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

                                                        S. Hrg. 108-470




                               before the

                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION




                              MAY 20, 2004


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

                            C O N T E N T S



                         THURSDAY, MAY 20, 2004


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

                          ADDITIONAL MATERIAL

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



                         THURSDAY, MAY 20, 2004

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

                   Opening Statement of Senator Gregg

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

                   Prepared Statement of Senator Enzi

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

                   Prepared Statement of Senator Reed

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

                  Prepared Statement of Senator Frist

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

                  Prepared Statement of Senator Harkin

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

                 Prepared Statement of Senator Jeffords

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

                 Prepared Statement of Senator Edwards

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


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

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

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

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

                  Opening Statement of Senator Kennedy

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

                 Prepared Statement of Senator Kennedy

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

            Pharmaceutical Market Access and Drug Safety Act

                          I. IMPORTABLE DRUGS

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


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


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

                       IV. ``GAMING'' THE SYSTEM

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


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




    The Chairman. Mr. Hubbard.

                    POLICY AND PLANNING, FDA

    Mr. Hubbard. Thank you, Mr. Chairman.
    We certainly understand, as you noted, Mr. Chairman, that 
drug prices are of concern to many Americans, and we're not in 
denial at all about that being a problem in some cases.
    FDA's mission, as you stated, is safety. That has been our 
concern, that if you open up the borders to these drugs, it 
needs to be done with great care and perhaps take into account 
the sorts of concerns that FDA has. What we would like to do is 
show you some of those concerns today.
    I have given the members a little handout of six exhibits 
that I would like to walk through to describe that, if I may.
    [The FDA exhibits follow:]
    [GRAPHIC] [TIFF OMITTED] T3889.004
    [GRAPHIC] [TIFF OMITTED] T3889.005
    [GRAPHIC] [TIFF OMITTED] T3889.006
    [GRAPHIC] [TIFF OMITTED] T3889.007
    [GRAPHIC] [TIFF OMITTED] T3889.008
    [GRAPHIC] [TIFF OMITTED] T3889.009

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

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

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

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

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

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

    Question 4. Do you believe that innovation in the pharmaceutical 
industry will cease because of drug importation? How will it be 
    Answer 4. Research and development funding is an expense that 
should be shared equally by the citizens of wealthy countries 
throughout the world. Innovation is the heart of the prescription drug 
industry. The leaders of the industry, its stockholders, and the 
continuing enormous investment in biomedical research that is occurring 
at leading institutions around the world will ensure that drug 
innovation not only continue but accelerates.
    Again, thank you for the opportunity to assist you with this 
important endeavor.
                                       David Kessler, M.D.,
                                     Dean, UCSF School of Medicine.
  Leadership Council of Aging Organizations (LCAO),
                                   Washington, D.C., 20006,
                                                      May 19, 2004.

