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                                                       Calendar No. 431
107th Congress                                                   Report
                                 SENATE
 2d Session                                                     107-167

======================================================================



 
                    THE DRUG COMPETITION ACT OF 2001

                                _______
                                

                 June 20, 2002.--Ordered to be printed

                                _______
                                

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

                              R E P O R T

                         [To accompany S. 754]

    The Committee on the Judiciary, to which was referred the 
bill (S. 754) to enhance competition for prescription drugs by 
increasing the ability of the Department of Justice and the 
Federal Trade Commission to enforce existing antitrust and 
competition laws regarding brand name drugs and generic drugs, 
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. Legislative history..............................................3
.................................................................
 II. The need for S. 754..............................................4
.................................................................
III. Vote of the Committee............................................5
.................................................................
 IV. Section-by-section analysis......................................5
.................................................................
  V. Cost estimate....................................................7
.................................................................
 VI. Regulatory impact statement.....................................14

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

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Drug Competition Act of 2001''.

SEC. 2. FINDINGS.

    Congress finds that--
          (1) prescription drug prices are increasing at an alarming 
        rate and are a major worry of many senior citizens and American 
        families;
          (2) there is a potential for companies with patent rights 
        regarding brand name drugs and companies which could 
        manufacture generic versions of such drugs to enter into 
        financial deals that could tend to restrain trade and greatly 
        reduce competition and increase prescription drug expenditures 
        for American citizens; and
          (3) enhancing competition among these companies can 
        significantly reduce prescription drug expenditures for 
        Americans.

SEC. 3. PURPOSES.

    The purposes of this Act are--
          (1) to provide timely notice to the Department of Justice and 
        the Federal Trade Commission regarding agreements between 
        companies with patent rights regarding brand name drugs and 
        companies which could manufacture generic versions of such 
        drugs; and
          (2) by providing timely notice, to enhance the effectiveness 
        and efficiency of the enforcement of the antitrust and 
        competition laws of the United States.

SEC. 4. DEFINITIONS.

    In this Act:
          (1) ANDA.--The term ``ANDA'' means an Abbreviated New Drug 
        Application, as defined under section 201(aa) of the Federal 
        Food, Drug, and Cosmetic Act (21 U.S.C. 321(aa)).
          (2) Assistant attorney general.--The term ``Assistant 
        Attorney General'' means the Assistant Attorney General in 
        charge of the Antitrust Division of the Department of Justice.
          (3) Brand name drug.--The term ``brand name drug'' means a 
        drug approved under section 505(c) of the Federal Food, Drug, 
        and Cosmetic Act (21 U.S.C. 355(c)).
          (4) Brand name drug company.--The term ``brand name drug 
        company'' means the party that received Food and Drug 
        Administration approval to market a brand name drug pursuant to 
        an NDA, where that drug is the subject of an ANDA, or a party 
        owning or controlling enforcement of any patent listed in the 
        Approved Drug Products With Therapeutic Equivalence Evaluations 
        of the Food and Drug Administration for that drug, under 
        section 505(b) of the Food, Drug, and Cosmetic Act (21 U.S.C. 
        355(b)).
          (5) Commission.--The term ``Commission'' means the Federal 
        Trade Commission.
          (6) Generic drug.--The term ``generic drug'' means a product 
        that the Food and Drug Administration has approved under 
        section 505(j) of the Federal Food, Drug, and Cosmetic Act (21 
        U.S.C. 355(j)).
          (7) Generic drug applicant.--The term ``generic drug 
        applicant'' means a person who has filed or received approval 
        for an ANDA under section 505(j) of the Federal Food, Drug, and 
        Cosmetic Act (21 U.S.C. 355(j)).
          (8) NDA.--The term ``NDA'' means a New Drug Application, as 
        defined under section 505(b) et seq. of the Federal Food, Drug, 
        and Cosmetic Act (21 U.S.C. 355(b) et seq.).

SEC. 5. NOTIFICATION OF AGREEMENTS.

