agreements.

SEC. 6. FILING DEADLINES.

Any filing required under section 5 shall be filed with the Assistant Attorney General and the Commission not later than 10 business days after the date the agreements are executed.

SEC. 7. DISCLOSURE EXEMPTION.

Any information or documentary material filed with the Assistant Attorney General or the Commission pursuant to this Act shall be exempt from disclosure under

section 552 of title 5, and no such information or documentary material may be

made public, except as may be relevant to any administrative or judicial action or

proceeding. Nothing in this section is intended to prevent disclosure to either body

of Congress or to any duly authorized committee or subcommittee of the Congress.

SEC. 8. ENFORCEMENT.

(a) CIVIL PENALTY.—Any brand name drug company or generic drug applicant

which fails to comply with any provision of this Act shall be liable for a civil penalty

of not more than $11,000, for each day during which such entity is in violation of

this Act. Such penalty may be recovered in a civil action brought by the United

States, or brought by the Commission in accordance with the procedures established

in section 16(a)(1) of the Federal Trade Commission Act (15 U.S.C. 56(a)).

(b) COMPLIANCE AND EQUITABLE RELIEF.—If any brand name drug company or generic drug applicant fails to comply with any provision of this Act, the United States

district court may order compliance, and may grant such other equitable relief as

the court in its discretion determines necessary or appropriate, upon application of

the Assistant Attorney General or the Commission. Equitable relief under this subsection may include an order by the district court which renders unenforceable, by

the brand name drug company or generic drug applicant failing to file, any agreement that was not filed as required by this Act for the period of time during which

the agreement was not filed by the company or applicant as required by this Act.

SEC. 9. RULEMAKING.

The Commission, with the concurrence of the Assistant Attorney General and by

rule in accordance with section 553 of title 5, United State Code, consistent with

the purposes of this Act—

(1) may define the terms used in this Act;

(2) may exempt classes of persons or agreements from the requirements of

this Act; and

(3) may prescribe such other rules as may be necessary and appropriate to

carry out the purposes of this Act.

SEC. 10. SAVINGS CLAUSE.

Any action taken by the Assistant Attorney General or the Commission, or any

failure of the Assistant Attorney General or the Commission to take action, under

this Act shall not bar any proceeding or any action with respect to any agreement

between a brand name drug company and a generic drug applicant at any time

under any other provision of law, nor shall any filing under this Act constitute or

create a presumption of any violation of any antitrust or competition laws.

SEC. 11. EFFECTIVE DATE.

This Act shall—

(1) take effect 30 days after the date of enactment of this Act; and

(2) shall apply to agreements described in section 5 that are entered into 30

days after the date of enactment of this Act.

I. LEGISLATIVE HISTORY

The Drug Competition Act was introduced into the 106th Congress by Senator Leahy on July 27, 2000. Senators Kohl, Schumer,

and Durbin joined Senator Leahy as original co-sponsors. No action

4

was taken on the bill in the 106th Congress, and it was re-introduced in the 107th Congress on April 6, 2001. Senators Feingold,

Cantwell, and Grassley have also co-sponsored the bill. The bill

was referred to the Committee on the Judiciary.

On October 18, 2001, a motion to favorably report S. 754 was approved unanimously by the Judiciary Committee. The Committee

received the Congressional Budget Office analysis, found on pages

7 through 13 of this report, February 2002.

II. THE NEED FOR S. 754

The pharmaceutical industry has been able to reap significant

profits by selling vitally important drugs to all consumers, especially senior citizens. However, the industry has recently witnessed

the creation of pacts between big pharmaceutical firms and makers

of generic versions of brand name drugs, that are intended to keep

lower-cost drugs off the market. Agreeing with smaller rivals to

delay or limit competition is an abuse of the Hatch-Waxman law

that was intended to promote generic alternatives. S. 754, along

with its companion House bill, H.R. 1530, is designed to put an end

to this exploitation of the provision in Hatch-Waxman that grants

a short-term protection from competition to the first manufacturer

to bring a generic version of a brand name drug to market.

