[Senate Hearing 110-1189]
[From the U.S. Government Publishing Office]

                                                       S. Hrg. 110-1189




                               before the


                                 OF THE

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION


                             MARCH 7, 2007


    Printed for the use of the Committee on Commerce, Science, and 



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                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                   DANIEL K. INOUYE, Hawaii, Chairman
JOHN D. ROCKEFELLER IV, West         TED STEVENS, Alaska, Vice Chairman
    Virginia                         JOHN McCAIN, Arizona
JOHN F. KERRY, Massachusetts         TRENT LOTT, Mississippi
BARBARA BOXER, California            OLYMPIA J. SNOWE, Maine
BILL NELSON, Florida                 GORDON H. SMITH, Oregon
MARIA CANTWELL, Washington           JOHN ENSIGN, Nevada
FRANK R. LAUTENBERG, New Jersey      JOHN E. SUNUNU, New Hampshire
MARK PRYOR, Arkansas                 JIM DeMINT, South Carolina
THOMAS R. CARPER, Delaware           DAVID VITTER, Louisiana
CLAIRE McCASKILL, Missouri           JOHN THUNE, South Dakota
   Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
Lila Harper Helms, Democratic Deputy Staff Director and Policy Director
              Margaret Spring, Democratic General Counsel
   Christine D. Kurth, Republican Staff Director and General Counsel
Kenneth R. Nahigian, Republican Deputy Staff Director and Chief Counsel


BYRON L. DORGAN, North Dakota,       JIM DeMINT, South Carolina, 
    Chairman                             Ranking
    Virginia                         OLYMPIA J. SNOWE, Maine
JOHN F. KERRY, Massachusetts         GORDON H. SMITH, Oregon
BARBARA BOXER, California            JOHN ENSIGN, Nevada
MARIA CANTWELL, Washington           JOHN E. SUNUNU, New Hampshire
MARK PRYOR, Arkansas

                            C O N T E N T S

Hearing held on March 7, 2007....................................     1
Statement of Senator DeMint......................................     4
Statement of Senator Dorgan......................................     1
Statement of Senator Snowe.......................................     6
Statement of Senator Vitter......................................     5


Barnett, Nelda, Member, Board of Directors, AARP.................    73
    Prepared statement...........................................    74
Lutter, Ph.D., Randall W., Acting Deputy Commissioner for Policy, 
  Food and Drug Administration, HHS..............................     8
    Prepared statement...........................................    13
Schondelmeyer, Pharm.D., Ph.D., Stephen W., Professor of 
  Pharmaceutical Economics and Director, PRIME Institute, College 
  of Pharmacy, University of Minnesota...........................    65
    Prepared statement...........................................    68
Schultz, William B., Partner, Zuckerman Spaeder, LLP.............    56
    Prepared statement...........................................    58
Tauzin, Hon. W.J. Billy, President and CEO, Pharmaceutical 
  Research and Manufacturers of America (PhRMA)..................    31
    Prepared statement...........................................    34
Vernon, Dr. John A., Assistant Professor, Department of Finance, 
  University of Connecticut School of Business...................    60
    Prepared statement...........................................    62


Canadian Pharmacists Association, the Ontario Pharmacists' 
  Association, and the Best Medicines Coalition, joint prepared 
  statement......................................................    95
Pitts, Peter, President, Center for Medicine in the Public 
  Interest, prepared statement...................................    97
Response to written question submitted by Hon. Byron L. Dorgan to 
  Randall W. Lutter, Ph.D........................................   100



                        WEDNESDAY, MARCH 7, 2007

                               U.S. Senate,
   Subcommittee on Interstate Commerce, Trade, and 
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 9:30 a.m. in 
room SR-253, Russell Senate Office Building, Hon. Byron L. 
Dorgan, Chairman of the Subcommittee, presiding.


    Senator Dorgan. We'll call the hearing to order.
    This is a hearing of the Subcommittee of the Commerce 
Committee. The Subcommittee on Interstate Commerce, Trade, and 
Tourism is here today to consider an issue of importation of 
prescription drugs, FDA-approved prescription drugs.
    I'm joined by the Ranking Member on the Subcommittee, 
Senator DeMint. Senator DeMint, welcome. And we will have some 
others join us momentarily.
    There had previously been two votes scheduled for 10 
o'clock this morning. They have just been postponed until this 
afternoon. So, we will not now be interrupted by votes.
    Let me ask that the door be closed, please.
    We're here today to consider a matter that literally can 
mean the difference between life and death for many Americans, 
and that is the cost of prescription medicines. Clearly, there 
are some miracle drugs that are available in this country, 
thanks to substantial research by the National Institutes of 
Health, by the pharmaceutical industry and others. But miracle 
drugs offer no miracles to those who can't afford them. And the 
question we're going to ask today is whether we believe that 
American consumers ought to pay the highest prices in the world 
for prescription medicines. My answer to that is, of course, 
no. I don't believe they should be paying the highest prices in 
the world. I think the American taxpayers already heavily 
subsidize research, through the tax code, and we pay for basic 
research at the NIH that's led to many breakthroughs for wonder 
drugs currently marketed by prescription drug manufacturers.
    Today, we're considering whether we should continue to 
allow the prescription drug companies, or the pharmaceutical 
industries, to dictate the prices that U.S. consumers pay for 
prescription drugs, or whether we ought to allow a little price 
competition into the marketplace for prescription drugs.
    Today, we will talk about prescription drugs, and we will 
only refer to, and mean, FDA-approved prescription drugs.
    Should we allow the safe importation of FDA-approved 
medicines from Canada and other Western industrialized nations? 
This routinely has happened for a couple of decades in Europe, 
through parallel trading. If you're in France and want to buy a 
prescription drug from Italy; or in Spain and want to buy one 
from Germany, the parallel trading system has worked well for 
European consumers, with no safety issues at all.
    Given the substantial price differences between products 
sold in the U.S. and abroad, it will come as no surprise that 
the American people feel strongly about this and already do 
import some prescription drugs. Let me use a chart to show the 
difference in pricing. And I'll show two bottles of Lipitor. 
Lipitor is a fairly common prescription drug in this country 
for lowering cholesterol levels. These two bottles contain 
exactly the same pill, produced in exactly the same FDA-
approved plant in Ireland. The only difference is, one is 
shipped to Canada, one is shipped to the United States, one is 
$1.83 per tablet, the other is $3.57 per tablet. Same bottle, 
same pill, produced in the same place, different prices. The 
American taxpayer is charged just about double, and I think 
that's unfair. The same is true with a good many other drugs--
Prevacid, Zocor, Nexium, Zoloft, and so on.
    [The information referred to follows:]



    Senator Dorgan. The question before the Congress has been 
now, for some long while: Can we allow for the safe import of 
prescription drugs from FDA-approved plants in other countries? 
My answer to that is yes. I believe that we have produced a 
bipartisan piece of legislation--cosponsored by many Members of 
Congress. The Pharmaceutical Market Access and Drug Safety Act 
of 2007--Senator Snowe, Senator Grassley, Senator Kennedy, 
Senator McCain, Senator Stabenow, and many, many others have 
cosponsored this legislation. We believe it puts in place an 
effective regulatory framework to make the importation of FDA-
approved drugs safe for consumers, and gives consumers the 
opportunity to use the market system for FDA-approved drugs, to 
avoid having to pay the highest prices in the world.
    We have witnesses today with a wide variety of views on 
this subject. It will be interesting to hear them. Some are 
among the most vigorous defenders of the pricing strategy by 
the prescription drug companies, others say we ought to put 
market-price competition to work for consumers.
    Let me be clear that my goal is not to force Americans to 
go to Canada to purchase prescription drugs, but, rather, to 
create a little competition in the marketplace so that we can 
put real downward pressure on domestic drug prices. I believe 
that what is happening currently is wrong. I think it's unfair. 
Some say that, ``Well, it doesn't matter. We now have 
prescription drug coverage for senior citizens.''
    There are tens of millions of citizens--in fact, 43 percent 
of the uninsured American adults, aged 19 to 64--I have a chart 
to show on that--18 percent of insured adults did not fill 
prescriptions because of cost. The result is that paying the 
highest price in the world is diminishing opportunities for 
healthcare for a good many Americans, and we believe the 
marketplace ought to be used to provide a fair break for 
American consumers. When I say ``we,'' I'm speaking the royal 
``We,'' of course. I'm sure there are--well, I know there are 
some in Congress that would disagree with that.
    [The information referred to follows:]



    Senator Dorgan, Let me call on the Ranking Member, Senator 

                 STATEMENT OF HON. JIM DeMINT, 

    Senator DeMint. Thank you, Mr. Chairman. Appreciate you 
holding these hearings. And I do take Lipitor, and if there are 
any in there you'd let me have, I'd really appreciate that.
    Senator DeMint. Could save me $300.
    But I appreciate everyone being here, particularly the ones 
who are going to be on the panel. And what I hope we can have 
today, maybe, is a little intellectual honesty. There are so 
many of us who are supportive of free trade and the value of 
that and how that keeps prices down, how that keeps competition 
in this country and outside of this country. It needs to apply 
to prescription drugs. It doesn't make sense for the Food and 
Drug Administration to say it's OK to import all kinds of food 
products from all over the world that are much more difficult 
to put in tamper-proof containers than pharmaceuticals, and 
then say that it's not safe to import pharmaceuticals, 
particularly reimport the drugs that have been made here in 
blister packs that are tamperproof. It doesn't make sense to 
take that tack. It doesn't make sense to say it's dangerous to 
import drugs that were made in America, when a lot of the 
ingredients for all the drugs in this country are imported in 
bulk, which are much easier to contaminate than finished drugs 
that are in tamperproof containers. It's very obvious to me 
that safety is not an issue. It's just a distraction. And I 
want to hear that explained, particularly from Dr. Lutter 
    We know the issue is with other countries and trade 
agreements. We're afraid, the pharmaceutical companies are, 
that if they don't honor the fixed prices in Canada and other 
parts of the world, that these countries will simply take their 
patents and produce their drugs. This is a trade issue which 
the Administration needs to address. I hear folks say that, by 
us reimporting from Canada, that we're importing socialism. In 
fact, what we're doing now is, we are propping up socialism in 
Canada and other parts of the world. We charge American 
consumers a higher price, and then allow other countries to 
dictate a lower price for their citizens, allowing Americans to 
subsidize and pay for our own drug products in other parts of 
the world. It's difficult for me to find any intellectual 
honesty in the arguments against allowing Americans to buy 
drugs from any part of the world that are FDA-approved from 
FDA-approved or certified facilities.
    So, I'm very interested in the discussion today. And, 
again, all I ask for is some intellectual honesty and 
    Thank you, Mr. Chairman.
    Senator Dorgan. Senator Vitter?

                  U.S. SENATOR FROM LOUISIANA

    Senator Vitter. Thank you, Mr. Chairman. And thank you for 
convening this important hearing.
    I guess I round out the spectrum of opinion on the panel by 
saying amen to everything that was said before me, because I 
also am a--an ardent supporter of reimportation, which I know 
can be done safely, completely protecting American consumers. 
And I say that about those of us up here, because I think it 
makes an important point. We obviously represent different 
points on the political spectrum. Maybe we define the political 
spectrum, I don't know. But we all agree on this issue, and I 
think we all share the clear majority consensus opinion of the 
American people.
    I've been working on this issue since I was in the House. 
It's been a top priority of mine, including as I came to the 
Senate. I want to thank and salute the Chairman for his 
leadership on this. He and Senator Snowe have one of the 
leading bills, and I appreciate all of their leadership on it.
    I have a separate bill that's very similar in many ways, 
and certainly has exactly the same goal, which is supported by 
Senator DeMint and others. And I completely agree with the 
previous comments, that this is a matter of political will--not 
technology, not what is possible, but what is the--when will we 
have the political will to get this done for the good of the 
American people? Besides my broadbased reimportation bill and 
my work with Senator Dorgan and others on their measures, I've 
also been involved in a couple of amendments that have passed. 
In particular, I teamed up with Senator Stabenow to pass 
language prohibiting trade agreement barriers to reimportation. 
Up until that point, there was a very, very onerous practice 
which was becoming established of the Administration using 
bilateral trade agreements to insert anti-reimportation 
language through those trade agreements. And the threat was 
being posed that even if we were to be able to pass significant 
reimportation legislation, if you had all these trade 
agreements out there, with many, many countries, reimportation 
would still be blocked through that route. I'm happy to say we 
put an end to that practice--first, with this amendment on an 
appropriations bill, and that led to the current USTR 
abandoning, and stating very clearly to me and others that she 
would abandon this practice of trying to negotiate those 
provisions in trade deals.
    Also, more recently, we were able to pass a significant 
amendment, again, on an appropriations bill, to prevent the 
enforcement of the law against United States consumers who are 
coming home from Canada with amounts of prescription drugs from 
Canadian pharmacies that were simply for personal use. That 
passed the Congress overwhelmingly. It has now gone into law. 
And I would also note that, after dire predictions about what 
that would cause, the safety concerns and everything else that 
would cause, I don't know of any documented cases of problems 
that that has, in fact, caused.
    But we do need to go further. We do need a full-blown 
reimportation bill to establish all of the safety procedures 
that we need to ensure the American people safe drugs in a true 
free-market environment.
    And I would certainly echo Senator DeMint's comments. I 
believe in free trade. I believe in global commerce. I don't 
understand why all of that stops, and all of those rules go out 
the window completely when we get to prescription drugs. It 
doesn't occur when we talk about food and other products that 
clearly have safety implications. We do things to guard against 
safety violations in those areas. It doesn't when we talk about 
products which may be subsidized in other countries. We 
certainly try to fight that subsidization. But, you know, free 
trade doesn't come to a grinding halt with regard to those 
other products because of those concerns. So, I would echo 
Senator DeMint's call for intellectual honesty and consistency 
on this topic.
    Thank you.
    Senator Dorgan. Senator Snowe is the principal cosponsor of 
the Pharmaceutical Market Access and Drug Safety Act of 2007. 
We have 31 cosponsors in the United States Senate, spanning the 
ideological spectrum. My expectation is that the Congress will 
have to address, and the Senate will address, this legislation, 
at long, long last, this year. Senator Snowe, thank you.

                    U.S. SENATOR FROM MAINE

    Senator Snowe. Yes, thank you, Mr. Chairman. And I thank 
you very much for holding this hearing, once again, on a 
critical issue facing so many American consumers. And I want to 
applaud you for the leadership that you provided in shaping the 
legislation that we are considering here in the Senate, and 
hopefully in the overall Congress, and before this Committee.
    It's unfortunate that we're at a point that we have not 
been able to enact this legislation. This is about the tenth 
Senate hearing that's been held on the subject since 2004. It's 
been repeatedly studied. One-third of the Senate, as the 
Chairman indicated, is cosponsoring this legislation. In fact, 
2 years ago, the Commerce Committee adopted an amendment to the 
FCC reauthorization based on our legislation. But, despite 
that, we've obviously faced considerable resistance and 
barriers to enacting this legislation.
    And what is tragic in all of this is that 70 percent of the 
American people support drug importation. And for a very good 
reason, because of the skyrocketing increases in the cost of 
medications, exceeding two and even three times the rate of 
inflation. And I think that the penalties that ultimately are 
imposed by cutting off supplies to pharmacies in Canada, for 
example, is another way of placing tremendous burdens on the 
American consumer, and forcing them to ultimately look to 
sources that might end up being counterfeit drugs. And so, we 
set up a system in this legislation that I think undeniably 
provides for the security of the medications coming across the 
border from Canada or from the European Union and other 
countries, that have demonstrated, over decades, that parallel 
trading can work, and can work safely. And that's what our 
legislation is designed to do. With FDA-approved, registered, 
and inspected, facilities--and, the fact is, many more 
inspections than is required now currently under law for those 
FDA-approved facilities, and then, second, setting up a 
pedigree, being able to track the medication. We also provide 
for the financing for the administration of this program, as 
    So, I think that we have identified every conceivable and 
legitimate concerns about how we're going to import these 
medications, and we will do so on a safe basis. We've addressed 
all of those initiatives in this legislation. Furthermore, it 
provides savings to the consumer, according to Congressional 
Budget Office.
    In addition to all of that, I think the American consumer 
deserves to have a break when it comes to prescription drug 
prices in this country. We pay the highest prices of any 
consumers in the world. And I think that is inappropriate, 
given the investments the America taxpayer makes in research 
and development, without question. And the industry has not had 
to operate under the competition which would ultimately benefit 
the American consumer. And so the American consumer has paid a 
price in more ways than one.
    And so, in drafting this legislation, we designed a safe 
system, above and beyond everything else. It is possible to 
implement. It is doable, it is reasonable. And I think that, 
frankly, the time has come--hopefully it's going to be this 
year. We can assure safety. That's what it's all about. It's 
not simply certifying safety, our legislation assures safety 
through a systematic process that requires every facet to be 
determined and certified and monitored by the FDA. And with the 
requirements that are necessary in dispensing prescriptions and 
certifying people's histories and verifying their 
prescriptions, and also tracking drug shipments, and the entire 
history and chain of custody.
    So, with that, Mr. Chairman, I appreciate your leadership 
on this matter. Hopefully, we can get above and beyond and 
address the questions here today, and hopefully we can pass 
this legislation.
    Senator Dorgan. Senator Snowe, thank you very much.
    I don't think there's much question but that there is a 
majority on the Commerce Committee now in support of 
reimportation legislation. It's my intention to work very hard 
to move it out of the Commerce Committee and get a vote on it, 
on the floor of the Senate. Identical legislation has been 
introduced in the U.S. House, and my hope is that, at long, 
long last, perhaps the America consumers will be treated 
    We are, first, joined by Dr. Randall Lutter, who's the 
Acting Deputy Commissioner for Policy at the Food and Drug 
    Dr. Lutter, we appreciate your being here, and you may 
summarize your testimony. We have added a copy of your full 
testimony, which I read last evening. And we appreciate your 
being here.




    Dr. Lutter. Thank you very much, Mr. Chairman and members 
of the Committee--Subcommittee. I'm Randall Lutter, Acting 
Deputy Commissioner for Policy at the U.S. Food and Drug 
Administration, and I very much appreciate the opportunity to 
discuss the important issues relating to importation of 
prescription drugs.
    At FDA, our statutory responsibility is to assure the 
American public that the drug supply is safe, secure, and 
reliable. FDA remains deeply concerned about unapproved 
imported pharmaceuticals whose safety and effectiveness cannot 
be assured because they originate outside the closed system 
we're fortunate to have in the United States.
    In 1987, due to widespread distribution of imported 
counterfeit drugs, including antibiotics and birth control 
pills, Congress passed a law that strengthened the oversight of 
domestic wholesalers and only allows a drug manufacturer to 
import a drug originally made in the U.S. and then sent abroad. 
The conclusion of Congress reflected, in current law, is that 
the safety and effectiveness of imported drugs is best assured 
by carefully limiting how prescription drugs can be imported 
into the U.S. as part of a closed drug distribution system.
    The Department of Health and Human Services convened a task 
force in 2004 to examine issues related to drug importation as 
it was directed to study by Congress as part of the Medicare 
Modernization Act. We have copies of the report available to 
anyone here. The report drafted by this task force clearly 
outlined significant safety and economic issues that must be 
addressed before the widespread importation of unapproved 
prescription drugs can be permitted. The report is still, we 
believe, the most comprehensive examination of the issue, and 
we continue to find evidence supporting some of its findings.
    Key findings identified in the task force report include 
the following. There are significant risks associated with the 
way individuals are currently importing drugs that violate the 
Food, Drug, and Cosmetics Act. It would be extraordinarily 
difficult and costly for personal importation to be implemented 
in a way that ensures the safety and effectiveness of imported 
drugs. Overall savings from legalized commercial importation 
will likely be a small percentage of total drug spending, and 
developing and implementing such a program would incur 
significant costs and require significant additional authority.
    The public expectation that most imported drugs are less 
expensive than American drugs is not generally true, especially 
in the case of generic drugs marketed in the U.S. And legalized 
importation may raise liability concerns for consumers, 
manufacturers, distributors, pharmacies, and other entities.
    The Internet today has created an extraordinary unregulated 
marketplace for the sale of unapproved drugs, prescription 
drugs dispensed without a valid prescription, and products 
marketed with fraudulent health claims. Patients who buy 
prescription drugs from a rogue website are at risk of 
suffering adverse events, and some of them can be life-
threatening. These risks include, most importantly, therapeutic 
failure due to lack of effect because the drug doesn't contain 
the correct dose prescribed by a physician or active 
ingredients, and potential side effects from inappropriately 
dispensed medications, dangerous drug interactions, or drug 
    Patients are also at risk because they often don't know 
what they're getting when they purchase some of these drugs 
from websites. Although some patients may receive the genuine 
product, others may unknowingly receive counterfeit copies that 
contain inert or harmful ingredients, drugs that are expired 
and have been diverted to illegitimate resalers, or dangerous 
subpotent or superpotent products that are improperly 
    I'd like to show you a couple of slides to illustrate just 
a few examples highlighting our concerns with imported drugs, 
and my written statement further describes these concerns and 
illustrates some cases.
    The first slide--I don't know if you can see it from there, 
but the first slide identifies a phenomenon that we first 
reported in December of 2005 in a press release called ``Bait 
and Switch.'' Consumers had placed orders on Internet websites 
that appeared to be Canadian, and we intercepted, at 
international mail facilities, parcels which were coming into 
the country from other countries--in particular, India, Israel, 
Costa Rica, and Vanuatu. And about--nearly half of the parcels 
coming in from those countries had documentation indicating 
that they had been shipped in response to orders on apparently 
Canadian websites, and almost 85 percent of those parcels, in 
fact, originated from 27 countries all over the globe. 
Consumers were not getting what they thought they were buying.


    The second slide shows a scheme where consumers are sent 
drugs containing the wrong active ingredient, which is 
potentially a very harmful practice. This was reported only 
recently, in, actually, February, last month, of 2007. 
Consumers ordered drug A, for example, for insomnia, they 
received a confirmation from a second website, the credit 
card's statement lists purchase from a third website, and then 
they received Haloperidol tablets, which are used for the 
treatment of schizophrenia. Some people sought emergency 
medical care because they received the wrong active ingredient 
in these instances.


    FDA understands that Congress and the public are concerned 
about the high price of some prescription drugs. FDA currently 
has a very successful generic drug approval program that brings 
lower-cost versions of brand name drugs to U.S. consumers. In 
general, FDA-approved generic drugs are less expensive, not 
only compared with the brand name innovator product that are 
sold in the United States, but also generally less expensive 
than generic drugs available abroad that would appear to be 
    And you may be surprised to learn--and this is slide 3--
that a survey conducted--also in January of 2007--revealed that 
approximately half of the drugs intercepted at one 
international mail facility are available as FDA-approved 
generics in the United States. And, even more surprising, of 
those generic equivalents, over 40 percent are available at 
some national retail pharmacy chains for about $5 each. That's 
less than the shipping price for most Internet sellers.


    Next slide. In this survey, we also saw examples of 
products that U.S. consumers ordered from foreign sources that 
cause us grave concern. Warfarin is a blood-thinner that 
requires routine and very careful blood monitoring by 
physicians. Another drug that was intercepted is Amoxicillin. 
These could--if misused, may contribute to antibiotic 
resistance. Antibiotics should only be used if a bacterial 
infection, as opposed to a viral infection, occurs. Another 
drug that we intercepted is Dipyrone, an analgesic which was 
removed from the U.S. market in 1977, due to serious adverse 
health concerns. Methotrexate, a cancer drug, requires careful 
monitoring for potential serious toxicities. These are examples 
of some of the drugs that we've found in this survey that cause 
us to think very carefully about safety concerns of Internet 


    Consumers may be obtaining these types of products without 
valid prescriptions, and without the appropriate supervision of 
a physician.
    Slide 5, the final one, deals with a drug of special 
importance these days. We've uncovered counterfeit Tamiflu. 
This concerns us greatly, given the implications not only for 
seasonal flu, which is associated with deaths of more than 
20,000 Americans annually, but also the Tamiflu may be useful 
in the event of a pandemic flu.


    As a public-health agency, we understand very much the 
importance of protecting public health, not only through 
regulation and enforcement, but also through education and 
collaboration. FDA's website contains extensive information for 
consumers about drug importation, buying drugs online, 
counterfeit drugs, our enforcement activities, and potential 
public-health threats. Our website also provides resources to 
report problems with FDA-regulated products or websites that 
could be selling fake or harmful products.
    The standards for drug review and approval in the U.S. are 
unsurpassed in the world, and the safety of our drug supply 
mirrors those high standards. However, despite these very real 
risks, a substantial number of Americans are obtaining 
prescription medications from foreign sources. Many drugs 
purported to be from Canada are actually from other countries 
that lack regulatory oversight. And FDA cannot assure the 
safety or effectiveness of these drugs.
    Thank you very much for the opportunity to testify, and I 
look forward to responding to questions that you may have.
    [The prepared statement of Dr. Lutter follows:]

     Prepared Statement of Randall W. Lutter, Ph.D., Acting Deputy 
       Commissioner for Policy, Food and Drug Administration, HHS
    Mr. Chairman and Members of the Subcommittee, I am Randall W. 
Lutter, Ph.D., Acting Deputy Commissioner for Policy at the U.S. Food 
and Drug Administration (FDA or the Agency). Thank you for the 
opportunity to discuss with you the important issues relating to the 
importation of prescription drugs.
    At FDA, our statutory responsibility is to assure the American 
public that the drug supply is safe, secure, and reliable. For more 
than 60 years, the Federal Food, Drug, and Cosmetic (FD&C) Act has 
helped to ensure that Americans can be confident that when they use an 
FDA-approved drug, the medicine will be safe and effective and will 
work as intended in treating their illness and in preventing 
complications. In carrying out this responsibility, we work, through a 
variety of steps, to do all we can under the law to make medicines 
accessible to patients and help doctors and patients use them as 
effectively as possible. These include: expanding access to essential 
unapproved treatments that are being studied under FDA investigational 
new drug applications; approving generic medicines; reducing the time 
and cost of showing that new medicines are safe and effective; and 
providing up-to-date information for health professionals and patients 
to allow them to obtain the benefits and avoid the risks associated 
with medicines. That is the primary mission of the thousands of 
dedicated staff, including leading health care experts, doctors, and 
scientists who work tirelessly at FDA in public service for the 
American people. FDA remains immensely concerned about unapproved, 
imported pharmaceuticals whose safety and effectiveness cannot be 
assured because they originate outside the closed legal structure and 
regulatory system we are fortunate to have in the United States.
    The FD&C Act requires that FDA approve each new drug as safe and 
effective before marketing. It also authorizes FDA to oversee the 
production of drugs that are the subject of approved applications, 
whether manufactured in a facility in the U.S. or a foreign country and 
imported into the U.S. by the manufacturer. By the 1980s, Congress 
recognized that some foreign entities were importing counterfeit drugs 
as well as improperly handled and stored drugs into the U.S. For 
example, at that time, millions of counterfeit birth control pills from 
Panama found their way into the U.S. drug distribution system. In 
another case, a counterfeit version of a widely used antibiotic entered 
the U.S. drug distribution system from a foreign source. These types of 
activities posed significant risks to American consumers. In 1987, 
Congress passed the Prescription Drug Marketing Act (PDMA), which 
strengthened oversight of domestic wholesalers and added the provision 
to the FD&C Act--801(d)(1)--that generally prohibits anyone except a 
drug's manufacturer from reimporting into the U.S. a drug originally 
manufactured in the U.S. and then sent abroad.
    The conclusion of Congress, reflected in current law, is that the 
safety and effectiveness of imported drugs is best assured by carefully 
limiting how prescription drugs can be imported into the U.S. as part 
of a closed drug distribution system. In the case of legally imported 
drugs, the chain of custody is known for an FDA-approved drug 
manufactured in an FDA-inspected facility using FDA-approved methods 
before it is introduced into the U.S. distribution system.
    In 2003, Congress tasked the Department of Health and Human 
Services to examine issues related to drug importation. A task force, 
chaired by then U.S. Surgeon General Carmona, examined the relevant 
data, considered testimony from the public and health experts, and then 
issued the ``Report on Prescription Drug Importation'' (Task Force 
Report). This Task Force Report clearly outlines significant safety and 
economic issues that must be addressed before the widespread 
importation of unapproved prescription drugs can be permitted. Even 
though 2 years have passed since the Task Force Report was issued, it 
is still the most comprehensive examination of the issue and we 
continue to find evidence confirming its findings.
    Some of the key findings identified in the Task Force Report 
include the following:

   There are significant risks associated with the way 
        individuals are currently importing drugs that violate the FD&C 

   The integrity of the distribution system must be ensured.

   It would be extraordinarily difficult and costly for 
        ``personal'' importation to be implemented in a way that 
        ensures the safety and effectiveness of the imported drugs. 
        Regulating personal importation could be extraordinarily 
        costly, on the order of $3 billion a year based on 2003 
        estimates of the volume of packages entering the U.S.

   Overall national savings from legalized commercial 
        importation will likely be a small percentage of total drug 
        spending, and developing and implementing such a program would 
        incur significant costs and require significant additional 

   The public expectation that most imported drugs are less 
        expensive than American drugs is not generally true, especially 
        in the case of generic drugs marketed in the U.S.

   Legalized importation of now-unapproved drugs will likely 
        adversely affect the future development of new drugs for 
        American consumers.

   The effects of legalized importation on intellectual 
        property rights are uncertain but likely to be significant.

   Legalized importation raises liability concerns for 
        consumers, manufacturers, distributors, pharmacies, and other 

    Keeping unsafe drugs away from American consumers is an enormous 
task, as we are faced with a deluge of drugs at points of entry into 
the U.S. originating from all over the world. We are continually 
assessing this issue to determine how FDA can best protect American 
consumers from this threat.
    The Internet has created an extraordinary, unregulated marketplace 
for the sale of unapproved drugs, prescription drugs dispensed without 
a valid prescription, and products marketed with fraudulent health 
claims. Patients who buy prescription drugs from a rogue website are at 
risk of suffering adverse events, some of which can be life 
threatening. These risks include therapeutic failure due to lack of 
effect because the drug does not contain the correct dose or active 
ingredient and potential side effects from inappropriately-prescribed 
medications, dangerous drug interactions or drug contamination. 
Patients are also at risk because they often don't know what they are 
getting when they purchase some of these drugs. Although some patients 
may receive genuine product, others may unknowingly receive counterfeit 
copies that contain inert or harmful ingredients, drugs that are 
expired and have been diverted to illegitimate resellers, or dangerous 
sub-potent or super-potent products that were improperly manufactured.
    Efforts of Federal and state authorities have kept infiltration of 
counterfeit drugs in the U.S. drug supply chain to a minimum. Our 
success is a result of the extensive system of laws and our enforcement 
efforts. In recent years, however, FDA is challenged by efforts of 
increasingly well-organized counterfeiters who are often located 
overseas, backed by sophisticated technologies and criminal operations, 
intent on profiting from drug counterfeiting at the expense of American 
patients. To respond to this domestic emerging threat, FDA has been 
working with manufacturers, wholesalers, retailers, other Federal and 
state government entities, standards bodies, and others to implement 
measures to further secure our Nation's drug supply.
    When FDA learns of schemes intended to use the drug supply to harm 
U.S. consumers, we actively work to prevent them to the fullest extent 
of the law. A recent case illustrates why American consumers ordering 
prescription drugs from Canadian sources cause FDA great concern. In 
August 2006, FDA advised consumers not to purchase prescription drugs 
from various websites, including www.RxNorth.com, that have orders 
filled by a firm in Manitoba, Canada, following reports of counterfeit 
versions of prescription drug products being sold by these companies to 
U.S. consumers. FDA is investigating these reports and is coordinating 
with international law enforcement authorities on this matter. 
Laboratory results to date have found counterfeits from these websites, 
destined for the U.S. market, of the following drug products: Lipitor, 
Diovan, Actonel, Nexium, Hyzaar, Ezetrol (known as Zetia in the United 
States), Crestor, Celebrex, Arimidex, and Propecia.
    In addition, just last month, FDA issued an alert to consumers who 
placed orders for specific drug products over the Internet (Ambien, 
Xanax, Lexapro, and Ativan), but instead received a product that, 
according to preliminary analysis, contains haloperidol, a powerful 
anti-psychotic drug. Reports show that several consumers in the U.S. 
have sought emergency medical treatment, after ingesting the suspect 
product, for symptoms such as difficulty in breathing, muscle spasms, 
and muscle stiffness. Haloperidol can cause muscle stiffness and 
spasms, agitation, and sedation. Identifying the actual sellers or 
websites has been challenging because of the deceptive practices of 
many commercial outlets on the Internet. Currently, the origin of these 
tablets is unknown but the packages were postmarked in Greece. 
Preliminary investigation has identified some of the responsible 
websites and we are currently pursuing both domestic and foreign leads. 
Details of additional cases are included in an appendix to this 
    In an effort to gauge the volume and scope of drugs coming into the 
U.S., we routinely survey international mail facilities. A recent 
finding confirms our concern that buying drugs from foreign sources 
pose specific risks to U.S. citizens. An FDA operation in 2005, called 
``Bait and Switch,'' found that nearly half of the imported drugs that 
FDA intercepted from four selected countries (India, Israel, Costa 
Rica, and Vanuatu) were shipped to fill orders that consumers believed 
were placed with ``Canadian'' pharmacies. Of the drugs being promoted 
as ``Canadian,'' 85 percent appeared to come from 27 countries around 
the globe. Many of these drugs were not adequately labeled to help 
assure safe and effective use and some were found to be counterfeit.
    FDA also works with U.S. Customs and Border Protection on their 
surveys at international mail facilities. In the last 6 months, FDA has 
assisted in two such operations. These operations revealed that we are 
still fighting the same issues we have seen in the past:

   Almost all of the pharmaceuticals found in mail parcels 
        continue to be subject to refusal of admission because they 
        violate the FD&C Act.

   We continue to see evidence of websites employing tactics 
        such as those revealed by FDA's ``Bait and Switch'' operation. 
        These suppliers appear to be Canadian sources, but send U.S. 
        consumers drugs from countries other than Canada.

   A survey conducted in January 2007 revealed that of the 462 
        drug products intercepted and examined at one international 
        mail facility, over half were drugs that are available as FDA-
        approved generic drug products in the U.S. and are most likely 
        cheaper in the U.S. than abroad. Of those products examined, 
        with generic equivalents, over 40 percent are available at 
        national retail chains that offer certain generic drugs for $4 
        each. This is less than the shipping price of most Internet 

    Last year, an FDA investigation found that many foreign 
medications, although marketed under the same or similar-sounding brand 
names as those in the U.S., contain different active ingredients than 
the U.S. products. For example, in the U.S., ``Flomax'' is a brand name 
for tamsulosin, a treatment for an enlarged prostate, while in Italy, 
the active ingredient in the product called ``Flomax'' is morniflumate, 
an anti-inflammatory drug.
    FDA also has found 105 U.S. drug brand names that are so similar to 
drugs marketed in foreign countries that consumers who fill such 
prescriptions abroad may receive a drug with the wrong active 
ingredient. For example, in the United Kingdom, ``Ambyen,'' a brand 
name for a drug product containing amiodarone, used to treat life-
threatening abnormal heart rhythms, could be mistaken for ``Ambien,'' a 
U.S. brand name for a sleeping pill. Consumers taking medications 
containing active ingredients not prescribed by their physician 
increase their risks of unnecessary side effects and possibly serious 
adverse outcomes.
    FDA also publishes Import Alerts to field personnel about 
potentially dangerous drugs being offered for import into the U.S. 
Field personnel use this information to halt shipments of potentially 
dangerous products at the borders. For example, last month FDA added 39 
known foreign suppliers of unapproved isotretinoin (known by the brand 
name Accutane) to an existing Import Alert, ``Unapproved New Drugs 
Promoted in the U.S.'' The unsupervised use of isotretinoin carries 
significant potential risks, including birth defects and even fetal 
death, and may cause serious mental health problems. For this reason, 
the approved medication should only be taken by persons taking part in 
a specific risk management program closely monitored by their personal 
physician. Consumers receiving isotretinoin from these foreign sources 
are not likely taking part in the risk management program.
    As a public health agency, we understand the importance of 
protecting the public health not only through regulation and 
enforcement, but also through education and collaboration. FDA's 
website (www.fda.gov) contains extensive information for consumers 
about drug importation, buying drugs online; counterfeit drugs, 
enforcement activities, potential public health threats, as well as 
resources to report problems with FDA regulated products or websites 
that could be selling fake or harmful products.
    FDA coordinates with other governmental bodies and meets regularly 
with other Federal agencies and state officials to share information 
and identify opportunities for partnering in enforcement actions. Some 
of the Federal agencies that are FDA partners include U.S. Customs and 
Border Protection, U.S. Drug Enforcement Administration, U.S. 
Immigration and Customs Enforcement, U.S. Postal Service, and the 
Federal Bureau of Investigation, just to name a few. We also work with 
organizations representing consumers, health care practitioners, 
industry, and others. These relationships are essential to keep the 
Agency abreast of emerging issues, to leverage resources, and to best 
protect American consumers.
    FDA understands that Congress and the public are concerned about 
the high cost of prescription drugs. FDA currently has an efficient 
generic drug approval program that brings lower cost versions of brand 
name drugs to U.S. consumers. In most instances, FDA-approved generic 
drugs are less expensive than generics sold abroad.
    Prompt approval of generic drug product applications is a priority 
for FDA. Resources for generic drug approvals have consistently 
increased. Moreover, both the number of generic drug applications FDA 
receives and the number of applications FDA's Office of Generic Drugs 
(OGD) approves continue to increase each year as well. OGD recently 
instituted many new practices and procedures to help expedite the 
generic drug application review process. Because of these efforts, on 
the very day that the last controlling patents or exclusivities expired 
on an innovator product, OGD has approved at least one generic drug 
application in most cases. Recent examples of approvals when the 
exclusivities expired include pravastatin (Pravachol); sertraline 
(Zoloft); simvastatin (Zocor); and ondansetron (Zofran). Multiple 
versions of these products from various manufacturers are currently on 
the market.
    Last year, 21 applications for meloxicam (Mobic), a product with no 
patent or exclusivity protection blocking approval, were approved. 
(This product is used to relieve the signs and symptoms of 
osteoarthritis and rheumatoid arthritis.) The cost to consumers of this 
product dropped dramatically after these generic approvals. Using OGD's 
``cluster'' team approach, many of these applications were approved in 
just over 9 months. These approvals will result in many generic 
alternatives available for patients potentially saving millions of 
dollars in medication costs for consumers and the Federal Government.
    The standards for drug review and approval in the U.S. are the best 
in the world, and the safety of our drug supply mirrors these high 
standards. However, despite the very real risks, a substantial number 
of Americans are obtaining prescription medications from foreign 
sources. U.S. consumers often seek out Canadian suppliers, sources that 
purport to be Canadian, or other foreign sources that they believe to 
be reliable. Many drugs purported to be from Canada are actually from 
other foreign countries that lack regulatory oversight and FDA cannot 
assure the safety or effectiveness of these drugs.
    Thank you for the opportunity to testify. I look forward to 
responding to any questions you may have.
Drug Importation Cases
    Provided below are summaries of selected cases FDA investigated 
that pertain to drug importation.
    Counterfeit Percocet', Viagra' and 
Cialis' Tablets: In January 2007, an individual in 
Philadelphia who purchased thousands of counterfeit drugs over the 
Internet from China, including Percocet, Viagra and Cialis, was 
sentenced in the Eastern District of Pennsylvania on charges related to 
trafficking in counterfeit goods and other counterfeit prescription 
drug related charges. The defendant sent samples of various medications 
to a counterfeit pharmaceutical manufacturer in China to be copied and 
manufactured. After the counterfeits were made in China, the medication 
was then shipped to the defendant in Philadelphia for eventual sale on 
the Internet and other venues. The United States Attorney said of this 
case: ``When you go around government safeguards to either the Internet 
or the street to purchase prescription medication, you have no idea 
what you're getting. The reality is that you might wind up taking 
something that is ineffective, as we saw in this case, or downright 
    This Office of Criminal Investigations (OCI) case, worked jointly 
with U.S. Immigration and Customs Enforcement (ICE), U.S. Drug 
Enforcement Administration (DEA), U.S. Postal Inspection Service and 
the Philadelphia Police Department, was part of a much larger OCI-ICE 
counterfeit drug investigation.
    Clandestine Drug Manufacturing of Internet Drugs: In 2006, eleven 
individuals and an Atlanta, Georgia-based company were indicted by a 
Federal grand jury on multiple felony charges relating to a scheme to 
sell adulterated and unapproved new drugs over the Internet. The 
defendants in this case opened up a pharmaceutical manufacturing 
facility in Belize where they made over 24 different prescription 
medications. The defendants marketed the drugs through ``spam'' e-mail 
advertisements where they claimed the drugs were Canadian generic 
versions of brand name drugs. Some of the drugs the defendants made 
were unapproved versions of Ambien', Valium', 
Xanax', Cialis', Lipitor', 
Vioxx' and others. These drugs were then purchased by and 
shipped to U.S. consumers and to various drug wholesalers.


    Dextromethorphan deaths: On April 12, 2006, two men were sentenced 
in the Southern District of Indiana Federal Court to 77 months 
incarceration after pleading guilty to introducing a misbranded drug 
into interstate commerce; specifically, dextromethorphan (DXM), a cough 
suppressant, which they sold over the Internet through their website.
    This case started in 2005 after five young people died after 
ordering and consuming DXM from the defendant's website. DXM is an 
anti-tussive (cough suppressant), which is approved for over-the-
counter cough medications. The defendants purchased the raw ingredients 
from a firm in India, manufactured the finished product, and sold the 
DXM through their website. The defendants marketed the DXM by falsely 
claiming that DXM was a chemical used for research and development 
rather than a drug for human consumption. DXM is often abused by some 
in order to experience a ``high.''


    Counterfeit Viagra', Cialis', and 
Lipitor': In January 2006, an individual from the state of 
Washington was convicted for his involvement in the importation of 
counterfeit drugs from China including Viagra, Cialis and Lipitor and 
the subsequent distribution of those counterfeit drugs. In this joint 
OCI-ICE investigation, cooperation was sought and received from the 
Chinese government. As a result of this cooperation, the Chinese 
authorities arrested eleven individuals in China and recovered 
significant amounts of counterfeit drugs and counterfeit drug 
packaging. The defendant was sentenced in October 2006 to 10 month's 


    Consumers Warned of Receiving Incorrect Medication in the Mail: In 
February 2007, FDA issued an alert to consumers who placed orders for 
various medications such as Xanax', Ativan', 
Lexapro', and Ambien', over the Internet. Instead 
of receiving the products they ordered, these consumers instead 
received a product containing haloperidol, a powerful anti-psychotic. 
Some of these consumers sought emergency medical treatments for a 
variety of symptoms after ingesting the suspect product. In all 
instances, consumers received the suspect medication in packaging, 
which was postmarked from Greece. FDA is attempting to identify the 
actual vendors and source of the suspect medication, but the illusive 
nature of the Internet and the deceptive practices of many Internet 
pharmaceutical businesses are making identification of the actual 
supplier of these medications problematic. This investigation is 


    Counterfeit Drug Arrest in Hong Kong: In September 2006, an 
individual from China was arrested by officers of the Hong Kong Customs 
and Excise Department based on a Federal arrest warrant issued by the 
U.S. District Court for the District of Colorado. The defendant was 
arrested in Hong Kong after meeting with an undercover OCI agent who 
posed as a buyer of over 400,000 counterfeit Cialis and Viagra tablets. 
This investigation also involved the sale of several thousand 
counterfeit Tamiflu' capsules that were manufactured in 
China and shipped to the U.S. Information developed by OCI and ICE was 
shared with Chinese authorities, which led to the August 2006 arrests 
of four individuals in China. Furthermore, information developed during 
this joint OCI-ICE counterfeit drug investigation was the basis for the 
previously mentioned counterfeit Percocet investigation in 
Philadelphia, PA. In addition to the arrest in Hong Kong, three other 
defendants in the U.S. have pled guilty to counterfeit drug charges. 
This case is ongoing.
    Counterfeit Viagra' and Cialis': In July 
2006, a man was arrested by OCI and ICE agents after several 
transactions in the Houston, Texas area where significant quantities of 
counterfeit Viagra were sold to an undercover ICE agent. Subsequent to 
the arrest, counterfeit Viagra and Cialis valued at approximately 
$600,000 were seized. The drugs were manufactured in China and sent to 
the suspect in Houston for distribution. The suspect was charged with 
trafficking in counterfeit goods and other related counterfeit drug 
charges and remains incarcerated as a potential flight risk. The 
defendant pled guilty in this case in October 2006 but has not yet been 
sentenced. Other defendants have been arrested and are awaiting 
judicial action. This joint OCI-ICE investigation is ongoing.
    FDA Warns Consumers of Canadian Website Shipping Counterfeit 
Medications: In August 2006, FDA published a warning to consumers about 
counterfeit medications shipped from RxNorth, a company based in 
Manitoba, Canada, which operates several websites. RxNorth, which 
operates as Mediplan Prescription Plus Pharmacy and Mediplan Global 
Health, were shipping counterfeit medications from various countries to 
American consumers who were ordering a variety of medications through 
the RxNorth and affiliated websites. Although this is an ongoing 
investigation, FDA issued a press release alerting consumers about 
these websites because of the potential dangers of counterfeit 
    Counterfeit Lipitor' Tablets: In August 2005 in the 
Western District of Missouri, three businesses and eleven individuals 
were indicted for their involvement in a $42 million conspiracy to sell 
counterfeit, smuggled and misbranded Lipitor and other drugs and for 
participating in a conspiracy to sell stolen drugs. These indictments 
are the result of an ongoing OCI investigation that was begun by OCI in 
April 2003 involving the manufacturing, smuggling, and the interstate 
distribution of counterfeit pharmaceuticals. To date, twelve defendants 
have been convicted; one received a nine- year term of imprisonment. 
Additional defendants are awaiting trial.

