    [Senate Hearing 108-470]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 108-470

                       IMPORTATION OF PRESCRIPTION DRUGS

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

                                    HEARING

                                   before the

              COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS
                              UNITED STATES SENATE

                          ONE HUNDRED EIGHTH CONGRESS

                                 SECOND SESSION

                                       ON

       EXAMINING PRESCRIPTION DRUG REIMPORTATION, FOCUSING ON EFFORTS TO
       REDUCE DRUG COSTS, PATIENT SAFETY CONCERNS, RECENT STATE ACTION,
    FRAUDULENT AND COUNTERFEIT DRUGS, AN INTERNATIONAL COMPARISON OF RISING
    PRESCRIPTION DRUG EXPENDITURES, AND S. 2328, TO AMEND THE FEDERAL FOOD,
    DRUG, AND COSMETIC ACT WITH RESPECT TO THE IMPORTATION OF PRESCRIPTION
                                     DRUGS

                                   __________

                                  MAY 20, 2004

                                   __________

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              COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS

                      JUDD GREGG, New Hampshire, Chairman
    BILL FRIST, Tennessee                EDWARD M. KENNEDY, Massachusetts
    MICHAEL B. ENZI, Wyoming             CHRISTOPHER J. DODD, Connecticut
    LAMAR ALEXANDER, Tennessee           TOM HARKIN, Iowa
    CHRISTOPHER S. BOND, Missouri        BARBARA A. MIKULSKI, Maryland
    MIKE DeWINE, Ohio                    JAMES M. JEFFORDS (I), Vermont
    PAT ROBERTS, Kansas                  JEFF BINGAMAN, New Mexico
    JEFF SESSIONS, Alabama               PATTY MURRAY, Washington
    JOHN ENSIGN, Nevada                  JACK REED, Rhode Island
    LINDSEY GRAHAM, South Carolina       JOHN EDWARDS, North Carolina
    JOHN WARNER, Virginia                HILLARY RODHAM CLINTON, New York
                       Sharon Soderstrom, Staff Director
          J. Michael Myers, Minority Staff Director and Chief Counsel

                                C O N T E N T S

                                  ----------

                                   STATEMENTS

                             THURSDAY, MAY 20, 2004

                                                                       Page

    Gregg, Hon. Judd, a U.S. Senator from the State of New Hampshire,
      opening statement..............................................     1
    Enzi, Hon. Michael B., a U.S. Senator from the State of Wyoming,
      prepared statement.............................................     2
    Reed, Hon. Jack, a U.S. Senator from the State of Rhode Island,
      prepared statement.............................................     4
    Frist, Hon. Bill, a U.S. Senator from the State of Tennessee,
      prepared statement.............................................     5
    Harkin, Hon. Tom, a U.S. Senator from the State of Iowa, prepared
      statement......................................................     7
    Jeffords, Hon. James M., a U.S. Senator from the State of
      Vermont, prepared statement....................................     8
    Edwards, Hon. John, a U.S. Senator from the State of North
      Carolina, prepared statement...................................     9
    Taylor, John M., Associate Commissioner for Regulatory Affairs,
      U.S. Food and Drug Administration; accompanied by William K.
      Hubbard, Associate Commissioner for Policy and Planning, U.S.
      Food and Drug Administration...................................    10
        Prepared statement...........................................    14
    Kennedy, Hon. Edward M., a U.S. Senator from the State of
      Massachusets, opening statement................................    21
        Prepared statement...........................................    23
    Hubbard, William K., Associate Commissioner for Policy and
      Planning, FDA..................................................    28
    Alexander, Hon. Lamar, a U.S. Senator from the State of
      Tennessee, opening statement...................................    43
    Murray, Hon. Patty, a U.S. Senator from the State of Washington,
      prepared statement.............................................    45
    Mikulski, Hon. Barbara A., a U.S. Senator from the State of
      Maryland, prepared statement...................................    47
    Dodd, Hon. Christopher J., a U.S. Senator from the State of
      Connecticut, prepared statement................................    53
    Lee, Philip, M.D., Consulting Professor, Program in Human
      Biology, Stanford University, and Professor of Social Medicine
      [Emeritus], School of Medicine, University of California, San
      Francisco......................................................    57
        Prepared statement...........................................    59
    Vernon, John A., Ph.D., Department of Finance and Center for
      Healthcare and Insurance Studies, School of Business,
      University of Connecticut......................................    66
        Prepared statement...........................................    69
    Malone, Tim and Margaret, Livermore, California, Parents of James
      Malone [Deceased]..............................................    71

                              ADDITIONAL MATERIAL

    Statements, articles, publications, letters, etc.:
        Response to Questions of Senator Kennedy by David Kessler,
          M.D........................................................    36
        Leadership Council of Aging Organizations (LCAO).............    37
        Response to Questions of Senator Gregg by Philip R. Lee, M.D.    80
        Questions of Senator Gregg to:
            John M. Taylor, J.D......................................    81
            John A. Vernon, Ph.D.....................................    81
        Questions of Senator Frist to John M. Taylor, J.D. and
          William K. Hubbard.........................................    81
        Response to Questions of Senator Enzi by Philip R. Lee, M.D..    83
        Questions of Senator Enzi to:
            John M. Taylor, J.D......................................    85
            John A. Vernon, Ph.D.....................................    85
        Questions of Senator DeWine to John M. Taylor, J.D...........    85
        Response to Questions of Senator Jeffords by Philip R. Lee,
          M.D........................................................    86
        Questions of Senator Jeffords to John A. Vernon, Ph.D........    87
        Response to Questions of Senator Reed by Philip R. Lee, M.D..    88
        Questions of Senator Murray to John M. Taylor, J.D...........    98
        Hon. Jim Doyle, Governor, State of Wisconsin.................    99
        Kenneth C. Carter, Ph.D......................................   101
        Randall Hoggle, RPh..........................................   102
        McDonald & Hayden............................................   104
        AARP.........................................................   108
        Allergan, Inc................................................   111
        Biotechnology Industry Organization (BIO)....................   113
        National Association of Chain Drug Stores (NACDS)............   118
        Pharmaceutical Research and Manufacturers of America (PhRMA).   122

                       IMPORTATION OF PRESCRIPTION DRUGS

                                  ----------

                             THURSDAY, MAY 20, 2004

                                  United States Senate,
           Committee on Health, Education, Labor, and Pensions,
                                                       Washington, D.C.
            The committee met, pursuant to notice, at 10:17 a.m.,
            in room SD-106, Dirksen Senate Office Building, Hon.
            Judd Gregg (chairman of the committee) presiding.
        Present: Senators Gregg, Enzi, Alexander, Kennedy, Dodd,
    Mikulski, Murray, Reed, and Clinton.

                       Opening Statement of Senator Gregg

        The Chairman. Let's get started.
        I appreciate the courtesy of the panel in delaying the
    hearing here for 15 minutes, as we were at a meeting earlier
    this morning with the Republican membership of the House and
    Senate and the President, so it was necessary to delay the
    meeting.
        I want to get right into the hearing, and if Senator
    Kennedy comes in, I will yield to him for an opening statement.
        Basically this hearing is about an issue which has captured
    the interest and participation of a large number of Americans,
    which is the question of purchasing drugs from foreign
    countries or over the Internet, and the issues which that has
    raised for us as a culture, which has always taken a tremendous
    amount of pride and made a great commitment to the safety and
    efficacy of the pharmaceutical products that are available to
    us.
        The FDA, historically, has been one of the lead agencies in
    our Nation for protecting consumers and giving consumers the
    assurance that when they buy a product they will be taking to
    try to cure themselves, the product doesn't hurt or kill them.
    Its record is exemplary, obviously. There have been issues
    relative to how quickly they may have gotten through the
    process of approving products, but there has never been an
    issue around the fact that they have been very effective
    guardians of the safety and health of the American people,
    especially relative to the pharmaceuticals.
        So the question of reimportation and the question of
    purchasing over the Internet has raised the whole issue of can
    it be done safely, and if it can be done safely, how it should
    be done. It also raises other questions dealing with the
    economics of research and development and the bringing on line
    of new medications.
        But really, this hearing is going to focus more on the
    question of what is out there, what is being purchased, whether
    the processes in place today are safe, whether people buying
    things over the Internet are, through reimportation, putting
    themselves at risk by purchasing products which may have been
    adulterated or counterfeited, and if so, how we could address
    that in a more structured way.
        So I certainly appreciate the testimony of the witnesses
    today. The American people really are seeking the opportunity
    to go into other countries and purchase these drugs--certainly
    in New Hampshire, and I'm sure in most States that border
    Canada or Mexico, for that matter--and they certainly want to
    take the opportunity of using the Internet, which is a unique
    and wonderful tool that we now have available to us for
    commerce. But in pursuing those avenues, we want to make sure
    that they also are able to have a certain level of confidence,
    that what they are purchasing isn't going to hurt them. So I
    think it's important that we ask the people who are involved in
    this issue what is happening out there and what they recommend
    for addressing safety specifically.
        With that, unless there are other opening statements--
    Senator Enzi, do you have anything you want to say?
        Senator Enzi. I assume you were discouraging----
        The Chairman. It was a rhetorical question.
        [Laughter.]
        Senator Enzi. I would ask that my full statement be made a
    part of the record.
        The Chairman. Certainly.
        [The prepared statement of Senator Enzi follows:]

                       Prepared Statement of Senator Enzi

        Importing prescription drugs from other countries will not
    solve the problem of rising drug prices. I won't support drug
    importation until we can ensure that the drugs that are
    imported are safe, effective, and will not compromise the
    integrity of our Nation's prescription drug supply or our
    world-leading pharmaceutical research.
        Today, millions of Americans import prescription drugs from
    Canada and other countries, or purchase drugs from Internet
    pharmacies that operate from outside the United States. These
    Americans are taking their lives in their hands by going
    outside our closed drug distribution system and obtaining their
    prescription medicines from pharmacies and Internet sites that
    don't meet the high standards that we require domestically.
        Right now, the Federal Government and State governments are
    looking the other way. We're not enforcing the laws on our
    books that prohibit drug importation, and we're just crossing
    our fingers and hoping that no one gets hurt. Some State and
    local governments are actually encouraging their employees and
    citizens to import drugs from Canada, while disclaiming any
    liability if someone is injured or dies as a result of taking
    unregulated imported drugs.
        We can't keep this up indefinitely, so I commend Chairman
    Gregg for calling this hearing to consider the complex issues
    involved in opening our borders to imported prescription drugs.
    If the Senate is going to amend our laws to permit drug
    importation, the process must begin in this committee. As the
    committee begins to consider drug importation, I look forward
    to questioning our witnesses about some of the issues that
    concern me.
        As we look into this issue, we must keep in mind that,
    whatever we decide to do on the importation of drugs, it won't
    make a big difference in how much we spend on our medications.
    The reason for that is simple. Canada's pharmaceutical market
    is less than one-tenth the size of ours. Our market is larger
    than the combined markets of Canada and all of Europe. We
    simply can't import enough medications from these price-
    controlled countries to make a significant impact on prices
    here, as the Congressional Budget Office has pointed out.
        Clearly, there are many other ways for us to help Americans
    and keep their prescription medications available and
    affordable.
        First, we need to set aside the politics of Medicare and
    work together to help seniors choose the Medicare drug discount
    card that is right for them. Low-income seniors especially
    deserve our help, since they will receive up to $600 in credit
    on their cards in 2004 and 2005 to help them pay for their
    prescriptions. Many of the cards are free, so there's no good
    reason why a senior shouldn't sign up for a drug discount card,
    which could save them from 20 to 35 percent off the retail
    prices of the medications they need.
        Second, most of the major pharmaceutical companies have
    special patient-assistance programs for low-income Americans
    without health insurance. These noteworthy programs offer a
    supply of free or low-cost drugs to people who would otherwise
    not be able to afford their much-needed medications, and these
    programs are available to people of any age, not just seniors.
    Each of the manufacturers has its own program application,
    however, which complicates the sign-up process for patients who
    need drugs made by a number of different companies. The major
    pharmaceutical companies could help patients in need get into
    their patient-assistance programs more quickly if they were to
    develop a single uniform application and a simplified and
    streamlined application process.
        Third, people should ask their pharmacists about generic
    drugs. The generic drugs available in the United States have
    the same active ingredients as their brand-name counterparts.
    They also are manufactured in FDA-inspected facilities, just
    like brand-name drugs. The difference is that generics usually
    cost from 30 to 60 percent less than their equivalent brand-
    name drugs. Nationwide, every 1 percent increase in the
    utilization of generic drugs yields $1.16 billion in savings in
    prescription drug costs per year.
        Fourth, the Senate Republican Task Force on Health Care
    Costs and the Uninsured recently recommended expanding the
    Federal program that makes deeply discounted drugs available to
    patients of ``safety-net'' clinics and other healthcare
    facilities. Enacting this proposal would expand access to low-
    cost drugs for people who rely on our healthcare safety net.
        Fifth, we need to eliminate unfair trade practices such as
    the drug price controls that many foreign governments employ,
    which force the American consumer to shoulder the burden of
    paying for the pharmaceutical research that benefits all
    consumers worldwide.
        Those are just five ways that American citizens,
    pharmaceutical companies, and Congress could take action to
    make prescription drugs more affordable to more people. None of
    these ideas would require us to institute or import foreign
    price controls, nor would they threaten the safety of our drug
    distribution system, as I'm afraid some of the legislative
    proposals introduced in this session of Congress would do.
        Again, I commend Chairman Gregg for calling this hearing.
    If the Senate is to allow for the importation of prescription
    drugs, we ought not to rush this process to meet an artificial
    political timetable. The importation of prescription drugs
    raises serious questions about the safety of our Nation's drug
    supply and our ability to continue to reap the benefits of
    American pharmaceutical research and development. If we're
    going to open our borders to imported prescription drugs, we
    had better be certain about exactly what we're doing and how
    we're going to do it.
        The Chairman. Senator Reed.
        Senator Reed. I ask that my statement be made a part of the
    record, Mr. Chairman.
        [The prepared statement of Senator Reed follows:]

                       Prepared Statement of Senator Reed

        Mr. Chairman, thank you for calling today's hearing on the
    issue of drug reimportation.
        The escalating cost of prescription drugs continues to
    plague this Nation. Last November, the Congress passed the
    Medicare Modernization Act, which included a number of dramatic
    changes to this program, the most notable being the addition of
    a temporary drug discount card and beginning in 2006, the
    creation of a Medicare Part D drug benefit. I did not vote for
    this legislation because I felt that it did not provide an
    adequate drug benefit nor did it recognize Medicare's
    significant potential bargaining power.
        The fact that there continues to be such strong interest in
    allowing for the importation of FDA-approved prescription drugs
    is an indication of how significant a burden drug costs have
    become, not only for frail elderly and disabled Medicare
    beneficiaries, but also for non-elderly Americans who lack drug
    coverage and are forced to pay often exorbitant prices for
    their medications. Even city and State Governments are
    encouraging employees to purchase medications from Canada as a
    way of restraining skyrocketing health care costs.
        In light of this groundswell of interest, it is very
    appropriate that you have called today's hearing Mr. Chairman.
    It is imperative that as legislators, we carefully and
    thoughtfully explore the various theories on drug reimporation
    as well as take a long, hard, practical look at how it would
    work in the real world.
        I hope today's hearing will also provide an opportunity to
    examine the already significant problem of drug counterfeiting
    in this country and what steps are being taken by the Food and
    Drug Administration (FDA) to crack down on such dangerous
    illegal enterprises. The FDA is the primary agency responsible
    for ensuring the safety of our Nation's food and drug supply,
    and as such, I will be very interested to learn about its
    efforts in this area.
        Mr. Chairman, I believe that if we are to allow
    prescription drugs to be imported into this country there are a
    number of very important questions we must first address. I
    think the most obvious issue of concern to many is ensuring the
    safety of individually and commercially imported products.
        We are fortunate that advancements in medicine have yielded
    remarkable breakthrough treatments that have the potential to
    extend or drastically improve the quality of one's life.
    Diseases that were once untreatable or treated through invasive
    procedures can now be tackled with a simple little pill. Yet,
    for many, these medical wonders remain out of reach because
    they cannot afford them. As a result, they are willing to risk
    that medications purchased overseas could possibly be
    counterfeit or adulterated because the alternative is not
    taking the medication at all and suffering the adverse health
    consequences that are certain to come with that choice.
    However, if we are to permit drug reimportation, we must be
    certain it can be done safely. The various legislative
    proposals that are currently pending take critical steps to
    address this very important aspect.
        We also need to be mindful of what level of savings will be
    yielded through importation, particularly on the commercial
    side. What mechanisms will be in place to ensure that savings
    will be passed on to cash paying customers as well as consumers
    with insurance?
        A final question that deserves our consideration pertains
    to supply. Americans make up a considerable share of the global
    market for prescription drugs. Clearly, large-scale
    reimportation is going to have an impact on drug supplies
    internationally. In terms of personal importation, the Dorgan
    bill takes constructive steps to ensure that manufacturers do
    not limit drug supplies overseas as a means of quelling U.S.
    importation.
        However, on the commercial side, only a certain percentage
    of drugs available in the U.S. market would be from imported
    sources. The Congressional Budget Office estimates that between
    10 and 15 percent of the U.S. prescription drug market would
    come from imports. The question becomes how these limited
    quantities would be allocated to consumers and whether or not
    they will have a meaningful impact on overall costs of
    medication in this country.
        Mr. Chairman, let me again commend you for calling today's
    hearing and for providing a venue for these many important
    issues to be examined. I look forward to the testimony of the
    witnesses.
        The Chairman. Thank you. I appreciate the courtesy of the
    members.
        At this time I will submit the statements of Senators
    Frist, Harkin, Jeffords, and Edwards.
        [The prepared statements of Senators Frist, Harkin,
    Jeffords, and Edwards follow:]

                      Prepared Statement of Senator Frist

        Chairman Gregg, thank you for holding today's hearing. I
    commend you for the careful, deliberate approach you have taken
    with respect to importation. And I appreciate the opportunity
    you have provided for all of us to examine the important issues
    raised by legislative proposals to expand the importation of
    prescription drugs from foreign countries.
        Senator Kennedy, you have also been a leader in this area.
    In the past, you have been extremely articulate in discussing
    the need to ensure that any changes in this area do not
    jeopardize the health and safety of American patients.
        We are all searching for ways to provide consumers with
    affordable access to health care. In fact, that was a primary
    focus of the Senate Leadership Task Force on Health Care Costs
    and the Uninsured led by Senator Gregg, which issued its
    recommendations last week.
        I want to remind my colleagues that this Congress already
    has taken important steps to make health care more affordable.
    The Medicare Modernization Act (MMA), which President Bush
    signed in December, includes a number of steps to make
    prescription drugs more affordable. For example, the MMA:
         Provides affordable, voluntary prescription drug
    coverage to all seniors and individuals with disabilities with
    a special emphasis on those with lower incomes and those with
    high, catastrophic drug costs;
         Includes a greater emphasis in the traditional
    fee-for-service Medicare program on prevention, chronic care,
    and disease management, which has the potential to save money
    and save lives;
         Authorizes the Agency for Health Care Research and
    Quality (AHRQ) to conduct research on the outcomes, clinical
    effectiveness, and appropriateness of prescription drugs and
    other health care items and services and to widely disseminate
    this information to patients, providers, and purchasers;
         Makes cheaper generic drugs available to consumers
    more quickly by closing loopholes in the Hatch-Waxman law;
         Provides all Americans with the opportunity to
    exercise greater control over their health care choices and
    dollars through tax-free Health Savings Accounts;
         Dramatically improves the pricing transparency of
    prescription drugs and attempts to drive down costs through
    competition by making retail prices widely available on the
    Centers for Medicare and Medicaid Services' ``Price Compare''
    website; and
         Offers seniors immediate prescription drug savings
    of 10-25 percent through Medicare-approved prescription drug
    discount cards.
        In fact, beginning next month--less than 6 months after
    this landmark legislation was signed into law--seniors will
    begin benefiting from lower prescription drug costs. Just
    yesterday, the Centers for Medicare and Medicaid Services
    released an analysis showing that Medicare beneficiaries
    qualifying for the transitional assistance program under the
    new Medicare law could save between 29 and 77 percent on their
    brand-name drug costs and as much as 92 percent on their
    generic drug costs combining the effects of discounts available
    with the cards and the effect of the $1,200 credit they have
    available to them over the next 18 months.
        The recommendations of the Gregg Task Force are one attempt
    to build on these initial steps.
        And, in fact, there is more to be done.
        As we examine the factors driving overall health care
    inflation, we know that the rapidly rising cost of prescription
    drugs is a key culprit--both because of increased utilization
    and increased prices. Pharmaceutical costs have outpaced all
    categories of health spending in recent years and are expected
    to account for nearly 15 percent of all national health
    expenditures by 2011--up from 9.4 percent in 2000.
        Thus, a greater focus on prescription drug costs is clearly
    appropriate. At the same time, none of us want to jeopardize
    the development of life-saving pharmaceutical treatments as we
    consider importation legislation and other policies intended to
    make health care and health coverage more affordable.
        As we examine these policy proposals, we also must ensure
    that patients are not put at risk. As a physician who has
    dedicated my life to treating and healing patients, this is the
    most important consideration for me personally as I weigh the
    proposals before this committee and before the U.S. Senate.
        How do we ensure that all Americans have access to safe,
    effective, and affordable prescription drugs?
        Our challenge is to strike a balance among these sometimes
    competing priorities. In fact, it is the central challenge for
    us as we consider legislation to allow the importation and
    reimportation of prescription drugs into the United States.
        Chairman Gregg, Senator Kennedy, I look forward to working
    with both of you, and the other members of this committee, as
    this process moves forward to ensure that we can strike the
    appropriate balance.
        I look forward to hearing the testimony of our two panels
    and thank everyone for participating in this hearing today. At
    the end of the day, we must ensure that individuals not only
    receive the prescriptions they need and at the prices they can
    afford, but with the safety and efficacy they expect and
    deserve.

                      Prepared Statement of Senator Harkin

        Mr. Chairman, we are here today to talk about the
    reimportation of prescription drugs from other countries back
    into the United States. In Iowa, people are always looking for
    ways to cut the costs of their prescription drugs. Constituents
    have told me about splitting pills, others have used mail order
    pharmacies in Canada or have traveled there. Still others have
    used pharmacies on the Internet. Some of these methods are not
    safe. But people do it because of one thing: cost.
        A recent Kaiser Family Foundation report noted that 27
    percent of Americans without insurance went without a
    prescribed medication last year. Even if you have insurance,
    coverage for prescription drugs has decreased and out-of-pocket
    costs have increased dramatically over the past decade. This is
    a problem for everyone--not just senior citizens.
        I support reimportation with good safety measures in place.
    I believe Senator Dorgan and Senator Kennedy have put together
    a good bill to address the fundamental regulatory hurdles that
    must be cleared to make reimportation safe. We can't have
    people exposed to potentially harmful products without any
    oversight--the exact situation that exists today.
        However, Mr. Chairman, I believe the calls for
    reimportation are really calls for lower drug prices in
    general. We will discuss prices today and some witnesses have
    talked about drug pricing in their testimony. Some will argue
    that unless prices--and profits--remain high for the
    pharmaceutical industry, investment in research and development
    will decline. In addition, arguments will be made that millions
    of people will suffer needlessly because future research and
    development is not done. I think this holds us hostage to the
    pricing practices of the pharmaceutical industry. For example,
    a recent University of Wisconsin study found that the Top 10
    drug companies only invest 13 percent of revenues in research
    and development. But they collect 23.6 percent of revenues in
    profit, and almost 35 percent of revenues are spent on
    marketing. No wonder they are the most profitable industry in
    the world.
        People are suffering needlessly now because they can't get
    access to the same prescription drug prices as people in other
    countries. People's lives are at stake. Prescription drugs are
    not like other consumer products. They are not optional or
    discretionary. For people with HIV-AIDS, lack of access to
    drugs can mean debilitating illness and even death. For older
    Americans with chronic conditions--like Diabetes or Congestive
    Heart Failure--lack of access to drugs means unnecessary
    hospital stays, and drastic changes in the quality and length
    of their lives. It's not like buying a car--the customer can't
    walk away from the deal with his health in tact. So the choices
    that we make here in Washington . . . the choices that the Bush
    administration and the pharmaceutical industry makes . . . are
    fateful choices. And let's be clear, the prices as they are
    today cost countless lives here at home.
        I fully appreciate the need to preserve the pharmaceutical
    industry's ability to perform research and development. The
    Federal Government, through taxpayer money, already supports
    this through rich tax incentives and investment in biomedical
    research at the National Institutes of Health. Likewise, I
    certainly do not dispute the industry's right to make a profit.
    But we are quickly coming to the point where the pursuit of
    reasonable profits turns into flat out profiteering. Diseases
    are viewed as marketing opportunities, not as scourges to be
    eliminated as rapidly and as cost-effectively as possible.
        Lower prices matter because without them, millions of
    people don't have access to the pharmaceuticals they need to
    remain healthy, contributing members of our society. Without
    them, they are denied their health. And, even worse, we all
    pay. Taxpayer dollars are wasted on hospitalizations that could
    have been prevented. Chronic diseases that could have been
    controlled and treated become major medical problems. Until we
    choose a different course--until we choose to allow
    reimportation, or choose to allow the Secretary of Health and
    Human Services to negotiate lower drug prices on behalf of our
    Medicare beneficiaries--necessary care will remain out of reach
    for millions of Americans.

                     Prepared Statement of Senator Jeffords

        About 5 years ago, I was encouraged and optimistic when the
    Congress passed and President Clinton signed the first
    reimportation legislation, a bill I had introduced called the
    Medical Equity and Drug Safety, or the ``MEDS'' Act. It was
    designed to allow safe, FDA-approved medicines, that are
    manufactured in plants approved by FDA and sold abroad, to be
    purchased by American pharmacists and wholesalers and
    reimported into the United States. We worked closely with the
    FDA in developing this law. We sought the agency's advice about
    provisions that were necessary to ensure the safety and quality
    of these medicines. We accepted that advice and included
    stringent controls in the MEDS Act.
        President Clinton supported and signed the MEDS Act. Then-
    presidential candidate, George W. Bush, supported it during his
    campaign. But since then, the goal-posts have moved. We are now
    being told that what FDA had advised us would work to ensure
    safety, will now no longer work. That the controls FDA advised
    us to include in the MEDS Act are now inadequate.
        Mr. Chairman, I can accept that the MEDS Act was not
    flawless. I can accept that there were some disagreements about
    whether and how it could work. But few disagreed with the
    notion that it should work. No one has argued that Americans
    should continue to pay prices higher than those by other
    consumers in other countries. This concept of reimportation is
    not a partisan issue. It is supported by Democrats, Republicans
    and Independents in both the House and the Senate. All of whom
    are looking for the right answer.
        As of today, we have no fewer than four initiatives in the
    House of Representatives, three bills introduced in the Senate
    and at least one more waiting in the wings that would provide
    for the reimportation of prescription drugs. Virtually all have
    been criticized for a number of reasons ranging from safety
    concerns to the imposition of price controls; for either going
    too far, or not far enough. Clearly, we have an opportunity to
    address this issue this year and the proponents of these
    measures deserve our praise for working to resolve outstanding
    problems. But I believe all these efforts could succeed with
    just a little more help.
        So today I would argue that FDA must stop telling us what
    will not work, and must now tell us what will work. The agency
    needs to stop obfuscating and confusing the issue with stories
    about counterfeit, fake or unsafe drugs. We are interested in
    knowing how to ensure that the safe, effective medicines that
    are available on the world market, can be made available here.
    I hope, that the witness from the FDA, can begin to tell us
    what is necessary: what regulatory authority and what level of
    resources are needed to make this program available. We can
    then take that advice, write the necessary law and get to the
    matter at hand: that is making sure that Americans have better
    access to more fairly priced medicine.
        Mr. Chairman, I want to commend you and Senator Kennedy for
    holding this hearing and I am continuing my commitment to work
    with you and our colleagues to solve this vexing problem. I
    look forward to hearing from our witnesses, especially those
    that can contribute to the solutions and not just recite the
    litany of problems that all of us already know--and know all
    too well.

                     Prepared Statement of Senator Edwards

        Thank you, Mr. Chairman, for convening this hearing. As we
    all know, Americans are suffering from skyrocketing drug
    prices. People from all over the country have told me heart-
    wrenching stories of having to choose between paying for their
    prescriptions and putting food on their table. In a country as
    great as ours, people should never have to make this choice.
        Today, this committee meets to discuss the safe and
    effective reimportation of prescription drugs. Safe and
    effective reimportation of drugs would be a very helpful step
    in helping reduce drug costs. We already know that a safe
    system to bring drugs in from Canada and other countries will
    give our seniors much better savings than the new Medicare Drug
    Card.
        Americans must have access to affordable prescription drugs
    here at home. But all too often, that is not the case. The
    reality is that prescription drug costs continue to rise at
    more than twice the rate of inflation. As a result, many
    Americans are forced to go without their medication. Some of
    them end up in the emergency room, potentially worse off then
    they were before.
        Last year, we had a chance to do something about this with
    the Medicare Prescription Drug bill. We had a chance to allow
    the government to negotiate lower drug prices. But the drug
    companies were against it, and it was defeated. We had the
    chance to enact a meaningful benefit for seniors. But big
    insurance companies claimed they needed subsidies from the
    government to compete with the Medicare program. So instead of
    giving seniors a full drug benefit, the Medicare bill gave
    billions away to HMOs and drug companies.
        Truly, the political power of the drug lobby and HMO lobby
    is a thing to behold. They have hundreds of lobbyists all over
    Washington doing everything they can to make sure we keep drug
    prices high. They achieved a spectacular success with the
    Medicare bill. And you can bet that the drug companies will
    continue to do everything they can to stop reimportation as
    well.
        Many of my colleagues and I stood up to the drug lobby and
    opposed this bill. We voted against this $530 billion piece of
    legislation because it helps HMOs and drug companies more than
    it helps ordinary Americans. Despite our efforts to include
    provisions that would lower drug costs, the bill passed and is
    now law.
        We are seeing the effects of this legislation now, as the
    drug discount card program is being unveiled. Unfortunately, it
    is more of the same. It is an overly complicated system that
    will give most seniors no additional help over the current
    system.
        Mr. Chairman, Americans deserve to buy drugs at reasonable
    prices. No one should have to make a choice between filling
    their prescriptions and feeding their family. I am gratified
    that so many of my Democratic and Republican colleagues support
    reimportation. I urge them to pass legislation that includes
    strict safety measures to ensure that Americans receive FDA-
    approved drugs from registered pharmacies and wholesalers.
        We shall proceed to Mr. Taylor, who is here representing
    the FDA. He is the Associate Commissioner for Regulatory
    Affairs at the U.S. Food and Drug Administration. He is joined
    by other members of the Food and Drug Administration.
        Mr. Taylor, tell us what you think and how we should
    address this issue.

        STATEMENT OF JOHN M. TAYLOR, ASSOCIATE COMMISSIONER FOR
        REGULATORY AFFAIRS, U.S. FOOD AND DRUG ADMINISTRATION;
     ACCOMPANIED BY WILLIAM K. HUBBARD, ASSOCIATE COMMISSIONER FOR
         POLICY AND PLANNING, U.S. FOOD AND DRUG ADMINISTRATION

        Mr. Taylor. Thank you, Mr. Chairman.
        Mr. Chairman and members of the committee, I am John M.
    Taylor, Associate Commissioner for Regulatory Affairs at the
    Food and Drug Administration. With me is Mr. William K.
    Hubbard, Associate Commissioner for Policy and Planning. In
    addition to my remarks, Mr. Hubbard will be presenting some
    examples of products that highlight the safety concerns that we
    will be discussing today.
        We appreciate having this opportunity to discuss with you
    issues relating to the importation of prescription drugs into
    the United States and proposals that would legalize the
    importation of these drugs beyond what is currently allowed by
    law.
        FDA shares with Congress its concern for senior citizens
    and other patients who have difficulty paying for prescription
    drugs. That is why the administration worked closely with
    Congress to enact the new Medicare prescription drug law, and
    that is why FDA has made it a priority for its medical and
    scientific experts to establish and expand programs that
    promote access to innovative treatments and affordable
    medications.
        FDA has taken a number of important steps to lower the cost
    of prescription drugs, including an unprecedented effort to
    speed up the development and approval of generic drugs, which
    typically cost 50 to 70 percent less than their brand-name
    counterparts. Last year, FDA published a final rule to improve
    access to generic drugs that will save Americans over $35
    billion in drug costs over the next 10 years. The agency has
    also taken steps to improve the development process for
    innovator drugs, increase the efficiency of drug development,
    and reduce regulatory costs.
        FDA is also working to prevent adverse events through new
    rules to require bar coding of drugs and improve the tracking
    of adverse events, with the goal of preventing billions of
    dollars in unnecessary health care costs each year.
        FDA continues, however, to have serious public health
    concerns about the importation of drugs outside the current
    safety system established by Congress under the Federal Food
    Drug and Cosmetic Act. When it comes to buying drugs absent our
    existing regulatory procedures, FDA has consistently concluded
    that it is unable to endorse a ``buyer beware'' approach.
    Currently, new drugs marketed in the United States, regardless
    of whether they are manufactured here or in a foreign country,
    must be approved by FDA based on demonstrated safety and
    efficacy. They must be produced in inspected manufacturing
    plants that comply with good manufacturing practices, and the
    shipment and storage of these drugs must be properly documented
    and, where necessary, inspected.
        Unfortunately, the drug supply is under unprecedented
    attack from a variety of progressively more sophisticated
    threats. This is evident in the recent increase in efforts to
    introduce counterfeit drugs into the U.S. market. FDA's
    counterfeit drug investigations have risen four-fold since the
    late 1990s. Although once a rare event, we are now seeing
    greater numbers of counterfeit finished drugs being
    manufactured and distributed by well-funded and elaborately
    organized networks.
        At the same time, inadequately regulated foreign Internet
    sites have also become portals for unsafe and illegal drugs.
    For example, FDA recently worked with domestic and
    international authorities to shut down a website advertising
    ``FDA approved'' and safe ``European'' birth control pills and
    other drugs, but actually importing ineffective, counterfeit
    products.
        Evidence strongly suggests that the volume of these foreign
    drug importations is rising steadily, presenting an ever more
    difficult challenge for agency field personnel at ports-of-
    entry, mail facilities, and international courier hubs.
        Consumers are exposed to a number of potential risks when
    they purchase drugs from foreign sources or from sources that
    are not operated by pharmacies properly licensed under State
    pharmacy laws. These outlets may dispense expired, subpotent,
    contaminated or counterfeit drug products, the wrong or a
    contraindicated product, an incorrect dose, or medication
    unaccompanied by adequate directions for use. The drugs may not
    have been packaged and stored under proper conditions to
    prevent degradation, and there is no assurance that these
    products were manufactured under good manufacturing practice
    standards.
        When consumers take such medications, they face the risk of
    dangerous drug interactions and/or suffering adverse events,
    some of which can be life-threatening. More commonly, if the
    drugs are subpotent or ineffective, patients may suffer
    complications from the illnesses that their prescriptions were
    intended to treat, without ever knowing the true cause.
        To help assess the extent of the problem posed by imported
    drugs, FDA and Customs conducted import blitzes at four
    international mail facilities last summer. We found that 88
    percent of the products we examined were unapproved or
    otherwise illegal. Examples of the potentially hazardous
    products encountered during the blitz included: drugs never
    approved by FDA, drugs withdrawn from the market, drugs with
    inadequate labeling, drugs inappropriately packaged, drugs
    requiring close physician monitoring, and controlled
    substances.
        At a time when FDA faces more challenges than ever in
    keeping America's supply of prescription drugs safe and secure,
    legislation to liberalize drug importation without providing
    concomitant enhancements in our authorities and resources could
    seriously compromise the safety and effectiveness of our drug
    supply.
        Successive versions of legislation introduced in the House
    and Senate have achieved mixed results in providing FDA with
    the authority and resources needed to assure the safety of
    imported drugs. But we still see some very basic safety issues
    with these bills. Chief among these is our concern about
    provisions to legalize the practice of individual consumers
    importing drugs on their own from foreign sources. Even if
    personal importation is limited to Canada, the volume of
    imported drugs that could result from enactment of the personal
    importation provisions could overwhelm our already burdened
    regulatory system.
        We do not believe that FDA or any other agency has the
    ability to assess and properly regulate the millions of small
    individual packages of drugs that will enter the country each
    year if personal importation is legalized. Currently, the
    volume of incoming packages is far beyond the ability of FDA
    and Customs to properly process. Codification of personal
    importation would merely exacerbate this problem, as we
    estimate that tens of millions of small drug parcels will enter
    the United States through international mail facilities and
    private courier hubs. Neither FDA nor Customs, at current
    staffing levels, would be able to inspect these packages.
        Even if such resources could be provided, a mere visual
    inspection is not adequate to ensure a product's safety. Due to
    the sheer volume of these packages, it would be impossible to
    replicate the current regulatory system that relies not only on
    the inspection of incoming drug shipments at the border, but on
    the ability of FDA and Customs to track the drugs from the
    manufacturer to the pharmacy shelf.
        In short, legalizing personal importation will endorse the
    sale of drugs to U.S. consumers from foreign Internet
    pharmacies, when we know there are already many illicit
    operators of websites that are selling phony or unapproved
    medications. When substantial numbers of individual consumers
    import their own drugs from foreign sources, there is no way
    for FDA to make meaningful decisions as to the safety or
    efficacy of such products.
        Other concerns relate to the workability of provisions for
    commercial importation. We caution against the creation of
    highly complex regulatory systems that are insufficiently
    funded. Fees to regulate entities should be determined by
    straightforward means. Funding for such a program should take
    into account the need for the expenditure of significant new
    resources for criminal investigations. Where new gateways are
    created for drugs to enter the United States, some criminal
    elements will try to exploit these channels and attempt to
    bring in counterfeit and other unsafe medications. Due to the
    new pathways by which drugs would enter the country, it would
    become more difficult to detect fraudulent behavior, and the
    safety of U.S. consumers may depend to a large degree on
    intensive investigative activities, as well as the actions of
    numerous foreign regulatory bodies and border agencies.
        While we believe it is a positive step to provide some
    mechanism for FDA review of foreign products, we note that
    merely identifying two drugs as pharmaceutically similar would
    not necessarily ensure true therapeutic equivalence or
    substitutability between those products. We are concerned about
    the possibility that drugs with differences that could lead to
    different therapeutic results or allergic reactions could be
    sold along side the U.S. version of the drug, or carry the same
    labeling as the U.S. drug.
        Under this system, consumers would have no way to know
    whether the drug they purchase at their local drugstore would
    be the U.S. version approved by FDA, or one of up to 20 foreign
    versions of the drug. They would also have no way of knowing
    the true composition of the drug, whether it contained a
    substance harmful to them, or whether the drug would act the
    same way within the body as the original FDA-approved drug.
        Finally, we are concerned that legislation which would
    mandate unreasonable timetables for implementation would
    compromise FDA's ability to ensure the safety or quality of the
    drugs proposed for import.
        FDA firmly believes that we can and should do a better job
    of making safe and innovative drugs more affordable in the
    United States, but to succeed, we need to find safe and
    affordable solutions that do not put consumers at risk. The
    standards for drug review and approval in the United States are
    the best in the world, and the safety of our drug supply
    mirrors these high standards. We believe that U.S. consumers
    should not have to settle for less.
        FDA would urge Congress to ensure that any change to our
    drug regulation system does not require consumers to give up
    the ``gold standard'' in drug safety that they have come to
    rely on. FDA's scientists, doctors, health care experts and
    regulators must be empowered to protect us from bad medicine.
    We owe it to patients today and tomorrow to make our medical
    future brighter, healthier, and more affordable.
        Thank you for this opportunity to testify.
        [The prepared statement of Mr. Taylor follows:]
                   Prepared Statement of John M. Taylor, J.D.
                                  introduction
        Mr. Chairman and members of the committee, I am John M. Taylor,
    Associate Commissioner for Regulatory Affairs at the U.S. Food and Drug
    Administration (FDA or the Agency). With me is Mr. William K. Hubbard,
    Associate Commissioner for Policy and Planning at FDA. We appreciate
    having this opportunity to discuss with you the issues relating to the
    importation of prescription drugs into the United States and proposals
    that would legalize the importation of these drugs beyond what is
    currently allowed by law.
        At FDA, our statutory responsibility is to assure the American
    public that the drug supply is safe, secure, and reliable. For more
    than 60 years, the Federal Food, Drug, and Cosmetic (FD&C) Act has
    ensured that Americans can be confident that, when they use an FDA-
    approved drug, the medicine will be safe and effective and will work as
    intended in treating their illness and preventing complications. In
    carrying out this responsibility, FDA also works to do all we can under
    the law to make medicines accessible and help doctors and patients to
    use them as effectively as possible, through such steps as expanding
    access to generic medicines, reducing the time and cost of showing that
    new medicines are safe and effective, and providing up-to-date
    information for health professionals and patients to obtain the
    benefits and avoid the risks associated with powerful medicines. That
    is the primary mission of the thousands of dedicated staff, including
    leading health care experts, doctors, economists and scientists who
    work tirelessly at FDA in public service for the American people. FDA
    has concerns about unapproved, imported pharmaceuticals whose safety
    and effectiveness cannot be assured because they are outside the legal
    structure and regulatory resources provided by Congress. We have also
    taken steps within the law to improve the availability of affordable
    medicines and reduce drug costs, without compromising safety. In my
    testimony today I look forward to having the opportunity to engage in a
    constructive dialog about the issue of importing prescription drugs as
    well as discussing steps to provide greater access to more affordable
    prescription medications.
                              reducing drug costs
        FDA shares with Congress its great concern for senior citizens and
    other patients who have difficulty paying for prescription drugs. That
    is why the Administration worked with Congress to enact the new
    Medicare prescription drug law. And that is why FDA has made it a
    priority for its medical and scientific experts to establish and expand
    programs that promote access to innovative treatments to help Americans
    live healthier lives and assure that Americans have access to
    medications and treatments that they can afford.
        FDA has taken a number of significant steps to provide greater
    access to affordable prescription medications, including unprecedented
    steps to lower drug costs by helping to speed the development and
    approval of low-cost generic drugs after legitimate patents have
    expired on branded drugs. Generic drugs typically cost 50 to 70 percent
    less than their brand-name counterparts. On June 18, 2003, FDA
    published a final rule to improve access to generic drugs and lower
    prescription drug costs for millions of Americans. These changes will
    save Americans over $35 billion in drug costs over the next 10 years.
    Elements of this rule were codified as part of the recently enacted
    Medicare law and, with FDA's technical assistance, the law added
    additional mechanisms to enhance generic competition in the
    marketplace.
        In addition, last year Congress provided an increase of $8 million
    for FDA's generic drug program, the largest infusion of resources into
    this program ever. This increase in the generic drug budget enables FDA
    to hire additional expert staff to review generic drug applications
    more quickly and initiate targeted research to expand the range of
    generic drugs available to consumers. Improvements in the efficiency of
    review procedures have led to significant reductions in approval times
    for generic drugs since 2002, and consequently will save consumers
    billions more by generally reducing the time for developing generic
    drugs and making them available.
        The Agency has also taken steps to help improve the development
    process to help lower the high cost of developing new drugs. In
    particular, FDA is continuing to improve the methods by which
    assistance and advice is provided to sponsors regarding what we believe
    are the best approaches to develop new therapies and maximize the
    prospects for swift FDA approval. These ongoing efforts are designed to
    provide sponsors with the best possible information and thus increase
    the efficiency of the development process. We expect that reforms in
    drug and biologic manufacturing requirements should help reduce
    manufacturing costs by 20 percent. FDA has identified several priority
    disease areas, such as cancer, diabetes and obesity, and new
    technologies including gene therapy, pharmacogenomics and novel drug
    delivery systems that are good candidates for efforts to clarify
    regulatory pathways and clinical endpoints.
        FDA is also working to prevent adverse events through new rules
    that would require bar coding for drugs and better ways to track
    adverse events automatically with the goal of preventing billions of
    dollars in unnecessary health care costs each year. FDA's final rule
    requiring bar coding of drugs is estimated to have net economic
    benefits of approximately $3.5 billion per year. Avoiding such
    preventable medical complications will also help reduce health care
    costs, while enhancing quality and safety. In addition, the agency is
    striving to promote electronic prescribing, to improve quality and
    reduce prescription costs as well.
                       importation of prescription drugs
        Sixty-five years ago, Congress responded to widespread instances of
    unsafe drugs by directing FDA to create a system for assuring that
    Americans have a drug supply they can trust will not harm them. Over 40
    years ago, Congress required that legal drugs be proven to be effective
    as well, because modern medicines--when they are produced, distributed,
    prescribed, and used properly--should not only be safe but also should
    prevent the many complications and side effects of diseases. More
    recently, in 1988, Congress enacted the Prescription Drug Marketing Act
    (PDMA) to establish additional safeguards to prevent substandard,
    ineffective, or counterfeit drugs from entering the United States.
    Under PDMA, it is illegal for anyone other than the drug's original
    manufacturer to reimport a prescription drug into the United States
    that was manufactured in the United States. This law was enacted with
    strong bipartisan support because of high-profile cases of unsafe and
    ineffective drugs entering the United States in large volumes. In one
    instance, over 2 million unapproved and potentially unsafe and
    ineffective Ovulen-21 ``birth control'' tablets from Panama were
    distributed throughout the United States. In another case, a
    counterfeit version of Ceclor, a widely used antibiotic at the time,
    found its way into the U.S. drug distribution from a foreign source.
    Over the years, FDA's dedicated professional staff has employed PDMA
    and other authorities to build a drug safety infrastructure to ensure
    that Americans enjoy the highest-quality drug supply in the world.
        Unfortunately, the drug supply is under unprecedented attack from a
    variety of increasingly sophisticated threats. This is evident in the
    recent significant increase in efforts to introduce counterfeit drugs
    into the U.S. market. FDA has seen its number of counterfeit drug
    investigations increase fourfold since the late 1990's. Although
    counterfeiting was once a rare event, we are increasingly seeing large
    supplies of counterfeit versions of finished drugs being manufactured
    and distributed by well-funded and elaborately organized networks. At
    the same time, inadequately regulated foreign Internet sites have also
    become portals for unsafe and illegal drugs. For example, FDA recently
    worked with domestic and international authorities to shut down a
    website that was advertising ``FDA-approved'' and safe ``European''
    birth control pills and other drugs, but was actually responsible for
    importing ineffective, counterfeit drugs. Evidence strongly suggests
    that the volume of these foreign drug importations is increasing
    steadily, presenting an increasingly difficult challenge for agency
    field personnel at ports-of-entry, mail facilities, and international
    courier hubs, and our laboratory analysts and border and law
    enforcement partners.
        FDA is doing its best to use its limited international authorities
    to stop the increasing flow of violative drugs into this country, but
    the task is daunting. Each day, thousands of individual packages
    containing prescription drugs are imported illegally into the United
    States, simply because the sheer volume has grown to exceed the
    capability of FDA field personnel to properly process. FDA's Office of
    Regulatory Affairs has inspectors who work in the field who perform
    investigational work pertaining to imported prescription drugs, a job
    that is not limited to inspections at ports-of-entry.
                    safety concerns relating to importation
        FDA remains concerned about the public health implications of
    unapproved prescription drugs from entities seeking to profit by
    getting around U.S. legal standards for drug safety and effectiveness.
    Many drugs obtained from foreign sources that either purport to be or
    appear to be the same as U.S.-approved prescription drugs are, in fact,
    of unknown quality. Consumers are exposed to a number of potential
    risks when they purchase drugs from foreign sources or from sources
    that are not operated by pharmacies properly licensed under State
    pharmacy laws. These outlets may dispense expired, subpotent,
    contaminated or counterfeit products, the wrong or a contraindicated
    product, an incorrect dose, or medication unaccompanied by adequate
    directions for use. The labeling of the drug may not be in English and
    therefore important information regarding dosage and side effects may
    not be available to the consumer. The drugs may not have been packaged
    and stored under appropriate conditions to prevent against degradation,
    and there is no assurance that these products were manufactured under
    current good manufacturing practice standards. When consumers take such
    medications, they face risks of dangerous drug interactions and/or of
    suffering adverse events, some of which can be life threatening. More
    commonly, if the drugs are subpotent or ineffective, they may suffer
    complications from the illnesses that their prescriptions were intended
    to treat, without ever knowing the true cause.
        Patients also are at greater risk because there is no certainty
    about what they are getting when they purchase some of these drugs.
    Although some purchasers of drugs from foreign sources may receive
    genuine product, others may unknowingly buy counterfeit copies that
    contain only inert ingredients, legitimate drugs that are outdated and
    have been diverted to unscrupulous resellers, or dangerous sub-potent
    or super-potent products that were improperly manufactured.
    Furthermore, in the case of foreign-based sources, if a consumer has an
    adverse drug reaction or any other problem, the consumer may have
    little or no recourse either because the operator of the pharmacy often
    is not known, or the physical location of the seller is unknown or
    beyond the consumer's reach. FDA has only limited ability to take
    action against these foreign operators.
        The Agency has responded to the challenge of importation by
    employing a risk-based enforcement strategy to target our existing
    enforcement resources effectively in the face of multiple priorities,
    including homeland security, food safety and counterfeit drugs.
    However, this system, as it works today, is already overwhelmed by the
    number of incoming packages, and this presents a significant ongoing
    challenge for the Agency.
        Recent spot examinations of mail shipments of foreign drugs to U.S.
    consumers revealed that these shipments often contain dangerous or
    unapproved drugs that pose potentially serious safety problems. In
    2003, inspectors found that the majority of the packages examined in
    these ``blitzes'' contained illegal, unapproved drugs. Last summer, FDA
    and Customs conducted blitz examinations on mail shipments at the Miami
    and New York (JFK) mail facilities in July, and the San Francisco and
    Carson, California, mail facilities in August. In each location, the
    agencies examined packages shipped by international mail over a 3-day
    time span. Of the 1,153 shipments examined, the overwhelming majority
    (1,019 packages, or 88 percent) contained unapproved drugs. The drugs
    arrived from many countries. For example, 16 percent entered the United
    States from Canada; 14 percent were from India; 14 percent came from
    Thailand, and 8 percent were shipped from the Philippines.
        A second series of import blitz exams, conducted in November 2003,
    also revealed potentially dangerous, illegally imported drug shipments.
    Of the 3,375 products examined, 2,256 or 69 percent were violative. FDA
    found recalled drugs, drugs requiring special storage conditions and
    controlled substances. These blitz exams were performed at the Buffalo,
    Dallas, Chicago and Seattle international mail facilities and, for the
    first time, the private courier hubs at Memphis and Cincinnati.
    Canadian parcels appeared most frequently (80 percent of the mail
    parcels), while 16 percent were from Mexico, and the remaining 4
    percent came from Japan, the Netherlands, Taiwan, Thailand and the
    United Kingdom.
        Examples of the potentially hazardous products encountered during
    the exams include:

         Unapproved drugs such as (1) alti-azathioprine, an
    immunosupressant drug that can cause severe bone marrow depression and
    can be associated with an increased risk of infection and cancer
    development; and (2) human growth hormone, which can have serious side
    effects if used inappropriately or in excessive doses.
         Controlled substances--FDA and Customs found over 25
    different controlled substances, including Diazepam; Xanax; Codeine;
    Valium, Lorazepam, Clonazepam and anabolic steroids.
         Drugs withdrawn from the U.S. market for safety reasons
    such as Buscapina, which appears to be the drug dipyrone, removed from
    the market in 1977 due to reports of association with agranulocytosis--
    a sometimes fatal blood disease.
         Improperly packaged drugs shipped loose in sandwich bags,
    tissue paper or envelopes.
         Animal drugs not approved for human use such as
    Clenbuterol, a drug approved for the treatment of horses but also known
    as a substance of abuse in the ``body building'' community and banned
    by the International Olympic Committee.
         Potentially recalled drugs--Serevent Diskus and Flovent
    Diskus medicines from Canada for the treatment of asthma. Shortly after
    the blitz, certain lots of the Canadian versions of these drugs were
    recalled in Canada.
         Drugs requiring risk management and/or restricted
    distribution programs--for example, Canadian-manufactured isotretinoin,
    which in the United States is subject to a stringent risk management
    plan, under which prescribers are required to screen, educate and
    monitor patients to avoid certain serious risks such as birth defects.
         Drugs with inadequate labeling such as those with missing
    dosage information or labeling that is not in English.

