S. HRG.

107359

COMPETITION IN THE PHARMACEUTICAL MARKET-

PLACE: ANTITRUST IMPLICATIONS OF PATENT
SETTLEMENTS

HEARING
BEFORE THE

COMMITTEE ON THE JUDICIARY

UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION

MAY 24, 2001

Serial No. J10721

Printed for the use of the Committee on the Judiciary

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 COMMITTEE ON THE JUDICIARY
ORRIN G. HATCH, Utah, Chairman
STROM THURMOND, South Carolina PATRICK J. LEAHY, Vermont
CHARLES E. GRASSLEY, Iowa EDWARD M. KENNEDY, Massachusetts
ARLEN SPECTER, Pennsylvania JOSEPH R. BIDEN, JR., Delaware
JON KYL, Arizona HERBERT KOHL, Wisconsin
MIKE DEWINE, Ohio DIANNE FEINSTEIN, California
JEFF SESSIONS, Alabama RUSSELL D. FEINGOLD, Wisconsin
SAM BROWNBACK, Kansas CHARLES E. SCHUMER, New York
MITCH MCCONNELL, Kentucky RICHARD J. DURBIN, Illinois
MARIA CANTWELL, Washington
SHARON PROST, Chief Counsel
MAKAN DELRAHIM, Staff Director
BRUCE COHEN, Minority Chief Counsel and Staff Director

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 CONTENTS

STATEMENTS OF COMMITTEE MEMBERS

Page
Brownback, Hon. Sam, a U.S. Senator from the State of Kansas ....................... 38
Cantwell, Hon. Maria, a U.S. Senator from the State of Washington ................ 45
Feingold, Hon. Russell D., a U.S. Senator from the State of Wisconsin ............. 46
Hatch, Hon. Orrin G., a U.S. Senator from the State of Utah ............................ 1
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont .................... 36
Schumer, Hon. Charles E., a U.S. Senator from the State of New York ............ 6

WITNESSES
Boast, Molly, Director, Bureau of Competition, Federal Trade Commission,
Washington, D.C. ................................................................................................. 14
Buehler, Gary, R.Ph., Acting Director for Generic Drugs, Food and Drug
Administration, Washington, D.C. ...................................................................... 9
Griffin, James M., Deputy Assistant Attorney General, Antitrust Division,
Department of Justice, Washington, D.C. .......................................................... 24
Shurtleff, Mark, Attorney General, State of Utah, Salt Lake City, Utah .......... 27

SUBMISSIONS FOR THE RECORD

Aventis Pharmaceuticals Inc., Bridgewater, New Jersey ..................................... 40
Pharmaceutical Research and Manufacturers of America, Washington, D.C. ... 46

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 COMPETITION IN THE PHARMACEUTICAL
MARKETPLACE: ANTITRUST IMPLICATIONS
OF PATENT SETTLEMENTS

THURSDAY, MAY 24, 2001

U.S. SENATE,
COMMITTEE
JUDICIARY, ON THE
Washington, DC.
The Committee met, pursuant to notice, at 2:07 p.m., in room
SD226, Dirksen Senate Office Building, Hon. Orrin G. Hatch,
Chairman of the committee, presiding.
Present: Senators Hatch, Schumer, Cantwell, and Leahy.
OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S.
SENATOR FROM THE STATE OF UTAH
Chairman HATCH. Good afternoon. I hate to tell you, but I have
just gotten through arguing for Ted Olson over on the floor and I
have to go back there, then to the tax conference, and I cannot
imagine a more important hearing than this one. So, as you can
imagine, I am under a lot of pressure, but good afternoon.
Today, we are examining the antitrust implications of recent set-
tlements relating to pharmaceutical patents. As the co-author,
along with Henry Waxman, of the Drug Price Competition and Pat-
ent Term Restoration Act of 1984, I have long been interested in
the laws and competitive forces that underpin the American phar-
maceutical industry. If there is interest in revisiting these laws, I
am willing to play the same type of facilitator role that I did 17
years ago.
Indeed, there is a good deal at stake here. We want to make
available todays medicines at the most competitive and affordable
prices, but we also want to provide the necessary incentives to en-
courage the development of tomorrows breakthrough drugs. Those
are two very important goals and they sometimes seem conflicting.
My preference is to develop a comprehensive consensus legisla-
tive package that provides incentives for all segments of the indus-
try to better produce their products that have so many benefits for
the American public. We need to find ways to just grow the pie, not
just to slice it, or perhaps reslice it would be a better word.
This is, of course, a very tall order that will demand a good deal
of bipartisan spirit, hard work, and leadership. I commend Senator
Leahy for his work in introducing legislation aimed at helping to
promptly identify any possible anti-competitive pharmaceutical pat-
ent settlements. I believe there is great merit in his notification ap-
proach and would like to work with him on that legislation.
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 2

I must also commend our colleagues. Senator Schumer, who has

taken a great interest in this area and with whom I enjoy working,
has offered legislation with Senator McCain in some of the areas
that I have just outlined. And while I would prefer to take a broad-
er and more balanced approach than that reflected in their bill, I
want to recognize them for their work. They are the catalysts in
bringing this to everybodys attention.
Now, let me focus on the specific issue before the Committee
today. The public deserves the effective and affordable drugs that
competition can bring, not elaborate legal machinations that iden-
tify or create and then exploit anti-competitive loopholes. Some
have already concluded that the 1984 law as implemented by the
FDA regulation and interpreted by the courts presents a legal
framework that invites improper anti-competitive settlements. The
1984 law provides incentives for generic drug applicants to chal-
lenge the validity of, or invent around the patents of pioneer drugs.
Each time a patent is found to be deficient or can be legally
circumnavigated, consumers can benefit from speedier access to ge-
neric products.
In order to encourage such pro-consumer activities, the 1984 law
awarded 180 days of marketing exclusivity for the first generic firm
to meet certain conditions. My friend, Bill Haddad, helped nego-
tiate this provision on behalf of the generic industry. For many
years, FDA practice provided that exclusivity be awarded only to
the first applicant to file a substantially complete drug application,
be sued by the pioneer firm under the special terms of the statute,
and win the suit. However, due to the series of Federal court deci-
sions, the successful defense requirement has been struck down.
As the Senate author of the 1984 law, I am afraid, to paraphrase
the great philosopher Pogo, this may be a case of We have met the
enemy, and he is me. Mea culpa. Mea culpa, is all I can say. Many
have observed that the blocking position that the statute grants to
first filers creates perverse incentives for patent settlements. While
as a general matter the law smiles upon patent settlements under
the joint DOJFTC guidelines, not all such patent settlements will
automatically survive antitrust scrutiny.
Several recent pharmaceutical patent settlements have triggered
antitrust actions. The Committee needs to know if these cases rep-
resent a few outliers or a pattern. We will get more information
about a major study that the FTC has recently initiated to gauge
the frequency and the nature of these settlements. I am more inter-
ested in examining the pattern of cases and whether the law needs
to be changed than I am in conducting a, Who struck John? anal-
ysis of the cases that have triggered governmental involvement. I
would hope that my colleagues on the Committee will also step
back and focus on the forest rather than any particular tree.
While no parties to these settlements are testifying today, in the
interest of fairness, I will hold the record open until Friday to allow
the Committee to receive their written testimony or the testimony
of any other interested parties who may take interest in these pro-
ceedings.
In closing, I want to remark again upon the tremendous ad-
vances that we are making in scientific research and discovery. I
wish each of you could experience the sheer excitement that Dr. Al

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Rabson conveys to me when discussing the latest developments in

cancer research. Dr. Rabson is one of Americas unsung heroes. He
has long served as the Deputy Director of the National Cancer In-
stitute and we are fortunate to have had him in government for the
past 46 years. Al Rabson tells me that cancers that have been vir-
tually untreatable are now succumbing to medications like the re-
cently announced leukemia drug STI571, and that, in his 46
years, he has never been so excited.
We are literally at the doorstep of a revolution in biology that
promises to benefit mankind in profound ways. With the stakes so
high, it is imperative that our intellectual property laws provide
the proper incentives to facilitate a new era in our understanding
of human biology, health, and disease. At the same time, we must
be sure that the pharmaceutical marketplace is highly competitive
so that patients and their families can obtain their medicines at
the most affordable prices.
These are the challenges before us today, challenges I hope we
will be able to meet as the Congress continues consideration of
these issues.
[The prepared statement of the Chairman follows:]
STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM THE STATE OF UTAH
Good afternoon. I am pleased that the Committee is holding this hearing today
on the antitrust implications of recent settlements relating to pharmaceutical pat-
ents.
Not only is this a matter squarely within the jurisdiction of the Judiciary Com-
mittee, but as a coauthor with Rep. Henry Waxman of the Drug Price Competition
and Patent Term Restoration Act of 1984, I have long been interested in the laws
and competitive forces that underpin the American pharmaceutical industry. And as
I have stated on occasions, if there is interest in revisiting these laws, I am willing
to play the same type of facilitator role that I did in 1984.
The American public has a great stake in achieving the twin ends of the 1984
law. These goals are:
First, making available todays medicines at the most competitive and af-
fordable prices; and,
Second, encouraging the development of tomorrows breakthrough cures.
We should all take pride in the fact that the United States is the worlds leader
in biomedical research. Through a public/private partnership that has grown stead-
ily since World War II, it is our country that is on the cutting edge of medicine.
Just this year alone, there has been a combined $50 billion investment in life
science research. It is Americas scientists and technology that have led the way for
the mapping of the human genome. We stand poised to unravel the mysteries of the
human genetic code and translate this knowledge to advance the health of public.
A1 Rabson is one of Americas unsung heroes. Dr. Rabson has long served as the
Deputy Director of the National Cancer Institute. He started his distinguished ca-
reer at NIH 46 years ago. I wish all of you could experience first hand the sheer
excitement that Dr. Rabson conveys to me when discussing the latest developments
in cancer research. He tells me that cancers that have been virtually untreatable
are now succumbing to medications like the recently announced leukemia drug,
STI571.
We are literally at the doorstep of a revolution in biology that promises to benefit
mankind in profound ways. But this progress will not come easily; nor will it come
cheaply. When factoring in the costs of false starts and blind alleys, it can take lit-
erally several hundred million dollars to bring an effective new drug to market.
Some estimate that for every product that makes it through the complex scientific
and regulatory screening systems, five thousand failures fall by the waysideand
do so with great expenditures of time, expense, and talent.
When we speak about competition, we must not forget that, in addition to critical
price competition between pioneer and generic firms, it is the competition among
pioneer firms for the next generation of diagnostic and therapeutic products where
the future of medicine resides. But we must never lose sight of the hard fact of life
that an unaffordable medication may be the same as no medication at all.

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 4
With the stakes so high, it is imperative that our intellectual property laws pro-
vide the proper incentives to facilitate a new era in our understanding of human
biology, health, and disease. At the same time, we must be sure that the pharma-
ceutical marketplace is highly competitive so that patients and their families can
obtain their medicines at the most affordable prices.
Congress is debating the question of developing a Medicare drug benefit for one
simple but powerful reason: too many of our seniors have a hard time making ends
meet when paying the out-of-pocket costs of prescription drugs. For those of us who
also serve on the Finance Committee, the estimates of providing a Medicare drug
benefit have skyrocketed over the last several months. CBO tells us that it may
take at least $368 billion over ten years to pay for catastrophic drug coverage alone;
and these estimates, in my opinion, will continue to go up.
I mention these staggering costs in part because of the growing therapeutic impor-
tance of biological products which can sometimes be very expensive. Therefore I
think it is imperative, and frankly inevitable, for policymakers to examine whether
there ought to be alternative regulatory pathways for biological products to enter
the market once patents have expired.
I know there are formidable scientific questions regarding the wisdom of even be-
ginning down the path of a fast track approval system for equivalent biologics. But,
as was evidenced yet again in the mad dash to complete the mapping of the human
genome, properly motivated scientists have away of overcoming scientific obstacles.
I just raise the question of whether Congress can, or should, enact and sustain over
time a Medicare drug benefit in parallel with a FDA regulatory system that acts
like a secondary patent by barring bioequivalent biological products. At some point,
the forces of economics will compel discussion of science and legal issues involved
in the consideration of fast track biologicals.
Also at the intersection of science and law are questions pertaining to the pat-
enting of human genes. We must also examine how much science has changed since
1984 and whether our patent laws facilitate both basic research and appropriate
commercial development of genetic discoveries.
I am proud of the Drug Price Competition and Patent Term Restoration Act
CBO estimates that it contributes to consumer savings of $8 to $10 billion annually.
We have had a substantial success on both fronts: we have helped stimulate the de-
velopment of many new drugs all the while fostering an environment in which the
generic segment of the market has about tripled and now comprises almost half of
all new prescriptions in the United States. Some experts have projected that each
additional percentage point of generic drug usage represents over $1 billion in con-
sumer savings.
To those who would propose to change the 1984 legislation, I would urge you to
consider that this is a carefully balanced bill and caution against making changes
that tilts the balance. Yet no law is so perfect that it cannot stand improvement
as it gets tested by the realities of a changing marketplace and society. There have
been several unanticipated and unintended consequences of the 1984 Act and other
changes in the landscape that need attention.
In this regard, I believe this Committee should examine in detail the op-
eration of the 30 month stay provision of the 1984 law. Over the last sev-
eral months, there have been a number of controversial cases of late-issued
patents that have been entered into the FDA Orange Book. There are pow-
erful arguments that justify the 30 month statutory period to allow pioneer
firms a fair chance to attempt to resolve the status of patents. Yet, there
may be grounds to treat patents differently that suddenly appear in the Or-
ange Book so late in the day that there are literally approved generic prod-
ucts on the loading docks that must be destroyed. As well, the 30 month
stay provision has an effect on the nature of the patent settlements we ex-
plore today although we want to concentrate on the settlements themselves
and the 180 day rule at todays hearing.
Similarly, the Committee should explore the ramifications of the First
Amendment and the U.S. Supreme Courts Noerr-Pennington Doctrine as
they relate to suggestions to remedy the alleged abuses of the citizens peti-
tion process with respect to challenges to generic drug applications. Some-
times, legitimate questions of science are raised by those who might directly
benefit from FDA delay. Maybe the 10 year battle over premarin fits this
model.
There has also been concern that FDAs bioequivalence standards should
be examined and that perhaps we should codify the FDA guidelines in this
area. Certainly this issue should be fully examined.
As well, on the R&D side of the industry, there are those who argue for
day for day patent term restoration, harmonization of U.S. law with Euro-

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 5
pean marketing exclusivity rules, and for changes in the current limitations
on the type of patents and products that may receive partial patent term
restoration. Frankly, I think the Committee would be well advised to put
these issues on the table and learn about their merits and down-sides. I be-
lieve it might be a worthwhile inquiry to examine the implications of the
fact that the 1999 American Inventors Protection Act generally permits all
patents to be restored up to 17 years of patent life if there is undue delay
at the PTO but under the 1984 HatchWaxman law, patent term restoration
in recognition of the lengthy FDA review of new drugs is capped at 14
years. Why should PTO review time be treated differently than FDA review
time?
So there are many areas relating to pharmaceutical development that Congress
should examine.
My preference is to see if we can develop a comprehensive consensus legislative
package that addresses all of the issues I have just outlined. Such a bill would pro-
vide incentives for all segments of the industry to better produce their products that
have so many benefits for the American public. We need to find ways to grow the
pie, not just re-slice it.
This is, of course, a tall order. It will take a bipartisan spirit, hard work, and
leadership to craft legislation that can help usher in the next generation of treat-
ments and do so at more affordable prices.
I commend Senator Leahy for his work in introducing legislation aimed at helping
to promptly identify any possibly anti-competitive pharmaceutical patent settle-
ments. These settlements are the subject of our hearing today and I believe there
is great merit in his notification approach and would like to work with him on this
legislation.
I must also commend our colleague from New York, Sen. Schumer, who with my
friend, Sen. McCain, has offered legislation on some of the areas that I just outlined.
While I personally would prefer to take a broader and more balanced approach and
have some reservations about how they resolve some of the issues, I want to recog-
nize them for their work.
Having said that, I would like to focus in on the important matters before the
Committee today. The 1984 provides incentives for generic drug applicants to chal-
lenge the validity of, or invent around, the patents of pioneer drugs. Each time a
patent is found to be deficient or can be legally circumnavigated, consumers can
benefit from speedier access to generic products.
In order to encourage such pro-consumer activities, the 1984 law awarded 180
days of marketing exclusivity for the first generic firm to meet certain conditions.
For many years, FDA practice provided that this exclusivity be awarded only to that
applicant first to file a substantially complete drug application, be sued by the pio-
neer firm under the special terms of the statute, and win the suit.
However, due to a series of federal court decisions, that FDA will further explain
in its testimony, the successful defense requirement has been struck down. The
courts in the Mova and Granutec decisions, strictly construing the language of the
law, awarded the exclusivity to the first filer. As a drafter of the 1984 law, I am
afraid that, to paraphrase the great philosopher Pogo, this may be a case of We
have met the enemy, and he is me. Mea Culpa. Mea Culpa.
Once the courts struck down the successful defense requirement there has been
a potential mismatch of the first filer and the party who actually defeats the patent.
Many have observed that the blocking position the statute grants to first filers cre-
ates perverse incentives for patent settlements.
As a general matter, the law smiles upon patent settlements. For example, the
1995 joint DOJFTC Antitrust Guidelines for the Licensing of Intellectual Property
state:
Settlements involving cross-licensing of intellectual property rights can be an ef-
ficient means to avoid litigation and, in general, courts favor such settlements.
Yet, according to these guidelines not all such patent settlements will automati-
cally survive antitrust scrutiny:
(w)hen such [settlement] involves horizontal competitors, [the government] will
consider whether the effect of the settlement is to diminish competition among enti-
ties that would have been actual or likely potential competitors.
As the FTC will explain, several agreements in the last few years have triggered
antitrust actions. The Committee needs to know if these cases represent a few
outliers or a pattern. The Committee needs to know if the existing antitrust laws
are sufficient to police this situation. We need to know if there are ways to improve
Sen. Leahys legislation that is designed to help solve the problem by assisting FTC
and DOJ to respond more quickly and effectively in this area.

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The FTC will tell us about a major study that they have recently initiated to
gauge the frequency and nature of these settlements. This will help the Administra-
tion and Congress examine whether there is a pattern of behavior that requires a
comprehensive legislative response rather than the current case by case approach.
The public deserves the effective and affordable drugs that competition can bring,
not elaborate legal machinations that identify or create then exploit anti-competitive
loopholes. Some have already concluded that the 1984 law, as implemented by FDA
regulation, and interpreted by the courts, presents a legal framework that invites
improper, anti-competitive settlements.
For example, as former FTC official, David Balto, has assessed the situation:
The competitive concern is that the 180-day exclusivity provision can be used
strategically by a patent holder to prolong its market power in ways that go beyond
the intent of the patent laws and the Hatch-Waxman Act by delaying generic entry
for a substantial period of time.
In short, the questions we face at todays hearing are straightforward: Is the 180
day exclusivity law broken and, if it is, how should we fix it?
I am pleased that the FTC, DOJ, and FDA will help us start to think through
these issues. I am also pleased that Attorney General Mark Shurtleff from my home
state of Utah will explain how a group of states have responded to the current envi-
ronment.
I am more interested in examining the underlying law, pattern of cases, and
whether the law needs to be changed than I am in conducting a Who Struck John
analysis of the cases that have triggered governmental involvement. I would hope
that my colleagues on the Committee will also step back and focus on the forest
rather than the trees.
While no parties to these settlementseither pioneer or generic firmsrequested
to testify today, I understand there may well be interest in how these agreements
may be characterized. Without objection, I will hold the record open until next Fri-
day to allow the Committee to receive comments from all parties interested in to-
days hearing.
I look forward to learning from the testimony we will receive today.
Chairman HATCH. Senator Leahy is not here. Would you care to
represent the Democrats on the committee?
Senator SCHUMER. Thank you, Mr. Chairman.
Chairman HATCH. I need to say Democrats, not minority, any-
more.
Senator SCHUMER. We still are, for the last few hours.
Chairman HATCH. Well, we wish you well when you take over.
Senator SCHUMER. Thank you. Thank you. And seriously, you
have always been fair in the majority
Chairman HATCH. Thank you.
Senator SCHUMER.and we will try to be just as fair.
Chairman HATCH. Thank you.
STATEMENT OF HON. CHARLES E. SCHUMER, A U.S. SENATOR
FROM THE STATE OF NEW YORK
Senator SCHUMER. This is not Senator Leahys statement, this is
my own. I have been very interested in this issue, but I do want
to commend him for his leadership. He is on the floor right now
dealing with another issue that has been before this committee, the
nomination of three Justice Department appointees.
But Mr. Chairman, I want to first thank you for holding this
hearing, and more importantly, for your longtime dedication to the
important issue of pharmaceutical competition. Because of Senator
Hatchs leadership, consumers have saved billions of dollars on
pharmaceuticals in the two decades since the Hatch-Waxman Act
was enacted, and you are, as I told you privately, Mr. Chairman,
I think this is one of the most important pieces of legislation that
this Congress has passed in the last 20 years and you should be
awfully proud to have your name attached to it.

