    [House Hearing, 109 Congress]
    [From the U.S. Government Publishing Office]

                      PHARMACEUTICAL SUPPLY CHAIN SECURITY

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

                                    HEARING

                                   before the

                       SUBCOMMITTEE ON CRIMINAL JUSTICE,
                        DRUG POLICY, AND HUMAN RESOURCES

                                     of the

                                  COMMITTEE ON
                               GOVERNMENT REFORM

                            HOUSE OF REPRESENTATIVES

                           ONE HUNDRED NINTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 JULY 11, 2006

                                   __________

                               Serial No. 109-227

                                   __________

           Printed for the use of the Committee on Government Reform

      Available via the World Wide Web: http://www.gpoaccess.gov/congress/
                                   index.html
                          http://www.house.gov/reform

                                     ______

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                         COMMITTEE ON GOVERNMENT REFORM

                         TOM DAVIS, Virginia, Chairman
    CHRISTOPHER SHAYS, Connecticut       HENRY A. WAXMAN, California
    DAN BURTON, Indiana                  TOM LANTOS, California
    ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
    JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
    JOHN L. MICA, Florida                PAUL E. KANJORSKI, Pennsylvania
    GIL GUTKNECHT, Minnesota             CAROLYN B. MALONEY, New York
    MARK E. SOUDER, Indiana              ELIJAH E. CUMMINGS, Maryland
    STEVEN C. LaTOURETTE, Ohio           DENNIS J. KUCINICH, Ohio
    TODD RUSSELL PLATTS, Pennsylvania    DANNY K. DAVIS, Illinois
    CHRIS CANNON, Utah                   WM. LACY CLAY, Missouri
    JOHN J. DUNCAN, Jr., Tennessee       DIANE E. WATSON, California
    CANDICE S. MILLER, Michigan          STEPHEN F. LYNCH, Massachusetts
    MICHAEL R. TURNER, Ohio              CHRIS VAN HOLLEN, Maryland
    DARRELL E. ISSA, California          LINDA T. SANCHEZ, California
    JON C. PORTER, Nevada                C.A. DUTCH RUPPERSBERGER, Maryland
    KENNY MARCHANT, Texas                BRIAN HIGGINS, New York
    LYNN A. WESTMORELAND, Georgia        ELEANOR HOLMES NORTON, District of
    PATRICK T. McHENRY, North Carolina       Columbia
    CHARLES W. DENT, Pennsylvania                    ------
    VIRGINIA FOXX, North Carolina        BERNARD SANDERS, Vermont
    JEAN SCHMIDT, Ohio                       (Independent)
    BRIAN P. BILBRAY, California

                          David Marin, Staff Director
                    Lawrence Halloran, Deputy Staff Director
                           Teresa Austin, Chief Clerk
              Phil Barnett, Minority Chief of Staff/Chief Counsel

       Subcommittee on Criminal Justice, Drug Policy, and Human Resources

                       MARK E. SOUDER, Indiana, Chairman
    PATRICK T. McHenry, North Carolina   ELIJAH E. CUMMINGS, Maryland
    DAN BURTON, Indiana                  BERNARD SANDERS, Vermont
    JOHN L. MICA, Florida                DANNY K. DAVIS, Illinois
    GIL GUTKNECHT, Minnesota             DIANE E. WATSON, California
    STEVEN C. LaTOURETTE, Ohio           LINDA T. SANCHEZ, California
    CHRIS CANNON, Utah                   C.A. DUTCH RUPPERSBERGER, Maryland
    CANDICE S. MILLER, Michigan          MAJOR R. OWENS, New York
    VIRGINIA FOXX, North Carolina        ELEANOR HOLMES NORTON, District of
    JEAN SCHMIDT, Ohio                       Columbia

                                   Ex Officio

    TOM DAVIS, Virginia                  HENRY A. WAXMAN, California
                           Marc Wheat, Staff Director
                            Michelle Gress, Counsel
                            Kimberly Craswell, Clerk
                         Tony Haywood, Minority Counsel

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on July 11, 2006....................................     1
    Statement of:
        Catizone, Carmen, executive director, National Association of
          Boards of Pharmacy; Susan C. Winckler, esq., vice
          president, policy and communications, American Pharmacists
          Association; John M. Gray, president and CEO, Healthcare
          Distribution Management Association, HDMA; and Rick Raber,
          project manager, Northern Apex, RFID.......................    64
            Catizone, Carmen.........................................    64
            Gray, John M.............................................    90
            Raber, Rick..............................................    99
            Winckler, Susan C........................................    79
        Lutter, Randall W., Acting Associate Commissioner for Policy
          and Planning, Food and Drug Administration; and Kevin
          Delli-Colli, Deputy Assistant Director, Financial and Trade
          Investigations Division, Office of Investigations, U.S.
          Immigration and Customs Enforcement........................     8
            Delli-Colli, Kevin.......................................    45
            Lutter, Randall W........................................     8
    Letters, statements, etc., submitted for the record by:
        Catizone, Carmen, executive director, National Association of
          Boards of Pharmacy, prepared statement of..................    67
        Delli-Colli, Kevin, Deputy Assistant Director, Financial and
          Trade Investigations Division, Office of Investigations,
          U.S. Immigration and Customs Enforcement, prepared
          statement of...............................................    47
        Gray, John M., president and CEO, Healthcare Distribution
          Management Association, HDMA, prepared statement of........    93
        Lutter, Randall W., Acting Associate Commissioner for Policy
          and Planning, Food and Drug Administration, prepared
          statement of...............................................    11
        Raber, Rick, project manager, Northern Apex, RFID, prepared
          statement of...............................................   101
        Souder, Hon. Mark E., a Representative in Congress from the
          State of Indiana, prepared statement of....................     4
        Winckler, Susan C., esq., vice president, policy and
          communications, American Pharmacists Association, prepared
          statement of...............................................    81

                      PHARMACEUTICAL SUPPLY CHAIN SECURITY

                                  ----------

                             TUESDAY, JULY 11, 2006

                      House of Representatives,
    Subcommittee on Criminal Justice, Drug Policy, and
                                       Human Resources,
                                Committee on Government Reform,
                                                        Washington, DC.
        The subcommittee met, pursuant to notice, at 10 a.m., in
    room 2154, Rayburn House Office Building, Hon. Mark E. Souder
    (chairman of the subcommittee) presiding.
        Present: Representatives Souder, Gutknecht, Foxx, Cummings,
    Ruppersberger, and Norton.
        Staff present: Marc Wheat, staff director and chief
    counsel; Michelle Gress, counsel; Scott Springer, congressional
    fellow; Kimberly Craswell, clerk; Tony Haywood, minority
    counsel; and Jean Gosa, minority assistant clerk.
        Mr. Souder. The subcommittee will come to order. Mr.
    Cummings is going to be a little late, and we will have Members
    in and out, but I want to get the hearing started on time.
        Good morning, and thank you for being here today. This is
    the second hearing conducted by the subcommittee to investigate
    the threat of counterfeit drugs within the United States.
        Today's hearing is focused on measures to prevent
    counterfeits from entering the pharmaceutical supply chains and
    to improve supply chain security. This hearing comes in the
    wake of FDA's recent update from its Counterfeit Drug Task
    Force which recommends ending the multi-year stay on
    implementing the pedigree rule required in the Prescription
    Drug Marketing Act, an act that was signed into law in 1988.
        A pedigree shows the drug's chain of custody, tracking the
    product as it flows through the supply chain. States such as
    California and Florida already have tough pedigree laws, and
    other States are moving forward with their own legislation. The
    FDA's decision to implement the pedigree requirement is a
    welcome, if overdue, effort in the national fight against
    counterfeit medicines in a pharmaceutical supply chain.
        Pedigrees can be paper or electronic, also known as an
    ePedigree; ePedigree can be accomplished through what is known
    as radio frequency identification [RFID], where a small RFID
    tag on the drug package is read and tracked from seller to
    seller providing, an electronic record of all transactions for
    the drug. Nonetheless, the pedigree is only one tool in the
    tool box for creating and maintaining a secure supply chain.
        Counterfeit pharmaceutical drugs are illegal, generally
    unsafe and pose a serious threat to the public health.
    Moreover, despite some sensational media segments on the
    prevalence and danger of counterfeit drugs, the American public
    is generally unaware of the program.
        The illegitimate business of creating, distributing and
    selling counterfeit pharmaceutical products is an unregulated,
    criminal and growing part of the global economy. There is one
    major difference between pharmaceutical counterfeiting and
    other underground industries: lives are at stake. It has been
    estimated that, globally, counterfeit pharmaceutical commerce
    will grow to become 16 percent of the aggregate size of the
    legitimate industry, a 6 percent increase from 2004. This
    illegal business will generate $75 billion in revenue in 2010,
    a 92 percent increase from 2005.
        The counterfeit industry is also growing at a much faster
    rate than the legitimate pharmaceutical business. Some
    estimates indicate that counterfeit drug sales will grow 13
    percent annually through 2010, compared to just 7.5 percent
    estimated annual growth for global pharmaceutical commerce.
        Many of the products sold via drug traffickers contain
    ingredients that could be harmful, and these products are
    coming from illegal operations with very poor controls. The
    U.S. supply chain has become increasingly vulnerable to a
    variety of threats. Counterfeit drugs often travel through a
    distribution network of wholesalers, distributors, pharmacies,
    online shelf companies and criminal organizations buying,
    selling and reselling through unofficial channels with little
    product integrity. The FDA has confirmed that the large
    majority of known instances of counterfeit drugs have entered
    the supply stream through what is known as a secondary market,
    where drug diversion takes place. Drug diversion is the
    principle method by which counterfeits consistently enter the
    legitimate drug market. This happens because the pharmaceutical
    supply chain is not regulated by any single entity, private or
    governmental. The pharmacies within the State are monitored by
    the State Boards of Pharmacy which enforce the standards of
    care within each State. However, the State Boards of Pharmacy
    lack police power, and many are limited to only a handful of
    inspectors. Drug manufacturers have to comply with the FDA for
    the safety, effectiveness and labeling of their drugs. The drug
    manufacturers typically exercise no control over their drugs
    once they are shipped out of the manufacturing facility.
    Rather, the drugs are bought and sold by distributors and
    frequently pass in and out of the secondary market, where they
    may be bought and sold dozens of times, passed among several
    hands, repackaged, mishandled or relabeled.
        Distributors like retailers and physicians are licensed by
    the States which must only meet the minimal standards set by
    the Prescription Drug Marketing Act. In order to obtain a
    distributor's license, some States' licensing requirements are
    more lenient than others. Although some States have toughened
    their licensing standards for distributors, this leaves a
    patchwork of inconsistent standards across the country.
    Unscrupulous distributors can exploit the lowest standards of
    some States to insert counterfeit or adulterated product in the
    legitimate drug supply chain.
        When unscrupulous middlemen resell pharmaceuticals, they
    sometimes relabel them to reflect higher and more valuable
    doses, mishandle them to contaminate or degrade the drug, or
    substitute fake products for the legitimate goods. The
    counterfeits can be indistinguishable from the legitimate
    product. For the patient, there is no commercial transaction
    like this. The patient has virtually zero ability to inspect
    the drug's packaging or compare it to other samples. The
    patient who goes to a pharmacy to have his or her prescription
    filled is as helpless in determining the quality of the drug
    and completely dependent on a system that has experienced some
    tragic breaches. Moreover, it is impossible to measure the
    scope of the problem, and we cannot say with any degree of
    certainty how many or which counterfeit drugs make it to the
    pharmacy shelves because a health indication or ultimate death
    may be attributed to the patient's underlying illness rather
    than the drug.
        I look forward to hearing from our witnesses an assessment
    of the current threats and available protective measures to
    strengthen the supply chain.
        Our first panel today consists of Mr. Randall Lutter,
    Associate Commissioner for Policy and Planning at the Food and
    Drug Administration; and Mr. Kevin Delli-Colli, Deputy
    Assistant Director, Financial and Trade Investigations,
    Division, Office of Investigations, U.S. Immigration and
    Customs Enforcement [ICE].
        Our second panel consists of Carmen Catizone, executive
    director of the National Association of the Boards of Pharmacy;
    Ms. Susan Winckler, vice president of policy and communications
    at the American Pharmacists Association; Mr. John Gray,
    president and CEO of Healthcare Distribution Management
    Association [HDMA]; Rick Raber, project manager with Northern
    APEX-RFID and a fellow Hoosier from northeastern Indiana.
        Welcome to each of you, and I look forward to your
    testimony.
        Mr. Gutknecht, do you have an opening statement?
        [The prepared statement of Hon. Mark E. Souder follows:]

