Report on Prescription Drug Importation

Department of Health and Human Services

December 2004
II

CHAIRMAN:

Richard H. Carmona, M.D., M.P.H., F.A.C.S.

Surgeon General

U.S. Public Health Service

TASK FORCE MEMBERS:

Jayson P. Ahern 

Assistant Commissioner for Field Operations

Customs and Border Protection

Alex M. Azar II 

General Counsel

U.S. Department of Health and Human Services

Josefina Carbonell

Assistant Secretary for Aging

U.S. Department of Health and Human Services

Lester M. Crawford, D.V.M., Ph.D.

Acting Commissioner

Food and Drug Administration

Elizabeth M. Duke, Ph.D.

Administrator

Health Resources Services Administration

Tracey Hardin 

Attorney

U.S. Department of Justice

HHS TASK FORCE ON DRUG IMPORTATION

Mark B. McClellan, M.D., Ph.D.

Administrator

Centers for Medicare & Medicaid Services

Michael J. O’Grady, Ph.D.

Assistant Secretary for Planning and Evaluation

U.S. Department of Health and Human Services 

William Raub, Ph.D.

Deputy Assistant Secretary for Public

Health Emergency Preparedness

U.S. Department of Health and Human Services

Thomas M. Reilly

Public Health Branch Chief

Office of Management and Budget 

Amit K. Sachdev 

Deputy Commissioner for Policy

Food and Drug Administration

Elizabeth A. Willis 

Chief of Drug Operations Section

Drug Enforcement Administration 
III

LIST OF ABBREVIATIONS ........................................................................................................................IV

LIST OF FIGURES .......................................................................................................................................V

EXECUTIVE SUMMARY .................................................................................................................VII

BACKGROUND.................................................................................................................................1

CHAPTER 1

Scope, Volume, and Safety of Unapproved Drugs.............................................................................7

CHAPTER 2

Limits on Resources and Authorities ..............................................................................................23

CHAPTER 3

Impact on the Pharmaceutical Distribution System........................................................................35

CHAPTER 4

Role of New Technologies ..............................................................................................................45

CHAPTER 5

Agency Resources Associated with Drug Importation Activities.....................................................51

CHAPTER 6

Role of Foreign Health Agencies.....................................................................................................59

CHAPTER 7

Effects of Importation on Prices and Consumer Savings................................................................65

CHAPTER 8

Impact of Importation on Research 

and Development and Consumer Welfare......................................................................................81

CHAPTER 9

Impact on Intellectual Property Rights...........................................................................................91

CHAPTER 10

Liability Issues Related to Importation ...........................................................................................99

APPENDIX....................................................................................................................................111

TABLE OF CONTENTS
IV

LIST OF ABBREVIATIONS HHS REPORT ON PRESCRIPTION DRUG IMPORTATION

LIST OF ABBREVIATIONS

Bioterrorism Act – Public Health Security and Bioterrorism Preparedness and Response Act of 2002 

CBO – Congressional Budget Office 

CBP – U.S. Customs and Border Protection

cGMP – Current Good Manufacturing Practice 

CMRI – Center for Medicines Research International 

CMS – Centers for Medicare and Medicaid Services 

CSA – Controlled Substances Act 

CSDD – Center for the Study of Drug Development 

DEA – U.S. Drug Enforcement Administration

DOJ – U.S. Department of Justice 

EC – European Commission 

EMEA – European Medicines Agency

E.U. – European Union 

FCC – Forensic Chemistry Center Laboratory 

FD&C Act – Federal Food, Drug and Cosmetic Act 

FDA – U.S. Food and Drug Administration 

HHS – U.S. Department of Health and Human Services

HMO – Health Maintenance Organization 

ICH – International Conference on Harmonization 

IND – Investigational New Drug 

IT – Information Technology 

JFK – John F. Kennedy International Airport Mail Facility 

MEDS Act – Medicine Equity and Drug Safety Act of 2000 

MMA – Medicare Prescription Drug, Improvement and Modernization Act of 2003 

MOU – Memoranda of Understanding 

MRA – Mutual Recognition Agreement 

NABP – National Association of Boards of Pharmacy

NAFTA – North American Free Trade Agreement 

NASs – New Active Substances 

NCE – New Chemical Entity 

NDA – New Drug Application 

OASIS – Operational and Administrative System for Import Support 

OCI – Office of Criminal Investigations

ORA – Office of Regulatory Affairs 

PDMA – Prescription Drug Marketing Act of 1987

PSW – Pharmacy Society of Wisconsin 

R&D – Research and Development 

RFID – Radio-Frequency Identification 

SSRIs – Selective Serotonin Reuptake Inhibitors

SWID – Southwest Import District 

TRIPS Agreement – Trade Related Aspects of Intellectual Property

U.K. – United Kingdom 

U.S. – United States of America 

USPS – U.S. Postal Service 

USPTO – U.S. Patent and Trademark Office

VIPPS – Verified Internet Pharmacy Practice Site 

WTO – World Trade Organization
V

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION LIST OF FIGURES 

LIST OF FIGURES

Report

Figure 1.1 – Points of Entry

Figure 1.2 – Detained Controlled Substances at JFK International Mail Facility

Figure 1.3 – Quarterly Cross-Border Sales From Canada

Figure 1.4 – Canadian Pseudo-Generics

Figure 3.1 – Drug Distribution Models

Figure 3.2 – Counterfeit Drug Cases are Increasing

Figure 4.1 – Types of Anti-Counterfeiting Technologies

Figure 5.1 – Mail and Baggage Inspections, FY 2001 – FY 2003

Figure 5.2 – FDA Average Staff Time and Cost to Process Packages 

Figure 5.3 – FDA Staffing of International Mail Facilities

Figure 5.4 – Inspections at Courier Facilities, FY 2001 – FY 2003

Figure 5.5 – Calculation of Costs for Individual Inspection Activities, FY 2004

Figure 7.1 – Savings to Drug Buyers From Legalized Commercial Importation May Be Small Relative to Total Drug Spending

Figure 7.2 – Price Indices of Innovator and Licensed Products in Nine Countries Relative to the U.S. in 2003

Figure 7.3 – Price Indices of Generic (Non-Innovator/Non-Licensed) Products in Nine Countries Relative to the U.S. in 2003

Figure 7.4 – U.S. Share of New Active Substances First in World Market

Figure 7.5 – Summary of New Drug Availability in Selected Countries

Figure 7.6 – Availability of 54 Top-Selling 2002 U.S. Molecules Eligible for Importation in Other Countries in 2003

Figure 7.7 – Total Quantity of Drugs by Country in 2003 54 Top Selling Molecules

Figure 8.1 – Pharmaceutical Sales by Country

Figure 8.2 – Summary of R&D Impact Analysis 

Appendix

Figure A.1 – The 54 Active Ingredients Ranked by IMS Retail Acquisition Costs (for 56 Products)

Figure A.2 – The Top-Selling 31 Generic Drugs

Figure B.1 – Internet Prices—Distribution of Ratio of Best Canadian Price to Best U.S. Price—Branded Products

Figure B.2 – Internet Prices—Range of Price Ratios for Different Strengths or Package Sizes of the Same Product—Branded 

Products

Figure B.3 – Internet Prices—Best U.S. and Canadian Prices for Five Top Generics (14 Strengths)

Figure C.1 – Comparison of Different Indexing Methodologies—All Comparable 54 Top-selling 202 U.S. Products, Innovators and

Licensees only, Weighted by U.S. Consumption

Figure C.2 – Counts of Data Records Used in Comparisons

Figure C.3 – Counts of Molecules Used in Comparisons

Figure D.1 – Savings from Drug Importation for Selected European Countries in 2002

Figure D.2 – Parallel Trade in Germany and the UK

Figure D.3 – Price Indices (trade) for Molecules Common Since 1999
VI
VII

EXECUTIVESUMMARY

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION EXECUTIVE SUMMARY 

OVERVIEW

Introduction

In 2003, Congress passed the Medicare

Prescription Drug, Improvement and

Modernization Act of 2003, Pub. L. 108-173

(Medicare Modernization Act or MMA), which for

the first time provided a prescription drug benefit

for seniors and people with disabilities. The MMA

also contained provisions that would permit the

importation of prescription drugs into the U.S. if the

Secretary of the Department of Health and Human

Services (HHS) certifies that drugs imported from

Canada pose no additional risk to public health and

safety and that such imports would provide significant cost savings to American consumers. The

MMA also requires the Secretary to conduct a

study on the importation of drugs. The conference

agreement for MMA included eleven issues for

consideration. The Surgeon General of the U.S.

Public Health Service, Dr. Richard H. Carmona, was

charged with leading a task force of senior executives across the Federal government to conduct the

analysis required by the MMA. The Task Force met

with key constituencies numerous times throughout 2004 in public forums, received testimony from

over one hundred presenters from around the

world with all types of backgrounds, and received

over one hundred written comments providing

insight into these issues. This report is a summary

of what the Task Force reviewed from the testimony and written comments for the specific questions

posed in the MMA conference agreement and their

findings based on this evaluation.

Background

In the early years of the twentieth century, pharmaceuticals in the U.S. were characterized by a large

number of ineffective, often dangerous, compounds, the principal ingredient of which was often

alcohol. The invention of penicillin in the 1930s

marked the beginning of the modern era of drug

development, when scientists were able to create

powerful new chemicals that were safe and effective in killing bacteria. Since then, the world’s

investment in research and development (R&D) has

produced many more safe and effective treatments

to reduce pain and inflammation, regulate the cardiovascular system, impede the growth of cancer

cells, and provide a host of other effective therapies

for disease. The resulting discovery of new medications has enabled doctors to offer comfort for the

sick and to prescribe from an extensive array of

drugs to treat most human afflictions.

As this innovation began in the 1930s, Congress

recognized the need for a strong oversight body to

ensure that drugs were properly tested before

being given to patients. The manufacturing of

drugs needed equally rigorous oversight to ensure

that drugs were made in a safe and consistent way.

The Federal Food, Drug, and Cosmetic (FD&C) Act

of 1938 and its 1962 amendments provided that

oversight, by requiring that the U.S. Food and Drug

Administration (FDA) approve each new drug as

safe and effective before marketing and authorizing FDA to oversee the production of drugs,

whether manufactured in a U.S. facility or imported

from abroad.

By the 1980s, Congress recognized that some entities not subject to U.S. law were importing counterfeit drugs as well as improperly handled and stored

drugs. For example, at that time, counterfeit birth

control pills found their way into the U.S. drug distribution system. These types of activities posed

significant risks to American consumers. Therefore,

in 1987, Congress passed the Prescription Drug

Marketing Act (PDMA), which, among other things,

strengthened oversight of domestic wholesalers

and added the “American goods returned” provision to the FD&C Act, which prohibits anyone
VIII

EXECUTIVE SUMMARY HHS REPORT ON PRESCRIPTION DRUG IMPORTATION

except a drug’s manufacturer from importing into the

U.S. a prescription drug that was originally manufactured in the U.S. and then sent abroad.

We recognize that there are different categories of

“imported drugs” that potentially have different levels of associated risk. Currently, the only types of

legally imported drugs are: 1) those that are manufactured in foreign FDA-inspected facilities and

adhere to FDA-approval standards, or 2) those that

are U.S.-approved and manufactured in the U.S., sent

abroad, then imported back into the U.S. by the manufacturer under proper controls and in compliance

with the FD&C Act. This latter category includes

products that are truly re-imported. In both cases, the

manufacturing process is subject to direct FDA oversight and the drug distribution system is “closed,”

and the manufacturer complies with FDA and other

regulations to assure that the drug delivered to the

pharmacy is of high quality.

Another category of imported drugs are those that

are manufactured in a foreign facility that also manufactures the U.S.-approved version. In such a case,

FDA would have inspected the U.S.-approved manufacturing process, but not the unapproved production

lines; in this case, the foreign version may differ in

certain respects from the U.S.-approved version.

Although there may be significant similarities

between the two versions, because of the potential

differences and the fact that only the U.S.-approved

drugs have been shown to meet U.S standards

enforced by FDA, the foreign version cannot necessarily be considered equivalent to the U.S.-approved

version.

A final category of imported drugs are unapproved

drugs that are produced in foreign facilities that FDA

has not inspected and, therefore, has no knowledge

of, or experience with, the facility. Consequently, the

safety and effectiveness of these drugs and the safety and security of their distribution systems are

unknown. These drugs pose the greatest level of concern because they are not regulated within the U.S.

drug safety system and little is known to U.S. regulators about the specifications to which they are made,

the processes used to ensure their safety, and the

integrity of their distribution. As the report describes,

there is ample evidence that these are the types of

drugs that consumers have received when they order

prescription drugs from some international sources

over the internet.

When a drug is imported into the U.S., FDA inspectors

are required to confirm that the drug meets the necessary approval requirements. Such review of imported drugs is limited by the amount of resources available, given the substantial amount of legal and illegal

prescription drugs that are imported daily. If there is

a question of whether the drug can legally be imported and, thus, raises safety questions, FDA has the

authority to detain the product and gives the

importer several days to demonstrate the drug’s

acceptability (or, failing that, the drug is either

refused admission and returned to its foreign source,

if known, or destroyed.)

