Majority Statement

• Byron L. Dorgan

  Senator
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  Majority Statement

  Byron L. Dorgan

  We’re here today to consider a matter that literally means the difference between life and death for many Americans – the cost of prescription medicines.  And the question we are going to ask is: do we really believe that Americans ought to have to pay the highest prices in the world for prescription medicines?

   

  I don’t believe they should.  American taxpayers already heavily subsidize pharmaceutical research through the tax code and pay for basic research at the National Institutes of Health that has led to many of the wonder drugs currently marketed by the prescription drug manufacturers. 

   

  Today we are considering whether we should continue to allow drug companies to dictate the prices U.S. consumers pay for prescription drugs or whether we ought to introduce a little price competition into the market, by allowing the safe importation of FDA-approved medicines from Canada and other western industrialized nations.

   

  Given the substantial price differences between products sold in the U.S. and abroad, it should come as no surprise that millions of Americans already import prescription drugs. 

   

  Let me give just one example.  Lipitor, one of the best selling drugs in the world, is used to help treat people with high cholesterol levels.  Here are two bottles of Lipitor.  Both were made in a factory in Dublin, Ireland.  The only difference is that the bottle sent to the U.S. sells for $321.30, and the bottle sent to Canada sells for $164.34. 

   

  I think it is wrong that consumers in the U.S. are forced to pay 98 percent more than Canadians for the very same medication.  Given the substantial price differences between products sold in the U.S. and abroad, it should come as no surprise that many Americans already import prescription drugs.

   

  For many Americans, particularly the uninsured, there are often no alternatives.  Take David Heintzleman for example.  David lives in Newburg, North Dakota.  Newburg is a small town – less than 100 residents – located about 25 miles from the Canadian border.  David is 60 years old and uninsured.  He takes several prescription drugs to help control his blood pressure.  When David first went to fill his prescriptions, he was shocked to learn that a three month supply cost more than $525.  He later discovered that he could get the very same drugs in Canada for about half the price. 

   

  The sad reality is that when family budgets can’t be stretched, individuals have no choice but to split pills, skip doses or not fill their prescriptions at all.  A recent study found that 43 percent of uninsured American adults ages 19-64 and 18 percent of insured adults did not fill a prescription because of cost.

   

  I believe part of the solution is to allow American consumers to purchase more affordable FDA-approved prescription drugs that are available in Canada and other countries.  That is why I introduced the Pharmaceutical Market Access and Drug Safety Act with Senators Snowe, Grassley, Kennedy, McCain, Stabenow and many others. 

   

  I believe this legislation puts in place an effective regulatory framework to make importation of FDA-approved drugs safe for consumers like David.  My goal is not to force Americans to go to Canada to purchase their prescription drugs but rather to create a little competition in the market so that we can put real downward pressure on domestic drug prices.

   

  We have with us today witnesses with a wide variety of views on this question.  Some are among the most vigorous defenders of monopoly pricing by the drug companies.  Others say we ought to put market price competition to work for consumers and allow the safe, lower priced importation of FDA-approved prescription medicines.

   

  I welcome both proponents and opponents of drug importation to this hearing.  We’re going to have a vigorous discussion and a significant debate.  Let it begin.

   

Testimony

• Dr. Randall Lutter

  Acting Deputy Commissioner for Policy

  Food and Drug Administration
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  Testimony

  Dr. Randall Lutter

  Statement of

  Randall W. Lutter, Ph.D.

  Acting Deputy Commissioner for Policy

  Food and Drug Administration

  Before the

  Subcommittee on Interstate Commerce, Trade, and Tourism

  Committee on Commerce, Science, and Transportation

  United States Senate

  Policy Implications of Importing Drugs into the United States

  March 7, 2007

   

  INTRODUCTION

  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 two years have passed since the Task Force Report 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 Act. 

  ·        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 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. 

  ·        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 entities.

   

  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, standard 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 testimony.