        But its not just FDA that has identified both legal and safety
    concerns about importation of prescription drugs--so have many other
    professional regulators, including State pharmacy boards and most
    recently courts. On November 6, 2003, Federal District Court Judge
    Claire V. Eagan, U.S. District Court for the Northern District of
    Oklahoma, issued a decision in United States v. RX Depot, Inc. and RX
    of Canada LLC, granting a preliminary injunction to immediately prevent
    these defendants who operate business that import prescription drugs
    from Canada, because such unapproved drugs were a clear violation of
    the FD&C Act. In addition to her unequivocal findings of law, the Judge
    concluded that these companies could not assure the safety of the drugs
    they have been importing and, as a result, in violating the law, have
    put Americans at serious risk. The Judge concluded that ``unapproved
    prescription drugs and drugs imported from foreign countries by someone
    other than the U.S. manufacturer does not have the same assurance of
    safety and efficacy as drugs regulated by the Food and Drug
    Administration.'' She continues: ``Because the drugs are not subject to
    FDA oversight and are not continuously under the custody of a U.S.
    manufacturer or authorized distributor, their quality is less
    predictable than drugs obtained in the United States.''
                              recent state actions
        Despite this ruling and the concerns raised by the Agency,
    recently, several Governors and mayors have proposed to create systems
    whereby their employees and/or constituents could be directed to
    Canadian pharmacies for purchasing Canadian drugs. FDA has spoken with
    a number of such officials about our concerns, and many have declined
    to proceed and have turned to other legal, proven ways to safely reduce
    drug costs. However, some States and localities, including the State of
    Minnesota and the State of Wisconsin have proceeded to establish state-
    run websites linking citizens to entities dispensing drugs purportedly
    from Canada.
        Recent research by the State of Minnesota pointed out significant
    problems related to purchasing non-FDA approved pharmaceuticals from
    foreign Internet pharmacies. Minnesota State health officials observed
    even Canadian pharmacies that participate in the Canadian Internet
    Pharmacy Association engaging in problematic practices during a single,
    voluntary, pre-announced ``visit.'' The officials noted dozens of
    safety problems, such as:
        (1) several pharmacies used unsupervised technicians, not trained
    pharmacists, to enter medication orders and to try to clarify
    prescription questions;
        (2) one pharmacy had its pharmacists review 100 new prescriptions
    or 300 refill prescriptions per hour, a volume so high that it would
    have been impossible to assure safety;
        (3) one pharmacy failed to label its products, instead it shipped
    the labels unattached in the same shipping container, even to patients
    who received multiple medications in one shipment; and
        (4) drugs requiring refrigeration were being shipped unrefrigerated
    with no evidence that the products would remain stable.
        At least one of the Canadian pharmacies visited by Minnesota health
    officials dispensed many drugs that apparently were not even of
    Canadian origin, and many of the drugs were obtained from prescriptions
    that had been written and rewritten across multiple Canadian provinces.
    These types of systematic safety problems would generally be clear
    regulatory violations that would not be tolerated under the
    comprehensive system of Federal and State regulation of drug safety in
    the United States.
        Similar findings occurred when representatives of New Hampshire
    Gov. Craig Benson visited the Canadian Internet pharmacy known as
    CanadaDrugs.com, located in Winnipeg, Manitoba. The ``terms of
    service'' for CanadaDrugs.com requires purchasers to agree that they
    ``will not be liable for damages arising from personal injury or
    death'' from the use of drugs sold by the pharmacy. Under this
    practice, the consumer has no recourse for injuries arising from the
    use of drugs from this shipper. Additionally, the website allows
    patients to send in their prescriptions by fax, when the practice is
    illegal under the law in New Hampshire and other States.
    CanadaDrugs.com is ``accredited'' only by the Internet and Mail order
    Pharmacy Accreditation Commission, which is a voluntary body with no
    legal standing and no Federal or State regulatory or enforcement
    authority.
                              drug counterfeiting
        Counterfeiting of prescription drugs is a growing global concern.
    In fact, counterfeiting of drugs is commonplace in many countries. In
    the United States, Federal and State authorities have kept
    counterfeiting of drugs to a minimum because of our extensive system of
    laws, regulations and enforcement. As a result, Americans have a high
    degree of confidence in the drugs they obtain from their local
    pharmacy. In recent years, however, FDA has seen growing evidence of
    efforts by increasingly well-organized counterfeiters, backed by
    increasingly sophisticated technologies and criminal operations, intent
    on profiting from drug counterfeiting at the expense of American
    patients.
        To respond to this emerging threat, FDA convened a Counterfeit Drug
    Task Force that received extensive comment and ideas from security
    experts, Federal and State law enforcement officials, technology
    developers, manufacturers, wholesalers, retailers, consumer groups, and
    the general public. Based on these comments, on February 18, 2004, FDA
    issued a report that contains specific steps that can be taken now and
    in the future to protect consumers from counterfeit drugs and secure
    the U.S. drug supply chain.
        The report's framework describes how to strengthen our drug safety
    assurances against modern counterfeit threats through a multilayered
    strategy that includes modern anti-counterfeiting technologies.
    Promising developments such as ``track and trace'' technologies that
    cannot be faked like a paper drug pedigree, and verification
    technologies built not only into tamper-resistant drug packaging but
    also into the drugs themselves will make our job of verifying the
    legitimacy of drug products much easier. FDA is working to speed the
    availability of these anti-counterfeiting technologies, but these
    technologies have not yet been proven, and they are intended to
    complement and reinforce an underlying system for assuring the safety
    and effectiveness of prescription drugs.
        Thus, anti-counterfeiting technologies hold great promise for
    strengthening our legal drug distribution system, but to be effective
    they must be used in conjunction with effective legal authorities.
                           international drug prices
        As millions of Americans without good prescription drug coverage
    experience every day, the ``list prices'' they face for patented drugs
    when they walk into a drug store in the United States can be much
    higher than the price of drugs sold abroad. But these price differences
    do not result from a comparative advantage in the production of such
    goods abroad. Foreign ``list'' prices are lower in part because of
    price controls in foreign countries. While drug prices in the United
    States can be much lower than ``list'' for Americans with good drug
    insurance, in Canada, the Patented Medicine Price Review Board (PMPRB)
    limits both initial prices and price increases of patented medicines
    through a variety of ``tests.'' Price controls at the provincial level
    also constrain prices.
        Studies of patented drug prices often ignore how competition in the
    United States today, building on the measures described above to
    improve access and competition in generic drugs, effectively lowers
    generic drug prices so that many are far lower than drug prices abroad.
    Generic drugs comprise over half of all U.S. prescriptions, a much
    higher percentage than in most other countries. Furthermore, low
    generic prices are fully compatible with strong incentives for research
    and development of new drug products, because generics are allowed in
    the United States only after patents expire. The U.S. policy has meant
    that patent law and competition, not price controls, are the primary
    mechanism by which to affect incentives for innovation.
        Competition in the United States has provided U.S. consumers with
    some of the lowest priced generic drugs in the world. For example,
    recent studies examined the prices for seven drugs that are the biggest
    selling chronic-use drugs for which the first U.S. entry of a generic
    version occurred in the last 10 years (alprazolam, clonazepam,
    enalapril, fluoxetine, lisinopril, metformin, and metoprolol). Five of
    the seven U.S. generic drugs were found to be significantly cheaper
    than the generic version of the same drug available in Canada. Five of
    the same seven generics were also more expensive in Australia than in
    the United States, with some prices being many times greater than the
    comparable U.S. price.
        Many countries could do more to encourage innovation in health care
    by changing the way their dollars are being spent, to get more value
    for their citizens. First, most countries need more competition when it
    comes to generic drugs, which should be made available quickly and used
    more widely and at lower prices as soon as legitimate drug patents
    expire. Regulation of generics should not restrict prices and choices;
    it should focus on promoting free and fair generic drug competition,
    including lower prices for patients that use generic drugs. The bottom
    line is that it can be possible to redirect billions of dollars in drug
    spending, through greater use of less expensive generic drugs,
    permitting greater financial rewards for developing and providing
    access to valuable new drugs quickly. This approach encourages
    innovation without spending more money. If the savings from more
    competitive generic prices and wider use of generic drugs are applied
    to providing better rewards for innovative new drugs, this approach
    could reduce the inequities in new drug prices across countries, while
    improving global incentives to develop better drugs.
        The international community has started making progress toward
    greater fairness in drug pricing, with the potential to reduce the
    excessive burden on American consumers, who currently pay about half of
    all drug costs worldwide. For example, an agreement under TRIPS last
    year will help make very low-cost medicines available to developing
    countries for urgent public health threats, such as AIDS. In
    conjunction with this agreement, many developed nations agreed not to
    ``reimport'' these low cost medicines, in recognition of the fact that
    the price of medicines in a country should reflect that country's
    ability to pay. The United Kingdom and France are also taking steps
    toward increasing payments for innovative new medicines. The fact that
    significant savings are possible in other developed countries from
    greater use and more competition involving generic drugs means that it
    is possible to achieve fairer new drug prices worldwide with less
    burden on American consumers, without other countries having to spend
    more.
                             importation proposals
        At a time when FDA faces more challenges than ever in keeping
    America's supply of prescription drugs safe and secure, legislation to
    liberalize drug importation without providing concomitant enhancements
    in FDA's authorities and resources to assure the safety of these
    imports could compromise the safety and effectiveness of our drug
    supply. Depending upon the specifics of the legislation, the volume of
    importation that could result from enactment of these bills could
    overwhelm our regulatory system. Many of these bills fail to provide
    FDA with adequate authority or resources to establish and regulate the
    major new ``legal'' channels for incoming foreign drugs--manufactured,
    distributed, labeled, and handled outside of our regulatory system--or
    even to ensure their safety. Some of these proposals would even limit
    FDA's existing authorities. They would impose unprecedented
    restrictions on FDA's ability to inspect and test drugs, and FDA's
    authority to block the distribution of drugs we think are unsafe.
        Today, FDA drug approvals are manufacturer-specific, product-
    specific, and include many requirements relating to the product, such
    as manufacturing location, formulation, source and specifications of
    active ingredients, processing methods, manufacturing controls,
    container/closure system, and appearance. Under section 801 of the FD&C
    Act, only manufacturers may import drugs into the United States. The
    drugs must be produced in FDA inspected facilities. These facilities
    and the drugs produced in them are currently covered by the U.S.
    regulatory system, and it is legal to import these drugs. It is
    important that in considering legislation to allow expanded importation
    of drugs by persons other than the manufacturer, Congress should not
    bypass the protections provided by FDA's drug approval process and by
    State regulation of firms that dispense drugs within their
    jurisdictions.
        We want to be clear that our objections to legislative proposals
    that would create large, legal channels for drugs to enter our drug
    supply without assurances of safety are based on concerns that they
    will create substantial drug safety problems without clear, large-
    scale, long-term benefits. FDA has particularly raised concerns about
    legislative proposals that would create such channels by weakening our
    existing safety protections rather than providing the necessary
    resources or additional authorities to enable the Agency to assure drug
    safety and security. Furthermore, our economic experts as well as many
    others have raised concerns about the limitations of potential longer-
    term benefits and savings that could be realized from imported drugs.
    The Congressional Budget Office has estimated that the savings from
    even a broad, multiple-country importation proposal would be only about
    1 percent, while savings from importing drugs from Canada only would be
    ``negligible.'' Even the Canadian Internet pharmacy operators have said
    that they cannot provide safe drugs for Americans on a large scale.
    These are important concerns, but that does not mean that we are
    opposed to undertaking a thorough effort to determine whether and how
    importation could be accomplished safely. But this cannot be
    accomplished by fiat or with a presumption of safety.
        Some Members of Congress are working on the difficult challenge of
    identifying the resources and authorities necessary to assure safety
    for certain types of imported drugs. This is a much more constructive
    approach than simply declaring imported drugs to be legal or
    restricting FDA's authorities to keep the U.S. drug supply safe. To
    help determine whether and what specific authorities and resources
    would provide for the safe importation of drugs, the conference report
    of the new Medicare law gave the Secretary of Health and Human Services
    specified requirements for a study of drug importation. Among these
    requirements, the conference report asked the Secretary to ``identify
    the limitations, including limitations in resources and in current
    legal authorities, that may inhibit the Secretary's ability to certify
    the safety of imported drugs'' and to ``estimate agency resources,
    including additional field personnel, needed to adequately inspect the
    current amount of pharmaceuticals entering the country.''
                   medicare importation study and task force
        Last year, when Congress enacted the Medicare Modernization Act, it
    recognized these safety issues and included language that required that
    the Secretary certify the safety of prescription drugs prior to
    authorizing their importation. At the same time, Congress directed the
    Department to conduct a comprehensive study and prepare a report to
    Congress on whether and how importation could be accomplished in a
    manner that assures safety. The Department is currently working on that
    analysis and has created an intergovernmental task force to steer this
    effort to completion by the Congressional deadline later this year.
        The taskforce includes representatives from FDA, the Centers for
    Medicare and Medicaid Services, Customs and Border Protection, and the
    Drug Enforcement Administration. The taskforce has brought together a
    wide variety of health care stakeholders to discuss the risks, benefits
    and other key implications of importing drugs into the United States,
    and to offer recommendations to the Secretary on how to best address
    this issue in order to advance the public health. The statutory
    language and the conference report provide detailed, comprehensive
    requirements for the importation study.
        As an integral part of the study process, the task force held a
    series of six meetings to gather information and viewpoints from
    consumer groups, health care professionals, health care purchasers,
    industry representatives and international trade experts, and a public
    docket for comments was opened as well. This process affords Congress
    and the Administration an opportunity to fully address the complex
    public health, economic and legal questions in order to make
    appropriate and effective recommendations about importation of
    prescription drugs and the associated fundamental changes to the FD&C
    Act and in safety resources that may be required.
                                   conclusion
        The standards for drug review and approval in the United States are
    the best in the world, and the safety of our drug supply mirrors these
    high standards. The employees of FDA constantly strive to maintain
    these high standards. However, a growing number of Americans are
    obtaining prescription medications from foreign sources. U.S. consumers
    often seek out Canadian suppliers, sources that purport to be Canadian,
    or other foreign sources that they believe to be reliable. Often, the
    imported drugs arriving through the mail, through private express
    couriers, or by passengers arriving at ports-of-entry are unapproved
    drugs that may not be subject to any reliable regulatory oversight. FDA
    cannot assure the safety of drugs purchased from such sources.
        The vigilance of FDA and Customs inspectors is an important tool in
    detecting imported products that violate the FD&C Act. Given the
    available resources and competing priorities facing these agencies,
    however, experience shows that inspectors are unable to visually
    examine many of the parcels containing prescription drug products that
    arrive through the mail and private courier services each day. The
    growing volume of unapproved imported drugs, which often are generated
    from sales via the Internet, presents a formidable challenge.
        FDA firmly believes that we can and should do a much better job of
    making safe and innovative drugs more affordable in the United States,
    but to succeed we need to find safe and affordable solutions that, when
    implemented, do not put consumers at risk. We appreciate and support
    the bipartisan commitment to making drugs more affordable for seniors
    and other consumers and are working hard to achieve the goals of safety
    and affordability. We believe that Americans should not have to settle
    for less.
        We all agree more needs to be done to continue to address the high
    cost of prescription medicines. But we must be cautious and deliberate
    as we consider proposals to accomplish this goal. FDA would urge that
    Congress ensure that any changes to our drug regulation system do not
    require American citizens to give up the ``gold standard'' in drug
    safety that has become a hallmark in this country. FDA's scientists,
    doctors, health care experts and regulators must be empowered to
    protect us from bad medicine. We owe it to patients today and tomorrow
    to make our medical future brighter, healthier and more affordable.
        Thank you for the opportunity to testify. I look forward to
    responding to any questions you may have.

        The Chairman. Mr. Taylor, I know that Mr. Hubbard is going
    to testify, but before he does, Senator Kennedy has joined us
    and I didn't know if the Senator wanted to make an opening
    statement.

                      Opening Statement of Senator Kennedy

        Senator Kennedy. Thank you very much, Mr. Chairman. We were
    on guard waiting for the President, who is up meeting with a
    number of our good Republican friends, and we were just
    uncertain as to the exact moment that this hearing was going to
    start. So I appreciate the courtesy to make a brief opening
    comment here.
        First of all, thank you very much for having this hearing
    because it is a hearing of enormous importance. It affects the
    quality of health for millions of our citizens and it's an
    issue that, in many instances, involves life and death to many
    of our citizens. I think there are ways of trying to address
    this issue, so I thank you very much for having the hearing.
        I wanted to indicate that in our audience today we have a
    number of senior citizens who have come here because they know
    how important the issue is. We especially welcome Joybelle
    Poole, who has come all the way from Sandusky, OH because this
    issue is important to her. She is a retired nurse, has four
    grown children, and like other Americans, struggling to make
    ends meet. She has found a way to get her drugs from Canada and
    they cost her $151 for a 90-day supply. In the United States,
    it costs her $660. So she knows that every patient should have
    access to the same kind of savings.
        If I could, Joybelle is out there, so if she could just
    stand so I could see her. She is there in the back. Thank you
    very much.
        [Applause.]
        I will be brief, Mr. Chairman, but this is very important.
    The current rules on the importation or reimportation of FDA-
    approved drugs manufactured in FDA-approved plants are
    indefensible and unsustainable. They prohibit anyone except a
    drug manufacturer from importing drugs into the United States,
    and they create a shameful double standard in which the
    Canadians, Europeans and other foreign patients can buy
    American drugs at affordable prices, while drug companies
    charge exorbitant prices to the American consumer. This chart
    over here indicates the dramatic contrast that exists between
    what is paid for in the United States and what is paid for in
    these other countries.
        The central issue is fairness for millions of Americans
    struggling to afford the soaring costs of prescription drugs.
    Americans understand fairness. They know it's wrong when
    American patients buy the same prescription drug and pay 60
    percent more than the British or the Swiss, two-thirds more
    than the Canadians, 80 percent more than the Germans, and twice
    as much as the Italians.
        Prescription drugs, as I mentioned, often mean the
    difference between sickness and health, or life and death, for
    millions of Americans. Drug companies are consistently the most
    profitable industry in the Nation; yet, they overcharge
    countless families. It is wrong that patients have to go
    without the drugs they need because this administration won't
    stand up to the industry.
        The bipartisan legislation introduced by Senators Dorgan,
    Snowe, McCain, Daschle, myself and many others on this
    committee, will at long last give American patients a fair
    deal. Our proposal will legalize safe imports of U.S.-approved
    drugs manufactured in U.S.-approved plants. It will enable U.S.
    consumers to buy FDA-approved drugs at the same fair prices as
    they are sold abroad.
        The drug companies and the Bush administration argue that
    imported drugs threaten the health of American consumers
    because of the possibility of counterfeiting or adulteration.
    Under our bill, this argument can't pass the laugh test.
        A quarter of the drugs Americans use today are already
    legally imported into the United States. The American people
    have no idea how large a share of the pills they take are
    outsourced, produced for U.S. drug makers in plants overseas,
    where wages are far cheaper. The catch is that the law allows
    it. Drugs can be legally imported only by the drug companies
    themselves, who then sell them at a high U.S. price.
        If the drug companies can import drugs at low prices, why
    can't patients import them at low prices, too? Our legislation
    sets up ironclad safety procedures to guarantee that every drug
    imported legally into the United States is the same FDA-
    approved drug originally manufactured in an FDA-approved plant,
    whether the drug is manufactured abroad and shipped to the
    United States, or whether it is manufactured in the United
    States, shipped abroad and then imported back into the United
    States.
        Under the bill, the FDA is given new legal authority and
    resources to enforce the law. In fact, under this legislation,
    the procedures to prevent counterfeiting or adulteration of
    drugs shipped into the United States are actually stronger than
    the protections against counterfeiting of drugs manufactured
    for the domestic market.
        But legalizing the safe importation of drugs is only half
    the battle to bring fairness to the prices consumers pay.
    Legalization is meaningless unless it is backed up by strong
    measures to prevent drug manufacturers from subverting the law.
    Already, large American companies are retaliating against
    imports from Canada by limiting the amount of drugs they will
    sell to Canada, or denying drugs to pharmacies that resell them
    to American patients.
        Our legislation also includes strict rules to close the
    loopholes that drug companies use to evade the law. Violations
    will be considered unfair trade practices under the Clayton
    Act, and violators will be subject to treble damages.
        Year in and year out, drug company profits are the highest
    of any industry in the United States. Yet, year in and year
    out, patients are denied lifesaving drugs because those
    astronomical profits are obtained by equally astronomical
    prices, prices that drug companies can't charge anywhere else
    in the world because no other country in the world would
    tolerate such high prices.
        It is time to end the shameful price-gouging here at home.
    It is time for basic fairness, and it is time for Congress to
    act.
        Finally, Mr. Chairman, we have the situation where
    militarily we protect the Straits of Ormuz, the Straits of
    Malacca, the Suez Canal, the Panama Canal, because of
    international trade--and the taxpayers pay for that.
        We are doing the same thing with regard to the drug
    industry. The hard working American taxpayers are paying,
    through the NIH, for the basic research, which I am a very
    strong supporter of. We are in the time of the life sciences. I
    think the breakthroughs are going to be extraordinary and I
    strongly support it, and reject even the administration's
    cutting back on much of that research. But for the American
    taxpayers to have to pay double, which they are, paying one
    time in terms of research and then paying the higher prices,
    when we are effectively subsidizing every other country,
    including western Europe, is bad health policy, bad economics,
    and that has to be altered and has to be changed. We believe we
    have legislation that could best address that.
        I thank the witnesses for their courtesy in letting me make
    a brief statement at this time, and I thank the chair very
    much, as well.
        The Chairman. Thank you, Senator.
        [The prepared statement of Senator Kennedy follows:]

                     Prepared Statement of Senator Kennedy

        I commend our Chairman, Senator Gregg, for holding this
    hearing on this issue of such basic importance to patients and
    their families.
        This is the biggest rip-off of Middle America since Enron.
    Big drug companies are swelling their bloated bottom line by
    pricing good health care beyond the reach of average
    Americans--and it's time for a change.
        The current rules on importation or reimportation of FDA-
    approved drugs manufactured in FDA-approved plants are
    indefensible and unsustainable. They prohibit anyone except a
    drug manufacturer from importing drugs into the United States.
    They create a shameful double standard in which Canadians,
    Europeans and other foreign patients can buy American drugs at
    affordable prices, while drug companies charge exorbitant
    prices to American patients.
        The central issue is fairness for millions of Americans
    struggling to afford the soaring cost of prescription drugs.
    Americans understand fairness. They know it's wrong when
    American patients buy the same prescription drug and pay 60
    percent more than the British or Swiss, two-thirds more than
    Canadians, 80 percent more than Germans, and twice as much as
    Italians.
        Prescription drugs often mean the difference between
    sickness and health--or even life and death--for millions of
    Americans. Drug companies are consistently the most profitable
    industry in the Nation, yet they overcharge countless families.
    It's wrong that patients have to go without the drugs they need
    because the Bush Administration won't stand up to the
    pharmaceutical industry.
        Bipartisan legislation introduced by Senators Dorgan,
    Snowe, McCain, Daschle, myself, and others will, at long last,
    give American patients a fair deal. Our proposal will legalize
    safe imports of U.S.-approved drugs manufactured in U.S.-
    approved plants. It will enable U.S. consumers to buy FDA-
    approved drugs at the same fair prices as they are sold abroad.
        The drug companies and the Bush Administration argues that
    imported drugs threaten the health of American consumers
    because of the possibility of counterfeiting or adulteration.
    Under this bill, that argument can't pass the laugh test.
        A quarter of the drugs Americans use today are already
    legally imported into the United States. The American people
    have no idea how large a share of the pills they take are out-
    sourced--produced for U.S. drug-makers in plants overseas,
    where wages are far cheaper. The catch is that the law allows
    it. Drugs can be legally imported only by the drug companies
    themselves, who then sell them at the high U.S. price.
        If drug companies can import drugs at low prices, why can't
    patients import them at low prices too?
        Our legislation sets up iron-clad safety procedures to
    guarantee that every drug imported legally into the United
    States is the same FDA-approved drug originally manufactured in
    an FDA-approved plant--whether the drug is manufactured abroad
    and shipped to the United States, or whether it is manufactured
    in the United States, shipped abroad and then imported back
    into the United States.
        Under the bill, the FDA is given new legal authority and
    resources to enforce the law. In fact, under this legislation,
    the procedures to prevent counterfeiting or adulteration of
    drugs shipped into the United States are actually stronger than
    the protections against counterfeiting of drugs manufactured
    for the domestic market.
        But legalizing the safe importation of drugs is only half
    the battle to bring fairness to the prices consumers pay.
    Legalization is meaningless unless it is backed by strong
    measures to prevent drug manufacturers from subverting the law.
    Already, large American drug companies retaliating against
    imports from Canada by limiting the amount of drugs they will
    sell to Canada, or denying drugs to pharmacies that resell them
    to American patients.
        Our legislation also includes strict rules to close the
    loopholes that drug companies use to evade the law. Violations
    will be considered unfair trade practices under the Clayton
    Act, and violators will be subject to triple damages.
        Year in and year out, drug company profits are the highest
    of any industry in the United States. Yet year in and year out,
    patients are denied life-saving drugs because those
    astronomical profits are obtained by equally astronomical
    prices--prices that drug companies can't charge anywhere else
    in the world because no other country in the world would
    tolerate such high prices.
        It's time to end the shameful price-gouging here at home.
    It's time for basic fairness. It's time for Congress to act.
        I look forward to the testimony of our distinguished
    witnesses.
                                    ------

                Pharmaceutical Market Access and Drug Safety Act

                              I. IMPORTABLE DRUGS

        Drugs must be approved by the Food and Drug Administration
    and manufactured in an FDA-inspected plant.
        Drugs must be patient-administered, and not a controlled
    substance, an infused or injected drug, a biologic, or a drug
    inhaled during surgery.

         II. COMMERCIAL IMPORTATION BY PHARMACIES AND DRUG WHOLESALERS

        Allows importation by licensed pharmacies and wholesalers
    from Canada within 90 days of enactment and from the current
    European Union members, Australia, New Zealand, Japan, and
    Switzerland beginning 1 year from enactment.
        Requires registration of wholesalers and pharmacies with
    FDA, and levies capped fees to support the costs of the
    program. Registration may only be of those entities that are
    fully licensed in accordance with applicable State and Federal
    law to act as pharmacies or wholesalers of prescription drugs.
        Importers and all resellers of imported products must
    provide a full chain-of-custody (pedigree), tracking possession
    of drugs from the point of manufacture to the sale to the
    consumer.
        Drugs must be re-labeled in English to comply with FDA
    requirements. The FDA will provide approved labeling
    information to importers.
        FDA may stop the importation of a drug that has been
    determined to be counterfeit, contaminated, or is otherwise
    adulterated. FDA may require use of approved anti-
    counterfeiting technologies to verify the chain-of-custody of a
    drug.
        The bill says that importation, sale, and use of drugs is
    not patent infringement.

                        III. IMPORTATION BY INDIVIDUALS

        Immediately upon enactment, an individual may import up to
    a 90-day supply of a prescription drug from Canada for their
    personal use or for the personal use of a family member. Once
    FDA has issued regulations, a Canadian pharmacy registered
    under the Act may ship drugs to individuals for personal use.
    Registered Canadian pharmacies must be approved by FDA,
    frequently inspected, and they must validate a U.S.
    prescription, review health and medication history, and track
    shipments.
        The bill also allows individual Americans who travel
    outside the United States to bring back with them for their
    personal use a 90-day supply of medicine from Australia,
    current countries in the European Union, Japan, New Zealand, or
    Switzerland, or a 14-day supply of medicine from other foreign
    countries.
        The bill continues the FDA's current ``compassionate use''
    policy of allowing importation for patients with special needs.

                           IV. ``GAMING'' THE SYSTEM

        The bill protects those selling or using drugs imported
    under the program by preventing a drug company from taking
    actions that would thwart drug importation. An individual who
    takes such an action against a pharmacist, wholesaler, or
    consumer to hinder importation of prescription drugs will be in
    violation of the Clayton Act, and treble economic damages may
    be awarded.
        The proposal includes features to prevent a drug
    manufacturer from blocking importation of drugs by changing the
    color, dosage form, or place of manufacture of the drug so that
    it is no longer FDA-approved. Drug manufacturers that make
    these kinds of changes would be required to notify the FDA, and
    the FDA would be given the authority to take the steps needed
    to approve the drug.

                        V. LIMITING UNSAFE DRUG IMPORTS

        Customs could seize and destroy drugs imported by
    individuals from foreign exporters that are not registered with
    FDA. FDA would provide the individual whose drugs were seized
    with a simple notice explaining how the individual can import
    drugs from registered Canadian exporters safely and legally.

    [GRAPHIC] [TIFF OMITTED] T3889.001

    [GRAPHIC] [TIFF OMITTED] T3889.002

    [GRAPHIC] [TIFF OMITTED] T3889.003

        The Chairman. Mr. Hubbard.

      STATEMENT OF WILLIAM K. HUBBARD, ASSOCIATE COMMISSIONER FOR
                        POLICY AND PLANNING, FDA

        Mr. Hubbard. Thank you, Mr. Chairman.
        We certainly understand, as you noted, Mr. Chairman, that
    drug prices are of concern to many Americans, and we're not in
    denial at all about that being a problem in some cases.
        FDA's mission, as you stated, is safety. That has been our
    concern, that if you open up the borders to these drugs, it
    needs to be done with great care and perhaps take into account
    the sorts of concerns that FDA has. What we would like to do is
    show you some of those concerns today.
        I have given the members a little handout of six exhibits
    that I would like to walk through to describe that, if I may.
        [The FDA exhibits follow:]
        [GRAPHIC] [TIFF OMITTED] T3889.004

        [GRAPHIC] [TIFF OMITTED] T3889.005

        [GRAPHIC] [TIFF OMITTED] T3889.006

        [GRAPHIC] [TIFF OMITTED] T3889.007

        [GRAPHIC] [TIFF OMITTED] T3889.008

        [GRAPHIC] [TIFF OMITTED] T3889.009

        Mr. Hubbard. These are drugs that Americans bought from
    Canada. We see this every day. I would be glad to pass this up
    to the dais if you would like to see them. These are actual
    Canadian drugs that American citizens bought over the Internet.
        Of course, as you see from the first exhibit, these come in
    huge volumes now. This is a mailroom at one of the 12
    international mail facilities. The packages come off the planes
    and go on to conveyor belts, and for drugs they are segregated
    into these bins for examination. The volume currently is
    perhaps 5 million. We have perhaps a dozen or so inspectors at
    these facilities to look at all these drugs. So we are
    overwhelmed now with the inability to open all of these
    packages and make any reasonable safety judgments about these
    drugs. This is what it looks like.
        We are concerned that a further opening of the borders will
    exacerbate what we already fear is an unsafe situation. Let me
    explain a little bit more about some of those safety issues.
        The second exhibit--and there is a poster over here against
    the wall--is of a website offering to sell cheaper generic
    drugs from Canada. We got it through a ``spam'' e-mail. We
    noted that these drugs did not have generic versions, so we
    investigated to determine where the server was, where the
    computer was, that set this site up. It turned out to be in
    China, a province called Dandong Province bordering North
    Korea. So we thought these might be Chinese counterfeits
    because counterfeiting of drugs is fairly common in that part
    of the world.
        So we made an order. We put a prescription together and
    bought Ambien and Lipitor and Viagra. It arrived a few days
    later like this, and then it had a return address not in China
    but Miami, FL, but a postmark from Dallas, TX and a phone
    number for reorder. So we called the phone number and asked the
    phone company where it was, and they said it was in Belize. So
    we called the people there. They said, ``Where are you?,'' and
    we said, ``We're in the United States,'' called back and got
    another person and were told they were in Belize. Then we asked
    the credit card company, ``Who did you pay for this drug?''
    They said, ``Well, we paid a company on the Island of St.
    Kitts.''
        Now, what I'm trying to give an example of is that we don't
    know where this business is, but we do know there are no
    Canadian generics of these drugs. We also know that this
    business is hard to find. It is obviously not a legitimate
    business selling legitimate drugs. The patients that receive
    these drugs are obviously getting some sort of fake knockoffs.
        Now, proponents of importation would say, ``Well, these
    drugs shouldn't be allowed in.'' These would not be allowed in
    under our bills. But our concern, Mr. Chairman, is that our
    investigators tell us that they can make some minor change in
    the way this business operates and stay in business. For
    instance, by establishing a mail drop in Canada, perhaps faking
    the return address. That would require a lie. But this whole
    thing is a lie. So these people have no intention of being
    concerned about whether they are going to lie or not.
        We do need to make sure that you understand that these
    sorts of criminal activities are very difficult to police now,
    and if we open the borders, our concern is that that becomes
    even worse.
        Let me give you another example of our concern, if I may.
    It is often stated that these drugs in other countries are the
    same. We point out that sameness is a very important thing to
    us because chemical equivalence is not all you need to show a
    drug.
        What I have given you here is an x-ray. This is of a woman
    who was given a drug that is a calcium pill for osteoporosis.
    But the drug was not the same as the one the doctor told her to
    get because it didn't dissolve. It was improperly made. So she
    was essentially eating rocks. As you can see, these are pills
    going through her digestive system. They never dissolved in her
    body, never entered her blood stream, never had any therapeutic
    effect. But if you took those pills and crushed them with a
    hammer and did a chemical analysis, it would say it's the same
    as the U.S.-made drug. It is not the same. This drug would be
    useless to you, but it will be the same when you do that
    chemical analysis.
        Now, on a similar note, we have three more here that are
    very commonly ordered by Americans. These are drugs of
    warfarin, dilantin and synthroid. The issue here is that some
    drugs need to be very carefully titrated. If you get a little
    bit too much of warfarin, if this product, which may be a
    perfectly safe product in Canada, is a little different from
    the product that the doctor has carefully titrated for the
    patient in the United States, and the patient gets a little too
    much, they run a risk of fatal bleeding. And if they get a
    little too little, they run a risk of blood clots.
        For the drug in the middle, a similar thing. A little too
    much and you're going to have a serious central nervous system
    effect, and too little and you're going to have a potential for
    seizures.
        These drugs in Canada may be perfectly fine. If the patient
    went to Canada and was prescribed these drugs and went on these
    drugs, and the doctor carefully titrated them, they may be
    fine. But for the patient to start on the American drug and
    then go to the Canadian drug in our view is posing a serious
    risk.
        The next example is another control we have. We call it
    transshipment. This is the issue of people in third world
    countries using Canadian pharmacies and wholesalers to send
    drugs to our citizens. This is a case of an elderly gentleman
    in Michigan who ordered a drug from what he thought was a
    Canadian pharmacy selling American drugs through Canada. He got
    this drug made in India.
        Now, we have seen cases in which third world pharmaceutical
    manufacturers are saying to these Canadian pharmacies, when
    your supply starts running low, let us know. We can meet all
    your needs because we can make all you want here in India,
    Pakistan and Indonesia.
        I don't think the proponents of importation are trying to
    access those drugs. They are trying to access American-made
    drugs that have been FDA approved. This drug is not FDA
    approved, and in our view, is an unsafe product. But
    transshipment, in our view, is a legitimate concern and I would
    urge you to think about that as you craft legislation in this
    area.
        The last point I would make is these are counterfeit drugs.
    The bottom one is counterfeit and the top one is authentic. You
    can't tell the difference. So to ask the FDA inspectors at the
    border to open these packages that come in from Canadian
    pharmacies and visually look at that package and say, ``Have I
    got a good drug here?,'' he's going to run into these kinds of
    examples, where he's not going to know.
        If I took this to a manufacturer, he wouldn't know. He
    would have to do sophisticated testing. Obviously, you can't do
    that with 5 million or 20 million or even 50 million packages
    that might be coming in under personal importation.
        So I hope these examples give you some sense of our
    concerns, that the theory of good American drugs being in
    Canada and coming back sounds good from a safety point of view,
    but in the real world that we work in, we see a lot of dangers
    out there that would need to be controlled if legislation were
    to happen in this area.
        With that, thank you for giving me the time, Mr. Chairman.
    Mr. Taylor and I will take questions.
        The Chairman. Thank you.
        We will work on a 5-minute timeframe here for questions.
        I think, Mr. Taylor, you said that you did four spot checks
    of mail drops and you found 88 percent of the drugs coming
    through were counterfeit, adulterated or not appropriate; is
    that correct?
        Mr. Taylor. Yes. We did a series of blitzes at the mail
    facilities last year, in order to help both us and Customs
    better assess the type of products that were coming into the
    country. What I said was that we had found a myriad of products
    that pose potential risks to the consumer, including products
    that were unapproved, and in some cases, people have said,
    ``Well, an unapproved drug is unapproved in name only and still
    has the same therapeutic effects.''
        But one of the products that we found at the mail facility
    was warfarin, the very product that Bill Hubbard just talked
    about. It does have potential safety issues because, if the
    potency is not right, then obviously the benefits that it is
    supposed to provide are diminished.
        We also found a large number of controlled substances,
    including animal drugs that, quite frankly, are used by body
    builders and others, and are the favorites of adolescents who
    want to become larger and stronger.
        We found drugs that were withdrawn from the market for
    safety reasons. We found drugs that were potentially recalled.
    We had one instance where there was a recall in Canada that
    occurred for a particular medication. Because we believed that
    some people were probably purchasing that product over the
    Internet, we put out a talk paper to the American public,
    warning them about this potential Canadian recall for the
    foreign version product. When we did the blitz, we were able to
    corroborate that, indeed, some people were purchasing this
    product and receiving it in the mail.
        We also found products that were improperly packaged. The
    continuum ranged from products that were just coming over in a
    plain plastic bag, to products that had foreign language
    labeling that neither a physician nor a consumer could possibly
    understand, thereby making it difficult to use the----
        The Chairman. I don't want to cut you off, but my time is
    limited.
        Mr. Taylor. Okay.
        The Chairman. And I think you made that point very well.
        I guess my question is this. Is there a way to track
    imported drugs so that you know whether the pharmaceutical
    product that came out of an FDA-approved facility and was
    packaged and sent to Canada comes back here? Is there some way
    to do that?
        Mr. Taylor. Well, to do so, quite frankly, is to put
    together a model that kind of replicates the current system we
    have in place in regards to foods. I mean, a couple of years
    ago Congress gave the agency enhanced authority regarding
    imported foods, including registration requirements, prior
    notice, as well as other tools that allowed us to better target
    products that are coming from overseas and assess the risk and
    make better decisions as to whether or not to detain a product
    or not.
        The Chairman. So if we used the template of the authorities
    we have given you relative to food and applied it to
    importation of drugs, you might be able to address that?
        Mr. Taylor. Right, as well as the template we currently
    have in existence for products that are imported. You can
    import products into the United States legally if these
    products come from FDA-
    inspected facilities, that are manufactured products approved
    by the agency, and we determine whether or not the active
    ingredient is proper--and that goes to the issue of whether or
    not the product works well within the body. We ensure that the
    product moves properly from the point of entry all the way to
    the pharmacy shelf and are able to track the product so that,
    if something happened or led to a recall, we would be able to
    track the product back.
        Those are the kind of steps that we think, if you were
    going to look at a way to ensure safety, those are some of the
    things that should be considered.
        The Chairman. What sort of increase in resources would you
    need to effectively do that, and would you consider a fee
    system of obtaining those resources?
        Mr. Taylor. We think that the resource needs are quite
    extreme. We would need to have people not only--we need to
    enhance our presence not only at the borders, at the mail
    facilities, but we would need to enhance our ability to do
    foreign inspections overseas to determine whether or not the
    products are manufactured properly. We would need to enhance
    our resources in order to do any type of enforcement follow up
    or any kind of criminal cases that might result. We might need
    to enhance our resources in order to look at the products to
    make sure they are, indeed, safe.
        So we're talking about a substantial number of resources to
    ensure that any of these legislative proposals are done in a
    way that ensures what the American consumer is getting is safe
    and works as intended.
        The Chairman. Thank you.
        Senator Kennedy.
        Senator Kennedy. Thank you, and thank you both for
    testifying.
        I know I speak for all of those who are cosponsoring and
    sponsoring this legislation, that we are eager to work with the
    FDA to ensure that we have the best in terms of safety. In more
    recent days we have actually engaged the FDA to try to get
    their recommendations and their suggestions. You quite properly
    point out we have the safest system in the world at the present
    time, but there are still a lot of troubles, as you mentioned
    here, that need addressing.
        Many of us feel that the kinds of protections that we have
    in the existing proposed legislation will address a number of
    those items, because we will have the adequately inspected
    licensed exporter, licensed importers. We will have the
    requirements of pedigrees to ensure the kind of safety and
    security measures that are necessary in terms of the passage of
    these various kinds of items in the system.
        You also remind us about the importance of additional
    resources, which I think is a given. We obviously have
    inspectors now that go to plants and FDA inspect all over the
    world. They do that on a regular basis, but this would mean
    there would probably be an expansion. But we have taken the
    concepts that we have accepted, and our committee had
    accepted--in PADUFA, for example, with the prescription drug,
    which has worked very, very well. We have extended that concept
    with the medical device legislation, which is in the process of
    working as well. It has a few glitches that still have to be
    addressed, but at least it is working as well, to see if we
    can't follow that kind of model to try and get the additional
    resources for the agency to be able to do this, and make sure
    we are going to have, with this kind of expanded opportunity
    and availability, not only the best in terms of security in the
    new legislation, but also address some of the very important
    issues that you have raised here today.
        I would like to just ask if you are willing to continue to
    work with us--this panel, Mr. Taylor and others--in terms of
    addressing some of these issues as we move this process along.
    I think we have solid safety provisions in this. These have
    been the kind of safety provisions that we will have later on
    the second panel with Phil Lee, who has been the Assistant
    Secretary of Health under two administrations, and also has
    been the Chancellor at the University of California at San
    Francisco, and dean of one of our great medical schools. We
    also have the support of Dr. Kessler, of course, who has been
    the head of the FDA, was up at Yale, now out at San Francisco
    at the University of California.
        So we have attempted to try and get the best in terms of
    safety and security, because that is a key issue. This is going
    to be a key item as we are considering this. But to have the
    kind of strong support that we have had from Dr. Lee and Dr.
    Kessler--I would ask, Mr. Chairman, that Dr. Kessler's letter
    be put in the record at an appropriate place. There are 24
    other groups that have supported this legislation, and I ask
    that their letters of support also be included at an
    appropriate place.
        The Chairman. Well, this isn't a hearing on the
    legislation, but we will accept it.
        [The referred to letters follow:]

        Response to Questions of Senator Kennedy by David Kessler, M.D.

                                                          May 19, 2004.
    Hon. Edward M. Kennedy,
    United States Senate,
    Washington, DC 20510.
        Dear Senator Kennedy: Thank you for the opportunity to respond to
    your questions about S. 2328, the Pharmaceutical Market Access and Drug
    Safety Act of 2004. As a former Commissioner of Food and Drugs, and a
    current leader of one of the Nation's leading centers for medical
    research and treatment, I share your concern over the affordability of
    prescription drugs, and support your efforts to ensure that less costly
    prescription drugs purchased overseas are safe and effective.

        Question 1. Does S. 2328 ensure the safety of drugs imported to the
    United States? In particular, are there adequate assurances that drugs
    imported by registered pharmacies and wholesalers and exported to
    individuals from registered pharmacies in Canada will not be
    counterfeit and will meet the conditions of approval of the Food and
    Drug Administration?
        Answer 1. It is essential that prescription drugs purchased by
    Americans are safe and effective. I am certain that FDA, given the
    proper authority, mandate, and support can ensure the safety of drugs
    imported into the United States. S. 2328 provides a sound framework for
    assuring that imported drugs are safe and effective. Most notably, it
    provides additional resources to the agency to run such a program,
    oversight by FDA of the chain of custody of imported drugs back to FDA-
    inspected plants, a mechanism to review imported drugs to ensure that
    they meet FDA's approval standards, and the registration and oversight
    of importers and exporters to assure that imported drugs meet these
    standards and are not counterfeit. As the legislation progresses, I'm
    sure that adjustments to this sound framework can be made to
    accommodate legitimate concerns of FDA or other experts and ensure that
    the legislation works as intended.

        Question 2. Will the user fees provided for in S. 2328 provide
    adequate resources for FDA to police the importation of drugs under the
    bill?
        Answer 2. FDA must be given new and adequate resources to carry out
    the responsibilities it would have under S. 2328, As commissioner, I
    oversaw the implementation of the 1992 Prescription Drug User Fee Act
    (PDUFA). PDUFA has proven that users fees can be an effective means of
    funding critical agency programs. User fees capped at 1 percent of the
    value of imported drugs as provided in S. 2328 would give substantial
    resources to FDA to police drug imports. For example, using CBO
    projections that 10-15 percent of drugs used in the United States might
    come in through imports, and assuming that the drugs will be half the
    price of domestic drugs, the user fee proposal in S. 2328 could result
    in up to $100 million in new resources for FDA, which would enable FDA
    to double the center for drugs field budget. It will be important,
    however, that the Congress work with FDA to ensure that as the drug
    import program evolves that FDA receives adequate, new funds to support
    the program.

        Question 3. Does S. 2328 provide adequate protections against
    efforts by drug companies to stop drug importation, such as cutting off
    the supply of drugs to those entities that export drugs to the United
    States or changing drugs distributed overseas so that they do not meet
    the conditions of approval of FDA?
        Answer 3. U.S. prescription drug companies have made their products
    available at substantially less cost in highly developed countries such
    as Canada, but have then acted to prevent U.S. citizens from importing
    these less costly versions of their products. The steps you have taken
    in S. 2328 are effective tools to prevent some of the industry
    practices that have been documented to date.