  (a) In General.--
          (1) Requirement.--A generic drug applicant that has submitted 
        an ANDA containing a certification under section 
        505(j)(2)(vii)(IV) of the Federal Food, Drug, and Cosmetic Act 
        (21 U.S.C. 355(j)(2)(vii)(IV)) and a brand name drug company 
        that enter into an agreement described in paragraph (2), prior 
        to the generic drug that is the subject of the application 
        entering the market, shall each file the agreement as required 
        by subsection (b).
          (2) Definition.--An agreement described in this paragraph is 
        an agreement regarding--
                  (A) the manufacture, marketing or sale of the brand 
                name drug that is the subject of the generic drug 
                applicant's ANDA;
                  (B) the manufacture, marketing or sale of the generic 
                drug that is the subject of the generic drug 
                applicant's ANDA; or
                  (C) the 180-day period referred to in section 
                505(j)(5)(B)(iv) of the Federal Food, Drug, and 
                Cosmetic Act (21 U.S.C. 355(j)(5)(B)(iv)) as it applies 
                to such ANDA or to any other ANDA based on the same 
                brand name drug.
  (b) Filing.--
          (1) Agreement.--The generic drug applicant and the brand name 
        drug company entering into an agreement described in subsection 
        (a)(2) shall file with the Assistant Attorney General and the 
        Commission the text of any such agreement, except that the 
        generic drug applicant and the brand name drug company shall 
        not be required to file an agreement that solely concerns--
                  (A) purchase orders for raw material supplies;
                  (B) equipment and facility contracts; or
                  (C) employment or consulting contracts.
          (2) Other agreements.--The generic drug applicant and the 
        brand name drug company entering into an agreement described in 
        subsection (a)(2) shall file with the Assistant Attorney 
        General and the Commission the text of any other agreements not 
        described in subsection (a)(2) between the generic drug 
        applicant and the brand name drug company which are contingent 
        upon, provide a contingent condition for, or are otherwise 
        related to an agreement which must be filed under this Act.
          (3) Description.--In the event that any agreement required to 
        be filed by paragraph (1) or (2) has not been reduced to text, 
        both the generic drug applicant and the brand name drug company 
        shall file written descriptions of the non-textual agreement or 
        agreements that must be filed sufficient to reveal all of the 
        terms of the agreement or agreements.

SEC. 6. FILING DEADLINES.

    Any filing required under section 5 shall be filed with the 
Assistant Attorney General and the Commission not later than 10 
business days after the date the agreements are executed.

SEC. 7. DISCLOSURE EXEMPTION.

    Any information or documentary material filed with the Assistant 
Attorney General or the Commission pursuant to this Act shall be exempt 
from disclosure under section 552 of title 5, and no such information 
or documentary material may be made public, except as may be relevant 
to any administrative or judicial action or proceeding. Nothing in this 
section is intended to prevent disclosure to either body of Congress or 
to any duly authorized committee or subcommittee of the Congress.

SEC. 8. ENFORCEMENT.

    (a) Civil Penalty.--Any brand name drug company or generic drug 
applicant which fails to comply with any provision of this Act shall be 
liable for a civil penalty of not more than $11,000, for each day 
during which such entity is in violation of this Act. Such penalty may 
be recovered in a civil action brought by the United States, or brought 
by the Commission in accordance with the procedures established in 
section 16(a)(1) of the Federal Trade Commission Act (15 U.S.C. 56(a)).
    (b) Compliance and Equitable Relief.--If any brand name drug 
company or generic drug applicant fails to comply with any provision of 
this Act, the United States district court may order compliance, and 
may grant such other equitable relief as the court in its discretion 
determines necessary or appropriate, upon application of the Assistant 
Attorney General or the Commission. Equitable relief under this 
subsection may include an order by the district court which renders 
unenforceable, by the brand name drug company or generic drug applicant 
failing to file, any agreement that was not filed as required by this 
Act for the period of time during which the agreement was not filed by 
the company or applicant as required by this Act.

SEC. 9. RULEMAKING.

    The Commission, with the concurrence of the Assistant Attorney 
General and by rule in accordance with section 553 of title 5, United 
State Code, consistent with the purposes of this Act--
          (1) may define the terms used in this Act;
          (2) may exempt classes of persons or agreements from the 
        requirements of this Act; and
          (3) may prescribe such other rules as may be necessary and 
        appropriate to carry out the purposes of this Act.

SEC. 10. SAVINGS CLAUSE.

    Any action taken by the Assistant Attorney General or the 
Commission, or any failure of the Assistant Attorney General or the 
Commission to take action, under this Act shall not bar any proceeding 
or any action with respect to any agreement between a brand name drug 
company and a generic drug applicant at any time under any other 
provision of law, nor shall any filing under this Act constitute or 
create a presumption of any violation of any antitrust or competition 
laws.

SEC. 11. EFFECTIVE DATE.

  This Act shall--
          (1) take effect 30 days after the date of enactment of this 
        Act; and
          (2) shall apply to agreements described in section 5 that are 
        entered into 30 days after the date of enactment of this Act.