    Senator Dorgan. Dr. Lutter, thank you for being here.
    It's hard for me to know where to start with respect to 
your testimony.
    The task force you referred to in the first paragraph was 
largely a joke. Creating a task force with Dr. McClellan, Dr. 
Crawford, and so on, to tell us what they think about drug 
importation? Creating a task force of people who largely oppose 
drug importation to tell us that they largely oppose it? That 
was a joke, in my judgment. So, I place little credibility in 
    Let me just say to you, as well, when Tommy Thompson left 
government, the Secretary of HHS, we met at the elevator on the 
second floor of the Capitol one day after he had retired and 
left government, and as we greeted each other, he said, ``By 
the way''--to me--``By the way, keep on that prescription drug 
issue, the importation issue. You're right about that.'' So--
that's after he left the government.
    But let me ask you, did you study the piece of legislation 
that Senator Snowe and I have introduced, with respect to the 
safety considerations in that legislation?
    Dr. Lutter. I have been briefed on it, and I've discussed 
it with staff. I have not read it in detail.
    Senator Dorgan. But most of your testimony had nothing to 
do with that, isn't that correct? Your testimony is about the 
seizure of counterfeit medicine or importation from unapproved 
venues and so on? So, your testimony had little to do with the 
legislation that Senator Snowe and I and 31 Senators have 
introduced. Why is that the case?
    Dr. Lutter. The concerns that we have with importation 
currently are related, Senator, to the risks that we see 
currently, and that is that people are now buying unapproved 
products over the Internet in a manner that we think is unsafe. 
And we think we have a key responsibility to communicate that 
to the public so that they understand the safety risks that 
they face when buying unregulated, unapproved products from 
foreign sources.
    Senator Dorgan. You'll find no objection from the four of 
us on this panel at all about that. That's not the point of 
this hearing. No one, that I'm aware of, has suggested that we 
allow unauthorized drugs, drugs not approved by the FDA, drugs 
coming in from Internet sites that have not been approved--I 
don't think anyone is suggesting that. So, I guess you have 
won--won a debate we're not having. Congratulations.
    But the fact is, we've introduced a piece of legislation, 
with nearly one-third of the Senate, that has very specific--
very specific safety issues. Would you testify about your 
evaluation of those safety issues?
    Dr. Lutter. I'm sorry, the safety issues pertaining to?
    Senator Dorgan. In the--well, we have introduced 
legislation that has nearly a third of the Senate as cosponsors 
of the legislation. We have included issues dealing with safety 
in that legislation, because much of your testimony dealt with 
safety. We've included provisions, that are very significant 
provisions, that address, for example, the first time we went 
through this, where Donna Shalala refused to certify, and set 
out four conditions that needed to be met. We meet all these 
four conditions in this legislation that responds to the 
Executive Branch issues. My question for you is, how do you 
respond to those, or do you believe there is not the capability 
to provide for safe reimportation of FDA-approved drugs from 
FDA-approved plants or FDA-approved sites? Do you believe that 
is impossible?
    Dr. Lutter. My understanding, Senator, from the invitation 
was that you wanted me to talk about the policy implications of 
importation broadly. And if you wish, we will be very happy to 
offer technical assistance on the legislation, in particular, 
if you request us to do so.
    Senator Dorgan. Let me ask it a different way, then. As I 
indicated in my opening statement, Europe has a system of 
parallel trading. They've had it for a couple of decades. 
German can buy from Spain; an Italian can buy from France, 
under parallel trading, a prescription drug that is an approved 
drug. Let me ask you whether you think we are as capable as the 
Europeans in establishing--providing you the resources, and 
then establishing a system by which, with FDA approval and FDA 
certification, that a U.S. consumer can safely reimport an FDA-
approved drug that has never left the chain of custody, an FDA-
approved chain of custody? Do you----
    Dr. Lutter. I think, surely, Senator, the Americans are as 
capable as Europeans in that regard, but there's a key 
distinction with respect to that model, and that is that 
Brussels, as the capital of the European Union, can establish 
regulations which apply to all countries. And I believe, 
Senator, that the form of importation that we're talking about 
in the United States lacks a clear parallel, in the sense that 
the foreign countries from which we would be importing are ones 
that are not governed by any ``international government,'' if 
you will, in the way that Brussels governs countries that are 
members of the European Union.
    Senator Dorgan. Well, that's a novel answer, because the 
proposal in our legislation deals with plants in foreign 
countries that the FDA has already approved. It deals with an 
Internet seller that the FDA would have approved and certified. 
So, we're not talking about a regime outside of the FDA's 
approval process. My question is--the FDA--the FDA approved the 
plant that this Lipitor was produced in, in Ireland. I assume 
the FDA actually sends people to this plant and says, ``Yes, 
you can produce this medicine in this plant, and you can ship 
this medicine to the U.S. consumer, and we believe that is 
safe.'' Is that correct?
    Dr. Lutter. Yes, sir.
    Senator Dorgan. All right. And if the FDA approves a 
foreign plant that is a production facility for this medicine, 
and a foreign--a distribution system to move that, in a closed 
system, to a U.S. consumer, tell me where the safety 
implications are.
    Dr. Lutter. Well, I think the issue, Senator, is that, when 
we inspect a foreign facility that is manufacturing an FDA-
approved product, that this is very necessary and essential to 
ensure that that product meets FDA standards. But there may be 
another facility, even another line, even another building 
within that same manufacturing facility, which isn't inspected 
by us. And the question is, if that product is not inspected by 
us, what is our ability to ensure that it meets our standards? 
And that's, I think, a key distinction to follow.
    Senator Dorgan. What about the case today? How do you 
assure this comes from the line that you've inspected, and not 
the line that you didn't inspect?
    Dr. Lutter. Well, I have trouble recognizing the bottle 
from its distance.
    Senator Dorgan. It's Lipitor.
    Dr. Lutter. If that's the Lipitor which is manufactured in 
Ireland, then that's inspected by an FDA inspector at the plant 
in Ireland, and it is shipped from Ireland to the United 
    Senator Dorgan. Well, let me--my colleagues wish to ask 
questions. Let me ask you a simpler question, if I might. In 
Emerson, Canada, there's a one-room drugstore. And I went there 
one day with a group of senior citizens from Fargo, North 
Dakota. And just miles across the border, in this little one-
room drugstore, they purchased their prescription drugs that, 
10 miles on the other--on the U.S. side of the border, they 
would have had to pay substantially more money for. These were 
citizens who didn't have a lot of money. And they made their 
purchases in this drugstore, and showed me their savings, and 
were excited about it. And my understanding of the chain of 
custody in Canada is such that you would not be concerned about 
someone buying a prescription drug in a Canadian drugstore. 
Would you agree with that? Do you believe the chain of custody 
of drugs in Canada, with respect to the drugs that go from the 
producer to the wholesaler to the drugstore, is essentially as 
safe as the chain of custody in the U.S.?
    Dr. Lutter. FDA has no particular expertise in the 
regulatory system of Canada.
    Senator Dorgan. The FDA has already answered that question 
affirmatively previously.
    Dr. Lutter. But, in general, it is very, very well 
respected as being safe and adequate for Canadians.
    Senator Dorgan. Essentially has the same type of chain of 
custody with the same safety circumstances as the U.S.?
    Dr. Lutter. It's widely seen that way.
    Senator Dorgan. And that's what the FDA has previously 
said. If that's the case, then at least you and I can probably 
agree that the importation of that drug purchased in the one-
room pharmacy in Emerson, Canada, brought back across the 
border, is not a safety issue. Is that correct?
    Dr. Lutter. There are a collection of safety issues that 
people need to be concerned about. In January of last year, we 
issued a report on our website dealing with confusing brand 
names. And it illustrates an example that many people don't--
aren't aware of, of a regulatory function performed by FDA in 
the United States that many people recognize is valid, which 
isn't often appreciated, and that is that in the United States 
when a new product comes to market, we ascertain whether or not 
the proposed brand name for that product is one that is similar 
to existing brand names, or so close that it could be confused 
by pharmacists dispensing medications. In the case of Americans 
taking prescriptions and filling them abroad, there's no such 
function provided by FDA or any other regulatory body. So, 
Americans taking prescriptions, even crossing the border, if 
you will, to a pharmacist that they think is entirely reliable 
in other circumstances, should be aware that the name of the 
product does not necessarily translate across the border to one 
that is otherwise equivalent.
    Senator Dorgan. Yes. Well, that's the--a new defense, the 
confused-pharmacist defense, I guess. I don't understand. I 
don't understand, at all, why the FDA, given the resources--and 
our legislation gives them the substantial resources they 
need--cannot do what others in the world are able to do, and 
that is stand up for the consumers of this country, give them a 
safe supply of drugs, allow a little market--a little bit of 
the market system to play a role in putting downward pressure 
on market prices. What you are supporting, Dr. Lutter, is a 
circumstance in which we do have price controls in this 
country. The price controls are imposed by the pharmaceutical 
industry. They're the ones that impose the price controls. And, 
by the way, they say, ``Well, we really can't make any money, 
except in the U.S. That's why we have to charge the U.S. 
consumer the highest prices.'' Well, why did they repatriate 
60-plus-billion dollars when this Congress, regrettably, gave 
them a five and a quarter percent--gave all industry a five and 
a quarter percent sweetheart tax rate if they could--if they 
would repatriate money from abroad. The pharmaceutical industry 
repatriated 60-plus-billion dollars. Clearly, they're making 
money elsewhere by charging much lower prices.
    And I--you probably detect I'm enormously frustrated, have 
been for a long while, with the FDA coming here, telling us 
what they can't do. I'm very interested in finding out what 
they can do to try to help consumers. And I think, you know, 
your first consumer's ``bait and switch''--I think yours was 
``bait and switch.'' You came, talking about counterfeit drugs. 
There's nothing in legislation that any of the four of us have 
been talking about that has anything to do with counterfeit 
drugs. It has to do with safe reimportation of FDA-approved 
    Senator DeMint?
    Senator DeMint. Dr. Lutter, I, too, am disappointed in the 
testimony. We all know that the status quo is not acceptable, 
and we know denying importation and not having any kind of 
approval or certification is not working. The whole point of 
this legislation is to create a safe system.
    Am I right in saying that the FDA oversees the importation 
of fruits, vegetables, meats, fruit juice, beer, wine from all 
over the world? Do you have a system that does that?
    Dr. Lutter. We inspect those products at the border, yes, 
    Senator DeMint. But you're responsible for the health of 
the American people when it comes to products coming in from 
all over the world that we eat and drink.
    Dr. Lutter. We are responsible for the safety of food and 
beverages that we regulate, yes.
    Senator DeMint. And I would assume that's a very complex 
system of understanding points of origin and what is brought 
in, who the suppliers are. I assume the FDA is very involved 
with making sure that these products are safe.
    Dr. Lutter. These products, unlike drugs, do not contain 
active pharmacological ingredients that are being prescribed to 
sick people.
    Senator DeMint. But they could have disease, they could be 
tainted, there could be a lot of dangers, right?
    Dr. Lutter. There are problems of food-borne illness, and 
we actively fight that domestically in imported products.
    Senator DeMint. OK. Are you aware that most of the--or a 
lot of the drugs that are made in this country are made from 
imported ingredients?
    Dr. Lutter. I'm aware that there's active trade, if you 
will, in active pharmaceutical ingredients.
    Senator DeMint. Does the FDA inspect these foreign plants 
where these ingredients are made?
    Dr. Lutter. We inspect facilities where active 
pharmaceutical ingredients are manufactured.
    Senator DeMint. Well, isn't it possible that the line you 
inspect is not the line they actually ship these ingredients to 
the United States?
    Dr. Lutter. I suppose it's possible. The question is 
whether or not it would be violating our regulations. And I'd 
have to get back to you on that.
    Senator DeMint. Is it not the exact same situation you're 
saying you can't do with finished products?
    Dr. Lutter. I'm not sure I follow your questioning.
    Senator DeMint. Is not the situation with finished 
products, as far as developing some international safety 
system, very similar, if not exactly the same, as assuring that 
the ingredients for the same pharmaceuticals----
    Dr. Lutter. Yes----
    Senator Dorgan.--are safe?
    Dr. Lutter.--Senator, let me try--if I could try and answer 
your question, and that of Chairman Dorgan, in a slightly 
different way. And I'm sorry that you're disappointed with the 
testimony. I thought I was being invited to talk about policy 
implications of imported drugs, broadly, rather than the 
particular bill that you're----
    Senator DeMint. We're well aware of the Administration's 
position, and we really didn't need that repeated today. And we 
have--there are several good proposals, with a lot of detail, 
which the Administration is very aware of. There's no reason 
that we can't have some testimony as to what the possibilities 
are of creating these safety--or safeguards that we've got in 
this legislation. So, I--forgive me for being impatient, but I 
see a lot of inconsistency in what we're talking about. If the 
drugs that are made in this country come from ingredients from 
inspected plants, you're telling me that you can somehow 
guarantee that safety, but, if they're made here and put in 
tamperproof containers and sent to some other country that is 
within an FDA-inspected distribution system, that somehow 
that's not safe. It--I hope you realize that what you're saying 
is very difficult to absorb.
    Dr. Lutter. A key concern that we have with, I think 
broadly speaking, the type of proposal that you're endorsing 
is, the implications for FDA of having to approve the foreign 
products, because you're asking me to speak particularly about 
the legislation. I'm not prepared to offer technical 
assistance, but I have been briefed on the broad theme, so let 
me speak a little bit about----
    Senator DeMint. You do know what we're doing now, as far as 
inspecting plants for the ingredients of pharmaceutical 
products that are made in this country--foreign plants. I mean 
you're aware of your policies and procedures, and how that's 
done--I'm assuming you are.
    Dr. Lutter. Yes.
    Senator DeMint. OK.
    Dr. Lutter. But then if the proposal were for the FDA to 
allow commercial importation of FDA-approved products that are 
made abroad, presumably it's the foreign versions of FDA-
approved products that are already for sale in the United 
States. If that were the legislative proposal that's being 
considered, then I think the question is, what does this really 
mean for FDA program management and the review of such 
applications? And one way of thinking about this is, really it 
amounts to a substantial new FDA program that would review 
applications for foreign products to see if they're safe, 
effective, and equivalent to U.S. products. So, it looks a 
little bit like our generic drugs program. And our generic 
drugs program currently has roughly 200 employees who are 
approving 500 abbreviated new drug applications annually. And 
that gives you some idea of the magnitude of the task that we 
would be faced with if one were to set up a program wherein we 
would have to approve foreign products as safe and effective 
and equivalent to U.S.----
    Senator DeMint. You realize what we're asking----
    Dr. Lutter. We believe this is a very, very significant 
expansion of an existing FDA program.
    Senator DeMint. But you realize what we're asking is not to 
approve a drug that's made in another country, but just to 
create a safety loop of distribution, that we can oversee, 
that's primarily reimporting products that were made in the 
United States, under FDA approval and certified plants, that 
    Dr. Lutter. But it's----
    Senator DeMint.--reimported into this country.
    Dr. Lutter. Senator, I'm not familiar with the details of 
the legislation that we're discussing. If you want technical 
assistance--on it, I'm very happy to come and offer that at a 
later time.
    Senator DeMint. Well, I think that's probably what we're 
going to need to do.
    Thank you, Mr. Chairman. I yield.
    Senator Dorgan. Let me call on Senator Snowe, as the--OK, 
Senator Vitter.
    Senator Vitter. Thank you, Mr. Chairman.
    Dr. Lutter, I take it that your testimony comes out of the 
FDA's central mandate to protect safety, including of 
prescription drugs. Is that correct?
    Dr. Lutter. Yes, sir.
    Senator Vitter. Is there any greater mandate or 
responsibility that FDA has?
    Dr. Lutter. Our overall mission is to protect and promote 
public health, and that's our overall mission.
    Senator Vitter. So, is there any other--is there any 
greater mandate than that safety----
    Dr. Lutter. No.
    Senator Vitter.--concern that you have? And so, these sort 
of problems and dangers are very concerning to you because of 
that mandate, I assume. Is that correct?
    Dr. Lutter. Yes, sir.
    Senator Vitter. So, what regulatory regime--what solution 
are you putting in place in light of these dangers?
    Dr. Lutter. These dangers are very problematic from the 
viewpoint of protecting Americans and promoting--their public 
    Senator Vitter. That's my point. So, what's the FDA's 
solution to this?
    Dr. Lutter. Our key solution--I need to back up and say why 
this is so problematic, and then I'll elaborate on the 
solution. This is very problematic precisely because there's a 
huge volume of imported parcels coming into international mail 
facilities, which contain unapproved products. We don't know 
where they're from, we don't know what they are, and we lack 
the resources, we lack the ability to identify what they are at 
the border, and to stop them. Therefore, our key program is to 
emphasize, instead, public education, to tell consumers what 
risks they face buying these products on the web. Everybody has 
a home computer, they think they can click on the keyboard, 
they think they can find an international website, they see 
somebody reassuring, wearing a white coat and with a 
stethoscope, and they think they can buy something that is what 
their doctor really wants them to have and is equivalent to 
what their U.S. trained and licensed pharmacists would give. 
And they discover, instead, that that's not the case. And we 
think that our key job, and one of the most effective ways that 
we can communicate these risks is to go public with them. And 
that's why what you see here is a collection, if you will, of 
the messages that we've communicated to the public and to you. 
They're on our website, they're in our press releases over the 
last year and a half, indicating--in fact, going way back 
before then, about the risks that Americans face when they buy 
these drugs on the Internet----
    Senator Vitter. So protecting safety is your top mandate. 
This sort of stuff is happening. You have highlighted that. 
That's a big danger. And so, the FDA response is to tell 
people, ``Don't do it.'' That's basically the solution, the 
FDA's solution.
    Dr. Lutter. That has been the----
    Senator Vitter. How has that strategy been working? How 
effectively have you reduced the activity of getting drugs from 
abroad? What are the statistics there?
    How's that strategy working?
    Dr. Lutter. We wish we had statistics on that. We do not. 
The best available statistics that we have to date are the ones 
that we released in December 2004, and we have no updates since 
then. It's very difficult for us actually to count the volume 
of drugs coming in at the border, because we don't always know 
what parcels are containing pharmaceutical products.
    Senator Vitter. And what were those statistics from 
December 2004?
    Dr. Lutter. December 2004, we estimated, given the data 
that we had, that there were 10 million parcels arriving 
annually at international mail facilities, and they contained 
roughly 25 million prescriptions.
    Senator Vitter. And was that on the rise, or was----
    Dr. Lutter. That had definitely been rising over--relative 
to recent years.
    Senator Vitter. OK. You get the sense that, in light of 
your solution to the problem, that that trend has been 
reversed? Do you think it's declining right now?
    Dr. Lutter. The broad perception is that it has declined, 
but it's unclear as to why. The key reason that it may have 
declined is the success of Medicare Part D, which provides 
prescription drug coverage to elderly Americans over 65.
    Senator Vitter. Well, maybe I'm just out of step with the 
broad perception. It is not my perception that it has declined. 
It is my perception that it's increased 50-fold, up to the 
point that you are talking about, and has continued to grow 
from that point. I don't know at what rate. I don't know if the 
pace has slowed. But my perception is that it is a curve that 
is going up and up.
    So, I would just suggest that, when the FDA's top mandate 
is safety, when the FDA knows there are problems out there, and 
dangers, and your only solution is press releases that say, 
``Beware,'' I would propose that it's patently clear that that 
is a failed strategy and that if you take your mandate 
seriously, you'd better do something else, like a regulatory 
regime. What's your response to that?
    Dr. Lutter. Well, the regulatory regimes that we implement 
are under the authority of the laws that we've been entrusted 
to administer. And the key challenge here with respect to the 
international mail facilities, it's virtually impossible. My 
predecessor testified it would take an army to actually 
identify what are the problems--what parcels at the border 
contain pharmaceutical products and what they are, given the 
procedures and the due process that we're asked to follow. We 
cannot stop these at the border with the resources that we 
have. And the key reason for that is essentially the 
impossibility of identifying what each parcel contains, and 
then examining them to see what they may contain before making 
decisions on what to do with them.
    Senator Vitter. Well, I would just end by saying I agree 
with you, it's impossible to set up that system to stop parcels 
at the border. What is possible is to regulate the sources that 
are allowed to come into the country to advertise those to the 
American people, so the American people have confidence in 
those sources, and use those sources. That's the sort of 
regulatory regime I'm talking about, which, of course, the FDA, 
right now, has full authority to implement.
    Thanks. I have no further questions.
    Senator Dorgan. Senator Snowe?
    Senator Snowe. Thank you, Mr. Chairman.
    You were saying that you don't have the resources. I think 
the point of this legislation is that we provide you the 
resources, and the funding provided in our bill was estimated 
by CBO as being more than adequate to implement this 
legislation and allow FDA to do what you would be required to 
do. So, if you had these resources, would you be able to do 
what is required in this legislation?
    Dr. Lutter. We believe there are a variety of technical 
issues associated with the legislation, as I understand it, and 
we probably should look forward to a different opportunity to 
offer the technical assistance that's been provided. But I 
think a key question is the ability to stop the imports at the 
border, at the international mail facilities; in particular, 
the ability to stop them, provided that there is a implicit 
message being conveyed through legalization of commercial 
imports about the safety of foreign products themselves. And 
the question is, even if one had a regulatory system that 
allowed for FDA review of the foreign equivalents to ensure 
that those were safe and effective, and we were given adequate 
resources to ensure that, and then, of course, we'd have to see 
whatever resources--whether these were, in fact, adequate--but, 
even if we had that, there's a question of, how do you actually 
stop the problem that Senator Vitter has just alluded to at the 
    Senator Snowe. Well, I don't think there's anything magical 
about it. It's really having the will to do it. I'm sensing 
you're either unable or unwilling. If we gave you the resources 
and gave you the statutory authority--and that's what we have 
outlined in this legislation, you know, that we import from 
manufacturers in more than 40 countries, where you may, on 
average, inspect a plant once every 7 years? In our 
legislation, we require inspections randomly, but not less than 
12 times a year--12 times a year for wholesalers which import, 
as well as for those exporting pharmacies which would directly 
serve consumers. So, you know, I just don't understand why 
we're hearing here today, I think, you know, bureaucratic 
intransigence about coming up with a way in which to allow it 
to happen. And, while you're talking about American consumers 
misled by buying drugs from ``bait and switch'' and Canadian 
websites. Well, FDA could list which ones are legitimate for 
consumers. I mean, why isn't there the can-do spirit? Instead 
it's can't-do, and we're seeing everything done to deny 
consumers access to affordable medications. And we are talking 
about brand name drugs. You were referring to generics earlier. 
What we're talking about is brand names, frankly, because 
consumers don't have access to affordable brand name 
medications. So, that's what our legislation addresses.
    Can you tell me, in the incidence of counterfeiting, what 
do you have for statistics here in the United States? Do you 
have a rate of counterfeiting? Because there's obviously a 
serious problem within our borders. Do we have a rate of 
incidence regarding counterfeiting?
    Dr. Lutter. Senator, if I could just go back to one----
    Senator Snowe. Yes.
    Dr. Lutter.--comment you made a moment----
    Senator Snowe. Yes.
    Dr. Lutter.--ago, about why we don't list legitimate 
foreign websites, and that's really that we have no ability to 
know which ones are legitimate, because they can take down 
their websites, they can change the names, we don't have 
authority to inspect foreign pharmacies to see what they're 
doing. So, as much as----
    Senator Snowe. Well, we would give you that, under our 
legislation. See, that's the----
    Dr. Lutter. We'd be happy to review that legislation in 
detail and get back to you on that.
    Senator Snowe. So--OK.
    Senator Snowe. Well, it is amazing that you weren't, 
because this has been an outstanding issue, frankly, for a 
decade here. I mean, this is not a new issue. I think Senator 
Dorgan introduced that bill, back in 1999--and in 2000 we saw 
the MEDS Act passed. Now we have, you know, run the gamut on 
establishing the standards and getting advice from all, you 
know, corners on this debate, and perspectives, and getting the 
very best advice how to go about certifying it.
    So, on the rate of incidence of counterfeiting within our 
borders, do you have any idea what the magnitude is?
    Dr. Lutter. We had a public meeting as part of a 
counterfeit drug task force in February of last year. We were 
very concerned about developing an estimate. We asked that of 
all the attendees in the public meeting, and we got no reliable 
estimates of the prevalence of counterfeit drugs in the United 
States. That's essentially because it's extremely difficult 
even for a trained pharmacist to distinguish between an 
authentic and a counterfeit product. We have opened, last year, 
54 new criminal investigations into counterfeiting in the 
United States. That's a significant increase in the rate of 
newly opened counterfeit cases relative to about 6 years ago, 
around 2000. We'd had several years in a row where we were 
opening less than ten cases annually. So, in that sense, what 
we perceive is that there's increased sophistication, increased 
networks establishing counterfeit drugs in the United States, 
but we have no estimates on the prevalence. We believe that 
it's very low. We believe that the overwhelming share of all--
of finished pharmaceutical products sold in the United States 
are safe and effective, genuine FDA-approved articles.
    Senator Snowe. Well, we wrote a letter to the Commissioner 
of FDA, back in October, asking for details upon which blanket 
warnings are issued regarding counterfeit drugs. Do you have 
any specific data on seizures of prescription drugs at the 
border? Do you have any data so that we know specifically what 
the basis was for claims of counterfeiting?
    Dr. Lutter. Well, I think it depends a little bit on the 
nature of the seizure. Some of them are ongoing criminal 
investigation cases, so I'm not sure that's something that we 
wish to talk about. In other instances, we have conducted 
blitzes of intercepting all products, and partly to motivate 
the public health messages, that we think are so important to 
communicate to the American public the risks of imported drugs. 
And, in those instances, we undertake some analysis of the 
nature of the products, yes.
    Senator Snowe. Well, the--first of all, I think that would 
obviously be helpful to everybody to know exactly what was the 
basis for the seizure, what was the information and data to 
support it, what was it all about, because it would be helpful 
to everybody to know exactly, you know, what issues were 
involved, useful to all of us in this process. But I guess the 
point here is the need to be setting up a system. And, you 
know, I sense that if you have the resources, and the statutory 
authority, it could be done. I mean, we do oversight in over 40 
countries, in terms of manufacturing medications that come in 
use here in the United States.
    So, what's the issue, really?
    Dr. Lutter. The letter accompanying the December 2004 HHS 
Task Force Report on Importation was signed by Secretaries 
Thompson and Evans of Commerce, and it outlined conditions 
under which commercialized drug importation, could in 
principle, would have to be satisfied in order for it to be 
done safely. And those are available there. I think you're 
familiar with several of them. It's included that it should be 
limited to Canada, and it said that it should be limited only 
to a set of drugs that was relatively high volume and where 
there was reason for there to believe that there would be 
significant savings. And it also limited it to products where 
there are no special handling concerns, such as biologics or 
injectables, which are relatively easy to counterfeit, that 
these are issues that were outlined there, and that we share as 
being important to address in any potential legislation.
    Senator Snowe. Yet, on the other hand, you know, we can 
talk about the European Union being engaged in parallel trading 
for 30 years without consequence, without incidence. There has 
been a truly remarkable track record. There's no reason why we 
can't import, based on the safety standards that have been 
included in this legislation and the resources which the bill 
provides to do it, and the requirement for numerous inspections 
on the part of the FDA. So, I think that, when you consider all 
of that, it's a very different system. We just don't employ a 
simple certification, we set which standards have to be in 
place, and the resources in which to do it. And I think that's 
the critical difference from other approaches.
    Thank you, Mr. Chairman.
    Senator Dorgan. Thank you.
    Dr. Lutter, because of the confusion here, what I'd like to 
do is send you a series of questions about the legislation that 
I have described, and ask for the FDA's response to those 
questions, giving us your evaluation of the safety provisions 
in the legislation. So, we will do that--with your willingness 
to respond to them, we'll do that within the next week, get 
those questions to you.
    Dr. Lutter. Thank you.
    Senator Dorgan. All right. Thank you for being here, Dr. 
Lutter. Thank you for your testimony.
    The second panel today that we will hear from will be Billy 
Tauzin, CEO of PhRMA. Bill Tauzin is a former colleague of ours 
who served in the U.S. House for many years. John Vernon is a 
Professor of Finance at the University of Connecticut. He has a 
Ph.D. from the City University of London, and a Ph.D. in Health 
Policy and Management from the Wharton School of Business, 
University of Pennsylvania. Stephen Schondelmeyer is Professor 
and Head of the Department of Pharmaceutical Care & Health 
Systems, University of Minnesota. William Schultz is a Partner 
at Zuckerman Spaeder, LLP, previously was Deputy Commissioner 
for Policy at the Food and Drug Administration. And, finally, 
Nelda Barnett, a Member of the Board of Directors of the AARP.
    We thank the five of you for being with us today. And I--we 
will begin with our former colleague, former Congressman 
    Mr. Tauzin. Mr. Chairman, thank you very much.
    Senator Dorgan.--if you will pull that microphone closer to 
you, we'd appreciate it--you may proceed.


    Mr. Tauzin. Thank you very much, Senator.
    I haven't had the chance to be on this side of the podium 
for a while, so let me first thank you, Senator, for allowing 
me to come and visit with you today on this important topic. 
You've pinned it correctly, it is a matter of life and death. 
And I want to talk a little bit about that today.
    I've given you an extensive written testimony. I won't read 
that, but I'll call your attention to parts of it, beginning on 
page 2, which tell the story about where we've been, so that we 
can get some idea about where you and others might want to go, 
or not go, in the future, when it comes to drug safety in our 
    I was in the Congress in 1987 when Chairman John Dingell 
executed a series of hearings on this important topic. I was 
then a Democrat, working with Chairman Dingell on the issue, 
and we had some extraordinary hearings. It was prompted by a 
discovery, in 1984, that nearly 2 million counterfeits of G.D. 
Searle's Ovulen 21 birth control pills had been brought into 
our country as counterfeits. And there was a great deal of 
information developed in that series of hearings. I call it to 
your attention. You ought to go back and read it. It basically 
describes why the 1988 PDMA was passed, why Congress, in 1988, 
decided to prevent the reimportation of drugs that have left 
the control of the manufacturer and had gone out into the 
marketplace in other countries, and might be part of the 
process of reimporting those products into our own country 
after they've left that chain of control.
    The Commerce Committee, in that series of hearings, 
concluded, and I quote, that the--``permitting reimportation of 
U.S.-origin goods prevents effective control of even routine 
knowledge of the true sources of merchandise in a significant 
number of cases.'' It went on to say that, ``the reimportation 
resulted in pharmaceuticals which had been mislabeled, 
misbranded, improperly stored, or shipped.'' As you know, it's 
not just whether the drug contains the right content, it's how 
well it's been handled, whether it's been refrigerated 
properly, handled properly, stored properly, labeled properly. 
In fact, we concluded that reimportation resulted in those 
pharmaceuticals entering the country that had exceeded their 
expiration dates or were flat-out, bald counterfeits, and that 
they were being injected into the national distribution system 
for ultimate sale to American consumers.
    The Committee further concluded--and this is very, very 
important, Mr. Chairman--that the very existence of the market 
for reimported goods here provides the perfect cover for 
foreign counterfeits, and, as a result of those findings, 
Chairman Dingell, the Congress, in the House and the Senate, 
concurred in the adoption, in 1988, of the prohibition against 
reimportation. There was an exception. The exception was, as 
you described it today, for the manufacturer, the original 
manufacturer in a foreign country, to be able to ship into this 
country. However, in those cases, the manufacturer controlled 
the chain of custody, from the plant inspected by the FDA all 
the way through the market into the United States. In effect, 
we, in 1988, said, ``Look, we're not going to let drugs that 
have gone out of the chain of custody come back into this 
country, because we can't trust it. Counterfeiting is too 
serious,'' in 1988, ``for us to trust that system.'' We said, 
``We're going to put it on the backs of the pharmaceutical 
industry to be responsible, from the manufacturing plant 
overseas to the consumer in America, for that chain of custody, 
and the FDA will manage that inspection and that safety 
system.'' We, in effect, created a closed regulatory system to 
protect American consumers from the dangers of these imports.
    Now, that was 1988. And the simple question I ask you today 
is, have things gotten better or worse? Madam Snowe, you asked 
that question, just a minute ago, ``What's the status? Is it 
getting better or worse?'' Mr. Vitter, you asked it, ``What's 
the status in this country?'' I call your attention to two 
articles, one of which I'll send over to the desk, which is an 
article that was included in Parade magazine in The Washington 
Post on March 5. What I want to quote from, a New York Times 
article that came out on February 20 entitled ``In the World of 
Life-Saving Drugs, a Growing Epidemic of Deadly Fakes.'' For a 
long time in this debate in Congress, the question has been, 
show us the bodies, where are the bodies? Well, the bodies are 
piling up all over the world. Read the article. According to 
this article, estimates of deaths now caused by fakes run from 
the tens of thousands a year to 200,000 or more. The World 
Health Organization has estimated that a full fifth of the 1 
million annual deaths from malaria would be prevented if the 
medicines, in fact, were genuine and were taken properly. China 
is obviously the biggest problem, the source of most of these 
counterfeits. The article goes on to say that the 
counterfeiters in China are not selling them to the Chinese. 
They're smarter than that. They understand they'd get hauled 
off to jail if they start killing Chinese citizens with fake 
drugs. The article goes on to say they don't want anybody 
beating down the door in the middle of the night, dragging them 
away, so they make their drugs for sale outside the country. It 
goes on to say that not only do the pills look correct, as did 
the cardboard boxes and the blister packaging and the foil 
backing, but they found 12 versions of tiny holograms added to 
prevent forgery, even a secret X-52 logo visible only under 
ultraviolet light was present.
    What they're basically saying is, they can't tell the 
counterfeits from the real products anymore. When they're out 
of that chain of custody, when you permit them into this 
system, you're literally allowing an open door for those types 
of products to come into America.
    The most frightening aspect of what's going on in the 
world, Mr. Chairman, is that these counterfeiters are beginning 
to make drugs that appear to work. For example, they'll contain 
drugs that apparently fool the patients into thinking the pills 
are working. The Parade article tells the real story. It's not 
necessarily the toxic chemicals that are found in a counterfeit 
drug that are killing people. It's the fact that they're 
getting drugs that don't contain the active ingredients that 
you're supposed to have to get people healthy and to battle 
    Now, it's one thing for your constituents to walk across 
the border and to buy a drug if they really want to take that 
chance in Canada. By the way, I've got a letter from Canada 
saying they will not, and cannot, be responsible for the safety 
of drugs imported from Canada into the United States. That's 
our job, over here, to make sure it's safe. And it's one thing 
for a citizen to voluntarily walk across the border and buy 
those drugs; it's another thing for me to bring my child to a 
hospital, in America, where those counterfeit drugs have been 
brought in and mixed in with the safe system we have, and for 
me not to even know that my child is getting a drug that is not 
only doesn't contain the ingredients necessary to save his 
life, but, in some cases, may be diluted, polluted--even 
contain pond water, in some cases, we've discovered. So, it is 
a matter of life or death, Mr. Chairman.
    Now, as I said, some things have changed since 1988. You 
know, I'm no longer a Democrat. I became a Republican. I'm no 
longer in Congress. I left. Some people say both of those are 
good things. But the bad thing is, this is getting worse, not 
better. And opening the door to it, to American consumers, who 
unknowingly will be taking these fake products in increasing 
numbers, is the scariest thing I can think of right now.
    Look at the Parade article. The Parade article talks about 
600,000 Lipitor tablets that were discovered, counterfeited, 
received by patients like you, taking them, thinking they're 
taking the cardiovascular medicine they need, and taking 
nothing but cornstarch. Fake products. Look at it, and you'll 
see some numbers, Senator Snowe and Mr. Vitter, 40 million 
estimated by the National Association of Boards of Pharmacy in 
this country--40 million fake prescriptions already in America, 
getting worse. And we're only a 1 percent problem, according to 
them. In the world, it's becoming a 20-percent problem. In the 
parallel trade in Europe, it's growing rapidly. Three countries 
in the former Soviet Union are now in the EU, and the 
counterfeits in those countries are enormous. In Borat's 
Kazakhstan, for example, our researchers tell us, 50 percent of 
the drugs there are likely counterfeit. The same is true in 
Mexico today.
    Open those borders, given our closed regulatory system, and 
open it up to those drugs, that's what the FDA's trying to tell 
you would be a serious mistake for consumers in America. That's 
the life-or-death decisions we have to make here.
    Let me conclude. When I officially retired from Congress in 
2005, I was already gone. I had left in 2004, when I was 
diagnosed with cancer, as you know.
    I didn't leave to take a job with the pharmaceutical 
companies or the Motion Picture Association. I left to go to 
Johns Hopkins and M.D. Anderson to battle for my life. And 
there were some tough moments. I took the last sacrament and 
said goodbye to my family during that process. I got a very 
generous finding at M.D. Anderson, that I had a five percent 
chance to live. Thanks a lot. But somehow I survived.
    And in that worst year of cancer, of surgery and treatments 
and chemo and radiation, they gave me 3 weeks off. I took one 
of those weeks to come to work here in Congress. That's the one 
week I spent working with you in 2004, when I left for cancer 
treatment. And I gave one speech to Congress. I've got a copy 
with me today. That speech I gave was to the Appropriations 
Committee on the House side. It was a Cassandra warning. I 
brought it to you. I'll give it to you, Mr. Chairman. It was a 
warning. It was a plea to Congress to please end the filibuster 
in the Senate and pass the energy bill that contained $20 
billion for my City of New Orleans, Mr. Vitter, to save us from 
what happened. I talked about going down and seeing the 
simulation of the storm that was coming. I talked about the 
fact that New Orleans was about to drown. And I begged 
Congress, in that one appearance in 2004, not to have to come 
back one day with a red-faced commission and admit that we 
could have stopped it and we didn't do anything about it before 
it happened. I concluded with these words, ``Please help me 
place into law some system that the Corps and the great people 
of my state can collectively work to begin doing something 
about the 35 square miles of wetlands. That's the only--that 
the critical land mass--that's the barrier between us--life and 
death. That's the barrier between us and the storms that churn 
in the Gulf that are about to destroy not only the cities and 
the communities, but the lives of the people I represent.'' 
That was the one speech I gave in 2004. Nobody listened.
    I'm going to ask you, please, Mr. Chairman, as one who's 
just gone through it, who's had to count on a medicine to save 
my life, whatever you do on this issue, take seriously the 
admonitions of Donna Shalala, take seriously the admonitions of 
Tommy Thompson, take seriously the admonitions of the current 
Secretary, when they tell you that they cannot--they cannot, 
today, stop this flood of imports that is only a one percent 
problem in America today, that's a 20 percent problem in the 
    Senator Dorgan. Mr. Tauzin----
    Mr. Tauzin. It is a matter of life or death. Don't accept 
responsibility for the consequences of opening that door wide 
open to all of these fakes.
    Senator Dorgan. Mr. Tauzin----
    Mr. Tauzin. Thank you, Mr. Chairman.
    Senator Dorgan.--thank you very much.
    [The prepared statement of Mr. Tauzin follows:]

