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38–992 PDF 2007

PROTECTING CONSUMER ACCESS

TO GENERIC DRUGS ACT OF 2007

HEARING

BEFORE THE

SUBCOMMITTEE ON COMMERCE, TRADE,

AND CONSUMER PROTECTION

OF THE

COMMITTEE ON ENERGY AND

COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

ON

H.R. 1902

MAY 2, 2007

Serial No. 110–39

(

Printed for the use of the Committee on Energy and Commerce

energycommerce.house.gov
COMMITTEE ON ENERGY AND COMMERCE

JOHN D. DINGELL, Michigan, Chairman

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, JR., New Jersey

BART GORDON, Tennessee

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

DIANA DEGETTE, Colorado

Vice Chairman

LOIS CAPPS, California

MIKE DOYLE, Pennsylvania

JANE HARMAN, California

TOM ALLEN, Maine

JAN SCHAKOWSKY, Illinois

HILDA L. SOLIS, California

CHARLES A. GONZALEZ, Texas

JAY INSLEE, Washington

TAMMY BALDWIN, Wisconsin

MIKE ROSS, Arkansas

DARLENE HOOLEY, Oregon

ANTHONY D. WEINER, New York

JIM MATHESON, Utah

G.K. BUTTERFIELD, North Carolina

CHARLIE MELANCON, Louisiana

JOHN BARROW, Georgia

BARON P. HILL, Indiana

JOE BARTON, Texas

Ranking Member

RALPH M. HALL, Texas

J. DENNIS HASTERT, Illinois

FRED UPTON, Michigan

CLIFF STEARNS, Florida

NATHAN DEAL, Georgia

ED WHITFIELD, Kentucky

BARBARA CUBIN, Wyoming

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

STEVE BUYER, Indiana

GEORGE RADANOVICH, California

JOSEPH R. PITTS, Pennsylvania

MARY BONO, California

GREG WALDEN, Oregon

LEE TERRY, Nebraska

MIKE FERGUSON, New Jersey

MIKE ROGERS, Michigan

SUE WILKINS MYRICK, North Carolina

JOHN SULLIVAN, Oklahoma

TIM MURPHY, Pennsylvania

MICHAEL C. BURGESS, Texas

MARSHA BLACKBURN, Tennessee

PROFESSIONAL STAFF

DENNIS B. FITZGIBBONS, Chief of Staff

GREGG A. ROTHSCHILD, Chief Counsel

SHARON E. DAVIS, Chief Clerk

BUD ALBRIGHT, Minority Staff Director

(II)
(III)

SUBCOMMITTEE ON COMMERCE, TRADE, AND CONSUMER PROTECTION

BOBBY L. RUSH, Illinois, Chairman

JAN SCHAKOWSKY, Illinois

Vice Chairman

G.K. BUTTERFIELD, Georgia

JOHN BARROW, Georgia

BARON P. HILL, Indiana

EDWARD J. MARKEY, Massachusetts

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

DIANA DEGETTE, Colorado

CHARLES A. GONZALEZ, Texas

MIKE ROSS, Arkansas

DARLENE HOOLEY, Oregon

ANTHONY D. WEINER, New York

JIM MATHESON, Utah

CHARLIE MELANCON, Louisiana

JOHN D. DINGELL, Michigan (ex officio)

CLIFF STEARNS, Florida,

Ranking Member

J. DENNIS HASTERT, Illinois

ED WHITFIELD, Kentucky

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

GEORGE RADANOVICH, California

JOSEPH R. PITTS, Pennsylvania

MARY BONO, California

LEE TERRY, Nebraska

SUE WILKINS MYRICK, North Carolina

MICHAEL C. BURGESS, Texas

MARSHA BLACKBURN, Tennessee

JOE BARTON, Texas (ex officio)

(V)

C O N T E N T S

Page

Hon. Bobby L. Rush, a Representative in Congress from the State of Illinois,

opening statement ................................................................................................ 1

Hon. Cliff Stearns, a Representative in Congress from the State of Florida,

opening statement ................................................................................................ 3

Hon. John D. Dingell, a Representative in Congress from the State of Michigan, prepared statement ...................................................................................... 4

Hon. Marsha Blackburn, a Representative in Congress from the State of

Tennessee, opening statement ............................................................................ 6

Hon. Henry A. Waxman, a Representative in Congress from the State of

California, opening statement ............................................................................. 7

Hon. G.K. Butterfield, a Representative in Congress from the State of North

Carolina, prepared statement ............................................................................. 9

H.R. 1920, To prohibit brand name drug companies from compensating generic drug companies to delay the entry of a generic drug into the market,

and for other purposes. ........................................................................................ 13

WITNESSES

Jon Leibowitz, Commissioner, Federal Trade Commission, Washington, DC .... 20

Prepared statement .......................................................................................... 23

Barry Sherman, Ph.D., chief executive officer, Apotex, Incorporated ................. 61

Prepared statement .......................................................................................... 64

C. Scott Hemphill, associate professor of law, Columbia University Law

School, New York, NY .......................................................................................... 69

Prepared statement .......................................................................................... 71

Phillip A. Proger, partner, Jones Day, Washington, DC ...................................... 89

Prepared statement .......................................................................................... 91

Michael Wroblewski, project director, Consumer Education and Outreach,

Consumers Union ................................................................................................. 120

Prepared statement .......................................................................................... 122

Theodore C. Whitehouse, partner, Willkie Farr & Gallagher LLP, Washington, DC .................................................................................................................. 136

Prepared statement .......................................................................................... 138
(1)

H.R. 1902, PROTECTING CONSUMER ACCESS

TO GENERIC DRUGS ACT OF 2007

WEDNESDAY, MAY 2, 2007

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON COMMERCE, TRADE

AND CONSUMER PROTECTION, COMMITTEE ON ENERGY AND COMMERCE, Washington, DC.

The subcommittee met, pursuant to call, at 3 p.m. in room 2123,

Rayburn House Office Building, Hon. Bobby L. Rush (chairman)

presiding.

Present: Representatives Butterfield, Barrow, Hill, Gonzalez,

Matheson, Dingell, Stearns, Pitts, Bono, Burgess, and Blackburn.

Staff present: Angela Davis, Valerie Baron, Consuela Washington, Christian Fjeld, Judith Bailey, Shannon Weinberg, Brian

McCullough, Will Carty, and Matthew Johnson.

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

Mr. RUSH. The Subcommittee on Commerce, Trade and Consumer Protection will come to order. We are convening this hearing

to discuss H.R. 1902, Protecting Consumer Access to Generic Drugs

Act of 2007.

I will recognize myself for 5 minutes for an opening statement,

and then we will proceed with the ranking member Mr. Stearns.

And as Members come in, then they will be recognized for opening

statements also.

Today’s hearing focuses on an alarming practice in the pharmaceutical industry that is costing American consumers billions of

dollars. Brand name drug companies are paying generic drug companies to stay out of the marketplace. Consequently, they are denying consumers the considerable savings they should otherwise receive from generic competition in their prescription drug costs. This

practice of pay for delay is known as exclusion payment or reverse

consideration, and they are features in legal settlements between

brand name and generic drug companies in their patent disputes.

It is worth noting from the outset that these exclusion payments

are unique to the U.S. pharmaceutical industry. In the commercial

world, outside of drugs, patent disputes are settled by the accused

infringer paying a royalty fee to the patent holder in order to legally market a product. Exclusion payments in the pharmaceutical

world turned this concept on its head. The patent holder or the

brand name drug company is paying the accused patent infringer,

the generic, to stay off the market.
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It is no accident that these types of anticompetitive,

anticonsumer agreements are prevalent in the pharmaceutical industry, but absent everywhere else. The unique regulatory framework of the groundbreaking Hatch-Waxman Act set the table for

drug companies to game the system and thwart the law’s intent.

By design Hatch-Waxman is supposed to strike a balance. Brand

name drug companies retain incentives for innovation, but generic

challenges are encouraged to aggressively challenge weak patents

and bring their products to market.

The first generic company to successfully challenge a brand

name’s patent and bring its product to market is rewarded with a

180-day period of exclusivity in which only that generic company

is allowed to compete with the brand name company. As such, it

is easy to see why the brand name and generic companies would

settle their dispute. The brand name and generic companies can

simply stop competing with each other, take the savings that consumers will receive from their competition, and divide it up among

themselves. It is easy money.

In response to these unique anticonsumer agreements, Chairman

Waxman and I have introduced a bill to crack down on exclusion

payments and ensure that the purpose of Hatch-Waxman is fulfilled. H.R. 1902, the Protecting Consumer Access to Generic Drugs

Act, creates a bright line solution and bans reverse consideration

agreements in drug patent settlements. This is the legislative approach recommended by the Federal Trade Commission.

I want to emphasize that this bill does not in any way affect any

other kind of legal settlement. So the complaint that the RushWaxman bill somehow squashes the ability of brand name and generic drug companies to settle their disputes is simply not true.

Our bill zeroes in on a very specific type of legal settlement that

is completely unique to the pharmaceutical industry. Moreover, we

are addressing a problem that is not trivial and is costing the consumers and Government programs billions upon billions of dollars.

Let me note here that since the FTC started challenging these

anticonsumer practices, every single commissioner, 11 in all, Republican, Democrat and Independent, have supported these enforcement efforts. Under this bill drug companies are still free to

settle their disputes like all other companies do. The bill provides

exceptions to the ban and authorizes the FTC to promulgate interpretive rules and additional carve-outs if the Commission believes

that such exemptions serve consumer interest. As such, this is in

no way a radical bill, and we are attempting to legislate with a

scalpel and not a meat ax.

Lastly, let me briefly address the issue of the regulatory bottleneck. Currently under Hatch-Waxman a generic company can park

its 180-day exclusivity and effectively preclude other generic companies from seeking approval from the FDA and entering the market. The Rush-Waxman bill deals with this bottleneck provision as

part of a larger solution to the anticompetitive nature of reverse

consideration legal settlements. However, I have pledged to work

with my colleague and friend Chairman Pallone of the Health Subcommittee to address effectively this issue since it technically falls

under the Health Subcommittee’s jurisdiction.
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While I believe that clearing the regulatory bottleneck is an important part of the overall solution, I want to work constructively

with Chairman Pallone to ensure that we craft a careful and

thoughtful piece of legislation.

Lastly, I want to welcome our guests who are appearing before

us today. As chairman of the subcommittee, I intend for this hearing to serve as a serious policy discussion and as a first step toward correcting a market failure that is costing American consumers billions of dollars in prescription drug calls.

Thank you.

And now I’ll recognize the ranking member of the subcommittee

Mr. Stearns.

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

Mr. STEARNS. Thank you, Mr. Chairman. And it is nice that we

are here to discuss this bill. And I understand the Federal Trade

Commission, Mr. Leibowitz, is endorsing this idea. He has endorsed the bill, so to speak.

I think the intent of the legislation, I think, as ranking member

and my colleagues on this side would say that we support that intent to bring generic drugs to market sooner, benefiting our customers with greater choices and lower prices. But between the cup

and the lip, there are some things that we think are some problems. And I do have some concern, Mr. Chairman, about this bill,

and I thought I would just outline these two concerns.

These two pieces of legislation in concert will create disincentives

for generic pharmaceutical companies to challenge brand drug patents. There is a strong incentive built into the Hatch-Waxman Act.

That incentive was designed for a reason. The generic pharmaceutical companies needed strong encouragement to take on the financial burden of litigating a patent challenge. We know how expensive that is.

Litigation on patent challenges can last for years, and legal fees

reach into the millions of dollars for both parties. For a generic

pharmaceutical company it is an impossible financial burden without a mechanism to ensure that they can recoup their investment

if there is a successful patent challenge.

In 1984, our colleagues wisely devised a 180-day marketing exclusivity period for the first patent challenger. Now, this 180-day

period is a carrot for generic pharmaceutical companies to challenge brand drugs. The first patent challenger will be the only generic pharmaceutical product on the market for 6 months, an opportunity to recoup legal costs and an award of sorts for being the

first company to put its neck out there.

My colleagues, without this carrot, fewer generic pharmaceutical

companies would be willing to bring a patent challenge, opting instead to wait until a brand drug’s patent expires. This legislation

will effectively nullify, in our opinion, that carrot. By triggering the

countdown clock to a forfeiture of this 180 days by just a dismissal

of a frivolous or meritless lawsuit by another generic pharmaceutical company, a first filer will be forced to launch their product

at risk or lose a 180-day exclusivity period, which is their assurance for recouping their legal fees.
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If a generic pharmaceutical company launches their product prior

to a court’s determination that their challenge is successful or prior

to a settlement with a brand pharmaceutical company permitting

prepatent expiration marketing, then the generic pharmaceutical

company is liable for triple damages for patent infringement. This

would simply be too much risk for a publicly traded generic pharmaceutical company to challenge a patent without a guarantee for

a return on their investment.

The second part of this legislation bans cash or other compensation in settlements. I will admit such trades sound bad, but if we

dig deeper, we find that these settlements are actually beneficial

to consumers. Bear with me. Brand companies are not keeping generic companies off the market altogether. They are actually giving

up some of their guaranteed monopoly time under their patent and

bringing generic drugs to market much sooner than would otherwise occur. Just because money or other compensation is involved

does not make the deal anticonsumer. Patent litigation is expensive. The outcomes are often uncertain, and the odds for success or

failure are about even when you consider whether a generic drug

launched results. Without additional compensation a generic pharmaceutical company would not settle for anything less than an immediate launch of their product in order to recoup their investment. However, brand drug companies have no reason to give an

immediate launch date and would prefer to litigate to the end, delaying even further a launch of a generic drug.

To interfere in private litigants’ ability to settle is dangerous territory. Obviously we want to balance this interest with the consumer’s best interest, but Congress has done that. Both the FTC and

the Department of Justice have tools that challenge suspect settlements in court. The courts have reviewed so many settlements and

have refused, refused, to throw out so many settlements sends a

clear signal that we should not look at drug patent settlements as

anticompetitive on their face. Furthermore, our goal should be to

encourage settlements in any area of the law, not force cases to the

bitter end, wasting not only limited judicial resources, but also

wasting precious dollars in legal fees that could otherwise be used

for research and development of new treatments and drugs.

