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                                                       Calendar No. 640
104th Congress                                                   Report
                                 SENATE

 2d Session                                                     104-394
_______________________________________________________________________


 
           PHARMACEUTICAL INDUSTRY SPECIAL EQUITY ACT OF 1996

                                _______
                                

                October 1, 1996.--Ordered to be printed

_______________________________________________________________________


Mr. Hatch, from the Committee on the Judiciary, submitted the following

                              R E P O R T

                             together with

                             MINORITY VIEWS

                         [To accompany S. 1277]

    The Committee on the Judiciary, to which was referred the 
bill (S. 1277) to amend title 35, United States Code, with 
respect to patents on pharmaceutical products, having 
considered the same, reports favorably thereon with an 
amendment in the nature of a substitute and recommends that the 
bill as amended do pass.

                                CONTENTS

                                                                   Page
  I. Purpose and summary of the bill..................................3
 II. Background and need for legislation..............................5
III. The Committee on the Judiciary's hearing........................19
 IV. Legislative history.............................................21
  V. Section-by-section analysis.....................................21
 VI. Committee views.................................................22
VII. Cost estimate...................................................28
VIII.Regulatory impact statement.....................................28

 IX. Minority views of Mr. Brown.....................................29
  X. Minority views of Messes. Kennedy and Simon.....................39
 XI. Changes in existing law.........................................41

    The amendment is as follows:
    Strike all after the enacting clause and insert in lieu 
thereof the following:

SECTION. 1. SHORT TITLE.

    This Act may be cited as the ``Pharmaceutical Industry Special 
Equity Act of 1996''.

SEC. 2. APPROVAL OF GENERIC DRUGS.

    (a) In General.--With respect to any patent, the term of which is 
modified under section 154(c)(1) of title 35, United States Code, as 
amended by the Uruguay Round Agreements Act (Public Law 103-465; 108 
Stat. (4983), the remedies of section 271(c)(4) of title 35, United 
States Code, shall not apply if--
          (1) such patent is the subject of a certification described 
        under--
                  (A) section 505(b)(2)(A(iv) or (j)(2)(A)(vii)(IV) of 
                the Federal Food, Drug, and Cosmetic Act (21 U.S.C. 
                355(b)(2)(A)(iv) or (j)(2)(A)(vii)(IV)); or
                  (B) section 512(n)(1)(H)(iv) of such Act (21 U.S.C. 
                360b(n)(1)(H)(iv);
          (2) on or after the date of enactment of this section, such, 
        a certification is made in an application that was filed under 
        section 505 or 512 of the Federal Food, Drug, and Cosmetic Act 
        and accepted for filing by the Food and Drug Administration 
        prior to June 8, 1995; and
          (3) a final order, from which no appeal is pending or may be 
        made, has been entered in an action brought under chapter 28 or 
        29 of title 35, United States Code--
                  (A) finding that the person who submitted such 
                certification made a substantial investment of the type 
                described under section 154(c)(2) of title 35, United 
                States Code, as amended by the Uruguay Round Agreements 
                Act; and
                  (B) establishing the amount of equitable remuneration 
                of the type described under section 154(c)(3) of title 
                35, United States Code, as amended by the Uruguay Round 
                Agreements Act, that is required to be paid by the 
                person who submitted such certification to the patentee 
                for the product that is the subject of the 
                certification.
    (b) Determination of Substantial Investment.--In determining 
whether a substantial investment has been made in accordance with this 
section, the court shall find that--
          (1) a complete application submitted under section 505 or 512 
        of the Federal Food, Drug, and Cosmetic Act was found by the 
        Secretary of Health and Human Services on or before June 8, 
        1995 to be sufficiently complete to permit substantive review; 
        and
          (2) the total sum of the investment made by the person 
        submitting such an application--
                  (A) is specifically related to the research, 
                development, manufacture, sale, marketing, or other 
                activities undertaken in connection with, the product 
                covered by such an application; and
                  (B) does not solely consist of that person's 
                expenditure related to the development and submission 
                of the information contained in such an application.
    (c) Compensation.--(1) In connection with the entry of the order 
described in subsection (a)(3), the court may order that the patentee 
pay equitable compensation, to the person that submitted such an 
application, for the period commencing on the date a certification 
described in subsection (a)(1) was first made and ending on the date of 
the entry of the order described in subsection (a)(3).
    (2) The court may order payment of equitable compensation under 
paragraph (1) if marketing of the product that is the subject of the 
certification was delayed as a result of an action brought pursuant to 
this section.
    (d) Effective Date of Approval of Application.--In no event shall 
the Food and Drug Administration make the approval of an application 
under section 505 or 512 of the Federal Food, Drug, and Cosmetic Act, 
which is subject to the provisions of this Act, effective prior to the 
entry of the order described in subsection (a)(3).
    (e) Applicability.--The provisions of this section shall not apply 
to any patent the term of which, inclusive of any restoration period 
provided under section 156 of title 35, United States Code, would have 
expired on or after June 8, 1998, under the law in effect on the date 
before December 8, 1994.

SEC. 3. APPLICATION OF CERTAIN BENEFITS AND TERM EXTENSIONS TO ALL 
                    PATENTS IN FORCE ON A CERTAIN DATE.

    For the purposes of this Act and the provisions of title 35, United 
States Code, all patents in force on June 8, 1995, including those in 
force by reason of section 156 of title 35, United States Code, are 
entitled to the full benefit of the Uruguay Round Agreement Act of 1994 
and any extension granted before such date under section 156 of title 
35, United States Code.

SEC. 4. EXTENSION OF PATIENTS RELATING TO NONSTEROIDAL ANTI-
                    INFLAMMATORY DRUGS.

    (a) In General.--Notwithstanding section 154 of title 35, United 
States Code, the term of patent shall be extended for any patent which 
encompasses within its scope of composition of matter known as a 
nonsteroidal anti-inflammatory drug if--
          (1) during the regulatory review of the drug by the Food and 
        Drug Administration the patentee--
                  (A) filed a new drug application in 1982 under 
                section 505 of the Federal Food, Drug and Cosmetic Act 
                (21 U.S.C. 355); and
                  (B) awaited approval by the Food and Drug 
                Administration for at least 96 months; and
          (2) such new drug application was approved in 1991.
    (b) Term.--The term of any patent described in subsection (a) shall 
be extended from its current expiration date for a period of 2 years.
    (c) Notification.--No later than 90 days after the date of 
enactment of this Act, the patentee of any patent described in 
subsection (a) shall notify the Commissioner of Patents and Trademarks 
of the number of any patent extended under such subsection. On receipt 
of such notice, the Commissioner shall confirm such extension by 
placing a notice thereof in the official file of such patent and 
publishing an appropriate notice of such extension of the Official 
Gazette of the Patent and Trademark Office.

SEC. 5. SENSE OF THE SENATE.

    It is the sense of the Senate that litigation pursuant to this Act 
will be concluded as expeditiously as possible.

                   I. Purpose and Summary of the Bill

    The purpose of this legislation is to clarify a perceived 
ambiguity in the treatment of certain pharmaceutical patents 
stemming from the United States' adoption of an internationally 
negotiated treaty.
    The Uruguay Rounds Agreement Act (``URAA''), which is the 
General Agreements on Tariffs and Trade (``GATT'') implementing 
legislation, changed U.S. patent terms. Under the GATT treaty, 
as implemented by the URAA, all patents expire 20 years from 
date of application. Prior to the June 8, 1995, effective date 
of the URAA, U.S. patents expired 17 years from the date of 
issuance.
    The URAA established special ``transition'' rules for any 
patents in force as of June 8, 1995; the patent terms would be 
the old 17-year or the new 20-year terms, whichever was 
greater. It is the applicability of this transition rule to the 
pharmaceutical industry which gives rise to the need for this 
legislation.
    A special provision was inserted in the URAA that, in 
effect, immunized from infringement those who had commenced 
certain acts or made ``substantial investment'' in reliance of 
the patent expiration to utilize the patent during this 
transition period when those acts became infringing by reason 
of the new patent expiration dates. The law stated that those 
who met this test could seek judicial approval to market their 
inventions upon payment of a court- determined ``equitable 
remuneration'' to the patent holder.
    The generic drug industry has argued that this provision 
would allow them to utilize the old effective dates for patent 
terms and send their FDA-approved products to market in advance 
of the URAA-revised dates, assuming that equitable remuneration 
were paid to the patent holder.
    However, that argument neglected another provision of law 
which precludes the FDA from certifying that a generic drug can 
be marketed if the patent term has not expired. While that 
other provision of law, the ``Hatch-Waxman Act'' (98 Stat. 
1585), was elsewhere modified in the URAA, the basic rule 
precluding approval of generic pharmaceuticals while the 
innovator's patent is in force was not modified.
    Certain generic pharmaceutical firms which had planned on 
marketing their products prior to adoption of the URAA were not 
able to do so because the effective date of the innovator's 
patent had been adjusted by the URAA changes and the FDA could 
not certify the products for marketing. They argued that they 
should be allowed to go to market based on the old patent date, 
which was the purpose of Senator Brown's legislation, S. 1277.
    However, S. 1277, as introduced, neglected a basic reading 
of the law that the change of patent terms, in fact, precluded 
any potential generic competitor, in any industry, from going 
on the market in advance of the GATT-revised patent term 
expiration--unless the generic met the test of having made 
substantial investment in reliance of the old patent expiration 
when that investment became infringing by reason of the new 
patent expiration dates. Now, over 1 year after implementation 
of that provision, it appears that no industry, pharmaceutical 
or other, has attempted to use the URAA provision to market a 
product.
    Due to continuing concerns raised by the generic 
pharmaceutical industry about their treatment under the URAA, 
the Committee scheduled consideration of S. 1277, and approved 
a substitute authored by Chairman Hatch. That substitute will 
permit generic versions of patented pharmaceutical products, 
whose terms were redefined by the URAA, to enter the market 
without the legal challenges normally available to the patent 
holder if certain criteria are met.
    Under the provisions of S. 1277, as amended, certain 
generic drug products may enter the market before the 
expiration of the patent of the pioneer product once a court 
issues a final order: (1) finding that the manufacturer of the 
generic drug made the URAA-required ``substantial investment'' 
prior to June 8, 1995, in anticipation of entering the market 
upon expiration of the pre-URAA patent term; and (2) 
establishing the ``equitable remuneration'' the generic drug 
manufacturer must provide to the pioneer patent holder, given 
that the proper certification application is made pursuant to 
the Federal Food, Drug and Cosmetic Act. Subsection (b) of S. 
1277, as amended, provides standards to be utilized by the 
court in determining whether a particular generic applicant 
made the requisite substantial investment.
    The bill, as amended, provides the court the discretion to 
order that the patent holder pay equitable compensation to the 
generic drug applicant if the lawsuit caused delay in the 
initiation of marketing by the generic drug company. The 
substitute also contains a specific provision authored by 
Senator Biden clarifying that patents in force on June 8, 1995, 
as a result of extensions under the Hatch-Waxman Act are 
entitled to the same benefits under the URAA as any other 
patent. Finally, the amended version of S. 1277 contains 
Senator Specter's provision which compensates for a deficiency 
in the FDA approval process and restores 2 years of lost patent 
life for the nonsteroidal anti-inflammatory drug Lodine.

              II. Background and Need for the Legislation

                     gatt-uruguay round agreements

    On April 15, 1993, the United States and 122 other nations 
concluded the most recent series of international trade and 
tariff negotiations, a process begun almost 50 years ago.1 
The ``Uruguay Round'' of the General Agreement on Tariffs and 
Trade negationist resulted in signature of a broad and 
comprehensive trade agreement which represented a major step in 
lowering international trade barriers and promoting increased 
competition in world trade. As a result of the Uruguay Round 
Agreements, it has been estimated that the world economy output 
will expand by $5 trillion over the next decade.2
---------------------------------------------------------------------------
    \1\ General Agreement on Tariffs and Trade, opened for signature 
Oct. 30, 1947, 61 Stat. A3. 55 U.N.T.S. 187.
    \2\ Warren Christopher, Kick-Starting Global Economy, U.S.A. Today, 
Dec. 16, 1993, at 13A.
---------------------------------------------------------------------------
    Negotiating the Uruguay Round was a difficult process. Ten 
years ago, President Reagan launched the discussions in Punte 
del Este. The negotiations were continued by President Bush, 
and finally concluded by President Clinton. The product of 
tough U.S. negotiations and careful bipartisan cooperation, the 
Uruguay Round Agreements won significant benefits for the 
United States. Throughout the negotiations, each Administration 
closely consulted with and consistently received input from 
both Congress and industry.3
---------------------------------------------------------------------------
    \3\ Message from the President to Congress Transmitting the Uruguay 
Round Trade Agreements, H. Doc. 103-316, vol. 1, Sept. 27, 1994, 1.
---------------------------------------------------------------------------
    The numerous benefits of the Uruguay Round Agreements that 
will accrue to the United States include provisions limiting 
discriminatory government subsidies, opening markets to 
agriculture, reducing tariffs, and protecting intellectual 
property.
    In particular, the agreement on intellectual property 
rights, obviously relevant to any discussion of S. 1277, was a 
very contentious issue and the subject of intense debate and 
negotiations, both within and without the United States. The 
negotiations involved 122 countries and a large scope of 
issues, including provisions on the protection of copyrights 
and patents. In fact, the Uruguay Round has been cited as 
covering more industries in more countries than any other 
agreement in history.4
---------------------------------------------------------------------------
    \4\ Keith Bradsher, U.S. and Europe Clear the Way for a World 
Accord on Trade, Setting Aside Major Disputes, New York Times, Dec. 15, 
1993, at A1.
---------------------------------------------------------------------------