   Prepared Statement of Hon. W.J. Billy Tauzin, President and CEO, 
      Pharmaceutical Research and Manufacturers of America (PhRMA)
    Mr. Chairman, Senator DeMint, and Members of the Subcommittee:
    Thank you for the invitation to participate in today's hearing on 
pharmaceutical importation. My name is Billy Tauzin and I am the 
President and Chief Executive Officer of the Pharmaceutical Research 
and Manufacturers of America (PhRMA). PhRMA is the Nation's leading 
trade association representing research-based pharmaceutical and 
biotechnology companies that are devoted to inventing new, life-saving 
medicines that help achieve longer, healthier, more productive lives.
    Much has changed since the debate over legalizing importation began 
nearly a decade ago. Unlike the situation in 2000, millions of seniors 
who lacked prescription drug insurance and were paying for their 
medicines out-of-pocket now have comprehensive prescription drug 
insurance through Medicare Part D. Today, we know much more than we did 
in 2000 about the growing problem of counterfeiting and the seriousness 
of the problem. Moreover, we have evidence that foreign governments are 
not willing or interested in taking responsibility for assuring the 
safety of drugs imported into the U.S.
    My testimony today begins by reviewing current law governing drug 
safety and importation. This portion of my testimony also explains that 
importation would effectively circumvent the other drug safety 
provisions carefully constructed over the course of nearly a century. 
My testimony then focuses on five main points: (1) Importation opens 
our borders to drugs from anywhere in the world and there is no 
plausible way of limiting importation to Canada or Western Europe; (2) 
Safety testing, inspections, chain of custody requirements and other 
attempts to ``guarantee'' safety provide no assurances that imported 
drugs will be safe; (3) Projections of potential cost-savings from 
importation are very small and the largest beneficiaries are 
arbitrageurs; (4) Importation is not free trade, it is price controls 
which lead to delays and denials in patients' access to medicines; and 
(5) There are better, safer alternatives for patients to access needed 
medicines, including the Partnership for Prescription Assistance (PPA) 
and Medicare Part D for seniors and the disabled.
Overview of Current Law Related to Importation
    Over the years, a number of bills have been proposed that would 
legalize the commercial and personal importation of unapproved 
prescription drugs from foreign countries. It is my belief that opening 
our closed system in this way would circumvent a system that was 
carefully constructed and developed over the years to protect the 
health and safety of the American public.
    The regulatory system that governs development, approval, and 
marketing of new drugs in the United States is the most complex and 
comprehensive in the world. To ensure that Americans have the safest 
drug supply in the world, it has become increasingly comprehensive and 
more robust over time. As far back as 1938, the Federal Food, Drug, and 
Cosmetic Act (FDCA) \1\--which remains in place today--prohibited the 
marketing of any drug not shown to be ``safe for use under the 
conditions prescribed, recommended, or suggested'' in its labeling.\2\ 
In 1962, the Food and Drug Administration (FDA) obtained explicit 
authority to demand proof that a drug is effective and to prescribe the 
tests that a manufacturer must perform before its product can be 
approved for marketing.\3\ Since that time, several amendments have 
expanded, strengthened, and refined the regulatory scheme.\4\ These 
include the Prescription Drug Marketing Act of 1987 (PDMA), under which 
Congress, following an investigation of incidents of counterfeit drugs 
reaching American consumers, closed the U.S. prescription drug supply 
to products that have circulated overseas, beyond the jurisdiction of 
FDA and outside the control of the manufacturer.
    As a consequence of this comprehensive framework, FDA currently 
regulates virtually every stage in the life of a prescription medicine 
sold in the U.S., from pre-clinical testing in animals and human 
clinical trials before the medicine can be marketed, to manufacturing, 
labeling, packaging, and advertising when the drug is marketed, to 
monitoring actual experience with the drug after its sale to consumers. 
In particular, the FDCA prohibits the introduction into interstate 
commerce of any ``new drug'' (which covers virtually every prescription 
drug) that is not the subject of a FDA-approved new drug application 
(NDA) or abbreviated new drug application (ANDA).\5\
    Importation of a prescription medicine constitutes introduction of 
that medicine into interstate commerce and thus is subject to the FDA 
approval requirement.\6\ If a company that holds an approval for a drug 
manufactures a version of that drug product in a plant that is not 
listed in the relevant NDA or ANDA or fails to manufacture according to 
specifications in the approved application, FDA considers that version 
an unapproved drug, and it cannot be imported or otherwise introduced 
into interstate commerce.\7\ Foreign versions of drugs that are 
approved in the United States often are manufactured by companies that 
do not hold an approved NDA or ANDA. Even if the foreign version is 
made by a company with a U.S. approval, the foreign version often does 
not comply with the terms of the approved NDA or ANDA and thus is 
unapproved. That is because the U.S. has some of the toughest drug 
approval requirements in the world. For these reasons, the importation 
of a drug purchased in a foreign country will usually violate the 
statutory requirement for FDA approval--requirements that have been 
established to protect consumers and that no one would advocate 
repealing. Yet permitting importation of drugs not meeting these 
standards would have the same effect as repealing current consumer 
protections, since these unapproved drugs would be mixed into the U.S. 
drug supply.
    There are occasions where some drugs that are available overseas 
are manufactured in the United States and then exported. But in those 
instances, the FDCA prohibits the importation (or ``reimportation'') of 
these drugs, even if they are manufactured in full compliance with the 
approved NDA.\8\ Congress added this prohibition on reimportation to 
the law in the PDMA, following a series of hearings that documented 
adulterated and counterfeit drugs entering the U.S. In 1984, for 
instance, nearly two million counterfeits of G.D. Searle's Ovulen 21 
birth control pills were found to have been shipped to Miami and New 
York from Panama. Based on a robust record and exhaustive 
investigation, the U.S. House of Representatives Committee on Energy 
and Commerce concluded that permitting reimportation of U.S.-origin 
goods ``prevents effective control or even routine knowledge of the 
true sources of merchandise in a significant number of cases.'' \9\ The 
Committee further found that reimportation resulted in 
``pharmaceuticals which have been mislabeled, misbranded, improperly 
stored or shipped, have exceeded their expiration dates, or are bald 
counterfeits, are injected into the national distribution system for 
ultimate sale to consumers.'' \10\
    The Committee also concluded that ``the very existence of the 
market for reimported goods provides the perfect cover for foreign 
counterfeits.'' \11\ As a result of these findings and the conclusion 
that reimportation posed a grave risk to consumers, Congress prohibited 
the reimportation of approved drugs that have left the United 
    There is an exception for the original manufacturer, who is an 
integral part of this closed regulatory system and subject to FDA 
authority and oversight at all times.\13\ However, in such instances, 
the manufacturer's own importation of drugs that have never been 
outside its control is comparable to shipments between its 
manufacturing plants and warehouses within the United States. It is 
entirely different from the importation of drugs that have been placed 
into the wholesale and retail distribution systems of foreign 
countries, where they are no longer subject to FDA jurisdiction.
    Notably, FDA has a very limited exception to the statutory 
prohibition on importation of unapproved drugs which it developed in 
the early 1990s when it announced a policy of ``enforcement 
discretion'' with respect to personal importation of certain unapproved 
drugs.\14\ Under this policy, FDA personnel may permit the importation 
of a drug if: (1) it is clearly intended for personal use; (2) the 
intended use of the drug is clearly identified; (3) the drug is 
intended for treatment of a serious condition for which satisfactory 
treatment is not available in the U.S.; (4) the drug is not known to 
present a significant health risk; and (5) the drug is not approved in 
the U.S. FDA officials will presume commercial use, rather than 
personal use, if the supply exceeds what one person might take in three 
months. FDA guidelines direct agency personnel to look for either: (a) 
the inclusion of the name and address of a doctor licensed in the U.S. 
and responsible for the patient's treatment with the product, or (b) 
evidence that the product is intended for the continuation of treatment 
begun in the foreign country. However, the personal use policy does not 
apply to the importation of unapproved foreign versions of drugs 
available in the United States, or to reimportation of drugs in 
violation of the PDMA. Rather, it applies only to the personal 
importation of drugs for which there is no approved U.S. source. This 
kind of importation remains technically illegal. The policy represents 
a limited exercise of enforcement discretion in the interest of 
individual patient treatment.\15\
    In 2000, Congress authorized an additional exception to the 
prohibition on reimportation. The Medicine Equity and Drug Safety Act 
(MEDS Act) added a new section 804 to the FDCA under which pharmacists 
and wholesalers would be permitted to import drugs from a list of 
designated countries, including Canada and the countries of the 
European Union.\16\ During the debate on the MEDS Act, however, 
concerns were voiced that section 804 would be ineffective (at reducing 
consumer prices) and unsafe (by allowing the influx of counterfeit and 
adulterated products). Congress responded to these concerns in part by 
delaying implementation until the Secretary of HHS could 
``demonstrate'' that the law would pose no additional risk to public 
health and safety and that it would result in a significant reduction 
in the cost of covered products. Secretary Donna Shalala concluded on 
December 26, 2000, that it was ``impossible . . . to demonstrate that 
[importation] is safe and cost effective.'' \17\ Similarly, Secretary 
Tommy Thompson, citing an analysis by FDA on the safety issues and an 
analysis by his planning office on the cost issues, decided not to 
``sacrifice public safety for uncertain and speculative cost savings.'' 
    As part of the Medicare Prescription Drug, Improvement and 
Modernization Act of 2003, Congress replaced the MEDS Act with a new 
section 804. Reimportation language was included in the drug benefit 
legislation--despite enactment of a prescription drug benefit for 
Medicare beneficiaries--primarily because proponents of importation 
were working separately from the Medicare conferees to address access 
issues. Notably, however, the drug benefit that became available to 
seniors in 2006 provides much safer and effective ways for Americans to 
access affordable medicines. Company and state patient assistant 
programs that can help the under and un-insured also exist. These 
options are all safer than the importation of foreign products.
    This reimportation language in section 804 of the FDCA differs 
markedly from existing legislative proposals. The legislation would 
only permit reimportation from Canada and it would require reimported 
drugs to comply with sections 501, 502, and 505 of the FDCA. In other 
words the drugs could not be adulterated, misbranded, or unapproved new 
drugs.\19\ Most importantly, the provisions require that the Secretary 
determine importation would be safe and create significant cost savings 
before it can proceed. To date, no Secretary has been able to make such 
a determination.
Importation of Medicines into the U.S. That Have Been Outside the 
        Jurisdiction of the FDA Is Inherently Unsafe
    Importation of medicines into the U.S. that have been outside the 
jurisdiction of FDA is inherently unsafe. There is no assurance that an 
imported drug meets FDA's stringent requirements for quality, purity, 
safety, effectiveness or proper labeling. As FDA has documented, many 
of these imported drugs are unapproved, contaminated, counterfeit, or 
have been stored, handled or shipped under substandard conditions.
    The current system has been effective in the U.S. for protecting 
public health, but it faces increased threats with the proliferation of 
Internet pharmacies outside the U.S. and outside the jurisdiction of 
FDA. The safety concerns that exist today are many. A recent example 
illustrates the potential dangers and reinforces concerns over 
proposals to legalize importation. According to FDA, recently patients 
ordering drugs online for depression and insomnia instead received 
schizophrenia medication that caused them to seek emergency medical 
treatment for breathing problems. Side effects ranged from muscle 
spasms to difficulty breathing. According to FDA, while none of the 
cases resulted in death, in at least three cases, patients required a 
trip to the emergency room.\20\ Legislation that would legalize the 
importation of medicines would place significant, additional burdens on 
our current system and will increase safety concerns that exist today.
    Proponents of importation believe that with certain modifications--
such as end product testing, chain of custody provisions, requiring the 
use of anti-counterfeiting technology, or limiting importation to 
Canada--importation can be done safely. The fact is no modification can 
guarantee safety that equals the safety of the current closed system 
that Congress established in 1987 precisely to protect consumers from 
the dangers of importation--dangers that have not abated in the 
intervening 20 years.
Limitations on Safety Testing
    The safety, quality, and authenticity of pharmaceutical products 
that are imported into the United States cannot be assured by 
inspection and/or testing programs to meet the levels of safety, 
quality and authenticity achieved in today's system. Although terminal 
testing (i.e., testing a product after it has been manufactured) may 
provide some useful information about product quality and safety, such 
testing is inherently limited and can never, by itself, guarantee the 
safety and quality of products as complex as pharmaceuticals. As the 
FDA and other experts recognize, the only way to assure the safety and 
quality of pharmaceutical products is to strictly control the 
conditions under which they are manufactured and distributed.
cGMP Requirements: Safety and Quality Cannot Be ``Tested Into'' A 
    FDA's current Good Manufacturing Practice (cGMP) regulations are 
based upon the fundamental quality assurance principle that quality, 
safety, and effectiveness ``cannot be inspected or tested into a 
finished product'' but instead ``must be designed and built into a 
product.'' \21\ FDA has reiterated this bedrock principle on numerous 
occasions, most recently in connection with its 2003 initiative to 
modernize the cGMP regulations.\22\
    Consequently, those regulations impose strict controls on all 
aspects of the manufacturing process, including (1) the qualifications 
and responsibilities of employees and consultants; (2) the design and 
maintenance of manufacturing facilities; (3) the design, construction, 
cleaning and maintenance of manufacturing equipment; (4) the receipt, 
storage, testing and acceptance of pharmaceutical raw materials and 
components, including containers and closure systems; (5) the 
manufacturing process itself, including reprocessing procedures; (6) 
the packaging and labeling of finished drug products; (7) the storage 
and distribution of final products; (8) required laboratory testing 
procedures; and (9) recordkeeping requirements.\23\ Failure to satisfy 
any of these cGMP requirements renders the affected drug product 
``adulterated'' and thus illegal in the United States--even if testing 
fails to reveal any obvious deficiencies in the product.\24\
    The cGMP regulations recognize that routine end-product testing is 
inherently limited and cannot be relied upon as the sole basis for 
assuring quality and safety for a number of reasons. First, many end-
product tests have limited sensitivity and may fail to detect 
substances, such as impurities or degradants that are present in a drug 
product at low levels.\25\ If these substances are dangerous at low 
levels or have an adverse effect on product quality (e.g., accelerate 
degradation of active ingredient), the end-stage testing will fail to 
reveal that the drug product may be unsafe, unstable or ineffective. In 
essence, such testing would yield an unacceptably high rate of ``false 
negatives,'' i.e., finding no quality or safety problems when such 
problems actually exist.
    Second, drug products often are extremely complex, and end-product 
testing does not reveal all variations that may occur in the product 
that may impact on safety and effectiveness. Even seemingly minor 
changes in manufacturing process or storage conditions may introduce 
variations in the product, such as new impurities, that cannot be 
predicted or easily tested. Oftentimes, these variations can have a 
significant impact on safety and effectiveness. For example, testing 
might be conducted to demonstrate that a drug product contains the 
proper strength of a specific active ingredient; however, such testing 
would not detect other variations in the product caused by 
manufacturing changes, such as increased pill hardness or contamination 
with cleaning chemicals, that could have a significant impact on safety 
and effectiveness. While dissolution and impurity testing might be 
added to the battery of tests conducted on the drug product, such 
testing still would not detect meaningful variations in the drug 
product, such as new or different impurities or changes in the drug's 
stability profile. Because of the complexity of drug products, end-
product testing simply cannot measure all of the possible variations 
that could affect safety and effectiveness.
    Because of these significant limitations, FDA does not rely upon 
terminal testing alone to assure the safety and quality of drug 
products. Instead, through application of the cGMP regulations, FDA 
seeks to minimize the variability in the manufacturing process itself. 
As FDA recognizes, safety and quality cannot be ``inspected or tested 
into'' a drug product; they must be built into the product through 
rigorous approval requirements and strict controls over the conditions 
under which drugs are manufactured and distributed.
Limitations of Safety Testing of Imported Drug Products
    These significant limitations on the use of end-product testing to 
assure safety and quality are not restricted to the manufacturing 
context but apply with even greater force to the importation context as 
well. Safety, quality, and authenticity cannot be ``inspected or tested 
into'' imported drug products any more than it can be inspected or 
tested into domestic drug products. These attributes instead must be 
built into imported drugs by strictly controlling the distribution 
system. The greatest assurance that drug products are safe, effective, 
and authentic comes from maintaining a closed, closely-controlled 
distribution system.
Testing for Counterfeits
    Counterfeit drug trafficking is one of the primary safety concerns 
associated with importation. FDA estimates that counterfeits make up 10 
percent of the global medicines market.\26\ The latest estimates by the 
World Health Organization (WHO), the Organisation for Economic Co-
operation and Development (OECD), and the Pharmaceutical Security 
Institute (PSI) show that ``. . . 50 percent of illegal Internet sales 
are counterfeit.'' According to the WHO, ``. . . the message for now 
is: do not take the risk of buying your medicines from unknown sources, 
such as the Internet. If you must buy from the Internet, ensure that 
the website is that of a pharmacy you know and trust.'' \27\
    A recent article in the Financial Times reinforces concerns with 
counterfeit medicines. A report by the International Narcotics Control 
Board, which monitors compliance with U.N. drug conventions, cited 
``growing concerns'' about the unregulated market for medicines that is 
exposing patients to ``serious health risks''. The report ``expresses 
concern about the rise in counterfeit drugs . . .'' and the health 
risks of the Internet medicines market. Financial Times reports that, 
``The findings mark the latest escalation in international concern 
about the mixing of criminal, narcotic and prescription medicines, and 
heightened worries about counterfeit drugs.'' \28\
    According to a February 2005 Business Week report, ``The global 
counterfeit business is out of control, targeting everything from 
computer chips to life-saving medicines.'' The story reported that, 
``Chinese police last year conducted raids confiscating everything from 
counterfeit Buick windshields to phony Viagra. In Guam, the Secret 
Service uncovered a network selling bogus North Korean-made 
pharmaceuticals, cigarettes and $100 bills.'' The report also found 
that Pakistan and Russia are ``huge producers of fake 
pharmaceuticals.'' \29\
    And, the problem is expected to grow quickly over the next several 
years. In fact, a study by the Center for Medicine in the Public 
Interest estimates that counterfeit drug sales will reach $75 billion 
in 2010, a 92 percent increase from 2005.\30\ Both the FDA and industry 
have grappled with this problem for years and have devised many 
strategies for combating the problem both domestically and 
internationally. Indeed, FDA issued its final report detailing new 
strategies for keeping counterfeit drug products from entering the U.S. 
drug supply. Significantly, none of these strategies relies upon end-
product testing as the sole, or even a significant, weapon in the fight 
against counterfeits, effectively illustrating why such reliance on 
testing can not achieve adequate levels of safety in the importation 
    This is because end-product testing simply is not adequate to 
identify counterfeit drugs or prevent them from entering the U.S. drug 
supply. While random sampling and inspection might be acceptable in the 
manufacturing context, it will never be sufficient to detect 
counterfeit drugs entering the U.S. from abroad. This is because 
``counterfeits can easily be commingled with authentic product, either 
by the case, by the bottle, or by the pill . . .'' \31\ Consequently, 
as FDA itself concludes, ``[n]o random sampling plan will be able to 
detect and protect against such criminal conduct since the threat does 
not depend upon the nature of the reimported product, but upon the 
integrity of those handling it.'' \32\
    This would suggest that in order to identify counterfeits, an 
inspection and testing program requiring authentication of all drug 
products offered for importation would be necessary. Such inspection 
and testing would be extremely cumbersome and expensive. Large 
shipments would need to be removed from shipping containers and broken 
down into individual units for inspection. Then each individual unit 
would need to be inspected or analyzed separately before being repacked 
into shipping containers.
    Yet even if a 100 percent inspection program were feasible from a 
practical perspective (which it is not), it still would not be 
sufficient to assure the safety and authenticity of imported drug 
products. This is because both visual inspection and product testing 
have significant practical and scientific limitations.
Visual Inspection
    Visual inspection of drug packaging and labeling is not a viable 
method for accurately identifying counterfeits. From a practical 
standpoint, drug packaging and labeling--and the overt counterfeit 
resistant features incorporated therein (e.g., color-shifting inks, 
holograms)--are too varied and numerous to provide for the real time 
verification of drug products. It simply is not realistic to expect 
inspectors to be familiar with the wide variety of overt features used 
on the thousands of different drug products likely to be imported. This 
problem will be exacerbated by the need to rotate overt features on a 
regular basis to stay one step ahead of the counterfeiters.
    Second, packaging and labeling, and even counterfeit resistant 
technologies, can themselves be counterfeited, often within 12-18 
months. The counterfeiters are becoming increasingly sophisticated and 
are making use of advanced technologies to duplicate the packaging and 
labeling of authentic drugs. As a result, counterfeit products are 
becoming increasingly difficult to detect, even to trained experts. 
Given the sophistication of today's counterfeiters, visual inspection 
can no longer be expected to reliably detect counterfeit products 
presented for import.
    Finally, visual inspection is of little or no value when a drug 
product has been repackaged. Such repackaging removes or destroys the 
drug's original packaging and labeling as well as any counterfeit 
resistant technologies incorporated by the manufacturer. In such 
situations, inspectors conducting a visual inspection would have little 
or no basis for determining whether a product is authentic because they 
would have no authentic product against which to compare it. This 
likely will be a major problem because virtually all drugs that are 
imported have foreign packaging and labeling and thus would need to be 
repackaged prior to importation. Repackaging is subject to minimal 
oversight, and it was implicated in a recent counterfeiting incident, 
including one that led to the recall of 200,000 bottles of counterfeit 
cholesterol-reducing medicine.
Chemical Analysis and Authentication of Covert Features
    Covert features and chemical analysis offer more accurate methods 
of authenticating drug products, but they have their own limitations. 
Most significantly, such methods do not provide real time verification 
of a drug's authenticity. Covert features and taggants typically 
require specialized equipment or testing to authenticate and can and 
should be authenticated only by the manufacturer. These tests often 
cannot be performed onsite or require a manufacturer's representative 
to travel to the site. In addition, tests for taggants may take up to 
several days to perform in order to accurately determine whether the 
drug is counterfeit or not. This may be problematic if a large amount 
of drug is of questionable authenticity as it would have to be withheld 
from commerce until the testing is completed.
    Chemical analysis of imported drugs has another problem. Since 
random sampling methods likely could not be employed (for the reasons 
discussed above), chemical analysis would need to be performed on all 
drug products offered for importation. This not only would be 
prohibitively expensive but also counterproductive, since such testing 
would destroy the very products being tested.
    Further, according to the Department of Health and Human Services' 
Task Force report on importation, issued in December 2004, while a 
number of new anti-counterfeiting technologies show potential for 
assuring the safety and authenticity of prescription medicines, until 
they are universally adopted they cannot be relied upon to secure the 
safety, efficacy, and integrity of the global market. The report also 
found that ``widespread adoption of authentication technologies, while 
theoretically able to secure the U.S. drug supply, is a daunting task 
that could raise the cost of imported drugs thereby reducing any 
expected savings from importation.'' \33\ Estimates from the 
Congressional Budget Office (CBO) suggest a counterfeit-resistant 
technology mandate could substantially increase the cost of any 
importation scheme. The mandate in H.R. 2427 (an importation bill 
introduced in the 108th Congress) could ``raise the cost of 
prescription drugs by as much as $2 billion in the first year.'' CBO 
found that the cost of such a mandate would be ``significant.'' \34\
    Finally, the identities of covert features and chemical taggants 
incorporated into drug products are (for good reason) closely held 
secrets by manufacturers. In addition, for the many drug products that 
do not incorporate taggants, there is no simple laboratory test that 
can verify authenticity. Consequently, authenticity testing would 
either have to be conducted by the manufacturer or would require the 
disclosure of trade secret information by the manufacturer to the 
laboratory or facility conducting the test.
Safety Testing
    Safety testing for imported products suffers from many of the same 
limitations as authenticity testing and has some additional limitations 
as well. Visual inspections, for example, would be even less effective 
at identifying safety problems than authenticity problems. This is 
because most safety problems do not leave overt visual clues. 
Accordingly, visual inspection likely would not detect dangerous 
impurities in a drug product; stability problems caused by improper 
storage conditions; or degradation of the active ingredient. On the 
contrary, visual inspection is likely to identify only the most obvious 
safety problems, such as opened or water-damaged drug products.
    Likewise, chemical testing does not provide an adequate assurance 
of the safety or quality of imported drug products. As discussed above, 
end-product testing has significant limitations because of the 
complexity of many drug products and the lack of sensitivity of many 
tests. Just as in the manufacturing context, end-product testing of 
imported drugs simply cannot measure all of the possible variations 
that could affect safety and effectiveness.
    For all of these reasons, the safety, quality, and authenticity of 
pharmaceutical products that are imported into the United States cannot 
be assured by inspection and/or testing programs but instead must be 
based on strictly controlling the conditions under which they are 
manufactured and distributed. This means maintaining to the greatest 
extent possible the closed distribution system in the U.S. that 
Congress enacted to reduce risks to U.S. consumers.
Chain of Custody Requirement Does Not Guarantee Safety of Imported 
    The inclusion of a chain of custody provision, otherwise known as a 
drug pedigree requirement, also does not equate to today's closed 
system and the level of safety it provides. In testimony on July 9, 
2002, before the Senate Special Committee on Aging, FDA stated:

        ``Because we could not go certify and look in the other 
        countries, the bill that they refuse to implement or decline to 
        implement would have replaced the normal quality control system 
        with a testing process with a paper or so-called pedigree 
        process that attempted to follow the trail of the drugs, but 
        both Secretaries [Shalala and Thompson] found that the paper 
        process could be forwarded by faking documents and that you 
        really couldn't adequately test these products, either 
        economically or feasibly.'' \35\

    It is inappropriate and dangerous to rely solely on chain of 
custody or pedigree papers to authenticate an imported medicine. Such 
documents can be easily forged, for example. According to the HHS Task 
Force report on importation, ``Paper pedigrees, which are in use today, 
have significant limitations. They are subject to failures to keep 
adequate records and can be forged, thus making them an unreliable 
means for documenting the chain of custody.'' \36\
Limiting Importation to Canada Does Not Guarantee Safe Importation
    On its face, limiting importation to drugs imported from Canada 
appears to be safe. In practice, a drug could be imported from anywhere 
in the world, as long as it entered into the U.S. through Canada. There 
is no effective way to prevent the transshipment of drugs from Third 
World countries into Canada and then into the U.S. The FDA has already 
warned that if importation from Canada were enacted into law, Canada 
could become a gateway for counterfeit drugs.
    First, the Canadian government is on record saying that while it 
regulates drugs manufactured for its citizens, it cannot vouch for the 
safety of medicines that are then exported to the U.S. According to its 
then-Assistant Deputy Minister, Health Canada, ``The Government of 
Canada has never stated that it would be responsible for the safety and 
quality of prescription drugs exported from Canada into the United 
States, or any other country for that matter.'' \37\
    Second, buying medicines from a Canadian website does not guarantee 
the product actually came from Canada or that it is safe and effective. 
For example, last August, the FDA issued an advisory to consumers 
warning them against purchasing prescription drugs from websites that 
have orders filled by Mediplan Prescription Plus Pharmacy or Mediplan 
Global Health in Manitoba, Canada (pharmacies that were ``certified'' 
by the Canadian International Pharmacy Association), following reports 
of counterfeit versions of prescription drug products being sold by 
these companies to U.S. consumers. Lab analysis of the intercepted 
products found counterfeit versions of several popular medications, 
including medicines for high cholesterol, gastroesophageal reflux 
disease (GERD), arthritis-related pain, high blood pressure and breast 
    According to FDA, ``In our experience, many drugs obtained from 
foreign sources that purport and appear to be the same as U.S.-approved 
prescription drugs have been of unknown quality. We cannot provide 
adequate assurance to the American public that the drug products 
delivered to consumers in the United States from foreign countries are 
the same products approved by FDA.'' \39\ A FDA analysis of three 
commonly prescribed drugs purchased from a website advertised as 
Canadian showed that so-called ``Canadian Generics'' bought from the 
website were fake, substandard and potentially dangerous. One was a 
controlled substance. According to FDA, ``This firm shipped drugs that 
were the wrong strength, including some that were substantially super-
potent and that pose real health risks as a result, drugs that didn't 
dissolve properly, drugs that contained contaminants, and drugs that 
should not have been given because of potentially dangerous drug 
interactions.'' \40\
    In a series of ``blitz exams'' FDA discovered that drugs were being 
imported from alleged Canadian websites that were in fact from other 
parts of the world. According to then-FDA Commissioner, Mark McClellan, 
``During the import blitz, we have examples where our examinations 
revealed that products were manufactured in countries other than 
Canada, yet were exported from Canada. For example, at the Dallas, 
Seattle and Buffalo mail facilities, imported drugs were encountered 
which were manufactured in Canada, Mexico, Costa Rica, India, Pakistan, 
New Zealand, Taiwan, Thailand, and a host of other countries. However, 
in some cases, the drugs that had obviously been manufactured in other 
countries were exported from Canada.'' \41\
    A more recent FDA investigation reconfirmed the fact that many 
drugs being ordered from so-called Canadian pharmacies are in fact from 
other parts of the world. In December 2005, FDA announced the results 
of an operation in August of that year to confiscate parcels containing 
pharmaceuticals from India, Israel, Costa Rica and Vanuatu--43 percent 
of which had been ordered from Canadian Internet pharmacies. Of the 
drugs being promoted as ``Canadian,'' 85 percent actually came from 27 
countries around the globe. Then-acting FDA Commissioner Andrew C. von 
Eschenbach stated, ``These results make clear there are Internet sites 
that claim to be Canadian that in fact are peddling drugs of dubious 
origin, safety and efficacy.'' \42\
    Recent news reports have found that some Canadian pharmacies now 
acknowledge that they are going to foreign countries to get their drugs 
to sell to U.S. consumers. An April 6, 2006, New York Times article 
reported that the Canadian online pharmacy industry is selling foreign 
drugs, instead of Canadian drugs, to American patients.\43\ The article 
states that, ``At their peak in 2004, the online pharmacies employed 
about 4,000 Canadians. That number has decreased to 3,000 with the 
squeeze in profits, company closings and the purchasing and stockpiling 
of supplies in Europe, Australia and New Zealand.'' According to Daren 
Jorgenson, founder of Winnipeg-based Canadameds.com, ``We're filling 50 
percent of our prescriptions [from international pharmacies].'' 
Jorgensen's website boasts, ``Not just from Canada any more! Choose 
your country and your savings!'' \44\
    The President and Owner of CanadaRx.net has also confirmed that his 
medicines are not coming from only Canada. According to Harvey Organ, 
``I can get drugs from all over the world.'' \45\ A Bloomberg news 
article reported that CanaRx Services Inc., ``has joined other Canadian 
Internet pharmacies in finding sources of drugs from partners in the 
U.K., Continental Europe, Israel, Australia and India.'' \46\ This is 
particularly troubling since according to a study by Temple University 
for Pharmaceutical Health Service Search, India is a worldwide leader 
in the production of counterfeit drugs with as much as 35 percent of 
the world's drug counterfeiting originating in that country.\47\
    This is confirmed by data from Industry Canada, which shows 
significant increases in pharmaceutical imports into Canada in 2006 
from the previous year. For example, according to the data, imports of 
pharmaceutical products into Canada were up significantly from many 
countries, including, for example: Singapore up 165 percent; Argentina 
up 913 percent; Bulgaria up 255 percent; Jordan up 823 percent; and 
Mexico up 284 percent, to name a few.\48\
Expanding importation beyond Canada presents additional safety concerns
    If importation were to be legalized beyond Canada, further safety 
concerns exist. While proponents of importation point to parallel trade 
\49\ in the European Union (EU) as evidence that importation beyond 
Canada can be done safely, they often ignore the problems that exist 
with parallel trade in terms of safety. Specifically, EU member states 
have struggled with counterfeit drugs, safety issues arising from 
improper storage and handling, and safety issues arising out of 
repackaging and re-handling.
Parallel Trade and Introduction of Counterfeit Drugs
    First, parallel trade in Europe has facilitated the introduction of 
counterfeit medicines in the destination countries. For example, in 
January 2005, the Council of Europe (CoE) released a report on 
counterfeit medicines in the EU. According to the CoE report, ``Based 
on the results of the surveys conducted by the CoE, the counterfeit 
medicine problem is not insignificant in Western Europe and estimates 
provided by several respondents indicate that the problem is not likely 
going away in the foreseeable future. It affects all countries of the 
world. It is no longer safe to assume that the problem does not exist 
to any real extent in Western Europe and thus can safely be ignored by 
authorities in the latter. Although it can be assumed that Western 
Europe is relatively less affected by the counterfeit medicine problem 
than Eastern Europe, it has to be borne in mind that counterfeit 
medicines probably regularly transit through and exit Western Europe.'' 
\50\ If importation were legalized, these counterfeit medicines could 
then make their way into the U.S.
    The CoE report found that parallel trade in the EU provides for the 
inadvertent entry of counterfeit drugs. According to the report, ``The 
existence of a significant level of parallel trade in the EU, in the 
absence of adequate controls on repackaging and relabeling, provides an 
opportunity for the inadvertent entry of counterfeit medicines into the 
market. . . . Furthermore, parallel trade means that any counterfeit 
product within the legitimate distribution chain in one MS [Member 
State] can easily contaminate other MSs.'' \51\
    European health officials have discovered counterfeit versions of a 
cholesterol-lowering medicine in the supply chains of the U.K. and 
Netherlands. A parallel trader illegally purchased the counterfeits 
from outside Europe and sold it to a large wholesaler within the U.K. 
Dutch health authorities also found counterfeit cholesterol-lowering 
medicines in their own country's pharmacies.\52\
    At a meeting of the WHO's International Medical Products Anti-
Counterfeiting Taskforce in 2006, the European Commission announced 
that in the past years, it had witnessed 27 cases of counterfeit drugs 
in the legitimate supply chain. In addition, the EC saw another 170 
cases through the Internet and what it calls the ``illegal'' supply 
    According to an investigation into the links between organized 
crime, terrorism and counterfeit medicines conducted for the Stockholm 
Network by a former detective superintendent, ``There is no effective 
method within the U.K.--or to a greater or lesser extent across 
Europe--of identifying counterfeited pharmaceuticals before they are 
dispensed.'' The report also found that the ``rapid, legal growth in 
the movement of medicines around the world via parallel trade in Europe 
and re-importation into the United States provides more opportunities 
for counterfeit and sub-standard medicines to enter the legitimate 
distribution chain.'' \54\ A study by Patricia Danzon, a health care 
economist from the Wharton School, University of Pennsylvania, found, 
``Although parallel importers are required to obtain a license, 
chemical testing for equivalence is not performed, and instances of 
counterfeit products have occurred.'' \55\
Importation from any EU Country Would Open the U.S. to Drugs from Every 
        EU Country
    Because of the free flow of goods between members of the EU, any 
legislation that permits the importation of pharmaceuticals from any 
country in the EU is essentially permitting the entry of drugs from 
every country in the EU--it simply is not possible to prevent 
importation that includes any EU country from including every one of 
the EU countries. This would include, for example, a number of Eastern 
European countries with either known counterfeiting problems or 
neighbors with known counterfeiting problems. Many of these countries 
do not have pharmaceutical infrastructures even roughly comparable to 
ours. The WHO, in their 2006 estimates, warned that the countries in 
the former Soviet Union have counterfeit rates up to 20 percent.\56\ As 
of 2007, there are three former Soviet Union countries in the 27 member 
European Union, this number will grow. As the EU expands, the risk of 
counterfeits from countries with weaker regulatory systems, such as the 
Ukraine is likely.\57\
EU Countries Not Willing to Police Drugs Exported to the U.S.
    Aside from growing concerns over counterfeit medicines in the EU, 
there also does not appear to be a willingness among countries in the 
EU to implement protections to ensure the safety of drugs exported to 
the U.S. if importation were legalized in the U.S. As part of the HHS 
Task Force's investigation into the feasibility of prescription drug 
importation, it requested comment from foreign health agencies on their 
willingness or ability to implement new or additional protections to 
ensure the safety of exported or transshipped drugs. However, no 
comments from foreign health agencies directly addressed this point. 
Further, none outlined a specific strategy for new steps to collaborate 
with the U.S. Government on the effective oversight of importation. The 
Task Force report stated, ``Foreign governments have little incentive 
and limited resources to ensure the safety of drugs exported from their 
countries, particularly when those drugs are transshipped or are not 
intended for import . . . If foreign health agencies were willing to 
ensure the safety and effectiveness of drugs exported from their 
countries to the U.S., one would expect a greater global response.'' 
Parallel Trade and Improper Storage of Medicines
    Significant health issues are associated with improper storage of 
medicines during transit. Parallel imported goods must pass through the 
hands of various international trading organizations, and it is not 
always possible for regulatory authorities to ensure sufficient 
physical monitoring and sampling of these products. A WHO/World Trade 
Organization (WTO) Workshop paper found, ``while parallel importers may 
themselves be required to comply locally with stringent drug wholesale 
regulations, there are many ways to circumvent drug regulations.'' \59\
Parallel Trade and Safety Problems Associated with Repackaging and Re-
    Parallel trade requires both repackaging and re-labeling, which can 
introduce a variety of safety problems. For example, parallel traders 
often discard the anti-counterfeiting measures that some packaging now 
incorporates. One member state medicines agency commented on a safety 
problem with parallel imports, which it attributed to relabeling. In 
its report for the years 1998-2002, the German Medicines Agency (BfArM) 

        Events worth mentioning in connection with parallel trade:


        Complaints from consumers and diabetics associations related to 
        reduced activity of imported insulin preparations; Results of 
        the investigation: insulin content of the checked products, 
        which are about to be administered by means of a pen, is in 
        order, but possibly the functionality of the pens is affected 
        by inappropriate relabeling of the vials; In essence products 
        that are centrally approved in the EU are involved; Consequence 
        of parallel import approval procedure: directions for proper 
Importation Violates the Entire Approach to Ensuring the Safety of the 
        Pharmaceutical Distribution System
    The cornerstone of the U.S. pharmaceutical distribution system is 
total control of the process--from selection of raw materials, design 
of the manufacturing process, packaging of a final product, evaluation 
of storage conditions and careful selection of the distribution 
pathway. Importation is at odds with this system, increasing the 
chances for substandard, adulterated and counterfeit medicines to enter 
our system. Clearly, no one would propose relaxing the current system 
for drugs produced under FDA jurisdiction, yet importation effectively 
does just that.
    The examples mentioned here, and countless others not mentioned 
here, illustrate that legalizing importation opens an avenue for 
unscrupulous counterfeiters. In order to continue assuring American 
patients that the medicines they take are safe and effective, and meet 
the highest standards, the current system for manufacturing and 
distribution of pharmaceuticals must be maintained. Only the current 
system, with its full battery of quality testing conducted by the 
manufacturer, coupled with complete knowledge of the domestic 
distribution process can assure the safety Americans expect.
Evidence Suggests Minimal Cost-Savings from Importation
    While importation is often identified as a way to reduce the cost 
of medicines for patients, the evidence suggests otherwise. Savings are 
not as significant as claimed for several reasons, including the fact 
that middlemen--or arbitrageurs--often benefit considerably more than 
patients and price differentials between the U.S. and other countries 
are often exaggerated.
Government Reports Find Cost-Savings from Importation Minimal
    The HHS Task Force report on prescription drug importation found, 
``Total savings to drug buyers from legalized commercial importation 
would be one to 2 percent of total drug spending and much less than 
international price comparisons might suggest. The savings going 
directly to individuals would be less than 1 percent of total spending. 
Most of the savings would likely go to third party payers, such as 
insurance companies and HMOs.'' \61\
    Similarly, according to an April 2004 CBO analysis of H.R. 2427 (an 
importation bill that would have allowed importation from 25 
countries), savings would amount to approximately 1 percent of total 
projected spending on drugs between 2004 and 2013. Most of these 
projected savings don't even materialize for more than half a decade. 
Permitting importation only from Canada, according to CBO, would 
produce a ``negligible reduction in drug spending.'' \62\
State Importation Experiments Have Failed to Show Savings
    Several states and localities that have examined importation have 
caste additional doubts on potential savings that may accrue from 
importation. For example, the State of Illinois began its I-SaveRx 
program in October 2004 to allow people to refill prescriptions using 
foreign pharmacies. The state worked with pharmacies in Canada, the UK, 
Australia and New Zealand and the program was later expanded to four 
other states. According to the Chicago Tribune, in the first 19 months 
of the operation, the program served only 3,689 Illinois residents--and 
another 1,265 individuals in four other states, despite a massive 
promotional campaign by the state that utilized 521 workers in 28 state 
agencies at a cost of nearly $1 million.\63\
    According to a January 2005 Washington Post article, Montgomery 
County, Maryland's plans to make Canadian prescription drugs available 
to employees has ``hit a snag'' after an analysis by the county school 
system concluded that importation of prescription drugs from Canada 
wouldn't save as much money as hoped and could be more expensive than 
domestic sources for drugs. In reaction to the findings, Superintendent 
Jerry D. Weast, in a confidential memo to the Board of Education 
(detailed by the Washington Post) wrote, ``In many cases, purchasing 
medications from Canada would prove to be more costly.'' \64\
    In November 2003, the Massachusetts Group Insurance Commission, the 
insurance administrator for state employees and retirees, examined 
importation from a state perspective and found, ``the potential savings 
[of importation] would not be worth the liability risks and the 
disruption of existing insurance contracts.'' \65\
European Experience with Parallel Trade Demonstrates Profits to 
        Middlemen, Not Savings to Patients
    The European experience with parallel trade has demonstrated that 
the practice financially benefits middlemen rather than patients. 
According to a study by the London School of Economics (LSE) and 
Political Science, profits from parallel imports accrue mostly to the 
benefit of the third party companies that buy and resell the medicines, 
not to patients. Specifically, the LSE study found that, ``Although the 
overall number of parallel imports is continuing to increase, 
healthcare stakeholders are realizing few of the expected savings . . . 
profits from parallel imports accrue mostly to the benefit of the 
third-party companies that buy and resell these medicines.'' The study 
found savings to insurance organizations ranged from .3 percent to 2 
percent, while parallel trader mark-ups ranged from 12 percent to 54 
Prescription Drug Price Comparisons Between the U.S. and Other 
        Countries are Often Deeply Flawed and Exaggerated
    Supporters of importation often point to retail prices in the U.S. 
and compare those prices to government controlled prices in Canada and 
various other countries as evidence that importation will provide a 
means to lower prices for U.S. consumers. As with all products, prices 
vary from country to country for a host of reasons including income 
differences and exchange rates. For pharmaceuticals, government-imposed 
reimbursement and price controls in other developed countries are 
another factor generating cross-national price differences. While the 
price paid for a given medication may be cheaper in a foreign country 
than it is in the U.S., it is not always the case and such comparisons 
are flawed for a number of reasons.
    Before addressing these flaws, I note that the current debate 
sometimes seems to incorrectly assume that medicines are the only 
product for which prices vary internationally, and that this suggests 
manufacturers somehow engage in inappropriate practices. In fact, 
prices for computers, food, cars and other consumer goods in the U.S. 
are not priced the same as they are in Italy, Canada, France, or any 
other country. This has been graphically illustrated in the new car 
market. An article published in the Associated Press, ``Auto Industry 
Attacks Canadian `Gray Market' Discounts,'' illustrates this point. The 
article notes that, ``Savings from the cross-border trade can be 
substantial. For example, a loaded Dodge Caravan costs $31,000 in the 
U.S., but just $21,000 in U.S. dollars in Canada, said David Pierce, 
owner of Pierce's Superstores in Great Falls, Mont.'' Mr. Pierce went 
on further to say, ``[T]hat even his wholesale cost is $6,500 more than 
is charged a retail customer in Canada . . . even when he's charged a 
customer $2,000 for an aftermarket warranty, the Caravan he has bought 
from Canadian exporters will cost $8,000 less than the same model meant 
for American showrooms.'' \67\
    Most price comparisons also ignore the fact that pricing 
differentials on other health care services vary more from country to 
country than do pricing differentials for medicines. According to a 
study by Patricia M. Danzon and Michael F. Furukawa that compared 
average price levels for pharmaceuticals in eight countries--Canada, 
Chile, France, Germany, Italy, Japan, Mexico and the U.K.--relative to 
the U.S., U.S.-foreign price differentials are roughly in line with 
income and smaller for drugs than for other medical services.\68\ In 
fact, when looking just at health care, drugs account for only about 7 
percent of the lower per capita spending in Canada than the U.S., while 
other health care services account for about 93 percent of the lower 
health care costs paid by Canadians.\69\
    Further, only a small minority of consumers in the U.S. pay the 
``retail'' price for prescription drugs. The overwhelming majority pay 
substantially discounted prices through pharmacy benefit managers 
(PBMs) and health plans, many of which negotiate on behalf of tens of 
millions of patients and are part of the way that U.S. imposes market-
based cost containment in contrast to the government price controls 
imposed in parts of Europe and Canada. As mentioned above, for Medicare 
beneficiaries, passage of the Medicare prescription drug benefit has 
increased the number of Medicare beneficiaries with comprehensive 
prescription drug coverage from 24.3 million (or 59 percent) in 2005 to 
39 million (or 90 percent) today. This coverage has amounted to average 
savings of $1,200 per beneficiary. According to a January 2006 
investigation by AARP, Medicare drug plans that cover all of a 
beneficiary's drugs can cost less than buying the same drugs across the 
border. The AARP calculation, which took into account premiums, 
deductibles, and copayments, was based on real combinations of drugs 
taken by beneficiaries living in different parts of the country, as 
well as the cost of six commonly used brand name drugs.\70\
    Like Medicare beneficiaries, insured Americans enjoy significant 
discounts on the medicines they purchase as a result of large, powerful 
purchasers (often representing tens of millions of Americans) such as 
pharmacy benefit managers (PBMs) and managed care organizations. A PBM 
``can negotiate discounts at both ends of the pricing chain: from the 
manufacturer and from the retail pharmacy.'' \71\ A study in Health 
Affairs found ``to the extent `list' prices fail to report the impact 
of discounts and rebates in the United States, alleged price advantages 
in Canada are overestimated. It is likely that only Americans who find 
themselves without prescription drug coverage are charged prices that 
exceed Canadian prices.'' \72\
    Even those consumers who buy at retail can save considerably 
depending on where they buy their drugs in the U.S. For example, 
according to the New York City Council's Investigations Committee Chair 
Eric Gioia, ``At a time when Americans are flocking to Canada for cheap 
prescription drugs, New Yorkers could be saving more than 50 percent on 
their prescription drug purchases just by traveling to a different 
borough.'' An investigation conducted by Council Member Gioia's 
committee staff found that by traveling to a pharmacy perhaps only a 
few blocks away from where they usually shop, consumers could save up 
to $80 on a single prescription.'' \73\ Similar studies have been done 
in other parts of the country and have resulted in similar 
    Finally, generics now make up about 60 percent of all prescriptions 
in the U.S., a much higher percentage that in most developed countries. 
Generic medicines are often priced at significant discounts in the U.S. 
compared to Canada and represent a viable option for patients looking 
to lower their health care costs. FDA conducted an analysis of prices 
actually charged on customer invoices for a sample of the detained 
foreign generic medications encountered in the shipments. FDA converted 
the price paid to U.S. dollars and checked the prices at four U.S. 
pharmacies. In every instance, a U.S. pharmacy price for the FDA-
approved generic drug was less than what consumers had paid for the 
foreign generic drug ordered from Kohler's Drugstore in Canada.\75\ In 
light of the heavy use of generics in the U.S., price comparisons that 
focus on only a few brand drugs while excluding generics also 
exaggerate cost differences experienced by consumers.
Importation Is Not Free Trade, it Is the Importation of Foreign Price 
    Some who support importation have argued that importing 
prescription drugs from other countries is a means to utilize the free 
market to bring lower cost medicines to American consumers. Apart from 
the likelihood that for the reasons specified above importation will 
not achieve the cost reductions claimed by its proponents, this 
argument also ignores the fact importation would promote trade in 
medicines that are subject to government price controls--the antithesis 
of free trade. Economists and trade experts have argued that 
importation is not a free market principle, but rather is a mechanism 
to ``import'' a foreign government's price control regime. For example, 
according to John E. Calfee, American Enterprise Institute (AEI), 
``Congress should dismiss all possibility of these scenarios by 
rejecting the drug importation legislation. It should not fall into the 
trap of thinking that as long as controls over U.S. prices were 
introduced by the government of a foreign country we would still have a 
free market. We wouldn't have a free market, and we wouldn't get the 
benefits of one.'' \76\
    Commentary in The Wall Street Journal explained, ``In effect, re-
importation of drugs would import something else to the U.S.: price 
controls, where the lack of such practices is the oxygen that allows 
pharmaceutical research to thrive. Drug-price controls are pernicious. 
While controls on oil and other products tend to be short-lived, as 
voters eventually object to the resulting shortages, the effects of 
drug regulations are more difficult to observe since they mainly affect 
medicines that haven't been invented yet.'' \77\
    The lack of a free market in Europe has led to a decline in the 
European pharmaceutical market and an exodus of the pharmaceutical 
industry from Europe to the U.S. The exodus from Europe results in part 
from the more hospitable business climate in the U.S.--for example, the 
science and technology base in the U.S. and the opportunity for public-
private research partnerships--the European pharmaceutical industry and 
the European Commission, however, concluded that the exodus results 
primarily from the price control policies and cost-containment measures 
that lead to a lack of competition in the European market. The European 
Federation of Pharmaceutical Industries and Associations (EFPIA) has 
explained that the ``European pharmaceutical industry has lost its 
competitiveness because there is a problem of price--and innovation is 
not compensated.'' \78\ EFPIA adds, ``Europe lacks a climate which 
favours and rewards innovation. . . . Compared to the U.S., Europe is 
seen as a less attractive R&D investment location in terms of market 
size and incentives for the creation of new biotech companies.'' \79\
    According to a report by the U.S. Department of Commerce, price 
controls maintained by OECD countries reduce the amount of global 
pharmaceutical R&D below what it would otherwise be under market 
conditions similar to those in the U.S. The study estimates that this 
reduction falls in the range of $5 billion to $8 billion annually, once 
prices were fully adjusted. Based on an estimated cost of developing a 
new drug, an increase in R&D of $5 billion to $8 billion could lead to 
three or four new molecular entities annually once markets fully 
    By using simulation experiments under multiple price control 
scenarios, John A. Vernon, an economist at the University of 
Connecticut, estimated that the pharmaceutical industry's output of new 
medicines under price controls would significantly decline. Regulation 
of pharmaceutical prices in the U.S., similar to what is done in 
Europe, could have a ``precipitous effect on pharmaceutical innovation 
in the long run.'' \81\ Importation of prescription drugs could also 
have significant implications for U.S. intellectual property rights for 
prescription drugs, potentially upsetting the careful balance between 
encouragement of innovation and ensuring patient access to new medical 
Price Controls Often Lead to Delays and Denials in Access to New 
    As nearly all would agree, new medications are a critical element 
of quality health care. Yet many patients in countries that employ 
cost-containments measures, such as price controls, often wait years 
before gaining access to breakthrough drugs. According to the 
Department of Commerce report, ``Such controls can also delay or reduce 
the availability of some innovative medicines in foreign countries, 
with the effect of limiting competition and requiring national health 
systems to forego the benefits of these innovations in reducing health 
care costs.'' \82\ These restrictions on patients' access to medicines 
through government price controls in not an approach that would benefit 
U.S. patients.
    While drug approval is handled in the European Union by a 
centralized body called the European Medicines Agency (EMEA), each 
Member State of the EU has control over price and reimbursement 
decisions. In the majority of Member States, a marketing authorization 
alone is not sufficient to enable a prescription drug to actually be 
sold. The medicine will only appear on the market once the competent 
authorities have set a price and/or the medicine has been registered on 
the positive list defining the conditions under which it is covered by 
public health care insurance for residents of the particular Member 
State. According to a report by the G10 Medicines Group, ``The price 
negotiating systems and reimbursement structures in a number of Member 
states can lead to significant delays.'' \83\
    This was corroborated by a February 2003 report in Business Week, 
which stated, ``Once a drug is approved by the European Agency for the 
Evaluation of Medicinal Products, national governments must debate 
whether to make the drug available through their health systems and at 
what price. The process, which usually involves negotiations with 
manufacturers, who are under pressure to extend deep discounts, can 
drag on for several years. . . . As a result of price controls, 
European consumers are heading toward second-class citizenship when it 
comes to access to medicine.'' \84\
    In some markets, patients must wait more than 2 years after 
marketing approval before gaining access to a new medicine (if at 
all).\85\ European Union Directive 89/105 requires that applications to 
the competent authorities to secure a price or reimbursement for new 
medicines must be decided within 90 days, or 180 days where it is 
necessary to agree price before applying for reimbursement.\86\ Only 7 
countries presently comply with the requirement for countries to 
provide decision within 180 days: U.K., Germany, Denmark, Sweden, 
Ireland, Cyprus and Estonia. Poland has approved only a handful of new 
medicines for the past 8 years, and Austria, Belgium, France, Greece, 
Czech Republic, Italy and Slovenia have delays of over 300 days. Again, 
this approach, which is inherently part of government price control 
schemes, is a poor precedent of policy in the U.S.
    An ongoing analysis by the European Federation of Pharmaceutical 
Industries and Associations (EFPIA) indicates that many EU Member 
states are not meeting the standard set out in the EU Directive 89/105 
as of June 2006. For example, patients in very few EU countries have 
access to all new medicines that received marketing authorization from 
EMEA between January 1, 2002 and December 31, 2005. In fact, doctors in 
only 2 of 18 EU countries monitored can prescribe all medicines 
approved during this time period to their patients. In the other 16 
countries between 55 percent and 79 percent of EMEA approved medicines 
are available. The average waiting time for these medicines becoming 
available varies widely.\87\
Government Price Controls and Related Policies Lead to Less Diffusion 
        of New 
    A 2002 survey entitled, ``Diffusion of Medicines in Europe,'' found 
shortfalls in the diffusion of state-of-the-art medicines between 
European countries for 20 key diseases. The study noted that the 
shortfalls in diffusion of new medicines was in large part the result 
of European price containment measures. According to the study, ``The 
most important factors for the diffusion of innovative medicines are 
policy related. Some examples are drug pricing policies, insufficient 
recognition of the (global and long term) economic effects of 
innovative medicine, inadequate governmental planning and last but not 
least cost containment strategies of every kind.'' \88\
For example:

        Cardiovascular Disease--In Germany, 87 percent of all patients 
        with coronary heart disease there was a lack of provision of 
        modern lipid-lowering drugs.
        In Italy, 83 percent of eligible patients did not receive 

        Diabetes--In Germany, 30 percent of at least 4 million diabetes 
        patients are not treated with drugs at all.