So I look forward to hearing from our distinguished panel of witnesses, and I thank you, Mr. Chairman, for holding this hearing.

Mr. RUSH. Thank you.

I now recognize the chairman of the full committee Mr. Dingell.

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

Mr. DINGELL. Mr. Chairman, I begin by commending you and our

colleague Mr. Waxman for introducing H.R. 1902 upon which we

are having hearings today. Legislation is sorely needed. Consumers

no longer receive full benefits that Congress intended when it

passed the Hatch-Waxman Act in 1984. It appears that in instances drug companies may be making deals that thwart the goals

of Hatch-Waxman and cost consumers billions of dollars in savings

which the Congress intended that they should have.
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When Congress passed this legislation, it appreciated the growing importance of pharmaceuticals for treating a host of physical

and mental conditions. The statute struck a careful balance between drug innovation and drug affordability.

Mr. Chairman, there is more in my statement that I ask be put

in the record by extension of remarks. I simply observe this is good

legislation. Your leadership is of great value in this matter. I look

forward to working with you to see to it this becomes law at an

early time. And I thank you for your leadership again, Mr. Chairman.

I yield back the balance of my time.

[The prepared statement of Mr. Dingell follows:]

PREPARED STATEMENT OF HON. JOHN D. DINGELL, A REPRESENTATIVE IN CONGRESS

FROM THE STATE OF MICHIGAN

Let me begin by commending Chairmen Rush and Waxman for introducing H.R.

1902, the Protecting Consumer Access to Generic Drugs Act of 2007. It is sorely

needed. Consumers no longer receive the full benefits that Congress intended when

it passed the Hatch-Waxman Act in 1984. It appears that, in certain instances, drug

companies may be making deals that thwart the goals of Hatch-Waxman and cost

consumers billions of dollars in intended savings.

When Congress passed Hatch-Waxman, it appreciated the growing importance of

pharmaceuticals treating a host of physical and mental conditions. The statute

struck a careful balance between drug innovation and drug affordability.

On the one hand, it extended the patent protection for pharmaceuticals to encourage ‘‘branded’’ manufacturers to research and develop new drugs, given the lengthy

Food and Drug Administration approval process. On the other hand, it crafted incentives to induce generic manufacturers to enter the market sooner to make lowercost alternatives available to consumers. Among those incentives, the legislation encouraged generic companies to challenge potentially dubious patents and withstand

infringement litigation by a branded company.

The legislation has been successful. Consumers Union estimates that in 2006 the

appearance on the market of new generic drugs as alternatives to just five ‘‘blockbuster’’ drugs saved consumers over $6 billion.

For some years now, however, we have learned that instead of continuing litigation, some generic entrants are accepting cash payments and other transfers of

value to settle and stay out of the market. These settlements, called ‘‘exclusionary

payments’’ or ‘‘reverse payments,’’ are a sweetheart deal for both brandeds and

generics. Generics get paid even when they bring no product to the market. The

brandeds pay less to the generics than the revenues they would lose when competing against a lower-cost rival.

These settlements are bad deals for consumers. Drug companies are essentially

pocketing the savings that Hatch-Waxman intended for consumers.

Let’s focus on some of the consumers left behind by these deals.

One is the taxpayer. Through programs such as Medicare and Medicaid, the Government spends billions on drugs every year. In 2006, Government expenditures for

prescription drugs were estimated to be $68 billion. By 2016, these estimates rise

to more than $200 billion.

Other consumers include employer heath plans sponsored by U.S. industry. Government and industry would save enormous sums if more generics were made available earlier in the marketplace, as the Hatch-Waxman Act had intended.

H.R. 1902 endeavors to fix this problem. It will prevent exclusionary payments

and restore Hatch-Waxman’s goal of putting generic drugs on the market more

quickly.

Chairman Rush, I look forward to working with you as this legislation moves

through the committee and the Congress.

Mr. RUSH. Thank you, Mr. Chairman.

We now recognize the gentleman from Texas Mr. Gonzalez.

Mr. GONZALEZ. Waive opening.

Mr. RUSH. The Chair now recognizes the gentleman from Georgia

Mr. Barrow.
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Mr. BARROW. And I waive the opportunity to make an opening.

Mr. RUSH. Mr. Matheson is now recognized.

Mr. MATHESON. I waive opening.

Mr. RUSH. Now we will recognize the gentle lady from Tennessee

Mrs. Blackburn.

OPENING STATEMENT OF HON. MARSHA BLACKBURN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF TENNESSEE

Mrs. BLACKBURN. Thank you, Mr. Chairman. I want to thank

you and our ranking member for holding today’s hearing so that we

can continue to explore the merits of H.R. 1902, the Protecting

Consumer Access to Generic Drugs Act of 2007. The American people have greater access to lifesaving, low-cost prescription drugs

today than at any other time in our modern history, and though

my colleagues share strong opinions and may disagree on many

issues surrounding prescription drugs, I truly think we can all

agree that generic drug access is a net positive for our constituents

and the consumers. And given the title of the legislation under consideration today and the fact that they are all cosponsors of H.R.

1902, I am sure that my colleagues on the other side of the aisle

believe they are doing just that.

What I want to point out is that sometimes the devil is in the

details, Mr. Chairman, and I want to make certain that this committee acts deliberately before amending the landmark Hatch-Waxman Act patent dispute amendments of 1984. After all, the HatchWaxman Act amendments are largely responsible for the proliferation of generic pharmaceuticals in the marketplace. And without

them many of our constituents would not enjoy the benefits of competition that are available to them today.

These considerations guide my thinking with respect to the bill,

and I do not take them lightly. That is not to say, however, that

the relative proliferation of out-of-court settlements and patent disputes between generic and brand name pharmaceutical companies

does not warrant attention. Far from it. The American people do

have a right to understand why a patent holder, in this case the

drug companies, would pay a settlement fee to a potential patent

infringer, in this case a generic manufacturer, during a patent dispute. Such reverse payments, if you will, might defy logic to a casual observer given the fact they do not happen in any other American industry, something that is unique to the pharmaceutical industry. It might even appear that such settlements allow large

drug companies to game the system or prevent generic drugs from

coming to the market.

If that is the case, as several of today’s witnesses will suggest,

the American people have a right to gripe. Yet my experience

teaches me to remain cautious before jumping to such conclusions,

Mr. Chairman, and I look forward to the expert testimony of our

witnesses and their shedding some light on the situation.

Thank you. And I yield back.

Mr. RUSH. I want to thank the gentle lady.

It is the rule of this subcommittee that a nonmember will have

an opportunity to testify before this committee after all members

of the subcommittee have testified.
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And now it is my honored privilege to recognize the co sponsor

of this bill and the Waxman of the original Hatch-Waxman Act,

none other than our colleague from California Mr. Waxman, for an

opening statement for 5 minutes. And I want to commend him on

his unparalleled leadership in this particular endeavor.

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

Mr. WAXMAN. Thank you very much, Mr. Chairman, and my colleagues. I want to thank you for holding this very important hearing. In 1984, when we drafted the Drug Price Competition and Patent Term Restoration Act, commonly known as the Hatch-Waxman

law, we were trying to benefit consumers by lowering drug prices,

and we did this by creating competition where there was none and

ending the permanent monopolies that drug companies had enjoyed

until that point.

By almost any measure this law worked. It worked very well. It

promoted competition, lowered drug prices. In fact, generic drugs,

when they are available, lower drug prices by as much as 90 percent.

But there is evidence that the law could function more effectively

for consumers. The fact is that in 2005 we still spent 10 times as

much on brand name drugs, $229.5 billion, over the $22 billion we

spent on generics. This simply illustrates we can do more to get

generics on the market faster.

The Federal Trade Commission, and I thank them very much for

their excellent work, they highlighted a significant cause of this

problem. In recent years generic and brand name companies have

increasingly been entering into patent settlement agreements that

the FTC believes have an anticompetitive effect. These settlement

arrangements now frequently include agreements under which the

brand companies pay the generic firms to keep their product off the

market.

Well, this averts the objectives of the law. One of the unique aspects of Hatch-Waxman is that it was intended not only to speed

up generic drug approval, but to speed up resolution of patent disputes. Rather than wait until after approval to litigate patent infringement actions, Hatch-Waxman encourages patent challenges

to begin before approval. The law also provides incentives for generic companies to undertake this protracted litigation.

We gave the first generic company to challenge the brands patents 180 days of exclusive marketing. Our goal, our whole reason

for this, was to hasten generic market entry for the benefit of the

consumers. By rewarding generic companies to challenge patents

that had no business blocking market entry either because they

were invalid or not infringed, consumers could have access to lowcost generic drugs at the earliest possible moment.

Anticompetitive settlements turned this fundamental goal of

Hatch-Waxman on its head. We established an abbreviated regulated pathway to encourage generics to enter the market as soon

as possible, not to authorize the companies to use that regulatory

pathway as a means for sharing the brands’ monopoly profits.
8

The impact of these settlements is that they are contracts between two parties, generic and brand companies, to share the profits that are entirely paid by a third party. And the third party are

the consumers, the insurance companies, the Government, and

they pay those profits in the form of higher drug prices, yet consumers have no say in the terms of these contracts. As long as consumers bear the full cost of the later marketing date, there is little

incentive for the parties to negotiate an earlier date. And economics is sometimes referred to as the moral hazard, an agreement in

which parties are motivated to spend more money as long as it is

someone else’s money. Some courts have erroneously concluded

that these agreements were condoned by Hatch-Waxman. They say

that since the law created a situation in which generic firms could

extract the settlement payments in exchange for delayed entry,

that this was somehow the intent.

Well, those courts are sorely mistaken. The use of Hatch-Waxman to prevent generic competition was very obviously not the intent of the law. As a result of their misunderstanding of the underlying intent of the law and the Supreme Court’s refusal to look at

this issue, Congress is now in a position in which we need to act

to prevent the continued erosion of the principles of the law.

I recognize we need to proceed with care. Some patent settlement

agreements can provide benefits across the board. Settlements can

allow the parties involved to avoid expensive protracted litigation.

But it strikes me as a much more prudent thing to do to pass this

legislation. If the Federal Trade Commission decides that other exceptions to this bright line test need to be made to enhance competition and benefit consumers, then FTC can implement those

changes through rulemaking. In effect, the bill is designed to rid

us of the bad settlements and leave us with the good. And I look

forward to the testimony of the witnesses today, and I hope we can

move expeditiously on this legislation.

Thank you very much, Mr. Chairman and my colleagues.

Mr. RUSH. Thank you very much. This concludes opening statements. Any other statements for the record as well as the text of

H.R. 1902 will be accepted at this time.

[The prepared statement of Mr. Butterfield and H.R. 1902 follows:]
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Mr. RUSH. And now the subcommittee will hear from the first

panel. And the first panel is the Honorable Jon Leibowitz. He is

a Commissioner of the Federal Trade Commission. Commissioner

Leibowitz will testify on behalf of the FTC, which favors a strong

legislative response to exclusion payment agreements. The Commission has been very aggressive in pursuing legal action against

these agreements, and Commissioner Leibowitz will inform the

subcommittee on why they are anticompetitive and bad for consumers.

Before we hear testimony from the Commissioner, I will ask for

unanimous consent to allow Commissioner Leibowitz to testify for

8 minutes instead of the usual and customary 5 minutes. Without

objection, so approved.

Welcome, Commissioner.

STATEMENT OF JON LEIBOWITZ, COMMISSIONER, FEDERAL

TRADE COMMISSION

Mr. LEIBOWITZ. Thank you, Chairman Rush; thank you, Chairman Waxman, Ranking Member Stearns, members of the subcommittee, so much for inviting the FTC to testify here on this

lovely afternoon.

Simply put, we believe H.R. 1902 is a fundamentally sound approach to eliminate the pay-for-delay settlement tactics employed

by the pharmaceutical industry that could cost American consumers and the Federal Government billions of dollars annually. Obviously the Federal Government is a major purchaser of drugs.

But let me start with the usual disclaimer. The written statement we submitted today represents the views of the Commission.

My oral testimony does not necessarily reflect the views of any

other Commissioner. And I ask unanimous consent to put the Commission’s written statement into the record. And I thank you for

the 8 minutes. I won’t use all of it.

There is particular urgency to pharmaceutical competition issues

today. Recent appellate decisions are making it difficult, as Chairman Waxman pointed out, to challenge so-called exclusion payments and reverse payments; that is patent settlements in which

the brand name drug firm pays the generic to stay out of the market. If these decisions are allowed to stand, drug companies will

enter into more and more of these agreements, and prescription

drug costs will continue to rise.

Indeed, in the past year we have seen a dramatic increase in the

types of deals, from none in fiscal year 2004 to more than a dozen

in fiscal year 2006. These increased costs will burden individual

consumers, they will burden American businesses, and they will

burden the Federal Government, which, with a new Medicare Part

D program, paid an estimated $68 billion or 32 percent of the Nation’s $215 billion in annual drug purchases last year.

Now, when Congress enacted the Hatch-Waxman statute in

1984, and we heard from one of the authors, this committee promoted speedy introduction of generics by encouraging challenges of

invalid or narrow patents on branded drugs by providing additional

protections for innovator firms. This statutory framework ensured

that our pioneer drug companies remain the envy of the world, and

they are, while also delivering enormous consumer savings.
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Generic entry prior to patent expiration has played an instrumental role in allowing Americans to find and to get the medicines

that they need. The first generic usually enters the market at a 20

to 30 percent discount off the brand price. When other generic companies enter, the price can drop by 80 percent or more. Indeed, according to the Generic Pharmaceutical Association’s own study, generic competition following successful patent challenges to just

four, Prozac, Zantac, Taxol and Platinol, is estimated to save consumers more than $9 billion alone. All those savings could be lost,

however, if brands are given a green light to pay generics to sit it

out until the patent expires. As you pointed out, Chairman Rush,

it can be easy money.

Sadly, the incentives to enter into these pay-for-delay deals are

substantial because generic entry causes the branded drug firm to

lose far more in sales than the lower-priced generic could ever possibly earn by competing. So it is a win-win deal for the companies,

but it is a lose-lose profit for consumers who are left holding the

bill.