        [GRAPHIC] [TIFF OMITTED] T4446.001

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        [GRAPHIC] [TIFF OMITTED] T4446.003

        Mr. Gutknecht. Mr. Chairman, I don't so much have an
    opening statement, I just want to thank you and congratulate
    you for holding this hearing. This is an issue that I've had an
    interest in for a long time. It all started--this opening
    statement may get a little longer than I originally intended,
    but I want to just make a few points.
        First of all, it started at a town hall meeting that I had
    many years ago where seniors began to question why it was they
    were treated like common criminals for buying their
    prescription drugs from Canada. And the argument that has been
    consistently proposed by the FDA and their fellows in the
    pharmaceutical industry is that we cannot guarantee the safety
    of drugs coming in from industrialized countries like Canada.
    The truth of the matter is, there is technology available today
    at low cost, and I've got some examples that I brought with me
    if you want to see audio visuals. In here, I have 50 RFID
    computer chips, and you can barely see them. But this
    technology is not futuristic. It's not pie-in-the-sky. It is
    available today. And we have the ability to protect the
    integrity and the safety of the drug supply not only here in
    the United States but from other industrialized countries. And
    so I think this hearing is a very important step I think on
    that path toward making certain that the pharmaceutical drugs
    that Americans take are safe but, more importantly, more
    affordable for all Americans.
        So I really do want to thank you for having this hearing,
    and I'm delighted to be here.
        Mr. Souder. I thank the gentleman. He's been very active
    and outspoken on this for some time, and I'm glad we can
    continue to progress with this.
        I ask unanimous consent that all Members have 5 legislative
    days to submit written statements and questions for the hearing
    record, and any answers to written questions provided by the
    witnesses also be included in the record. Without objection, so
    ordered.
        I also ask unanimous consent that all exhibits, documents
    and other materials referred to by Members may be included in
    the hearing record, that all Members be permitted to revise and
    extend remarks. Without objection, it's so ordered.
        As the witnesses know, it's our standard procedure to ask
    witnesses to testify under oath. If you will raise your right
    hands, I will administer the oath to you.
        [Witnesses sworn.]
        Mr. Souder. Let the record show that both of the witnesses
    responded in the affirmative.
        We thank you for coming today.
        Dr. Lutter, is that correct? Did I say that correct? I look
    forward to your testimony. I'll have you start.

    STATEMENTS OF RANDALL W. LUTTER, ACTING ASSOCIATE COMMISSIONER
      FOR POLICY AND PLANNING, FOOD AND DRUG ADMINISTRATION; AND
      KEVIN DELLI-COLLI, DEPUTY ASSISTANT DIRECTOR, FINANCIAL AND
     TRADE INVESTIGATIONS DIVISION, OFFICE OF INVESTIGATIONS, U.S.
                  IMMIGRATION AND CUSTOMS ENFORCEMENT

                     STATEMENT OF RANDALL W. LUTTER

        Mr. Lutter. Good morning, Chairman Souder, members of the
    subcommittee. I'm Dr. Randy Lutter, Associate Commissioner for
    Policy and Planning at the U.S. Food and Drug Administration.
    Thank you for the opportunity to testify about FDA's efforts
    regarding counterfeit prescription drugs.
        Counterfeit drug products and illicit drug diversion are
    major concerns to FDA. While the U.S. drug supply is among the
    safest in the world, we believe threats from drug
    counterfeiters have become increasingly sophisticated.
    Organizations and individuals who peddle fake medicines put
    unsuspecting patients at risk by exposing them to unknown
    contaminants and denying them medicines known to be safe and
    effective at treating their medical ailments.
        Our mission is to protect and promote the public health,
    and today I will discuss measures FDA has taken and continues
    to take to fight phony medicines.
        First I'd like to clarify what FDA considers counterfeit.
    The definition in the True Drug and Cosmetics Act focuses on
    fraud and deception toward the consumer as when persons falsely
    believe they are receiving a genuine FDA-approved product. It
    generally does not include products that are marketed as being
    similar to or a foreign version of an FDA-approved drug. Those
    types of products are also illegal but referred to as
    unapproved new drugs, not counterfeit drugs.
        My written statement contains details of FDA's enforcement
    efforts to combat prescription drug counterfeiters; today,
    however, I'd like to highlight some of the work of FDA's
    Counterfeit Drug Task Force, and some of the recommendations
    made in the recently issued 2006 report.
        The Task Force was established in 2003 and consists of
    senior FDA officials. Our mission is to develop recommendations
    for steps that FDA, other government agencies and industry
    could take to minimize the risk to the public from the
    introduction of counterfeit drugs into the U.S. distribution
    system.
        In 2004, the Task Force issued a report outlining a
    framework for public and private sector actions that could
    further protect Americans from counterfeit drugs. This
    framework called for a multi-layered approach to address the
    problem and stated among other things that widespread use of
    electronic track-and-trace technology would help secure the
    integrity of the drug supply chain by providing an accurate
    drug pedigree, which is a record of the chain of custody of the
    product as it moves through the supply chain from manufacturer
    to pharmacy. Radio frequency identification is a promising
    technology to achieve electronic pedigree.
        The third conclusion was that widespread adoption and use
    of electronic track-and-trace technology would be feasible by
    2007. And finally, the effective date of certain regulations
    related to the implementation of the Prescription Drug
    Marketing Act should be delayed until December 1, 2006, to give
    stakeholders in the supply chain time to focus on implementing
    widespread use of ePedigree.
        In 2005, the Task Force issued an updated report which
    assessed FDA's and industry's progress toward implementing the
    2004 recommendation. The Task Force found, among other things,
    that progress had been made in many areas, but progress toward
    widespread use of ePedigree was slowing, and the goal might not
    be met by 2007. This year, to evaluate progress toward
    widespread use of ePedigree by 2007 and to solicit public
    comment on the implementation of certain PDMA related
    regulations, we held a public meeting on February 8th and 9th.
    Subsequently, on June 9th, the Task Force issued its most
    recent report based on this extensive fact-finding effort. I'll
    focus my discussion on this 2006 report on the status of the
    stayed provisions related to PDMA and electronic track-and-
    trace technologies.
        As you know, FDA published five regulations related to the
    PDMA in December 1999. The provisions in those regulations
    define the phrase ``ongoing relationship'' as used in the
    definition of authorized distributor of record set forth in the
    requirements regarding pedigrees and define the fields of
    information that must be included in the pedigree.
        FDA had delayed the effective date for these provisions
    several times because of significant issues raised by
    stakeholders. Based on our recent fact-finding effort, we can
    no longer justify continuing the stay. A large majority of
    supply chain stakeholders told FDA that the regulations should
    be allowed to go into effect. Allowing the stay to expire will
    provide clarity in the prescription drug supply chain by
    distinguishing clearly authorized distributors of records who
    are exempt from providing drug pedigrees from non-authorized
    distributors of record, who must provide a pedigree.
        While the regulations do not provide for a phased in
    approach for pedigree implementation, FDA has issued a draft
    compliance policy guidance for public comment that reflects the
    risk-based approach that FDA will use to focus its enforcement
    efforts regarding the pedigree regulations. The focus will be
    on prescription drug products that are most vulnerable to
    counterfeiting diversion based on factors such as high value,
    prior history of counterfeiting or diversion, reasonable
    likelihood of counterfeiting for new drugs, and other
    violations of law.
        The 2006 report also states that FDA continues to believe
    that RFID is the most promising technology for implementing
    electronic track-and-trace in the prescription drug supply
    chain and that stakeholders should move quickly to implement
    this technology. FDA recognizes that implementing an RFID-
    enabled drug supply chain is challenging and urges
    manufacturers to take a risk-based approach to implementation.
        The 2006 report also considered several technical issues
    related to adoption of electronic track-and-trace technology
    that were perceived as obstacles to implementation and are in
    need of resolution. These include mass serialization and unique
    identification of each drug package, universal pedigree,
    covering all drugs from all manufacturers to the dispenser,
    national uniform information, and privacy issues and the need
    for consumer education about RFID and the labelling of RFID tag
    drug products in order to help prevent unauthorized disclosure
    of personal information.
        FDA's vision of a safe and secure prescription drug supply
    chain is based on transparency and accountability for all
    persons who handle the prescription drug throughout the supply
    chain. With the pedigree regulations taking effect in December
    2006, FDA expects that supply chain stakeholders will move
    quickly to electronic track-and-trace technology. Ultimately,
    we believe that the public health would be better protected if
    all stakeholders work cooperatively to enable all distributors
    to pass pedigrees.
        FDA is doing its part to effectively enforce the law in
    conjunction with other Federal, State and local entities, to
    protect Americans from criminals who attempt to undermine the
    public health by introducing counterfeit and diverted
    prescription drugs into the U.S. drug supply.
        I'd like to thank the subcommittee for the opportunity to
    testify today on this important issue. I'd be pleased to
    respond to any questions.
        [The prepared statement of Mr. Lutter follows:]

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        Mr. Souder. Thank you.
        Mr. Kevin--is it Delli-Colli?
        Mr. Delli-Colli. Yes, thank you.
        Mr. Souder. He is Deputy Assistant Director for Financial
    and Trade Investigations at ICE. We welcome you back to our
    committee.