Under Hatch-Waxman, manufacturers of generic drugs are encouraged to challenge weak or invalid patents on brand name

drugs so consumers can enjoy lower drug prices. The law as it

stands gives temporary protection from competition to the first

manufacturer that gets permission to sell a generic drug before the

patent on the brand name drug expires, giving the generic firm a

180-day head start on other companies making generic versions of

the drug. The Federal Trade Commission reports that some firms

are exploiting that provision of law by entering into secret deals to

allow a maker of the generic drug to claim the 180-day grace period

in order to block other generic drugs from entering the market,

while at the same time getting paid by the brand name manufacturer for withholding sales of the generic version.

S. 754 (and H.R. 1530) would protect consumers by solving the

most difficult problem faced by Federal antitrust investigators:

learning about the worst of these improper deals in time to do

something about them. As Molly Boast, then-Director of the Commission’s Bureau of Competition, testified at a May 24, 2001 Judiciary Committee hearing entitled ‘‘Competition in the Pharmaceutical Marketplace: Antitrust Implications of Patent Settlements’’, the notice that these bills would provide ‘‘could be quite

helpful in the enforcement mission.’’ The bills would expose the

deals abusing the Hatch-Waxman period of protection from competition and subject them to immediate investigation by the Commission or the Department of Justice. And as Ms. Boast also testified, such a regime ‘‘might deter the [anticompetitive] agreements

outright, but it also certainly would force the firms who were contemplating those agreements to give them much more careful scrutiny for potentially offensive provisions.’’ The Drug Competition Act of 2001 would facilitate these agencies’ confidential review of agreements between brand name manufacturers and potential generic competitors so the agencies could

more efficiently, and more effectively, ensure that the antitrust

5

laws are not being violated. It covers agreements entered into between a company that owns or controls any listed patent for the

brand name drug, or that itself is the holder of the ‘‘New Drug Application’’ under the Food and Drug Administration’s rules—usually the manufacturer of the brand name drug—and any company

that seeks to manufacture the generic version of that drug (but has

not yet entered the market), when the agreement concerns the

manufacture, marketing, or sale of either the brand name or generic versions of the drug, or when the agreement relates to the

180-day period of protection from competition under Hatch-Waxman. Thus, any agreement that seeks to take advantage of, or inappropriately influence, the 180-day period of protection for a generic manufacturer from competition prescribed by Hatch-Waxman

is covered; the Act does not limit its reach to agreements just between the brand name manufacturer and the generic company likely to be its first competitor. Moreover, the burden the Act places

on pharmaceutical companies is negligible; it simply requires the

firms to file those agreements with the Commission and Department of Justice within 10 business days after the agreement is executed. Failure to file is punishable by a civil penalty of up to

$11,000 per day, and by possible unenforceability of the agreements they concern. The bills would not change the Hatch-Waxman

Act, amend FDA law or slow down the drug approval process, and

existing confidentiality requirements would still apply to the enforcement agencies.

III. VOTE OF THE COMMITTEE

In compliance with paragraph 7(b) of rule XXVI of the Standing

Rules of the Senate, the following statements are made concerning

the roll call votes in the Committee’s consideration of the bill.

S. 754 was ordered reported favorably, as amended by an amendment in the nature of a substitute, by a unanimous voice vote on

October 18, 2001. A quorum was present.

IV. SECTION-BY-SECTION ANALYSIS

Section 1.—Section 1 sets out the short title of this bill, the

‘‘Drug Competition Act of 2001.’’

Section 2.—Section 2 states the findings upon which this legislation is based. Specifically, the findings are that rapidly increasing

prescription drug costs are creating real problems for American

senior citizens and families, that patent holders for brand name

drugs can engage in private agreements with generic drug companies that both decrease competition and increase costs for prescription drugs, and that enhancing competition between brand name

and generic drug companies can significantly reduce prescription

drug costs.

Section 3.—Section 3 states the purposes of this legislation,

which are to ensure timely notice to the antitrust enforcement

agencies—the Department of Justice and the Federal Trade Commission—regarding agreements between companies with patent

rights on brand name drugs and companies who could manufacture

generic versions of those drugs, and thus to enhance antitrust enforcement in the pharmaceutical industry.