                         I. Legislative History

    The Drug Competition Act was introduced into the 106th 
Congress by Senator Leahy on July 27, 2000. Senators Kohl, 
Schumer, and Durbin joined Senator Leahy as original co-
sponsors. No action was taken on the bill in the 106th 
Congress, and it was re-introduced in the 107th Congress on 
April 6, 2001. Senators Feingold, Cantwell, and Grassley have 
also co-sponsored the bill. The bill was referred to the 
Committee on the Judiciary.
    On October 18, 2001, a motion to favorably report S. 754 
was approved unanimously by the Judiciary Committee. The 
Committee received the Congressional Budget Office analysis, 
found on pages 7 through 13 of this report, February 2002.

                        II. The Need for S. 754

    The pharmaceutical industry has been able to reap 
significant profits by selling vitally important drugs to all 
consumers, especially senior citizens. However, the industry 
has recently witnessed the creation of pacts between big 
pharmaceutical firms and makers of generic versions of brand 
name drugs, that are intended to keep lower-cost drugs off the 
market. Agreeing with smaller rivals to delay or limit 
competition is an abuse of the Hatch-Waxman law that was 
intended to promote generic alternatives. S. 754, along with 
its companion House bill, H.R. 1530, is designed to put an end 
to this exploitation of the provision in Hatch-Waxman that 
grants a short-term protection from competition to the first 
manufacturer to bring a generic version of a brand name drug to 
market.
    Under Hatch-Waxman, manufacturers of generic drugs are 
encouraged to challenge weak or invalid patents on brand name 
drugs so consumers can enjoy lower drug prices. The law as it 
stands gives temporary protection from competition to the first 
manufacturer that gets permission to sell a generic drug before 
the patent on the brand name drug expires, giving the generic 
firm a 180-day head start on other companies making generic 
versions of the drug. The Federal Trade Commission reports that 
some firms are exploiting that provision of law by entering 
into secret deals to allow a maker of the generic drug to claim 
the 180-day grace period in order to block other generic drugs 
from entering the market, while at the same time getting paid 
by the brand name manufacturer for withholding sales of the 
generic version.
    S. 754 (and H.R. 1530) would protect consumers by solving 
the most difficult problem faced by Federal antitrust 
investigators: learning about the worst of these improper deals 
in time to do something about them. As Molly Boast, then-
Director of the Commission's Bureau of Competition, testified 
at a May 24, 2001 Judiciary Committee hearing entitled 
``Competition in the Pharmaceutical Marketplace: Antitrust 
Implications of Patent Settlements'', the notice that these 
bills would provide ``could be quite helpful in the enforcement 
mission.'' The bills would expose the deals abusing the Hatch-
Waxman period of protection from competition and subject them 
to immediate investigation by the Commission or the Department 
of Justice. And as Ms. Boast also testified, such a regime 
``might deter the [anticompetitive] agreements outright, but it 
also certainly would force the firms who were contemplating 
those agreements to give them much more careful scrutiny for 
potentially offensive provisions.''
    The Drug Competition Act of 2001 would facilitate these 
agencies' confidential review of agreements between brand name 
manufacturers and potential generic competitors so the agencies 
could more efficiently, and more effectively, ensure that the 
antitrust laws are not being violated. It covers agreements 
entered into between a company that owns or controls any listed 
patent for the brand name drug, or that itself is the holder of 
the ``New Drug Application'' under the Food and Drug 
Administration's rules--usually the manufacturer of the brand 
name drug--and any company that seeks to manufacture the 
generic version of that drug (but has not yet entered the 
market), when the agreement concerns the manufacture, 
marketing, or sale of either the brand name or generic versions 
of the drug, or when the agreement relates to the 180-day 
period of protection from competition under Hatch-Waxman. Thus, 
any agreement that seeks to take advantage of, or 
inappropriately influence, the 180-day period of protection for 
a generic manufacturer from competition prescribed by Hatch-
Waxman is covered; the Act does not limit its reach to 
agreements just between the brand name manufacturer and the 
generic company likely to be its first competitor. Moreover, 
the burden the Act places on pharmaceutical companies is 
negligible; it simply requires the firms to file those 
agreements with the Commission and Department of Justice within 
10 business days after the agreement is executed. Failure to 
file is punishable by a civil penalty of up to $11,000 per day, 
and by possible unenforceability of the agreements they 
concern. The bills would not change the Hatch-Waxman Act, amend 
FDA law or slow down the drug approval process, and existing 
confidentiality requirements would still apply to the 
enforcement agencies.