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Chairman HATCH. Thank you.

Senator SCHUMER. Hatch-Waxman, as we know, reformed patent
laws and created a blueprint that provided additional patent pro-
tection for research-based brand name drugs in conjunction with a
timetable to allow less-expensive generic equivalents on the mar-
ket. The law did two things. It preserved intellectual property
rights for the pharmaceutical companies that have put lots of effort
and produced wonder drugs that keep people alive, but at the same
time, it created competition after that reward for the intellectual
property was granted and it saved consumers billions of dollars,
still allowing brand name companies to stay profitable and innova-
tive. It was an exquisite balance that worked.
Unfortunately, the balance has been thrown out of whack in re-
cent years. The large pharmaceutical companies basically have
been playing by their own rules. As the stakes and profits have be-
come higher, lawyers for that industry have picked the Hatch-Wax-
man law clean. Again, I believe in intellectual property, but we
came up with a formulation, and to now extend patent after patent
after patent when that was never envisioned in the Hatch-Waxman
law for the reasons that they were is the reason that we are here
today and is the reason that we need real reform once again.
The Drug Competition Act that Senator Leahy has introduced,
and which I am proud to cosponsor, is an important first step in
ensuring the full potential of the Hatch-Waxman Act. It would pro-
vide the very cornerstone to ensuring fair competition in the phar-
maceutical marketplace. Too often, the agreements between phar-
maceutical companies are brokered with an anti-competitive spirit.
In requiring these agreements to be disclosed to the FTC and DOJ,
the legislation ensures anti-competitive efforts on the part of these
companies, both generic and brand name, are identified and re-
solved quickly so that consumers do not suffer unjustly. I find these
agreements outrageous. I am even more angry at the generic com-
panies that do them than the pharmaceutical companies because
they are basically selling their birthright for a few silver coins and
it is just awful.
But, Mr. Chairman, we have to do more than close just the loop-
holes which allow the pharmaceuticals to too easily enter into
agreements that are not in the best interests of consumers. Dove-
tailing with Senator Leahys efforts, Senator McCain and I reintro-
duced a bill last month called the GAAP Act, the Greater Access
to Affordable Pharmaceutical Act. Our bill seeks to breathe new life
into the Hatch-Waxman law, not by redrawing ideological battle
linesthat is for a different day and timebut by restoring the in-
tent of our patent laws. In doing so, it will save consumers $71 bil-
lion over the next 10 years on their drug costs.
Our intention is not to cut innovators off at the knees. We want
to protect their rights. Our bill is not a freebie for the generic drug
industry, either. It only makes the approval process fair and brings
lower-cost alternatives to the market. The bill would eliminate the
30-month stay automatically handed to brand companies who file
suit against a generic challenger, regardless of the merits of the
case. Another 30 months, way out of line from what you, good sir,
intended, simply by filing a case. What could be more abusive and

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 8

outrageous than that? Whether the case has merits should be de-
termined in the courts before any 30-month extension is granted.
The GAAP Act also strengthens the citizen petition process, in-
tended to allow average people to express concern over a drug,
which has become a back door way for pharmaceutical companies,
both brand name and generic, to delay a competitors entry in the
market. Today, the test to prove that a generic drug is truly bio-
equivalent to the original drug is a contest of exploiting loopholes
in Hatch-Waxman to ensure that the generic never sees the light
of day, a total 180-degree turn from what was intended in the law.
The GAAP Act reforms the so-called 180-day rule by closing the
loophole that enables a brand name company to pay a generic man-
ufacturer to stay off the market. We do not just ask for disclosure.
We prohibit these nefarious type agreements. Closing the loophole
would prevent problems like the cases we are discussing here
today, the Hytrin case, where Abbott Laboratories paid Geneva
Pharmaceuticals $4.5 million a month to keep their hypertension
drug off the market, or the recent KDur 20 case, where Schering-
Plough allegedly paid Upsher-Smith and American Home Products
millions of dollars to delay launching a generic potassium chloride
supplement. Again, these are outrageous.
Now, I know some of the brand name large pharmaceutical com-
panies say, well, we have no choice, because sometimes there are
injustices done at the other end. In other words, it takes too long
for the drug to come on the market. I have no problem with cor-
recting those abuses, but one abusethose are really not abuses,
but those injustices, if you want to elevate it to probably a higher
level than I would, given the level of profitability of the industry,
but these wrongs should be corrected. I am open to correcting
them, but not in the ad hoc way that they are done in the way that
people file petitions and things like that, and they do them for
drugs whether they have been on the market 2 years, 4 years, 10
years, 8 years, 12 years. One has nothing to do with the other in
the specific case of each drug.
So, Mr. Chairman, as Congress wrestles with the complexity of
crafting and paying for a Medicare prescription drug benefit, we
must not overlook a straightforward solution to escalating drug
prices facing seniors, businesses, insurers, and consumers. If we
can ensure fair competition in the pharmaceutical marketplace, a
level playing field for both brand and generic companies, everyone
will win. For the consumer, cheaper drugs. The generics can be out
and the pharmaceuticals attempts at price controls and other type
of non-economic behavior will not have as much pointed weight.
So I thank you, Mr. Chairman, for holding this important hear-
ing and look forward to working with you, Senator Leahy, and with
the FDA and the FTC to encourage fair marketplace practices
while preserving both safety and intellectual property rights to pro-
vide customers with affordable pharmaceutical alternatives.
Chairman HATCH. Thank you, Senator.
Let me introduce todays witnesses. First, we will hear from Mr.
Gary Buehler, the Acting Director of FDAs Office of Generic
Drugs. Mr. Buehler will describe some of the key statutory and reg-
ulatory provisions that have colored the patent settlements under
discussion today.

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Next, we will get the perspective of the Federal Trade Commis-

sion, the lead Federal agency in antitrust enforcement for the phar-
maceutical industry. Ms. Molly Boast is the Director of the Bureau
of Competition. We are surely glad to have both of you with us
today. Ms. Boast will tell us about some recent pharmaceutical pat-
ent settlement cases and a major survey into the industrys prac-
tices.
To fill out the first panel, we have Mr. James Griffin, Deputy As-
sistant Attorney General for the Antitrust Division at the Depart-
ment of Justice. He will explain how the Department of Justice and
FTC divide the responsibility for antitrust enforcement and how
the Department retains the sole authority for any criminal matters
in the antitrust area.
Now, without objection, I think we can expedite todays hearing
by collapsing the witnesses into one panel. We have only one wit-
ness on the second panel, Attorney General Mark Shurtleff from
my home State of Utah. Attorney General Shurtleff will tell us
what the States are doing in the area of pharmaceutical patent set-
tlement. So if we could get you to take your seat there, as well,
General Shurtleff.
If you could, please confine your oral testimony to 5 minutes. I
know this is pretty complex stuff. If you need more time, I have
always been courteous about that. You will be able to place your
complete remarks in the record, but if you could try and keep it
to 5 minutes, it will help us, and especially me today since I have
so much pressure to do these other things. I have just been told
I have to be at leadership meeting at four oclock, as well.
Because of the interest in this hearing, I think we should hold
the record open for 1 week so that interested parties will have a
chance to provide their views, and although no company involved
in these settlements asked to testify today and I do not plan to
parse each paragraph of these settlements, they may have some
useful perspectives on these issues. Certainly, consumer groups
and purchasers of drugs will have views, too, so we are hopeful
that we will hear from all of you.
We will turn to you first, Mr. Buehler, and take your testimony,
and then we will just go across the table.

STATEMENT OF GARY BUEHLER, R.PH., ACTING DIRECTOR

FOR GENERIC DRUGS, FOOD AND DRUG ADMINISTRATION,
WASHINGTON, D.C.
Mr. BUEHLER. Thank you, Mr. Chairman. Mr. Chairman and
members of the committee, my name is Gary Buehler. I am a reg-
istered pharmacist and Acting Director of the Office of Generic
Drugs at FDA. I am here today to discuss FDAs implementation
of the exclusivity provisions of the Drug Price Competition and Pat-
ent Term Restoration Act of 1984, the Hatch-Waxman amend-
ments, which govern the generic drug approval process.
These amendments are intended to balance two important public
policy goals. First, drug manufacturers need meaningful market
protection incentives to encourage the development of valuable new
drugs. Second, once the statutory patent protection and market ex-
clusivity for these new drugs has expired, the public benefits from

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 10

the rapid availability of lower-price generic versions of the inno-

vator drug.
The FD&C Act requires that an ANDA contain a certification for
each patent listed in the Orange Book for the innovator drug. The
certification relevant to exclusivity is a Paragraph IV certification
that states that such patent is invalid or will not be infringed by
the generic drug for which approval is being sought. If the NDA
sponsor or patent owner files a patent infringement suit against
the ANDA applicant within 45 days of the receipt of notice, FDA
may not give final approval to the ANDA for at least 30 months
from the date of notice. This 30-month stay will apply unless the
court reaches a decision earlier in the patent infringement case or
otherwise orders a longer or shorter period for the stay.
The statute provides an incentive of 180 days of market exclu-
sivity to the first generic applicant who challenges a listed patent
by filing a Paragraph IV certification and running the risk of hav-
ing to defend a patent infringement suit. The 180-day period of ex-
clusivity will begin either from the date the generic applicant be-
gins commercial marketing or from the date of a court decision
finding the patent invalid, unenforceable, or not infringed, which-
ever is first. These two events, first commercial marketing and a
court decision favorable to the generic, are often called triggering
events, because under the statute, they can trigger the beginning
of the 180-day exclusivity period.
Approval of an ANDA does not trigger exclusivity. Until an eligi-
ble ANDA applicants 180-day exclusivity period has expired, FDA
cannot approve subsequently submitted ANDAs for the same drug,
even if the latter ANDAs are otherwise ready for approval and the
sponsors are willing to immediately begin marketing. Therefore, an
ANDA applicant who is eligible for exclusivity is often in the posi-
tion to delay all generic competition for that innovator product.
The 180-day exclusivity provision has been the subject of consid-
erable litigation and administrative review in recent years as the
courts, industry, and the FDA have sought to interpret it in a way
that is consistent both with the statutory text and with the legisla-
tive goals underlying the Hatch-Waxman amendments. In light of
the court decisions finding certain FDA regulations inconsistent
with the statute, the agency proposed new regulations in August
1999 to implement the 180-day exclusivity. Since then, many com-
ments have been submitted and there have been additional court
decisions further interpreting the statute and complicating the reg-
ulatory landscape.
The agency has not yet published a final rule on 180-day exclu-
sivity. As described in the June 1998 guidance for industry, until
new regulations are in place, FDA is addressing on a case-by-case
basis those 180-day exclusivity issues not addressed by the existing
regulations.
One of the most fundamental program changes is the determina-
tion by the courts that a district court decision favorable to the ge-
neric applicant will trigger the 180-day exclusivity period. This in-
terpretation means that if 180-day exclusivity is triggered by a de-
cision favorable to the ANDA applicant in the district court, the
ANDA sponsor who wishes to market during that exclusivity period
now may run the risk of treble damages if the district court deci-

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 11

sion is reversed on appeal to the Federal circuit. As a practical

matter, it means that many generic applicants may choose not to
market the generic and, thus, the 180-day exclusivity period could
run during the pendency of an appeal.
FDA continues to implement the Hatch-Waxman amendments
exclusivity provisions in the best manner possible, given the text
of the legislation, the history of the legislation, and the numerous
court challenges. FDA has tried to balance innovation and drug de-
velopment and expediting the approval of lower-cost generic drugs.
Thank you, Mr. Chairman. I would be pleased to answer any
questions if I can.
Chairman HATCH. Thank you, Mr. Buehler.
[The prepared statement of Mr. Buehler follows:]
STATEMENT OF GARY BUEHLER, RPH, ACTING DIRECTOR, OFFICE OF GENERIC DRUGS,
CENTER FOR DRUG EVALUATION AND RESEARCH, FOOD AND DRUG ADMINISTRATION,
DEPARTMENT OF HEALTH AND HUMAN SERVICES
INTRODUCTION
Mr. Chairman and Members of the Committee, I am Gary Buehler, RPh, Acting
Director of the Office of Generic Drugs in the Center for Drug Evaluation and Re-
search (CDER), at the Food and Drug Administration (FDA or Agency). I am here
today to discuss FDAs implementation of provisions of the Drug Price Competition
and Patent Term Restoration Act of 1984 (HatchWaxman Amendments) which gov-
ern the generic drug approval process. These provisions give 180 days of marketing
exclusivity to certain generic drug applicants. The 180-day generic drug exclusivity
provision is one component of the complex patent listing and certification process,
which also provides for a 30-month stay on generic drug approvals while certain
patent infringement issues are litigated.
The Hatch-Waxman amendments are intended to balance two important public
policy goals. First, drug manufacturers need meaningful market protection incen-
tives to encourage the development of valuable new drugs. Second, once the statu-
tory patent protection and marketing exclusivity for these new drugs has expired,
the public benefits from the rapid availability of lower priced generic versions of the
innovator drug.
STATUTORY PROVISIONS
The Hatch-Waxman Amendments amended the Federal Food, Drug, and Cosmetic
(FD&C) Act and created section 5050). Section 5050) established the abbreviated
new drug application (ANDA) approval process, which permits generic versions of
previously approved innovator drugs to be approved without submission of a full
new drug application (NDA). An ANDA refers to a previously approved new drug
application (the listed drug) and relies upon the Agencys finding of safety and ef-
fectiveness for that drug product.
The timing of an ANDA approval depends in part on patent protections for the
innovator drug. Innovator drug applicants must include in an NDA information
about patents for the drug product that is the subject of the NDA. FDA publishes
patent information on approved drug products in the Agencys publication Ap-
proved Drug Products with Therapeutic Equivalence Evaluations (the. Orange
Book) (described in more detail below). The FD&C Act requires that an ANDA con-
tain a certification for each patent listed in the Orange Book for the innovator drug.
This certification must state one of the following:
(I) that the required patent information relating to such patent has not
been filed;
(II) that such patent has expired;
(III) that the patent will expire on a particular date; or
(IV) that such patent is invalid or will not be infringed by the drug, for
which approval is being sought.
A certification under paragraph I or II permits the ANDA to be approved imme-
diately, if it is otherwise eligible. A certification under paragraph III indicates that
the ANDA may be approved on the patent expiration date.
A paragraph IV certification begins a process in which the question of whether
the listed patent is valid or will be infringed by the proposed generic product may

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 12
be answered by the courts prior to the expiration of the patent. The ANDA applicant
who files a paragraph IV certification to a listed patent must notify the patent
owner and the NDA holder for the listed drug that it has filed an ANDA containing
a patent challenge. The notice must include a detailed statement of the factual and
legal basis for the ANDA applicants opinion that the patent is not valid or will not
be infringed. The submission of an ANDA for a drug product claimed in a patent
is an infringing act if the generic product is intended to be marketed before expira-
tion of the patent, and therefore, the ANDA applicant who submits an application
containing a paragraph IV certification may be sued for patent infringement. If the
NDA sponsor or patent owner files a patent infringement suit against the ANDA
applicant within 45 days of the receipt of notice, FDA may not give final approval
to the ANDA for at least 30 months from the date of the notice. This 30-month stay
will apply unless the court reaches a decision earlier in the patent infringement case
or otherwise orders a longer or shorter period for the stay.
The statute provides an incentive of 180 days of market exclusivity to the first
generic applicant who challenges a listed patent by filing a paragraph IV certifi-
cation and running the risk of having to defend a patent infringement suit. The
statute provides that the first applicant to file a substantially complete ANDA con-
taining a paragraph IV certification to a listed patent will be eligible for a 180-day
period of exclusivity beginning either from the date it begins commercial marketing
of the generic drug product, or from the date of a court decision finding the patent
invalid, unenforceable or not infringed, whichever is first. These two eventsfirst
commercial marketing and a court decision favorable to the genericare often called
triggering events, because under the statute they can trigger the beginning of the
180-day exclusivity period.
In some circumstances, an applicant who obtains 180-day exclusivity may be the
sole marketer of a generic competitor to the innovator product for 180 days. But
180-day exclusivity can begin to runwith a court decisioneven before an appli-
cant has received approval for its ANDA. In that case, some, or all, of the 180-day
period could expire without the ANDA applicant marketing its generic drug. Con-
versely, if there is no court decision and the first applicant does not begin commer-
cial marketing of the generic drug, there may be prolonged or indefinite delays in
the beginning of the first applicants 180-day exclusivity period. Approval of an
ANDA has no effect on exclusivity, except if the sponsor begins to market the ap-
proved generic drug. Until an eligible ANDA applicants 180-day exclusivity period
has expired, FDA cannot approve subsequently submitted ANDAs for the same
drug, even if the later ANDAs are otherwise ready for approval and the sponsors
are willing to immediately begin marketing. Therefore, an ANDA applicant who is
eligible for exclusivity is often in the position to delay all generic competition for
the innovator product.
Only an application containing a paragraph IV certification may be eligible for ex-
clusivity. If an applicant changes from a paragraph IV certification to a paragraph
III certification, for example upon losing its patent infringement litigation, the
ANDA will no longer be eligible for exclusivity.
COURT DECISIONS AND FDA ACTIONS
This 180-day exclusivity provision has been the subject of considerable litigation
and administrative review in recent years, as the courts, industry, and FDA have
sought to interpret it in a way that is consistent both with the statutory text and
with the legislative goals underlying the Hatch-Waxman Amendments. A series of
Federal court decisions beginning with the 1998 Mova 1 case describe acceptable in-
terpretations of the 180-day exclusivity provision, identify potential problems in im-
plementing the statute, and establish certain principles to be used by the Agency
in interpreting the statute.
In light of the court decisions finding certain FDA regulations inconsistent with
the statute, the Agency proposed new regulations in August 1999 to implement the
180-day exclusivity. Since then many comments have been submitted and there
have been additional court decisions further interpreting the 180-day exclusivity
provision and complicating the regulatory landscape. The Agency has not yet pub-
lished a final rule on 180-day exclusivity. As described in a June 1998 guidance for
industry, until new regulations are in place, FDA is addressing on a case-by-case
basis those 180-day exclusivity issues not addressed by the existing regulations.
One of the most fundamental changes to the 180-day exclusivity program that has
resulted from the legal challenges to FDAs regulations is the determination by the
courts of the meaning of the phrase court decision. The courts have determined

1 Mova Pharmaceutical Corp. v. Shalala, 140 F.3d 1060, 1065 (D.C. Cir. 1998).

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 13
that the court decision that can begin the running of the 180-day exclusivity pe-
riod may be the decision of the district court, if it finds that the patent at issue is
invalid, unenforceable, or will not be infringed by the generic drug product. FDA
had interpreted the court decision that could begin the running of 180-day exclu-
sivity (and the approval of the ANDA) as the final decision of a court from which
no appeal can be or has been takengenerally a decision of the Federal Circuit.
FDAs interpretation had meant that an ANDA applicant could wait until the ap-
peals court had finally resolved the patent infringement or validity question before
beginning the marketing of the generic drug. FDA had taken this position so that
the generic manufacturer would not have to run the risk of being subject to poten-
tial treble damages for marketing the drug, if the appeals court ruled in favor of
the patent holder. The current interpretation means that if the 180-day exclusivity
is triggered by a decision favorable to the ANDA applicant in the district court, the
ANDA sponsor who wishes to market during that exclusivity period now may run
the risk of treble damages if the district court decision is reversed on appeal to the
Federal Circuit. As a practical matter, it means that many generic applicants may
choose not to market the generic and thus the 180-day exclusivity period could run
during the pendency of an appeal.
In one of the cases rejecting FDAs interpretation of the court decision language
in the statute, the court determined that the applicant who relied in good faith on
FDAs interpretation of the 180-day exclusivity provision should not be punished by
losing its exclusivity. The court, therefore, refused to order FDA to begin the run-
ning of 180-day exclusivity upon the decision of the district court in the patent liti-
gation at issue. FDA has taken a similar approach in implementing the courts deci-
sions: the new court decision definition will apply only for those drugs for which
the first ANDA was submitted subsequent to March 30, 2000. In adopting this
course, a primary concern for the Agency was to identify an approach that would
minimize further disruption and provide regulated industry with reasonable guid-
ance for making future business decisions.
To advise the public and industry of this position, FDA published a Guidance for
Industry in March 2000. FDA intends to incorporate the courts interpretation of the
court decision trigger for 180-day exclusivity into the final rule implementing the
changes in 180-day exclusivity.