                     STATEMENT OF KEVIN DELLI-COLLI

        Mr. Delli-Colli. Good afternoon, Chairman Souder and
    distinguished members of this subcommittee. My name is Kevin
    Delli-Colli, and I am the Deputy Assistant Director for
    Financial and Trade Investigations at U.S. Immigration and
    Customs Enforcement [ICE].
        I am pleased to appear before you today to speak about
    ICE's role in combating the trafficking of counterfeit
    pharmaceuticals. I have a statement which I will submit for the
    record and will make a brief oral statement.
        In January 2004, ICE and FDA in San Diego began a multi-
    agency investigation targeting various Web sites, Internet
    payment networks and pharmaceutical supply chains. The targets
    utilized more than 650 affiliated Web sites to distribute more
    than $25 million in counterfeit or unapproved pharmaceuticals
    within a 3-year period.
        The distribution network extended throughout all of North
    America, and the source country, India, was disguised by trans-
    shipping the product through other countries. To date, this
    investigation has resulted in 20 indictments, 18 convictions
    and the seizure of $1.4 million. The primary violator was
    sentenced in January 2005 to 51 months imprisonment.
    Prosecution of other defendants is ongoing. This case
    highlights many of the challenges confronting U.S. law
    enforcement in combating the trafficking of counterfeit
    pharmaceuticals.
        As the largest investigative arm of the Department of
    Homeland Security, ICE plays a leading role in targeting
    criminal organizations responsible for producing, smuggling and
    distributing counterfeit products, including counterfeit
    pharmaceuticals. ICE investigations focus not only on keeping
    these products from reaching U.S. Consumers, but also on
    dismantling the criminal organizations responsible for this
    activity.
        ICE smuggling investigations have shown that the Internet
    has become the primary tool used by organizations engaged in
    the trafficking of counterfeit pharmaceuticals, whether for
    advertisement, direct sales or as a communication tool.
    Individuals who previously would have purchased controlled or
    prescription pharmaceuticals through an underground supplier
    now use the Internet to locate a source for the drugs, place
    orders, arrange shipments, and make payments all from the
    comfort of their own home. Thus, traffickers have been able to
    create an illicit unregulated supply chain which is filled with
    counterfeit, adulterated, misbranded and unsafe drugs that are
    distributed directly to consumers who in most instances are
    drug abusers.
        The problem is global. China and India are the most
    prolific source countries; however, Mexico, Thailand and Brazil
    are also sources of these drugs. Other countries host Web
    service, conduct payment processing or act as trans-shipment
    points.
        ICE addresses this threat in several ways. ICE is a cadre
    of dedicated and trained special agents assigned to domestic
    field offices who specialize in investigating counterfeit
    violations. ICE special agents are also deployed to 56 overseas
    attache offices, making it possible for ICE to effectively
    conduct global investigations. ICE agents in the field and
    overseas work closely with the ICE Crime Center to combat
    pharmaceutical violations over the Internet. ICE also hosts a
    National Intellectual Property Rights Coordination Center,
    which serves as the primary point of contact for law
    enforcement referrals and conducts industry outreach.
        Another way in which ICE combats pharmaceutical smuggling
    is through targeted operations such as Operation Apothecary.
    Operation Apothecary concentrates its efforts at international
    mail facilities and express courier hubs to examine and
    identify packages containing falsely declared or undeclared
    pharmaceuticals. ICE, FDA and other Federal law enforcement
    agencies use the information obtained from these examinations
    to target foreign sources, domestic organizations and
    recipients engaged in smuggling and distributing commercial
    quantities of illicit pharmaceuticals.
        Since 2003, ICE has initiated 178 criminal investigations
    targeting pharmaceutical smuggling. To date, these
    investigations have led to 86 arrests. Millions of dosage units
    of counterfeit, adulterated, misbranded and unapproved
    pharmaceuticals have been seized, and where appropriate, assets
    attributed to the illegal proceeds have also been seized and
    forfeited.
        To combat the supply side, ICE has actively engaged the
    Chinese Ministry of Public Security to conduct investigations
    of mutual interest. This dialog led to the first two joint
    U.S.-China enforcement actions ever to take place in China. One
    of these investigations began in February 2005 when the ICE
    attache in Beijing received information that Richard Cowley of
    Shelton, WA, was linked to groups of individuals involved in
    the Internet sale of pharmaceuticals in the United States and
    Europe. This investigation led to the initiation of Operation
    Ocean Crossing. ICE special agents acting undercover met with
    Cowley and learned the identity of his supplier in China. The
    information from this investigation was shared with Chinese
    authorities, who then took action against the largest
    counterfeit pharmaceutical operation in China. Twelve Chinese
    nationals were arrested, and three illicit pharmaceutical
    facilities were shut down during joint enforcement actions
    which took place in December 2005. Cowley was arrested in the
    United States. He has since pled guilty and is currently
    awaiting sentencing.
        This case is an excellent example of the value of
    cooperation and information sharing in combating transnational
    pharmaceutical trafficking, and ICE believes that this need for
    cooperation will continue to produce significant results.
        ICE will continue to aggressively apply our authorities in
    combating the transnational organizations that traffic in
    counterfeit pharmaceuticals.
        This concludes my remarks, and I would be pleased to answer
    your questions. Thank you.
        [The prepared statement of Mr. Delli-Colli follows:]