        Question 4. Do you believe that innovation in the pharmaceutical
    industry will cease because of drug importation? How will it be
    affected?
        Answer 4. Research and development funding is an expense that
    should be shared equally by the citizens of wealthy countries
    throughout the world. Innovation is the heart of the prescription drug
    industry. The leaders of the industry, its stockholders, and the
    continuing enormous investment in biomedical research that is occurring
    at leading institutions around the world will ensure that drug
    innovation not only continue but accelerates.
        Again, thank you for the opportunity to assist you with this
    important endeavor.
                Sincerely,
                                           David Kessler, M.D.,
                                         Dean, UCSF School of Medicine.
                                     ______

      Leadership Council of Aging Organizations (LCAO),
                                       Washington, D.C., 20006,
                                                          May 19, 2004.

        Dear Senator: The undersigned members of the Leadership Council of
    Aging Organizations (LCAO) are writing in support of S. 2328, the
    Pharmaceutical Market Access and Drug Safety Act of 2004. We commend
    the bi-partisan group of original co-sponsors for their leadership on
    this issue.
        S. 2328 will allow individuals to safely buy prescription drugs
    from Canada--and pharmacists and wholesalers to safely buy from the
    world's major industrialized nations--at prices that will be
    substantially lower than domestic prices. Most importantly, the bill
    gives the Food and Drug Administration (FDA) necessary resources to
    ensure the safety of the imported drugs, while also preventing attempts
    to thwart the intent of the bill by forms of market manipulation.
        As representatives of senior organizations, we have long been
    concerned that the increasing cost of prescription drugs has caused
    millions of consumers to go without the medicines they have been
    prescribed and/or has forced them to cut dosage, thus deviating from
    recommended courses of treatment. The double-digit rate of drug
    inflation has also been a major strain on State Medicaid budgets,
    forcing many States to cut back on coverage.
        Because the new Medicare law does so little to restrain the rate of
    drug inflation, its benefit to seniors will rapidly erode. For example,
    according to the Congressional Budget Office, the ``doughnut hole''
    grows from $2,850 in 2006 to $5,044 in 2013, and the share of
    beneficiaries' income consumed by prescription drug costs will increase
    dramatically.
        This bill will provide much-needed help to Medicare and Medicaid
    recipients. Individuals, States, State purchasing pools, and Medicare
    drug plans will all benefit. We urge you to co-sponsor this important
    bill. We look forward to working with you to pass S. 2328 this year.
        Again, we thank the bi-partisan group of original co-sponsors for
    their leadership on this important national consumer issue.

                Sincerely,
            AFL-CIO; Alliance for Retired Americans; American Federation of
            Teachers; American Public Health Association; Association for
            Gerontology and Human Development in Historically Black
            Colleges and Universities; Association of Jewish Aging Services
            of North America; B'nai B'rith International; Eldercare
            America; Experience Works; Families USA; Gray Panthers;
            International Union, UAW; National Adult Day Services
            Association; National Association of Professional Geriatric
            Care Managers; National Association of Retired and Senior
            Volunteer Program Directors; National Association of Retired
            Federal Employees; National Association of Senior Companion
            Project Directors; National Association of State Long-Term Care
            Ombudsman Programs; National Association of State Units on
            Aging; National Committee to Preserve Social Security and
            Medicare; National Indian Council on Aging; National Seniors
            Center Law Center; OWL, the voice of midlife and older women;
            Volunteers of America.
                                     ______

     Organizations Supporting S. 2328--The Pharmaceutical Market and Drug
                                   Safety Act
         1. ActionAlDS
         2. AFL-CIO
         3. AFSCME
         4. AIDS Survival Project
         5. Alliance for Retired Americans
         6. American Association on Mental Retardation
         7. American Federation of Teachers
         8. American Public Health Association
         9.  Association for Gerontology and Human Development in
    Historically Black Colleges and Universities
        10. Association of Jewish Aging Services of North America
        11. B'nai B'rith International
        12. Boston Health Care for the Homeless
        13. Citizen Action (Illinois)
        14. Congress of California Seniors
        15. Disability Rights Action Coalition for Housing (DRACH)
        16. Eldercare America
        17. Experience Works
        18. Exponents
        19. Families USA
        20. Frontline Hepatitis Awareness
        21. Gray Panthers
        22. International Union, UAW
        23. Minnesota Senior Federation
        24. National Adult Day Services Association
        25. National Association of Professional Geriatric Care Managers
        26. National Association of Retired and Senior Volunteer Program
    Directors
        27. National Association of Retired Federal Employees
        28. National Association of Senior Companion Project Directors
        29. National Association of State Long-Term Care Ombudsman Programs
        30. National Association of State Units on Aging
        31. National Committee to Preserve Social Security and Medicare
        32. National Indian Council on Aging
        33. National Seniors Center Law Center
        34. NETWORK: A National Catholic Social Justice Lobby
        35. OWL, the voice of midlife and older women
        36. Provincetown AIDS Support Group
        37. San Francisco AIDS Foundation
        38. Senior Action Network
        39. Service Employees International Union (SEIU)
        40. Southeast Kansas Independent Living (SKIL)
        41. Statewide Independent Living Council of Illinois (SILC of IL)
        42. Tennessee AIDS Support Services, Inc. (Knoxville, TN)
        43. Topeka Independent Living Resource Center, Inc. (TILRC)
        44. TREA Senior Citizens League (TSCL)
        45. Triad Health Project
        46. Volunteers of America
                                   __________

        Senator Kennedy. My time is up, but knowing that we can
    continue to work with you on these issues of safety, which are
    very, very important, is enormously important. If there are
    additional ideas, we are obviously hopeful of getting them.
        I thank the chair.
        The Chairman. Senator Enzi.
        Senator Enzi. Thank you, Mr. Chairman. I appreciate your
    holding this hearing.
        I have been looking at this important issue and notice that
    Canada is only 10 percent of the U.S. market, so I am
    questioning how much of an impact we're going to have on them
    or they're going to have on us.
        But one of the things I did notice was that the Canadian
    Internet pharmacies are largely based in Manitoba. Is there
    something about the law or regulations governing pharmacies in
    that province that is different from other places in Canada? Do
    either of you know?
        Mr. Hubbard. The Manitoba provincial government has been
    somewhat supportive of these pharmacies. They bring a lot of
    jobs and revenue into the province. Drug sales in Canada are
    very much decentralized at the provincial level, so there has
    been a surge of these international pharmacies in that
    particular province.
        They exist in other provinces as well, but Manitoba has
    probably had 80 percent or more of the international
    pharmacies.
        Senator Enzi. Thank you.
        Since S. 2328 has come up, it does not require FDA approval
    on an imported drug. It creates a presumption of FDA approval
    under certain circumstances.
        Could you describe the difference between actual FDA
    approval of a drug and a presumption of FDA approval of a drug?
    Either of you.
        Mr. Taylor.
        Mr. Taylor. I think what the bill attempts to do is to set
    up a standard of pharmaceutical--what it attempts to do is try
    and set up a construct that allows products that are sold in
    other countries to come into the United States based on a
    determination that they are pharmaceutically equivalent to the
    FDA-approved version, which means they have the same
    ingredients, the same formulation, roughly the same potency.
        The concern that we have is that pharmaceutical equivalence
    is not the same as therapeutic equivalence, and the reason that
    is important is because, as Mr. Hubbard stated earlier, two
    products can have the same active ingredients, can be
    manufactured in the same way, but still work differently within
    the body.
        To illustrate the point, there are certain products that
    are terribly sensitive, and if the product does not dissolve
    properly into the blood stream, the product will not have the
    health benefits that one would expect. So that's the reason why
    we have engaged in a dialogue and provided some input on why we
    think the pharmaceutical equivalence is not as strong as a
    therapeutic equivalence standard that we use now to look at our
    generic drugs.
        Senator Enzi. Thank you.
        Following up on that, Mr. Hubbard, you had that great
    picture of the undissolved calcium tablets. I want more
    information on that. You said if you crushed them with a
    hammer, they would have the same active ingredients----
        Mr. Hubbard. The correct drug and this drug both contain
    calcium. It often comes from oyster shells or something like
    that. The intent is that it be bound with stabilizers or other
    binders of so-called inactive ingredients and crushed into a
    tablet form. Then when the individual swallows it, it reaches
    the stomach and begins to dissolve. Once that dissolution
    occurs, the active ingredient enters the blood stream and has a
    therapeutic effect. In this case, I think it basically goes to
    the bones and keeps bone loss from occurring.
        This product apparently had improper binders and was
    crushed perhaps too--was compressed too hard, so that it would
    not dissolve in the stomach. But as I said, if you did a
    chemical analysis of it, you would find basically the same drug
    of the proper drug.
        Senator Enzi. So under a presumption it would be approved--
    --
        Mr. Hubbard. That's right. Unless there was a system in
    place to make sure that that difference was caught, then that
    would be viewed as an FDA-approved drug because it would be the
    same as an FDA-approved drug, chemically.
        Mr. Taylor. Senator, we have had some counterfeit drug
    cases where the drugs are pharmaceutically equivalent. However,
    they were obviously not the FDA-approved drugs. They were
    merely marketed in a way to suggest that they were.
        Senator Enzi. Another issue that has been brought up is
    having a full paper pedigree on drugs, whether they are
    imported or not, or perhaps electronic pedigrees.
        Would it be easy for somebody to counterfeit a paper
    pedigree, would it be more difficult with an electronic one, or
    would it make any difference?
        Mr. Hubbard. A pedigree currently is nothing but a piece of
    paper, a document that says this drug was made here, sold to
    this wholesaler, and then sold to this pharmacy. Any of us
    could counterfeit that fairly easily.
        Electronic pedigree, however, which the industry is
    developing, is much more difficult to copy, because you not
    only have to copy the electronic mechanism--in this case,
    probably a computer chip--but you then have to find a way to
    break into the database and get it into the computer database
    that your fake product is a real product. That is going to be
    really hard. So electronic pedigrees are in the future and they
    will substantially help combat counterfeiting of drugs.
        Senator Enzi. Thank you. My time has expired.
        Thank you, Mr. Chairman.
        The Chairman. Senator Reed.
        Senator Reed. Thank you, Mr. Chairman. And thank you,
    gentlemen, for your testimony.
        We have talked a lot about counterfeit drugs, but I
    understand that the FDA has continued to delay a final rule
    related to the wholesale distribution of prescription drugs
    under the Prescription Drug Marketing Act, and part of that
    rule would be touching upon a voluntary trace and track system
    that could contribute to identifying the source of drugs.
        If this is such a problem, why is the agency not moving
    more aggressively to promulgate a rule?
        Mr. Taylor. Senator, as we noted in the report that the
    department put out this summer on counterfeit drugs, what we
    said in that report was that we felt the track and trace
    technology was a stronger approach for combating counterfeiting
    for the reasons that have been noted today, and we thought that
    was the approach that we were encouraging industry to adopt in
    the future. We have thrown our weight behind trying to ensure
    that that approach is developed and adopted, hopefully by 2007.
        What we have done as a result of that is we have, as you
    have said, stayed the PMA rule relating to pedigrees. We
    originally stated because there were legal issues with the
    implementation of that reg that were brought to our attention.
    We sent a report to Congress highlighting these legal issues
    and have sought advice from Congress on how to resolve these
    issues.
        In the meantime, what we have explored is a track and trace
    technology which we feel is a better approach in the future to
    ensuring that the drug supply chain remains secure.
        Senator Reed. Do you have the authority to mandate that
    track and trace system in order to protect the quality and the
    safety of drugs?
        Mr. Taylor. We have not mandated----
        Senator Reed. Do you have the authority to do so, Mr.
    Taylor?
        Mr. Taylor. I don't know. I would have to get back to you
    on that, sir.
        Senator Reed. That's an important question, I think,
    because one of the issues here is--and you have both testified
    very eloquently--is to ensure that quality is there, efficacy
    is there. One of the problems we seem to have is that we just
    don't know where these drugs are coming from. We don't know if
    it's the drug that it says it is on the label. But if we have a
    track and trace system, which you are confident in, it should
    be deployed as quickly as possible.
        Mr. Hubbard. If I may interject, we thought about the
    requirement but determined that the industry wants to move in
    this direction. For us to freeze the industry while we go do 2
    or 3 years of rulemaking might actually take longer. We think
    the industry is working very quickly to put it in place.
        Senator Reed. The logic of that escapes me. If the industry
    is doing it, why would you freeze them if you say 3 years from
    now you're going to have to do it?
        Mr. Hubbard. We have learned from experience in bar coding,
    for instance, that they tend to wait and not invest in the
    technology until they see what FDA is going to require, so that
    they don't misjudge and invest in the wrong technology.
        Senator Reed. At least some might say that, as long as this
    situation is confused, as long as you can't effectively trace
    the source of pharmaceuticals, that is the strongest argument
    against importation. If that were to go away, then there is no
    argument left for the industry.
        Would you comment on that?
        Mr. Hubbard. We have certainly said in our counterfeit
    report from last year that development of track and trace
    technology will make it much more possible to ascertain whether
    a given drug is the real drug or not, so we agree with you,
    that track and trace technology needs to be in place. Our
    report was very firm in saying the industry should put it in
    place, and we gave them actually a bit of a deadline of 2007.
    But it is a big investment for them and it will take some time
    to develop.
        Senator Reed. Mr. Taylor.
        Mr. Taylor. We were very positive about track and trace
    technology in our report. But let me just raise a cautionary
    note. We also in that report were seeking input on other ideas
    that might be just as strong in securing the drug supply chain,
    because we should not look at any one approach or any one
    technology as fail safe.
        One of the true lessons learned right now in regards to
    counterfeit drugs is that the technological capability of
    counterfeiters is increasing and they have become much more
    savvy. As a result, one of the things we emphasized in our
    counterfeit report is that it is not embracing just one
    approach, if you're an industry member or a part of the drug
    supply chain, but instead, using multiple tools, including
    track and trace, to ensure that if one part of your secure
    mechanism is breached, it would not make it easy for someone to
    counterfeit your product.
        So what we advocated was looking at a comprehensive system,
    track and trace or something similar as a part of it, but I did
    not want to leave here advocating any one approach as being a
    fail safe approach because we have seen people overcome so far
    many of the technologies that have been introduced.
        Senator Reed. I appreciate that point, Mr. Taylor, and you
    will advise if you require any legal authority.
        But as we debate these different techniques, the issue is
    not being addressed. Sometimes you just have to set a standard,
    as they do so often in industry, and industry rapidly adapts.
        One final question, if I may. The Kennedy bill, which is an
    interesting piece of legislation, I am told does not set a
    standard of pharmaceutical equivalency. It requires that any
    imported drug be FDA approved under the same standard in
    section 506(a) that the manufacturer would have to meet.
        I wonder if I could have your comments on that point.
        Mr. Taylor. I think the distinction here is that, in
    regards to the approval of generic drugs, we look at the
    bioequivalency of the two products. What I mean by that is,
    using the example that Mr. Hubbard showed of the calcium in the
    chest cavity, what that bioequivalence or bioavailability or
    substitutability ensures is that the product works exactly like
    the FDA-approved innovator drug. Bioavailability is a crucial
    component of that.
        The concern that we have articulated in regards to this
    bill is that the standard that is used does not capture
    bioequivalency. It talks about potency, which goes to the
    strength of the drug, but that is not the same as ensuring that
    the product provides the very benefits that it is intended to
    provide.
        Senator Reed. Thank you very much, Mr. Taylor and Mr.
    Hubbard.
        Thank you, Mr. Chairman.
        The Chairman. Senator Alexander.

                     Opening Statement of Senator Alexander

        Senator Alexander. Thank you, Mr. Chairman. Thank you for
    your testimony.
        Under current Federal law, importation of drugs is allowed
    if the Secretary of Health and Human Services says that it may
    be done in a safe and effective way. We have had two well-
    respected Secretaries of the Department of HHS over the last 12
    years.
        How often have they exercised their authority to allow the
    importation of drugs?
        Mr. Taylor. They have not, to date. The implementation of
    those pieces of legislation would be triggered by the
    certification of the Secretaries. As you noted, both Secretary
    Shalala and Secretary Thompson----
        Senator Alexander. So over the entire 8 years of the
    Clinton administration and so far in the Bush administration,
    Secretary Shalala and Secretary Thompson, neither one have
    exercised the authority they now have for importation?
        Mr. Taylor. Senator, if I recall, it was Senator Jeffords'
    bill that first put out this authority. I think that was in
    1999 or 2000, so it hasn't been----
        Senator Alexander. Right. So far they have not----
        Mr. Taylor. So far, that's absolutely right.
        Senator Alexander. Why did they say they didn't do it?
        Mr. Taylor. Because they felt they could not certify that
    the piece of legislation would allow safe and effective
    products to make their way to the U.S. consumer.
        Senator Alexander. Would it be possible now for the
    administration to adopt its own procedures for allowing the
    importation of drugs without legislation from Congress under
    this preexisting authority?
        Mr. Hubbard. If I may, Senator, the legislation you
    referred to is still on the books.
        Senator Alexander. I understand.
        Mr. Hubbard. The Secretary could theoretically certify
    today, but the Secretary has determined he can't do that.
        Senator Alexander. What I'm asking is, why do we need
    another law if you already have a law saying you can do it, and
    the only reason you are not doing it is because two
    administrations have said it can't be done in a safe and
    effective way?
        Mr. Hubbard. I think Secretary Thompson has noted that FDA
    currently does have the resources and authority to oversee a
    safe importation system.
        Senator Alexander. So you need more money and a larger
    system to try to set up a safe way to do that?
        Mr. Hubbard. That is what he has said.
        Senator Alexander. May I ask one other question.
        Senator Kennedy mentioned research. One of the great things
    about our government is that we fund a lot of research, $19
    billion a year for various types of research just to our
    universities, but there are different kinds of research.
        Do you know how much money drug companies spend on research
    for new products in the United States each year?
        Mr. Taylor. Sir, I personally do not.
        Senator Alexander. Do you suppose you could help me get
    that figure?
        Mr. Taylor. Sure.
        Mr. Hubbard. I think it is in the range of $25- or $30
    billion a year.
        Senator Alexander. Isn't the kind of research the Federal
    Government funds at universities and at energy laboratories
    different from the kind of research that drug companies do in
    developing specific products for market?
        Mr. Hubbard. It is generally noted that NIH and NSF and
    others fund more basic research on how disease might occur,
    whereas drug companies do what is often called applied
    research, which is actually turning basic research into a
    product that can treat disease, such as, in this case, a
    pharmaceutical.
        Senator Alexander. So if I were worried about a stroke or
    infected with HIV or had Parkinson's disease, I might hope that
    the NIH sponsored research would be the basic research, but
    that the $25-$30 billion that the drug companies spend would
    take the basic research and bring it along and bring it to
    market?
        Mr. Hubbard. That is generally what happens, yes.
        Senator Alexander. How much of that kind of research is
    spent in countries outside of the United States by private
    companies? Do you know anything about that?
        Mr. Taylor. I don't know, but----
        Senator Alexander. Would you assume it is not much?
        Mr. Taylor. Senator, I wouldn't presume. I mean, we can
    certainly----
        Senator Alexander. Could you supply that? I would like to
    have a fair and honest idea, if we create a system that sets
    the price of drugs at about the cost of distribution, what will
    happen to the $25- or $30 billion that drug companies use for
    research to bring new innovations to market.
        Mr. Taylor. We would certainly be happy to get back to you
    on these questions.
        Senator Alexander. I would appreciate that.
        Thank you, Mr. Chairman.
        The Chairman. Senator Murray.
        Senator Murray. Thank you, Mr. Chairman. I would like to
    submit my full statement for the record.
        The Chairman. Absolutely.
        [The prepared statement of Senator Murray follows:]

                      Prepared Statement of Senator Murray

        Mr. Chairman: Access to quality, effective and affordable
    prescription drugs should not come down to finding the best
    deal on the Internet.
        I share the frustrations of my colleagues regarding the
    excessive price the American consumer must pay for many drug
    treatments.
        It hardly seems fair to have American consumers paying 50
    percent or even 100 percent more than Canadians or Europeans
    pay for the same drug.
        I recognize that American consumers often have faster
    access to new drug therapies and have more choices as well.
    But, unfortunately, for seniors and the uninsured, there is no
    choice. They simply go without.
        Reimportation may offer a mechanism for greater price
    competition in this country. But, we should not allow the rush
    to import drugs reduce our high safety standards.
        We often take it for granted that we have one of the safest
    drug supplies in the world--from drug approval to manufacturing
    and distribution. The FDA standard is truly the gold standard.
        As members of this committee know, getting the drug to the
    patient is not just about having the drug approved. There are a
    number of safeguards to ensue the integrity of the product.
        I am also concerned that the focus on reimportation or
    importation of prescription drugs as a savings mechanism for
    seniors and the uninsured can take the focus off what we should
    be talking about.
        We should be talking about an affordable, prescription drug
    benefit within Medicare that does not have coverage gaps or
    limitations and that offers a seamless benefit as part of the
    Medicare defined benefit package.
        We should also be talking about access to quality,
    affordable health care, including prescription drugs for the 44
    million uninsured.
        I look forward to the testimony of today's witnesses and
    hope that this committee will take the time to ensue that we do
    not jeopardize patient safety in the rush to reimport drugs.
        Senator Murray. Thank you very much for your testimony. I
    think all of us are concerned about the price of drugs, and I
    certainly live in a border State where many of my constituents
    tell me they drive to Canada to get drugs.
        One of the things I often hear from them is why are we so
    worried about this issue of safety. We don't know of a lot of
    Canadians who are dying because they got the wrong kind of
    drug.
        What is your response to them on that?
        Mr. Taylor. Well, I think it is in two parts. One is that
    the reason we're concerned about safety is because our job is
    not to wait until people are harmed. Our job is to try to
    prevent harm from occurring. Even though we do not necessarily
    expect acute harm from some of these products, based on some of
    the products that we have seen, both in the blitz that I noted
    earlier and in our counterfeit drug cases, one of the concerns
    is that, even though these products might not initially harm
    you, they might not be delivering the benefits that were
    promised when someone sought the use of the product.
        For example, in the counterfeit Lipitor case that led to
    the recall of 250,000 bottles last summer, our concern was that
    the product was manufactured in a way so that it probably was
    not going to deliver the cholesterol lowering benefits that
    were promised.
        We have had other situations where products were
    manufactured in a way so that they have an active ingredient,
    just like the FDA-approved product, but because the active
    ingredient is either subpotent or superpotent, the product will
    not work as intended. The patient might never be harmed, but
    they will not get the therapeutic benefits that----
        Senator Murray. Is that happening a lot in Canada today?
    Are we seeing a lot of those kinds of drugs sold, or is this
    just because our constituents go up there, they purchase
    something in a drug store that is then inspected and bring it
    back different than reimportation?
        Mr. Taylor. Well, our general concern is because the
    breadth and number of products that are coming to the country
    make it more likely that you will see products that are of poor
    quality. We are unable to inspect every package. We don't know
    the origin of many of these products. We have had more than one
    occasion where a consumer has----
        Senator Murray. But doesn't Canada know, if you're going up
    there to purchase it?
        Mr. Taylor. In some cases, the Canadian government has
    stated that their authority does not extend to products that
    come into Canada that are intended for the U.S. consumer. So
    that is a gap in the regulatory----
        Senator Murray. I think most people assume that the
    products they purchase in Canada have been inspected by
    Canadian authorities. You're saying to me, if they come in
    there from a third country to be exported, they are not?
        Mr. Taylor. That is correct.
        Senator Murray. So we would not know if products coming
    back were inspected if they were purchased someplace else and
    just came through Canada?
        Mr. Taylor. Yes. Our general message is that in some cases
    the products will be perfectly fine. But the over-arching
    public health concern that FDA has articulated is that we
    simply don't know very much about the products that are being
    sold in----
        Senator Murray. So you are not so worried about somebody
    going up and buying a product on a Canadian pharmacy shelf and
    bringing it back, as you are purchasing larger quantities that
    could perhaps not be made in Canada and inspected there?
        Mr. Taylor. We are concerned about any instance where the
    purchasers--we are worried about any instance where the origin
    of these products is unclear. Many have drawn the distinction
    between walking to your pharmacy and purchasing a product
    there, versus purchasing a product over the Internet site. They
    have made that argument. But the bottom line is knowing the
    product history and knowing the origin of the product, so that
    there is some assurance that the product will work as intended.
        Senator Murray. Drugs that are manufactured in Canada for
    export only, are they subject to Canadian health inspection? If
    they are manufactured in Canada but not for consumption there
    but are for export, are they inspected?
        Mr. Hubbard. I don't know. I do know, Senator Murray, that
    a drug made in another country that is exported to Canada for
    reexport, say, to the United States, is generally not covered
    by their FDA, just as in this country, our FDA doesn't regulate
    a product that is transshipped to the United States.
        Senator Murray. I assume, then, that the concern you have
    is that those products coming into this country would then have
    to be inspected by FDA and you don't have the capacity to do
    that?
        Mr. Taylor. At this current time we certainly don't have
    the resources to do so. But our regulatory system, as set up
    right now, is geared to doing foreign inspections pursuant to
    the act's current provisions, which means that, as I noted
    earlier, we do inspections of those facilities that have a
    product approved and will be introduced in the United States,
    to make sure that it is manufactured properly. That is really
    the full bulwark of our foreign inspection regulatory system.
        Senator Murray. Have you done any cost analysis of the
    House passed bill or any similar measures on what it would cost
    FDA to----
        Mr. Taylor. In our discussions with Senate staff 2 days
    ago, we do have some getbacks regarding cost, but our current
    estimate is that we are talking about hundreds of millions of
    dollars to ensure that we have the appropriate resources in
    place to make sure that safe products are coming to the United
    States.
        Senator Murray. Okay. Thank you very much.
        The Chairman. Senator Mikulski.
        Senator Mikulski. Thank you very much, Mr. Chairman. I,
    too, would ask unanimous consent that my statement go into the
    record.
        The Chairman. Absolutely.
        [The prepared statement of Senator Mikulski follows:]

                     Prepared Statement of Senator Mikulski

        Mr. Chairman, thank you for calling this important hearing
    today on reimportation of prescription drugs.
        The ballooning cost of health care is one of the biggest
    problems facing American families, especially the skyrocketing
    cost of prescription drugs. In 2002 alone, prescription drug
    costs grew more than 15 percent. Last year, Americans spent
    $184 billion on prescription drugs. Families are being
    squeezed, and so are businesses. Rising health insurance costs
    mean employers pass on more of their costs to their employees
    in higher co-pays for prescription drugs and more out-of-pocket
    costs for patients, or they stop offering health insurance
    altogether.
        Americans are paying more for their prescription drugs than
    anyone else in the world. This is unfair and offensive.
    Americans should not have to pay more for access to medicines
    that come from innovation and research conducted right here in
    the United States, funded by taxpayer dollars.
        That's why I'm proud to cosponsor the bipartisan
    Pharmaceutical Market Access and Drug Safety Act introduced by
    Senators Dorgan, Snowe and others. If passed, this legislation
    will help Americans get the same drugs for lower prices and put
    in place new safeguards against counterfeit drugs. It meets the
    day-to-day needs of Americans by helping them get the medicines
    they need at a price they can afford. This legislation would
    allow individual Americans to import drugs from Canada. It
    would also allow pharmacists and wholesalers to import drugs
    from 19 other industrialized countries.
        Americans must have access to affordable drugs, but they
    must also be safe to use whether they are from this country or
    another country. The Food and Drug Administration (FDA) is the
    gold standard for approving safe and effective drugs. Congress
    must help ensure a strong safety standard for imported drugs.
    That's one of the reasons I'm supporting the Dorgan/Snowe
    legislation. While it opens the door to consumers to buy drugs
    from Canada, it also puts in place stronger and smarter tools
    to prevent unsafe drugs from reaching American consumers. To
    protect the health of the American public, the bill requires:
    tracking of drugs from manufacture to sale, frequent FDA
    inspections of importers and exporters, and additional
    resources for FDA to do the job. It also gives FDA the ability
    to ban imported drugs that are counterfeit, contaminated, or
    adulterated. These are important measures that must go hand-in-
    hand with reimportation itself.
        Reimportation is just one tool to help make prescription
    drugs more affordable to Americans. To get a grip on drug
    costs, Congress must pursue a number of policies that combined
    will make a difference in the lives of American families. Last
    year, Congress helped improve access to lower-cost generic
    drugs. But last year's Medicare drug law doesn't do enough to
    get a grip on rising drug costs. In fact, Medicare is
    prohibited from using the purchasing power of the Federal
    Government to negotiate better prices for seniors. That's what
    VA does, and it works. VA negotiates discounts on drugs of 25
    percent or more. That saves veterans money and it saves
    taxpayers money--$1.1 billion over the last 3 years. That's why
    I am fighting for legislation that encourages Medicare to
    negotiate lower prices.
        I know that drug companies must have the resources to
    invest in research and development, so they can make the
    breakthroughs that lead to new treatments and cures. That's why
    I support entrepreneurship and extending the research and
    development (R&D) tax credit. But drug company bottom lines
    aren't the only lines that are important. What about the people
    standing in line at the pharmacy? The Federal Government must
    be on their side, making sure they can afford the medications
    they need.
        I look forward to hearing from our witnesses today about
    how Congress should design the best framework to allow
    Americans access to safe, imported prescription drugs. I know
    there are several proposals on the table. I hope that this
    committee can take the best ideas and put them to work to lower
    drug costs for Americans.
        Senator Mikulski. Mr. Chairman, thank you for organizing
    this hearing, because the cost to the American family for
    buying prescription drugs, I believe, is at a national crisis.
    It is stressing not only our seniors who need them for a
    lifeline and chronic illness management, but also for young
    families. If you're a young woman who has MS or Lupus, you're
    having a hard time paying for your drugs. If you have a child
    with asthma, autism, juvenile diabetes or others, families of
    all ages are wondering how are they going to be able to afford
    the lifeline.
        This is a national crisis. The Medicare bill we passed is
    really a hollow opportunity. The reason people are going to the
    Internet and crossing the border is out of desperation. So what
    we do know then is that where there is need, there will be
    greed, and where there is greed, there are scams and schemes.
    The way you deal with the scams and schemes is to come back and
    deal with the need, which is how can we get drug costs under
    control in our own country without shacking the emerging
    biotech companies as well as our pharmaceutical industry.
        So that's what we need to come to grips with. We need to
    recognize at this hearing--and, really, I am very proud of FDA;
    it's headquartered in my own State--their vigor to protect the
    consumer from a safety standpoint. But if we don't come up with
    a framework to do it, it is still going to go on. People are
    either going to do it in the sunshine, in a regulated
    environment, or they're going to go underground, bootleg, and
    that is where we're going to get all kinds of very, very sad
    outcomes, like the wonderful Malone family has had to grapple
    with in their own lives. It is going to happen because drug
    costs are beyond the reach of many people each day.
        Then that takes me to my question. We are talking about
    reimporting primarily from Canada, and I would like to focus on
    Canada. What does Canada tell us about this? Has FDA reached
    out to Canada? Has their trade representative reached out to
    Canada? Has our American Ambassador to Canada said, ``Look,
    we've got folks coming in by bus, and we've got them coming in
    by the Internet. How can we ensure the safety and efficacy of
    our people?''
        Have we engaged the Canadian government in helping us be
    able to do this?
        Mr. Hubbard. Many times, Senator Mikulski. In fact, we have
    had a number of discussions with Health Canada about whether
    they could assure the safety of drugs. What they tell us is,
    just as we might say to anyone if the situation were reverse,
    that Health Canada is responsible for assuring the safety of
    drugs for Canadian citizens. We have said, if you walk into a
    Canadian drug store, you are probably going to get a good drug.
        But these Internet sales, these international pharmacies
    that sell across the border, are viewed by Health Canada as the
    responsibility of the American FDA. They cannot assure that
    those exported drugs will meet American standards.
        Senator Mikulski. Do the Canadians manufacture drugs in
    their own country under an American patent drug, or do they
    import American drugs and, because of the Canadian nationalized
    system, buying in bulk and a variety of techniques in their own
    price controls, does the Canadian government manufacture the
    primary drugs? And we all know what the basic 40 or 50 are,
    that are being used safely in the management of chronic
    illness.
        Mr. Hubbard. I don't believe the government manufactures
    any drugs. However----
        Senator Mikulski. I'm not talking about the government. I'm
    talking about, are drugs manufactured in a country that is a
    wonderful ally, a great neighbor, and shares our ethical
    framework around safety and efficacy?
        Mr. Hubbard. As we understand it, drugs in Canada come from
    a variety of sources. Some of them are American made drugs that
    were exported to Canada for sale there. Some are made by
    Canadian subsidiaries of American companies. Some are made by
    independent Canadian companies, and some are even imported from
    other countries.
        Senator Mikulski. We then have a framework for getting
    those drugs back. In other words, those that go there that we
    make here, and those that are made under Canadian standards,
    which I think by the very nature of our long-standing
    relationship with Canada, we know that we could either count on
    them to have safety, because that is a value in their own
    country and so on, so we could do that, if we then even focused
    on that limitation; am I correct?
        Mr. Hubbard. You must understand, Senator, our problem is
    that people like this say they are good for people but they're
    not.
        Senator Mikulski. Mr. Hubbard, I know what you said about
    the people like that. Mr. Hubbard, please. I'm not trying to be
    abrasive with you. I'm trying to pinpoint.
        Now we have big broad brush issues to try to get at it. If
    we focused only on allowing those imports limited to the
    categories I just said, would we be on to something and then
    prohibit this type of regulation because of exactly what I
    said, the scammers, the schemers, who in their greed are
    preying on the American people?
        We want to make sure the bad guys aren't doing back things
    to our people, so we're on the same broadband here. But if we
    limited maybe our focus to those drugs that are manufactured in
    this country, sent there and then sent back--that's what
    reimportation means. It means we're reimporting, and then also
    those that would be made in a Canadian facility that could be a
    subsidiary of an American company and so on.
        What do you think about that?
        Mr. Taylor. I think that to the extent that you are
    defining a set of permissible drugs, whether they be from
    Canada or somewhere else, the key will still be making sure
    that whatever construct is in place, that you're allowing the
    permissible drugs to come in but not allowing the impermissible
    ones to come in behind them. That goes to the resource issue,
    making sure that you have the appropriate personnel to ensure
    that the products that are coming in have the requisite safety.
        So my response is, you know, you can set that up, but there
    still needs to be the infrastructure and the personnel to
    ensure the safety of those products that are deemed
    impermissible or outside the rubric that you have defined.
        The Chairman. Thank you, Senator.
        Senator Mikulski. I agree with that, and I would agree that
    that's a very important issue. But I think we can do better and
    I think we can be more creative in our thinking.
        The Chairman. I think the Senator is going to want to look
    at the bill I introduce next week. Your questions are exactly
    on point as to what my bill does.
        Senator Clinton.
        Senator Clinton. Thank you, Mr. Chairman.
        I'm just trying to make sure I understand what our
    witnesses are telling us, along with my colleague and friend,
    Senator Mikulski. Am I hearing that if you had the resources
    and the authority that you think you need to conduct this kind
    of function, you would not have any objection to trying to do
    it?
        Mr. Hubbard. The administration has taken no position, but
    FDA has said, if we had the resources and authority, we could
    presumably set up a system in which you could allow safe
    imported drugs, or at least ameliorate the safety concerns, in
    a very substantial way.
        Senator Clinton. You made an analogy earlier to what FDA
    does in inspecting food. I think the FDA has claimed over the
    years, with good cause, that we do have the safest food supply
    in the world. Would you agree with that statement?
        Mr. Taylor. I think we have a very safe one. I'm not sure
    it's the strongest, but I think we do a very good job in light
    of the increasing number of imports coming in. I think that our
    ability to do that job is enhanced by both the provisions in
    the Bioterrorism Act, in conjunction with the resources that
    were appropriated that allowed us to bring those provisions to
    life. We are currently implementing those now.
        Senator Clinton. Yet my understanding is we still only
    inspect 2 or 3 percent of the food that is imported into the
    country.
        Mr. Taylor. That is correct.
        Senator Clinton. And we also have, according to the Centers
    for Disease Control, every year 76 million people getting sick,
    more than 300,000 are hospitalized, and 5,000 die from diseases
    caused by foods.
        So even if you have an enhanced system that you think is
    doing a good job, there is still going to be problems. You keep
    working to try to improve that system to try to get the
    problems out of it so that you can make the food system even
    safer. Is that right?
        Mr. Taylor. Correct.
        Senator Clinton. So from my perspective, part of what we
    are trying to do here, with the legislation that has been
    introduced and other legislation that is coming, is to begin
    that process with respect to importing or reimporting drugs.
    Because it is also the case, isn't it, that we have a large
    problem of counterfeiting right here in the United States. We
    have counterfeit drugs made in the United States and sold in
    the United States, isn't that right?
        Mr. Taylor. That is right, Senator. But the difference is
    that our ability to address and investigate and identify and
    prosecute those counterfeiters is strengthened here in the
    United States because we have the jurisdictional ability to do
    so.
        I'm not suggesting that counterfeits only exist overseas,
    but what I am saying is that when we identify a counterfeiter
    domestically, we have additional tools that enhance our ability
    to identify the counterfeiter and bring that counterfeiter to
    justice. We just simply now, when we discover the
    counterfeiting is occurring overseas, we often have to work
    with the regulatory authorities overseas or work with the
    Customs posts or embassies overseas. It just presents a greater
    challenge.
        Senator Clinton. I think that one of the areas that we need
    to explore as we begin to open this up is how we enhance
    cooperation. I know that the European Union has already adopted
    a technology to secure pharmaceutical packages. It costs very
    little per package, and it is state-of-the-art
    anticounterfeiting. So I think there are things we can learn
    from other places in the world as we try to figure out how to
    exist in this global market.
        Because as my colleagues have said, we're going to have a
    flood of drugs and supplements and all kinds of things coming
    into our country because people can get on the Internet. You're
    not going to look at every package that is delivered everywhere
    in the world.
        Let me also ask with respect to Mr. Hubbard's question. You
    claim that drugs imported under the proposal might not be
    bioequivalent--and that's the calcium pill that doesn't
    dissolve. Isn't it true that any drug that is different than
    the U.S. drug must be approved by the FDA under section 506(a)?
        Mr. Hubbard. Yes, Senator. If you're speaking of one of the
    bills that is before the committee, that is anticipated. There
    would be a review. I think our concern would be that there
    would be a huge resource cost and questions about our ability
    to deal with all that data.
        Senator Clinton. I understand that. Of course, the FDA came
    into being in response to the problems at the beginning of the
    last century, and we created it because we had adulterated
    foods, we had adulterated drugs, and we had to do what needed
    to be done in the 20th century to deal with those problems.
        Well, now we're in the 21st century. We have new problems.
    We are going to have to give you new resources, new
    authorities, in order to deal with what is a problem. Whether
    we pass this legislation or not, it is not going to go away.
    You are still going to be dealing with a flood of imported and
    counterfeited drugs and other kinds of supplements that are
    coming in.
        You know, I think what we're looking for is as positive an
    attitude from the FDA as we can get. You are the experts. You
    are the ones trying to keep our food supply and our
    pharmaceuticals safe. But we have to think for the future. We
    can't continue to keep doing business the way we have done. It
    is not going to work. People are going to get those drugs,
    whether they go by car or get it in the mail. So we need a new
    system, and we need your help to develop that new system.
        Mr. Taylor. Senator, as you know, the Secretary has been
    asked to look at and consider many of these issues in response
    to the conference report that was attached to the Medicare
    prescription drug plan. To help him do so, he has convened a
    task force that has held listening sessions and public
    meetings, and these are some of the very issues that that group
    is looking at and considering.
        Senator Clinton. Look, Mr. Taylor, we might as well just
    put it on the table. We know that the pharmaceutical industry
    does not want this done, and we know how much influence they
    have within our Government. Whatever administration, whoever is
    at the FDA, it is a constant battle. We are well aware of that.
        What we are looking for is to try to at least even the
    playing field a little bit, as difficult as that might be, and
    to try to provide some of the additional authorities and
    resources so that the FDA can get into the 21st century.
        I mean, I don't think the pharmaceutical industry can
    withstand the onslaught of counterfeiting that is going to
    occur because people are desperate. I don't think they can
    stand the onslaught of reimportation because people are
    desperate.
        Finally, you know, we have no evidence of anyone being hurt
    by drugs obtained from Canada. And yet we have 30 percent of
    our seniors who have not filled a prescription because they
    can't afford it. So we need to look at this in the broader
    context. I would wish that the drug industry and the FDA would
    be partners in our trying to do our job, which is to protect
    people, but also provide affordable, safe pharmaceuticals to
    take care of the needs of the American people.
        It is not fair any longer for the American taxpayer,
    consumer and patient to be at the bottom of an inverted
    triangle supporting the drug research and development for the
    entire world. That's not fair. So we're looking for some kind
    of solution here. We understand the problems and we think we
    can solve this.
        [Applause.]
        The Chairman. It is the tradition of this committee that we
    don't have demonstrations during the committee hearings, but we
    appreciate the statement from the Senator from New York.
        The gentleman from Connecticut.
        Senator Dodd. Thank you, Mr. Chairman.
        Let me first of all ask unanimous consent as well, that my
    opening statement be included in the record.
        The Chairman. Without objection.
        [The prepared statement of Senator Dodd follows:]

                       Prepared Statement of Senator Dodd

        Mr. Chairman, I would like to thank you for holding today's
    hearing on such an important topic--the importation of Food and
    Drug Administration (FDA)-approved prescription drugs.
        As we have discussed time and time again, in this committee
    and elsewhere, our Nation's health care costs are exploding.
    Americans pay more for health care--by far--than any other
    nation.
        The fact that health care costs are so high places a
    particular burden on the 44 million uninsured Americans, and it
    also means that any efforts to provide coverage for the
    uninsured will be enormously costly to the American people.
    Therefore, reducing health care costs is a critical step in
    ensuring that everyone has access to appropriate care.
        Prescription drugs are an absolutely integral part of our
    health care system. The advances in drug therapies over the
    last few decades have led to millions of lives improved and
    even saved. I am proud that many of these medicines are made in
    my home State of Connecticut.
        However, prescription drugs are also a major driver of
    rising health care costs. Over the last 3 years, drug costs
    have increased by more than 50 percent. Our health care system
    cannot continue to bear these price increases.
        It is essential that we seek opportunities to control
    prescription drug costs. I was extremely disappointed that such
    an opportunity was missed during our consideration of the
    Medicare Modernization Act. That law now prohibits the Federal
    Government from using its purchasing power to bargain for lower
    drug prices. This is something that I, and I'm sure many of my
    colleagues, will be looking to change in the near future.
        We are now faced with another opportunity to control
    prescription drug costs by allowing the importation of FDA-
    approved prescription drugs from Canada and other
    industrialized nations.
        I have always taken the position that drug importation
    should be allowed as long as it is safe. I do not want lower
    prices to come at the cost of quality and safety for American
    consumers. I have looked at every importation proposal with
    these priorities in mind.
        We now have a bipartisan proposal from Senator Dorgan,
    Senator Kennedy, and others, that I believe addresses many of
    the safety concerns that have been raised in the past. It gives
    the FDA the authority and resources necessary to make drug
    importation a safe proposition.
        I want to make it clear that I am still analyzing this
    proposal, and I am looking forward to hearing what today's
    witnesses have to say about it. But my current thinking is that
    it seems to meet the safety requirements.
        Once safety is addressed, this really becomes an issue
    about what is best and what is fair for American consumers. At
    the moment, Americans pay significantly more for prescription
    drugs than those in other industrialized nations.
        Based on that inequity, it is my belief that we should
    insist on an open market for prescription drugs, just as there
    is for almost every product that we trade internationally.
        At the same time, we should continue to take steps to
    ensure fair trade practices for prescription drugs, just as we
    do for other products. But this should be done in conjunction
    with, and not in lieu of, importation.
        Again Mr. Chairman, thank you for holding this hearing. I
    am hopeful that in the very near future Congress will pass
    legislation to allow importation so that Americans have access
    to affordable prescription drugs. I look forward to working
    with all of my colleagues on this issue.
        Senator Dodd. Let me commend my colleagues, and thank the
    witnesses as well. And I thank the Chairman for holding a
    hearing on this subject matter.
        It has been said before, but certainly deserves being
    repeated, I think all of us here on this side of the table have
    a tremendous amount of respect for what the industry has been
    able to produce and do--extending lives, the quality of lives.
    Certainly, we are all very, very grateful for the tremendous
    innovations that have occurred and an industry that has made a
    huge difference in the lives of people. It's important to state
    that, because we certainly take great pride in the fact that
    the United States has led the way and the pharmaceutical
    industry has provided a tremendous amount of new products on
    line that have made a huge, huge difference for people.
        What you are hearing here, though, from Senator Mikulski,
    Senator Clinton and others, is an expression of the
    frustrations that we hear every day when we go back to our
    States. When you're talking about 44 million Americans that
    have no health insurance at all, and as Senator Clinton just
    pointed out, people are medicating themselves by taking
    prescriptions and deciding to cut pills in half or to extend
    the time over when they actually take the prescriptions, which
    is dangerous.
        We talk about products coming in that are dangerous because
    we don't know where they're coming from. People self-medicating
    is dangerous, and that is going on all across the country
    today. It isn't just people are without health insurance.
    People on Medicare, Medicaid, are doing this because they have
    to make choices between food--you have heard this over and over
    again--rents, basic costs, every single day they are faced with
    these incredible choices. It's dangerous and we truly have to
    enter the 21st century in how we deal with all of this.
        Obviously, the costs here are tremendously high, and we all
    know that. So we are torn between wanting to see products come
    on line to make a difference in people's lives, knowing that is
    not done for free. We all know that, that it is expensive to do
    it. We have had people talk about profitability and the amounts
    that get invested in research and the like, and that is a
    legitimate debate.
        But then with the cost of doing this we ought to have the
    product available, and yet we have it unavailable for the very
    practical reason that people just can't afford it, and then
    limit their ability to seek other sources that could be
    legitimate sources for those products.
        As Senator Mikulski said, people are going to do this. They
    are going to self-medicate and they are also going to find
    resources that they think are going to save their lives or make
    their lives more liveable. Whatever they have to do, they are
    going to do it. Our job is to see if, No. 1, we can't come up
    with a reasonable cost on these products, and also provide them
    with the kind of assurances that we do in so many other areas
    every single day.
        As this globalization occurs economically, we are using
    products every single day that require some safety standards
    and some precautions. We are seeing automobiles introduced into
    this country being made offshore, and what kind of safety
    standards do we provide for the American consumer when they
    drive an automobile that has been produced in a foreign
    country. You can go down a long list of things we use every
    single day. We know there are lax areas of protection that
    occur in a number of these areas. So this is an important
    hearing.
        I am interested in the written statement you made--and I
    think this is Mr. Taylor--let me quote your statement here. You
    were talking about the importation proposals on page 9 of your
    testimony. I'm quoting from it here now. You say, ``Some of
    these proposals would even limit FDA's existing authorities.
    They would impose unprecedented restrictions on FDA's ability
    to inspect and test drugs, and FDA's authority to block the
    distribution of drugs we think are unsafe.''
        Can you be more specific? Since you made that claim here,
    what specific proposals do that, and how do they do that?
        Mr. Taylor. Well, to keep it short, there have been
    proposals in the past that have sought, in order to facilitate
    greater importation, have actually sought to weaken the actual
    provisions of the act that exists now. That's what I was
    getting to on that point. That doesn't happen to be the case in
    Senator Kennedy's bill, but there have been proposals in the
    past that have tinkered with the current statute and,
    therefore, would prevent or weaken our ability to stop products
    that we think are still potentially problematic.
        Senator Dodd. Specifically, you're talking about the
    proposal now being introduced by Senator Dorgan, Senator
    Kennedy, Senator Snowe and, I think, Senator Collins.
        Mr. Taylor. That statement does not relate to the Senator
    Kennedy/Dorgan bill. That related to proposals that have been
    used and floated in the past.
        Senator Dodd. One more question. This goes to the issue
    that Senator Clinton was raising, and Senator Mikulski was
    raising.
        Correct me if I'm wrong on this, but this is what I am told
    is the case, that a licensed wholesaler, licensed by the
    Canadian government, and a licensed retailer licensed by the
    Canadian government, those companies can only handle products
    that have been approved by Health Canada; is that statement
    true or not? I'm asking the question. I don't know the answer.
        Mr. Hubbard. It's theoretically true. We believe some of
    the drugs coming from those businesses are not regulated by
    Health Canada, but that is besides the point, I guess.
        Senator Dodd. Is that the law, though? The law says that
    those----
        Mr. Hubbard. We think so, yeah.
        Senator Dodd. So we can assume, except when obviously
    people may abuse the system, but assuming that that's the case,
    then those products would be relatively safe, if they have been
    licensed by Health Canada, since I gather from your statements
    we have a lot of respect for how Health Canada regulates its
    products.
        Mr. Taylor. Yes, that's absolutely right. By no means
    should any of our statements be interpreted to disparage
    Health. We think they do have a very strong drug approval
    system. However, the issue that we are concerned about is that
    their strong drug approval and drug distribution system is
    focused on ensuring that the products that make their way to
    Canadian consumers are safe and effective, just like our laws
    and our resources are geared towards. But the problem is that
    their focus isn't on ensuring that products come from Canada,
    so there is a regulatory gap.
        Senator Dodd. I understand. My point is, I just want to
    narrow in on this particular area, that licensed wholesalers,
    licensed retailers, those products, they only can sell products
    that have been approved by Health Canada, and that we have a
    lot of respect for Health Canada's ability to make judgments on
    the efficacy and safety of products that are licensed by these
    particular wholesalers and retailers.
        Mr. Taylor. Sir, I can get back----
        Senator Dodd. But they're not transshipped is my point.
        Mr. Taylor. Sure. I mean, I can get back to you and explain
    specifically what the Canadian requirements are, but I can tell
    you that, yes, we do have a great deal of respect for
    Canadian----
        Senator Dodd. These wouldn't be transshipped products then?
        Mr. Hubbard. We are concerned that some of the products may
    be transshipped. That was one of the concerns we raised in our
    opening remarks.
        Senator Dodd. That's not the point. If they are licensed to
    sell, they wouldn't be transshipped products, is that correct?
        Mr. Hubbard. In theory. But again, we are concerned that is
    not fact.
        Mr. Taylor. In theory, that's correct.
        Senator Dodd. Okay. Thank you, Mr. Chairman.
        The Chairman. Thank you.
        We thank the panel. We especially thank the FDA for the
    exceptional job you do in protecting the American consumer,
    both in the food and drug area. We appreciate your work and
    look forward to working with you as we move down this road. We
    are obviously going to be developing legislation in this area
    and your input is absolutely critical to make sure that the FDA
    can handle the responsibility and feel comfortable with it.
        Mr. Taylor. Thank you.
        Mr. Hubbard. Thank you.
        The Chairman. Our next panel includes three witnesses. We
    have Dr. John Vernon, an economist and with the Finance
    Department at the University of Connecticut, where he also
    holds an appointment in the School of Business Center for
    Healthcare and Insurance Studies. His research focuses on the
    interface between industry and regulation, pharmaceutical
    innovation.
        Dr. Philip Lee, who has a long history of participation in
    health issues. He is now a Professor of Human Biology at
    Stanford. He was Chancellor of the University of California,
    San Francisco, and he was Assistant Secretary for Health,
    Department of Health and Human Services under the Johnson
    administration.
        And Mr. Tim Malone, and his wife is also here. Mr. Malone
    had a very unfortunate experience, obviously, in losing his
    son. He wanted to tell us about what happened.
        Why don't we begin with Dr. Lee, and then Dr. Vernon, and
    then Mr. and Mrs. Malone.