Over the past decade a unanimous Commission, six Republicans,

four Democrats and one Independent—and by the way, in response

to your very good point, Mrs. Blackburn, a bipartisan companion

bill to this legislation came out of the Senate Judiciary Committee

by unanimous consent. Chuck Grassley is one of the cosponsors. A

bipartisan Federal Trade Commission has made stopping these

harmful settlements a priority.

In 2000 and 2001, the Commission obtained two major consent

decrees preventing anticompetitive payments from brands to

generics, and our actions stopped this conduct cold. The Commission set forth rules that everyone understood. If you settled a case

by paying off a generic, we would not let you get away with it. And

there were dozens of settlements between 2000 and 2005, as you

can see from the chart—well, I’ll go to the chart later—but no exclusion payments.

Recent court decisions, though, have changed this dynamic. In

2003, the Commission ruled 5 to 0 that a 1997 settlement involving

a payment from Schering-Plough, the brand, to Upsher-Smith, the

generic, violated the antitrust laws. The case involved a drug widely used by older Americans. The Eleventh Circuit reversed us in

2005. Later that year, the Second Circuit, in a 2 to 1 decision in

the tamoxifen case, issued a similar holding. These decisions essentially allow a patent holder to compensate a generic, except under

very limited circumstances.

As a result, the exclusion payment problem is almost certainly

growing. And, Mr. Chairman, how do we know this to be true?

Well, thanks to the reporting requirement that this committee included in a 2003 Medicare Monitorization Act, and presumably you

did so because you were troubled by these agreements, the FTC

now reviews each and every Hatch-Waxman settlement. And

tellingly, here’s what the data for the last few years reveals. As you

can see from the chart, for fiscal year 2004 and the early part of

fiscal year 2005, none of the nearly 20 agreements reported between brands and generics contain both a payment from the brand

and an agreement to defer generic entry, but data from fiscal year

2006, which reflects agreements after the Schering and tamoxifen
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decisions, is far more disturbing. Half of all the settlements, 14 out

of 28, involve some form of compensation to the generic and an

agreement by the generic not to market its product for a period of

time. And almost all the settlements with first filers, I think it is

9 out of 11, you can see the charts better than I can, involve similar restrictions.

As you know, Mr. Chairman, these settlements with first filers

can create a bottleneck that may make it impossible for other

generics to enter.

In sum, just before Schering and tamoxifen, there were no reverse payments. Now it is becoming the new way of doing business.

Mr. Chairman, it is not hard to predict what will happen if nothing changes. No longer will generic companies vie to be the first to

bring a drug to market. Instead they will vie to be the first to be

paid not to compete. Now, from our perspective we are going to be

vigilant in looking for ways to challenge anticompetitive deals. It

is public knowledge that we are looking to bring a case or cases

that will create a clear split in the circuits. And we are hopeful

that the Supreme Court will review the tamoxifen decision, which

is a cert petition before the Supreme Court now. But the Court

only takes a handful of cert petitions annually, and a litigation

strategy could take years. A legislative approach could provide a

swifter and cleaner solution.

For that reason we strongly support legislation to prohibit these

anticompetitive payments. Both your approach, Chairman Rush

and Chairman Waxman, and the bipartisan measure reported out

of the Senate Judiciary Committee would ensure that consumers

continue to have access to low-price generics. But we also recognize

that these issues are complex, so we want to work with you and

other interested parties as the bill moves forward.

Mr. Chairman, we do have great respect for the pharmaceutical

industry. Brand firms pursue hundreds of drug candidates for each

one that comes to market, and these companies have brought enormous health benefits to consumers. And for their part, generic companies have produced low-cost drugs and really pushed the brands

to innovate even further. But we do not and we cannot support settlements when brands and generics resolve their disputes at the

expense of consumers and at the expense of the American taxpayers.

Thank you so much. I am happy to answer questions.

Mr. RUSH. Thank you, Commissioner.

[The prepared statement of Mr. Leibowitz follows:]
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Mr. RUSH. The Chair recognizes himself for 5 minutes of questioning.

Commissioner, in your testimony on behalf of the Commission,

you stated that the FTC believes the Rush-Waxman bill is a fundamentally sound approach to solving the problem of exclusion payment settlements. Can you please tell the committee why the Commission prefers our approach as opposed to the approach suggested

by the pharmaceutical industry, which proposes a solution in which

the FTC and courts review settlements on a case-by-case basis?

Mr. LEIBOWITZ. Well, I would make this point, Mr. Chairman.

We think your approach is fundamentally sound. That is a bright

line approach to the reverse payment problem and a solution to the

bottleneck problem, because during the period of 2000 to 2005,

when everyone believed that these payments were illegal, we still

saw plenty of settlements, dozens of settlements actually, but we

didn’t see any anticompetitive settlements. A bright line approach

will allow settlements to continue. And you saw settlements in

2006. Some were ones that weren’t troubling to us; others were

problematic. About half of each. But it will also make the potentially anticompetitive settlements migrate towards the nonanticompetitive side.

And with the approach I have seen different drafts of different

proposals from the generic industry. Most of them take a case-bycase approach. Some of them take a sort of Hart-Scott-Rodino

prereview approach. And as I heard one of the members of this

committee say, the devil is in the details. We do want to solve a

problem, but some of the drafts we have seen might not reverse,

for example, the Schering decision. And if you are not changing the

substantive standard in a case-by-case approach, then you are really not going to solve the problem. There are going to be more and

more of these deals, consumers are going to be harmed, and those

deals will push entry out, of course, back to almost the expiration

of the patent.

Mr. RUSH. You know that after the FTC began cracking down on

exclusion payments, they disappeared, and a drug company settled

their patent disputes, just like the rest of the commercial sector,

without these exclusion settlements, payments. You just noted

that. Then when the courts intervened and invalidated the Commission’s enforcement efforts, settlements with exclusion payments

came back to life and now are accelerating in their frequency.

Is there a reason that we only see these types of settlement in

the drug industry, and why don’t we see these type of settlements

in other commercial sectors of our economy?

Mr. LEIBOWITZ. Well, I think we only see these reverse payments

or these exclusion payments in Hatch-Waxman settlements. And

we only see side-bar deals, which we are very concerned about, because it is not always a straight cash payment. Sometimes it is a

payment that is refraining from introducing an authorized generic,

sometimes it is a side-bar deal.

Why do we see them only in Hatch-Waxman deals? Well, I think

it is the economics of the industry. When the first generic comes

in, prices go down by 20 or 30 percent. When multiple generics

come in, sometimes as early as 6 months after the first generic,

certainly if you will solve the bottleneck problem with your legisla-
51

tion, prices can go down by 80 percent. So there is a giant sweet

spot in which the brand can pay the generic, the generic can receive more compensation by not competing than by competing, and

the brand will make more money by keeping its monopoly rent essentially. So it is a win-win deal for the companies; it is a losing

proposition for consumers.

Mr. RUSH. My final question on this round is if we don’t pass this

bill, how will the FTC be able to act and protect consumers against

these anticompetitive agreements?

Mr. LEIBOWITZ. Well, look, if the legislation doesn’t pass, we are

still going to keep at it. This is a bipartisan priority for the Commission. It has been, as you pointed out. Since 1999, we have had

11 Commissioners, 6 Republicans, 4 Democrats and 1 Independent,

and we are all committed to doing this. So it is public knowledge

we have investigations going on. We are hoping the Court takes it,

the tamoxifen case, to reverse Schering and tamoxifen in the Second Circuit. But what is going to happen is that companies are

going to migrate to the more lenient standard. So there will be

more and more of these deals, and they are going to push out the

entry date of the first generic in the market. And so instead of having entry, as the GPHA said, long before patent expiration, you are

going to have entry at the end of the patent or 6 months before,

which will give the first generic 6 months of exclusivity, and you

won’t have all those benefits that Hatch-Waxman intended.

It turns Hatch-Waxman on its head. It really does. And consumers will be the ones who pay, and the taxpayers as well, because

obviously the Federal Government pays a third of all prescription

drug costs. So if somehow the current lenient standard isn’t modified, and we think your bill is a fundamentally sound approach for

doing so, we are all going to pay more.

Mr. RUSH. I thank you.

The Chair now recognizes Ranking Member Stearns.

Mr. STEARNS. Thank you, Mr. Chairman.

Mr. Leibowitz, I am just coming at this as an outsider just looking at it. Do all the Commissioners agree with you, or are you pretty much the strongest proponent of this bill?

Mr. LEIBOWITZ. No. You know, unlike, say, the FCC, when the

FTC submits testimony, all of the Commissioners vote on it, all of

us have a hand in writing it.

Mr. STEARNS. So the chairwoman has signed off on it?

Mr. LEIBOWITZ. Yes, she has. And I think what we say is we fundamentally support the approach of this legislation.

Mr. STEARNS. When you look at this just as an outsider, it looks

like the free market is working in its own way. You don’t think it

is working right, so you want the Government to step in with mandates. Is that a fair way to put it?

Mr. LEIBOWITZ. I wouldn’t characterize it exactly that way, Mr.

Stearns. Look, Hatch-Waxman has been a wonderful statute. It

gave the brands patent term restoration. It gave them something.

It gave the generics early entry. It has given consumers enormous

benefits, as I think Mrs. Blackburn said.

Mr. STEARNS. But you have been arguing here, and the chairman

mentioned it, too, that you don’t seem to have the tools. I mentioned in my opening statement the Federal Trade Commission, the
52

Department of Justice, I thought had the tools. And according to

your reports and settlements, there has been over 50 settlements

filed with the FTC in the last 3 years. Your testimony noted that

a large number of them have side agreements. Yet of these 50 settlements, the FTC has not filed legal challenges against any of

them. And private plaintiffs have brought suits against only two of

the settlements.

The question is why has the FTC not challenged any of these settlements, and particularly in light of the fact that Commissioner

Tom Roche suggested the FTC could successfully challenge these

settlements under the standards in the Schering case? Why should

the law be changed if you can’t litigate changes under the Schering

standard?

Mr. LEIBOWITZ. There are several good questions embedded in

that one question. Let me see if I can answer some of them. If I

miss one, you can come back and ask me again.

Mr. STEARNS. You got two there.

Mr. LEIBOWITZ. Let me start with Commissioner Rosch. Commissioner Rosch supports a legislative approach of fixing this problem.

Commissioner Rosch believes that Schering and tamoxifen were

wrongly decided and should be reversed.

Mr. STEARNS. It is fair to say he indicated the FTC could successfully challenge that, is our understanding; he has said that publicly?

Mr. LEIBOWITZ. He has said that, and I will put the Rosch statement into the record if there is no objection.

Mr. STEARNS. Sure.

Mr. LEIBOWITZ. Yes. And I think we all agree that we have investigations going on now. You want to make sure you get your investigations right. We don’t believe we are entirely precluded from

bringing a case. And, in fact, Mr. Stearns, as you may know, one

of the reasons why the bright line test is a good one is it will bring

some certainty to this rule. In the Eleventh Circuit the rule is very

lenient; fraud, sham, or beyond the actual scope of the patent, that

is the end of the patent.

Mr. STEARNS. But the Department of Justice hasn’t filed anything, have they?

Mr. LEIBOWITZ. Let me get to the Department of Justice. You are

asking all really good questions.

Mr. STEARNS. I know. And the problem is I have only 5 minutes,

so if I interrupt you, it is not because I am being impolite.

Mr. LEIBOWITZ. In the Sixth Circuit they have a rule of per se

illegality. All these reverse payments are per se illegal, as these

kind of deals would be if they were outside of the Hatch-Waxman

context. The Justice Department in the Schering case, the Justice

Department in the Schering case did not support the FTC’s position.

Now, I have a lot of respect for the Solicitor General. We worked

together on the Senate Judiciary Committee. He is a wonderful, decent, incredibly bright person. I think that at the time of Schering,

I think part of the reason why the Justice Department didn’t support our petition was because we said this was a problem that was

we couldn’t show that it was anything but theoretical. In other

words, we thought there would be more reverse payments. Since
53

then, as you can see from our settlement report in fiscal year 2006,

and again it was your committee that gave us these settlement

agreements to review, we can see that it is not just a theoretical

concern, because after Schering and tamoxifen, half of the deals we

have seen, 14 out of 28, now have a payment from the brand to

the generic and deferred generic entry. And even more important,

because of the bottleneck problem, 9 out of 11——

Mr. STEARNS. But isn’t it true that you say it is difficult for the

FTC to litigate this case because of the Court’s decision in a case

like Schering? But there seems to be several courts that have ruled

similarly. Why shouldn’t we rely on their decisions?

Mr. LEIBOWITZ. Again, you want certainty in the law.

Mr. STEARNS. Can you ever get permanent certainty in the law?

Mr. LEIBOWITZ. Well, Hatch-Waxman is a law that people have

tried to undo certainly from time to time.

Mr. STEARNS. Well, the mandate from the Federal Government

is permanent certainty, and I agree with that.

Mr. LEIBOWITZ. I would sort of look at Chairman Rush’s bill and

Chairman Waxman’s bill.

Mr. STEARNS. One other thing. You indicated the money lost, the

extra money that is going to come from the prescription drug benefit part D. But actually that has come down, the cost has come

down.

Mr. RUSH. The gentleman’s time is up.

Mr. LEIBOWITZ. Well, my understanding is that prescription drug

costs, the rate of increase went down in 2005. It may well go up

in 2006. And, of course, with the new Medicare Part D program,

which started in 2006, the Federal Government’s costs are obviously going to go up.

Mr. RUSH. The Chair recognizes the gentleman from Texas Mr.

Gonzalez.

Mr. GONZALEZ. Thank you very much, Mr. Chairman.

Welcome, Commissioner. I guess one of your observations was

this reverse exclusionary payment settlement under the present

guise and interpretation by courts and such is perfectly legal. We

understand that, and that is why we are attempting to address it

legally through legislation. Only because something is legal does

not necessarily make it right or best practice.

Mr. LEIBOWITZ. Well, I think that is absolutely true. And again,

it is legal in the Eleventh Circuit. It is legal by a 2-to–1 decision

in the Second Circuit. It is per se legal in the Sixth Circuit.