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        Mr. Souder. I thank you both for your testimony.
        Let me ask kind of a side question first that came up at a
    hearing we had last week in Colorado on meth.
        When Congress passes a new law that is about to take
    effect, for example, on September 30th, on--it's a legal drug
    if it has pseudoephedrine in it, but we're restricting the
    quantities and requiring people to register, and this will now
    become national.
        Has there been any discussion of what the logical market
    reaction is going to be? It appears in Oregon that they've gone
    to the Internet to bring in the pseudoephedrine for the so-
    called mom-and-pop labs. Oklahoma just appears to be bringing
    in crystal ice. Those were the first two States with
    pharmaceutical regulations. But does what you're talking about
    here, how would that be handled with a legal product that we're
    trying to control the dosage, in effect?
        Mr. Delli-Colli. Well, from ICE's perspective, with
    responsibility for the meth, it's a different division than the
    counterfeit division.
        Mr. Souder. But this is the pseudoephedrine that's legal.
    For example, many headache medicines that would now--now the
    quantity is handled differently.
        Mr. Delli-Colli. I'm not familiar enough with the
    legislation to know how the implication of that drug would be
    affected. I believe it would be similar to an anti-
    pharmaceutical; it's going to be prohibited unless it's brought
    in by a manufacturer.
        Mr. Lutter. Maybe I can expand on that a little bit.
    Pseudoephedrine brought in across the border would be treated
    as an illegal, unapproved drug because it has not been reviewed
    by FDA.
        Mr. Souder. But I'm not talking about raw pseudoephedrine,
    or ephedra, which we already control; I'm talking about the
    pills. Any headache medicine that 37 States are going through
    that process as of September 30th, the Federal regulation will
    put it behind a counter with people having to sign in, and you
    can only get a certain amount of it. Now the way to get around
    that law is to do what you do with other prescription drugs and
    try to move around the border. And I'm wondering, when we pass
    major legislation like this that's going to slam down in 50
    States, whether there's been any discussion, because the
    logical market reaction is going to be sort of trying to move
    around the legal distribution. And whether or not some of the
    ways you're trying to address tracking and so on would be a way
    to do that? I'm just wondering whether you've had any
    discussion about meth, because this is a new change that could
    result in a big bump up in what you're dealing with. But there
    hasn't been a discussion, I take it.
        Mr. Delli-Colli. Any time you restrict the domestic sale
    of--if the drugs that have the active ingredient that could be
    used to manufacture meth are put behind the counter and make it
    a little more difficult to obtain, anybody that wanted to do
    something inappropriate with those drugs would, I believe,
    resort to the Internet to find a supplier for that ingredient.
        Mr. Souder. And your agency hasn't begun to look at that
    impact?
        Mr. Delli-Colli. Other than the fact that we would
    anticipate that we would see an increase.
        Mr. Souder. What currently--if I may move to Dr. Lutter--
    what currently are some of the major drugs that you would be
    dealing with in the range of what you're trying to control
    here?
        Mr. Lutter. With respect to counterfeit drugs generally, or
    with respect to----
        Mr. Souder. Counterfeit drugs generally. In other words, to
    give just kind of an initial layout here, are we talking mostly
    people who are--are they common medicines? Are they
    prescription drugs? Are they illegal drugs?
        Mr. Lutter. There is a variety of similarities among the
    drugs that have been reported counterfeited in the past in the
    United States. First, they are typically high value. Some of
    them are lifestyle drugs. And third, some of them are
    relatively easier to counterfeit in the sense of being liquids,
    clear liquids rather than pills, which are difficult to
    counterfeit because they have to be manufactured in a manner
    that closely resembles the authentic product.
        In terms of the products that we've actually seen
    counterfeited in the past, recent cases that have been closed
    include Lipitor, anti-cholesterol drug, Viagra and Cialis,
    which are well known from advertisements, Zyprexa, and also
    other products for HIV and for AIDS. Procrit was also listed as
    a counterfeit drug according to recent accounts.
        So the common theme here is that they are drugs that are
    high value in the United States in terms of the market as a
    whole, and also relatively--some of them are relatively easy to
    produce in a manner that deceives trained pharmacists and
    physicians.
        Mr. Souder. As I understood your testimony, you were
    moving--you said you felt they could move forward in December
    with the process?
        Mr. Lutter. A key announcement that we made on June 9th of
    this past year is that we would allow the stay of the PDMA
    regulations to expire in early December of this year. An
    implication of the expiration of that stay of the regulation
    and a discontinuation of the stay is that there would be
    additional clarity to stakeholders in the drug distribution
    chain about who is supposed to provide pedigrees and what
    exactly the pedigrees are supposed to contain. The PDMA itself,
    as you know, mandated that stakeholders in a drug distribution
    system pass pedigrees to whoever the buyer is, unless they are
    authorized distributors of record, the term of art in the
    statute. And an authorized distributor of record in the statute
    is someone who has an ongoing relationship with the
    manufacturer. What the regulation that we issued in 1999 does
    is it defines further what is meant by an ongoing relationship.
    As you can imagine, many stakeholders have asked us what is
    actually meant by that. So what our 1999 regulation does is
    stipulate that an ongoing relationship which makes a wholesaler
    exempt from having to pass a pedigree under the Prescription
    Drug Marketing Act is a written agreement with the manufacturer
    designating that wholesaler as an authorized distributor. And
    under those circumstances, the authorized distributor would not
    have to pass the pedigree.
        Mr. Souder. Is that authorized distributor list going to be
    published?
        Mr. Lutter. I'm sorry?
        Mr. Souder. Is the authorized distributor list going to be
    published?
        Mr. Lutter. Yes. Our regulations make the--ask the
    manufacturers to make visible upon request the list of
    authorized distributors of record.
        Mr. Souder. So that's available to you?
        Mr. Lutter. And to anyone else who asks. They're also
    directed by our regulations to update it continually.
        Mr. Souder. Could secondary distributors claim they had
    been purchased from an authorized distributor when they really
    haven't been?
        Mr. Lutter. Well, a secondary distributor who is not an
    authorized distributor of record would have, as mandated under
    our regs and the statute, to pass a pedigree. So the pedigree
    would stipulate where they acquired the drugs and allow for
    anybody who buys the drugs from them an additional assurance
    that it is a pharma legitimate source and has been handled by
    known entities.
        Mr. Souder. One of the things that I was confused when you
    were finishing your statement and I was reading it as well, my
    understanding--I thought I heard you say that the focus should
    be high value, and you repeated that a minute ago, things that
    are easier to counterfeit and so on. Does this mean this isn't
    going to apply to all drugs? This is a phase in? Are you
    providing a list of what the process will be in December?
        Mr. Lutter. The decision that we announced in June is to
    allow the stay to expire in early December, and as of that
    point the regulation takes effect. We also issued----
        Mr. Souder. For everything?
        Mr. Lutter. Yes. We also issued a draft compliance policy
    guidance, which is now open for public comment. And we intend
    to issue that in final form before December. The key purpose of
    the draft compliance policy guidance is to articulate for
    stakeholders how we will use our enforcement resources for the
    first year during which the stay--after which--during which the
    regulations have taken effect. And there are four basic
    criteria in the compliance policy guidance that articulate how
    we will use our enforcement resources. They are essentially
    that we will focus efforts on pedigrees for drugs which are
    high value, and that's because we believe that----
        Mr. Souder. Are you going to specifically define what high
    value is? Are you going to name the different drugs or----
        Mr. Lutter. We have in the compliance policy guide listed
    examples of high value drugs, but not provided a definition.
    We've also listed drugs which have previously been
    counterfeited. And the reason that these are higher risk is
    that there is a track record. Counterfeiters have shown
    themselves to be interested in counterfeiting these drugs in
    particular for whatever reason.
        The third criteria is that for new drugs there needs to be
    a reasonable expectation that they're likely to be
    counterfeited, such as, again, expectations of high value or
    ease of creating a drug which is very similar to the genuine
    FDA approved article. And then the fourth one would be for
    other violations of law.
        Mr. Souder. And taking an example that you referred to say
    of Lipitor; so what you're saying is that would be one that
    they would be expected to have a tracking. Are you saying that
    they would have to have RFID tracking with it, or paper
    tracking would be sufficient at this point? A pedigree.
        Mr. Lutter. The regulation and the compliance policy
    guidance are silent about the particular technology to be used
    in providing the pedigree. The pedigree must be passed by
    certain entities, and it must contain certain information. We
    believe that RFID technology would offer a relatively cost-
    effective way of ensuring proper pedigrees. We think it offers
    substantial advantages to many stakeholders who believe it's
    the most promising electronic pedigree available based on the
    discussions that we had with stakeholders in our public meeting
    on February 8th and 9th. A variety of technologies presented at
    that meeting, other examples which were other than paper
    include a bar code, even a two-dimensional bar code, and very
    interestingly from the perspective of many stakeholders were
    hybrid technologies, technologies that would couple, if you
    will, RFID and paper or RFID and a bar code. And the purpose of
    these technologies was it reflected a need to meet stakeholders
    needs, given that the transition to an RFID world, which many
    people believe is where the industry will ultimately end up,
    will not be instantaneous but will instead involve a certain
    period during which there would be a demand for a variety of
    products to provide pedigrees using different technologies.
        Mr. Souder. Mr. Gutknecht.
        Mr. Gutknecht. Thank you, Mr. Chairman. And again, I want
    to thank you for holding this hearing.
        Let me first of all quote from the Center of Medicines in
    the public interest. They predict that counterfeit drug sales
    will reach $75 billion globally by 2010, an increase of more
    than 90 percent. And so this is a real issue. And it's not just
    about the United States; it's about the world.
        Second, I want to point out, I have in my hands here 50
    RFID tags. These are available today at relatively low cost.
    And so the technology exists today.
        I also have counterfeit proof packaging, which is available
    today. This is not something we're talking about 10 years from
    now, 5 years from now; it's available today.
        More importantly, a lot of this technology is being used
    today. Unfortunately, it's being used mostly in Europe. And I
    don't think the Europeans are intrinsically any smarter than we
    are. If they can do that, certainly we can do that.
        Dr. Lutter, I want to read from your testimony, and I will
    quote, ``The FDA stated in the 2006 Task Force report that
    although significant progress has been made to set the stage
    for widespread use of ePedigree, this goal, unfortunately, will
    not be met by 2007. The FDA is optimistic that considerable
    momentum and interest in widespread implementation of ePedigree
    continue and remains committed to working with the
    stakeholders--and I want to underscore stakeholders--to make
    this happen. Stakeholders urged FDA not to mandate RFID in
    order to give the private sector time to continue with
    developing standards that build the appropriate and necessary
    infrastructure. We listened to their concerns, and did not
    require RFID use at this time.''
        Dr. Lutter, I understand that the stakeholders are not
    particularly interested in doing this, and my sense is they
    have their own reasons for that. But I want to come back to, I
    understand that the conclusion was that this would be too hard
    to implement against all of the prescription drugs that are out
    there, which is why Mr. Burton of Indiana and myself have
    introduced H.R. 4829. And we would essentially phase in the
    implementation of this technology in the drug supply, starting
    only with the 30 most easily or most commonly counterfeited
    drugs in the United States.
        Dr. Lutter, why wouldn't you just start small? I mean, you
    don't have to do this globally. Why don't we begin somewhere? I
    mean, the journey of a thousand leagues begins with a single
    step, and I think the first single step is to say, OK, this is
    the biggest problem, let's scratch where it itches. Why didn't
    you do that?
        Mr. Lutter. With respect to starting small, that approach
    is actually very similar to something that we've adopted in the
    compliance policy guidance that we've put out for public
    comment. In that sense, we're using our resources to focus
    attention on pedigrees for the drugs which are most likely to
    be counterfeited during the first year after the red will take
    effect.
        With respect to RFID more generally, I think the question
    there is really the maturity of the technology and its
    readiness for immediate adoption on a widespread basis.
        According to the testimony that we heard in the public
    meeting on February 8th and 9th, a variety of issues pertaining
    to standards had not yet been resolved, and these included
    questions such as the frequency, how to characterize the
    serialization, in other words, a unique number for each
    individual product, and what to do, for example, with privacy.
    That is not to say at the same time that RFID isn't very
    promising. What we were told at that public meeting is that
    they were very successful pilot projects done by several drug
    companies with wholesalers, and these pilot projects had been
    so successful that they were not ended or discontinued when the
    original completion date arrived. Instead, they were seen as so
    successful that they were continued in a realtime production
    and distribution environment that allowed the manufacturers and
    the wholesalers information about inventory and the location of
    all the products for business reasons, in addition to providing
    information about the pedigree that would be useful in
    complying with the PDMA.
        Mr. Gutknecht. OK. I'll let you off on that. I'm not sure I
    completely agree. Because as I say, if you wait for all the
    stakeholders to agree on this, I think it's going to be a long
    wait.
        Mr. Delli-Colli--and I hope I'm pronouncing that close to
    the right way--over the last year, we have read about--and I
    received a number of calls and e-mails and letters from folks
    in my district about prescriptions that they had ordered via
    the mail from pharmaceutical supply houses in Canada that have
    been intercepted by your office. Can you tell us about that,
    and can you defend that?
        Mr. Delli-Colli. First of all, by way of explanation, my
    organization is Immigration and Customs Enforcement, and we
    conduct the criminal investigations that are associated
    oftentimes with seizures that are made by Customs and Border
    Protection. So what you may be referring to is that drugs are
    being ordered over the Internet from Canada and coming in
    probably through mail facilities or courier hubs and being
    intercepted by CBP and subsequently seized. CBP is doing that
    because currently there is no legal way to import drugs over
    the Internet. The only way you can bring in prescription drugs
    personally is if you accompany the drugs into the United States
    and present a prescription at the border.
        As far as my office, we would only get engaged with an
    investigation if we believe that those drugs were being
    imported for criminal purposes to be illegally distributed, and
    not specifically for just an end user.
        Mr. Gutknecht. But if a senior citizen in Winona, MN, is
    ordering their Prilosec from Canada, do you consider that a
    criminal act?
        Mr. Delli-Colli. It also depends. First of all, when you
    order something over the Internet, how do you know it's coming
    from Canada? I mean, just because there's a Web site that
    indicates that the site is in Canada, we find often times that