   

  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 six 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 sellers.

   

  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 nine 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.

   

Witness Panel 2

• Mr. William Schultz

  Partner

  Zuckerman Spaeder LLP
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  Witness Panel 2

  Mr. William Schultz

  TESTIMONY OF WILLIAM B. SCHULTZ

  HEARING ON THE IMPORTATION OF PHARMACEUTICALS FOR U.S. CONSUMERS

  Before the Subcommittee on Interstate Commerce,

  Trade and Tourism of the

  Senate Committee on Commerce, Science and Transportation

  March 7, 200

   

  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 today. 

   

  I.          Consumers Currently Are Purchasing Drugs From Foreign Sources and Current            Law Is Not Protecting Them. 

   

  The Food Drug and Cosmetic Act (the “FDC 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%.  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 FDC 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 separately.

  
  

   

  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 manufacturered 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 consumers. 

   

  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 legislation.

   

              I appreciate the opportunity to testify today.  I would be happy to answer any questions.

• Dr. John Vernon

  Assistant Professor, Department of Finance

  University of Connecticut School of Business
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  Witness Panel 2

  Dr. John Vernon

  Testimony of Dr. John A. Vernon

  Department of Finance, University of Connecticut

   

  Before the

  Committee on Commerce, Science, and Transportation

  Hearing on the Policy Implications of

  Pharmaceutical Importation for U.S. Consumers 

  March 7, 2007

   

   

  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). 

   

  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[i]^,[ii]. 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[iii]. 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[iv]. 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[v]. 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[vi]. 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[vii]. My academic research has focused on these costs, and specifically the economic relationships between pharmaceutical prices, profits, and R&D[viii].

   

  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% reduction in U.S. drug prices, industry R&D spending will decline by approximately 6%. 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 non-economic 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, 2002).  

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

  Endnotes

   

   

  
  

  ---

  [i] 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. 

   

  [ii] 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.

   

  [iii] 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.

   

  [iv] 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).

   

  [v] 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%, this is x% relative to the level of R&D spending in the absence of the policy, not R&D spending in absolute terms.   

   

  [vi] 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.

   

  [vii] 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).

   

  [viii] 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).

   

   

  References

   

   

  Abbott, T and Vernon, JA (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, PD 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 JA, Hansen RW, Grabowski HG (2003) “The Price of Innovation: New Estimates of Drug Development Costs.” J Health Economics.  22:151-185.

   

  Giaccotto C, Santerre RE and Vernon, JA (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, JA (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, JA (2006) “European Pharmaceutical Price Regulation, Firm Profitability, and R&D Spending” NBER working paper # w12676, Cambridge MA.

   

  Grabowski HG and Vernon JM (2000) “The Distribution of Sales Revenues from Pharmaceutical Innovation.” Pharmacoeconomics. 18 Supplement 1: 21-32.

   

  Lichtenberg FR (2002) “Sources of U.S. Longevity Increase, 1960-1997. National Bureau of Economic Research, working paper 8755, Cambridge, MA.

   

  Murphy KM and Topel RH (2003) “The Economic Value of Medical Research;” in Measuring the Gains from Medical Research; edited by Kevin M. Murphy and Robert H. Topel, The University of Chicago Press.

   

  Santerre, R and Vernon, JA (2006) “Assessing the Gains from A Drug Price Control Policy in the U.S.” Vol. 73, Issue 1 (July) 2006. Southern Economic Journal.  

   

  Scherer FM (1996) “Industry Structure, Strategy, and Public Policy,” Harper Collins College Publishers.

   

  Scherer FM (2001) “The Link Between Gross Profitability and Pharmaceutical R&D Spending.” Health Affairs. Sept./Oct.; 20:216-220.

   

  Vernon JA (2003) “Simulating the Impact of Price Regulation on Pharmaceutical Innovation.” Pharmaceutical Development and Regulation. 1(1): 55-65.

