[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:]

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    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.]

                                 
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