    many of these organizations are trying to disguise their
    existence----
        Mr. Gutknecht. Let me interrupt that. When you say
    oftentimes, you mean most of the drugs? I mean, often is an
    interesting word, but words have meaning. We're talking about
    drugs that actually are being distributed by Canadian
    distributors that have been doing this for many years, that are
    well respected, and we have had no problems either with
    counterfeit drugs or with adverse reactions by the consumers.
    So when you say often, that's a misleading word, isn't it?
        Mr. Delli-Colli. Oftentimes meaning within the context of
    the investigations that ICE conducts. And again, CBP is
    enforcing the regulations that currently exist. So the
    investigations that we conduct again are geared toward
    individuals that are illegally distributing drugs over the
    Internet. So I may be looking at, you know, a different cross-
    section of what we're dealing with because I am a criminal
    investigator.
        Mr. Gutknecht. OK. Well, my time is expired, but we're
    watching this very carefully. And I think our own government is
    overstepping its legal responsibilities to American consumers.
    And the Congress, just for the record, has gone on record
    several times making it clear that we believe that law-abiding
    citizens who are buying drugs from--prescription drugs--from
    established sources that have demonstrated that they are
    responsible and are distributing the exact same FDA-approved
    drugs, the Congress has gone on record several times saying
    that is not, in the opinion of the Congress, the right or the
    responsibility of the Custom agents to do. And I wish--and I
    want to thank the chairman for having this hearing, and I wish
    we could have more hearings on this because I think American
    consumers are being abused, and I think law-abiding citizens
    are being treated like criminals for no reason. And I just want
    that in the public record. Thank you.
        Mr. Souder. Thank you.
        Mr. Delli-Colli, in your testimony you said that ICE
    investigations have not revealed instances in which smuggled
    counterfeit pharmaceuticals were destined for the legitimate
    supply chain. However, you state in Operation Apothecary that
    you dismantle organizations involved in the illegal importation
    of commercial quantities of the pharmaceuticals. Where were
    they destined?
        Mr. Delli-Colli. The people associated with the
    distribution, we're referring to illicit importation, the
    ultimate end use of these drugs is, in the cases that we've
    investigated, are going to people that either can't--that would
    not be able to get a prescription for the drugs, are drug
    abusers, or just don't want to go to a doctor and apply for a
    prescription. We haven't had any--our investigations lead us to
    drugs that are being provided to wholesalers or distributors to
    be entered into the brick and mortar pharmacies in the United
    States; these are individuals that are using the Internet to
    acquire drugs that they wouldn't legally be able to obtain or
    choose not to bother going to the doctor or a physician, or are
    just looking for cheaper drugs without any concern as to where
    they're purchasing the drugs from. And then there are people
    then obviously involved in the distribution process that are
    involved in smuggling drugs into the United States, traditional
    ways, bringing them in trunks of cars, hand-carrying them
    through the airports, and then set up Internet sites in the
    United States and ship those drugs via the mail, via DHL,
    FedEx, things of that nature.
        Mr. Souder. So you haven't seen any instances of the
    equivalent of doctor shopping in the sense of certain
    pharmacies? We had one pharmacy in my district that actually--a
    group of meth users had sent somebody to a school, then opened
    up a pharmacy that became a major distribution point for meth.
    In Florida, in a hearing on OxyContin, the Orlando Sentinal had
    published, and we had quite a discussion that all the OxyContin
    abuse had come from just six places in the whole State of
    Florida. You haven't seen that kind of set up type operations
    where----
        Mr. Delli-Colli. Again, because we're ICE, we're focused at
    the border in the interdiction capacity. So there are probably
    things that are occurring domestically which would fit in that
    nature. And there are--we have some cases that are somewhat
    ongoing that involve, you know, actual physicians that are
    licensed to practice that write illegal script, but again, we
    just have not had the type of case where some unsuspecting
    person would walk into CVS and hand a prescription over, and
    drugs that we intercepted were destined to be put into that
    chain as if part of the real supply chain. However, our
    investigations are increasing, and I think the vulnerability is
    definitely there for that to occur in the future.
        Mr. Souder. We are obviously having a hot political
    discussion in Congress and across the country about what to do
    with legitimate Canadian pharmacies and whether they should
    ship in the United States, but anybody who has visited Mexico
    knows and is on the Internet that there is not security. Have
    you looked into or do you have any idea or do you work with the
    RCMP to see about trans-shipment, and in fact whether there are
    people working with the Canadian address who are not in fact
    Canadian pharmacies, do they have licensed pharmacies that they
    actually know? We know how much they bring in and how much they
    move out, and the quantity of goods coming in from Canada
    exceeds the amount that they have in their supply chain. So the
    question is, is ICE looking at this mismatch, and do we
    actually know whether there is trans-shipment, or is this
    occasional or frequent?
        Mr. Delli-Colli. Again, we believe that there is trans-
    shipment occurring via Canada as well. Again, what we're seeing
    and what we're getting--where our investigations are taking us
    is oftentimes we will either begin a case on the Internet or
    we'll find a package that is seized at the airport, and to
    defend my brothers at CBP a little bit, most oftentimes when
    they are seizing pharmaceuticals coming into the United States,
    they're falsely declared. They're not declared as drugs.
    They're declared as documents. They're not contained in the
    original packaging of the drugs. They've been removed from the
    blister packages, and they're inserted inside books and things
    of that nature.
        So a lot of what we're seeing are blatant attempts to
    circumvent the regulations at the port. We don't necessarily
    know at the time we make those seizures who the supplier is;
    oftentimes we have to followup with interviews of people, not
    intending to necessarily prosecute them because it's just a
    personal use situation, but to ask them how they acquired it
    and then try to work those cases back. But we're seeing again
    that most of what we're seeing is the Internet is the primary
    tool for the distribution network.
        Mr. Souder. When you find counterfeit drugs from China or
    India, which are two of the countries that you mentioned in the
    question--some from Mexico--who are they selling through? If
    it's predominantly Internet means, what kind of name would you
    look in the Internet to find it under? Is it pretending to be
    an American pharmacy, a Canadian pharmacy? What is the
    masquerade that they're using to ship the drugs in? Are they
    selling it on street corners through Lipitor gangs? I mean, I'm
    trying to sort----
        Mr. Delli-Colli. Probably the least of those would be
    standing on the street corner. Those days are sort of behind us
    because of the Internet. It could be any of those. Oftentimes,
    obviously, if you're gearing toward the U.S. market, you're
    going to have an Internet Web site that is all done in English.
    It doesn't necessarily mean that--the site may purport to be in
    a foreign country, and it will just have information on there
    which makes it--purports to be tied to a legitimate brick and
    mortar pharmacy somewhere. It will indicate that it accepts all
    forms of credit card purchases, MasterCard, Visa, Discover.
    They will frequently ask questions, talk about how--with
    respect to the question they have about the drugs. They may
    even have a consult with a physician, but you just don't know
    who necessarily you're dealing with; that is the biggest
    problem.
        We had one site--this is going back a few years, the end of
    1999--we had a Thai site that, by all appearances, the site
    looked really legitimate, except it turns out that the person
    that was filling the prescription was buying the drugs out of
    the back of a brick and mortar pharmacy in Thailand and then
    was himself a hepatitis patient who just recently, when we did
    the enforcement act, had just recently got released from the
    hospital. And his assistant that was helping him fill the
    prescription was a Thai prostitute. So there's no controls over
    the quality or how these drugs are coming in. And I think
    that's the dilemma that you get into, you know, who is
    regulating all these sites all over the world with respect to
    accounting for the legitimacy of those drugs.
        Mr. Souder. Dr. Lutter.
        Mr. Lutter. If I could elaborate a little bit on the lack
    of controls. I have an example here of counterfeit Tamiflu that
    was purchased by--it was seized by Customs, who is not with us
    today, in April 2006 and turned over to the FDA Office of
    Criminal Investigations for investigation. OCI determined, the
    Office of Criminal Investigations at FDA determined that this
    had been purchased over the Internet by an NBC Dateline
    producer and was part of an order of 500 total capsules that
    was shipped from China. These products, as you see, are very
    similar to authentic Tamiflu. The labelling in fact is not so
    close to U.S. Tamiflu as to confuse trained U.S. physicians or
    pharmacists.
        OCI is continuing its investigation into the source of this
    counterfeit, but the analysis of our forensic chemistry center
    confirmed that the packaging and capsules are counterfeit. And
    the capsules have no active ingredient. So aspects of this
    investigation, such as the source of the counterfeit Tamiflu,
    are still under investigation by OCI field offices, and for
    that reason the numbers on the blisters on the boxes are
    concealed here. But this is an example of how counterfeit
    products are available on Internet sites that Americans have
    access to.
        Mr. Souder. The big question that I am still kind of
    wrestling with here is that, because the distribution system
    question is critical, because if that had an RFID or a tracer
    on it, it wouldn't really matter because that is not going to
    have one and it is not moving through regular tracking
    procedure. What is this pedigree? How is the pedigree going to
    affect the elicit market?
        Mr. Lutter. There are probably three related issues on
    that. In this instance, the U.S. purchaser was attempting to
    buy large quantities as if he were in fact a wholesaler, trying
    to sell to retailers and not for personal consumption. However,
    the Web site could be available also to individual citizens who
    would be buying Tamiflu, which is known to be safe and
    effective when used as directed not only against seasonal flu,
    a very important ailment that affects millions of Americans
    annually, but also against pandemic, which is a very serious
    threat that concerns the administration and many informed
    people in the public health community.
        So the availability of the counterfeit Tamiflu for sale
    poses, either at a wholesale level----
        Mr. Souder. But getting back to the question, that Tamiflu
    is already illegal, right? Is that package you just held up
    illegal?
        Mr. Lutter. I'm sorry?
        Mr. Souder. Is that illegal?
        Mr. Lutter. Yes, this is illegal because it is counterfeit.
        Mr. Souder. And if I as an individual went to the Internet
    to try to buy that, am I going to have a way to tell whether
    it's got a pedigree if I buy it off the Internet and it's not,
    because that's already illegal, having a pedigree isn't going
    to affect that?
        Mr. Lutter. A pedigree would not protect you. A pedigree is
    for the purposes of ensuring integrity of the wholesale
    distribution scheme.
        Mr. Souder. And these people are outside that.
        Mr. Lutter. And these people are outside that. The pedigree
    provides an opportunity for U.S. wholesalers all the way
    through to dispensers, pharmacies or hospitals to verify that
    the product in question had an appropriate and valid chain of
    custody going all the way back to the manufacturer.
        Mr. Souder. So in the 16 percent that I referred to in my
    opening statement, how much of that potential 16 percent or
    whatever the current figure is--that was a 2010 projection--
    that 16 percent is outside the chain of legitimate
    distribution, that we're not going to----
        Mr. Lutter. The number I think you referred to is 16
    percent from mail order in the United States currently, and
    that reflects all sources, including Internet and old-fashioned
    mail order where people may not use the Internet. I don't know
    what percent of that is from foreign-based Internet pharmacies.
    We reported, HHS reported in a drug importation report to
    Congress in December 2004, that the total volume of imported
    parcles containing unapproved foreign pharmaceutical products
    was 10 million in calendar year 2003 and that contained
    approximately 25 million prescriptions. But these are rough
    estimates at best based on the experience that our staff have
    at international mail facilities.
        Mr. Souder. Mr. Gutknecht, do you have any more questions?
        Mr. Gutknecht. Mr. Chairman, not so much a question but I
    think there is what I would describe as almost a convenient
    conspiracy here. On one hand, you have the pharmaceutical
    industry who wants to hold American consumers captive.
    Counterfeiters don't counterfeit $1 bills. It is mostly $100
    bills they counterfeit because it is worth doing.
        The reason we have created this counterfeit industry is in
    large part because drugs in the United States are far too
    expensive. And what we have heard here is the Internet has
    become the instrument. Well, what is the Internet? It is the
    information age. And until American consumers knew how much
    more they were paying for the same drugs, they weren't
    interested in buying their drugs over the Internet. But once
    they began to know, once the information age--you can't hold
    American consumers hostage, and that is the fact. You can try,
    but it doesn't work and so now you have created a monster. And
    the answer, the technology that has existed now for a number of
    years, the FDA continues to decide, well, yeah, but we really,
    yes, it might work, but we don't want to use it yet.
        And so now you have part of the conspiracy is the custom
    agents who are literally, for senior citizens who are dealing
    with pharmacies that they have dealt with for several years and
    bought their prescription drugs and they're completely
    satisfied and they believe and everybody believes they are
    getting exactly what they requested--incidentally, Governors
    are now on the other side.
        Our own Governor of Minnesota, the Governor of Illinois,
    other Governors are saying, to save money, they want them to
    buy from certain prescription drug suppliers that they have
    screened. They have literally gone up and met with the people
    and looked at their operations and so forth and they have given
    them their seal of approval. But we have created this monster.
    And until or unless our government understands that you cannot
    hold American consumers hostage in the information age, this
    problem is going to get worse and worse and worse. And the
    responsibility for that problem rests with the FDA, with
    Customs and with us.
        So I want to thank you for coming to testify, but we won
    World War II in 3.5 years. We have been working on this issue
    of figuring out ways that Americans could have access to
    affordable FDA-approved drugs from FDA-approved facilities, we
    have been working on this for 5.5 years, and we won World War
    II in 3.5 years. And for me and I think for a lot of American
    consumers, this is totally unacceptable.
        I yield back.
        Mr. Souder. I thank you each for your testimony. We may
    have some additional written questions. Thank you for coming
    today. Thank you for your work. We will continue to track to
    see how this implementation works.
        If the second panel could come forward.
        The second panel is Carmen Catizone, the executive director
    of the National Association of the Boards of Pharmacy; Susan
    Winckler, vice president of policy and communications, American
    Pharmacists Association; John Gray, president and CEO of the
    Health Care Distribution Management Association; and Rick
    Raber, project manager, Northern Apex RFID.
        It is our standard practice as an oversight committee to
    swear in each of the witnesses. Mr. Catizone, you are sitting
    in Mark McGuire's seat, so we do expect you to talk about the
    past anyway. Will you each raise your right hands?
        [Witnesses sworn.]
        Mr. Souder. Let the record show that each of the witnesses
    responded in the affirmative. Thank you for agreeing to
    participate in today's hearing.
        Mr. Catizone, is that the correct?