                       III. Vote of the Committee

    In compliance with paragraph 7(b) of rule XXVI of the 
Standing Rules of the Senate, the following statements are made 
concerning the roll call votes in the Committee's consideration 
of the bill.
    S. 754 was ordered reported favorably, as amended by an 
amendment in the nature of a substitute, by a unanimous voice 
vote on October 18, 2001. A quorum was present.

                    IV. Section-by-Section Analysis

    Section 1.--Section 1 sets out the short title of this 
bill, the ``Drug Competition Act of 2001.''
    Section 2.--Section 2 states the findings upon which this 
legislation is based. Specifically, the findings are that 
rapidly increasing prescription drug costs are creating real 
problems for American senior citizens and families, that patent 
holders for brand name drugs can engage in private agreements 
with generic drug companies that both decrease competition and 
increase costs for prescription drugs, and that enhancing 
competition between brand name and generic drug companies can 
significantly reduce prescription drug costs.
    Section 3.--Section 3 states the purposes of this 
legislation, which are to ensure timely notice to the antitrust 
enforcement agencies--the Department of Justice and the Federal 
Trade Commission--regarding agreements between companies with 
patent rights on brand name drugs and companies who could 
manufacture generic versions of those drugs, and thus to 
enhance antitrust enforcement in the pharmaceutical industry.
    Section 4.--Section 4 defines the terms used in the Act.
    Section 5.--Section 5 is the operative section of the Act, 
setting forth the requirement that, if a brand name drug 
company and a generic drug applicant (which is simply a generic 
drug company that has filed with the FDA an ``Abbreviated New 
Drug Application'' in order to produce a generic version of a 
brand name drug) enter into an agreement that relates in any 
way to the 180-day period of semi-exclusivity to a generic drug 
applicant, described in section 355(j)(5)(B)(iv) of title 21, 
United States Code; or which concerns the manufacture, 
marketing, or sale of either the brand name drug or its generic 
equivalent, then both companies must file a copy of the 
agreement (or a complete written summary of any oral 
agreement), along with copies of any other related agreements, 
with the Federal Trade Commission and the Department of 
Justice.
    Section 6.--Section 6 states that the filings required by 
section 5 shall be made within 10 business days of the 
execution of the agreement between the brand name drug 
manufacturer and the generic drug applicant.
    Section 7.--Section 7 provides for protections of the 
filings made by the drug manufacturers with the antitrust 
enforcement agencies parallel to those protections provided in 
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, 15 
U.S.C. 18a(h).
    Section 8.--Section 8 describes the enforcement mechanisms 
authorized by the Act. First, failure to comply with any 
provision of the Act may subject the responsible party to a 
penalty of up to $11,000 per day of noncompliance. Second, 
failure to comply with the notification of the antitrust 
enforcement agencies required by section 5 of the Act within 
the 10 days prescribed by section 6 may render the agreement 
between the parties unenforceable (by the party which failed to 
file) for the duration of the noncompliance, should the 
relevant enforcement agency seek such a remedy in Federal 
court. While such a penalty would likely only be sought, and 
indeed might only be appropriate, in cases of willfulness or 
recidivism, the threat of such a sanction should prove an 
important deterrent in its own right. Third, failure to comply 
with the requirements of the Act may result in ordered 
compliance by a United States district court, and/or other 
appropriate equitable relief, upon application by one of the 
antitrust enforcement agencies.
    Section 9.--Section 9 permits the Federal Trade Commission, 
with the concurrence of the Assistant Attorney General for 
Antitrust at the Department of Justice, to issue rules which 
may define the Act's terms, which may create exemptions from 
the Act, and which may prescribe other necessary and 
appropriate rules to effectuate the purposes of the Act.
    Section 10.--Section 10 is a savings clause, ensuring that 
any action or inaction by the antitrust enforcement agencies 
under this Act will not bar proceedings pursuant to any other 
provision of law, and also ensuring that the simple act of 
complying with the Act's filing mandate will not put the filers 
at any risk of any presumption of wrongdoing.
    Section 11.--Section 11 states that the Act shall take 
effect 30 days after its enactment, and shall concern only 
agreements executed after its effective date.