And I just want to be read something that Senator Hatch said

on the Senate Floor in 2002 about these reverse payments. He

called these types of deals, reverse payments, collusive arrangements, appalling. And, of course, we heard from one of the authors

of Hatch-Waxman. This is the coauthor, and he is very, very concerned, because I testified on the Senate side about the bottleneck

problem.

And so I think you are absolutely right, Mr. Gonzalez. It is permissible under certain circuits’ interpretations. And, of course, if it

is permissible, businesses are going to want to do it. They have a

responsibility to their shareholders. And you will see, these are

really good businessmen, and these are really good lawyers, and

they are doing what is in the best interest of their shareholders.
54

That is why we believe that either through Supreme Court reversing those bad decisions or through the bright line approach and the

solution to the bottleneck that this bill entails you can solve this

problem.

Mr. GONZALEZ. Commissioner, you earlier alluded to the resulting lack of savings that would be realized by the introduction of

generics in the competition. This is anticompetitive. If you don’t get

the generics out there, you said there is obviously some cost to the

consumer. But you pointed out something that is of great importance to us up here, and that is a third of the cost of the drugs

is borne by the United States Government, Medicare and Medicaid.

Can you put a dollar figure on that?

Mr. LEIBOWITZ. Yes. I put a dollar figure in my oral statement.

I think it is $68 billion, or 32 percent of the $214 billion spent in

annual drug purchases last year by Americans. That adds up to

about $800 per American citizen or per American citizen or resident, $800 per American, and about $230 paid by taxpayers, by the

Federal Government. And then that percentage is expected to go

up, I think it is in our written statement, considerably in coming

years, the amount that is paid by the Federal Government, and the

overall amount that Americans will pay.

Mr. GONZALEZ. And one last question, because I think when we

enter these debates, and it comes to patents and patent litigation,

and we start making distinctions between the type of patent being

held, is it in the telecommunications or is it pharmaceutical, and

it seems to me that when we get into the pharmaceuticals, there

are different factors and considerations, and some will advance the

argument that it is so unique, the factors and the elements in that

business sector is so unique, that you need special arrangements,

or the laws should treat them differently.

Is there anything so unique in that particular industry or entity,

business arrangement, business model, that should take it out of

the norm and have a situation as we have presently?

Mr. LEIBOWITZ. Well, I guess I would say this. Hatch-Waxman,

it is unique in the sense that when the first generic enters, the

price goes down considerably. When other generics enter, and it is

anticipated by Hatch-Waxman by this committee’s product that you

will have early generic entry, pricing can go down by 80 or 90 percent. And so I think the fact that you have passed this law, and

there was a congressional intent to it, meaning that it should be

part of what you think about along with the antitrust laws, and

along with the patent laws, too, which have a presumption of validity as this legislation moves along—but, yes, it is a unique industry. It is an industry that has done wonderful things for consumers.

The generics have brought down prices for consumers, but you are

going to see no more early generic entry if these lenient rules continue to apply. And again lenient rules in two circuits, per se rule

against in another.

Mr. GONZALEZ. Thank you very much, Commissioner.

Mr. RUSH. The Chair wanted to remind the Member that he has

an additional 3 minutes because he waived his opening statement.

Do you want to yield?

Mr. GONZALEZ. I guess one last point, and that is you always

hear, and I think there is some validity to this, that when it comes
55

to the pharmaceutical companies, that is a tremendous investment

that they make in the research, in the development and the trials

and so on. And I have to appreciate that. But should we go ahead

and attempt to fix what we perceive as a shortcoming in HatchWaxman? Does it really impact that particular industry in the innovation, in bringing new products to the market and, again, being

able to protect that investment?

Mr. LEIBOWITZ. Look, I would say in some tangential way—well,

I agree with you, the innovator firms, the brands, they look at hundreds of different, maybe thousands of different chemical compounds before they bring one to market. And when they have to

pull a product—and Pfizer had to pull a cholesterol drug,

Torcetrapib; they lost $18 billion in market capitalization in a single day. But that is not an excuse for violating the antitrust laws,

or for doing something that we all believe should be illegal, or for

turning Hatch-Waxman on its head. So I agree with your thoughts.

Mr. GONZALEZ. Thank you very much.

I yield back.

Mr. RUSH. The Chair recognizes now the gentle lady from Tennessee Mrs. Blackburn for 5 minutes.

Mrs. BLACKBURN. Thank you Mr. Chairman.

Commissioner, I am not a lawyer. Usually I say thankfully I am

not. When we get into hearings like this, and when I am working

with my creative community in Tennessee, all of my song writers,

my auto engineers, a lot of our biotech innovators, I find myself always wishing I knew a little bit more about these issues. And as

my colleague was just talking about, there are two sides to this

coin. And I think that those of us who are passionate about being

certain that we meet the needs of our constituents, when it comes

to health care, looking at drugs getting to the marketplace, we realize the desire that is there. When we look at innovators and their

right to take an idea and a concept and take it through R&D, and

take it through commercialization, and move it to the marketplace,

and then to be fairly and justly compensated, we realize the need

for that also.

And you all have argued, the Commission has argued that the

recent court decisions do make it difficult to bring the antitrust

cases to stop these exclusion payment settlements and that the settlements are uncompetitive, all the things that we have talked

about. And we are looking at, tying back into Mr. Gonzalez’s question, you know, people are concerned about this having a chilling

effect. What is it going to do? What is it going to do long term? Especially when we are tying back into the hearing we had this morning with our Health Subcommittee and looking at the biosimilars

and the new products that are there and that can be coming to the

market. It is a concern shared by a lot of our manufacturers.

So let us talk about the discrepancy in the claims. Don’t the generic manufacturers have an incentive to make sure that they can

sell their product to the public? Let us talk just a little bit more

about that. And before you begin, because I am going to let you just

talk for the rest of the time, I want you to touch on the difference

in your opinion and the Department of Justice statement and why

they have argued back against the position that you all hold.
56

And, Mr. Chairman, if you would, I think that for the sake of debate, and I have that DoJ argument with me. I would love for us

to submit that into the record for the sake of discussion as we move

forward on the bill, and then I will yield to our guest to answer

the question.

Mr. RUSH. So ordered.

Mr. LEIBOWITZ. Well, I mean, you make a very important point,

Congresswoman. We have issued two reports on patents in the last

3 years for our intellectual property. We issued one last month. We

believe strongly in the importance of intellectual property. I worked

at the Motion Picture Association for 4 years, and we worked very

much with the music industry to protect intellectual property.

But a patent is an absolute. A patent is a presumption. And

what we have found in these deals, this is the Commission’s position, is that you are buying extra protection. And the incentives,

because of Hatch-Waxman, because of its uniqueness, are so great,

there is this giant sweet spot where the brand can pay the generic.

The generic makes more money by not competing before the patent

expires. And again, the generic can only get into the market if it

is not infringing on the brand’s patents or if the brand’s patent

isn’t valid.

But here what you are doing is you are buying extra protection

with these lenient court decisions, because the court decisions are

out there. But it means that a brand will pay the generic. The generic will earn more by not competing before the patent expires or

maybe 6 months, or by not coming in before the patent expires. Because of the bottleneck problem, nobody else can jump in in front.

And that is a problem for consumers; that is a problem for the Federal Government which pays for so much of the prescription drugs

in America.

Now, as to the DoJ position in Schering, we found by a 5-nothing, 5 to 0, that Schering had violated the antitrust laws by paying

a generic $60 million in a side deal for a license. They never used

the license. We thought it was a fig leaf for the anticompetitive

payment.

The Eleventh Circuit reversed us. And we appealed to the Supreme Court, because we have the authority. I think the FCC is

one of the other agencies that can do that, too. The Supreme Court

asked the Solicitor General for his opinion. And again, Paul Clement, the Solicitor General, is a brilliant, wonderful, decent guy and

a former colleague of mine, and I admire him enormously.

The brief will speak for itself, and we put it in the record.

I think the Justice Department was concerned about a couple of

things. One is they were concerned that the ruling wouldn’t be

cabined off only to Hatch-Waxman, which we know is unique. The

pharmaceutical in this is really unique because it is under HatchWaxman. That is, of course, not a problem with the bright line approach of the Rush bill, of the Kohl-Grassley-Leahy-Schumer bill in

the Senate, because it would only apply to Hatch-Waxman.

And the other reason, and I am speculating a little bit here, the

other reason I think is at the time of Schering, it was before our

2006 report, and so what we said was a problem was only a theoretical problem. They sort of acknowledged at some level in the
57

brief that it was a problem, but we could only show it was theoretical.

Now, if you look at first filers in fiscal year 2006, which goes

through, I think, the end of October 2006, 9 out of 11 times when

there is a first filer, the brand has been able to pay the filer, there

has been a delay in generic entry, and that leaves all the other generic companies lining up behind them for a later entry date. They

can’t get in until 180 days after the first filer does.

If you look at all the deals, 14 out of 28. So now we believe there

is a very real problem. And the Supreme Court has actually asked

the Solicitor General for his opinion about whether it takes cert on

the tamoxifen decision. And obviously we are having discussions

with the Solicitor General, his staff and the Antitrust Division.

Mr. RUSH. The gentle lady’s time is up.

We will now recognize the gentleman from Texas Mr. Burgess.

Mr. BURGESS. Mr. Leibowitz, I am having a little bit of trouble

understanding the concept of bottlenecking. Can you explain that

to me in simple declaratory sentences with a subject and verb?

Mr. LEIBOWITZ. I will try my best. You can ask me a couple of

times.

What basically happens is the first generic to enter has 180 days’

exclusivity. But sometimes a brand and a generic will settle for a

later entry date, possibly because there is a reverse payment, possibly because both the brand and the generic think there is a 50

percent chance of the generic winning, and so they split the difference. If there is 10 years left, it is a 5-year delay.

Mr. BURGESS. So that is a business arrangement that they make

between themselves?

Mr. LEIBOWITZ. It is a business arrangement they make between

themselves. Now, if there is a reverse payment involved, we would

be concerned about it.

Mr. BURGESS. But the business arrangement itself is legitimate?

Mr. LEIBOWITZ. It may or may not be. It depends on the nature

of the business arrangement. But to explain the bottleneck problem, let’s say the first generic is entering 5 years later. Well,

maybe the first generic didn’t have the best case against the brand.

Maybe the first generic’s product infringes, but the other generics

who filed a little bit later, maybe they have a product that is less

likely to infringe or a better product, and they have to wait. Under

current interpretations of the law and FDA rule, they have to wait

until the first generic goes to market.

Now, Hatch-Waxman has a forfeiture provision that says if the

first generic doesn’t come in for a period of time, if it comes in on

a much later entry date, other generics can force the first generic

either to use it or lose it. But that forfeiture provision hasn’t

worked because of a glitch in the law, and so it has created a bottleneck. It really allows the first generic to park its exclusivity, and

everybody else is in a bottleneck behind that first generic.

So there are different approaches for solving this. We think

Chairman Rush’s approach is a good one. I know that Dr. Sherman, the CEO of Apotex who is testifying on the next panel, has

a slightly different approach, and we want to think a little bit

about his concerns as well. But that is basically it.
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Mr. BURGESS. Just in layman’s terms, what is the solution proposed by the bill before us today?

Mr. LEIBOWITZ. The solution in the bill would allow generics, if

they receive a covenant not to sue from the brand, they would treat

your covenant not to sue as a forfeiture event and would allow

them to go to court to get a declaratory judgment action. And if it

is dismissed for lack of subject matter jurisdiction, that would also

be a forfeiture event.

Right now under the current law, to make that a forfeiture

event, you would need probably to litigate that case to the end. And

this would basically say if it is dismissed for lack of subject matter

jurisdiction, it would be a forfeiture event. And what would really

happen as a practical matter, because I think that is what you are

interested in, is companies, the brands, would then litigate, I believe, against the second generics. And so they would litigate, and

they decide whether the second generic had a valid or an invalid

claim.

Mr. BURGESS. And that would be a streamlined process over

what we see today?

Mr. LEIBOWITZ. It would be a streamlined process over what we

see today. Yes. I don’t know that this is entirely a statute that involves lots of streamlining. And, in fact, the tamoxifen case which

is now pending on circuit before the Supreme Court, patent cases

started on that—it is now an antitrust case—in 1987. So we are

talking 20 years. It is like the Bleak House of pharmaceutical litigation, and so part of the reason why a bright line approach is a

good approach is it solves the problem quickly.

Mr. BURGESS. Let me ask you this. We have been in another

hearing about similar drugs all morning, so forgive me if I wander

from the jurisdiction over which we preside in this committee. But

just in general, on generic drugs—and you talked about 70 to 80

percent savings that are available to consumers by going to a generic drug. But at some point with a drug that has been out there

for a while, and all the research and development costs have been

recouped, and all the costs of this expensive litigation have presumably been recouped or written off somewhere, at some point it

is just the cost of manufacture that is borne for things that have

been out there for a long time. I am thinking about things like

Phenergan. I am thinking about things like erythromicin and penicillin.

Has the FTC looked at the amount of markup that some of those

generics—you know, we talk about the percentage markup on a

brand name, but over the cost of production, over the cost of manufacturing, which may be pennies or tenths of pennies——

Mr. LEIBOWITZ. And the cost of research, of course.

Mr. BURGESS. Well, the research is now gone. It has all been recovered. Is there anything that you or your office does to look at—

is the price too high for what we are paying for generics that have

been around for a long time?

Mr. LEIBOWITZ. Well, I would say this. We are mostly an enforcement agency, so if we see collusive arrangements even after patent

expiration between a branded and generic, we actually have one

case pending now. But have we looked at the mark——

Mr. BURGESS. What case is that?
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Mr. LEIBOWITZ. That is the Warner Chilcott-Barr case settled

with Warner and Chilcott, not with Barr.

Mr. BURGESS. Would you make that information available?

Mr. LEIBOWITZ. Absolutely. We don’t look at the markups. We

are an enforcement agency, we are not really a regulatory agency.

But I will try to get you some information, Congressman. I am

happy to do that.

Mr. RUSH. The Chair recognizes the gentle lady from California

Mrs. Bono for 5 minutes.