      STATEMENTS OF CARMEN CATIZONE, EXECUTIVE DIRECTOR, NATIONAL
      ASSOCIATION OF BOARDS OF PHARMACY; SUSAN C. WINCKLER, ESQ.,
    VICE PRESIDENT, POLICY AND COMMUNICATIONS, AMERICAN PHARMACISTS
       ASSOCIATION; JOHN M. GRAY, PRESIDENT AND CEO, HEALTHCARE
      DISTRIBUTION MANAGEMENT ASSOCIATION, HDMA; AND RICK RABER,
                  PROJECT MANAGER, NORTHERN APEX, RFID

                      STATEMENT OF CARMEN CATIZONE

        Mr. Catizone. Yes, sir.
        Mr. Souder. We will start with you.
        Mr. Catizone. Thank you, Mr. Chairman, good morning.
        Good morning, Representative Gutknecht.
        Thank you for the opportunity to appear before you this
    morning.
        I am pleased to report that significant progress has been
    made to combat the threat of counterfeit drugs. However, as far
    as we have progressed, there is still much to do before we can
    rest and maintain the confidence we have in the integrity of
    the medication distribution system for U.S. patients. The real
    threat of counterfeit drugs at this time is not the limited
    breaches which have occurred but the potential catastrophe that
    could result if the U.S. medication distribution supply system
    is compromised.
        A recent incident that just came to our attention happened
    yesterday, where investigators in Indiana discovered
    counterfeit drugs that made their way into Indiana pharmacies
    from a wholesale distributor in Cincinnati. As we speak
    investigators are trying to track those sources and determine
    how widespread that counterfeit breach is.
        If the U.S. medication distribution system is compromised,
    every medication that travels from the pharmaceutical
    manufacturer to the wholesale distributor to the pharmacy to
    the patient will be in question. If that is allowed to take
    place, no patient will be safe. In order to prevent that from
    occurring, the State Boards of Pharmacy and States have passed,
    are continuing to pass and implementing legislation that
    tighten the laws and regulations for the licensure and
    regulation of wholesale distributors. This concentrated and
    concerted effort is closing avenues for the introduction and
    diversion of counterfeit drugs and has already resulted in the
    end of operations for a number of wholesale distributors that
    were dangerous and seeking to corrupt our distribution system.
        What has also propelled this effort is the shared desire of
    the pharmaceutical manufacturers, primary source wholesale
    distributors and technology vendors to work with the State
    Boards of Pharmacy and FDA to stop the influx of counterfeit
    drugs. Everyone involved in all aspects of dispensing and
    distributing medications to patients accepts the seriousness of
    the challenge and the crises or problems that could lay ahead.
        I am also pleased to report that NABP's accreditation
    program for wholesale distributors is fully operational and is
    required to recognize by an increasing number of States. VAWD,
    verified accreditation of wholesale distributors, certifies
    that the wholesale distributor is legitimate, duly licensed in
    compliance with State and Federal laws, and adhering to
    criteria for the wholesale distribution of medications that
    protect the integrity of the system and patients receiving
    medications. NABP will accredit all wholesale distributors,
    licensed or seeking licensure in the State of Indiana. And
    since an overwhelming majority of wholesale distributors
    conduct business in multiple States, that accreditation system
    required by Indiana is fast becoming a uniform and national
    standard.
        Some recommendations and considerations we ask of the
    subcommittee at this time to support the efforts of the States
    and sustain the progress being made are as follows: one, a
    uniformed pedigree system or auto tracking system must be
    established. It is a travesty that we can track the ingredients
    in the pizza prepared by our local pizza parlor better than we
    can track prescription drugs in the distribution supply system.
    Two, paper pedigrees are not a solution for counterfeit drugs.
    The counterfeit drug dealers are far too savvy and technology
    sophisticated to allow for much confidence in the paper-based
    system. The answer lies with the electronic track-and-trace
    technology, and we request support for the FDA to assume a
    leadership role in this area and use its expertise and
    influence to cause the development of the uniform standards and
    implementation of track-and-trace technologies and RFID as
    quickly as possible.
        Third, we ask support for the implementation deadlines for
    RFID technology that the States are now enacting. Without a
    uniform standard, without a uniform implementation date, the
    States are fast creating a patchwork of deadlines that are not
    supporting a uniform system. We need assistance. We need some
    uniform or national standards.
        Thank you again for this opportunity. NABP and the State
    Boards of Pharmacy take the threat of counterfeit drugs very
    seriously and are doing all we can to maintain the integrity of
    the U.S. medication distribution system. We are working as hard
    as we can to help the States protect the health and welfare of
    U.S. patients. Thank you.
        [The prepared statement of Mr. Catizone follows:]

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                  STATEMENT OF SUSAN C. WINCKLER, ESQ.