                            V. Cost Estimate

                                SUMMARY

    S. 754 would require that both brand name and generic drug 
companies file certain types of agreements with the Federal 
Trade Commission (FTC) and the Antitrust Division of the 
Department of Justice (DOJ). S. 754 also would authorize the 
FTC and the DOJ to assess civil penalties if drug companies 
fail to file such agreements within 10 business days of 
executing those agreements.
    The Congressional Budget Office (CBO) estimates that the 
administrative costs of implementing S. 754 would amount to 
less than $500,000 in 2002. Over the 2002-2007 period, however, 
discretionary health programs would realize savings from the 
earlier entry of lower priced generic drugs onto the market. 
CBO estimates that those savings would exceed the Federal costs 
of administering the new activities, with net Federal spending 
subject to appropriation falling by roughly $1 million over the 
2002-2007 period.
    CBO also expects that enacting S. 754 would affect both 
direct spending and revenues; therefore, pay-as-you-go 
procedures would apply to the bill. Most of the changes in 
direct spending and revenues would stem from lower prices for 
drugs, which in turn would decrease some Federal expenditures 
for Medicaid and Federal health insurance programs, and 
increase Federal revenues because of lower costs for private 
health insurance. Such effects would be modest, however. We 
estimate that direct spending would decline by less than 
$500,000 a year through 2005, by about $1 million in 2006, and 
by a total of $16 million over the 2002-2012 period. CBO 
further estimates that Federal revenues would increase by less 
than $500,000 a year through 2007, with a total increase of $4 
million over the 2002-2012 period.
    S. 754 contains no intergovernmental mandates as defined in 
the Unfunded Mandates Reform Act (UMRA). The bill would 
increase competition among drug manufacturers, in some cases, 
and that increased competition would decrease costs for state 
and local Medicaid programs. CBO estimates that state spending 
for Medicaid would decline by about $2 million over the 2002-
2007 period.
    The bill contains a requirement on manufacturers of both 
generic and brand name drugs that would be considered a 
private-sector mandate under UMRA. CBO estimates that the 
direct cost of the mandate would not exceed the threshold 
specified in UMRA ($115 million in 2002, adjusted annually for 
inflation) in any of the first five years the mandate would be 
effective.

                ESTIMATED COST TO THE FEDERAL GOVERNMENT

    CBO estimates that implementing S. 754 would decrease net 
spending subject to appropriation by about $1 million over the 
2002-2007 period. We also estimate that the bill would reduce 
direct spending by about $3 million and increase revenues by 
about $1 million over that period. The costs of this 
legislation would fall within budget functions 370 (commerce 
and housing credit), 400 (transportation), 550 (health), 700 
(veterans' benefits and services), and 750 (administration of 
justice).
    CBO expects that the reporting requirements under the bill 
would deter or result in the earlier identification of certain 
agreements that violate antitrust laws and delay the entry of 
lower priced generic drugs onto the market. As a result, we 
assume that the bill would promote the timely entry of generic 
products onto the market and thereby reduce the average price 
of certain prescription drugs over the next 10 years. However, 
we believe that S. 754 likely would affect average prices for a 
relatively small share of the overall prescription drug market. 
CBO believes that the incentive to enter into such agreements 
has been tempered significantly by current FTC initiatives to 
identify illegal agreements delaying generic entry and by 
recent court cases brought by states and health insurers. In 
addition, charges by the FTC of anticompetitive practices 
surrounding four agreements from the late 1990s have resulted 
in consent agreements for two of those four cases. Under 
current law, the two brand name and the two generic drug 
companies party to those consent agreements must follow 
reporting requirements similar to those outlined in the bill. 
Moreover, the proposed reporting requirements only apply to 
certain new agreements between brand and generic companies 
entered into after enactment.
    CBO estimates that lower drug prices would reduce the costs 
of Federal programs that purchase prescription drugs or provide 
health insurance that covers prescription drugs. CBO estimates 
that savings to programs subject to appropriation--such as 
health insurance provided to active workers through the Federal 
Employees Health Benefits (FEHB) program, the Coast Guard, the 
Public Health Service (PHS), and health programs of the 
Departments of Veterans Affairs (VA) and Defense (DoD)--would 
total less than $500,000 in 2002 and $2 million over the 2002-
2007 period.
    Lower prices would also reduce direct spending--for 
Medicaid and for health insurance provided to annuitants by 
FEHB, DoD, and the Coast Guard--by less than $500,000 in 2002, 
by $3 million over the 2002-2007 period, and by $16 million 
over the 2002-2012 period. CBO assumes that savings to Federal 
health programs would increase over time because the bill only 
would affect new agreements, which are more likely to relate to 
drugs losing patent protection in later years.
    S. 754 would affect revenues in two ways. First, the bill 
would increase governmental receipts (i.e., revenues) because 
it would create new civil penalties for those entities that 
violate the new reporting requirements. Based on information 
from the FTC and the Antitrust Division of the DOJ, CBO 
estimates that the increase in revenues would be negligible 
because of the limited number of cases expected.
    Secondly, the bill would also affect revenues because CBO 
assumes that part of the savings from lower health insurance 
costs would be passed on to workers as increases in taxable 
compensation. Lower prices for prescription drugs under the 
bill would reduce premiums for private health insurance 
(compared with premiums under current law). CBO estimates the 
bill would increase Federal revenues by less than $500,000 in 
2002, by $1 million over the 2002-2007 period, and by $4 
million over the 2002-2012 period.