The conclusion of Congress reflected in current law is

that the safety and effectiveness of imported drugs

can only be assured for drugs legally imported into

the U.S., as described above. In these cases, the

chain of custody is known for a U.S.-approved drug

manufactured in an FDA-inspected facility using FDAapproved methods as it travels through the U.S. distribution system. Much of the current public debate

about the safety of broader importation comes down

to issues regarding the additional oversight authorities, resources, and foreign government support that

would be needed to assure the safety and effectiveness of other types of drugs, principally foreign drug

purchases from international internet operations that

are not subject to FDA’s regulatory oversight.

Since the FD&C Act’s passage in 1938, American citizens returning from overseas with foreign drugs have

been advised that most of these drugs are not legal,

but, as a matter of enforcement discretion, FDA has

generally allowed those citizens to bring in small

quantities for their personal use and advised them to

consult with their physician. FDA created this

enforcement discretion policy to allow American residents who became ill in another country to continue

the treatment prescribed by a foreign healthcare

practitioner until they could receive medical attention

back home. That policy was not controversial until

the latter part of the 1990’s, when some citizens
began traveling regularly to other countries to fill

their prescriptions, and especially when more

Americans began ordering drugs via internet pharmacies located in other countries.

The Task Force understands what motivates more and

more Americans to import drugs. Access to affordable prescription drugs, many of which are needed to

treat life-threatening and serious conditions, is a daily

concern and challenge for many Americans. As there

has been a significant increase in drug utilization and

in list prices for drugs in the U.S. over the last few

years, spending by American consumers on prescription drugs has risen significantly. Over 40 percent of

Americans take at least one prescription drug and, in

an effort to lower their prescription drug bill, a relatively small but increasing number have turned to

importing drugs.

Consequently, the Task Force believes that access to

drugs that are safe and effective, as well as affordable, is a critical policy goal, and that all approaches

to achieving this challenging goal should be explored

thoroughly. Drugs that are affordable, but not safe

and effective, could be more harmful to patients than

not having the drugs at all. The difficult balance

between the need for affordable prescription drugs

and concerns over potential safety hazards that many

imported drugs may pose is reflected in the public

debate and controversies regarding drug importation

policy in the U.S. The Task Force report presents a

comprehensive overview of the evidence related to

this balance, as well as a number of other critical

issues, as requested by Congress, on the subject of

prescription drug importation.

THE REPORT IN BRIEF

Chapter 1 –Scope, volume, and safety of

unapproved drugs 

The number of unapproved prescription drug products entering the U.S. is now very large. Nearly five

million shipments, comprising about 12 million prescription drug products with a value of approximately $700 million, entered the U.S. from Canada alone

in 2003, via internet sales and travel to Canada by

American consumers. This report estimates that an

equivalent amount of prescription drugs are currently coming in from the rest of the world, mostly

through the mail and courier services.

Imported drugs are arriving from all corners of the

world, including developed and emerging countries.

Their scope is broad and includes tablets, capsules,

inhalants, injectables, biologics, generics, brand name

drugs, and controlled substances. Some of the arriving products appear to have been made in the U.S.;

however, many are not. The majority of these currently imported drugs are unapproved by FDA and do

not appear to conform in many aspects to the properly approved and manufactured products available

in American pharmacies.

Numerous comments submitted to the Task Force

described the current practice of internet purchases

by American consumers who seek lower-priced drugs.

Many state-licensed internet pharmacies provide a

legitimate means for consumers to access safe and

effective medicines, but others raise significant safety

concerns.

Most of these drugs are purchased by individual consumers via internet, phone, or fax, from entities that

focus on providing drugs to Americans and other

long-distance purchasers. These entities generally are

cross-border foreign pharmacies that may not primarily serve the citizens of the country in which they are

located, and their methods for providing drug products may not be subject to the same oversight that

foreign governments provide for drugs and pharmacies serving their own citizens. When consumers

order prescription drugs over the internet from international sources, they generally receive drugs that do

not have regulatory assurances of equivalence to U.S.

products or of safety and security in the distribution

process.

Some sellers of imported drugs are “rogue” internet

pharmacies that pretend to be legitimate and operate

behind facades. Many of the drugs sold over the

internet claim to be interchangeable with the

approved U.S. drug, but are not. Imported drugs

include those that pose special concerns, such as

drugs that require special handling, drugs with high

IX

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION EXECUTIVE SUMMARY

SUMMARY
X

EXECUTIVE SUMMARY HHS REPORT ON PRESCRIPTION DRUG IMPORTATION

abuse potential, drugs that should be sterile, counterfeit drugs, improperly packaged drugs shipped loose

in sandwich bags and envelopes, and drugs from

countries that have differing and sometimes more

limited regulatory authority to assure the safety of

pharmaceuticals manufactured and exported from

those countries. In sum, this report finds that

American consumers currently purchasing drugs from

overseas are generally doing so at significant risk.

Chapter 2 – Limits on resources and authorities 

The Federal law governing drug safety in the U.S.

establishes the standards by which FDA determines

whether a prescription drug is “safe and effective”

for sale in the U.S. These standards govern the way in

which prescription drugs are manufactured, packaged, labeled, held, and shipped. Many of the prescription drugs that are imported into the U.S. now by

individual citizens, via mail and courier services, fail

to comply with some or all of these Federal standards. To ensure that imported prescription drugs are

as safe as those that are legally sold in the U.S., an

importation program for U.S.-approved drugs would

have to ensure that the imported drugs meet the current (or equivalent) Federal standards. This report

determines that it would be extraordinarily difficult to

ensure that drugs personally imported by individual

consumers could meet the necessary standards for a

certification of safety to be made, especially if consumers continue to import prescription drugs in the

same or increased numbers. Meanwhile, a commercial importation program could be feasible but would

require new legal authorities, substantial additional

resources and significant restrictions on the type of

drugs that could be imported, which could increase

the costs of imported drugs.

Chapter 3 – Impact on the pharmaceutical

distribution system

The drug distribution network for legal prescription

drugs in the U.S. is a “closed” system that involves

several players (e.g., manufacturers, wholesalers,

pharmacies) who move drug products from the point

of manufacture to the end user, and provides the

American public with multiple levels of protection

against receiving unsafe, ineffective, or poor quality

medications. This system evolved as a result of legislative requirements that drugs be treated as potentially dangerous consumer goods that require professional oversight to protect the public health. The

result has been a level of safety for drug products

that is widely recognized as the world’s “gold standard.” Legalized importation of drugs in such a way

that creates an opening in the “closed” system will

likely result in some increase in risk, as the evidence

shows that weaknesses in the oversight of drug regulation and the distribution system have been

exploited. For example, doing so would increase the

opportunity for counterfeit and other substandard

drugs to enter and be dispersed into the U.S. drug distribution system.

Chapter 4 – Role of new technologies

There are a number of anti-counterfeiting technologies that show potential for effectively assuring the

authenticity of drugs and, thus, for combating the

counterfeiting of drugs. Some examples include holograms, color shifting inks, and watermarks currently

employed for U.S. currency. So-called “track and

trace” technologies, such as radio-frequency identification (RFID) and sophisticated bar coding, can provide effective monitoring of a drug’s movement from

the point of manufacture and through the U.S. distribution chain. Although these new and emerging

technologies are promising, until they are fully adopted internationally they cannot be adequately relied

upon to secure the safety, efficacy, and integrity of the

global market to safely import prescription drugs into

the U.S.

Chapter 5 – Agency resources associated

with drug importation activities

FDA currently has about 3,800 employees assigned to

field activities (e.g., inspections) involved in protecting the many thousands of products that make up the

Nation’s food, drug, biologic, medical device, and veterinary drug supply. Of the 3,800 field staff, 450 are

involved in investigative import activities. Only a limited number of FDA inspectors are available to staff

the 14 international mail facilities in the U.S., where

they historically have had to inspect a small number
of large commercial pharmaceutical imports. FDA

managers have repeatedly noted that the large number of personal drug shipments coming into the international mail and courier facilities is overwhelming

the available staff.

This report finds that despite significant efforts,

including joint efforts with CBP and import

alerts/bulletins, FDA currently does not have sufficient resources to ensure adequate inspection of

current levels and categories of personal shipments

of prescription drugs entering the U.S. With respect

to commercial shipments, based on the information

presented to the Task Force, FDA would need a

meaningful investment, among other things, in

new information technology and personnel, as well

as appropriate standards to ensure adequate

inspection of commercial quantities of drug products, if importation were legalized.

Chapter 6 – Role of foreign health agencies 

Just as the U.S. is responsible for the safety and effectiveness of drugs made available to its citizens, foreign governments give priority to ensuring the safety

of drugs used by their citizens. Foreign governments

have little incentive and limited resources to ensure

the safety of drugs exported from their countries, particularly when those drugs are transshipped or are

not intended for import. No country expressed any

interest or willingness to ensure the safety and effectiveness of drugs exported from their country in any

expansion of legal U.S. importation. Although we

specifically solicited them, few comments were submitted by foreign governments, and none outlined a

specific strategy for new steps to collaborate with the

U.S. government on the effective oversight of importation, suggesting that they are not willing or do not

have the means to ensure the safety of exported

products and that the primary safety responsibilities

would have to remain with the U.S.

Chapter 7 – Effects of importation on prices

and consumer savings

Consumers seek to import prescription drugs from

other countries in part because they believe they can

save money if they purchase their drugs from outside

the U.S. In many instances, U.S. consumers have been

able to purchase from abroad foreign versions of 

U.S.-approved brand name drugs at lower prices.

However, based on an analysis of actual data on drug

prices and volumes, this report finds that total savings to consumers from legalized importation under a

commercial system would be a small percentage relative to total drug spending in the U.S. (about one to

two percent). These savings are much smaller than

some specific international comparisons of retail

prices for certain drugs might suggest. Under any

safe, legalized commercial importation program,

when the scope is limited, intermediaries would likely capture a large part of the price differences. (This

is based on evidence from European countries where

some form of importation is legal.) 

This report also finds that generic drugs are often

cheaper in the U.S. compared to international prices

for similar drugs. Other, independent studies have

reached similar conclusions. The prices foreigners pay

for generic drugs are on average 50 percent greater

than the prices Americans pay for generic drugs.

Furthermore, there is evidence that greater use of

U.S.-approved generic drugs by Americans could

reduce drug spending by billions of dollars annually.

In addition, to the extent that prescription drugs are

eligible for importation from the same company at a

lower price than in the U.S., potential quantity constraints imposed by manufacturers or foreign governments would limit the eligible supply and the benefits

to U.S. consumers.

Chapter 8 – Impact of importation on

research and development and consumer

welfare

One of the most frequently debated issues surrounding drug importation is whether the legalization of

importation would reduce research and development

(R&D), including spending on discovery, development, and launching of new drugs. Based on both an

empirical analysis of drug data and a review of previous studies, this report finds that, by shifting sales to

countries with price controls for new drugs, importation would reduce overall U.S. pharmaceutical industry revenues. Since revenues would fall without a

reduction in the cost to produce new medicines, profXI

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION EXECUTIVE SUMMARY 
its would likely fall, as well as spending on R&D.

Consequently, legalized importation would likely

adversely affect incentives for R&D, thereby slowing

the flow of new drugs. This report also finds that

since annual R&D spending would drop, importation

could result in between four to eighteen fewer new

drugs being introduced per decade at a substantial

cost to society. Furthermore, if there were a likely

reduction in innovative new drugs, then the foregone

consumer benefits associated with loss or delay in

new therapies may significantly offset any anticipated savings from legalized importation, depending on

uncertainties.

Chapter 9 – Impact on intellectual property

rights

Intellectual property rights have evolved over many

years to strike a balance between, on the one hand,

providing incentives for innovation through grants of

exclusive rights over new ideas or products and, on

the other hand, ensuring that knowledge and products are widely disseminated and accessible to provide the maximum benefit to society now and in the

future. As with most new ideas and products, inventors of pharmaceuticals may obtain patents and other

intellectual property protections for their products

that provide certain exclusive rights. The challenge

policymakers face is to ensure that intellectual property protection for pharmaceuticals provides adequate economic incentives to develop new drugs

while facilitating access to affordable medicines.

An exhaustive legal analysis of the implications of

allowing importation of patented pharmaceuticals to

which intellectual property protections apply would

require further study. However, it is clear that importation could impact the intellectual property rights of

developers of pharmaceutical products and could be

subject to challenge under domestic law, including

possibly the U.S. Constitution, and international intellectual property rules.

Chapter 10 – Liability issues related to

importation 

This report identifies the liability issues raised if

importation is legalized for entities within the pharmaceutical distribution system. This report notes that

allowing prescription drug importation would have

uncertain effects on the litigation exposure of manufacturers, distributors, doctors, and pharmacists. To

deal with these likely increased risks, entities in the

pharmaceutical distribution chain may take additional costly defensive actions. Perhaps the largest source

of additional liability and/or litigation risk under a

drug importation system would be an increase in the

number of injuries and poor disease outcomes if

imported drugs are, as a class, less safe and effective.

KEY FINDINGS

This report details the diverse opinions expressed, the

data collected, and Task Force findings based on the

information presented. Some of the key findings of

the Task Force are:

1) The current system of drug regulation in

the U.S. has been very effective in protecting public safety, but is facing new threats.

It should be modified only with great care

to ensure continued high standards of safety and effectiveness of the U.S. drug supply. Americans have the benefit of one of the

safest drug supplies in the world and generally

have first access to the newest breakthrough drug

treatments. Any legislation to permit the importation of foreign drugs should only be done in a way

that provides the statutory authority and substantial resources needed to effectively regulate

imported drugs and, most importantly, protect the

public health by providing the same level of safety

assurances available for drugs sold in the U.S.