      trade-related aspects of the intellectual property agreement

    The intellectual property provisions of the Uruguay Round, 
commonly called the ``Trade-Related Aspects of Intellectual 
Property Rights Agreement (``TRIPs''), won a new, substantially 
higher international standard of protection for a full-range of 
U.S. property rights. The TRIP's agreement covered patents, 
copyrights, trademarks, industrial signs, trade secrets, 
integrated circuits, and geographical indications. While the 
TRIP's agreement required some relatively minor conforming 
changes in U.S. law, as embodied in the Uruguay Round 
Agreements Act, it required our trading partners to upgrade 
their protections substantially.
    For more than a decade, a major objective of U.S. 
international trade negotiations has been strengthening 
intellectual property protections worldwide.5 As 
multilateral trade negotiations under the GATT removed numerous 
``traditional'' trade barriers, such as high tariffs and 
quantitative import restrictions, negotiators began to realize 
that weak or ineffective intellectual property protection in 
foreign countries proved an even more potent force blocking 
U.S. exports of goods and services in some of our most 
competitive and important sectors.6 As a result, our 
country began to formulate objectives to remedy such unfair 
competition which was costing U.S. industry and consumers 
billions of dollars a year.
---------------------------------------------------------------------------
    \5\ Bruce A. Lehman, Intellectual Property Protection Under the 
Clinton Administration, 27, Geo. Wash. J. Int'l L. & Econ. 395, 396 
(1994).
    \6\ See U.S. Framework Proposal to GATT Concerning Intellectual 
Property Rights, 4 Int'l Trade Rep. (BNA) 1371 (Nov. 4, 1987).
---------------------------------------------------------------------------
    Beginning in the early 1980's, we began including 
provisions on intellectual property in various trade statutes, 
leading to one of our most powerful enforcement tools for 
intellectual property, referred to as ``Special 301.'' The 
Special 301 provision, part of the Omnibus Trade and 
Competitiveness Act of 1988, gives the U.S. Trade 
Representative the authority to implement sanctions and trade 
barriers against foreign nations who fail to provide ``adequate 
and effective'' intellectual property protection for U.S. goods 
and services.7 We have also included intellectual property 
provisions in other trade statutes such as: the Caribbean Basin 
Economic Recovery Act,8 which provides duty-free treatment 
for eligible articles of trade from 27 countries as long as 
those countries, among other things, have not repudiated or 
nullified any ``patent, trademark, or other intellectual 
property of, a United States citizen or corporation.''; the 
Generalized System of Preferences,9 which permits the 
President to provide duty-free treatment for goods from certain 
developing countries as long as they respect U.S. intellectual 
property rights; and the North American Free Trade Agreement 
(``NAFTA''),10 which includes a comprehensive section 
covering all aspects of intellectual property rights.
---------------------------------------------------------------------------
    \7\ Omnibus Trade and Competitiveness Act of 1988, section 301, 19 
U.S.C. 2411 (1988).
    \8\ 19 U.S.C. 2701-2706 (1988 & Supp. V 1993).
    \9\ 19 U.S.C. 2461-2466 (1988). A country may not benefit from the 
GSP program if it has previously violated the intellectual property 
rights of U.S. citizens or corporations, without providing a means of 
compensation. 19 U.S.C. 2462(b)(4). Furthermore, to be eligible to 
receive the GSP benefits, a country must extend ``adequate and 
effective means under its laws for foreign nationals to secure, to 
exercise, and to enforce exclusive rights in intellectual property, 
including patents, trademarks and copyrights.'' 19 U.S.C. 2462(c)(5).
    \10\ North American Free Trade Agreement, Dec. 17, 1993, U.S.-
Canada-Mexico, 32 I.L.M.289.
---------------------------------------------------------------------------
    During the Uruguay Round of the GATT negotiations, the 
United States persistently sought to include international 
protection of intellectual property as an element of free 
trade. This was at the top of our trade agenda and was 
considered to be an essential ingredient for a successful 
agreement.11
---------------------------------------------------------------------------
    \11\ Memorandum of December 15, 1993, for the U.S. Trade 
Representative: Trade Agreements Resulting from the Uruguay Round of 
Multilateral Trade Negotiations, 58 Fed. Reg. 67,263, 67,289 (1993) 
[hereinafter Memorandum of Dec. 15, 1993].
---------------------------------------------------------------------------
    There is no question that disagreements over intellectual 
property rights deadlocked negotiations at times during the 
lengthy 7-year process.12 Our trade negotiators 
experienced ardent opposition from a number of developing 
countries,13 and even from certain developed countries in 
the European Community.14 This was an unacceptable piracy 
of U.S. creativity and innovation.
---------------------------------------------------------------------------
    \12\ The GATT Deal: The Longest Round of All, Fin. Times, Dec. 16, 
1993, at 5.
    \13\ Among the developing countries, Brazil and India led the 
opposition to TRIP's. These countries have repeatedly and intentionally 
refused to protect the intellectual property rights of U.S. nationals, 
including patent rights in U.S. pharmaceuticals. They have been 
identified in the past by the USTR as countries that fail to provide 
``adequate and effective'' intellectual property protection as part of 
USTR's Special 301 investigations.
    \14\ In the European Community, there are countries that impose 
quotas on all television station transmission time. In France, for 
example, 60 percent of all television programs aired must be French or 
EC in origin. This is discriminatory to the U.S. film and television 
industry by effectively locking them out of the market through such 
quota barriers. For U.S. industry view, see Jack Valenti, Trade Bomb 
Scores a Direct Hit on Hollywood, L.A. Times, Dec. 16, 1993, at A11.
---------------------------------------------------------------------------
    Studies have demonstrated that weak enforcement mechanisms 
and intellectual property laws in countries such as Singapore, 
Taiwan, Indonesia, Brazil, Egypt, the Philippines, Malaysia, 
among others, are common because piracy of intellectual 
property provides a ``major source of income.'' 15 The 
United States is one of the world's largest producer of new 
technologies, ranging from computer-related technologies to 
pioneering biotechnology to pharmaceutical inventions. 
Accordingly, we have become increasingly vulnerable to piracy 
and otherwise inadequate protection of our intellectual 
property rights in foreign countries. Recent U.S. Government 
and industry studies reveal that billions of dollars are lost 
each year to counterfeiters,16 resulting in thousands of 
lost jobs. As a result, increased protection of U.S. 
intellectual property was a critical objective for our trade 
negotiators during the Uruguay Round.
---------------------------------------------------------------------------
    \15\ See Jan D'Alessandro, A Trade-Related Response to Intellectual 
Property Piracy: A Comprehensive Plan to Aid the Motion Picture 
Industry, 76 Geo. L.J. 417, 423-26 & n.78 (1987). See also Marshall A. 
Leaffer, Protecting United States Intellectual Property Abroad: Toward 
a New Multilateralism, 76 Iowa L. Rev. 273, 281 & 284 (1991).
    \16\ U.S. Int'l Trade Comm'n, USITC Pub. No. 2065, Foreign 
Protection of Intellectual Property Rights and the Effect on U.S. Trade 
4-2 (1985) (estimating U.S. losses to be as high as $23.8 billion).
---------------------------------------------------------------------------
    The Uruguay Round was completed on December 15, 1993, and 
included the TRIP's agreement.17 Although it did not fully 
meet our objectives, TRIP's was a major achievement in 
improving the mean level of international protection for all 
intellectual property rights, including patents, copyrights and 
trademarks.
---------------------------------------------------------------------------
    \17\ The TRIP's text was based on the ``Dunkel Draft.'' Draft Final 
Act Embodying the Results of the Uruguay Round of multinational Trade 
Negotiations, GATT Doc. MTN.TNC/W/FA (Dec. 20, 1991). This draft was 
proposed by Arthur Dunkel, the former Director General of the GATT, who 
resigned July 1, 1993.
---------------------------------------------------------------------------
    Summarily, the key patent-related provisions of TRIP's 
require that member nations: (1) provide product and process 
patents for virtually all types of inventions, including 
agrochemicals and pharmaceuticals, (2) limit the imposition of 
compulsory licensing, (3) provide a patent term of 20 years 
from the date of application, and (4) implement procedures to 
permit the filing of patent applications covering 
pharmaceuticals and agrochemicals.
    Similarly, the United States won key copyright and 
trademark-related benefits from TRIP's, as well as other 
intellectual property protections on trade secrets, computer 
chips, and products incorporating protected chip designs.
    Despite the many gains of the agreement, there were 
downsides in the TRIPs agreement as well. The transition 
provisions were a deeply debated issue and the whole agreement 
almost failed as a result. Indeed, Commissioner Bruce Lehman 
has commented that ``[o]ne of the downsides of the TRIPs, from 
the U.S.18 point of view, is the section on Transition 
Arrangements'' which allowed certain developing countries up to 
10 years to comply with TRIP's. Absent major compromises on 
this point from several key industries, including the 
pharmaceutical and biotechnology industries, we may not have 
had a final agreement on the Uruguay Round and its accompanying 
benefits.
---------------------------------------------------------------------------
    \18\ Bruce A. Lehman, Intellectual Property Under the Clinton 
Administration, 27 Geo. Wash. J. Int'l L. & Econ. 395, 409 (1994).
---------------------------------------------------------------------------

         the pharmaceutical industry and intellectual property

    Pharmaceutical industry breakthroughs, including those from 
the biotechnology industry, have been one of the success 
stories in U.S. industry, creating new jobs and pioneering 
exciting therapies that improve our way of life. They provide 
the best and most cost-effective hope for new cures and 
treatments for life-threatening and debilitating diseases. This 
is evident upon consideration of the alternatives to drug 
therapy: surgery and hospitalization.
    For example, in the case of ulcers, the advent of antacids, 
hydrogen antagonists and other drugs led to a decline in 
surgeries from 97,000 in 1977 to below 19,000 in 1987. It is 
estimated that this change alone resulted in the avoidance of 
approximately $224 million in health care cost per year.\19\
---------------------------------------------------------------------------
    \19\ PhRMA, Modern Medicines: Saving Lives and Money, 1994.
---------------------------------------------------------------------------
    The rigorous process of pharmaceutical innovation, given 
the complexities of developing cutting-edge treatments, is 
often expensive and takes many years before it yields practical 
results. According to an Office of Technology Assessment Report 
\20\ 3 years ago, new pharmaceutical products can cost up to 
$359 million to bring to market and take up to 12 years. That 
cost is undoubtedly much greater now.
---------------------------------------------------------------------------
    \20\ Pharmaceutical R&D;: Costs, Risks and Rewards, Office of 
Technology Assessment, Congress of the United States, February 1993.
---------------------------------------------------------------------------
    Indeed, incentives are necessary to encourage researchers 
to invest in the much needed, but often expensive and risky 
endeavors of drug discovery. A major incentive is our 200-year-
old patent code, which in effect allows inventors to exclude 
others from marketing their products or processes for a limited 
time. That incentive is grounded in article I, section 8, 
clause 8 of the United States Constitution, which gives 
Congress the power `` * * * to promote the Progress of Science 
and useful Arts, by securing for limited Times to Authors and 
Inventors the exclusive Right to their respective Writings and 
Discoveries.''
    The pharmaceutical industry relies heavily on patent 
protection in recouping the costs of bringing new drugs to the 
market. Furthermore, adequate patent protection is vital in 
persuading investors to provide the necessary capital to the 
industry for further research.\21\ Research in the 
pharmaceutical industry is extremely risky, with only a tiny 
fraction of total compounds, about one in 6,000, researched 
actually making it to the market.\22\
---------------------------------------------------------------------------
    \21\ Fully capitalized costs of the R&D; process appear to have 
risen from approximately $350 million for drugs introduced in the 
period 1981-83 to over $500 million for drugs introduced in 1990. These 
higher costs are reflected in other indicators of the expense of 
pharmaceutical R&D.; The average number of clinical trials per New Drug 
Application doubled from 30 in 1981-84 to 60 in 1989-92. For each 
trial, the average number of patients rose from 1,321 to 3,567 over the 
same period. Thus independent studies of numerous indicators point 
toward a significant, sustained increase in the financial cost of 
pioneer pharmaceutical R&D.; The Boston Consulting Group, Sustaining 
Innovation in U.S. Pharmaceuticals, (1996); see Office of Technology 
Assessment, Pharmaceutical R&D;: Costs, Risks and Rewards, pp. 10-23, 
(1993).
    \22\ J. DiMasi, Risks, Regulation, and Rewards in New Drug 
Development in the United States, Regulatory Toxicology and 
Pharmacology 19, pp. 228 (1994).
---------------------------------------------------------------------------
    While research into new medicines is extremely costly, most 
medicines can be copied at a small fraction of their 
development cost.\23\ One recent investigation reported that 
``the nature and operation of a new product [is] reported to a 
firm's rivals faster in pharmaceuticals than in nine other 
inventive industries.'' \24\ The factors that drive this 
process include readily available raw materials, fungible 
technology, and new reverse engineering chemical technologies.
---------------------------------------------------------------------------
    \23\ Statement of Harvey E. Bale, Jr., Ph.D., before the 
Subcommittee on International Trade, Senate Committee on Finance, June 
24, 1994.
    \24\ E. Mansfield, Intellectual Property Rights, Technological 
Change and Economic Growth, 1988.
---------------------------------------------------------------------------
    The research-based pharmaceutical companies have doubled 
their research and development expenditures every 5 years since 
1970 and, for several years, have been spending more than the 
entire Federal Government spends on all biomedical research. 
Last year, the industry spent an estimated $14 billion on R&D.; 
The ratio of R&D; to sales for the industry was about 18.8 
percent in 1994, which is more than four times the average rate 
for all U.S. industries engaged in R&D.;
    Without adequate and effective legal protection of 
intellectual property, free-riders, international as well as 
domestic, will produce versions of the pioneer drugs without 
significant investment. This will result in diminished 
incentives for pharmaceutical companies to invest in further 
research and development, ultimately creating a situation where 
there will be no innovative drugs for the generic manufacturers 
to copy.
    California Representative Henry Waxman recognized this 
issue during the debates on the Hatch-Waxman Act in 1984, when 
he noted:

          It would be fine to say that the consumer could get 
        the same drug at a lower price if there were generics 
        of the new drug. But there would not be a new drug to 
        copy if the first company did not put in the money to 
        develop it.\25\
---------------------------------------------------------------------------
    \25\ Remarks of Rep. Henry Waxman, Cong. Rec., Sept. 6, 1984, at 
H9124.

    It must be noted, however, that patent protection for 
pharmaceuticals does not grant the pioneer companies a monopoly 
totally free from competition. A patent on an invention gives 
the patent holder the right to exclude others from making, 
using or selling the invention, and only for a limited 
time.\26\ It does not prevent others from inventing different 
products that are not covered by the innovator's patent yet 
accomplish the same tasks as the patented product. Once this 
second product is available, consumers can choose which of the 
two products they will purchase.
---------------------------------------------------------------------------
    \26\ 35 U.S.C. 101, et seq.
---------------------------------------------------------------------------
    This is currently evident by the market for anti-ulcer 
class of pharmaceuticals, where several distinctively patented 
drugs directly compete with each other for market share. None 
of these drugs enjoy a monopoly of the market despite their 
patent on the innovative therapy.
    It must also be noted that pharmaceutical companies rarely 
enjoy the limited market exclusivity for their inventions for 
the full term of their patents. This is due to regulatory 
requirements imposed on this industry by the Federal Food, 
Drug, and Cosmetic Act. Before a drug may be marketed, it must 
first be approved by the FDA, even though the patent may be in 
force during the FDA review process. As a result, unlike any 
other industry in the United States, the pharmaceutical 
industry cannot fully enjoy its patent benefits. In certain 
cases, companies may obtain extensions for part of the 
regulatory delay, but rarely may they enjoy the full term of 
the patent.