ORANGE BOOK LISTINGS

There have been concerns expressed over FDAs role in the listing of patents in
the Orange Book which can have an impact on generic drug approvals by delaying
approval and 180-day exclusivity. Under the FD&C Act, pharmaceutical companies
seeking to market innovator drugs must submit, as part of an NDA or supplement,
information on any patent that 1) claims the pending or approved drug or a method
of using the approved drug, and 2) for which a claim of patent infringement could
reasonably be asserted against an unauthorized party. Patents that may be sub-
mitted are drug substance (active ingredient) patents, drug product (formulation
and composition) patents, and method of use patents. Process (or manufacturing)
patents may not be submitted to FDA.
When an NDA applicant submits a patent covering the formulation, composition,
or method of using an approved drug, the applicant must also submit a signed dec-
laration stating that the patent covers the formulation, composition, or use of the
approved product. The required text of the declaration is described in FDAs regula-
tions. FDA publishes patent information on approved drug products in the Orange
Book.
The process of patent certification, notice to the NDA holder and patent owner,
a 45-day waiting period, possible patent infringement litigation and the statutory
30-month stay mean there is the possibility of a considerable delay in the approval
of ANDAs as a result of new patent listings. Therefore, these listings are often close-
ly scrutinized by ANDA applicants. FDA regulations provide that, in the event of
a dispute as to the accuracy or relevance of patent information submitted to and
subsequently listed by FDA, an ANDA applicant must provide written notification
of the grounds for dispute to the Agency. FDA then requests the NDA holder to con-
firm the correctness of the patent information and listing. Unless the patent infor-
mation is withdrawn or amended by the NDA holder, FDA will not change the pat-
ent information listed in the Orange Book. If a patent is listed in the Orange Book,
an applicant seeking approval for an ANDA must submit a certification to the pat-
ent. Even an applicant whose ANDA is pending when additional patents are sub-
mitted by the sponsor must certify to the new patents, unless the additional patents
are submitted by the patent holder more than 30 days after issuance by the U.S.
Patent and Trademark Office.

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FDA does not undertake an independent review of the patents submitted by the
NDA sponsor. FDA does not assess whether a submitted patent claims an approved
drug and whether a claim of patent infringement could reasonably be made against
an unauthorized use of the patented drug. FDA has implemented the statutory pat-
ent listing provisions by informing interested parties what patent information is to
be submitted, who must submit the information, and when and where to submit the
information. As the Agency has stated, since the implementation of the 1984
HatchWaxman Amendments began, FDA has no expertise or resources with which
to resolve complex questions of patent coverage, and thus the Agencys role in the
patent-listing process is ministerial. The statute requires FDA to publish patent in-
formation upon approval of the NDA. The Agency relies on the NDA holder or pat-
ent owners signed declaration stating that the patent covers an approved drug
products formulation, composition or use. Generic and innovator firms may resolve
any disputes concerning patents in private litigation. As noted above, if the generic
applicant files a paragraph IV certification and is sued for patent infringement with-
in 45 days, there is an automatic stay of 30 months, substantially delaying the ap-
proval of the generic drug and, thus, the availability of lower cost generic drug prod-
ucts.

CONCLUSION
FDA continues to implement the Hatch-Waxman Amendments exclusivity provi-
sions in the best manner possible given the text of the legislation, the history of the
legislation and the numerous court challenges. Again, as previously noted, FDA has
tried to balance innovation in drug development and expediting the approval of
lower-cost generic drugs.
Chairman HATCH. Ms. Boast, we will turn to you now.
STATEMENT OF MOLLY BOAST, DIRECTOR, BUREAU OF COM-
PETITION, FEDERAL TRADE COMMISSION, WASHINGTON,
D.C.
Ms. BOAST. Thank you, Mr. Chairman and members of the com-
mittee. It is a true privilege for me to be able to participate in this
hearing today on a topic that I think is fundamentally important,
the ready availability of pharmaceutical products at competitive
prices.
The Commission has been very active in the pharmaceutical area
generally, and in particular in considering the relationship between
pioneer and generic drug manufacturers as their relationship has
evolved under the Hatch-Waxman Act. And, frankly, speaking for
myself, since I am here as the Director of the Bureau of Competi-
tion, not as a spokesman for the Commission itself, I think this is
among the Commissions most important work. We know that ge-
neric products, once they are introduced to the marketplace, tend
to bring prices down in the range of 20 to 50 percent within a very
few months. It is quite a dramatic change. I would estimate that
over the last 2 years, approximately 25 percent of the resources of
the Bureau of Competition have been devoted to the pharma-
ceutical industry. So you are able to see the high degree of impor-
tance we assign to this.
My comments here are going to highlight the three recent en-
forcement actions the Commission has taken challenging settle-
ment agreements between branded and generic drug manufactur-
ers.
Chairman HATCH. Did you say 25 percent of your time is spent
on
Ms. BOAST. Twenty-five percent of the Bureau of Competitions
resources have gone
Chairman HATCH. Is that right?

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 15

Ms. BOAST. This is an estimate, Mr. Chairman, to the pharma-

ceutical industry generally. That includes
Chairman HATCH. The important thing, I am just showing how
important this is, though.
Ms. BOAST. It is very important.
Chairman HATCH. Even I am amazed.
Ms. BOAST. It includes our merger enforcement work in this in-
dustry, as well.
Chairman HATCH. Sure. Sorry to interrupt you. I apologize.
Ms. BOAST. I am always happy when I capture someones atten-
tion with that kind of information.
[Laughter.]
Chairman HATCH. I know I look tired, but I am not that tired.
[Laughter.]
Ms. BOAST. Let me briefly try to summarize what the Commis-
sions recent enforcement actions challenging these settlement
agreements between branded manufacturers and generic firms are
about, and then talk very briefly about the Commissions Section
6(b) study.
The Commissions enforcement initiatives address settlement
agreements reached between the branded and generic firms in the
context of the patent litigation that is spurred by the Hatch-Wax-
man Act. Now, I agree with both Chairman Hatch and Senator
Schumers characterization of Hatch-Waxman. This was a remark-
able creation, an effort to bridge our interest in encouraging inno-
vation through protection of intellectual property rights and our in-
terest in competition introduced through generic entry.
But as Mr. Buehler has described, Hatch-Waxman provides a
mechanism pursuant to which the generic firm can certify to the
branded manufacturer that its proposed product does not infringe
the pioneers patent or that the patent is invalid, and this often
triggers patent litigation between the two firms.
Settlements have been reached in this context, and it is not the
fact that settlements have taken place that is our concern. Rather,
the Commission has become concerned that there are incentives
created quite inadvertently under Hatch-Waxman that have led to
settlements on anti-competitive terms. The agreements in question
share two things in common.
First, the Commission has alleged in each of these three cases
that payments have been made by the branded manufacturer who
has a strong incentive to discourage generic entry to the generic
firm to delay the date of entry, rather than letting litigation resolve
the question of the patent validity, which would, if resolved favor-
ably in the generics favor, trigger the 180-day exclusivity and
begin the process of generic entry, and rather than allowing the ge-
neric to come to market on the date at which it might absent the
payment.
The second feature that links these cases is a provision, or vari-
ations of a provision, that preclude entry with non-infringing prod-
ucts, that is, products entirely outside the scope of the patent liti-
gation in which the settlement takes place. In light of these provi-
sions, in all three cases, the Commission has found reason to be-
lieve that the arrangements constitute unreasonable restraints of
trade.

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 16

To give you a sense of the magnitude of the potential harm, we

can take an example such as was involved in the Commissions
case against Hoechst and Andrx. The product there was called
Cardizem CD. This is a product that is used to treat angina and
other heart-related disease. It is very widely prescribed. In 1998,
Cardizem CD enjoyed sales of $700 million in 1 year alone, and
over 12 million prescriptions were written. So you can see that if
you allow generic entry and this substantial price decrease I de-
scribed earlier, the benefits to consumers are quite substantial.
Let me turn quickly with my remaining time to the Commissions
6(b) study which is underway. This study was undertaken by the
Commission in its unique role as an advisor to Congress and spe-
cifically at the request of Representative Waxman, who is inter-
ested in using the study vehicle to determine whether the problems
we have identified in the Commissions recent cases are prevalent
or just isolated and whether there are other features of the statu-
tory and regulatory framework that need to be addressed.
The study will shed light on issues such as how pervasive are
these agreements? How do the exclusivity provisions operate to af-
fect the incentives of the generic firms? Is the Orange Book listing
process being abused? Are the stay provisions of Hatch-Waxman
being abused? And how frequently is the citizen petition process
being used to delay entry? I hope it will make a substantial con-
tribution to this committees work and to the work of Congress in
general.
I would be very happy to answer any questions, Mr. Chairman,
and I look forward to the Commissions further work with you.
Chairman HATCH. Thank you, Ms. Boast. When do you project
that your survey will be completed, the data analyzed and distrib-
uted to the Congress and the public?
Ms. BOAST. The responses are due from the firms next month
and it is our hope that the report will be given to Congress by the
end of the year, end of the calendar year.
Chairman HATCH. Can we have some advance things?
Ms. BOAST. I would need to confer with my colleagues about that,
but
Chairman HATCH. Some of us might want to know as much as
we can in advance of the end of the year distribution.
Ms. BOAST. I am unaware of what legal constraints might
exist
Chairman HATCH. I understand.
Ms. BOAST.but I certainly have no principled objection to some
consultative process, if that is
Chairman HATCH. If we could, I would like to be kept up to speed
because we do need to do some things in this area and I would like
to do them right.
Ms. BOAST. I completely agree.
Chairman HATCH. Thank you.
[The prepared statement of Ms. Boast follows:]
STATEMENT OF MOLLY BOAST, DIRECTOR, BUREAU OF COMPETITION, FEDERAL TRADE
COMMISSION, WASHINGTON, DC
Mr. Chairman and Members of the Senate Judiciary Committee, I am Molly
Boast, Director of the Federal Trade Commissions Bureau of Competition. I am
pleased to appear before you to present the Federal Trade Commissions (Commis-

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sion or FTC) testimony on our activities involving the pharmaceutical industry
in general and patent settlement cases in particular.1 The benefits to consumers
from generic competition are dramatic. A Congressional Budget Office (CBO) re-
port estimates that consumers saved $8 billion to $10 billion on prescription drugs
at retail pharmacies in 1994 by purchasing generic drugs instead of brand name
products.2 The CBO also noted that the 1984 Hatch-Waxman Act had greatly in-
creased the number of drugs that experience generic competition and, thus, contrib-
uted to an increase in the supply of generic drugs. 3
The surging cost of prescription drugs is a pressing national issue. Recent reports
suggest expenditures for retail outpatient prescription drugs rose in the year 2000
to $131.9 billion, an 18.8% increase from the previous year.4 This dramatic increase
has helped focus attention on the need to ensure competition in pharmaceutical
markets. The Commission is encouraged that Congress, and particularly the mem-
bers of this Committee, have shown a strong interest in this issue, both in Chair-
man Hatchs decision to convene this hearing and in recent bills introduced by Sen-
ators Leahy, Schumer, Kohl, Durbin and McCain, among others.5
The Commission has gained substantial recent experience concerning competition
in the pharmaceutical industry from its antitrust enforcement activities affecting
both the branded and generic drug industries.6 In 1999, the staff of the FTCs Bu-
reau of Economics released a report on competition issues in the pharmaceutical in-
dustry.7 In addition, the Commissions staff has submitted comments over the past
two years in connection with the Food and Drug Administrations (FDA) regula-
tion of generic drugs,8 and has recently filed a Citizen Petition with the FDA seek-
ing clarification of certain issues relating to patent listings with the FDA.9
The Commissions recent activity includes three challenges to alleged anticompeti-
tive agreements between pioneer pharmaceutical manufacturers and generic manu-
facturers. These actions address agreements reached in the context of the 1984
Hatch-Waxman Act. The Act was crafted to balance the legitimate but different in-
terests of the pioneer and generic manufacturers. Recently, however, the Commis-
sion has observed conduct suggesting that some firms may be exploiting the statu-
tory and regulatory scheme by reaching agreements to delay the introduction of ge-

1 The views expressed in this statement reflect the views of the Commission. My oral state-
ment and responses to questions are my own and are not necessarily those of the Commission
or any individual Commissioner.
2 Congressional Budget Office, How Increased Competition from Generic Drugs Has Affected
Prices and Returns in the Pharmaceutical lndustry (July 1998) <http://www.cbo.gov>.
3 3 Id
4 See National Institute for Health Care Management Research and Educational Foundation,
Prescription Drug Expenditures in 2000: The Upward Trend Continues at 2 (May 2001) (avail-
able at www.nihcm.org).
5 See S. 754, Drug Competition Act of 2001, introduced by Senators Leahy, Kohl, Schumer,
and Durbin; S. 812, Greater Access to Affordable Pharmaceuticals Act of 2001, introduced by
Senators Schumer and McCain.
6 E.g., Federal Trade Commission v. Mylan Laboratories, Inc. et al., 19992 Trade Cas. (CCH)
72,573 (D.D.C. 1999); Roche Holding Ltd, C3809 (February 25, 1998) (consent order);
CibaGeigy, Ltd, 123 F.T.C. 842 (1997) (consent order); Hoechst AG, 120 F.T.C. 1010 (1995) (con-
sent order). For a discussion of recent FTC pharmaceutical enforcement actions, see FTC Anti-
trust Actions Involving Pharmaceutical Services and Products, <http://www.ftc.gov/bc/rxupdate>;
see also David A. Balto & James Mongoven, Antitrust Enforcement in Pharmaceutical Industry
Mergers, 54 Food & Drug Law Journal 255 (1999).
7 Staff of the Federal Trade Commission, The Pharmaceutical Industry: A Discussion of Com-
petitive and Antitrust Issues in an Environment of Change (March 1999) <http://www.ftc.gov/
reports/phannaceutical/drugexsum.htm>. The report reviews significant informational, institu-
tional, and structural changes that have influenced price and non-price competition strategies
of brand-name pharmaceutical companies, particularly during the last 15 years. The study con-
siders the possible antitrust implications of these changes by examining alternative anticompeti-
tive and procompetitive explanations for the pricing, vertical contracting, and vertical and hori-
zontal consolidation strategies that have emerged in this environment of change.
8 Comment of the Federal Trade Commission Staff, In the Matter of Citizen Petitions; Actions
That Can be Requested by Petition; Denials, Withdrawals, and Referrals for Other Administra-
tive Action, Docket No. 99N2497 (Mar. 2, 2000), <http://www.ftc.gov/be/vOO0005.pdf>; Com-
ment of the Federal Trade Commission Star, In the Matter of 180-Day Generic Drug Exclusivity
for Abbreviated New Drug Applications, Docket No. 85N0214 (Nov. 4, 1999), <http://
www.ftc.gov/be/v990016.htm>.
9 The Bureau of Competition and Policy Planning Staff of the Federal Trade Commissions Cit-
izen Petition to the Commissioner of Food and Drugs pursuant to 21 C.F.R. 10.25(a) and
10.30 concerning certain issues relating to patent listings in the FDAs Approved Drug Products
with Therapeutic Equivalence Evaluations (the Orange Book) and requesting that the FDA
clarify these issues via industry guidance or other means that the FDA considers appropriate
(May 16, 2001).

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neric drugs to the market. Pioneer firms have strong incentives to delay generic
entry.
Delaying or preventing the generic entry that Hatch-Waxman seeks to promote
could preserve millions of dollars of ongoing profits for pioneer drug companies. The
typical steep price decline upon generic entry results in an enormous drop in market
share and profits for the pioneer firm. The Commission has reason to believe the
agreements it has challenged were designed to forestall that result.
The complexity of the strategies prompted by the operation of the Hatch-Waxman
Act and the regulatory framework for introducing new drugs to the market cannot
be fully comprehended through any particular enforcement action. Accordingly, the
Commission is undertaking a study, pursuant to its authority under Section 6(b) of
the FTC Act, of pharmaceutical industry practices relating to the Hatch-Waxman
Act. The study will examine:
the extent to which agreements between brand-name pharmaceutical
manufacturers and generic drug firms may have delayed generic competi-
tion;
the operation of provisions in the Hatch-Waxman Act that award a 180-
day period of market exclusivity to a generic firm;
the impact of provisions in the Act on the listing of patents by brand-
name pharmaceutical companies in the FDA Orange Book, and of provi-
sions that trigger a stay on FDA approval of a proposed generic drug; and
the use of the FDAs Citizen Petition process by brand-name drug compa-
nies to oppose potential generic entrants.
The Commission hopes that this study will provide valuable information to Con-
gress as it considers possible reform of the Hatch-Waxman Act.
This testimony provides an overview of the significance of generic drugs in the
pharmaceutical industry and a brief description of the statutory and regulatory
schemes governing generic drugs, and then turns to a discussion of recent FTC en-
forcement actions challenging settlement agreements between certain branded phar-
maceutical manufacturers and their generic competitors. The testimony also briefly
describes the generic drug study currently underway at the agency.

I. BACKGROUND
A. SIGNIFICANCE OF GENERIC DRUGS

Generic drugs contain active ingredients that are the same as their branded coun-
terparts, but typically are sold at substantial discounts from the branded price. Ge-
neric drugs account for approximately 40% of all prescriptions, but for only about
9% of total prescription drug expenditures.10 The first generic manufacturer to enter
a market typically charges 70% to 80% of the brand manufacturers price. As addi-
tional generic versions of the same drug enter the market, the price continues to
drop, sometimes decreasing to a level of 50% or less of the brand price.11
Within the next 5 years, patents on brand-name drugs with combined U.S. sales
approaching $20 billion will expire.12 This provides an enormous opportunity for the
generic drug industry. Presumably the brand-name industry views the situation in
quite the opposite way. The successful entry of generic versions of these drugs
should affect dramatically the amount consumers pay for the drugs they need.
B. STATUTORY AND REGULATORY SCHEME

In 1984, Congress passed the Drug Price Competition and Patent Term Restora-
tion Act, known as the HatchWaxman Act,13 to accomplish a delicate balancing of
two policy goals:14 (1) to facilitate and encourage the introduction of generic drugs,

10See National Institute for Health Care Management Research and Educational Foundation,
Prescription Drug Expenditures in 2000: The Upward Trend Continues at 2 (May 2001).
11 Congressional Budget Office, How Increased Competition from Generic Drugs Has Affected
Prices and Returns in the Pharmaceutical Industry (July 1998), <http://www.cbo.gov>.
12 12 Id at 3. See also Amy Barrett, Crunch Time in Pill Land, Business Week 52 (Nov. 22,
1999).
13 Pub. L. No. 98417, 98 Stat. 1585 (1984), codified at 21 U.S.C. 355, 360cc, and 35 U.S.C.
156, 271, 282.
14 See Tri-Bio Labs, Inc. v. United States, 836 F.2d 135, 139 (3d Cir. 1987), cert. denied, 488
U.S. 818 (1988). See also Eli Lilly and Co. v. Medtronic, Inc., 496 U.S. 661, 15 USPQ2d 1121
(1990); and Bristol-Myers Squibb Company v. Royce Laboratories, Inc., 69 F.3d 1130, 1132,
113334, 36 USPQ2d 1641 (Fed. Cir. 1995).