Mrs. BONO. Thank you, Mr. Chairman. I appreciate very much

the spirit of this bill before us today. I think it is a very important

issue, and I appreciate our panelists being here. But I have good

news. I don’t have any questions, so I will yield back.

Mr. LEIBOWITZ. Thank you. I want to continue to work with you

on spyware matters.

Mr. RUSH. Mr. Pitts is recognized for 5 minutes.

Mr. PITTS. No questions.

Mr. RUSH. Mrs. Blackburn.

Mrs. BLACKBURN. Thank you. Mr. Leibowitz, I have to tell you,

sitting here making some notes and listening to you, I feel like as

you are using the terms well, speculation of this and the theoretical

problems of this, I have a feeling you are the thought police kind

of going on me here just a little bit. I mentioned my industry in

Tennessee. And in light of that, can you give me any examples with

any other industry where the Congress has specified that there

should be certain industry-specific settlement practices that are per

se illegal?

Is there anywhere else that this is happening?

Mr. LEIBOWITZ. The courts have certainly said that there are certain settlements or certain deals are per se illegal. You can’t pay

your competitor to stay out of the market, right, outside of this.

But in terms of industries, let me get back to you. I don’t know

that there is again, but again——

Mrs. BLACKBURN. What we would like to know, and one of the

things that concerns me, is we look at intellectual property, and as

we look at making certain that intellectual property is a private

property right, and as we look at patent law, what I want you to

do is give me any example—as I said, I am not a lawyer. I am not

an intellectual property lawyer.

Mr. LEIBOWITZ. To your credit.

Mrs. BLACKBURN. Yes, I do believe it is to my credit. But if there

is some other industry that is doing this, where Congress is coming

in and saying, all right, this is the settlement practices, and then

if there is not another industry where this is standard practice,

then I would like to hear from you why we should make an exception and apply that only to pharmaceuticals. So that would be my

two-pronged question for you, if you will, sir.

Mr. LEIBOWITZ. All right. As to the first prong, the courts have

declared a lot of types of agreements per se illegal, and they have

declared reverse payments per se illegal in the Sixth Circuit. That

is the Cardizem decision. So the courts are sort of split about this.

The second question, could you just give me the second question

one more time? I want to make sure I have it right.
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Mrs. BLACKBURN. If you can tell us why we should make an exception for this industry. And there again you are talking about the

courts are split on this, and that is where I feel like we are kind

of morphing over in here into more or less a thought police. And

I am just not real comfortable. The more I have listened, the less

comfortable I have gotten. How about that?

Mr. LEIBOWITZ. We don’t want to police them in any way. Again,

here is why. And maybe I just haven’t done a good job of explaining

it. Because of the unique nature of this industry, because there is

such a giant sweet spot between the brands’ revenues and profits,

if there is no one competing with it, and the brands’ revenues of

generics are entered—particularly multiple generics—there is a

huge incentive here that you don’t see in other industries. Maybe

it is because you don’t see in other industries for the brand to pay

the generic some form of compensation to stay out of the market.

The generic can make more by taking this payment of some sort,

by taking the payment, than it would by competing. That is not

what we want in America. That is not what we want under HatchWaxman.

And so that is why I think—and what you see—and because

these lenient rules that a couple of courts have come up with, they

are allowed to do it legally. So they should do it. I shouldn’t say

they should do it; so they have an incentive to do it. They have to

represent their shareholders. They are good business people.

Mrs. BLACKBURN. I appreciate that, and the last time the Federal

Government, and I think the only time the Federal Government,

has jumped into an industry and said, let us help you out with this,

we are going to set in Federal statute the maximum that you can

earn, it was for song writers. And we are still trying to straighten

this out, Mr. Leibowitz. And I know you are very familiar with that

industry.

So what you need to do is say, this isn’t going to lead us down

that road, so that we look at losing an industry like we are looking

at losing a lot of our creative community right now.

Mr. LEIBOWITZ. Let me say this. And I think that is so important, and creators need to be paid value—you need to maintain

those incentives for creators, music, movies, of patent holders.

But having said that, we do believe in this industry, and calving

off only to this industry, right, that the incentives are so much that

a permissive rule encourages those deals to happen. They harm

consumers. And that is why we support a legislative approach or

a court overturning of the permissive rules.

So thank you. Those are good questions. We will continue to have

this discussion, I hope.

Mr. RUSH. I want to point out to the gentle lady from Tennessee

that no other industry is governed by a law like Hatch-Waxman.

And this is the congressional will that has been in effect for some

time now, and this practice is certainly absent in all other sectors

of our economy. So I just wanted to point that out to her.

Thank you so much, Commissioner.

Mr. RUSH. And now we will proceed with our next panel.

I want to recognize and welcome all the witnesses for panel 2.

I want to recognize specifically Dr. Bernard Sherman, who is is

CEO of Apotex, Incorporated, and Apotex is a generic pharma-
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ceutical company that opposes legal settlements with exclusion

payments. Dr. Sherman will testify why his company is successful

without these agreements and how reverse consideration legal settlements are anticompetitive and bad for consumers.

Our next witness is Mr. C. Scott Hemphill, J.D., an associate

professor of law at the Columbia University Law School. Professor

Hemphill has devoted considerable academic work to the issue of

exclusion payments and agreements and will testify in favor of the

bill. He will explain how the regulatory structure of Hatch-Waxman gives rise to such agreements and how they are anticompetitive.

It is worth noting to my Republican friends that Professor Hemphill is a former clerk to Judge Richard Posner and Justice Antonin

Scalia, so he should have a lot of street credibility with our conservative friends.

The next witness will be Mr. Phillip Proger. He is a J.D., a partner in Jones Day. Mr. Proger is a prominent expert on intellectual

property law and will provide his insights on the issue of reverse

consideration legal settlements and drug patents disputes. He will

testify that the problem of reverse payments is overstated, and that

the FTC and the courts are already well equipped to handle any

potential problems through the antitrust laws.

Michael Wroblewski, J.D., is a project director for the Consumer

Education and Outreach Division of the Consumers Union. Of

course, Consumers Union is one of the Nation’s most prominent

consumer advocacy groups. Mr. Wroblewski will testify that these

agreements adversely affect consumers and should be banned. Consumers Union, as an organization, supports this bill.

Finally, our witness is Mr. Theodore Whitehouse, who is also a

distinguished juris doctor. He is a partner in the firm of Willkie

Farr & Gallagher LLP, representing Teva Pharmaceuticals. Teva is

the Nation’s largest generic drug company, and Mr. Whitehouse

will present the generic industry’s side of this particular issue.

While Teva believes that there is room for reform, Mr. Whitehouse

will assert that certain legal settlements will reverse consideration

provisions unnecessary and beneficial to consumers.

I want to welcome all of our witnesses, and we will recognize

now Mr. Sherman for 5 minutes.

STATEMENT OF BARRY SHERMAN, CHIEF EXECUTIVE

OFFICER, APOTEX, INC.

Mr. SHERMAN. Thank you, Mr. Chairman, Ranking Member

Stearns and Members of the committee. Thank you for the opportunity to testify.

Apotex is very much opposed to anticompetitive settlements, and

therefore we are generally in favor of the bill as proposed, but we

have to add a big caveat to that, and that is we believe that there

are problems more fundamental than the reverse payments, and

that focusing solely on reverse payments without taking into account the more essential problem is likely to not accomplish very

much. And I would like to try to explain.

The fundamental problem that, as far as we can see, with the

settlements is that the settler retains the Hatch-Waxman exclusivity and continues to block market access from all others who would
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continue the patent battle and would bring the products to market

much earlier. It is a fundamental problem that needs to be addressed.

And indeed that is also what distinguishes this industry from all

others. That question was asked of the previous witness. And I

think the real answer is that this industry is different because here

the alleged infringer has the power to stop all others from entering

the market, and by settling with one, the first to file the patent

keeps everybody out of the market for the entire patent life essentially.

Apotex operates on the principle that it has a duty to always

work and fight for the earliest possible market entry. That is a

commitment we make to our customers, and it is something we

honor. We do not enter anticompetitive settlements.

Indeed we find it frustrating that so many times our ability to

bring products to market is obstructed by the very Hatch-Waxman

provisions that are intended to give us an incentive. And there is

one fundamental problem, and that is that the incentives don’t necessarily go to the right people. What happened is the Hatch-Waxman provisions, the regime was intended to give a reward to the

first person to file with a Paragraph IV certification and to win the

litigation and bring the product to market. That made sense. But

the courts have determined that the exclusivity is earned merely

by being the first to file, which means that someone could be first

to file, earn the exclusivity, and do nothing else, not win, not even

litigate, and even enter into a settlement where it agrees not to litigate, and it agrees to delay market entry for years, and yet it still

keeps that exclusivity it has not earned.

The exclusivity was given as a reward because litigation is expensive, and to earn it the first to file is supposed to litigate to win

and to bring early entry, not to settle and collude to delay market

entry.

The effect of this exclusivity going only to the first to file regardless of whether or not he wins has two implications. Number 1 is

the reward is going to someone who hasn’t earned it, but even

worse is the flip side. That exclusivity prevents someone else from

coming to market who would litigate and win. And this is not just

a theoretical problem, it is a real, practical problem.

And there have been examples. There is one very big example.

Just last month in the case of amlodipine, which is a blockbuster

product, Apotex won and defeated the patent in the court of appeals last month, but was unable to launch because it was not first

to file. Instead the first to file, another generic firm, launched and

is making hundreds of millions of dollars not earned by it, but we

earn nothing as a result of our investment.

And one may say, so what; Apotex is not getting the reward that

it earned. But the practical problem is we can’t keep doing it. Generic applicants were not first to file—as happened in this case—

can’t litigate, can’t afford to litigate to bring about market entry if

there is no reward at the end of the day, and if all they will get

is legal costs with no benefit.

This is the fundamental problem, and it is very easily fixed. All

that needs to be done is provide shared exclusivity to the person

that is first to win and to break the patent monopoly. There is al-
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ready a concept of shared exclusivity. If several people are first to

file on the same day, they should share exclusivity even if they

don’t do anything to earn it. There is no reason exclusivity can’t

also be shared by being the person who actually earns it by being

the first to litigate and to win. And that is an essential fix that we

think is needed to resolve the problem.

I also want to comment on the bottleneck provisions in this bill.

As you have heard, someone who is not first to file can be stuck

in a bottleneck where it can’t trigger an exclusivity because it isn’t

sued by the patentee. And the bill proposes to fix that by having

exclusivity forfeited if there is a judgment stopping a DJ, declaratory judgment, action from proceeding for lack of jurisdiction or a

covenant not to sue.

Mr. RUSH. Dr. Sherman, would you please bring your testimony

to a conclusion?

Mr. SHERMAN. Yes, I will.

The problem with that is that it will only replace one bottleneck

with another because the result will be that the patentees will now

sue everybody and put them in the same position that we were in

with respect to amlodipine. The second filer won’t be able to afford

to litigate because if it wins, it still can’t come to market unless

it is a provision of this bill that anyone who settles loses the exclusivity.

Mr. RUSH. Thank you so very much.

[The prepared statement of Mr. Sherman follows:]
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Mr. RUSH. I just want that point out your solution of relating to

the exclusivity period is not within the jurisdiction of this committee. It is within the jurisdiction of another subcommittee, the

Health Subcommittee. Thank you so very much.

The Chair now recognizes Mr. Hemphill for 5 minutes of testimony.

STATEMENT OF C. SCOTT HEMPHILL, ASSOCIATE PROFESSOR

OF LAW, COLUMBIA UNIVERSITY LAW SCHOOL, NEW YORK, NY

Mr. HEMPHILL. Chairman Rush, Ranking Member Stearns and

members of the subcommittee, I am Scott Hemphill, an associate

professor at Columbia Law School. My scholarship in teaching focuses upon the balance between innovation and competition established by antitrust law, intellectual property and sector-specific

regulation. I welcome this opportunity to testify today about anticompetitive pay-for-delay agreements between brand name

drugmakers and their generic rivals. These remarks draw upon ongoing academic research into the economic effects of these settlements and their appropriate legal treatment.

For more than 20 years, the Hatch-Waxman Act has provided a

way for generic drugmakers to introduce a competing version of a

brand name drug even before a patent expiration by arguing the

relevant patents are invalid or not infringed. The patent litigation

which often results has become the norm with respect to the most

important brand name drugs. These challenges often succeed in securing early generic entry. For example, of the 10 best-selling

drugs of 2000, 9 attracted challenges of which at least 4 led to

early entry.

In some cases the innovator, rather than take a chance the generic firm might win the patent suit, settles litigation. The parties

dismiss the suit and agree to a particular date for generic entry.

The entry date is a result of a hard-fought bargain between rivals.

The innovator pushes for a later entry date by arguing that if the

litigation proceeds to judgment, a court is likely to hold the patent

is valid and infringed. The likelier that judgment is, the later the

entry date.

Now, a settlement that relies solely upon the inherent strength

of the patent is properly permitted, but the situation is different

when an innovator makes a payment to its rival rather than relying solely upon its prospects at trial. In that case the payment secures a later entry date than is warranted by the likely validity of

the patent alone. That payment to a rival made to secure additional delay—in effect a privately arranged patent term extension—is properly prohibited.

These settlements have become a major tool of life-cycle management. It is not uncommon for settlement to account for more than

one-third of the time between brand name product introduction and

generic entry scheduled under the settlement. Brand name sales

during the settlement period—considering just six drugs whose settlements have attracted pending antitrust suits or FTC investigations—total more than $16 billion.

The current approach to pay-for-delay settlement is not working.

A case-by-case judicial evaluation has failed to identify and remedy

the consumer harm. A new wave of settlements, moreover, as we
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heard earlier, will make the problem worse. Even though the new

settlements exchange payment for delay, they do so in ways the

courts are unlikely to recognize through complex arrangements

that disguise the payments by converting them to other forms.

H.R. 1902 takes an important step forward in identifying and deterring pay-for-delay settlement. The bill adopts a bright line prohibition carefully limited to those settlements that combine payment

by the innovator with delay by the generic firm; whereas here,

anticompetitive activity is frequent, and courts have demonstrated

difficulty distinguishing if such a rule is justified.