2) There are significant risks associated

with the way individuals are currently

importing drugs. While some means of drug

importation (e.g., traveling to Canada for certain

brand name drugs available in both countries) may

be relatively safe in specific instances, this is not

the only way “importation” into the U.S. is occurring today. Many transactions are occurring via

poorly-regulated and occasionally bogus internet

operations that have been documented in some

cases to provide consumers with inferior products

that are not the same as the U.S.-approved verXII

EXECUTIVE SUMMARY 
sions. Also, treatment failures, which are not obvious adverse events, are a real concern with substandard drug products.

3) It would be extraordinarily difficult and

costly for “personal” importation to be

implemented in a way that ensures the

safety and effectiveness of the imported

drugs. While wholesalers and pharmacists purchase, transport, and dispense imported drugs

within our regulatory framework, American consumers making individual purchases from foreign

sources outside our regulatory system, in particular

those making long-distance purchases from internet sites or by fax or phone, face safety hazards

that would be extraordinarily difficult to effectively

address and prevent.

4) Overall national savings from legalized

commercial importation will likely be a

small percentage of total drug spending

and developing and implementing such a

program would incur significant costs and

require significant additional authorities.

The public rightly expects that, under any legal

importation program, the imported drugs will be

safe and effective. To accomplish this, additional

safety protections would need to be added that

would increase the costs of the program in an additive way as more safety measures are put in place.

Substantial resources would also be needed to

ensure adequate inspection of imported drug products. In addition to other factors that are likely to

reduce potential consumer savings, these increased

regulatory and program costs will also impact

potential savings to consumers. Furthermore,

intermediaries will likely capture at least half of any

savings between the U.S. and price-controlled

countries and potential quantity constraints

imposed by foreign governments and manufacturers will likely further limit the supply of these drugs

to U.S. consumers.

5) The public expectation that most imported drugs are less expensive than American

drugs is not generally true. Generic drugs

account for most prescription drugs used in the U.S.

and are usually less expensive in the U.S. than

abroad. Shopping around for price comparisons,

asking a doctor or pharmacist for a generic alternative to a prescribed brand name drug, or using a

Medicare or other prescription drug discount card

is a proven method to save American consumers

money on domestic prescription drugs while retaining the protections of a comprehensive safety

regime.

6) Legalized importation will likely

adversely affect the future development of

new drugs for American consumers. This

report estimates that R&D incentives will be lowered by legalized importation, resulting in roughly

between four and eighteen fewer new drugs introduced per decade.

7) The effects of legalized importation on

intellectual property rights are uncertain

but likely to be significant. A host of legal

and constitutional challenges are probable, and the

effects on enforcement of intellectual property

rights and on agreements with foreign countries

are likely to be problematic. These effects could

create additional disincentives to develop breakthrough medicines and further limit any potential

savings that might have been realized.

8) Legalized importation raises liability

concerns for consumers, manufacturers,

distributors, pharmacies, and other entities. Consumers harmed by imported drugs may

not have legal recourse against foreign pharmacies, distributors, or others suppliers. Entities in

the pharmaceutical supply chain may take actions

to protect themselves from liability that could ultimately raise the cost of drugs.

XIII

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION EXECUTIVE SUMMARY 
XIV
I. WHY ARE WE ISSUING THIS REPORT?

A. Medicare Modernization Act (MMA)

1. Statutory Language

The Medicare Prescription Drug, Improvement and

Modernization Act of 20031 (Medicare

Modernization Act, or MMA) was signed into law

on December 8, 2003. MMA primarily provides a

new prescription drug benefit enabling Medicare

beneficiaries to receive coverage for drugs not

administered in a hospital setting. However, MMA

also includes provisions aimed at providing lower

cost drugs to consumers.

Title XI, Subtitle C of MMA amends 21 U.S.C. 384

(importation of covered products) in the Federal

Food, Drug, and Cosmetic (FD&C) Act. Under section

384, the Secretary of the Department of Health and

Human Services (HHS) is directed to promulgate regulations that would allow pharmacies and wholesalers to import certain FDA-approved prescription

drug products from Canada. The section also requires

the Secretary to promulgate regulations to grant individuals a waiver to import certain FDA-approved prescription drugs from Canada under certain circumstances and permits the Secretary to grant individuals, by regulation or on a case-by-case basis, a waiver to import other drugs under such conditions as the

Secretary determines appropriate. By allowing individuals to import such drugs, the MMA expands the

scope of section 384, as originally established by the

Medicine Equity and Drug Safety Act of 20002 (MEDS

Act) because the MEDS Act authorized only pharmacists and wholesalers to import drugs. Nevertheless,

as with the MEDS Act, Congress conditioned the

implementation of the MMA’s importation program

on an initial certification by the Secretary. Section

384 provides that drug importation shall become

effective only if the Secretary of the HHS is able to

certify that implementing the program will:

• pose no additional risk to public health and

safety, and 

• result in a significant reduction in the cost of

drugs to the American consumer.

Regardless of whether the Secretary certifies safety

and savings, however, MMA also requires the

Secretary to submit a study to Congress within one

year on the importation of drugs. This study is the

subject of this report.

2. MMA Conference Agreement 

The MMA requires the Secretary of HHS, in consultation with appropriate government agencies, to

provide a comprehensive study that identifies problems with implementation of existing law and

examines a range of issues associated with the

importation of drugs. The conference agreement3

specifies eleven separate issues that Congress

requested the Secretary address in the study:

• Identification of the limitations, including limitations in resources and, if applicable, in current law authorities that may inhibit the

Secretary’s ability to certify the safety of pharmaceutical products imported into the U.S.

• Assessment of the pharmaceutical distribution

chain and the need for, and feasibility of, modifications, in order to assure the safety of products that may be imported into the U.S.

• Analysis of whether anti-counterfeiting technologies could improve the safety of products

in the domestic market as well as those products that could be imported from foreign

nations. This analysis shall identify the types of

technologies, if available, and assess the limitations of these technologies to the distribution chain.*

• Estimate of costs borne by entities within the

pharmaceutical distribution chain to utilize any

new technologies identified.*

1

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION BACKGROUND 

BACKGROUND
• Assess the scope, volume, and safety of unapproved drugs, including controlled substances,

entering the U.S. via mail shipment. This assessment should include the percentage of drugs

commercially available in other countries that

conform in all respects to FDA requirements, and

the limitations of visual inspection, sampling, and

other testing methods to determine its quality.

• The extent to which foreign health agencies are

willing and/or able to ensure the safety of drugs

being exported from their country into the U.S.,

including drugs that are transshipped through

their countries.

• Assessment of the potential short and long-term

impacts on drug prices and prices for consumers

and other system costs associated with importation of pharmaceuticals from Canada and other

countries into the U.S.

• Assessment of the impact on the research and

development of drugs—and the associated

impact on consumers and patients—if importation were permitted.

• Estimation of agency resources, including additional field personnel, needed to adequately

inspect the current amount of pharmaceutical

products entering into the country. This estimate

shall detail the number of field personnel needed

in order to appropriately secure all ports of entry

on a daily basis.

• Identification of liability protections, if any, that

should be in place, if importation is permitted,

for entities within the pharmaceutical distribution chain.

• Identify the ways in which importation could violate U.S. and international intellectual property

rights and describe the additional legal protections and agency resources that would be needed to assure the effective enforcement of these

rights.

* For purposes of this report, we combined the issues

of anti-counterfeiting and new technologies to better

communicate the intricate relationship between the

two.

B. The Task Force’s Charge

On February 26, 2004, HHS Secretary Tommy G.

Thompson announced the creation of a task force4 to

advise him on how to address the questions posed by

Congress in the MMA conference report.

Surgeon General Richard H. Carmona serves as chairman of the Task Force. The other Task Force members

are: Jayson P. Ahern (Assistant Commissioner for

Field Operations, Customs and Border Protection);

Alex M. Azar II (General Counsel, HHS); Josefina

Carbonell (Assistant Secretary for Aging, HHS); Lester

M. Crawford (Acting Commissioner, Food and Drug

Administration); Elizabeth M. Duke (Administrator,

Health Resources Services Administration); Tracey

Hardin (Attorney, Department of Justice); Mark B.

McClellan (Administrator, Centers for Medicare &

Medicaid Services); Michael J. O’Grady (Assistant

Secretary for Planning and Evaluation, HHS); William

Raub (Deputy Assistant Secretary for Public Health

Emergency Preparedness, HHS); Thomas M. Reilly

(Public Health Branch Chief, Office of Management

and Budget); Amit K. Sachdev (Deputy Commissioner

for Policy, Food and Drug Administration); and

Elizabeth A. Willis (Chief of Drug Operations Section,

Drug Enforcement Administration).

C. How did we address the issues?

As part of our fact-finding and information collection

process to address the issues, we made great efforts

to gather input, ideas, and expertise from the public

to give us guidance.

1. Listening Sessions and Public

Meeting

We held five listening sessions and a public meeting,

bringing together a wide variety of stakeholders to

present testimony and provide information relating to

the questions posed in the MMA conference report.

The public meeting was held on April 14, 2004 and

everyone who wanted to speak was given an opportunity to be heard. We heard from over 100 individuals,

including: consumer representatives; pharmaceutical

industry representatives; international regulatory and

industry representatives; academicians; health care

purchasers; professional medical groups; government

and elected officials; and members of the public. All of

the listening sessions were open to the media.

2

BACKGROUND HHS REPORT ON PRESCRIPTION DRUG IMPORTATION
2. Website

Immediately following the first listening session, HHS

developed a website (http://www.hhs.gov/importtaskforce/) dedicated to Task Force activities. The

website contains information about each stakeholder

listening session, including: the agenda, the text of

the speaker presentations, and a complete transcript

of each meeting. In addition, the website provides a

link for the public to submit and view comments.

3. Docket

We established a public docket to solicit and receive

information and comments.5 We announced the creation of the docket in the Federal Register.6 To stimulate and focus the discussion, the Federal Register

notice listed the broad questions that Congress posed

in the MMA conference agreement and also asked

more specific questions to seek additional input to

assist us in preparing this report. We requested that

all comments be submitted by June 1, 2004; however, we also considered comments submitted after this

date. We received and considered more than 100

written comments to the docket before drafting this

report.

4. Other Sources of Information

We supplemented the information presented during

the listening sessions and submitted to the docket

with information from other sources to be certain

that we adequately addressed the questions posed by

Congress. We obtained information relating to the

volume of imported drugs and drug prices from IMS

Health, a global data collection and analysis firm. For

some issues, where the comments did not provide

sufficient data or other information, we received

information from the U.S. Customs and Border

Protection (CBP), the U.S. Food and Drug

Administration (FDA), and the Department of Justice

(DOJ). Additionally, in June 2004, a group of Task

Force members toured the international mail facility

at John F. Kennedy (JFK) airport to observe how

imported drugs are processed daily by CBP and FDA

personnel. During this visit, we saw how drugs are

processed by this facility and the types of drugs that

are being imported.

D. What is in this report?

This report contains our findings based on all of the

information presented to us and expert views solicited from appropriate government agencies. The

report is divided into chapters according to the issues

posed by Congress in the MMA conference agreement.

1. Definitions

The terms “imported,” “importation,” “re-imported,”

and “re-importation,” are commonly used throughout this report. For purposes of this report, imported

drugs are drugs manufactured for sale inside and outside of the U.S., then brought into this country for use

by U.S. consumers. Unless otherwise specified, the

term “importation” includes a) personal importation

(internet sales, foot traffic across the border, mail

order) where the drugs are purchased by those who

consume them, and b) commercial importation

where the drugs are purchased by pharmacies and

wholesalers for resale to the ultimate consumer.

“Re-imported” drugs refer to FDA-approved prescription drugs that were made in the U.S., sent abroad,

and then brought back into the U.S. Currently, only

the original manufacturer can legally re-import a prescription drug and only if the manufacturer ensures

that the drug is authentic, properly handled, and relabeled for sale in the U.S., if necessary.

2. Types of Imported Drugs

We recognize that there are different categories of

imported drugs that potentially have different levels

of associated risk. Currently, the only types of legally

imported drugs are: 1) those that are manufactured

in foreign FDA-inspected facilities and adhere to FDAapproval standards, or 2) those that are U.S.-

approved and manufactured in the U.S., sent abroad,

then re-imported back into the U.S. by the manufacturer under proper controls and in compliance with

the FD&C Act. This latter category includes products

that are truly re-imported.

Another category of imported drugs are those that

are manufactured in a foreign facility that also man3

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION BACKGROUND 
ufactures the U.S.-approved version (in such a case

FDA would have inspected the U.S.-approved manufacturing process, but not the unapproved production

lines); however, the foreign version may be slightly

different than the U.S.-approved version. Although

there may be significant similarities between the two

versions, because of the potential differences and the

fact that FDA determined the U.S.-approved drugs

meet U.S. standards, the foreign version cannot necessarily be considered equivalent to the U.S.-

approved version.

A final category of imported drugs are unapproved

drugs that are produced in foreign facilities that FDA

has not inspected and, therefore, has no knowledge

of, or experience with, the facility. Consequently, the

safety and effectiveness of these drugs are unknown.

These drugs pose the greatest level of concern

because they are not regulated within the U.S. drug

safety system and there is little known about the

specifications to which they are made, the processes

used to ensure their safety, and the integrity of their

distribution. These are the types of drugs that consumers may receive when they order prescription

drugs over the internet.