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and (2) to protect the incentives of brand-name drug companies to invest in new
drug development.15
The Hatch-Waxman Act permits pharmaceutical manufacturers to seek FDA ap-
proval of generic versions of previously approved drug products 16 by submitting an
abbreviated new drug application (ANDA).17 Under the abbreviated procedure,
an ANDA applicant that demonstrates bioequivalency with a pioneer drug may rely
upon FDA findings of safety and efficacy for the relevant drug.18 The Food, Drug
and Cosmetics Act (FDCA) 19 requires the ANDA applicant to provide a certifi-
cation showing one of the following for each patent that claims the listed drug or
the method of the drugs use for which patent information is required to be filed: 20
(I) that the required patent information relating to such patent has not
been filed;
(II) that such patent has expired;
(III) that the patent will expire on a particular date; or
(IV) that such patent is invalid or will not be infringed by the drug for
which approval is being sought.
The Commissions recent enforcement actions involve agreements between pioneer
manufacturers and ANDA applicants that filed a certification under paragraph IV
of these provisions.21 A certification under paragraph IV requires the ANDA appli-
cant to give notice of the ANDA filing to the patent owner and the firm that ob-
tained the new drug approval for the listed drug (typically the pioneer manufac-
turer). This notice must include a detailed statement of the factual and legal basis
for the ANDA applicants opinion that the patent is not valid, is unenforceable, or
will not be infringed.22 An applicant whose ANDA is pending when additional pat-
ents are listed must certify to the new patents, unless the patent owner or NDA
holder fails to submit the additional patents within 30 days after their issuance by
the Patent and Trademark Office.23 In addition, if the ANDA applicant does not
seek approval for a use of the drug claimed in a listed patent, the FDCA allows the
ANDA to include a statement (commonly referred to as a Section viii Statement)
that the ANDA does not seek approval for such a use.24
The filing of a paragraph IV certification triggers an important process that re-
flects the Hatch-Waxman Acts core purpose of encouraging generic competition
while protecting pioneer companies incentives to innovate. If an action for patent
infringement is brought against the ANDA applicant within 45 days of the date the
patent owner receives notice of the paragraph IV certification,25 final approval of
the ANDA cannot become effective until 30 months from the receipt of notice. That

15 See H.R. Rep. No. 98857(1), at 1415 (1984), reprinted in 1984 U.S.C.C.A.N. 264748 (stat-

ing that the purposes of the Hatch-Waxman Act are to make available more low cost generic
drugs [and] to create a new incentive for increased expenditures for research and development
of certain products which are subject to premarket approval).
16 21 U.S.C. 3550).
17 The relevant statutory and regulatory framework for the ANDA approval process has been

described in Eli Lilly and Co. v. Medtronic, Inc., 496 U. S. at 67678; Mova Pharmaceutical
Corp. v. Shalala, 140 F.3d 1060, 106365, 46 USPQ2d 1385 (D.C. Cir. 1998); and Bristol-Myers
Squibb Company v. Royce Laboratories, Inc., 69 F.3d at 113132, 1135.
18 21 U.S.C. 3550)(2).
19 21 U.S.C. 355(a), (b).
20 21 U.S.C. 3550)(2)(A)(vii). By regulation, the FDA has defined the listed drug to mean the

approved new drug product. 21 C. F. R. 314.3(b).

21 If a certification is made by the generic manufacturer under paragraph I or II indicating

that patent information pertaining to the drug or its use has not been filed with FDA or the
patent has expiredthe ANDA may be approved immediately, and the generic drug may be
marketed. 21 U.S.C. 355(j)(5)(B)(i). A certification under paragraph III indicates that the ANDA
applicant does not intend to market the drug until after the applicable patent expires, and ap-
proval of the ANDA may be made effective on the expiration date. 21 U.S.C. 355(j)(5)(B)(ii).
22 21 U.S.C. 355(j)(2)(B); 21 C.F.R. 314.95(c)(6).
23 21 C.F.R. 314.94(a)(12)(vi).
24 21 U.S.C. 355(j)(2)(A)(viii); 21 CYR 314.94(a)(12)(iii). In the event of a dispute as to the ac-

curacy or relevance of patent information submitted to the FDA and subsequently listed in the
Orange Book, the FDA may request the NDA holder to confirm the correctness of the patent
information and listing. Unless the patent information is withdrawn or amended by the NDA
holder, however, the FDA will not change the patent information listed in the Orange Book. Id.
25 21 U.S.C. 355(j)(5)(B)(iii); 21 C.F.R. 314.107(f)(2). The statute also states that [u]ntil the

expiration of forty-five days from the date the notice made under paragraph (2)(B)(i) is received,
no action may be brought under section 2201 of Title 28, for a declaratory judgment with respect
to the patent. Id

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 20
timing cannot be changed unless a final court decision is reached earlier in the pat-
ent case or the patent court otherwise orders a longer or shorter period.26
The Hatch-Waxman Act also provides an incentive for generic drug companies to
bear the cost of patent litigation that may arise when they challenge allegedly in-
valid patents or design products they contend are non-infringing. The Act grants to
the first ANDA filer a 180-day period during which it has the exclusive right to
market a generic version of the brand name drug. The 180-day exclusivity period
begins running on the earlier of (1) the date the first ANDA filer begins commercial
marketing of its generic drug, or (2) the date a court decides that the patent ad-
dressed by the paragraph IV certification is invalid or not infringed. No other ge-
neric manufacturer may obtain final FDA approval to market its version of the rel-
evant product until the first filers 180.-day exclusivity period has expired.27
II. FTC CASES CHALLENGING SETTLEMENTS
The FTC has taken a lead role in promoting competition in the pharmaceutical
industry and has been significantly involved in antitrust cases arising in the context
of the Hatch-Waxman regulatory framework. In three recent cases, the Commission
challenged agreements between brand-name and generic drug companies that alleg-
edly delayed or were intended to delay generic drug competition in order to main-
tain higher prices.28 In each case the Commission alleged that as part of a settle-
ment agreement, the branded firm made payments to the generic firm in exchange
for delayed entry. The Commission further alleged in each case that the agreements
in question also delayed or were intended to delay entry of generic manufacturers
other than those to which payments were made.
A. AbbottlGeneva
In May 2000, the Commission issued a complaint and consent order against Ab-
bott Laboratories and Geneva Pharmaceuticals, Inc.29 The complaint charged that
Abbott paid Geneva approximately $4.5 million per month to keep Genevas generic
version of Abbotts proprietary drug (Hytrin) off the U.S. market, potentially costing
consumers hundreds of millions of dollars a year. Hytrin is used to treat hyper-
tension and benign prostatic hyperplasia (BPH or enlarged prostate)chronic condi-
tions that affect millions of Americans each year. BPH alone afflicts at least 50%
of men over 60. In 1998, Abbotts sales of Hytrin amounted to $542 million (over
8 million prescriptions) in the United States. Abbott projected that Genevas entry
with a generic version of Hytrin would eliminate over $185 million in Hytrin sales
in just six months.30
According to the complaint, Geneva agreed not to enter the market with any ge-
neric version of Hytrin, even if it were non-infringing, until the earlier of (1) the
final resolution of the patent infringement litigation involving Genevas generic
version of Hytrin tablets, including review through the U. S. Supreme Court; or (2)
entry of another generic Hytrin product. Geneva also agreed not to transfer, assign,
or relinquish its 180-day exclusivity right. These provisions ensured that no other
companys generic version of Hytrin could obtain FDA approval and enter the mar-
ket during the term of the agreement, because Genevas agreement not to launch
its product meant the 180-day exclusivity period would not begin to run.31
Under the terms of the Commissions consent order, Abbott and Geneva are
barred from entering into agreements pursuant to which a first-filing generic com-
pany agrees with a manufacturer of a branded drug that the generic company will
not (1) give up or transfer its exclusivity or (2) bring a non-infringing drug to mar-
ket. In addition, agreements to which Abbott or Geneva is a party that involve pay-
ments to a generic company to stay off the market must be approved by the court
when undertaken during the pendency of patent litigation (with prior notice to the
Commission), and the companies are required to give the Commission 30 days no-
tice before entering into such agreements in other settings. In addition, Geneva was

26 21 U.S.C. 355(j)(5)(B)(iii). A court may shorten or lengthen the period if either party to the
action fails to reasonably cooperate in expediting the case. Id
27 21 U.S.C. 355(j)(5)(B)(iv).
28 It is important to note that the first two cases discussed below, Abbott-Geneva and Hoechst-
Andrx, were resolved by settlement, while the third, Schering-Upsher-ESI Lederle, is pending
administrative trial. Thus, although the Commission found reason to believe that there was a
violation of the antitrust laws in each case, there has been no admission or final determination
of unlawfulness in any of these matters.
29 Abbott Laboratories, C3945 (May 26, 2000) (Analysis to Aid Public Comment), <http://
www.ftc.gov/os/2000/03>.
30 Id (complaint).
31 Abbott Laboratories, C3945 (May 26, 2000) (complaint).

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required to waive its right to a 180-day exclusivity period for its generic version of
Hytrin tablets, so other generic tablets could immediately enter the market.
B. Hoechst Marion RousselAndrx
In a second matter, the Commission charged that Hoechst Marion Roussel (now
Aventis), the maker of Cardizem CD, a widely prescribed drug for treatment of hy-
pertension and angina, paid Andrx Corporation over $80 million to refrain, during
the pendency of patent litigation, from bringing to market any competing generic
drug, without regard to whether it was allegedly infringing.32 Hoechsts Cardizem
sales in 1998 exceeded $700 million, and over 12 million prescriptions were sold.
Hoechst forecasted internally that a generic version of Cardizem CD, sold at 70%
of the brand price, would capture approximately 40% of Cardizem CD sales within
the first year.
The complaint further alleged that Andrxs agreement not to market its product
was intended to delay the entry of other generic drug competitors, thereby denying
consumers access to lower priced generic drugs.33 As in Abbott, the ability to pre-
clude other generic competitors flows from the exclusive 180-day marketing right
granted to the first generic to file an ANDA.34 This case was settled before trial,
and the Commission issued final consent orders on May 11, 2001. The orders en-
tered against Hoechst and Andrx contain relief similar to that in the Abbott and
Geneva orders.
C. Schering-Plough/Upsher-Smith/ESI Lederle
In its most recent case, the Commission issued an administrative complaint on
March 30, 2001, against Schering-Plough Corporation and two generic pharma-
ceutical manufacturers Upsher-Smith Laboratories, the first ANDA filer, and ESI
Lederle, Inc. (a division of American Home Products Corp.). The complaint charges
the three companies with entering into agreements aimed at delaying the entry of
generic versions of Scherings productKDur 20, a widely prescribed potassium
chloride supplement used to treat patients with insufficient levels of potassium, a
condition that can lead to serious cardiac problems.35 Scherings KDur products (in
two different strengths) had 1998 sales of over $220 million. In 1997, Schering alleg-
edly projected that the first year of low priced generic competition would reduce
branded KDur 20s sales by over $30 million.36
The Commission alleged in its complaint that Schering and Upsher-Smith settled
a patent infringement lawsuit by agreeing that Schering would pay Upsher-Smith
not to enter the market. Upsher-Smith allegedly agreed not to sell either the prod-
uct for which it had filed an ANDA, or any other generic version of Scherings K
Dur 20 (regardless of whether Schering had any basis to claim infringement), until
September 2001.37 In exchange, Schering paid Upsher-Smith $60 million. Upsher-
Smith also licensed five of its products to Schering but, according to the complaint,
the $60 million had little relation to the value of those products. It is alleged that
Scherings agreement with Upsher-Smith created a bottleneck by preventing other
potential generic competitors from entering the market because of the 180-day ex-
clusivity granted to Upsher-Smith as the first generic company to file an ANDA.
The Commission complaint alleges that Schering entered into a second agreement
with ESI Lederle to delay further the marketing of a generic version of KDur20.
Schering and ESI Lederle allegedly settled a patent infringement case with an
agreement by which ESI Lederle, in exchange for payments from Schering, promised
not to market any generic version of KDur 20 until January 2004, and thereafter
to market only one generic version until September 2006 (when Scherings patent
expires). In addition, ESI Lederle allegedly agreed that it would not help any other
firm with studies in preparation for an ANDA for a generic version of KDur 20

32 Hoechst Marion Roussel, Inc., Docket 9293 (March 16, 2000) (complaint), <http://
www.ftc.gov/os/2000/03>.
33 33 Id
34 In each of the cases brought by the CommissionAbbott, Hoechst, and Scheringit is not
the general principle of the 180-day exclusivity that is at issue; rather, the complaints alleged
that the parties entered into agreements that delayed or prevented the triggering of the first
ANDA filers exclusivity period, thereby also blocking other generic firms from entering.
The Commissions cases challenging settlement agreements also do not mean that parties to
patent litigation cannot settle their disputes. Indeed settlement of litigation can serve important
public purposes. But the antitrust laws have long condemned settlements that unreasonably
limit competition. See, e.g., United States v. Singer Mfg. Co., 374 U. S. 174 (1963).
35 In the Matter of Schering-Plough Corporation, et al., Docket No. 9297 (Mar. 30, 2001).
36 KDur 20 is the 20 mg version of the product and is the product version at issue in this
matter. Schering also makes a 10 mg version.
37 Upshur-Smith received final FDA approval in November 1998 to market a generic version
of KDur 20.

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until September 2006. The Commission complaint alleges that Schering agreed to
pay $30 million in exchange for these agreements and for licenses to two ESI
Lederle products that the complaint alleges were not as valuable as the $15 million
designated for them.
The Commission complaint alleges that the Schering/Upsher and the Schering/
ESI Lederle agreements are unreasonable restraints of trade and that the compa-
nies conspired to monopolize the market for potassium chloride supplements, in vio-
lation of Section 5 of the FTC Act. In addition, the complaint charges Schering with
unlawful acts of monopolization. The case is now in a pretrial stage before an Ad-
ministrative Law Judge.

III. OTHER COMMISSION ACTIONS

A. FTC v. Mylan
Although competition between manufacturers of branded and generic drugs is
critical and a continuing focus of Commission resources, the Commission also is con-
cerned about maintaining competition among generic firms. In FTC v. Mylan Lab-
oratories, Inc., the Commission, along with several states, sued Mylan Laboratories,
one of the nations largest generic pharmaceutical manufacturers, charging Mylan
and other companies with monopolization, attempted monopolization, and con-
spiracy in connection with agreements to eliminate much of Mylans competition by
tying up supplies of the key active ingredients for two widely-prescribed drugs
lorazepam and clorazepateused by millions of patients to treat anxiety.38
The FTCs complaint charged that Mylans agreements allowed it to impose enor-
mous price increasesover 25 times the initial price level for one drug, and more
than 30 times for the other. For example, in January 1998, Mylan raised the whole-
sale price of clorazepate from $11.36 to approximately $377.00 per bottle of 500 tab-
lets, and in March 1998, the wholesale price of lorazepam went from $7.30 for a
bottle of 500 tablets to approximately $190.00. The price increases resulting from
Mylans agreements allegedly cost American consumers more than $120 million in
excess charges.
The Commission filed this case in federal court under Section 13(b) of the FTC
Act seeking injunctive and other equitable relief, including disgorgement of ill-got-
ten profits. In July 1999, the U. S. District Court for the District of Columbia
upheld the FTCs authority to seek disgorgement and restitution for antitrust viola-
tions. In settlement of the Commissions case Mylan agreed to pay $100 million for
disbursement to qualified purchasers of lorazepam and clorazepate.39 On April 27,
2001, the federal court granted preliminary approval to a distribution plan for these
funds.40
B. FTC Pharmaceutical Industry Study
In light of the serious questions raised by its various generic drug investigations,
in October 2000 the Commission proposed a focused industry-wide study of generic
drug competition. This study is designed to examine more closely the business rela-
tionships between brand-name and generic drug manufacturers in order to better
understand the extent to which the process of bringing new low-cost generic alter-
natives to the marketplaceand into the hands of consumersis being impeded in
ways that are anticompetitive. The study will provide a more complete picture of
how generic drug competition has developed under the Hatch-Waxman Act, includ-
ing whether agreements between brand-name pharmaceutical manufacturers and
generic drug firms of the type challenged by the FTC are isolated instances or are
more typical of industry practices. In addition, the Commission will examine wheth-
er particular provisions of the Hatch-Waxman Act have operated as intendedto
balance the legitimate interests of pharmaceutical companies in protecting their in-
tellectual property and the legitimate interests of generic companies in providing
competitionor whether some provisions unintentionally have enabled anticompeti-
tive strategies that delay or deter the entry of generic drugs into the market.

38 CV983115 (D.D.C., filed Dec. 22, 1998; amended complaint filed Feb. 8, 1999). Over 20
million prescriptions are written for these drugs each year.
39 The Commission approved the settlement on November 29, 2000. FTC v. Mylan Labora-
tories, Inc., FTC File No. X990015 (Nov. 29, 2000). The Commission vote to accept the proposed
agreement was 41, with Commissioner Thomas Leary dissenting in part and concurring in
part.
40 FTC v. Mylan, et al., CV 1:98CV03114(TFH), Order Preliminarily Approving Proposed Set-
tlements (Apr. 27, 2001).

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In April, the Commission received clearance from the Office of Management and
Budget to conduct the study.41 The Commission has since issued 75 special orders
to brand-name pharmaceutical manufacturers and generic drug companies to pro-
vide the Commission with information about certain practices that were outlined in
the Federal Register notices that preceded OMB clearance to pursue the study.42
The Commission staff focused each special order on specific name-brand drug prod-
ucts that were the subject of paragraph IV certifications filed by potential generic
competitors, and, for generic companies, on specific drug products for which they
had filed an ANDA containing a paragraph IV certification. Responses from the
companies are expected by June 25, 2001.
The Commission plans to compile the information received to provide a factual de-
scription of how the 180-day marketing exclusivity and 30-month stay provisions of
the Hatch-Waxman Act have influenced the development of generic drug competi-
tion. For example, the Commission staff anticipates analyzing how often the 180-
day marketing exclusivity provision has been used, how it has been triggered (by
commercial marketing or court orders), the frequency with which innovator compa-
nies initiate patent litigation, and the frequency with which patent litigation has
been settled or litigated to a final court decision. The Commission will use the
agreements provided, along with underlying documents related to the reasons for
executing the agreement, to examine whether it appears that agreements between
innovator and generic companies (or between generic companies) may have operated
to delay generic drug competition.43
In addition, the study will provide evidence about innovator companies patent
listings in the Orange Book, the timeliness of the listings, and how frequently chal-
lenges are made to those listings by generic companies. Some have raised concerns
that manufacturers of pioneer drugs are listing additional patents shortly before the
expiration of previously listed patents, thereby starting procedures through which
branded manufacturers can sue ANDA applicants who have filed a paragraph IV
certification and can thus invoke the automatic 30-month stay for generic approval
under the Hatch-Waxman Act.44
The study also will provide information about innovator companies use of Citizen
Petitions in connection with generic versions of their brand-name drug products. In
March 2000, FTC staff provided some preliminary input to FDA in connection with
its proposed rule concerning Citizen Petitions. The proposed rules are aimed at im-
proving the efficiency of FDAs Citizen Petition process and narrowing the types of
actions that can be requested of FDA through the Citizen Petition process.45 Con-
cerns have been raised about the potential for abuse, for example, by companies fil-
ing petitions to keep a rival drug product or medical device off the market for as
long as possible. The FTC is concerned about the potential for abusing the regu-
latory process, but recognizes that some of this activity may implicate First Amend-
ment rights that may present a barrier to antitrust enforcement.46 Thus, the staff

41 The Commission obtained OMB clearance because the number of Special Orders being sent
triggered the requirements of the Paperwork Reduction Act of 1995, 44 U.S. C. Ch. 35, as
amended.
42 See 65 Fed. Reg. 61334 (Oct. 17, 2000); 66 Fed. Reg. 12512 (Feb. 27, 2001).
43 Commission staff commented to the FDA on the 180-exclusivity issue in connection with a
proposed rulemaking. See Comment of the Federal Trade Commission Staff, In the Matter of
180 Day Generic Drug Exclusivity for Abbreviated New Drug Applications, Docket No. 85N
0214 (Nov. 4, 1999), <http://www.ftc.gov/be/v990016.htm>.
44 See, e.g., Mylan v. Bristol-Myers Squibb, Civ. Action OOCV2876 (D.D.C. Mar. 13, 2001)
(case alleging last-minute Orange Book listing by Bristol-Myers Squibb (BMS) of another pat-
ent in connection with BuSpar, a leading anti-anxiety drug produced by BMS, just as BMSs
patent exclusivity for BuSpar was about to expire; the propriety of that listing and the issue
of whether the potential generic competitor can challenge the listing are currently the subject
of this litigation).
45 In the Matter of Citizen Petitions; Actions That Can be Requested by Petition; Denials,
Withdrawals, and Referrals for Other Administrative Action, Docket No. 99N2497, 64 Fed. Reg.
66822 (Nov. 30, 1999).
46 Eastern Railroad Presidents Conference v. Noerr Motor Freight, Inc., 365 U. S. 127 (1961);
United Mine Workers v. Pennington, 381 U. S. 657 (1965). The Noerr-Pennington doctrine
shields private parties from antitrust liability when they engage in certain concerted and gen-
uine efforts to influence governmental action, even though the conduct is undertaken with an
anticompetitive intent and purpose. For a further discussion of the Noerr-Pennington doctrine,
see James D. Hurwitz, Abuse of Governmental Processes, the First Amendment, and the
Boundaries of Noerr, 74 Geo. L.J. 601 (1985). There are some exceptions to the application of
the Noerr-Pennington doctrine. The Supreme Court has made clear that where one uses the
governmental processas opposed to the outcome of that process as an anticompetitive weapon,
the protection of the Noerr doctrine may not apply. Indeed if litigation or regulatory interven-
tion is objectively baseless in the sense that no reasonable litigant could realistically expect
Continued

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 24
supported the FDAs attempt to maintain the Citizen Petition process for legitimate
purposes, while limiting the ability of firms to use the process solely to hinder com-
petitors.47
Finally, the study will examine whether the size of a drug products sales influ-
ences the use of strategies to delay generic competition. The Commission expects to
complete the study by the end of 2001.