Taken alone, this proposed rule might prohibit on occasion a

competitively harmless settlement, but that in itself is no vice. In

price-fixing and bid-rigging, for example, two settings that pay-fordelay settlements resemble, a ban is well justified by the severe

harm to consumer welfare, notwithstanding the possibility that

rule has a somewhat overinclusive effect.

The real issue is whether any procompetitive justification for settlement is sufficiently important as a practical matter so as to justify an exception in a well-defined class of cases. And here the bill

places the identification of such exceptions in the hands of the entity best positioned to recognize them: the FTC. The FTC has developed a deep expertise in evaluating settlements, and thanks to

the foresight of Congress, which in 2003 required drugmakers to

file all such settlements with the agency, it is in an excellent position to make comprehensive evaluations of settlement practice.

To conclude, the pay-for-delay problem appears to be worsening

as courts continue to permit the settlements and as settlements

evolve in a way that makes effective judicial intervention unlikely.

Congress has a vital role to play here in prohibiting anticompetitive settlements while maintaining agency flexibility to recognize

exceptions where they are practically justified. The subcommittee

is to be commended for taking up this important issue, and I look

forward to your questions and further thoughts.

[The prepared statement of Mr. Hemphill follows:]
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Mr. RUSH. Mr. Proger. You are recognized for 5 minutes.

STATEMENT OF PHILLIP A. PROGER, PARTNER, JONES DAY,

WASHINGTON, DC

Mr. PROGER. Thank you, Mr. Chairman. At the outset I would

like to express my appreciation to the Chair, the ranking member

and the other members of the committee for inviting me to testify.

My name is Phillip Proger. I am a practitioner specializing in

antitrust law. I am here speaking for myself today. And I do have

clients in this area. I have represented clients in antitrust class actions against settlements and in FTC investigations. But I am here

today just speaking for myself.

H.R. 1902 addresses issues important to the welfare of the American public, and I am pleased to have an opportunity to address

some of these issues. I have submitted a written statement, and I

would like to address in my oral comments just one core issue, and

that is, is it appropriate or necessary to supplant the antitrust laws

for particular conduct in a particular industry? H.R. 1902 appears

to do so.

I am concerned about the precedent that is created by doing so.

In answer to the question of Congresswoman Blackburn earlier in

the hearing, I have looked for an example of whether Congress has

ever expressly chosen a particular practice in a particular industry

to enact special legislation outlawing that practice in that industry.

Now, there are examples where Congress carves out industries

for regulatory oversight, but in answer to your question, Congresswoman, I have not been able to find an example where Congress

has done so. Perhaps there are, but they are few and far between

as far as I can tell.

I believe that the application of the antitrust laws and the general standard of prohibiting conduct that restrains competition still

is the appropriate way to address the effect on consumer welfare

of drug patent settlements. The patent laws and the antitrust laws

both promote consumer welfare, but in the short run, each do it differently by different means. Patent laws encourage innovation and

invention by giving the patent holder an exclusionary grant for a

period of time. After all, we would not be here today if the drug

map had not been invented in the first place. The antitrust laws,

on the other hand, referee our free markets to ensure that the

American public receive the benefits of the competitive market.

Some settlements may be anticompetitive. Settlements that go

beyond the scope or time of the patent raise concern under existing

antitrust laws, and the courts, as Commissioner Leibowitz has

pointed out, have attacked those settlements. But settlements that

are within the scope of the patent, both in time and scope, pose a

more difficult question.

If the settlement is within the exclusionary grant of the patent,

I don’t see why there is a presumption that the settlement is unlawful. Any settlement, by definition, does result in payments from

one side to another. It is a settlement. It is an adjudication of risk.

But there appears to be a presumption by those who believe that

these settlements are a problem that the existence of a settlement

means that the patent holder believes its patent is weak.
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I believe that presumption is not valid. The Hatch-Waxman Act,

which is laudatory, and, as I said in my written statement, is working—generic drugs are much more widely available today—does

alter the balance of power in anti-drug-patent litigation. The patent holder has much to lose. The generic has comparatively little

to lose. Consequently it is not surprising that even a patent holder

with a valid and enforceable patent that it believes to be strong

may still settle. Given the economics, even if you believe you have

a virtually sure right to prevail, there is some chance that you

could lose, and therefore it may make sense for you to settle.

The antitrust laws balance the laws of innovation with the laws

of competition on a case-by-case basis and permit the courts and

the FTC to make such an evaluation in that circumstance, not a

broad, blunt rule.

Settlements that are bad for society are those that go beyond the

scope of the patent. Settlements that merely split the rents given

by the exclusionary grant are not necessarily anticompetitive and,

in fact, may be procompetitive. Society’s interest is best served by

keeping the good settlements that balance the interest of patent innovation with competition and prohibiting the bad settlements that

are anticompetitive.

I believe that that balance is best accomplished by a case-bycase, fact-intensive analysis that is the essence of the antitrust

laws, and we are uniquely situated here to do so. The Medicare Act

of 2003 requires that settlements between a drug patent holder and

a generic challenger be notified to the Federal Trade Commission.

The Federal Trade Commission has demonstrated that it is a vigilant and able enforcer. The threat of FTC enforcement alone is a

powerful deterrent. And for those that settle, the FTC has the right

to investigate and challenge the conduct.

Moreover, private plaintiffs have brought class actions against a

number of settlement. Each settlement involves its own unique set

of facts, own unique circumstances, own unique industry, and

unique terms and conditions of the settlement.

No one rule fits all. The antitrust laws have been judicially developed for the past 117 years to deal with these type of cases, factually intensive, unique facts. The antitrust standard of outlawing

only conduct that is anticompetitive is most appropriate when, as

you do have here, the law has to govern factually intensive and

unique conduct. A blunt instrument prohibiting virtually all settlements does not distinguish between those that harm consumer welfare and those that do not.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Proger follows:]
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Mr. RUSH. Thank you.

Mr. RUSH. Our next witness would be Mr. Wroblewski.

Mr. Wroblewski, you are recognized for 5 minutes.

STATEMENT OF MICHAEL WROBLEWSKI, PROJECT DIRECTOR,

CONSUMER EDUCATION AND OUTREACH, CONSUMERS UNION

Mr. WROBLEWSKI. Thank you, Mr. Chairman, members of the

subcommittee. Thank you for the invitation to testify this afternoon.

Consumers Union is the independent nonprofit publisher of Consumer Reports. We investigate and report extensively on issues

surrounding the cost, safety and effectiveness of prescription drugs

so that we can provide our 7.3 million subscribers with expert advice on how to manage their health.

Consumers Union’s publications carry no advertising and receive

no commercial support.

Consumers Union strongly supports H.R. 1902, the Protecting

Consumer Access to Generic Drug Act of 2007. This legislation

ends the use of patent settlements in which the generic applicant

receives anything of value in exchange for agreeing not to research,

develop, manufacture, market or sell its generic product. These settlements can deny consumer access to lower-priced generic drugs

for many years. They also jeopardize the health of millions of

Americans who have difficulty obtaining safe and effective medicines at competitive prices.

I would like to highlight three reasons for our support. First, generic drugs are critical to managing health care costs today. Health

care costs continue to surge at double or triple the rate of general

inflation, in part due to the high costs and rate of inflation of brand

name drugs. Generic drugs can dampen health inflation because

they cost up to 70 percent less than the brand name drug.

We have started a free public education initiative, Consumer Reports Best Buy Drugs, to provide consumers with reliable, easy-tounderstand advice about the safest, most effective and lowest-cost

prescription drugs available. We currently provide information for

17 different classes of medicine and will expand to more classes in

the near future. Consumers can use this information to check to

see if there is a safe, effective and low-cost alternative to any medicine they are taking.

We encourage consumers to talk to their doctors about this information. Access to these low-cost generic drugs saves consumer substantial sums.

The second reason we support legislation is to counter the incentives that brand name and generic companies have to enter lucrative settlement agreements. It is an economic fact that the brand

companies’ total profits from sales of its brand drug prior to generic

entry exceed the combined profits of the brand name and generic

company after generic entry occurs. In Commissioner Leibowitz’s

testimony he referred to that as the sweet spot.

The upshot is that the brand name company has powerful incentives to pay the generic applicant to delay in entry. This payment

is still less than the amount it would lose if the generic entered the

market. The generic applicant, on the other hand, also gains by

earning more from the settlement than it would otherwise compet-
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ing in the market. Indeed, legal sanctions of these agreements have

the potential to encourage generic companies to challenge otherwise strong patents with the hope of obtaining at least some payment.

These transfers from brand to generic companies to not serve any

public interest. These economic incentives are inadvertently exacerbated by the 180-day marketing exclusivity provision of the HatchWaxman Act. Any settlement with the first filer that delays entry

blocks any subsequent generic from entering the market. So the

brand company can forestall generic competition for years by settling with just the first filed generic. And the generic who is first

in line also has powerful incentives to ask for payment because not

only will it get the payment, but it retains the 180 days of marketing exclusivity.

The irony, of course, is that the intent behind the act was to

speed generic drug entry, not provide the generic a windfall to

delay its market entry.

The third reason we support legislation is because we believe it

is a legislative question as to how to balance the competing consumer interests of speeding generic entry with providing incentives

for continued pharmaceutical innovation. We believe that the use

of these exclusionary payments has upset the finely crafted balance

that Congress struck in 1984 and reaffirmed in 2003 in the Medicare Modernization Act between these two objectives.

We believe the courts won’t fix this problem in a timely manner.

Two recent appellate court decisions have taken a lenient view of

these patent settlements. These courts have ignored the specific

statutory incentives in the act that encourage generic applicants to

challenge weak patents and to obtain court rulings on these suits.

As a result of these rulings, a patent holder can now pay whatever

it takes to buy off a generic applicant during the life of the patent.

Industry experience shows that Congress struck the right balance when it established these statutory incentives. Between 1992

and 2000, generic companies that challenged weak patents won

their cases 73 percent of the time. Indeed these challenges have resulted in generic entry earlier than what otherwise would have occurred absent the generic challenge.

For all three of these reasons, we urge Congress to act now so

that consumers get the benefit of timely generic competition.

Thank you very much.

[The prepared statement of Mr. Wroblewski follows:]
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Mr. RUSH. Thank you.

Mr. RUSH. Final witness is Mr. Whitehouse.

Mr. Whitehouse, you are recognized for 5 minutes.

STATEMENT OF THEODORE C. WHITEHOUSE, PARTNER,

WILLKIE FARR & GALLAGHER LLP, WASHINGTON, DC

Mr. WHITEHOUSE. Thank you, Chairman Rush, members of the

subcommittee, and good afternoon. Teva and I appreciate the opportunity to be heard on the important issues that you are considering today.

As I think you all know, Teva has been an active participant in

the process leading up to this hearing. Representatives of Teva

have had numerous meetings with Chairman Rush’s staff and staff

of other sponsors of this bill, as well as meetings with Members

and staff on the Senate side. We have also had what we believe

have been very constructive discussions with some of the Commissioners of the Federal Trade Commission as well as several members of the Federal Trade Commission’s staff.

We hope that it has been apparent to everyone that Teva is very

concerned about this and similar legislative proposals, but also

very willing to work constructively with Congress and the FTC in

an effort to ensure that the concerns being raised here are addressed without doing harm to the vital incentives at the heart of

the Hatch-Waxman process.

The basic principle in health care since ancient times has been

first do no harm. That sums up the message Teva wants to convey

today. Teva believes that the intricately crafted Hatch-Waxman

process that Congress put in place more than 20 years ago has

worked and is working very well. Teva’s basic position is that no

new legislation is needed. Teva is therefore opposed to H.R. 1902.

As we had some advocacy this morning on the bright line, we can

say the bright line may be quick and simple, as Commissioner

Leibowitz said, but that doesn’t make it right. Teva believes that

the ability to reach reasonable, timely and proconsumer settlements in Hatch-Waxman in Paragraph IV litigation is absolutely

essential to Teva’s ability to bring low-cost generic drugs to market

as soon as possible. That is Teva’s fundamental business, to work

to bring products to market as soon as possible.

One of the things that a company like Teva has to consider in

deciding what its options may be when it takes an action that has

the probability of starting an expensive lawsuit is what options it

may have to settle if circumstances change or it turns out the case

was not as good as it initially appeared to be.

It is important to keep in mind that Teva has to make that decision not just as to one case in isolation, but as a balancing of resources among many simultaneous cases. That is an important

point that seems to be missing in some of the academic analysis,

such as that Dr. Hemphill has presented.

Today Teva knows it has the option to settle a case on

proconsumer terms and to redirect its resources to other products

if circumstances warrant doing that. All of that is to the benefit of

consumers. The proposed legislation would change that by making

settlements much more difficult to accomplish. It would do that by

prohibiting Teva and others from using procompetitive provisions
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that have proved necessary to getting settlements done and that

have resulted in settlements that were good for consumers.

Teva does not contend that all Hatch-Waxman settlements are

necessarily good for consumers, but takes strong issue with legislation that would have prevented Teva from engaging in any of the

10 settlements that Teva has reached since 1999 that produced

real benefits for consumers. Those 10 settlements have taken approximately 831⁄2 years off the lives of the patents at issue and will end up saving consumers more than $67 billion.

Teva believes that more serious consideration should be given to

legislative alternatives that have been discussed, such as mandatory review by the courts, or more formal FTC preeffectiveness review process. If this subcommittee determines to proceed with the

approach embodied in H.R. 1902, Teva strongly urges that the exceptions or carve-outs in the bill be broadened to make clear that

at least the kinds of terms that Teva has successfully employed in

the past to reach settlements that produced real benefits for consumers remain permissible.

Those provisions include early generic entry on other products, a

full release for damages in the covenant not to sue going forward

on all patents on all generic products involved in the settlement,

limited exclusive license during the exclusivity period, and case-bycase authority for the FTC to address individual settlements without rulemaking formality and delay.

Most of H.R. 1902 is directed to patent settlements; however, section 4 addresses a different set of issues not tied or limited to patent settlements. Essentially section 4 would broaden the circumstances under which the first generic company to challenge the

brand company’s patents could lose or forfeit the 180 days of marketing exclusivity provided to first filers under Hatch-Waxman.