E. Brief History of U.S. Importation

1. The Current U.S. System

The FD&C Act limits the types of drugs that may be

imported into the U.S. The current drug distribution

system is relatively “closed,” which helps ensure that

the domestic drug supply is safe and effective.

New drugs marketed in the U.S., regardless of

whether they are manufactured in the U.S. or a foreign country, must be the subject of a New Drug

Application (NDA) approved by FDA based on

demonstrated safety and efficacy. The drug must be

produced in plants that are inspected by FDA and are

operated in accordance with the current Good

Manufacturing Practice (cGMP) regulations.7 Also,

the drug’s labeling must bear certain information

required by the FD&C Act. Only a drug’s manufacturer can re-import into the U.S. a U.S.-made prescription

drug that was sent abroad, but the law clearly allows

legal, FDA-approved drugs to be made abroad. In

fact, many drugs now sold in the U.S. were made in

foreign, FDA-inspected facilities to standards

approved by FDA. When such drugs or active ingredients are offered for import into the U.S., FDA

inspectors evaluate them as they would any other

drug—they attempt to assess whether the drug is

FDA-approved, whether it is properly labeled, and

whether it otherwise complies with the FD&C Act.

Under sections 381 and 331, unapproved, misbranded, and adulterated drugs cannot be legally imported

into the U.S. This includes unapproved “foreign versions” of FDA-approved medications. In addition,

under the “American goods returned” provision, it is

illegal for any person other than the original manufacturer of a drug to re-import into the U.S. a prescription drug that was originally manufactured in the U.S.

and then exported to another country.8 This provision

was included in the Prescription Drug Marketing Act

of 1987 (PDMA)9 to ensure that prescription drug

products purchased by consumers would be safe and

effective and to avoid an unacceptable risk that counterfeit, adulterated, misbranded, subpotent, or

expired drugs were being sold to American consumers. Congress determined that legislation was

necessary because there were insufficient safeguards

in the prescription drug distribution system to prevent

the introduction and retail sale of substandard, ineffective, or counterfeit drugs and that a wholesale drug

diversion submarket had developed that prevented

effective control over, or even routine knowledge of,

the true sources of drugs. Congress limited access to

reimported drugs because of these safety concerns.

Thus, in order to comply with the FD&C Act, any entity that intends to import prescription drugs into the

U.S. must ensure that each drug is FDA-approved,

meets all the U.S. manufacturing and labeling

requirements, and that the importation does not violate section 381.

FDA drug approvals are manufacturer-specific, product-specific, and include 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.

10 Drugs sold to

4

BACKGROUND HHS REPORT ON PRESCRIPTION DRUG IMPORTATION
wholesale or retail establishments outside the U.S.

may comply with the foreign country’s specifications,

but may not be manufactured pursuant to an FDA

approval at all.

Even if a manufacturer has FDA approval for a drug,

the version produced for foreign markets may not

meet all of the requirements of the FDA approval, and

thus it may be considered to be unapproved in the

U.S.11 Moreover, the version may be misbranded

because it may lack certain information that is

required under 21 U.S.C. §§ 352 or 353(b)(2) but is

not required in the foreign country, or it may be

labeled in a language other than English.12

Under FDA’s regulations, the shipment and storage of

prescription drugs must be properly documented and,

when necessary, inspected.13 One concern FDA has

expressed is that, when a foreign manufacturer

makes an FDA-approved drug in a foreign plant and

then distributes it into foreign commerce, FDA has no

assurance that the drug was properly stored or handled while abroad.

It is also important to note that the Controlled

Substances Act (CSA), Title 21 U.S.C., Chapter 13,

Subchapter II, specifically prohibits controlled substances to be imported except by DEA registrants.

Any individual who imports controlled substances

without being registered with DEA and without DEA

authorization, is in violation of the CSA and is subject

to prosecution.

2. Personal Importation Policy

Importing unapproved prescription drugs is illegal.

However, FDA’s long-standing policy on importing

prescription drugs for personal use recognizes that

there are circumstances in which FDA may exercise

its enforcement discretion and not take action

against illegal importation. The personal importation

policy was first adopted in 1954; it was last modified

in 1988 in response to concerns that certain AIDS

treatments were not available in the U.S. Under the

policy, FDA exercises its enforcement discretion to not

stop individuals with serious conditions, such as a

rare form of cancer, from bringing into the U.S. treatments that are legally available in foreign countries

but are not approved in the U.S.

The current policy is not a law or a regulation, but

serves as guidance for FDA field personnel. The

importation of certain unapproved prescription medication for personal use may be allowed in some circumstances if all of the following factors apply:14

• If the intended use is for a serious condition for

which effective treatment may not be available

domestically;

• If the product is not considered to represent an

unreasonable risk;

• If the individual seeking to import the drug

affirms in writing that it is for the patient’s own

use and provides the name and address of the

U.S.-licensed doctor responsible for his or her

treatment with the drug or provides evidence

that the drug is for continuation of a treatment

begun in a foreign country;

• If the product is for personal use and is a threemonth supply or less and not for resale. (Larger

amounts would lend themselves to commercialization); and

• If there is no known commercialization or promotion to U.S. residents by those involved in distribution of the product.15

The majority of drugs coming into this country via

personal importation today do not technically meet

all of these factors. Nonetheless, given the high

demand and limits on available resources it is difficult

to effectively police this practice.

3. The Medicare Prescription Drug,

Improvement and Modernization Act of

2003 (MMA) 

MMA provides authority for pharmacists and wholesalers to import drugs from Canada,subject to certain

conditions. These specific conditions include:

• Requirements that importers and foreign sellers

keep certain information and records;

• Qualified laboratory drug testing;

• Registration of Canadian sellers; and 

• Use of approved labeling.

Once effective, MMA directs the Secretary to promulgate regulations to grant individuals a waiver to per5

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION BACKGROUND 
mit importation of a 90-day supply of any FDAapproved prescription drug imported from Canada

from a licensed pharmacy for personal use, if the drug

is accompanied by a valid prescription, in a final finished dosage that was manufactured in a registered

establishment, and imported under such other conditions as the Secretary determines necessary to ensure

public safety.

Section 1121 of MMA provides that the drug importation program described above shall become effective only if the Secretary of HHS first certifies that

implementing the program will pose no additional

risk to public health and safety and will result in a significant reduction in the cost of drugs to the American

consumer.

In 2000, Congress enacted legislation similar to the

MMA as part of the Fiscal Year 2001 Appropriations

Bill for the Department of Agriculture and Related

Agencies, also known as the MEDS Act.16 The MEDS

Act, if implemented, would have allowed pharmacists

or wholesalers in the U.S. to import FDA-approved

prescription drugs that were manufactured in the U.S.

in FDA-inspected facilities and exported to 26 specific foreign countries listed in the FD&C Act. On

December 26, 2000, then-HHS Secretary Donna

Shalala stated in a letter to President Clinton that she

was unable to certify the safety and cost savings

required by the MEDS Act.17 Similarly, in a letter to

Senator Jim Jeffords dated July 21, 2001, Secretary

Thompson also declined to make the certification

necessary to implement the MEDS Act due to safety

concerns.18

1 Pub. L. 108-173.

2 Pub. L. 106-387.

3 U.S. House of Representatives, Conference Report on

H.R. 1, Medicare Prescription Drug And Modernization

Act of 2003, H. Rept. 108-391, November 20, 2003.

Accessed at http://thomas.loc.gov/cgibin/query/R?r108:FLD001:H11878 on 11/4/04.

4 U.S. Department of Health and Human Services, “HHS

Announces Task Force on Drug Importation,” February

26, 2004. Accessed at

http://www.hhs.gov/news/press/2004pres/20040226.html

on 11/4/04; U.S. Department of Health and Human

Services, “HHS Names Members to Task Force on Drug

Importation,” March 16, 2004. Accessed at

www.hhs.gov/news/press/2004pres/20040316.html on

11/4/04.

5 U.S. Food and Drug Administration Docket 2004N-0115.

Accessed at

www.fda.gov/ohrms/dockets/dockets/04n0115/04n0115.

htm on 11/4/04.

6 69 Fed.Reg. 12810 (Mar. 18, 2004).

7 21 C.F.R. Part 211.

8 21 U.S.C. § 381(d)(1).

9 Pub. L. 100-293.

10 21 C.F.R. § 314.50.

11 21 U.S.C. § 355.

12 21 C.F.R. § 201.15(c).

13 21 C.F.R. § 205.50.

14 FDA, Regulatory Procedures Manual, Subchapter,

“Import Operations/Actions: Coverage of Personal

Importations,” March 2004.

15 Pub. L. 108-173.

16 Pub. L. 106-387.

17 U.S. Department of Health and Human Services, Letter

from Secretary Donna E. Shalala to President William J.

Clinton, December 26, 2000.

18 U.S. Department of Health and Human Services, Letter

from Secretary Tommy G. Thompson to Senator James

Jeffords, July 9, 2001. Accessed at

www.fda.gov/oc/po/thompson/medsact.html on 11/4/04.

6

BACKGROUND HHS REPORT ON PRESCRIPTION DRUG IMPORTATION
CHAPTERONE

7

Scope, Volume, and Safety of Unapproved Drugs

CHAPTER HIGHLIGHTS:

The number of unapproved prescription drug products entering the U.S. is now very large. Nearly five million shipments, comprising about 12 million prescription drug products with a value of approximately $700

million, entered the U.S. from Canada alone in 2003, via internet sales and travel to Canada by American

consumers. This report estimates that an equivalent amount of prescription drugs are currently coming in

from the rest of the world, mostly through the mail and courier services.

Imported drugs are arriving from all corners of the world, including developed and emerging countries.

Their scope is broad and includes tablets, capsules, inhalants, injectables, biologics, generics, brand name

drugs, and controlled substances. Some of the arriving products appear to have been made in the U.S.;

however, many are not. The majority of these currently imported drugs are unapproved by FDA and do

not appear to conform in many aspects to the properly approved and manufactured products available in

American pharmacies.

Numerous comments submitted to the Task Force described the current practice of internet purchases by

American consumers who seek lower-priced drugs. Many state-licensed internet pharmacies provide a

legitimate means for consumers to access safe and effective medicines, but others raise significant safety

concerns. Most of these drugs are purchased by individual consumers via internet, phone, or fax, from

entities that focus on providing drugs to Americans and other long-distance purchasers. These entities

generally are cross-border foreign pharmacies that may not primarily serve the citizens of the country in

which they are located, and their methods for providing drug products may not be subject to the same

oversight that foreign governments provide for drugs and pharmacies serving their own citizens. When

consumers order prescription drugs over the internet from international sources, they generally receive

drugs that do not have regulatory assurances of equivalence to U.S. products or of safety and security in

the distribution process.

Some sellers of imported drugs are “rogue” internet pharmacies that pretend to be legitimate and operate behind facades. Many of the drugs sold over the internet claim to be interchangeable with the

approved U.S. drug, but are not. Imported drugs include those that pose special concerns, such as drugs

that require special handling, drugs with high abuse potential, drugs that should be sterile, counterfeit

drugs, improperly packaged drugs shipped loose in sandwich bags and envelopes, and drugs from countries that have differing and sometimes more limited regulatory authority to assure the safety of pharmaceuticals manufactured and exported from those countries. In sum, this report finds that American consumers currently purchasing drugs from overseas are generally doing so at significant risk.

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 1
KEY POINTS:

• Safety and protection of the public health are paramount; safety should not be sacrificed for affordability.

• The significantly increasing volume of imported drugs makes it difficult to quantify, monitor, control, and

ensure safety.

• There are particular products of concern, including controlled substances, intravenous products, biologics,

drugs that must be refrigerated or frozen, drugs that have specific post-marketing risk management programs, drugs that are highly susceptible to counterfeiting on the global market, and those that have less

expensive alternatives (i.e., generics) in the U.S., that pose special concerns in the importation context.

• Imported drugs are not always therapeutically equivalent to FDA-approved drugs available in the U.S.

• Product testing at the border alone does not necessarily ensure that imported drugs were manufactured,

handled, or stored in such a way as to maintain their quality, safety, and efficacy.

• Drugs from countries with less developed regulatory systems may pose greater risks.

• Purchasing prescription drugs over the internet without a prescription has been found to be relatively easy

to accomplish. In those cases, the lack of an adequate health professional/patient relationship is of particular concern.

8

CHAPTER 1 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION
I. WHAT WE SOUGHT COMMENT ON

As part of its study, Congress asked HHS to assess the

scope, volume, and safety of unapproved drugs,

including controlled substances, entering the U.S. via

mail shipment. Congress requested that the assessment also include the percentage of drugs commercially available in other countries that conform in all

respects to FDA requirements, and the limitations of

visual inspection, sampling, and other testing methods to determine the quality of imported drug products.

To further explore this issue, we asked for

comment on the following:

• Information regarding the scope, volume, and

safety of imported drugs (brand and generic) and

biologics and any distinctions.

• Are there product characteristics that might be

associated with lower risk when imported without going through the usual FDA approval and

regulatory process?

• Information on ways in which products with different risk levels could be reliably distinguished

or otherwise differentiated at the border or elsewhere.

• Information on whether or not any imported

products can meet U.S. approval standards or the

equivalent.

• What is the scope and volume of drugs commercially available in other countries that are FDAapproved?