     STATEMENTS OF PHILIP LEE, M.D., CONSULTING PROFESSOR, PROGRAM
    IN HUMAN BIOLOGY, STANFORD UNIVERSITY, AND PROFESSOR OF SOCIAL
        MEDICINE [EMERITUS], SCHOOL OF MEDICINE, UNIVERSITY OF
                       CALIFORNIA, SAN FRANCISCO

        Dr. Lee. Mr. Chairman, thank you for the opportunity to
    testify.
        Much of what I was going to say--and you have it in my
    written testimony--has been covered in the Q&A with the FDA. I
    would say that I have carefully reviewed the legislation and,
    in my view, it provides the necessary, provided the resources
    are made available, the necessary authorities for the FDA to
    provide the adequate protections we need if we expand imports
    as proposed in S. 2328.
        FDA, as we all know, is the gold standard. I think there is
    one other factor in the legislation, that it does prohibit drug
    companies from manipulating the system in order to circumvent
    the price benefits that would accrue to American patients who
    purchase drugs either through their pharmacy or if they did it
    with a Canadian pharmacy directly. I think the legislation, in
    fact, will reduce rather than increase the likelihood of
    counterfeit drugs entering the United States. Also, I think it
    will provide some downward pressure on prices.
        Now, in my testimony I deal with the patient safety and
    quality, safety and effectiveness issues. I deal fairly
    extensively with the fraud issues and counterfeit drug issues
    which are very important. I think that Dr. McClellan, when he
    was FDA Commissioner, initiated the task force and they
    produced an excellent report. It outlines a series of steps.
    The legislation really dovetails very closely with the FDA-
    proposed rule in the Federal Register on the 1988 legislation,
    particularly with respect to tracing, tracking, and
    identification. Those, I think, have been covered.
        This RFID, the radio frequency identification system, is
    one that is now most frequently talked about. From my
    standpoint, it looks very, very promising, and hopefully can be
    implemented within the next several years. There is a lot of
    progress being made.
        Clearly, other things need to be done, the kind of single
    packaging that we see now with many over-the-counter drugs,
    where each capsule or each pill is in its separate package.
    That kind of protection is also an added benefit and the FDA is
    obviously working on that as well. They have worked very
    aggressively with industry to move this forward.
        Again, in section 8 of the proposed legislation, I think we
    have very specific language that makes certain that the
    pedigree would be there, and that the track and trace
    technology in lieu of pedigree would be authorized. I think
    those are important provisions.
        The rising prices, of course, there have been a lot of
    comments on that. I would say only one thing, expenditures have
    been projected to increase in the United States from $207
    billion in 2004, $233.6 billion in 2005, to $519.8 billion by
    2013. So we need to have some means. This happens because, No.
    1, we are using more drugs, using more new drugs, and the price
    of drugs has increased. In the United States in particular we
    are using more new drugs, and the prices have increased more
    than in other countries.
        Of course, for the patient, for the man or woman who goes
    to their physician and gets the prescription, which in this
    country is assured by the FDA of being safe and effective, one
    of their considerations is price. Many people, as has been
    pointed out in earlier comments, can't afford the drugs these
    days.
        Also in the testimony, in a fair amount of detail, with
    pharmaceutical research and development, I have suggested in my
    testimony an approach that might be taken to studying this
    problem, looking not just at the research and development
    expenditures but the marketing, advertising and administrative
    expenditures. As profits have increased, we have noticed
    expenditures in recent years in those areas have gone up and
    R&D has not been in recent years nearly as productive as it was
    as recently as 4 or 5 years ago. So we are in a period where I
    think we need some more analysis.
        Professor Vernon has done an excellent economic analysis
    based on certain assumptions, and has also in his written
    articles made some caveats for what he is suggesting in his
    testimony.
        One area that I didn't cover in my testimony in detail is
    direct to consumer advertising. There is an area where the
    industry is investing increasing amounts, and I think for every
    dollar and a half they invest in direct to consumer
    advertising, it brings in about four dollars in profits. My own
    view is that this needs to be examined very carefully to
    determine does that benefit the patient? Does the direct to
    consumer advertising, which then gets patients to go in and see
    their doctor and ask for a particular drug, brand name drugs,
    is that a benefit to the patient? I think some of these issues
    need a more thorough examination.
        We need to also understand why has innovation slowed
    recently. What's happening? Industry critics say we are
    developing too many ``me too'' drugs and not enough new
    molecular entities. That certainly appears to be the case. Less
    than a third, about a third of the drugs that are approved, are
    new molecular entities that really are some significant
    advance. So I would say this is an area that needs more study,
    and I think that certainly can be undertaken.
        I would just conclude by saying that this is only part of
    the answer. Other steps need to be done. Mr. Taylor mentioned
    the efforts the FDA has made with respect to generic drugs, and
    we are seeing in the United States a greater use of generics
    than in any other country. Patients need to be aware of the
    fact that if they go to Canada to purchase a drug, it may be
    more expensive than the generic equivalent. They need to ask
    the doctor if they can get a generic drug that is equivalent,
    not only chemically but biologically equivalent, and therefore
    presumably therapeutically equivalent.
        Another thing that we could do much more of is what we call
    academic detailing, where you have very well-trained clinical
    pharmacists to advise physicians about particular conditions in
    the drugs instead of just the detail people coming from the
    pharmacists. For 20 years, research has been done which
    documents the value of that approach.
        With that, Mr. Chairman, I would simply say I support the
    proposed legislation, S. 2328, and would be pleased to answer
    any questions.
        The Chairman. Thank you, Dr. Lee.
        [The prepared statement of Dr. Lee follows:]
                   Prepared Statement of Philip R. Lee, M.D.
        Mr. Chairman, Senator Kennedy, and members of the committee. I am
    pleased to appear today and testify in favor of the Pharmaceutical
    Market Access and Drug Safety Act of 2004 (S. 2328). The legislation
    addresses several important issues that were not addressed in the
    Medicare Prescription Drug Improvement and Modernization Act.
    Specifically, S. 2328 gives the Secretary of the Department of Health
    and Human Services the authority to implement a system for the
    importation of prescription drugs from Canada within 90 days of
    enactment and, beginning 1 year after enactment, from the members of
    the European Union as of January 1, 2003, Australia, New Zealand,
    Japan, and Switzerland. Moreover, it provides a rigorous licensing and
    inspections regime to assure that drugs imported under the program meet
    the FDA gold standard of safety and effectiveness. Unlike other
    legislative initiatives in this area, it also assures that drug
    companies will not be able to manipulate the rules to prevent a
    significant amount of drugs being imported into the United States.
    Without such rules, a program of importation and reimportation would
    likely have little or no impact on U.S. prices.
        After carefully reviewing the legislation, I conclude that it will
    reduce rather than increase the likelihood of counterfeit drugs
    entering the U.S. supply chain from abroad and that drugs imported
    under the program will meet FDA standards for safety and effectiveness.
    Moreover, it will provide downward pressure on prices paid by U.S.
    consumers without leading to a reduction in drug innovation.
        Let me deal with the issues of patient safety and drug product
    quality, safety and effectiveness. Then, I will deal with the issues of
    drug prices, costs, and cost effectiveness.
           patient safety and drug quality, safety, and effectiveness
        Last year, prior to enactment of the Medicare Prescription Drug,
    Improvement and Modernization Act of 2003 (MMA 2003), the House of
    Representatives, by a margin of 243 to 186, passed a bill to allow
    individual patients, pharmacists, and drug wholesalers to import
    prescription drugs from Canada and European countries if they had been
    approved for use in this country by the FDA. Before final action, the
    House-Senate conference committee rejected this approach and reaffirmed
    the current policy, which permitted importation only if the Secretary
    of the Department of Health and Human Services certified that drugs
    imported under the program authorized by the bill would be safe.
    Neither Secretary Shalala nor Secretary Thompson has been willing to
    grant such certifications. The MMA, while including a new prescription
    drug benefit (Part D) for Medicare, did not permit the importation of
    drugs from Canada and Europe. The MMA did, however, request a report to
    Congress on importation.
        To assist in examining the issues related to importation, Secretary
    Thompson established the Task Force on Drug Importation, chaired by Dr.
    Richard Carmona, the Surgeon General of the U.S. Public Health Service,
    and including Dr. William Raub, the DHHS Deputy Assistant Secretary for
    Science, and Dr. Mark McClellan, the former FDA Commissioner and
    currently the Administrator of the Centers for Medicare and Medicaid
    Services.
        The Task Force has held five listening sessions, drawing on a wide
    range of experts. I have had the opportunity to review some of the
    transcripts and the testimony of some of the witnesses in full. These
    documents should be carefully reviewed by the committee staff because
    they deal with a number of issues of concern to this committee.
        The Pharmaceutical Market Access and Drug Safety Act of 2004 (S.
    2328) deals with the quality, safety, and effectiveness issues very
    directly. The act would require that importable drugs must be approved
    by the Food and Drug Administration (FDA) and manufactured in an FDA
    inspected plant. In addition, the drug must be administered by the
    patient; it cannot be injected or infused; and it must not be a drug
    inhaled during surgery or a controlled substance.
        These requirements are essential to any expansion of drug imports,
    and I believe they deal with the drug quality and safety issues. The
    process and elements of FDA approval were described by Dr. Carl Peck,
    former Director of the FDA Center for Drug Evaluation and Research
    (1987-1993) in his testimony for the DHHS Task Force on Drug
    Importation on April 27, 2004. The importance of the FDA requirements
    for safety and effectiveness were also stressed by Pamela Wilkinson,
    Vice President of Regulatory Affairs/Serono Laboratories, Inc. I agree
    and do not believe it necessary to repeat their statements in detail.
    Suffice it to say, the FDA is the gold standard for assuring drug
    quality, safety and effectiveness. Drugs imported under the
    Pharmaceutical Market Access and Drug Safety Act of 2004 (S. 2328) are
    required by the legislation to meet these standards, and I believe that
    the regime of licensing and inspection established by the legislation
    will assure that they will in fact meet these standards.
                        fraudulent and counterfeit drugs
        Let me turn to a related safety and quality issue--fraudulent and
    counterfeit drugs entering the United States if current policies are
    modified to permit greater imports into the United States.
        I have had a long-standing interest in this problem. In 1990, in an
    article in the International Journal of Health Services, my late
    colleagues, Dr. Milton Silverman and, Mia Lydecker, and I wrote an
    article, ``The Drug Swindlers'' that described the problem of
    counterfeit drugs internationally. We developed the story more fully in
    the chapter, ``The Drug Swindlers,'' in our book, Bad Medicine,
    published by Stanford University Press in 1992. After our 1990 article,
    the story was reported in the November 12, 1990 Newsletter of the
    Pharmaceutical Manufacturers Association and it received international
    coverage in the magazine Newsweek (``The Pill Pilots'' November 5th,
    1990).
        Based on our studies, we noted that many drug experts were alarmed
    by the rapidly expanding growth of counterfeit drugs. I should note
    that in 1990 and 1992, we did not include China among the countries
    with serious problems. I have been very concerned about the increase of
    the problem in recent years, but I am encouraged by the possibilities
    for dealing with the problem.
        Let me elaborate. A number of pharmaceutical industry officials and
    trade association representatives have expressed concern that
    counterfeiting may increase with legislation allowing imports. On
    reading their statements before the DHHS Task Force on Drug
    Importation, I do not believe that they were speaking about the
    Pharmaceutical Market Access and Drug Safety Act of 2004 (S. 2328). I
    believe the act provides clear policies to prevent this.
        The issue of fraudulent and counterfeit drugs has concerned
    Congress and the FDA since the enactment of the Prescription Drug
    Marketing Act (PDMA) of 1988. The act was amended in 1992, but its
    benefits have not been realized. The Food and Drug Administration
    published a Federal Register Notice on February 19, 2004 delaying the
    final rule published in the Federal Register on December 3, 1999 on
    certain requirements in the final rule relating to wholesale
    distribution of prescription drugs. There have been multiple earlier
    delays in this final rule. In this most recent revision delaying the
    final rule until December 1, 2006, the FDA states:

              FDA is working with stakeholders through its counterfeit drug
            initiative to facilitate widespread, voluntary adoption of
            track and trace technologies that will generate a de facto
            electronic pedigree, including prior transaction history back
            to the original manufacturer, as a routine course of business.
            If this technology is adopted, it is expected to help fulfill
            the pedigree requirements of the PDMA and obviate and resolve
            many of the concerns that have been raised with respect to the
            final rule by ensuring that an electronic pedigree travels with
            the drug product all the time.

        On February 18th, the FDA held a press conference to announce the
    release of its report Combating Counterfeit Drugs. At the press
    conference, Secretary Thompson noted:

              We have started to see a tremendous increase in the volume
            and, more importantly, the sophistication of counterfeit and
            other unsafe drugs entering our supply (Young 2004, p. 645).

        The then-FDA Commissioner, Mark McClellan described the electronic
    track and trace technologies that would soon be able to provide a high
    level of confidence that a drug was manufactured safely and distributed
    under proper conditions. The report is an excellent one and describes
    the FDA's current strategy, with an emphasis on the track and trace
    technologies and the authentication technologies that should be in use
    by 2007.
        The plan is very well thought out, but it did not describe the
    resources that will be needed, in both the private and public sectors
    to implement the plan, nor did it deal with the issue of assuring the
    safety and effectiveness of drugs during the period before these
    standards are widely adopted.
        Section 8, Wholesale Distribution of Drugs (S. 2328) deals with
    this issue and is aligned with the FDA Strategy. It amends section
    503(c) of the FFDCA to require a pedigree in interstate commerce,
    including drugs exported from the United States and imported drugs, and
    allows FDA to require anti-counterfeiting or track and trace technology
    in lieu of pedigree. A pedigree is a statement of origin of the drug
    with information about all previous transactions. This is an important
    provision in S. 2328. Further, these actions are very appropriate in
    view of recent developments.
        In testimony before the HHS Task Force on Drug Importation,
    officials of Eli Lilly, Pfizer, and Johnson and Johnson all commented
    on the issue of counterfeit drugs, with the problem increasing in the
    United States since 1998. John Theriault, Vice President, Global
    Security, Pfizer, Inc. had appeared before the Senate Special Committee
    on Aging in July 2002, to describe the problem and the steps taken by
    Pfizer to counter the problem. He noted in his testimony to the Task
    Force on April 5, 2004:

              It is widely accepted that China is the major source of
            counterfeit pharmaceutical products marketed throughout the
            world. Before 1998, the United States and other developed
            countries were not particularly concerned about counterfeit
            pharmaceuticals. The security departments of major
            pharmaceutical companies devoted few, if any, resources to the
            problem. It was one of the widely accepted ``truths'' of
            counterfeiting that it was a problem only in China, India, and
            less developed countries.

        Between 2001 and 2003, the problem seems to have grown rapidly,
    including Europe, Asia, the Middle East, and the Americas. According to
    John Dempsey, Executive Director of Trade Relations and Brand Security
    for Ortho Biotech, the FDA has initiated 73 counterfeit drug
    investigations since October 1996, the majority in the last two and a
    half years, resulting in 44 arrests, 27 convictions, with a number of
    criminal investigations still ongoing. He added, ``The Pharmaceutical
    Security Institute's 2003 report states that there was a 60 percent
    increase in the incidence of prescription drug counterfeiting in 2003.
    They have documented 264 incidents of counterfeiting in 2003'' (p. 24
    of 38).
        Clearly the problem is a serious one throughout the world. I
    believe that the FDA's proposed system of modern protection against
    counterfeit drugs is supported by the Pharmaceutical Market Access and
    Drug Safety Act (S. 2328) and that S. 2328 would provide the necessary
    authority for the FDA to deal with the problem. Thus, rather than
    making American consumers less safe, S. 2328 would make American
    patients safer.
        Let me add a word of caution about the track and trace
    technologies. These are based on radiofrequency identification (RFID)
    tagging of products by manufacturers, wholesalers, and retailers. This
    appears to be the best approach available and there is an enormous
    literature on this topic. A web search of this issue for
    pharmaceuticals leads to more than 100,000 ``hits,'' and there are
    professional journals and trade publications solely devoted to RFID.
        I believe two issues still need to be fully addressed: (1) security
    and (2) privacy, particularly when large databases link products
    purchased by individual patients. I am not an expert in either of these
    areas, but this committee may wish to review the whole matter after it
    receives the Secretary's report on importation.
        Let me turn from drug quality, safety, and effectiveness to drug
    prices and expenditures and the forces that are compelling Congress to
    revisit the issue of the importation of prescription drugs from Canada
    and Europe.
        rising prescription drug expenditures: international comparisons
        According to the Directorate for Education, Employment, Labor, and
    Social Affairs (OECD):

              Total expenditure on pharmaceutical goods represents between
            0.7 and 2.2 percent of GDP across OECD countries, with a mean
            around 1.2 percent. Expenditure on pharmaceuticals represents
            between 8 and 29 percent of total health expenditure with a
            mean around 15.4 percent. Although relatively small this order
            of magnitude is still significant, since in most countries more
            than half of pharmaceutical expenditures is reimbursed by
            public funds (Jacobzone 2000, p. 11).

        The costs in all the countries reflect both the price of drugs and
    the use of drugs. The price is a reflection of the number of both new,
    brand name drug products and the generic products on the market and in
    use.
        In recent years, the price of prescription drugs has been rising
    rapidly. Before 1981, prescription drug prices tended to rise more
    slowly in the United States than did the consumer price index (CPI)--in
    many years, substantially more slowly. Since 1981, the CPI for
    prescription drugs has risen more rapidly, sometimes triple the CPI for
    all items (Smith 2004). Price increases in the 1990's and in the early
    21st century have been particularly striking.
        Spending for retail prescription drugs rose from $2.7 billion in
    1960 to $15 billion in 1982 to $48.2 billion in 1992 and $162.4 billion
    in 2002. The average annual rate of growth was 7.8 percent in 1980,
    11.7 percent in 1982, 12.4 percent in 1992, and 15.6 percent in 2002.
    As a percent of health spending retail drugs rose from 4.9 percent in
    1980 to 10.5 percent in 2002, and as a percent of gross domestic
    product from 0.43 percent to 1.55 percent (Smith 2004, p. 161).
        Annual increases in spending for prescription drugs in the United
    States are projected to increase to $207.9 billion in 2004, $233.6
    billion in 2005, and $519.8 billion by 2013 (Heffler 2004). It is small
    wonder that the cost of prescription drugs is of concern to patients,
    health plans, and State and Federal officials. A number of factors have
    contributed to the rapid increase in prescription drug costs throughout
    the developed world, including increased consumption of drugs, shifting
    of consumption from older, less costly drugs to newer drugs, and
    increased drug prices. Notably, the United States ranks well above the
    industrialized world on all dimensions. Our per capita consumption of
    drugs is higher, and the prices we pay for the drugs we consume are
    higher. From the point of view of the individual patient, whose goal is
    to treat illness or maintain health by following the instructions of
    his doctor, the prices of the drugs prescribed for him is the most
    important factor.
                   national policies to control expenditures
        There are two basic approaches to controlling drug expenditures:
    policies to control prices and policies to manage drug utilization
    (Morgan et al. 2003).
    Strategies for Controlling Expenditures
        In a critical review of the regulation of the market for
    pharmaceuticals, Maynard and Bloor (2003) make the point that the
    pharmaceutical market, like all markets, is regulated by government,
    private agencies (e.g., trade associations) or industry self-
    regulation. They also note that three objectives of regulation are
    often cited: (1) expenditure control, (2) quality, and (3) access.
        The construct of regulatory interventions includes three
    categories: (1) influencing patients, (2) influencing doctors, and (3)
    influencing industry. To influence patients, the emphasis has been on
    multi-tiered co-payment structures and increasing the amount of
    deductibles and premium. In addition, shifting drugs from prescription
    to over-the-counter status shifts costs to patients from third party
    payers. Also, direct-to-consumer advertising, a practice that is
    sanctioned only in the United States and New Zealand, attempts to
    directly influence patients' choice of brand name drug products.
        Policies designed to influence doctors largely have been based on
    feedback to physicians about their prescribing behavior and the costs
    of the drugs they prescribe. These policies have been ineffective when
    compared to the role played by the pharmaceutical manufacturers in
    promoting their brand name drugs, particularly their newer drugs to
    physicians. There is no doubt that drug promotion by manufacturers
    influences physician prescribing behavior, and it is seldom to
    prescribe the most cost-effective drugs.
        Formularies and generic substitution also are used, but they have
    more impact on cost than modifying physician behavior. One of the most
    detailed studies of the use of a formulary was carried out by the
    program in the Veterans Health Administration (VHA) in the United
    States. In 1995, the VHA established its own pharmacy benefit manager,
    the VHA Pharmacy Benefits Management Strategic Health Care Group that
    implemented a national formulary, including closed, open and preferred
    contracts (Huskamp et al. 2003). Although only a small number of drugs
    were included in the closed contracts the aggregate savings over the 2-
    year study period was $82.1 million for the five classes of drugs that
    were closed at some point during the study period.
        European countries and Canada use a mix of policies to control drug
    costs. Policies that focus on controlling price predominate. Policies
    to control utilization have been much less widespread. A wide variety
    of programs to limit prices have been followed, including ``reference
    pricing,'' negotiation of rates as condition for being included in
    government insurance programs, and profit limitation.
          price limitation and pharmaceutical research and development
        For the past 35 years, ever since the publication of the Final
    Report of the DHEW Task Force on Prescription Drugs, I have heard the
    argument that policies designed to impose government price controls or
    any other measure to reduce drug prices in the United States will
    reduce industry profits, which in turn will lead to a decrease in R&D
    investment by the pharmaceutical industry and a decrease in the number
    of innovative prescription drugs introduced, resulting in more disease,
    disability, and premature death. The argument has been made over and
    over, particularly by the Pharmaceutical Manufacturers Association
    (PMA) and its successor, the Pharmaceutical Research and Manufacturers
    of America (PhRMA), as well as by many economists.
        Few studies have systematically examined the growth of drug
    industry sales relative to profits and spending on R&D and drug
    promotion. Previous analyses of relative revenue allocation indicate
    that more dollars are spent on marketing, advertising, and
    administration (MAA) than on R&D. This allocation of revenue raises
    doubts about the link between drug prices and R&D spending voiced
    during the Medicare benefit debate. Studies also indicate that the
    pharmaceutical firms have among the highest returns on revenue of any
    U.S. business, with profits outpacing other research-intensive
    industries like medical devices and telecommunications (Fortune 2004).
    If profits and spending on drug promotion are increasing more rapidly
    than R&D investments, then R&D is not the only industry expenditure
    that could be reduced.
        New drug innovation also is critical to any drug pricing debate.
    While some analysts assert that constrained drug prices would limit
    innovation, recent trends suggest that slowing research productivity
    and increasing drug prices have gone together. In 2002 the FDA approved
    only 17 new molecular entities (NMEs) for U.S. sale, a fraction of the
    56 NMEs approved in 1996.
        In a recent analysis of the decline in the development of
    antimicrobial agents, Spellberg, Brass, Miller, and Edwards at the
    Division of Infectious Diseases, Harbor-UCLA Research and Education
    Institute and the David Geffen School of Medicine, UCLA and Powers from
    the Center for Drug Evaluation and Research, FDA found a significant
    decline in the number of antimicrobial agents approved by the FDA
    during the past 20 years. They concluded:

              Despite the critical need for new antimicrobial agents, the
            development of these agents is declining. Solutions encouraging
            and facilitating the development of new antimicrobial agents
            are needed.

        The development of new antimicrobial agents are needed especially
    for naturally occurring and emerging infectious diseases, including
    infections caused by agents of bioterrorism.
        How to account for slowed innovation amidst rising drug revenues?
    Industry critics say drug companies increasingly develop ``me-too''
    drugs; these incrementally modified drugs (IMDs) usually offer only
    marginal therapeutic benefits, but may be heavily promoted to increase
    market share (Angell 2000). A prior analysis of FDA approvals concluded
    that only about one-third of new drugs were truly innovative (NIHCM
    2002). The rest were ``me-too'' drugs, which contain active ingredients
    similar to those already available in marketed products. Since both
    NMEs and IMDs may offer medical or economic benefits over existing
    therapies, the number of NME approvals does not necessarily reflect the
    quality of new drug innovation. An analysis of drug innovation would
    expand current knowledge by examining the chemical novelty and the
    anticipated therapeutic advantage of new drugs and the changing rates
    of innovation relative to industry sales and profits.
        Such a study would add to the literature by examining
    pharmaceutical industry spending and innovation over time. Earlier
    analyses were limited because they examined few drug companies and
    provided figures for only 1 year (Families USA 2001, 2002). A separate
    study used Food and Drug Administration (FDA) data to evaluate
    innovation over time, but did not consider concomitant changes in R&D
    or MAA spending (NIHCM 2002). Recent research has examined R&D spending
    and innovation in the context of drug development decisions, but these
    studies used data from a trade organization and did not consider
    marketing, advertising, or administration costs (Cockburn 2004, Croghan
    2004, DeMasi 2003).
        When the prescription drug benefit was enacted in December 2003,
    the Congressional Budget Office estimated it would cost $395 billion
    over the next 10 years. The White House now projects the cost to be
    $534 billion. With such an enormous outlay of Federal dollars for
    prescription drugs, taxpayers and policymakers should have a systematic
    understanding of how manufacturers allocate revenues and what level of
    innovation is derived from R&D investments. This knowledge can inform
    future dialogue over the appropriate role of government in drug price
    negotiations.
        Such a study could contribute to evaluating the assertion that
    Federal drug price negotiation would inhibit the development of new
    therapies. It would explore the relationships among R&D investments and
    patterns of innovation and suggest evolving industry priorities
    regarding drug research, development, advertising, and marketing.
                            only part of the answer
        The Pharmaceutical Market Access and Drug Safety Act of 2004 (S.
    2328) is only part of the answer to the rapidly rising expenditures for
    prescription drugs.
        The first step that can be taken without any new legislative
    authority is the greater use of generic drugs. A recent study by
    Fischer and Avorn (2003) reported:

              Analysis of state-by-state Medicaid prescription drug
            spending in 2000 identified potential savings of $229 million
            that could be realized from greater use of generic drugs. If
            the best available prices from each State had been used,
            savings would have increased to $450 million. The majority of
            savings were concentrated in a small group of medications,
            including clozapine, alprazolan, and levothyroxine'' (p. 1051).

        The potential for generic drugs has long been recognized. The
    reasons that they are not prescribed more frequently by physicians or
    dispensed by pharmacists are many. It was not until the 1970's that
    State laws prohibiting the substitution of a generic name drug product
    that was chemically, biologically, and clinically equivalent to a
    brand-name drug product were abolished.
        While the generic name drugs have a greater market share in the
    United States than anywhere in the industrialized world, and they will
    usually be less expensive than brand name drug products imported from
    Canada or Europe, they are still underutilized. This is not a new
    problem. Fifteen years ago, Professor Helene Lipton and I discussed the
    issue in our book, Drugs and the Elderly, emphasizing the need for
    greater physician awareness and the removal of financial disincentives
    for pharmacists to dispense generics.
        One important factor has been the detailing of brand name drug
    products to physicians by the pharmaceutical companies and the recent
    dramatic increase in direct-to-consumer advertising of prescription
    drugs (expenditures now approach $3 billion per year). One approach to
    better informing physicians is the use of academic detailing (a program
    in which today's highly trained clinical pharmacists provide one-on-
    one, evidence-based, objective information on drug quality, safety,
    effectiveness, and costs to prescribing physicians). Studies reported
    by Avorn and Soumerai (1983) in the early 1980s demonstrated the
    benefits of this type of educational outreach in improving clinical
    decision-making. Many studies since then have confirmed their earlier
    observations.
        Much more needs to be done using this approach with both physicians
    and pharmacists.
        In summary, Mr. Chairman, I have carefully reviewed the
    Pharmaceutical Market Access and Drug Safety Act of 2004, and I
    encourage the committee to support it and Congress to enact it.
        I have been concerned with issues related to prescription drug
    policy for the past 39 years, including during both my years of Federal
    service and as a faculty member of the School of Medicine, UCSF.
        I believe that the bill provides strong assurances of the safety
    and quality of imported drugs. It contains appropriate provisions
    related to counterfeit drugs, and it provides patients, physicians,
    pharmacists and wholesalers the opportunity to add a tool--the
    importation of prescription drugs--to help deal with the problem of the
    rapidly rising costs of drugs. We all recognize that it is only one of
    the tools available; others include greater generic prescribing and
    dispensing and the use of academic detailing to better inform
    physicians about the many new drugs in the market place.
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        The Chairman. Dr. Vernon.

      JOHN A. VERNON, PH.D., DEPARTMENT OF FINANCE AND CENTER FOR
         HEALTHCARE AND INSURANCE STUDIES, SCHOOL OF BUSINESS,
                       UNIVERSITY OF CONNECTICUT

        Mr. Vernon. Mr. Chairman and members of the committee, I
    wish to thank you for the opportunity to testify today on the
    issue of pharmaceutical reimportation.
        My name is John Vernon and I am a professor in the
    Department of Finance and in the Center for Healthcare and
    Insurance Studies in the School of Business at the University
    of Connecticut. I have a Ph.D. in economics from City
    University of London and a Ph.D. in health policy and
    management from the Wharton School at the University of
    Pennsylvania. I also hold bachelor's and master's degrees in
    economics from Duke University and North Carolina State
    University, respectively.
        My testimony today will be quite narrow and focused. I will
    not discuss whether drugs imported from Canada or elsewhere are
    safe, nor will I discuss the potential economic benefits that
    importing drugs from price-regulated markets may produce
    through expanding access. While both of these issues deserve
    careful analysis and attention, they lie outside the domain of
    my research and expertise. Instead, this morning I will limit
    my testimony to the potential long-run economic costs
    associated with legalizing reimportation, which may be viewed
    as importing foreign price controls on to the U.S.
    pharmaceutical marketplace.
        Because informed policy debate must always weigh the
    benefits of a proposed policy against its costs, and because
    the costs associated with regulated drug prices in the United
    States will occur many years into the future, my colleagues and
    I have undertaken several research studies that attempt to
    estimate what these long-run costs would be. We calculate them
    to be quite substantial, and in the trillions of dollars.
        I would like to begin by clarifying an important point:
    reimporting patented pharmaceuticals from outside the United
    States is not a free trade issue. This is a common
    misunderstanding. The rationale for free trade is based on the
    doctrine of comparative advantage, where countries specialize
    in the production of goods and services for which they are,
    comparatively speaking, low-cost producers, and then trade
    freely with other countries doing the same thing.
        Free trade is good for the economy and it is good for
    society. But pharmaceutical prices in Canada and elsewhere are
    lower because drug prices are regulated in those markets and
    not because those countries have a comparative advantage in the
    production of pharmaceuticals.
        It is imperative to understand that the real issue at hand
    is intellectual property rights. If patented pharmaceuticals
    are imported from abroad, the U.S. patent system is
    circumvented and price controls will indirectly be imposed on
    pharmaceuticals in the United States. Please allow me to
    clarify this point.
        Once a new pharmaceutical or molecular entity has been
    discovered, researched and then developed, which typically
    takes 12 to 15 years, and all the safety, efficacy and other
    clinical data are collected and analyzed, the marginal
    manufacturing cost of a single pill is quite small. This is
    because the final product of all the R&D is essentially just
    new information and knowledge, information that has taken many
    years and hundreds of millions of dollars to obtain.
        In the absence of intellectual property rights, and the
    ability of pharmaceutical firms to price their products
    significantly above marginal manufacturing costs, no investor
    or firm would spend the time and money to discover and develop
    this information. Thus, there must be a sizable reward to
    induce these R&D activities.
        The research I will summarize today represents an attempt
    to measure the long-run costs associated with imposing foreign
    drug prices on the U.S. market. Importantly, while economic
    theory predicts it is unlikely this would occur through
    legalized reimportation alone, because this is the implicit
    intent of the policy, our analyses are based on this scenario.
        Measuring the costs associated with foregone future
    innovation is indeed a very difficult task. There are many
    variables that can affect the outcome. However, because there
    is an overwhelming tendency for public policy debate to focus
    on the short-run benefits of lower, regulated drug prices, it
    is critical that efforts also be undertaken to estimate what
    the corresponding costs would be in terms of lower levels of
    innovation in the future. Only then can the benefits be weighed
    against the costs to determine if the policy is, indeed, a good
    one.
        It is well known that the allocation of resources to
    investment activities depends on the expected costs and future
    returns of those investment activities. Pharmaceutical R&D is
    no exception. The effect of a policy permitting the large-scale
    reimportation of price-regulated pharmaceuticals from abroad,
    if successful, or if accompanied by direct price controls, will
    be to significantly diminish the expected returns associated
    with pharmaceutical R&D. Rational firm managers, acting on
    behalf of their shareholders, will divert resources away from
    pharmaceutical R&D and into other, now relatively more
    attractive investment activities.
        Pharmaceutical R&D will unambiguously decline. What is
    uncertain, however, is by how much R&D will decline. This will
    depend on two things primarily: the success and scale of the
    reimportation policy or price control scheme, and the
    sensitivity of R&D investment to expected pharmaceutical
    profitability. For the purposes of our research, we assumed
    that the policy would achieve its objective and the result
    would be pharmaceutical prices and profit margins in the United
    States that are comparable to those found outside the United
    States.
        To quantify the sensitivity of R&D to pharmaceutical prices
    and profitability in our research, we employed a variety of
    methodological techniques, including standard retrospective
    statistical analyses of industry and firm-level data and
    prospective simulation analyses.
        Interestingly enough, our findings were strikingly
    consistent across methods and studies and suggest that such a
    policy, if successful, would reduce R&D by approximately 25 to
    30 percent. For our base case analyses, we used the low-end
    figure of 25 percent. Depending on the study and method, this
    figure may reflect either a one-time drop in R&D, with no
    impact on the future growth rate of R&D investment, or a
    decline in the growth rate of R&D by between 1 and 2 percentage
    points only, with no one-time effect.
        Then, using results from recent studies on the growth rate
    of industry R&D, and the cost of capital for pharmaceutical
    R&D, we calculated the present value of foregone R&D using
    standard methods. Finally, we combined this measure with
    estimates of the productivity of pharmaceutical R&D to
    translate this policy-induced decline in R&D into human life
    years and lives lost, and then finally into dollars, using
    standard estimates of the value of a human life year.
        Our findings predict that a policy successfully reducing
    pharmaceutical prices, and profit margins, to the levels
    observed in markets where governments regulate drug prices will
    impose a cost of approximately 79 million life years, 1 million
    lives, or about $8 trillion.
        To place the latter figure into context, consider that the
    2003 GDP for the U.S. economy was roughly $11 trillion. This
    cost estimate seems reasonable when compared to the recent
    findings by University of Chicago economists Kevin Murphy and
    Robert Topel, that a permanent 10 percent reduction in
    mortality from cancer and heart disease would have a value of
    $10 trillion to Americans.
        In conclusion, I wish to emphasize that the research I have
    summarized looks at only one aspect of the policy issue: the
    long-run costs of foregone innovation. Informed policy debate
    must consider all aspects and consequences of legalized
    importation, or of regulating drug prices in the United States.
    This being said, however, the present value costs of such a
    policy to future generations appears to be quite significant.
        [The prepared statement of Mr. Vernon follows:]
                  Prepared Statement of John A. Vernon, Ph.D.
        Mr. Chairman and members of the committee, I wish to thank you for
    the opportunity to testify today on the issue of pharmaceutical
    reimportation. My name is John Vernon and I am a professor in the
    Department of Finance and in the Center for Healthcare and Insurance
    Studies in the School of Business at the University of Connecticut. I
    have a Ph.D. in economics from City University, London and a Ph.D. in
    Health Policy and Management from the Wharton School of Business at the
    University of Pennsylvania. I also hold bachelors and masters degrees
    in economics from Duke University and North Carolina State University,
    respectively.
        My testimony today will be quite narrow in focus. I will not
    discuss whether drugs imported from Canada or elsewhere are safe, nor
    will I discuss the potential economic benefits that importing drugs
    from price-regulated markets (such as Canada and the EU) may produce
    through expanded access to existing medicines. While both of these
    issues deserve careful analysis and attention, they lie outside the
    domain of my research and expertise. Instead, this morning, I will
    limit my testimony to the potential long-run economic costs of
    legalizing reimportation, which can be viewed as importing foreign
    price controls to the U.S. pharmaceutical market.
        Because informed policy debate must always weight the benefits of a
    proposed policy against its costs, and because the costs associated
    with regulated drug prices in the United States will occur many years
    into the future (through reduced levels of pharmaceutical innovation),
    my colleagues, Carmelo Giaccotto, Joseph Golec, and Rexford Santerre,
    and I have undertaken several research studies that attempt to estimate
    these long-run costs. We calculate them to be quite substantial, and in
    the trillions of dollars.
        I would like to begin by clarifying an important point: reimporting
    patented pharmaceuticals from outside the United States is not a free
    trade issue. This is a common misunderstanding. The rationale for free
    trade is based on the doctrine of comparative advantage: where
    countries specialize in the production of goods and services for which
    they are, comparatively speaking, low-cost producers, and then trade
    freely with other countries doing the same thing. Free trade is good
    for the economy and good for society. But pharmaceutical prices in
    Canada and elsewhere are lower because drug prices are regulated in
    those markets, and not because those countries have a comparative
    advantage in the production of pharmaceuticals (in the absence of price
    regulation, it is likely that prices would still be lower outside the
    United States because of lower real income levels). It is imperative to
    understand that the real issue at hand is intellectual property rights.
    If patented pharmaceuticals are imported from abroad, the U.S. patent
    system is circumvented, and price controls will be indirectly imposed
    on pharmaceuticals in the United States. Please allow me to clarify
    this point.
        Once a new pharmaceutical or molecular entity has been discovered,
    researched and then developed (which typically takes 12-15 years), and
    all the safety, efficacy, and other clinical data are collected and
    analyzed, the marginal manufacturing cost of a single pill is quite
    small. This is because the final product of all the R&D is essentially
    just new information and knowledge: information that has taken many
    years and hundreds of millions of dollars to obtain. In the absence of
    intellectual property rights, and the ability of pharmaceutical firms
    to price their products significantly above marginal manufacturing
    costs, no investor or firm would spend the time and money to discover
    and develop this information. Thus, there must be a sizable reward to
    induce these R&D activities. As is, only 3 out of 10 new products
    generate returns in excess of average R&D costs (Grabowski and Vernon,
    2000).
        This being said, however, once a product has been brought to
    market, pricing above marginal cost results in an underutilization of
    the new product (from a social welfare perspective). Clearly, then, a
    tradeoff exists between providing incentives for research and
    development (R&D), and thus innovation, and consumer access to today's
    medicines: this is the balance the U.S. patent system tries to strike.
        While there is nothing sacrosanct about the current structure of
    the U.S. patent system for pharmaceuticals, or indeed the existing rate
    (and stock) of R&D investment, what is immediately apparent is that
    allowing importation of prescription drugs from price-regulated
    markets, while possibly expanding access to medicines already
    developed, effectively circumvents the U.S. patent system and allows
    foreign governments to set the price of pharmaceuticals in the United
    States. If successful, the result will be to significantly diminish the
    incentives to invest in R&D, which in turn will reduce the future
    supply of new drugs.
        The research I will summarize today represents an attempt to
    measure the long-run costs associated with imposing foreign drug prices
    on the U.S. market. While economic theory predicts it is unlikely this
    would occur through legalized reimportation alone, because this is the
    implicit intent of the policy, our analyses are based on this scenario.
        Measuring the costs associated with forgone future innovation is
    indeed a difficult task: there are many variables that can affect the
    outcome. However, because there is an overwhelming tendency for public
    policy debate to focus on the short-run benefits of lower (regulated)
    drug prices, it is critical that efforts be undertaken to estimate what
    the corresponding costs would be in terms of lower levels of
    innovation. Only then can the benefits be weighted against the costs to
    determine if the policy is a good one. Obviously, our research focuses
    on only one component of the economics of importation and price
    regulation: the long-run costs. As such, our analyses must not be
    viewed as a complete cost-benefit analysis.
        It is well known that the allocation of resources to investment
    activities depends on the expected costs and future returns of those
    investment activities. Pharmaceutical R&D is no exception. The effect
    of a policy permitting the large-scale reimportation of price-regulated
    pharmaceuticals from abroad, if successful, or if accompanied by direct
    price controls, will be to significantly reduce the expected returns
    associated with pharmaceutical R&D. Rational firm managers, acting on
    behalf of their shareholders, will divert resources away from
    pharmaceutical R&D and into other, now relatively more attractive,
    investment activities. Pharmaceutical R&D will decline. What is
    uncertain, however, is by how much R&D will decline. This will depend
    on two things: (1) the ``success'' and scale of the reimportation
    policy, or price control scheme, and (2) the sensitivity of R&D
    investment to expected pharmaceutical profitability. For the purposes
    of our research we assumed that the policy would achieve its objective,
    and the result would be pharmaceutical prices (profit margins) in the
    U.S. that are comparable to those found outside the U.S.
        To quantify the sensitivity of R&D to pharmaceutical prices and
    profitability in our research, we employed a variety of methodological
    techniques, including standard retrospective statistical analyses of
    industry and firm-level data and prospective simulation analyses
    (Vernon, 2003, 2004; Giaccotto, Santerre and Vernon, 2004).
    Interestingly enough, our findings were strikingly consistent across
    methods and studies, and suggest that such a policy, if successful,
    would reduce R&D by approximately 25 to 30 percent. For our base case
    analyses we used the low-end figure of 25 percent (Golec and Vernon,
    2004). Depending on the study and method, this figure may reflect
    either a one-time drop in R&D, with no impact on the future growth rate
    of R&D investment, or a decline in the growth rate of R&D by between 1-
    2 percentage points only, with no one-time effect. The two effects
    generate the same estimate. It seems likely, however, that both effects
    would occur, at least to some degree, but in estimating the long-run
    costs of forgone innovation, we adopted a conservative approach, and
    assumed a single effect (Golec & Vernon, 2004).
        Then, using results from recent studies on the growth rate of
    industry R&D (Scherer, 2001) and the cost of capital for pharmaceutical
    R&D (DiMasi, Hansen, and Grabowski, 2003; Myers and Shyam-Sunder, 1996)
    we calculated the present value of forgone R&D using standard methods.
    Finally, we combined this measure with estimates of the productivity of
    pharmaceutical R&D (Lichtenberg, 2002, 2003) to translate this policy-
    induced decline in R&D into human life years and lives lost, and then
    into dollars using standard estimates of the value of a human life year
    (Cutler and McClellan, 2001). Our findings predict that a policy
    successfully reducing pharmaceutical prices (and profit margins) to the
    levels observed in markets where governments regulate drug prices will
    impose a cost of approximately 79 million life years, one million
    lives, or about $8 trillion (Golec and Vernon, 2004).
        To place the later figure into context, consider that the 2003 GDP
    for the U.S. economy was roughly $11 trillion. This cost estimate seems
    reasonable when compared to the recent findings by University of
    Chicago economists, Kevin Murphy and Robert Topel, that a permanent 10
    percent reduction in mortality from cancer and heart disease would have
    a value of $10 trillion dollars to Americans.
        In conclusion, I wish to emphasize that the research I have
    summarized looks at only one aspect of the policy issue: the long run
    costs of forgone innovation. Informed policy debate must consider all
    aspects and consequences of legalizing importation, or of regulating
    drug prices in the United States. This being said, however, the present
    value costs of such a policy to future generations appear to be quite
    significant.
                                   References
        Cutler DM and McClellan M (2001) Is technological change in
    medicine worth it? Health Affairs. Sept/Oct; pp. 11-29
        DiMasi JA, Hansen RW, Grabowski HG (2003) The price of innovation:
    new estimates of drug development costs. J Health Economics. 22:151-
    185.
        Giaccotto C, Santerre RE and Vernon, JA (2003) Explaining
    Pharmaceutical R&D Growth Rates at the Industry Level: New Insights and
    Perspectives. AEI-Brookings Joint Center Publication.
        Golec JH and Vernon JA (2004) What's at stake in pharmaceutical
    reimportation: the costs in terms of lost life years and lives.
    Department of Finance Working Paper, University of Connecticut.
        Golec JH and Vernon JA (2004) Pharmaceutical reimportation: the
    European experience: what the United States can expect. Managed Care in
    press.
        Grabowski HG and Vernon JM (2000) The distribution of sales
    revenues from pharmaceutical innovation. Pharmacoeconomics. 18 Suppl.
    1: 21-32.
        Lichtenberg FR (2002) Sources of U.S. longevity increase, 1960-
    1997. National Bureau of Economic Research, working paper 8755,
    Cambridge, MA.
        Lichtenberg FR (2003) The impact of new drug launches on longevity:
    evidence from longitudinal, disease-level data from 52 countries, 1982-
    2001. National Bureau of Economic Research, working paper 9754,
    Cambridge, MA.
        Murphy KM and Topel RH (2003) The economic value of medical
    research; in Measuring the gains from medical research; edited by Kevin
    M. Murphy and Robert H. Topel, The University of Chicago Press.
        Myers SC and Shyam-Sunder L (1996) Cost of capital estimates for
    pharmaceutical research and development; in R. M. Helms, ed.,
    Competitive Strategies in the Pharmaceutical Industry, American
    Enterprise Institute, Washington, DC.
        Scherer FM (2001) The link between gross profitability and
    pharmaceutical R&D spending. Health Affairs. Sept./Oct.; 20:216-220.
        Vernon JA (2003) ``Simulating the impact of price regulation on
    pharmaceutical innovation.'' Pharmaceutical Development and Regulation.
    1(1): 55-65.
        Vernon JA (2004) Examining the link between price regulation, re-
    importation, and pharmaceutical R&D investment. Health Economics. 2004.
    In press.

        The Chairman. Thank you very much, Dr. Vernon.
        We will now hear from Mr. Malone, and Mrs. Malone, if she
    wishes to comment. Obviously, you have experienced an
    incredible tragedy and the sympathy of this committee goes out
    to you. We very much appreciate your being willing to come and
    tell us your story relative to your son, Jim.