Section 4.—Section 4 defines the terms used in the Act.

6

Section 5.—Section 5 is the operative section of the Act, setting

forth the requirement that, if a brand name drug company and a

generic drug applicant (which is simply a generic drug company

that has filed with the FDA an ‘‘Abbreviated New Drug Application’’ in order to produce a generic version of a brand name drug)

enter into an agreement that relates in any way to the 180-day period of semi-exclusivity to a generic drug applicant, described in

section 355(j)(5)(B)(iv) of title 21, United States Code; or which concerns the manufacture, marketing, or sale of either the brand name

drug or its generic equivalent, then both companies must file a

copy of the agreement (or a complete written summary of any oral

agreement), along with copies of any other related agreements,

with the Federal Trade Commission and the Department of Justice.

Section 6.—Section 6 states that the filings required by section

5 shall be made within 10 business days of the execution of the

agreement between the brand name drug manufacturer and the generic drug applicant.

Section 7.—Section 7 provides for protections of the filings made

by the drug manufacturers with the antitrust enforcement agencies

parallel to those protections provided in the Hart-Scott-Rodino

Antitrust Improvements Act of 1976, 15 U.S.C. 18a(h).

Section 8.—Section 8 describes the enforcement mechanisms authorized by the Act. First, failure to comply with any provision of

the Act may subject the responsible party to a penalty of up to

$11,000 per day of noncompliance. Second, failure to comply with

the notification of the antitrust enforcement agencies required by

section 5 of the Act within the 10 days prescribed by section 6 may

render the agreement between the parties unenforceable (by the

party which failed to file) for the duration of the noncompliance,

should the relevant enforcement agency seek such a remedy in

Federal court. While such a penalty would likely only be sought,

and indeed might only be appropriate, in cases of willfulness or recidivism, the threat of such a sanction should prove an important

deterrent in its own right. Third, failure to comply with the requirements of the Act may result in ordered compliance by a

United States district court, and/or other appropriate equitable relief, upon application by one of the antitrust enforcement agencies.

Section 9.—Section 9 permits the Federal Trade Commission,

with the concurrence of the Assistant Attorney General for Antitrust at the Department of Justice, to issue rules which may define

the Act’s terms, which may create exemptions from the Act, and

which may prescribe other necessary and appropriate rules to effectuate the purposes of the Act.

Section 10.—Section 10 is a savings clause, ensuring that any action or inaction by the antitrust enforcement agencies under this

Act will not bar proceedings pursuant to any other provision of law,

and also ensuring that the simple act of complying with the Act’s

filing mandate will not put the filers at any risk of any presumption of wrongdoing.

Section 11.—Section 11 states that the Act shall take effect 30

days after its enactment, and shall concern only agreements executed after its effective date.

7

V. COST ESTIMATE

SUMMARY

S. 754 would require that both brand name and generic drug

companies file certain types of agreements with the Federal Trade

Commission (FTC) and the Antitrust Division of the Department of

Justice (DOJ). S. 754 also would authorize the FTC and the DOJ

to assess civil penalties if drug companies fail to file such agreements within 10 business days of executing those agreements.

The Congressional Budget Office (CBO) estimates that the administrative costs of implementing S. 754 would amount to less

than $500,000 in 2002. Over the 2002–2007 period, however, discretionary health programs would realize savings from the earlier

entry of lower priced generic drugs onto the market. CBO estimates that those savings would exceed the Federal costs of administering the new activities, with net Federal spending subject to appropriation falling by roughly $1 million over the 2002–2007 period.

CBO also expects that enacting S. 754 would affect both direct

spending and revenues; therefore, pay-as-you-go procedures would

apply to the bill. Most of the changes in direct spending and revenues would stem from lower prices for drugs, which in turn would

decrease some Federal expenditures for Medicaid and Federal

health insurance programs, and increase Federal revenues because

of lower costs for private health insurance. Such effects would be

modest, however. We estimate that direct spending would decline

by less than $500,000 a year through 2005, by about $1 million in

2006, and by a total of $16 million over the 2002–2012 period. CBO

further estimates that Federal revenues would increase by less

than $500,000 a year through 2007, with a total increase of $4 million over the 2002–2012 period.