        Ms. Winckler. Thank you, Mr. Chairman and the subcommittee
    for the invitation to appear this morning. We have heard
    already the foundation of data and statistics and numbers about
    the scope and problem and the threat of counterfeit medication.
        For pharmacists, however, we don't consider counterfeit
    medications in terms of numbers. We consider them in terms of
    faces, the faces of patients with cancer, with asthma, with
    diabetes, our patients and the thought that our patients could
    receive a product that is at best of questionable effectiveness
    and at worst poison stops us in our tracks and raises the
    importance of what it is that pharmacists do to protect our
    system against counterfeit drugs to be of prime importance.
        Pharmacists serve as the last line of defense in protecting
    patients from counterfeit medications. Recognition of this role
    however is not consistent. Our role and the impact of anti-
    counterfeiting initiatives on pharmacy practice is not always
    considered. We support enhanced efforts to combat
    counterfeiting, including advanced technology and coordination
    of efforts by all interested parties. Our support is tempered,
    however, by the need to minimize impact on our patients and
    recognizing the reality of the costs of these systems. Any
    anti-counterfeit initiative must include assessments of both
    the costs and benefits of those interventions.
        As Congress seeks to close gaps in our system, it must
    assess the impact of any proposed solutions on pharmacists and
    our ability to serve patients. A little bit about the
    pharmacists role in this arena. We play three essential roles:
    the first as prudent purchaser; the second as an educator; and
    the third as a reporter of counterfeit products.
        As a prudent purchaser, that's inherent. We have to be
    careful in whom we choose to purchase our medications from. But
    being able to do that well requires a licensure process and
    administration of that licensure process that is more than a
    paper fig leaf. We have to have confidence that the licensure
    process is more than making sure that the credit card or the
    check used to pay for that licensure process is valid. Our
    regulators need strong, clear regulations. They also need the
    authority to enforce those.
        The pharmacist's role as educator may appear to be a little
    different, but this is where we help patients understand their
    role and what they need to do should they be presented with a
    counterfeit product and the risks that they in fact face.
    Pharmacists help patients understand that they need to report
    certain information to their doctor and to their pharmacist
    that might help us identify that counterfeit drug that has
    evaded all of us and unfortunately realized our worst
    nightmare, actually made it to a patient's medicine cabinet.
    And so we have to have that information about those counterfeit
    drugs in order to work directly with our patients.
        An often overlooked side effect of counterfeit medications
    is the effect on legitimate medication use. As news of
    counterfeit medications emerges in the media, some patients
    stop taking their legitimate product because of fears about the
    product. For someone on blood pressure lowering medication or
    asthma medication, stopping that therapy could prove deadly. So
    we must also understand when we talk about counterfeit
    medication that we put it in the right context and get
    information about that to the patients who may have been
    affected but help other patients understand the value of
    continuing their medication.
        Pharmacists also have an important role in detecting
    counterfeit products, in noticing that the packaging may not be
    quite right or there is a difference in the appearance of the
    products and report that to the regulators so that we can
    protect those patients.
        To do all three of these roles, we need some things. We
    primarily need access to information. We have to know when
    there have been counterfeit products, what are the risks? What
    is it patients should do? Because we translate the information
    that appears on CNN for the individual patient to help them
    understand what they need to do if they need to take any
    action.
        We also need to have a consistent nationwide electronic
    pedigree. We support the FDA's recent recommendation to
    implement the relevant sections of the PDMA regarding the
    pedigree on December 1st of this year. As that implementation
    takes place, however, we do need to have consistent input and
    sufficient input from the stakeholders to make sure that
    implementation supports the eventual adoption of an electronic
    pedigree. And in this arena, PHA supports a strong national
    standard for the pedigree out of concern that having different
    State standards, while they may be intended to put a higher
    level of protection at the State level, may actually create
    loopholes that the unscrupulous operators would use to
    penetrate the system.
        We also ask the subcommittee to consider the costs and
    liability of all of these systems and understand the roles that
    when we talk about anti-counterfeiting measures, it is not just
    the manufacturers, the wholesalers, but there are the
    manufacturers, pharmacists, wholesalers and, at the end of the
    day, the patients.
        Mr. Chairman, as you mentioned, counterfeiting is often
    described as an economic issue, but we are stealing money from
    legitimate providers. Counterfeiting of drugs is so much more.
    It is stealing money. It is stealing health, and it is stealing
    our patients' confidence in our health care system, and we all
    must do whatever we can to stop that. Thank you.
        [The prepared statement of Ms. Winckler follows:]

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        Mr. Souder. Thank you. Mr. Gray.

                       STATEMENT OF JOHN M. GRAY

        Mr. Gray. Thank you, Mr. Chairman. Thank you for the
    opportunity to provide some perspective here on behalf of HDMA
    and my 40 primary full service distributors.
        We represent large national as well as numerous regional
    family owned companies. Our members deliver over 9 million
    health care products a day to about 142,000 locations which
    include pharmacies, hospitals, nursing homes, clinics and the
    like. HDMA and the members of our organization have
    particularly in the last 4 to 5 years begun working extremely
    closely with all our supply chain partners, from manufacturers
    down to pharmacies. We take the mission to work together
    cooperatively seriously. And we are supporting all the efforts
    to make sure that the U.S. medicine supply chain remains
    secure.
        There is no greater concern I know, particularly in my term
    here from our board of directors, no greater concern among them
    as a group of companies, about the threat of counterfeit
    medicines and what they represent to the supply chain. In
    response to that concern, we have begun to look at this problem
    through four key areas that we think as an organization, as an
    industry need to be addressed: No. 1, strict regulation and
    enforcement of laws regarding counterfeit drugs; No. 2, current
    and emerging technologies and making sure those get employed;
    No. 3, business and government alliances to track and report
    the counterfeit drugs, and No. 4, developing and implementing
    industry best practices.
        This morning, I will just address the first three of those
    four. The fourth is laid out in my detail in my written
    comments.
        First and foremost on the regulation and enforcement arena,
    we have fully supported the implementation of the final PDMA
    rule as of December 1, 2006. We think it is time for this
    industry to move on and get that accomplished. We think it is a
    key part of any anti-counterfeiting strategy the industry
    employs going forward. But our position is, it is just one
    aspect of it.
        In addition, we have worked extensively over the last years
    with the NABP, and we have worked and developed a model State
    licensure bill for the States to establish uniform tough
    standards on licensing wholesale distributors in the United
    States. We have been working with NABP and manufacturers,
    particularly this past year, in a number of States. I am here
    to report there are 16 States already enacting standards,
    including your State, Mr. Chairman. And there are bills pending
    in 18 other States currently. Our goal here is to make sure
    that no criminal ever gets a wholesale license to distribute
    drugs again in this country.
        The final area, in regulation of the penalty enforcement,
    our belief is currently the current Federal penalties are
    inadequate and outdated. We are advocating for strong criminal
    penalties for counterfeiters. I believe there is legislation in
    the Congress today addressing that matter.
        Then moving on to current and emerging technologies. We
    believe anti-counterfeit technologies are the most important
    tool we have available to try to secure the supply chain. No
    single technology would work. We think it is a layering of a
    variety of technologies. We hold the most promise out for this
    EPC RFID. We think that is the way the industry can go and
    probably likely will go to track and trace and authenticate
    products in the supply chain.
        The ability of EPC to tie unique electronic ID to an item
    to track it and trace it throughout the supply chain we believe
    is critical. My personal past experiences come from the
    consumer goods industry. I can tell you the progress being
    made, although it may appear to some to be slow, having lived
    through the development of linear bar coding from 1970 and on,
    we have made lightening speed with EPC technology. I think the
    industry is moving along well in that effort.
        As far as HDMA is concerned, specifically what we are doing
    in this organization, we are partnering with NACDS, our chain
    drug partners again for the second year in a row, and providing
    an RFID summit to bring all the industry leaders together to
    make them more clearly understand how to implement this
    technology and get those chips that Mr. Gutknecht has on these
    products and get them operating.
        We are also working, our members are involved in a number
    of the pilot projects currently going on that have been
    announced publicly. Our education and research foundation I
    believe has taken on the crux of the issue as far as EPC, and
    that is data management. Having lived thorough this world
    before, it is one thing to employ technology; it is another to
    also manage the data that comes from that technology.
        We are engaged with PHARMA as an organization and Rutgers
    University to look in-depth at how this industry will manage
    the data. Where is it going to go? Where is it going to reside?
    How will it be shared? How will law enforcement have access to
    it? Because all those rules, all those issues are terribly
    important, particularly when it gets into privacy issues with
    the consumers. So data management is critical as well as the
    technology. That is why I say it is a multi-layered approach.
        Finally, I would just say that as far as any of these
    things, patience is obviously required, but I think the
    industry is moving in the right direction. And I would agree
    with my other panelists here that, as far as uniform pedigree,
    one impediment to EPC right now is the lack of uniformity. If
    the industry gets bogged down in EPC and attracting not only
    all the data going beyond pedigree, all of the data that will
    be encompassed in EPC will be almost unbearable for the
    industry to deal with if we do not have uniform pedigree.
        Finally, an alliance between NACDS and PHARMA, and we are
    working with the FDA in our counterfeit alert network, and we
    have also joined the RX Patrol which is a device by which we
    can report theft directly to customers and to members
    throughout the supply chain.
        In sum, I will tell you, in my short time, we understand
    more than anybody the public trust placed upon our members to
    do this, to make sure the supply chain is authenticated and
    safely managed. We have zero tolerance as an organization as a
    philosophy for counterfeiters, and you have my pledge that we
    will remain constantly vigilant as a group of companies--that's
    40 wholesale distributors--to make sure that this supply chain
    is as secure as the American consumers need it to be. I am
    available for questions. Thank you for your time.
        [The prepared statement of Mr. Gray follows:]

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        Mr. Souder. Thank you.
        Our last witness today is Mr. Raber from Huntertown, IN.
    You are at the forefront of some of this technology, and I look
    forward to your testimony.

                        STATEMENT OF RICK RABER

        Mr. Raber. Thank you Chairman Souder, Mr. Gutknecht and
    subcommittee members. It is a great honor to sit before you
    today.
        From childhood it was ingrained in my life that Godly
    character was vital to success in life. Part of that character
    was to fulfill my civic responsibility. So I want to thank you
    today for the privilege of serving here today by testifying
    regarding the security in the pharmaceutical supply chain.
        I am before you today as one with close to a decade of
    experience integrating radio frequency identification [RFID].
    Our team at Northern Apex has utilized the technology in many
    areas in addition to pharmaceutical. We are an experienced
    stakeholder by virtue of the customers for whom we have
    integrated RFID onto their drugs. As project manager for
    Northern Apex, I led what many consider to be the world's first
    pharmaceutical production use of RFID. We worked with Purdue
    Pharma to place smart labels on produced popular pain
    medication Oxycontin.
        The solution identified bottles on the production lines at
    speeds greater than two and a half bottles per second. Once
    packaged in the sealed tamper evident case, 48 individual
    bottles could be verified in less than 5 seconds. Since that
    initial project, I have been directly involved in designing
    several pharma implementations.
        The discussion at hand regarding the security of the drug
    supply should not be about how bad the existing system is but
    rather ways for us to improve the already reliable process. The
    relative number of incidents to overall production of
    prescriptions is low but clearly increasing.
        As we examine options which can be utilized to enhance the
    chain of custody, there are many things to consider. First, are
    there technologies that exist today which could bolster the
    security of drug supply? Second, are the technologies under
    consideration being used today? Finally, is there cause to
    implement further technologies?
        Today millions of electronic transactions are being
    utilized around the world. They allow us to determine the chain
    of events related to a Web site visit or a trade on Wall
    Street. The FDA has already proposed using this technology in
    its prescription of an electronic or any pedigree.
        This electronic transaction records the chain of custody
    for a drug and is a significant improvement over the paper
    pedigree of today. There are, however, additional technologies
    which could complement this electronic pedigree. Consider
    having the trackability based on a unique serial number being
    associated with every bottle, every case and every pallet. As
    each item is assembled into the next larger shipping unit, they
    are automatically associated, recorded through a data base and
    used to enhance the electronic pedigree. This is the basis of
    the RFID schemes presently being used by GlaxoSmithKlein on
    Trizivir, Pfizer on Viagra and Purdue on Oxycontin as well as
    others.
        Complimentary technologies, such as 2-D barcodes,
    biometrics, telematatics and GPS could also be implemented at
    key spots in the supply chain. Technologies like RFID and
    others can change the effectiveness of the supply chain.
        Ladies and gentlemen, these are not things from a Star Wars
    movie. As Mr. Gutknecht replied, they are real. This is an
    American version that exists and is being done.
        The Department of Defense and Wal-Mart and others have
    mandated their suppliers use the technologies for incoming
    shipments to their receiving locations.
        There are some obstacles to seeing rapid widespread
    adoption though. Within the Pharma and RFID industry, there is
    an ongoing debate over the modes and frequencies of RFID
    technology and its operation. There are data base, interface
    and privacy concerns. Even with these issues, industries have
    teamed together to successfully implement item level track-and-
    trace technology.
        While some States have moved to implement pedigree
    legislation, these efforts have produced confusion on the parts
    of some of my friends sitting next to me today, drug
    manufacturers and distributors, in trying to accommodate just a
    few that exist today. Imagine 50 different ones.
        For this committee to consider enhancing the present
    pedigree legislation to include a set of the described
    technologies in my opinion is prudent. Does the risk warrant
    the effort to change? There is no question that people's lives
    have been greatly affected by the issue at hand. The cost to
    some has been their life.
        With the instances of breach which have already occurred,
    it is not out of the question to see this supply chain as a
    means for hostiles to suddenly attack the populous before even
    being discovered. In the same way some have misused the drugs
    created to help and heal, nefarious individuals will use and
    pervert the technologies and solutions we're even talking about
    today.
        The enemies of the safe drug supply chain are clearly
    getting smarter. They are leveraging ever increasing
    technologies and levels beyond what we can imagine, and the
    good guys should pursue doing the same. The risk is growing and
    shouldn't be ignored.
        Mr. Chairman and subcommittee members, again, thank you for
    the privilege of testifying here today, and I am open to any
    questions you might have.
        [The prepared statement of Mr. Raber follows:]