• Discuss any approaches that can be used to

determine whether they are equivalent to U.S.

approved drugs.

• How would FDA and other Federal agencies

identify, track, and limit or prohibit importation

of products that are not eligible for importation?

• What proportion of different types of imported

drugs meet typical standards of U.S. pharmacy

practice (e.g., no faxed prescriptions from individuals, proper oversight by a practicing pharmacist, proper repackaging and labeling)?

• If the same level of safety that consumers expect

from drugs purchased at U.S. licensed pharmacies cannot be assured, would a different level of

risk be acceptable to consumers and how could

that risk be conveyed?

• Should certain products be excluded from importation because of risk concerns?

• Can risk-based criteria for limitations be established?

II. WHAT THE COMMENTS SAID

Many comments stated that drug and biological

products are increasingly available from global

sources. Most of these comments did not provide

data to quantify the scope and volume of these

imports. Rather, the comments that discussed volume and scope referred to the blitz operations in

which FDA and CBP conducted short-term intensive

evaluation of drug products that were entering the

U.S. through specific international mail facilities. The

comments also described the volume of drugs entering the U.S. from Mexico by citing information that

found that a high percentage of people crossing the

border carried prescription drugs into the U.S.

Several comments suggested that if importation of

foreign drugs were legalized, certain products should

be included or excluded from the importation

scheme. For example, a few suggested that best-selling drugs be permitted or drugs that are used for specific chronic conditions, such as when the patient has

been stabilized on the drug for a while. Others stated that a list would be useful, but only for commercial importation, since it would be more manageable

to follow a list. The same comments stated that it

would be impossible to limit personal importation to

a list of specific drugs because patients and websites

may not adhere to the list. Moreover, it would be difficult to distinguish the listed and non-listed drugs as

they enter the U.S. at the international mail facilities

or other entry points because of the sheer number of

packages that would arrive daily. Several comments

noted that injectables, biological products, controlled

substances, drugs of narrow therapeutic range, drugs

requiring refrigeration, and non-FDA approved drugs

should be excluded from importation under any plan.

Of those comments that suggested that importation

be limited to certain countries, several said that the

program should start with importation from Canada

and then expand to other countries, including those

9

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 1
in Europe. Some comments advocated for drugs to

be permitted from any country, while others said that

only drugs from countries that have a regulatory system equivalent to the U.S. should be permitted.

Comments contained different opinions about

whether drugs sold in other countries are the same as

or equivalent to drugs sold in the U.S. Many comments said that the drugs sold elsewhere were the

same, but the comments did not provide any supporting documentation. Other comments said that visual

inspection of the different dosage forms currently

being imported clearly demonstrates that many of

these products cannot possibly be the same as products sold in the U.S.

Most comments agreed that it is essential that any

drug that is imported into the U.S. adhere to the

“gold standard” of safety and efficacy that is expected from FDA-approved drugs. Concern was raised

that if a two-tier system were established, lower

quality drugs would disproportionately appear in

markets serving economically disadvantaged communities. We heard during a listening session that a

two-tier system is unacceptable and that imported

drugs must be of the same high quality as FDAapproved products. A few comments noted that several countries, such as Canada, do require similar

standards for safety and efficacy, but acknowledged

that the drugs that U.S. consumers are currently

importing are not necessarily Canadian-approved

drugs.

Of those comments that discussed testing of imported drug products, many stated that it would be costly and difficult to develop a system of testing products at the border to ensure authenticity. Some comments said that only the manufacturer has the

resources and analytical information to ensure that

the product is authentic; however, other comments

said that tools are available for rapid authentication

for presence of active ingredient. Comments also

stated that in order to adequately screen for authenticity, every lot in each shipment would have to be

tested. Some comments noted that not only would

the product have to be tested for the presence of

active and inactive ingredients, but also for adulteration, impurities, strength, and whether proper storage conditions were maintained. Several comments

maintained that quality cannot be tested into a product after it is manufactured and that the FDA gold

standard is based on building quality into a product

by ensuring that good manufacturing practices are

used in the manufacturing, processing, and handling

of the product. Comments also expressed concern

that it would be costly, time consuming, and perhaps

unrealistic to test the millions of packages that enter

the U.S. yearly. On the other hand, many comments

stated that it should not be left to the individual consumer to determine if a product is mislabeled, adulterated, contaminated, counterfeit, or substandard.

We have only anecdotal information on the proportion of personally imported drugs that are currently

dispensed from foreign pharmacies that meet typical

standards of U.S. pharmacy practice. Many comments stated that pharmacies in Canada are regulated and meet the same standards as pharmacies in the

U.S. Other comments noted that many internet pharmacies accept orders for drugs without a prescription

and are hard to locate to determine whether they

adhere to pharmacy practice standards or from where

they obtain their drug products. They noted several

instances where the product received from an internet pharmacy was visibly different from the U.S.-

approved drug and came with no labeling information or only with information that was written in a

foreign language.

There were no comments that suggested a different

level of risk that would be acceptable for imported

drugs. Rather, the majority of comments stated that

safety is paramount and that safety should not be

sacrificed for affordability. Concern was expressed

that many consumers are deciding not to buy their

medicines, but no specific data was presented on

how widespread this problem is. Other comments

stated that that the U.S. approval and marketing system is not set up as a risk-based system. Rather, they

said it is a system where safety must be affirmatively

established before a product may be sold in the U.S.

No comments discussed how to establish risk-based

criteria for limitations on imported drugs.

10

CHAPTER 1 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION
III. DISCUSSION

A. The Scope and Volume of Currently

Imported Unapproved Drugs 

1. Estimates of Volume of Imported

Drugs

It is difficult to quantify the exact number of unapproved drugs entering the U.S. We note that the term

“unapproved drugs” refers to those drugs that have

not been approved by FDA, pursuant to the FD&C

Act.1 Although some unapproved drugs may be

harmful or pose risks, others may not. However, if the

drug has not been approved by FDA and maintained

in the U.S. closed distribution system, the safety and

efficacy of the unapproved product cannot be

assured. Due to the sheer volume of packages arriving daily through the international mail, into ports,

via couriers, or with persons traveling across a border,

CBP and FDA told us that currently they have no

mechanism for keeping an accurate account.

According to CBP, there are 355 “points of entry” for

access into the U.S. (See Figure 1.1) This includes 14

international mail branches, 29 express consignment

facilities, and 312 ports.2 At this time, there are too

many packages to monitor and control the influx of

drugs sent into the U.S., much less perform comprehensive examinations of all packages.

It is apparent that the volume of prescription drugs

for personal use imported through the mail has

increased significantly in recent years. FDA estimated that in 2001 approximately two million parcels

containing FDA-regulated products for personal use

entered the U.S. through international mail facilities.3

This estimate is based on an extrapolation of data

obtained during a pilot project conducted at the

international mail facility in Carson, California. It is

estimated that this number has increased significantly and that approximately ten million packages containing prescription drugs enter the U.S. annually

from all over the world.

According to IMS Health data, in 2003 the

U.S./Canada cross-border sales volume for prescription drugs was $695 million U.S. dollars. Of this vol11

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 1

Figure 1.1
ume, about $408 million was from internet pharmacy

sales and $287 million was from foot traffic sales.4

IMS Health data also reveal that there were 12 million prescriptions sold from Canadian pharmacies to

the U.S. in 2003.5 On average, we estimate that there

are about 2.5 prescriptions per package, which would

equate to 4.8 million packages of prescription drugs

entering the U.S. in 2003 from Canada alone.

It is commonly known that a large number of

Americans travel daily over the border to Mexico to

purchase prescription medicines. For example, we

heard during a listening session that on a typical

Saturday, approximately 25,000 to 30,000 individuals

walk across the bridge at the Nuevo Laredo,

Mexico/Laredo, Texas border crossing. We heard an

estimate that half of these individuals purchase prescription medicines in Mexico and bring them back

into the U.S. Recently, there have been reports of

counterfeit drugs dispensed to Americans at Mexican

border-pharmacies.6

According to CBP, seizures of pharmaceuticals made

by CBP at international mail and express consignment facilities were 43,659 during fiscal year 2004

and 31,725 during fiscal year 2003. The number of

pharmaceutical seizures made solely at international

mail facilities was 37,040 during FY 2004 and 24,891

during FY 2003. These figures cannot be distinguished by controlled versus non-controlled substances. It should be noted that these numbers represent the number of parcels and that each parcel

may contain any number of individual containers of

controlled substances.

In June 2004, several Task Force members toured the

JFK international mail facility to view first-hand the

volume of packages arriving daily at a major port of

entry. Because of the high volume of packages that

travel through this facility daily, CBP and FDA have

employed a risk-based approach towards their operations at international mail facilities and courier hubs

(through which the majority of illegal drugs arrive

from foreign sources for personal use) so that they

can more effectively target, identify, and interdict

those potentially unsafe and dangerous imported

products that are offered for entry into the U.S. on a

daily basis. CBP, however, seizes all controlled substances that it identifies and refers all non-controlled

drugs to FDA for review. Using this risk-based

approach, FDA considers the following to prioritize

their work, so that they are able to provide the most

protection given limited resources: whether the product has been counterfeited in the past; whether it is

an injectable drug product; unlabeled drug product;

compliance history and historical data of the exporter

and/or importer and/or recipient; non-English labeling; and whether there is an import alert/bulletin.

Even with this risk-based approach, however, packages of unapproved drugs still enter the country. It is

impossible for Federal officials to open and examine

all packages and detain all those that violate Federal

law. At the JFK facility, we observed unapproved

drugs from every corner of the world, including traditional medicines, counterfeit drugs, unapproved

generic versions of U.S.-approved innovator drugs,

drugs requiring refrigeration that were sent with no

provision to keep them cold, controlled substances,

and drugs that were unknown because there were no

identifying markings on the product or package.

2. What types of unapproved drugs are

being imported into the U.S.?

There is little quantitative data on the types of drugs

that are being purchased from foreign internet pharmacies. According to IMS data,7 cross-border shipments are predominantly drugs for chronic conditions

12

CHAPTER 1 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION

Figure 1.2, Detained controlled substances at JFK international mail

facility
that are typically prescribed to older patients.

Analysis of the IMS data shows that while there has

been an upward trend from 2002-2003, sales are leveling off. This leveling off may indicate that (as IMS

noted) import restrictions are having an effect, the

Canadian system may be exporting all the drugs it

can, U.S. consumers are beginning to go elsewhere

for their prescription drugs, or some combination of

these factors.

Additional insight into the types of drugs that are

being imported can be gleaned from CBP and FDA

activities. The agencies told us that they periodically

conduct targeted examinations of international mail

and courier shipments over three-day periods known

as “import blitz examinations.” The import blitz

examinations of mail shipments of foreign drugs to

U.S. consumers revealed that these shipments often

contain dangerous, unapproved or illegal drugs that

pose potentially serious safety problems. During the

summer (July – August) and again in November of

2003, FDA and CBP conducted two series of “blitz”

examinations at various international mail facilities

and courier hubs. In all cases, CBP and FDA inspectors found that the overwhelming majority of the

packages examined contained violative drugs.

During the import blitz examinations conducted by

FDA and CBP during the

summer of 2003 at the

Miami, New York (JFK), San

Francisco, and Carson (CA)

international mail facilities,

these agencies examined

1,153 imported products,

the overwhelming majority

of which were drugs.

Inspection revealed that

1,019 (88%) of the 1,153

products were violative; and

861 of the 1,019 violative

products (85%) were noncompliant because they

appeared to be unapproved

drugs. During the import

blitz examinations conducted in November 2003 at the

four international mail facilities in Buffalo, Dallas,

Chicago and Seattle, and the two courier hubs in

Cincinnati and Memphis, FDA and CBP examined

3,375 imported products, the overwhelming majority

of which contained drugs. Of the 1,927 imported

products examined during the blitz examinations at

the mail facilities, 1,641 (85%) were deemed violative. The overwhelming majority of the violative

products (69%) were non-compliant because they

contained unapproved drugs.

The following examples are typical of unapproved

drug products found during the blitzes and illustrate

the potential scope of the products found and the

risks they pose to their buyers:

• Improperly Labeled Drugs: Many of the

drugs did not bear adequate labeling or instructions for proper, safe use.

• Improperly packaged drugs: Some drugs

were shipped loose in sandwich bags, tissue

paper or envelopes.

• Controlled substances: Over 25 different controlled substances were found. These have a significant abuse potential and can be dangerous

when consumers take them inappropriately and

without a doctor’s supervision.

• Drugs withdrawn from the U.S. market

13

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 1

Figure 1.3
for safety reasons such as Buscapina, which

appears to be the drug Dipyrone, removed from

the market in 1977 due to reports of agranulocytosis — a sometimes fatal blood disease.

• “Foreign versions” of FDA-approved

drugs: Foreign versions may vary in potency and

purity from the U.S.-approved versions and may

raise concerns regarding safety and efficacy.

• Drugs requiring risk management and/or

restricted distribution programs: Drugs

were shipped into the U.S. without any assurance

that their use would be monitored by a doctor.

• Drugs that require initial screening or

periodic monitoring of patients: Initial

screening and periodic patient monitoring by a

medical practitioner are recommended in FDA’s

approved labeling for some of the drugs found

during the blitz operations.

• Drugs requiring careful dosing: For example, Synthroid (levothyroxine), Glucophage (metformin), Dilantin (phenytoin), digoxin, theophylline, and Coumadin (warfarin).