        Multiple Sclerosis--In France, ``less than 50 percent of 
        patients [with Multiple Sclerosis] eligible for treatment with 
        beta interferons actually receive it (only 10,000 from about 
        25,000 to 30,000).''

        Schizophrenia--In France it is estimated that there are 4.4 
        schizophrenia sufferers for every 1,000 people aged between 31 
        and 50 years, but only 2.4 people for every 1,000 are treated. 
        For the treated patients the level of the use of innovative 
        second generation drugs continues to be at a very low level.

        Depression--``The European average shows that only 18 percent 
        of patients with severe depression received treatment with 
        In Germany, of the percent of patients treated with 
        antidepressants, ``only one in three received an up-to-date 
        treatment with modern antidepressants (SSRIs). The other 8 
        percent are treated with older substances with more side 
        effects or less effective drugs like herbal preparations.''
        In France, ``recent studies have shown that 50 to 70 percent of 
        patients with symptomatic depression are not treated at all, 
        either with interpersonal or behavioural psychotherapies nor 
        with antidepressant medication or a combination of both.''
Safe Alternatives in the U.S. for Those That Cannot Afford Their 
    While importation is often hailed as the only solution for 
individuals who lack prescription drug coverage and cannot afford their 
medicines, in fact there are better, safer ways to ensure that patients 
have access to affordable medicines.
    PhRMA member companies have long offered patient assistance 
programs to expand access to medicines for patients. In 2005, PhRMA 
joined with public and private voluntary organizations to create the 
Partnership for Prescription Assistance (PPA), which offers a single 
point of contact to about 475 patient assistance programs and sources 
of government assistance. So far, the PPA has helped more than 3 
million patients find programs that provide free or nearly free 
medications. In 2005, pharmaceutical companies gave away $5 billion in 
medicines to patients in need. More than 1,300 partners make up the 
PPA, including groups such as the American Academy of Family 
Physicians, the American Cancer Society, Easter Seals and the National 
Association of Chain Drug Stores.
    In addition to the PPA, since January 1, 2006, Medicare 
beneficiaries have had access to comprehensive prescription drug 
insurance. They have a wide range of coverage choices at various price 
points, including prescription-drug only plans and ``Advantage'' plans 
that also cover hospital and physician services. The new Medicare 
benefit has greatly expanded access to prescription drugs for older 
Americans, many of whom have substantial medicine needs. First year 
indications show that the results are even better than anticipated--for 
seniors and for the health care system. For example, according to an 
Amundsen Group study, average out-of-pocket costs for beneficiaries who 
had no drug coverage in 2005 and who have enrolled in coverage through 
Medicare Part D have been reduced by half, despite an increase in the 
number of medicines used. Further, the percentage of previously 
uninsured patients who spend more than $50 out-of-pocket per month fell 
from 34 percent in 2005 to 18 percent in 2006.\89\
    State PAP programs, Medicaid and SCHIP are also options available 
to patients who cannot afford their medicines. Today, there are 
millions of people eligible for, but not taking advantage of such 
programs. Helping to ensure patients are enrolled in such programs, 
which provide coverage for all services, not just medicines, would be a 
step toward better care for millions of patients.
    The solutions detailed above provide practical options for many 
individuals to access affordable medicines that will not risk their 
health and safety.
    Importation schemes are unsafe. At a time when we are struggling to 
combat counterfeit drugs and tighten security at our borders, we should 
be searching for ways to close existing loopholes in the drug 
distribution chain, not creating new ones by opening up the borders to 
foreign imports. While some believe importation can be done safely, 
even FDA recognizes that there is no technological ``magic bullet'' or 
inspection process that can protect against adulterated or counterfeit 
foreign drugs. Consequently, implementing importation would jeopardize 
the safety of millions of American consumers.
    Importation would not result in cost savings. There is no 
indication that implementing importation would result in cost savings. 
The costs of counterfeit-resistant technologies and industry and 
government testing and inspections likely would run billions of dollars 
each year. If the experience in Europe is any guide, any cost savings 
resulting from foreign importation will be captured by the parallel 
traders rather than passed on to consumers.
    Importation is poor public policy. Importation of foreign drugs is 
nothing more than importation of foreign price control practices. These 
have been a disaster for patients in foreign countries, limiting access 
to new medicines and significantly restricting research and development 
activities in foreign countries. American patients deserve better. For 
individuals who lack prescription drug coverage and cannot afford their 
medicines, there are better and safer ways to obtain needed 
medications, including the Medicare drug benefit, other government 
programs such as Medicaid, SCHIP and State PAPs, PPA, and shopping for 
lower prices in safe, legal U.S. pharmacies.
    \1\ Pub. L. 75-717, 52 Stat 1040 (1938).
    \2\ 21 U.S.C.  355(d)(1).
    \3\ Pub. L. 87-781, 76 Stat. 780 (1962), codified at 21 U.S.C.  
    \4\ See, e.g., the Durham-Humphrey Act, Pub. L. 82-215, 65 Stat. 
648 (1951) (concerning prescription requirement); the Drug Listing Act 
of 1972, Pub. L. 92-387, 86 Stat. 559 (1972); the Orphan Drug Act, Pub. 
L. 97-414, 96 Stat. 2049 (1983) (subsequently amended); the Drug Price 
Competition and Patent Term Restoration Act of 1984, Pub. L. 98-417, 98 
Stat. 1585 (1984); the Drug Export Amendments of 1986, Pub. L. 99-660, 
100 Stat. 3743 (1986), the Prescription Drug Marketing Act of 1987, 
Pub. L. 100-293, 102 Stat. 95 (1988) (subsequently amended); the 
Generic Drug Enforcement Act of 1992, Pub. L. 102-282, 106 Stat. 149 
(1992); and the Prescription Drug User Fee Act, Pub. L. 102-571, 106 
Stat. 4491 (1992).
    \5\ See 21 U.S.C.  331(d), 355(a).
    \6\ See 21 U.S.C.  321(b).
    \7\ 21 U.S.C.  331(d), 355.
    \8\ 21 U.S.C.  381(d).
    \9\ H.R. Rep. 76, 100th Cong., 1st Sess. 6-7 (1987).
    \10\ Id.
    \11\ ``Dangerous Medicine: The Risk to American Consumers from 
Prescription Drug Diversion and Counterfeiting,'' 99th Cong., 2d Sess. 
22 (Comm. Print 99-2 1986).
    \12\ The record supporting the PDMA was extensive and unambiguous, 
and the prohibition on reimportation was not controversial. In June 
1985, the staff of the Subcommittee on Oversight and Investigations of 
the House Committee on Energy and Commerce published its first report 
on the drug diversion problem. Staff of Subcommittee on Oversight and 
Investigations of the House Committee on Energy and Commerce, 99th 
Cong., Report on Prescription Drug Diversion and the American Consumer: 
What You Think You See May Not Be What You Get (Comm. Print 99-R 1985). 
This report discussed the Ovulen 21 incident and laid the groundwork 
for the PDMA provision prohibiting reimportation. The subcommittee 
convened the first of eight public hearings on drug diversion and 
counterfeiting on July 10, 1985. Over 2 years, the committee would hear 
from state and Federal law enforcement officers, private investigators, 
state drug and narcotic agents, Customs officials, FDA officials, 
pharmacists, diverters, U.S. attorneys, pharmacy and pharmaceutical 
trade associations, pharmaceutical sales representatives, and senior 
enforcement officials from state regulatory agencies. Two more 
Subcommittee reports were released, ``Dangerous Medicine: The Risk to 
American Consumers from Prescription Drug Diversion and 
Counterfeiting,'' 99th Cong., 2d Sess. (Comm. Print 99-2 1986), and 
``Uncertain Returns: The Multimillion Dollar Market in Reimported 
Pharmaceuticals,'' 99th 2nd. Cong., Sess. (Comm. Print 99-GG 1985). 
Final legislation passed in early 1987. As Mr. Waxman pointed out on 
the day it passed the House, the PDMA ``is a very important public 
health measure. It will provide additional assurances to American 
consumers that drugs they purchase will always be safe and effective. . 
. . The bill was developed after one of the most extensive 
investigations the Energy and Commerce Committee has conducted on a 
health-related matter. . . . [The Subcommittee] discovered that all the 
efforts of the FDA to approve drugs for safety and effectiveness could 
be for naught if the wholesale distribution system didn't handle drugs 
properly or allowed counterfeit drugs to be passed along to 
consumers.'' 133 Cong. Rec. 10962 (May 4, 1987). He added, ``[t]he bill 
is not controversial and has enjoyed bipartisan support.''
    \13\ 21 U.S.C.  381(d).
    \14\ See FDA Regulatory Procedures Manual, ``Coverage of Personal 
    \15\ FDA has repeatedly expressed concerns about the safety of 
mail-order personal imports, and in 2001 the agency recommended that 
the policy be rescinded. See Letter from FDA Acting Principal Deputy 
Commissioner to Secretary of Health and Human Services (requesting that 
HHS Secretary revoke the personal importation mail policy) (May 24, 
2001); see also Examining Prescription Drug Importation: A Review of a 
Proposal to Allow Third Parties to Reimport Prescription Drugs, hearing 
before the Subcommittee on Health of the Committee on Energy and 
Commerce of the U.S. House of Representatives, 107th Cong. 2d Sess. 40 
(July 25, 2002) (``[W]e stand by that recommendation and believe that 
we should work with the Congress to develop legislation that would 
indeed give FDA the ability to screen these drugs and turn them 
back.'') (William K. Hubbard, Senior Associate Commissioner); 
Continuing Concerns over Imported Pharmaceuticals, Hearing before the 
Subcommittee on Oversight and Investigations of the Committee on Energy 
and Commerce of the U.S. House of Representatives, 107th Cong. 1st 
Sess. 48, 62, 72, 76 (June 7, 2001) (Hubbard).
    \16\ Pub. L. 106-387, 114 Stat. 1549, 1549A-35 (2000).
    \17\ Letter from Secretary Donna Shalala to the Hon. William J. 
Clinton (December 26, 2000).
    \18\ Letter from Secretary Tommy G. Thompson to Senator James 
Jeffords (July 9, 2001).
    \19\ 21 U.S.C.  384(c).
    \20\ Gregory Lopes, ``Patients Get Wrong Drugs Online; Anti-
Psychotics Substituted for Depression, Insomnia Medicine,'' The 
Washington Times: February 17, 2007.
    \21\ 61 Fed. Reg. 20104, 20105 (May 3, 1996).
    \22\ See Draft Guidance for Industry: PAT--A Framework for 
Innovative Pharmaceutical Manufacturing and Quality Assurance (August 
2003); see also Guideline on General Principles of Process Validation 
(May 1987).
    \23\ See 21 CFR Part 211.
    \24\ 21 U.S.C.  351(a)(2)(B).
    \25\ See Guideline on General Principles of Process Validation at 
    \26\ See FDA, Counterfeit Drugs Questions and Answers, available 
at: http://www.fda.gov/oc/initiatives/counterfeit/qa.
    \27\ World Health Organization, ``WHO and partners accelerate fight 
against counterfeit medicines; Up to 50% of medicines sold through 
rogue websites are fake,'' November 15, 2006.
    \28\ ``Internet Medicines Market `Poses Risk to Patients' Health,'' 
Financial Times Online, March 1, 2007.
    \29\ Business Week, ``Fakes!'' February 7, 2005.
    \30\ 21st Century Health Care Terrorism: The Perils of 
International Drug Counterfeiting, Center for Medicine in the Public 
Interest, September 20, 2005.
    \31\ Letter dated July 17, 2002, from FDA to the Honorable Thad 
    \32\ Id.
    \33\ Report on Prescription Drug Importation, HHS Task Force on 
Drug Importation, U.S. Department of Health and Human Services, 
December 2004.
    \34\ Congressional Budget Office, ``Would Prescription Drug 
Importation Reduce U.S. Drug Spending,'' April 29, 2004.
    \35\ Statement of William K. Hubbard Senior Associate Commissioner, 
Policy, Planning and Legislation FDA before the Special Committee on 
Aging U.S. Senate: July 9, 2002.
    \36\ Report on Prescription Drug Importation, HHS Task Force on 
Drug Importation, U.S. Department of Health and Human Services, 
December 2004.
    \37\ Diane Gorman, Assistant Deputy Minister, Health Canada, Letter 
to The Washington Post, May 9, 2003.
    \38\ FDA News, FDA Warns Consumers Not to Buy or Use Prescription 
Drugs from Various Canadian Websites that Apparently Sell Counterfeit 
Products, P06-123, August 20, 2006.
    \39\ Letter from FDA to Robert P. Lombardi, Esq. of The Kullman 
Firm: February 12, 2003 http://www.fda.gov/ora/import/kullman.htm.
    \40\ FDA Test Results of Prescription Drugs from Bogus Canadian 
Website Shows All Products are Fake and Substandard, FDA Press Release, 
P04-65, July 13, 2004.
    \41\ ``Recent FDA/U.S. Customs Import Blitz Exams Continue to 
Reveal Potentially Dangerous Illegally Imported Drug Shipments,'' FDA 
Press Release, P04-07, January 27, 2004.
    \42\ FDA News, ``FDA Operation Reveals Many Drugs Promoted as 
`Canadian' Products Really Originate From Other Countries,'' December 
16, 2005.
    \43\ Clifford Krauss, ``Kinks in Canada Drug Pipeline,'' New York 
Times: April 6, 2006.
    \44\ Leonard Zehr, ``Internet Pharmacies Aim Overseas,'' Globe and 
Mail: February 6, 2005.
    \45\ Christopher Rowland, ``Drugs from Anywhere; As Importation 
Networks Spread, Concerns for Consumer Safety Grow,'' The Boston Globe: 
December 16, 2004.
    \46\ ``FDA Seizes Drugs Imported Under States' Program, Supplier 
Says,'' Bloomberg: March 9, 2005.
    \47\ ``Pharmacists React to CanaRx Exploring Importation of Drugs 
from India, Bloomberg Article Reveals Canadian Internet Pharmacy is 
Considering Use of Drugs From Country Associated with Counterfeits,'' 
Yahoo News: March 16, 2005.
    \48\ Industry Canada, Trade Data Online, Canadian Imports, 
Pharmaceutical and Medicine Manufacturing, 2005-2006, available at: 
    \49\ Parallel trade is a legal practice in the EU and involves a 
supplier who buys drugs in low-cost member states, often in Southern 
Europe, and sells them at a discount in countries where prices for that 
product are higher, often in Northern Europe. The essential purpose of 
this practice is arbitrage between countries with different prices.
    \50\ Jonathan Harper; MB ChB, BSc (hons), MBA, ``Harmonised 
provisions for legislative and administrative procedures applicable to 
counterfeit medicines in the Council of Europe Member States,''&nuary 
    \51\ Id.
    \52\ http://safemedicines.org/resources/documents/Pfizercftwo-
    \53\ Dr. Nils Behrndt, Deputy Head of Pharmaceuticals Unity, DG 
Enterprise and Industry, ``Combat Counterfeit Medicines--Views From a 
Regional Organisation (EU),'' WHO Conference, Rome 16-18 February 2006, 
slide 4.
    \54\ Graham Satchwell, ``A Sick Business--Counterfeit Medicines and 
Organised Crime,'' Press Release, November 8, 2004.
    \55\ P. Danzon, The Economics of Parallel Trade, PharmacoEconomics 
    \56\ World Health Organization, ``WHO and Partners Accelerate Fight 
Against Counterfeit Medicines; Up to 50 percent of Medicines Sold 
Through Rogue Web Sites are Fake,'' November 15, 2006.
    \57\ ``Parallel Trade in Medicines,'' Social Market Foundation, May 
    \58\ Department of Health and Human Services (HHS) Task Force on 
Drug Importation, chaired by Surgeon General Richard H. Carmona, 
``Report on Prescription Drug Importation,'' December 21, 2004.
    \59\ Guy Woods, Lacuna Research Limited, ``Session V--Market 
Segmentation: techniques, actors, and incentives; Governmental 
Measures: Role of regulatory authorities,'' http:www.wto.org/English/
    \60\ BfArM report on the activities for the years 1998-2002 on page 
39 (see: http://www.bfarm.de/de/DasBfArM/publ/BfArM_Bericht_Bd01.pdf.)
    \61\ Department of Health and Human Services (HHS) Task Force on 
Drug Importation, chaired by Surgeon General Richard H. Carmona, 
``Report on Drug Importation,'' December 21, 2004.
    \62\ ``Would Prescription Drug Importation Reduce U.S. Drug 
Spending,'' Congressional Budget Office, April 29, 2004.
    \63\ Crystal Yednak and Rick Pearson, ``Audit Slams State Drug 
Plan: But Blagojevich Plans Expansion,'' Chicago Tribune: September 20, 
    \64\ Tim Craig, ``Savings Uncertain in Import Drug Plan,'' 
Washington Post: January 14, 2005.
    \65\ Christopher Rowland, ``Drug plan isn't worth the savings: 
Canada imports seen bringing liability risks,'' Boston Globe: November 
21, 2003.
    \66\ London School of Economics and Political Science, ``The 
Economic Impact of Parallel Trade,'' November 2003.
    \67\ ``Auto Industry Attacks Canadian `Gray Market' Discounts,'' 
The Associated Press, May 31, 2002.
    \68\ P. Danzon and M. Furukawa, ``Prices and Availability of 
Pharmaceuticals: Evidence from Nine Countries,'' Health Affairs, Web 
Exclusive, 29 October 2003.
    \69\ OECD Health Data 2003--2nd ed. (Table 9: Total Expenditure on 
Health, Per capita US$ PPP, available at: http://www.oecd.org/dataoecd/
1/33/2957325.xls. Table 14: Total expenditure on pharmaceuticals and 
other medical non-durables, percent Total expenditure on health, 
available at: http://www.oecd.org/dataoecd/12/58/2957414.xls.)
    \70\ ``The New Math Cheaper than Canada? The Drug Benefit May be 
the Better Deal,'' Accessed on February 1, 2006 at http://www.aarp.org/
    \71\ ``Report to the President, Prescription Drug Coverage, 
Spending, Utilization and Prices,'' Department of Health and Human 
Services, April 2000.
    \72\ S. Morgan, M. Barer and J. Agnew, ``Whither Seniors' 
Pharmacare: Lessons from (and for) Canada,'' Health Affairs, Vol. 22, 
No. 3, May/June 2003.
    \73\ ``City Council Reviews Legislation Allowing Consumers to 
Compare NYC Prescription Drug Costs Online,'' Press Release, The 
Council of the City of New York, Office of Communications, October 12, 
    \74\ Associated Press Newswires, ``Cost of prescription drugs vary 
statewide,'' June 24, 2003; Associated Press, ``Survey finds price 
differences in prescription drugs,'' September 25, 2003; ``Prescription 
drug prices vary at area pharmacies,'' St Louse Business Journal: May 
2003; City Council Reviews Legislation Allowing Consumers to Compare 
NYC Prescription Drug Costs Online,'' Press Release, The Council of the 
City of New York, Office of Communications, October 12, 2004; Mary 
Massingale ``Advocates: Shop around for prescription drugs,'' The State 
Journal-Register (Springfield, IL), June 27, 2003.
    \75\ U.S./Canadian Price Comparisons, U.S. Food and Drug 
Administration, October 2004, http://www.fda.gov/oc/opacom/hottopics/
    \76\ John E. Calfee, ``The High Price of Cheap Drugs,'' The Weekly 
Standard: July 21, 2003.
    \77\ James K. Glassman and John R. Lott, Jr., ``The Drug World's 
Easy Riders,'' Commentary, The Wall Street Journal: July 23, 2003.
    \78\ EFPIA, ``In figures 2004,'' http://www.efpia.org/Objects/2/
    \79\ Id.
    \80\ Pharmaceutical Price Controls in OECD Countries, Implications 
for U.S. Consumers, Pricing, Research and Development, and Innovation, 
U.S. Department of Commerce, International Trade Administration, 
Washington, D.C., December 2004.
    \81\ John A. Vernon, ``Simulating the Impact of Price Regulation on 
Pharmaceutical Innovation,'' Pharm Dev Regul (2003).
    \82\ Pharmaceutical Price Controls in OECD Countries, Implications 
for U.S. Consumers, Pricing, Research and Development, and Innovation, 
U.S. Department of Commerce, International Trade Administration, 
Washington, D.C., December 2004.
    \83\ European Commission, ``High Level Group on Innovation and 
Provision of Medicines, Recommendations for Action,'' G10 Medicines 
Report, (Brussels, Belgium: European Commission, May 7, 2002).
    \84\ Kerry Capell, ``Europe Pays a High Price for Cheap Drugs,'' 
Business Week: February 17, 2003.
    \85\ ``Delays in Market Access,'' Cambridge Pharma Consultancy (a 
unit of IMS Health), December 2002.
    \86\ Id.
    \87\ ``Patients Waiting to Access Innovative Therapies--The 
Patients W.A.I.T. Indicator'' accessed from http://www.efpia.org/
content/Default.asp?PageID=173 on March 2, 2007.
    \88\ O. Schoffski, ``Diffusion of Medicines in Europe,'' Prepared 
for the European Federation of Pharmaceutical Industries and 
Associations (EFPIA), September 2002.
    \89\ The Amundsen Group, ``Medicare Part D: Improving Care for 
Beneficiaries Without Drug Coverage,'' 27 October 2006.

                 The New York Times--February 20, 2007

 In the World of Life-Saving Drugs, a Growing Epidemic of Deadly Fakes

                        By Donald G. McNeil, Jr.

    Asia is seeing an ``epidemic of counterfeits'' of life-saving 
drugs, experts say, and the problem is spreading. Malaria medicines 
have been particularly hard hit; in a recent sampling in Southeast 
Asia, 53 percent of the antimalarials bought were fakes.
    Bogus antibiotics, tuberculosis drugs, AIDS drugs and even 
meningitis vaccines have also been found.
    Estimates of the deaths caused by fakes run from tens of thousands 
a year to 200,000 or more. The World Health Organization has estimated 
that a fifth of the one million annual deaths from malaria would be 
prevented if all medicines for it were genuine and taken properly.
    ``The impact on people's lives behind these figures is 
devastating,'' said Dr. Howard A. Zucker, the organization's chief of 
health technology and pharmaceuticals.
    Internationally, a prime target of counterfeiters now is 
artemisinin, the newest miracle cure for malaria, said Dr. Paul N. 
Newton of Oxford University's Center for Tropical Medicine in 
Vientiane, Laos.
    His team, which found that more than half the malaria drugs it 
bought in Southeast Asia were counterfeit, discovered 12 fakes being 
sold as artesunate pills made by Guilin Pharma of China.
    A charity working in Myanmar bought 100,000 tablets and discovered 
that all were worthless.
    ``They're not being produced in somebody's kitchen,'' Dr. Newton 
said. ``They're produced on an industrial scale.''
    China is the source of most of the world's fake drugs, experts say. 
In December, according to Xinhua, the state news agency, the former 
chief of China's Food and Drug Administration and two of his top 
deputies were arrested on charges of taking bribes to approve drugs.
    The director, Zheng Xiaoyu, was in office from the agency's 
creation in 1998 until he was dismissed in 2005 after repeated scandals 
in which medicines and infant formula his agency had approved killed 
dozens of Chinese, including children.
    ``The problem is simply so massive that no amount of enforcement is 
going to stop it,'' said David Fernyhough, a counterfeiting expert at 
the Hong Kong offices of Hill & Associates, a risk-management firm 
hired by Western companies to foil counterfeiters.
    The distribution networks, he said, `'mirror the old heroin 
networks,'' flowing to Thai distributors with financing and money-
laundering arranged in Hong Kong. The penalties are less severe than 
for heroin.
    Daniel C. K. Chow, an Ohio State University law professor and an 
expert on Chinese counterfeiting, said he believed that the authorities 
would pursue counterfeiters `'ruthlessly'' for killing Chinese citizens 
but be more lax about drugs for export.
    ``The counterfeiters aren't stupid,'' he said. ``They don't want 
anyone beating down the door in the middle of the night and dragging 
them away, so they make drugs for sale outside the country.''
    A spokesman for the Chinese Embassy in Washington said that he had 
`'no idea'' whether most of the world's counterfeits came from China, 
but that Mr. Zheng's arrest proved China was cracking down. He also 
said counterfeiters would get the same punishment no matter whom they 
    Many of the fake artesunate pills found by Dr. Newton's team were 
startlingly accurate in appearance--and much more devious in effect 
than investigators had suspected.
    Not only did the pills look correct, as did the cardboard boxes, 
the blister packing and the foil backing, but investigators found 12 
versions of the tiny hologram added to prevent forgery.
    In one case, even a secret ``X-52'' logo visible only under 
ultraviolet light was present, though in the wrong spot.
    Another hologram was forged by hand, Dr. Newton said, by someone 
who obviously spent hours with a pin and a magnifying glass making tiny 
dots on a circle of foil to imitate the shimmer.
    But the most frightening aspect appeared when the pills were 
tested. Some contained harmless chalk, starch or flour. But the latest, 
he said, contained drugs apparently chosen to fool patients into 
thinking the pills were working.
    Some had acetaminophen, which can temporarily lower malarial fevers 
but does not kill parasites. Some had chloroquine, an old and now 
nearly useless antimalarial.
    One had a sulfa drug that in allergic people could cause a fatal 
    And some had a little real artemisinin--not enough to cure, but 
enough to produce a false positive on the common Fast Red dye test for 
the genuine article.
    Those would not merely fool a laboratory, Dr. Newton noted. They 
could also foster drug-resistant parasites, so if patients were lucky 
enough to get genuine artemisinin treatment later, they might have 
already developed an incurable strain and could die anyway.
    Such resistant strains could spread from person to person by 
mosquito and ultimately render the drug ineffective, as already 
happened with chloroquine and Fansidar, two earlier malaria cures.
    ``We make no apology for the use of the term `manslaughter' to 
describe this criminal lethal trade,'' Dr. Newton and his co-authors 
said last year in an article in The Public Library of Science Medicine. 
``Indeed, some might call it murder.''
    In the United States, finding counterfeit drugs in pharmacies is 
very rare, ``but we've seen a lot from Internet sellers posing as 
legitimate pharmacies,'' said Dr. Ilisa Bernstein, director of pharmacy 
affairs for the Food and Drug Administration.
    Thus far, few counterfeits of life-saving drugs have been found in 
the United States. Most are drugs used or abused for fun, like Viagra, 
the painkiller Oxycontin and sleeping pills. Investigators have, 
however, found fake statins, which could eventually lead to a heart 
attack, and fake Tamiflu, which could be fatal in a pandemic of lethal 
    Fake drugs have a long history; the film noir masterpiece ``The 
Third Man,'' based on a real criminal case, involves adulterated 
penicillin in post-war Vienna.
    And in the 1600s, after conquistadors discovered that South 
American cinchona bark cured malaria, Europe was flooded with fake 
bark. ``It caused a great loss of confidence in it as a cure,'' Dr. 
Newton said. ``We're seeing history repeat itself.''
    The problem with antimalarials is worst in Asia, but is growing 
rapidly in Africa.
    For example, in September, Nigerian authorities found $25,000 worth 
of counterfeit malaria and blood pressure drugs concealed in a shipment 
of purses from China.
    The temptation for counterfeiters is likely to grow because money 
to fight malaria is being poured into the Third World.
    President Bush's $1.2 billion Malaria Initiative avoids the problem 
by buying directly from Western pharmaceutical companies like Novartis, 
said Dr. Trenton K. Ruebush II, an adviser to the initiative.
    By contrast, the Global Fund to Fight AIDS, Tuberculosis and 
Malaria gives money directly to poor countries to buy their own drugs, 
and sends auditors to follow up. But 80 percent of the world's nations, 
pharmacology experts estimate, lack drug agencies capable of detecting 
sophisticated counterfeits.
    ``The countries are supposed to purchase from W.H.O.-qualified 
manufacturers, but there are places where things can go wrong where we 
wouldn't necessarily have control,'' said Dr. Bernard Nahlen, the 
fund's malariologist. ``In some countries, there is, let's say, a 
certain lethargy about paying attention to these issues. You have to 
take the government's word for it, and anybody can pull the wool over 
anybody's eyes.''
    The Global Fund, which appointed a new director on Feb. 8, is 
considering adopting central purchasing, a spokesman said.
    A global alert system for counterfeit drugs has existed for 16 
years, first by fax, and now on the World Health Organization website, 
said Dr. Valerio Reggi, chief of the anticounterfeiting task force 
created last year by the organization.
    ``But it isn't used very much,'' he said. ``Regulators are human 
beings, and it's difficult to identify a benefit for those who report 
to it.''
    Dr. Reggi said the task force would try to change that by drawing 
attention to the problem and getting harsher laws passed. As he pointed 
out, in many countries, ``counterfeiting a T-shirt means 10 years in 
jail, but counterfeiting a medicine can be a misdemeanor.''

                   Parade Magazine--February 18, 2007

 Prescription Drugs Seems Safe, but Beware--Is Your Medicine Dangerous 
                             to Your Health

                            By Tom Zoellner

    Some call it the most perfect crime in medicine: Buy some empty 
gelatin capsules, fill them with worthless powder, print up a phony 
label and sell them to a drug wholesaler who has no scruples or just 
chooses to look the other way. The unsuspecting consumer who buys the 
drugs from his corner pharmacy will almost certainly never discover why 
he is getting sicker instead of better. This is called ``drug 
counterfeiting,'' a business that has expanded in the last 5 years. 
Phony drugs already have taken the lives of several Americans, and the 
perpetrators have walked off with nearly $35 billion in black market 
    Thankfully, the chances are fairly slim that your daily pills could 
be fakes, but the problem is worsening as counterfeiters become more 
savvy. The World Health Organization estimates that up to 10 percent of 
the medications sold globally are actually counterfeit. The number in 
the United States is much lower--experts peg it at 1 percent--but the 
practice is growing as dealers of illicit street drugs like cocaine and 
Ecstasy discover there are more profits and less risks in selling phony 
tablets of drugs like Ambien, Lipitor and Cipro.
    ``We're seeing a lot more of this than ever before,'' says John 
Theriault, vice president for global security at the pharmaceutical 
giant Pfizer. The problem has become serious enough for Pfizer to 
develop its own private team of 17 former law-enforcement agents to 
investigate counterfeit drugs. Theriault, an ex-FBI agent, says his 
team has come across drug labs in homes, hotel rooms and overseas 
    Phony pills are put in conventional plastic bottles that sometimes 
have labels soaked off from legitimate shipments. One such case in 2003 
involved as many as 18 million tablets of bogus Lipitor that had been 
manufactured in Costa Rica. The counterfeiters had purchased their 
ingredients from the Hong Kong office of a Swiss company and even 
embossed the fake product with a real-looking Pfizer logo. The 
``Lipitor'' was then marketed through a drug wholesaler operating in 
the Midwest and sold through legitimate pharmacies. The pills reached 
Pfizer's attention only after American customers began to complain 
about their bitter taste. It's possible that more than 600,000 people 
could have received bottles containing the fake Lipitor tablets.
    But not every counterfeit drug is cooked up in an illicit lab. Some 
unscrupulous suppliers have been known to boost their profits by 
``uplabeling''--for example, passing off a 10mg dose of a drug as 40mg. 
Expiration dates may be altered too. Experts say the vulnerabilities in 
the supply chain also can be traced to secondary drug wholesalers, who 
face pressure to keep costs low and may not be inclined to scrutinize 
the source of their purchase. Where the drug changes hands several 
times, that's where you have the problem, says one industry expert. The 
bogus drugs go from a wholesaler's warehouse to a retail pharmacy and 
into a consumer's medicine cabinet.
    Not surprisingly, the Internet is another common source of 
counterfeits. Direct-to-consumer websites offer great deals that are 
literally too good to be true. ``You can find plenty of `Canadian' 
sites that aren't really Canadian,'' says Pfizer spokesman Bryant 
Haskins. ``They're decorated with maple leaves, but we've tracked them 
to Belize, Russia, Vietnam--all over the place.''
    The deception often goes further than that. ``Overseas 
counterfeiters are also known for selling `generic' versions of drugs 
where no generics exist,'' points out Joan Todd of Eli Lilly and 
Company. ``The consumer assumes that somebody out there is regulating 
this. But anybody can set up a website and sell fake medicine.'' In one 
notorious case, Lilly investigators found a machine used to create 
bogus drugs in which a toilet seat had been jerry-rigged into the 
device. ``This obviously does not adhere to good manufacturing 
procedure,'' remarks Todd dryly.
    Last year, the U.S. Food and Drug Administration investigated 53 
cases of drug counterfeiting--up from six just 5 years ago. Though it 
is difficult to chart how many people unwittingly ingest counterfeit 
drugs each year, the injuries and deaths likely number in the hundreds. 
Experts say that thousands of Americans doubtlessly have been affected 
without even knowing it.
    Most ersatz-drug fatalities almost certainly have escaped notice, 
explains Haskins. Autopsies are not routine for the sick or elderly, 
and few doctors would ever suspect that the drugs they prescribed were 
nothing more than useless filler. What harms a patient is usually not 
toxic substances in the phony drug but a lack of the potentially 
lifesaving medication they are supposed to be receiving.
    Besides, drug counterfeiters rarely set out to kill their 
customers--such a move would invite police attention and run contrary 
to their economic interests. The logic is similar to that of a 
parasite, which seeks not to kill the host but to feed off it for as 
long as possible. This is why expensive drugs that treat long-term 
conditions such as AIDS are the most likely to be counterfeited. 
Erectile-dysfunction drugs are also a prime target because of the big 
money involved--and the disinclination of many patients to complain 
about a lack of results.
    Solving this problem will not be quick or easy. Rep. Mike Rogers 
(R., Mich.) has proposed raising the penalties for prescription drug 
counterfeiters from 3 years in prison to 20 years, putting the 
perpetrators on an equal plane with heroin dealers. The bill he 
proposed died in committee last session but was reintroduced earlier 
this month.
    The Food and Drug Administration also has encouraged drug companies 
to track their pills after they leave the factory. GlaxoSmithKline, for 
example, now inscribes its pills and packages with invisible text 
symbols to authenticate its product. But these markings would be 
checked only after a counterfeit suspicion arises.
    Tracking is becoming easier, however, with a technology known as 
Radio Frequency Identification (RFID), an advanced variety of bar code 
that is now used in the E-ZPass highway toll system, among other 
places. This technology would allow officials to scan entire pallets of 
drugs instead of checking individual barcodes. Such a system would make 
it hard to slip bogus products into the supply chain, because drugs 
could be tracked from factory to pharmacy counter. Progress with RFID 
has been slow due to the high costs involved. So far, only limited 
shipments of expensive drugs like the painkiller Oxycontin contain RFID 
tags on their labels.
    One thing everyone agrees on: The problem is becoming widespread, 
and the supply chain is still vulnerable. Up to 40 million of the 
prescription bottles handed out in the U.S. today are filled with 
substances that aren't what they claim to be, according to the National 
Association of Boards of Pharmacy.
    ``If the system becomes further compromised, it will get to the 
point where it's very difficult to fix,'' says Carmen Catizone, the 
association's executive director. ``Imagine someone going to the 
emergency room for a heart attack and being given counterfeit drugs by 
the hospital staff. This could cripple the whole health-care system.''
How to Protect Yourself
    Here are a few precautions you can take to avoid counterfeit drugs:

    Don't buy prescription drugs online unless it's through the website 
of a legitimate pharmacy.

    Look closely at your medicine. Note any signs of runny coloring or 
shoddy logos on the pills.

    Watch for changes in appearance or taste in the prescriptions you 
regularly take.

    Bring any reliable medication that suddenly begins to have no 
effect to your doctor right away.

Learn more about the counterfeit drug problem in America:
    On its website, the U.S. Food and Drug Administration posts the 
latest warnings about counterfeit drugs and offers other important 
consumer information. http://www.fda.gov/oc/initiatives/counterfeit/.
Report a suspicious drug:
    The National Fraud Information Center/Internet Fraud Watch (NFIC/
IFW) tells you step-by-step how to notify authorities if you think a 
drug you've bought is fake. http://fraud.org/fakedrugs/.

    Senator Dorgan. I've given you a bit more time.
    You've chaired these hearings before in the Congress, and--
    Mr. Tauzin. I apologize.
    Senator Dorgan.--understand we have five witnesses on this 
panel, and I want to hear the rest of them. But we appreciate 
your testimony.
    William Schultz is a partner in Zuckerman Spaeder. He was 
previously the Deputy Commissioner for Policy at the Food and 
Drug Administration, which is the position that Dr. Lutter now 
    Mr. Schultz, thank you for being with us, and you may 
proceed with your testimony.