 OVERVIEW OF THE DRUG PRICE COMPETITION AND PATENT TERM RESTORATION ACT

    In the case Roche Products, Inc. v. Bolar Pharmaceutical 
Co., 733 F.2d 858 (Fed. Cir. 1984), the U.S. Court of Appeals 
for the Federal Circuit, held that the manufacture or use of a 
patented drug in to generate test results for an application to 
the FDA constituted patent infringement. In 1984, Congress 
legislatively overruled Roche in the Drug Price Competition and 
Patent Term Restoration Act,\27\ more popularly known as the 
``Hatch-Waxman Act.''
---------------------------------------------------------------------------
    \27\ Public Law No. 98-417, 98 Stat. 1585 (1984).
---------------------------------------------------------------------------
    Hatch-Waxman contains two titles: (I) abbreviated new drug 
applications for generic drugs, and (II) patent extensions to 
partially restore the time lost by research based 
pharmaceutical companies to the FDA regulatory review process. 
The Act struck a careful balance between two important public 
policy goals. One goal was to ``make available more low cost 
generic drugs by establishing a generic drug approval procedure 
* * * '',\28\ and the other was to strengthen incentives for 
pioneering research and development expenditures by 
pharmaceutical companies through the ``restoration of some of 
the time lost on patent life while the product is awaiting pre-
market clearance'' from the FDA.\29\
---------------------------------------------------------------------------
    \28\ H. Rept. 857 (Part I), 98th Cong., 2d sess., p. 14 (1984).
    \29\ Id. at 15.
---------------------------------------------------------------------------
    As a result of Hatch-Waxman, the generic industry has an 
infringement-free right, unique in patent law, to use patented 
pharmaceuticals for pre-expiration testing purposes.\30\ The 
pharmaceutical industry is barred from enforcing its patent 
against a generic drug manufacturer who is making, using or 
selling a drug for regulatory approval purposes to get a head 
start on marketing generic versions of the drug immediately 
upon expiration of the patent. This was a great compromise by 
the pharmaceutical industry and has gone a long way to foster 
the development of the generic drug industry in the United 
States.
---------------------------------------------------------------------------
    \30\ 35 U.S.C. 271(e)(1).
---------------------------------------------------------------------------
    During congressional debates on Hatch-Waxman, Congressman 
Waxman articulated that:

          This bill represents a compromise among sharply 
        differing interests. * * * After almost a year of data 
        analysis and negotiations, we were able to fashion a 
        compromise bill. * * * Mr. Chairman, this bill fairly 
        and carefully balances the public's need for low cost 
        generic drugs and private industry's need for 
        sufficient patent life to encourage the development of 
        innovative products such as drugs.\31\
---------------------------------------------------------------------------
    \31\ Cong. Rec. at H-8707 (Aug. 8, 1984).

    As part of the compromise for allowing generic drug 
companies to use patented pharmaceuticals which they could not 
have under Roche v. Bolar, Hatch-Waxman provided for limited 
patent term restoration for part of the time lost in the 
lengthy regulatory review process.\32\
---------------------------------------------------------------------------
    \32\ 35 U.S.C. 154.
---------------------------------------------------------------------------
    However, numerous restrictions on the potential restoration 
period severely limit the extent of actual patent term 
restoration a pioneer drug company may obtain for its 
innovative pharmaceutical.\33\ These restrictions are: (1) only 
50 percent of the time spent in clinical trials testing can be 
restored; (2) there is a maximum of 5 years of restoration no 
matter how long a delay the product experienced; (3) the total 
patent life--including restoration--may not exceed 14 years to 
be eligible for Hatch-Waxman restoration; (4) only one product 
per patent is eligible for an extension under the Act; (5) only 
one patent per product is eligible for an extension; and (6) no 
regulatory activities that occur before patent issuance can be 
used in calculating the period of patent term restoration.
---------------------------------------------------------------------------
    \33\ Some members believed that the bill provided too much 
incentive for the generic industry while not providing a commensurate 
incentive for the pioneer drug firms. In fact, Congressman Bliley of 
the House Energy and Commerce Committee stated:
    ``[The Hatch-Waxman Act] is a bill described by its proponents as 
having something for everyone--restoration of patent terms for products 
subject of elaborate premarket approval requirements to provide 
incentives for pharmaceutical research and facilitation of approval of 
generic drugs by the Food and Drug Administration under abbreviated 
application procedures to increase drug price competition. * * * In my 
view, however, the legislation fails to achieve a proper balance 
between these two objectives.
    ``Instead of providing an appropriate patent term for 
pharmaceuticals by restoring the time devoted to periods of `regulatory 
review,' the bill strictly limits the types of patents eligible for 
term restoration and the conditions and length of the restoration 
period. In short, the patent term restoration provisions of this bill 
are largely illusory.'' H. Rep. 98-857 part I, at p. 71, June 21, 1984.
---------------------------------------------------------------------------
    Development and sales in the American generic drug industry 
exploded as a result of Hatch-Waxman; the investment necessary 
to produce a generic drug was greatly reduced. Before the 
passage of Hatch-Waxman, all tests for generics had to be 
undertaken independently of the work done to prove the safety 
and efficacy of the pioneer drug. By using Abbreviated New Drug 
Applications (ANDA's) created by title I of Hatch-Waxman, a 
generic drug company can reference the proprietary research 
work done for the pioneer drug that is on file at the FDA. 
ANDA's are vastly less expensive to secure than approval for a 
pioneer drug. Some ANDA's are obtained with an investment of 
less than $100,000 and most cost less than $1 million.\34\
---------------------------------------------------------------------------
    \34\ Chemicalweek, Generics Set to Take Off: Opportunities Abound, 
p. 30, Aug. 12, 1992.
---------------------------------------------------------------------------
    These special privileges enjoyed by the generic drug 
industry are not enjoyed by any other industry in the United 
States. No other industry's generic competitors are permitted 
to conduct research during the pioneer's patent life. As a 
result, generic drugs are able to enter the market immediately 
upon expiration of the pioneer's patent--as opposed to waiting 
months or years for approval after the expiration of the 
patent.\35\
---------------------------------------------------------------------------
    \35\ We received testimony from Prof. Harold C. Wegner on Feb. 27, 
1996; indicating that a recent Netherlands Supreme Court decision which 
deferred the generic marketing in the Netherlands for 14 months after 
patent expiration on the basis that approximately that much time was 
used in pre-patent expiration generic testing which was an infringement 
of the Dutch patent, and that such testing could only have commenced 
upon expiration of the patent. Smith, Kline and French Laboratories 
Ltd. v. Generics BV, [1996] 1 EIPR D-20.
---------------------------------------------------------------------------

                the regulatory framework of hatch-waxman

    Under the Hatch-Waxman Act, a pharmaceutical manufacturer 
seeking to introduce a generic version of a patented drug may 
submit an Abbreviated New Drug Application (ANDA) to get 
expedited FDA approval. The ANDA submission must certify one of 
four circumstances: (1) that the drug has not been patented--
otherwise known as a ``paragraph I'' certification; (2) that 
any patent on the pioneer drug has expired--otherwise known as 
a ``paragraph II'' certification; (3) the date on which patents 
on a drug will expire if the drug is still under patent--
otherwise known as a ``paragraph III'' certification; or (4) 
that the patent on such drug is ``invalid or that it will not 
be infringing by the manufacture, use, or sale of the new 
drug'' for which the ANDA is submitted--otherwise known as a 
``paragraph IV'' certification. An applicant must give the 
patent owner notice of certification if it submits an ANDA that 
contains a paragraph IV certification.
    Pursuant to Hatch-Waxman, the submission of an ANDA 
containing a paragraph IV certification constitutes ``an act of 
infringement.'' With an ANDA that contains a paragraph I or a 
paragraph II certification, FDA approval is effective 
immediately, provided that all applicable scientific and 
regulatory requirements have been met. If it contains a 
paragraph III certification FDA approval is effective on the 
patent expiration date.
    Where an ANDA contains a paragraph IV certification, 
approval is effective immediately, unless the patent owner 
brings an action for infringement under 35 U.S.C. 271(e)(2)(A) 
within 45 days of receiving the notice required under paragraph 
IV, again provided that all applicable scientific and 
regulatory requirements have been met. When a patent owner 
brings such an infringement action, the FDA must suspend 
approval of the ANDA. The FDA cannot approve the ANDA until the 
earliest of three dates: (I) if the court decides that the 
patent is invalid or not infringed, the date of the court's 
decision; (ii) if the court decides that the patent has been 
infringed, the date that the patent expires; or (iii) subject 
to modification by the court, the date that is 30 months from 
the patent owner's receipt of notice of the filing of the 
paragraph IV certification.
    As the U.S. Court of Appeals for the Federal Circuit 
recently held:

          the Hatch-Waxman Act strikes a balance between the 
        interests of a party seeking approval of an ANDA and 
        the owner of a drug patent.36
---------------------------------------------------------------------------
    \36\ Bristol-Myers Squibb, 69 F.3d at 1132.

    While the manufacture, use, or sale of a patented drug is 
not an act of infringement, to the extent it is necessary for 
the preparation and submission of an ANDA, a patent owner can 
seek to prevent approval of the ANDA by bringing a patent 
infringement suit once the generic manufacturer wants to market 
the patented drug prior to the expiration of the patent.

      transition provisions of trip's and the 20-year patent term

    Under the TRIP's agreement, all member countries must 
provide a patent term of at least 20 years measured from the 
time of application. Prior to the URAA, U.S. patent law 
provided for a term of 17 years measured from the date of 
issuance. As a result, Congress in the URAA amended the Patent 
Act to provide that the term of a patent shall end 20 years 
after the date on which the application for patent was filed.
    The 20-year patent term was a very contentious issue. 
Congress held hearings on this matter and heard from many in 
industry, especially the pharmaceutical and biotechnology 
industry, who had concerns that the 20-year term might erode 
patent terms in this country.37
---------------------------------------------------------------------------
    \37\ See Joint Hearing on General Agreement on Tariffs and Trade 
(GATT): Intellectual Property Provisions, Aug. 12, 1994, Senate 
Committee on the Judiciary, Serial No. J-103-77.
---------------------------------------------------------------------------
    In fact, a 20-year patent term measured from filing was not 
a new proposition. As early as 1966, such a term was 
recommended by President Johnson's Commission on the Patent 
System. The same type of 20-year term was recommended, in the 
context of patent law harmonization, by the Commerce 
Department's Advisory Commission on Patent Law Reform in 1992.

                    elimination of submarine patents

    One of the benefits of a 20-year patent term measured from 
application is that it stimulates progress in technology. A 
term measured from grant can encourage applicants to file 
successive continuing applications on the same invention 
resulting in troublesome ``submarine'' patents that remain 
submerged in the Patent and Trademark Office in secrecy year 
after year. These ``submarines'' can emerge to displace the 
efforts of another company after that company has been 
successful in bringing the product to the market. Submarine 
patents can also delay the dissemination of technological 
information to the public and prolong the period of uncertainty 
about the status of legal rights in inventions.
    It is important to note that, if the 17-year system had not 
been changed, the pharmaceutical industry could have used these 
``submarine'' practice to delay the grant of their patents, 
while they sought FDA approval. Such a practice would have 
allowed them to ensure greater patent terms. It was a major 
sacrifice on the part of the biotechnology and the 
pharmaceutical industries to support the 20-year provisions of 
the URAA in favor of harmonized patent rules internationally. 
With a 20-year term from filing, applicants, including 
pharmaceutical and biotechnology applicants, are no longer able 
to extend their patent terms through intentional delay in the 
Patent and Trademark Office.
    This is doubly important in the context of the GATT 
pharmaceutical patent debate, as it points up the necessity of 
ensuring continued adequate patent life for innovator 
pharmaceuticals.

               pharmaceutical and biotechnology concerns

    During URAA negotiations over the possibility of enacting a 
new 20-year term, there was an underlying assumption that 
applications are generally processed within 3 years, therefore 
a 20-year term measured from filing would in effect be 
comparable to a 17-year term measured from the date of grant of 
the patent.
    Representatives of the pharmaceutical industry and the 
biotechnology industry were very hesitant to support the 20-
year term; they argued that patent applications in their 
industry often take longer than 3 years to process due to the 
complex subject matter and administrative delays at the Patent 
and Trademark Office.38
---------------------------------------------------------------------------
    \38\ See Testimony of Genentech, Inc., before the Joint Hearing, 
Aug. 12, 1994, at pp. 4-8; see also, Testimony of Gerald J. 
Mossinghoff, president, Pharmaceutical Research and Manufacturers of 
America, before the Joint Hearing, Aug. 12, 1994.
---------------------------------------------------------------------------
    While the ``average'' patent is granted in less than 3 
years, pioneer pharmaceutical patents generally are either 
granted more than 3 years after filing.39 As a result, the 
pharmaceutical industry only agreed to the 20-year patent term 
after assurances the United States would work toward 
implementing both a new policies to grant extensions due to 
administrative delays which were outside the patent applicant's 
control and to examine U.S. patent applications within 3 years 
of application.40
---------------------------------------------------------------------------
    \39\ Testimony of Professor Wegner, before the Senate Judiciary 
Committee, Feb. 27, 1996, at p. 4.
    \40\ Testimony of Gerald J. Mossinghoff, supra note 39, at 6-7.
---------------------------------------------------------------------------
    When the URAA was being considered, few, if any, were aware 
that there were any important drug patents that could benefit 
from a switch to the 20-year patent term.41 With 
pharmaceutical patents often taking more than 5 years to be 
granted, it was imagined that the beneficiaries of the 20-year 
term would largely be other technologies--whose patents are 
often granted within 20 months--and ``certainly not 
pharmaceutical companies.'' 42 In fact, most drug patents 
do not benefit from the new patent term because they have used 
far more than 3 years for the prosecution of their patent 
application.43
---------------------------------------------------------------------------
    \41\ Testimony of Professor Wegner, supra note 39, at 5.
    \42\ Id.
    \43\ Id.
---------------------------------------------------------------------------

             transition provisions under trip's article 70

    In the final provisions of the TRIP's agreement, article 70 
provides for the treatment of existing subject matter by member 
nations. Specifically related to the change in patent terms, 
article 70.4 authorizes member nations to provide a ``safe 
harbor'' for those activities that become infringing with the 
implementation of TRIP's.44 Article 70.4 reads:

    \44\ GATT Agreement on TRIP's, supra note 5, art. 70.
---------------------------------------------------------------------------
          In respect of any acts in respect of specific objects 
        embodying protected subject matter which become 
        infringing under the terms of legislation in conformity 
        with this Agreement, and which were commenced, or in 
        respect of which a significant investment was made, 
        before the date of acceptance of the WTO Agreement by 
        that Member, any Member may provide for a limitation of 
        the remedies available to the right holder as to the 
        continued performance of such acts after the date of 
        application of this Agreement for that Member. In such 
        cases the Member shall, however, at least provide for 
        the payment of equitable remuneration.45
---------------------------------------------------------------------------
    \45\ Id.
---------------------------------------------------------------------------
    The United States implemented this provision in section 
532(a) of the Uruguay Round Agreements Act.46 This section 
amended section 154 of title 35, United States Code, to provide 
that for certain patents which were issued and for pending 
applications which were filed prior to June 8, 1995, a 
guaranteed 17-year term, if it is longer than 20 years from the 
date of filing will be provided. This section also addressed 
the issue of the legal relationship between the patent holders 
of such transitional term-affected patents and those who had 
made substantial investment toward commission of acts which 
became infringing as a result of the changes brought forth by 
the URAA. Section 154(c), as amended by the URAA, provides:
---------------------------------------------------------------------------
    \46\ Public Law No. 103-465, 108 Stat. 4809 (1994).