S. 754 contains no intergovernmental mandates as defined in the

Unfunded Mandates Reform Act (UMRA). The bill would increase

competition among drug manufacturers, in some cases, and that increased competition would decrease costs for state and local Medicaid programs. CBO estimates that state spending for Medicaid

would decline by about $2 million over the 2002–2007 period.

The bill contains a requirement on manufacturers of both generic

and brand name drugs that would be considered a private-sector

mandate under UMRA. CBO estimates that the direct cost of the

mandate would not exceed the threshold specified in UMRA ($115

million in 2002, adjusted annually for inflation) in any of the first

five years the mandate would be effective.

ESTIMATED COST TO THE FEDERAL GOVERNMENT

CBO estimates that implementing S. 754 would decrease net spending subject to appropriation by about $1 million over the

2002–2007 period. We also estimate that the bill would reduce direct spending by about $3 million and increase revenues by about

$1 million over that period. The costs of this legislation would fall

within budget functions 370 (commerce and housing credit), 400

(transportation), 550 (health), 700 (veterans’ benefits and services),

and 750 (administration of justice).

CBO expects that the reporting requirements under the bill

would deter or result in the earlier identification of certain agreeVerDate 11-MAY-2000 05:04 Jun 21, 2002 Jkt 099010 PO 00000 Frm 00007 Fmt 6659 Sfmt 6601 E:\HR\OC\SR167.XXX pfrm12 PsN: SR167
8

ments that violate antitrust laws and delay the entry of lower

priced generic drugs onto the market. As a result, we assume that

the bill would promote the timely entry of generic products onto

the market and thereby reduce the average price of certain prescription drugs over the next 10 years. However, we believe that

S. 754 likely would affect average prices for a relatively small

share of the overall prescription drug market. CBO believes that

the incentive to enter into such agreements has been tempered significantly by current FTC initiatives to identify illegal agreements

delaying generic entry and by recent court cases brought by states

and health insurers. In addition, charges by the FTC of anticompetitive practices surrounding four agreements from the late

1990s have resulted in consent agreements for two of those four

cases. Under current law, the two brand name and the two generic

drug companies party to those consent agreements must follow reporting requirements similar to those outlined in the bill. Moreover, the proposed reporting requirements only apply to certain

new agreements between brand and generic companies entered into

after enactment.

CBO estimates that lower drug prices would reduce the costs of

Federal programs that purchase prescription drugs or provide

health insurance that covers prescription drugs. CBO estimates

that savings to programs subject to appropriation—such as health

insurance provided to active workers through the Federal Employees Health Benefits (FEHB) program, the Coast Guard, the Public

Health Service (PHS), and health programs of the Departments of

Veterans Affairs (VA) and Defense (DoD)—would total less than

$500,000 in 2002 and $2 million over the 2002–2007 period.

Lower prices would also reduce direct spending—for Medicaid

and for health insurance provided to annuitants by FEHB, DoD,

and the Coast Guard—by less than $500,000 in 2002, by $3 million

over the 2002–2007 period, and by $16 million over the 2002–2012

period. CBO assumes that savings to Federal health programs

would increase over time because the bill only would affect new

agreements, which are more likely to relate to drugs losing patent

protection in later years.

S. 754 would affect revenues in two ways. First, the bill would

increase governmental receipts (i.e., revenues) because it would create new civil penalties for those entities that violate the new reporting requirements. Based on information from the FTC and the

Antitrust Division of the DOJ, CBO estimates that the increase in

revenues would be negligible because of the limited number of

cases expected.

Secondly, the bill would also affect revenues because CBO assumes that part of the savings from lower health insurance costs

would be passed on to workers as increases in taxable compensation. Lower prices for prescription drugs under the bill would reduce premiums for private health insurance (compared with premiums under current law). CBO estimates the bill would increase

Federal revenues by less than $500,000 in 2002, by $1 million over

the 2002–2007 period, and by $4 million over the 2002–2012 period.