                           BASIS OF ESTIMATE

    For this estimate, CBO assumes that the bill will be 
enacted in spring of 2002 and that outlays will follow 
historical spending rates for the authorized activities.
Spending Subject to Appropriation
    S. 754 would require that brand name and generic drug 
manufacturers report certain agreements to the FTC and the DOJ 
within 10 days after the agreements are executed. Affected 
agreements would include those related to the manufacturing, 
marketing, and sale of either the brand or generic version of 
the product. In addition, agreements related to the 180-day 
period of exclusive marketing rights that may be granted to 
certain generic manufacturers by the Food and Drug 
Administration (FDA) must also be filed.
    Assuming the appropriation of necessary amounts, CBO 
estimates that enacting S. 754 would result in higher outlays 
for discretionary programs of less than $500,000 for 2002. Over 
the 2002-2007 period, however, Federal health programs would 
realize savings from the earlier entry of lower priced generic 
drugs onto the market. We estimate that those savings would 
exceed the Federal costs of administering the new activities. 
As a result, net Federal spending subject to appropriation 
would fall by roughly $1 million over the 2002-2007 period.
    Effect on administrative costs. Implementing S. 754 would 
raise the administrative costs of the FTC and the Antitrust 
Division of the DOJ. The two agencies would need staff to issue 
new regulations and review the filings from drug companies. 
Based on information from the FTC and the Antitrust Division, 
CBO estimates that these additional costs would amount to less 
than $500,000 per year.
    Effect on average prices paid by Federal health programs 
for prescription drugs. Once the marketing protections of brand 
name drugs expire (usually at the end of a product's patent 
life), generic drugs generally enter the market at a lower 
price compared with the brand name drug. Recent FTC 
investigations have charged that agreements between certain 
innovator and generic drug companies were anticompetitive and 
delayed the market entry of generic drugs for which the generic 
firms sought marketing approval from the FDA before the 
expiration of listed patents. The reporting requirements under 
the bill would enhance the ability of the FTC and the DOJ to 
regulate those types of agreements and enforce antitrust law.
    CBO estimates that eliminating the delay in the entry of 
lower priced generic drugs would reduce costs for Federal 
discretionary health programs drugs by less than $500,000 in 
2002 and by $2 million over the 2002-2007 period, assuming that 
appropriations are reduced accordingly. Programs of the PHS and 
the VA would be affected, as would pharmacy costs incurred by 
FEHB, DoD, and the Coast Guard for active workers.
    The agreements that would be affected by S. 754 relate only 
to drugs filed with ``paragraph IV certifications'' in their 
applications for marketing approval. A generic manufacturer 
that submits an application to the FDA for marketing approval 
of a generic drug must address or ``certify'' their intent with 
regard to each patent identified with the innovator product and 
listed with the FDA. The certification procedure was set in 
place by the Hatch-Waxman Act; certifications are based on four 
``paragraphs'' found in the statute. A paragraph IV 
certification states that the listed patent is invalid or will 
not be infringed by the purposes for which approval is being 
pursued. By filing an application to market a generic drug 
under a paragraph IV certification, the company may seek 
approval to market a generic drug before the expiration of a 
patent listed with the brand name product.
    Under certain conditions, the first generic manufacturer 
that submits a substantially complete application to the FDA 
challenging an innovator's patent claim under a paragraph IV 
filing may be awarded 180 days of generic market exclusivity. 
The FDA cannot approve any other generic versions of the drug 
during that 180-day period. The generic exclusivity period 
begins after a court decision finding the challenged patent 
invalid, unenforceable, or not infringed, or the date of first 
commercial marketing of the generic product, whichever is 
earlier.
    The generic drug firm must notify the innovator firm when 
it files a paragraph IV certification, and the innovator then 
has 45 days to bring a lawsuit to defend its patent 
protections. If the innovator sues, the FDA cannot approve the 
application of the generic version for 30 months (unless the 
patent expires, or a court rules that the patent is invalid or 
is not infringed). A court may modify that 30-month period.
    Both the initial introduction of the generic version of the 
drug and the subsequent marketing of competing generic versions 
of the drug could be delayed if the innovator and the generic 
drug firm reach an agreement under which the generic firm 
delays or abstains from marketing its version of the drug. Such 
agreements may be attractive to both firms, because the price 
charged for the generic version of a drug generally is 
significantly lower than the price charged for the brand name 
version, and the price of the generic version drops further 
when competing versions enter the market. Therefore, the profit 
lost by the innovator firm following the entry of the generic 
version generally substantially exceeds the profit gained by 
the generic firm; both firms could be made better off by 
sharing some of that difference in profits instead of 
competing.
    Delaying or preventing the initial introduction of the 
generic version of a drug by the firm that filed the paragraph 
IV certification and delaying the entry of generic versions 
marketed by other firms would both result in higher costs for 
prescription drugs to consumers and to the government.
    To estimate the costs associated with the lower drug prices 