IV. CONCLUSION
The Commission appreciates the opportunity to share with the Committee its ob-
servations about the pharmaceutical industry. The Commission looks forward to
working with the Committee to address problems that may arise in this important
sector of the U.S. economy. Thank you.
Chairman HATCH. Mr. Griffin, we will go to you.
STATEMENT OF JAMES M. GRIFFIN, DEPUTY ASSISTANT AT-
TORNEY GENERAL, ANTITRUST DIVISION, DEPARTMENT OF
JUSTICE, WASHINGTON, D.C.
Mr. GRIFFIN. Thank you, Mr. Chairman. It is a pleasure to be
here and I appreciate the opportunity to speak to you and the Com-
mittee today.
As a starting point, I thought it would be helpful if perhaps I
simply describe in general terms the division of labor between the
Antitrust Division and the Federal Trade Commission in the en-
forcement of the antitrust laws.
The Department of Justice and FTC, of course, share Federal re-
sponsibility for antitrust enforcement, but that shared enforcement
is limited to civil enforcement, including merger cases. Section 1 of
the Sherman Act prohibits contracts, combinations, and conspir-
acies in restraint of trade. Criminal prosecution under that section
is vested exclusively in the Department of Justice and those crimi-
nal prosecutions under that section are generally confined to that
class of agreements that have been found to be unambiguously
harmful to consumers and are considered per se unlawful. Exam-
ples of those kinds of agreements are agreements among competi-
tors to fix prices, rig bids, allocate markets, and such agreements
are generally secret. Businesses and consumers are defrauded and
misled because the conspirators continue to hold themselves out as
competitors.
The Division places a very high priority on criminal enforcement
of the antitrust laws, and in recent years, we have aggressively
pursued price fixing, bid rigging, market allocation, and customer
allocation conspiracies in both international and in domestic mar-
kets.
Let me just summarize briefly some of the things that we have
done on the international side. The division has prosecuted inter-
national cartels operating in a broad spectrum of commerce, includ-
ing products found in household goods, such as vitamins and food

success on the merits, a partys behavior may not be immune from antitrust challenge. As an
example, the Supreme Court identified as unprotected conduct the filing of frivolous objections
to the license application of a competitor, with no real expectation of achieving denial of the
license, in order to impose expense and delay. See Professional Real Estate Investors, Inc. v.
Columbia Pictures Indus. Inc., 508 U.S. 49, 61 (1993); Columbia v. Omni Outdoor Advertising,
Inc., 499 U. S. 365, 380 (1991) (quoting California Motor Transport Co. v. Trucking Unlimited,
404 U.S. 508 (1972)).
47 See Comment of the Federal Trade Commission Staff, In the Matter of Citizen Petitions;
Actions That Can be Requested by Petition; Denials, Withdrawals, and Referrals for Other Ad-
ministrative Action, Docket No. 99N2497 (Mar. 2, 2000), <http://www.ftc.gov/be/vOO0005.pdf>.

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 25

preservatives; also in products used in manufacturing, such as

graphite electrodes, which are used in the manufacture of steel;
products used in the agricultural sector, such as animal and live-
stock feed additives; as well as a variety of services ranging from
auctioning fine art to marine transportation and construction. We
estimate that these international cartels, those that we have pros-
ecuted over the last few years, have affected over $10 billion in
U.S. commerce, and perhaps more disturbingly, this cartel activity
in these cases has cheated U.S. businesses and consumers of many
hundreds of millions of dollars annually.
On the domestic side of our docket, the Division recently has
prosecuted bid rigging cases, cartels affecting hundreds of millions
of dollars in contracts to supply food to such institutions as schools,
hospitals, and other public institutions, rigging of contracts to pro-
vide relief construction projects in disaster areas, real estate fore-
closure auctions, and contracts for the construction of water treat-
ment plants, as well as price fixing conspiracies involving metal,
building insulation, and numerous anti-competitive schemes in the
graphics display markets.
Now, not all Section 1 violations, of course, rise to the level of
criminal conduct, but may be subject to civil antitrust enforcement.
Because we share Federal antitrust enforcement responsibility with
the FTC, we have developed a clearance protocol with the Commis-
sion to determine which agency will investigate a particular matter
or a particular civil matter. That determination is based primarily
on which agency has the greater expertise in the area, in the prod-
uct market as a result of recent antitrust investigations.
The clearance protocol enables the two agencies to most effec-
tively use our resources as well as to avoid duplicative investiga-
tory requests on private parties. Under this clearance protocol, the
FTC has handled the recent civil investigations involving patent
disputes and the delay of generic competition in the pharma-
ceutical industry, and as Ms. Boast just mentioned, the FTC is cur-
rently undertaking a broad investigation into this activity and we
are all looking forward to the results of that study.
However, because the Division has sole responsibility for crimi-
nal antitrust enforcement, if the FTC were to uncover evidence of
potential criminal violations relating to the pharmaceutical indus-
try, under our clearance procedure, the FTC would refer that mat-
ter to us for prosecution. Likewise, if at the very outset of an inves-
tigation it appeared that the violation likely would turn out to be
criminal, the Division would investigate the matter regardless of
which agency had the greater expertise.
In fact, in this very market, the pharmaceutical market, the Di-
vision recently prosecuted the largest criminal antitrust conspiracy
ever uncovered, the international vitamin cartel. To date, we have
prosecuted 11 companies, 13 individuals for cartel activity in ten
separate vitamin markets. The companies prosecuted were
headquartered in Switzerland, Germany, Canada, Japan, and the
United States, and to date, we have obtained almost $1 billion in
fines in this investigation, including the largest fine ever imposed
in a Federal criminal prosecution in the United States, the $500
million fine against the Swiss company Hoffman-LaRoche. In addi-
tion, we have obtained the first jail sentences ever imposed against

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 26

European business executives for violating U.S. antitrust laws, and

that investigation, Mr. Chairman, is continuing.
I hope this information will be helpful to the Committee and I
look forward to answering any questions you may have.
Chairman HATCH. Thank you so much, Mr. Griffin.
[The prepared statement of Mr. Griffin follows:]
STATEMENT OF JAMES M. GRIFFIN, DEPUTY ASSISTANT ATTORNEY GENERAL,
ANTITRUST DIVISION, DEPARTMENT OF JUSTICE
Good afternoon, Mr. Chairman and members of the Committee. I appreciate being
invited here to testify.
The issues raised by todays hearing on the antitrust implications of patent settle-
ments in the pharmaceutical marketplace are currently the subject of investigations
being conducted by the Federal Trade Commission (FTC). As a starting point I
thought it would be helpful to the Committee if I were to describe in general the
division of labor between the Antitrust Division and the FTC in the enforcement of
the antitrust laws.
The Department of Justice and the FTC share federal responsibility for antitrust
enforcement, but that shared responsibility is limited to civil antitrust enforcement,
including merger enforcement. The Department of Justice has exclusive responsi-
bility for criminal antitrust enforcement.
Because criminal investigations are highly sensitive, I cannot comment on any
specific investigation. However, I can describe generally what distinguishes conduct
subject to criminal prosecution from conduct subject to a civil enforcement action.
Section 1 of the Sherman Act prohibits contracts, combinations, and conspiracies
in restraint of trade. Criminal prosecution is generally confined to a class of agree-
ments that have been found to be unambiguously harmful and are considered per
se unlawful. Examples of such conduct include naked agreements among competi-
tors to fix prices, rig bids, or allocate customers, territories, or sales. Such agree-
ments are generally secret, and businesses and consumers are defrauded and misled
because the conspirators continue to hold themselves out as competitors.
I should note, however, that there are some situations in which criminal inves-
tigation or prosecution may not be considered appropriate, even though the conduct
may appear to be a per se violation of law. Such situations may include cases in
which (1) there is confusion in the law; (2) there are truly novel issues of law or
fact presented; (3) confusion reasonably may have been caused by past prosecutorial
decisions; or (4) there is clear evidence that the subjects of the investigation were
not aware of, or did not appreciate, the consequences of their action. In these in-
stances, as well as in other cases where the conduct does not rise to the level of
a criminal violation of Section 1, the conduct may be subject to civil antitrust en-
forcement.
Individuals criminally convicted of violating the Sherman Act are subject to fines
up to $350,000 and prison sentences up to three years, and corporations are subject
to fines up to $10 million. Under the alternative sentencing provision found in 18
U.S.C. 3571, a convicted defendant is subject to higher fines equaling twice the
gain resulting from the violation, or twice the loss caused to the victims, whichever
is higher.
The Antitrust Division places a high priority on criminal antitrust enforcement.
In recent years, the Division has aggressively pursued price-fixing, bid-rigging, and
market- and customer-allocation conspiracies in both international and domestic
markets.
On the international side, the Division has prosecuted international cartels oper-
ating in a broad spectrum of commerce, including: products found in household
goods, such as vitamins and food preservatives; products used in the manufacturing
sector, such as graphite electrodes used in steel making; products used in the agri-
cultural sector, such as animal and livestock feed additives; and a variety of serv-
ices, ranging from auctioning fine art to marine transportation and construction.
The Division estimates that the international cartels it has prosecuted over the last
few years affected well over $10 billion in U.S. commerce. More importantly, the
cartel activity in these cases cheated U.S. businesses and consumers of many hun-
dreds of millions of dollars annually.
On the domestic side, the Division recently has prosecuted bid-rigging cartels af-
fecting hundreds of millions of dollars in contracts to supply food to schools, hos-
pitals, and other public institutions; typhoon relief projects; real estate foreclosure
auctions; and contracts for the construction of water treatment plants, as well as

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 27
price-fixing conspiracies involving metal building insulation and numerous anti-
competitive schemes in the graphics display industry.
Because we share federal antitrust enforcement responsibility for civil violations
with the FTC, we have a clearance protocol with the FTC to determine which agen-
cy will investigate a particular civil matter. That determination is based primarily
on which agency has the greater expertise in the product market as a result of re-
cent antitrust investigations conducted by that agency. The clearance protocol en-
ables the two agencies to make the most effective use of enforcement resources, as
well as to avoid duplicative investigatory requests on private parties. Under this
clearance protocol, the FTC has handled recent civil investigations involving patent
disputes and the delay of generic competition in the pharmaceutical industry.
However, because the Division has sole responsibility for criminal antitrust en-
forcement, if the FTC were to uncover evidence of a potential criminal violation re-
lating to the pharmaceutical industry, under our clearance protocol the FTC would
be required to refer that evidence to us for criminal investigation. Likewise, if at
the outset of an investigation, the evidence suggested a potential criminal violation,
the Division would investigate the matter, regardless of which agency had greater
expertise in the product market.
In fact, in the pharmaceutical market, the Division recently prosecuted the largest
criminal antitrust conspiracy ever uncoveredthe international vitamin cartel. To
date, we have prosecuted eleven companies, headquartered in the United States,
Switzerland, Germany, Canada, and Japan, and thirteen individuals for cartel activ-
ity in ten vitamin markets. We have obtained nearly $1 billion in fines, including
the $500 million fine imposed against F. HoffmannLa Roche, the largest fine ever
imposed in a U.S. criminal prosecution of any kind. In addition, we obtained the
first jail sentences ever imposed against European business executives for violating
U.S. antitrust laws. The investigation is continuing.
Mr. Chairman, I hope this information is helpful to the Committee. I would be
happy to answer questions if I can.
Chairman HATCH. General Shurtleff, let us hear from you now.

STATEMENT OF MARK SHURTLEFF, ATTORNEY GENERAL,

STATE OF UTAH, SALT LAKE CITY, UTAH
Mr. SHURTLEFF. Thank you very much, Mr. Chairman. It is truly
an honor and a privilege to be here to testify today regarding com-
petition in the pharmaceutical marketplace, and more specifically
on the antitrust implications of settlements in patent litigation be-
tween brand name and generic drug manufacturers.
As you know, on May 14, 15 State Attorneys General filed a Fed-
eral antitrust lawsuit alleging that drug companies conspired to
keep cheaper generic alternative to the high blood pressure drug
Cardizem CD off the market. That case was filed in Federal district
court in Michigan. Now, as the chief legal officers of our States, at-
torneys general have a sworn mandate to enforce the laws passed
both by Congress and those of our respective State legislatures.
The decision to pursue legal action against alleged unlawful con-
duct is made more difficult when different laws intended to protect
and benefit the public apparently conflict.
There are those who believe that litigation is the desirable meth-
od of resolving those conflicts, and, in effect, using the courts to
legislate. I do not share that belief. To the contrary, it is the most
expensive and the least effective method of resolving apparent con-
flicts in the law and closing loopholes. But until the law is changed
by the legislative branch and we, as representatives of the execu-
tive branch, have substantial evidence that existing laws have been
violated to the injury of our States and our citizens, we must move
to hold the offenders accountable.
Today, I am wearing a pin that the Attorney General of Dela-
ware gave me. It represents the scales of justice. You know that

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 28

signifies balance and equity and fairness in both creating and ad-
ministering the laws of the land. Today, I am here to address, and
I apologize that some of it is repetitive, the balance between the
two canons of law, which are intended in different ways to benefit
and protect consumers, and I speak of patent laws on the one side
of the scale and antitrust laws on the other side.
The purpose, of course, of the former, the patent law, is to benefit
the consumer by encouraging innovators and risk takers to invest,
to invent, develop, and create products that better our lives by
granting these industrial, commercial, and medical pioneers tem-
porary monopolies. The latter, the antitrust law, was passed on the
other side to protect the consumer from those who unfairly act in
restraint of trade or to monopolize the marketplace to their finan-
cial benefit at the expense of the consuming public.
I read the 1984 Hatch-Waxman amendments to the Federal Food
and Drug and Cosmetic Act as an example of this balancing task
between these two very important laws. On the one side of the
scale, on the patent, Hatch-Waxman encourages innovation by con-
firming or extending that patent right, exclusive right to market
protection to those pioneering name brand and generic drug compa-
nies. Millions of Americans have been blessed in the last 17 years
by the tremendous advances in pharmaceuticals available to us.
Lives have been saved. Lives have been enriched. So these
innovators and pioneers, which also have been enriched substan-
tially. The past decade has seen a huge increase, also, as you are
very aware, in the cost of prescription drugs, which has a major im-
pact primarily on our senior citizens, who most often need and are
most benefited by those advances, but who again most often are on
fixed incomes and can least afford these important medicines.
On the antitrust or consumer protection side of the scales of jus-
tice, Hatch-Waxman was intended to and has succeeded in getting
more low-cost generic or bioequivalent drugs to consumers faster.
Pioneer innovators have been protected and encouraged to develop
and market better medicines by the 30-day prohibition on generics
going to market after a patent infringement suit is filed. Cost sav-
ing generic innovators are protected and encouraged to get cheaper
bioequivalence to the public by the 180-day exclusive marketing
grant should a court rule against the brand name company in the
patent infringement action.
So, in theory and for the most part in practice, Hatch-Waxman
has balanced that scale. Consumers and producers are in harmony,
and again, millions are the better for it.
However, as sometimes occurs with the best laid plans, some-
thing happens to upset that balance and tip the scales. Throughout
history, unscrupulous businessmen or shopkeepers have at times
been found to have put a thumb on one side of the scale or to oth-
erwise manipulate the weights and measures with the intent to
cheat their customers and make a few extra bucks. When accused,
those shopkeepers often wouldtheir first defense was to say, well,
I did not have my thumb on there. The problem is in the scale. The
scale must be malfunctioning. This is not a problem of their mak-
ing, so they say, why should we be punished for taking advantage
of that problem, that loophole, perhaps, without notifying the
buyer? We are not talking about a few bucks here. We are talking

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 29

about millions and millions of dollars today in this pharmaceutical

industry.
Hatch-Waxman is silent on the question of what happens in a
patent infringement action if it is resolved by settlement as op-
posed to going to the judge. Some have called this a loophole in the
law. They have rushed to take advantage of it, thereby tipping the
scale against the consuming public.
FTC Chairman Robert Pitofsky has reportedly called this bur-
geoning sue, then settle practice private treaties that rob con-
sumers. The president of one drug company admitted in a press
release that, There are clear abuses that are occurring in the in-
dustry that are actually delaying generic products from reaching
consumers. He also said that settlement agreements do not per se
so delay and may, in fact, get lower price product to them faster.
However, if brand name and generic companies are, again in the
words of Chairman Pitofsky, gaming the rules to their financial
benefit by delaying the availability of cheaper alternatives to the
consuming public, then it is my responsibility to protect the public,
right the scales, and hold the cheaters liable.
As stated before, some would argue that sue, then settle ar-
rangements are unlawful per se. I do not believe so. I think the
jury is out on that.
At this point in time, with the evidence currently available on a
number of these deals, it appears as if some companies have acted
unreasonably in the restraint of trade under a rule of reason ap-
proach. Unless and until Congress acts to close the loophole, State
attorneys general will be required to continue to scrutinize and
bring enforcement actions.
As I stated at the beginning, I would prefer that you, the Con-
gress, act to balance the scale. I appreciate you have asked me here
today as an executor of the law. I disagree with some of those who
would suggest that the answer is tipping the scale over altogether
and doing away with the protections that have been in place for so
many years. I think a more reasoned approach is that the Depart-
ment of Justice or if the FTC have noticed an approval of settle-
ment agreements, and again, I thank you for the opportunity to ad-
dress you, Senator Hatch, and your committee. I look forward to
answering any questions you might have.
Chairman HATCH. Thank you, General. We appreciate it.
[The prepared statement of Mr. Shurtleff follows:]
STATEMENT OF MARK L. SHURTLEFF, UTAH ATTORNEY GENERAL
Mr. Chairman, Members of the Committee:
It is an honor and a privilege to testify to you today regarding competition in the
pharmaceutical marketplace; and more specifically on the antitrust implications of
settlements in patent litigation between brand name and generic drug manufactur-
ers. As you know, on May 14th, fifteen state attorneys general filed a federal anti-
trust lawsuit alleging that drug companies conspired to keep a cheaper generic al-
ternative to the blood-pressure drug Cardizem CD off the market.
As the chief legal officers of our states, attorneys general have a sworn mandate
to enforce the laws passed by Congress and those of our respective state legisla-
tures. The decision to pursue legal action against alleged unlawful conduct is made
more difficult when different laws, intended to protect and benefit the public, appar-
ently conflict. There are those who believe that litigation is the desirable method
of resolving those conflicts and, in effect, using the courts to legislate. I do not share
that belief. To the contrary, it is the most expensive and least effective method of
resolving apparent conflicts in the law and closing loopholes. But until the law is

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 30
changed by the legislative branch, and we, as representatives of the executive
branch have substantial evidence that existing laws have been violated to the injury
of our states, and individual citizens thereof, we must move to hold the offenders
accountable. Today I am wearing a lapel pin representing the scales of justice,
which as you know signifies balance, equity and fairness in both creating and ad-
ministering the laws of the land. I am here today to address the balance between
two cannons of law which are intended in different ways to benefit and protect con-
sumers. I speak of Patent Law and Antitrust Law. The purpose of the former is to
benefit the consumer by encouraging innovators and risk-takers to invent, develop
and create products that better our lives, by granting these industrial, commercial
and medical pioneers temporary monopolies. The latter was passed to protect the
consumer from those who unfairly act in restraint of trade or to monopolize the
marketplace to their financial benefit at the expense of the consuming public.
I read the 1984 Hatch-Waxman amendments to the Federal Food, Drug and Cos-
metic Act as a classic example of the aforementioned balancing task. On one side
of the scales, Hatch-Waxman encourages innovation by confirming or extending the
patent laws exclusive right to market protection to pioneering name brand and
generic drug companies. Millions of Americans have been blessed in the last 17
years by the tremendous advances in pharmaceuticals available to us. Lives have
been saved. Lives have been enriched. The innovators and pioneers have also been
enriched. The past decade has seen a huge increase in the cost of prescription drugs
which has had a major impact primarily on our senior citizens who most often need
and are benefitted by the advances, but who again most often are on fixed incomes
and can least afford these medicines.
On the antitrust or consumer protection side of the scales of justice, Hatch-Wax-
man was intended to, and has succeeded in, getting more low-cost generic or
bioequivelent drugs to consumers faster. Pioneer innovators have been protected
and encouraged to develop and market better medicines by the thirty month FDA
prohibition on generics going to market after a patent infringement suit is filed.
Cost-saving generic innovators are protected and encouraged to get cheaper
bioequivelents to the public by the 180 day exclusive marketing grant should a court
rule against the brand name company in the patent infringement action.
In theory, and in most part in practice, Hatch-Waxman balanced the scale. Con-
sumer and producer are in harmony and, again, millions are better for it. However,
as sometimes occurs with the best laid plans, something happens to upset the bal-
ance and tip the scales.
Unscrupulous businessmen or shopkeepers have, throughout time, been found to
have rested a thumb on one side of the scale, or otherwise to have manipulated the
weights and measures with the intent to cheat their customers and make a few
extra bucks. When accused, often their first defense was to claim there must be a
malfunction in the scale itself. A problem not of their making, so why should they
be punished for taking advantage of it without notifying the buyer?
Hatch-Waxman is silent on the question of what happens when a patent infringe-
ment action is resolved by settlement rather than judicial ruling. Some have called
this a loophole in the law and have rushed to take advantage of it, thereby tipping
the scale against the consuming public. FTC Chairman Robert Pitofsky has called
this burgeoning sue-then-settle practice: private treaties that rob consumers. The
president of one drug company admitted that there are clear abuses that are
occuring in the industry that are actually delaying generic products from reaching
consumers. He also said that settlement agreements do not per se so delay, and
may in fact get lower priced product to them faster. However, if brand name and
generic companies are, again in the words of Chairman Pitofsky, gaming the rules,
to their financial benefit by delaying the availability of cheaper alternatives to the
consuming public, then it is my responsibility to protect the public, right the scales
and hold the cheaters liable.
As stated, some would argue that sue-then-settle arrangements are unlawful per
se. I believe the jury is, literally, still out on that argument. At this point in time,
with evidence currently available on a number of these deals, it appears as if some
companies have acted unreasonably in restraint of trade under a Rule of Reason ap-
proach. Unless and until Congress acts to resolve or close this loophole, state at-
torneys general will be required to continue to scrutinize and bring enforcement ac-
tions. As I stated at the beginning of my remarks, I would prefer that you act to
balance the scale. I appreciate that you have asked me here today as part of an
analysis of that possibility. As an executor of the law, I disagree with those who
would suggest the answer lies in tipping the scale over completely. That will benefit
no one. I think a much more reasoned approach of requiring notice and/or DOJ or
FTC approval of settlement agreements, along the lines proposed in S. 754, is wor-
thy of close consideration.