9

BASIS OF ESTIMATE

For this estimate, CBO assumes that the bill will be enacted in

spring of 2002 and that outlays will follow historical spending rates

for the authorized activities.

Spending Subject to Appropriation

S. 754 would require that brand name and generic drug manufacturers report certain agreements to the FTC and the DOJ within

10 days after the agreements are executed. Affected agreements

would include those related to the manufacturing, marketing, and

sale of either the brand or generic version of the product. In addition, agreements related to the 180-day period of exclusive marketing rights that may be granted to certain generic manufacturers

by the Food and Drug Administration (FDA) must also be filed.

Assuming the appropriation of necessary amounts, CBO estimates that enacting S. 754 would result in higher outlays for discretionary programs of less than $500,000 for 2002. Over the 2002–

2007 period, however, Federal health programs would realize savings from the earlier entry of lower priced generic drugs onto the

market. We estimate that those savings would exceed the Federal

costs of administering the new activities. As a result, net Federal

spending subject to appropriation would fall by roughly $1 million

over the 2002–2007 period.

Effect on administrative costs. Implementing S. 754 would raise

the administrative costs of the FTC and the Antitrust Division of

the DOJ. The two agencies would need staff to issue new regulations and review the filings from drug companies. Based on information from the FTC and the Antitrust Division, CBO estimates

that these additional costs would amount to less than $500,000 per

year.

Effect on average prices paid by Federal health programs for prescription drugs. Once the marketing protections of brand name

drugs expire (usually at the end of a product’s patent life), generic

drugs generally enter the market at a lower price compared with

the brand name drug. Recent FTC investigations have charged that

agreements between certain innovator and generic drug companies

were anticompetitive and delayed the market entry of generic

drugs for which the generic firms sought marketing approval from

the FDA before the expiration of listed patents. The reporting requirements under the bill would enhance the ability of the FTC

and the DOJ to regulate those types of agreements and enforce

antitrust law.

CBO estimates that eliminating the delay in the entry of lower

priced generic drugs would reduce costs for Federal discretionary

health programs drugs by less than $500,000 in 2002 and by $2

million over the 2002–2007 period, assuming that appropriations

are reduced accordingly. Programs of the PHS and the VA would

be affected, as would pharmacy costs incurred by FEHB, DoD, and

the Coast Guard for active workers.

The agreements that would be affected by S. 754 relate only to

drugs filed with ‘‘paragraph IV certifications’’ in their applications

for marketing approval. A generic manufacturer that submits an

application to the FDA for marketing approval of a generic drug

must address or ‘‘certify’’ their intent with regard to each patent

identified with the innovator product and listed with the FDA. The

10

certification procedure was set in place by the Hatch-Waxman Act;

certifications are based on four ‘‘paragraphs’’ found in the statute.

A paragraph IV certification states that the listed patent is invalid

or will not be infringed by the purposes for which approval is being

pursued. By filing an application to market a generic drug under

a paragraph IV certification, the company may seek approval to

market a generic drug before the expiration of a patent listed with

the brand name product.

Under certain conditions, the first generic manufacturer that

submits a substantially complete application to the FDA challenging an innovator’s patent claim under a paragraph IV filing

may be awarded 180 days of generic market exclusivity. The FDA

cannot approve any other generic versions of the drug during that

180-day period. The generic exclusivity period begins after a court

decision finding the challenged patent invalid, unenforceable, or

not infringed, or the date of first commercial marketing of the generic product, whichever is earlier.

The generic drug firm must notify the innovator firm when it

files a paragraph IV certification, and the innovator then has 45

days to bring a lawsuit to defend its patent protections. If the innovator sues, the FDA cannot approve the application of the generic

version for 30 months (unless the patent expires, or a court rules

that the patent is invalid or is not infringed). A court may modify

that 30-month period.