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

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

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

                 Opening Statement of Senator Alexander

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

                  Prepared Statement of Senator Murray

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

                 Prepared Statement of Senator Mikulski

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

                   Prepared Statement of Senator Dodd

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

                   CALIFORNIA, SAN FRANCISCO

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

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

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

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

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

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

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

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

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

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

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

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

    The potential for generic drugs has long been recognized. The 
reasons that they are not prescribed more frequently by physicians or 
dispensed by pharmacists are many. It was not until the 1970's that 
State laws prohibiting the substitution of a generic name drug product 
that was chemically, biologically, and clinically equivalent to a 
brand-name drug product were abolished.
    While the generic name drugs have a greater market share in the 
United States than anywhere in the industrialized world, and they will 
usually be less expensive than brand name drug products imported from 
Canada or Europe, they are still underutilized. This is not a new 
problem. Fifteen years ago, Professor Helene Lipton and I discussed the 
issue in our book, Drugs and the Elderly, emphasizing the need for 
greater physician awareness and the removal of financial disincentives 
for pharmacists to dispense generics.
    One important factor has been the detailing of brand name drug 
products to physicians by the pharmaceutical companies and the recent 
dramatic increase in direct-to-consumer advertising of prescription 
drugs (expenditures now approach $3 billion per year). One approach to 
better informing physicians is the use of academic detailing (a program 
in which today's highly trained clinical pharmacists provide one-on-
one, evidence-based, objective information on drug quality, safety, 
effectiveness, and costs to prescribing physicians). Studies reported 
by Avorn and Soumerai (1983) in the early 1980s demonstrated the 
benefits of this type of educational outreach in improving clinical 
decision-making. Many studies since then have confirmed their earlier 
    Much more needs to be done using this approach with both physicians 
and pharmacists.
    In summary, Mr. Chairman, I have carefully reviewed the 
Pharmaceutical Market Access and Drug Safety Act of 2004, and I 
encourage the committee to support it and Congress to enact it.
    I have been concerned with issues related to prescription drug 
policy for the past 39 years, including during both my years of Federal 
service and as a faculty member of the School of Medicine, UCSF.
    I believe that the bill provides strong assurances of the safety 
and quality of imported drugs. It contains appropriate provisions 
related to counterfeit drugs, and it provides patients, physicians, 
pharmacists and wholesalers the opportunity to add a tool--the 
importation of prescription drugs--to help deal with the problem of the 
rapidly rising costs of drugs. We all recognize that it is only one of 
the tools available; others include greater generic prescribing and 
dispensing and the use of academic detailing to better inform 
physicians about the many new drugs in the market place.
    Anderson GF, Reinhardt UW, Hussey PS, and Petrosyan V. (2003) 
``It's the Prices, Stupid: Why the United States is So Different From 
Other Countries.'' Health Affairs. 23 (1): 89-104.
    Angell, M. (June 2000) ``The Pharmaceutical Industry--To Whom is It 
Accountable?'' New England Journal of Medicine. 342: 1902-1904.
    Avorn J and Soumerai SB. (1983) ``Improving drug-therapy decisions 
through educational outreach: a randomized controlled trial of 
academically based `detailing'.'' New England Journal of Medicine. 308: 
    Canadian Institute for Health Information. (2002). ``Chapter 6: 
Medicating Illness: Drug Use and Cost in Canada'' Health Care in Canada 
2002. Ottawa, Ontario. http://www.cihi.ca/pdf/ec/hlthrpt2002.pdf.
    Cockburn, I. (Jan/Feb 2004) ``The Changing Structure of the 
Pharmaceutical Industry.'' Health Affairs. 23: 10-22.
    Croghan, T and Pittman, P. (Jan/Feb 2004) ``The Medicine Cabinet: 
What's In It, Why, and Can We Change the Contents?'' Health Affairs. 
23: 23-33.
    Danzon PM and Furukawa MF. (Oct. 29 2003) ``Prices and Availability 
of Pharmaceuticals: Evidence from Nine Countries.'' Health Affairs web 