    (c) Continuation--
          (1) Determination.--The term of a patent that is in 
        force on or that results from an application filed 
        before the date that is 6 months after the date of the 
        enactment of the Uruguay Round Agreements Act shall be 
        the greater of the 20-year term as provided in 
        subsection (a),47 or 17 years from grant, subject 
        to any terminal disclaimers.
---------------------------------------------------------------------------
    \47\ Subsection (a)(2) of the URAA provides that the term of a 
patent ``shall be for a term beginning on the date on which the patent 
issues and ending 20 years from the date on which the application for 
the patent was filed in the United States or, if the application 
contains a specific reference to an earlier filed application or 
applications under section 120, 121, or 365(c) of this title, from the 
date on which the earliest such application was filed.'' 35 U.S.C. 
154(a)(2) (1994).
---------------------------------------------------------------------------
          (2) Remedies.--The remedies of sections 283, 284, and 
        285 of this title shall not apply to Acts which--
                  (A) were commenced or for which substantial 
                investment was made before the date that is 6 
                months after the date of the enactment of the 
                Uruguay Round Agreements Act; and
                  (B) became infringing by reason of paragraph 
                (1).
          (3) Remuneration.--The acts referred to in paragraph 
        (2) may be continued only upon the payment of an 
        equitable remuneration to the patentee that is 
        determined in an action brought under chapter 28 and 
        chapter 29 (other than those provisions excluded by 
        paragraph (2)) of this title.'' 48
---------------------------------------------------------------------------
    \48\ 35 U.S.C. 154(c).

    In effect, the URAA created a limited ``safe harbor'' for 
persons who commenced particular acts, or made substantial 
investments toward commission of such acts before June 8, 1995, 
which acts became infringing because of the adjustment of the 
patent period by the transitional provisions of the 
URAA.49 In circumstances involving the safe harbor 
provisions, a patent owner ``will not be able to obtain an 
injunction, recover a reasonable royalty, or obtain attorneys 
fees as provided for in sections 283 to 285 of title 35, but 
will be able to recover equitable remuneration from a third 
party who infringes the patent during the period in question.'' 
50
---------------------------------------------------------------------------
    \49\ Bristol-Myers Squibb v. Royce Laboratories, 69 F.3d 1130, 1132 
(Fed. Cir. 1995).
    \50\ Statement of Administrative Action, Uruguay Trade Agreements, 
Message from the President of the United States, 103d Cong., 2d sess., 
H. Doc. 103-316 Vol. 1, Sept. 27, 1994.
---------------------------------------------------------------------------
    The transition provisions of the URAA do not make 
infringing conduct noninfringing during the ``safe-harbor'' 
period. As the U.S. Court of Appeals for the Federal Circuit 
recently held, ``[the URAA] merely provides that infringing 
conduct will not give rise to the entire panoply of traditional 
statutory remedies for patent infringement. Such conduct will 
give rise only to the limited remedy of equitable 
remuneration,'' which is to be ``determined in an action 
brought under chapter 28 or chapter 29 of title 35.'' 51 
The two chapters under which the equitable remuneration is to 
be determined under URAA authorize and govern the bringing of 
actions for infringement. Thus, the URAA specifically renders 
certain acts, performed by third parties during the extension 
periods provided by section 154(c)(1), as infringing, but then 
to provide a limited remedy for that kind of infringement, 
through an action for relief for infringement in the form of 
equitable remuneration.
---------------------------------------------------------------------------
    \51\ Bristol-Myers Squibb, 69 F.3d at 1136.
---------------------------------------------------------------------------
    As the Federal Circuit has properly interpreted, the 
statutory scheme of the URAA ``does not say * * * [i]f normally 
you would infringe, you do not infringe during the delta 
period.'' 52 Rather the proper interpretation of the URAA 
is that you still infringe, but if you meet certain 
requirements, you may still continue to infringe, provided that 
you pay the equitable remuneration required by TRIP's and the 
URAA.
---------------------------------------------------------------------------
    \52\ Id.; see also Merck & Co. v. Kessler, 38 U.S.P.Q. 2d (BNA) 
1347 (Apr. 4, 1996).
---------------------------------------------------------------------------

    judicial interpretations related to the pharmaceutical industry

    After passage of the URAA, several parties affected by the 
transitional provisions codified in 35 U.S.C. 154 have brought 
actions. These cases all deal with the interpretation of the 
section as it relates to generic pharmaceutical companies and 
their actions which became infringing after the passage of the 
URAA. These actions have culminated in final decisions 
interpreting section 154 and its interplay with the Hatch-
Waxman act as it relates to the pharmaceutical industry.
    The following is a summary of the recent appellate court 
decisions that related to the interpretation of issues germane 
to the present bill:
          Merck & Co. v. Kessler 53: Decided on April 4, 
        1996, this case involved an appeal by generic drug 
        companies from a district court ruling which held that 
        under the URAA, all patents in force on June 8, 1995, 
        including patents in force only because of Hatch-Waxman 
        extension, were entitled to add the time of the Hatch-
        Waxman extension to the new term afforded by the URAA 
        pursuant to section 154(c).54 The issue in that 
        case was whether a holder of a patent in force on June 
        8, 1995, could add a previously granted patent 
        restoration period to a 20-year term in determining 
        when the patent expires.
---------------------------------------------------------------------------
    \53\ Merck & Co. v. Kessler, 38 U.S.P.Q. 2d (BNA) 1347 (Apr. 4, 
1996).
    \54\ Merck & Co. v. Kessler, 903 F. Supp. 964 (E.D. Va. 1995).
---------------------------------------------------------------------------
          The Federal Circuit, on appeal, affirmed in part and 
        reversed in part, the district court's ruling. Agreeing 
        with the lower court, the appellate court interpreted 
        the URAA and the Hatch-Waxman Act in that all ``patents 
        in force on June 8, 1995 (except for those in force 
        only because of a Hatch-Waxman extension), [are] 
        entitled to have a [Hatch-Waxman] restoration 
        extension, whenever granted, added to the longer term 
        of either 17 years from issuance of 20 years from 
        filing.'' 55 The Court held that for patents that 
        were in force on June 8, 1995, only as a result of a 
        Hatch-Waxman extension, were not entitled to reapply a 
        restoration extension to a 20-year from filing term.
---------------------------------------------------------------------------
    \55\ Merck & Co. v. Kessler, 38 U.S.P.Q. 2d (BNA) 1347 (Apr. 4, 
1996).
---------------------------------------------------------------------------
          Bristol-Myers Squibb Co. v. Royce Laboratories: 
        56 This decision, handed down November 1, 1995, 
        involved an appeal by a patent owner who brought an 
        infringement action against a generic drug manufacturer 
        who sought FDA approval of a generic version of its 
        drug while its patent was still in force. The district 
        court dismissed the infringement action ruling that the 
        generic company's actions did not constitute 
        infringement of the pharmaceutical patent pursuant to 
        the URAA.57 The Federal Circuit reversed the 
        district court ruling that because ``safe harbor'' 
        provisions of the URAA, 35 U.S.C. 154(c), did not 
        render infringing acts of generic drug companies 
        noninfringing, the patent holder was entitled to an 
        order that the effective date of any generic drug 
        approval through the Abbreviated New Drug Application 
        procedures of the Hatch-Waxman Act would have to wait 
        until the expiration of the pioneer patent's term as 
        extended by the URAA.
---------------------------------------------------------------------------
    \56\ Bristol-Myers Squibb v. Royce Laboratories, 69 F.3d 1130 (Fed. 
Cir. 1995).
    \57\ Bristol-Myers Squibb v. Royce Laboratories, 36 U.S.P.Q. 2d 
1637 (S.D. Fla. 1995).
---------------------------------------------------------------------------
          DuPont Merck Pharmaceutical Co. v. Bristol-Myers 
        Squibb Co: 58 Similar to the above two cases, the 
        Federal Circuit Court of Appeals in this case held that 
        a generic drug manufacturer infringes a drug patent 
        when it files an ANDA for a generic version of a 
        patented drug still under patent protection, pursuant 
        to 35 U.S.C. 271(e)(2). The Court further held that the 
        URAA did not convert such infringing activity by 
        generic drug manufacturers before the expiration of the 
        pioneer patent to noninfringing activity during the 
        transitional period where the patent was extended by 
        URAA. The Court noted that the generic drug 
        manufacturer must pay equitable remuneration as 
        provided under the URAA-amended section 154 of title 
        35, United States Code.
---------------------------------------------------------------------------
    \58\ Dupont Merck Pharmaceutical Co. v. Bristol-Myers Squibb Co., 
62 F.3d 1397 (Fed. Cir. 1995).
---------------------------------------------------------------------------

                    Trip's Considerations of S. 1277

    Due to the amendments made by the URAA, certain patents, 
from all industries, including the pharmaceutical industry, are 
entitled to limited extensions under 35 U.S.C. 154(a), if their 
patents were prosecuted in less than 3 years.
    Under the URAA, generic companies could only utilize the 
remedies in the law if their acts were commenced or for which 
substantial investment was made before June 8, 1995, and the 
acts became infringing by reason of the adjusted patents. It is 
important to note that the law did not make infringing 
activities noninfringing. As a result of the extended patent 
terms, companies that produce generic versions of products in 
all industries, including the pharmaceutical industry, are not 
able to market their products unless and until they meet the 
requirements outlined in the URAA.59
---------------------------------------------------------------------------
    \59\ 35 U.S.C. 154 (1994).
---------------------------------------------------------------------------
    The generic pharmaceutical manufacturers, affected in the 
same way other generic manufacturers are affected by the URAA, 
has persistently sought a special exemption from the patent 
term extensions of the URAA. They first sought relief through 
administrative interpretation of the URAA transitional 
provisions at the U.S. Patent and Trademark Office and the Food 
and Drug Administration. Then they sought relief through 
litigation, to no avail. And they also seek to ameliorate the 
effects of the URAA through legislative action.
    Sympathetic to the concerns expressed by the generic 
pharmaceutical manufacturers, yet conscious of the danger of 
weakening our intellectual property system and our ability to 
seek increased protection of intellectual property in foreign 
countries (and the prompt implementation of the GATT/TRIP's 
agreement), the committee sought to craft a compromise to S. 
1277 which would strike a fair balance in providing equitable 
relief for the generic pharmaceutical industry.
    Congress must be cautious in adopting an interpretation of 
article 70.4 of TRIP's which does not lend aid and comfort to 
foreign governments, such as those in Brazil and India, who 
have refused to grant patent protection for drugs and 
agricultural products. Any U.S. exceptions to the TRIP's 
agreement will weaken our trade negotiators in seeking prompt 
and effective implementation of TRIP's or in other bilateral 
intellectual property negotiations or investigations on 
intellectual property, such as the Special 301 investigation 
under our Trade Laws.
    The President's Advisory Committee on Trade Policy and 
Negotiations (ACTPN) has said ``the ACTPN urges U.S. 
negotiators to make clear that reliance by any WTO member on 
this provision--70 (4)--to render moot any other provision of 
the TRIP's Agreement will be considered an impairment of the 
basic intellectual property obligations under the agreement.'' 
60
---------------------------------------------------------------------------
    \60\ See testimony of Ambassador Clayton K. Yeutter, before the 
Senate Judiciary Committee, Feb. 27, 1996.
---------------------------------------------------------------------------
    Furthermore, former U.S. Trade Representative, Ambassador 
Yeutter noted in testimony before the Committee that ``[w]e do 
not want developing countries, (or China and Russia for that 
matter) when they accede to the WTO, to be able to claim that 
modest investments by local pirates in future infringing acts * 
* * are grandfathered under TRIP's.'' 61
---------------------------------------------------------------------------
    \61\ Id.
---------------------------------------------------------------------------
    In accordance with our concerns of not losing our 
credibility in the new World Trade Organization, and our 
equally important concern of providing cheaper drugs to the 
American consumer, S. 1277, as amended, provides for equitable 
relief for the generic drug industry with respect to patents on 
pioneer pharmaceutical drugs, the term of which is modified by 
the URAA--yet does not raise the TRIP's concerns concomitant 
with the bill as introduced.
    The amended legislation will permit generic versions of 
patented pharmaceutical products to enter the market, before 
the expiration of the patent, once a court issues a final 
order: (1) finding that the generic applicant has made a URAA-
mandated substantial investment in anticipation of entering the 
market upon the expiration of the pre-URAA patent term, and (2) 
establishing the URAA-mandated amount of equitable remuneration 
the generic applicant is to pay the pioneer patent holder, 
given that the proper certification application pursuant to the 
Federal Food, Drug, and Cosmetic Act is made.

             III. The Committee on the Judiciary's Hearing

    The Committee on Judiciary convened on February 27, 1996, 
for the purpose of hearing testimony related to the issues 
raised by the URAA and adjusted pharmaceutical patent terms, 
including a discussion of the legislation introduced by 
Senators David Pryor, John Chafee, and Hank Brown. Present were 
Chairman Hatch, Senators Grassley, Specter, DeWine, Kennedy, 
Leahy, Heflin, Simon, and Feinstein.
    The Committee first heard testimony from Senators 
Faircloth, Chafee, and Pryor. Urging a policy of fairness, 
Senator Faircloth noted the provisions of the Hatch-Waxman law 
and raised questions centering on the need for incentives for 
innovator pharmaceutical research. Senator Chafee argued that 
the Congress and the administration made a simple and 
inadvertent, but expensive, error in drafting the URAA, 
resulting in a costs to consumers, and State and Federal 
Governments. He urged that the Congress rectify that error. 
Senator Pryor summarized the legislative history of the issue 
and urged an immediate, simple, congressional amendment which 
he believed would close the URAA ``loophole,'' restore 
competition in the marketplace, and correct a ``multi-billion 
windfall'' subsidized by consumers.
    The Committee next heard from a panel comprised of U.S. 
Trade Ambassador Mickey Kantor, representing the 
Administration, and former USTR Clayton Yeutter. Ambassador 
Kantor told the Committee that the GATT transition provisions 
had been drafted to apply to all types of patented technology, 
without distinction, but that Congress and the Administration 
had failed to take into account the technical interrelationship 
between the patent code and the food and drug law putting the 
generic pharmaceutical industry at a disadvantage. He said that 
he supported the correction of this oversight. Such an 
amendment, he averred, would not undermine ongoing U.S. efforts 
to seek high levels of intellectual property protection around 
the world.
    Ambassador Brock expressed major reservations about the 
legislative amendment and said that it would set an unfortunate 
precedent which would undermine the United States'' ability to 
safeguard our intellectual property rights worldwide. He 
reviewed the history of U.S. efforts to win greater 
international intellectual property protections and urged that 
the United States not back off from the leadership it had been 
exercising. He told the Committee he believed that adoption of 
S. 1277 would be read by other nations as the United States 
backing down from 15 years of negotiations.
    Next, the Committee heard from a panel consisting of: the 
Honorable Gerald J. Mossinghoff, president, Pharmaceutical 
Research and Manufacturers of America and former Commissioner, 
Patent and Trademark Office; Charles J. Cooper, on behalf of 
the Pharmaceutical Research and Manufacturers; James P. Firman, 
chair of the Generic Drug Equity Coalition, and president, 
National Council on the Aging; Judith Simpson, president, 
United Patients'' Association for Pulmonary Hypertension, Inc; 
and Robert J. Gunter, chairman, National Pharmaceutical 
Alliance, and president, Novopharm, USA.
    Mr. Mossinghoff told the Committee that the generic drug 
industry is treated under the URAA equally to all other 
industries. Noting the complexity of the laws, he said that the 
legislative outcome of the URAA was intended, as supported by a 
recent court decision. Mr. Cooper concentrated his testimony on 
the takings clause secured by the fifth amendment, concluding 
that the change proposed in S. 1277 would trigger that 
constitutional protection.
    Mr. Firman expressed strong support for S. 1277, estimating 
that the GATT changes will cost consumers $2.5 billion by the 
end of the century. He said that this is an issue of fairness, 
and the arguments in support of the legislative change are 
clearcut. His testimony was followed by that of Judith Simpson, 
who urged that the legislation not be adopted, as she believed 
it would undercut the patent protections which support research 
and development in the pharmaceutical industry. She 
specifically mentioned the long-term need for continued support 
of research into diseases such as Primary Pulmonary 
Hypotension, which can now be treated by a life-saving even 
though the condition is so rare that sales could never recoup 
the development cost.
    Finally, the Committee heard from Mr. Gunter, who discussed 
his company's experience in developing a generic drug and urged 
that his company, and others like it, who have met the 
statutory criteria for substantial investment be allowed to 
bring their products to the market prior to expiration of the 
URAA-adjusted patent expiration dates for the relevant 
innovator drug.

