FTC Testifies on Competition in the U.S. Pharmaceutical Industry

Presenting Federal Trade Commission testimony today before the Senate Judiciary Committee, Bureau of Competition Director Molly S. Boast said the Commission has taken a lead role in promoting competition in the pharmaceutical industry and has been significantly involved in antitrust cases brought in the context of the regulatory framework of 1984's Drug Price Competition Patent Term Restoration Act, commonly known as the Hatch-Waxman Act.

Citing Congress and the Committee's "strong interest in this issue," including two bills currently before the Senate, the testimony stressed that U.S. consumers saved between $8 billion and $10 billion on prescription drugs at retail pharmacies in 1994 by buying generic instead of brand-name products. Without the availability of generics, the testimony stated, consumers would pay much more for the same volume of prescriptions, and retail outpatient prescription drug expenditures likely would have increased even more than the 18.8 percent they did between 1999 and 2000 alone. In 2000, consumers spent nearly $132 billion for retail outpatient prescription drugs.

According to the testimony, the Congressional Budget Office has noted that the Hatch-Waxman Act "greatly increased the number of drugs that experience generic competition, and thus, contributed to an increase in the supply of generic drugs." Recently, however, the Commission has observed conduct suggesting that some firms may be exploiting the statutory and regulatory scheme by reaching agreements to delay the introduction of generic drugs to the market. Delaying or preventing generic entry could preserve millions of dollars of ongoing profits for the pioneer drug companies, the testimony states, as such entry results in an enormous drop in market share and profits for the pioneer firm. The Commission has brought three recent cases challenging such agreements under the antitrust laws.

To better understand a broader range of pharmaceutical industry practices related to the Hatch-Waxman Act, the testimony states, the Commission is currently conducting a study pursuant to its statutory authority under Section 6(b) of the FTC Act. The study is examining:

1) the extent to which agreements between brand-name pharmaceutical manufacturers and generic drug firms may have delayed generic competition;

2) the operation of provisions in the Hatch-Waxman Act that award a 180-day period of marketing exclusivity to a generic firm;

3) the impact of provisions in the Act on the listing of patents by brand-name pharmaceutical companies in the Food and Drug Administration's ("FDA") "Orange Book," and of provisions that trigger a stay on FDA approval of a proposed generic drug; and

4) the use of FDA's Citizen Petition Process by brand-name drug companies to oppose potential generic entrants. The study is also examining whether the size of a drug product's sales influences the use of strategies to delay generic competition. The Commission received Office of Management and Budget ("OMB") clearance to conduct the study in April, and hopes to complete it by the end of the year.

The testimony also provides an overview of the significance of generic drugs in the pharmaceutical industry, as well as the statutory and regulatory schemes governing their approval and entry into the marketplace. Under the Hatch-Waxman Act, a generic manufacturer may file an Abbreviated New Drug Application ("ANDA") for FDA approval, whereupon the brand-name drug manufacturer may sue it for patent infringement. When such a suit is brought, the Act provides for a delay of 30 months in the approval of the ANDA (unless a final court decision is reached earlier in the patent case or the court otherwise orders a longer or shorter period). The recent cases that the Commission has brought concern agreements between brand-name and generic companies settling such suits which, the Commission has alleged, further delayed or were intended to further delay generic entry.

The testimony describes two cases brought by the Commission in 2000 in which the Commission challenged two agreements between brand-name and generic drug companies - Hoechst Marion Roussel (now Aventis)/Andrx Corp. and Abbott Laboratories/Geneva Pharmaceuticals - that allegedly delayed, or were intended to delay, generic drug competition. In each case, the Commission alleged that as part of a settlement agreement, the branded firm made payments to the generic firm in exchange for the generic firm's agreement to delay its entry into competition with the branded firm's drug. The Commission further alleged that the agreements delayed or were intended to delay the entry of other generic manufacturers. Both matters were settled through consent orders under which the companies were barred from entering into such agreements in the future, unless approved by the court during the pending patent litigation and with FTC prior notification. The generic firms were also required to waive their marketing exclusivity period to allow other generic products to enter the market.

Most recently, the testimony states, on March 30, 2001 the Commission filed an administrative complaint against Schering-Plough Corporation and two generic pharmaceutical manufacturers - Upsher-Smith Laboratories (the first ANDA filer) and ESI Lederle, Inc. (a division of American Home Products) - charging them with entering into agreements to delay the entry of generic versions of Schering's K-Dur 20 drug into the marketplace. The Commission alleges that Schering agreed to pay $30 million in exchange for these agreements and for the licenses to two ESI Lederle products, constituting an unreasonable restraint of trade and conspiracy to monopolize the market for such potassium chloride supplements. Schering's 1998 sales of K-Dur 20 topped $220 million, and in 1997 the company allegedly projected that the first year of low-priced generic competition would reduce branded sales by more than $30 million.

Finally, the testimony states that "although competition between manufacturers of branded and generic drugs is critical and a continuing focus of Commission resources," the FTC is also concerned about maintaining competition among generic firms. For example, in FTC v. Mylan Laboratories, Inc., the Commission, along with several states, sued Mylan - one of the nation's largest generic pharmaceutical makers - and other companies in connection with agreements designed to monopolize, attempt to monopolize, and eliminate much of Mylan's competition by tying up supplies of the key ingredients in two widely prescribed anti-anxiety drugs. The price increases allegedly cost American consumers more than $120 million in excess charges.

In July 1999 a U.S. district court upheld the FTC's authority to seek disgorgement and restitution for such antitrust violations and, in settlement of the Commission's case, Mylan agreed to pay $100 million to be provided to purchasers of these drugs. This past April, a federal court granted preliminary approval to a distribution plan for these funds.

The Commission vote to approve the release of the testimony and provide a copy for inclusion in the formal record was 5-0.

Copies of the testimony are available from the FTC's Web site at http://www.ftc.gov and also from the FTC's Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580; 877-FTC-HELP (877-382-4357); TDD for the hearing impaired 202-326-2502. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710.

Richard Feinstein
FTC Bureau of Competition
202-326-3688

(FTC File No. P859910)