paid by Federal purchasers anticipated under the bill, CBO 
assumed that the recent cases identified as anticompetitive by 
the FTC may provide some insight into the average amount of 
sales affected by agreements delaying the entry of generic 
drugs that were in play before the recent crackdown by the FTC. 
(CBO estimated that the average value of a drug affected by 
those agreements at roughly $1 billion in 2001, based on 1998 
average drug sales in the year of the agreement identified by 
the FTC and grown by 10 percent annually.) However, we assumed 
that the number of illegal agreements delaying generic entry 
have been greatly reduced by the FTC investigations under 
current law and by other litigation brought by states and 
health insurers. Furthermore, charges by the FTC of 
anticompetitive practices surrounding four agreements from the 
late 1990s have resulted in consent agreements for two of those 
four cases. Under current law, the two brand name and the two 
generic drug companies party to those consent agreements must 
follow reporting requirements similar to those outlined in the 
bill.
    CBO assumes that S. 754 would affect agreements concerning 
roughly two drugs per year, on average. Based on an average 
expected value of almost $200 million in sales in 2001, CBO 
forecasts the future sales of drugs associated with illegal 
agreements by assuming that the same percent of sales for brand 
drugs losing market exclusivity in future years (as estimated 
in 2001) may be illegal in nature and potentially delay generic 
entry. We assume the average length of delay that would be 
eliminated through the deterrence of those agreements or their 
more timely identification under the bill would be about one 
year.
    Reducing the incidence of illegal agreements that delay 
generic entry would result in the accelerated introduction of 
lower priced generic products and translate into program 
savings. Recent market trends suggest a more rapid loss of 
market share to generics and a more significant reduction in 
average price after generic entry than previously estimated by 
CBO. To estimate the savings associated with this bill, pending 
further study of these market dynamics, we assume that generic 
products, on average, account for roughly 50 percent of total 
market volume and cost about 50 percent of the brand price 
after one year on the market.
    CBO expects that the share of spending in the prescription 
drug market affected by the reporting requirements under S. 754 
likely would be small. As mentioned above, we anticipate that 
FTC's ongoing activities and the existence of similar reporting 
requirements for four companies mandated in the consent 
agreements stemming from past investigations will significantly 
reduce the number of illegal agreements entered into by 
competitors and will assist the government with the 
identification of many of the illegal agreements that persist. 
Moreover, the proposed reporting requirements under the bill 
only apply to new agreements related to drugs with paragraph IV 
certifications entered into after enactment.
    To the extent that illegal agreements delaying generic 
entry persist under current law, many drugs with patent 
expiration expected in the next five years, for example, have 
already had paragraph IV certifications filed by generic firms. 
Therefore, the likelihood of potentially illegal agreements to 
be already in place would be strong for many of the high-sales 
drugs with market exclusivity expiring in the near term. But as 
noted above, this bill only applies to new agreements. Over 
time, however, the effectiveness of the reporting requirements 
would increase. Even with the reporting requirements outlined 
in S. 754, it is also unclear what other means drug companies 
may pursue that effectively delay generic entry while staying 
within the legal limits of the law.
Direct Spending
    CBO estimates that S. 754 would reduce Federal direct 
spending over the 2002-2012 period by $16 million. The manner 
in which the bill would affect the price of drugs for 
discretionary health programs discussed earlier would also 
affect direct spending by Federal health programs characterized 
as mandatory (that is, not requiring appropriation action). CBO 
estimates that implementing the new reporting requirements 
would reduce direct spending (for Medicaid and for annuitants 
covered by health insurance offered through FEHB, DoD, and the 
Coast Guard) by less than $500,000 in 2002, $3 million over the 
2002-2007 period, and $16 million over the 2002-2012 period.
Revenues
    CBO estimates that S. 754 would increase Federal revenues 
by less than $500,000 in 2002, by $1 million over the 2002-2007 
period, and by $4 million over the 2002-2012 period. The bill 
would affect Federal revenues in two ways. First, S. 754 would 
increase revenues because it would create new civil penalties 
for those manufacturers that fail to comply with the new 
reporting requirements. Based on information from the FTC and 
the DOJ, CBO estimates that the increase in revenues would be 
negligible because of the limited number of cases expected.
    Secondly, CBO also assumes that changes in drug prices 
would affect the costs of private health insurance premiums, 
and a portion of those amounts would be returned to workers 
through changes in taxable compensation. S. 754 would reduce 
costs for employer-sponsored health plans because of the lower 
costs of pharmacy benefits stemming from the more timely entry 
of cheaper generic drugs. Lower pharmacy costs translate into 
lower premium payments for employer-sponsored plans and thus 
higher taxable compensation for employees.
    CBO assumes that 60 percent of the change in the cost of 
health premiums would be offset by behavioral responses of 
employers and employees. The remaining 40 percent would be 
passed through to workers as changes in taxable compensation 
and would lead to changes in Federal tax revenues.