• Drugs with clinically significant drug-drug

interactions: Zocor (simvastatin), imipramine,

Viagra (sildenafil citrate) and tramadol have

been associated with clinically significant interactions with other drugs the consumer may be taking.

• Unlicensed biologic drugs, which should

be administered by a healthcare provider.

• Investigational Products: These products

should only be shipped pursuant to FDA’s

Investigational New Drug (IND) regulations,

which require that patients who use investigational products are fully informed of the drugs’

investigational status and are not exposed to

unreasonable risks. When these products are

shipped through the mail, and used outside of

the protections established to safeguard patients

involved in clinical trials of experimental drugs,

there is a significant risk that a patient may be

harmed.

• 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.

3. What percentage of drugs from

other countries are the same as the

FDA-approved version?

Many FDA-approved drugs are made in foreign

plants. To be FDA-approved, the drugs must be produced in FDA-inspected facilities, meet FDA safety

and effectiveness standards, and be made in compliance with good manufacturing practices (quality controls) prescribed by FDA. Particular manufacturing

lines for FDA-approved drugs in foreign plants must

meet these FDA manufacturing standards. Although

such plants may house additional lines of similar drug

products, FDA has no de facto assurance that they

meet FDA standards. Medicines produced on these

other lines cannot be presumed to be equivalent to

FDA-approved drugs. Although a foreign version of a

drug may look identical to an FDA-approved version,

there are many important differences that can exist

between these different versions that can affect the

way the drug works in the body, as described below.

For a medication to be approved for marketing in the

U.S., FDA reviews scientific data to determine

whether that specific formulation is safe and effective. Changes in the active ingredient or in an inactive ingredient can impact how well the drug works.

For example, changes to an inactive ingredient can

alter the amount of and speed with which the active

ingredient is absorbed by the body. Ingredients purchased from suppliers that do not meet FDA’s standards may contain impurities that can put patients at

risk for adverse effects on their health. FDA also

inspects the foreign plant to determine whether it

meets the agency’s exacting standards for quality

production and control,so called good manufacturing

practices, such as using state-of-the-art sterilization

equipment. Failure to meet these standards can lead

to drug products that are subpotent or superpotent,

contain impurities, including infectious agents, or

degrade quickly.

Different countries have different regulatory systems. Therefore, foreign versions of FDA-approved

drugs may not be the same as their U.S. counterparts due to differences in formulation, source of

ingredients or manufacturing processes. These differences may occur even when the FDA-approved

14

CHAPTER 1 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION
medicine and a foreign version are made in the

same facility. In these cases, each drug is made on

a different line and subject to different standards

and controls to meet the requirements of the

respective country.

When the foreign version is made in a separate facility there may be a greater likelihood of using different quality controls. For example, FDA recently alerted U.S. residents about a recall of GlaxoSmithKline

“Diskus” medicines sold in Canada to treat asthma

and chronic obstructive pulmonary disease. The products were recalled in Canada because their drug

delivery system may not function properly. The FDAapproved versions were made in a different plant and

did not experience the same problems as those medicines produced for the Canadian market.

Another significant difference is that the labeling of

medicines produced overseas for foreign markets

may not be in English and, therefore, important information regarding dosage, side effects, and safe use

may not be available to the U.S. consumer.

Even when a drug produced for a foreign market contains the same or similar ingredients and uses the

same or similar formulation as the FDA-approved

medication, the foreign drug may not have been

packaged and stored under appropriate conditions to

prevent contamination, degradation, or substitution

with another product once it leaves the manufacturer’s facility. In the U.S., Federal or state government

authorities tightly regulate all participants in the drug

distribution system, such as wholesalers and pharmacies. However, FDA, its sister agencies, and the states

lack the authority to oversee foreign distributors and

pharmacies, and, therefore, cannot ensure that drugs

from other countries are in fact the same – the same

formulation composed of the same ingredients from

the same sources, made in the same facility under the

same manufacturing standards, with the same labeling, and packaged, stored, and handled by entities

that meet Federal and state standards – as the medicines American consumers receive from the U.S. drug

supply chain.

We could not determine the percentage of drugs

commercially available in other countries that conform in all respects to FDA requirements. Companies

do not share this information with FDA or publicize it

by other means. Foreign countries do not share this

information, and there are no applicable Memoranda

of Understanding (MOU) that would permit the U.S.

and other countries to do so. Furthermore, although

the International Conference on Harmonization (ICH)

has made significant strides in harmonizing processes and requirements for approving and reviewing

prescription drugs, there are still significant differences that prevent mutual recognition of drug

approvals, making it difficult to know whether the

foreign-approved version is identical to the FDAapproved version.

4. Where are imported unapproved

drugs coming from?

Unapproved drug products are pouring into the U.S.

from all over the world. Several initiatives have been

undertaken to quantify and characterize the source of

these drugs.

a. Via Mail

FDA told us that during the blitz examinations they

attempted to document the country of export for

those parcels containing drug products that entered

through the mail facilities. They determined that

Canadian parcels appeared most frequently, but

drugs came from a variety of other countries, including Japan, India, the Netherlands, Taiwan, Thailand,

Belize, Malaysia, Philippines, Nicaragua, Romania,

Cambodia, Uganda, and the U.K.

b. Travel Across the Border

During 2000-2001, FDA conducted surveys at U.S.

borders to gather data on drug products carried by

individuals entering the U.S. In 2000, FDA’s

Southwest Import District (SWID), with the assistance

of other agencies, conducted a survey of prescription

drugs being brought by pedestrians into the U.S. at

eight ports-of-entry along the 2,000-mile border with

Mexico. The survey looked at activity during four

hours on a Saturday at border ports in California,

Arizona, and Texas. The data collected from over 600

15

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 1
interviews indicated that the most common type of

drug that these persons imported into the U.S. were

antibiotics or pain relievers. Sixty-three percent of the

persons interviewed had prescriptions; of these prescriptions, 59 percent were U.S. prescriptions while 41

percent were Mexican. While many of these products

were foreign versions of FDA-approved drugs, some

drugs bore no resemblance whatsoever to any FDAapproved product in the U.S.

In 2001, FDA, CBP, and other agencies conducted a

survey of prescription drugs being brought into the

U.S. at seven ports-of-entry along the U.S./Mexican

border. During the four-hour survey, a total of 586

persons brought in a total of 1,120 drug products.

Approximately 56 percent had a prescription for the

medicines (61 percent of these were U.S. prescriptions, 39 percent were Mexican). As in the earlier survey, many of these products had currently marketed

FDA versions in the U.S., while some were not

approved for sale in this country.

c. Internet

According to FDA, based on a review conducted in

early 2000 by their Office of Criminal Investigations

(OCI) and a subsequent study by the General

Accounting Office, there appeared to be approximately 300 to 400 Internet sites selling prescription

drugs to consumers, approximately half of which are

located in the U.S. and half located outside the U.S.8

More recent data is not available; however, it is

believed that this number has increased significantly

in the four years since this survey was completed. It

is important to note that, despite this trend, we

believe that there are many licensed internet pharmacies that provide a legitimate means for consumers to

access safe and effective medicines.

In addition to the internet pharmacies selling prescription drugs directly to consumers, several state and

local governments have set up links from their websites to websites that purport to dispense drugs from

Canada and other countries. We were told about several government-sponsored websites that facilitate the

sale of unapproved drugs to U.S. consumers.

d. Organized Trips to Canada

Since 2000, organized bus and train trips to Canada

have apparently increased steadily, the most common

scenario being a group of senior citizens organized to

travel by bus to a Canadian city with one or more

pharmacies offering drugs at the government-established Canadian price. Some of these trips have been

organized by public officials, such as governors or

members of Congress, with the intention of highlighting the price disparity between the U.S. and Canada.

However, to date, no studies have been conducted to

ascertain the volume of drugs imported through

those trips or the precise types of drugs being purchased (although it can be presumed that the predominance of drugs are those for chronic conditions

in the elderly, such as hypertension, high cholesterol,

arthritis, and diabetes).

e. Storefront Pharmacies

Beginning in early 2004, a new form of access for foreign drugs emerged with the advent of so-called

“storefront pharmacies.” These walk-in businesses

appeared suddenly around the country, offering intermediary services between consumers and foreign

(mostly Canadian) drugstores. They would receive

the patient’s prescription and fax it to a Canadian

pharmacy, which would mail a Canadian drug directly to the patient; the storefront pharmacy would

charge the patient’s credit card and split the charge

with the Canadian pharmacy. Many states took successful legal action against these businesses under

their laws prohibiting the sale of drugs without a

pharmacy license. A significant case was decided in

Federal court against a large storefront pharmacy, Rx

Depot, that was operating in numerous states. The

judge ruled that drugs sold in this manner were both

illegal and potentially unsafe. Despite these illegalities, such businesses continue to appear.

B. The Safety of Unapproved Imported

Drugs

An overwhelming number of comments told us that

safety is paramount when it comes to imported

drugs. For over 65 years, a comprehensive system of

laws and regulations has protected the American

16

CHAPTER 1 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION
public from unapproved, adulterated, counterfeit,

misbranded, and otherwise substandard drug products entering the U.S. drug distribution system. There

are potential public health consequences associated

with using imported unapproved drugs that bypass or

do not meet the U.S. legal standards for safety and

efficacy.

We were told that importation of unapproved drugs

creates a “buyer beware” situation, where the consumer is left to accept the health risks and consequences of their purchase. The comprehensive regulatory system in place in the U.S. is intended to protect consumers who use drugs purchased within the

legal, relatively closed distribution system in this

country. Although some comments argued that drug

importation is safe, a vast number of comments stated that there are several real potential safety concerns with imported drugs: quality assurance concerns, counterfeit potential, presence of untested substances, risks of unsupervised use, labeling and language issues, and a general lack of information.

In addition, there have been limited reports of harm

from imported drugs, despite the significant number

of current illegal imports, in part because there is no

system in place to determine whether an imported

drug caused an adverse event. FDA currently learns

about adverse drug events through a combination of

mandatory and voluntary reports submitted by manufacturers, health professionals, and consumers

about FDA-approved medical products. FDA’s adverse

event reporting system is called MedWatch.

Currently, the MedWatch system is not set up to distinguish whether an adverse event related to a drug

product occurred from an FDA-approved product that

was purchased within the closed U.S. distribution system, from an imported unapproved product purchased over the internet, or from a product personally brought over from another country. FDA told us

that it constantly evaluates the MedWatch database

to determine if there are any unusual trends that

should be investigated further. They note, however,

that it is difficult to determine if an increased incident

of adverse events for a particular drug product is

related to the approved product or an unapproved

imported product because the health professional or

consumer making the report typically does not report

this information.

Another reason that there may be limited reports of

adverse events associated with imported drugs is

because the adverse event may be a “treatment failure.” Treatment failures can occur with substandard

imported drugs, however, it is difficult to tell if the

failure is due to the imported drug or the patient’s

underlying disease itself. These reports are often not

made to the MedWatch system because the patient’s

doctor often assumes that the drug is not working

(not knowing that it may have come from a foreign

source) and, instead, chooses a different treatment

option.

1. Interchangeability Can Affect Safety

Although foreign versions of FDA-approved drugs

may contain the same active ingredient, they are not

17

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 1

Canadian Drugs

We recognize that American consumers who

travel to Canada and purchase prescription

drugs from Canadian-regulated “brick and

mortar” pharmacies that service Canadian citizens may very well get drugs that are fully

regulated by Canadian drug safety authorities.

However, practical experience and evidence

shows that Americans are not always getting

the same drugs as Canadian citizens when

purchasing drugs from Canadian internet sites

or sites purporting to be Canadian. We heard

during the listening sessions that the Canadian

drug supply cannot supply the needs of all

Americans. The potential for shortages in the

Canadian drug supply has prompted Canadian

suppliers to search overseas for drugs to fill

orders for American consumers.9 As described

in Chapter 6 of this report, most countries,

including Canada, place lower priority on regulating drugs that are transshipped or exported.

Even more troubling is the evidence we have

seen that Canadian pharmacy internet sites

are often not located in Canada or even regulated by the Canadian government.10
necessarily interchangeable. To be interchangeable

under Federal law, drugs must be pharmaceutically

equivalent, bioequivalent, and appropriately stored

and handled. Pharmaceutically equivalent drugs

have the same active ingredient, strength, dosage

form, and route of administration. Bioequivalent

drugs must have the same route and extent of

absorption into the body, whereby the two drugs

deliver the same amount of active ingredient into the

bloodstream in the same amount of time. Foreign

versions of FDA-approved drugs are not necessarily

pharmaceutically equivalent or bioequivalent.

Unapproved drugs cannot be treated as generic versions of FDA-approved drugs, even if the products

contain the same active ingredient and dosage.

Unless two drugs have been shown to be bioequivalent, it is potentially dangerous to treat them as identical.

Drugs that are pharmaceutically equivalent are not

necessarily bioequivalent because even small

changes in the manufacturing process can affect a

drug’s absorption into the body. For example, a foreign version may have different amounts of active

ingredients or inactive ingredients, such as fillers,

binders, lubricants, disintegrants, glidants, starch, colors, or flavorings. Even these slight changes in formulation can affect whether the drugs are interchangeable, in addition to influencing the efficacy and side

effects of the drug. If a foreign version of a drug is

made on a different production line than the U.S.-

approved version, the possible differences in equipment operation, settings, mixer efficiency, humidity,

and drying materials could affect the quality or effectiveness of the products, resulting in non-interchangeable products. This could be the case even if

the facility is FDA-registered and inspected.