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 31
Thank you again for the opportunity to address you on this issue of extreme im-
portance to the states and our good citizens. I would be happy to respond to any
questions.
Chairman HATCH. Let me just go right to the belly of the beast
of the 1984 law. Section 505(j)(2)(v), paragraph four, on this chart.
As weve heard, applications for equivalent products who certify
that a pioneer patent is invalid or infringed may, if successful, trig-
ger a 180-day period of marketing exclusivity. Now, my first ques-
tion is fact oriented and will, for a moment, leave aside the impor-
tant question of which generic applicant, the first filer or the first
to successfully defend the pioneers lawsuit, should obtain such a
potentially valuable exclusivity. The question is this, and any of
you can answer if it you would like. Do any of your agencies have
the precise fix on the number of times Paragraph IV certifications
have been made, how many times the pioneer firms have elected
to bring or not to bring suit, and the ultimate disposition of such
suits and applications? I am particularly interested in the break-
down between the number of times patents have been held valid
or invalid versus the number of times the contest has centered on
non-infringement. If you do not have this information today, I
would like to know in particular if the FTC would yield such data,
and if it cannot, if it will not, can you help us get these facts so
that we know where we are going and what we are talking about?
Mr. BUEHLER. I do not have that information right now, Mr.
Chairman. I believe we have provided some similar information to
FTC, though.
Ms. BOAST. Mr. Chairman, this is precisely the kind of informa-
tion that the Commissions study pursuant to Section 6(b) of the
FTC Act is designed to procure. You are exactly on point with the
kinds of information that would be relevant to figuring out how se-
vere a problem we have here and what are the points at which the
severity is most obvious and, therefore, where we should direct our
energy. We do not have that information in a systematic form
today, to my knowledge, and as I said, subject to legal constraints
that might exist on the confidentiality of the collection process, I
do not see any reason why a consultation with members who are
interested in this area would not be appropriate, but there may be
legal constraints.
Chairman HATCH. My second question is more policy oriented.
Let us deconstruct Paragraph IV. If we look at the language of
Paragraph IV, we see two very different concepts lumped together,
patent invalidity and non-infringement. The former suggests a
frontal assault on the patent while the latter suggests a careful
navigation around protected intellectual property. The 1984 law
wishes to encourage generic drug manufacturers to challenge weak
patent claims and to invent around valid patents so that consumers
can reap the benefits of generic competition as quickly as possible.
But should these very different routes be treated to the identical
180-day marketing exclusivity benefit?
That is a question I have. I am very concerned about that. Pre-
sumably, there may be cases where a non-infringer has some sort
of trade secret or even patent technology not available to subse-
quent applicants so that the exclusivity can operationally extend
beyond the 180 days. Conversely, if a second or third ANDA appli-

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cant comes up with a different non-infringing technology from the

first applicant, why should these applicants and consumers be de-
nied the benefits of more competition in the marketplace for the
balance of the 180 days?
Let me just say further, this invalidity, non-infringement distinc-
tion seems to be a proper topic for debate. One of the most brilliant
lawyers I have ever come across is Al Engelberg, who played a key
role in the compromises of 1984 and who has made out very well
challenging patents. Here is what Al said on this issue, and I
quote, In cases involving an assertion of non-infringement, an ad-
judication in favor of one challenger is of no immediate benefit to
any other challenger and does not lead to multi-source competition.
Each case involving non-infringement is decided on the specific
facts related to that challengers product and provides no direct
benefit to any other challenger. In contrast, a judgment of patent
invalidity or enforceability creates an estoppel against any subse-
quent attempt to force the patent against any party. The drafters
of the 180-day exclusivity provision failed to consider this impor-
tant distinction, very critical of me but very accurate.
So here is your
Senator LEAHY. How dare he be critical.
Chairman HATCH. I have wondered that myself, so here is your
chance to take a shot at one of the drafters of the law, I think. I
want to ask the witnesses from DOJ and FTC or from the FDA,
if you want to join in, to comment upon the effects of equating in-
validity and non-infringement in Paragraph IV. Now, this is a
tough question. I realize you are in no position to render a final
administration view today, but I ask you to help me reanalyze the
impact of this law. So please help us think through the question
of whether consumers might be better off and the marketplace
more competitive if non-infringement was treated differently than
claims of invalidity.
I turn it over to you. That was a long question, but it is pretty
hard to put out there without giving you that much information.
Do you want to start, Mr. Buehler?
Mr. BUEHLER. Mr. Chairman, you are correct. There is presently
no distinction between the two, and obviously that is the way we
regulate the statute, is there is no distinction between the two.
Whether there should be or that should be changed, I am afraid
that the Administration does not have a position on that particular
issue at the present time, as you stated.
Chairman HATCH. OK.
Ms. BOAST. Mr. Chairman, it was not only a long question but
a very good question and a very difficult question. I certainly can-
not speak for the Commission on this. I will say that I think the
Commission in its enforcement actions has not focused on that dis-
tinction. Rather, the concern has been that once an agreement has
been reached to delay entry by the first filer, that exclusivity provi-
sion time is not running and, therefore, no one else can enter. And,
indeed, it is one of the reasons that I focused in my structural de-
scription of what links these three cases on the provisions of the
settlement agreements that preclude entry with non-infringing
products. That is fairly offensive, I think.

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I think you raise a very, very legitimate issue and it is something

that, again, without the Commission having a position or having
studied it directly, we clearly ought to be considering as we move
forward in this area.
Chairman HATCH. Will you make that recommendation and get
that done for us?
Ms. BOAST. I certainly will.
Chairman HATCH. I think it is pretty important.
Ms. BOAST. I certainly will, Mr. Chairman.
Chairman HATCH. Let me just ask a final question. At last De-
cembers Food and Drug Law Institute conference on Hatch-Wax-
man, Liz Dickinson, and I am told by my staff that she is one of
the most able, dedicated, and respected members of the FDA Gen-
eral Counsels Office, raised a fundamental question to us. Let me
emphasize that Liz was participating in the FDLI Educational Con-
ference and made clear she was not speaking in a way that would
bind the agency or the Administration.
As a good attorney and expert policy analyst, she should be ap-
plauded for raising some tough questions that bear further consid-
eration by all of us in this matter. In fact, I encourage everyone
interested in Hatch-Waxman reform to get a copy of and study
Lizs remarks, along with the complete record of the December con-
ference. I think it is important.
As Liz said in December, I suggest we look at whether 180-day
exclusivity is even necessary, and I know that there is this idea
that it is an incentive to take the risk. I say the facts speak other-
wise. If you have a second, third, fourth, fifth generic in line for
the same blockbuster drug filing at Paragraph IV certification, un-
dertaking the risk of litigation without the hope of exclusivity, is
that exclusivity even necessary?
Then she goes on. She said, We have got a provision that is sup-
posed to encourage competition by delaying competition. It has got
a built-in contradiction, and that contradiction, I think, is bringing
down part of this statute.
So my question for the panel is the one raised by Liz, among oth-
ers. Is it necessary or advisable to retain the 180-day exclusivity
period given the enormous financial incentives to challenge patents
on blockbuster drugs?
Ms. BOAST. Mr. Chairman, again, speaking only for myself, I be-
lieve that the balance that was struck by Congress in the original
Hatch-Waxman Act contemplated encouraging generic entry by giv-
ing them this 100-day [sic] exclusivity provision. What the Commis-
sion staff has said is in support of an FDA proposal to create a sort
of use or lose regime, in which if the first filer did not take advan-
tage of exclusivity within a certain amount of time, other firms
would be able to enter, and that is one way of addressing the con-
cern about exclusivity being misused by this, to say you have got
to take advantage of it or you cannot have it.
Chairman HATCH. OK. Anybody else?
Mr. BUEHLER. Mr. Chairman, as Liz stated at the meeting, we
often have the second, third, fourth, fifth challengers to the same
patent, oftentimes when the challengers actually realize that they
are not first and there is no hope for them to get the 180-day exclu-
sivity. So with that in mind, I would agree with Lizs statement

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 34

that generic firms will continue to challenge patents. Whether the

180-day exclusivity is a necessary reward for that challenge is un-
known, but it does not appear that it is.
Chairman HATCH. I would like answers to this. Right now, I per-
sonally favor the 180-day provision, but I would like to have the
best expertise I can possibly get on this and you both have been
very helpful here. In fact, all four of you have, but I seem to have
had the two of you on the hot spot for most of these questions
today. Mr. Griffin, I am not trying to ignore you.
Let me just ask one more question and then I will turn to our
Democratic leader on the committee. Please explain what, in your
view, are the pros and cons of Congress adopting any of the fol-
lowing 180-day exclusivity regimes. First, a legislative override of
Mova and a statutory reversion back to the old rule of first to file,
first to be sued and win. Second, the type of ruling exclusivity em-
braced in the Schumer-McCain legislation. And third, the 180-day
triggering period provision contained in the 1999 FDA proposed
rule whereby if the first filer did not or could not start the use of
the exclusivity within 180 days, all other filers could march in.
Mr. BUEHLER. Mr. Chairman, all of these are somewhat related
to pending legislation, and at this point
Chairman HATCH. I do not want any weasel excuses here. I do
not want you weaseling out
[Laughter.]
Mr. BUEHLER. OK. Let me just try to address the first part, the
Mova part. Prior to Mova, prior to the Mova decision, from 1984
through 1997, three generic firms were granted 180-day exclu-
sivity. Post-Mova, 31 generic firms were granted 180-day exclu-
sivity. Post-Mova, we have been barraged by lawsuits and various
litigation.
Chairman HATCH. You mean legislation that I write leads to law-
suits and litigation?
[Laughter.]
Chairman HATCH. Go ahead. I am sorry. The second one was the
type of rolling exclusivity embraced in the Schumer-McCain legisla-
tion.
Mr. BUEHLER. Well, again, pending legislation, the Administra-
tion does not have a position on that particular pending legislation.
Chairman HATCH. How about you? What is your opinion?
Mr. BUEHLER. I am the agency today.
Chairman HATCH. Well, you can speak for yourself here. We will
not hold the agency responsible.
Senator LEAHY. They will never notice what you say.
[Laughter.]
Mr. BUEHLER. I am also Acting Director, Mr. Chairman.
Chairman HATCH. I have to say, a lot of them will not under-
stand what you say, either.
[Laughter.]
Chairman HATCH. Go ahead. Just give us to the best of your abil-
ity. If it is too uncomfortable, that is OK with me.
Mr. BUEHLER. Our preamble to our proposed rule for the 180-day
revision notes the number of lawsuits that we have had to defend
and had to become involved in post-Mova in trying to sort out the,

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 35

I guess, legislative difficulties right now with the Hatch-Waxman

amendments.
Chairman HATCH. So your concern is that the Schumer-McCain
legislation might even lead to more litigation?
Mr. BUEHLER. I did not say that.
[Laughter.]
Chairman HATCH. Might may be too small a word, is that
right?
Mr. BUEHLER. Can I go to rolling exclusivity?
Chairman HATCH. Yes, go ahead.
Mr. BUEHLER. Our present system does not provide for rolling ex-
clusivity. We believe that rolling exclusivity would actually be an
impediment to generic competition in that the exclusivity would
continue to bounce from the first to the second to the third if, some-
how or other, the first was disqualified. Right now, when the first
is disqualified, there is no exclusivity. Everyone can come on the
market and let the competition begin.
Chairman HATCH. OK. Does anybody else care to comment?
Ms. BOAST. Mr. Chairman, I would simply reiterate what I had
said before, and that is that at the staff level, at least, we have
supported the use or lose approach to this. I would observe that,
again, the Commissions study is the vehicle it proposes to use to
try to help sort out some of these issues and to provide better ad-
vice to Congress on this. My other observation is that there seems
to be in these three different approaches clear recognition that
something needs to be done with exclusivity.
Chairman HATCH. I have other questions I will submit in writ-
ing. I have one in particular for you, General Shurtleff, but I will
submit it in writing. We would like the best analysis that you can
give us.
This has been very, very interesting to me, as you can imagine,
and you have been particularly interesting witnesses. I want to
commend you and compliment, all four of you, for what you have
been able to say. This is a very important subject and it is very
important that we refine this bill to make it even more effective
than it has been, and everybody admits it has been pretty effec-
tivealmost everybody, I should say. I guess I had better not be
universal in any statement.
But to make a long story short, we would like all the help we
could get on it because I would like it to work better. I would like
more competition. I would like more innovation. I would like to see
the two sides balanced and we need your help in order to know
what is best to do in this particular area.
I am going to head back over to the floor, so I am going to turn
this hearing over to our soon-to-be Chairman who has a com-
plementary bill and who, of course, is very interested in this issue,
as well. If you could finish this hearing, I sure would appreciate
it, and if you will forgive me for running off. I have about four con-
flicts right now and I apologize to you. He says he is going to praise
me, so I had better stay for just a few minutes. This is such a rare
occasion.
[Laughter.]
Senator LEAHY. Now, now, now.

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 36

Chairman HATCH. No, he has been pretty good for a Vermonter,

is all I can say.
[Laughter.]
Chairman HATCH. I am just kidding. I am just kidding. Jim is
a great
Senator LEAHY. We Vermonters are the best thing that ever hap-
pened to the U.S. Senate.
Chairman HATCH. There might be some dispute there, but I am
willing to accept that.
Senator LEAHY. This could go on too far and get us both in trou-
ble. But Mr. Chairman, you and I have always worked well to-
gether on patent, copyright, broadcast, and the other high-tech-
nology issues, and I appreciate that. It is a mark of our legislative
friendship on these issues, but also, I think, reflects our personal
friendship, which goes back a quarter of a century.
It was not long ago, Mr. Chairman, when you and I and the
Committee hit a high-tech home run. We had passage of three
major bills of enormous importance to consumers. In one fell swoop,
we provided consumers with local-into-local satellite television, pro-
tected important patent rights and terms, and enhanced electronic
commerce and trademark protection.
Chairman HATCH. How does that equal a home run? There are
only three hits there? A couple of them were doubles?
Senator LEAHY. The bases were loaded.
Chairman HATCH. OK.
[Laughter.]
Senator LEAHY. On the first one. They were all three home runs.
Chairman HATCH. That is right. OK.
STATEMENT OF HON. PATRICK J. LEAHY, A U.S. SENATOR
FROM THE STATE OF VERMONT
Senator LEAHY. [Presiding.] In light of the testimony we are
going to hear today, I hope we can work together and quickly re-
port out a bill which I introduced last Congress and reintroduced
this year, S. 754, the Drug Competition Act. This bill, which has
Senators Kohl, Schumer, Durbin, and Feingold on it, would put a
stop to secret agreements made between drug companies which
hurt our senior citizens and American families, that cheat health
care providers and inflate Medicaid and Medicare reports.
I am pleased that Attorney General Shurtleff is here to talk
about this harm to families in his and other States. I appreciate
the legal action you took with 14 other States, including Vermont.
I know the high regard that Attorney General Sorrell has for you.
It is just another example that Vermont and Utah work closely to-
gether and so on.
But in General Shurtleffs prepared testimony, he says that, I
think a much more reasoned approach requiring notice along the
line proposed in S. 754 is worthy of close consideration. I want to
thank you, General, and I also want to thank the Federal Trade
Commission. They deserve a lot of credit for exposing this problem.
What I want to do, and the reason for my bill is to say there will
be no more secret deals to keep generic drugs off the market. If you
want to boil it down to the basics, no more secret deals keeping ge-
neric drugs off the market. Any agreements have to be immediately

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 37

provided to the law enforcers, in that case, the FTC and the Justice
Department. So if you are going to notify the deals immediately,
I think it is going to be a heck of a deterrent to making these kinds
of illegal deals in the first place, and any such deal would be sub-
ject to immediate investigation and action by the Federal Trade
Commission or the Justice Department. If you have something like
that, people are going to think twice before they do a secret deal,
an illegal deal, and it would solve the most difficult problem, that
is, just finding out about the improper deals in the first place.
It does not change the Hatch-Waxman Act. It does not amend
FDA law. It does not slow down the drug approval process. It al-
lows existing antitrust laws to be enforced because the enforcement
agencies have the information they need.
A New York Times editorial published last July, Driving Up
Drug Prices, mentioned that the FTC is taking aggressive action
to curb the practice. It needs help from Congress to close loopholes
in Federal law. Well, my bill provides that help. It would slam the
door shut on would-be violators. How? By exposing the deals to our
enforcement agencies. So I think Congress should make sure the
FTC and Justice look at every single deal that could lead to abuse,
and only the deals that are consistent with the intent of the law
will be allowed to stand. I will insert the rest of this for the record
before I have to go to one of the same things that Senator Hatch
had to.
Ms. Boast, let me ask you, first, I want to thank the FTC for the
outstanding job you do in helping protect both consumers and also
to promote competition, which helps us all. I think the legal actions
you have filed show a lot of very, very careful work. I can only
imagine the amount of effort that went into crafting them. As a
lawyer, I am in awe. But I am going to be very direct and ask you
a few questions about the Drug Competition Act, my bill.
The bill simply requires that agreements between branded drug
manufacturers and potential generic competitors be provided to the
FTC and the DOJ within 10 days after the agreements are signed.
You would then confidentiallythey would not be filed publicly,
but you would confidentially review these documents and you
would take any actions you deem necessary. So my first question
is this. If the Drug Competition Act were enacted, would the FTC
obtain additional documents, obtain them more quickly than under
the current system, and if that is so, would that help you enforce
the law?
Ms. BOAST. Senator LeahyI hope I have the title right as of the
moment
Senator LEAHY. We are all struggling with titles, so Senator
Leahy is great. Being a Senator from Vermont is something that
gives me pride.
Ms. BOAST. First of all, let me thank you for your compliments
for our work. These are, you are quite correct, very resource-inten-
sive cases. They involve very difficult legal issues and intellectual
property issues, and anything that could be done to help us be
more effective in enforcing the law in this area would be helpful.
I believe that a legal regime that gave us notice of agreement so
that we did not have to find out about them by accident could be
quite helpful in the enforcement mission, with due regard to the