Both the initial introduction of the generic version of the drug

and the subsequent marketing of competing generic versions of the

drug could be delayed if the innovator and the generic drug firm

reach an agreement under which the generic firm delays or abstains from marketing its version of the drug. Such agreements

may be attractive to both firms, because the price charged for the

generic version of a drug generally is significantly lower than the

price charged for the brand name version, and the price of the generic version drops further when competing versions enter the market. Therefore, the profit lost by the innovator firm following the

entry of the generic version generally substantially exceeds the

profit gained by the generic firm; both firms could be made better

off by sharing some of that difference in profits instead of competing.

Delaying or preventing the initial introduction of the generic

version of a drug by the firm that filed the paragraph IV certification and delaying the entry of generic versions marketed by other

firms would both result in higher costs for prescription drugs to

consumers and to the government.

To estimate the costs associated with the lower drug prices paid

by Federal purchasers anticipated under the bill, CBO assumed

that the recent cases identified as anticompetitive by the FTC may

provide some insight into the average amount of sales affected by

agreements delaying the entry of generic drugs that were in play

before the recent crackdown by the FTC. (CBO estimated that the

average value of a drug affected by those agreements at roughly $1

billion in 2001, based on 1998 average drug sales in the year of the

agreement identified by the FTC and grown by 10 percent annually.) However, we assumed that the number of illegal agreements

delaying generic entry have been greatly reduced by the FTC investigations under current law and by other litigation brought by

11

states and health insurers. Furthermore, charges by the FTC of

anticompetitive practices surrounding four agreements from the

late 1990s have resulted in consent agreements for two of those

four cases. Under current law, the two brand name and the two generic drug companies party to those consent agreements must follow reporting requirements similar to those outlined in the bill.

CBO assumes that S. 754 would affect agreements concerning

roughly two drugs per year, on average. Based on an average expected value of almost $200 million in sales in 2001, CBO forecasts

the future sales of drugs associated with illegal agreements by assuming that the same percent of sales for brand drugs losing market exclusivity in future years (as estimated in 2001) may be illegal

in nature and potentially delay generic entry. We assume the average length of delay that would be eliminated through the deterrence of those agreements or their more timely identification under

the bill would be about one year.

Reducing the incidence of illegal agreements that delay generic

entry would result in the accelerated introduction of lower priced

generic products and translate into program savings. Recent market trends suggest a more rapid loss of market share to generics

and a more significant reduction in average price after generic

entry than previously estimated by CBO. To estimate the savings

associated with this bill, pending further study of these market dynamics, we assume that generic products, on average, account for

roughly 50 percent of total market volume and cost about 50 percent of the brand price after one year on the market.

CBO expects that the share of spending in the prescription drug

market affected by the reporting requirements under S. 754 likely

would be small. As mentioned above, we anticipate that FTC’s ongoing activities and the existence of similar reporting requirements

for four companies mandated in the consent agreements stemming

from past investigations will significantly reduce the number of illegal agreements entered into by competitors and will assist the

government with the identification of many of the illegal agreements that persist. Moreover, the proposed reporting requirements

under the bill only apply to new agreements related to drugs with

paragraph IV certifications entered into after enactment.

To the extent that illegal agreements delaying generic entry persist under current law, many drugs with patent expiration expected

in the next five years, for example, have already had paragraph IV

certifications filed by generic firms. Therefore, the likelihood of potentially illegal agreements to be already in place would be strong

for many of the high-sales drugs with market exclusivity expiring

in the near term. But as noted above, this bill only applies to new

agreements. Over time, however, the effectiveness of the reporting

requirements would increase. Even with the reporting requirements outlined in S. 754, it is also unclear what other means drug

companies may pursue that effectively delay generic entry while

staying within the legal limits of the law.

Direct Spending

CBO estimates that S. 754 would reduce Federal direct spending

over the 2002–2012 period by $16 million. The manner in which

the bill would affect the price of drugs for discretionary health programs discussed earlier would also affect direct spending by FedVerDate 11-MAY-2000 05:04 Jun 21, 2002 Jkt 099010 PO 00000 Frm 00011 Fmt 6659 Sfmt 6601 E:\HR\OC\SR167.XXX pfrm12 PsN: SR167
12

eral health programs characterized as mandatory (that is, not requiring appropriation action). CBO estimates that implementing

the new reporting requirements would reduce direct spending (for

Medicaid and for annuitants covered by health insurance offered

through FEHB, DoD, and the Coast Guard) by less than $500,000

in 2002, $3 million over the 2002–2007 period, and $16 million over

the 2002–2012 period.