      TIM AND MARGARET MALONE, LIVERMORE, CALIFORNIA, PARENTS OF
                        JAMES MALONE [DECEASED]

        Mr. Malone. Thank you, Senator. We are not professional
    speakers, but I would like to thank you and the committee for
    giving us this opportunity to tell our story and to spread the
    word and, hopefully, to save some lives.
        I am pleased to be here today, but also very sad. I want to
    tell you about our son, James, and how he died, because he
    ordered prescription drugs over the Internet.
        Our son James was a bright 24-year-old, working part time,
    and just finishing his 2-year degree at Los Positas College in
    Livermore, CA. James lived at home with us, his parents, in
    Livermore, and planned to move to Sacramento to attend
    California State University in September of this year.
        During the last few months before his death, James was
    understandably under a lot of stress, particularly for a shy
    person, with final exams at school, his work, and making plans
    to move away to attend a 4-year college. He also worked out
    regularly at the gym. We believe this is why James was ordering
    drugs, primarily muscle relaxants and anti-anxiety drugs, on
    the Internet.
        What we didn't know at the time is there is a tragic
    problem with these Internet medication orders. Almost any drug
    manufactured by pharmaceutical companies, even controlled
    substances, are available via Internet websites. All that is
    needed is Internet access and a credit card.
        When James searched on the Internet for medical information
    on how to relieve back pain and muscle spasms, and help with
    his anxiety disorder, he found not only was there no
    prescriptions required, but there was no evaluation or
    consultation on the kinds of medications, the strength, form,
    or dosage taken, or cautions about the interactions with other
    drugs. We believe this is what killed our son. He mixed
    medications, fell asleep, and stopped breathing.
        Some of the drugs that James received by UPS from Internet
    orders, with return addresses in India and Pakistan, were
    Darvacet, Diazepam--which is valium--codeine, soma, a muscle
    relaxant, and others.
        As we struggled to make sense of our son's death, and tried
    to understand how this could happen, we tried to determine the
    actual source of these drugs, how and where they were
    manufactured, and how they are distributed. James receives
    shipments via UPS from India and Pakistan, with no
    documentation or dosing instructions. The sparse writing on the
    blister packs holding the pills, the individual wrapping, was
    in a foreign language and alphabet, probably Farsi. However,
    some of the shipments of drugs also contained the name brand of
    well-known pharmaceutical companies.
        We also discovered the manner in which these credit card
    transactions were processed. Like most Internet orders, only a
    credit card number and expiration date were required. However,
    for these controlled substance drug orders, the websites
    required purchasers to go through a third party company to
    process the order. This made it almost impossible for terrified
    parents like ourselves to find the actual distributors of these
    drugs.
        Mrs. Malone. Mr. Chairman and Senators, since James' death,
    we have continued to receive packages of dangerous, high
    potency drugs. These were apparently shipped after he died. We
    continue to receive 10, 20, or 30 offers a day on his computer,
    on my husband's computer, and on my own, for as wide variety of
    controlled medications, even though we have tried to contact
    the apparent sources and have requested that they stop sending
    solicitations.
        Not only are these e-mails still coming, but the
    sophisticated spam blockers can't stop it, since the senders
    use a variety of techniques, such as intentionally misspelling
    words, leaving spaces in the middle of words, and using special
    characters to make sure the e-mail gets through.
        We are concerned about the source of these drugs, both from
    a quality control perspective, and are they what the packaging
    says they are, as well as the potential for mislabeling,
    purposefully tampering, or outright fraudulence, such as
    aspirin marketed as cancer medication or cholesterol lowering
    pills.
        And no longer do addicts need to drive to a certain part of
    town to obtain drugs from the friendly local drug dealer on the
    corner. People with addictions can now order from the comfort
    of their own homes and have it delivered overnight by a
    reputable delivery service, in a plain brown wrapper. The
    neighbors need never know.
        Our goal in speaking out publicly about our son's death is
    to help others realize the deadly results that can happen, and
    do happen, from the seemingly innocuous practice of ordering
    medications on the Internet. This could happen to your mother
    or grandmother; it could happen to your daughter or son, or
    your best friend, who is trying to save a few dollars on
    medication or avoid another costly trip to the doctor's office
    to obtain a prescription with instructions on how to use it
    safely.
        We are also concerned about the Internet drug companies, or
    their ever-changing distributors, who are in the market solely
    to make money. Making money in and of itself is not a bad
    thing, but it becomes questionable when it is earned at the
    expense of our loved ones' lives. To determine the source of
    these deadly drugs, we would ask that there be accountability,
    that laws be enacted to allow investigators to follow the money
    trail and to ascertain who is raking in these profits.
        We are asking that legislation be enacted to regulate the
    ability of companies to sell medications indiscriminately,
    without verification of age, medical condition, or
    prescription. We are asking that legislation be enacted so that
    when medications are purchased over the Internet, complete
    information is provided about strength, dosage, and especially
    deadly drug interactions.
        Finally, we are asking that legislation be enacted so that
    companies manufacturing these drugs are clearly identified, and
    the law should require monitoring of these medications for
    purity, quality, and truth in packaging. We would like to see
    serious fines and jail time for those circumventing these laws,
    using phony names, and overseas companies and accounts, and
    third-party payment requirements to mask who is profiting from
    these sales.
        Mr. Malone. For James, he honestly and naively thought that
    he could take care of his own medical needs by doing the
    research on the net, that he could trust the information
    provided him by these medical sites. You could put a key word
    into AOL under ``pain'' and get solicitations on 20 percent off
    morphine this month. I have examples of that.
        Buying the recommended drugs to treat his ailments, James
    assumed that what was presented on these official-looking
    websites was true and accurate information, but that if there
    were no dosage and interaction information on the medications,
    that they must be safe to take. As we now know, he was dead
    wrong.
        Thank you for your time. If you have any questions or if
    anyone would like to follow up later, I would be glad to make
    myself available.
        The Chairman. Thank you very much, Mr. and Mrs. Malone. It
    was very courageous of you to come forward. You have done a
    tremendous public service, considering the trauma that you have
    been through, well beyond the call of citizenship. We
    appreciate it.
        Mrs. Malone. Thank you.
        The Chairman. Following up on your thoughts there on what
    type of legislation we should pass, almost all of what you have
    outlined I would have no problem with. I guess the question is,
    if the product was manufactured in India and transshipped
    through Canada and the credit card company was in Belize, as we
    heard earlier, we don't have much of a legislative reach.
        Were any of the products that your son took manufactured in
    the United States, to your knowledge?
        Mr. Malone. Not that we have been able to determine yet. We
    were able to trace the distributor for virtually all of the
    drugs, even though he went to different websites, to one
    distributor in Florida. So if we could focus enforcement, that
    might be an area to look at, because we have more control over
    U.S. companies.
        But again, some of the packages that we saw in his room
    after he died had names of major pharmaceutical companies on
    them. I would think maybe that would be an avenue to----
        The Chairman. Have you determined whether those were
    counterfeited names or whether they were real names, or haven't
    you been able to determine that?
        Mr. Malone. We are pursuing an investigation of this, but
    it appears from what we have been able to determine so far that
    they seem to be legitimate.
        The Chairman. Obviously, you have put a lot of time into
    this, and I certainly understand your commitment to do that, in
    your investigating did you find that these products had been
    transshipped through other countries to our country? Do you
    know if any of them came through Canada?
        Mr. Malone. I don't know for sure, but in one particular
    case some valium that we received in the original factory
    packaging showed it was manufactured in Pakistan by a major
    pharmaceutical company, and then transshipped--I guess that
    would be the term--handled through a third party, a distributor
    based in Florida. Then they would control the Internet website
    and manage the orders.
        The Chairman. This Internet website, did it have an access
    number that allowed you to actually physically talk to someone?
        Mrs. Malone. Sir, we've got quite a bit of backup
    information available. We have been working through Joseph
    Califano, Jr., with a detective agency in New York City. They
    have come out to our home, spoken with us, and done quite a bit
    of investigative research. We can make the information
    available to you or others that would be of interest.
        The Chairman. That would be great.
        What is your recommendation to people who decide that they
    want to try to self-prescribe, or just want to go on the
    Internet, from your experience?
        Mrs. Malone. My first recommendation would be that there
    would be a prescription required if it's a controlled
    substance, that it not be just available like you're ordering a
    pair of shoes.
        Mr. Malone. I think the danger here that we are talking
    about is not necessarily product quality control, quality
    assurance, because these drugs may very well be exactly what
    they say they are, but it is the ease with which you can get
    controlled substances just with a credit card and Internet
    access. I'm not sure what would prevent that, but I think that
    needs to be taken into consideration.
        I'm in high tech. I am reluctant to regulate the Internet
    or to tax it, that kind of thing. But something has to be done
    because people believe, the common citizen believes that they
    are protected, that there are Federal laws that protect them
    from buying these prescription drugs, even if they are doing it
    over the Internet. And they're not.
        The Chairman. You're right. That is what we're going to try
    to address. We thank you for taking the time to come and
    present your very unfortunate situation. It is obviously
    educational and will be valuable as we develop legislation.
        Dr. Vernon, your conclusion of an obviously in-depth
    analysis of the trade offs between lower prices, which are
    price controlled basically, and research was that that would
    have about an $8 trillion cost and it would affect about a
    million people. Is that an annual number or is that a 10-year
    number?
        Mr. Vernon. Actually, that is a present value. It takes
    into account the entire future and discounts back towards the
    present, to today, and puts it in terms of today's dollars.
        I would point out that that is what we consider to be our
    most reasonable point estimate, that there is a very wide range
    of estimates that we came up with, depending on the assumptions
    employed.
        The Chairman. You characterized reimportation as
    essentially reimporting foreign price controls of an American
    made product, is that right?
        Mr. Vernon. That is correct.
        The Chairman. And you are assuming that a 10-percent price
    control on a foreign product would cause--on an American made
    product, whether the price control was put in place in Canada
    or whether we actually put in price controls--that a 10 percent
    reduction in the cost of that product was what you were using
    as your basis?
        Mr. Vernon. The basis was what manufacturers would
    experience would be profitability similar to what they generate
    off their foreign sales in foreign countries.
        The Chairman. So I guess the bottom line of my question is,
    what is the price-control number that you are assuming for
    American-made products which are now price-controlled, which
    would lead to a significant reduction in research and the
    effect on life?
        Mr. Vernon. We actually don't have a specific percentage
    reduction in the average price of pharmaceuticals in the United
    States. Our analysis is just based on it being similar and very
    comparable to the prices found outside the United States.
        The Chairman. In other words, if you went to a price-
    control system in the United States, similar to the price-
    control system in Canada, this would cause a loss of $8
    trillion and would affect a million lives?
        Mr. Vernon. That was the basis for our analysis, that is
    correct, Senator.
        The Chairman. I have been rejoined by Senator Kennedy. I
    may have to leave here in a few minutes, so if you could----
        Senator Kennedy. Are you going to leave me in charge, Mr.
    Chairman? I remember when--
        [Laughter.]
        Senator Kennedy. Thank you. I apologize to the witnesses.
    We were dealing with the defense authorization bill and I
    needed to be on the floor for a few moments. But I have had the
    opportunity to review the testimony prior to the hearing.
        Dr. Lee, you heard the testimony from Mr. Taylor from the
    FDA on our first panel. Don't the problems with importation
    happening now make a compelling case that we need to provide a
    safe way for individuals to import prescription drugs? For
    example, S. 2328 provides a safe way for individuals to get the
    drugs from Canada and would identify who the safe suppliers are
    and assure that a physician has prescribed the medicine, and
    that it is a truly FDA-approved product.
        So isn't S. 2328 the obvious solution to this kind of a
    problem?
        Dr. Lee. Well, I would certainly agree with that in terms
    of the authority. Certainly, as people have pointed out
    earlier, the resources necessary to implement must be provided,
    and I think that is a critical element.
        It is clear that the FDA is currently not being given
    adequate resources to deal with the counterfeiting issue, so
    that I think we have to look at that. But I would say that,
    absolutely, that is absolutely correct.
        Senator Kennedy. The point I think we have to make is that,
    even though we have the best system around, you are still
    seeing and hearing from the witnesses the challenges that they
    are facing. I think we address a good part of those challenges
    in the legislation.
        Also, you were the Assistant Secretary for Health twice,
    and in that capacity you have had the responsibility for
    supervising the activities at FDA. You have also been
    chancellor of one of the Nation's great medical research
    universities and are recognized as an expert on public health.
        I want to underline that part of your testimony that says
    our legislation would assure the safe importation of
    prescription drugs, and a similar statement I have entered into
    the record from David Kessler, the former Commissioner of the
    FDA. I recognize that there may need to be some fine tuning of
    the legislation, but don't you agree that the many safeguards
    in this bill should really put to rest those who claim to be
    concerned that this legislation will expose Americans to unsafe
    and counterfeit drugs?
        Dr. Lee. I agree with that. I do detail that in greater
    detail in my testimony.
        Senator Kennedy [presiding]. Dr. Vernon, you have had some
    scary sounding estimates for the number of lives that could be
    lost over the next 50 years if drug industry profits go down.
        Just yesterday we read in the Wall Street Journal about the
    impact of relatively small increases in copayments, causing
    patients to cut back on drugs that their doctors prescribe.
        Have you calculated the loss of life that we are
    experiencing every day because patients are unable to afford
    needed drugs?
        Mr. Vernon. No, I have not, but certainly those are
    important costs that need to be considered.
        Senator Kennedy. You're absolutely right, because I see
    earlier that a number of our colleagues pointed out the kinds
    of situations that I have seen in my own State. I still have a
    searing memory of having a hearing in Quincy, MA, where both
    the husband and wife needed the same drug, but they had limited
    resources and agreed they would get the full prescription as
    long as they could, and then they would divide it between
    themselves, hopefully knowing they couldn't survive without it,
    and hoping that they would pass it together. It was one of the
    memorable kinds of meetings that blazed in my soul, and that
    sort of choice is being made every single day. I know others
    have spoken eloquently of it and I think it is a matter of
    importance and we should certainly think about that, too.
        Dr. Lee, in your reaction to Dr. Vernon's paper, do you
    think, if drug prices went down a bit, we would see reductions
    in research and development and the invention of needed drugs?
        I have a chart over here. It shows a number of things. One,
    it shows profitability, but it also shows the investment in
    research. This is according to Fortune 500, the top six
    companies per industry. Hold it up, please.
        This is the drug companies smaller share profits in R&D
    than other research-based industries. Pharmaceuticals, 68
    percent; chemicals, 80; semiconductors, 97; software, 167; and
    203 in aerospace and defense. This is according to Fortune 500,
    the annual 10(k) reports.
        I know it makes a difference, obviously, in what you're
    dealing with in terms of the gross, but if you are looking at
    the gross, you also see the pharmaceutical industry is one of
    the most profitable industries. I have another chart, but let's
    accept that to be the case.
        You talk about the $24 billion, approximately--it has
    always been very difficult to get that figure. But it does seem
    they spend a lot in terms of the advertising and other kinds of
    payments in the industry. You have the basic rationale that the
    pharmaceutical companies are not going to be successful unless
    they innovate, unless they research. There is no reason for
    them to exist.
        So if they are going to cut way back in their research and
    not be able to produce new products, they are going to go out
    of business, effectively. They are going to have to make a
    judgment on whether they are going to continue the research on
    that or have more advertising, or more profits, for their
    industry. Because if they don't research, they are going to go
    out of business.
        It seems to me that it is logical to think they would find
    other ways of trying to save rather than cutting back on the
    research. But that has been something mentioned many, many
    times.
        Dr. Lee. Senator Kennedy, if I may just add a word, much of
    the research money by the pharmaceutical companies goes for
    these ``me too'' products, which are not new molecular
    entities.
        Second, they fund what many of us would call marketing as
    opposed to true clinical trials. They are called clinical
    trials, but in fact, they are efforts to market and those come
    under the research. So when you look at those expenditures, you
    have to look critically at how much money really goes for new
    molecular entities that are innovative, that advance our
    knowledge and advance therapy.
        I mentioned in my testimony the paper by the group at UCLA
    Harbor Hospital, about the lack of new antibacterial drugs. You
    know, there are virtually none coming on. There are a number
    that have come on with HIV drugs in the last 4 or 5 years,
    partly because NIH's investment spawned a great deal of that
    drug development, and a market for an HIV drug people take for
    the rest of their life. For an antibacterial drug, it is only a
    short time and they don't see the profit return, so they are
    making decisions that are purely profit-related and don't
    necessarily serve the public interest.
        So I think we have to look in greater depth than is
    possible--I mean, Dr. Vernon did a very excellent economic
    analysis, but that is only part of the story. You have to look
    at what data was available to them, and they didn't look at the
    marketing expenses, they didn't look at the promotional
    expenses, which in fact, exceed those for research and
    development.
        Senator Kennedy. I can remember when we had hearings on the
    industry at another time the lack of interest and investment in
    drug resistant bacteria. This was something that was very
    evident. If you are looking over the general challenge that we
    are facing, in terms of health care--I mean, there are many,
    many different challenges, but certainly in the pharmaceutical
    area, this is key. I think the point you make about the ``me
    too'' drugs is absolutely correct. So this is something that is
    important to mention.
        Let me just mention to Mr. and Mrs. Malone, I thank you for
    coming and appearing. It is always difficult to talk about
    these matters, but we thank you for your willingness to share.
    I think you are obviously motivated that we try and get this
    right, and that is why you are here. I think it is a great
    tribute to you both for being willing to go over this sad
    ground again. But it is enormously helpful. Obviously, the best
    way we can thank you is by trying to get it right.
        Several of my colleagues and I have introduced a bill to
    allow drug importation, but the bill will not allow the
    importation of controlled substances. It will give Customs and
    FDA better authority to stop the illegally imported drugs at
    the border. It will allow the Government to stop credit card
    payments to the illegal offshore Internet and mail order
    pharmacies. It requires individual imports of drugs to come
    from licensed Canadian pharmacies that FDA regularly inspects,
    and the drugs are dispensed with a prescription from the
    patient's attending physician.
        So I understand these are not all the proposals that you
    made in your testimony, but they are certainly some of them.
        Mr. Malone. Senator Kennedy, just one comment I could make
    on the prescription. That is key.
        For example, through my health care I can get mail order
    drugs. I have to take my original prescription, mail that in,
    and then they contact my doctor and verify that it really is a
    prescription from him. There is that double check, that
    confirmation. That would solve a lot of issues, that model that
    insurance companies are using today.
        Senator Kennedy. That is very, very helpful.
        As we mentioned, as other sponsors here on the committee
    have said, we are going to exhaust every avenue to ensure
    protection. We are concerned about the challenges that are out
    there now, which are exposing our population. We will work with
    the agency, we will work with others who are skilled
    practitioners, knowledgeable individuals, that can be helpful
    to us.
        I was here when we passed the Medicare bill. I was here
    when it was defeated in 1964, and then 8 months later we passed
    it in 1965. Only 3 percent of all private insurance had
    pharmaceuticals at that time, so we didn't include it at that
    time. We had the physicians' fees and hospitalizations. We
    didn't have pharmaceuticals. That is the third leg on the
    stool. We committed to our people that we were going to deal
    with the health care issues, and that is as essential to many
    of our seniors as their hospital visits or visits to their
    doctors, and in many respects, more so.
        Every day that we fail, we violate that pledge and that
    commitment. We have an opportunity to do something that can
    make a difference. We at least partially missed it, as I have
    said repeatedly on our Medicare bill. But we have an
    opportunity to do something with this legislation. We have to
    do it carefully and we have to make sure we have the resources
    necessary for the FDA to do it, and we have to clear up the
    existing kinds of challenges. But we are strongly committed to
    that and we welcome those that have been listening to our
    hearing, if they have ideas and suggestions, we will certainly
    look forward to hearing them.
        Finally, I would just say that we are going to move ahead
    with this legislation. We have met with the Majority Leader. I
    have talked to the chairman, whose own legislation is going in.
    We want to work through the committee, and it is our desire to
    certainly do that. But we are running out of time in terms of
    this session, and this need is out there.
        We have indicated to our leader that we are going to deal
    with this issue in the near future, because there is an
    extraordinary need, and every day that goes by without it, we
    are putting a health risk on our fellow citizens that we ought
    to be able to address. I think we can and have every intention
    to do so.
        There being no further business, the committee will stand
    in recess, subject to the call of the chair.
        [Additional material follows.]

                              ADDITIONAL MATERIAL

         Response to Questions of Senator Gregg by Philip R. Lee, M.D.
                                   Stanford University,
                                                         July 19, 2004.
    Hon. Judd Gregg, Chairman,
    Committee on Health, Education, Labor, and Pensions
    U.S. Senate,
    Washington, DC 20510-6300.

        Dear Mr. Chairman: I am pleased to respond to your letter of May
    26th (not received until July 7th) and respond to your questions as
    well as those of Senators Enzi and Jeffords. My replies are attached.

        Question 1. You stated that, under S. 2328, importable drugs must
    be FDA approved and manufactured in an FDA-inspected plant. It is my
    understanding, however, that the bill would permit the importation of
    drugs with different active ingredients, ``related'' active
    ingredients, or different active ingredients [section 4.]; and allows
    FDA to waive virtually any approval condition for a personally imported
    drug, including whether the drug is FDA-approved or manufactured in an
    FDA-approved facility [section 5].
        Answer 1. Mr. Chairman, it is my understanding of S. 2328 that a
    prescription drug cannot be imported by registered importers (e.g.,
    pharmacies, groups of pharmacies, wholesalers) without the submission
    of an application to the FDA by the manufacturers and the FDA approving
    the drug for import. Section 804(g)(2)(C) requires that the
    manufacturer of the drug that may be imported to submit to the FDA a
    notice of any differences in the drug from conditions of approval of
    the U.S. label drug (such as a different formulation or different
    manufacturing plant) or that there are no differences. The FDA must
    then review those differences as if they were manufacturing changes to
    the U.S. label drug under section 506A of the Federal Food, Drug, and
    Cosmetic Act. Some of these changes require pre-approval or allow the
    FDA to require preapproval. Others may be implemented pending approval.
    Still others do not require approval. The FDA may also inspect the
    manufacturing plant if that is required. The drug to be imported may be
    imported only if the differences that would require preapproval are
    approved by the FDA, and importation is stopped if the difference is
    not approved.
        S. 2328 also contemplates importation of drugs that differ from a
    U.S. label drug because of small variations in active ingredient, or
    because of differences in dose, strength, or route of administration.
    It facilitates importation of such drugs in section 804(g)(2)(G), which
    requires manufacturers to submit applications to FDA under section 505
    of the Federal Food, Drug, and Cosmetic Act. Importation could occur
    only if FDA were to approve such an application, so the standard of
    FDA-
    approval is maintained.

        Question 2. As you know, FDA's enforcement activities under S. 2328
    would be funded by means of a user fee that would be capped at 1
    percent of the total value of drugs imported annually into the United
    States. As such, the current $1 billion worth of drugs imported
    annually into the United States from Canada would generate a mere $10
    million in fees.
        Answer 2. I believe the user fees that would be authorized under S.
    2328 would be adequate to cover the costs of the necessary inspections,
    the review process, and the development of regulations necessary to
    implement the Act. There are, for example, only 30 or 40 pharmacies in
    Canada that would likely export to the United States. This number of
    pharmacies, as well as wholesalers, plants in Canada could certainly be
    inspected with resources made available. When the imports are permitted
    from Europe, it is likely that the additional costs could be covered by
    the user fees imposed, especially if the number of domestic importers
    is a manageable number.

        Question 3. S. 2328 does not require that imported drugs be kept
    separate from other drugs, or to disclose to the consumer whether or
    not a prescription drug is imported.
        Answer 3. While current policy does not require that consumers be
    informed about the place of manufacture of their prescription drugs
    (whether imported by the manufacturer or produced domestically), I
    think this is a good idea. I believe the patient's ``right to know'' is
    a good one and should be applied to drugs imported by manufacturers,
    pharmacies, or individuals.
                Sincerely,
                                           Philip R. Lee, M.D.,
            Consulting Professor of Human Biology, Stanford University,
      Professor of Social Medicine (Emeritus), Department of Medicine,
                                                                    and
        Senior Advisor, Institute for Health Policy Studies, School of
                                                        Medicine, UCSF.
                                   __________
               Questions of Senator Gregg to John M. Taylor, J.D.
        Question 1. Is it fair to note a shift in tone in the agency's
    position on importation--from outright opposed to ``we're willing to
    work with Congress to determine what resources and authorities could be
    provided to ensure that importation delivers only safe and affordable
    drugs to Americans?''

        Question 2. If importation is automatically permitted from
    countries throughout Europe and the South Pacific, is 1 year sufficient
    time for the FDA to prepare?
                      specific to s. 2328 (kennedy-dorgan)
        Question 1. Can you identify the FDA's chief concerns with the
    bill?

        Question 2. What critical safety features are missing from the
    bill?

        Question 3. How much will the bill cost to implement?
                                   __________
              Questions of Senator Gregg to John A. Vernon, Ph.D.
        Question 1. CBO predicts that overall cost savings to U.S.
    consumers would produce, at most, a modest reduction in prescription
    drug spending--roughly 1 percent over 10 years. Do you agree?

        Question 2. Under an importation program, what cost-savings would
    be available to individual consumers? What portion of potential savings
    would go to the middle-men who import?

        Question 3. In your research model, you assume that the impact of
    large-scale importation will result in U.S. drug prices equal to the
    lowest prices in the world, adversely impacting pharmaceutical R&D
    spending. Based upon your research, what do you believe the impact on
    pharmaceutical R&D would be if importation accounted for 5 percent-10
    percent of total U.S. drug sales?
                                   __________
       Questions of Senator Frist to John M. Taylor, J.D. and William K.
                                    Hubbard
                                                          May 25, 2004.
    John Taylor,
    Associate Commissioner for Regulatory Affairs,
    Food and Drug Administration,
    Rockville, Maryland 20857.

    William K. Hubbard,
    Associate Commissioner for Policy and Planning,
    Food and Drug Administration,
    Rockville, Maryland 20857.
        Dear Mr. Taylor and Mr. Hubbard: Thank you for participating in the
    prescription drug importation hearing before the Senate Health,
    Education, Labor and Pensions (HELP) Committee last week. While I
    regret being unable to attend, I look forward to reviewing your
    testimony and your response to questions posed by the committee
    members.
        Your testimony will prove extremely valuable as Congress continues
    to consider efforts to provide Americans with safe, effective,
    affordable prescription drugs. Because I was unable to attend the
    hearing, I have submitted the following questions for the record and
    would greatly appreciate your timely response to the following:

        Question 1. In reviewing S. 2328, the legislation introduced by
    Senator Dorgan and others, I understand that the FDA must permit
    importation from Canada within 90 days following the date of enactment
    of the act. Do you believe that the FDA is ready to meet such a time
    frame for issuing regulations? What are the differences with respect to
    enforcing this law for food importation as compared to prescription
    drug importation?
        The bioterrorism law Congress passed in 2001 provided FDA 18 months
    to issue regulations for just the registration of food exporters alone.
    The law also provided $100 million in the first year in additional
    authorized funding for FDA to assess the threats posed by efforts to
    intentionally adulterate food--and a food importing infrastructure was
    already in place.
        Do you believe that S. 2328 provides FDA with the time frame and
    resources to ensure the safety of imported medicines? Do you believe
    that we should also consider extending resources to U.S. Customs and
    the U.S. Department of Homeland Security?

        Question 2. In at least one of the bills before the committee, as I
    read it, the FDA must automatically permit importation from 19
    additional countries beyond Canada 1 year following the date of
    enactment.
        Does it concern you that this expansion to these additional
    countries would be automatic, and that it does not require prior review
    by the FDA as to (1) the impact of expanding the importation system
    beyond Canada and (2) whether importation from a particular country
    poses a public health risk?
        Also, it is my understanding that the regulatory authorities in
    some of these countries may not be nearly as rigorous in ensuring
    safety and efficacy as those used by the FDA. Can you expand on this?

        Question 3. Currently, FDA-approved generic drugs must meet a
    bioequivalency standard. As you have reviewed S. 2328, do you view the
    standards contained in that legislation as requiring imported drugs to
    meet a similar bioequivalency standard? The language of that bill seems
    to say that drugs must meet pharmaceutically equivalent standards, but
    not necessarily therapeutically equivalent standards. Is this an
    accurate reading?

        Question 4. Last year the United States learned that a cow in
    Canada exhibited signs of bovine spongiform encephalopathy (BSE),
    commonly referred to as ``Mad Cow'' disease. In order to protect
    American consumers, the United States banned all beef imports from
    Canada. While the Secretary of the Department of Agriculture, Ann M.
    Veneman, believed the risk to Americans was low, the government
    nevertheless had the authority to take this extra precaution.
        Would you agree that the FDA must possess similar authority with
    respect to prescription drugs (i.e., the authority to shut off
    importation from a particular country in the event of a public health
    risk)? Do you feel that the proposals before the committee provide such
    authority and is it sufficient?
        Furthermore, I noticed on the FDA's website a list of recalls,
    market withdrawls, and safety alerts. What is FDA's current recall
    authority? Under S. 2328, would the FDA have recall authority and would
    the FDA be able to differentiate between a foreign and U.S.-approved
    product? How important is it for us to include recall authority, or
    some type of equivalent authority, in any legislation?

        Question 5. Parenteral or ``injectable'' medications generally have
    very specific shipping and handling requirements such as refrigeration
    to ensure the product's safety and efficacy. Parenteral medications can
    be used to treat chronic and acute diseases such as diabetes.
        Past legislation has recognized the inherent danger in allowing
    importation of products of this fragile nature, due to the high risk of
    improper storage or shipping, and disallowed their import into the U.S.
    In fact, there are reports of adverse events that have occurred as a
    result of improperly shipped parenterals from Canada. When considering
    importation legislation, should we consider any special limits on these
    types of medications? Are there other drugs that are particularly
    sensitive to conditions such as temperature whereby the FDA should have
    additional authority?

        Question 6. Finally, all new drugs currently undergo a rigorous FDA
    approval and regulatory process. Can you briefly describe this process
    and how those standards may differ in comparison to the approval and
    distribution systems found in EU member countries such as Greece and
    Portugal? And if so, what are the implications for patient safety as we
    consider expanding the legal importation of drugs?
        Once again, thank you for attention to these questions. I look
    forward to your response. If you have any questions, please contact
    Jennifer Romans of my staff at (202) 224-9598.
                Sincerely,
                                        William H. Frist, M.D.,
                                                       Majority Leader,
                                                  United States Senate.
                                   __________
          Response to Questions of Senator Enzi by Philip R. Lee, M.D.
        Question 1. Dr. Lee, you testified that you believe importation
    will provide downward pressure on drug prices paid by American
    consumers. However, the Congressional Budget Office has estimated that
    importation from a broad set of industrialized countries--not just
    Canada--would only result in a 1 percent reduction in U.S. drug
    spending.
        The CBO also pointed out foreign governments probably would respond
    to U.S. importation by taking actions to limit the volume of drugs
    diverted to the United States, out of a desire to prevent shortages or
    higher prices in their own countries.
        What makes you so sure, then, that changing the law to allow
    importation would result in lower drug prices for most Americans?
        Answer 1. I am not familiar with the report of the Congressional
    Budget Office (CBO) on the savings from the importation of prescription
    drugs. I was not aware of a CBO report on S. 2328 and would wait until
    that was available before commenting in more detail. Two anecdotes,
    however, have influenced my thinking. The people who currently import
    prescription drugs from Canada do so because they believe they save
    money, far beyond the 1 percent reported by the CBO. This is not
    surprising in view of the fact that the prices of prescription drugs in
    Canada are 40 percent below those in the United States. My second
    anecdote: in Israel, where parallel imports are authorized, it is the
    view of some that, while rarely used, they exert a downward pressure on
    prices.

        Question 2. Dr. Lee, you endorse FDA approval as the ``gold
    standard'' for assuring drug quality, safety and effectiveness. I agree
    with you. However, the bill that you support, S. 2328, does not require
    FDA approval--it creates a ``presumption'' of FDA approval under
    certain circumstances.
        Could you describe the difference between actual FDA approval of a
    drug and the presumption of FDA approval of a drug?
        Answer 2. I believe the language of S. 2328, creating a new section
    804 to the Federal Food, Drug, and Cosmetic Act does, in fact, require
    FDA approval of any prescription drug imported from registered
    exporters or by registered importers. It would make sense to eliminate
    the word, ``presumption.''

        Question 3. Dr. Lee, the bill you support provides for drug
    importation to begin in 90 days. In contrast, the bioterrorism law for
    food importation allowed 18 months for the FDA to issue many parts of
    the regulations, even though the FDA already had some authority and an
    inspection infrastructure in place.
        Here, the FDA has no authority and no real infrastructure in place,
    yet the bill you support would permit drug importation almost
    immediately.
        Why do you believe the FDA would be ready to allow importation in
    90 days?
        Answer 3. Yes, I believe the FDA would be ready to allow
    importation in 90 days. The limited number of pharmacies in Canada,
    perhaps 30-40, that are likely to be registered exporters should make
    it feasible for the FDA to implement the provisions of S. 2328 that
    relate to the importation of approved prescription drugs from Canada
    within 90 days.

        Question 4. You testified that drug companies spend more on
    marketing, advertising, and administration than on research and
    development. Having run a small business myself, I can tell you that
    businesses have a lot of administrative expenditures that aren't
    related to marketing or advertising, so lumping them together doesn't
    make much sense to me. Can you explain what you mean by administration?
        Answer 4. In my testimony, I defined administrative costs as those
    costs that were defined by the companies in their SEC filings. In our
    review of SEC filings, my colleagues and I did not define
    administrative costs. It appears that different companies include
    different categories under administration.

        Question 5. I also found some data from the business intelligence
    firm IMS Health that contradicts your assertion about drug company
    spending on advertising and promotion versus research. For instance,
    their data shows that the drug industry spent $30 billion on R&D in
    2001, and $19 billion on all promotional activities, including direct-
    to-consumer advertising.
        That $19 billion on promotional activities also includes free or
    heavily discounted drugs that companies offer through their patient
    assistance programs.
        Can you explain the discrepancy between your assertion and these
    figures?
        Answer 5. Unfortunately, I do not have access to IMS Health data,
    but the figures do seem to be very different than those reported to the
    SEC by the individual companies. For example, the report published by
    Families USA in July 2002, Profiting from Pain: Where Prescription Drug
    Dollars Go, included data for SEC filings. They reported on the
    manufacturers of the top 50 drugs prescribed to seniors. Families USA
    reported that the revenues (net sales) were $166.678 billion, with
    marketing, advertising, and administration at $45.413 billion (27
    percent), R&D at $19.076 billion (11 percent) and profit at $30.599
    billion (18 percent) (see Table 1 in Profiting from Pain: Where
    Prescription Drug Dollars Go. A Report by Families USA. July 2002).
        I cannot explain the IMS Health Data because I do not know how they
    defined R&D or promotion and what they included in those categories.
    The paper by Rosenthal et al. (New England Journal of Medicine (2002)
    346: 498-505) suggests that in 2000 that spending for promotion of
    prescription drugs was $16 billion, a figure that comes close to the
    IMS Health Data suggested for 2001. Clearly the SEC filings include a
    good deal more under marketing, advertising and administration than
    prescription drug promotion to physicians.
        In a recent article by Ma, Stafford, Cockburn, and Finkelstein (``A
    Statistical Analysis of the Magnitude and Composition of Drug Promotion
    in the United States in 1998'' Clinical Therapeutics. (2003) 25(5):
    1503-17.), the authors reported that the pharmaceutical industry spent
    $12.724 billion promoting its products in the United States. The
    expenditure included free drug samples provided to physicians ($6.002
    billion), office promotion ($3.537 billion), direct-to-consumer
    advertising ($1.337 billion), hospital promotion ($0.705 billion) and
    advertising in medical journals ($0.540 billion). Again, this total for
    1998 appears to match more closely the IMS Health figure than do the
    SEC filings by companies.

        Question 6. Dr. Lee, you testified that most new drugs approved by
    the FDA are not clinical breakthroughs. You suggested that most new
    drugs are simply ``me-too'' products of marginal value to consumers.
        Considering that the pharmaceutical research and development
    process takes on average between 12 and 15 years between the discovery
    of a potential drug and FDA approval of that drug, I find the ``me-
    too'' label hard to accept.
        The ``me-too'' label suggests that companies are emulating the
    success of popular drugs already on the market. How many examples can
    you provide of successful innovative drugs aimed at particular
    conditions that were the object of ``me-too'' drugs developed after
    other companies saw the market potential for the originial innovative
    drug?
        Furthermore, when there are multiple drugs aimed at a particular
    medical condition, the resulting competition generally brings lower
    prices for all drugs in that therapeutic class. Do you disagree with
    this assessment, and how many examples can you provide where this
    assessment does not hold true?
        Answer 6. This is a complex issue, but the best recent analysis was
    carried out by the National Institute for Health Care Management
    Research and Education Foundation. The report, Changing Patterns of
    Pharmaceutical Innovation (Washington, D.C., NIHCM Foundation, May
    2002, pg. 24) ``characterizes the level of innovation of all new
    branded medicines that entered the U.S. market from 1989 to 2000,
    excluding vaccines and other biological products'' (pg. 2). In the 12-
    year period from 1989 to 2000, the FDA approved 1,035 new drug
    applications. Of these, 361 (35 percent) were new molecular entities
    (NMEs), 674 (65 percent) were drugs containing active ingredients
    already available in marketed drug products. The FDA classifies these
    as incrementally modified drugs (IMDs). The remaining 116 (11 percent)
    were drugs that were identical to products already available on the
    U.S. market. These were called other drugs (other). It is the IMDs that
    are often referred to as ``me too'' products by industry critics. The
    vast majority (85 percent) of these drugs (IMDs) reviewed by the FDA
    received a standard rating. A priority rating was given when a drug
    appeared to provide clinical improvement over the drug products
    available on the market at the time of the New Drug Application (NDA).
    Only 15 percent of IMDs received a priority rating in contrast to 42
    percent of NMEs, which received a priority rating. The authors of the
    report noted:

            Highly innovative drugs--medicines that contain new active
            ingredients and also provide significant clinical improvement
            are rare. Over the 12-year period examined, just 153 out of a
            total of 1,035 new drug approvals (or 15 percent) were for such
            drugs, priority NMEs (pg. 3).

        During the late 1990's, the authors reported that while many new
    drugs entered the market, most of the growth came from the less
    innovative products. Standard IMDs accounted for 62 percent of the
    increase and priority NMEs for only 3 percent of the increase. These
    standard IMDs may be heavily promoted (see Angell M. ``The
    Pharmaceutical Industry--To Whom Is it Accountable?'' New England
    Journal of Medicine (2000). 342(25): 1902-1904.)
        The spending for newly introduced prescription drugs, according to
    the NIHCM study, was driven by the standard rated new products. These
    products provide no significant improvement over existing products, yet
    they accounted for 67 percent of the increase associated with new drugs
    and 44 percent of the total increased spending. The use of prescription
    drugs depends on physician prescribing and that is why the drug
    companies spend so much on promoting their products to physicians,
    including the billions of dollars of free samples given to physicians
    to encourage the use of their products. I don't believe that brand name
    prescription drug products represent a true market.
                                   __________
               Questions of Senator Enzi to John M. Taylor, J.D.
        Question 1. There is a requirement in S. 2328 for a full paper
    pedigree for all drugs, whether imported or not.
        My understanding is that the drug distribution system is moving
    toward the adoption of track-and-trace technologies using
    radiofrequency devices--in other words, an electronic pedigree.
        Would it be easy for someone to counterfeit a paper pedigree? What
    would it take for someone to do so?

        Question 2. Considering how much safer an electronic pedigree would
    be, and that the system is on track to have electronic pedigrees in use
    by 2007, shouldn't we wait for the new technology?
        In other words, would we be exposing consumers to a much higher
    level of risk by allowing imported drugs to enter the country with
    nothing more than an easy-to-fake paper pedigree?

        Question 3. Would you describe, to the best of your knowledge, the
    major differences between how Canada regulates prescription drugs for
    domestic consumption, and how Canada regulates drugs that are exported
    to other countries?
                                   __________
               Question of Senator Enzi to John A. Vernon, Ph.D.
        Question 1. Dr. Vernon, the Congressional Budget Office sees little
    savings in drug importation, which suggests we ought to keep our drug
    distribution system closed to imports.
        The CBO suggests that if we allow importation, foreign governments
    would act to limit exports from their countries to the U.S. to prevent
    shortages and protect their own price-control schemes. Is that a fair
    analysis?
                                   __________
              Questions of Senator DeWine to John M. Taylor, J.D.
                                                          May 19, 2004.
    Hon. Judd Gregg, Chairman,
    Health Education Labor and Pensions Committee,
    U.S. Senate,
    Washington, DC 20510.

        Dear Chairman Gregg: I kindly request that the following questions
    be submitted for the record for the Thursday, May 20, 2004 hearing on
    the ``Importation of Prescription Drugs.''
        Several recently introduced Senate bills include provisions
    requiring a paper pedigree on all domestic prescription drug products
    distributed to retail pharmacies. I know the FDA has spent a lot of
    time studying drug counterfeiting and convened a task force to make
    recommendations about what should be done to address the problem.
    Specifically, your report titled ``Combating Counterfeit Drugs''
    states:

              ``Modern electronic technology is rapidly approaching the
            state at which it can reliably and affordably provide much
            greater assurances that a drug product was manufactured safely
            and distributed under conditions that did not compromise its
            potency. FDA has concluded that this approach is a much more
            reliable direction for assuring the legitimacy of a drug than
            paper recordkeeping requirements, which are more likely to be
            incomplete or falsified, and that it is feasible for use by
            2007.'' (page ii of the Executive Summary)

        In another section of the report, the FDA states:

              ``At the time PDMA was enacted, the only way to pass on a
            pedigree for drugs was to use paper, which has posed practical
            and administrative challenges. RFID technology, which would
            provide a de facto electronic pedigree, could surpass the
            intent of PDMA and do so at a lower cost. In light of the rapid
            progress toward much more effective electronic pedigrees that
            can be implemented within several years, FDA intends to
            continue to stay its regulations regarding certain existing
            pedigree requirements to allow suppliers to focus on
            implementing modern effective pedigrees as quickly as
            possible.'' (page iii of the Executive Summary)

        I think the FDA's conclusions in this report make sense. Mr.
    Taylor, I think it would be helpful for the committee to have you
    elaborate on these points.

        Question 1. Please explain what a paper pedigree is and why, as you
    say in your report, it is ``more likely to be incomplete or
    falsified.''

        Question 2. What would be the relative difficulty of counterfeiting
    the paper pedigree as compared to counterfeiting the prescription drug,
    its label and its packaging?

        Question 3. If a paper pedigree were required to accompany every
    prescription drug item delivered to retail pharmacies, can you give us
    an estimate of how many pedigrees would be provided to retail
    pharmacies on a daily basis?

        Question 4. Please describe what would be required throughout the
    distribution chain--from the manufacturer through the distributor to
    retail pharmacy--in order to implement a paper pedigree requirement for
    all prescription drugs distributed to retail pharmacies. How would
    current administrative and operational procedures need to be changed?
    Can you estimate the costs associated with these changes?

        Question 5. FDA indicated that paper pedigrees pose ``practical and
    administrative challenges.'' Please provide the committee with examples
    of these challenges and, where possible, an analysis of their costs.
        Thank you for the kind consideration of this request.
                Very respectfully yours,
                                                           Mike DeWine.
                                   __________
        response to questions of senator jeffords by philip r. lee, m.d.
        Question 1. Dr. Lee, welcome and thank you for coming back to
    testify once again before this committee and to commend you for your
    thoughtful statement.
        As you mentioned, you have heard many of these same arguments over
    the past 35 years. In part, this is because the pharmaceutical industry
    has been so successful in pushing off legislation they did not want.
        Carrots and sticks are the methods Congress has at hand to obtain
    support--or at least--compliance with some policies, and there at least
    two bills before the Senate that take these different approaches.
        Given your long experience in these issues, I would be interested
    in your views of how, from a legislative point of view, we might
    finally move forward on this issue of reimportation?
        Answer 1. I believe that the balanced approach that is represented
    in S. 2328 is a very reasonable approach to assure the high quality of
    prescription drugs available in the United States. The bill stimulates
    competition by providing citizens of the United States access to the
    prescription drugs that have been prescribed for them at lower prices
    than are currently available in the United States.

        Question 2. In your statement you noted the increasing price of
    drugs and the increasing costs of drugs and I appreciate your
    clarifying the differences. The bottom line is that American consumers
    feel they are spending too much on medicines, especially compared to
    people in other countries.
        On the other hand, some of these costs have been offset by reduced
    costs (and sometimes the eliminated costs) of treating diseases and
    hospitalizations.
        You have seen first hand the impact of NIH funded research has had
    for example on the health expenditures of the Medicare program. I would
    appreciate hearing your views on how we might better balance our policy
    goals in this arena?
        Answer 2. The cost of drugs differs from the price in that it
    reflects price and volume of use. An individual may pay a reasonable
    price for each pill, but if the medicine must be taken three times
    daily on a permanent basis, the cost on a monthly or annual basis may
    be quite high.
        There are many treatments, such as those for congestive heart
    failure and asthma, that if applied appropriately in the ambulatory
    setting can result in dramatically lower costs of medical care because
    unnecessary hospitalizations are avoided. On the other hand, we also
    have the overuse of prescription drugs, such as antibiotics to treat
    the common cold, that not only do no good, but may result in antibiotic
    resistant organisms. We now have a very serious problem because of
    hospital-acquired infections with organisms that are resistant to
    virtually all antibiotics. This may result in the death of patients,
    and it certainly adds to the costs of medical care.
        There are many other areas where technological advances, such as
    laparoscopic surgery provide significant benefit to patients and reduce
    costs to the individual patient because inpatient hospital care is
    avoided. However, the number of procedures, such as removal of the
    gallbladder because of stones or chronic inflammation, has increased
    and thus the costs have risen. This is also true for many of the new
    imaging technologies. Unfortunately, many of these are performed
    unnecessarily, increasing the costs of care (and the radiologists'
    income) without benefit to patients.
        The problems with prescription drugs are very serious. There is
    overuse (e.g., antibiotics), underuse (e.g., diuretics to treat
    hypertension), and misuse (many examples). Thirty-five years ago, we
    identified these problems in the Task Force Report on Prescription
    Drugs. In that report, we called for rational prescribing. Doctor
    Milton Silverman and I reemphasized this in our book, Pills, Profits,
    and Politics, published 30 years ago. The recommendations are still
    applicable today. I could actually write another book on the subject
    now and again emphasize many of the points that we made 30 years ago.
        How to deal with the problems? The first steps we recommended many
    years ago began with physician education and far greater use of
    clinical pharmacists in hospitals and I would add now in ambulatory
    care settings. Hospitals need to adopt electronic medical records and
    every inpatient prescription should be made electronically to avoid the
    errors in handwritten prescriptions. The IOM Reports, To Err Is Human
    and The Quality Chasm, dealt with these and had a number of specific
    recommendations.
        I think that medical students and residents should not receive
    gifts from drug companies, and all forms of promotion should be fully
    disclosed so that patients know that their doctors are receiving gifts
    from drug companies. An organization has been formed, ``No Free
    Lunch,'' to address many of the issues related to promotion. The
    organization and its web site are under the direction of Bob Goodman, a
    general internist practicing in New York City.
        Doctor Avorn at Harvard has proposed academic detailing to replace
    the commercial detailing that currently promotes prescribing of brand
    name products.
        These are but a few suggestions. Others would be more regulatory,
    such as banning the use of antibiotics in agriculture to promote
    growth. New antibiotics, particularly to treat drug resistant
    organisms, should be limited to inpatient hospital use until the
    problem of hospital-acquired infection is under better control.

        Question 3. I'm also especially interested in your views on how we
    might best incentivize research into New Molecular Entities as opposed
    to the ``Me Too'' drugs. Could you elaborate on your statement for the
    committee?
        Answer 3. One step that might be taken--it would require action by
    Congress--would be to require that any new drug introduced demonstrate
    that it was more cost-effective than the drugs on the market. This idea
    would, of course, be strongly resisted by industry, but it would help
    to reduce the number of incrementally modified drugs that receive a
    standard rather than a priority rating by FDA in their reviews.
                                   __________
             Questions of Senator Jeffords to John A. Vernon, Ph.D.
        Question 1. In your statement you note that if reimportation is
    successful . . . ``the result will be to significantly diminish the
    incentives to invest in R&D, which in turn will reduce the future
    supply of new drugs.'' That assertion raises a couple of questions.
        The CATO Institute, which is dedicated in part to an open-market
    view of economics, has reached a very different conclusion than yours.
    CATO advocates in favor of reimportation arguing that it will require
    companies to review their international pricing strategies and truly
    negotiate, rather than just accept, prices for their products. This
    approach will lead to greater competition and let the markets better
    decide the true value of these products. Isn't the CATO hypothesis as
    valid as yours, and if not, why not?