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burdens on business that it might impose, which I am sure you

have taken account of in your drafting.
Senator LEAHY. Do you think it is safe to say that it would deter
branded name pharmaceutical companies from entering into writ-
ten agreement with potential generic competitors that might vio-
late our antitrust laws?
Ms. BOAST. Senator, I think it would be very likely to have that
kind of effect. It might deter the agreements outright, but it also
certainly would force the firms who were contemplating those
agreements to give them much more careful scrutiny for potentially
offensive provisions.
Senator LEAHY. You are doing a study, I understand, a very im-
portant study of the pharmaceutical practices relating to the
Hatch-Waxman Act. If my bill became law, would the FTC have ac-
cess to otherwise secret agreements between branded name compa-
nies and potential generic competitors? And if you had access to
that, would that help you carry out the study you are doing regard-
ing Hatch-Waxman?
Ms. BOAST. Senator, it certainly could enhance our work on the
study that the Commission has underway, but I would like to note
that the virtue of your approach is that it goes beyond the rel-
atively time-bound request that is present in the study that is un-
derway. Your proposal would create an ongoing obligation that
would far exceed the scope of the study.
Senator LEAHY. Am I right in assuming these agreements are not
routinely provided to the FTC now?
Ms. BOAST. You are quite right that they are not routinely pro-
vided.
Senator LEAHY. So how would you get access to these agree-
ments?
Ms. BOAST. Senator, it is not that easy. I mean, detecting illegal
conduct is part of what we are about. We sometimes hear about it
from people in the industry. We have had a very, very close and
cordial working relationship at the staff level with FDA, who I
think has been interested in, let us say, our efforts in this area.
But we have not had, short answer, a systematic tool such as you
propose.
Senator LEAHY. You do not get them 10 days after the agreement
is signed, I take it.
Ms. BOAST. That is exactly right, Senator.
Senator LEAHY. I am going to submit the other questions for the
record so I can go back to this other matter. I will leave the record
open until the close of business tomorrowfor a week, I have just
been told. You see, Senators are merely constitutional impediments
to the staff. The staff really knows what is going on around here.
[Laughter.]
Senator LEAHY. We will leave it open for a week if anybody
wants to submit questions, and I will include a statement from
Senator Brownback in the record at this point.
[The prepared statement of Senator Brownback follows:]
STATEMENT OF HON. SAM BROWNBACK, A U.S. SENATOR FROM THE STATE OF KANSAS
Recently, there has been a great deal of publicity concerning possible antitrust
violations in settlements of patent disputes between innovator and generic pharma-
ceutical companies. Its been alleged that these settlements have resulted in higher

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 39
prescription drug prices to consumers. Companies have defended these agreements
as procompetitive, arguing in part that they enable generic manufacturers to chal-
lenge patents of branded companies without incurring the risks of draconian liabil-
ities or loss of the incentive to promote the development of generic drugs for which
the Hatch-Waxman Act was intended. Be that as it may, there are efforts this year
here in Congress to re-open the Hatch-Waxman Act, which was passed in 1984, and
controls the entry of generic drugs into the market.
During the past 17 years, the Hatch-Waxman Act has been extraordinarily suc-
cessful in achieving its dual objectivesencouraging research by innovator compa-
nies, and facilitating the entry of lower cost generic drugs into the market. I want
to insure its continued success.
The Act has created a strong generic drug industry whose share of the prescrip-
tion drug market has risen from 19% in 1983 to nearly 50% today. Likewise,
spending on research by innovator companies is many times higher now than
it was prior to Hatch-Waxman, and important new therapies continue to be in-
troduced.
Much of the concern over alleged abuses relates to a provision of the law that pro-
vides 180 days of exclusivity to certain generic applicants who challenge inno-
vator patents. That provision was added to the Act in 1984 to provide a reward
for generic manufacturers who challenge a patent on the innovator drug it wish-
es to copy. It has been alleged, however, that in some cases a generic manufac-
turer and the patent holder have settled cases in a way that uses the 180-day
exclusivity provision to delay the approval of generic products of manufacturers
that were not party to the settlement . Those allegations are being disputed.
The purpose of our hearing is to review the situation and elicit the facts. After
17 years, any statute, no matter how successful, should be reviewed to see how
it is working and whether flaws have developed that need to be corrected.
Therefore, I look forward to todays witnesses and testimony.
However, I must say that this statute should not be changed lightly, even if we
decide that there have been occasional abuses. The statute has generally
worked exceedingly well, and it is highly complex. If we do change it, we seri-
ously risk triggering the law of unintended consequences, which could, unless
we are very careful, result in less research or fewer generic drugs.
It may be that after our hearings we will decided that changes are essential. But
at this point, it seems to me quite possible that adequate remedies already exist
in the law to deal with any abuses which may exist. I note that the Federal
Trade Commission has brought actions involving some of the settlements, which
have resulted in consent decrees. There is also private litigation involving some
settlements. Further, I understand that the FTC is undertaking an extensive
investigation stemming from patent dispute settlements and related issues, and
plans to issue a report later this year.
In the case of the 180-day provision and its possible abuse, the FDA issued a pro-
posed rule in August 1999 to address the issue. It would require the applicant
with the 180 days of exclusivity to begin marketing within 180 days after ap-
proval of a second generic application. FDAs proposal is intended to limit
delays resulting from patent dispute settlements.
Before Congress acts to change this important and complex law by amending the
180-day provision, we should see whether the FDA can resolve any problems
through a revision of its rules after due consideration of public comments on
its proposal. In addition, we should not pre-empt the FTCs investigation by
hurried Congressional action and should wait for the results of that investiga-
tion.
After the FTC has issued its report and FDA has issued its regulations, I think
it will be completely appropriate to hold further hearings on this matter to see
if legislative change is necessary.
Senator LEAHY. General Shurtleff, you came the furthest here
today and I appreciate you doing that. As I said, Bill Sorrell says
very nice things about you.
Mr. SHURTLEFF. Thank you. I look to returning to your State in
a couple of weeks. The National Association of Attorneys General
is meeting in Vermont next month, so I look forward to that.
Senator LEAHY. I understand that Bill passed out pictures of peo-
ple in snowshoes for that time of year, but trust me, it has been
gorgeous. We have had probably the warmest spring we have had
since I was a child, and I hope you have a good time. I know where

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 40

you are going. I know the area you are going to be in. I just hope
the weather cooperates. I think you will enjoy it, just as I have al-
ways enjoyed the hospitality any time I have been in your State.
Mr. SHURTLEFF. Thank you, Senator.
Senator LEAHY. Mr. Griffin, Ms. Boast, Mr. Buehler, thank you
very much for being here.
Mr. BUEHLER. Thank you, Senator.
Ms. BOAST. Thank you, Senator.
Mr. GRIFFIN. Thank you.
Senator LEAHY. The Committee is adjourned.
[Whereupon, at 3:18 p.m., the Committee was adjourned.]
[Submissions for the record follow:]
SUBMISSIONS FOR THE RECORD
Statement of Aventis Pharmaceuticals Inc., Bridgewater, New Jersey
These comments are submitted by Aventis Pharmaceuticals Inc. to be included in
the formal record of the hearing of the Committee on the Judiciary of the United
States Senate concerning Competition in the Pharmaceutical Marketplace: Anti-
trust Implications of Patent Settlements which was conducted on May 24, 2001.
Aventis Pharmaceuticals Inc. conducts the U.S. business of Aventis Pharma AG, the
pharmaceutical company of Aventis S.A. With headquarters in Bridgewater, N.J.,
Aventis Pharmaceuticals focuses its activities on important therapeutic areas such
as cardiology, oncology, anti-infectives, arthritis, allergy and respiratory, diabetes,
and the central nervous system. Last year, Aventis Pharma spent approximately $2
billion dollars in research to develop new and innovative pharmaceutical products
to help Americans live better, live longer and have happier and more productive
lives.

THE IMPORTANCE OF PHARMACEUTICAL PATENT SETTLEMENTS

PHARMACEUTICAL PATENTS BENEFIT CONSUMERS

At the outset, we endorse the views expressed by Senator Hatch and others ac-
knowledging the critical role that pharmaceutical patents play in bringing new and
innovative health care solutions to the market. Often lost in this debate is the fact
pharmaceutical patents benefit consumers because they provide a necessary and ir-
replaceable incentive for research companies to develop new and innovative drug
therapies to prolong and improve the quality of life. To bring a new pharmaceutical
product to the market requires an investment of hundreds ofmillions of dollars 1 and
hundreds of person-years in testing, research, and product evaluation. A pharma-
ceutical patent provides the research company and its shareholders with a fair op-
portunity to recoup that investment. Without the patent system, innovation in the
pharmaceutical industry and all other areas of science would suffer.
The importance of pharmaceutical patents for promoting innovation and reward-
ing innovators also requires that the rights of pharmaceutical patent holders to en-
force their patents and exclude infringing products be protected and sustained. Yet
too often, the legitimate efforts of pharmaceutical patent holders to enforce their
patents against infringing goods are characterized as anticompetitive or illegal.
When a patent holder files and prosecutes a patent infringement action, the pre-
sumption should not be that the company is engaged in some sort of suspect activ-
ity. Rather, absent clear and convincing evidence to the contrary, a patent holders
efforts to exclude an alleged infringer from the market should receive the same pre-
sumption of validity and regularity that the law extends to all patents. Pharma-
ceutical patents should not be treated differently.
PUBLIC POLICY FAVORS PATENT SETTLEMENTS

We also note that public policy favors the settlement of disputes without litiga-
tion. There is no special contrary rule for patent litigation. When a generic manufac-
turer decides to settle a case for less than an immediate right to market the alleg-
edly infringing product, that decision reflects the generic companys subjective as-

1 In 2000, the aggregate investment in new pharmaceutical product by the nations research
pharmaceutical companies totaled more than $36 billion.

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 41
sessment of the value of its case and its likelihood of prevailing on the merits. Simi-
larly, a decision by the patent holder to license its technology to the generic com-
pany at some future point within the patent term reflects the patent holders uncer-
tainty as to its ability to achieve a positive outcome from litigating the patent ac-
tion. Thus, in reaching settlements, the parties make these internal risk assess-
ments and then reach a compromise that maximizes the benefit and minimizes the
risk that each otherwise would have to accept. In this regard, settlements of patent
litigation also are generally win/win outcomes from the consumers point of view.
PATENT SETTLEMENTS OFTEN CONTAIN EXCLUSIONARY TERMS

Because patents exist to protect the patent holder from infringing products in the
market, settlements of many patent cases, particularly those in which the patent
holder is perceived to have a strong case, necessarily will include some limitation
on the alleged infringers post-settlement right to enter the market with its product.
The right to settle a patent dispute by providing for a limited exclusion of an alleg-
edly infringing good is a subset of the patent holders statutory right to completely
exclude infringing goods. Therefore, limitations on market entry are legitimate
points of compromise in a patent infringement case. The federal and state antitrust
agencies nevertheless seem too ready to presume that any post-settlement limitation
on the right of the alleged infringer to enter the market is the product of anti-
competitive motivation rather than a good faith compromise between both parties
assessments of the strength of the patent infringement claim.
For similar reasons, we believe that interim settlements can be as procompetitive
as final settlements. The prosecution of a motion for a preliminary injunction is not
inconsequential; it can significantly delay the ultimate resolution of the merits of
the patent case and dramatically increase the costs and burden of litigation for the
parties and the courts alike.
Interim settlements that manage the short-term risks posed to the parties by the
unresolved patent litigation generally should be favored, as long as they do not dis-
courage the parties from diligently prosecuting the case and seeking its ultimate
resolution. Of course, where an interim settlement has the effect of significantly re-
ducing the significance of the Courts ultimate ruling, that settlement is more akin
to a final settlement and should be analyzed as such.
THE HMR/ANDRX STIPULATION AND THE FTC

As the Committee is aware, Aventis Pharmaceuticals Inc. recently resolved its

dispute with the Federal Trade Commission which related to an interim Stipulation
and Agreement that an Aventis predecessor, Hoechst Marion Roussel Inc. (HMR)
had entered into with Andrx Pharmaceuticals Inc. as part of their patent litigation
over Andrxs generic version of HMRs Cardizem CD product. Without admitting
any wrongdoing, Aventis agreed, as part of this settlement, to notify the Commis-
sion in advance before entering into certain agreements in the future. Because the
Committee may have drawn certain incorrect assumptions from the Prepared State-
ment that was submitted by the Commission and the oral comments of Ms. Boast,
Aventis would like to take this opportunity to amend the record.
THE HMR/ANDRX STIPULATION AND AGREEMENT CAUSED NO CONSUMER HARM

The Commissions prepared statement accurately recounts that the Commissions

Administrative Complaint, filed on March 16, 2000, alleged that HMR paid Andrx
to refrain from bringing to market any generic version of Cardizem CD, without
regard to whether such product infringed HMRs patents. Prepared Statement of
the Federal Trade Commission, Competition in the Pharmaceutical Marketplace:
Antitrust Implications of Patent Settlements: Before the Comm. on the Judiciary
United States Senate, at 12 (May 24, 2001) (FTC Statement), In the Matter of
Hoechst Marion Roussel, Inc., et al, FTC Docket No. 9293 (March 16, 2000) (FTC
Complaint) at 32. The Administrative Complaint also alleged that the purpose and
intended effect of the Stipulation and Agreement was to delay the entry of other
generic drug competitors and den[y] consumers access to lower priced generic
drugs. FTC Statement at 12; FTC Complaint at 33.
Regrettably, the Prepared Statement presented only half the story. Following the
filing of the administrative complaint, the Commissions staff engaged in substantial
discovery and conducted depositions that significantly enhanced the Commissions
understanding of the case. As the completion of discovery neared, the Commission
and respondents reached agreement on the Draft Consent Order that ultimately re-
solved the case. As to the potential for consumer harm, the Commission stated, in
the Analysis in Aid of Public Comment that was released along with the Draft Con-
sent Order on April 4, 2001, that:

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 42
Based on the FTCs investigation, it does not appear that there was any
delay in the entry into the market of a generic version of Cardizem CD by
Andrx or any other potential manufacturer, or that the conduct or agree-
ment at issued delayed consumer access to a generic version of Cardizem
CD.
Analysis in Aid of Public Comment, FTC Docket No. 9293 at 4 (April 2, 2001)
(FTC Analysis).
While prepared remarks must necessarily distill a great deal of information into
a brief and succinct statement, we respectfully submit that the Commissions assess-
ment of the Stipulation and Agreement at the close of the Commissions investiga-
tion is at least as important as the allegations that were charged when the case was
originally brought. By separate letter, we have provided the Committee with a copy
of the Commissions Analysis in Aid of Public Comment and have asked that it be
placed in the formal record of this Committee as well.
THE HMR/ANDRX STIPULATION AND AGREEMENT DID NOT BLOCK THE SALE OF ANY NON-
INFRINGING GENERIC VERSION OF CARDIZEM CD

The Commissions prepared statement also noted that the original Administrative
Complaint charged that the HMR/Andrx Stipulation and Agreement had the effect
of preventing Andrx from bringing to market any competing generic drug, without
regard to whether it was allegedly infringing. FTC Statement at 12. Again, we re-
spectfully observe that the Analysis in Aid of Public Comment reveals a quite dif-
ferent result:
The agreement terminated in June 1999. It was at that time that Andrx
received FDA approval to market, and commenced marketing, a reformu-
lated generic version of Cardizem CD that HMR stipulated did not infringe
any HMR patent.
FTC Analysis at 4.
Thus, the Commissions own statement acknowledges that the Stipulation and
Agreement did not prevent Andrx from bringing a competing generic drug to mar-
ket. Instead, it recognizes that when Andrx perfected a reformulated product that
HMR determined not to sue for patent infringement, and secured prompt FDA ap-
proval, Andrx entered the market with its reformulated product without inter-
ference from HMR or the Stipulation and Agreement. By recognizing Andrxs sub-
stantial efforts to work around HMRs patents, the statement in the Commissions
analysis also tacitly acknowledges the reasonableness of HMRs initial patent in-
fringement claims. Companies like Andrx do not spend millions of dollars and years
of effort in the laboratories working around patent claims that are either clearly in-
valid or not potentially infringed.
The fact that Andrx expended millions of dollars and years of research in an effort
to invent around HMRs patent claims while the patent litigation was underway un-
derscores the fact that no intelligent analysis of the potential competitive impact of
these settlements can be undertaken without due consideration of the strength of
the underlying patent claims. By definition, a patent confers upon the patent holder
the power to completely exclude infringing goods from the market. It follows there-
fore that some patent settlements will necessarily include some limitations on the
right of the alleged infringer to enter the market. We respectfully submit that if
HMR had the right to permanently exclude Andrxs originally infringing formulation
from the market, it should also have the right to try to prevent the sale of that same
product until its patent rights are vindicated without running afoul of the antitrust
laws.
THE HMR/ANDRX STIPULATION AND AGREEMENT WAS NOT INTENDED TO DELAY THE
ENTRY OF OTHER GENERIC DRUG COMPETITORS.

The Commissions prepared statement recounts that the Commissions original

complaint alleged that the intent of the Stipulation and Agreement was to delay
the entry of other generic drug competitors, thereby denying consumers to lower
priced generic drugs. The Commissions original allegation was premised on the as-
sumption that by delaying market entry by Andrx, the ANDA first-filer, Aventis
could take advantage of the first filers 180-day market exclusivity rights under
Hatch-Waxman to block the entry of second and third generic applicants.
The problem with the Commissions theory is that it depends upon a judicial in-
terpretation of the 180-day market exclusivity rights that had not been decided at
the time that the HMR/Andrx Stipulation and Agreement was executed.
As Senator Hatch noted in his opening remarks, until the D.C. Circuit decided
the matter in Mova Pharmaceuticals Corp. v. Shalala, 140 F.3d 1060 (D.C. Cir.

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 43
1998), the generally accepted FDA position was that the first generic filer was enti-
tled to the 180-day exclusivity period only if it had successfully defended its position
in the patent litigation before the second or third generics received final FDA ap-
proval. Under this pre-Mova interpretation of the statute, no agreement between the
pioneer company and first-filer generic company prior to the conclusion of the patent
litigation between them could have precluded the second or third generic filers from
entering the market upon receiving final FDA approval for their products. (There
are other reasons why such foreclosure could not have taken place in this case
which are case- specific and therefore not pertinent to this Committees concern).
In charging that an intended effect of the HMR/Andrx Stipulation and Agreement
was to block the second and third generic applicants, the Commission overlooked
the fact that the Stipulation and Agreement was executed more than six months
prior to the D.C. Circuits decision in Mova and eight months before the FDA acqui-
esced in the Mova decision and agreed to apply it to companies like Andrx. As a
result, the Commissions case essentially sought to charge the parties with anti-
competitive intent premised upon the holding of a court decision that was rendered
six months later and which overturned the FDAs long-standing interpretation of its
own statute. We respectfully submit that this charge is and was unfair and, in fact,
the Commission itself acknowledged this change of law had occurred in its final
Analysis.2
We also believe that the Commissions attempt to employ ex post facto legal prece-
dent to charge the respondents with anticompetitive intent underscores the need for
absolute clarity should this Committee consider making any significant revisions of
existing law. It took fourteen years for Mova to arise from the seemingly clear and
uncomplicated language of HatchWaxman. It would be a shame if, in attempting to
clarify and simply Hatch-Waxman at this date, this Congress were to include lan-
guage that might serve as a trap from the unwary in the future.
AVENTIS PROVIDED TIMELY NOTICE OF THE HMR/ANDRX STIPULATION AND AGREEMENT
TO THE PUBLIC AND TO THE FEDERAL TRADE COMMISSION.