                      PAY-AS-YOU-GO CONSIDERATIONS

    The Balanced Budget and Emergency Deficit Control Act sets 
up pay-as-you-go procedures for legislation affecting direct 
spending or receipts. The following table displays CBO's 
estimate of the effects of S. 754 on direct spending and 
receipts. We estimate the effects on direct spending through 
2005 would be less than $500,000 a year. We also estimate that 
the effects on revenues would be less than $500,000 a year 
through 2006. For the purposes of enforcing pay-as-you-go 
procedures, only the effects through 2006 are counted.

                                                          By Fiscal Year, in Millions of Dollars
--------------------------------------------------------------------------------------------------------------------------------------------------------
                         2002        2003        2004        2005        2006        2007        2008        2009        2010        2011        2012
--------------------------------------------------------------------------------------------------------------------------------------------------------
       Change in            0            0           0           0          -1          -2          -2          -2          -2          -2          -2
         outlays
       Change in            0            0           0           0           0           0           1           1           1           1           1
        revenues
--------------------------------------------------------------------------------------------------------------------------------------------------------


        ESTIMATED IMPACT ON STATE, LOCAL, AND TRIBAL GOVERNMENTS

    S. 754 contains no intergovernmental mandates as defined in 
UMRA. The bill would increase competition among drug 
manufacturers, in some cases, and that increased competition 
would decrease costs for state and local Medicaid programs. CBO 
estimates that state spending for Medicaid would decline by 
about $2 million over the 2002-2007 period.

                 ESTIMATED IMPACT ON THE PRIVATE SECTOR

    The bill contains a private sector mandate on manufacturers 
of both generic and brand name drugs. It would require drug 
companies to submit specific contracts between brand name and 
generic firms that relate to generic drugs for which a 
paragraph IV certification under the Food, Drug, and Cosmetic 
Act has been filed with the FDA. Although the requirements 
would add administrative and legal costs, those costs would be 
minimal. CBO estimates that the direct cost of the mandates on 
both generic and brand name drug manufacturers contained in the 
bill would not exceed the annual threshold specified in UMRA 
($115 million in 2002, adjusted annually for inflation) in any 
of the first five years the mandate would be effective.

                         ESTIMATE PREPARED BY:

          Federal Costs:

          Effects on Drug Prices--Julia Christensen
          FTC--Ken Johnson
          DOJ--Lanette Walker

          Impact on State, Local, and Tribal Governments: Leo 
        Lex

          Impact on the Private Sector: Judith Wagner

                         ESTIMATE APPROVED BY:

          Peter H. Fontaine
          Deputy Assistant Director for Budget Analysis

                    VI. Regulatory Impact Statement

    In compliance with paragraph 11(b) of rule XXVI of the 
Standing Rules of the Senate, the Committee made the following 
evaluation of the regulatory impact which would be incurred in 
carrying out S. 754.
    We estimate that some regulatory actions would be required 
of the Federal Trade Commission and the Department of Justice 
related to indicating the types of documents which those 
agencies would receive in implementing S. 754.

                      VII. 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. 754.