   

  Vernon JA (2005) “Examining the Link Between Price Regulation and Pharmaceutical R&D Investment.” 14:1 2005: 1-17. Health Economics.

   

  Vernon JA (2003) “The Relationship Between Price Regulation and Pharmaceutical Profit Margins.” Applied Economics Letters. Volume 10, 2003.

   

  Vernon JA (2004) “New Evidence on Drug Research and Price Controls.”  Regulation: The Cato Journal of Business and Government, Volume 27, Issue No. 3, 2004.

   

   

• Hon. Billy Tauzin

  CEO

  PhRMA
  Download Testimony (162.91 KB)

• Ms. Nelda Barnett

  Member, Board of Directors

  AARP
  Download Testimony (113.92 KB)

• Dr. Stephen Schondelmeyer

  Professor and Head, Department of Pharmaceutical Care & Health Systems

  University of Minnesota, College of Pharmacy
  Read statement

  Witness Panel 2

  Dr. Stephen Schondelmeyer

  Statement on

   

  Economic & Policy Implications of

  Importing Pharmaceuticals

  into the United States

   

   

   

   

   

   

   

  Statement before

   

  Subcommittee on Interstate Commerce, Trade and Tourism

  Committee on Commerce, Science, and Transportation

  United States Senate

  March 7, 2007

   

  Statement of

   

  Stephen W. Schondelmeyer, Pharm.D., Ph.D.

  Professor of Pharmaceutical Economics

   

  Director, PRIME Institute

  College of Pharmacy

  University of Minnesota

   

   

   

  Statement on

  Economic & Policy Implications of

  Importing Pharmaceuticals

  into the United States

   

  Stephen W. Schondelmeyer, Pharm.D., Ph.D.

   

   

  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 pharmaceuticals;

  (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;

  (4) high prices and low cost of production are major factors leading to counterfeits;

  (5) wholesalers and chains are positioned for a global market;

  (6) non-traditional distribution channels need to be monitored or eliminated; and

  (7) manufacturers will attempt to control supply to maintain prices.

   

   

  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 & 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 projections.

   

  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% to 60% 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% versus price changes in the United States that may vary from plus 3% to plus 10% 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% to 20% 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% to 3% of total drug expenditures for persons who choose to go to Wal-Mart or Target stores.

   

  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% of the drug supply flows through parallel trade in the UK, 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% 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 single the 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% ($198 billion) of the manufacturer sales to the developed world.  In contrast, the top five countries in Europe are about 25% ($96 billion) and Canada is 3.5% ($14 billion) of manufacturer prescription sales to the developed world.

   

                                                                                                  % of                % of

  Manufacturer              Total                Selected        

                                                              Sales ($ in bil.)          World              World

   

  Total World                                        $554.7 bil.                  100.0%          

  Developed (Selected) World           $388.3 bil.                    70.0%           100.0%

   

  U.S.                                                     $197.8 bil.                  50.9%            35.7%

  Europe (Top 5)                                  $  95.5 bil.                   24.6%            17.2%

  Canada                                              $  13.7 bil.                     3.5%               2.5%

  Australia/New Zealand                     $    5.8 bil.                     1.5%               1.0%

  Japan                                                 $  56.7 bil.                  14.6%            10.2%

  Latin America                                    $  18.7 bil.                     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 US more than 50% of market for developed countries while the other countries in the proposed parallel trade market are about 30% of the developed countries market.  U.S. prices may decrease about 12% to 20% 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% to 4% per years rather than 4% to 7% per year.

   

   

  The Drug Supply in the United States is Safe,

  But Conterfeits 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 & 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% 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 one 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 consequences.

   

  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 Monitored  

   

  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% 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 the 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% of the world pharmaceutical market, while Canada is only about one-tenth that size, or 5% 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).”

   

   

  Recommendations

   

  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

  purchaser.

   

  (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 system.

   

  (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.