        Question 2. Pharmaco-economics is not my specialty area . . . but I
    believe that companies experience the greatest return on investment
    from truly breakthrough products, those that are known as ``New
    Molecular Entities.''
        Less--but still profitable are those known as ``Me Too'' drugs that
    may be good for a companies bottom line but are of less value from a
    health perspective.
        Your analysis leads me to wonder whether companies operating in a
    climate of fewer R&D resources wouldn't be more inclined to devote
    those scarce resources on the newer more profitable breakthrough drugs.
    Has your research addressed that as a possible outcome resulting from a
    reimportation policy?
                                   __________
          Response to Questions of Senator Reed by Philip R. Lee, M.D.
        Question 1. Dr. Lee, you note in your testimony that the United
    States and New Zealand are the only two countries that allow direct-to-
    consumer (DTC) advertising. To what extent does DTC advertising
    contribute to increased utilization in these two countries?
        Answer 1. A recent study by Harvard-based researchers, Meredith
    Rosenthal and colleagues, on the effects of direct-to-consumer (DTC)
    advertising and physician promotion activities on drug sales within
    five therapeutic drug classes found that for every 10 percent increase
    in DTC advertising, drug sales within classes studied increased on
    average by 1 percent (Rosenthal et al. 2003). In this study, the
    authors examined monthly data from August 1996 to December 1999 for
    five therapeutic classes of drugs (where at least one product had high
    DTC advertising expenditures and there was variation in advertising
    patterns within the therapeutic class). The five classes were: anti-
    depressants, antihyperlipidemics, proton pump inhibitors, nasal sprays,
    and antihistamines. By applying the price elasticity results from these
    five therapeutic classes to the aggregate changes in total sales and
    total DTC advertising spending for the 25 drug classes with the highest
    retail sales from 1999 to 2000, the authors estimated that changes in
    DTC advertising from 1999 to 2000 accounted for 12 percent (or $2.6
    billion) of the total growth in drug spending in 2000. This means that
    each additional dollar spent on DTC advertising in 2000 yielded $4.20
    in additional pharmaceutical sales in that year. This study
    demonstrates that DTC advertising, while not the only driver of
    increased drug expenditures, is an important contributor to increased
    growth in drug costs (Rosenthal et al. 2003).
        Similarly, a study conducted by Findlay for the National Institute
    for Health Care Management Foundation examined which products were the
    major drivers of annual increases in retail drug costs and DTC
    advertising (Findlay 2001). Although Findlay did not separate out the
    effects of DTC advertising from the effects of drug company promotional
    practices aimed at physicians, the study found that heavily advertised
    drugs had more rapid increase in sales and disproportionately affected
    cost increases. Findlay concludes that ``much of the sales increase for
    heavily advertised drugs came from a jump in the number of
    prescriptions. For the 50 most heavily advertised drugs, the number of
    prescriptions increased 24.6 percent. The number of prescriptions for
    all other drugs rose just 4.3 percent . . . Thus, the number of
    prescriptions for the 50 most heavily advertised drugs grew at a rate
    six times that for other drugs'' from 1999 to 2000 (Findlay 2001, pg.
    7).
        A comprehensive and detailed analysis of available literature
    bearing on the association between DTCA spending and drug sales can be
    found in Dr. Barbara Mintzes' doctoral dissertation (``Direct-to-
    consumer Advertising of Prescription Drugs: Effects on Prescribing and
    Policy Implications.'' Center for Health Services and Policy Research,
    University of British Columbia, Vancouver, British Columbia, Canada,
    June 2003). Dr. Mintzes is a leading scholar and expert on the nature
    and impact of DTCA both in the United States and abroad. An excerpt
    from this dissertation is attached and includes a review of relevant
    data from New Zealand as well as other U.S. studies (see Attachment A).
        Clearly, there is some evidence that direct-to-consumer advertising
    influences prescription drug expenditures and utilization. According to
    Dr. Barbara Mintzes, DTCA does contribute to increased sales of heavily
    advertised drugs. However, most of these analyses do not separate out
    fully the effects of DTCA from drug company promotional campaigns aimed
    at physicians (Mintzes 2003).

        Question 2. A November 2003 Wharton study comparing average prices
    for pharmaceuticals in nine countries found that price differences were
    generally consistent with income differences between these nations.
    However, the study only examined manufacturer prices not retail prices.
    How much do retail prices vary across nations? Does the general
    correlation drug prices and per capita income as indicated in this
    study hold true at the pharmacy counter?
        Answer 2. In answer to Senator Reed's second set of questions, I am
    not familiar with any literature that examines the Wharton study's
    correlation for retail drug prices and per capita income, but we are
    searching for additional information about retail price comparisons and
    hope to have a more complete answer soon.
        As the Senator states, the Danzon and Furukawa study focuses on
    manufacturer prices, not retail prices. Regarding retail prices, the
    authors write ``the general conclusion from these retail-price
    comparisons is that retail prices in the European countries that
    regulate pharmacy margins (France, Germany, and Italy) are much higher,
    relative to U.S. prices, than their manufacturer prices; hence,
    differences measured at retail prices are smaller than differences at
    manufacturer prices'' (Danzon and Furukawa 2003, pg. W3-530). The
    authors later state that ``in fact, high regulated wholesale and retail
    pharmacy distribution margins in some foreign countries could
    contribute to their lower manufacturer prices'' (Danzon and Furukawa
    2003, pg. W3-530).
        Two recent articles provide some comparative data of spending on
    pharmaceuticals across countries (Reinhardt et al. May/June 2002,
    Anderson et al. May/June 2003). For instance, using the most recent
    OECD data available (Anderson et al. May/June 2003) for the countries
    that Danzon and Furukawa examined (Canada, France, Germany, Italy,
    Japan, Mexico, United Kingdom, and United States):
        Spending on Pharmaceuticals in Selected OECD Countries, 2000
    (excerpted from Anderson, Reinhardt, Hussey, and Petrosyan. (May/June
    2003) ``It's the Prices, Stupid: Why the United States is So Different
    From Other Countries'' Health Affairs 22 (3): 94).

    ------------------------------------------------------------------------
                                                                    Spending
                                                            As        per
                                                         percent    capita,
                          Country                        of GDP,      2000
                                                           2000       (US$
                                                                     PPP)*
    ------------------------------------------------------------------------
    Canada............................................        1.4        385
    France............................................        1.9        473
    Germany...........................................        1.4        375
    Italy.............................................        1.8        459
    Japan (1999)......................................        1.2        313
    Mexico (1999).....................................        1.1         93
    United Kingdom (1997).............................        1.1        253
    United States.....................................        1.6        556
    ------------------------------------------------------------------------
    * PPP stands for purchasing power parity.

        In addition to France and Italy, Portugal and Hungary also spend a
    greater percent of GDP on pharmaceuticals than the United States (2.0
    percent and 1.8 percent respectively). All other OECD countries
    included in the analysis spend a smaller percentage of GDP on
    pharmaceuticals with Ireland the smallest percent (0.6 percent). While
    these data do not allow me to directly answer Senator Reed's questions
    regarding whether there is a correlation between retail drug prices and
    per capita income, they indicate that the United States spends a
    greater percentage of GDP on pharmaceuticals than most other OECD
    countries.
                                   References
        Anderson, Reinhardt, Hussey, and Petrosyan. (May/June 2003) ``It's
    the Prices, Stupid: Why the United States is So Different From Other
    Countries'' Health Affairs 22(3): 89-105.
        Danzon PM and Furukawa MF. (Oct. 29 2003) ``Prices and Availability
    of Pharmaceuticals: Evidence from Nine Countries.'' Health Affairs web
    exclusive. W3-521 to W3-536.
        Findlay S. (November 2001) ``Prescription Drugs and Mass Media
    Advertising, 2000.'' Washington, D.C.: National Institute for Health
    Care Management. Available at www.nihcm.org.
        Mintzes B. (June 2003) ``Direct-to-Consumer Advertising of
    Prescription Drugs: Effects on Prescribing and Policy Implications.''
    Ph.D. Dissertation, Center for Health Services and Policy Research,
    University of British Columbia, Vancouver, British Columbia, Canada.
        Reinhardt, Hussey, and Anderson. (May/June 2002) ``Cross-National
    Comparisons of Health Systems Using OECD Data, 1999'' Health Affairs
    21(3): 169-181.
        Rosenthal MB, Berndt ER, Donohue JM, Epstein AM, and Frank RG.
    (June 2003) ``Demand Effects of Recent Changes in Prescription Drug
    Promotion.'' Menlo Park, CA: Kaiser Family Foundation. Available from
    www.kff.org.
                                   __________
                                  ATTACHMENT A
        From Mintzes B. (June 2003) ``Direct-to-Consumer Advertising of
    Prescription Drugs: Effects on Prescribing and Policy Implications.''
    Ph.D. Dissertation, Center for Health Services and Policy Research,
    University of British Columbia, Vancouver, British Columbia, Canada.
                       2.4.5 retrospective data analyses
        Table 2.26 describes studies that have used administrative and
    sales databases to examine the association between DTCA spending and
    drug prescribing and sales.

                    Table 2.26.--Retrospective data analyses
    ------------------------------------------------------------------------
                                         Main Outcomes
                  Study                    Assessed           Methodology
    ------------------------------------------------------------------------
    National Institute of Health
     Care Management (NIHCM)1999-
     2001 reports on DTCA & retail
     prescription drug spending:
      Barents 1999..................  Factors affecting   Data on DTCA from
                                       growth in           IMS Health and
                                       prescription drug   Competitive Media
                                       expenditures.       Reporting (CMR).
                                      Drug classes        Data on retail
                                       responsible for     spending,
                                       spending            prescriptions,
                                       increases.          from Scott Levin.
                                      DTCA spending per
                                       class.
      Findlay, 2000.................  Increase in retail  Data on DTCA from
                                       drug spending in    IMS Health and
                                       1999 over 1998      CMR.
                                       levels             Data on retail
                                       attributable to     spending,
                                       top 25 DTCA drugs   prescriptions,
                                       vs. other drugs.    from Scott Levin.
      Findlay, 2001.................  Increase in retail  Data sources/
                                       drug spending in    methodology same
                                       2000 over 1999      as above.
                                       levels
                                       attributable to
                                       top 50 DTCA drugs
                                       vs. other drugs.
    Other reports:
      Rosenthal et al., 2002........  Spending on DTCA    Data from IMS
                                       vs. other forms     Health and CMR.
                                       of promotion:      5 drug classes:
                                       1996-2000.          antidepressants,
                                      Ad spending vs.      antihistamines,
                                       sales 1996-2000.    statins, nasal
                                                           sprays, PPI's.
      Zachry et al., 2002...........  No. of diagnoses    Data from CMR for
                                       for conditions      ad spending.
                                       treated by DTCA    National
                                       drugs.              Ambulatory
                                      # Rx within drug     Medical Care
                                       class versus DTCA   Survey (1992-
                                       spending.           1997) for
                                      # Rx vs. DTCA        diagnoses and
                                       spending.           prescriptions.
                                                          Time series
                                                           analysis.
      PHARMAC, 2002.................  DTCA spend for 4    Data on DTCA from
                                       subsidized drugs    IMS Health.
                                       vs. sales and #    Spending and # of
                                       Rx, 1999-2001.      scripts,
                                      Volume &             administrative
                                       substitution        data, New Zealand
                                       effects.            drug plan
                                                           (PHARMAC).
      Wosinska, 2001................  # Rx for            1996-1999 data
                                       advertised drugs.   Blue Shield,.
                                      Effects of DTCA by  # Rx for lipid-
                                       drug formulary      lowering drugs.
                                       status.            Data on DTCA and
                                      Product switching    drug detailing
                                       within class.       from CMR.
      Eichner and Maronick, 2001....  DTCA spending vs.   DTCA data from
                                       sales.              CMR, prescribing
                                      drugs for allergy,   data Scott-Levin
                                       nail fungus, high  1996-1998: 16
                                       cholesterol,        drugs -4 classes.
                                       depression.
      Basara, 1996..................  Increased           Four regional
                                       prescribing and     campaigns.
                                       sales for Imitrex  Individual
                                       (sumatripan) vs.    physician
                                       DTCA spending.      prescribing data
                                                           from IMS Health.
                                                          7 month time
                                                           series analysis.
    ------------------------------------------------------------------------

         nihcm: effects of dtca on u.s. retail drug spending 1993-2000
        The National Institute of Health Care Management (NIHCM), a non-
    profit foundation, published a report in July 1999 outlining factors
    affecting the growth in prescription drug expenditures in the U.S.
    between 1993 and 1998. Error! Bookmark not defined. This report
    highlights the importance of growth in spending on new drugs within
    four heavily advertised drug classes: oral antihistamines, antide-
    pressants, lipid lowering drugs and anti-ulcerants. NIHCM followed this
    report with two additional analyses specifically examining the
    relationship between DTCA and annual increases in retail prescription
    drug expenditures, published in 2000\1\ and 2001.\2\ As these reports
    follow one another as a progressively more detailed examination of the
    same phenomenon, they are discussed in chronological order below.
                                  barents 1999
        U.S. retail spending on prescription drugs increased from $50.6
    billion in 1993 to an estimated $93.4 billion in 1998, an 84 percent
    increase over a 5-year period. Four categories of drugs accounted for
    30.8 percent of this increase: oral antihistamines, antidepressants,
    lipid lowering drugs and anti-ulcerants. These categories include seven
    of the ten drugs most heavily advertised to the public in 1998.

     Table 2.27.--Increase in Spending in four Therapeutic Classes, 1993 to
                                      1998
    ------------------------------------------------------------------------
                                                   Increase in   Percent of
                                                  expenditures      total
                    Drug category                   1993-1998    increase in
                                                     [U.S. $    prescription
                                                    billions]    drug costs
    ------------------------------------------------------------------------
    Antidepressants.............................         $ 5.0         11.8%
    Lipid lowering drugs........................         $ 3.4          8.0%
    Anti-ulcerants..............................         $ 2.7          6.4%
    Oral antihistamines.........................          $1.9          4.5%
                                                 ---------------------------
      Total--four categories....................         $13.1         30.8%
    ------------------------------------------------------------------------
    Adapted from: Barents Group,1999, Figure A, p2.

        DTCA spending is highly concentrated. In 1998, U.S. $706.9 million,
    or 54 percent of total DTCA spending, went towards promoting ten
    products to the public. These ten drugs alone accounted for 22 percent
    of the total increase in retail pharmaceutical sales in the U.S.
    between 1993 and 1998.

                                                  Table 2.28.--The 10 Drugs with Highest DTCA Spending in 1998
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                            1998 sales  [US$      Share of 1998 retail                           Share in therapeutic     Spending on DTCA
                    Drug                        millions]                 sales           Therapeutic category         category            [US$ millions]
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Claritin (loratadine)..............  2,140.0...............  2.3%..................  Antihistamine........  62.2%................  185.1
    Propecia (finasteride).............  72.7..................  0.1%..................  Baldness.............  41.4%................  92.0
    Zyrtec (cetirizine)................  454.9.................  0.5%..................  Antihistamine........  18.6%................  75.6
    Zyban (bupropion)..................  183.8.................  0.2%..................  Smoking cessation....  82.8%................  64.4
    Pravachol (pravastatin)............  953.6.................  1.0%..................  Lipid lowering.......  18.3%................  59.7
    Allegra (fexofenadine).............  432.0.................  0.5%..................  Antihistamine........  13.6%................  52.5
    Prilosec (omeprazole)..............  2,945.0...............  3.2%..................  Ulcer/reflux.........  44.7%................  49.7
    Zocor (simvastatin)................  567.3.................  1.7%..................  Lipid lowering.......  30.1%................  44.5
    Evista (raloxifene)................  99.8..................  0.1%..................  Osteoporosis.........  19.3%................  42.3
    Prozac (fluoxetine)................  2,346.0...............  2.5%..................  Antidepressant.......  32.9%................  41.1
                                        --------------------------------------------------------------------------------------------------------------------
        Total above....................  11,195 (12.0% of total  12.0%.................    ...................  Mean = 36.4%.........  $707 (53.9% of DTCA
                                          sales).                                                                                       spend)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Adapted from: Barents Group 1999; Table 4, p13.

        From January to June 1999, the top five drugs advertised on
    television, by spending, were treatments for: allergy, baldness,
    obesity, and allergic rhinitis (two products); the top five drugs in
    print advertisements were for: allergy, type II diabetes, impotence and
    high cholesterol.\3\
        Higher prices per prescription were responsible for 64 percent of
    the 1993-1998 increase in retail prescription drug spending, according
    to NIHCM, and the use of new, costlier drugs was identified as the
    primary factor driving this increase. In 1998, the average price of
    drugs introduced in 1992 or later was $71.49, as compared to an average
    price of $30.47 for drugs introduced before 1992.
                                 findlay, 2000
        In a follow-up analysis of the effects of DTCA on pharmaceutical
    costs, NIHCM found that the top 25 drugs promoted directly to consumers
    were responsible for a U.S. $7.2 billion increase in U.S. retail
    pharmaceutical costs in 1999 over 1998 costs, or 40.7 percent of the
    total $17.7 billion increase in retail drug spending. They also found
    that doctors wrote 34.2 percent more prescriptions for these 25
    products in 1999 than 1998, as compared to a 5.1 percent increase in
    prescribing volume for all other prescription drugs.\2\
        Table 2.29 describes the contribution to drug sales of the 10
    products with top DTCA spending, representing 41 percent of total DTCA
    spending. Only four of these products were also on the 1998 top 10 list
    for DTCA spending: loratadine (Claritin), cetirizine (Zyrtec),
    omeprazole (Prilosec) and fexofenadine (Allegra). However, the degree
    of concentration in DTCA spending is similar, as is the proportion of
    total prescription drug sales (11 percent vs. 12 percent in 1998)
    represented by this small number of drugs. Additionally, they
    contributed to the annual increase in U.S. retail spending to a similar
    degree (approx. 20 percent versus 22 percent). This suggests a similar
    pattern of advertising spending as in 1998, highly concentrated on a
    few ``blockbuster'' drugs.

                                                  Table 2.29.--The 10 Drugs with Highest DTCA Spending in 1999
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                          Contribution to
                    Drug                       Indication          1999 DTCA  Spending      1999 sales [US$     Change in sales 1998-    increased spending
                                                                     [US$ millions]            millions]                 1911                1998-1999
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Claritin (loratadine)..............  Allergy...............  137.1.................  2,591.1..............  +21.1%...............  2.6%
    Prilosec (omeprazole)..............  Ulcer/reflux..........  79.4..................  3,649.4..............  +28.9%...............  4.1%
    Xenical (orlistat).................  Obesity...............  76.2..................  144.7................  N/A*.................  0.8%
    Zyrtec (cetirizine)................  Allergy...............  57.1..................  551.5................  +31.5%...............  0.8%
    Lipitor (atorvastatin).............  Lipid lowering........  55.5..................  2,659.9..............  +55.7%...............  5.5%
    Flonase (fluticasone)..............  Allergic rhinitis.....  53.5..................  489.5................  +37.9%...............  0.8%
    Nasonex (mometasone)...............  Allergic rhinitis.....  52.3..................  264.0................  +116.1%..............  0.8%
    Ortho tri-cyclen...................  Contraceptive.........  50.1..................  431.5................  +58.2%...............  0.9%
    Glucophage (metformin).............  Diabetes..............  43.1..................  1,157.8..............  +48.7%...............  2.2%
    Allegra (fexofenadine).............  Allergy...............  42.8..................  423.9................  +50.0%...............  1.0%
    Top 10 DTCA drugs..................    ....................  647.1 (41% of DTCA      12,363.3 (11% of       Mean = 50.0%.........  19.5%
                                                                  spend).                 total Rx drug sales).
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Adapted from: Findlay, 2000. Figure 3, page 4.
    * Launched in this period.

                                 findlay, 2001
        A follow-up NIHCM report in 2001 again examined the relationship
    between DTC advertised drugs and annual increases in retail drug
    sales.\2\ In this report, Findlay examines the contribution of the 50
    top DTCA drugs to sales. These 50 drugs represent almost all DTCA
    spending in 2000 (94.8 percent), and together they were responsible for
    U.S. $.9.9 billion, or 47.8 percent, of the $20.8 billion increase in
    retail spending over 1999 levels. They had combined sales of $41.3
    billion, or 31.3 percent of total retail prescription drug sales.
        Retail sales increased by 32 percent for these 50 drugs in 2000, as
    compared to an increase of 14 percent for all other drugs combined, and
    the number of prescriptions rose by 25 percent, as compared to a 4
    percent increase in all other drugs.

                              Table 2.30.--The 10 Drugs with Highest DTCA Spending in 2000
    ----------------------------------------------------------------------------------------------------------------
                                                          2000 DTCA spending   2000 sales  [US$     Change in sales
                  Drug                    Indication        [US$ millions]         millions]           1999-2000
    ----------------------------------------------------------------------------------------------------------------
    Vioxx (rofecoxib)...............  Arthritis.........  160.8.............  1,518.0...........  +360.7%
    Prilosec (omeprazole)...........  Ulcer/reflux......  107.5.............  4,102.2...........  +12.4%
    Claritin (loratadine)...........  Allergy...........  99.7..............  2,035.4...........  +14.9%
    Paxil (paroxetine)..............  Antidepressant....  91.8..............  1,808.0...........  +24.5%
    Zocor (simvastatin).............  Lipid lowering....  91.2..............  809.4.............  +22.2%
    Viagra (sildenafil).............  Impotence.........  89.5..............  2,015.5...........  +31.2%
    Celebrex (celecoxib)............  Arthritis.........  78.3..............  618.7.............  +58.0%
    Flonase (fluticasone)...........  Allergic rhinitis.  73.5..............  1,120.4...........  +26.4%
    Allegra (fexofenadine)..........  Allergy...........  67.0..............  113.2.............  +61.8%
    Meridia (sibutramine)*..........  Obesity...........  65.0..............  652.7.............  -8.1%
    Top 10 DTCA drugs...............    ................  924.3 (41% of DTCA  14,793.5 (11% of    Mean = +60.4%
                                                           spending).          total Rx drug
                                                                               sales).
    ----------------------------------------------------------------------------------------------------------------
    * Safety concerns prompting a market withdrawal in Italy may have affected sales.

        Table 2.30 above presents the contribution to sales of the top 10
    drugs, by DTCA spending during 2000. The proportion of total DTCA
    spending on just 10 products was 41 percent in 2000, as in 1999, and
    these 10 products again represented 11 percent of the U.S. retail
    pharmaceutical market. The overlap between the year 2000 and 1999 ``top
    10'' DTCA products was again 4 of the 10 products.
        The three NIHCM reports summarized above indicate a strong
    association between annual increases in prescription drug spending and
    the most heavily advertised products. A small number of heavily
    advertised products contributed dispro-
    portionably to annual retail expenditures on prescription drugs, mainly
    through higher prescribing volume and sales, rather than through price
    increases. This is consistent with the expected direction of effect of
    DTCA, and suggestive of a causal effect. However, the authors were
    unable to distinguish between increased sales stimulated by DTCA alone,
    by promotion aimed at physicians alone, or by the combined effects of
    these two marketing techniques. Other factors may have also influenced
    prescribing volumes, such as publication of favourable trial results,
    or formulary inclusion by large managed care companies.
                             rosenthal et al. 2002
        Meredith Rosenthal and colleagues compared industry spending on
    DTCA to spending on promotion aimed at physicians between 1996 and
    2000.\4\ They also examined data on sales versus DTCA spending for five
    heavily advertised therapeutic classes, antidepressants,
    antihistamines, lipid-lowering drugs, corticosteroid nasal sprays and
    proton pump inhibitors. Table 2.31 presents an overview of U.S.
    promotional spending over this time period.

                     Table 2.31.--U.S. Spending on DTCA and Promotion Aimed at Physicians: 1996-2000
                                        [Promotional Spending (in US$ millions)]
    ----------------------------------------------------------------------------------------------------------------
                                                                      1996      1997      1998      1999      2000
    ----------------------------------------------------------------------------------------------------------------
    Estimated spending on promotion to physicians*................     9,503    11,261    12,663    13,643    15,029
    DTCA spending.................................................       791     1,069     1,316     1,848     2,467
    Percent of DTCA spending on television ads....................       28%       29%       50%       61%       64%
    Total estimated promotional spending..........................    10,294    12,330    13,979    15,491    17,496
    Percent of promotional spending on DTCA.......................      8.3%      9.5%     10.4%     13.5%     16.4%
    DTCA spending as a percent of sales...........................      1.2%      1.5%      1.6%      1.8%      2.2%
                                                                   -------------------------------------------------
        Total promotional spending as a percent of sales..........     15.8%     17.2%     17.1%     15.2%     15.6%
    ----------------------------------------------------------------------------------------------------------------
    Adapted from: Rosenthal et al, Table 1, p 500.
    * Promotion to physician recalculated to include an estimated 13.5 percent on meetings and events, as described
      by Rosenthal et al. (p. 499; Methods., range 12-15 percent) Rosenthal et al. Table 1 omits this category

        Although the industry spent much more on promotion aimed at
    physicians than on DTCA, the proportion devoted to DTCA increased
    continually over this time period. By 2000, spending on DTCA had more
    than tripled over 1996 levels. In 2000, the industry as a whole spent
    nearly twice as much on print DTCA as on print advertising in health
    professional journals.
        Rosenthal et al. examined advertising intensity within five drug
    classes: antide-
    pressants, antihistamines, lipid-lowering drugs, corticosteroid nasal
    sprays and proton pump inhibitors (PPI's). They found that spending on
    DTCA as a proportion of sales varied much more per drug class than
    spending on promotion aimed at physicians. In 1999, the category with
    the highest DTCA advertising intensity (11.6 percent of sales) was
    nasal sprays. In contrast, DTCA spending reached only 0.5 percent of
    sales for antidepressants. This was a 23-fold difference in advertising
    intensity. For promotion aimed at health professionals (omitting
    sponsored meetings and events), the highest advertising spending was
    also on nasal sprays, at 24.7 percent of sales. However, this was only
    a 2.8-fold difference in advertising intensity as compared to the
    category with the lowest spending among the five, lipid-lowering drugs
    (8.7 percent of sales).
                               zachry et al. 2002
        Zachry et al. carried out a retrospective data analysis to examine
    whether a relationship existed between prescriptions for an advertised
    drug, prescriptions for drugs within the same class, and frequencies of
    diagnoses for approved indications of advertised drugs and monthly
    advertising spending.\5\ They combined data from the National
    Ambulatory Medical Care Survey (NAMCS) and information on monthly
    advertising spending obtained from Competitive Media Reporting. The
    NAMCS includes 195,577 consultations between 1992 and 1997, weighted to
    be representative of the U.S. population.
        Zachry et al. only included drugs and drug classes advertised for
    at least 19 months within this time. From 1992-1997, 121 drugs within
    48 drug classes were advertised to the U.S. public, with 80 percent of
    spending on full product advertising, and only 4.4 percent on ``help-
    seeking'' or disease-oriented ads that make no mention of brand name.
    Nineteen of these drugs, within 5 drug classes, met the study inclusion
    criteria. The five classes were: antihistamines, antihypertensives,
    acid-peptic disorder drugs, benign prostatic hypertension (BPH), and
    lipid lowering drugs.
        For lipid-lowering drugs, spending was significantly associated
    with diagnoses: for each $1000 spent on DTCA for lipid-lowering drugs,
    32 additional diagnoses and 41 prescriptions were generated. For
    antihistamines, a strong substitution effect was observed within the
    class, with every $1000 spent on DTCA for loratadine (Claritin)
    associated with 24 additional prescriptions for loratadine (Claritin),
    20 fewer for terfenadine (Seldane) and 7 fewer for astemizole
    (Hismanal). No significant association was observed between spending on
    antihypertensives and BPH drugs and the number of diagnoses or
    prescriptions.
        In two cases prescriptions for leaders within the class--loratadine
    (Claritin) and simvastatin (Zocor)--were positively associated with
    total spending within the class, as well as drug-specific spending.
        The authors caution that causality cannot be assumed, and that DTCA
    expenditures accounted for a modest amount of variance (10-30 percent)
    associated with diagnoses and prescribing. However, this study
    represents the first published report to combine retrospective data on
    diagnoses and prescriptions with DTCA spending data. The differences
    the authors observed between drug classes are also consistent with
    market factors. For example, the majority of lipid-lowering drugs with
    strong sales performance are advertised to the U.S. public, and
    therefore both product-specific and class effects might be expected.
    However, most antihypertensives are not advertised to the public, and
    overall spending on DTCA within this class is lower than for lipid
    lowering drugs. This is consistent with the lack of association between
    monthly advertising spending and diagnoses or prescriptions within this
    class.
                                 pharmac, 2002
        In an unpublished report to the New Zealand Ministry of Health, New
    Zealand's public pharmaceutical management agency, PHARMAC, examined
    prescribing volumes and costs for four subsidized products that had
    been advertised to the New Zealand public between 1999 and 2001.\6\
    These were fluticasone (Flixotide), terbinafine (Lamisil), omeprazole
    (Losec) and eformoterol (Oxis Turbuhaler). This is the only analysis of
    the effects of DTCA on costs of publicly financed pharmaceuticals.

      Table 2.32.--New Zealand DTCA Spending for Four Products During 2001
    ------------------------------------------------------------------------
                                          Total DTCA
                                           Spending
                  Product                   (CDN $     Print    TV     Radio
                                            equiv)
    ------------------------------------------------------------------------
    Flixotide (fluticasone)............   $1,469,173      6%     94%
    Lamisil (terbinafine)..............     $613,589     19%     81%
    Losec (omeprazole).................     $867,352     15%     75%     10%
    Oxis Turbuhaler (eformoterol)......     $998,006     12%     88%
    ------------------------------------------------------------------------
    Source: PHARMAC, 2002. Adapted from: Table 1, page 4.

        During the period from 1999 to 2001, the number of prescriptions
    grew for all four products. Table 2.33, below, provides information on
    the number of prescriptions per year and cost differences had prices
    remained stable (standardized to May 2002 prices).

                         Table 2.33.--Increases in Expenditure and Script Numbers From 1999-2001
    ----------------------------------------------------------------------------------------------------------------
                                  No. of prescriptions/year                                      2001 vs. 1999
    ----------------------------------------------------------------------------------------------------------------
                                                                                                           Percent
                                                                                             Percent     increase in
                          Product                           1999       2000       2001     increase in   spending at
                                                                                              no. of       May 2002
                                                                                          prescriptions    prices*
    ----------------------------------------------------------------------------------------------------------------
    Flixotide (fluticasone)............................    184,608    216,021    269,584          46%            54%
    Lamisil (terbinafine)..............................     10,161     13,415     15,661          54%            64%
    Losec (omeprazole).................................    294,888    337,076    327,583          11%            18%
    Oxis Turbuhaler (eformoterol)......................      2,012      4,094     21,017         945%           704%
    ----------------------------------------------------------------------------------------------------------------
    * May 2002 prices used as subsidy prices for some products changed during this period.

        Real growth in expenditure on these four products was more than
    NZ$3.66 million (CDN $2.94) from 1999 to 2001. This is a lower fiscal
    risk than might have occurred without other policies implemented by
    PHARMAC, including negotiated price reductions for fluticasone
    (Flixotide) in mid-1999 and a manufacturer surcharge for omeprazole
    (Losec) in April 2001, in both cases in response to increased
    prescribing volumes.
        PHARMAC tracked shifts in prescribing volume for metered dose
    corticosteroid inhalers used to treat asthma in the period from January
    1998 to June 2000.\7\ They documented a substitution effect from less
    expensive beclomethasone inhalers, which are off patent and therefore
    not advertised, to fluticasone (Flixotide). Television advertising
    campaigns had encouraged patients to switch to fluticasone if their
    asthma was ``not controlled.'' This substitution effect occurred in
    spite of a lack of reliable evidence of greater effectiveness or safety
    for fluticasone versus other steroid inhalers such as
    beclomethasone.\8\

    Figure 2.1. Numbers of Corticosteroid Metered Dose Inhalers Dispensed,
    1998-2000

        These data do not allow for attribution of a causal effect between
    DTCA and increased prescribing volume for fluticasone, as fluticasone
    inhalers were most likely also promoted heavily to physicians during
    this time period. These are also aggregated data on population
    prescribing patterns, which do not allow for examination of individual
    switching from beclomethasone to fluticasone versus differences in
    product choice for initial prescriptions for a steroid inhaler for
    asthma. Thus the extent of substitution of fluticasone for
    beclomethasone among individuals who incorrectly believed that the
    advertised product was superior to the steroid inhaler they were
    already using is unknown.
                                 wosinska, 2001
        In an unpublished report, Marta Wosinska has analyzed the relative
    contributions of DTCA and promotion aimed at physicians on shifts in
    prescribing of cholesterol-lowering drugs within a population insured
    by Blue Shield of California's PPO plan.\9\ She analyzed data covering
    over 38,000 patients who filled a prescription for one or more
    cholesterol-lowering drugs between 1996 and 1999. Prescribing data were
    matched to monthly brand-level DTCA spending, obtained from Competitive
    Media Reporting, and monthly, brand-level spending on sales
    representatives and free sampling.
        Preliminary results indicate a strong association between product
    choice and DTCA spending. However, the impact is diminished if
    physician detailing and free samples are taken into account, and the
    estimated impact of detailing is five times that of DTCA. She also
    found that although spending on DTCA strongly affects product choice,
    the effect for drugs that were on Blue Shield's formulary was three
    times that of drugs not on the formulary. Thus the effects of DTCA on
    product choice appeared to have been mediated by decisions related to
    formulary inclusion.
                           eichner and maronick, 2001
        Eichner and Maronick compared DTCA spending and sales data from
    1996 to 1998 for products within four heavily-advertised drug classes:
    antihistamines, lipid-lowering drugs, antidepressants and antifungal
    drugs for toenail fungus.\10\ This is based on annual advertising
    spending and sales data obtained from Competitive Media Reporting and
    Scott-Levin.
        Between 1996 and 1998, there was a 2.5-fold increase in
    prescriptions for three heavily-advertised antihistamines, loratadine
    (Claritin), fexofenadine (Allegra), and cetirizine (Zyrtec), a much
    greater increase than in overall drug prescriptions within this time
    period. This was not accounted for by substitution of these newer
    products for older antihistamines; the proportion of patients
    prescribed an antihistamine for allergy increased. The authors were
    unable to examine whether patients had previously used over-the-counter
    medications, or whether they were treating symptoms they had previously
    managed without medicines. For nail fungus treatments, prescriptions
    within the class increased by over 50 percent between 1996 and 1998,
    although DTCA spending decreased within this time period. This could
    reflect awareness raising for the condition and/or other promotional
    spending. The authors also did not examine whether lagged effects
    occurred.
        For lipid-lowering drugs, the authors found a stronger class than
    product-specific effect. The authors calculated the degree of
    correlation between product-specific DTCA spending and the product's
    market share within its class. Their results are generally
    inconclusive, especially in drug classes with several competitors. This
    is likely to reflect the many factors that remain unexamined, such as
    the date of a product's launch, product-specific characteristics (such
    as therapeutic advantages or disadvantages), and spending on promotion
    aimed at physicians.
                                  basara 1996
        Lisa Basara used the launch of sumatriptan (Imitrex) for migraine
    in February 1993 as a test case to examine the effects of a DTCA
    campaign.\8\ She used a time series analysis to look at the volume of
    new prescriptions before and after a 7 month DTCA campaign. Data from
    four cities were used. Albany, Erie, Grand Rapids, Boise City. They
    were chosen because of similar demographics and physician prescribing
    levels. The four cities had a joint population of 1.1 million and 2,419
    doctors. Physician-specific data were available for 73 percent of the
    doctors through IMS, which buys these data from dispensing pharmacies.
    All physicians in the four regions with at least one dispensed
    prescription were included in the study.
        The sumatriptan (Imitrex) advertising campaign did not include the
    product name, but it mentioned a ``surprisingly effective'' new
    treatment for migraine and said to go see your doctor. As this was the
    only migraine therapy being actively promoted to doctors, such an
    approach was expected to pay off. Thus this is a study of the
    effectiveness of ``help-seeking'' DTCA in generating sales.
        The interrupted time series analysis included 11 months before the
    launch of the DTCA campaign, 7 months during an active campaign, and 4
    months afterwards. The primary hypothesis tested was whether the number
    of new prescriptions would increase significantly after consumers were
    exposed to DTCA. Basara found the DTCA campaign to be a significant
    predictor of new prescription volume (p=.0006). She estimates that
    1,620 new prescriptions could be attributed to the 7-month campaign in
    these four cities. Extrapolating to the entire U.S. population, this
    campaign would have generated about $11.5 million for the company in
    new prescriptions, and nearly as much again could be expected in
    refills.
        DTCA was entered into this analysis as a binary variable
    representing presence or absence of consumer-directed advertising
    within specific months, with lagged effects also included within the
    model. Basara's analysis explored whether a relationship was found
    between DTCA presence and increased prescribing volumes; she did not
    include differences in the amount spent on DTCA per month in her model
    and was therefore unable to estimate returns on advertising investment.
        This is the only published study using a time series analysis of
    physician-specific data to assess the effects of a DTCA campaign.
    Promotion of this product to physicians preceded the DTCA campaign and
    continued afterwards. Thus, this analysis identified increases in
    prescribing associated in time with the DTCA campaign and probably
    attributable to it.
                    Conclusion: Retrospective Data Analyses
        The administrative data analyses described above indicate an
    association between heavily advertised products and increases in
    prescribing volume and drug costs. In other words, they strongly
    suggest that, as intended by manufacturers, DTCA does stimulate drug
    sales. The NIHCM reports have found a strong association between the
    most heavily advertised products and therapeutic classes, and large
    annual increases in retail prescription drug costs in the United
    States. This occurred through an increase in prescribing volume for
    expensive heavily advertised products.
        Zachry et al. found an association between monthly spending on DTCA
    and increases in diagnoses for conditions treated by advertised
    conditions as well as for prescriptions for specific products. For
    lipid lowering drugs, both the drug class and individual products
    appeared to benefit. This is consistent with the pattern of advertising
    that has occurred within this class, with competing products advertised
    to the public. For antihistamines, increased prescribing for heavily
    advertised products was accompanied by a reduction for older products
    that are not being advertised to the public. This is similar to the
    pattern observed by PHARMAC in New Zealand, with a concurrent increase
    in prescription volume for fluticasone inhalers and a reduction in
    volume of beclomethasone inhalers. The experience in New Zealand
    suggests that some beclomethasone users (and their physicians) may have
    been unaware that the two products were essentially equivalent, except
    in price.
        Wosinska found a strong association between monthly spending on
    DTCA and choice of lipid lowering drug within an insured population in
    California. However, when promotion aimed at physicians (drug
    detailing) was entered into the model, the association became weaker,
    and her results suggest that drug detailing remains a dominant means of
    shifting prescribing choice.
        Taken together, the administrative database analyses suggest that
    DTCA does contribute to increased prescribing volumes for heavily
    advertised drugs. However, most of these analyses cannot separate out
    the effects of DTCA from promotion aimed at physicians, and therefore
    do not allow for calculation of the proportion of new prescriptions
    stimulated by DTCA versus those stimulated by physician-directed
    promotion, or of interactions between the two.
                                   References
        1. Findlay S. Prescription Drugs and Mass Media Advertising.
    Washington, DC: National Institute of Health Care Management. September
    2000. Available at: www.nihcm.org. Accessed: December 2002.
        2. Findlay S. Prescription Drugs and Mass Media Advertising, 2000.
    Washington DC: National Institute of Health Care Management, November
    2001. Available at: www.nihcm.org. Accessed: December 2002.
        3. IMS Health. 1999 Direct-to-Consumer Prescription Drug
    Advertising in U.S. Reaches $905 million through June. Press Release.
    London, Oct 12, 1999.
        4. Rosenthal MB, Berndt ER, Donohue JM, Frank RG, Epstein AM.
    Promotion of Prescription Drugs to Consumers. New England Journal of
    Medicine 2002; 346 (7): 498-505.
        5. Zachry WM, Shepherd MD, Hinich MJ, Wilson JP, Brown CM, Lawson
    KA. Relationship between direct-to-consumer advertising and physician
    diagnosing and prescribing. Am J Health Syst Pharm 2002; 59: 42-49.
        6. PHARMAC Direct to Consumer Advertising (DTCA) submission to
    Medsafe, Ministry of Health. July 2002. M5-12-15 #65401 [unpublished
    report].
        7. PHARMAC (Pharmaceutical Management Agency Ltd). PHARMAC
    Submission to Ministry of Health Review of Direct to Consumer
    advertising. November 2000. [unpublished report].
        8. Hankin J. FDA letter to GlaxoWellcome concerning promotional
    campaign for Flixotide, April 8, 1998. Available at: http://
    www.fda.gov/cder/warn/apr98/6205.pdf. Accessed January 2000.
        9. Wosinska M. Effects of Direct-to-Consumer Advertising on
    Prescription Choice. Department of Economics. University of California
    at Berkeley. Working Paper. June 2001. Available at:
    www.ucberkeley.econ.edu. Accessed January 2002.
        10. Eichner R, Maronick TJ. A review of direct-to-consumer (DTC)
    advertising and sales of prescription drugs: does DTC advertising
    increase sales and market share? J Pharm Market Manag 2001;13(4):19-43.
                                   __________
              Questions of Senator Murray to John M. Taylor, J.D.
        Question 1. When I joined this committee in 1997, I worked on the
    FDA Modernization Act. Our goal was to provide additional resources to
    FDA and streamline the regulatory process for drug approval.
        Recently, I worked with several members of this committee to enact
    a Medical Device User Fee to provide additional resources to FDA to
    improve the approval process of medical devices.
        These pieces of legislation are important in our efforts to get
    safe and effective life-saving drugs and devices to patients without
    unnecessary delay.
        But, I know your agency is struggling to meet the mandates included
    in both of these bills, and as an Appropriator, I know we struggle to
    provide the resources.
         Will the new requirements included in the House-passed
    reimportation bill or the Senate bipartisan bill strain FDA's limited
    resources?
         I realize that a user fee has been proposed to offset the
    regulatory costs for FDA, but what happens if we are unable to collect
    the userfee or--if because of appropriations limits--you don't have the
    ability to spend the money raised through the user fee?
         Has FDA done a cost analysis on the agency if the House-
    passed bill or similar measures are adopted?

        Question 2. Many American consumers assume that all ``drugs they
    purchase'' from Canada have been inspected and approved by Health
    Canada authorities.
        Are products that are simply shipped through Canada for export to
    other countries inspected by Canadian authorities?
        Drugs that are manufactured in Canada for export to other countries
    are subject to Health Canada inspection.
         Is this the case?
         And, if so, how can American consumers be sure that they
    are protected from potentially dangerous, unsafe, and counterfeit drugs
    passing through Canada?

        Question 3. As you know, there are a number of products that could
    be exempt from any reimportation legislation, including infused or
    injected biologics and controlled substances.
        While I am pleased that these products are being treated with
    greater caution under the proposed legislation, I am concerned that
    this illustrates the concerns about patient safety and abuse of
    prescription drugs.
         Is there a justification for excluding certain products
    from reimportation?
         Do you believe these exemptions are sufficient and that
    FDA will be able to ensure that these products are not illegally
    reimported?

        Question 4. The growing threat of counterfeit drugs is an issue
    that FDA and drug manufacturers have been struggling with for a number
    of years.
        We've heard about a number of drugs that were counterfeited and
    imported into the United States for patient consumption:
         drugs that had been tampered with;
         drugs that did not have the same safety and efficacy
    standards required by FDA; and
          drugs that had been manufactured in unsanitary
    conditions.
        Are there adequate protections in the pending reimportation bills
    to prevent an explosion of counterfeit drugs in the United States.?
        Could the mechanisms included in these proposals--like the full
    chain-of-custody--also be open to counterfeiting?
         Are there additional steps we should take to prevent an
    increase in counterfeit drugs?
        I am concerned that many patients may never know if their drugs
    have been tampered with or are even the appropriate dosage.

        Question 5. The Canadian drug market is significantly smaller than
    the U.S. market.
         Can this market sustain a huge new U.S. customer?
         How do we ensure that we have sufficient drug supplies in
    this country and that patients who reimport or access reimported drugs
    are not subject to a disruption in their supply? Many patients take
    medication daily or several times a day, and any disruption or delay
    could have serious health consequences.

        Question 6. In your testimony, you endorse reimportation as a
    mechanism for: controlling drugs costs in the United States;
    introducing competition into the market; and offering patients and
    doctors another tool to address the increasing costs of drugs.
         What kind of pressure do you see happening on drug costs?
         What potential savings are there for all consumers or when
    calculating the cost of health care in this country?
         Will the savings be widespread or isolated to a few drugs?
                                   __________
     Prepared Statement of the Hon. Jim Doyle, Governor, State of Wisconsin
        Mr. Chairman, members of the Senate Health, Education, Labor, and
    Pensions Committee. I submit my testimony to this committee on behalf
    of the citizens of Wisconsin, so many of whom are struggling to afford
    the costs of basic medical care.
        There is no doubt that medical science has yielded discoveries that
    have extended and improved the quality of our lives. But it is equally
    true that the skyrocketing price of prescriptions threatens to deny
    many of our citizens access to these lifesaving cures.
        Like most Americans, I am deeply disappointed that the Federal
    Government has not done more to address this dramatic inflation in
    prices, or to provide meaningful prescription drug coverage to those
    who need it most.
        But as I have often said, there is one thing the Federal Government
    could do tomorrow that would make prescription drugs more affordable
    for every American, and that's to allow safe reimportation of U.S. made
    and approved prescriptions from Canada.
        Everyday, I meet people in Wisconsin who struggle with the high
    cost of prescription drugs--and are often forced to make inhumane and
    unbearable choices between food and medicine . . . or skipping a dose.
        But just across the border, Canadians can walk into their corner
    drug store and buy prescriptions for a fraction of what we pay. These
    are the same medications available here, but may be two or three times
    as expensive for U.S. consumers.
        Because the Federal Government hasn't acted effectively, States
    like Wisconsin have been forced to lead the way. In February, in
    response to overwhelming demand from the people of Wisconsin, we
    launched a website--www.drugsavings.wi.gov--that empowers our citizens
    to order these lower price prescription drugs from pharmacies that our
    State has visited and found to be safe, reputable, and reliable.
        The response has been remarkable. Over the last 11 weeks we have
    had more than 107,000 visitors to the website, an average of more than
    1,500 visitors a day trying to find help with affordable prescription
    drugs.
        Here are some of the stories they have shared with me:
        Connie sent an e-mail to tell me that the only way she and her
    husband can afford the drugs he depends on is to buy them from Canada--
    since there are no generic substitutes.
        Cari is 48 years old, disabled, and has no prescription drug
    coverage. She hopes that my website will help her with the costs of the
    nine prescription drugs she takes.
        Clare wrote to tell us that her husband is a transplant patient and
    his anti-rejection medication costs $1,000 to $1,300 per month
    depending on the pharmacy used. Her husband is 65 and still working,
    but she wonders how anyone except the wealthy can afford this
    medication.
        Mary from Brookfield says she has been ordering drugs from Canada
    for over a year for herself and for her husband. They are senior
    citizens and take multiple medications and just could not afford the
    high prices.
        Yvonne from Cudahy takes 20 medications daily. Some she buys from
    Canada, some she gets in samples from her doctor, and others she will
    have to drop because she simply can not find a way to afford them.
    Unfortunately, the drugs she will have to stop taking are the important
    ones--treatment for her heart and coronary artery disease, chronic
    pain, and depression.
        Bonnie asked me if there is anything to help her pay for over $500
    a month in drugs. She had to switch insurance companies and no longer
    has prescription drug coverage. She is 57 years old.
        Bruce wrote saying:

              Thanks for your work on drugs from Canada. The only problem
            is that our insurance company won't cover any of the costs,
            because they say the drugs are not FDA approved. We need to
            address that issue.''