                        IV. Legislative History

    S. 1277, the Prescription Drug Equity Act of 1995, was 
introduced by Senators Brown and Pryor on September 27, 1995, 
and referred to the Committee on the Judiciary. Similar 
legislation, S. 1191, the Consumer Access to Prescription Drugs 
Act of 1995, was introduced by Senator Pryor on August 11, 
1995, and referred to another committee.
    During September 29, 1995, Finance Committee consideration 
of the Medicare/Medicaid provisions of the budget 
reconciliation legislation, Senators Chafee and Pryor attempted 
to offer an amendment to clarify the application of the GATT 
transition rules for pharmaceuticals. The Chair ruled that the 
amendment was nongermane, and a subsequent vote (9-7, with a 
two-thirds majority being necessary) failed to override that 
ruling.
    Two months later, during Senate consideration of the 
Partial Birth Abortion Ban legislation (H.R. 1833) on December 
5, Senators Pryor, Chafee, Brown, and Byrd offered amendment 
number 3082 which mirrored the Pryor legislation. During 
subsequent consideration of H.R. 1833 on December 7, Senator 
Smith (for Senators DeWine and Dodd) offered amendment number 
3088 to amendment 3082. The DeWine/Dodd amendment expressed the 
sense of the Senate that the Judiciary Committee should conduct 
hearings to investigate the effect of the URAA patent 
provisions on the approval of generic drugs under section 505 
of the Federal Food, Drug and Cosmetic Act. The Senate failed 
to table the DeWine/Dodd amendment by the vote of 48-49, and 
the Pryor amendment was withdrawn.
    Consistent with the Senate vote, the Committee on the 
Judiciary held a hearing on the issue on February 27, during 
which testimony was heard as outlined above.
    The Committee scheduled an executive session to consider S. 
1277 on April 18, 1996, but recessed when a quorum was not 
attained. Later that day, Senator Brown filed amendment number 
3678 to S. 1028, the Kassebaum-Kennedy health insurance reform 
bill. The Brown amendment was withdrawn.
    S. 1277 was also on the agenda for the Judiciary 
Committee's April 25, 1996, session, but was held over pending 
deliberations on the immigration legislation. Markup was 
continued on May 2, 1996, at which time the Committee approved, 
10-7 the Chairman's substitute for S. 1277.
    [Note: Subsequent to the Committee's action on S. 1277, on 
June 27, 1996, Senator Pryor offered amendment number 4365 to 
S. 1745, the Department of Defense authorization Act. The Pryor 
amendment expressed the sense of the Senate that the generic 
drug industry should be provided equitable relief in the same 
manner as other industries under the transitional provisions of 
the URAA. By a vote of 53-45, the Senate agreed to the Hatch 
amendment number 4366 to the Pryor amendment, which embodied 
the text of the measure approved by the Judiciary Committee 
with a modification by Senator Specter to ensure speedy court 
consideration of any cases brought. Conferees for the defense 
bill dropped the GATT provision, and thus the final measure did 
not contain the Judiciary language.]

                     V. Section-by-Section Analysis

    Section 1.--Short Title: The substitute is entitled the 
``Pharmaceutical Industry Special Equity Act of 1996''.
    Section 2. Approval of Generic Drugs: Subsection (a) 
provides that the unique Hatch-Waxman remedies--available under 
current law when pioneer pharmaceutical companies' patent 
rights are challenged by generic applicants--shall not apply 
with respect to patents whose terms were redefined by the URAA 
if three criteria are met:
          (1) A generic applicant files a paragraph IV 
        certification pursuant to the existing provisions of 
        Hatch-Waxman with respect to the GATT-extended patent;
          (2) That paragraph IV certification is filed after 
        enactment of the bill, and is submitted in connection 
        with an application that was found by FDA to be 
        sufficiently complete to permit substantive review 
        prior to the effective date of the URAA; and
          (3) In accordance with the existing provisions of 
        Hatch-Waxman, a lawsuit is brought against the generic 
        applicant following receipt of that certification, and 
        a final order from which no appeal can be taken or has 
        been taken is entered finding that the generic 
        applicant made a URAA-mandated substantial investment 
        and establishing the URAA-mandated amount of equitable 
        remuneration the generic applicant is to pay the 
        pioneer patent holder.
    Subsection (b) sets forth standards to be utilized by the 
court in the litigation filed pursuant to subsection (a), in 
determining whether a particular generic applicant made the 
requisite substantial investment. Specifically, the court must 
find that: (1) the generic applicant submitted a complete ANDA 
that was sufficiently complete to permit substantive review by 
FDA prior to June 8, 1995; and (2) the total sum of the generic 
applicant's investment was specifically related to the 
research, development, manufacture, sale, marketing, or other 
activities undertaken in connection with the ANDA; and does not 
consist solely of expenditures relating to preparing and filing 
its ANDA.
    Subsection (c) provides that, at the conclusion of 
litigation filed pursuant to subsection (a), the court would 
have discretion to order that the patent holder pay equitable 
compensation to the generic applicant if the lawsuit caused any 
delay in the initiation of marketing by the generic company.
    Subsection (d) provides that FDA cannot approve a generic 
application and thereby allow a generic to enter the market 
during the GATT delta period until both substantial investment 
and equitable remuneration are resolved in the court ordered 
required under subsection (a)(3).
    Subsection (e) limits the bill's applicability. None of the 
bill's provisions would apply to any patent that would have 
expired on or after June 8, 1998, inclusive of any restoration 
period provided under Hatch-Waxman, under the law in effect 
prior to the date of enactment of the URAA, i.e. December 8, 
1994.
    Section 3.--Application of Certain Benefits and Term 
Extensions to all Patents in Force on a Certain Date: Provides 
for equivalent treatment of all patents in force on June 8, 
1995. It specifically provides that patents in force on that 
date as a result of extensions under Hatch-Waxman are entitled 
to the same benefits under the URAA as any other patent.
    Section 4.--Extension of Patents Relating to Nonsteroidal 
Anti-Inflammatory Drugs: Extends the patent for the 
nonsteroidal anti-inflammatory drug Lodine for 2 years to 
adjust for lengthy delays in its review at the Food and Drug 
Administration.
    Section 5.--Sense of the Senate: Expresses the sense of the 
Senate that litigation pursuant to this Act should be concluded 
as expeditiously as possible.

                          VI. Committee Views

    The GATT/pharmaceutical patent legislation evokes a myriad 
of complex issues, with ties to laws under the jurisdiction of 
at least three congressional committees. The legislation we are 
considering, S. 1277, would have serious ramifications for the 
U.S. food and drug statute, trade policy, and most importantly, 
intellectual property law. These aspects of the issue are 
intertwined, and cannot be separated easily. Nor should they 
be.
    It is clear that intellectual property rights, a major 
issue which falls within this Committee's jurisdiction, were 
addressed on a multilateral trade basis for the first time in 
the history of GATT during the Uruguay Round. As a result of 
hard-fought compromises, worldwide standards for protecting and 
enforcing intellectual property rights were established, and 
intellectual property protection was significantly improved.
    The Committee was involved substantially in drafting the 
Agreement on Trade-Related Aspects of Intellectual Property 
(TRIP's) after concluding that, as the world leader in 
inventive activity, the United States stood to gain 
substantially from that accord. Enhanced patent protection 
overseas will have a significant impact on the commercial 
interests of the United States and the resulting considerable 
economic gains and job creation.
    The real test comes when other countries implement their 
multilateral obligations under GATT. The United States insisted 
on the inclusion of enhanced patent protections in the Uruguay 
Round agreements. We have historically been the leading 
international advocate for broadening patent rights, so it is 
essential that the United States be a world leader on GATT 
implementation.
    Enhanced patent protection will be diminished abroad if the 
United States itself violates the TRIP's. It is almost certain 
that such an action would provide foreign-based pirates and 
patent infringers with potent ammunition in seeking to have 
their domestic governments devise measures that are 
inconsistent with TRIP's--thereby denying U.S. patent holders 
their rights secured by TRIP's.
    Several developing nations, such as Singapore and Thailand, 
are already attempting ``to dilute and evade'' the patent 
protection commitments they accepted during the Uruguay Round. 
In this patent-unfriendly context, the proposed bill, if 
unamended, would be interpreted internationally as encouraging 
a minimalist's interpretation of GATT's improvements in patent 
protection. Having redefined patent terms domestically in order 
to secure enhanced patent rights overseas, it would be 
imprudent for this Congress to give the green light to erosion 
of this principle domestically.
    But these international trade ramifications extend beyond 
questions of intellectual property protection. The positions 
advocated by proponents of this amendment are likely to be 
turned against the United States in future trade negotiations.
    The Committee was mindful of the concerns expressed by 
then-Ambassador Kantor at its February 27 hearing on this 
issue. Mr. Kantor told the Committee that the changes proposed 
in S. 1277 would not have major international trade 
ramifications.
    However, we must also note that the Committee has received 
a letter from the Vice President of the European Community, Sir 
Leon Brittan, who stated the bill ``would contradict our mutual 
aim of providing a reasonably high and secure protection for 
the huge investments made by EC and US research-based 
pharmaceutical companies'' and ``send a negative and highly 
visible signal to those numerous countries which are still in 
the process of preparing new legislation on the protection of 
pharmaceutical inventions.''
    This view was bolstered by the views of former Ambassador 
Bill Brock, who has said that the nations which in the past 
have denied American inventors patent protection ``will see 
this retreat on our part as a ready excuse to implement their 
own minimalist versions of intellectual property protection.'' 
Thus, Ambassador Brock concludes, we would be unable ``to force 
other nations to adhere to the TRIP's agreement if we set this 
unfortunate precedent.''
    The Committee was impressed by the multitude of testimony 
it heard from Members of Congress and interested generic 
pharmaceutical industry and consumer representatives who avowed 
that the GATT legislation had caused a loophole which 
inadvertently precluded generic manufacturers from going to 
market with products based on the pre-GATT innovator drug 
patent expiration dates. Indeed, this strongly held belief on 
the part of many presented a very moving and compelling case 
for enactment of S. 1277 unamended.
    Unfortunately, though, the Committee's laborious study of 
this issue led it to conclude that those arguments--while 
extremely well-intentioned--were without basis in legislative 
history and correct interpretation of the statute. The 
Committee also concluded that enactment of S. 1277 without 
change could undermine important incentives for pharmaceutical 
research and development which have made the United States the 
world leader in new drug development.
    Three key statutory provisions come into play in any 
deliberation over this GATT issue.
    First, there are the transition rules of the Uruguay Round 
Agreements Act of 1994, codified at 35 U.S.C. 154(c). As noted 
previously, a key provision in the GATT Treaty was a change-
over by the United States from the old 17-year patent term--
measured from the date of issuance--to the standard, 
international 20-year patent term, measured from date of 
application. Included in the URAA were special transition rules 
relating to this new patent term. These provisions stipulate 
the relief available when certain activities, presumably done 
in good-faith reliance on the old patent term, were initiated 
prior to the June 8, 1995, effective date of the URAA; and 
became infringing due to the effective date of the URAA.
    Cited in these rules, but left undefined and unexplained, 
are such critical terms as ``substantial investment'' and 
``equitable remuneration.''
    Also relevant to this debate is law against patent 
infringement.
    Section 271(a) of the patent code contains a cornerstone of 
our Nation's intellectual property laws: ``whoever without 
authority makes, uses, offers to sell, or sells any patented 
invention, within the United States or imports into the United 
States during the term of the patent * * * infringes the 
patent.'' The italicized words were added by the URAA, thus 
rendering ineffective arguments put forth by some that the 
Congress overlooked the existence of the patent infringement 
laws when it passed the URAA.
    The Drug Price Competition and Patent Term Restoration Act 
of 1984 (``Hatch-Waxman'') added a special provision to section 
271 that reversed the Federal Circuit's 1984 decision in the 
case of Roche v. Bolar. An understanding of the Bolar amendment 
added by Hatch-Waxman is crucial to this whole debate. It 
created a unique exception to patent law which allows an 
applicant to undertake acts that would normally be considered 
infringing, that is, it made permissible the acts of generic 
drug manufacturers to ready their products for market.
    The Bolar amendment provides (1) it is not an infringing 
act to make, use, or sell a patented invention solely for uses 
reasonably related to submitting a generic drug application to 
the Food and Drug Administration; and (2) it is, however, an 
act of infringement to submit the application to gain approval 
while the pioneer patent is still in effect.
    Under the Hatch-Waxman law, a generic drug applicant must 
certify one of four things: (1) the pioneer drug has not been 
patented; (2) the pioneer patent has expired; (3) the pioneer 
patent is slated to expire at a specific future date; and (4) 
the patent of the pioneer is invalid or will not be infringed 
by manufacturing the drug in question. It seems clear that 
under current law, as interpreted by two Federal circuit court 
decisions, that generic drug manufacturers cannot introduce 
their products into the marketplace until the patent terms 
revised by GATT expire.
    One reason the Committee took such a great interest in the 
GATT issue is that intellectual property rights are critical to 
all American industries and should not be lightly disregarded. 
They are particularly important to the pharmaceutical industry 
because they fuel the engine that drives the biomedical 
research enterprise and result in numerous therapeutic 
advances.
    An amendment that eliminates the GATT patent benefits for 
pharmaceutical products would undermine a critically important 
incentive for research and development, as testimony before the 
Committee amply demonstrated.
    As with other research-intensive industries in the United 
States, the pioneer pharmaceutical industry has benefitted 
significantly from America's patent system. Due to the high 
costs and risks associated with developing and marketing 
prescription drugs, patents have allowed manufacturers to 
attract the risk capital necessary to develop and clinically 
test innovative new therapies. The results of such ground 
breaking biomedical research flows directly to patients who 
have access to drugs for complex and life-threatening diseases 
which are developed only by pioneer pharmaceutical companies. 
We should continue to reward their ingenuity and encourage 
their innovation.
    If Congress encourages curtailment of biomedical R&D; by 
limiting incentives, it inevitably will cause a downturn in the 
rate at which biomedical innovations will become available to 
the public. For this reason, an array of patient and research 
groups--including the American Association for Cancer Research, 
the Alliance for Aging Research, the Cystic Fibrosis 
Foundation, the Allergy and Asthma Network/Mothers of 
Asthmatics, and the Autism Society indicated to the Committee 
that they opposed the legislation unamended.
    These views are, perhaps, best summed up by former Surgeon 
General C. Everett Koop, who commented on this issue:

          * * * we must resist the temptations of short-term 
        thinking and look at the big picture. The only way to 
        make a real difference in health care costs--and a real 
        difference in people's lives--is to find cures for 
        AIDS, cancer, Alzheimer's and * * * other diseases. The 
        way to do that is to encourage support for medical 
        innovation.