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        Mr. Souder. I thank you.
        Let me start with you Mr. Raber and try to startup in the
    questioning.
        We heard several witnesses say we need some sort of a
    uniform approach to this. As you've worked with this product
    and you've just alluded to the fact that it's very confusing,
    could you kind of explain what that means? Does it mean you
    have different readers, different frequencies? What is a
    practical--helping me and others understand what is necessary.
        Mr. Raber. Within the RFID industry, sir, there are several
    different primary technologies. Without getting really, really
    technical here before you, there are two primary that are
    existing today. An HF at 13.56 megahertz and UHF in 868 to 915
    megahertz. There is clearly a part of the technology sector
    that are trying to advance their technologies, and for good
    reasons. And I believe it is a good competitive factor. And
    otherwise, there are things related to what kind of products
    that some of the technologies have been able to be used on in
    the past. How does one of the technologies perform in a case,
    environment where you have 100 cases of Oxycontin a pallet? Are
    you able to read all 100 cases while they are there? And short
    range versus long range, there are clearly instances where
    short range is more desirable so that singulation is not an
    issue. If I have all these bottles sitting on a desk here today
    and I have certain versions of 900 megahertz technology, I
    could see that they would all be present here. However, I could
    not tell you which one was present before each witness here
    today depending on how that technology is utilized. So,
    therefore, some of the near-field communications and some of
    the things that are related to short-range technologies can
    present some desirable things.
        Clearly the chain of custody and the way that electronic
    transaction occurs, RFID is a subset of that. It allows it to
    tie in better as has already been said multiple times today.
    How that transaction occurs certainly can take place without
    RFID ever playing a component in it.
        What RFID does is allow us to scan bottles as they are
    going down the line, scan them as they are put into a multipack
    of 12 and shrink wrapped, scan them again as they are put into
    a tamper evident case of 48, scan them again as they go into a
    vault, scan them again as they are received at a health care
    distributor, scan them again as they are shipped out to another
    wholesaler. Those kinds of things.
        RFID and other technologies could significantly change the
    way that looks. But the technologies themselves, they are real.
    They are working today. They will continue to advance, but to
    hold off and say that the RFID technology will be adopted by,
    as Mr. Gutknecht implied, that there will be people that may
    avoid doing it until they are made to do it. It was the same
    way that has happened with the Wal-Mart mandate. Wal-Mart
    several years ago initiated that their top 100 suppliers from a
    dollar perspective start shipping in case level, scanning them,
    and pallet level. Many of those people didn't do it until the
    deadline showed right up.
        I think the health care distributors really have seen value
    though when, as you talked about, 16 percent, if they are able
    to close the security of the supply chain and eliminate some of
    the counterfeit, there actually can be a very legitimate case
    made for the value coming back to them in increased sales
    because their products are really truly making it to the field
    rather than otherwise. So, hopefully, I have answered your
    question there related to some of the mix up about what the
    technologies are.
        Mr. Souder. When I visited your facility and you talked
    some about the Wal-Mart, didn't you say they also have the
    ability to take it down to the very individual bottle? And
    could you describe two things with that, and I also remember
    that part of their reason was internal theft. It wasn't just
    counterfeiting. In other words, you can figure out who's
    stealing things. And if you want to comment on those two things
    and then leading to this question: What are the functional
    approximate, without giving out competitive things and so on,
    approximate cost questions that were involved in here in the
    different types of frequencies, the difference between the
    pallet and an individual, the ability, are people going to have
    to get scanners that are specialized with this?
        Mr. Raber. Sure. First of all, item level tracking and
    unique serial number that would be addressed to each individual
    bottle that would go through the distribution chain, that is
    very real, very practical. It does happen today. Several
    hundred thousand bottles of Oxycontin have been tracked. Many
    bottles of Pfizer's Viagra and GlazoSmithKline's Trizivir have
    all been tagged in large lots.
        The bottles are individually being tracked, we can tell,
    prior to the shipping of the case and prior to leaving the
    facility that those drugs are there, that there really are 48
    in the box, that the 48 have moved through the supply chain.
    That can occur.
        So item level really does happen. What that looks like on
    the different kinds of things, whether that's a liquid
    medication in a vile or whether that's a dosage medication that
    is in a capsule or something; whether it's in a blister pack or
    the different types of things that may occur. Those all play
    into the manifestation of what technology you would use at item
    level to be able to track that technology, to track that item.
        So are there technologies that exist today? As the
    gentleman from the HDMA said here, not one technology, whether
    UHF or HF is going to be the answer to the world, universe and
    everything as we know it in tracking pharmaceutical items, the
    value associated with that, the supply and demand has clearly
    driven the cost of an RFID tag down. We have seen in our 10-
    plus, 10 years experience of watching tags that used to be in
    the double digits and closer to $1 to now being down in volume
    below 30 cents regularly and in high volumes certainly below
    that. And so there are people that are claiming sub 10 cents
    now in volume. And when we are talking volume, we are talking
    about millions and hundreds of millions of tags a year where
    somebody would commit to.
        Those we are yet to see in production, and I will clarify
    my statement in that. We have yet to see in high volume
    production the single 3 or 4 cent tag in being delivered in
    volumes that would require to support the supply chain. That is
    another component that is not to be ignored.
        The technology providers today, while the technologies do
    exist, Mr. Gutknecht, one of the things that clearly is an
    issue and they are all ramping up their ability to deliver this
    product, but there has been a clear on the part of multiple
    organizations, the ability to get the product is something that
    should not be ignored. In order to tag, just picture Oxycontin
    alone or Viagra alone or some of the other drugs, Lipitor,
    those drugs and the amount of tags that it would take to
    support those kind of implementations are not negligible. They
    are significant. So that is something that the RFID
    manufacturers are required to do.
        As it relates to the value related to the readers and the
    infrastructure that is put in place, many things have rapidly
    changed in the last 2 or 3 years since we first worked with
    simple technologies to do, Matrix and simple technologies to do
    the Purdue Oxycontin implementation and the technology is
    rapidly changing and working well.
        Mr. Souder. Mr. Gutknecht.
        Mr. Gutknecht. Mr. Chairman, and to this panel, thank you
    for coming. I think you all provided very excellent testimony.
        Mr. Catizone, we have seen you at a number of these types
    of meetings, and I want to thank you for coming.
        First of all, I want to make it clear that I really
    appreciate what the pharmacists do every day. I know they have
    a tough job. Frankly, what I have felt for a long time is, and
    this may sound funny, but I don't want people to buy their
    drugs over the Internet.
        What I really want to do is create a system whereby our
    pharmacists have a little more freedom where they can buy their
    products from because American pharmacists are actually held
    hostage as well. And one of the arguments has been--and, Ms.
    Winckler, I am going to come to you because you said something
    so powerful and so true--we many times talk here in Washington
    particularly in terms of statistics and numbers and dollars and
    so forth. But at the end of all of this are real people with
    real faces. And I have a chance to meet a lot of these people
    with real faces. And this goes back a few years, and I
    understand we have probably gone beyond that, but I think the
    best example is the drug tamoxifen which is taken by women of
    all ages, but principally it is an anti-breast-cancer drug.
    That drug, a number of years ago when we began to do this
    research, you could buy in the United States for roughly $400 a
    month. You could buy it in Canada for $89. It was exactly the
    same drug made by the same company in the same plants. It was
    FDA approved. And yet for a lot of these people, if you have
    insurance, it's not that big of a deal, $400 versus $89. But
    believe it or not, there are a lot Americans who either don't
    have adequate insurance or whatever, but either way, I mean, I
    cannot defend the difference between $400 and $89 for the same
    drug. And this is why I am so frustrated because our own FDA
    and the pharmaceutical industry, when we began talking to them
    years ago about the technologies Mr. Raber talked about, their
    argument was, no, no, we can't do that.
        What do you think? Can we do this?
        Ms. Winckler. The first thing we have to do is move beyond
    that ``we can't'' and let's figure out how we can and what are
    those most cost-effective steps. So I think we can if we have
    enough consistency and uniformity to make it work, which I
    think is key particularly in the pedigree area, and then let's
    make sure as we are looking at identifying technologies, what
    is counterfeit proof today may not be counterfeit proof
    tomorrow. So do we start--as you recommended, let's start small
    and start with a piece but then build into the system and
    understanding that we need to continually advance those
    technologies and move forward that we won't be able to be say--
    we will solve the counterfeit problem by continuing to work to
    stay ahead of the counterfeiters.
        So I think we can but it does take that commitment and
    being able to listen and work with everyone and giving the
    regulators not only the authority but the resources to enforce
    and that is I think something that is a key role for everyone
    in this room to understand, that if we put a new penalty in or
    put a new requirement out there, it is well funded, and we do
    have the back up to make sure that it's enforceable.
        Mr. Gutknecht. Well, we are more than willing to let the
    industry lead on this. I don't hold myself out as an expert on
    this technology. But we have some people in this town who are
    experts. I do agree with you. I mean, we have had to revisit
    the $20 bill several times in the last several years to try to
    come up with more sophisticated technologies to prevent the
    counterfeit of the $20 bill.
        So success leaves clues, and are you ever going to prevent
    counterfeiting? Probably not. But we can make it extremely
    difficult and more complicated and more expensive to do that.
    And so success leaves clues, and they are all around us. The
    same company that makes the ink for this $20 bill makes the ink
    for this packaging, OK. And you can make it so it is very, very
    difficult for a low-cost supplier whether they are in India or
    China or Bangladesh, it doesn't matter. We can make it very
    complicated for them to counterfeit this packaging.
        And these chips, one of the arguments we heard a few years
    ago when I first started talking about this technology, oh,
    they said, that's way too expensive. Mr. Raber, how would you
    respond to that? Is this way too expensive?
        Mr. Raber. Value is always in the eyes of the beholder,
    sir. But, clearly, there are things that are happening. It is
    clearly that value is always in the eyes of the beholder. And
    the way that any individual market space or company addresses
    value is based on their response to that, but what we have seen
    over and over and over and a gentleman that I spoke with from
    Hewlett-Packard about a year ago spoke about the hidden value
    that occurs when you implement RFID technologies, there are
    clearly discussions that happen as it relates to not just the
    chain of custody and being able to close that more secure, but
    the way that you increase your accuracy of your supply chain so
    that your inventory is more accurate; the way that you reduce
    the amount of time and handling that it takes to occur--
    handling that it takes to handle 100 cases of a drug, the
    amount of time that it takes to create a paper pedigree. That
    value is clearly one that is not to be ignored.
        Mr. Gutknecht. Well, I agree with that. Finally, let me
    say, Mr. Chairman, I have been in this thing for so long now
    that I just really suspect that there are people who have
    ulterior motives. OK. This is much less about consumer safety
    than it is the bottom line profit. Because once you have a
    system that is far more secure, all of the sudden the biggest
    argument that we have heard about not allowing pharmacists and
    consumers access to world class drugs at world market prices,
    all of a sudden it changes the arithmetic about what Americans
    can and should pay.
        I believe we ought to pay our fair share. The truth of the
    matter is I think we are a blessed country and we ought to be
    willing to pay and subsidize drugs in undeveloped countries. I
    think we ought to pay more than the people in sub-Saharan
    Africa, but I do not believe that American consumers should be
    required to subsidize the starving Swiss. I mean, it is time
    that we create what we have in virtually every other product
    class that is a world market. And I believe RFID and other off-
    the-shelf technologies can go a long way. Can we ever create a
    perfect system? No. But if we created a system where you had a
    better assuredness that these were in fact the products that
    the pharmacists carry that really are what they say they are,
    all of a sudden you create a marketplace that is much fairer
    for American consumers. This has huge implications. I want a
    safe drug supply. I don't want people buying drugs over the
    Internet. But as long as you have a system where Tamoxifin is
    $400 in the United States, and it's $89 in most of the
    industrialized world, this problem is going to get worse and
    worse and worse. And what we have encountered from the FDA so
    far is little more than food dragging.
        If anybody wants to respond to that, you are more than
    welcome.
        Ms. Winckler. If I could offer one suggestion as we look at
    this, at how to continue to move forward, it is to also
    consider that some of these anti-counterfeiting initiatives
    have benefits outside of the direct anti-counterfeiting
    question. Going unit-of-use packaging for example helps us on
    the part of my job that I want to spend my time on which is
    helping patients use their drugs correctly. It helps immensely
    with patient compliance, and so you have all these other areas
    where you can see a benefit. I think we have to look at our
    interventions and say, there is an anti-counterfeiting benefit;
    what other benefits do we see? What other impact does it have?
    And understand that what we do here not only affects the
    legitimate source of the drug supply but affects the medication
    supply generally for patients and worldwide as well.
        Mr. Catizone. Congressman, the States are saying they can
    no longer wait. Florida, California have put in electronic
    pedigree requirements, and they are holding fast to those
    deadlines, 2006 and 2007. HDMA and the primary full service
    wholesalers are supporting those efforts, but there is a
    significant contingent of people that don't want this track-
    and-trace technology in place, are fighting it, are using every
    political trick they can in those States to defeat those
    implementation deadlines and working against any regulation and
    any tracking of those drugs. And so that is a significant
    battle that we need your support and need your help with
    because the States can't wait any longer.
        Mr. Gutknecht. Let me just say that I know those tricks,
    and I know who those people are, and we do have a bill. Now it
    is not perfect, and we would love your input, but mostly, we
    would love your support. It is a little bill we put together. I
    am not an expert. Mr. Raber, people like you are, and we are
    willing to listen to you because we get so little help from our
    own agencies. But I would encourage you to at least look at
    H.R. 4829 and see if maybe we can't get something going,
    because I agree with you. Ultimately, we are going to wind up
    with 50 different regulations, and this is one that is not
    just--I think this issue is a national issue, and it is an
    international issue. And I am not necessarily critical of
    California or any other State that wants to move forward with
    this, but I think it is an indication of just how slow we have
    been to respond to what is happening out there in the
    marketplace. So, again, thank you to the chairman, and the
    bells are going off, but I want to thank you for coming today
    and for your testimony.
        Mr. Souder. Mr. Cummings.
        Mr. Cummings. Mr. Chairman, I only have a question or two.
        Ms. Winckler, let me ask you this, do generic drugs present
    any unique situation different than what we would normally see
    with regard to these issues?
        Ms. Winckler. It is probably fair to say that, because
    generic medications are generally lower cost, that they are
    less likely to be counterfeited. But I think there is still the
    risk of counterfeiting, and certainly as we look to trying to
    address this situation across the board, we should not ignore
    them by any means.
        Mr. Cummings. Anybody else have anything on it?
        Mr. Gray. I would agree. But from my understanding talking
    to our members, there are some generic drugs that are at the
    point almost now that might be worth counterfeiting from a
    counterfeiter's perspective. So we as an industry and as an
    association are working with the generic companies to look at
    what is the viability of putting electronic chips on those
    products. It is one thing to put a chip on a $100 branded item.
    It is another thing to put a chip on a $2 generic item. And how
    does that work for that generic manufacturer, because the last
    thing you want to do obviously is to disincent the ability of
    consumers to get generic drugs as well as branded drugs? So we
    are working as an industry to figure out what is the ability to
    do that with generics relative to all the things, Mr. Raber,
    and with the cost of these chips, all the other things that go
    along with the anti-counterfeiting measures. So there are
    particular issues regarding generics that are just beginning to
    get explored now.
        Mr. Cummings. Mr. Raber, you were laughing. Why is that?
        Mr. Raber. It is really interesting because there are
    always, there is always a price point. It is real easy to
    discuss putting an RFID tag on at Oak Ridge National Labs on
    something that is a product related to nuclear security, and it
    is big things that cost lots of money, or if it is a stainless
    steel container that transports acid around the country that
    costs $5,000 for the container, it is easy to put a tag on the
    side of that. As my colleague says here, there is a point where
    you have to make a decision, does the value of putting it on
    outweigh the risk or not, and it really always comes back to
    that.
        Mr. Cummings. Mr. Chairman, in the interest of time, I will
    submit questions to the panel in writing. Thank you.
        Mr. Souder. Mr. Ruppersberger.
        Mr. Ruppersberger. Just one. I just came in late, I'm
    sorry. I want to talk about the pedigree issue on the chain of
    custody. I know some States have toughened their licensing
    standards for distributors such as Florida, which now requires
    pedigree for all prescription drugs in the State. However, the
    FDA has delayed the effective date for national regulations
    requiring a pedigree until December 2006 in the hopes that an
    electronic track-and-trace program such as radio frequency
    identification will be viable. Where do you think we need to
    be? Do we need to wait until December 2006? Do you think
    Florida's plan is effective and should be used as a model for
    other States?
        Mr. Catizone. Commenting from the State perspective, we're
    not happy that the States are embarking on this individually
    without national leadership, without uniform standards. But
    what Florida has said in a way to transition to the track-and-
    trace technology is they have defined normal distribution and
    normal distribution encompasses pretty much all the
    transactions that exist today between legitimate wholesalers,
    manufacturers and pharmacies. And Florida has then said,
    anything outside of that where we have seen diversion, where we
    have seen the problems would require an electronic pedigree.
        We think that is the best approach at this point to phase
    in electronic pedigrees rather than coming up with a
    requirement for all drugs. We think the time is now. We can't
    wait any longer because if we do and the system becomes
    compromised, than every patient is going to be at risk.
        Mr. Gray. As I said, HDMA was very active in Florida, and
    our position, as Mr. Catizone said, as primary distributors
    purchasing directly through is the model that Florida has been
    trying and working with since 2003 on a 34-susceptible-drugs
    list and very successfully. To our knowledge, there's no
    incidence of counterfeiting in that 3-year period in Florida
    once they tightened down on those 34 drugs and the licensing
    requirements. And our position going into Florida, which
    ultimately was passed into law, was that pedigree would be
    required for those drugs that are purchased outside of the
    direct purchase process.
        Mr. Ruppersberger. What needs to be done to implement it
    now, the Florida plan? What's the hold up?
        Mr. Gray. They are doing regulations right now. The bill
    was only signed by the Governor 2 to 3 weeks ago. Some
    implementing regulations need to be done. And but, again, most
    of our companies have all been doing this on those 34 high-risk
    drugs, so we already know the drill, what's going to be
    required for information purposes. It is just now getting the
    States to do the formal regulations and instituting it from
    there.
        Mr. Raber. There are a couple issues related to the
    industry. An organization called APC Global and some of the
    other organizations that are involved: The standardization of
    what's going to be put on an RFID tag, the standardization of
    what's going to be into an electronic pedigree, what that looks
    like; does it contain the actual NDC number that is normally
    associated with a drug? Does that NDC number get encrypted?
    What happens and what becomes part of that electronic pedigree
    is certainly one of the things that's up in the air. And the
    industry in some of the committees that exist in the different
    organizations is trying to work their way through that. But
    those are some of the obstacles that clearly exist today.
        If you are using RFID in the electronic pedigree--there are
    means that you could do an electronic pedigree that does not
    have RFID. There are ways to be able to do that I would say
    should be pursued rapidly as long as--as well as with the RFID
    coming along side of it that keep it moving forward. But there
    has to be some agreement on what's put in place from the
    product coding that occurs on the tag.
        Ms. Winckler. From the pharmacist's perspective, we need
    action and we need uniformity. So we need to make sure that the
    protections that are in place in Iowa are as strong as those in
    California and Florida and Nevada and across the country. And
    so that requires leadership, and it needs it soon.
        Mr. Gray. I would support that. Our companies, we have
    national and regional, but even my regional distributors ship
    in multiple States and their fear is that Florida will require
    one element of pedigree in their chips, California another. And
    then they're managing multiple data bases of information.
        Mr. Ruppersberger. Some of the same issues we have with
    labelling of food throughout the country.
        Mr. Gray. Very similar. Absolutely.
        Mr. Souder. Thank you very much. We have a vote on the
    basic move to the question on the rule for Internet gambling,
    and we have may have a vote on the rule, so we will wind this
    up, but we will have some additional written questions. We will
    try not to overwhelm you.
        Some that I have to give you, some ideas here are, Mr.
    Raber referred to the competitive advantage of having several
    different technologies going here. At what point do we gain
    from the competitive versus having a uniform? Second, if we
    could get some information on what Europe does and their
    relative costs and why we haven't--why wouldn't we just bring
    that system into here? Is there a cost reason? Is there a
    tracking reason? Also we heard earlier, in some written
    testimony at least if not verbally, about ebay and flea markets
    or secondary sales of products, how this might affect that.
    Would you take those RFID's off? Is this a secure way to track?
        We have had hearings in this committee on infant baby
    formula which has clearly been degraded and changed and altered
    at some risk in going to flea markets. And legislation was put
    in Texas, Oklahoma and a number of States to try to address
    that question. One that Wal-Mart was early on trying to
    address, putting baby formula behind the counter in some
    States.
        Then I had some questions that I wanted to make sure got
    asked on what your associations were doing as far as trying to
    do due diligence, for example, on wholesalers, what does that
    mean? Are you tracking to make sure that the wholesale market
    is legitimate coming into the pharmacies? As you receive this
    price pressure from Canada in effect, the tendency is to try to
    find the cheapest product, and how do you kind of counter
    balance these type of things which also puts then legitimate
    above-board wholesalers at risk.
        We will have a series of questions about those type of
    things. I'm sorry I won't get more in depth.
        Mr. Gray.
        Mr. Gray. Just one item on the European. I have very close
    relationships with our Europe counterpart, and I will contact
    them in Belgium to find out what are they doing actually. I was
    just over at their annual meeting, and it was news to me that
    they are employing it over there because I do not hear the
    wholesalers talking about it at their event. But I will find
    out for you, Mr. Chairman, exactly what is the level of BPC
    implementation at the wholesale level anyway in the European
    marketplace.
        Mr. Souder. Also, I still am somewhat troubled, and I want
    to make sure this question gets in this hearing record. In the
    first panel, we heard high-value pharmaceuticals without really
    a definition or specific items of what that is which seems to
    me that we are putting a law in and you're guilty of a
    violation of this law, good luck on figuring out what you are
    going to be prosecuted on. And I would like some clarification
    on that.
        Thank you very much. I have to make it over to vote. The
    subcommittee stands adjourned.
        [Whereupon, at 11:52 a.m., the subcommittee was adjourned.]