Additionally, for drugs that have a time-release mechanism, different mechanisms can affect interchangeability, such as delayed release, sustained release, or

extended release.

For persons taking narrow-therapeutic range drugs,

such as phenytoin and warfarin, where the patient’s

blood level of the drug must be carefully titrated

within a certain range, even slight changes in the

dose and/or the amount of drug in the blood could

potentially have dangerous effects. Foreign versions

of U.S. approved drugs that are not pharmaceutically

equivalent or bioequivalent may result in different

blood levels. Consequently, if a patient has been

maintained on a particular formulation of the drug,

switching formulations can cause their clinical condition to recur (due to a blood concentration of the

drug below the narrow therapeutic range) or lead to

toxicity (due to blood concentrations of the drug

above the narrow therapeutic range.)

2. Risks of buying drugs from some

internet pharmacies

There are an increasing number of foreign internet

pharmacies capitalizing on the vulnerability of

patients in search of less expensive prescription

drugs. It is important to note that the internet is a

valuable resource for consumers to find information and is a convenient way to purchase prescription drugs from legitimate, state-licensed pharmacies. There are efforts to help patients identify if an

online pharmacy site is appropriately licensed,such

as the Verified Internet Pharmacy Practice Site

(VIPPS) certification program, run by the National

Association of Boards of Pharmacy. Online pharmacies with the VIPPS logo also have successfully

completed a rigorous inspection and review. The

internet is also useful for telemedicine, which

increases communications between and among

patients and health professionals. However, the

internet has created a marketplace for the sale of

unapproved drugs, prescription drugs dispensed

without a valid prescription, drugs from unknown

origins, counterfeit drugs, and otherwise substandard drugs. Although there are a number of legitimate and reputable internet pharmacies in the U.S.

that serve American consumers, there are a considerable number of internet pharmacies that are not

legitimate and that unlawfully sell prescription

drugs to American consumers.

Unfortunately, it is very easy to set up a webpage that

misrepresents the pharmacy’s location, the source

and country of origin of its drugs, the regulatory status of the drugs (e.g., whether or not FDA-approved),

and its compliance with applicable laws and regula18

CHAPTER 1 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION
tions. Moreover, many of these internet pharmacies

require the patient to sign a disclaimer waiving their

right to sue if harmed by the products they bought.

Legalizing personal importation in the U.S. could lead

to the proliferation of these types of internet pharmacies. Because of the ease with which such websites

can be established and obscure their physical location, it would be nearly impossible to monitor, find, or

inspect all of these pharmacies. Furthermore, the volume of packages entering the U.S. today has been

increasing at a steady rate. Under a personal importation program, it would be very

difficult to distinguish which of

these millions of packages are

from ‘permitted’ internet pharmacies and which are from rogue

websites, increasing the potential

safety risks associated with

imported drugs.

a. Unapproved Versions of

FDA-Approved Drugs

Some of these rogue internet

pharmacies offer for sale what

they claim to be FDA-approved

prescription drugs or in some

cases, generic versions, which in

fact are unapproved, illegal, and

unsafe copies of the drugs. For

example, FDA identified a website from a spam email

that was sent to consumers for www.canadiangenerics.com.11 Every page of this site suggested that the

internet pharmacy was located in, and operated out

of, Canada. FDA made a purchase and determined,

however, that neither the dispensers of the drugs nor

the drugs themselves were Canadian. The registrants, technical contacts, and billing contacts for the

website are listed with addresses in China. The

reordering website for the purchase, as well as its

registrant, technical contact, and billing contact have

addresses in Belize. The drugs were shipped from

Texas, with a customer service and return address in

Florida.

The drugs that FDA purchased were described on the

website as generic Viagra, generic Lipitor, and generic Ambien, all prescription drugs that have no generic version approved in the U.S. or Canada. No prescription was needed. Even more troubling is that

when an FDA laboratory analyzed the drugs, they

failed most of the purity, potency, and dissolution

tests. All contained some amount of active ingredient, but two were found to be subpotent and one was

found to be superpotent. (generic “Ambien” had

140% of declared potency; generic “Lipitor” had

81% of declared potency; generic “Viagra” had 65%

of declared potency) Figure 1.4 summarizes the test

results:

b. Misleading or Unknown Location of

Pharmacy

As described in the example above, some internet

pharmacies purport to be located in one country,such

as Canada, but in fact the drugs are mailed from a

location in another country. In addition, we recently

learned that www.CanadaRx.net, an internet pharmacy claiming to be located in Canada, set up an

operation in the Bahamas to serve consumers who

thought that they were buying drugs from Canada.

According to FDA, the orders were placed on the

internet site claiming to be in Canada and filled in the

Bahamas. From there, the drugs were shipped to the

consumer in the U.S. The consumer received an

invoice claiming that the pharmacy is located in

Hamilton, Ontario and there was no acknowledge19

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 1

Figure 1.4
ment that the order was filled and sent from the

Bahamas. In fact, it is reported that the drugs originated from the world market, from countries, including but not limited to, New Zealand, United Kingdom,

and Singapore. It would be logical to question the

integrity and safety of a product when the business

that sold the product makes fraudulent claims and/or

fails to disclose important information about the

source of its drugs.

c. Pharmacy Noncompliance with Practice

Standards

U.S. state-licensed pharmacies are required to abide

by state laws and regulations that ensure the safe

and effective use of FDA-approved drugs. Foreign

internet pharmacies may or may not comply with the

laws and regulations applicable in their country. An

inspection by the state of Minnesota of several

Canadian pharmacies showed the substandard practices followed at some pharmacies, which can lead to

significant safety problems.12 These practices included:

• Several pharmacies used unsupervised technicians, not trained pharmacists, to enter medication orders and to clarify prescription questions;

• 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;

• 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;

• Drugs requiring refrigeration were being shipped

un-refrigerated 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 problems would generally

constitute regulatory violations under the comprehensive system of Federal and state regulation of

drug safety in the U.S.

d. Prescription Drugs Obtained Without a

Prescription 

It is easy to purchase prescription drugs over the

internet without a prescription. During our public

meeting, we heard from a group that surveyed 250

websites and found that 167 did not require a prior

prescription.13 A recent General Accounting Office

(GAO) report entitled, “Internet Pharmacies: Some

Pose Safety Risks for Consumers,”14 describes significant problems with internet pharmacies. Of 68 drug

samples purchased from 68 different websites, GAO

obtained 45 of 68 prescription drug samples either by

a prescription issued after completing only an online

medical questionnaire or without any prescription at

all. GAO easily purchased without a prescription,

drugs with special safety restrictions, such as

Accutane (which can cause birth defects if taken

when pregnant) and Clozaril (which requires close

monitoring of blood levels to avoid serious side

effects) as well as the highly addictive and abused

narcotic, OxyContin. The lack of a health professional/patient relationship is of particular concern if a

patient is using a drug for the first time or is taking

other medications that the patient does not mention

when filling out the online questionnaire. In essence,

without a physician-patient relationship, the patient

may be self-diagnosing a problem, which can magnify the safety risks associated with the use of prescription drugs.

4. Particular Products of Concern

Certain drugs can pose significant risks to patients if

they require careful administration and monitoring,

require special handling or storage, pose sterility concerns, are addictive or have a high abuse potential, or

are highly susceptible to counterfeiting on the global

market. The comments and the MMA acknowledge

that drugs that have potential elevated safety concerns should be excluded from any legalized importation program. Particular products of concern include:

• Injectable drugs;

• Biological products;

• Drugs inhaled during surgery;

• Drugs that have specific post-marketing risk20

CHAPTER 1 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION
monitoring programs;

• Drugs that must be refrigerated or kept frozen;

• Controlled substances; and

• Drugs that are highly susceptible to counterfeiting on the global market.

5. Countries of Concern

Although there are countries that do meet high regulatory standards, there are other countries that have

regulatory systems that are emerging or that fall

short of the U.S. system. The available evidence

reflects that importation from these countries of concern can become an avenue for drugs that may be

adulterated, misbranded, counterfeit, or otherwise

substandard, to enter the U.S. drug distribution system.

As the number of countries from which drugs can be

imported increases, the potential for risk increases

and safety concerns can arise. As the number of

countries involved in the shipping and handling of

drugs increases (creating a longer chain of custody)

there is greater opportunity for substitution of problematic drugs. These risks may be alleviated with a

shorter chain of custody and oversight by competent

regulatory authorities, e.g., Canada.

For example, one comment stated that under

Japanese law, it is legal to import or domestically purchase expired medical products, re-package them as

new, and export them to other countries. Under U.S.

law, these types of products would be illegal. The

comment also noted that countries that do have

oversight over transshipped products may not actively enforce their laws on those products.

6. Safety Cannot Be Tested Into a

Product 

A quality manufacturing process builds the foundation for the safety and efficacy of a drug product. A

fundamental principle of drug regulation is that quality cannot be tested into a product. Rather, quality

must be built into the product through the manufacturing process. Verification of product integrity and

quality cannot be left to the consumer. From the evidence presented to us, visual inspection alone is not

sufficiently reliable and consumers cannot tell if a

drug contains the appropriate active or inactive

ingredients, is adulterated, misbranded, contains

impurities or was stored properly.

Some comments suggested that a testing requirement be instituted at the border or port of entry to

validate or authenticate that an imported product is

genuine. Although simple chemical analysis can verify if the active ingredient is present, such testing

would be inadequate to identify the purity and potency of the product or to determine whether it was

made according to cGMPs, is expired, has been

stored under adverse or inappropriate conditions, or

is counterfeit. Furthermore, we are not aware of any

single technology or machine that could do these

types of tests for all products as they enter the country. Even if such a technology or machine existed, it

would be prohibitively expensive and resource-intensive, and it still would be logistically impossible to

test all imported products. Such a process would

delay access to, and availability of, the drugs while

the test results were pending, and would substantially increase the cost of the drugs beyond any available

discount that might have been realized.

1 21 U.S.C. § 355.

2 A “port” is a location where an individual can transit

into the U.S., such as an airport, seaport, or land border.

3 FDA, Statement of William K. Hubbard, Associate

Commissioner for Policy and Planning, before the U.S.

Senate Committee on Commerce, Science, and

Transportation, Subcommittee on Consumer Affairs,

Foreign Commerce, and Tourism, September 5, 2001.

4 IMS Health, IMS Management Consulting, Canadian

Cross-Border Pharmaceutical Sales, Q1/2002-Q1/2004.

5 IMS Health, IMS National Sales Perspectives TM: Retail,

Q1/2003-Q4/2003; IMS Health, NPA Plus TM: Monthly

Rx Audit, Q1/2003-Q4/2003; IMS Health, IMS

Management Consulting Canadian Cross-Border

Pharmaceutical Sales, Q1/2003-Q4/2003.

6 FDA, “FDA Talk Paper: FDA warns consumers about

counterfeit drugs purchased in Mexico,” July 30, 2004.

Accessed at

http://www.fda.gov/bbs/topics/ANSWERS/2004/ANS0130

3.html on 11/4/04.

7 IMS Health, IMS Management Consulting Canadian

Cross-Border Pharmaceutical Sales Q1/2002-Q1/2004

8 FDA, Statement of John M. Taylor, Associate

21

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 1
Commissioner for Regulatory Affairs before the U.S.

House of Representatives Committee on Energy and

Commerce, Subcommittee on Oversight and

Investigations, March 10, 2003.

9 Los Angeles Times, “Canadian sites look overseas for

drug supply: To combat shortages, online pharmacies

used by U.S. consumers are seeking new sources. Safety

could be an issue,” August 30, 2004.

10 See FDA, U.S./Canadian Price Comparisons. Accessed at

http://www.fda.gov/oc/opacom/hottopics/importdrugs/ca

nadarx.html on 11/9/04.

11 FDA, “FDA News: FDA Test Results of Prescription Drugs

from Bogus Canadian Website Show All Products Are

Fake and Substandard,” July 13, 2004. Accessed at

http://www.fda.gov/bbs/topics/news/2004/NEW01087.ht

ml on 11/9/04.

12 FDA, Letter from William K. Hubbard, Associate

Commissioner for Policy and Planning to the Honorable

Tim Pawlenty, Governor of Minnesota, February 23,

2004. Accessed at http://www.fda.gov/oc/opacom/hottopics/importdrugs/pawlenty022304.html on 11/9/04.

13 HHS Task Force on Drug Importation Public Meeting,

Testimony of Peter Neupert, Drugstore.com, April 14,

2004.

14 GAO report June 2004, “INTERNET PHARMACIES Some

Pose Safety Risks for Consumers” Report to the

Chairman, Permanent Subcommittee on Investigations,

Committee on Governmental Affairs, U.S. Senate.

22

CHAPTER 1 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION
CHAPTERTWO

23

Limits on Resources and Authorities

CHAPTER HIGHLIGHTS:

The Federal law governing drug safety in the U.S. establishes the standards by which FDA determines

whether a prescription drug is “safe and effective” for sale in the U.S. These standards govern the way in

which prescription drugs are manufactured, packaged, labeled, held, and shipped. Many of the prescription drugs that are imported into the U.S. now by individual citizens, via mail and courier services, fail to

comply with some or all of these Federal standards. To ensure that imported prescription drugs are as safe

as those that are legally sold in the U.S., an importation program for U.S.-approved drugs would have to

ensure that the imported drugs meet the current (or equivalent) Federal standards. This report determines

that it would be extraordinarily difficult to ensure that drugs personally imported by individual consumers

could meet the necessary standards for a certification of safety to be made. Meanwhile, a commercial

importation program could be feasible but would require new legal authorities, substantial additional

resources, and significant restrictions on the type of drugs that could be imported, which could increase

the costs of imported drugs.