    The Committee feels it is important to underscore that the 
courts have generally agreed with this panel's conclusions on 
S. 1277 that the GATT change did not result in an unintended 
loophole or windfall for the innovator pharmaceutical 
companies.
    On August 8, 1995, the U.S. Court of Appeals for the 
Federal Circuit issued a ruling in the case of DuPont Merck 
Pharmaceutical Company v. Bristol-Myers Squibb. Upon reviewing 
the relevant statutes, the court found that ``* * * the URAA 
does not clash with the Hatch-Waxman Act'' and precluded the 
generic manufacturers from entering the market via the Waxman-
Hatch route until the expiration of the affected patent.
    On October 16, 1995, the U.S. District Court for the 
Eastern District of Virginia issued an opinion (Merck v. 
Kessler) in a group of four consolidated cases that raised 
similar, but not identical, URAA/Hatch-Waxman issues. In this 
case, the court was unpersuaded by the arguments made by the 
generic drug industry and stated, ``This was no more a windfall 
* * * than the windfall which benefitted many patent holders 
when the seventeen year term of patents was extended to twenty 
years.''
    Two weeks later, on November 1, 1995, the Federal Circuit 
overturned a decision rendered by the U.S. District Court for 
the Southern District of Florida in the case of Bristol-Myers 
Squibb v. Royce Labs. The Federal Circuit ruling noted:

          The parties have not pointed to, and we have not 
        discovered, any legislative history on the intent of 
        Congress, at the time of passage of the URAA, regarding 
        the interplay between the URAA and the Hatch-Waxman 
        Act. Therefore, we limit our inquiry to the wording of 
        the statute.

    In finding against the generic manufacturer, the Federal 
Circuit makes a number of other points about the Royce case. 
The decision notes the unique treatment afforded to new drugs 
by the 1984 law. The Federal Circuit said, ``Yet, as the 
Supreme Court stated in Eli Lilly Co. v. Medtronic, Inc., the 
Hatch-Waxman Act created `an important new mechanism designed 
to guard against infringement of patents relating to pioneer 
drugs,' with enforcement provisions that `apply only to drugs 
and not to other products.' ''
    The Royce court also observed, citing as authority the 1990 
Federal Circuit decision in the VE Holding Corp. case: ``We 
presume `that Congress is knowledgeable about existing law 
pertinent to legislation it enacts.' '' The court went on to 
say that, ``We believe that if Congress had intended that the 
URAA affect the Hatch-Waxman Act's finely crafted ANDA approval 
process in the manner urged by [generic manufacturers], at the 
very least it would have referred to 21 U.S.C. 355(j) and 35 
U.S.C. 271(e) in the URAA.''
    A key point often ignored in this debate was addressed in 
the Federal Circuit's decision, when it boiled down the 
situation as follows: ``The statutory scheme does not say, as 
[the generic manufacturer] argues * * *, `If normally you would 
infringe, you do not infringe during the Delta period.' Rather, 
it says, `If normally you would infringe, you also infringe 
during the Delta period.' '' The Committee finds overly 
simplistic, thus, arguments put forth that the GATT changes 
were inadvertent and unintentionally created a loophole. They 
did neither.
    Another counterargument to those who concluded that S. 1277 
achieves a result that was clearly intended by the URAA can be 
found in a letter sent to the Congress by an FDA official. 
Although it appears that the FDA later reversed itself on this 
issue, its earlier statements are illustrative.
    In September of 1995, the FDA noted that the URAA was 
silent on this controversy. A September 27, 1995, letter from 
the FDA, Deputy Commissioner for Policy, William Schultz 
stated, ``The URAA does not address the effect of the URAA 
patent term extensions on the drug approval process under the 
Federal Food, Drug, and Cosmetic Act. * * * ''
    The Committee finds the characterization in the September 
FDA letter particularly interesting in light of an earlier May 
25, 1995, FDA response to a citizen petition filed by several 
innovator drug firms. The May FDA statement of policy is quite 
explicit on what the law addresses.
    In its May statement, FDA acknowledged that the Supreme 
Court's 1984 Chevron decision provides guidance in the area of 
statutory construction. In Chevron, the Supreme Court 
instructed: ``If the intent of Congress is clear, that is the 
end of the matter; for the court, as well as the agency, must 
give effect to the unambiguously expressed intent of 
Congress.''
    The Committee finds compelling several quotes from the 
Schultz letter. In that letter, the Deputy Commissioner stated, 
``The agency believes that interpretation of the 
interrelationship between the transitional provisions of 
section 532(a)(1) of the URAA and 35 U.S.C. 271(e)(4) is 
governed by the plain language of the URAA.'' He went on to 
say, ``The URAA is not `silent or ambiguous' on the question of 
applying the transitional provision to the generic drug 
approval process. * * * Moreover, this apparently is not an 
example of Congress having overlooked a statutory provision it 
might have been changed had it been aware of its existence. * * 
* ''
    Particularly revealing was the Administration official's 
statement that `` * * * the agency does not believe that it can 
assert that Congress was unaware of the existence of these 
remedies for infringement of patents on drug products, and, 
therefore, did not include them among the unavailable remedies 
* * * of the URAA * * *. In the present matter, therefore, the 
plain meaning of the URAA is dispositive.''
    The Committee has also found that overly simplistic 
arguments in support of measures such as S. 1277 ignore a 
fundamental point, that patents are property and cannot be 
treated lightly. Legal experts have presented testimony to the 
Committee arguing that the proposed URAA amendment would 
clearly deprive the patent holders of their property rights 
since patents have traditionally been recognized and protected 
by American courts as property.
    Based upon existing precedents, it can be argued that any 
legislation affecting either the exclusive use of a product to 
which a patent holder is entitled, or the time during which the 
patent holder is entitled to that exclusive use, affects core 
elements of the property right represented by a patent.
    By repealing patent extensions granted under the URAA, and 
reducing vested patent terms to which existing patent holders 
are currently entitled, some have argued that S. 1277, if 
unamended, could trigger the fifth amendment guarantee that the 
property holders receive just compensation from the U.S. 
Treasury.
    As Committee Chairman Orrin Hatch noted at the Committee's 
hearing examining the complex relationship between our trade, 
intellectual property, and drug laws:

          The American people have a great stake in this 
        dynamic. It is the public health--in the most literal 
        sense--that benefits from the delicately-crafted 
        statutory balance between incentives for the creation 
        of new breakthrough drugs and production of lower cost 
        generic copies.
          Both the pioneer and generic segments of the 
        pharmaceutical industry play important and valuable 
        roles in our health care system. At times, there is an 
        unavoidable, inherent tension between them * * * But 
        that competitive tension is necessary for our balanced 
        system which brings both innovative drugs and lower-
        cost copies to the patient's bedside.

    As we continue our vital national debate on ways in which 
to balance the budget and lower Federal Government spending, 
there is no question that economic pressures will dictate an 
even larger role for generic products in the ever-changing 
health care marketplace.
    At the same time, the only way America will retain its 
leadership role in the biological sciences is for our patent 
and drug regulation to encourage--not inhibit--the rapid 
progress of this scientific revolution.
    Strong patent protection is necessary to attract the 
enormous financial and scientific resources necessary to 
develop and test diagnostic and therapeutic products. A good 
example is identification of a gene that appears to be involved 
in a common form of breast cancer. Identification of the ``BRCA 
1'' gene emerged from the joint enterprise of NIH, the 
University of Utah and a startup Salt Lake City biotechnology 
firm, Myriad. Continued biomedical research, with a strong 
foundation of intellectual property protections, will be vital 
components of our national commitment to improve the public 
health. Revelation of that fact is, perhaps, one of the major 
achievements of our debate on the GATT legislation.

                           VII. Cost Estimate

    The Congressional Budget Office had not concluded its 
estimate of this legislation at the time this report was filed.

                   VIII. Regulatory Impact Statement

    The Congressional Budget Office had not issued its 
regulatory impact statement at the time this report was filed.
                    IX. MINORITY VIEWS OF MR. BROWN

    We oppose the Judiciary Committee's reported Hatch 
substitute to S. 1277 and believe there are serious flaws in 
this ``compromise.'' Here's why:

                               I. Summary

                a. windfall for pharmaceutical industry

    An oversight in GATT implementation legislation created a 
windfall for branded pharmaceutical companies at the expense of 
consumers. The GATT loophole resulted from an inadvertent 
omission of a conforming amendment in the GATT implementation 
legislation to the Federal Food, Drug and Cosmetics Act. 
Consequently, the pharmaceutical industry is the only industry 
not covered by GATT patent transition rules. The cost to 
consumers will exceed $2.5 billion. One drug alone is producing 
an unexpected windfall profit of more that $3.8 million a day 
for its parent company.

                        b. ``litigation first''

    The Hatch substitute mandates ``litigation first'' over 
insurmountable legal hurdles. This substitute is a trial 
lawyers dream and ensures that generic drugs will be kept off 
the market by endless and needless court delays. For example, 
under the substitute, brand name companies can get an unlimited 
stay to keep generic drugs off the market for the entire 
duration of the GATT transitional extension. For Zantac, which 
had already received the benefit of a 5 months of no generic 
competition, the Hatch bill would protect this multibillion 
dollar windfall from generic competition for another 15 months.

                          c. not a compromise

    The Hatch substitute is not a compromise. A compromise 
requires that the interests of both parties are served to some 
extent. This bill (drafted by the brand-name industry 
association) serves only the interests of the branded drugs by 
preventing all generics from entering the market. Medications 
such as Zantac, Seldane-D, a widely prescribed allergy 
medicine, and Toradol, a pain killer, will be kept off the 
market during the GATT patent extension period. As a result, 
consumers will pay an estimated hundreds of millions of dollars 
more for their medicines than they should.

                    d. ``christmas tree'' of goodies

    Rather than an evenhanded attempt to solve the GATT 
loophole, the Hatch bill is chock full of protection for 
special interests. It is a Christmas tree of ``goodies'' for a 
few big drug companies at the expense of American consumers. It 
includes an array of legal hurdles to protect the Zantac 
windfall, a cutoff date to protect a few chosen companies from 
competition, a ``fix'' to extend a few patents despite a recent 
federal appeals court decision and a specific patent extension 
for one mid-Atlantic company.

                        e. overturns current law

    Current law is overturned by the Hatch substitute. Under 
current law, a generic pharmaceutical manufacturer is required 
to complete a series of tests and studies in the course of 
filing an abbreviated new drug application to prove to the FDA 
that the generic drug will in fact meet FDA standards when 
brought to market. These tests require substantial investment 
on the part of those generic manufacturers who file an ANDA. 
Just as in previous versions, the proposal categorically 
excludes from consideration as substantial investment virtually 
everything a generic manufacturer is required or even permitted 
to do in developing a legally marketable generic drug. The 
Hatch substitute would erect insurmountable barriers by 
creating a new definition of ``substantial investment'' that 
requires an even greater investment than that already required. 
The only avenue left by the Hatch bill would be illegal 
activity.

                          f. blocks marketing

    It automatically blocks marketing of the generic while the 
litigation proceeds, without any time limitation whatsoever, 
even if it consumes the entire ``Delta period'', an advantage 
conferred by the URAA on patent holders in no other industry.
    This substitute withholds from the generic drug industry 
the protection enjoyed by every other industry under the ``acts 
commenced'' prong of the URAA transition provision. It makes no 
provision whatsoever for redress to consumers, including 
Medicaid and other government programs, who were forced to pay 
higher prices during the ``Delta period'' because generics were 
kept off the market by the litigation, or for disgorgement of 
profits gained by patent holders during the period of delay.
    We believe the Hatch substitute codifies the GATT loophole 
S. 1277 was designed to fix. We pushed for a proposal which 
would have effectively closed that loophole. Under our 
proposal, brand-name companies would receive a royalty payment 
from qualifying generic companies that go to market during the 
GATT patent extension period, as is provided in the transition 
rules for all other companies.
    Most importantly though, under our proposal, consumers and 
taxpayers would save billions of dollars as those generic drug 
manufacturers who have met the standards of current law are 
able to go to market under the transition rules. According to 
The Seniors Coalition, the mistake has already cost America's 
seniors, consumers, and taxpayers more than $750 million, while 
a few major drug companies have realized windfall profits. One 
company alone will earn a projected $2 billion in windfall 
profits unless Congress corrects this mistake made in December 
1994.
    Our proposal simply makes sense by supporting equitable 
treatment for the pharmaceutical industry and for American drug 
consumers.