                     ZUCKERMAN SPAEDER, LLP

    Mr. Schultz. Thank you, Mr. Chairman and members of the 
Committee. I appreciate the opportunity to testify on the 
Pharmaceutical Market Access and Drug Safety Act of 2007, S. 
    This carefully crafted and comprehensive bill, if enacted, 
would significantly improve the safety of drugs used by 
patients in the United States today. It would also make safe, 
affordable drugs available to many Americans who are, today, 
using drugs for which no generics are available, and who can't 
afford the brand prescription drugs that they need.
    One only has to listen to the testimony of Dr. Lutter to 
understand why this bill would improve the safety of drugs used 
in this country today. As Dr. Lutter has told us, today we are 
being flooded with counterfeit and otherwise unsafe drugs. We 
also know that every year American patients purchase millions 
of prescriptions by mail order from Canada. I think Dr. Lutter 
said the 2004 report had the number 25 million prescriptions 
coming across the borders in that year.
    So, the question before Congress is not whether to allow 
patients to import drugs from Canada because, as a country, we 
already do that. Instead, I submit that the real question 
before the Committee is whether S. 242 will make drugs imported 
from Canada safer.
    There are at least five reasons why American citizens will 
be significantly better off if S. 242 is enacted.
    First, the bill will carefully regulate Canadian exporters 
and U.S. importers. Even the FDA, at times, has conceded that 
drugs from legitimate Canadian pharmacies are safe. They're 
probably as safe as drugs sold in the United States. The 
problem is that, today, American consumers have no way of 
knowing which drugs they purchase are from legitimate exporters 
and which ones are not. Under the bill, the FDA will approve 
each Canadian exporter, and the exporters from other countries 
that the agency designates as having acceptable drug-approval 
systems. The bill also directs FDA to list safe Canadian 
sources on the Internet so that patients can know which 
Canadian exporters are legitimate.
    Second, under the bill, the FDA would regularly inspect 
foreign plants that manufacture drugs exported to the United 
States. Although, as was pointed out before, to date FDA does 
inspect foreign facilities that manufacture U.S. drugs, it does 
not inspect plants that manufacture Canadian drugs, even if 
they are imported into the United States.
    Third, the bill allows U.S. wholesalers and pharmacies to 
import drugs from Canada, and this system would allow for even 
more complete protection, because it provides for monitoring 
the chain of custody from the manufacturer to the wholesaler. A 
mechanism is also provided for FDA to examine any differences 
between the imported drug and the drug sold in the United 
    Fourth, the bill has an innovative provision that would 
direct the Federal Reserve Board to issue regulations to stop 
credit card payments to persons illegally exporting the drugs 
to the United States.
    And, fifth, the bill provides the FDA with the necessary 
resources. Today, the agency has little or no resources to 
inspect foreign facilities that inspect Canadian drugs--
manufacture Canadian drugs or to monitor imports. The user-fee 
provision in the bill would provide those resources.
    Mr. Chairman, today consumers are purchasing millions of 
dollars of low-cost prescription drugs from Canada. They are 
also purchasing inferior drugs from Canada and other countries 
in an effort to gain access to affordable medicines. But, 
today, consumers do not know how to separate the good drugs 
from the bad drugs. This bill would create a stream of safe and 
affordable drugs from Canada and other countries certified by 
FDA. It will make it easier for the agency to keep unsafe drugs 
out of the United States, to the great benefit of American 
    Let's not forget what's at stake here. There are many 
important drugs that patients in this country need for which 
low-cost, generic drugs are not available. These same drugs are 
available in Canada at a significantly lower price, often at 
savings as much as 50 percent. If this were any other product, 
our trade policy would allow consumers to purchase a less-
expensive alternative, if they wished. And this is not just a 
matter of saving money, as it is with most products. For many 
patients, it's a matter of their health, because they cannot 
afford the drug at the U.S. price. Today, the only way for 
these patients to protect their health is to break the law, 
and, even when they do so, they do it at the risk of importing 
fraudulent and a potentially unsafe product. S. 242 will make 
those patients law-abiders. It includes important measures 
which will go a long way toward assuring that the drugs being 
imported in this country are safe and effective.
    I'd be happy to answer any questions.
    [The prepared statement of Mr. Schultz follows:]

          Prepared Statement of William B. Schultz, Partner, 
                         Zuckerman Spaeder, LLP
    I appreciate the opportunity to testify on the issue of drug 
importation. I have been working on issues related to food and drug law 
for my entire career. I have worked on these issues as a public 
interest attorney, a Congressional staffer, an FDA official and now as 
an attorney in private practice. I have worked on issues related to 
patients obtaining drugs from foreign sources both inside and outside 
of the Food and Drug Administration. During my tenure with FDA, I 
initiated a study of the sale of prescription drugs over the Internet. 
This examination was precipitated by, among other things, concerns over 
patients obtaining illegal drugs from foreign sources. During my time 
in private practice, I became involved with issues related to the 
importation of drugs from Canada. In 2003, I represented a Canadian 
pharmacy that wanted to develop a mechanism for U.S. citizens to 
legally obtain FDA approved prescription drugs at lower prices. The 
following year, I represented the State of Illinois during its efforts 
to assist their citizens in obtaining lower priced prescription drugs 
from Canada. Specifically, I helped these clients understand FDA 
requirements and policies in this area.
    I am here today to express my support for the Pharmaceutical Market 
Access and Drug Safety Act of 2007 (S. 242). This legislation addresses 
a substantial and serious problem--patients illegally obtaining 
potentially dangerous prescription drugs from foreign sources. For the 
reasons discussed below, I believe this bill would significantly 
advance public health by creating a safe means for U.S. citizens to 
obtain lower-priced prescription drugs from countries that have 
appropriate protections in place through an FDA-controlled mechanism.
    In my testimony today, I will start by discussing the problem with 
the current system of regulation and then explain why I think this 
legislation would give U.S. citizens far more protection than they have 
I. Consumers Currently Are Purchasing Drugs From Foreign Sources and 
        Current Law Is Not Protecting Them
    The Food Drug and Cosmetic Act (the ``FD&C Act'') does not permit 
individuals to purchase prescription drugs from Canada or any other 
country. Nevertheless, U.S. consumers are doing just that, and for all 
practical purposes, much of this activity has been blessed by FDA. For 
example, FDA regularly permits patients to bring with them into the 
United States a 90-day supply of drugs that they purchased outside of 
the United States. Even though this activity is technically illegal, as 
a matter of its enforcement discretion FDA permits the import of 
prescription drugs for personal use. This policy has been in effect for 
many years, during both Democrat and Republican administrations.
    In other instances, FDA policy does not permit the activity. For 
example, there is a well-known and widespread practice of consumers 
illegally purchasing prescription drugs from foreign Internet websites 
and mail order companies. Although FDA has not condoned this practice, 
it has not been able to effectively stop it. As FDA has repeatedly told 
Congress, thousands of packages containing prescription drugs from 
foreign counties enter the United States daily. Neither FDA nor U.S. 
Customs and Border Protection (``Customs'') can effectively police this 
practice. Moreover, the law, as it currently stands, makes it extremely 
difficult and burdensome for FDA and Customs to stop the illegal 
packages that they are able to identify.
    It is not difficult to understand why consumers import drugs from 
Canada and other countries. The price difference between prescription 
drugs purchased in the United States and those purchased in Canada is 
significant. The difference can be as much as 50 percent. For many 
patients, this is the difference between being able to obtain needed 
medicines and forgoing such medicines. In recent years, the number of 
prescription drugs being brought or shipped into the United States from 
Canada and other counties has been rising dramatically.
    Because the FD&C Act does not specifically permit patients to 
obtain their prescription drugs from foreign countries, it does not 
include any protections for consumers who are engaging in it. As FDA 
has repeatedly told Congress, the risks to patients are real and they 
are great. Most patients are probably receiving medicines that are 
comparable to those sold in the United States. But others may be 
receiving medicines that are expired, subpotent, contaminated or 
counterfeit. The labeling may be in another language, thus depriving 
the patient of important information about the drug. Moreover, if the 
patient experiences problems and they manage to trace it to the drug 
(which is not likely since they usually assume the drug they got is 
safe and effective), they probably have no recourse. FDA's ability to 
take action against foreign suppliers is quite limited. The current 
system leaves American patients who obtain their prescription medicines 
from foreign countries completely unprotected.
II. The Bill Would Give Patients Who Receive Their Prescription Drugs 
        From the Designated Countries Important Protections
    S. 242 recognizes, as have even FDA officials, that prescription 
drugs sold by Canadian pharmacies are safe. The challenge is to prevent 
the import of unsafe drugs from Canada and other countries. The bill 
addresses this issue in two ways. First, it creates a mechanism for 
individuals to obtain prescription medicines for their personal use 
from registered Canadian pharmacies (or from pharmacies in another 
permitted country if FDA determines that that country's pharmacy laws 
are equivalent to Canada's). Second, it creates a mechanism for U.S. 
pharmacies and wholesalers to commercially import medicines from a 
defined set of countries under controlled conditions. Both provisions 
require that the drug be an FDA-approved drug and be manufactured in an 
FDA-inspected facility. I will discuss each of these provisions 
A. Personal Importation
    S. 242 creates a legal mechanism for Canadian (and potentially 
other FDA designated) pharmacies to ship drugs to U.S. consumers who 
have a valid prescription. As I stated earlier, U.S. citizens have been 
receiving low price drugs from Canada for many years. By formalizing 
and adding specific requirements for individual supplies, the bill is 
adding protections for those citizens. I believe the protections in the 
bill address many of the concerns that have been raised by opponents of 
the practice. For example, FDA must approve and inspect the Canadian 
exporter. Today many of the drugs that are sold in the United States 
under approved new drug applications are manufactured in facilities 
located in foreign countries and FDA has the responsibility for 
inspecting those plants.
    For Canadian exporters, the bill directs FDA to inspect no less 
than 12 times annually, which far exceeds FDA's inspection frequency 
domestically. Moreover, exporters are required to mark their packages 
in a way that allows FDA and Customs to identify legal imports. In 
addition, FDA can require exporters to incorporate anticounterfeiting 
technology or track and trace technology. The protections are designed 
to address the concerns that Canadian drugs are not actually coming 
from Canada or that Canada will become a dumping ground for counterfeit 
drugs and FDA will not be in a position to police the activity. 
Moreover, the bill directs FDA to publicly list safe sources of 
Canadian drugs so that patients will be directed to the sources listed 
by the Agency. Finally, by including a user fee for exporters, the 
legislation will ensure that FDA has the resources it needs to 
implement these provisions.
B. Commercial Importation
    S. 242 also creates a mechanism for wholesalers and pharmacies to 
import prescription drugs from Canada, the European Union, Australia, 
New Zealand, Japan, and Switzerland. It includes safeguards to ensure 
that such products are safe. Wholesalers and pharmacies that want to 
participate must register with FDA. They must provide a full chain of 
custody and FDA may require anticounterfeiting technologies. Again, the 
bill includes requirements that are more protective than those imposed 
for drugs sold domestically. S. 242 also requires manufacturers of a 
drug sought to be imported to notify FDA of any differences in their 
drug from the U.S. approved version. FDA must approve the difference 
before the drug can be imported. Again, I applaud the sponsors of the 
bill for including user fees to ensure that FDA has the means to 
oversee the program as intended. The bill also allows FDA to ease its 
way into the new system by limiting the number of participating 
pharmacies and wholesalers and then allowing that number to increase 
gradually over time.
    By creating a pathway for bulk importation, the bill provides a 
broader mechanism that allows consumers to obtain less expensive 
prescription drugs. If consumers have domestic access to lower-priced 
prescription drugs, they will not feel compelled to obtain their drugs 
from illegal, foreign sources. This legislation will significantly 
decrease the number of patients turning to illegal Internet pharmacies 
or mail order companies for their medications.
C. Stopping Illegal Imports
    I believe that this legislation will succeed because it also 
attacks the problem defensively; in other words it includes provisions 
that make it easier for FDA to stop the illegal importation of drugs. 
Under current law, FDA is required to go through a number of time 
consuming steps if it wants to detain an illegally imported drug. Here 
a simple notice to the intended recipient of the drug explaining how 
they can import drugs legally from Canada is all that is required. 
Moreover, the bill directs the Federal Reserve Board to issue 
regulations to stop credit card payments to persons illegally exporting 
drugs to the United States. In my opinion, this dual approach to the 
problem of illegal drugs entering the United States--namely provisions 
to stop the entrance and provisions to permit a safe legal 
alternative--is an excellent way to effectively protect American 
III. Conclusion
    I support this legislation because it creates legal pathways for 
consumers to obtain lower priced prescription medications from 
designated foreign sources. As I stated earlier, these pathways are 
critical to patients who simply cannot afford prescription medicines at 
the prices they must pay in this country. This is the solution for 
patients who otherwise must either forgo their medicine or obtain it 
illegally and thus, potentially unsafely.
    Opponents of this legislation have repeatedly expressed concern 
that it opens the door to dangerous foreign drugs entering the U.S. I 
disagree. These opponents are ignoring the world as it exists today and 
has for many years--where a growing number of Americans regularly 
import prescription drugs from Canada and other countries. In 2004, an 
HHS task force reported that in 2003 approximately 12 million 
prescription drug products had entered the U.S. from Canada alone. The 
report estimated that an equal amount currently is coming in from the 
rest of the world. I firmly believe that if Congress creates a legal 
mechanism for providing lower cost drugs, consumers will no longer 
resort to buying substandard or possibly dangerous drugs off of illegal 
Internet websites or mail order companies. Patients are resorting to 
this practice because their only other option is to go without their 
medicine. This legislation creates options: it creates pathways to 
ensure that patients have access to safe and effective, lower-priced 
medicines. Moreover, the bill puts an end to FDA's current policy, 
which effectively condones the breaking of the very laws FDA has been 
created to enforce. For this reason, I support passage of this 
    I appreciate the opportunity to testify today. I would be happy to 
answer any questions.

    Senator Dorgan. Mr. Schultz, thank you very much for your 
    Next, we will hear from Dr. Vernon, John Vernon, Professor 
of Economics at the University of Connecticut.
    Dr. Vernon, thank you for being with us.

                STATEMENT OF DR. JOHN A. VERNON,



    Dr. Vernon. Thank you.
    Mr. Chairman and members of the Committee, thank you for 
inviting me to testify on the policy implications of 
pharmaceutical importation.
    My name is John Vernon, and I am a professor in the School 
of Business at the University of Connecticut, and a Faculty 
Research Fellow with the National Bureau of Economic Research. 
I also serve part time as Senior Advisor for Economic Policy at 
the FDA, though my testimony will be based on academic research 
I have undertaken at the University of Connecticut. The 
opinions I am about to express are entirely my own.
    My testimony is neither in support of, nor opposition to, 
importation. Rather, I am only advocating that a balanced 
economic perspective be adopted on this important public policy 
issue, one that places the economic costs of importation on 
equal footing with the economic benefits. To date, I do not 
think this has occurred. The economic costs, I fear, have 
received relatively little attention.
    For the purposes of the points I wish to make, let us 
assume that a new importation policy will be effective in 
achieving its objective, it will significantly reduce drug 
prices in the U.S. Precisely how importation will achieve this 
objective is the subject of some debate, but one possibility is 
through a forced sales provision.
    To begin, the economic benefits of pharmaceutical 
importation are obvious. U.S. consumers will pay lower prices 
for their prescription drugs. This is because most foreign 
governments regulate drug prices. The benefits of regulated 
prices are readily apparent and straightforward to measure. The 
same, however, cannot be said about the costs. This may explain 
why they have received less attention. Please allow me to 
    Once a new pharmaceutical has been developed, which 
typically takes 12 to 15 years, and all the safety and efficacy 
data have been collected and analyzed, the marginal cost of a 
single pill is quite small. This is because the final product 
of the R&D is essentially just new information, much like 
computer software, information that has taken many years and 
hundreds of millions of dollars to obtain. In the absence of 
pharmaceutical patents and intellectual property rights and the 
ability of firms to price their products well above marginal 
cost, no firm or investor would invest the time or money needed 
to develop this information. Thus, there must be a sizable 
reward to induce the R&D. As is, only three out of every ten 
new drugs generate returns in excess of average R&D costs.
    Pharmaceutical importation, precisely to the extent it is 
successful in lowering U.S. drug prices, will reduce the 
incentives to invest in R&D. The expected returns on R&D 
projects will fall, and some projects will be terminated, and 
some projects may not be initiated. The result will be a 
decline in the rate of pharmaceutical innovation. Fewer new 
drugs will be developed, and it will take longer to find cures 
for many diseases. Unlike the benefits of the policy, the costs 
of the policy are more difficult to appreciate and quantify. 
This is because of the time lag and uncertainty associated with 
the R&D process.
    My research is focused on these costs, and, specifically, 
the economic relationships between pharmaceutical prices, 
profits, and R&D. My colleagues and I have studied the 
sensitivity of R&D spending to pharmaceutical prices and 
profits, using a variety of research methods. I will now 
summarize these results, and specifically the results from two 
recently published studies. Now, these studies have been vetted 
by the academic peer-review process and published in 
professional economics journals.
    The first study used publicly available, firm-level data 
and exploited observed differences in U.S. and non-U.S. 
pharmaceutical profit margins. Using established economic 
models and statistical techniques, we estimated that a new 
policy that reduces pharmaceutical profit margins in the U.S. 
to non-U.S. levels will cause firm R&D spending to decline by 
between 25 and 35 percent. Pharmaceutical importation will 
theoretically have this effect.
    The second study used publicly available, industry-level 
data, and studied the direct link between U.S. drug prices and 
industry R&D spending. We estimated that for every 10 percent 
reduction in U.S. drug prices, industry R&D spending will fall 
by 6 percent.
    In sum, the empirical evidence suggests R&D spending is 
very sensitive to pharmaceutical prices and profits, as 
predicted by economic theory. This is in contrast to some of 
the noneconomic notions one often hears, such as, ``Lower 
prices and profits won't reduce R&D spending, because firms 
will still have enough profit to cover their R&D,'' and, 
``These firms have to invest in R&D. What else are they going 
to do?''
    The point of my testimony is that the benefits associated 
with lower U.S. drug prices will unequivocally come at a cost: 
lower levels of R&D and a reduced rate of innovation. It is 
imperative, I think, that these costs be balanced carefully 
against the benefits of importing price-regulated 
pharmaceuticals from abroad. This is particularly true in light 
the recent evidence on the significant contributions of 
pharmaceutical and medical R&D to human health and life 
expectancies in the U.S.
    Thank you.
    [The prepared statement of Dr. Vernon follows:]

    Prepared Statement of Dr. John A. Vernon, Assistant Professor, 
  Department of Finance, University of Connecticut School of Business
    Mr. Chairman and members of the Committee, thank you for inviting 
me to testify today on the policy implications of pharmaceutical 
importation. My name is John Vernon and I am a professor in the School 
of Business at the University of Connecticut and a Faculty Research 
Fellow with the National Bureau of Economic Research (NBER). I also 
serve part-time as Senior Adviser for Economic Policy in the Office of 
Policy and Planning at the Food and Drug Administration, but my 
testimony will be based on academic research I have undertaken at the 
University of Connecticut. The opinions I am about to express are 
entirely my own; they do not necessarily reflect those of the 
institutions and organizations with which I am affiliated.
    As you will soon see, my testimony is neither in support of, nor in 
opposition to, importation. Rather, I am only advocating that a 
balanced economic perspective be adopted on this important public 
policy issue--one that places the economic costs of importation on 
equal footing with the economic benefits. To date, I do not think this 
has occurred: the economic costs of importation have received 
relatively little attention.
    For the purposes of the points I wish to make, let us assume a new 
importation policy will be effective in achieving its objective: it 
will significantly reduce drug prices in the U.S. Precisely how 
importation will achieve this objective is the subject of some debate, 
but one possibility is through a forced-sales provision (such as that 
contained in the recently reintroduced Pharmaceutical Market Access and 
Drug Safety Act of 2007).
    To begin, the economic benefits of pharmaceutical importation are 
obvious: U.S. consumers will pay lower prices for their prescription 
drugs. This is because most foreign governments regulate drug prices, 
and importing drugs from these markets is simply an indirect price 
control--albeit one set by foreign governments.1,2 The 
benefits of lower, government-regulated prices are readily apparent and 
straightforward to measure. Unfortunately, the same cannot be said 
about the costs. This may partially explain why they have received less 
attention in the debate. Allow me to explain.
    Once a new pharmaceutical has been developed (which typically takes 
12-15 years), and all the safety and efficacy data have been collected 
and analyzed, the marginal manufacturing cost of a single pill is quite 
small. This is because the final product of the pharmaceutical R&D is 
essentially just new knowledge and information (much like computer 
software): information that has taken many years and hundreds of 
millions of dollars to obtain. In the absence of intellectual property 
rights (pharmaceutical patents), and the ability of drug companies to 
price their products significantly above marginal manufacturing costs, 
no investor or firm would be willing to invest the time and financial 
resources necessary to discover and develop this information. Thus, 
there must be a sizable reward to induce the R&D. As is, only 3 out of 
every 10 new pharmaceuticals generate returns in excess of average R&D 
costs (Grabowski and Vernon, 2000).
    Pharmaceutical importation, precisely to the extent it is 
successful in lowering U.S. drug prices, will reduce the financial 
incentives to invest in R&D.\3\ The expected returns on individual R&D 
projects will fall and some projects will be terminated (or not 
initiated). This is because these projects will no longer generate 
expected net returns for the firm's shareholders.\4\ The result will be 
a decline in the rate of pharmaceutical innovation: fewer new drugs 
will be developed and it will take a longer time to find cures for many 
diseases, all else considered.\5\ Unlike the benefits of the policy, 
which will produce immediate and observable savings through lower drug 
prices, the costs are more difficult to appreciate and quantify.\6\ 
This is because of the considerable time lag and uncertainty associated 
with the R&D process, which, as already noted, is very long, costly, 
and risky.\7\ My academic research has focused on these costs, and 
specifically the economic relationships between pharmaceutical prices, 
profits, and R&D.\8\
    The sensitivity of R&D spending to pharmaceutical prices and 
profits has been studied with a variety of different research methods, 
including standard retrospective statistical analyses of industry and 
firm-level data, prospective simulation analyses, and financial event 
studies (Vernon, 2003, 2004, 2005; Giaccotto, Santerre and Vernon, 
2005; Abbott and Vernon, 2007; Santerre and Vernon, 2006; Golec, Hegde, 
and Vernon, 2006; Golec and Vernon, 2007). The research findings have 
been strikingly consistent and robust. I will summarize the results 
from two recent studies (Vernon, 2005; Giaccotto, Santerre, and Vernon, 
2005). Both have been vetted by the academic peer-review process and 
have been published in professional economics journals.
    The first study utilized publicly available, firm-level financial 
data and exploited observed differences in U.S. and non-U.S. 
pharmaceutical profit margins (the latter were used to proxy profit 
margins in the presence of price regulation). Using established 
economic models and statistical techniques, we estimated that a new 
policy that reduces pharmaceutical profit margins in the U.S. to non-
U.S. levels will cause firm R&D spending to decline by between 25 and 
35 percent, all things considered. An importation policy that imports 
regulated prices from foreign markets will theoretically have this 
effect on U.S. profit margins.
    The second study adopted a slightly different approach and used 
publicly available, industry-level data to study the direct link 
between U.S. drug prices and industry-level R&D spending (Giaccotto, 
Santerre, and Vernon, 2005). In this study, we estimated that for every 
10 percent reduction in U.S. drug prices, industry R&D spending will 
decline by approximately 6 percent. This finding is consistent with an 
earlier study that also analyzed industry-level pharmaceutical R&D 
(Scherer, 1996; 2001).
    In sum, the empirical evidence suggests firm R&D spending is very 
sensitive to pharmaceutical prices and profits, as economic theory 
predicts. This is in direct contrast to the ubiquitous noneconomic 
notions one often hears, such as ``lower prices and profits won't 
reduce R&D spending because firms will still have enough profit to 
cover their R&D'' and ``these firms have to invest in R&D, what else 
are they going to do?''
    The point of my testimony today is that the benefits associated 
with lower drug prices in the U.S. will, unequivocally, come at a cost: 
lower levels of R&D and a reduced rate of pharmaceutical innovation. It 
is imperative that these costs be balanced carefully against the 
benefits of importing price-regulated pharmaceuticals from abroad. This 
is particularly true in light of the recent evidence on the significant 
contributions of pharmaceutical and medical R&D to human health and 
life expectancies in the U.S. (Murphy and Topel, 2003; Lichtenberg, 

    \1\ It is important to note that importing patented pharmaceuticals 
from outside the United States is not a free trade issue. This is a 
common misunderstanding. The rationale for free trade is based on the 
doctrine of comparative advantage: where countries specialize in the 
production of goods and services for which they are, comparatively 
speaking, low-cost producers, and then trade freely with other 
countries that are doing the same thing. Free trade is good for U.S. 
consumers, the U.S. economy, and the global economy. But pharmaceutical 
prices in Canada and elsewhere are lower because drug prices are 
regulated in those markets, and not because those countries have a 
comparative advantage in the production of pharmaceuticals (in the 
absence of price regulation, it is likely that prices would still be 
lower outside the U.S. because of lower per capita real income). It is 
imperative to understand that the real issue at hand is intellectual 
property rights. If patented pharmaceuticals are imported from abroad, 
the U.S. patent system is circumvented, and price controls will be 
indirectly imposed on pharmaceuticals in the U.S.
    \2\ It is likely that even in the absence of price regulation 
foreign drug prices would still be lower outside the U.S. because of 
lower per capita income levels (see Danzon and Towse (2003) for a 
detailed discussion and analysis.
    \3\ Some researchers have suggested that an importation policy that 
reduces drug prices in the U.S. will actually increase firm profits 
(which would lead to increased R&D spending). But this ``argument'' 
assumes firm managers are currently not acting in the best interest of 
the firm's shareholders and are, for lack of a better word, stupid. 
This ``argument'' does not have any economic merit.
    \4\ The implicit argument being put forth is a net present value 
(NPV) argument. A real options framework, in the parlance of modern 
finance theory, will generate the same prediction (see Golec, Hegde, 
and Vernon, 2006).
    \5\ The phrase ``all else considered'' is important here. The 
relevant comparison for assessing the impact of an importation policy 
on R&D spending and innovation is the counterfactual event of no 
importation policy. R&D and innovation are driven by a number of 
factors and even if an importation policy is enacted real R&D spending 
may continue to grow over time, but it would grow at a slower rate than 
would have been the case if the policy were not enacted. The relevant 
measure of the effect of policy is one that holds all other factors 
constant: the comparison of the reality with the counterfactual. Some 
of the research I will mention in this testimony can easily be taken 
out of context. For example, if the statement is made that 
pharmaceutical importation will reduce R&D by x percent, this is x 
percent relative to the level of R&D spending in the absence of the 
policy, not R&D spending in absolute terms.
    \6\ To more formally consider the balancing of the costs and 
benefits with respect to a policy allowing pharmaceutical importation, 
the following may provide some clarification. Once a pharmaceutical 
product has been brought to market, pricing above marginal cost results 
in an underutilization of the new product (from a social welfare 
perspective). These costs are referred to as static inefficiency costs. 
Thus, a tradeoff exists between providing incentives for research and 
development (R&D), and thus innovation, and consumer access to today's 
medicines: this is the balance the U.S. patent system tries to strike. 
While there is nothing sacrosanct about the current structure of the 
U.S. patent system for pharmaceuticals, or indeed the existing rate 
(and stock) of R&D investment, what is immediately apparent is that 
allowing importation of prescription drugs from price-regulated 
markets, while it will expand access to medicines already developed 
(the aforementioned benefits), it circumvents the U.S. patent system 
and allows foreign governments to set the price of pharmaceuticals in 
the U.S. This, as I have mentioned, will reduce the future supply of 
new drugs. These costs are referred to as dynamic inefficiency costs. 
The optimal policy (or patent system) will minimize the sum of the 
static and dynamic inefficiency costs.
    \7\ The term risk here refers to the technical risk of an R&D 
project, which is the likelihood it will make it through the various 
stages of drug development and become a marketed product. This is quite 
different from financial risk, which is the risk faced by an investor 
who holds the market portfolio, i.e., the relevant risk for determining 
the project's cost of capital (or discount rate).
    \8\ While understanding how R&D spending may be affected by 
pharmaceutical importation is important, what is most relevant is how 
this change in pharmaceutical R&D spending will influence innovation 
and public health. Obviously, measuring the costs associated with 
forgone future innovation is a near impossible task: there are many 
variables that can affect the outcome. However, because there is an 
overwhelming tendency for public policy debate to focus on the short-
run benefits of lower (regulated) drug prices, it is critical that 
efforts be untaken to at least approximate the magnitude of what the 
corresponding costs would be in terms of lower levels of innovation. 
Only then can the benefits of lower drug prices be weighed against the 
costs to determine if the policy is a good one. A very rough first 
approximation of the social costs associated with various 
pharmaceutical price-reduction policies (measured in terms of life 
years and dollars) may be found in Vernon (2004).
    Abbott, T. and Vernon, J.A. (2007) ``A Financial Simulation Model 
of the Firm Pharmaceutical R&D Investment Decision: Implications for a 
New U.S. Price Control Policy.'' Forthcoming, Managerial and Decision 
Economics, Summer 2007.
    Danzon, P.D. and Towse, A. (2003) ``Differential Pricing for 
Pharmaceuticals: Reconciling Access, R&D, and Patents.'' With Adrian 
Towse. International Journal of Health Care Finance and Economics, 3: 
183-205, 2003.
    DiMasi, J.A., Hansen, R.W., Grabowski, H.G. (2003) ``The Price of 
Innovation: New Estimates of Drug Development Costs.'' J Health 
Economics. 22:151-185.
    Giaccotto, C., Santerre, R.E. and Vernon, J.A. (2005) ``Drug Prices 
and R&D Investment Behavior in the Pharmaceutical Industry'' (with 
Rexford Santerre and Carmelo Giaccotto) Vol. 48, Issue 1, 195-214 2005. 
Journal of Law and Economics.
    Golec, J., Hegde, S., Vernon, J.A. (2006) ``Pharmaceutical Stock 
Price Reactions to Price Constraint Threats and Firm-Level R&D 
Spending'' NBER Working paper # w11229, Cambridge, MA.
    Golec, J. and Vernon, J.A. (2006) ``European Pharmaceutical Price 
Regulation, Firm Profitability, and R&D Spending'' NBER working paper # 
w12676, Cambridge MA.
    Grabowski, H.G. and Vernon, J.M. (2000) ``The Distribution of Sales 
Revenues from Pharmaceutical Innovation.'' Pharmacoeconomics. 18 
Supplement 1: 21-32.
    Lichtenberg, F.R. (2002) ``Sources of U.S. Longevity Increase, 
1960-1997.'' National Bureau of Economic Research, working paper 8755, 
Cambridge, MA.
    Murphy, K.M. and Topel, R.H. (2003) ``The Economic Value of Medical 
Research;'' in Measuring the Gains from Medical Research; edited by 
Kevin M. Murphy and Robert H. Topel, The University of Chicago Press.
    Santerre, R, and Vernon, J,A, (2006) ``Assessing the Gains from A 
Drug Price Control Policy in the U.S.'' Vol. 73, Issue 1 (July) 2006. 
Southern Economic Journal.
    Scherer, F.M. (1996) ``Industry Structure, Strategy, and Public 
Policy,'' Harper Collins College Publishers.
    Scherer, F.M. (2001) ``The Link Between Gross Profitability and 
Pharmaceutical R&D Spending.'' Health Affairs. Sept./Oct.; 20:216-220.
    Vernon, J.A. (2003) ``Simulating the Impact of Price Regulation on 
Pharmaceutical Innovation.'' Pharmaceutical Development and Regulation. 
1(1): 55-65.
    Vernon, J.A. (2005) ``Examining the Link Between Price Regulation 
and Pharmaceutical R&D Investment.'' 14:1 2005: 1-17. Health Economics.
    Vernon, J.A. (2003) ``The Relationship Between Price Regulation and 
Pharmaceutical Profit Margins.'' Applied Economics Letters. Volume 10, 
    Vernon, J.A. (2004) ``New Evidence on Drug Research and Price 
Controls.'' Regulation: The Cato Journal of Business and Government, 
Volume 27, Issue No. 3, 2004.

    Senator Dorgan. Dr. Vernon, thank you very much. We 
appreciate your testimony.
    Dr. Schondelmeyer, why don't you proceed. You're from the 
University of Minnesota?
    Dr. Schondelmeyer. Yes.
    Senator Dorgan. And we appreciate, very much, your being 
here today.


    Dr. Schondelmeyer. Ja, you betcha.
    Thank you very much, Mr. Chairman and members of the 
Committee. I'm Steve Schondelmeyer. I'm a professor of 
pharmaceutical economics and management at the University of 
Minnesota, where I direct the PRIME institute that does 
research on pharmaceutical, economic, and policy issues. My 
comments today are my own, and not those of any other body or 
    I appreciate the opportunity to address this Committee, 
would remind you, as others have, that we still have a number 
of Americans who do not have health insurance or prescription 
drug coverage. So, the new Medicare Part D program certainly 
has helped drug coverage in America for some Americans, but it 
hasn't solved the access to drug therapy problems throughout 
the country, and there are still a number of people who do not 
have access.
    Also, coverage does not solve the affordability problem, it 
only shifts it from the individual to the other private or 
public sources who are paying for the drugs for those 
individuals. In fact, I would argue that coverage, especially 
when that coverage is under public programs, increases the 
importance of examining price as a part of the issue, because 
now we are paying for the costs of those medications out of the 
public coffers, and it is a cost to each of us, as taxpayers. 
And I think we all have a responsibility to use those resources 
    My comments today will be focused upon the potential role 
of drug importation and its expected impact on market prices 
and the presence of counterfeits in the U.S. marketplace.
    Drug importation, I think, can be an important tool in this 
marketplace if we use it wisely and carefully.
    Consumers are very price-sensitive. That's, in fact, why 
they go to Canada or the Internet to buy this same drug, the 
exact same drug, at a lower price. They are trying to express 
their demand. They're screaming in the marketplace, saying, 
``We need lower prices on drugs,'' but the manufacturers don't 
seem to hear that very well.
    I think prescription drug coverage for some, or even all, 
consumers does not solve this affordability problem, because 
Medicare Part D, in particular, we subsidize the costs of that 
program. And, again, that puts it on the public rolls. 
Provision of coverage under public programs without meaningful 
market-based pressures and negotiation of price is much like 
writing a blank check to the pharmaceutical companies. And I 
think that's much the position we're in.
    Other developed countries have brand name prices that are 
25 to 60 percent lower than the price for the same drugs in the 
U.S. marketplace. While the U.S. may be willing to pay premium 
prices compared to other countries, we continue to experience 
this ever growing price premium compared to other countries, 
and not only is the price higher, but year-to-year increases in 
prices go up in the U.S. on average 3 to 7 percent a year; in 
other countries, the prices may go down 3 percent or up 3 
percent in a range of about plus or minus 3 percent. The rate 
of growth of prices is much slower in other countries, as well. 
And that also creates a problem, and creates that gap of 
difference in price between the U.S. and other countries.
    Yes, generics are an important part of the competitive 
pharmaceutical marketplace, but generic--and generics hold down 
U.S. drug expenditures, but they don't address the problem of 
the person who needs a single-source, brand name prescription 
drug that does not have a generic alternative. Generics aren't 
the answer. They might be, in a market sense, a part of the 
answer, but, for each individual patient who needs a specific 
drug, they hold no promise.
    If no drug is available for an individual consumer, they 
face that monopoly price of the brand name country. As has been 
noted, the EU has experienced parallel trade for a number of 
years, and a large share of the trade in pharmaceuticals that 
occurs in the EU in certain countries comes through parallel 
trade and importation.
    Importation, I think, is an important part of the big 
picture related to affordability of drugs in a society. The 
U.S. represents about 51 percent of the total manufactured-drug 
purchases in the developed world. The EU countries are about 25 
percent, and Canada is less than 5 percent. So, collectively, 
Canada and the EU are about 30 percent, the U.S. is 50 percent. 
If we took and--totally opened up with reimportation, I won't 
sit here and tell you that we will see EU or Canadian prices in 
the U.S., but we'll move closer to them. We will see the U.S. 
price go down some, we will see the EU and Canadian prices go 
up some. The end equilibrium price is much more likely to be 
close to the U.S. price than it is to the Canadian or European, 
primarily because we're such a larger share of the market to 
begin with. But I think we could easily see 12 to 20 percent 
drops in most drug prices in the U.S.
    But, even more importantly, I think we would see a slowing 
of the rate of growth of those prices over time, which is as 
much a problem as the price itself. Both are important, both 
must be tracked.
    Let me remind you, as we heard earlier today, that Congress 
passed the Prescription Drug Marketing Act of 1987, 20 years 
ago, and that Act required a pedigree, a paper or electronic 
process for maintaining the documentation of the source of 
origin and the traveling of that product through the channels 
of distribution. It wasn't until 1999 that the FDA first even 
promulgated regulations, nearly 12 years after the Act was 
passed. FDA had a law on the books they could have implemented 
that would have assured we knew where our product came from, 
and how it traveled through the market, and how it went out and 
came back into the U.S., and who made it, and where it was. 
They just recently have promulgated and begun to implement 
rules related to that pedigree. I think we need to look back at 
that pedigree process and move that ahead as quickly as we can 
to make sure we can assure we know where all the product in the 
marketplace comes from, and that it is safe and effective.
    Major wholesalers and chains in the U.S. also have 
international operations in Canada, in Europe, in Mexico. And 
they're ready, today. They're doing business in those markets. 
It would take very little for them to begin to import products 
from their Canadian operations, their European operations, 
other sites.
    The newer and most expensive drug products are the ones 
that are most often counterfeited. Why? Because they have the 
highest price and the highest profit margins, and the highest 
gross margin compared to their actual marginal cost of 
    Let me conclude by recommending that I think we need to 
encourage that pedigree process as quickly as possible. We need 
to eliminate or closely regulate the sale of drugs over the 
Internet, both domestically and internationally. That's not how 
you're going to--that isn't going to lower prices in the U.S., 
as a whole; it does, for each individual that buys there, but 
not for the market, as a whole.
    Second, establish a pedigree system that must be initiated 
at the manufacturer level, must be--cannot be unreasonably 
withheld by the manufacturer from wholesalers and end-
purchasers, and is required as the product passes to the 
wholesaler and pharmacy or any other end-purchaser.
    Third, set uniform standards for the pedigree system so 
that we don't end up with a multiplicity of State requirements 
that would proliferate and complicate the process and the cost 
of implementing the pedigree system, and bog it down, 
    Fourth, authorize importation of pharmaceuticals through 
normal channels of distribution, manufacturers, wholesalers, 
chain warehouses, and community pharmacies.
    Finally, prohibit manufacturers from manipulating the 
supply as a means of limiting importation from the markets with 
lower prices.
    I would argue, members of the panel, that if you allowed 
importation through normal channels, your constituents could go 
to their corner drugstore and get their prescription at the 
same price that they find on the Internet or in Canada. They 
won't be using the Internet anymore, and FDA won't have to 
worry about shutting down those Internet sites, because your 
constituents will have a way to get that lower price that 
they're demanding.
    Thank you very much.
    [The prepared statement of Dr. Schondelmeyer follows:]

   Prepared Statement of Stephen W. Schondelmeyer, Pharm.D., Ph.D., 
 Professor of Pharmaceutical Economics and Director, PRIME Institute, 
              College of Pharmacy, University of Minnesota
    Thank you, Mr. Chairman and members of the Senate Subcommittee for 
this opportunity to provide input into your deliberations regarding 
policy implications of pharmaceutical importation. I am Stephen W. 
Schondelmeyer, Professor of Pharmaceutical Economics at the University 
of Minnesota, College of Pharmacy where I also serve as Director of the 
PRIME Institute. The PRIME Institute focuses on pharmaceutical research 
involving management and economics. These remarks are my own views 
based upon my extensive research and experience with the pharmaceutical 
marketplace throughout the past thirty years, during which I have 
studied the economic behaviors and pricing policies of the 
pharmaceutical industry and have developed a broad understanding of the 
dynamics of the pharmaceutical marketplace. In particular, I have also 
examined the structure and financing of both private and public 
pharmaceutical benefit programs.
    This Committee is considering issues that influence access to 
pharmaceuticals, one of the most important components of the health 
care system. Keep in mind that prescription drugs have a universal 
demand. That is, everyone in society needs prescription drugs at some 
point during their lifetime. Virtually everyone has used, will use, or 
should have used prescription drugs during their lifetime. During any 
given week one-half of the adult population uses one, or more, 
prescriptions and more than three-fourths of the population age 65 and 
over uses one, or more prescriptions.
    While the new Medicare Part D drug program has provided coverage 
for many seniors and disabled, there are still about 47 million 
Americans with no health insurance and no prescription drug insurance. 
Affordability is still a problem for those uncovered person who must 
pay for their own prescriptions. Also, coverage does not solve the 
affordability problem, it simply shifts the issue of affordability from 
the individual to private or public sources. Employers are struggling 
with rising health care and prescription drug costs. Also, the total 
cost of the Medicare Part D drug program to society is a major cost 
that the Federal Government will struggle with in the years ahead. 
Coverage does not make price irrelevant, and in fact, public program 
coverage makes the price of prescription drugs an even more important 
policy issue for Federal and state governments. My comments today will 
be focused upon the potential role of drug importation and its expected 
impact on market prices and the presence of counterfeit drugs in the 
U.S. market. Drug importation is an important tool that, if used 
properly, can facilitate increased access and decreased presence of 
counterfeits in the market.
    There are several major prescription drug issues which the 
Committee should address as part of health care reform. I want to 
address four issues, which are specifically mentioned in the Health 
Security Act, and which should be incorporated into any other package 
that emerges to reform health care in the United States:

        1. economic forces are driving the demand for importation of 

        2. generics are an important competitive factor in the U.S. 
        market, but generics do not eliminate the need for more 
        rational pricing of brand name drugs;

        3. parallel trade is present in the European Union market;

        4. the drug supply in the U.S. is safe, but counterfeits exist 
        in the market;

        5. high prices and low cost of production are major factors 
        leading to counterfeits;

        6. wholesalers and chains are positioned for a global market;

        7. nontraditional distribution channels need to be monitored or 
        eliminated; and

        8. manufacturers will attempt to control supply to maintain 

Economic Forces Driving the Demand for Re-importation
    Consumers are very ``price sensitive,'' that is, they are not 
willing to pay higher drug prices when the same drug is available in 
the market at a lower price. Consumers have been shopping with their 
feet (by traveling to Canada or Mexico) and with their fingers by 
shopping on the Internet. The behavior of consumers indicates that many 
are screaming that price does matter, but drug firms are not listening 
to these cries. Uninsured consumers may have to choose ``your money or 
your life'' when it comes to certain prescription drugs. In other 
words, a number of persons needing prescription drugs may have to 
forego needed prescriptions due to lack of resources and, or, high drug 
prices. This may include individuals without drug insurance coverage 
and persons covered by public programs with limited resources such as 
state Medicaid programs, state and Federal HIV-AIDs programs, and the 
Medicare Part D drug benefit. The total cost of the Medicare Part D 
drug program is projected to be considerably above the original 
    Private employers are also concerned about rising health and drug 
benefits costs that are choking off corporate profits and global 
competitiveness. International drug prices do differ at the firm level 
and at the product level, if not also at the market level. While 
examination of drug prices at the aggregate market level is of 
interest, it is not particularly relevant to the individual who needs a 
specific drug product in the U.S. market. Consumers do not buy a 
``market basket'' of drugs, but rather they buy only the one, or a few 
drugs, that they need at the time. Prices set by drug firms on the 
basis of differences in income levels across countries may have some 
logic from a macroeconomic perspective, but this approach does not take 
into account the income disparities experienced within a specific 
country. In particular, the U.S. has much greater income disparity and 
diversity than most other developed countries. Based on the price 
discrimination practiced by drug firms, the cash payers in the U.S. 
market pay the highest prices in the U.S., and for that matter the 
world, yet the U.S. cash payers are often among the lowest income 
persons within the U.S. Those without health and drug insurance may 
include part-time workers, workers who are at minimum wage and without 
employer-based health insurance, and others with limited resources. 
Lack of coverage for the individual, when not subsidized, still means 
the person has to pay the full cost of drug therapy.
    Prescription drug coverage for some, or even all, consumers does 
not solve the affordability problem. Coverage benefits the individual 
when a public subsidy is provided to help cover the cost of drugs, but 
we all bear the total cost of drugs provided through tax-subsidized 
public programs. Provision of coverage under public programs without 
meaningful market-based pressure and negotiation of the price is 
essentially the same as writing ``blank checks'' for pharmaceutical 
firms. Other hearings in Congress have explored and examined the 
possible ways that the Medicare Part D drug program may exercise market 
negotiation power for better prescription drug prices.
    Other developed countries (Canada, the EU, and others) have brand 
name drug prices that are 25 percent to 60 percent below the U.S. 
prices of the same drugs. While the U.S. may be willing to pay a 
premium price compared to other countries, we continue to experience an 
ever-growing price premium compared to other developed countries. Not 
only are the brand name drug prices typically higher in the U.S. than 
in other developed countries, but these other countries usually 
experience annual drug price changes in the range of plus or minus 3 
percent versus price changes in the United States that may vary from 
plus 3 percent to plus 10 percent or more.
Generic Are an Important Competitive Factor
    Generics are an important competitive factor in the U.S. 
prescription drug market, but do not solve the affordability and 
pricing problems. Certainly generics help to hold down the total U.S. 
drug expenditures. Even though generics account for more than one-half 
of all outpatient prescriptions filled in the United States each year, 
their relatively low prices result in generics accounting for about 15 
percent to 20 percent of total drug expenditures. People are not going 
to Canada, or the Internet, to buy the $4 generic prescriptions that 
are available through selected Wal-Mart and Target stores. This limited 
set of generics, accounts for about 1 percent to 3 percent of total 
drug expenditures for persons who choose to go to Wal-Mart or Target 
    In most cases, generics are less expensive in the U.S. than in 
Canada, or other developed countries. Generics may help lower the 
overall, weighted average market price, but generic prices are not 
relevant to the individual who needs a specific brand name medication 
with no generic alternatives. If no generic is available for your 
prescription, then you may face the monopoly brand name price in the 
United States.
Parallel Trade Is Present in the European Union Market
    All EU countries engage in some parallel trade (importation) for 
prescription drugs. Greater than 10 percent of the drug supply flows 
through parallel trade in the U.K., the Netherlands, and Denmark. 
According to IMS Health, the European market ``is a market that has 
exactly the same high quality requirements'' across member countries. 
Parallel trade occurs and depends upon: price level in the destination 
country; price difference compared to the source country (20 percent 
or more will lead to parallel trade); product volume available in the 
source country; product volume demanded in the destination country; 
costs of transportation, customs, and product verification; assurance 
that market conditions allow importers to make a reasonable profit; and 
legal and regulatory conditions that support the rights of importers.
    Parallel trade with importation, and re-importation, is a part of 
the ``big picture'' needed for affordable drugs in a society. 
Importation, and re-importation, will help, but will not completely 
solve the pricing concerns for prescription drugs. Re-importation will 
not deliver Canadian, or EU prices to the United States, but some 
equilibrium price in between the U.S. price and the developed world 
price will be achieved. Keep in mind that the U.S. is the single 
largest pharmaceutical market in the world. For the 12 months ending in 
December 2006, the manufacturer prescription sales to the developed 
world were about $388 billion and to the total world were about $555 
billion. The U.S. represents about 51 percent ($198 billion) of the 
manufacturer sales to the developed world. In contrast, the top five 
countries in Europe are about 25 percent ($96 billion) and Canada is 
3.5 percent ($14 billion) of manufacturer prescription sales to the 
developed world.