        I get e-mails from all over the country, because people everywhere
    are facing the same challenges.
        Nicole from California thanked me for posting the information about
    Canadian pharmacies and taking the time to ensure these are reputable
    sources. She went on to say that her mother will have to cut back her
    food budget to afford Celebrex, needed after her foot surgery. The
    irony here is that her mother is a former employee of the Federal
    Government--the same government that now steadfastly refuses to take
    action that will make drugs more affordable.
        I understand that the pharmaceutical companies don't want us buying
    safe prescription drugs from Canada--because it cuts into their
    profits. But I don't understand why the Federal Government isn't on our
    side, trying to get some help for our citizens.
        The Bush Administration has the authority--right now--to allow the
    safe reimportation of U.S. made and approved prescription drugs from
    Canada.
        The drug companies have waged an expensive, highly coordinated
    scare campaign to try to convince people that buying from Canada is
    unsafe. But do any of us really believe that the Canadian health care
    system is more dangerous than our own? If we were in Canada and got
    sick, would any of us really think twice about going to a hospital and
    taking the medication prescribed to us?
        I know there may be a few disreputable pharmacies in Canada, just
    as there are here. But that's precisely why our State has checked out
    the pharmacies we're dealing with to ensure that they are safe.
        If the FDA has concerns about the safety of these drugs, then I
    would encourage them to do what our State has done. Put some inspectors
    on a plane, send them to Canada, and check out these pharmacies for
    yourself.
        It is time for the FDA to stop doing the bidding of the drug lobby,
    and start helping States like Wisconsin to implement a safe system of
    prescription drug reimportation. I find it amazing that the FDA has
    time to send out press releases attacking our website, time to send its
    staff to Wisconsin to hold press conferences criticizing our efforts,
    but not time to actually work with us to put this system into place. It
    is a story of missed opportunities and misplaced priorities, and it is
    a disservice to the American people.
        One thing is clear: someone has to stand up to the big drug
    companies, who have proven they will do anything to protect their
    profits at the expense of our citizens' health.
        U.S. drug manufacturers have threatened to blacklist Canadian
    pharmacies and cause shortages in Canada if they move ahead with
    reimportation. I have asked Attorney General John Ashcroft to
    investigate these companies for violations of anti-trust laws.
        Unfortunately, Attorney General Ashcroft has taken no action. And
    unless he does, the 25 largest online Canadian pharmacies have said
    they won't be able to do business with Wisconsin . . . or any other
    State.
        Even more recently, we have heard that several merchant credit card
    payment processors have been scared off from providing their e-commerce
    credit card services to Canadian mail order pharmacies. In March, Visa
    and MasterCard announced that they will not service Canadian mail order
    pharmacies because they have been under pressure from the FDA to cease
    their support of payment processing. They cited pressure from the FDA
    and have warned their member financial institutions to avoid so-called
    ``illegal'' transactions.
        The simple fact is this: people in Wisconsin--and all over
    America--need relief from the high price of prescription drugs.
    Reimportation holds the promise of lower prices, and expanded access to
    life saving medicines. It is time for the Federal Government to move
    past the scare campaign and heavy-handed tactics of the drug lobby, and
    start being on our side as we work to make prescription drugs
    affordable for all Americans.
        Not only that, but Federal approval of prescription drug
    reimportation holds the potential for huge savings for Wisconsin
    taxpayers. Our State spends more than $700 million annually on
    prescription drugs for Medicaid recipients, employees, and inmates. If
    we could save just a fraction of that amount by purchasing drugs from
    Canada with Federal approval, it would mean savings to taxpayers of
    tens of millions of dollars.
        Organizations that advocate on behalf of senior citizens in
    Wisconsin such as the Coalition of Wisconsin Aging Groups, Wisconsin
    Citizen Action, and AARP-Wisconsin support our efforts to provide
    access to safe, low cost prescription drugs from Canada.
        No matter what happens, this is an issue that won't go away. I am
    going to continue to fight to make lower price prescription drugs from
    Canada available here in the United States--and I hope that the people
    of Wisconsin will have your support in this effort.
                                   __________
                 Prepared Statement of Kenneth C. Carter, Ph.D.
        Mr. Chairman and members of the committee, thank you for the
    opportunity to submit my comments for the written record on the
    reimportation of prescription drugs into the United States. I commend
    this committee for holding this hearing and particularly for allowing
    American healthcare and biotechnology companies, like Avalon, to put
    forth our input. Please allow me to strongly encourage you to hold
    additional hearings on this issue that will afford companies, like my
    own, the opportunity to share our views directly before the committee
    as you consider drug reimportation. The decisions you make with respect
    to this issue will have profound effects on our industry which in turn
    will have an enormous impact on the continued development of cutting
    edge pharmaceuticals. The advances made by American enterprises in the
    area of drug development and biologicals is unsurpassed by any other
    nation. I ask that this committee consider how drug reimportation would
    impact the kind of innovation that has led to medical advances
    unimagined just a short time ago.
        It is extraordinarily important that Congress continue to ban the
    reimportation of drugs from foreign countries, both for broader social
    reasons and because of the potential negative impact on the development
    of better medicines in the United States. While I am extraordinarily
    sensitive to the issue of healthcare costs in general, and prescription
    drugs in specific, having my own elderly parents and several other
    relatives who are struggling with this issue, passing bills which allow
    importation of price-controlled, potentially unsafe medications from
    markets that are not regulated, poses not only risks to individual
    patients, but undermines fundamental free trade underpinnings of the
    American economy.
        Another important issue, which is a more critical issue for the
    economy, is the fact that healthcare innovation is absolutely dependent
    on the free trade pricing of medicines. The United States is home of
    the vast majority of innovative healthcare and biotech companies.
    Investors have risked billions of dollars on the promise that the
    Biotech industry will develop new and better drugs. Thousands of
    Biotech companies throughout the United States will be severely,
    negatively impacted by the passage of this bill. I am the Co-Founder
    and President of a company that has raised $80M to develop next-
    generation cancer drugs and our company is faced with the negative
    consequences of drug reimportation every day. Just a short time ago,
    when meeting with potential investors in New York, I was peppered with
    questions about why investors should invest in healthcare companies
    given the trend toward the allowance of reimportation of unregulated
    drugs from other countries. I fear that reimportation will simply kill
    innovative research in healthcare and in the end crush a vital sector
    of the U.S. economy.
        Some ideas being considered by Congress attempt to mitigate the
    impact of drug reimportation by excluding biologics from the list of
    drugs that could be reimported. That would not help Avalon or many
    other biotech companies. Avalon uses cutting edge genomic techniques to
    develop the type of small molecule drugs that would be allowed to be
    reimported. Avalon and companies like it are developing hundreds of
    drugs in clinical trials and have thousands more in the preclincal
    stages. All of these companies are heavily dependent on the prospect
    that their drug will be approved and accepted in the marketplace,
    thereby generating the profits necessary to reward the investors who
    took the risk of backing the company and, additionally, to fund the
    development of additional drugs. Drug reimportation would shut off the
    flow of investment funds to the biotech sector and would stifle the
    development of new life-saving drugs that patients are waiting for.
        Providing access to medical treatment for all socio-economic groups
    is an important issue. Please consider other options that do not risk
    bringing unregulated drugs into the country while damaging the economy.
        I strongly encourage the committee to consider a broad view of this
    issue and work to find ways to address the cost of prescription drugs
    in a way that will not jeopardize the availability of new cutting edge
    treatments at a time when medical advances show so much promise. Again,
    thank you for allowing me to share my views with this committee. I
    welcome an opportunity to continue working with this panel as you
    continue your examination into drug reimportation.
                                   __________
                  Prepared Statement of J. Randall Hoggle, RPh
        Mr. Chairman, and members of the committee, I am pleased to share
    my comments with you today as you consider the very important issue of
    prescription drug importation. First, I would like to commend the
    members of this committee for your continued efforts to find ways to
    make prescription drugs more affordable while balancing concerns
    related to product safety and quality. Indeed every American wants to
    have affordable access to prescription pharmaceuticals and at the same
    time have placed a great deal of confidence in our government to ensure
    the safety of these medicines.
        After more than 30 years of experience in the pharmaceutical
    industry, I know the many challenges associated with drug development
    and delivery. Safety and quality are two of the most important factors
    when it comes to placing drugs in the market. Having worked closely
    with the Food and Drug Administration (FDA), I know the rigorous
    standards in place to guard our Nation's drug supply. As CEO of Health
    Pathways, a privately held healthcare services and products holding
    company in Gaithersburg Maryland, I want to share my concerns over
    assuring the safety and quality of imported drugs. Further, I want to
    highlight for you the kinds of systems available to meet those
    challenges which I urge the Senate to address thoroughly as you
    consider prescription drug importation.
      1. taking necessary steps to keep our nation's drug supply safe and
                                     secure
        The United States is one of the most tightly regulated national
    systems for distributing prescription drugs. As a result, we can boast
    that it is one of the world's safest systems as well. However the
    pharmaceutical supply chain in the United States is plagued with issues
    surrounding the potential for counterfeiting and diversion. Mark
    McClellan, the former Food and Drug Administration (FDA) Commissioner,
    recently (2004) stated ``The number of discovered counterfeit drugs in
    the United States has increased four fold in the last decade. The
    counterfeiters are getting smarter and more sophisticated.'' The
    potential for counterfeiting and diversion is likely to increase when
    allowing drugs to enter the United States from countries that do not
    have the stringent standards that we have domestically.
        Legislative proposals which move toward a world market in
    pharmaceuticals makes the regulatory mission of FDA much more
    challenging than ever before. Proposals allowing importation of
    pharmaceuticals pose issues that have never before been addressed by
    current U.S. regulatory or distribution schemes. There are multiple
    issues that need be identified to implement importation. These issues
    particular to the U.S. market will need to be addressed to ensure
    product quality and patient safety as this new market is developed.
    Emphasis must shift from enforcement strategies to prevention measures
    to keep illegal products from entering the U.S. market. Drug
    counterfeiters not only defraud consumers, they also deny ill patients
    the therapies that can alleviate suffering and save lives.
    Counterfeiters produce and introduce near-perfect copies of the most
    popular and expensive drugs through diversionary tactics employed by
    sophisticated schemes. Some counterfeits have passed undetected through
    wholesalers and/or retail chain warehouses to the shelves of retail and
    acute care pharmacies.
        The FDA report (COMBATING COUNTERFEIT DRUGS--February 2004)
    describes how to achieve modern, comprehensive security protections for
    the U.S. drug supply so we can keep pace with the increasingly
    sophisticated threats we face. The FDA's comprehensive report
    highlights ways to assure that the Nation's drug distribution system
    protects Americans from counterfeit drugs. These measures address
    critical areas, including: (1) Securing the movement of the product as
    it travels into and through the U.S. drug distribution chain; (2)
    Enhancing regulatory oversight and enforcement; and (3) Adoption of
    secure business practices by all participants in the drug supply chain.
    In addition if importation laws are passed FDA will need new Systems to
    assure that any exporters into the U.S. market are inspected and
    continually certified for doing business with U.S. importers.
               2. about health pathways audit service and purpose
        Health Pathways currently serves as a trusted agent by government
    and industry sources within the health care distribution system. Its
    team of management and staff has a long track record of serving the
    industry in an intermediary role where they have discreetly
    demonstrated the use of appropriate business practices and security
    procedures. Health Pathways formed the Audit Services Division in
    October 2003 to provide a comprehensive Inventory Management Agreement
    (IMA) advisory service. Further, the division provides complete Drug
    Supply Audit Services to verify compliance with Federal and State
    regulations and the effective implementation by distributors of
    recently approved Guidelines for Pharmaceutical Distribution System
    Integrity. FDA's Counterfeit Drug Task Force Final Report (February
    2004) highlights specific steps the agency is taking to keep the U.S.
    drug supply secure against increasingly sophisticated criminal efforts
    to introduce counterfeit drugs. If these measures and voluntary
    consensus guidelines are adopted and enforced, the U.S. pharmaceutical
    market will serve as a worldwide example of self regulation and will
    avoid further governmental intervention to insure the integrity of
    pharmaceutical supplies to American consumers. These systems can be
    expanded for use with drug exporters from foreign countries and can be
    the base for the development of additional systems necessary for FDA to
    implement new laws allowing imported drugs from outside the United
    States.
        Health Pathways, Inc. (HPI) has met with over 25 of the major
    pharmaceutical and biotech companies to preview the new HPI Audit
    Service. Based on the knowledge and feedback gained at these meetings
    combined with input from the leading experts in pharmaceutical and
    distribution sector, Joint Council on Accreditation of Hospital
    Organizations (JCAHO), corporate finance, FDA inspections and materials
    safety audit, HPI has built a comprehensive and flexible audit service
    business and system that will assist all stakeholders in the
    distribution channel in their efforts to assure medical product
    distribution system integrity and product safety.
        HPI audit procedures are developed by industry experts who combined
    standard audit practices with techniques developed from field tests. By
    employing these procedures, HPI auditors can support members of the
    distribution system to identify ways that counterfeits may be
    penetrating the distribution system and to close those gaps.
      3. distribution process and audit service--a process to protect and
                maximize the pharmaceutical distribution system
        Health Pathways provides a menu of five audit procedure options for
    manufacturers to meet individual needs and budget needs. These options
    allow manufacturers to select one and migrate to others based on
    findings and need.
        In general, Audit Service options will each provide buy and sell
    side audit assessments and will provide a comprehensive look at
    wholesalers' plans for insuring integrity in workflow, documentation
    and IT management systems.
        The five options are summarized below:
        (1) Rapid Statistical Analysis Sampling Process: Sampling of all
    three-distributor categories uniformly: (a) Top 4; (b) Regionals with
    Multi-State Locations; and (c) Regionals with Single State Locations
    and Specialty Distributors. This sampling pattern will provide three
    sequences of statistical analysis across all three distributor
    categories. This approach has the value of identifying issues uniformly
    across the Company-authorized wholesaler community while allowing a
    great breadth of prevailing issues to be uncovered and addressed in
    unison. The other advantage is increased likelihood of finding
    subversive elements prior to counter maneuvers being implemented.
        (2) Detailed Analysis By Distributor Company Process: This approach
    requires sequencing the Top 4 wholesalers and would allow additional
    time to make changes by the other companies who are audited later. The
    advantage of this process is that it would allow the audit teams to
    clearly, within each company, understand the patterns of intra-company
    product movement over a 2- to 3-month period, especially as it relates
    to interface and business relationships with its Trading Company and
    associated two-way tracking of Retail Chain product movement with their
    prime wholesalers.
        (3) Rapid Statistical Sampling followed by Detailed Analysis
    Process: In this blended model, the Rapid Statistical Analysis Sampling
    Process would be completed through the First Level of three wholesalers
    and then converted to the Detailed Analysis By Distributor Company
    Process starting with following two groups: (a) the Company-authorized
    wholesalers who have Trading Company divisions; and (b) the Company-
    authorized wholesalers where information patterns warrant closer
    scrutiny.
        (4) Desktop Inventory Analysis Process: For each distribution
    location, five inventory data feeds will be collected and utilized to
    develop an exception report for outliers on net inventory calculations.
    The advantage of this approach is a rapid low cost ``exception only''
    analysis demonstrating distribution locations with variance in net
    sales to purchases. If used alone, without the ability to assess
    physical inventory, workflow process, and potential for diversion or IT
    systems, there is opportunity to falsify and/or manipulate
    documentation.
        (5) Standard Manufacturer Audit Process: Additionally, these four
    options can be converted into the Standard Manufacturer Audit Procedure
    Service that encompasses the additional aspects of the Distribution
    Guidelines. This audit provides the most comprehensive analysis and
    summary of how a distribution location scores against the Distribution
    Guidelines and the State Requirements in which the wholesaler operates.
    This audit process provides a supportive approach to the wholesalers by
    providing cure periods and re-evaluation to score improvements in
    workflow process, documentation and IT system capabilities. Only after
    the cure period is final scoring completed against a benchmark standard
    for distribution channel integrity. By employing this process,
    manufacturers can demonstrate strong leadership in the fight against
    counterfeits by enforcing the audit provisions of their Inventory
    Management Agreements with their Authorized Distributors of Record.
        The HPI Audit Team performs the Audit Services consistent with the
    rigorous GSA contracts standard for the Department of Health & Human
    Services (DHHS) FDA, DEA and other government agencies. This enables
    manufacturers to demonstrate the rigor that has been undertaken to
    insure patient safety of manufacturer's product distributed in the
    United States by Company-authorized wholesaler customers.
               4. audit service safety assurance for drug imports
        Health Pathways has built a team of highly qualified audit experts
    and has developed audit processes and procedures that use a secure and
    sophisticated IT system to capture and analyze audit data. Collectively
    these capabilities enable Health Pathways Audit Services Division to
    identify and provide documentation for its manufacturer clients to
    assure compliant distribution of their products. Our copyrighted
    procedures have been field tested. To date the initial audits have
    demonstrated the ability to identify gaps in the distribution channel
    that allow counterfeits to enter, diversion to occur and multiple
    accounting entries to be recorded in legacy systems.
        It is essential that any program to allow the importation of drugs
    into the United States adhere to strict safety standards. In this
    regards, a greater burden would be placed on the FDA which would have
    to find a way to certify the safety of pharmaceuticals coming into the
    country. I believe that the kind of audit system I've described today
    can contribute tremendously to the work of the regulatory agency. In
    fact, it is essential to making sure that the cross-border drug supply
    chain is safe and secure. I urge this committee to consider ways to
    adopt a system of auditing, conducted through the proper regulatory
    agency, if drug importation is to become a reality. It is a necessary
    step in assuring the safety and quality of drug imports from
    manufacturers through supply lines and ultimately to the American
    consumer.
        Thank you again for accepting my written statement today. I welcome
    a continued dialog with the members of this committee on this crucial
    matter as you move forward.
                                   __________
                                     McDonald & Hayden,
                                     Toronto, Ontario, M5C 2Y3,
                                                          May 18, 2004.
    Hon. Judd Gregg, Chairman,
    Committee on Health, Education, Labor, and Pensions,
    U.S. Senate,
    Washington, DC 20510.

    Hon. Edward M. Kennedy, Ranking Minority Member,
    Committee on Health, Education, Labor, and Pensions,
    U.S. Senate,
    Washington, DC 20510.

    Re: Full Committee Hearing on Prescription Drug Import Legislation,
    Thursday, May 20, 2004

        Dear Chairman Gregg and Senator Kennedy: McDonald and Hayden is a
    Toronto law firm that represents a number of Canadian pharmacies, some
    of whom sell exclusively to the domestic Canadian market and others of
    whom both sell in Canada and export to the United States.
        Our clients have a keen interest in the legislation pending before
    the committee which would authorize the importation of prescription
    drugs into the United States from Canada. As the committee studies this
    matter, we believe it is very important for the committee to take note
    of steps which have been taken in Canada by the major branded
    pharmaceutical companies (``Big Pharma'') to cutoff the supply of
    pharmaceutical products to the Canadian market. This subject appears to
    us to bear directly on your deliberations concerning new Federal U.S.
    legislation that would permit prescription drug imports into the United
    States from Canada.
        Over the past several months, our clients have had to deal with a
    wide-spread and concerted effort on the part of Big Pharma to cutoff
    supplies to those suspected of providing pharmaceutical products to
    Canadian exporters.
        We urge your committee to take these restrictive supply practices
    carefully into account in your deliberations on proposed U.S.
    legislation. As we understand it, the proposed legislation pending
    before the committee \1\ is designed to permit the importation of drugs
    into the United States from Canada, as well as other identified
    countries. If appropriate preventive steps with regard to supply
    restrictions are not taken, it is our belief, based upon their past
    conduct, that Big Pharma will try to frustrate, and may well succeed in
    frustrating U.S. legislative reforms by continuing to limit supply in
    Canada, as well as elsewhere, thus drying up stocks available for
    export to the United States.
    ---------------------------------------------------------------------------
        \1\ We understand that the committee has pending before it three
    bills: S. 2307, introduced by Senator Charles Grassley on April 8,
    2004; S. 2328, introduced by Senator Byron Dorgan et al. on April 21,
    2004; and, H.R. 2427, passed by the House of Representatives on July
    25, 2003. We also understand that the Chairman may also introduce
    legislation on this issue.
    ---------------------------------------------------------------------------
          2003: big pharma's efforts to limit drug supplies in canada
        In early 2003, a number of pharmaceutical manufacturers, including
    GlaxoSmithKline Inc., Pfizer Canada Inc., AstraZeneca Pharmaceuticals
    LP, and Wyeth Canada Inc., took concerted steps to control the flow of
    pharmaceutical products from Canada to the United States.\2\
    ---------------------------------------------------------------------------
        \2\ See copies of 2003 correspondence from these manufacturers at
    Tab 1.
    ---------------------------------------------------------------------------
        GlaxoSmithKline's actions, in particular, led one of our clients,
    Kohler's Drug Store Limited (``Kohler's''), which exports to the United
    States as well as serving Canadians, to initiate a complaint under
    Canada's Federal Competition Act, seeking relief from GlaxoSmithKline's
    refusal to supply products to our client under that enactment's
    ``refusal to deal'' provisions. Unfortunately, the Competition Bureau,
    Canada's competition watchdog, determined, on the facts before it in
    2003, that GlaxoSmithKline's refusal to deal did not warrant further
    investigation. This determination was made because of statements issued
    by officials at the U.S. Food and Drug Administration (``FDA'') that
    the importation of drugs from Canada, even by individuals for their
    personal use, was in ``violation'' of U.S. laws.
        This so called ``violation'' is really a phantom illegality. The
    FDA, as is well known, in fact permits, under its enforcement
    discretion, repeated importation by U.S. citizens into the United
    States of up to 90 days supply of drugs from Canada.\3\ Nevertheless,
    the Canadian Competition Bureau, perhaps confused by the FDA's self-
    imposed contradictions and verbal contortions, refused in 2003 to
    intervene on Kohler's behalf against GlaxoSmithKline.
    ---------------------------------------------------------------------------
        \3\ As succinctly stated by Minnesota District Court Judge Peter
    Albrecht, in The Matter of GlaxoSmithKline plc, File No. MC 03-15992
    (May 7, 2004): ``not all drug importation is illegal,'' Tab 2, page 11.
    ---------------------------------------------------------------------------
              2004: big pharma's efforts to curtail supply further
        In 2004, as the cloud of this phantom illegality began to
    dissipate, and the real prospect arose of new U.S. legislation which
    would explicitly approve Canadian drug shipments to the United States,
    the response of Big Pharma, now led by Pfizer, was to redouble their
    efforts to curtail supply to all those whom it even suspected of
    providing product to Canadian exporters. The Big Pharma companies named
    above, and since joined by Novartis and Boehringer Ingelheim,\4\ have
    resorted to concerted and very intense supply restriction practices,
    such as refusing to supply Canadian distributors with full orders for
    their products. Arbitrary and unilateral quotas have been, and continue
    to be imposed on distributors and direct pharmacy purchasers alike,
    with the express purpose of squeezing out the supply of drugs to
    Canadian exporters.
    ---------------------------------------------------------------------------
        \4\ See letters from Novartis and Boehringer Ingelheim, dated May
    3, 2004 and May 12, 2004, respectively, at Tab 3.
    ---------------------------------------------------------------------------
        Other recent steps taken by Big Pharma in this regard have included
    complete refusals to supply products to any pharmacy even suspected of
    selling to U.S. consumers, or of selling to other pharmacies who
    themselves are thought to sell to U.S. customers. This practice was
    quite accurately described by Minnesota District Judge Albrecht as
    ``black-balling Canadian wholesalers and pharmacies that ship to U.S.
    consumers.'' \5\ This offensive, regrettably, has caused local Canadian
    pharmacists to reduce greatly, or curtail altogether their long-
    established practice of sharing surplus supply with professional
    colleagues who find themselves in short supply, much in the same way as
    individual stores of the larger drug chains in Canada (for example
    Shopper's Drug Mart) share product among their various outlets.
    ---------------------------------------------------------------------------
        \5\ See Tab 2, page 11.
    ---------------------------------------------------------------------------
        These draconian measures have even led to the complete cutoff of
    supplies to Canadian pharmacies that only serve their local customers,
    and do not export, and have never exported to the United States at all,
    on the slim ground that Big Pharma merely suspects them of doing so.
    For example, we represent Mrs. O's Pharmacy, a small pharmacy located
    in Fort Erie, Ontario, run by a 73-year-old pharmacist who has
    practised pharmacy in Ontario for over 50 years. In March, 2004,
    without any notice or justification, Pfizer Canada advised Mrs. O's
    Pharmacy that it would no longer supply any products to it, apparently
    because Mrs. O's Pharmacy had advertised its business on the Internet.
    Notwithstanding that Mrs. O's Pharmacy has never exported any drugs to
    the United States, Pfizer continues to refuse to supply Mrs. O's
    Pharmacy with any of its products. Our client estimates that Pfizer
    products would normally comprise at least 15 percent of its total drug
    sales. This loss of revenue threatens to ruin Mrs. O's business.\6\
    ---------------------------------------------------------------------------
        \6\ Affidavit of O. O'Charchin, paragraphs 10-12 (Mrs. O's Pharmacy
    and Pfizer Canada Inc.--Competition Tribunal materials, Tab 4).
    ---------------------------------------------------------------------------
        The measures taken by Big Pharma have also forced other Canadian
    pharmacies to undertake not to supply drugs to anyone who may export to
    the United States. Another of our clients, Broadview Pharmacy, located
    in Toronto, Ontario, finds itself in such a predicament with respect to
    Wyeth Canada, whose products (now completely cutoff) comprise of a
    significant portion of its total sales.\7\
    ---------------------------------------------------------------------------
        \7\ Affidavit of H. Cohen, paragraph 7 (Broadview Pharmacy and
    Wyeth Canada Inc.--Competition Tribunal materials, Tab 4).
    ---------------------------------------------------------------------------
         reaction in canada: pending applications before the canadian
                              competition tribunal
        Some of our clients have been forced to take on Big Pharma
    themselves, by commencing their own proceedings before Canada's
    Competition Tribunal (the Canadian equivalent of the U.S. Federal Trade
    Commission). Canada's Competition Act permits persons to seek leave
    from the Competition Tribunal to commence proceedings to obtain relief
    from a supplier's refusal to deal. Last week, Mrs. O's Pharmacy,
    Broadview Pharmacy and two other pharmacies based in Hamilton, Ontario
    all commenced leave applications for such relief before the Canadian
    Competition Tribunal, as against Pfizer Canada, Wyeth Canada, and
    Novartis, respectively.\8\
    ---------------------------------------------------------------------------
        \8\ Copies of the Application materials in all three cases, which
    have now been filed and are a matter of public record, are attached at
    Tab 4. They include sworn affidavits.
    ---------------------------------------------------------------------------
       likely future proceedings before the canadian competition tribunal
        We anticipate that, once suitable U.S. legislation is passed
    permitting the importation of drugs from Canada into the United States,
    other pharmacies, including our client, Kohler's, will also apply for
    leave to the Competition Tribunal to obtain relief from Big Pharma's
    refusal to deal.
        Nevertheless, it must be recognized that such proceedings are time-
    consuming, burdensome and expensive, necessitating, as they do,
    individual Canadian pharmacies conducting complex litigation against
    Big Pharma. Such proceedings could be delayed and deliberately ``strung
    out'' by Big Pharma, which is more than capable of hiring experienced,
    effective counsel to represent their interests.
     u.s. legislation: the clear necessity for the inclusion of penalties
                             for refusing to supply
        The ongoing efforts of our clients to challenge Big Pharma's supply
    restrictions at the Canadian Competition Tribunal, while absolutely
    necessary for their business well-being, nevertheless do not, in our
    view, represent the most effective means of ensuring that Canadian
    exporters receive adequate supplies of drugs for their U.S. customers.
    A far more effective means of ensuring that Big Pharma adequately
    supplies Canadian exporters would be for the proposed U.S. legislation
    to impose severe penalties in the United States for supply restrictions
    sought to be imposed by Big Pharma upon exporters in Canada and
    elsewhere. It is apparent to us that, if such penalties are not imposed
    by the new legislation, Big Pharma, which desperately wants to curtail
    Canadian pharmaceutical exports to the United States, will no doubt
    attempt to, and may succeed in rendering U.S. legislative reform moot,
    by taking some or all of the following steps:
         Continuing to cutoff the Internet pharmacies from
    supplies;
         Attempting to drive the Canadian Internet pharmacies out
    of business;
         Forcing Canadian pharmacies to engage in lengthy and
    expensive litigation to reinstate supplies; and
         Generally frustrating and blocking Canadian drug export
    activity, even after the cloud of the FDA's phantom illegality has been
    lifted by new U.S. legislation.
        Accordingly, we respectfully urge that Big Pharma's supply
    restrictions be ``nipped in the bud'' by suitable provisions in the
    proposed U.S. legislation which would severely penalize Big Pharma for
    engaging in such practices. Of the legislation pending before the
    committee, bill S. 2328 would in our view be by far the most effective
    way to deal with this the current supply restriction problem. Such an
    approach would free U.S. consumers from dependence upon the outcome,
    which may be much delayed, of proceedings before the Canadian
    Competition Tribunal, where Big Pharma likely will attempt to ``grind
    down'' the Canadian pharmacies who are seeking relief from it. U.S.
    consumers should not have to await the favourable conclusion of
    Canadian Competition Tribunal proceedings in order to get the drug
    price relief they need and deserve now.
                           u.s. patent law amendments
        In addition, we also urge appropriate amendments to U.S. patent
    laws in order to prevent Big Pharma from taking the position that the
    export of drugs from Canada into the United States is an actionable
    patent violation. Even if Big Pharma's attempts directly to curtail
    supply fail, we anticipate that Big Pharma will likely launch suits
    against Canadian exporters alleging such patent violations.\9\ Such
    litigation could drive Canadian drug exporters out of business, thus
    accomplishing Big Pharma's goals indirectly. We therefore urge that
    corrective U.S. legislation be passed which would prevent Big Pharma's
    patent rights from being abused in this manner.\10\
    ---------------------------------------------------------------------------
        \9\ See Tab 1, Wyeth's letter of June 16, 2003, in which it stated
    to Kohler's ``. . . Moreover, these exports of Wyeth Canada products
    from Canada into the United States may constitute infringement of
    intellectual property rights in the United States.''
        \10\ InsideHealthPolicy, on March 29, 2004, and CPTech, on March
    31, 2004, each identified this issue, which arises out of the Jazz
    Camera (or Jazz photo) case referred to in their respective
    publications on the subject. See Tab 5. It is urged that U.S.
    legislation prohibit Big Pharma from attempting to employ its patent
    rights to prevent Canadian and other pharmaceutical exports to the
    United States. One way to do this would be for the legislation to make
    it clear that U.S. patent rights are exhausted by the first sale of the
    patented product by the patent owner, or by a party authorized to use
    the patent, as for example on resale by a distributor.
    ---------------------------------------------------------------------------
                                   conclusion
        If the foregoing points are not taken adequately into account, and
    if they are not effectively dealt with in the legislative reforms which
    Congress is now considering, it is our fear that the resulting new U.S.
    laws may have little or no practical effect, because Big Pharma may
    still be able to cutoff the source of supply for U.S. consumers by
    continuing the restrictive supply practices described above, and by
    threatening and prosecuting patent violation suits against Canadian and
    other exporters. We therefore urge Congress to enact full remedial
    legislation accordingly.
        We also respectfully urge Congress to consider the establishment,
    through legislation, of a statute-mandated cooperation program between
    U.S. and Canadian pharmaceutical regulators, such that each country may
    be encouraged and enabled to accept the adequacy of the pharmaceutical
    regulatory regimes of the other, thus enhancing the free flow of
    pharmaceutical products across the border, in the spirit of the free
    trade principles which both countries have accepted.
        We very greatly appreciate the opportunity to make these
    submissions to your committee.
                Sincerely Yours,
                                                             D.H. Jack,