                        II. ``Special Benefits''

    Brand name drug manufacturers receive seven ``special 
benefits'' under the Hatch-Waxman Act, conferred on no other 
industry:
            Extension of drug (and food and color additive) 
        patent terms for up to 5 years to compensate for delays 
        in marketing caused by the need to obtain FDA approval;
            Prohibition against marketing by a competitor 
        challenging a drug patent without prior notice to the 
        patent holder;
            Prohibition against lawsuits challenging drug 
        patents until 1\1/2\ months after the patent holder 
        receives notice of the challenge, guaranteeing the 
        patent holder the right to sue first in a court of its 
        own choosing;
            If the drug patent holder does sue, prohibition 
        against marketing by the competitor challenging the 
        patent for the first 2\1/2\ years of the litigation;
            If the drug patent holder wins its lawsuit, 
        prohibition against marketing by the competitor even if 
        the ordinary requirements for an injunction are not 
        met;
            Even if the drug patent holder does not sue during 
        the 1\1/2\ month ``standstill'' period, another 
        prohibition against lawsuits challenging drug patents 
        except in the patent holder's ``home court'';
            Prohibition against marketing generics even where 
        there is no patent on the brand-name drug, for 5 years 
        in the case of brand-name drugs receiving their first 
        FDA approval and for 3 years where a new use of a 
        brand-name drug is approved.
    The ``special benefits'' received by brand-name drug 
manufacturers under Hatch-Waxman have not prevented them from 
also receiving the full benefits conferred on all patent 
holders by the URAA. By the same token, Hatch-Waxman is no 
reason to deny generic drug manufacturers the full protection 
afforded every other industry by the GATT/URAA transition 
provision.

                   III. Analysis of Hatch Substitute

Section 1

    This provision is ironic but unexceptionable.

Section 2(a)

    This provision purports to extend the terms of the URAA 
transition provision to some generic drugs, by making the pre-
URAA patent expiration date applicable if certain conditions 
are met. The scope of the provision is narrowly confined, 
however, and even as to this limited class of drugs, the 
provision ingeniously avoids actually granting any transitional 
protection.
    First, the provision applies only where the ANDA for the 
generic drug was both ``filed'' with FDA and ``accepted for 
filing'' by the agency prior to June 8, 1995. Strictly 
speaking, no ANDA can meet that standard, because in FDA 
parlance ANDA's are not ``filed'' but merely ``submitted'; 
after the applicant ``submits'' the application, FDA decides 
whether the application is deemed ``received.'' Moreover, 
although FDA regulations require the agency to notify an ANDA 
applicant if the ANDA is not deemed ``received,'' there is no 
deadline within which it must do so. At best, therefore, the 
effect of the provision thus is to make transitional protection 
available only where the ANDA was submitted at some point prior 
to June 8, 1995--perhaps well prior to that date.
    Second, the provision does not become operative until both 
the existence of ``substantial investment'' (as narrowly 
defined in section 2(b)) and the amount of ``equitable 
remuneration'' to be paid by the generic manufacturer under the 
URAA have been conclusively determined by a court, and all 
possible appeals have been exhausted, no matter how long that 
may take. (The entry of a court order is required, even if the 
parties are in agreement on these issues.) Meanwhile, as a 
matter of patent law, the generic cannot be marketed because 
such marketing would constitute patent infringement. No such 
hurdle need be overcome by new competitors in any other 
industry under the URAA transition provision.

Section 2(b)

    This provision creates a special and restrictive definition 
of the URAA term ``substantial investment,'' applicable only to 
the generic drug industry, that would be binding on the courts. 
The URAA itself imposes no such restriction on the courts when 
any other industry is involved. The definition is so 
restrictive that virtually no generic manufacturer can be 
expected to qualify for the transitional protection that the 
proposal purports to provide. The true effect of the provision 
is not ``definitional,'' but rather to eviscerate the proposal 
in its entirety.
    First, subparagraph (1) forbids the courts to recognize a 
generic manufacturer's ``substantial investment,'' regardless 
of when the investment was made, unless by June 8, 1995, the 
resulting ANDA was both submitted to FDA and found by the 
agency to be complete. Moreover, as noted above in connection 
with section 2(a), the latter does not occur until some time 
after the ANDA is actually submitted. The effect of the 
provision is thus to push back the qualifying date for 
``substantial investment'' to some indeterminate time prior to 
June 8, 1995, which under the URAA is the qualifying date in 
every other industry.
    Second, subparagraph (2) forbids the courts to recognize a 
generic manufacturer's ``substantial investment'' unless it is 
``specifically related to the research, development, 
manufacture, sale or marketing'' of the particular product in 
question. Because it is illegal to sell or market a generic 
drug prior to FDA approval, it is difficult to imagine that any 
investment in such activities prior to approval could qualify 
as ``substantial.'' As to ``manufacture,'' the FDA approval 
process--even for generics--is so lengthy, and the shelf life 
of drugs is so limited, that no significant quantities are 
likely to be manufactured prior to approval even if the firm 
were willing to ``roll the dice'' and take its chances that 
changes in the product or its method of manufacturing would not 
be required by FDA. What a generic manufacturer can do prior to 
FDA approval of the ANDA is limited, both by the general patent 
law and by the regulatory provisions of the Food, Drug, and 
Cosmetic Act, to ``research, [and] development'' of its 
product.
    Third, however, whatever may be given by subparagraph (2) 
is promptly taken away by subparagraph (3). In stark 
contradiction to what precedes it, subparagraph (3) forbids the 
courts to recognize a generic manufacturer's ``substantial 
investment'' that ``solely consist[s] of * * * expenditures 
related to the development and submission of the information 
contained in [the ANDA].'' This is the cruelest deception of 
all; ``research and development undertaken in connection with'' 
a proposed generic product is just another way of saying 
``development and submission of the information contained in'' 
the ANDA. Under patent law both pre-URAA and post-URAA, and 
under the regulatory statute administered by FDA, generic 
manufacturers are not legally permitted to do virtually 
anything but ``develop and submit the information'' contained 
in the ANDA.
    It is true that new manufacturing facilities may sometimes 
be constructed in anticipation of FDA approval (as was the case 
with at least one manufacturer's proposed generic form of 
Zantac). But even that sort of ``investment'' could be deemed 
``related to the development and submission of information'' to 
FDA, inasmuch as full information on manufacturing facilities 
and controls must be included in an ANDA.

Section 2(c)

    This provision purports to authorize (but does not require) 
compensation to generic drug manufacturers for delays in 
marketing that result from litigation brought by patent holders 
under section 2(a). The compensation must be ``equitable.'' If 
the provision is intended to remove a patent holder's incentive 
to use the procedures of section 2(a) to keep generics off the 
market, it will do nothing of the kind. Or, it may be merely a 
cynical attempt to buy off generic manufacturers supporting 
efforts in Congress to correct the URAA mistake. In either 
case, the provision does nothing to recompense consumers or 
taxpayers for the higher prices they will be forced to pay 
during the URAA created ``Delta period.''
    The latter point is self-evident. The first may require 
some explanation. The only ``equitable compensation'' to a 
generic manufacturer that would make sense would be its lost 
profits. But a drug patent holder would happily pay a generic 
manufacturer its lost profits into eternity if it could, rather 
than allow the generic to enter the market, because the profits 
made by the patent holder on the brand-name drug are so many 
times greater than the profits being lost by the far lower 
priced generic. Far from removing the patent holder's incentive 
to delay entry of the generic, this provision creates an 
overwhelming incentive for the patent holder to do exactly 
that.

Section 2(d)

    This provision operates in tandem with section 2(a) to 
ensure that FDA is powerless to approve generic drugs during 
the URAA ``Delta period'' until--without any time limitation 
whatsoever--the bitter end of any litigation brought by a 
patent holder under section 2(a), including all possible 
appeals. This gives patent holders a lengthier delay in URAA 
transition-provision cases than existing Hatch-Waxman Act 
procedures authorize in cases where a proposed generic 
manufacturer wishes to challenge a patent as invalid or 
unenforceable, or to assert that the proposed generic product 
does not infringe a patent on the innovator drug. Under Hatch-
Waxman, the delay is limited to 30 months (2\1/2\ years). Under 
this proposal, the delay is limited only by the length of the 
``Delta period.''
    Thus, rather than fix Congress' inadvertent mistake in 
failing to conform FDA's approval authority with the transition 
provision of the URAA, this provision of the proposal codifies 
and perpetuates that error. Indeed, it exposes the entire 
proposal as nothing but a cynical and duplicitous charade.

Section 2(e)

    This provision limits the applicability of the proposal to 
cases where the pre-URAA expiration date of the patent on the 
innovator drug was less than three years after the URAA became 
effective. The URAA transition provision applicable in every 
other industry contains no such limitation.

Section 3

    This provision would legislatively overrule the decision of 
the U.S. Court of Appeals for the Federal Circuit in Merck & 
Co. v. Kessler, Nos. 95-1068 et al., decided April 4, 1996, 
insofar as that decision refused to allow drug patent holders 
already enjoying Hatch-Waxman Act patent term extensions as of 
the URAA effective date (June 8, 1995) to claim a second Hatch-
Waxman extension based on the lengthening of patent terms by 
the transition provision of the URAA.
    This provision would legislatively grant a special patent 
term extension for an unnamed specific drug, approved by FAA 5-
years ago. Whether this is in addition to a patent term 
extension under the general provisions of the Hatch-Waxman Act 
is not revealed.

Section 5

    This provision purports to express the ``sense of the 
Senate'' that the litigation contemplated--indeed, compelled--
by the proposal be ``concluded as expeditiously as possible.'' 
The provision is hortatory only. It can be expected to have no 
effect whatsoever upon the litigating tactics of drug patent 
holders seeking to keep generics off the market during the 
``Delta period'' notwithstanding Congress' contrary intent as 
expressed in the URAA transition provision. Nor can it affect 
the way in which overburdened courts attempt to discharge their 
many responsibilities (including numerous statutes requiring 
expedited hearing of various types of civil cases, not to 
mention the Speedy Trial Act provisions governing criminal 
trials).

                                                        Hank Brown.

         IV. Letter From Secretary of Health and Human Services

                            The Secretary of Health
                                        and Human Services,
                                     Washington, DC, June 13, 1996.
Hon. Hank Brown,
U.S. Senate, Washington, DC.
    Dear Senator Brown: This is in response to your letter concerning 
S. 1277, the ``Pharmaceutical Industry Special Equity Act of 1996'', as 
recently ordered reported by the Senate Judiciary Committee. You asked 
the Department to respond to questions on particular aspects of the 
bill, which addresses the effect of the Uruguay Round Agreements Act 
(URAA) on the generic drug industry. In brief, despite the bill's 
declared intent to eliminate the unequal treatment of generic drugs 
created by the URAA, S. 1277 as ordered reported would be ineffective 
in affording generic drugs the same transitional period benefits given 
to other technologies, leaving the generic drug industry for all 
practical purposes at the same disadvantage as under current law.
    The URAA extended the terms of some existing patents. In 
recognition that businesses may have made investments based on the 
expectation that a patent would expire at the end of the original 
patent term, Congress provided that if a patent is infringed by an act 
that became infringing only because the patent was extended by the 
URAA, and the infringer made a substantial investment before June 8, 
1995, the only remedy available to the patent holder against that 
infringer would be the right to equitable remuneration during the 
period of patent extension, or ``Delta period''. Because of an 
unintended loophole favoring manufacturers of innovator human drugs, 
this transitional provision is available to all U.S. industries with 
the single exception of generic pharmaceuticals.
    1. Does S. 1277 truly remedy the URAA loophole?
    In all other industries, infringers of patents extended by the URAA 
may put their products on the market, and then resolve, through 
litigation or otherwise, whether the infringer made a substantial 
investment by June 8, 1995, and the amount of equitable remuneration. 
The URAA does not define substantial investment or equitable 
remuneration for any industry. Legislation designed with the sole 
purpose of closing the URAA loophole would permit generic drugs to be 
approved upon the expiration of the pre-URAA patent term and would 
leave matters of substantial investment and equitable remuneration to 
subsequent judicial interpretation or agreement between the parties in 
a particular case.
    S. 1277 does not close the URAA loophole, but rather imposes 
requirements on the generic drug industry that are entirely different 
from those that apply to other industries:
          (A) The bill requires that before a generic drug can be 
        marketed, all issues related to substantial investment and 
        equitable remuneration must be finally resolved by a court from 
        which no appeal may be taken.
          (B) S. 1277 both defines substantial investment--a matter 
        that the URAA left to the courts--and does so in a manner that 
        would make it virtually impossible for a generic drug company 
        to meet the requirement.
          (C) Whereas the transitional benefit period for all other 
        products is not time-limited, section 2(e) of S. 1277 would 
        prohibit marketing of an infringing generic drug during the 
        Delta period of any pharmaceutical patent that, but for the 
        URAA, would have expired on or after June 8, 1998.
          (D) In the unlikely event that the generic drug applicant 
        prevails in litigation on the substantial investment issue, 
        section 2(c) of S. 1277 provides for ``equitable compensation'' 
        to the applicant if it can establish that its market entry was 
        delayed by the litigation. Section 2(c), which assigns to the 
        generic manufacturer the difficult burden of persuading the 
        court of the existence and amount of financial injury, is not a 
        meaningful equivalent to the option, available to qualifying 
        infringers of all other URAA-extended patents, of marketing the 
        product and paying equitable remuneration to the patent holder.
    2. Does S. 1277 represent a compromise between proponents of a 
legislative remedy and those seeking to preserve the loophole?
    No, the bill as currently written would effectively preclude entry 
onto the market of any generic drug during the Delta period, because it 
will be nearly impossible to meet the ``substantial investment'' 
requirement. Furthermore, given the difficulty of proving the full 
amount of damages, even those few who would be eligible for equitable 
compensation would be unlikely to be made whole. With few or no 
exceptions, the generic drug industry would be no better off than it is 
today.
    3. Would it be legally possible for a generic drug manufacturer to 
meet the ``substantial investment'' requirement of S. 1277?
    It would be virtually impossible for a generic drug manufacturer to 
meet the substantial investment requirement as it is defined in the 
proposed legislation. Section 2(b)(2) requires that the investment by 
the generic drug company be specifically related to the product for 
which the application was filed, but not consist solely of the 
company's expenditures related to the development and submission of the 
information in the application.
    Because an application to market a generic drug is required to 
contain information on every important aspect of the drug product and 
its manufacture, it is difficult to imagine what investment the generic 
drug company could make that would be both specifically related to the 
product for which the application was submitted and not related to the 
development and submission of the application. For example, if the 
applicant were to invest in a new plant to manufacture the generic drug 
product it would be required to submit to FDA, either in the original 
application or by amendment, information on the location of the plant, 
and on the manufacturing and packaging equipment and processes in the 
facility.
    4. Could any generic drug manufacturer obtain FDA approval during 
the Delta period for a drug that obtained a patent extension under the 
URAA transition provision?
    Given the requirements proposed in S. 1277, it would be virtually 
impossible for a manufacturer to obtain FDA approval for a generic drug 
product during the Delta period. Not only is substantial investment 
defined in such a way that it presents a nearly insurmountable obstacle 
to a generic company, but the bill also requires that patent litigation 
be completed prior to FDA approval of the generic drug. This 
requirement, particularly when coupled with the limitation in section 
2(e) to patents whose original term expired before June 8, 1998, would 
assure that no generic drug will be marketed during the Delta period. 
Unlike section 505(j) of the Federal Food, Drug, and Cosmetic Act, 
which establishes a 30-month period for resolution of patent disputes 
after which FDA can approve the generic regardless of the status of the 
patent litigation, S. 1277 establishes no binding timetable for 
resolution of patent litigation. Because the pendency of patent 
litigation ensures that there will be no generic competition, there is 
no incentive for an innovator company to expedite litigation. The 
proposed ``equitable compensation'' would not be an adequate incentive 
to expedite litigation.
    We are advised by the Office of Management and Budget that there is 
not objection to the presentation of this report from the standpoint of 
the Administration's program.
    An identical letter is being sent to Senator Pryor.
            Sincerely,
                                                  Donna E. Shalala.
                               __________