                                  Manufacturer   Percent of   Percent of
                                    Sales  ($      Total       Selected
                                   in billion)     World        World
Total World                             $554.7        100.0
Developed (Selected) World               388.3         70.0        100.0
U.S.                                     197.8         50.9         35.7
Europe (Top 5)                            95.5         24.6         17.2
Canada                                    13.7          3.5          2.5
Australia/New Zealand                      5.8          1.5          1.0
Japan                                     56.7         14.6         10.2
Latin America                             18.7          4.8          3.4

    Parallel trade through importation, or re-importation, from Canada, 
the EU, and selected other developed countries will not deliver 
Canadian, or European prices, to the U.S. in the long run (more than 2 
years). Importation, or re-importation will deliver a developed world 
equilibrium price less than the U.S. price and more than the Canadian 
or EU price. In fact, the equilibrium price will be closer to the U.S. 
price than to the EU or Canadian price since U.S. accounts for more 
than 50 percent of market for developed countries while the other 
countries in the proposed parallel trade market are about 30 percent of 
the developed countries market. U.S. prices may decrease about 12 
percent to 20 percent after implementation of parallel trade. As 
important as the price decrease, would be the effect on price changes 
over time. Parallel trade would most likely lead to slower inflation in 
brand name prices than the U.S. is accustomed to paying. The inflation 
rate would probably slow to about 2 percent to 4 percent per year 
rather than 4 percent to 7 percent per year.
The Drug Supply in the United States is Safe, But Counterfeits Exist in 
        the Market
    ``The U.S. drug supply chain is probably the safest one in the 
world, and we're working hard to keep it that way,'' said Tom McGinnis, 
Director of Pharmacy Affairs, U.S. Food and Drug Administration (FDA). 
McGinnis went on to say ``There's a lot of money to be made in knocking 
off these kinds of products if you can get them into the distribution 
system.'' [Traffic World, Journal of Commerce, ``Securing the Drug 
Pipeline,'' June 20, 2005] The FDA estimates that less than 1 percent 
of U.S. drugs are counterfeit or adultered. The most frequently 
counterfeited drugs are those with the highest prices (e.g., cancer and 
hematoligic agents) and the highest volume (e.g., Lipitor). ``America 
has become the go-to market for counterfeiters because we pay the 
highest prices of anyone in the world,'' says Katherine Eban [Eban, K., 
Dangersous Doses: How Counterfeiters are Contaminating America's Drug 
Supply.] High prices for drugs with relatively low marginal costs play 
a role in determining the types of drug products that are the target of 
counterfeiters. Lowering prices through parallel trade may, in fact, 
reduce the likelihood of counterfeits.
    While importation of drugs from Canada and other countries is 
illegal, the current policy in the United States has been a somewhat 
passive tolerance of personal importation from Canada via the Internet 
and mail or through `drug trips' to Canada or Mexico. This has resulted 
in sort of an individualized `wild west' environment for prescription 
drug importation. That is, Americans can usually import prescription 
drugs via the Internet or in person as long as no one is watching and 
the quantity is limited (e.g., a 1 month to 12 month supply). This 
informal policy of allowing ad hoc importation does little, if 
anything, to prevent counterfeits and may also be harmful to patients 
by fragmenting their prescription drug records. With fragmented 
prescription drug records, physicians, pharmacists, and pharmacy 
benefit managers are less likely to have the information necessary to 
properly advise the patient on drug use, interactions, and potential 
    Congress passed the Pharmaceutical Drug Marketing Act in 1987, 
twenty years ago. The Act required that a ``pedigree''--paper or 
electronic--be maintained to document the origin and source of a drug 
product all the way from the manufacturer to the end dispenser. The FDA 
did not even promulgate proposed regulations until 1999, and it 
announced in 2004 that it would delay the effective date of those rules 
until December of 2006. Certainly, the technology for these pedigrees 
has changed substantially over the past twenty years. Today, electronic 
pedigrees in various forms appear to be far more efficient than paper 
pedigree procedures. The pedigree can authenticate the source of a drug 
product and it may also serve as a means to track-and-trace a drug 
throughout the distribution chain and even for recalls, if needed for a 
drug product. After more than twenty years, it is time that this 
pedigree process be implemented.
    If the pedigree process was in place, then the traditional drug 
distribution channels could effectively maintain the quality of the 
drug supply whether the drug originates in the U.S. or is imported by 
the manufacturer, wholesaler, or pharmacy. One step in this direction 
has been the recent action by the Healthcare Distribution Management 
Association (HDMA) in 2003. The HDMA adopted voluntary Guidelines for 
Pharmaceutical Distribution System Integrity, which encourages 
distributors to carefully scrutinize each of their business partners 
both upstream and downstream.
Wholesalers and Chains Are Positioned for a Global Market
    In the year 2000, the National Wholesale Druggist Association 
(NWDA) changed its name to the Healthcare Distribution Management 
Association (HDMA). As described in the trade publication known as The 
Pink Sheet, ``The change from emphasis on a `national' organization to 
one defined by `health distribution' comes as NWDA members face the 
legislated opportunity of moving products across borders to take 
advantage of different pricing levels.'' [FDC Reports, The Pink Sheet, 
Vol. 62, No. 44, Oct. 30, 2000, p. 19] Indeed, major wholesalers and 
chains already have international operations and connections with 
Canada, Mexico, and European Union countries. ``McKesson has operations 
to the north and south of the U.S. border that could help the company 
implement an import provision.'' [FDC Reports, The Pink Sheet, Vol. 62, 
No. 44, Oct. 30, 2000, p. 8]
    Bindley Western (now part of Cardinal Health) ``CEO Bill Bindley 
told an Oct. 25 (2000) conference call that ``we're looking at drug 
import legislation, as are our competitors . . . if there is 
opportunity, you can be assured that we'll be trying to take advantage 
of it.'' [FDC Reports, The Pink Sheet, Vol. 62, No. 44, Oct. 30, 2000, 
p. 8]. Cardinal Health has wholesaling operations and interests in 
Canada and Europe. In addition to wholesalers, ``some chains already 
operate internationally, `looking at a global market is something 
they're already accustomed to,' '' added Mary Ann Wagner, Senior V.P., 
Regulatory Affairs, National Association of Chain Drug Stores (NACDS). 
``NACDS members that operate in Canada include Cardinal's Medicine 
Shoppe, Costco, and Wal-Mart. Chains could import drugs through their 
own distribution centers or agreements with wholesalers.'' [FDC 
Reports, The Pink Sheet, Vol. 62, No. 49, Dec. 4, 2000, p. 14]
Non-traditional Distribution Channels Need to Be Eliminated or 
    There are, or have been in recent years, thousands of wholesalers 
in the United States although only about 46 of these firms are 
traditional, full-line drug wholesalers. The three largest wholesalers 
(McKesson, Cardinal Health and AmeriSourceBergen) accounted for 92.7 
percent of the U.S. pharmaceutical wholesale market in 2004. [HDMA 
Foundation, 2005-2006 HDMA Factbook: Industry Overview, 2005, p. 22]
    Brand name drug firms are themselves, in part, responsible for many 
of the large number of faux wholesaler firms registered with states 
such as Florida and California. Most of these firms are not traditional 
wholesalers, but rather they are end-purchasers such as clinics and 
physician's offices. These end-purchasers have been induced to register 
as wholesalers by the pricing scheme of one or more brand name 
pharmaceutical firms so that the `registered wholesaler' can benefit 
from special pricing when purchasing high cost specialty drugs from 
these certain manufacturers. These faux wholesaler pricing schemes have 
most commonly been developed for specialty drug products (e.g., 
oncology and hematological drugs) sold to, and administered by, clinics 
and physicians' offices. The faux wholesaler may buy a larger quantity 
than required for their own needs in order to qualify for certain 
levels of volume discounts from the manufacturer and then they re-sell 
the excess quantity of product purchased to other clinics or 
physician's offices.
    For example, the pricing scheme of TAP Pharmaceuticals for their 
Lupron product provided favorable pricing to clinics and physicians 
that were registered as wholesalers. The favorable prices to faux 
wholesalers were also hidden from private and public third party 
payers. This pricing scheme was the subject of legal actions that led 
to settlements with the U.S. Department of Justice ($875 million) and 
with a class action group of plaintiffs. This proliferation of faux 
wholesalers to qualify for certain discounts created opportunities for 
counterfeit, stolen, or diverted drug products to also enter the 
distribution system. In some cases, the large wholesalers would buy 
drug product back from these faux wholesalers through what has come to 
be know as the ``gray market.''
    The newer and most expensive drug products, also known as specialty 
drug products, have been one of the most often targets of 
counterfeiters. These drug products are targets because they have both 
very high prices and very high profit margins above the marginal cost 
of production for both legitimate and counterfeit product. One 
manufacturer (i.e., Johnson & Johnson) has taken steps (Jan. 19, 2004) 
to assure that drug wholesalers ``purchase J&J products directly from 
the manufacturer, in an effort to reduce counterfeits.'' [FDC Reports, 
The Pink Sheet, Vol. 65, No. 50, Dec. 15, 2003, p. 37] ``J&J's current 
policy has stipulated that customers who purchase Procrit or any other 
Ortho Biotech product from a different source will have their account 
status immediately terminated. The more stringent policy will likely 
better secure the supply chain.'' This policy requirement by J&J is not 
expected to pose a major challenge for the three largest wholesalers 
(AmeriSourceBergen, McKesson, and Cardinal) because these firms have 
committed to ``eliminating purchases from secondary wholesalers as part 
of anti-counterfeit measures.'' [FDC Reports, The Pink Sheet, Vol. 65, 
No. 46, Nov. 10, 2003, p. 31]
Manufacturers Will Attempt to Control Supply To Maintain Prices
    Even if importation is allowed, drug firms will try to limit 
importation by limiting supply into the lower-priced markets. This 
phenomenon has already been seen in Canada in response to Canadian 
importation into the U.S. market. ``In a Jan. 3 (2003) letter, GSK 
(GlaxoSmithKline) said it would stop selling drugs to any Canadian 
distributor whose pharmacy clients are suspected of selling them to 
U.S. customers.'' The letter states ``GSK will refuse to supply our 
products through your distribution centers until such time that we are 
satisfied that you are complying with our Terms and Conditions of 
Sale.'' [FDC Reports, The Pink Sheet, Vol. 65, No. 3, Jan. 20, 2003, p. 
27] ``Other companies, including Merck, have previously sent letters to 
their purchasers to remind them of similar reimport rules. GSK's move, 
however, appears to be the first time a company has set out 
consequences for failure to comply.'' The actions of GSK and other 
manufacturers have had some impact on drug supply in Canada. Keep in 
mind that the United States represents about 50 percent of the world 
pharmaceutical market, while Canada is only about one-tenth that size, 
or 5 percent of the world market.
    Health Canada has also conducted inspections of ``Canadian 
pharmacies that are thought to be acting as wholesalers for the purpose 
of exporting drugs to the U.S.'' The Executive Director of the Canadian 
National Association of Regulatory Authorities told the DHHS task force 
on drug importation at its April 27, 2004 meeting that if pharmacies 
``are purchasing drugs from other pharmacies, they're acting as 
wholesalers. And if they don't have an establishment (wholesale) 
license, that would be illegal. The Canadian authority is also looking 
for ``unapproved drugs being dispensed.'' [FDC Reports, The Pink Sheet, 
Vol. 66, No. 18, May 3, 2004, p. 40] The Health Canada official pointed 
out that ``in terms of the exportation of drugs to the U.S., there's 
nothing federally (in Canada) that prevents that (importation).''
    The following recommendations are made to facilitate importation 
(and re-importation), while minimizing counterfeits in the U.S. market. 
Consumers and private and public programs are far more likely to 
benefit from importation through the traditional distribution channels 
in the United States. Internet purchases would drop dramatically, or 
virtually disappear, if American consumers can get the lower prices of 
foreign markets at their corner drug store. Also, the pharmacist can 
maintain a complete medication history and more appropriately provide 
counseling and medication therapy management.

        1. Eliminate or closely regulate sale of drugs over the 
        Internet, both domestic and international.

        2. Establish a pedigree system that: (a) must be initiated at 
        the manufacturer level, (b) can not be unreasonably withheld 
        from wholesalers and end-purchasers, and (c) is required as 
        product passes to wholesaler and pharmacy, or other end 

        3. Set uniform standards for the pedigree system so that a 
        multiplicity of state requirements do not proliferate and 
        complicate the process (and cost) of implementing the pedigree 

        4. Authorize importation of pharmaceutical products through 
        ``normal channels of distribution'' (i.e., traditional 
        wholesalers, chain warehouses, and community pharmacies).

        5. Prohibit manufacturer manipulation of supply as a means to 
        limit importation from the markets with lower prices.

    Senator Dorgan. Dr. Schondelmeyer, thank you very much.
    Finally, we will hear from Nelda Barnett, who's a member of 
the Board of Directors of the AARP.
    Ms. Barnett, you may proceed.

                    BOARD OF DIRECTORS, AARP

    Ms. Barnett. Mr. Chairman and members of the Committee, I 
am Nelda Barnett, a member of AARP Board of Directors. Thank 
you very much for including AARP in your discussions about the 
implication of prescription drug importation for U.S. 
    Americans need affordable prescription drugs, but, for too 
many people, the price of drugs is beyond their means. Recent 
AARP studies reveal that drug prices continue to rise much 
faster than the rate of inflation. Our members tell us that 
these high prices are the single greatest barrier to obtaining 
needed medication.
    Rising prescription drug prices affect every segment of the 
population. Though tens of millions of Medicare beneficiaries 
are now getting help with their prescription drug costs through 
Medicare Part D, beneficiaries are still feeling the effects of 
rising prescription drugs--costs--in the form of higher 
premiums, deductibles, copayments, and, for some beneficiaries, 
lack of coverage in the donut hole.
    Escalating prescription drug prices continue to hamper 
employers' ability to provide health insurance coverage for 
their workers and families. Pressures also squeeze public 
programs at both the State and Federal level. Rising 
prescription drug prices plague Medicaid and put pressures on 
states' ability to maintain current coverage levels, let alone 
expand eligibility to meet the increasing need as fewer 
employers provide access to affordable healthcare coverage.
    Finally, rising prescription drug prices particularly hurt 
the almost 47 million Americans who lack health insurance. 
These individuals pay most of the highest prices in the world 
for the--for their prescription drug needs. Some don't fill 
prescriptions, because they cannot afford to do so.
    Importation is not the sole solution to soaring drug prices 
in the United States, but it will create downward pressure on 
drug prices and provide consumers some immediate relief.
    The simple fact is that importation is already happening. 
Many Americans already purchase their drugs from other 
countries. The trend is growing, and we have a responsibility 
to ensure that Americans can access lower drug costs safely.
    Safety is critical in any importation system. The Dorgan-
Snowe bill ensures safety and provides consumer protections, 
including anti-counterfeiting and anti-tampering requirements, 
mandatory labeling and chain-of-custody requirements. My 
written statement outlines these safety precautions and 
    I would also like to add that a system of safe importation 
cannot be realized if the industry curtails supply. We believe 
that a vital component of the Dorgan-Snowe bill are the 
provisions that seek to prevent the drug industry from cutting 
off supply to countries engaging in importation to the United 
    AARP has endorsed the Dorgan-Snowe importation legislation, 
S. 242. We believe it meets the challenge of designing a 
prescription drug importation program that will ensure the 
integrity of pharmaceuticals and provide consumers access to 
lower-cost drugs.
    Our members want Congress to enact bipartisan legislation 
this year to allow for safe, legal importation of lower-cost 
prescription drugs. AARP is pleased to see this Committee and 
Members of Congress from both sides of the aisle moving forward 
on this issue.
    We understand the challenges Congress faces in designing a 
program that ensures the integrity of pharmaceuticals, but does 
not create an overly burdensome process that would prevent 
consumers from gaining access to lower-cost prescription drugs. 
We believe the Dorgan-Snowe legislation meets that threshold, 
and we urge its enactment this year.
    Thank you, again, for inviting us here, and I'm happy to 
answer any questions.
    [The prepared statement of Ms. Barnett follows:]

 Prepared Statement of Nelda Barnett, Member, Board of Directors, AARP
    AARP is pleased that the Committee is moving forward with the issue 
of prescription drug importation. Congress has been considering 
legislation to provide for importation of lower-priced prescription 
drugs for well over a decade, and we strongly urge you and your 
colleagues to take action this year to enact S. 242, the Pharmaceutical 
Market Access and Drug Safety Act. We believe this legislation includes 
measures to ensure the safety of imported prescription drugs, while at 
the same time allowing Americans to gain access to lower-priced 
prescription drugs.
Prescription Drug Prices Continue to Rise at Unsustainable Rates
    Prescription drug costs continue to rise. Recent reports estimate 
that total spending on health care is expected to double by 2016, and 
much of this is due to rising prescription drug costs.\1\
    \1\ John A. Poisal, et al., Health Spending Projections Through 
2016: Modest Changes Obscure Part D's Impact, Health Affairs, 21 Feb. 
    A recent AARP study revealed that, on average, pharmaceutical 
manufacturer prices for the 193 brand name drugs most widely used by 
older Americans rose at nearly twice the rate of general inflation in 
2006.\2\ Reversing the trend between 2004 and 2005, when the average 
rate of increase in manufacturer drug prices fell, the 2006 average 
growth rate of 6.2 percent represents an up-tick from the 2005 average 
increase of 6.0 percent. For the 153 brand-name drugs that were in the 
market since 2000, this translates into a cumulative average price 
increase of 53.6 percent, over two-and-one-half times the general 
inflation rate of 20.1 percent over the same period.\3\
    \2\ David J. Gross, Leigh Gross Purvis, and Stephen W. 
Schondelmeyer, Trends in Manufacturer Prices of Brand Name Prescription 
Drugs Used by Older Americans, 2006 Year-End Update, AARP Public Policy 
Institute Data Digest #DD154 (Washington, D.C.: AARP), March 2007.
    \3\ Id.
    The new Medicare prescription drug benefit is helping tens of 
millions of Medicare beneficiaries better afford their prescription 
drugs. However, even with this new program, Medicare beneficiaries are 
still feeling the effects of rising prescription drugs costs in the 
form of the higher premiums, deductibles, co-payments and--for some 
beneficiaries--lack of coverage in the donut hole.
    Medicare beneficiaries are not the only group impacted by rising 
prescription drug prices. Escalating prescription drug prices continue 
to hamper employers' ability to provide health insurance coverage for 
their workers and families. In addition employers are increasingly 
eliminating or curtailing their retiree prescription drug coverage.
    Pressures also continue to squeeze public programs at both the 
state and Federal level. Rising drug prices also plague Medicaid, and 
put pressure on states' ability to maintain current coverage levels. 
These prices also hamper states' ability to expand eligibility to meet 
the increasing need as fewer employers provide access to affordable 
health care coverage.
    Finally, rising prescription drug prices particularly hurt the 
almost 47 million Americans who lack health insurance. These 
individuals pay among the highest prices in the world for their 
prescription drug needs. Some don't fill prescriptions because they 
cannot afford to do so.
Public Support for Importation Grows
    For the millions of Americans without drug coverage and those with 
limited coverage, importation is seen as an option to obtain access to 
affordable medications. A recent AARP poll found that AARP members 
overwhelmingly support Congress allowing for the importation of drugs 
from Canada and Europe.\4\ While AARP does not believe prescription 
drug importation is the sole solution to soaring drug prices in the 
United States, we do believe it is one way to begin to secure lower 
priced drugs.
    \4\ AARP Knowledge Management, Medicare Price Negotiation of 
Prescription Drugs--A National Poll February 12, 2007, page 8, 
available at: http://assets.aarp.org/rgcenter/health/
    Our members and their families question why brand name drug prices 
in Canada and other industrialized countries can be lower--sometimes by 
as much as 50 percent lower--than prices in the U.S. It is a national 
embarrassment that people from all over the world come to the United 
States to access our advanced medical systems while many of our own 
citizens need to look outside our borders in order to afford their 
prescription drugs.
    The simple fact is that importation is already happening. In 2003, 
Americans purchased approximately 12 million prescription drug products 
(valued at almost $700 million) from Canada alone.\5\ As prescription 
drug prices continue to rise, more and more individuals are choosing to 
import prescription drugs. We have a responsibility to ensure that 
Americans who choose to import prescription drugs do so safely. 
Congress can no longer afford to do nothing but hope that the millions 
of Americans who purchase prescription drugs from abroad do so without 
dire consequences.
    \5\ HHS Task Force on Drug Importation, Report on Prescription Drug 
Importation, December 2004, at 11-12.
Congress Should Act Quickly to Pass the Dorgan-Snowe Legislation
    We believe that Congress should enact legislation that provides 
appropriate safeguards while at the same time ensuring a workable 
system for prescription drug importation. Currently, many prescription 
drugs sold for market in the U.S. are already manufactured abroad and 
brought into the U.S. safely and legally by prescription drug 
manufactures. If these manufacturers can import drugs safely and 
legally, then a process can be created to allow American consumers to 
safely import drugs.
    S. 242 balances the challenge of designing a prescription drug 
importation program to ensure the integrity of pharmaceuticals while at 
the same time providing consumers access to lower price prescription 
drugs. We strongly urge you and your colleagues to enact S. 242 this 
Dorgan-Snowe Ensures the Safety of Imported Drugs
    Access to lower-priced prescription drugs isn't enough. These 
prescription medications must be safe and efficacious. Recent news 
reports highlight an increasing problem with the use of counterfeit 
drugs. Implementing a system of safety procedures could begin to 
alleviate this serious problem.
    AARP supports the approach taken in S. 242 to create a system that 
provides for importation of safe, effective pharmaceuticals. The 
legislation first legalizes personal importation from Canadian 
pharmacies and wholesalers. Regulation of the Canadian pharmacy system 
closely resembles its U.S. counterpart, and drugs purchased from Canada 
can be as safe as drugs purchased in the United States.
    Under the legislation, importers and exporters must agree to allow 
their place of business to be inspected by the Food and Drug 
Administration (``FDA'') not less than twelve times per year. The 
legislation also tasks the FDA with the responsibility of ensuring that 
the prescription drugs imported from abroad are comparable to drugs 
available in the U.S. market. If the difference between the foreign 
drug and its U.S. counterpart is minimal, the FDA can allow the drug to 
be imported into the U.S. However, if the difference is significant, a 
supplemental application may be required. If the supplemental 
application would not be approved, the FDA will prevent the importation 
of the prescription drug.
    To ensure that the FDA isn't besieged with inspection and 
certification requirements, the legislation allows the FDA to phase-in 
its review of registered importers and exporters, provided that 
priority is given to entities that can process a high volume of sales. 
Likewise, the legislation also permits the FDA to phase-in its review 
of foreign versions of FDA-approved drugs to determine whether they are 
the same as their U.S. counterparts. AARP believes that phasing in 
these provisions will further bolster the safety of the importation 
plan by providing FDA the opportunity to conduct thorough inspections 
and review.
Pedigree Requirements
    One way of effectively ensuring the safety of pharmaceuticals is 
the institution of pedigree requirements--the ability to trace a drug 
from the point of origin to the point of dispensing. In order to 
accomplish this task in an expanded international arena, the Dorgan-
Snowe legislation mandates that importers and exporters may only 
purchase prescription drugs from a manufacturer or entity that can 
establish a drug's pedigree. These requirements include identification 
of the drug's prior sale or transaction and contractual authority to 
inspect records to determine whether an entity engaged in the system is 
in compliance with applicable safety and other standards. AARP believes 
that standards such as these are crucial to protecting the quality and 
efficacy of imported pharmaceuticals.
    In order to ensure safety, pharmaceuticals imported from another 
country should be equipped with anti-tampering materials and anti-
counterfeiting measures. As the technology in this area progresses, 
imported pharmaceuticals should be equipped with state-of-the-art 
devices, such as bar codes, and specialized ink, or other appropriate 
technology. The Dorgan-Snowe bill requires the use of anti-tampering 
and/or track-and-trace technologies to prevent counterfeiting of 
imported drugs.
    Finally, S. 242 provides that pharmaceuticals imported by 
wholesalers and pharmacies be labeled in such a way as to indicate to 
the consumer that the drug has been imported under the new system. 
Consumers will thus expect to realize some savings from these 
Anti-Gaming Provisions
    We recognize that some manufacturers are already curtailing their 
drug supply to Canada and other countries, which could lead to supply 
shortages or fear of retribution by entities that engage in 
importation. An importation proposal that does not seek to prevent 
entities from pressuring those who engage in importation will amount to 
nothing more than an importation system in name only. Our members do 
not want hollow promises of importation--they want legislation passed 
that will allow them the opportunity to fill their prescription safely 
and at a lower price.
    Therefore, AARP believes that anti-gaming provisions are a vital 
component of any importation legislation. The Dorgan-Snowe legislation 
seeks to prevent entities--particularly pharmaceutical manufactures--
from eliminating or curtailing drug supply to those who engage in 
importation of prescription drugs to the U.S. so that the system can 
work as Congress intends.
Protection from Rogue Internet Pharmacies
    Many consumers who choose to purchase prescription drugs from 
abroad do so through Internet pharmacies. Unfortunately, many consumers 
fall victim to rogue Internet pharmacies due in part to the inability 
to distinguish between reputable and fly-by-night operations.
    The Dorgan-Snowe legislation instructs the FDA to maintain a 
website listing approved pharmacies. Having the FDA website as the 
point of contact for a list of approved pharmacies provides consumers 
with an official, secure source of information on safe drugs. However, 
not all consumers have access to the Internet; therefore, the 
legislation provides that the FDA must also maintain a toll-free number 
where consumers can get information on approved foreign sources.
    The Dorgan-Snowe legislation provides for a safe and effective 
system for allowing importation of prescription drugs. Our members, and 
all Americans, need Congress to enact this bi-partisan, legislation 
this year. We are pleased to see this Committee and Members from both 
Houses of Congress and both sides of the aisle moving forward on this 
issue. AARP pledges to work with you to make safe importation a 

    Senator Dorgan. Ms. Barnett, thank you very much for being 
    And thanks, to all five of you, for offering testimony 
today, testimony that is varied and different, and comes to 
different conclusions about this issue. We recognize it's a 
controversial issue. And that's precisely why we have asked 
witnesses to provide varied viewpoints.
    Dr. Schondelmeyer, you heard Dr. Lutter, and you heard 
former Congressman Tauzin, describe--I think Billy Tauzin's 
comment was, ``open the door to those products to come in,'' 
referring to the legislation that would allow importation. I 
think Mr. Lutter described the counterfeits and the specter of 
reimportation compromising our drug supply, amplifying the 
problem of counterfeits, and so on. You disagree with that? And 
you have indicated in your testimony, I believe, that you feel 
that safety provisions in the Dorgan-Snowe bill would, in fact, 
strengthen our confidence in the drug supply. Can you respond 
to that?
    Dr. Schondelmeyer. Sure, I'd be glad to, sir.
    First of all, I believe that the current system we have is 
much like the Wild West environment, where people can do about 
anything they want, in terms of buying prescription drugs on 
the Internet, as long as they keep the quantities low and they 
don't get caught in the process; or they can go across the 
border to Canada and Mexico, and we kind of look the other way 
and let them do it. And that's--so, the door is open. The back 
door, the front door is open already. I think the system 
proposed by the Snowe-Dorgan bill and similar bills really 
defines a process that closes the system and says, ``We will 
use the traditional channels, the channels that FDA knows and 
works with. We will ask FDA to finally give us a pedigree 
chain-of-custody system that they've had authority to do for 20 
years, and haven't done.'' And I think that will close the 
system and help keep counterfeits out of the market, rather 
than make them more available.
    Senator Dorgan. Mr. Tauzin, what's wrong with that 
analysis, if anything?
    Mr. Tauzin. Well, there's a lot wrong with it. And we'll be 
happy to comment in much larger degree to you, to all of the 
points that we think are weak in the draft we've seen.
    But one of the most important parts, for example, is that 
the FDA, under the bill, has no control over the shipper and 
where the drugs are coming from. There is no authorization, no 
possibility, as you heard from FDA, for them to regulate 
unregulated manufacturers in China and India and Kazakhstan, or 
wherever it may be coming from. The bill opens up importation, 
as you know, to many more countries--29 more countries--than 
does the current law, which applies to Canada. And even if you 
limited it to Canada, we're told that the drugs coming into 
Canada are coming from many other sources. There are figures we 
can give you on the incredible rising number of imports into 
Canada from strange sources around the world of drugs 
manufactured in establishments not regulated by the FDA, not 
controlled, nor even registered with the FDA. Under this bill, 
they would remain unregistered, uncontrolled, uninspected, and 
they would be allowed to ship into the authorized receivers in 
this country of those products, and they would be commingled 
with the supply in this country. It is----
    Senator Dorgan. But, Mr. Tauzin----
    Mr. Tauzin. It is not a simple task. And my final thought, 
Mr. Dorgan, is--I mean, we're obviously willing to work with 
you on this. The law requires that if Donna Shalala and Mr. 
Thompson and Mr. Leavitt had been able to certify the safety, 
that importation would be allowed. The problem is, they have 
not been able to do so. It is not as easy as has been described 
here. And even, I think, the attempts in this bill to address 
those issues are going to fall woefully short. But we'll be 
happy to have those conversations with you about why we think 
that's true.
    Senator Dorgan. I'll give you a chance to respond in a bit 
again, except I would observe that the counterfeiting that is 
described by you and Mr. Lutter is occurring under today's 
circumstances. And I believe that the legislation that we have 
drafted will, in fact, substantially reduce the opportunity for 
that. But let me ask Mr. Schultz.
    Mr. Schultz, you, in a previous life, were the Deputy 
Commissioner for Policy at the FDA. You believe that, with 
proper resources, that there can be a regime of reimportation 
that does not threaten or compromise our prescription drug 
supply in this country. Is that correct?
    Mr. Schultz. Yes. And I've reviewed your bill. There are 
always going to be constructive suggestions and improvement and 
so on, but it's a very comprehensive, sophisticated approach 
that, most importantly, gives the agency resources to do the 
    Senator Dorgan. Let me ask if there's any of you on the 
panel who believes that the U.S. consumer should pay the 
highest prices in the world for brand name prescription drugs. 
Now, that, I believe, is now the case. You can contest that, if 
you like. But if that is the case--and I believe it is--does 
anybody believe that is the fair method of pricing prescription 
drugs, that the U.S. consumer should bear the highest cost?
    Mr. Tauzin. I don't.
    Senator Dorgan. You don't?
    Mr. Tauzin. I think we have failed miserably in insisting 
that other people around the world bear the cost of R&D. 
Charlie Rangel, in an interview, Sunday, made it very, very 
clear. Congressman Rangel said, ``You know, Americans pay the 
R&D expenses--for a lot of things, not just pharmaceuticals--
for the rest of the world, and they don't bear a responsible 
share of the cost.'' And that's true. And that's a failure of 
our trade policies.
    Senator Dorgan. So----
    Mr. Tauzin. But importing their price control systems into 
our country is not free trade, and it is not the kind of stuff 
that is going to lead to the investment in R&D and new drugs 
that we need for the world, much less for this country.
    Senator Dorgan. So, if the consumer in the U.S. pays the 
highest prices in the world--80-year-old man sitting on a straw 
bale on a farm in southern North Dakota tells me his wife is 
fighting breast cancer for 3 years--3 years. They drive back 
and forth to Canada, because it's the only way they could 
afford Tamoxifen, at, you know, 80 percent discount. If--this 
is the case for American consumers, that they----
    Mr. Tauzin. Mr. Chairman, I read your story, a number of 
times. Tamoxifen, today, under the Medicare Part D, which is 
available to that couple you met, would cost 30 cents a day 
    Senator Dorgan. Yes, which----
    Mr. Tauzin. The prices--we've got a chart we'll show you, 
of the top ten medicines, where actually the prices under 
Medicare Part D coverage, where insurance--where seniors now 
have available coverage with those drugs--are lower than 
Canadian prices.
    Senator Dorgan. That would work if you were 77 years old, 
but not if you're 57 years old.
    Mr. Tauzin. Well, as a matter of fact----
    Senator Dorgan. So, it's part pragmatic----
    Mr. Tauzin.--that's why we put the PPA program together.
    Senator Dorgan. But----
    Mr. Tauzin. This year, we've reached the 3.5 million mark 
of patients we've added to free medicine programs in this 
country, who are in that category, Mr. Dorgan. What we're 
saying is, there are better alternatives----
    Senator Dorgan. I commend the industry for that, Mr. 
Tauzin, but----
    Mr. Tauzin. Thank you.
    Senator Dorgan.--that is not a substitute for fair pricing. 
And I asked the question, anybody think that the current 
system, in which we pay the highest prices, is a fair system? 
All of you, I think--I don't think anybody volunteered to say, 
``Yup, sign me up. I think Americans ought to continue to pay 
the highest prices.'' If that is the case, then the question 
isn't whether we have a change, the question is, what is the 
change to try to resolve that?
    Now, Dr. Vernon, you came with a study that says if you cut 
prices--that is, create a circumstance in which the market 
system, the U.S. consumer can access, through the market 
system, the FDA-approved drug at a lower price, the price it's 
being sold at in much of the rest of the world--if you do that, 
it would necessarily reduce the amount of research and 
development expenditures by the pharmaceutical industry. I 
understand the math of that, but I don't understand the 
circumstances of why you connect that price to R&D. How about 
connecting that to marketing, for example? My feeling is that 
most of the drug industry spends more on marketing and 
promotion than they do on research and development, or----
    Mr. Tauzin. That's not true.
    Senator Dorgan.--at least it's a very--well, we'll have the 
    Mr. Tauzin. OK.
    Senator Dorgan.--you may submit for the record----
    Mr. Tauzin. Yes, we will----
    Senator Dorgan.--your evaluation----
    Mr. Tauzin.--do that.
    Senator Dorgan.--of that.
    [The information previously referred to follows:]

     Additional Statement of W.J. Billy Tauzin, President and CEO, 
      Pharmaceutical Research and Manufacturers of America (PhRMA)
    Mr. Chairman, I wanted to address the issue you raised regarding 
how much drug companies spend on research and development, marketing 
and direct-toconsumer advertising.
    The biopharmaceutical industry spent $55.2 billion in 2006 on 
research and development according to data from PhRMA's Annual Survey 
\1\ and an independent analysis by Burrill & Company, an increase from 
$51.8 billion in 2005.\2\ By way of comparison, the biopharmaceutical 
industry spent $11.4 billion on marketing and educational activities in 
2005, including $4.2 billion on direct-to-consumer ads, according to 
IMS Health.\3\ Notably, in October 2006, CBO reported, ``The 
pharmaceutical industry is one of the most research-intensive 
industries in the United States. Pharmaceutical firms invest as much as 
five times more in research and development, relative to their sales, 
than the average U.S. manufacturing firm.'' \4\
    \1\ PhRMA, Profile; Appendix: PhRMA Annual Member Survey 
(Washington, D.C.: PhRMA).
    \2\ Burrill & Company, analysis for PhRMA, 2006 and 2007. Includes 
PhRMA research associates and nonmembers.
    \3\ IMS Health, Integrated Promotional ServicesTM and CMR, 5/2006.
    \4\ Congressional Budget Office, Research and Development in the 
Pharmaceutical Industry; October 2006.
    Some critics of the biopharmaceutical industry have claimed 
companies spend more on marketing than on research. First, they reach 
this flawed conclusion by categorizing all selling, general, and 
administrative expenses reported in filings to the Security and 
Exchange Commission (SEC) as ``marketing costs.'' However, this line-
item includes such non-marketing costs as free medicines provided to 
low-income patients through patient assistance programs, distribution 
and shipping expenses, systems and IT support, and corporate functions 
(i.e., legal, communications, dues, procurement, utilities and property 
taxes). As Princeton professor Uwe Reinhardt has written, ``the 
[selling, general and administrative] category represents many expenses 
other than selling expenses and should not be seen as an estimate 
purely of outlays on marketing, as the industry's critics occasionally 
do.'' \5\ I hope that we can agree that these comparisons are not 
grounded in fact.
    \5\ U.E. Reinhardt, Perspectives on the Pharmaceutical Industry; 
Health Affairs, September/October 2001
    Second, the critics who make this point also fail to acknowledge 
that marketing expenditures help bring patients into treatment for 
previously untreated or undertreated conditions,\6\ and help improve 
compliance with physician-prescribed treatment.\7\ Moreover, there is a 
gap in ``translating research findings into medical practice.'' \8\ 
Bringing health professionals FDA-regulated information regarding 
prescription medicines can help bridge this gap.\9\ Early intervention 
and improved compliance for conditions like high blood pressure, 
diabetes, and cardiovascular disease can help patients remain healthier 
and avoid high health care costs.
    \6\ J.S. Weissman et al.. ``Physicians Report on Patient Encounters 
Involving Direct-to-Consumer Advertising.'' Health Affairs Web 
Exclusive, April 28, 2004.
    \7\ Federal Trade Commission and Department and the Department of 
Justice, Improving Health Care: A Dose of Competition; July 2004.
    \8\ C. Lenfant, ``Clinical Research to Clinical Practice: Lost In 
Transition?'' The New England Journal of Medicine, August 28, 2003.
    \9\ Dubois. R., et al., ``Growth in Use of Lipid-Lowering 
Therapies: Are We Targeting the Right Patients;'' The American Journal 
of Managed Care, October 2002.
    The pharmaceutical industry's investment in the discovery of new 
medicines is yielding important results for patients. For instance, 
just over the last few weeks, the FDA has approved a medicine that 
represents an entirely new approach to treating high blood pressure 
\10\ and press reports \11\,\12\ indicate promising trial 
results for three new medicines to treat HIV, including two that are 
entirely new approaches to attacking this virus and one that overcomes 
resistance to earlier drugs of its type.
    \10\ FDA Press Release. ``FDA Approves New Drug Treatment for High 
Blood Pressure;'' March 6, 2007.
    \11\ Lawrence Altman and Andrew Pollack. ``2 New Drugs Offer 
Options to Fight H.I.V. in Novel Ways''. The New York Times, February 
28, 2007.
    \12\ Marilyn Chase, ``Emerging Drugs Show Promise Against HIV.'', 
The Wall Street Journal. February 28, 2007.
    At the same time that medical advances continue to meet patients' 
health care needs, medicines remain a small part of overall health 
spending. According to the latest estimates by the Centers for Medicare 
& Medicaid Office of the Actuary (OACT), spending on prescription 
medicines accounted for 10 percent of national health spending in 2005, 
and 8.5 percent of overall growth of health care costs. Other services 
accounted for over 91 percent of overall cost growth. In 2005, 
prescription drug spending growth slowed for the sixth consecutive 
year, reaching its lowest level (5.8 percent) since 1977.