As you have heard today, there are people in the industry who

don’t like the 180-day exclusivity provisions, but it is important to

be very clear that those provisions have been in Hatch-Waxman

from the start and are absolutely central to the incentive structure

that has brought this country to the vibrantly competitive and publicly beneficial generic drug industry which we have today, and

which benefits consumers, third-party payers, and the Federal and

State governments.

I respectfully invite your attention to my written statement for

full explanation of Teva’s concerns regarding section 4.

Very briefly, Teva believes that proposed subsection CC addresses an obsolete issue, and that proposed subsection DD is unclear

and potentially severely overbroad.

Those observations bring me back to where I started. On all of

these issues Teva hopes to continue an active and constructive dialogue with Members of Congress and their staffs and with FTC

Commissioners and the FTC staff all with a view to trying to address any legitimate concerns while carefully preserving all that is

good and necessary about the existing and highly successful HatchWaxman process.

Thank you very much. I will look forward to answering your

questions.

Mr. RUSH. Thank you very much.

[The prepared statement of Mr. Whitehouse follows:]
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Mr. RUSH. The Chair recognizes himself for 5 minutes.

My first question is directed to Mr. Hemphill. Mr. Hemphill, the

FTC’s deterrent impact has been greatly diluted as shown by the

increased number of reverse payment settlements, particularly

since the Eleventh Circuit ruled in Schering, which, by the way,

was a 7-year battle. So isn’t that why this legislation that we are

considering today is essential and necessary?

Mr. HEMPHILL. Mr. Chairman, that is correct. As was earlier

mentioned, there is a division of opinion among the courts of appeals in the Sixth Circuit. There is a rule per se, a legality on the

rather special facts of that case. But as you have noted, the Second

Circuit and the Eleventh Circuit have come out quite sharply

against the illegality of these settlements. That makes it an uphill

battle for a private plaintiff or for the FTC to win litigation in the

courts.

And as a matter of resetting the system in a way, if you will, a

bill like this is quite important.

Mr. RUSH. Mr. Whitehouse, in your testimony, you assert that

brand name and generic drug companies will be hard pressed to

settle their patent disputes if we would ban exclusion payments.

Why is it that all other commercial sectors are able to settle patents without exclusion payments, and what makes the drug companies so unique and so special?

Mr. WHITEHOUSE. Mr. Chairman, I think we need to first recognize that when we say exclusion payments, that has become a term

that may cover a lot or a little. And if it is talking about something

like what is at issue in the Cardizem case in the Sixth Circuit,

which is found to be per se unlawful, that is one end of the spectrum.

We think there are other things that are being unfairly disparaged as exclusion payments that are, in fact, legitimate and necessary terms of settlements in patent cases that wind up producing

very substantial benefits for consumers. And our fundamental

point is that you can’t lump all of these mechanisms into one basket.

Mr. RUSH. Professor Hemphill, in Mr. Whitehouse’s written testimony, he states, and I quote, ‘‘given that the parties are likely to

disagree about their relative strengths of their respective cases, a

negotiation for settlement limited to only one variable is highly

likely to fail’’, end of the quote.

Mr. Whitehouse is referring to traditional patent settlements in

which the two parties agree on an early entry date, and only on

an early entry date, without any other payments.

Now, referring to your testimony, you take almost the exact opposite stance from Mr. Whitehouse and assert that this is precisely

the way that brand name and generics ought to settle. Can you explain your position, please?

Mr. HEMPHILL. I would say that Teva and other generic firms remain free to reach procompetitive settlements as we saw during

the period prior to the adverse decisions in tamoxifen and in Schering, and that they ought to be able to do so without conferring

payment from the innovator to the generic firm.

There is, I think, a related confusion, though, that bears mentioning here, which is that I think perhaps Teva, perhaps other ge-
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neric firms, have taken the view, an erroneous view, I think, that

the gambles that they make in engaging in ANDA-based litigation

ought to always have a payoff, that in each and every case they

ought to be able to receive some kind of compensation to justify

their expenditure on the litigation.

But the nature of a gamble is that that is just not so. Sometimes

when you drill, you find a dry hole. And it is just not the case that

the inability to even receive compensation in a particular case

ought to be something that necessarily troubles us.

Mr. RUSH. Thank you.

In my last few minutes I want to ask Mr. Proger. Mr. Proger,

you characterize the bill I have introduced with Mr. Waxman as

adopting a, quote, ‘‘blunt instrument’’, end of quote. Yet I see our

bill as a scalpel that goes after a very specific practice that is totally and completely unique to the drug industry.

Can you explain how is that being blunt, and especially since we

create flexibility by authorizing the FTC to promulgate further exceptions to the rule? And I want to also ask Mr. Wroblewski and

Mr. Hemphill to give me their comments.

Mr. PROGER. Mr. Chairman, I characterized the bill as being

blunt because it doesn’t go on a case-by-case basis, and the bill prohibits the generic challenger from receiving anything of physical

value. We continue to talk in this session about payments as if payments are only cash. You can attain the exact same solution by licensing, by other forms of entry, and still have the same economic

consequences. And as I read your legislation, absent action by the

Federal Trade Commission, all of those would be prohibited. Some

of those particular practices have been endorsed by proponents of

Hatch-Waxman and proponents of your legislation. And so that is

where my concern is.

And I think one other thing, if I may, sir, we keep hearing Schering and tamoxifen as if those decisions somehow went against the

American public and ruled that you can do whatever you want.

That is not the case. The Second Circuit and Eleventh Circuit

found that those settlements were not anticompetitive because the

settlements were within the scope of the patent. We have to remember that there is a patent here.

Mr. RUSH. My time has ended.

Mr. Hemphill or Mr. Wroblewski, if you all care to respond,

please do so.

Mr. WROBLEWSKI. I think the approach is a reasonable approach

given that Congress’s intent in doing Hatch-Waxman in the first

place was to provide an incentive to challenge patents.

And so in response to Mrs. Blackburn, your question, in terms

of was there any other industry in which there has been—the Federal Government is kind of dictating what the terms or not the

terms could be of a particular settlement, I can’t think of any. And

I agree with Mr. Proger. I don’t know if there are any, but I don’t

know of any other industry in which Congress has specifically

incentivized generic companies to challenge patents and to get resolution of those patent issues, which I believe is just as important

in terms of the public interest.

And regardless of which way the resolution turns out, if the

brand company wins, then that is good for innovation because
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strong—as we have known, pharmaceutical innovation depends on

strong patents. So that is good. And on the other hand, if the generic wins, well, that is good for consumers because they will get

a competitively priced generic drug.

Mr. RUSH. Thank you.

Mr. Hemphill, I am going to ask the other Members for their

questions. We will come back to you a little later.

The Chair recognizes now the ranking member.

Mr. STEARNS. Thank you, Mr. Chairman.

Mr. Sherman, I understand that your company and BristolMyers Squibb negotiated a settlement related to Bristol-Myers’

drug Plavix, a deal which was subsequently rejected by the FTC.

Now, once this deal was rejected, your generic version entered

the market despite what seemed to be a blatant patent infringement. Indeed, after 3 weeks you were forced to pull the drug from

the market. Did the consumer benefit more from 3 weeks of availability in 2006, or would he or she have benefited more from the

6 months in 2011 as the settlement had called for? Does that make

sense?

Mr. SHERMAN. Well, you have to keep in mind the litigation is

not over yet, and we think that there is a very high probability

that we will win the litigation either in the first instance or on appeal.

So, it was—and certainly also the—we did launch the product.

We sold very large quantities for which the consumer certainly

benefited very highly. And I think the benefit from our launching

now is equal to what it would have been from a launch many years

from now.

But on top of that, as I said, there is a strong probability that

we will yet be back in the market and save many billions of dollars

for consumers by litigating and winning.

Mr. STEARNS. Is it possible that litigation will last longer than

the patent time?

Mr. SHERMAN. No. No. No. The decision in the district court will

come within months, and then a decision on appeal will come probably a year later.

Mr. STEARNS. Isn’t it true that a settlement can provide a certainty of early generic market entry before patent expiry, particularly in a difficult challenge?

Mr. SHERMAN. Well, it depends on your frame of reference. If you

assume that all patents are valid and would be infringed, then any

settlement that gives any early entry beyond patent expiry is pro

consumer. But large numbers of patents are invalid or would not

be infringed. The very purpose of the Hatch-Waxman provisions

was to put that to the test, as Mr. Wroblewski, I think, articulated

very well.

The incentive is you get a reward. You are supposed to get a reward from taking on the risk of litigating it. That is what you are

supposed to do. And it is fundamentally wrong for a company to

be able to be the first to file, take the reward and not litigate, and

agree not only not to launch the product for years and not to litigate, but in so doing block everybody else from doing so.

Mr. STEARNS. Mr. Proger, this question is for you.
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If many of these settlements are pacts, end quote, to keep

generics off the market early, as proponents of the bill have said,

then in your view why have courts not adjudicated them as collusive behavior?

Mr. PROGER. Ranking Member Stearns, we have to start with the

proposition that there is a patent that is presumed to be valid and

enforceable. If the patent is valid and enforceable, and the settlement is within the scope and time of the patent, there is nothing

wrong under our law today with the patent holder sharing that. We

have to remember someone invented this wonder drug in the first

place, and it is the patent holder, and we have given them certain

rights.

I am an antitrust lawyer. I am a past chair of the section of antitrust law of the American Bar Association. I believe in the antitrust laws; have been my whole life. But there are other equal

dignities in our society, and the patent laws are one.

Mr. STEARNS. Mr. Wroblewski, your goal is to get cheaper generic

drugs to market sooner; is that correct?

Mr. WROBLEWSKI. Actually consumers have two interests. I

would say one would be for competitively priced generic drugs, but

also continued pharmaceutical innovation.

Mr. STEARNS. If generic companies choose to stop challenging

patents, delaying market entry, wouldn’t that cost consumers millions of dollars?

Mr. WROBLEWSKI. But there is an incentive to challenge.

Mr. STEARNS. What is the incentive for generic companies to

challenge a patent currently? If that incentive disappears, do you

expect the same number of patent challenges that you see today?

Mr. WROBLEWSKI. I don’t anticipate it disappearing.

Mr. STEARNS. Isn’t it true products brought to markets through

patent settlements have saved consumers a significant amount of

money? I would think, ostensibly, yes.

Mr. WROBLEWSKI. I am not sure. Do you have an example in

mind?

Mr. STEARNS. No, I am asking you the question.

Mr. WROBLEWSKI. Are there settlements in which there has

been——

Mr. STEARNS. Isn’t Prozac a good example, 2.5 billion?

Mr. WROBLEWSKI. Prozac was—they invalidated the patent. So

they came in via the incentive, and it worked the way it should

work.

Mr. STEARNS. Have any of the settlements that involved a reverse compensation component aided consumers, in your view?

Mr. WROBLEWSKI. Not that I am aware of.

Mr. STEARNS. Thank you, Mr. Chairman.

Mr. RUSH. The committee now recognizes Ms. Hooley from Oregon for 5 minutes.

Ms. HOOLEY. Thank you, Mr. Chairman; and I thank our panel

for your presentation.

I have a few questions. Mr. Hemphill, we will start with you. Are

these pay-for-delay settlements found in patent disputes outside

the Hatch-Waxman framework? And, if not, why not?

Mr. HEMPHILL. The situation in pharmaceuticals is quite special

because of the fairly unique incentives that have been created by
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the scheme that Commissioner Leibowitz and others have said. So

I would say they are highly special, which is why we see positive

payments from the innovator to the generic firm in this industry

but not in others and also why, when we pay attention to the interaction, as Mr. Proger mentioned, the equal dignity in antitrust and

in patent law, we also have to think of the Hatch-Waxman Act, the

sector-specific regulation that is in play here, which created this

big push in the direction of litigation and in the direction of competition, which is being undermined by these settlements.

Ms. HOOLEY. OK. Thank you.

Why do you think—and I am going to stay with you, Mr. Hemphill, for another question. Why do you think it is preferable to

enact legislation such as H.R. 1902, rather than have the FTC

challenge these deals on a case-by-case basis?

Mr. HEMPHILL. Well, if we were writing on a clean slate where

there wasn’t already a set of judicial opinions that have come out,

to my view, the wrong way, perhaps the status quo would be fine.

But in light of the fact that we have repeated cases that have failed

to recognize and remedy the anti-competitive harm, under those

circumstances I think stronger medicine is justified.

Ms. HOOLEY. Mr. Sherman, as a generic manufacturer, you are

testifying in support of this bill?

Mr. SHERMAN. Yes, with qualifications.

Ms. HOOLEY. With qualifications. While Teva, another generic

manufacturer, does not support it as currently drafted, that is my

understanding, why does your generic company seem to take a different position than another generic company on the bill?

Mr. SHERMAN. Well, I think that it is fair to say that each person

tries to serve the interest of his own company. In the case of most

of our generic competitors, they see an enormous upside to be made

through being first to file and settling litigation as opposed to litigating. But our view is that our proper role is to fight to bring the

products to market as early as possible, and we have made a corporate decision to pursue that objective, and we have let our customers know. We hope that our customers will appreciate what we

are doing in fighting to bring products to market and in opposing

anti-competitive settlements that delay market entry.

Ms. HOOLEY. OK. Thank you.

Mr. Whitehouse, your testimony cites a need for flexibility to settle these cases, but doesn’t this bill afford flexibility in section 3

where it authorizes the FTC to promulgate rules that permit settlement terms that are not anti-consumer or anti-competitive?

Mr. WHITEHOUSE. Well, the answer in short is no, because the

rulemaking process is a particularly protracted and long-running

process, and we are advocating that we need to have, at a minimum, a process whereby the FTC could, on a case-by-case basis,

provide for exceptions where provisions seem obviously pro-competitive.

Furthermore, in the interest of simple business planning and

business certainty, it is important to know there are certain things

you can do. So we also advocate there be specific carve-outs for

other kinds of provisions beyond simply time off the patent that is

now provided for in the introduced legislation that would enable

business people to know there are certain kinds of things that have
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been demonstrably pro-competitive that should be permitted, and

we have articulated those in our testimony.