During her oral remarks, Molly Boast, Director of the FTCs Bureau of Competi-
tion suggested in several different ways that it was difficult for the Commission to
learn of settlements arising in pharmaceutical patent cases and that legislation was
needed to address this problem. While Ms. Boast did not specifically suggest that
Aventis or Andrx had been remiss in terms of providing timely public notice or not
cooperating with the Commission, we feel it appropriate to note for the record
Aventis predecessor provided both the public and the Commission with timely no-
tice of the HMR/Andrx Stipulation and Agreement.
Regarding public disclosure, HMR issued a press release within hours of the exe-
cution of the Stipulation and Agreement on September 24, 1997, generally describ-
ing the agreement. While the press release did not contain the competitively sen-
sitive details of the agreement, it did recite the fact that Andrx had agreed to re-
frain from marketing its generic product during the pendency of litigation, that
HMR had agreed to make substantial lost profits payments to Andrx in the event
that it lost the patent case, and that non-refundable interim payments were also
part of the transaction.
Within days of the documents execution, the Commission received a copy of the
Stipulation and Agreement. It is worth noting that the Commission had the Stipula-
tion and Agreement in its possession for nearly ten months before the agreement
became effective on July 9, 1998. Neither the Commission nor its staff registered
and indeed, it was not until after the parties to the stipulation had resolved their
litigation, some nineteen months later, that the Commission staff first shared its
preliminary concerns about the transaction with the parties.
As a matter of corporate policy, Aventis adheres to the view that information con-
cerning potentially significant events affecting the company should be promptly
shared with its stockholders and the public and that reasonable requests for docu-
ments from federal regulatory agencies should receive an affirmative and timely re-
sponse, providing, of course that appropriate safeguards are in place to protect the
confidential and competitively sensitive terms of such transactions. To the extent
that the Congress believes that some generally applicable codification of this policy

2 Under current FDA regulations, the Act grants the first company to file an ANDA with a
paragraph IV certification a 180-day period during which it has the exclusive right to market
a generic version of the brand name drug. No other generic manufacturer may obtain FDA ap-
proval to market its product until the first filers 180-day exclusivity period has expired. At the
time the Respondents entered into the challenged agreement in 1997, the governing FDA regula-
tions required that an ANDA applicant successfully defend the patent holders patent suit in
order to be entitled to this exclusivity. FTC Analysis at 2 (Emphasis added).

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might be in order, Aventis would not object, provided that such a notification system
would not impose additional burdens on parties seeking to resolve patent litigation
and that it contained a workable system to protect competitively sensitive materials
from disclosure under F01A or other federal disclosure statutes.
PHARMACEUTICAL PATENT SETTLEMENTSLOOKING TOWARDS THE FUTURE

Looking forward, we believe it unlikely that Congress or the federal agencies will
see transactions in the future like those that have captured so many headlines over
the past several years. Responsible pharmaceutical companies focus their attention
on what is transpiring in the laboratory and in the marketplace. Right or wrong,
pharmaceutical companies would prefer to avoid the time, expense, and distractions
occasioned by a Commission investigation. For that reason, the Commissions docket
remains focused on a group of transactions that arose before the preclusive effect
of the first-filers 180-day exclusivity rights were established by the D.C. Circuit in
Mova in the spring of 1998.
On a going forward basis, we believe that companies will consciously steer clear
of the kinds of transactions that might provoke the Commissions interest. Doubt-
lessly, this caution likely will mean that some cases that should have been settled
will not be settled and that consumer access to certain generic pharmaceuticals will
be delayed as patent litigation grinds on. These are the unavoidable consequences
of the enforcement decisions that have been made by federal and state agencies.
We believe that the Commissions Pharmaceutical Industry Study likely will
produce some information useful to Congress, the federal agencies, and the regu-
lated community in understanding how changes in the legal and regulatory environ-
ment have affected the manner in which research pharmaceutical companies secure
and defend their intellectual property rights. But while gathering this information
is worthwhile, it is not enough. We believe that it is also important to review and
reconsider some of the legal and economic assumptions that have heretofore driven
much of this debate.
For example, in the current version of the Antitrust Guidelines for the Licensing
of Intellectual Property Rights, U.S. Department of Justice/Federal Trade Commis-
sion (April 6, 1995)(IP Guidelines), the relationship between a patent holder and
a party not possessing patent rights is deemed to be vertical with respect to the pat-
ented technology, even though the patent holder and the party seeking to acquire
rights to that patent are horizontal competitors in the market for their finished
goods. See EP Guidelines, Section 3.3, especially Example 5. By correctly describing
this relationship as vertical, the EP Guidelines expressly permit the patent holder
to license his patented technology to his erstwhile competitor without running the
risk of being accused of engaging in prohibited conduct with a horizontal competitor.
Most often, a competitor will recognize his need to obtain a license from the pat-
ent holder only after patent infringement litigation has been threatened or initiated.
In our view, the logic set forth in the IP Guidelines is as applicable to defining the
relationship between a patent holder and a potentially infringing party when those
parties are engaged in litigation as it is when they are not. By regarding litigants
in a good-faith patent dispute as being vertically related, the IP Guidelines permit
the parties to settle their dispute without being charged with engaging in illegal
horizontal activity.
However, at least one FTC staffer has publicly voiced his view that good-faith dis-
putants in pharmaceutical patent cases must necessarily be viewed as horizontal
competitors or at least potential horizontal competitors in assessing patent settle-
ments. While we doubt very seriously whether this view is shared at the Commis-
sion level, this sort of statement leaves companies vulnerable to charges in private
litigation that their good faith patent settlement represents nothing more than a
market allocation agreement between horizontal competitorsa per se violation of
the antitrust laws. Intended or not, this sort of half-baked policy statement creates
a minefield for those who might otherwise be disposed to settle a pharmaceutical
patent case. By increasing the potential costs and risks of settlement, policy state-
ments like these make it more likely that marginal cases will remain in litigation
a result that serves no ones interests.
Comparable challenges are presented on the economic front. For example, one
widely-quoted former FTC staffer recently suggested in a paper on pharmaceutical
patent settlements that:
A payment flowing from the innovator to the challenging generic . . . may
indicate whether the generic firm has the incentive or ability to enter the
market or to pursue fully the litigation. In essence, the generic firm may
have chosen the quiet life, at least temporarily, of an amicable settlement,
rather than the hard life of competition. This situation would be trouble-

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some particularly, where, as FDA observed, the economic gains to the inno-
vator from delaying generic competition exceed the potential economic gains
to the generic applicant from 180 days of market exclusivity.
David A. Balto, Pharmaceutical Patent Settlements: The Antitrust Risks, 55 Food
& Drug L.J. 321, 355 (2000) (quoting FDA Proposed Rule Regarding 180-Day Ge-
neric Drug Exclusivity for Abbreviated New Drug Applications, 64 Fed. Reg. 42,873,
42,8823) .
The problem with this statement is that in the real world, the economic value of
a patent to the innovator will always exceed the potential economic gains that a ge-
neric company might enjoy were it able to enter the market with a non-infringing
product. Where a generic sells at a price point 60% and 70% of the price of the
branded product, the loss of revenue to the innovator is always much greater than
the revenue gained by the generic company, regardless of whether the generic en-
joys 180 days of market exclusivity or not. So the particularly troublesome eco-
nomic factor that causes this commentator particular concern is present in every
patent infringement dispute involving a patent holder and a first-filer generic.3
In our view, these examples are good illustrations of the fact that many of the
legal and economic assumptions informing the public debate and employed in re-
viewing these cases are inadequate and incomplete. We respectfully submit that
working through these legal and economic issues in a reasoned and objective man-
ner is as important to this process as the information gathering of the Commissions
Pharmaceutical Industry Study. We hope that the Commissions study will be only
the beginning of a more substantial effort on the part of the federal regulatory and
law enforcement authorities to develop better tools to enforce the law, provide guid-
ance to industry, and inform this important debate before the Congress.

Statement of Hon. Maria Cantwell, a U.S. Senator from the State of

Washington
Thank you, Mr. Chairman. Todays hearing is one of the most importantand
most fascinatingconsumer interest hearings before the Committee this year.
Americans are becoming ever more reliant on more effectiveand more com-
plicateddrug therapies. Total health care spending in the United States totaled
more than $1.2 trillion in 1999, an increase of 5.6 percent from the previous year,
according to a March report released by the Health Care Financing Administration.
And prescription drug expenditures are the fastest growing segment of the health
care marketwith spending for drug therapies rising nearly 17 percent that year
alone. Drug expenditures in the United States rose from about $5.5 billion in 1970
to $100 billion in 1999, and the report predicts that prescription drug expenditures
will continue to increase faster than any other category of health care spending
throughout the next ten years. Those two factorsgreat dependency on drug thera-
pies and skyrocketing drug pricesput us on a collision course in our efforts to pro-
vide affordable health care.
There is no doubt in my mind that the patent rights and privileges enjoyed by
the pharmaceutical companies fuel the drive for research and development in this
area. And one day soon I hope to see a cure for Alzheimers, cancer, or cystic fibro-
sis. Furthermore, this debate is not about pitting research and development against
consumer protections because these issues should go hand-in-hand.
This is why, almost 20 years ago, Chairman Hatch worked to create a balanced
law to encourage innovation in the pharmaceutical industry while facilitating the
speedy introduction of lower-cost generic drugs. But frankly, the reports that name-
brand companies have exploited the law and allegedly paid-off their generic oppo-
nents, distress me.
Congress is trying to take a reasoned and rational approach to drug price competi-
tion, and I am very concerned that companies may be taking the law Congress
wrote for the benefit of both business and consumers for their advantage alone. It

3 To address the problem of generic companies preferring the quiet life of settlement to the
hard life of competition, we believe that a proper focus for the antitrust agencies would include
an examination of whether the generic companys receipts in settlement exceed what it could
enjoy were it to enter the market with a non-infringing good. If the generic companys settle-
ment receipts approach what it might expect to receive in the market place, then some addi-
tional scrutiny may be warranted. On the other hand, if the receipts in settlement are but a
fraction of what it would likely earn in the market, then the opposite presumptionthat the
generic company is concerned about the merits of the underlying patent case and that the settle-
ment is not objectionableshould be drawn.

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is outrageous that buying off generic settlements could be a calculated business ex-
pense in the pharmaceutical marketplace.
Generic medicines account for 42 percent of all prescriptions dispensed in America
and on average are put on the market at 75 percent of the cost of their name-brand
rivals. Two hundred drug patents are set to expire over the next five yearsrep-
resenting a loss of approximately $28 billion to name-brand pharmaceutical compa-
nies. This is a key time for this Committee to examine actions by the pharma-
ceutical industry intended to prevent generics from becoming available at lower
costs to consumers. We are beginning to see indications that the practice of using
secret, and possibly illegal, deals is much more common within the industry than
previously known.
Despite the fact that Hatch-Waxman is truly landmark legislation, as with a lot
of legislation, industry officials have learned over time how to get around the letter,
if not the spirit, of the law. By extending FDA and FTC authority to investigate
how wide-spread this practice is, Senator Leahys bill is certainly a step toward end-
ing these collusive practices.
Interject these facts into the political debate surrounding the need to provide
Medicare coverage of prescription drugs for our elderly and disabled, and we have
a debate to be rivaled by few others. Only thirty percent of Medicare beneficiaries
have prescription drug coverage and the average senior spends $1,100 a month on
prescriptions.
Thank you, Mr. Chairman for convening this hearing so that we may learn more
about this problem. I am hopeful we can work together to find a solution.

Statement of Hon. Russell D. Feingold, a U.S. Senator from the State of

Wisconsin
Mr. Chairman, thank you very much for holding this hearing. This is a very im-
portant issue for consumers of prescription drugs in this country. It goes to the in-
tegrity of our antitrust laws and the Hatch-Waxman Act, which I know you feel very
strongly about.
There is mounting evidence that drug companies are attempting to deprive con-
sumers of the option of less expensive generic drugs by paying those companies to
delay development or sales of competing drugs. The beauty of Sen. Leahys bill,
which I am proud to cosponsor, is that it doesnt change the substantive law in any
way. It doesnt modify the Hatch-Waxman Act, or the antitrust laws, or reach any
judgment about whether a particular agreement violates those statutes. It simply
requires that agreements between brand name manufacturers and potential generic
competitors that could limit the research, development, manufacture or marketing
of a competing generic drug be provided to the Federal Trade Commission or the
Department of Justice within 10 days of signing. It is my understanding that the
agreements will remain confidential so there is no argument that companies will be
forced to release trade secrets.
I believe this simple step of throwing some sunshine on these agreements will be
a significant deterrent to anti-competitive agreements. It will allow the FTC and
DOJ to determine whether the agreements violate the antitrust laws or the Hatch-
Waxman Act. And it will ultimately lead to lower prices for consumers.
I hope todays testimony will shed some light on the kinds of agreements that
might be exposed by this bill, and how this bill will assist the antitrust enforcement
agencies to protect the public. And I hope that after the hearing, the Committee will
move expeditiously to mark the bill up and send it to the Senate floor. This is a
rare instance where the Congress can save consumers potentially hundreds of mil-
lions of dollars through simple, commonsense, legislation that poses no possibility
of financial harm to law abiding drug companies.
Again, I thank you, Mr. Chairman, for holding this hearing and beginning the
process of enacting this legislation. And I congratulate Sen. Leahy and Sen. Kohl
for this bill. I am proud to support it.

Statement of the Pharmaceutical Research and Manufacturers of America

The Pharmaceutical Research and Manufacturers Of America (PhRMA) is pleased
to provide a statement of its views in connection with the Committees hearing on
the antitrust implications of patent settlements. PhRMA represents the countrys

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 47
leading research-based pharmaceutical and biotechnology companies, which are de-
voted to inventing medicines that allow patients to lead longer, healthier and more
productive lives. Investing over $30 billion this year in discovering and developing
new medicines, PhRMA companies are literally leading the way in the search for
cures, just as hoped for by Congress when Hatch-Waxman was passed in 1984.
THE HATCH-WAXMAN ACT
The Hatch-Waxman Act had the dual objectives of encouraging pharmaceutical in-
novation and easing the entry of generic drugs into the market. In PhRMAs view,
HatchWaxman has been successful in achieving its objectives. Spending on research
by PhRMA members is now many times higher than it was before passage of the
Act, and important new therapies continue to be introduced. At the same time, a
generic drug industry has been created and is now thriving. The generics share of
the prescription drug market (by countable units) has grown from 18 percent in
1984 to over 47 percent by 1999. Moreover, it must be underscored that the $71
billion in savings for consumers that some advocates of legislative change to Hatch-
Waxman have touted (see press release of May 1, 2001 from the offices of Senators
Schumer and McCain) were calculated based on coming patent expirations and ge-
neric applications provided for under the current provisions of Hatch-WaxTnan.
In his opening statement for this hearing, Chairman Hatch acknowledged that
tine twin goals of the HatchWaxman Act have been achieved. Although the Chair-
man listed a number of issues that have been raised about the Act, and suggested
that they need attention, he cautioned that the legislation was carefully balanced
and that changes that tilt the balance should not be made. PhRMA concurs with
that assessment.
Of course, after 17 years, any statute, no matter how successful, should be re-
viewed to see how it is working and whetherflaws have developed that need cor-
rection. But many of the asserted flaws in the Hatch-Waxman Act can be addressed
under existing law without amending Hatch-Waxmmi in ways that may lead to un-
intended and undesirable consequences. A prime example of an alleged defect that
can be remedied without new legislation is the specific topic of this hearingpatent
dispute settlements.
PATENT DISPUTE SETTLEMENTS
Recently, there has been publicity concerning possible antitrust violations in set-
tlements of patent disputes between generic and innovator pharmaceutical compa-
nies. It has been alleged that these settlements have resulted in higher prescription
drug prices to consumers. As a result, there are efforts this yeas in Congress to re-
open Hatch-Waxman.
Much of the concern over alleged abuses centers on a provision in Hatch-Waxman
related to generic drug exclusivity. That provision provides 180 days of exclusivity
to certain generic applicants who challenge innovator patents. It has been alleged
that, in some cases, a generic manufacturer and the patent holder have settled cases
by using the 180-day provision in a way that delays the approval of generic products
of manufacturers who are not parties to the settlement.
PhRMA has no view on whether the particular cases that have been cited do or
do not violate antitrust laws. That is a question best left to the agencies and the
courts. But fhRMA does believe that the highly successful and highly complex
Hatch-Waxman Act should not be changed lightly on the basis of a very small num-
ber of allegedly problematic cases. If Congress changes the statute because of the
current clamor, it seriously risks triggering the law of unintended consequences,
which could, unless great care is taken, result in less research or fewer generic
drugs.
Since 1984, there have been 8,259 generic applications submitted to the Food and
Drug Administration (FDA). According to FDA, more than 94 percent of these (some
7,781) involved no patent issues; less than 6 percent involved a paragraph IV cer-
tification. To place the subject of the May 24 hearing in perspective, only 3 inno-
vator-generic agreements (involving less than 0.1 percent of generic applications)
are reportedly alleged by the Federal Trade Commission (FTC) to be involved iii in-
appropriate patent dispute settlementsmatters which the FTC has itself settled
with consent decrees. There is also private litigation involving some settlements.
Further, the FTC is undertaking an extensive investigation in this area, with a re-
port due later this year. If there is a problem, there is reason to believe it is small
and the iudicial and regulatory systems are dealine with it.
Also, in August 1999, the FDA issued a proposed rule to address problems it per-
ceived in the 180-day exclusivity rule. The proposal would require an applicant with
the right to 180 days of exclusivity to begin marketing within 180 days of approval

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of a second generic or lose its exclusivity. FDAs proposal is designed to limit delays
resulting from patent dispute settlements, among other purposes. To help resolve
the issue of patent dispute settlements, FDA should finalize that rule in the near
future after any appropriate changes based on the public comments.
PhRMA urges the Committee to take great care when dealing with the Hatch-
Waxman Act. Congress should not hurriedly act to change this important and com-
plex law by amending the 180-day exclusivity rule or other provisions. The number
of alleged abuses is very small, and the system seems to be dealing with the alleged
abuses adequately. PhRMA encourages the Committee, and the Congress as a
whole, to let the FDA and FTC actions take their course, and not rush to judgment.

THE FTC STUDY

Although PhRMA believes that Congress should await the FTC study before
reaching mzy conclusions about the need for new legislation, we are concerned
whether the design of the study, as outlined in the testimony in this hearing, will
provide the kind of objective analysis that would assist Congress. Although Hatch-
Waxman was designed to balance the public interest in both innovative research
and lower drug pricesand the FTC testimony pays lip service to those objectives
the study seems slanted toward finding obstacles to the introduction of generic
drugs.
Thus, in examining the 30-month stay provision in Hatch-Waxman, which is the
provision allowing innovator companies to protect their patent rights, the only stat-
ed objective of the FTC study is to determine whether the stprovision has influenced
the development of generic drums competition. Obviously it has, since a statutory
provision delayiiiFDA approval of generic drugs nendina patent litigation has that
effect as its intended result. The value ofthe 30month stav and its related procedure
for patent litigation riot to FDA approval ofalle fnfringiL7g products cannot properly
be analyzed solely by reference to their effect on generic drug competition; they
must also be analvred by reference to the need to protect, patent holders until the
courts have spoken. The procedure for patent litigation, including the 30-month
stay, was included to prevent judgment-proof generic drug companies from incurring
huge damages and destroying the innovators market through sale of an infringing
product.
Similarly, the FTC testimony questions the filing of citizen petitions at the FDA
related to generic drugs. Although the FTC acknowledges that First Amendment
rights are implicated, it endorses FDAs pending proposed regulation to restrict the
use of citizen petitions. Under the proposal, citizen petitions could be filed only if
they proposed general policies and not if they raised scientific or other pertinent
issues regarding specific products, such as proposed generic drugs. The FTC testi-
mony characterizes FDAs inappropriately restrictive proposal as limiting the citizen
petition process to legitimate purposes and as limiting the ability of firms to use
the process solely to hinder competitors. The FTCs conclusion, prior to completing
its study, that the filing of a citizen petition addressing scientific issues raised by
a particular product necessarily and invariably represents an illegitimate attempt
to hinder competitors does not inspire confidence that the study will be an objective
analysis. In our view, FDA should welcome, rather than reject, valid scientific data
submitted via the petition process.
The FTC testimony also announced that it had itself filed a citizen petition with
FDA in connection with its study. The petition, in the form of a May 16 letter, seeks
FDAs detailed interpretations of the regulations governing which patents are eligi-
ble for listing in FDAs Orange Book. This petition is also of concern. The FTC peti-
tion does not seek pre-existing interpretations from FDAsince there are few if any
such interpretations in existencebut asks FDA to issue new interpretations con-
sistent with the FTCs reading of the rules. If there are ambiguities in the regula-
tions that have not been clarified by FDA, one would think that an objective FTC
study would point to those ambiguities and suggest clarification if they have created
problems. Instead, it appears that the studys authors want to develop a case, based
on after-the-fact pronouncements from FDA, that certain patents were improperly
submitted to FDA for publication in the Orange Book. This approach would not
seem to be consistent with an objective review of the HatchWaxman procedures.

CONCLUSION
PhRMA welcomes analysis of the Hatch-Waxmnan Act and its implementation.
The possible problems that have been identified should be carefully anal objectively
studied before any legislative solution is undertaken. Many of the problems can and
are being addressed through existing mechanisms without the need for amending

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 49
Hatch-Waxman. It is extremely important that the balance in this important legisla-
tion not be upset by ill-considered amendments.

10721a.eps

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