    Senator Dorgan. But the fact is, it's a--if not, it's a 
very close second. And this morning I once again, as I was 
getting ready for work, was asked if I shouldn't ask my doctor 
about several kinds of prescription drugs. A substantial amount 
is spent on marketing and promotion. Did you study whether 
reducing the expenditure for direct television ads, for 
example, asking me whether I could ask my doctor if the purple 
pill was right for me or for my colleague Senator Snowe--if 
they reduced that expenditure, could that amplify and help with 
additional research and development?
    Dr. Vernon. I appreciate that question. And I would add 
that all businesses and companies, and politicians, for that 
matter, invest in marketing. It's part of the business 
practice. And firms make decisions on how much they're going to 
invest in R&D based upon expected future returns. To the extent 
that marketing expenditures enter into that, or other factors, 
it will impact R&D investment. However, the focus of our study 
was on how we can measure expected returns by the industry, and 
identifying the precise empirical link between those expected 
returns, prices, and profits, and R&D spending.
    Senator Dorgan. Who commissioned the study, Dr. Vernon?
    Dr. Vernon. This was not commissioned, and it was not 
funded. This was part of my doctoral research and also some of 
the first few papers I published when I was on the faculty at 
the University of Connecticut.
    Senator Dorgan. But you've previously done work for the 
pharmaceutical industry.
    Dr. Vernon. I have previously received funding from various 
organizations, including the pharmaceutical industry, that's 
    Senator Dorgan. Ms. Barnett, the AARP supports this piece 
of legislation. I think it goes without saying--and I shouldn't 
have to say it at this hearing, but I will--I don't think 
there's anyone that would in any way ever suggest that they 
want to compromise our drug supply or do anything to diminish 
the safety of our drug supply. The testimony by Mr. Tauzin and 
others today, about counterfeits--counterfeit drugs--is 
disturbing to all of us. That is existing under a circumstance 
where importation really doesn't exist in any managed way. But 
tell me, about what you think about Mr. Tauzin alluding to the 
fact that, ``Look, since we now have Medicare Part D, you've 
got access to prescription drugs''--Mr. Tauzin described 
Tamoxifen. Tell me why the AARP is supporting this legislation, 
if you have Medicare Part D.
    Ms. Barnett. Medicare Part D will only cover up to a 
certain part before the consumer then has to go into the donut 
hole, and, at that point, you don't reach the amount, 
necessarily, that is there, that cost. But, on the other hand, 
not all people--over half of our members are ages 50 to 64, and 
they're not--Medicare and the prescription drug benefit is not 
available to them.
    Senator Dorgan. Can I just complain about starting--getting 
letters from the AARP at age 35 or whenever it was I----
    Ms. Barnett. Of course you can, but you don't----
    Senator Dorgan.--whenever it was I started getting them in 
my mail? I mean, I didn't feel old at that time.
    Ms. Barnett. Was this perceived 35 or was it actual 35?
    Senator Dorgan. No, it was--it was actually perceived.
    Senator Snowe?
    Senator Snowe. Thank you very much.
    And I want to welcome the panel.
    Former Congressman Tauzin, you were mentioning about former 
Secretary of Health and Human Services, Secretary Shalala. And, 
it's interesting, to examine the three objections that she 
had--if I can find them here--back in 2000, when she said that 
it was ``impossible for me to demonstrate that importation is 
safe and cost-effective.'' First, she said, based on the 
provision which ``allows drug manufacturers to deny U.S. 
importers legal access to the FDA-approved labeling that is 
required for reimportation.'' Two, that ``the drug 
reimportation provision fails to prevent drug manufacturers 
from discriminating against foreign distributors that import 
drugs to the United States.'' And, third, that ``the 
reimportation system has both authorization and funding 
limitations . . . the law requires that the system end 5 years 
after it goes into effect.''
    So, all of those issues, in one way or another, have been 
addressed by our legislation. So, I don't think it's safe to 
say that you can characterize those three problems, as she 
mentioned them as issues upon which she had to oppose the 
legislation. She was required to certify for safety. She didn't 
have the resources, and she only had a simple certification. 
So, we have addressed all of those issues in our legislation.
    Mr. Tauzin. She was required to certify two things, as the 
current law requires the Secretary to do, that is, not only 
that you satisfy all the safety concerns, which we--which we 
agree, with her and the current Secretary, cannot be safely 
satisfied, even with this legislation. And we'll elaborate, as 
I said, further to you on that. And, second, the cost-
effectiveness of doing it. CBO estimated a cost savings, if you 
did pass this bill, of 1 to 2 percent over 10 years, with no 
cost savings at all in the first 5 years. That's CBO estimates. 
There have been some other experiences that--you don't have to 
take my word for it. Go to Massachusetts and check with their 
program. They abandoned importation when they discovered that 
prices in America were actually lower for many drugs, including 
the generic products----
    Senator Snowe. Yes, but isn't that the choice of the 
    Mr. Tauzin. I'm sorry?
    Senator Snowe. I mean, I think--isn't that the choice of 
the consumer? I mean, why is the industry so----
    Mr. Tauzin. Well, but----
    Senator Snowe.--vigorously opposed----
    Mr. Tauzin.--but the problem is----
    Senator Snowe.--to it if----
    Mr. Tauzin.--the problem is, you're not going to make it 
the choice of the consumer. I'll be buying this stuff from my 
hospital when I go to the hospital, whether I want to or not. 
There's nothing in this bill that says I can opt out.
    Senator Snowe. Yes. Well, let me make another point here. 
Well, you can opt-out--you set up a safety system. That's the 
point. Then the consumer makes the determination whether or not 
they want to have access to----
    Mr. Tauzin. I wish----
    Senator Snowe.--imported medications.
    Mr. Tauzin. I wish----
    Senator Snowe. And you mentioned China. Can I just make----
    Mr. Tauzin. Yes.
    Senator Snowe.--clear here?
    Mr. Tauzin. Yes, go ahead.
    Senator Snowe. China isn't on our list. OK? I'm just--make 
that clear. And let me just say, the European Union's been 
doing it--parallel drug trading without incident for the last 
30 years, and they label what is imported and what is not. We 
don't even have a system set up in the United States for 
counterfeiting. I mean, that's the interesting point here. You 
know, for all that's been mentioned about the preponderance of 
domestic counterfeiting, nothing has been done to address that.
    So, I think that the point is, here, we're setting up a 
system, and you would have the labeling of imported 
medications, which I understand--because that could mean there 
would be more competitive pricing in the United States. So, I 
make that point----
    Mr. Tauzin. I invite you to check with the EU lately. 
Parallel trading is becoming a huge problem. They discovered 
two things. The arbitragers pick up all the savings. The 
consumers and the payers don't get any savings.
    Senator Snowe. Well----
    Mr. Tauzin. And the second thing is that counterfeiting is 
rising dramatically in Europe, and it's coming from China. It 
goes through Thailand, it arrives in Europe, and--as it's 
arriving in America from all of the countries that you list in 
the bill. You can't control it as coming from only those 
countries anymore.
    Senator Snowe. Well, you know--but I think it's 
interesting--that where we manufacture--I mean, it's on the map 
here--is all over the world. You know, as I said, over 40 
countries in which we manufacture. And that's what we've done. 
And we're talking about FDA-approved facilities. And I think 
it's very important to say that. We do that with manufacturing 
medications in over 40 countries. We certainly can set up a 
system. And if you have recommendations how better to improve 
our legislation, I would hope that we would get those 
recommendations. And----
    Mr. Tauzin. Sure. And we'll talk to you about it.
    Senator Snowe. OK, great.
    And, Mr. Schultz, you've been in the position of our 
previous witness. You were former Deputy Commissioner for 
food--for Policy, Food and Drug Administration, is that 
    Mr. Schultz. Yes.
    Senator Snowe. OK. So, you've had a chance--and I know you 
responded to the Chairman's question--and you may have some 
other follow-up recommendations on specifics--is that 
correct?--in our legislation. But, overall, do you think the 
framework that we have is doable? I mean, is this something 
that can be done for importation, based on our approach in this 
    Mr. Schultz. Yes. I think it's a very sound approach. And I 
think the important point is that it's going to improve things, 
in terms of safety. I don't know if it's going to be perfect, 
but it's going to inject resources to the FDA, it's going to 
allow FDA to inspect facilities, and, where there are 
commercial sales, it will require a chain of custody. So, this 
is a terrific improvement.
    I mean, if I could say a word about price, there are two 
points. One is, the people buying these drugs from Canada would 
be really shocked to know that CBO is saying they're not going 
to save money because they're saving money today. The second 
thing is that the reason those CBO estimates may have showed no 
savings is because so many people are doing it today. The 
problem is they're not necessarily getting safe products. And 
what you've done in your bill is to set up a system where 
consumers will have much more assurance from FDA of safety. 
There's never going to be a promise. There's nothing risk-free. 
But we'll be moving in that direction.
    Senator Snowe. No, I appreciate that and would appreciate 
your future input on our legislation. So, if there's anything 
we can do to make adjustments in that----
    Senator Dorgan. If I might just----
    Senator Snowe. Yes.
    Senator Dorgan.--for Senator Snowe--this issue of savings, 
the CBO actually scored the bill that we offered to the FTC 
reauthorization, and they scored a savings of $6.1 billion over 
10 years for the Government and $50 billion over 10 years for 
consumers. So, the CBO score, the most recent score for 
legislation nearly identical to that which we've reintroduced, 
does show a savings, both to the Government and the consumers.
    Senator Snowe. Thank you.
    Dr. Vernon, you were focusing on the decline in R&D 
spending. And, obviously, we'll look at the information that 
you've provided. But, you know, the industry has spent about, I 
think, $5.6 billion more. At least based on the 2004 numbers, 
in the United States than in Europe, even though our consumers 
are paying $87 billion on higher prices than, foreign 
consumers. So, I mean, I think that the fact is if you start to 
compare the R&D spending of the 12 largest pharmaceutical firms 
by revenue, it's interesting--they have an average R&D 
investment of 14.7 percent of gross revenues, and you compare 
that with other firms with high R&D requirements and low 
marginal costs of production, they have a similar investment 
rate. It's 14.4 percent of gross revenues. And yet, they 
produce--if you're talking about microprocessors, software, 
electronics--similarly situated, they produce products which 
they improve every year, and they're offered at lower costs, 
and they do not increase pricing of old products at two and 
three times the rate of inflation.
    So, I don't see, with importation that the problem is going 
to result in R&D decline. That's not to include, frankly, the 
$30 billion that's spent by the American taxpayer in support of 
the National Institutes of Health and other means for the 
research and development for medications that consumers benefit 
from in other countries. And we're paying the higher prices.
    So, I just don't see where the argument is here that it's 
going to have an impact on the research and development, given 
what we pay here in America today, given what the American 
taxpayer's paying. I don't see that the higher margin is 
increasing the rate of investment in the research and 
development. And you compare that with other companies, as you 
look at these charts--they're similarly situated, and yet we 
don't get the benefit of lower drug prices.
    Dr. Vernon. I appreciate that, and I would make a couple of 
    The first is, I do agree that the U.S. is subsidizing R&D. 
And that's because foreign markets and governments regulate 
drug prices, and, in the U.S., we largely do not. I would say, 
also, that the link between R&D spending and prices and profits 
is unequivocal, and is based on over two centuries' worth of 
economists' thought. And economists are united on that issue. 
So, I don't think that's a question.
    And I do have a question about the comparison you made 
between R&D intensities on the two charts you showed, Senator I 
think what's relevant is pharmaceutical R&D spending to 
pharmaceutical sales--and I'm not sure, of those companies up 
there, if what was being represented was pharmaceutical R&D or 
total firm R&D to gross firm sales. Because a lot of the 
companies in the industry are diversified into various 
different types of businesses, I think that's an important 
distinction that needs to be made.
    Mr. Tauzin. Senator, can I add a----
    Senator Snowe. Yes.
    Mr. Tauzin.--thought, too? The big difference in the R&D 
spending in our industry, as opposed to other industries, is 
that the moment they invent something and get a patent on it, 
they can go to market with it. On the other hand, our companies 
have to spend money, over 14 years of clinical trials, before 
their product can go to market within their 20 years of patent 
protection. So, there's a very different economic model that, 
frankly, is getting very threatened today. But, at the same 
time, even the Japanese companies that are part of our 
organization do their R&D in America right now. Most of the 
European companies do their R&D in America today. They've left 
the countries, where the governments have initiated price 
controls, to come to this country to do their research and 
development. That's a fact.
    Senator Snowe. Well, I'd just point out another quote here 
from Hank McKinnell, who is a former CEO of Pfizer, and he 
said, ``It's a fallacy to suggest that our industry, or any 
industry, prices a product to recapture the R&D budget spent in 
    Mr. Tauzin. And he's right.
    Senator Snowe. So, I think----
    Mr. Tauzin. He's right. But what he--what you fail to have 
there is the rest of his statement, which is that they price it 
in order to make sure they can cover the next 14 years of R&D 
development for the next product in the pipeline.
    Senator Snowe. Yes, but the industry overall is pricing so 
that the American consumer pays $87 billion more----
    Mr. Tauzin. And we're spending in----
    Senator Snowe.--than consumers in other countries----
    Mr. Tauzin.--we're spending----
    Senator Snowe.--plus the $30 billion----
    Mr. Tauzin.--well over $60 billion in R&D----
    Senator Snowe. Plus----
    Mr. Tauzin.--every year.
    Senator Snowe. Yes, but--plus the $30 billion by--financed 
by the Federal Government.
    And one more point by Hank McKinnell, because I think it 
is--it is an interesting point. He says, ``Competition is good 
medicine for economies. Name an industry in which competition's 
allowed to flourish--computers, telecommunications, small-
package shipping, retailing, entertainment--and I'll show you 
lower prices, higher quality, more innovation, and better 
customer service. There's nary an exception. OK, there's one. 
So far, the healthcare industry seems immune to the discipline 
of competition.''
    And I think that's what it's all about, and that's what 
we're striving for. I think we have an obligation to set up a 
system of safety and allow the consumers to make that decision 
in what they----
    Mr. Tauzin. Give us a chance to----
    Senator Snowe.--get benefit from.
    Mr. Tauzin.--compete against another free market, and we'll 
compete. But those are not free markets, Senator you know that.
    Senator Snowe. Thank you.
    Mr. Tauzin. Those are controlled markets.
    Senator Snowe. Thank you.
    Senator Dorgan. Senator Vitter?
    Senator Vitter. Thank you, Mr. Chairman.
    First of all, with Billy Tauzin here, let me just, apart 
from this issue, setting this aside for a few seconds, let me 
thank you for all of your service and leadership to our state, 
which was exemplary throughout your career.
    Mr. Tauzin. Thank you, David.
    Senator Vitter. And I personally appreciate that, and the 
people of Louisiana appreciate that.
    On this issue, Billy, you started your remarks by 
remembering your work with John Dingell----
    Mr. Tauzin. Yes.
    Senator Vitter.--going back to 1988. I guess one thing I 
would say is, what do you think the prescription drug 
inflation--cumulative inflation has been in those 19 years 
since 1988?
    Mr. Tauzin. Good question. Let me----
    Senator Vitter. It's been----
    Mr. Tauzin. Let me----
    Senator Vitter. It's been enormous.
    Mr. Tauzin. Let me address it. It is not soaring. It is not 
enormous. AARP issued a report, I think, yesterday--again, 
doing what they always do, which is to compare a list of patent 
drug products that are used by seniors, and examines only those 
in the marketplace, instead of the whole prescription drug 
marketplace. If you look at the 60 percent of the drugs that 
are consumed in America that are generic, and combine them with 
the patent drugs that come out of this 14 year expensive 
process--combine them together, the inflation rate of drugs in 
America has been moderating over the last 5 years and is lower 
than the healthcare inflation rate again this year, falling 
every year. It is not soaring, it is not exponentially rising. 
It's rising at a lower rate than healthcare inflation, and 
moderating every year. In fact, the number of new drugs coming 
off patent are alarming, frankly, because, as those new drugs 
come off patent, a lot of the companies are going to be in a 
very difficult position over the next 10 years.
    Senator Vitter. Well, first of all, I think what we're 
largely talking about in this debate is nongenerics, because 
the generic issue is largely solved, in terms of price 
competitiveness in this country. So, I do think we're basically 
talking about nongenerics.
    Mr. Tauzin. Well, but you can't----
    Senator Vitter. And that----
    Mr. Tauzin.--you can't----
    Senator Vitter.--cumulative----
    Mr. Tauzin.--not talk about it. Do you know, in Canada, 
that generics cost about 167 percent of U.S. prices? You can't 
just talk about one set of drugs. In----
    Senator Vitter. Well, the problem----
    Mr. Tauzin. If you look at the ten----
    Senator Vitter.--is, you don't have generics for 
    Mr. Tauzin. No, but if you look at the ten top drugs, six 
of them are generic variations----
    Senator Vitter. Right.
    Mr. Tauzin.--right now. And, as you heard, you know, when 
you look at the amount of time that a patent drug has left in 
its patent life, and the fact that these drugs are coming off 
pretty rapidly over the next 10 years, that 60 percent is 
likely to rise in this country. We're one of the highest users 
of generic products in the world, at 60 percent. It is working 
fairly well. Do we still have a problem of uninsured? Yes. And 
we ought to address that.
    But here's another feature I hope you think about when you 
think about this bill and other bills on healthcare. We're 10 
percent of the market. The healthcare dollars spent in America, 
pharmaceuticals represent 10 percent of that. They represented 
10 percent in 1978, and they represent 10 percent today. We are 
not the biggest problem in the healthcare cost equation. Ninety 
percent of the problem is in other healthcare cost areas. But 
do we have a problem making sure seniors have access to 
affordable prescriptions? Yes. That's why we passed Part D. Do 
we have a problem with the 20 some odd million Americans who 
are chronically uninsured? Yes. We ought to address that. But 
to open the door to a problem that's a one percent of problem 
in America today, that could become a 20 percent problem, in 
terms of counterfeits hitting this market. Just to try to solve 
a 10 percent or 7 percent problem, which is the difference in 
Canadian cost to Americans today. It is, I think, very risky, 
Senator Vitter. That's all I'm asking you to think about.
    Senator Vitter. Well, my point is that, since 1988, 
nongeneric drug inflation has soared. Since 1988, as a result, 
this commerce across the border in these drugs has soared. And, 
of course, that's directly related to price.
    And so, in--with that history behind us, in the current 
environment, I simply think it is an unworkable and 
unreasonable so-called solution to the safety issue to say 
we're going to put our finger in the dike. It's not working. 
We're--we are being deluged with this issue, to some extent; 
and to, sort of, just say ``no'' isn't a policy----
    Mr. Tauzin. We're not saying there's----
    Senator Vitter.--it's not a workable policy.
    Mr. Tauzin. We're not just saying no. We've instituted, 
this year, some very important initiatives. I want to tell you 
about them.
    First of all, the drug distributors in this country, their 
association, it's finally kicked out the secondary marketers. 
They're no longer a part of their association.
    If you look the problem in the U.S. drug marketplace in 
counterfeiting and uplabeling and the concern we have about 
danger to patients, it was primarily in that secondary market. 
That's where the counterfeiters play. And they're playing as 
good a game as they played with heroin.
    Second, Senator Vitter, we're meeting, today, with the 
distributors and the pharmacists to see if we can't accelerate 
the work on RFID technologies, nanotechnologies, to protect our 
system even better.
    We're not just saying no. We're doing things, we're trying 
to protect the people under 200 percent of poverty who are 
uninsured today, with the PPA program--3.5 million new 
Americans covered with free drugs because of our program. We're 
working on the uninsured problem all over America. We're 
working with the distributors to come up with track-and-trace 
systems that are really good in this country.
    All I'm asking you to do is to understand that we can't 
pass those laws for other countries. And the FDA can't regulate 
the distribution chain in other countries. And if you expect 
them to do so by passing a bill, I just want to warn you, as I 
tried to warn you about New Orleans a few years ago, one day 
we'll rue the day we opened up that flood. One day in this 
country, the deaths are going to pile up the way they're piling 
up around the world with malaria right now. Please think about 
    Senator Vitter. Let me suggest two other things we can do, 
and you all can be helpful to address the problem. One is to be 
more helpful and to not oppose generic reform. And, quite 
frankly, too often, in my opinion, the industry has been an 
obstacle to pro-generics reform.
    Mr. Tauzin. Yes, but Senator Vitter, I----
    Senator Vitter. The----
    Mr. Tauzin.--you know, I can't speak for what happened more 
than 2 years ago, but I can tell you this, we are very open to 
working with you, and all of you, in making sure that drug 
prices are affordable and available in this country to people. 
That's why we started the PPA program. We've got--we've got a 
very different organization today. Give us a chance to work 
with you. I think you'll see a different face of this industry.
    Senator Vitter. The second area where I think we need a lot 
of work is trade policy.
    Mr. Tauzin. Yes.
    Senator Vitter. This is all created by vastly different 
prices between U.S. and other countries. That is largely 
created by strong or weak price-control regimes elsewhere.
    Mr. Tauzin. Exactly.
    Senator Vitter. Now, we essentially, in my opinion, do 
absolutely nothing to attack that through our trade policy. I'm 
not saying we have all the power to change that overnight, but 
we certainly have some leverage and some opportunity to attack 
that. In my opinion, neither the industry nor this 
administration does anything meaningful to attack that. And 
that price difference is what creates this entire debate.
    Mr. Tauzin. Can I paint a quick picture before you--how 
difficult it is? Not only do we have countries like Thailand, 
which is a military government now, stealing patents, they've 
basically said they're going to just take our patents and 
produce our products without regard to IP protection anymore. 
And they're executing that right now in Thailand.
    Not only do we have situations like that, we've got the 
underdeveloped world that can't afford to pay even generic 
prices for some life-saving drugs, like HIV drugs. And we're 
trying to set up a system in the world to make sure critical 
life-saving medicines reach people in the underdeveloped world 
who, like in America, can't afford their drugs. Mr. Chairman, 
we are trying to help that situation.
    Second, you have the developing world, the middle-index 
countries, if you will, who are, like Thailand, trying to 
literally take advantage of American R&D, and literally 
stealing from the American people, in my view, their rights to 
the R&D they've spent for these products.
    And then you've got the developed work that is not taking 
its fair share of responsibility for paying for that R&D. And I 
concur with you on that. We need a much stronger emphasis at 
our State Department on insisting that the----
    Senator Vitter. Well----
    Mr. Tauzin.--developed world do a better job of paying 
    Senator Vitter. Again, on the----
    Mr. Tauzin.--it's that simple.
    Senator Vitter.--trade front, the only activity I've seen, 
until we put a stop to it a couple of years ago, was an effort 
to embed anti-reimportation policy in trade agreements. That 
was the only effort I have ever seen, in terms of trade policy. 
I've seen no effort from the administration or the industry 
quite frankly, in trying to attack the root issue of these 
price differentials, and trying to use all of our resources----
    Mr. Tauzin. Senator Vitter, I assure you, a lot of that----
    Senator Vitter.--to solve that.
    Mr. Tauzin.--goes on. We belong to international 
organizations, the IFPMA. We to work with EFPIA. We work with a 
group called Dolder, globally, trying to influence those 
decisions around the world. But, without the leverage of our 
government saying something is wrong when other countries can 
take advantage of the consumers in America who are spending 
their dollars on this R&D--without your leverage, they're not 
going to change their policies. It's that simple.
    Senator Vitter. Also want to briefly address the R&D issue, 
which is very important, in my mind. And let me state, up 
front, I'm not for reimportation to import price controls into 
this country, and that sort of argument against it is often 
made; I'm for reimportation, because I don't think price 
controls can survive a full-bodied reimportation policy in this 
country and in other countries.
    And so, with that in mind, Dr. Vernon, you suggested that 
reimportation will basically drive down R&D. Does that take 
into account the possibility--the probability, in my mind--that 
if you have a full-bodied reimportation policy, it's--it 
doesn't simply import those prices that exist now in other 
countries, but it actually changes them, it raises them, as Dr. 
Schondelmeyer suggested, and lowers our domestic prices?
    Dr. Vernon. Well, I think that's an excellent question, and 
a very--and the answer is very complicated, and I don't have a 
full answer. I think that if reimportation were undertaken on a 
large scale, such that we had forced-sales provisions and we 
did see prices falling in the U.S., the question then is, would 
that have an impact on prices abroad? Many economists believe 
that prices abroad are lower, not just because of price 
controls and price regulation, but also because average per-
capita incomes in those countries are lower.
    So, I don't know that we would--exactly how that would play 
out. And it's a very complicated issue, in terms of how these 
foreign governments would respond, and in terms of how the U.S. 
Government would interact with these foreign governments and--
    Senator Vitter. Well, let me just suggest one of the things 
that would happen is, their buying pool would no longer be 
simply in their country; it would involve our country. And so, 
the per-capita income of that buying pool will increase. What I 
think you're going to see is an equalization of prices. I'm not 
saying it would be immediate or complete. But I think what you 
would see is a drive toward equalizing prices worldwide.
    Dr. Schondelmeyer, you alluded to that a little bit. How do 
you think that would work with a robust reimportation policy?
    Dr. Schondelmeyer. If the U.S. began a full-bore 
reimportation policy, the Canadian Government, the EU 
countries, are going to have the drug companies coming into 
them the next day, and they're going to be saying, ``We can't 
continue with the prices we're paying you. We've got to change 
something.'' It would disrupt the market, in the short run. But 
they will have to change something.
    If we're going to use average per-capita income as our 
measure, let's look at the average per-capita income of the 
uninsured Americans. And it's lower than most of those 
countries that are getting lower prices in other--in Europe, so 
why aren't we giving that lower price to the 47 million--and 
that's probably more people in America than most of those other 
countries, as well--why aren't we giving them those lower 
prices, if we're going to use that as our measure of how you 
price drugs?
    Senator Vitter. Let me just----
    Dr. Schondelmeyer. I think it's unfair to price the U.S. as 
an aggregate, because we probably have the greatest income 
disparities of any country in the world, or any major developed 
country in the world, compared to the European countries. And--
    Mr. Tauzin. Senator Vitter, can I tell you what Canada 
plans to do----
    Dr. Schondelmeyer.--that makes a mess.
    Mr. Tauzin.--if you pass this? They're not going to lower 
their price. They're going to raise their prices in Canada. 
What Canada has threatened to do, and what they're likely to 
do, is to pass a bill, which they've got ready to go, which 
will ban bulk exports to America. They don't want to become our 
pharmacy. And neither does Europe. And they say that very 
clearly in their policy.
    Senator Vitter. Well, again--and that gets back to trade, 
too. The question is, are we just going to allow that without 
consequence? I don't think we should. So, I think there are 
ways to attack that. But, again, my point is, a robust 
reimportation policy doesn't simply import prices from other 
countries to here, it changes prices worldwide--it lowers 
prices in this country, it increases artificially low prices 
elsewhere. And what I think it does is do nothing worldwide 
with regard to what's available for R&D, but it redistributes 
where all that R&D money comes from so that we don't have to 
pay 98 percent of it, or whatever very high percentage we pay 
alone as Americans.
    Mr. Tauzin. There's another feature, though. And the other 
feature that you can't discount is the fact that other 
governments, because they are the payer--they have single-payer 
systems--have limited resources to pay for the drugs that are 
used by their citizens. And the way they handle that is, they 
cut off access. In Canada, for example, on average, 20 percent 
of the pharmaceuticals that are available to Americans are not 
available to citizens in Canada under their single-payer 
system. In Japan, only 69 of the top 100 medicines are 
available to their citizens under their single-payer system. 
So, you won't necessarily drive up their cost. What you're more 
likely to do is to see more limitations on access to their 
citizens. I don't want to see that----
    Dr. Schondelmeyer. And it depends on----
    Mr. Tauzin.--imported into America, by the way.
    Senator Dorgan. Dr. Schondelmeyer, you wanted to respond to 
    Dr. Schondelmeyer. Yes, it depends on which drugs we leave 
off of that system. If we leave off Nexium or Ambien CR or 
Clarinex that are very similar to other drugs that really don't 
have any therapeutic difference, maybe we're better off.
    I would argue that we already have the effect of European 
price controls imported in our market in the prices that are 
being charged to Americans now. We don't have free market 
pricing. We don't have market-based prices. It's been 
acknowledged. Dr. Vernon said that does affect our prices, and 
we essentially are subsidizing the rest of the world. So, the 
effect of that price-control system in Europe and in Canada is 
already in our market, and we're paying for it. And unless we 
squeeze back gently in some way, we will continue paying that 
higher price. I think we have to squeeze back, in some way, to 
get those other countries--I think passing re-importation will 
work much faster than trade negotiations with other countries 
to tell them to raise their prices. If you start reimporting 
from their countries at their lower prices, those prices will 
go up much faster than any negotiations are going to accomplish 
on trade negotiations, country by country.
    Mr. Tauzin. Well, but don't leave with the perception that 
we're just talking about Nexium. In Canada, you can't get 
Avastin. That's the drug that saved my life. You can't get it 
in Japan. You can't get it in Europe, in England and Wales. 
Both Avastin and Erbitux were deemed not cost-effective in 
those countries under their single-payer systems. So, don't 
think it's just a purple pill or a pill that you have of 
choice. Sometimes it's the pill that'll save your kid's life. 
Don't forget that.
    Senator Dorgan. Mr. Tauzin, you've lost none of your skill 
or aggressiveness.
    Senator Dorgan. And we appreciate your being here. I 
appreciate the entire panel.
    I want to put a chart up, here, that shows you something 
that FDA Commissioner David Kessler has said in a letter to us. 
He talked about--our proposal, quote, ``. . . provides a sound 
framework for assuring that imported drugs are safe and 
effective. Most notably, it provides additional resources to 
the agency to run such a program, oversight by FDA of the chain 
of custody of imported drugs back to the FDA-inspected plants, 
a mechanism to review imported drugs to ensure that they meet 
FDA's approval standards, and the registration and oversight of 
importers and exporters to assure that imported drugs meet 
these standards that are not counterfeit.''
    I wanted to put that on the record, only because there's a 
great debate about this, I--and I think you will admit we've 
tried to provide fair opportunity for alternative views with 
this hearing. It will not surprise you to know that Senator 
Snowe and I will very soon work with our colleagues on the 
Commerce Committee to try to move this legislation, and we 
would hope, obviously, to get a vote on the floor of the 
Senate. Identical legislation is existing in the U.S. House.
    And we will keep the record of this hearing open for 2 
weeks. Should our witnesses wish to submit additional views, we 
will accept that.
    Mr Tauzin, you indicate you want to work with us on a range 
of things. We welcome that.
    Mr. Tauzin. Thank you.
    Senator Dorgan. We would say the same to all of the 
    Obviously, you know from my statements, and, I believe, 
from the statements of others on the panel here, that we feel 
strongly about this, and we represent constituencies across our 
country that feel, as I offered the question today, they feel 
that they shouldn't be paying the highest prices in the world. 
They feel it's unfair.
    And so, we hold a hearing today, invite you. All of you are 
great to come.
    Dr. Vernon, I wasn't suggesting your research is worthless 
because of who you've previously worked with, but I did want to 
have that in the record.
    All of you have taken some time to be with us and driven 
from Connecticut and Minnesota and across the street----
    Senator Dorgan.--and Kentucky. And let me thank you for 
taking the time to be a part of this discussion.
    This hearing is adjourned.
    [Whereupon, at 11:55 a.m., the hearing was adjourned.]
                            A P P E N D I X

 Joint Prepared Statement of the Canadian Pharmacists Association, the 
   Ontario Pharmacists' Association and the Best Medicines Coalition
Do No Harm: Congress Should Leave Canadian Prescription Drugs Alone
    Canadian pharmacists, pharmaceutical distributors and patients are 
extremely concerned by the proposed Pharmaceutical Market Access and 
Drug Safety Act of 2007, and its serious implications for the integrity 
of Canada's prescription drug supply.
    We understand fully that your hearings will focus on the impact of 
this legislation on the United States and its citizens. As you proceed, 
however, we would urge you to widen your perspective to consider the 
repercussions of this legislation on Canadians and their healthcare 
    Our representatives would have liked to make these arguments 
directly to you. Your committee has however decided to invite only a 
few organizations to speak at the hearings, excluding any 
representation from Canada, the country most directly affected by this 
proposed legislation. Under these circumstances, we urge you to 
consider the issues in this written submission.
    We would like to focus on three points. Allowing Canadian price-
controlled medicines to be imported in bulk into the United States will 
have serious consequences for Canadians and will be of very little long 
term benefit to Americans. Not only will such a measure damage the 
Canadian drug supply, it will in all likelihood lead to increased drug 
prices for Canadians. The Pharmaceutical Market Access and Drug Safety 
Act of 2007 is a quick-fix solution to a complicated issue which will 
not, given the differences of scale between Canada and the United 
States, significantly reduce the cost of prescription drugs in your 
    This proposed legislation also puts the health of Americans at risk 
by opening your borders to increased counterfeit drugs and criminal 
activity from outside North America. Although our submission does not 
address this issue in detail, we fully share the deep concerns 
expressed by organizations such as the American Pharmacists Association 
on this matter.
1. A Threat To Canada's Supply
    Canada's supply of prescription medicines is not limitless. It is 
designed for the demands of a population of 30 million, not for a 
market ten times that size.
    Lipitor', Zocor', Prevacid', 
Nexium' and Plavix' are among the top ten most 
prescribed medicines in the United States. Although widely prescribed 
in Canada, our domestic supply of these drugs could meet only a small 
fraction of U.S. demand. For example, the Canadian stock of Lipitor 
represents the equivalent of just 14 percent of U.S. demand. Similarly, 
Plavix stocked in Canada is sufficient to meet only nine percent of 
U.S. demand.

                    Table 1.--Supply of Leading Prescriptions in the U.S. Available in Canada
                                                         Number of              Number of
       Rank (by number  of                         prescriptions:  U.S.--     prescriptions:     Canadian  share
   prescriptions filled in the        Product         2005  (millions)         Canada--2005      of U.S.  demand
              U.S.)                                                             (millions)
1                                 Lipitor          79,170                 11,24                  14%
2                                 Zocor            27,839                 1,77                   6.4%
3                                 Nexium           27,341                 1,94                   7%
4                                 Prevacid         25,020                 1,75                   7%
8                                 Plavix           23,973                 2,15                   9%
Note: Based on 2005 figures, IMS Health.

    At the request of some Members of Congress in 2004, Professor Marv 
Shepherd of the University of Texas at Austin provided a comparative 
analysis of the size of the pharmaceutical market in the United States 
and Canada. By comparing the total number of prescription drugs 
dispensed in Canada with the number of prescriptions filled in the 
United States every day, Dr. Shepherd calculated that Canada's annual 
supply of prescription drugs would be exhausted in 38 days if U.S. 
residents were to purchase all their prescriptions in Canada.\1\
    \1\ Marv Shepherd, Drug Importation Analysis: Comparison of the 
Canadian Pharmaceutical Market Size with the U.S. and Implications for 
Drug Importations, Center for Pharmacoeconomic Studies College of 
Pharmacy, The University of Texas at Austin, May 5, 2004, p. 13, http:/
    This scenario is obviously meant to draw out the worst-case outcome 
but it effectively illustrates that bulk imports by the United States 
will very significantly curtail the supply available to Canadians. 
Indeed, as Table 2 illustrates, if 10 percent of U.S. prescriptions 
were filled in Canada, this would lead to a minimal increase in the 
size of U.S. supply while significantly reducing the amount of drugs 
available to Canadians.

     Table 2.--Projected Increase on U.S. Supply if 10% of America's
                   Prescriptions Were Filled in Canada
                                    Number of     10% of    based on 10%
         Rank           Product        U.S.      Canadian     of  U.S.
                                  Prescriptions    Supply  prescriptions
                                                             filled  in
1                      Lipitor    79,170,000     1,124,00  1.4%
2                      Zocor      27,839,000     177,000   0.6%
3                      Nexium     27,341,000     194,000   0.7%
4                      Prevacid   25,020,000     175,000   0.7%
8                      Plavix     23,973,000     215,000   0.9%
Note: Based on 2005 figures, IMS Health.

    To further illustrate the differences in size between the two 
pharmaceutical markets, the number of U.S. seniors is greater than the 
total Canadian population. To supply just half of U.S. seniors, Canada 
would have to increase its total annual prescription drug supply by 2.5 
times, an increase that pharmaceutical companies would not be capable 
of achieving.
    Shortages of prescription drugs are already on the rise in Canada. 
The Canadian Pharmacists Association reported in 2004 that 80 percent 
of pharmacists had experienced one or more drug shortages weekly. 
Pharmacists surveyed also stated that shortages were becoming more 
frequent.\2\ Shortages are caused by a variety of factors ranging from 
issues with the manufacturing process to shortages of raw materials and 
also exports to the Unites States through Internet pharmacies. It is 
clear, however, that actively seeking bulk purchases from Canada would 
seriously compound an existing problem with the Canadian supply.
    \2\ Canadian Pharmacists Association, Administrative Burden on 
Canadian Pharmacists Due to Drug Shortages, November 2004, http://
2. A Threat to the Integrity of Canada's Price-Control Regimen
    If passed, the Pharmaceutical Market Access and Drug Safety Act of 
2007 will, in effect, distort and disrupt the Canadian pharmaceutical 
market. It will do so by providing a strong incentive to big-box 
retailers present in Canada (either American owned or not) to re-route 
their stock of price-controlled pharmaceutical products for sale at a 
higher margin in their U.S. stores. This practice, known as 
``arbitrage,'' would completely corrupt Canada's price-control regimen.
    The resulting shortages will unavoidably lead to higher prices in 
Canada, negating the intended benefit of this legislation to the U.S.
    Canadian provinces already face tremendous pressure to keep the 
costs of healthcare manageable. This bill could seriously compromise 
the various measures put in place in Canada to negotiate lower prices 
for prescription medication. Not only would this legislation lead to 
shortages for Canadians, it could possibly force provincial governments 
to further limit the number of drugs placed on their formularies, 
thereby further penalizing Canadian patients by limiting their 
therapeutic options.
3. Limited Benefit to the United States
    Although the impacts of bulk importation on Canada's domestic drug 
supply and on Canadian patients is real, what is less clear is the net 
benefit the legalization of bulk imports would have on America's supply 
and American consumers.
    Given the small size of the Canadian market, it comes as no 
surprise that the U.S. Department of Health and Human Services 
concluded in December 2004 that ``total savings to drug buyers from 
legalized commercial importation would be one to 2 percent of total 
drug spending and much less than international price comparisons might 
suggest. The savings going directly to individuals would be less than 1 
percent of total spending. Most of the savings would likely go to third 
party payers, such as insurance companies and HMOs.'' \3\
    \3\ Department of Health and Human Services, Report On Prescription 
Drug Importation, December 2004, p. 65, http://www.hhs.gov/
    Canada's drug supply and price control systems were intended to 
meet the health care needs of Canadians, not to provide Americans with 
a quick fix or a band-aid solution to the cost of prescription drugs in 
your country. The real purpose of this bill is not the importation of 
cheaper prescription drugs, but rather the importation into the United 
States of Canadian price controls. The United States should not be 
cherry picking parts of Canada's healthcare system.
    Once U.S. demand depletes Canadian stocks, prices will almost 
certainly rise, narrowing or possibly even eliminating the difference 
between U.S. and Canadian pharmaceutical prices. In short, there is no 
long-term advantage to be gained in raiding Canada's regulated market. 
Further, there is always the likelihood that the Canadian Parliament 
would simply ban bulk exports of prescription drugs to the United 
States. The undersigned organizations have called on the government of 
Canada to institute such a ban, immediately, in order to protect the 
Canadian drug supply and pricing system and to protect Canadian 
patients. In fact, Canada's Health Minister has recently indicated to 
our organizations a willingness to pass legislation that would do 
exactly this.
    The Pharmaceutical Market Access and Drug Safety Act of 2007 is 
deeply flawed. It will not solve the problems of high drug costs in the 
U.S. but will certainly increase prices paid by Canadians and restrict 
the number and quantity of prescription drugs available to Canadian 
    If adopted, it is clear that this proposed legislation will strain 
Canada-U.S. relations. We urge Members of Congress to consider this 
possibility. We call upon you to see beyond the narrow scope of 
domestic issues, and to consider the full range of consequences that 
would attend the passage of this legislation.
                                               Jeff Poston,
                                                Executive Director,
                                      Canadian Pharmacists Association.
                                               Marc Kealey,
                                      Ontario Pharmacists' Association.
                                             Louise Binder,
                                              Best Medicines Coalition.
             Prepared Statement of Peter Pitts, President, 
               Center for Medicine in the Public Interest
    Mark Twain once said that there's a simple solution to every 
complicated problem--and it's usually wrong.
    The issue of broader access to safe and effective drugs is an 
extraordinarily complicated problem.
    And importation of foreign drugs is a simplistic solution with a 
container-full of unintended consequences.
    Let me get one thing out of the way right away. If you walk into a 
pharmacy in Windsor, Ontario and have your prescription filled by a 
real pharmacist--the drugs you receive will be both safe and effective.
    But--when the ``learned intermediary''--a doctor or pharmacist--is 
replaced by a greedy intermediary (a storefront drug dealer or an 
unregulated Internet site) then all bets are off. Profiteers 
masquerading as pharmacists bode poorly for both safety and 
effectiveness. Those who support importation of foreign drugs are 
endangering the lives of Americans.
    Recently an 81-year-old man suffering from epilepsy and an enlarged 
prostate purchased what he was led to believe were FDA-approved drugs 
from a website purportedly representing a Canadian pharmacy.
    Upon receipt, he noticed that they were from India. He called the 
FDA, and we determined that not only were the drugs not from Canada, 
but they weren't even approved for use in the United States.
    Nature abhors a vacuum. Large-scale importation (because those 
floodgates can't be opened only part way) will create the silent sound 
of drugs crossing the border from Canada and thru Canada into the 
United States.
    And that vacuum won't be refilled with safe and effective drugs.
    They'll be replaced with unapproved knock-offs, gray market 
substitutes, counterfeits, and similares from South America coming into 
the U.S. thru Canada. In fact, that's already happening today.
    Recently, the Canadian Health Minister who, under tremendous 
political pressure to continue a charade, instead told the truth about 
the cross-border drug trade and the dangers that it poses to both 
Americans and Canadians.
    ``I want to make sure that we don't have . . . 250 million 
Americans buying drugs in Canada,'' he said in an interview Dec. 12 on 
a CTV television show in Canada. ``We cannot be the drugstore for the 
United States.''
    Indeed. The Minister clearly sees that as the Internet pharmacy 
cowboys soak up the Canadian drug supply for their own profit, domestic 
Canadian pharmacists are reporting more and more shortages.
    What's more, our neighbors to the north are becoming ever-more 
concerned about medicines from nations outside their regulatory 
purview--drugs that may be subpotent, superpotent, expired, or just 
plain counterfeit.
    The Canadian Health Minister recognizes the danger to the public 
health of Canada and his government is preparing to take action. Any 
American who wants a prescription from a Canadian pharmacy may soon be 
required to first visit, in person, with a physician in Canada.
    Why such a dramatic departure from previous practices? Consider 
this . . .
    Recently, a doctor in Toronto was indicted for co-signing 24,212 
prescriptions for American patients he had never seen--at $10 a pop. 
Health Canada means business, because when doctors start selling their 
signatures, health care consumers are being sold a bill of goods.
    Canada's new policy will end importation ``as we know it.'' The 
fantasy of ``Canada-only'' drugs will be showed to be just that. And, 
according to a recent poll, 54 percent of Americans oppose importing 
drugs from European countries.
    The FDA is faced with enough challenges policing drug safety at 
home; do we really want them to stretch their resources even further 
and become responsible for drug safety globally?
    According to the recent report issued under the signature of 
Admiral Richard Carmona, the Surgeon General of the United States, 
opening up our borders to drugs ``from Canada'' would result in an 
uncontrollable influx of untested, impure, expired, and counterfeit 
drugs from around the world. That's just a fact. It may not be 
politically popular, but facts are stubborn things.
    The various state and local websites promising something for 
nothing have received, according to a recent Wall Street Journal 
article, ``Tepid response.''
    That article continues, ``With great fanfare, at least nine states 
over the past year launched websites to help their residents buy 
inexpensive prescription drugs from Canada. But so far, the sites 
aren't doing much business.''
    Fortunately, the American consumer is smarter than a lot of 
demagogues give them credit for.
    People ask me--aren't the drugs from Canada coming into the U.S. 
genuine? Well, I can tell you this--the oxycontin and vicodin, the 
darvocet and the valium are--at least for now.
    Illegal, unsafe importation presents the very real danger of 
turning the Internet into the 21st century's virtual drug cartel. And 
we must not let that happen.
    ``Buyer Beware'' is bad health care practice and even worse health 
care policy. Americans deserve both safety and savings. Trade-offs are 
just not acceptable.
    When the Governor of New Hampshire said he was going to start 
allowing the importation of Canadian drugs, my sound-bite was that 
while ``Live free or Die'' is a great state motto, it's irresponsible 
health care policy.
    But consider Minnesota. Recently Governor Tim Pawlenty launched a 
state-endorsed website called ``Minnesota RXConnect.'' This website 
provides both information on and facilitation to Canadian websites that 
illegally sell non-FDA approved pharmaceuticals. This action is unsafe, 
unsound, and ill-considered.
    When you recommend that citizens go outside of our regulatory 
system and enter into a ``buyer beware'' gray zone, you assist those 
who put profits before patient health and, by the way, shine a bright 
light on a path that can (and, indeed, is) used not only by profiteers 
masquerading as pharmacists, but by outright criminals who do not pause 
before actively feeding counterfeit drugs into the marketplace.
    During pre-announced visit by Minnesota State officials Canadian 
pharmacies were observed engaging in dangerous practices. Minnesota 
state officials noted dozens of safety problems. For example:

   One pharmacy had its pharmacists check 100 new prescriptions 
        or 300 refill prescriptions per hour, a volume so high that 
        there is no way to assure safety.

   One pharmacy failed to label its products, instead they just 
        shipped the labels unattached in the same shipping container, 
        even when patients received multiple medications in one 

   Drugs requiring refrigeration were being shipped un-
        refrigerated with no evidence that the products would remain 

   One pharmacy had no policy in place for drug recalls. 
        Representatives of the pharmacy allegedly said that the patient 
        could contact the pharmacy about a recall ``if they wished''.

   One pharmacy re-dispensed medicines that were not labeled 
        and apparently had been previously returned by U.S. Customs.

   Several pharmacies failed to send any patient drug 
        information to patients receiving prescription drugs.

   All of the pharmacies generally allowed customers to fax in 
        their own prescriptions. This not only fails to assure the 
        validity of the prescription; it means that patients can get 
        multiple drug orders from a single prescription, including for 
        more risky drugs.

   Only one of the pharmacies visited had a thermometer in 
        their refrigerator to verify that labeled storage requirements 
        were being met for refrigerated products.

   Many drugs obtained through at least one of the pharmacies 
        were apparently not even of Canadian origin, and many of the 
        drugs were obtained from a difficult-to-follow path of writing 
        and rewriting prescriptions across multiple Canadian provinces.

   Equally concerning was the statement from one of the 
        pharmacy presidents who allegedly said, ``We won't have any 
        problems getting drugs. We have creative ways to get them.''

