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

Providing Federal Trade Commission testimony today before the U.S. House of Representatives Committee on Energy and Commerce, Subcommittee on Health, Chairman Timothy J. Muris presented the results of the FTC's recent study on "Generic Entry Prior to Patent Expiration." The FTC's study included recommendations for ensuring continued competition in the drug industry and lowering consumer costs through certain changes to the Hatch-Waxman Amendments and proposed legislation that would require the filing of certain agreements between firms with the FTC and the Department of Justice. Muris also provided an overview of the Commission's recent law enforcement initiatives regarding pharmaceutical competition in the context of the Hatch-Waxman Amendments.

The testimony first presented an overview of the U.S. drug industry, stating that factors such as the growth of spending on prescription drugs at retail outlets, which has exceeded that of other health services by a wide margin, have made pharmaceutical expenditures "a concern not only to individual consumers, but also to government payers, private health plans, and employers."

The Hatch-Waxman Amendments to the Food, Drug and Cosmetic Act addressed both escalating drug expenditures and continued benefits from pharmaceutical innovation. Specifically, Hatch-Waxman established a regulatory framework that sought to balance incentives for continued innovation by research-based pharmaceutical companies and opportunities for market entry by generic drug manufacturers. The Congressional Budget Office estimates that by purchasing generic equivalents, U.S. consumers saved between $8 billion to $10 billion on retail prescription drug purchases in 1994 alone. With patents set to expire within the next four years on brand-name drugs that have combined retail sales of almost $20 billion, "the already substantial savings are likely to increase dramatically," according to the testimony.

However, the amendments "have also been subject to some abuse," the testimony continued. "Although many drug manufacturers - including both brand-name companies and generics - have acted in good faith, others have attempted to 'game' the system, securing greater profits for themselves without providing corresponding benefits to consumers."

The testimony next described the FTC's past and present response to such anticompetitive efforts, including numerous antitrust enforcement actions the Commission has pursued against both generic and brand-name drug manufacturers. These actions have been taken in response to a variety of allegedly illegal anticompetitive actions, including settlements between brand-name companies and generic applicants, improper listings in the Food and Drug Administration's "Orange Book," and settlements between generic manufacturers. In each case, the Commission contended that the company's goal was to reduce competition by using tactics designed either to delay the entry of generics onto the market or unfairly to divide the market itself.

Next, the testimony presented the results of the Commission's recently released study of generic entry into the U.S. pharmaceutical market prior to patent expiration. This study found that brand-name companies initiated patent infringement lawsuits against the first generic applicant for 72 percent of the drug products examined. In 70 percent of these cases, either there was a court decision, or the parties agreed to a final settlement without a decision on the merits of the patent infringement suit. In the other 30 percent of the cases, a district court had not yet ruled as of June 1, 2002. Of all patent infringement cases in which the court had ruled, the study found that generic applicants had prevailed in 73 percent of the cases.

The study also examined the issue of Orange Book listings, finding that since 1998, "two new phenomena appear to be emerging in relation to patent listing practices that affect patent litigation": 1) an increase in the number of patents listed in the Orange Book for "blockbuster" drug products; and 2) the listing of patents after an Abbreviated New Drug Application (ANDA) has been filed for the particular product.

Further, the study found that "by the timely listing of additional patents in the Orange Book after a generic applicant has filed its ANDA, the brand-name companies can obtain additional 30-month stays of FDA approval of the generic applicant's ANDA," thereby extending exclusive rights to market the branded formulation of the drug. The Commission identified eight instances in which this has occurred, with the study recommending that only one 30-month stay be permitted to reduce the possibility of abuse of the provision.

Finally, the study recommended that Congress pass the Drug Competition Act to require brand-name companies and first generic applicants to provide copies of certain agreements to the FTC and the Department of Justice in order to prevent abuses of the Hatch-Waxman 180-day marketing exclusivity provision. Such notification and review "will help ensure that the 180-day provision is not manipulated in a way to delay entry of additional generic applicants." Copies of the complete study can be found at the following Web site: http://www.ftc.gov/opa/2002/07/genericdrugstudy.htm.

The testimony concluded by stating that the FTC "has been and will continue to be very active in protecting consumers from anticompetitive practices that inflate drug prices," and that it "looks forward to working closely with the subcommittee, as it has in the past to ensure that competition in this critical sector of the economy remains vigorous. In keeping with this objective, the Commission likewise will endeavor to ensure that the careful Hatch-Waxman balance - between promoting innovation and speeding generic entry - is scrupulously maintained."

The FTC vote to approve the testimony and place a copy on the public record was 5-0. The written statement presented by the Chairman at the hearing represents the views of the FTC.

The FTC's Bureau of Competition seeks to prevent business practices that restrain competition. The Bureau carries out its mission by investigating alleged law violations and, when appropriate, recommending that the Commission take formal enforcement action. To notify the Bureau concerning particular business practices, call or write the Office of Policy and Evaluation, Room 394, Bureau of Competition, Federal Trade Commission, 600 Pennsylvania Ave, N.W., Washington, D.C. 20580, Electronic Mail: antitrust@ftc.gov; Telephone (202) 326-3300. For more information on the laws that the Bureau enforces, the Commission has published "Promoting Competition, Protecting Consumers: A Plain English Guide to Antitrust Laws," which can be accessed at http://www.ftc.gov/bc/compguide/index.htm.

(FTC File No. P859900)