Ms. HOOLEY. OK. Thank you.

Mr. Wroblewski, can the Consumers Union provide any figures

on the loss to consumers because of these exclusionary payment

settlements? Do you know how much of this loss is borne by the

taxpayer through payments for prescription drugs under Medicare

or Medicaid? And can we assume that any lack of available lower

cost generic drugs increase the cost to the American industry

through higher costs for employer health benefits or health plans?

Mr. WROBLEWSKI. It is difficult to put a number on what could

have been, because the settlement agreements aren’t made public.

So we don’t know what the terms of the settlements are. I know

when we released our most recent best buy drug recommendations

on cholesterol-reducing drugs we calculated that a consumer who

takes the best buy drug, which in that particular case would have

been a generic version, could have saved about $1,800 a year,

which is substantial amounts of money, you know, for a particular

consumer.

Ms. HOOLEY. Thank you.

Mr. Whitehouse, I know you have a note in your hand. Go ahead.

Mr. WHITEHOUSE. If I may, a couple of things. There was an important question left pending by Congressman Stearns that is relevant to the questions you are asking, which is are there savings

from these settlements; and, of course, as I said in my oral statement and my written statement, there are. Settlements we think

have taken about 831⁄2 years off the patent life of the drugs where

we have made settlements and have saved consumers about $67

billion, which is about the same as that annual amount which Mr.

Leibowitz referred to for Medicare Part D. That is a lot of money.

So there have been, we think, very real, substantial savings.

The second thing is one needs to remember that a lot of these

answers presume that we would have won the case, and of course

that is exactly what is wrong here. There is a very high probability

and a growing probability that you can’t make that assumption. So

you are faced with the need, again, if you are a substantial generic

manufacturer, to decide among numerous cases and decide among

those numerous cases which are the ones most likely to produce an

imminent consumer benefit through litigating, which ones look

weaker, we would be in a better position to settle, get something

at least for the benefit of consumers, some time off the patent, and

get an outcome that is still preferable to losing the case. And you

have to be able to make those decisions.

A one-dimensional negotiation with a brand company is not going

to enable you to implement those decisions to the benefit of consumers with any confidence or predictability.

Ms. HOOLEY. Thank you.

Mr. RUSH. The gentle lady’s time is up.

The Chair recognizes the gentle lady from Tennessee, Mrs.

Blackburn.

Mrs. BLACKBURN. Thank you, Mr. Chairman.

I just wish I could take everybody’s time and ask a lot of questions. I have lots of questions for all of them.
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Mr. Wroblewski, I, just listening to you, appreciate you and appreciate your magazine. But I am going have to tell you, sir, I just

feel like you are kind of the cheerleader of the crowd. You want everybody to get it all and to get it all at a good price, but somebody

has got to pay the price at some point, and that R&D has to be

paid.

I appreciate your position, as I said. I have been a long-term

reader of your magazine. But I think we do have to realize these

innovators and patent holders have to recoup their cost at some

point.

Mr. Proger, reading your background, your resume, you have

worked with clinics, hospitals, a lot of the business process mergers. Antitrust you said was your kind of law. The settlements on

first filers, is this something that innovators now look at just as

the cost of doing business? Do they anticipate they are going to

have to pay this? And is that adding to the overall cost of drugs?

Mr. PROGER. Well, certainly the innovator, the inventor of the

drug, has to now consider the incentives of Hatch-Waxman, recognize that they may be challenged and there will be additional costs.

Mrs. BLACKBURN. Did they set aside for that? As you are making

your pro forma, do you say, well, and we are probably going to need

X amount? Do you just write this in and consider it a cost of doing

business, just a yes or no?

Mr. PROGER. I am not aware of whether they do so up front.

Mrs. BLACKBURN. Would you advise people to?

Mr. PROGER. Yes.

Mrs. BLACKBURN. You would?

Mr. PROGER. It is a very practical concern.

Mrs. BLACKBURN. It would be a best practice action?

Mr. PROGER. It is certainly going to happen.

Mrs. BLACKBURN. All right. So it would increase the cost of doing

business.

You know, sometimes I feel like we sit here, and it is easy for

us to pick winners and losers, and it is unfortunate that many

times that we do that. That is why I think, Mr. Hemphill, your

statement about resetting the system and us doing that legislatively rather than the market doing that, that is of concern to me.

That is kind of a red flag for me.

We all think our kids are special, we think different things are

special, and for you to say, you know, this is special, this is unique,

it is still the process of innovation and doing business.

And, let’s see, I have 2 minutes left, so I am going to have to be

quick. Mr. Sherman, very briefly, going back to the situation that

you have been dealing with, I have got an article here, an August

9, 2006, article where, as you are talking about the regulatory review and the situation you have been in, you said you viewed efforts by brand name companies to extend monopolies through settlement negotiations as outrageous. Our focus was to get the concession that would enable us to launch when the FTC turned us

down. That was your statement.

OK, so let’s say that is the case. So if that is the case, why don’t

we just get out of the way and let the private sector do its work?

Very quickly.
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Mr. SHERMAN. Get out of the way in what sense, by repealing the

Hatch-Waxman provisions?

Mrs. BLACKBURN. I am asking you. Your best answer.

Mr. SHERMAN. Well, my best answer would be that repealing the

Hatch-Waxman provisions entirely would be better than a system

in which the first to file can take the exclusivity and keep it while

not moving to market and using it to keep others off the market.

Mrs. BLACKBURN. OK. We have 11⁄2 minutes left, and I want a

yes or no from everybody down the line. Do you believe that it is

going beyond our traditional jurisdiction or at least that it would

be inappropriate for Congress to insert itself into the private legal

negotiations between two parties and preventing them an avenue

to redress their concerns? Yes or no?

Mr. WHITEHOUSE. Let me start at this end of the table. The answer is to the extent such a regulation sensors, the antitrust law

is already provided as they presently stand.

Mr. WROBLEWSKI. No, because you already set up a structure to

specifically encourage these types of patent challenges.

Mr. SHERMAN. Yes.

Mr. PROGER. No, because Congress has already.

Mr. HEMPHILL. I think Congress has to intervene, because it set

up the Hatch-Waxman provisions, which provide a unique set of

circumstances.

Mrs. BLACKBURN. Very good. My time is gone. Thank you all very

much.

Mr. RUSH. Mr. Burgess, you are recognized for 5 minutes for

questioning.

Mr. BURGESS. Thank you, Mr. Chairman.

Being a doctor, it has been kind of a life-long fantasy of mine to

tell a lawyer answer the question yes or no, but I am going to resist doing that.

Dr. Sherman, I just got to tell you, we hear all the time that

Canada is a place where drugs are so cheap that they are literally

jumping off the shelves into consumers’ hands and that nobody

ever has to worry about drug prices in Canada and we should do

the same thing here in this country. So I was a little bit surprised

to learn that you are even concerned about a generic and would

spend all that money on a lawsuit. Are generics valuable to Canada

as well?

Mr. SHERMAN. Well, the situation is very similar in Canada to

that in the United States. There is a brand market and a generic

market, and we fight to bring products to the Canadian market as

generics, just as we do in the United States.

Mr. BURGESS. But I thought you regulated prices in Canada.

Mr. SHERMAN. The prices of brand name products are regulated,

patented products.

Mr. BURGESS. So the patent price is regulated?

Mr. SHERMAN. Patented products are regulated.

Mr. BURGESS. When the patent goes away, it would be the generic that could be competing with the brand name, is that not correct?

Mr. SHERMAN. Yes. And there are usually several generics and

the prices are much lower than the brands because prices are determined by competition.
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Mr. BURGESS. Again, that was just for my general information.

I thought Canada was completely different from where we live.

Mr. SHERMAN. No.

Mr. BURGESS. Well, the bottleneck issue, though, for me keeps

coming up; and I am concerned about the story that you told and

the concept of forfeiting exclusivity. Do you think we go far enough

in the bill that is before us? Has it addressed the problem sufficiently?

Mr. SHERMAN. No, it hasn’t addressed the problem.

Mr. BURGESS. It hasn’t addressed it at all, has it?

Mr. SHERMAN. No. I think what is important is not what the

terms are of a settlement between a brand and a generic company.

They should be free to settle as they wish. What is fundamentally

wrong is that the generic in settling is blocking, continues to block

all others from making a deal that is better for the consumer or

from litigating and winning by retaining the exclusivity that it

hasn’t earned by not litigating.

Mr. BURGESS. This is such an important subject, and we have got

such limited time.

Mr. Proger, if I could ask you, if there were going to be one thing

we were going to improve this legislation as it goes through, what

approach should we take? What should we do?

Mr. PROGER. Obviously, Congressman, I have been pretty clear

that I think the antitrust laws on a case-by-case basis would be far

preferable to a broad ban on settlements. Many of the settlements

contain pro-competitive aspects, and unless you know whether or

not the patent is valid and enforceable you don’t know whether

there is a restraint in the first place.

We keep presuming that the patent holder’s patent is not valid.

In many of these cases, it is. And because of Hatch-Waxman, which

I would point out to the committee expressly says doesn’t change

the laws of patents, because of Hatch-Waxman, someone who may

have a very valid, enforceable patent may still settle because they

have so much at risk.

Now, Hatch-Waxman has done a lot of good. It has brought

generics to the market, and it cured a problem. The problem was

that you could not even begin to start the generic process at FDA

until after the patent expired; and the evidence was that—and

Congressman Waxman pointed this out at the time of the legislation—that it was taking 3 more additional years to get the products

to market. Now they come within 2 or 3 months.

But in balancing the interest Hatch-Waxman also balanced the

interest of getting someone to innovate and invent. We don’t have

these drugs in the first place if someone didn’t invent them.

Mr. BURGESS. Mr. Whitehouse, would you have a thought if we

were looking to improve this situation that we have in front of us

going forward, do you have a suggestion for the committee?

Mr. WHITEHOUSE. Yes, Mr. Burgess. We have, in fact, proposed

several suggestions that we would like to see changed. They include broadening the carve-outs, basically.

If you are going to proceed down this path of having a prohibition with carve-outs, which we suggest may not be the best way to

proceed, but if you are going to go down this path, that you ought

to make sure that we can have arrangements for early entry on ge-
164

neric products other than the one that is the one in suit. That obviously is to the consumer’s benefit when you can bring that about.

That you be able to negotiate a full release for damages in a covenant not to sue going forward on all the patents on generic products that might be involved in the litigation or in the settlement;

that you have a limited exclusive license during the exclusivity period when you come to market, again to preserve the incentives

that Hatch-Waxman creates for generic companies; and, as we discussed earlier, that the FTC have case-by-case authority not just

rulemaking authority—to exempt settlement provisions other than

those specifically provided for in the carve-outs.

Mr. BURGESS. So more flexibility at the level of the FTC?

Mr. WHITEHOUSE. Yes, sir.

Mr. BURGESS. Let me ask you a question. The world is a little

bit different place than in 1984 when Hatch-Waxman was first

passed. Has it kept pace with the times?

Mr. WHITEHOUSE. Hatch-Waxman, generally, Mr. Burgess, has

worked very, very well, we think. It has produced enormous benefits for consumers. It is intricate and complex in the interaction of

its parts; and that is exactly why, as I think Mrs. Blackburn also

recognized, there is an important need to be careful and not to

make changes that have unintended consequences and upset an

equilibrium that right now we think is working very, very well to

the benefit of consumers, of the Government, of third-party payors

and preserving the health of the pharmaceutical companies which

are essential to making all those other things happen.

Mr. RUSH. The gentleman’s time is up.

Mr. BURGESS. I thank the chairman.

Mr. RUSH. This concludes the testimony of our——

Mr. WHITEHOUSE. Mr. Chairman, may I have your indulgence to

make two short points that I will try to take less than a minute

to do? I would be grateful if you would. I am sorry for intruding

on the committee’s time.

I would like to point out that the 70 percent success statistic Mr.

Wroblewski referred to refers to a time period between 1992 and

2000, a time period in which patent challenges were very different

from those, as my testimony makes clear in some length, had different characteristics and had different probabilities of success for

the parties involved. And it is materially harder to win these cases

now than it was then.

And, second, it is very important to remember that generic pharmaceutical companies, their stock price isn’t going to be helped by

taking cash settlement payments in patent cases. They are going

to benefit only in the marketplace, from bringing products to market as effectively and as quickly as they can. So their incentives

are not to take cash or any other form of consideration in lieu of

coming to market. So there is a fundamental assumption we made

here that there is some nefarious or unwholesome incentive on the

part of these companies and the very nature of these companies

makes that improbable.

Thank you very much.

Mr. RUSH. Thank you.

Mr. Wroblewski, did you want to respond for 1 minute?
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Mr. WROBLEWSKI. In terms of the 70 percent rate, that is the

only statistic that is really out there that shows over a broad, you

know, an 8-year period that looked at every case that was out

there.

And I think we get somewhat sidetracked when we concentrate

on the actual number. As I tried to make the point earlier, and

maybe I was unsuccessful, but the number, the success rate isn’t

really that important. Because if the generic wins, that is good for

consumers because it allows a generic to come into the market at

competitively priced. If the brand company wins, it validates their

investment, which encourages additional innovation; and so that is

good, too.

So I think if it were 30 percent, it is neither here nor there. It

is the fact that you have put an incentive in there to try to clear

out the patents that are invalid. And if they are unsuccessful, then

that is fine. You want to validate the brand company’s patent

rights.

Thank you.

Mr. RUSH. Thank you very much. This concludes the testimony.

I have in my hand an article from the Wall Street Journal dated

May 1, 2007, under the title ‘‘Patent Holder’s Power is Curtailed’’.

I would enter this article into the record with unanimous consent.

I also want to announce that there will be a period of 30 days

that the record will be open for parties to insert statements into

the record. The witnesses, I will ask that you be prepared to receive written follow-up questions from members of this committee

and to respond within the 30-day period of time. Thank you very

much.

I want to thank the witnesses for coming and for participating.

You certainly have helped this committee tremendously, and thank

you so very much for your sacrifices of your time. Thank you so

very much.

The subcommittee stands adjourned.

[Whereupon, at 5:20 p.m., the subcommittee was adjourned.]

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