exclusive. W3-521 to W3-536.
    Davis M, Poisal J, Chulis G, Zarabozo C, and Cooper B. (1999) 
``Prescription Drug Coverage, Utilization, and Spending Among Medicare 
Beneficiaries.'' Health Affairs. 18 (1): 231-243.
    DeMasi JA, Hansen RW, and Grabowski, HG. (March 2003) ``The Price 
of Innovation: New Estimates of Drug Development Costs.'' Journal of 
Health Economics. 22:325-30.
    Department of Health and Human Services. (Apr. 2004) ``HHS Task 
Force on Drug Importation.'' Accessed online on 5/11/04 at: http://
    Families USA. (July 2002) ``Profiting from Pain: where prescription 
drug dollars go.'' Pub. No. 02-105. Washington, DC. 
    Families USA. (July 2001) ``Off the Charts: pay, profits, and 
spending by drug companies.'' Pub No. 01-104. Washington, DC. 
    Fischer MA and Avorn J. (Aug. 2003) ``Economic consequences of 
underuse of generic drugs: evidence from Medicaid and implications for 
prescription drug benefit plans.'' Health Services Research. 38 (4): 
    Food and Drug Administration, HHS. (Feb 2004) ``Combating 
Counterfeit Drugs: A Report of the Food and Drug Administration.'' 
Rockville, MD: DHHS, FDA. Accessed online on 5/13/04 at: http://
    Food and Drug Administration, HHS. (Feb. 23, 2004) ``Prescription 
Drug Marketing Act of 1987; Prescription Drug Amendments of 1992; 
policies, requirements, and administrative procedures; delay of 
effective date.'' Federal Register. 69 (35): 8105-8107.
    Fortune. ``How the Industries Stack Up'' (April 5, 2004) Fortune, 
New York. Accessed online on 3/24/2003 at: http://www.fortune.com/
    Heffler S, Smith S, Keehan S, Clemens MK, Zezza M, and Truffer C. 
(Feb. 11, 2004) ``Health Spending Projections Through 2013.'' Health 
Affairs web exclusive. W4-79 to W4-93.
    Huskamp HA, Epstein AM, and Blumenthal D. (2003) ``The Impact of a 
National Prescription Drug Formulary on Price, Market Share, and 
Spending: Lessons for Medicare?'' Health Affairs. 22 (3): 149-158.
    Jacobzone S. (April 2000) ``Pharmaceutical Policies in OECD 
Countries: Reconciling Social and Industrial Goals.'' Labor Market and 
Social Policy--Occasional Papers No. 40. Paris, France: Organization 
for Economic Cooperation and Development, Directorate for Education, 
Employment, Labour, and Social Affairs, Employment, Labour and Social 
Affairs Committee.
    Kanavos P and Reinhardt U. (May/June 2003) ``Reference Pricing for 
Drugs: Is It Compatible With U.S. Health Care?'' Health Affairs. 22 
(3): 16-30.
    Maynard A and Bloor K. (2003) ``Dilemmas In Regulation of the 
Market for Pharmaceuticals.'' Health Affairs. 22 (3): 31-41.
    Morgan S. (Oct. 2002) ``Quantifying Components of Drug Expenditure 
Inflation: The British Columbia Seniors' Drug Benefit Plan.'' Health 
Services Research. 37 (5): 1243-1266.
    Morgan SG, Barer ML, and Agnew JD. (2003) ``Whither Senior 
Pharmcare: Lessons From (and For) Canada.'' Health Affairs. 22 (3): 49-
    National Institute for Health Care Management Research and 
Education Foundation. (May 2002) Changing Patterns of Pharmaceutical 
Innovation. Washington, D.C.: NIHCM Foundation, Accessible at: 
    Silverman M and Lee PR. (1974) Pills, Profits, and Politics. 
Berkeley, CA: University of California Press.
    Silverman M, Lydecker M, and Lee PR. (1992) Bad Medicine: The 
Prescription Drug Industry in the Third World. Stanford, CA: Stanford 
University Press.
    Silverman M, Lydecker M, and Lee PR. (1990) ``The Drug Swindlers.'' 
International Journal of Health Services. 20: 561-572.
    Smith C. (Jan/Feb 2004) ``Retail Prescription Spending in the 
National Health Accounts.'' Health Affairs. 23: 160-167.
    Spellberg B, Powers JH, Brass EP, Miller LG, and Edwards, JE. 
(2004) ``Trends in Antimicrobial Drug Development: Implications for the 
Future.'' Journal of Clinical Infectious Diseases. 38 (9): 1279-1286.
    White KL, Anderson DO, Kalimo E, Kleczkowski BM, Purola T, and 
Vukmanovic C. (1977) Health Services: Concepts and Information for 
National Planning and Management. Geneva: World Health Organization.
    Young D. (Apr. 1, 2004) ``FDA declares actions to combat 
counterfeit drugs.'' American Journal of Health-System Pharmacy. 61 
(7): 645-646.

    The Chairman. Dr. Vernon.


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

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

                    JAMES MALONE [DECEASED]

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

                          ADDITIONAL MATERIAL

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

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

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

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

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

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

    Question 2. What critical safety features are missing from the 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    In another section of the report, the FDA states:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Figure 2.1. Numbers of Corticosteroid Metered Dose Inhalers Dispensed, 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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