                                                          Mark Adilman.
                                   __________
                           Prepared Statement of AARP
        Mr. Chairman and members of the committee, thank you for convening
    this hearing and for providing AARP an opportunity to share our views
    on the need to address rising drug costs through the safe importation
    of prescription drugs.
        Over 5 months ago, Congress enacted some sweeping changes to
    Medicare--including long-overdue prescription drug coverage. We believe
    that the new law, while far from perfect, lays the foundation for
    affordable Medicare prescription drug coverage upon which will we will
    build over time. AARP will continue to work with Congress to strengthen
    and improve the drug benefit and the Medicare program.
                      the need for importation legislation
        The Medicare prescription drug benefit was an important first step.
    But now more needs to be done to control the rising costs of
    prescription drugs so that Americans of all ages can afford needed
    medications. Modern medicine increasingly relies on prescription drug
    therapies; yet the benefit of these therapies still eludes those
    Americans who cannot afford to pay escalating drug prices. Between 1998
    and 2003, prescription drug prices rose at nearly twice the annual rate
    of inflation for that same period.\1\
    ---------------------------------------------------------------------------
        \1\ http://data.bls.gov/servlet/SurveyOutputServlet.
    ---------------------------------------------------------------------------
        CMS estimates that, in 2003, per capita spending on prescription
    drugs rose approximately 12 percent, with a similar rate of growth
    expected for this year.\2\ Much of the increase in drug spending is due
    to higher utilization and the shift from older, lower cost drugs to
    newer, higher cost drugs. However, rapidly increasing drug prices are a
    critical component.
    ---------------------------------------------------------------------------
        \2\ Data for 2003-2004 are projections from Table 11.
        Prescription Drug Expenditures: Aggregate and per Capita Amounts,
    Percent Distribution and Average Annual Percent Change by Source of
    Funds: Selected Calendar Years 1990-2013, http:
    //cm.hhs.gov/stastics/nhe/projections-2003/t11.asp.
    ---------------------------------------------------------------------------
        High drug prices, combined with the surging older population, are
    also taking a toll on State budgets and private sector health insurance
    costs. Medicaid spending on prescription drugs increased at an average
    annual rate of nearly 20 percent between 1998 and 2001. Until lower
    priced drugs are available, pressures will continue to squeeze public
    programs at both the State and Federal level. Pressure will continue on
    the private sector as well, possibly leading to elimination of, or
    reductions in, employer-provided drug benefits. Further, over 43
    million Americans currently have no health insurance coverage. Without
    access to negotiated prices, these Americans pay among the highest
    prices for prescription drugs in the world or, worse yet, don't fill
    prescriptions because they cannot afford to pay for them.
        AARP surveys demonstrate that our members consider drug prices
    exorbitant and the single most significant barrier to obtaining needed
    medications. Responses to an AARP Bulletin questionnaire last fall
    showed that our members split pills, skipped doses, asked doctors for
    free samples, and sold possessions because the costs of needed
    medications were too expensive. One woman poignantly noted that she
    begged for the unfinished prescriptions of friends who had died, hoping
    their left-over drugs would meet her needs.
        Americans of all ages need affordable prescription drugs now. Safe
    importation of prescription drugs from Canada is one way to begin to
    secure lower priced drugs. Our members question why prices in Canada
    can be lower, sometimes far lower, than prices in the U.S. It is a
    national embarrassment that people from all over the world come to the
    United States to access our advanced medical systems while many of our
    own citizens need to look outside our borders in order to afford their
    prescription drugs. But with the same drugs selling, in some cases, at
    30 percent and even 50 percent less in Canada and overseas, it is
    hardly surprising that so many make that choice.
        It is no longer a question of whether we should or should not allow
    the importation of drugs from abroad. The simple fact is that
    importation is already happening. Many Americans travel to Canada for
    less costly prescription drugs, or purchase their drugs through the
    Internet without any systematic U.S. oversight process in place to
    assure safety. Importation of drugs is likely to continue whether or
    not Congress acts. The trend is growing, and we have a responsibility
    to ensure that Americans can access lower cost drugs without putting
    their health at risk. AARP therefore supports legalizing importation
    through a system that ensures safety and lowers drug costs.
        We are very pleased that this committee--and the Senate as a
    whole--is moving the issue forward. We strongly urge you and your
    colleagues to take action that will lead to enactment of importation
    legislation this year. We believe we can meet the challenges of
    designing a prescription drug importation program that will ensure the
    integrity of pharmaceuticals and provide a streamlined process that
    enables consumers to access lower cost prescription drugs.
        AARP supports efforts--such as the bipartisan bill introduced by
    Senators Dorgan, Snowe, and Kennedy and the legislation being developed
    by Senator Gregg--that move to make lower priced drugs available to
    American consumers. We have specific recommendations for safety
    features that should be included in any importation legislation, and
    look forward to working with all of these bill sponsors on these
    recommendations. AARP and its members will actively support bipartisan
    legislation that lowers costs and ensures safety and we will
    aggressively work for passage this year.
                                 safety issues
        The health and safety of individuals is paramount in any
    importation system. AARP supports importation with strong safety
    features from licensed Canadian pharmacies and wholesalers. Regulation
    of the Canadian pharmacy system closely resembles its U.S. counterpart.
    As a result, we are confident that drugs purchased from Canada can be
    as safe as drugs purchased in the United States.
        However, we recognize that some manufacturers are curtailing their
    drug supply to Canada, which could lead to supply shortages. Thus,
    limiting importation legislation to Canada may not be feasible. Our
    members do not want hollow promises of importation legislation--they
    want legislation passed that will allow them the opportunity to fill
    their prescription safely and at a lower cost. Therefore, legislation
    that expands importation beyond Canada should also include strong
    consumer safeguards to ensure that these systems closely align with the
    U.S. standards.
                               fda certification
        Congress has tasked the Food and Drug Administration (``FDA'') with
    ensuring the safety and effectiveness of U.S. pharmaceuticals. Drugs
    manufactured for distribution in other countries may differ slightly
    from drugs destined for the United States. Some differences may be
    minimal and have little or no effect on the efficacy of the drug. Other
    differences may actually change the efficacy of the drug. Therefore,
    the FDA should determine whether imported drugs are safe for the U.S.
    market.
        In order to accomplish this goal, FDA will need the authority and
    resources to inspect pharmaceutical plants in foreign countries--much
    as they do now--to ensure that these plants conform to rigorous U.S.
    safety requirements. Where appropriate, a specific manufacturing line
    in a plant may receive certification in lieu of undergoing the more
    lengthy process of certifying the entire plant. We therefore urge the
    committee to ensure adequate FDA resources to effectively monitor and
    enforce these standards.
        Once the safety of pharmaceuticals from a given plant has been
    determined, a process should be established to guarantee the quality
    and efficacy of pharmaceutical distribution and dispensing.
    Pharmaceuticals should be dispensed and distributed according to the
    usual and customary pharmacy practices in the United States.
        The safety and authenticity of these pharmaceuticals should be
    assured at each point along the stream of commerce. Regular inspection
    of the flow of prescription drugs from the point of manufacture to the
    ultimate point of dispensing is necessary. FDA should implement
    mechanisms by which foreign pharmacies and wholesalers can be
    registered with and licensed by, or on behalf of the FDA. These
    entities should be fully accredited and licensed by a reputable
    licensing board.
        Consumers should be made aware of the results of FDA plant
    inspections and licensing activities. For example, FDA could provide
    electronic links from its Internet site to approved Internet pharmacies
    in Canada and other countries as appropriate. Having the FDA web site
    as the point of contact for a list of approved pharmacies would provide
    consumers with an official, secure source of information on safe drugs.
    However, not all consumers have access to the Internet; therefore,
    there should be mechanisms in place that will allow consumers to call a
    toll free number sponsored by the FDA, or other appropriate entities,
    in order to get information on approved foreign sources from which
    consumers can purchase lower cost pharmaceuticals. Consumers should
    also have confidence in the Internet sites they use to purchase drugs
    from other countries. We recommend that a system be put in place to
    identify and shut down unregistered Internet pharmacies.
                             pedigree requirements
        One way of effectively ensuring the safety of pharmaceuticals is
    the institution of pedigree requirements--being able to trace a drug
    from the point of origin to the point of dispensing. In order to
    accomplish this task in an expanded international arena, there should
    be a way to trace pharmaceuticals back to the point of manufacture and
    enforce pedigree requirements. Each entity that handles prescription
    drugs should be required to maintain records as to the drug's pedigree.
    Furthermore, there should be no impediments to an entity's ability to
    receive records regarding a drug's pedigree.
                anti-tampering/anti-counterfeiting requirements
        Pharmaceuticals imported from another country should be equipped
    with anti-tampering materials and anti-counterfeiting measures. As the
    technology in this area progresses, imported pharmaceuticals should be
    equipped with state-of-the-art devices, such as bar codes, and
    specialized ink, or other appropriate technology. We urge the committee
    to work with the FDA and others with the expertise necessary to
    determine appropriate anti-tampering and anti-counterfeiting
    requirements.
        Other measures aimed at counterfeiting and tampering to be
    considered include the prohibition on repackaging and re-labeling of
    pharmaceuticals from other countries. This requirement could be
    enforced through the pedigree standards. Repackaging and re-labeling of
    pharmaceuticals creates the potential for misbranded or counterfeit
    drugs to enter the stream of commerce. Imported pharmaceuticals should
    be shipped in a manner that provides a tracking number (e.g., via
    international mail systems or some similar entity) to reduce the
    opportunity for counterfeit pharmaceuticals to enter the stream of
    commerce from outside the point of manufacture.
        Because pharmaceuticals may be manufactured in countries where
    English may not be the official language, pharmaceutical labels and
    patient package inserts destined for the United States should be
    written in English as well. These labels should be applied at the point
    of manufacture, or prior to entry into the United States. Imported
    pharmaceuticals should be labeled in such a way as to indicate to the
    consumer that the drug has been imported under the new law.
                                  other issues
        We believe that features such as those previously outlined will
    help assure the safety of imported pharmaceuticals. Any system designed
    by Congress should also be realistic in terms of its safety
    requirements and FDA's responsibilities and capacity. This system
    should not be overly burdensome and costly to the point where American
    consumers will not be able to realize savings from imported
    pharmaceuticals. In addition to drug prices, shipping and handling,
    processing fees, licensure, and other costs should be reasonable and
    fully disclosed to the consumer at the time of purchase.
        Consumer privacy also must be protected. As American consumers are
    able to purchase prescription drugs from other countries, not only
    should the integrity of the pharmaceuticals be ensured, but so should
    the privacy of the individual's protected health information. With the
    promulgation of the Health Insurance Portability and Accountability Act
    (``HIPAA'') privacy standards, we have moved our Nation closer to
    assuring protection against misuse of an individual's medical
    information. Studies have shown that individuals will not take
    advantage of a system if they fear their protected health information
    may be misused. Therefore, we encourage you as you design an
    importation system, to ensure that an individual's private medical
    information is protected at least to the level currently required by
    HIPAA.
        There are additional issues that we urge Congress to consider.
    There remains a strong need to examine the safety of pharmaceuticals
    within the United States' drug supply in order to prevent counterfeit,
    diluted, or ineffective drugs. As Congress examines foreign
    pharmaceutical supply systems, there is also an opportunity to revisit
    the integrity of the U.S. pharmaceutical system--from point of
    manufacture to the ultimate consumer.
        Finally, importation legislation undoubtedly will impact the
    worldwide pharmaceutical market. The FDA should be required to submit
    reports to Congress, annually or as otherwise appropriate, to monitor
    the impact of regulated importation on the price, quality, and access
    to pharmaceuticals both in the United States and worldwide.
                                   conclusion
        Our members want Congress to enact legislation this year to allow
    for legal, safe importation of lower priced prescription drugs. We
    commend this committee for its work in moving forward on the issue. We
    pledge to work with members on both sides of the aisle to develop a
    system to enable our members--and all Americans--to have secure access
    to lower cost imported prescription drugs.
                                   __________
                      Prepared Statement of Allergan, Inc.
        This testimony is submitted on behalf of Allergan, Inc., a
    biologics and pharmaceutical company headquartered in Irvine,
    California. Allergan develops innovative therapies for vision,
    muscular, and other disorders and conditions. We have developed a
    number of orphan products, including Botox, which is a biologic used to
    treat dystonia and related eye disorders, as well as muscular
    contracture in pediatric cerebral palsy patients.
        We appreciate the opportunity to submit testimony on the matter of
    prescription drug importation legislation, and in particular, on the
    need for an exemption in such legislation for FDA-designated orphan
    drugs. Allergan believes that Congress should exclude orphan drugs from
    prescription drug importation legislation for two reasons: (1)
    permitting importation of orphan drugs would endanger patient safety;
    and (2) permitting importation of orphan drugs would undermine the
    Orphan Drug Act and thus jeopardize the future development of rare
    disease therapies.
                         i. background on orphan drugs
        ``Orphan'' drugs are drugs (including biologicals) that are
    developed specifically to treat a rare disease or condition, i.e.,
    generally, a disease or condition that affects fewer than 200,000
    people nationwide. According to the National Organization for Rare
    Disorders, more than 6,000 rare diseases have been identified. Some
    rare diseases are as familiar as cystic fibrosis, hemophilia, and Lou
    Gehrig's disease, while others--such as Hamburger disease and Job
    syndrome--might be known only to the relative few who are afflicted
    with the disease, along with their families and health care
    professionals. By definition, the number of people with a particular
    orphan disease is relatively small, but collectively, rare diseases
    afflict more than 25 million Americans. Rare disease patients rely on
    orphan drugs to treat their diseases, which often are life-threatening
    acute or chronic conditions.
         ii. importation of orphan drugs would endanger patient safety
        Exempting orphan drugs from prescription drug importation
    legislation is imperative to ensure the safety of rare disease
    therapies administered in the United States. Many orphan drugs are
    biologicals, which often require unique handling and shipping measures,
    such as maintaining the product at specific and often extreme
    temperatures, and limiting the product's exposure to light. If these
    handling and shipping requirements are not strictly followed, the
    clinical performance of a biological can be profoundly affected,
    resulting in an ineffective or harmful drug. Further, because many
    orphan drugs are infused or injected, rather than administered orally,
    they often are maintained in vials, syringes, or similar packaging.
    These types of packaging are much more vulnerable to tampering and
    counterfeiting than tablets or pills.
        These safety concerns are not hypothetical or exaggerated. Consider
    the following reported examples of counterfeit or diluted orphan drugs
    that have entered the U.S. drug supply under current law:
         Epogen (epoetin alfa). Epogen is an injectable biologic
    used to stimulate red blood cell production. On February 21, 2001, the
    manufacturer of Epogen disclosed reported incidents of tampering. The
    flip caps from some vials had been removed and the vial contents were
    replaced with varying amounts of a subpotent aqueous solution. The
    vials bore counterfeit labels with phony lot numbers. Lab tests
    revealed that some vials contained active ingredient 20 times lower
    than expected. A 16-year-old liver transplant patient suffered severe
    muscle cramping after injections of the subpotent drug. His parents had
    purchased the drug from a national pharmacy chain store, which had in
    turn received it from one of three national drug distributors.
         Neupogen (filgrastim). Neupogen is an injectable colon-
    stimulating factor used mostly in cancer patients. In 2001, a
    distributor discovered counterfeit vials of the drug that contained
    fake lot numbers and incorrect expiration dates. Laboratory tests later
    revealed that the vials contained only saline solution.
         Procrit (epoetin alfa). Procrit helps anemic cancer and
    HIV patients increase their red blood cell counts. Counterfeit versions
    of the drug were first discovered in 2002 and have been found at two
    large wholesalers and a number of retail outlets. Counterfeit lots of
    the drug that purported to contain 40,000 units only had 2,000 units.
    Instead of active ingredients, some vials contained bacteria-tainted
    water that can cause blood stream infections.
         Serostim (somatropin (rDNA origin) for injection). There
    have been two counterfeit incidents associated with Serostim for
    injection, a growth hormone used to treat AIDS wasting. In 2001, a
    recall at the distributor level was prompted by consumer complaints
    about adverse events. A later investigation revealed the counterfeiting
    of two lots of Serostim. In 2002, the manufacturer of the drug became
    aware of another counterfeit lot. Laboratory analysis revealed that the
    drugs contained no active ingredients, and that the drugs did not
    originate from the manufacturer.
        Although prescription drug importation legislation may establish
    safeguards to protect the Nation's drug supply, safeguards can never be
    completely effective. Even the legal safeguards currently in place have
    not prevented numerous cases of counterfeit and adulterated orphan
    drugs in the United States. Importation of orphan drugs would only
    increase the risk of exposing rare disease patients to an ineffective
    or harmful drug, because more entities that are far beyond the
    effective control of FDA will handle the drug before it reaches the
    patient. This introduces a much greater risk that a drug may be
    mishandled, contaminated, or counterfeited by an unscrupulous or
    careless person willing to exploit or ignore patient safety for
    economic benefit. Congress therefore should exempt orphan drugs--with
    their higher threat of adulteration and contamination, or compromised
    safety or efficacy due to mishandling--to reduce the risk of
    introducing unsafe products into the U.S. drug supply.
    iii. importation of orphan drugs would jeopardize future development of
                             rare disease therapies
        In enacting the Orphan Drug Act in 1983, Congress recognized the
    unique challenges that rare diseases pose for patients and drug
    manufacturers. Congress determined that there are ``many diseases and
    conditions . . . which affect . . . small numbers of individuals,'' and
    that ``because so few individuals are affected by any one rare disease
    or condition,'' companies that develop ``orphan drugs'' to treat these
    diseases may ``reasonably expect . . . to incur a financial loss'' in
    doing so. Given the inability of companies to recoup costs incurred in
    bringing these products to market, Congress found that ``orphan drugs
    will not be developed'' absent changes in Federal law to encourage
    their development.
        To address this problem, Congress established certain incentives
    under Federal law for orphan drug development, including market
    exclusivity for 7 years, tax credits, assistance for clinical research,
    and research grants. These incentives have been essential to the
    development of orphan drugs. As a result of the Orphan Drug Act, more
    than 240 orphan drugs have been developed to treat rare diseases
    affecting approximately 12 million Americans.
        Permitting importation of orphan drugs would thwart the goals of
    Orphan Drug Act, because it would introduce competition during the
    period in which the Orphan Drug Act promises market exclusivity. In
    addition to breaching the promise that Congress made in the Orphan Drug
    Act, this would impair manufacturers' ability to recover the costs
    incurred in developing rare disease therapies and discourage future
    research and development efforts aimed at discovering treatments for
    rare diseases. This result is precisely what the Orphan Drug Act sought
    to avoid, and could have disastrous consequences for the future
    development of orphan drugs--and thus for millions of Americans
    suffering from one of the thousands of rare diseases for which
    effective treatments have not yet been developed.
                                 iv. conclusion
        In conclusion, we believe it is imperative that Congress exempt
    orphan drugs from prescription drug importation legislation to ensure
    the safety of rare disease therapies administered in the United States,
    and to maintain appropriate incentives to encourage the future
    development of orphan drugs. Allergan has long been supporter of the
    rare disease community and the Orphan Drug Program, and we remain
    committed to developing innovative therapies for the 25 million
    Americans suffering from rare diseases. We would be happy to provide
    the committee with any additional information that may be useful as it
    consider these important issues.
                                   __________
      Prepared Statement of the Biotechnology Industry Organization (BIO)
        The Biotechnology Industry Organization (BIO) appreciates the
    opportunity to present the views of the industry and our members on the
    issue of legalizing prescription drug importation. BIO represents more
    than 1,000 biotechnology companies, academic institutions, State
    biotechnology centers and related organizations in all 50 States. BIO
    members are involved in the research and development of health care,
    agricultural, industrial, and environmental biotechnology products. BIO
    agrees with many in Congress and elsewhere that patients should have
    access to the prescription drugs they need--including the life-saving
    products developed by our member companies--and wants to work with
    Congress to find the right ways to ensure this. We do not believe
    legalizing importation of prescription drugs is the right solution for
    a number of reasons that are explained more fully below.
        Legalizing prescription drug importation will put Americans at risk
    of obtaining products that do not meet the Food and Drug
    Administration's (FDA) high standards for ensuring safety and
    effectiveness--standards that have made the U.S. prescription drug
    market the safest in the world. The wholesale importation of
    prescription drugs across American borders will also jeopardize all
    U.S. consumers, not just those individuals who choose to obtain their
    prescription drugs from a foreign source.
        Allowing the importation of prescription drugs with the intention
    of importing foreign government-imposed price controls will do little
    to curb growing drug costs while seriously threatening the continued
    innovation of the U.S. biotechnology industry and the patients who rely
    on its medical advancements to treat debilitating and often life-
    threatening illnesses. Further, current legislative proposals designed
    to establish an importation framework would erode intellectual property
    rights that serve as the backbone of America's biotechnology industry
    and would have seriously negative implications for U.S. trade policy.
                    prescription drug importation is unsafe
        BIO strongly opposes the legalization of prescription drug
    importation, even though current legislative proposals exempt many
    biological and biotechnology products, because it would open the
    floodgates to a variety of unsafe prescription products.
        The FDA has testified on multiple occasions that the U.S.
    prescription drug supply already is constantly under attack from a
    variety of increasingly sophisticated threats. Opening our borders, the
    FDA has asserted, would enable certain unscrupulous entities to
    circumvent the agency's standards for ensuring drug safety and
    effectiveness and peddle unapproved and perhaps dangerous products to
    U.S. consumers. Even if biologics and certain biotech products are
    exempt, counterfeiters and other criminals will likely find a way to
    shop dangerous versions of our products across the border.
    Biological/Biotechnology Products Are Unique
        We applaud Congress for recognizing the unique and sensitive
    features of products developed by the biotech industry and, therefore,
    exempting them from the proposed importation framework. Many biologics
    and other biotech medicines are particularly susceptible to
    adulteration, degradation and virtually undetectable counterfeiting.
    Moreover, many of our products cannot be safely administered by a
    patient and, therefore, require the intervention and/or supervision of
    a health care provider. As a result, our products are often not
    available in the United States through out-patient prescriptions, nor
    available at the local pharmacy.
        Yet, patients and the FDA, through its sting operations, have been
    able to acquire biological and biotechnology products through Internet
    sites and through other questionable means. In many of these cases,
    these products were packaged improperly, maintained at temperatures
    that hastened their degradation or completely destroyed their
    effectiveness or were diluted, concentrated or otherwise dangerously
    adulterated. Obviously, the illegality of the transactions did not
    prevent them from occurring. To legalize importation for virtually all
    prescription drugs will do little to protect against further entry of
    unsafe medicines and will likely increase the availability of unsafe
    or, at the very least, ineffective biotechnology medicines.
    Wholesale Importation Is Not Individual Importation
        Questions about the safety and the integrity of the prescription
    drug supply are real and valid. The Congressional Budget Office
    recently issued a report on prescription drug importation, noting, with
    respect to cost savings, that although one patient filling a
    prescription in a foreign pharmacy may realize savings, the same would
    not necessarily be true for the entire health care system. This analogy
    can also be extrapolated to safety concerns. If an individual chooses
    to travel to a foreign country to fill a prescription or to order
    prescription drugs from an unknown source via an Internet site, that
    individual is making a decision to accept the risk associated with that
    transaction.
        Legalizing wholesale importation is not the same as personal
    importation. Wholesale importation will result in an intermingling of
    foreign drug products with those that have been approved as safe and
    effective through the FDA's gold-standard approval process. This means
    that every person filling a prescription will face the possibility of
    receiving a ``second class'' drug product. It will be irrelevant that a
    consumer chose to take the risk of filling a prescription from a
    foreign source while a different consumer has chosen not to: both will
    be forced to take the risk that their prescription medicine is a
    second-tier medicine.
    Legalizing Importation Devalues the FDA Approval System
        Drug importation would call into question the value and the
    viability of the FDA approval process. Recently introduced importation
    legislation, requires prescription drug manufacturers, who have non-FDA
    approved but foreign approved drugs, to submit an FDA application for
    approval. The application must state the differences between the
    foreign-made product and their U.S. counterpart. While this legislation
    technically allows the FDA to reject these applications, the
    legislation's clear message is an anticipation of FDA approval. Indeed,
    FDA will be required to make public all such notices and applications.
    The same public pressure that is driving this legislation will make it
    extremely difficult for FDA to disapprove an application. Therefore,
    the FDA will be required to approve drugs for distribution in the
    United States that have not undergone the same safety and efficacy
    tests as their United States counterparts. Importation legislation will
    allow foreign approved drugs to completely circumvent the FDA approval
    process.
    Unrealistic Expectations for FDA Make Enforcement Impossible
        Requiring the FDA to carry out numerous requirements and examine
    voluminous paperwork under a new importation program will not and
    cannot make an inherently bad system safe. It would be impossible for
    the FDA to register, monitor and regulate importers and exporters,
    ensure that all incoming drug products are in accord with proper
    prescriptions, and inspect parcels, products and facilities to ensure
    product safety with the intensity required under such a program.
        Those who will recognize the infeasibility of enforcing these
    requirements will be those who least intend to abide by them--
    criminals, counterfeiters, smugglers, and others whose only goal is to
    make the most money in the easiest fashion without regard to whether
    the so-called prescription products they peddle are safe or effective.
    An importation program would needlessly compromise the safest drug
    supply in the world.
       prescription drug importation will hurt the economy and threatens
                            biotechnology innovation
        In addition to threatening the safety and integrity of the U.S.
    prescription drug supply, there are other valid economic reasons to
    oppose drug importation.
        The biotechnology industry is a thriving, growing, creative force
    on the U.S. economic landscape. The industry provides numerous
    employment opportunities and a thriving tax base for many communities
    around the country. The biotechnology industry is a key economic
    component in California, Pennsylvania, Massachusetts, North Carolina,
    and Maryland, to name a few. National and State policies that encourage
    the biotech industry's innovation and foster its growth will not only
    provide an economic boost but will also provide fertile ground for the
    development of treatments and cures for patients all over the country
    and the world. Policies and legislation that discourage innovation will
    have the opposite effect--squelching a positive economic and public
    health force.
    Importation Will Have a Negative Impact on Investment
        Investment in the U.S. biotechnology industry is based on an
    expectation that a product's success will reap benefits not only for
    patients but also for future industry projects and investors. That
    expectation can be fulfilled if a successful product remains in a
    favorable competitive environment for a reasonable period of time.
    Investors will not look favorably on the possibility of imported
    products quickly becoming competitors of FDA-approved products, nor
    will they look favorably on what will become, essentially, a system of
    foreign-imposed price controls on FDA-approved products.
        The vast majority of biotechnology companies across the United
    States are small companies with no products yet available on the market
    and without significant revenue or profits. To fund the costly and
    lengthy periods of research and development, biotech companies rely
    heavily on three primary sources of capital: (1) private investment
    capital, (i.e., institutional or venture investors); (2) public
    investment capital (i.e., the stock markets--mutual fund investors and
    individual investors); and, (3) capital obtained from partnerships with
    other companies (e.g., pharmaceutical companies).
        The capital markets are acutely sensitive to factors that threaten
    to limit current or future profitability for any company or industry
    sector. We see examples of this on a daily basis: if a public company
    unexpectedly announces an event that could adversely impact future
    earnings, the stock price plummets resulting in millions, if not
    billions, in lost market value. Frequently, depending on the nature of
    the event, an announcement by one company will also have a negative
    effect on other stocks in the same sector, because of the fear that
    something similar could happen to those companies. Broader
    pronouncements that threaten to limit the profitability of an entire
    sector have even greater significant adverse consequences.
        To understand this, one need only remember the early nineties, when
    the suggestion of widespread healthcare reform caused a precipitous
    decline in healthcare stocks, in aggregate valuations, and in the
    subsequent flow of investment capital into the health care sector. It
    is worth remembering that this tide was only reversed when the specter
    of healthcare reform was substantially reduced. Other examples of how
    quickly the capital markets respond to a perceived threat to future
    profitability include the Clinton-Blair gene patent pronouncement, when
    a mis-statement by a White House press secretary caused the immediate
    loss of billions of dollars in market value for the biotech industry.
    In that situation, there was no policy change, yet the bottom literally
    fell out of the biotechnology market as stock prices plummeted within a
    matter of a few hours of the statements.
        These examples illustrate the sensitivity and vulnerability of
    investment in the biotechnology sector. Legalizing prescription drug
    importation will have at least the same desultory impact and probably a
    greater one. The question is whether Congress and patients want to take
    the chance that prescription drug importation--which is arguably not
    even a long-term solution to the identified problem of escalating drug
    costs--will adversely affect biopharmaceutical innovation. BIO is
    certain that it will affect biotechnology innovation in a way that
    could slow the development of new products, or perhaps stop such
    development in its tracks.
        It costs more than $800 million and anywhere from 5 to 10 years to
    develop a new pharmaceutical product; biotechnology products can
    require even greater costs and longer timeframes. Since many
    biotechnology companies are not yet profitable because they do not yet
    have products on the market, they must maintain a high rate of capital
    investment for long periods of time to stay in business. This
    investment is based on an expectation of return. National policy or
    legislative changes that affect the potential viability of the market
    for a new biotechnology product will affect the willingness of
    investors to take this risk.
        Biotechnology development is an extremely high-risk venture. Of the
    many wonderful ideas that this creative industry generates, only a
    small handful result in FDA-approved new products. Our member companies
    are dedicated to finding the next biological-based treatment or cure.
    They are willing to devote enormous energy, creativity, and resources
    to this endeavor, even though they know success is difficult and
    elusive. But no treatment or cure will come without this research. And
    this research and development cannot be undertaken without the
    commitment of substantial financial resources, most of which come from
    the highly sensitive capital market. Some may argue that the pro forma
    (and we believe unenforceable) exemption of biotechnology products from
    importation legislative proposals will resolve these economic concerns.
    However, it is important to remember that many BIO member companies use
    the fruits of biotechnology as part of their drug discovery and
    development efforts, although the products themselves may not be
    manufactured using biotechnology processes. Such companies would be
    severely affected by the legalization of drug importation regardless of
    whether biological products are exempted.
        The unrestricted importation of drugs that are sold to foreign
    suppliers under the foreign-government imposed (or ``negotiated'')
    price controls will reduce the profitability of the companies that
    developed the drugs. In fact, that is precisely the objective of the
    advocates of importation--to use it as a mechanism to reduce prices for
    consumers artificially, and thereby reduce company profits as a result.
    The immediate and unavoidable impact of reducing economic profitability
    is a reduction in investment in an industry that requires such capital
    to fund further innovation. Quite simply, reduced profits (via price
    controls or any other mechanism) mean less investment capital to
    support drug research and development.
        De facto implementation of price controls via importation will not
    create a corresponding reduction in drug development costs. It will
    still cost the same to discover, test, validate through clinical
    trials, manufacture and ultimately sell a new product. The failure
    rates experienced during the product development process will still be
    the same. The costs and risks will remain the same, but the potential
    return will be greatly diminished. As a result, companies will have no
    choice but to further limit their development efforts to only those
    drugs that have the highest potential profitability in the face of
    price controls. Drug candidates that could potentially help many
    patients and that were once considered viable opportunities under a
    free-market pricing system will be abandoned because they will no
    longer be sufficiently profitable in a world of de facto price
    controls.
        Importation's effects on institutional capital flow into the
    biotechnology sector will be even more harmful. Merrill Lynch published
    an industry research report in May 2004 that found that during 2001,
    2002, and 2003 there was a net outflow of $500 million, $3.0 billion,
    and $1.0 billion in capital from biotech/healthcare investment funds
    for each respective year. This represents a net reduction of $4.5
    billion in available investment capital for public biotechnology
    companies. In 2003 alone, there was an estimated $12.7 billion in
    financing need (i.e., amount of new investments sought by biotechnology
    companies), yet at the same time there was an overall net outflow of $1
    billion from biotech/healthcare investment funds. In short, the amount
    of available investment capital diminished while the need for capital
    increased.
        While the trend regarding the flow of investment capital out of
    biotechnology funds has reversed somewhat this year, the current
    appetite for investment capital among public biotechnology companies
    continues to outstrip the current supply. Currently nearly 60 percent
    of all biotechnology companies have less than 2 years of cash, and
    nearly 30 percent percent have less than 1 year of cash. In 2004, more
    than $4.7 billion of new financing demand has entered the market (i.e.,
    amount of capital sought by companies in the public markets). During
    the same timeframe, less than $1 billion of new capital has entered the
    sector. The current rate of capital demand is nearly five times greater
    than capital supply for public biotechnology companies.
        Less product innovation is the long-term effect of inadequate
    capital supply. If companies have fewer dollars available to invest in
    research, they will be unable to support the research and development
    required for finding and creating new medicines. Companies will scale
    back or eliminate research and development projects that could result
    in new medicines. They will also slow the growth or even reduce their
    research and development staff, causing the loss of many high quality,
    tax-paying jobs.
        As the baby boom generation continues to age, the need for safer,
    more effective, and more cost-effective medicines is clearly
    increasing. Entrepreneurial innovation is the driving force that could
    ultimately enable us to address the growing national healthcare burden
    by providing more medically and economically effective ways to improve
    human health and treat disease. The best hope to address the growing
    challenge is to stimulate increased investment before the national need
    becomes too acute, and the only available option becomes the use of
    current medicines and implementation of widespread healthcare
    rationing. In a climate of price controls, vital investment capital
    will flow elsewhere, and innovation in the biotechnology sector will
    largely become a thing of the past.
    Prescription Drug Importation Imports Foreign Government Price Controls
        The importation issue is not just about the importation of drugs--
    it's about the importation of price controls. Importation would not
    even be a topic of discussion today were it not for the fact that
    foreign governments have arbitrarily imposed pricing restrictions on
    companies that develop new, safer and innovative medicines, and then
    elect to sell them outside the United States. That is a global trade
    issue that must be addressed. Why should foreign countries be allowed
    to force U.S. consumers and companies to subsidize their healthcare
    costs? Without the innovations provided by the U.S. biotechnology and
    pharmaceutical industry their health care costs would surely be far
    higher, and the quality of life experienced by many patients far less,
    than it is today.
        Biotechnology is the future of medical innovation. The promise of
    the Human Genome project, huge breakthroughs in biological sciences,
    and the astoundingly escalating understanding of human genetics will
    result in products created by this industry. Policies that stymie the
    biotechnology industry will interfere with the fulfillment of this
    promise for every patient waiting for a cure.
        Just recently, a study was published demonstrating that the United
    States is losing its technological edge in the physical sciences. The
    authors found that, as measured by patents issued, scientific prizes
    received, graduate students studying in one country versus another, and
    other measures, by countries such as China, Japan, and India, are on
    the road to surpassing the United States. However, the United States
    still leads the way in biotechnology innovation. This country is
    without peer in terms of understanding disease and developing the most
    biologically and genetically appropriate ways to treat disease. The
    reason this country is so successful, and the reason our patients have
    the best chance at the latest and best medicine, is that our national
    policies foster innovation. We do not have prescription price controls
    because such controls hinder and discourage innovation. We do not have
    international parallel trade because those trade policies stifle
    innovation. We have strong protections for intellectual property
    because such protections foster and reward innovation. Biotechnology
    innovation will deliver on its promise if the country delivers on
    policies that allow it to thrive.
                   importation proposals threaten patent law
        Prescription drug importation legislation also erodes intellectual
    property rights. One bill that has been introduced would prevent U.S.
    manufacturers from enforcing their patents against foreign products
    that, if marketed in the United States under current law, would violate
    the patent on the U.S. product. In other words, even though the foreign
    product is imported into the U.S. market in direct competition with the
    U.S. FDA-approved drug, the manufacturer would be denied any recourse
    under U.S. patent laws. Again, the impact on the biotechnology industry
    of such a change to patent rights would be enormous. In many cases,
    companies in this industry own very little except their intellectual
    property. The entire value of the company may be attached to the
    existence of intellectual property rights to a material or a means to
    achieve specific activity from certain kinds of biological agents. The
    message of such legislation is loud and clear: the United States is not
    willing to protect patent rights associated with pharmaceutical
    innovation. This message alone is enough to discourage investment and
    smother innovation.
         prescription drug importation does not guarantee cost savings
        Further, although this legislation is intended to be a mechanism to
    provide patients with lower priced prescription drugs, the
    Congressional Budget Office and numerous economists have challenged the
    assumptions of substantial cost savings, noting both the unique
    features of the world pharmaceutical marketplace and the substantial
    costs that would be incurred by middlepersons in the import/export
    scheme that certainly would be passed along to patients. Recently
    introduced bills provide numerous requirements that were not even
    envisioned by the economists who looked at earlier legislation, so
    these transaction costs would be significantly higher. Additionally,
    examination by economists of European parallel imports shows that the
    expected significant savings for consumers have not materialized,
    although tidy profits have been made by the traders. Moreover, none of
    the bills guarantee that the cost differential obtained by the
    importer/exporter is actually passed along to the consumer.
                                   conclusion
        BIO is strongly opposed to any attempt to legalize prescription
    drug legislation. We believe that any form of drug importation will
    harm our industry and will, more importantly, harm the patients we are
    dedicated to helping. No exemption is fail-safe, and the ingenuity of
    criminals cannot be underestimated. They will find ways around the
    myriad requirements proposed by these bills, and no on-paper
    ``exemption'' for biologics will stop them from dealing in whatever
    product they believe will be the most lucrative.
        There can be no doubt that incursions into trade policy,
    intellectual property protection, and economic incentives for U.S.
    business--all of which are part of this legislation--will have
    unintended consequences. The benefits of a free-market economy for U.S.
    citizens and for this country's economic well-being are well-accepted.
    There will be harm when legislative policy attempts to distort the free
    market by imposing requirements and penalties designed to perturb what
    the market otherwise achieves on its own. This is particularly true
    when the incursions and perturbations are directed at one and only one
    industry and at one set of products.
        BIO agrees with those who believe that patients need access to our
    life-saving and life-enhancing products. Health coverage helps this
    happen, and we encourage the Congress to take action to reduce the
    number of uninsured Americans and increase assistance in purchasing
    their prescriptions to those in need. We also support the new
    entitlement under Medicare, which will help all Medicare
    beneficiaries--most of whom are our senior citizens--with their
    prescription drug needs. Until that prescription benefit takes full
    effect, the Medicare discount card will help many. Whether one supports
    the new Medicare benefit or not, or believes the discount card is
    sufficient or not, both of these mechanisms at least do no harm to the
    future of innovation and the future possibility that treatments and
    cures will be available for those who need them. Legalizing importation
    is not the answer to prescription drug access. Its promise is false and
    its dangers are real.
                                   __________
      Prepared Statement of the National Association of Chain Drug Stores
                                    (NACDS)
        Mr. Chairman, and members of the committee, the National
    Association of Chain Drug Stores (NACDS) appreciates the opportunity to
    submit testimony relating to importation of prescription drugs. NACDS
    is a national trade association that represents more than 200 chain
    pharmacy companies that operate nearly 35,000 community retail
    pharmacies. Our members dispense more than 70 percent of all outpatient
    retail prescription drugs in the United States.
        NACDS supports access to low cost prescription drugs. However,
    NACDS does not support importing drugs from Canada or other foreign
    sources. The safety net established to assure the integrity of the drug
    supply in the United States works well. We do not believe that the
    relative short term savings that can be realized by compromising our
    closed drug distribution system will be worth the longer-term costs to
    our patients.
        There are two different methods of importation of prescription
    drugs that should be distinguished and evaluated separately in terms of
    their safety and cost effectiveness.
        1. Importation by Individuals. NACDS is strongly opposed to
    proposals that would encourage or facilitate importation of
    prescription drugs by individuals. Simply put, there is no realistic
    way that consumers can know whether the imported prescription
    medications that they are receiving--whether through the mail or in
    person--are misbranded, adulterated, counterfeit, approved for use in
    the United States, or labeled appropriately. There are short term
    savings that some consumers can realize by purchasing prescription
    drugs from a foreign source due to the price differentials in drugs
    sold in other countries. However, NACDS believes that any potential
    savings is dwarfed by the potential dangers of purchasing drugs outside
    the closed system of distribution in the United States.
        As is all too evident from recent Federal reports and
    investigations, millions of packages containing pharmaceutical
    products--many containing illegal, contaminated, adulterated,
    counterfeit or harmful controlled substances--are being shipped into
    the United States each year ordered by consumers through various
    means.\1\ Many of these drugs look exactly like their authentic
    counterparts, making it even more difficult to determine their
    authenticity without some form of rigorous testing and validation.
    ---------------------------------------------------------------------------
        \1\ See FDA Press Release, ``Recent FDA/US Customs Import Blitz
    Exams Continue to Reveal Potentially Dangerous Illegally Imported Drug
    Shipments'' (January 27, 2004) at http://www.fda.gov/bbs/topics/NEWS/
    2004/NEW01011.html.
    ---------------------------------------------------------------------------
        Patients assume an incredible risk when they go shopping
    internationally for health care products. There is virtually no way for
    consumers to discern a ``legitimate'' source from a dangerous source.
    If the drug is subpotent or adulterated or otherwise ineffective, any
    savings realized is lost. Moreover, many of these international
    businesses, purportedly doing business in Canada, are not what they
    advertise to consumers and drug supply may be from questionable
    sources.\2\
    ---------------------------------------------------------------------------
        \2\ See Testimony of William Hubbard, Associate Commissioner of
    Policy and Planning and Legislation, FDA, before the Committee on
    Government Reform, U.S. House of Representatives (June 24, 2003)
    (discussing purported Canadian pharmacy service website run by three-
    time convicted felon which delivered drugs made in India to an American
    who ordered from website); see also, Global Options, Inc., ``The
    Analysis of Terrorist Threats to American Medicine Supply,'' (2003) at
    145-48.
        Also, the Coalition for Manitoba Pharmacy reported on April 2, 2004
    that a Vancouver Internet pharmacy company is openly selling Americans
    prescription medicines from Mexico, approved by neither HealthCanada
    nor the U.S. Food and Drug Administration. The company,
    www.canadianpharmacytrust.com, which dispenses drugs through its
    ``affiliate'' Southland Pharmacy of Vancouver, announces on its website
    ``Generic Viagra now available at 80 percent off,'' and ``Generic
    Cialis & Levitra also available from our pharmacy. Why pay more?!?''
        ``They are shipping Americans drugs from Mexico,'' said Michele
    Fontaine, Vice President of the Coalition for Manitoba Pharmacy. ``Who
    knows what's in those pills? These drugs have not been validated by
    Health Canada or the FDA. And it seems that they're violating U.S. and
    Canadian patent laws, too. From our perspective it looks like Internet
    pharmacy companies will stop at nothing in putting profits before the
    interests of patients. To me, this isn't pharmacy, its piracy.''
        ``And now they're openly selling Americans medicines not just from
    Canada's supply, but from any other country where they can get their
    hands on more drugs,'' said Fontaine. The trans-shipment of medicines
    originating in distant countries has been a major concern for pharmacy
    and medical organizations in Canada and the United States, as well as
    for the FDA. Research from Prudential Financial and the FDA has
    indicated a major increase in drug imports to Canada from countries
    including Bulgaria, Pakistan, India and Argentina. If, as the Coalition
    believes, these drugs are being trans-shipped to the United States, the
    concern is that neither the FDA nor Health Canada verifies whether
    these medicines are safe and effective, or if they even contain the
    proper active ingredient.''
    ---------------------------------------------------------------------------
        Just as important, individual importation of prescription medicines
    usually eliminates any patient interaction with the pharmacist. This
    professional interaction is important to ensure that the patient
    understands how to take the medication appropriately and to avoid any
    potential interactions with other medications that the patient might be
    taking. With no knowledge of a patient's foreign purchases, a patient's
    pharmacist cannot protect the patient from a drug misadventure. Thus, a
    patient that receives a medication from another country is not only at
    risk for the potential problem with the medication, but also for
    potential harmful drug interactions that may occur with the other
    medications that the patient is taking. The coordination of care that
    occurs at pharmacies today cannot occur when a drug is imported by a
    patient from another country.\3\ An incomplete health care profile is a
    recipe for patient harm, particularly for patients who are using
    multiple medications. In almost every case, the cost of hospitalization
    for an iatrogenic event far exceeds any savings that a patient may have
    realized on the purchase of a drug.
    ---------------------------------------------------------------------------
        \3\ Health plans spend more money treating the adverse consequences
    of misuse of drugs than they do on the drugs themselves. See Frank R.
    Ernst & Amy J. Grizzle, ``Drug-Related Morbidity and Mortality:
    Updating the Cost-of-Illness Model,'' Journal of the American
    Pharmaceutical Association, v. 41, no. 2 (March/April 2001). Patients
    who fail to take their drugs as directed end up costing the system much
    more, in terms of increased hospitalization and patient care.
    Separating patients from their community pharmacists will only make
    this problem worse.
    ---------------------------------------------------------------------------
        Importantly, patients in pursuit of cheaper brand-name prescription
    drugs from foreign sources will likely miss the fact that a cheaper
    generic alternative may be available in the United States. In most
    cases, there are safer, cheaper drugs available at the local pharmacy
    than in Canada--on pure price comparison, generic drugs are still much
    less expensive on this side of the border. Further, pharmacists can
    assist many patients in finding other savings, either through
    pharmaceutical manufacturer assistance programs or the new Medicare-
    endorsed discount cards which will be available to Medicare
    beneficiaries later this year. And the savings generated by these
    programs do not threaten the integrity of patient care and the
    prescription drug safety net in the United States.
        Additionally, there are broader economic costs that must be
    considered when we send patients to foreign suppliers of prescription
    drugs. Drug importation schemes promote unfair competition against
    American pharmacies. The reason is that foreign pharmacies do not
    compete on a level playing field in compliance with the strict Federal
    and State regulatory standards to which domestic pharmacies must
    adhere. Instead, foreign pharmacies are given unfair advantages that
    make fair trade all but impossible. As examples:
         Foreign pharmacies do not have to pay U.S. taxes.
         Foreign pharmacies are not subject to Federal and State
    consumer protection laws.
         Foreign pharmacies do not have to comply with stringent
    Federal and State licensure requirements and U.S. safety standards.
         Foreign pharmacies do not face the frequent lawsuits that
    are an ever-growing threat in the United States; indeed they often
    require customers to waive all liability.
         Foreign pharmacies do not comply with the thousands of
    laws and regulations that apply to U.S. pharmacies, such as the
    stringent HIPAA privacy rules that protect patients against improper
    use and disclosure of their personal health information.\4\
    ---------------------------------------------------------------------------
        \4\ See attached Letter from Susan McAndrew, Senior Policy
    Specialist/HIPAA, HHS/OCR to S. Lawrence Kocot, Senior Vice President
    and General Counsel, NACDS (March 4, 2004). Specifically, HHS recently
    told NACDS that many Canadian storefronts facilitating importation are
    not even subject to the Health Insurance Portability and Accountability
    Act (HIPAA) which protects the confidentiality of patient information.
    As a result, no United States citizen should have the false expectation
    that their patient medical records will not be sold or traded on the
    international market to unscrupulous marketers.
    ---------------------------------------------------------------------------
        Drug importation has another negative consequence: Job losses.
    Community pharmacists fill literally billions of prescriptions for
    Americans every year, and their work is supported by everyone from
    pharmacy technicians to cash register operators to truck drivers to
    janitors and everyone else that makes it possible to operate a
    community pharmacy. If prescriptions are sent through international
    mail order to be filled by foreign ``pharmacies,'' some pharmacists and
    many other pharmacy employees in the United States will lose their
    jobs. It's inescapable: When you import drugs, you export jobs.
        Finally, Drug importation leads to lower tax revenues. Community
    pharmacies collected about $30.8 billion in State taxes nationwide. The
    employees of those community pharmacies also pay billions and billions
    of dollars in Federal, State and local taxes. Recently, we have heard
    some in government argue that States and cities can save money by
    having prescription drugs mailed into the State from distributors in
    other States or other countries. But will State and local governments
    really be better off financially if local retailers lose business and
    local citizens lose jobs? We believe that is a short-sighted approach.
    Governments should avoid importation schemes that appear to save money,
    but in reality hollow out their own tax bases.
        2. Importation by Pharmacists and Wholesalers. We believe there are
    significant challenges and issues relating to implementing a program of
    importation of prescription drugs by pharmacists and wholesalers,
    whether limited to Canada or expanded to other countries. Moreover, we
    question the long term potential for savings and safety from a program
    of importation from Canada.
        We have concerns that the testing, tracking, and paperwork
    requirements of a commercial importation law will outweigh any cost
    savings that might be realized from a program of importation. We agree
    that such requirements would be prudent under any program of
    importation that introduces foreign supplies of drugs into our closed
    drug distribution system. However, some of this recordkeeping
    information may be difficult or impossible for an importer to obtain or
    validate. For example, under current law, importers are required to
    obtain lot or control numbers, and sources of origin of prescription
    medications. Some of this information may not be available to the
    importer. Moreover, the current program assumes that manufacturers
    would be willing to provide information relating to assay tests and
    approved labeling to importers of prescription medications. These
    features are critical to assuring quality of the products, and limiting
    potential liability to importers from mislabeled medications.
        Establishing the infrastructure necessary to effectively and
    efficiently operate an importation program--coupled with potential
    testing and other regulatory requirements would impose significant
    startup and operational costs for the entire pharmaceutical
    distribution system.
        Additionally, pharmacies would likely have to maintain dual
    inventories of pharmaceutical products to assure those products that
    have not been imported, and those that have been imported, are tracked
    and billed appropriately, particularly to individuals covered under
    private third party contracts or Medicaid programs. However, space
    limitations in pharmacies, carrying costs, and other considerations
    make it virtually impossible to maintain separate pharmaceutical
    inventories.
        Finally, the relatively small volume of drugs that is likely to be
    imported into the United States, compared to the overall market, may
    further create a reluctance to invest in the infrastructure needed to
    operate this program. The ability of the supply chain to invest in the
    necessary startup costs will have to be weighed against the long term
    viability of the program, the prices of medications from Canada, and
    the ability to recover costs and make a profit.
        The bottom line is that once the costs of testing and validation
    are factored into the overall pricing equation, we cannot be certain
    that the price of imported medications would be significantly less
    expensive than the prices for prescription medications in the United
    States.
        Even if the government limits importation of pharmaceuticals to
    those from a particular country or countries, it will be an ongoing
    challenge to assure that drugs made in those countries meet the same
    standards for quality that are required in this country, or if those
    drugs were really even manufactured in those specific countries. Also,
    pharmacies must be assured that products are not counterfeit or
    diverted. Even if products are thought to be from a particular country
    that has high manufacturing or quality standards, the products may in
    fact be diverted from a country that does not. Importation likely will
    generate growth in ``black markets'' for pharmaceuticals, raising
    serious questions about the quality of these drugs.\5\
    ---------------------------------------------------------------------------
        \5\ See ``Importation of Drugs Into the U.S. Appears Difficult to
    Stop--Puts Slow Pressure on EPS,'' Diane Duston and Tim M. Anderson,
    Prudential Financial (Equity Research) (Oct. 8, 2003) (stating that the
    ``squeeze on Canadian pharmacy supplies'' has caused Canadian
    pharmacies to get their product from Bulgaria, Singapore, Pakistan,
    among others); ``Cross Border web pharmacists could hurt Canada,'' AP,
    September 24, 2003, www.ctv.ca (reporting on rise of grey market for
    prescription drugs in Canada due to reduced supply).
    ---------------------------------------------------------------------------
        In addition, many pharmaceutical products sold in other countries--
    albeit containing the same active pharmaceutical ingredients as those
    sold here--may have different shapes, sizes, colors, and even trade
    names. Some are made with different inactive ingredients, while some
    are sold in different doses because the patients in other countries
    have different dose-response relationships. Introducing different-
    looking foreign pharmaceutical products into the U.S. system will only
    confuse patients and health professionals. This will lead to an
    increase in medication-related events, which already lead to deaths and
    injury for thousands of individuals each year, and already results in
    $177 billion in related health care costs.\6\
    ---------------------------------------------------------------------------
        \6\ See Ernst & Grizzle, footnote 3.
    ---------------------------------------------------------------------------
        There are serious questions regarding which parties will bear the
    liability if the imported drugs result in harm to individuals. For
    example, manufacturers currently bear the potential for liability
    resulting from harm from prescription medications that have been sold
    by them through established and licensed distribution channels. It is
    not clear how the burden for liability might change for a manufacturer
    if the drug is, in fact, made by the manufacturer for use in another
    country, but imported here by a pharmacist or pharmacy. Pharmacists and
    pharmacies that import these drugs may not be willing or able to accept
    the liability that comes with a program of importation of drugs.
        There are also questions of whether international sources of
    pharmaceutical supply will be adequate and consistently reliable.\7\
    Pharmacies may be able to obtain sufficient international drug products
    at one time, but inadequate product supply at another. This might lead
    to a higher price for consumers--or a different quality of drug--when
    consumers come back for their medication if the source of supply is
    unavailable. Pharmacies must have access to consistent, reliable,
    quality sources of medication supply.
    ---------------------------------------------------------------------------
        \7\ ``Ban drug exports, say regulators,'' Tom Blackwell, National
    Post (Canada), November 15, 2003 (referring to the ``reports on drug
    shortages'' referenced by the head of the national Canadian pharmacy
    regulatory); ``Canadians Warn of Rx Shortage.'' John O'Connor, Chicago
    Sun Times, November 13, 2003 (warning that Canadian pharmacists are
    concerned that Canada could run out of prescription drugs if States
    like Illinois implement importation plans); ``Net pharmacies hard to
    stop,'' www.calgary.cdc.ca/regional, October 14, 2003; ``Pharmacist
    Refutes U.S. Allegations,'' Eliza Barlow, October 10, 2003,
    www.brandonson.com (referring to difficulty in getting some brand name
    drugs); Coalition for Manitoba Pharmacy Submission to Standing
    Committee on Health, Winnipeg, Manitoba, October 2, 2003 (reviewing
    negative impact of the Canadian cross-border sales on supply and price
    of drugs in Canada).
    ---------------------------------------------------------------------------
        3. Market Realities and the Fallacy of Importation. Currently, some
    Americans may realize a savings by individually purchasing drugs from
    Canada. However, that savings is only attractive to Americans who have
    no insurance or poor insurance coverage. This pool of ``qualifying''
    individuals and drugs eligible for individual importation is relatively
    small in the United States.\8\ Opening the individual importation
    loopholes for a relatively small number of Americans is not worth the
    cost to our society as a whole.
    ---------------------------------------------------------------------------
        \8\ According to IMS Health, approximately 14 percent of the 3.2
    billion prescriptions dispensed in 2003 were paid in cash. With
    approximately 50 percent of those prescriptions already filled with
    generic drugs which are generally cheaper in the United States, any
    savings from Canadian purchasing would be realized for no more than
    approximately 225 million out of the 3.2 billion prescriptions
    dispensed in the United States. In short, by further reducing this
    number by the types of drugs that would be prohibited from individual
    international purchasing by the Secretary under Section 1121(j), we
    estimate that only 4-7 percent of Americans would realize any savings
    by assuming the risks of individually importing prescription drugs from
    Canada.
    ---------------------------------------------------------------------------
        Additionally, the supply of available drugs from Canada is
    relatively small. IMS Health reports that dollar sales for prescription
    drugs in the United States totaled approximately $214 billion in 2003.
    According to the IMS Health Retail Drug Monitor, for the 12 months
    ended in December 2003, Canadian retail prescription drug sales totaled
    only about $9 billion (US). About 85 percent or $7.5 billion is in
    brand name prescription drug sales. Therefore, assuming that we would
    leave the Canadians with some drug supply for their population, the
    theoretically ``available'' cheaper drug supply from Canada
    approximates a number substantially less than $7.5 billion worth of
    brand name drugs. To put this in perspective, in 1 year, CVS alone
    could purchase all of the Canadian drug supply and still not satisfy
    its prescription drug inventory needs.\9\
    ---------------------------------------------------------------------------
        \9\ For the fiscal year ended January 3, 2004, CVS total sales were
    reported to be $26.588 billion, 68.8 percent or $18.292 billion was in
    pharmacy sales.
    ---------------------------------------------------------------------------
        Basic laws of supply and demand dictate one of two things will
    happen to the Canadian drug supply if the United States implements a
    system of drug importation by American wholesalers and pharmacists:
    either prices will rise dramatically in Canada \10\ or Canadian
    suppliers will turn to alternative foreign suppliers that would likely
    be unacceptable to United States purchasers. In either case,
    implementation of a ``successful'' United States importation program
    would likely be more costly than any theoretical savings we could
    derive from buying up the Canadian drug supply.
    ---------------------------------------------------------------------------
        \10\ As the number of United States citizens purchasing drugs from
    Canada has grown, prices have begun to increase in Canada and shortages
    of drugs are being reported. This is a natural phenomenon.
    ---------------------------------------------------------------------------
        It is unrealistic for United States policymakers to expect that the
    Canadian marketplace would not react and adjust to a formal expansion
    of importation from their country. It is our guess that Canadians
    would, rightfully so, take steps that would further protect their drug
    supply to avoid shortages and excessive price increases. Meantime,
    Canadian pharmacies that supply the United States under any formal
    reimportation program might find that they are unable to obtain
    sufficient supply of Canadian drugs--if at all--and seek other sources
    of supply that would not necessarily meet U.S. standards.
                                   conclusion
        NACDS does not believe that possible short term savings that may be
    realized through implementing a formal system of importation will
    outweigh the potential long term risks to patient safety or the cost of
    implementing such a system. However, NACDS is committed to working with
    Congress, the Department of Health and Human Services, and the Food and
    Drug Administration to fully explore the issues associated with
    importation of drugs and ensuring that the voice of community retail
    pharmacy contributes to the debate. NACDS appreciates the opportunity
    to submit this statement for the record.
                                   __________
      Prepared Statement of Pharmaceutical Research and Manufacturers of
                                America (PhRMA)
        The Pharmaceutical Research and Manufacturers of America (PhRMA)
    appreciates the opportunity to provide a written statement for the
    record regarding the importation of prescription drugs. PhRMA is the
    Nation's leading trade association representing research-based
    pharmaceutical and biotechnology companies that are devoted to
    inventing new, life-saving medicines.
        The importation of medicines into the United States that have been
    outside the jurisdiction of the U.S. Food and Drug Administration (FDA)
    is inherently unsafe. These risky schemes are also unnecessary to
    ensure Americans have access to needed medicines. As we explain later
    in our statement, programs offered by pharmaceutical companies and
    others can help ensure that no American has to go out without his or
    her medicine. There is no assurance that such imported drugs meet the
    FDA's stringent requirements for quality, purity, safety,
    effectiveness, or proper labeling. As FDA has documented, many of these
    imported drugs are unapproved, contaminated, counterfeit, or have been
    stored, handled or shipped under substandard conditions.
        While proponents of importation believe that with certain
    modifications, such as end product testing, chain of custody provisions
    and/or limiting importation to Canada, importation can be done safely--
    the fact is, no modification can guarantee safety. End product testing
    is not adequate to demonstrate that a drug was manufactured in
    accordance with U.S. approval standards and quality requirements. Drugs
    are highly sensitive and can become adulterated and even dangerous
    during shipment if they are not properly controlled. Some medicines
    require maintenance of very precise temperatures at every point in
    time--from production to shipment to use. So, even if a drug passes
    testing standards when it arrived into the United States, if it is
    later stored improperly it can become contaminated.
        Including a chain of custody requirement also does not guarantee
    safety. In fact, according to testimony given by the FDA before the
    Senate Special Committee on Aging on July 9, 2002:

              Because we could not go certify and look in the other
            countries, the bill that they refuse to implement or decline to
            implement would have replaced the normal quality control system
            with a testing process with a paper or so-called pedigree
            process that attempted to follow the trail of the drugs, but
            both Secretaries found that the paper process could be
            forwarded by faking documents and that you really couldn't
            adequately test these products, either economically or
            feasibly.

        Limiting drugs to Canada, while on its face appears safe, is not.
    In reality, drugs could be imported from anywhere in the world, so long
    as they entered the United States via Canada. There is increasing
    evidence this practice is happening today. In fact, the FDA has
    testified this to be the case. There is no effective way to prevent the
    transshipment of medicines from Third World countries into Canada and
    then into the United States. The Canadian government is on record
    saying that while it regulates drugs manufactured for its citizens, it
    cannot vouch for the safety of medicines that are then exported to the
    United States. Even if the Canadian government had the authority to
    regulate its exports--the fact is, the Canadian prescription drug
    market is less than 10 percent of the U.S. market. Even creating a
    modest demand on the system would pose quite a challenge to the
    distribution and regulation of prescription drugs in the United States.
        The cornerstone of our pharmaceutical distribution system in the
    United States is total control of the process--from selection of raw
    materials, design of the manufacturing process, packaging of a final
    product, evaluation of storage conditions and careful selection of the
    distribution pathway. If this system is relaxed--the chances for
    substandard, adulterated and counterfeit medicines to enter our system
    increases.
        There are many unforeseen problems that may arise if pharmaceutical
    manufacturers lose control of the distribution system. For example,
    what happens in the event of a product recall for an imported drug? If
    a shipment of medicines is imported into the United States and later
    recalled, there are no requirements that a foreign government notify
    American consumers of the recall. The FDA would not be able to enforce
    a recall without receiving extensive shipping documentation prior to
    importation that identifies a lot number, the country the product came
    from and every wholesaler and pharmacist that imported the drug into
    the United States. Such an information infrastructure would cost tens
    of millions of dollars and still would not be complete.
        Another problem relates to unknown storage conditions. Not all
    pharmaceuticals come in pill or tablet form--there are liquid
    formulations, gel capsules, freeze-dried powders, creams and lotions,
    drops for ocular administration, patches, etc. Every product that has
    been FDA approved is individually evaluated for stability and potency
    from the time of release from the manufacturer to the expiration date.
    Conditions for storage in the manufacturer's original container are
    specified in the new drug application (NDA) in detail so that the
    product the consumer receives will be safe and effective when taken as
    prescribed. There is no easy way for a consumer or the FDA to know
    whether the product that is imported into this country has been stored
    appropriately. Extremes in temperature, humidity or the repackaging
    process are likely to result in a product that deviates from the
    original specifications. Testing might reveal the current potency of a
    product, but would not be predictive of future potency if the medicine
    was inappropriately handled or stored. Moreover, in some cases,
    packaging may react with a drug over time. That may not be apparent
    even if the drug is tested upon entry.
        Counterfeit medicines also present a very real safety issue.
    Counterfeit drugs are not manufactured in accordance with the original
    NDA. Counterfeiters may use different starting materials, additives or
    intermediaries that are not acceptable. The counterfeit products are
    not manufactured in accordance with Good Manufacturing Practices
    (GMPs). It is very difficult to document any of these violations. The
    quality of a medicine is a measure of many factors including
    reproducibility of the physical state in terms of particle size,
    crystal structure, color, density, and other characteristics.
        The ability of the active ingredient to be manufactured into the
    final dosage form with all the other materials (usually 5 to 30 other
    substances called excipients) as well as the amount of impurities
    present is the measure of its quality. Pharmaceutical companies have
    many personnel and departments devoted to ensuring that necessary
    procedures are carried out and standards are being met. While
    sophisticated counterfeiters can and do manufacture pharmaceuticals
    that often look every bit the same as ones made by the manufacturer,
    there are no guarantees that there won't be dangerous impurities
    present, or that the medicine will have the same clinical activity.
    Even differences in particle size are critical to the drug's safety and
    effectiveness.
        These examples, and countless others not mentioned here, illustrate
    that legalizing importation opens an avenue for unscrupulous
    counterfeiters. In order to continue assuring American patients that
    the medicines they take are safe and effective, and meet the highest
    standards, the current system for manufacturing and distribution of
    pharmaceuticals must be maintained. Only the current system, with its
    full battery of quality testing conducted by the manufacturer, coupled
    with complete knowledge of the domestic distribution process can assure
    the safety Americans expect.
        While importation is often hailed as the only solution for
    individuals who lack prescription drug coverage and cannot afford their
    medicines, the fact is, there are better, safer ways to ensure that
    patients have access to affordable medicines.
        Patient assistance programs sponsored by pharmaceutical companies
    are one option that is available to all uninsured Americans that meet
    income eligibility requirements. In total, 65 percent of the uninsured
    population have income levels of 200 percent of poverty or less and
    thus are eligible for many of the patient assistance programs that
    provide medicines free of charge. Approximately 1,400 medicines are
    made available through these programs. Information on these programs
    can be found at: www.helpinqpatients.orq, an interactive Web site by
    PhRMA and 48 of its member companies that is designed to help
    individuals find patient assistance programs for which they may
    qualify. This online service is free and completely confidential. Last
    year alone, PhRMA members provided 17.8 million free prescription
    medicines to more than 6.2 million patients in the United States at a
    value of $3.3 billion. According to Dr. Dexter Frederick, Tampa
    Community Health Center, these programs have made a positive difference
    to patients. Speaking of the programs, Dr. Frederick stated:

              As a family physician in Florida, I see every day how the
            pharmaceutical industry's Patient Assistance Programs
            positively help my patients. Without these programs in place,
            many would go without the critical medicine and health care
            they so desperately need. These programs offer hope and quality
            of life to those who have little or no means to afford
            medications on their own. As a doctor, it is wonderful to
            provide needy patients with such care.

        Pharmaceutical company discount card programs are a way for seniors
    and the disabled to save money on prescription medicines. Seniors under
    200 percent of poverty who lack prescription drug coverage can access
    medicines made by two PhRMA member companies at a cost of $12 per 30-
    day supply and $15 per prescription, respectively. Other company
    discount card programs exist that offer seniors and the disabled up to
    300 percent of poverty discounts on prescription medicines. This June,
    all Medicare beneficiaries will be eligible for a Medicare-endorsed
    discount card that will offer discounts on prescription medicines. The
    lowest income seniors will be eligible for $600 (per individual, or
    $1,200 per couple) this year, and next year as well, to help them
    afford their prescription medicines until the full Medicare
    prescription drug benefit begins in 2006. Once individuals have
    exhausted the $600, three PhRMA member companies have publicly stated
    they will offer their medicines free of charge to these individuals.
        In 2006, all people with Medicare will be able to enroll in plans
    that cover prescription drugs. Plans may vary somewhat, but in general,
    individuals can choose a prescription drug plan and pay a premium of
    about $35 a month. They will pay the first $250 of their prescription
    drug costs, and Medicare will pay 75 percent of the costs (and
    individuals the remaining 25 percent) between $250 and $2,250. Once an
    individual has reached $3,600 in out-of-pocket spending, Medicare will
    pay 95 percent of the costs, and individuals will be responsible for
    the remaining 5 percent. Individuals with low incomes and low assets
    will not have to pay premiums or deductibles and will only pay a small
    co-payment for each prescription needed. Other people with low incomes
    and limited assets will get help paying the premiums and deductible and
    the amount they pay for each prescription will be limited.
        Generic drugs available in the United States are often considerably
    less expensive than foreign drugs, and offer a solution for many who
    cannot afford their medicine. In addition, many States operate
    prescription assistance programs for lower income Medicare
    beneficiaries. For instance, the State of Wisconsin offers a program
    for Medicare beneficiaries, which is typically a much better deal for
    Wisconsin seniors than any Canadian web site. According to a letter
    from the FDA to Wisconsin Governor Doyle, if you take the prices for
    five common drugs for seniors (Detrol, Lipitor, Accupril, Aricept, and
    Prevacid), the patient would pay only $277.50 under the Senior Care
    Program in Wisconsin for 112 days for all of these drugs. From the
    three Canadian pharmacies that the Governor of Wisconsin identified for
    his citizens, the patient would pay over six times that amount--a
    difference between $14.25 per day for Canadian drugs versus only $2.35
    from the local pharmacy selling safe, FDA-regulated American drugs.\1\
    ---------------------------------------------------------------------------
        \1\ Letter from FDA, Associate Commissioner for Policy and
    Planning, William K. Hubbard to Wisconsin Governor Doyle, March 18,
    2004.
    ---------------------------------------------------------------------------
        Often times, shopping around to various pharmacies can yield
    savings for consumers. According to John Graham, the author of a study
    by the Fraser Institute, Canada's leading economic think tank, ``We
    hear about Americans who claim that they save money, some say up to 60
    percent, by filling their prescriptions in Canada. That is very
    misleading because in some cases a consumer can save as much by bargain
    hunting at home as he can by crossing the border.'' \2\ Numerous
    surveys have been done by States and cities across the country that
    show consumers can and do save money by shopping around. For example, a
    survey by the Maine Bureau of Elder and Adult Services of prescription
    drug prices within the State of Maine found that the retail price of 10
    drugs commonly used by seniors varied by as much as 60 percent in the
    100 stores they surveyed across the State.\3\
    ---------------------------------------------------------------------------
        \2\ Media Release, Fraser Institute, August 30, 2001,
    www.fraserinstltute.ca.
        \3\ ``State Survey Reveals Wide Range of Prescription Drug
    Prices,'' Maine Times, February 8, 2001.
    ---------------------------------------------------------------------------
        The solutions detailed above provide practical options for many
    individuals to access affordable medicines that will not risk their
    health and safety.
        We urge this committee to keep intact the current ``closed'' U.S.
    distribution system and reject efforts that would erode the ability of
    the FDA to ensure the safety and effectiveness of drugs sold in the
    United States.

        [Whereupon, at 12:28 p.m., the committee adjourned.]