    And these were licensed Canadian pharmarcies!
    A one-time pre-arranged ``visit'' to any Internet pharmacy is no 
substitute for a comprehensive system for assuring the safety of the 
prescription drugs used by Americans.
    Minnesota officials knew these facts and still went ahead with 
their program.
    Wisconsin residents who used Governor Doyle's website received 
unapproved generics in place of the brand name medicines they were 
promised--despite their contractual promise to the Governor that they 
would only provide ``FDA-Approved'' drugs.
    Sometimes a bargain is just too expensive--and nowhere is that more 
true then when it comes to counterfeit prescription medicines--the 
inevitable follow-on of the drug importation schemes under 
consideration by Congress.
    Around the world, millions of people are exposed to a real health 
threat every day--the danger of taking the wrong medication. This 
spreading problem has nothing to do with patients mixing up their 
pills. Rather, it's caused by the proliferation of counterfeit drug 
traffickers, who are profiting immensely from selling fake medicines.
    To combat this threat, the FDA requires distributors to keep 
detailed records of the sources of the medications they dispense. But 
that's a futile undertaking. Drug counterfeiters have become so 
sophisticated, they can produce drugs and packaging that cannot be 
differentiated from the real thing without complex chemical analysis. 
Paper ``pedigrees'' are next to useless.
    With huge profits, counterfeiting is increasing at a phenomenal 
pace. The Center for Medicine in the Public Interest estimates that 
counterfeit-drug commerce will grow 13 percent annually through 2010. 
Counterfeit sales are increasing at nearly twice the rate of legitimate 
pharmaceutical sales.
    Illegal drugs are a money machine. In 2010, it's estimated that 
fake drugs will generate $75 billion in revenues--a 92 percent increase 
from 2005. And the risks of detection and prosecution are low.
    Authorities are concerned. The EU recently released statistics on 
counterfeit-drug sales in Europe. Canadian authorities have made some 
high-profile arrests. But overall, the results of enforcement have been 
    Two years ago, when the FDA claimed that counterfeit drugs were 
being used to fund global terrorism, some politicians accused the 
agency of being in the pocket of Big Pharma. Today, these same 
politicians are strangely silent. The recent news that North Korea has 
gone into the business of manufacturing and selling counterfeit drugs 
has put a muzzle on the anti-pharma gang. Trashing patents to produce 
generics is one thing. Manufacturing totally useless fakes is entirely 
    It's not a stretch to call it health care terrorism.
    The issue is global. National borders mean nothing to these 
criminals. Pharmaceuticals are easily smuggled, because medical 
supplies are a humanitarian need. Law authorities are frequently 
stymied. Our FDA must work with the World Health Organization, Interpol 
and other international public health and law enforcement 
organizations. Jurisdictions overlap. Fake drugs, substituted for the 
real thing, move under the cover of aid efforts. And then both can be 
sold to double profits.
    The war against prescription-drug counterfeiters is hampered by 
what is known as ``parallel trade.'' Individual drug packages--140 
million last year--are imported to the countries of the European Union. 
Once inside the EU, a wholesaler is allowed to repackage each one 
before sale.
    The intent is humanitarian. But the potential for abuse--and 
illegal profits--is enormous. At the most basic level, drugs are 
mislabeled. Dosages are misstated; a label indicates tablets instead of 
capsules; expiration dates don't match the medication; and labels are 
in the wrong language or outdated.
    Even when the ``confusion'' is unintentional, the results are 
dangerous. A drug purchased by a consumer from an Internet pharmacy 
purported to come from a British pharmacist could originate in any EU 
nation. In Britain, it's estimated that parallel-traded medicines 
account for approximately 20 percent of all prescriptions filled. No 
one really knows what's happening in America.
    Since the EU does not require the recording of batch numbers for 
parallel-imported medicines, there is no way to track shipments that 
are recalled. If a batch of medicines originally intended for sale in 
Greece is recalled, tracing where the entire batch has gone (e.g., from 
Athens to London through Canada to Indianapolis) is impossible.
    More dangerous than the lack of quality control is that such 
practices allow counterfeiters to integrate their products into 
legitimate supply chains. The WHO estimates that 8 percent to 10 
percent of the global medicine supply chain is counterfeit--rising to 
25 percent or higher in some countries.
    The largest counterfeit market with close proximity to the EU free 
trade zone is Russia, where approximately 12 percent of drugs are said 
to be counterfeit. Now that the Baltic nations of Latvia, Lithuania, 
and Estonia have joined the EU, the WHO has warned that there is 
increased risk of counterfeits entering the supply chain.
    It's time to stop accusing the drug industry of crying wolf about 
counterfeit drugs. Policymakers must confront the serious business of 
ensuring that drugs entering our markets are legitimate and safe. It's 
an area where mistakes are dangerous to everyone's health.
   Response to Written Question Submitted by Hon. Byron L. Dorgan to 
                        Randall W. Lutter, Ph.D.
    Question. The main point of your testimony was that counterfeit 
drugs are entering the U.S. drug supply. You also talked about online 
pharmacies that consumers thought were in Canada but turned out to be 
located in other countries. I don't think anyone disagrees that there 
are currently no regulations in place to protect consumers who are 
often forced to decide whether to import a prescription drug or forego 
filling a prescription altogether.
    Where we disagree is what should be done to protect consumers, 
which is the mission of your agency. As you know, I have introduced 
legislation with Senators Snowe, Grassley, Kennedy, McCain, Stabenow 
and many others to put in place an effective regulatory framework to 
allow consumers to safely import more affordable, FDA-approved 
prescription drugs from Canada and several other countries. I was 
troubled that you had not taken the time to read this comprehensive 
    After you take the time to review our legislation, please let me 
know if you agree with the conclusion of Former FDA Commissioner David 
Kessler that the Pharmaceutical Market Access and Drug Safety Act of 

        1. ``Provides a sound framework for assuring that imported 
        drugs are safe and effective.''

        2. ``Provides additional resources to the agency to run such a 

        3. Ensures ``oversight by FDA of the chain of custody of 
        imported drugs back to FDA-inspected plants.''

        4. Provides ``a mechanism to review imported drugs to ensure 
        that they meet FDA's approval standards.''

        5. Mandates ``the registration and oversight of importers and 
        exporters to assure that imported drugs meet these standards 
        and are not counterfeit.''

    If you disagree with Dr. Kessler, please provide a detailed 
    Answer. Thank you for the opportunity to testify at the March 7, 
2007, hearing entitled, ``Policy Implications of Pharmaceutical 
Importation for U.S. Consumers,'' before the Senate Subcommittee on 
Interstate Commerce, Trade, and Tourism. The Food and Drug 
Administration (FDA or the agency) is responding to address the March 
9, 2007, correspondence you sent in follow up to that hearing.
    Your correspondence included statements made by former FDA 
Commissioner, David Kessler, at an April 19, 2005, hearing entitled, 
``Examining S. 334, to amend the Federal Food, Drug, and Cosmetic Act 
with respect to the importation of prescription drugs,'' held by the 
Senate Committee on Health, Education, Labor, and Pensions. Dr. 
Kessler's statements focused on the issues of safety, resources, supply 
chain security, and standards for approval of foreign versions of FDA-
approved drugs. You asked that I explain my views on the 
``Pharmaceutical Market Access and Drug Safety Act of 2007'' in the 
context of these issues. The bulk of this response details our views 
about these issues.
    I would like to start, however, by commending you for your efforts 
to address American consumers' concerns regarding access to affordable 
prescription medications. Nevertheless, the agency continues to have 
concerns with enacting such a sweeping importation program and fears 
that intermediaries would likely swallow the bulk of cost-savings, 
preventing American consumers from enjoying much, if any, practical 
benefit from such a program. We expect such a result might lead 
consumers to continue to look for substantial savings on their 
prescription medications by seeking products outside the legalized 
importation system, just as some do now. We continue to observe that 
many consumers buy drugs from foreign Internet sources even though 
generic versions of those products are approved by FDA and such 
products are generally cheaper in the United States than abroad.
    We note that legalizing commercial importation may have unintended 
effects on protection of intellectual property and may reduce 
incentives for research and development, as noted in the 2004 report 
issued by the Health and Human Services' (HHS) Task Force Report on 
Drug Importation.
Safety Concerns
    We have safety concerns related to both the identification of 
unsafe and or non-compliant drug products and about the 
substitutability of foreign products for domestic products.
Identifying Unsafe/Non-compliant Drug Products
    The section of the bill that would allow individuals to import a 
qualifying drug from a registered exporter would likely pose an 
overwhelming resource burden for the agency and create significant 
safety concerns. Under such a program, the anticipated high volume of 
products would make it extremely difficult for FDA and U.S. Customs and 
Border Protection officials to examine adequately all of the personally 
imported drug products to ensure that they comply. In fact, the HHS 
Task Force estimated that it would have cost $3 billion annually to 
examine and process each of the 10 million packages that entered the 
U.S. in 2003. Even if a lower level of examination were considered 
adequate, the costs to FDA would still be very high.
    Despite its registration and inspection fee provisions, the bill 
likely provides inadequate resources to conduct such examination on a 
routine basis. Resources are limited to 2.5 percent of the total price 
of qualifying drugs imported by registered exporters, an amount likely 
to be a small fraction of the cost of inspecting packages at 
international mail facilities.\1\ This is a particular concern because, 
once personal importation is given the appearance of legality, 
consumers may be less vigilant in scrutinizing the drug shipments they 
receive from abroad.
    \1\ The 2004 HHS Task Force report noted that individuals in the 
U.S. imported from Canada some $695 million of drugs amounting to 12 
million prescriptions in 2003. Assuming that each parcel contained two 
and a half prescriptions, the value of a parcel would be approximately 
$145, so that the revenues to FDA from each parcel would be about 
$3.62, if the fees were capped at 2.5 percent of the price of 
qualifying drugs being imported. But the HHS Task Force report notes 
that the cost of inspecting packages in 2003 was about $264 per package 
containing drugs, suggesting that the fees provided by the bill would 
be grossly inadequate for the tasks asked of FDA. Put differently, the 
fee revenue from importation of drugs from Canada at this scale, if 
capped at 2.5 percent of the price of the imported drugs, would provide 
less than $20 million to FDA. The HHS Task Force report, however, noted 
that the total cost of inspecting all incoming shipments in 2003 
(including products from countries other than Canada), would have 
amounted to nearly $3 billion, an amount more than 100 times greater.
    S. 242 would establish a complicated system for the regulation of 
imported drugs. This complex system is so vast that it would be 
enormously resource-intensive, likely much greater than the proposed 
registration fees and inspection fees could support. The bill and its 
associated fees also do not appear to account for the costs of the 
increased volume of packages likely to inundate the U.S., or address 
the accompanying and likely substantial enforcement work that will 
arise as a result of legalized importation as more unscrupulous vendors 
set up shop to circumvent the new U.S. system.
Lack of Substitutability
    The proposed bill provides a mechanism for foreign imported 
products to be approved for distribution in the U.S. even though these 
products may not be bioequivalent to the FDA-approved product. This 
mechanism seems to by-pass the existing drug approval process for drug 
products that are not bioequivalent to an FDA-approved product, which 
is through the submission of a new drug application (NDA) that is 
thoroughly reviewed for safety and efficacy. Ultimately, the bill 
appears to establish for imported drugs an alternative to FDA's 
existing generic drugs program.
    The bill would allow non-bioequivalent products to be sold in the 
U.S. as approved ``variations'' of the innovator product under the 
existing NDA, which would create confusion for doctors and pharmacists 
in prescribing or dispensing, respectively. Dr. Todd Cecil of the U.S. 
Pharmacopeia testified at the April 2005 Senate HELP hearing regarding 
pharmaceutical equivalence and bioequivalence and his concerns with 
this bill. In addition, doctors cannot anticipate which version of a 
drug product their patients will receive, and pharmacists may not know 
which version of a drug the doctor intended to prescribe. The 
possibility of confusion is significant and poses a real public health 
concern as this increases the chance of error in prescribing and/or 
dispensing of medications. In addition, the domestic and foreign 
versions of prescription drugs may become commingled in the drug supply 
chain. It is unclear whether a patient will be able to specify if he 
wants the foreign version or the original FDA-approved version when he 
gets his prescription filled at the pharmacy or receives medication at 
a hospital or other medical treatment facility.
Inadequate Resources
    It is uncertain whether the anticipated fee revenues will be 
realized because the market response to legalization of importation 
cannot be accurately predicted. This uncertainty could pose problems 
for FDA's program, because large costs of starting and developing a 
program to regulate imports will have to be incurred even if the volume 
of legalized imports is initially low. Although the bill does assume 
certain sales volumes in the first several years for purposes of 
collecting inspection fees, with only a few registered importers and 
exporters participating initially, the high pro rata share of fees may 
actually discourage participation and make it difficult for FDA to 
collect fees at the designated levels. Even once a program is 
developed, the bill is not likely to provide the necessary funds to 
continue an adequate regulatory program if inspection fees are low 
because imports do not reach the anticipated levels.
Supply Chain Security
    We are proud of FDA's efforts with supply chain stakeholders and 
states to maintain a safe and secure drug supply in the U.S. that is 
premised on a closed, tightly regulated system. The type of drug 
importation program in the bill would increase the number of foreign 
entities FDA would have to monitor and regulate. It can be difficult 
for FDA enforcement to reach foreign entities violating our laws and 
regulations. This bill would open the door to more entities outside our 
domestic legal framework. We also have grave concerns for consumers who 
may be harmed from products from these foreign sources. The bill does 
not take into account protecting the rights of the consumer if they are 
injured after using one of these products.
    As we all agree, counterfeit drugs must be kept out of the U.S. 
drug supply chain. FDA is currently using its resources and authorities 
as efficiently as possible to secure the drug supply chain and protect 
American consumers from counterfeit and diverted drugs. Opening the 
U.S. drug distribution system to foreign markets would provide more 
opportunity for counterfeit drugs to enter our currently closed system 
and would significantly complicate FDA's efforts to investigate 
irregularities in the drug supply chain.
    Conducting foreign investigations and prosecutions is inherently 
costly and difficult and often is complicated by language barriers and 
issues of extraterritorial jurisdiction and extradition. We are 
concerned that the bill does not provide sufficient enforcement tools 
and penalties to deter foreign entities from introducing counterfeit or 
otherwise substandard drugs into the U.S. drug supply chain.
Approval of Foreign Versions
    We believe the bill creates complicated application and inspection 
requirements for imported ``foreign'' versions of FDA-approved 
products. These requirements would be difficult to implement, as each 
foreign country has its own regulatory scheme and requirements for the 
information necessary to approve a drug product. FDA would essentially 
have to review foreign information in a foreign format, all in less 
time than is required for review of traditional NDAs. In addition, the 
bill would require imported ``foreign'' versions of a drug bear the 
labeling associated with the original FDA-approved product. This 
practice would essentially legalize the misbranding of these products, 
and raises concerns for FDA not only in the approval context but also 
in the counterfeits context. It is difficult enough for FDA and other 
Federal enforcement agencies to detect counterfeit drug products and 
packaging; creating a mechanism that would allow persons to label 
foreign drugs with reproductions of FDA-approved labeling would make it 
even harder to distinguish between ``legal'' foreign products and 
    U.S. consumers currently have a number of options available to them 
when looking for affordable medications within the closed U.S. drug 
distribution system. Many essential drugs have a generic alternative 
and some even have many generics, which are generally less expensive 
than the brand product. We continue to find that many consumers 
currently buying foreign products are actually trying to purchase, or 
are unknowingly receiving, a foreign product that often is more 
expensive than the U.S. product. In addition, the consumers are at risk 
when receiving foreign drug products, as there are documented cases 
where the wrong medication was received (the haloperidol case mentioned 
in my testimony). Many pharmaceutical companies and Pharmaceutical 
Research and Manufacturers Association of America offer discounts and 
sometimes even free medications for consumers who cannot afford them. 
Medicare Part D has also helped some seniors cut their prescription 
costs. Consumers should not feel restricted to higher priced innovator 
(brand) products.
    Consumers must also understand that if a medication is costly, they 
should discuss other treatment options with their doctor and 
pharmacist, as most often there are lower-cost alternatives available. 
We will continue to strive to make more affordable medicines available 
to consumers, but we remain concerned about the implications of 
legalizing drug importation as one of those options.
    In conclusion, I would like to reiterate concerns about the 
economic implications of prescription drug importation, as stated in 
the 2004 HHS Task Force Report on Drug Importation. Even if all the 
safety concerns could be allayed, these concerns would remain: that 
savings to U.S. consumers would be small as a percent of total drug 
spending; that implementing such a program would incur significant 
costs; and that legalized importation would likely adversely affect the 
future development of new drugs for American consumers. In 2004, the 
HHS Task Force Report noted that generic drugs account for most 
prescription drugs used in the U.S. and that these are usually less 
expensive in the U.S. than abroad. We thus have a well-functioning 
system of intellectual property rights that balances the short-term 
interests of consumers with the long-term research incentives.
    Thank you for the opportunity to address some of our concerns with 
S. 242.
                              Attachment 1
Prepared Statement of Dr. Benjamin Zycher, Senior Fellow in Economics, 
             Pacific Research Institute for Public Policy *
    * The views expressed are those of Benjamin Zycher, and do not 
purport to represent the views of the Pacific Research Institute for 
Public Policy or of any of its officers or contributors.
     Before the Committee on Health, Education, Labor, and Pensions
                     U.S. Senate--February 17, 2005
Pharmaceutical Importation, Price Controls, Federal Price Negotiations, 
        and the Interests of Consumers
    Thank you, Mr. Chairman, and distinguished members of this 
committee, for this opportunity to offer my perspective on the now-
prominent issues of pharmaceutical importation, domestic/foreign 
pricing differentials, and the long-term economic effects of 
pharmaceutical price controls and Federal price negotiations, 
particularly in the context of consumer well-being.
    Well-known principles of economic analysis and existing bodies of 
data not subject to serious challenge yield several conclusions on the 
prospective adverse effects of the importation of price-controlled 
pharmaceuticals into the U.S. Moreover, the recent ``free-market'' 
argument favoring the importation of price-controlled pharmaceuticals 
is deeply flawed, as discussed below. Similarly, the perverse market 
effects of a possible imposition of Federal negotiating power--Federal 
``interference''--in the context of the Medicare program are not 
difficult to predict. Alternatively, U.S. consumers would benefit from 
efforts to end the free ride that foreign consumers are able to obtain 
on U.S. research and development investments, financed largely by U.S. 
consumers. These central observations and some other ancillary 
arguments form the basis of my testimony today.
I. Pharmaceuticals Subject to Price Controls Overseas Are Not ``Cheap''
    The true economic cost of pharmaceuticals--that is, the real 
resource cost to the economy of developing and producing them--cannot 
be reduced without improvements in the economic and regulatory 
environment, a broad set of issues outside the scope of today's 
hearing. The importation of drugs subject to foreign price controls, 
far from reducing real economic costs, by necessity would import those 
price controls into the U.S. in terms of prices received by 
manufacturers. To the extent that lower prices for consumers result, 
that would not represent a true reduction in ``costs''; instead it 
would be a wealth transfer from pharmaceutical producers and possibly 
from foreign consumers to U.S. consumers in the short run, with adverse 
consequences for U.S. consumers in long run, as discussed below. The 
more likely short run outcome for U.S. consumers, depending on market 
conditions, would be little or no price reductions but instead price 
increases for various market participants (intermediaries) in the 
supply chain, since the importation of price-controlled pharmaceuticals 
would not affect either market demand conditions or market supply 
conditions on the margin.\1\
    \1\ See, e.g., U.S. Department of Health and Human Services, Report 
on Prescription Drug Importation, December 2004, pp. 65-67.
    In the long run--which is not necessarily a long period of time--it 
is incontrovertible that lower prices will reduce the marginal 
efficiency of investment, that is, the incentive to invest in the 
research and development of new pharmaceuticals.\2\ Since ultimately it 
is anticipated consumer demands--for cures, for disease alleviation, 
for better health, and for reduced suffering--that drive the research 
and development choices of profit-seeking firms, lower anticipated 
prices will reduce research and development investment and thus the 
future flow of new drugs. The adverse future effects in terms of fewer 
cures and greater suffering will be real economic costs attendant upon 
the importation of foreign price controls; but such costs will not 
appear directly in government budgets or private balance sheets, except 
to the (significant) extent that more-costly hospitalizations and other 
substitute medical procedures will be used in place of the drugs that 
will have failed to have been developed due to the long term effects of 
price controls.\3\ Thus will the adoption of price controls through the 
vehicle of the importation of price-controlled drugs mortgage the 
future in favor of the present by weakening incentives for research and 
development investment and other activities yielding streams of new and 
improved medicines.
    \2\ See Ibid., chapters 7 and 8. See also U.S. Department of 
Commerce, International Trade Administration, Pharmaceutical Price 
Controls in OECD Countries: Implications for U.S. Consumers, Pricing, 
Research and Development and Innovation, December 2004, chapters 2-4.
    \3\ See, e.g., Frank R. Lichtenberg, ``Are the Benefits of Newer 
Drugs Worth Their Cost? Evidence From the 1996 MEPS,'' Health Affairs 
20(5), September/October 2001, pp. 241-51.
    Based upon the recent experience in the non-U.S. OECD and upon 
simulation exercises and other analyses, the magnitude of this 
projected adverse research and development effect varies somewhat, 
although it is never predicted to be small.\4\ My view is that all of 
these estimates are biased downward because they fail to take into 
account the fact that the imposition of price controls, whether direct 
or indirect, introduces an asymmetry into the statistical distribution 
of future returns to research and development, in that the price 
controls have the effect of limiting (truncating) upside potential 
while leaving downside risk unaffected. This is an effect separate from 
the price reduction itself, the implication of which is that the long 
term effects of price controls in terms of a reduced flow of new and 
improved drugs is likely to prove larger rather than smaller.\5\
    \4\ See U.S. Department of Commerce, op. cit., chapter 8.
    \5\ In order to see this, suppose that market conditions shifted 
for some reason, yielding a reduction in future pharmaceutical demand 
and prices. That would shift the entire distribution of investment 
returns, but would not bias future returns in favor of losses.
    Some observers have argued that there can be an inefficiently large 
amount of pharmaceutical research and development investment, so that a 
reduced amount still may be efficient. High purported ``profits'' 
(either undefined or defined poorly) then are used to infer that 
current investment is too high.\6\ But if ``profits'' are 
(uncompetitively) high--adjusting for investment risk--we would expect 
to see significant entry into the market by new firms. We do not.
    \6\ This seems to be the argument of Professor Kevin Outterson in 
his ``Statement'' to the Committee on Ways and Means, U.S. House of 
Representatives (undated), on the U.S.-Australia Free Trade Agreement.
    More generally, the current emphasis by some commentators on total 
revenues or total profits as predictors of research and development 
incentives is incorrect. It is the marginal efficiency of investment 
for a particular research and development effort that is relevant. 
Consider, for example, a firm earning enormous profits, however 
defined; would it sink dollars into a project that it knows will not 
yield adequate returns (however broadly defined)? Regardless of overall 
revenues or profitability, firms have powerful incentives to make only 
efficient investments, that is, investments expected to yield at least 
normal rates of return with some allowance for risk. Price controls 
cannot further that outcome; and competitive capital markets will 
enforce such discipline.
    Finally, an accounting of the true cost of imported drugs subject 
to price controls must include some consideration of the safety 
problem, important socially in particular in the context of contagious 
diseases. That solutions to the safety problem are likely to prove 
highly elusive is evidenced by the fact that current legislation under 
discussion either shunts the issue aside completely, or apparently 
bestows an ``FDA-approved'' imprimatur upon foreign plants not actually 
approved by the FDA.\7\ The safety problem is discussed in detail in 
the Department of Health and Human Services study noted above; I will 
not repeat its findings here.\8\
    \7\ See S. 334, the ``Pharmaceutical Market Access and Drug Safety 
Act of 2005''; and S. 109, the ``Pharmaceutical Market Access Act of 
    \8\ See fn. 1, supra.
    In short: As much as we want our medicines to be affordable, we 
also want them to be available when needed.
II. U.S. Consumers Would Benefit From Policies Reducing the Foreign 
        Free Ride
    The basic cost economics of pharmaceuticals are somewhat unique, in 
that large fixed costs (for research, development, and production 
facilities) are accompanied by small marginal production costs.\9\ The 
large fixed costs--over $800 million per drug \10\--yield a body of 
knowledge, which itself is a classic collective (or ``public'') good in 
that those who can find ways to avoid paying their ``fair'' share thus 
obtain a free ride on the efforts of others to finance the research and 
development investment. Foreign price controls on drugs have the effect 
of yielding for foreign consumers just such a free ride at the expense 
of U.S. consumers.
    \9\ An exception is marginal production cost for biologics, a topic 
outside the scope of this testimony.
    \10\ See, e.g., J. Dimasi, R. Hansen, and H. Grabowski, ``The Price 
on Innovation: New Estimates of Drug Development Costs,'' Journal of 
Health Economics, 22 (2003), pp. 151-185. See also Christopher P. Adams 
and Van V. Brantner, ``Estimating the Costs of New Drug Development: Is 
It Really $802M?'' December 2004.
    Some have argued that policies designed to increase foreign prices 
would not yield benefits for U.S. consumers because ``drug companies 
are under no obligation to lower U.S. prices as [foreign] prices 
increase.'' \11\
    \11\ See Professor Kevin Outterson, op. cit., at p. 2.
    That argument is incorrect, regardless of the assumption one makes 
about the competitiveness of the U.S. pharmaceutical market. From the 
viewpoint of U.S. pharmaceutical producers, an increase in foreign 
prices analytically is equivalent to an increase in foreign demand; 
total perceived worldwide demand would increase, yielding an increase 
in the marginal efficiency of research and development investment, and 
so a long run increase in that investment and in the flow of new drugs. 
But, ceteris paribus, U.S. demand would not change, so that the 
increased long run supply of drugs would induce profit-seeking U.S. 
firms to reduce their U.S. prices, that is, would put downward pressure 
on U.S. prices.\12\ Again: This is true whether the U.S. market is 
viewed as perfectly competitive or as a perfectly discriminating 
monopoly.\13\ In the short run, it is unclear whether U.S. prices would 
fall; demand and cost conditions would not change, but producers might 
have incentives to cut prices in the expectation of increased 
competition over the longer term.
    \12\ Whether U.S. producers face competitive or monopolistic market 
conditions, the increased prices from overseas would increase long run 
incentives to produce new drugs. Because demand is an inverse function 
of price--it is ``downward sloping''--the greater flow of drugs would 
put downward pressure on prices.
    \13\ The latter assumption would be highly questionable and 
inconsistent with the evidence, but that is an issue outside the scope 
of this testimony.
III. The ``Free-Market'' Argument Favoring Drug Importation Is 
        Fundamentally Flawed
    Some prominent supporters of free markets have argued recently in 
favor of the importation of price-controlled drugs. The argument in 
summary is that an end to the import ban would force pharmaceutical 
producers to negotiate more stringently with foreign governments over 
the prices for drugs, because the prospect of ``cheap'' foreign drugs 
flooding the U.S. market would make it difficult to preserve U.S. 
prices sufficient to cover high R&D costs. The producers also could 
insist upon ``no foreign resale'' provisions in contracts, which could 
be enforced by limiting sales to the foreign governments.
    This argument is fundamentally flawed. Most foreign governments 
under their patent laws reserve the right to engage in compulsory 
licensing under various conditions, one of which is a ``failure to work 
the patent.'' The precise meaning of that phrase is unclear, but to 
foreign officials it might mean a failure to sell all that is demanded 
at the controlled price. What is clear is that foreigners will not be 
happy to pay more for medicine. And so it is unlikely that foreigners 
faced with substantial increases in their drug costs would be 
fastidious in their adherence to the rule of patent or international 
trade law, as interpreted by U.S. drug producers and some U.S. 
officials. Indeed, compulsory licensing already has been used, so that 
price negotiations and trade environments are highly vulnerable even to 
implicit threats of patent theft.
    Moreover, under some prominent interpretations of patent law, 
producers control their patents but not the resale of their patented 
products. Would contracts to limit resale of price-controlled drugs, 
even if they could be negotiated and enforced, survive challenge under 
this interpretation? Such uncertainties inevitably will force the 
producers to sign agreements eroding their ability to recover R&D costs 
or to protect their intellectual property.
    The basic problem with the ``free market'' position in support of 
drug importation is that it tries to reconcile free markets 
domestically with price controls overseas. That is a circle that cannot 
be squared as long as foreign governments can steal patents; and in the 
final analysis, it is likely to be difficult and time-consuming to stop 
a government intent on doing so. What is needed instead are U.S. 
Government efforts, perhaps in the context of trade policy, designed to 
end the free ride that many foreigners now obtain at the expense of 
U.S. consumers. That many U.S. officials now attack drug producers--
whose investments have saved millions of lives--rather than the foreign 
theft of U.S. intellectual property is unlikely to prove salutary.
IV. Federal Price Negotiation Would Not Serve the Interests of 
    Consider a large pharmacy chain or other sizable intermediary 
between pharmaceutical producers and consumers. That intermediary must 
balance two competing objectives, which actually are the objectives of 
its customers. It seeks to reduce costs, and thus prices for its 
customers; and it seeks to preserve a formulary broader rather than 
narrower, so that it can serve as broad a market as possible, that is, 
preserve more rather than less consumer choice. Both objectives are 
driven by competition among pharmacies and other intermediaries; that 
these objectives conflict is obvious, so that private sector 
intermediaries, reflecting the preferences of their customers, must 
find ways to balance them.
    The more obvious difference between such private sector 
intermediaries and the Federal Government is the sheer size of the 
latter as a purchaser; it is almost axiomatic that the Federal 
Government has more monopsony power \14\ than private sector 
intermediaries. At a more subtle level, the Federal Government has 
incentives in terms of the cost/formulary tradeoff incentives that 
differ substantially from those constraining private sector 
intermediaries. Budget pressures are strong at all times, so that 
incentives to negotiate substantial price reductions are powerful. But 
the Federal Government is not a profit-seeking firm, so that its 
incentives to satisfy its ``customers'' in terms of broad formularies 
must be attenuated through political processes; voting is simply a 
weaker constraint than the ability of customers to take their business 
elsewhere. This is a common problem with public sector services: The 
tradeoff incentives between cost (budget) reduction and preservation of 
service quality systematically are different from those constraining 
private sector choices. This bias in favor of price reductions as 
opposed to formulary availability is obvious overseas,\15\ and arguably 
has affected U.S. consumers in the vaccine market.\16\
    \14\ This essentially is monopoly power on the part of a buyer to 
force prices down.
    \15\ See, e.g., Sally C. Pipes, Miracle Cure: How To Solve 
America's Health Care Crisis and Why Canada Isn't the Answer, San 
Francisco: Pacific Research Institute, 2004, pp. 171-179. See also, 
Cambridge Pharma Consultancy, ``Delays In Market Access,'' December 
    \16\ See Institute of Medicine, Financing Vaccines in the 21st 
Century, Washington D.C.: National Academies Press, 2004, ch. 5. See 
also, The Global Vaccine Shortage: The Threat To Children And What To 
Do About It, Proceedings of the Albert B. Sabin Vaccine Institute Ninth 
Annual Vaccine Colloquium, 2003, pp. 25-33.
V. Conclusions
    The interests of consumers are served by a pharmaceutical sector 
offering medicines both affordable and available. More generally, 
consumers are served by economic efficiency, that is, policies yielding 
an aggregate output basket as valuable as possible. Policies that 
bestow benefits upon one set of consumers at the expense of others, 
perhaps in the future, are inconsistent with that goal; in particular, 
price controls are fundamentally incompatible with the operation of 
free or competitive markets, with the institutions of free trade, and 
with the interests of consumers. It is incontrovertible that the 
importation of pharmaceuticals subject to foreign price controls will 
have the effect of importing the price controls themselves, with clear 
and substantial adverse effects over the long term in terms of research 
and development incentives and the flow of new and improved medicines. 
Other analyses suggest that such policies will not save much even in 
the narrow dimension of budget dollars and drug spending; and the 
longer term costs in terms of substitution of costly substitute medical 
procedures and reduced human health outcomes are obvious. This 
committee would be wise to reject efforts to allow the importation of 
pharmaceuticals subject to foreign price controls.
    Instead, the pursuit of consumer well-being would be served by 
policies--perhaps in the context of trade negotiations--ending the free 
ride that foreign governments have garnered for themselves, through the 
imposition of price controls, at the expense of the U.S. market. 
Noninterference--a farsighted policy incorporated into the 2003 
Medicare legislation--with competitive private sector negotiations will 
further those consumer interests as well.
                              Attachment 2
Response to Written Questions Submitted for the Record by the Committee 
 on Health, Education, Labor and Pensions, U.S. Senate to Dr. Benjamin 
 Zycher, Senior Fellow, Pacific Research Institute for Public Policy, 
                               March 2005
    Dear Mr. Chairman, and Distinguished Members of this Committee:

    I submit respectfully for the record the answers below to the 
written questions addressed to me.
Questions From Senator Enzi
    Question 1. As I am sure you are aware, every free trade agreement 
that the United States has signed recognizes the importance of allowing 
legitimate domestic regulation. Both WTO agreements as well as NAFTA 
explicitly permit governments to restrict imports for a number of 
important purposes, like protecting public health and safety, and 
national security. Do you believe that permitting importation of 
pharmaceuticals from foreign nations works against such trade 
    Answer. Throughout the postwar GATT and more recent WTO negotiating 
rounds and through the NAFTA process, the central purpose of 
liberalized trade has been the improvement of economic productivity and 
thus the long term well-being of consumers. That improvement is 
achieved through the reduction of artificial barriers to efficient 
resource allocation, so that individuals, firms, and economies can 
exploit both their own comparative advantages and those of others as 
well. In short: The central goal of free trade agreements is an 
expansion in the value of overall economic output, and so a reduction 
in the aggregate level of real prices. International trade in 
pharmaceuticals is fully consistent with that goal, subject to safety 
and other public health considerations,\1\ and subject to the absence 
of other policies that might obviate the gains that trade otherwise 
would yield. In the context of the international pharmaceutical market, 
foreign price controls are foremost among such perverse policies. 
Because of the basic economic conditions of pharmaceutical development 
and production--for the most part fixed costs are high while marginal 
production costs are low--foreign governments have strong incentives to 
obtain a ``free ride'' on (a substantial part of) the fixed costs 
financed by U.S. consumers, by imposing price controls on retail 
transactions. These foreign price controls impose several types of 
inefficiency costs, foremost among them an inefficient reduction in 
incentives for the development of new pharmaceuticals. Accordingly, the 
importation of pharmaceuticals subject to foreign price controls 
necessarily would introduce those controls into the U.S., either at 
wholesale or at retail depending upon market conditions; such pricing 
distortions and the perverse long term effects attendant upon them are 
inconsistent with the efficiency goals of free trade agreements, and so 
indeed would ``work against such trade agreements.'' This inconsistency 
would take the form of reduced and distorted pharmaceutical investment 
over the long term, thus increasing real prices by reducing the future 
availability of new and improved medicines. That outcome obviously is 
at odds with the central goal of efficient investment in the context of 
free trade agreements, thus reducing rather than expanding the value of 
aggregate output and consumer well-being.
    \1\ Note that profit-seeking firms generally have efficient and 
powerful incentives to preserve the economic value of their brand names 
and thus the safety and effectiveness of their products. In the context 
of the pharmaceutical market, the problem of contagion may introduce a 
distortion, and the cost of policing counterfeit drugs may yield an 
efficient role for government activity. See, e.g., Benjamin Klein and 
Keith B. Leffler, ``The Role of Market Forces in Assuring Contractual 
Performance,'' Journal of Political Economy 89(4), 1981, pp. 615-641.

    Question 2. Trade agreements such as the WTO Agreement on Trade-
Related Aspects of Intellectual Property Rights (TRIPS) and NAFTA 
require governments to protect intellectual property rights. These 
agreements are designed to ensure the continuing viability of 
industries involved in the research and development of innovative 
products, and to prevent unfair competition from companies who would 
otherwise free-ride on the technology developed by others. Do you think 
that unauthorized importation of prescription pharmaceuticals would 
undermine the value and purpose of U.S. patent rights?
    Answer. The central economic purpose of patent rights is the 
creation of a temporary stream of ``monopoly'' returns to investment in 
pursuit of efficient investment incentives for innovation and research 
and development.\2\ These returns are engendered by a (marginal) 
revenue stream temporarily higher than otherwise would be the case; 
accordingly, any policies that reduce such revenue streams artificially 
indeed ``would undermine the value and purpose of U.S. patent rights.'' 
The importation of pharmaceuticals subject to price controls obviously 
would reduce the (expected) revenue stream for the given drugs (or drug 
class), and so would have the effect of undermining the goals of the 
patent system. Indeed, even without importation of pharmaceuticals, and 
even without compulsory licensing or other such policies, the 
imposition of price controls overseas interferes with patent rights by 
reducing the marginal revenues yielded by introduction of a new or 
improved medicine. (Merely consider the extreme case of a drug the 
price of which is controlled at zero; the patent value would be zero as 
well.) \3\
    \2\ The issue of the efficient structure and length of patent 
rights in the pharmaceutical context is not addressed here.
    \3\ The imposition of price controls is very different from 
differential pricing. Such ``price discrimination'' is efficient, fully 
consistent with competitive market behavior, and makes consumers better 
off by allocating fixed costs in accordance with differing valuations 
placed upon the knowledge capital yielded by pharmaceutical innovation, 
thus moving the production of pharmaceuticals closer to the efficient 
    Note also that neither overall firm ``revenues'' nor ``profits'' is 
the correct criterion for determining whether investment incentives 
will be efficient; instead we must ask whether a policy affects the 
marginal expected returns attendant upon investment in a given drug.\4\
    \4\ In order to see this, consider the case of a highly profitable 
pharmaceutical producer; would it invest in a drug subject to severe 
(future) price controls merely because overall profits are high? It 
will do that no more readily than bury a $100 bill in the hope that a 
money tree will sprout.

    Question 3. You indicate that the magnitude of the projected 
adverse effect of importation on research and development varies 
somewhat, ``although it is never predicted to be small.'' You also 
mention that all of the estimates are biased downward. What do you see 
as the realistic potential effect on research and development? Do you 
feel that even if importation leads to price reductions, U.S. consumers 
would end up sacrificing choice in favor of cost?
    Answer. The importation of pharmaceuticals subject to price 
controls would yield both reduced consumer choice and higher overall 
health care costs. The reduced consumer choice would be one central 
adverse effect of the lessened research, development, and innovation 
that inexorably will be engendered over the long run by price controls. 
The higher overall health care costs will be caused by the substitution 
of hospital and other types of medical services in place of the 
pharmaceuticals that will have failed to have been developed over 
time.\5\ In the narrow context of the pharmaceutical market, any short 
term reduction in drug costs (prices) will be offset partially, fully, 
or more than fully by the higher real costs of reduced drug 
availability over the long term.\6\ The potential effect on research 
and development is difficult to measure, although a crude but unbiased 
approximation can be obtained by estimating the reduction in the 
present value of the expected future revenue stream for a prospective 
drug, and then comparing that reduced revenue base with the cost of 
developing new drugs, estimated at over $800 million in peer-reviewed 
journals, or perhaps with the present value of the expected costs of 
developing that prospective drug.\7\ Such analyses are reasonable as 
initial starting points for analysis, but they are likely to 
underestimate the adverse effect of price controls on research and 
development because they are static rather than dynamic; they fail to 
take into account the fact that the imposition of price controls, 
whether direct or indirect, introduces an asymmetry into the 
statistical (stochastic) distribution of future returns to research and 
development. This is an effect distinct from the price reduction 
itself: Ex ante, any given potential investment offers upside potential 
that is limited (truncated) by the price controls, while downside risks 
remain unaffected. The dynamic effect, therefore, is to shift the 
entire statistical distribution of possible returns downward (or to the 
left); this means that the standard static measurements of the adverse 
research and development effects attendant upon the imposition of price 
controls are biased downward.
    \5\ See, e.g., Frank R. Lichtenberg, ``Are the Benefits of Newer 
Drugs Worth Their Cost? Evidence From the 1996 MEPS,'' Health Affairs 
20(5), September/October 2001, pp. 241-51. See also Kevin M. Murphy and 
Robert H. Topel, eds., Measuring the Gains From Medical Research: An 
Economic Approach, Chicago: University of Chicago Press, 2003. Even 
with an adjustment for the costs of substitute medical procedures, such 
measured ``costs'' underestimate the adverse effects of pharmaceuticals 
made unavailable by the prior direct or indirect imposition of price 
controls because they exclude the real but difficult-to-measure costs 
of increased mortality, morbidity, and suffering.
    \6\ Note that because pharmaceutical producers have incentives to 
invest only in drugs the development and production costs of which 
consumers are willing to bear, the reduced prices in the short run are 
likely to be offset at least fully by the longer term higher costs of 
reduced drug availability, as a first-order approximation. Moreover, 
the imposition of price controls might not yield price reductions at 
retail even in the short run, as the difference between controlled 
prices and market value might be captured in whole or in part by 
various transaction agents (``middlemen'') under a broad range of 
market conditions.
    \7\ See U.S. Department of Commerce, International Trade 
Administration, Pharmaceutical Price Controls in OECD Countries: 
Implications for U.S. Consumers, Pricing, Research and Development and 
Innovation, December 2004, chapter 8.

    Question 4. The Department of Commerce study acknowledged that 
improvements to health care and life sciences are an important global 
source of gains in health and longevity. According to the study, ``The 
development of innovative pharmaceutical products plays a critical role 
in ensuring these continued gains.'' The report states that ``economic 
incentives are essential'' in order to encourage the continued 
development of new medicines. Do you think legalized importation would 
reduce the ``economic incentives'' that are critical to the development 
of new medicines?
    Answer. It is incontrovertible that the imposition of price 
controls on pharmaceuticals, whether directly or indirectly in the form 
of competition from drugs subjected to price controls overseas, would 
weaken incentives to invest in pharmaceutical research and development. 
This is true under any set of assumptions about the competitiveness of 
the industry, about its maximand, or other parameters; the market for 
investment capital will recognize immediately the attendant reduction 
in expected returns to investment in this sector, and will reallocate 
some capital elsewhere. As discussed in footnote 4 above, such 
parameters as the overall profitability of the industry (or given 
firms) or overall industry (or firm) revenues are not relevant. For any 
given prospective investment in a new chemical entity or other 
developmental product, the capital market will ask whether expected 
returns (on the margin) justify the expected development costs. Price 
controls cannot improve the marginal efficiency of any such investment.
Questions From Senator Kennedy
    Question 1. The Department of Commerce report suggests that the 
increased prices of name-brand drugs in Europe could be offset by 
reduced prices (and increased utilization) of generic drugs. Do you 
agree with that assessment?
    Answer. It certainly is true that name-brand and generic drugs in 
the short run are substitutes to some substantial degree. In the long 
run, they are more complementary, in that generic drugs over time 
cannot become generic drugs unless they are developed first as name-
brand drugs. In the short run, an increase in the prices of name-brand 
drugs would increase the demand for generics; depending on supply 
conditions for the latter, increased utilization of generics would be 
expected to yield some savings that might be substantial.\8\ In the 
long run, increased prices for name-brand drugs would reduce the prices 
of generics by increasing competition among them. The reasons that 
generic prices seem to be higher in Europe than in the U.S. 
(abstracting from exchange rate issues and the like) are unclear; some 
attribute that condition to anticompetitive policies in Europe, but in 
my view a careful analysis of this question is yet to be done. As an 
aside, the elimination of European price controls unambiguously would 
make U.S. consumers better off, in the long run and possibly the short 
run, by inducing profit-seeking producers to reduce their U.S. prices.
    \8\ For most drugs marginal production costs are low and short run 
scale economies seem not to be particularly important; accordingly, 
supply conditions as a first approximation suggest that the increased 
demand for generics would not increase the prices of generic drugs 

    Question 1a. How much could Europe save with increased generic use?
    Answer. The best evidence that I have seen on this issue is 
presented in a 2004 study by the Boston Consulting Group, which 
concludes in summary that an increase in European generic use to levels 
proportionate to those in the U.S. would reduce drug spending by 20 
    \9\ See Charles-Andre Brouwers, Martin B. Silverstein, and Tory 
Wolff, Adverse Consequences of OECD Government Interventions in 
Pharmaceutical Markets on the U.S. Economy and Consumer, Boston 
Consulting Group, July 1, 2004, esp. exhibit 14.

    Question 1b. Would increased generic savings impact innovation?
    Answer. Certainly there would be more innovation investment if 
competition from generics were reduced, that is, if name-brand drugs 
enjoyed more or longer ``monopoly'' positions. The presence of generics 
yields competition, as does the presence of name-brand competitors, 
sometimes called ``me-too'' drugs quite incorrectly. But the possible 
reduction in innovation yielded by competition from generics is not 
necessarily inefficient if we assume that patent periods are optimal 
and that other government policies are efficient also. In the context 
of Europe, if increased generic savings were caused by a loosening or 
removal of price controls, then such a shift would enhance innovation 
because the removal of the price control policies would improve the 
investment climate. In short, in the European context, the removal of 
price controls might induce a shift toward generics, which might 
increase the savings yielded by the use of generics, but that would be 
salutary for long run innovation because the removal of the price 
controls would improve investment incentives.

    Question 2. Would you agree that increased utilization of 
pharmaceuticals is beneficial to health status?
    Answer. Yes; see footnote 5 above.

    Question 2a. If so, should the Department of Health and Human 
Services and Department of Commerce reports have estimated the positive 
health impacts of increased consumer access to drugs due to lower 
    Answer. In the narrowest sense, the issue of what the HHS/DOC 
studies should have examined is a question for Congress. More broadly, 
the purported price and attendant health effects of ``increased 
consumer access to drugs due to lower prices'' in a real sense answers 
the question (qualitatively) before it has been asked: Price controls 
increase ``access'' in the short run but not the long run, so that the 
improved health outcomes yielded by drug utilization in the short run 
must be weighed against the adverse long term health effects of reduced 
pharmaceutical research and development. Is it worth mortgaging the 
future in favor of the present? I believe not; but that is one crux of 
the debate over the importation of pharmaceuticals subject to foreign 
price controls. And so any such study must examine not only the short 
term effects of prospective policy shifts, but the long term effects as 

    Question 2b. Should comparative effectiveness play a role in 
approval or R&D or marketing incentives?
    Answer. If ``R&D or marketing incentives'' are the products of 
market forces, then comparative effectiveness is a crucial parameter 
that should influence investment choices by producers, and market 
forces yield precisely that outcome. If, on the other hand, such 
incentives are imposed by regulators and other public officials---if 
``evidence-based medicine'' is used to allocate resources in a top-down 
decision process--then they would be highly inappropriate. Patients 
respond differently to given medicines; what is ``effective'' in the 
aggregate may not be ``effective'' for specific patients, who in 
consultation with their physicians should choose among alternatives for 
the best solutions to their respective conditions. Moreover, the 
differences in ``effectiveness'' can manifest themselves in ways 
essentially unobservable to analysts; consider a generic diuretic equal 
in ``effectiveness'' with some name-brand hypertension drug, but which 
causes the patient to visit the bathroom multiple times during the 
night, before work the next day. Only patients in consultation with 
their physicians can evaluate all the relevant tradeoffs in pursuit of 
``effectiveness;'' government policy is too blunt an instrument to do 
so without the creation of important adverse effects in terms of 
patient well-being.