               V. Letters of Support/Articles of Support

                                     The Seniors Coalition,
                                      Washington, DC, May 10, 1996.
Hon. Hank Brown,
U.S. Senate, Washington, DC.
    Dear Senator Brown: On behalf of the two million members of the 
Seniors Coalition, I am writing to urge you to support legislation 
offered by Senators Hank Brown (R-CO), John Chafee (R-RI) and David 
Pryor (D-AR) to correct a mistake made in the GATT Agreement 
implementing legislation, and to oppose the substitute reported by the 
Judiciary Committee.
    The mistake has already cost America's seniors, consumer, and 
taxpayers more than $750 million, while a few major drug companies, 
most notably Glaxo-Wellcome, have realized unintended windfall profits. 
Glaxo alone will earn a projected two billion in windfall profits 
unless Congress corrects this mistake made in December 1994.
    Although its proponents call it a ``compromise,'' the Judiciary 
Committee substitute does absolutely nothing to help seniors. It 
ensures that generic versions of such popular medications as Zantac, 
Glaxo's blockbuster anti-ulcer drug, Seldane-D, a widely prescribe 
allergy medicine, and Toradol, a pain killer, will be kept off the 
market during the GATT patent extension period. As a result, seniors 
will pay an estimated hundreds of millions of dollars more for their 
medicines than they should.
    Only the Brown/Chafee/Pryor legislation applies the GATT transition 
rules to the pharmaceutical industry in a way that is consistent with 
the intent of the GATT Agreement and the implementing legislation. The 
Judiciary Committee substitute incorporates a ``litigation first'' 
policy, making it a trail lawyers dream and ensuring that generic drugs 
will be kept off the market by endless and needless court delays.
    The Seniors Coalition strongly urges you to support the Brown/
Chafee/Pryor legislation and oppose the Judiciary Committee substitute 
when the GATT issue comes to the floor for a vote.
    Thank you.
            Sincerely,
                                            Thair Phillips,
                                           Chief Executive Officer.
                               __________

             [From the Des Moines Register, Nov. 27, 1995.]

                           A Costly Oversight

        fine print in gatt law could cost zantac users millions
    The nation's prescription drug makers are at war again, with a $1 
billion-plus purse going to the winner. If the brand-name drug 
manufacturers win, the losers will include the millions of Americans 
who suffer from ulcers or heartburn, and take the drug Zantac regularly 
to combat the problem. It's going to cost each of them about $1,600.
    Zantac is made by Glaxo Wellcome, the biggest in the business.
    Here's what started the current war:
    When a new prescription drug hits the market, generic drug 
manufacturers await the patent expiration so they can enter the market 
with the same drug. They offer it for sale without the brand name, 
usually at a fraction of the brand-name price.
    The new international GATT treaty signed by the United States and 
122 other countries sets the life of a patent at 20 years from the date 
of application. Former U.S. law provided patent protection for 
pharmaceuticals for 17 years from the date of approval. Because the 
difference could have a significant impact on the number of years a 
firm could market its patented drug without competition. Congress made 
special provisions for drugs under patent at the time GATT was approved 
last summer.
    But when the legal beagles got done reading all the fine print, it 
turned out that Zantac was granted a 19-month extension of its patent 
life--and it is such a hugely popular drug that that translates into a 
multimillion-dollar windfall.
    Generic drug makers call the windfall a congressional oversight, 
and estimate the difference is worth $2.2 billion to Glaxo, because the 
generics can't enter the market for 19 more months. Glaxo counters that 
Congress made no mistake, that the extension was part of the compromise 
with generics. It won't wash. Nothing in the GATT treaty was intended 
to further enrich the happy handful of brand-name drug makers who hold 
lucrative patents--or to penalize the users of the drugs.
    A month's supply of Zantac ordinarily sells for around $115; the 
generic price--meaning the same drug without the Zantac label--would be 
around $35, the generic makers contend. Unless Congress changes the 
wording of the law regarding transition to GATT provisions, Zantac 
users will pay the difference for 19 months longer.
    Some generic drug manufacturers had already spent a bundle 
preparing to enter the market before the GATT treaty took effect. They 
lose. So do taxpayers, who pay for Medicaid prescriptions. The Generic 
Drug Equity Coalition estimates that the higher cost of Zantac and some 
other drugs affected by the mistake (such as Capoten, for high blood 
pressure) will cost Iowa Medicaid $3.5 million. Further, say the 
generic drug makers, it will tack another $1.2 million onto the cost of 
health-insurance premiums for Iowa state employees.
    Glaxo's political-action committee has doubled its contributions to 
Congress in recent months. Glaxo wants the mistake to stay in the law. 
Generic drug manufacturers want it out.
    So should ulcer sufferers. So should taxpayers. So should Congress.
                               __________

            [From the Washington Post, Monday, Dec. 4, 1995]

                          The Zantac Windfall

    All for lack of a technical conforming clause in a trade bill, full 
patent protection for a drug called Zantac will run 19 months beyond 
its original expiration date. Zantac, used to treat ulcers, is the 
world's most widely prescribed drug, and its sales in this country run 
to more than $2 billion a year. The patent extension postpones the date 
at which generic products can begin to compete with it and pull the 
price down. That provides a great windfall to Zantac's maker, Glaxo 
Wellcome Inc.
    It's a case study in legislation and high-powered lobbying. When 
Congress enacted the big Uruguay Round trade bill a year ago, it 
changed the terms of American patents to a new worldwide standard. The 
effect was to lengthen existing patents, usually by a year or two. But 
Congress had heard from companies that were counting on the expiration 
of competitors' patents. It responded by writing into the trade bill a 
transitional provision. Any company that had already invested in 
facilities to manufacture a knock-off, it said, could pay a royalty to 
the patent-holder and go into production on the patent's original 
expiration date.
    But Congress neglected to add a clause amending a crucial paragraph 
in the drug laws. The result is that the transitional clause now 
applies to every industry but drugs. That set off a huge lobbying and 
public relations war with the generic manufacturers enlisting the 
support of consumers' organizations and Glaxo Wellcome invoking the 
sacred inviolability of an American patent.
    Mickey Kantor, the president's trade representative, who managed 
the trade bill for the administration, says that the omission was an 
error, pure and simple. But it has created a rich benefit for one 
company in particular. A small band of senators led by David Pryor (D-
Ark.) has been trying to right this by enacting the missing clause, but 
so far it hasn't got far. Glaxo Wellcome and the other defenders of 
drug patents are winning. Other drugs are also involved, incidentally, 
although Zantac is by far the most important in financial terms.
    Drug prices are a particularly sensitive area of health economics 
because Medicare does not, in most cases, cover drugs. The money spent 
on Zantac is only a small fraction of the $80 billion a year that 
Americans spend on all prescription drugs. Especially for the elderly, 
the cost of drugs can be a terrifying burden. That makes it doubly 
difficult to understand why the Senate refuses to do anything about a 
windfall that, as far as the administration is concerned, is based on 
nothing more than an error of omission.
             X. MINORITY VIEWS OF MESSRS. KENNEDY AND SIMON

    The relationship between the Uruguay Round Agreements Act 
and existing U.S. pharmaceutical patent laws posed an important 
question to members of this Committee regarding the treatment 
of generic pharmaceutical drugs. Although we commend Chairman 
Hatch for his hard work in this area, we oppose the legislation 
that was reported out of the Judiciary Committee.
    Under the Uruguay Round Agreements Act (URAA, Public Law 
103-465), the United States harmonized its patent laws with 
other nations in accordance with the trade agreements resulting 
from the Uruguay Round of multilateral negotiations under the 
auspices of the General Agreements on Tariffs and Trade (GATT), 
and pursuant to the Statement of Administrative Action (SAA) 
submitted to the Congress. Section 532 of the URAA states that, 
after June 8, 1995, new patents are valid for 20 years from 
date of filing. Patents approved before June 8 are extended to 
the greater of either 20 years from filing or the traditional 
17 years from patent grant.
    In implementing these changes, however, Congress recognized 
that in many instances the private sector had already made 
significant investments based on pre-GATT dates of patent 
expiry. As a result, the URAA includes a transitional provision 
in section 532 which allows any party that has made a 
``substantial investment'' prior to June 8, 1995, in a generic 
version of a patented product to market it during the period of 
extended patent life granted under the URAA if ``equitable 
remuneration'' is made to the patent holder. This provision 
applies to all patents extended by the URAA and is both 
consistent and explicitly sanctioned in the World Trade 
Organization (WTO) Agreement on Trade-Related Aspects of 
Intellectual Property Rights (TRIP's Agreement).
    According to the U.S. Trade Representative (USTR), the 
Secretary of Health and Human Services (DHHS), the Food and 
Drug Administration (FDA) and the Patent and Trademark Office 
(PTO), this transition provision was also intended to apply 
uniformly to all industries, including the pharmaceutical 
industry. As U.S. Trade Representative Mickey Kantor testified 
on March 13, 1996, before the Committee:

          When we drafted this transitional provision, we 
        intended it to apply to all types of patented 
        technology, and expected no distinctions to be made 
        between electronic products, pharmaceutical products, 
        or any other type of patented products. By contrast, 
        when we intended to distinguish between types of 
        intellectual property in the URAA, we did so clearly 
        and unambiguously--the lack of any distinctions in 
        section 532 of the URAA or the relevant portions of the 
        Statement of Administrative Action clearly indicates 
        that we intended no distinction to be made.

    Nor was it the intent of the Congress to single out a 
specific industry for special treatment under the transition 
provision. On August 12, 1994, the Senate Judiciary Committee 
and the House Judiciary Committee held a joint hearing to 
review the intellectual property provisions of the URAA. No 
reference to any industry-specific exemptions to the transition 
provision was made, including in the testimony of the 
pharmaceutical industry's trade association, the Pharmaceutical 
Research and Manufacturers Association (PhRMA). Nor did any 
other industries with compelling commercial interests at stake 
articulate the desirability, necessity or existence of 
exemptions to the transition provision. Moreover, no hearings, 
testimony or statements conducted or made in either the House 
or the Senate prior to enactment of the URAA refer to section 
532, including the transition provision, in any manner save 
with reference to its universal scope and application.
    Despite the intent of both the Congress and the 
Administration, the record clearly shows that an error was made 
in drafting the language of the URAA transition provision with 
respect to the technical interrelationship between the Patent 
Act and the regulation of pharmaceutical products by the 
Federal Food, Drug and Cosmetic Act (FD&C; Act). In originally 
drafting this language, the PTO assumed that all forms of 
technology would be treated alike under section 532. In their 
review of the legislation, the Office of Legislative Counsel in 
both the House and the Senate similarly assumed that section 
532, including the transition provision, was universal in 
scope. The Committees of jurisdiction, however, failed to 
account for the inconsistency between section 532 and the 
statutory language controlling the approval and marketing of 
generic pharmaceuticals in the 1984 Waxman-Hatch amendments to 
the FD&C; Act.
    As a result of the absence of a conforming amendment to the 
Waxman-Hatch amendments, the prescription drug industry is the 
only industry in the country which received the URAA patent 
extension but is unfairly exempted and shielded from generic 
competition. The Waxman-Hatch amendments require a manufacturer 
seeking to market a generic drug to receive FDA approval, upon 
which the manufacturer may go to market on the date of the 
innovator's patent expiry. While the URAA extends existing 
patents, it also provides under section 532 for generic 
manufacturers who have made a ``substantial investment'' to go 
to market on the original 17-year date of patent expiry so long 
as ``equitable remuneration'' is paid. However, in its 
exhaustive review of the congressional record of deliberations 
on the URAA, the FDA concluded:

          Here there were neither hearings nor a single word of 
        debate on the floor of the House or Senate on the 
        impact of the URAA on the 1984 Waxman-Hatch Amendments. 
        Nor do the committee reports indicate that Congress 
        understood that the URAA would both grant a patent term 
        extension for certain pioneer products and block FDA 
        from approving generic versions of those drugs until 
        the extended patent terms have expired. Nonetheless, 
        the language of the URAA directs that result.

    The absence of a conforming amendment has thus created a 
statutory loophole which benefits a few brand name drug 
companies, blocks the fair market competition called for in the 
URAA, delays the availability of less expensive generic drugs 
and forces American consumers to pay as much as $2 to $6 
billion more for their medicines.
    Consumers, health insurers, HMO's and hospitals are not 
alone in subsidizing this multibillion dollar windfall. 
Taxpayers must also subsidize higher government health care 
spending. The Congressional Budget Office (CBO) estimates that 
Medicaid will save $150 million over 5 years if the loophole is 
closed. The Veterans Health Administration estimates it could 
save $211 million and Public Health Service and Indian Health 
Service clinics could save $15 million.
    In no way did the Congress intend the URAA to obstruct the 
free market, hinder FDA product approvals or create special 
patent exemptions for particular industries. But in failing to 
adopt S.1277 as originally proposed by Senator Brown and 
Senator Pryor, the Committee has not acted to correct the 
statutory loophole and the resulting multibillion dollar 
windfall. In his testimony before the Committee, Ambassador 
Kantor stated that S.1277, as originally proposed, ``would do 
nothing more than [fulfill] our obligation to be faithful to 
what we negotiated'' in the URAA and confirmed that the bill 
would ``carry out the intent, not only of the negotiations and 
what the Administration intended, but also what the Congress 
intended.'' Additionally, HHS Secretary Donna Shalala wrote on 
February 26, 1996, that ``the [URAA] transitional rules should 
be applied to the generic pharmaceutical industry just as they 
are applied to other businesses.'
    In place of S. 1277, the Committee reported out substitute 
language which fails to correct the URAA loophole and, in 
effect, codifies its effect on the pharmaceutical industry. 
According to a comprehensive analysis by the FDA and DHHS, the 
substitute would block marketing of competing generic products 
and guarantees that litigation would consume any opportunity 
for the lower-cost generics affected by the loophole to enter 
the market as originally intended under the URAA.
    In failing to amend the FD&C; Act to correct the URAA 
loophole, the Committee has regrettably left a clear and costly 
statutory mistake to stand uncorrected, effectively rewarding a 
few companies with an unintended, unjustifiable multibillion 
dollar windfall which is being subsidized daily by American 
consumers and taxpayers.

                                   Edward M. Kennedy.
                                   Paul Simon.

                      XI. Changes in Existing Law

    In compliance with paragraph 12 of rule XXVI of the 
Standing Rules of the Senate, the committee finds no changes in 
existing law caused by passage of S. 1277.