Revenues

CBO estimates that S. 754 would increase Federal revenues by

less than $500,000 in 2002, by $1 million over the 2002–2007 period, and by $4 million over the 2002–2012 period. The bill would

affect Federal revenues in two ways. First, S. 754 would increase

revenues because it would create new civil penalties for those manufacturers that fail to comply with the new reporting requirements.

Based on information from the FTC and the DOJ, CBO estimates

that the increase in revenues would be negligible because of the

limited number of cases expected.

Secondly, CBO also assumes that changes in drug prices would

affect the costs of private health insurance premiums, and a portion of those amounts would be returned to workers through

changes in taxable compensation. S. 754 would reduce costs for employer-sponsored health plans because of the lower costs of pharmacy benefits stemming from the more timely entry of cheaper generic drugs. Lower pharmacy costs translate into lower premium

payments for employer-sponsored plans and thus higher taxable

compensation for employees.

CBO assumes that 60 percent of the change in the cost of health

premiums would be offset by behavioral responses of employers and

employees. The remaining 40 percent would be passed through to

workers as changes in taxable compensation and would lead to

changes in Federal tax revenues.

PAY-AS-YOU-GO CONSIDERATIONS

The Balanced Budget and Emergency Deficit Control Act sets up

pay-as-you-go procedures for legislation affecting direct spending or

receipts. The following table displays CBO’s estimate of the effects

of S. 754 on direct spending and receipts. We estimate the effects

on direct spending through 2005 would be less than $500,000 a

year. We also estimate that the effects on revenues would be less

than $500,000 a year through 2006. For the purposes of enforcing

pay-as-you-go procedures, only the effects through 2006 are counted.

13

By Fiscal Year, in Millions of Dollars

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Change in

outlays

0 0 0 0 –1 –2 –2 –2 –2 –2 –2

Change in

revenues

00000011111

ESTIMATED IMPACT ON STATE, LOCAL, AND TRIBAL GOVERNMENTS

S. 754 contains no intergovernmental mandates as defined in

UMRA. The bill would increase competition among drug manufacturers, in some cases, and that increased competition would decrease costs for state and local Medicaid programs. CBO estimates

that state spending for Medicaid would decline by about $2 million

over the 2002–2007 period.

ESTIMATED IMPACT ON THE PRIVATE SECTOR

The bill contains a private sector mandate on manufacturers of

both generic and brand name drugs. It would require drug companies to submit specific contracts between brand name and generic

firms that relate to generic drugs for which a paragraph IV certification under the Food, Drug, and Cosmetic Act has been filed with

the FDA. Although the requirements would add administrative and

legal costs, those costs would be minimal. CBO estimates that the

direct cost of the mandates on both generic and brand name drug

manufacturers contained in the bill would not exceed the annual

threshold specified in UMRA ($115 million in 2002, adjusted annually for inflation) in any of the first five years the mandate would

be effective.

ESTIMATE PREPARED BY:

Federal Costs:

Effects on Drug Prices—Julia Christensen

FTC—Ken Johnson

DOJ—Lanette Walker

Impact on State, Local, and Tribal Governments: Leo Lex

Impact on the Private Sector: Judith Wagner

ESTIMATE APPROVED BY:

Peter H. Fontaine

Deputy Assistant Director for Budget Analysis

14

VI. REGULATORY IMPACT STATEMENT

In compliance with paragraph 11(b) of rule XXVI of the Standing

Rules of the Senate, the Committee made the following evaluation

of the regulatory impact which would be incurred in carrying out

S. 754.

We estimate that some regulatory actions would be required of

the Federal Trade Commission and the Department of Justice related to indicating the types of documents which those agencies

would receive in implementing S. 754.

VII. CHANGES IN EXISTING LAW

In compliance with paragraph 12 of Rule XXVI of the Standing

Rules of the Senate, the Committee finds no changes in existing

law caused by passage of S. 754.

Æ