KEY POINTS:

• The FD&C Act establishes the standards by which FDA determines whether a prescription drug is

“safe and effective” for sale in the U.S. These standards govern the way in which prescription drugs

are manufactured, packaged, labeled, held, and shipped.

• In order to assure that imported prescription drugs are as safe as those that are legally sold in the

U.S., an importation program would need to assure that the imported drugs meet the same level of

safety as current Federal standards. If imported drugs fail to meet these or equivalent standards, the

Task Force believes that the Secretary would have difficulty in assuring U.S. consumers that imported

drugs pose no additional risk to their health and safety.

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 2
I. WHAT WE SOUGHT COMMENT ON

Congress asked HHS to identify the limitations,

including limitations in resources and, if applicable, in

current legal authorities, that may inhibit the

Secretary’s ability to certify the safety of imported

drugs.

To further explore this issue, we asked for

comment on:

• Changes in law, regulations, and guidances needed to assure a level of safety comparable to that

provided in U.S.

• Resources needed to assure a level of safety

comparable to that provided in the U.S.

• Whether and to what extent does the government need specific authorities and controls to

assure the safety of imported drugs?

• What impact would restricting importation to

products manufactured in or shipped from certain countries have on adequately regulating

these products?

• Whether any current authorities for promoting

the safety and security of food imports provide

useful information for developing a system for

safety assurances for drug imports.

II. WHAT THE COMMENTS SAID

Several comments stated that numerous provisions of

the FD&C Act prohibit the Secretary from certifying

the safety of imported drugs. They argued that opening up the current closed distribution system would

harm the public health by allowing larger amounts of

potentially unsafe drugs into the U.S.

Many comments stressed that imported drugs should

adhere to the standard of safety and efficacy that currently exists in the U.S. Most comments offered broad

suggestions on ways to change laws, regulations, and

guidances to assure that the level of safety would

remain comparable to that provided in the U.S.

Accreditation of internet pharmacies - It was noted

that while many internet pharmacies provide legitimate services, some pose significant risks to consumers. For example, one comment described an incident where a consumer received expired insulin,

which led to a serious adverse event. Some comments said that since many imported drugs are

ordered via the internet, FDA should consider adequate regulation of internet pharmacy sites. Several

comments suggested establishment of a list of legitimate websites. One comment suggested that the list

be linked to FDA’s website so that consumers would

have a reputable source to consult when making

healthcare decisions.

FDA authority to conduct foreign inspections – Many

comments recommended that FDA have the authority to inspect foreign manufacturing facilities in order

to ensure adherence to good manufacturing practices.

Pedigree requirements – Several comments discussed the need for a pedigree, to trace a drug product back to the manufacturer, to help guard against

counterfeit or adulterated drugs. Of the comments

that discussed the pedigree requirement, there was

overwhelming support for its implementation. Some

comments stated that FDA has sufficient authorities

for requiring pedigrees under the PDMA, however,

FDA continues to stay the implementation of these

requirements.

Electronic track and trace technology - Many comments agreed that electronic track and trace technology, although expensive, holds great promise and

would help maintain the integrity of the drug supply.

One comment suggested that FDA encourage manufacturers to include this technology in their product

packaging.

FDA authority to oversee international recalls – One

comment suggested that FDA have the same level of

authority for international recalls as it currently has

for domestic recalls. In addition, a system for assessing post-marketing complaints and adverse events

for foreign drugs would need to be established.

Higher penalties for drug counterfeiters – A few

comments stated that the current penalty for a felony

drug counterfeiting violation is inadequate and

should be increased.

24

CHAPTER 2 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION
Product testing - Some comments suggested requiring product testing at the border to authenticate

products. There was conflicting information about

the accuracy and feasibility of product testing. Some

comments said that testing would be very expensive,

resulting in higher prices. Other comments said that

testing is necessary, accurate, and could be productspecific.

Special packaging and prior notice - One comment

suggested that the value of special packaging for

imported drugs would be limited, but that requiring

importers to serve prior notice of the drugs they are

bringing in, with reasonable time frames for FDA to

inspect these products, would be useful.

III. DISCUSSION

A. Safety Certification 

As previously discussed, the FD&C Act strictly limits

the types of drugs that may be imported into the

U.S.

1,2 Congress enacted these provisions to create a

relatively closed drug distribution system, which helps

ensure the safety, effectiveness, and high quality of

prescription drugs for U.S. consumers. MMA establishes Federal authority in 21 U.S.C. § 384 to create an

importation program, however, this section does not

become effective unless the Secretary of HHS first certifies that implementing the importation program

would pose no additional risk to public health and

safety and would result in a significant reduction in

the cost of drugs to the American consumer.

Under the MMA, FDA would have to promulgate substantial regulations to ensure that the drugs being

imported are U.S.-approved drugs and that they comply with all of the requirements of the FD&C Act and

its implementing regulations concerning FDA

approval and how the prescription drugs are manufactured, packaged, labeled, held, and shipped.

Limitations in current legal authorities may inhibit the

Secretary’s ability to certify the safety of a drug

importation program. The authorities and prohibitions in Title 19 of the U.S. Code and state pharmacy

laws discussed below are examples of such legal limitations that impact the Secretary’s ability to certify

that importation would pose no additional risk to

public health and safety.3 Any importation program

would need to address these standards.

Second, if Congress were to authorize the importation of non-U.S.-approved drugs, there are additional

legal authorities that would be necessary to ensure

that an importation program would pose no additional risk to public health and safety.4

The chart at the end of this chapter identifies additional issues and regulatory actions to consider with

respect to commercial importation.

1. Title 21, Food and Drugs

The FD&C Act establishes the standards by which FDA

determines whether a prescription drug is “safe and

effective” for sale in the U.S. These standards govern

the way in which prescription drugs are manufactured, packaged, labeled, held, and shipped. As discussed in Chapter 1 of this report, most of the prescription drugs that are imported into the U.S. now by

individual citizens, via mail and courier service, fail to

comply with some or all of these Federal standards.

In order to assure that imported prescription drugs

are as safe as those that are legally sold in the U.S.,

an importation program would need to assure that

the imported drugs meet the current Federal standards. Taken together, these standards represent the

baseline level of safety that the Secretary would need

to consider in weighing his ability to certify that an

importation program poses no additional risk to the

public’s health and safety. If imported drugs fail to

meet these (or equivalent) standards, we believe the

Secretary would have difficulty certifying to U.S. consumers that imported drugs pose no additional risk.

The discussion below outlines current legal requirements and assesses whether and how imported drugs

could comply with these safety standards.

2. 21 U.S.C. 355, Drug Approvals 

Section 355 states that a “new drug”5 may not be

introduced into interstate commerce (which includes

importation into the U.S.) unless it has been preapproved by FDA. There are two basic ways a manufacturer of a new drug may obtain FDA approval.

25

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 2
First, a manufacturer may submit a New Drug

Application (NDA) to FDA to demonstrate that its

drug is safe and effective for its intended uses.6

Second, a manufacturer may seek approval in an

Abbreviated New Drug Application (ANDA) of a drug

product that would be therapeutically equivalent

(pharmaceutically equivalent and bioequivalent) to

the approved innovator drug and, thus, substitutable.

A drug that is approved under an ANDA is commonly

referred to as a “generic” drug.7 In either case, FDA

drug approvals are product-specific and manufacturer-specific and, therefore, do not authorize the sale of

any other drug.

a. Safety and Effectiveness

The MMA’s importation scheme requires safeguards

to ensure that drugs imported from Canada comply

with section 355. Most drugs imported into the U.S.

from Canada now are not approved under section

355. Thus, their sale into the U.S. would remain illegal, even if the importation program under the MMA

were to become effective. In this respect, whether

this was intended or not, section 355 strictly limits

the universe of drugs that are eligible to be imported

from Canada. In other words, under MMA, very few

drugs would be eligible for importation, specifically, a

small subset of drugs that have approved NDAs and

ANDAs.

If Congress were to further amend section 384 to

allow importation of Canadian “versions” of U.S.-

approved drugs, the volume of drugs available to U.S.

consumers from Canada would increase.8 Such legislation would necessarily provide an exemption from

section 355’s requirements for imported drugs.

However, for the Secretary to make a safety certification, sufficient alternative safeguards would have to

be imposed to ensure that imported drugs meet the

same level of safety as drugs approved under section

355. Such alternative safeguards would not only

have to be developed and implemented in the importation context, they would also have to be determined to be equivalent to the existing standards

under section 355. As a result, the Secretary’s ability

to certify that an importation program would pose no

additional risk to public health and safety would turn

on whether and to what extent statutory and regulatory safeguards equivalent to section 355’s requirements could be developed and implemented and

whether adequate resources are available to enforce

these safeguards.

b. Bioequivalence and Substitutability

Under the MMA, the issue of substitutability is largely moot, at least from a legal standpoint. Since the

drugs that are eligible to be imported under the MMA

are limited to FDA-approved drugs, there should be

no concern that the program legally sanctions labeling an unapproved Canadian drug with the label of

an approved drug.

If, however, Congress amended section 384 to allow

importation of unapproved drugs, section 355 could

also impact the Secretary’s ability to certify that

importation would pose no additional risk to public

health and safety. This is especially true if such program would allow or require the imported foreign

“versions” of FDA-approved drugs to be labeled and

sold as interchangeable, generic substitutes for their

FDA-approved counterparts.

Section 355(j) sets out the approval standard for

generic drugs. To obtain approval of a drug under

section 355(j), an ANDA applicant generally must

demonstrate that the proposed drug product has the

same active ingredient, dosage form, route of administration, strength, and labeling as the innovator product. Only bioequivalent drug products that have the

same active ingredient, dosage form, strength, and

route of administration are considered therapeutically

equivalent by FDA and, thus, substitutable.

Bioequivalence has been the basis for approving

generic copies in the U.S. for more than 20 years. In

addition, manufacturers of brand name drugs perform the same bioequivalence tests as generics when

they reformulate to ensure substitutability. A showing that a drug product is safe and effective for its

intended uses is independent of a showing of bioequivalence; two products used to treat the same condition may both be safe and effective for their intended uses, but they may not be bioequivalent. As a

result, the two drugs cannot be substituted for each

other.

26

CHAPTER 2 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION
If a drug imported from Canada is not actually an

FDA-approved product, FDA cannot assure that an

imported drug product is readily substitutable for the

FDA-approved version without a showing of bioequivalence. Substitution or commingling of non-bioequivalent drugs may result in one version of a drug

being super-potent or sub-potent compared to the

other. In the case of some drugs, these differences in

potency can have toxic effects (e.g., warfarin), or they

may result in the delivery of insufficient active ingredient to treat a particular condition.

c. Repackaging

Section 355’s requirements with respect to who may

repackage drugs also affect the Secretary’s ability to

make the safety certification the MMA requires. As

discussed above, every step in the manufacture, packing, and repacking of a new drug must be the subject

of an NDA.9 This means that when drugs are repackaged (other than in the practice of pharmacy), the

repackaging generally must be covered by an FDAapproved drug application. In addition, NDA holders

must obtain pre-market approval through a supplement for any change in packaging that might have an

adverse effect on the identity, strength, quality, purity, or potency of a drug product.10 This includes any

change to a drug product container closure system

that controls the drug product delivered to a consumer, or changes in the type or composition of a

packaging component that may affect the impurity

profile of the drug product.11

There is an important exception to the preceding NDA

requirement for repackagers that is particularly applicable with respect to the importation of FDAapproved drugs under MMA. In section 446.100 of

FDA’s Compliance Policy Guide, FDA permits persons

who repackage approved, solid oral dosage form

drug products to do so without an NDA, so long as

the labeling used for the repackaged product is

equivalent to that of the approved drug, except for

labeling changes necessary to comply with section

352(b). That provision requires the product label to

bear an accurate statement of the quantity of the

contents of the package. Since the drugs that are eligible to be imported under the MMA are, in general,

the type of products described in the Compliance

Policy Guide, it seems likely that, for the most part,

prescription drugs imported under the MMA will fall

into the exception to the requirement under section

355 for repackaging to be covered by an FDAapproved drug application.

If, however, Congress amended the MMA to allow

importation of other dosage forms, persons wishing

to repackage those drugs would need an NDA to do

so, unless Congress modified these statutory requirements with respect to imported drugs.

3. 21 U.S.C. 352, Misbranding 

Section 352 and its implementing regulations set

forth the labeling requirements for drugs. These

labeling requirements are both general and productspecific, and are intended to assure that drugs are

safely handled, shipped, and used. Foreign drugs that

are misbranded may not be legally imported into the

U.S. pursuant to section 331(a). There are several

provisions in the FD&C Act describing or defining misbranding that are potentially implicated by the

importation of prescription drugs. First, under section

352(a), a drug is misbranded if its labeling is false or

misleading in any particular. Second, under section

352(c), a drug is misbranded if any information (for

example, expiration dates, specific product warnings,

and lot numbers) required to appear on its label is not

prominently displayed on the label. Third, under section 352(o), a drug is misbranded if it was not prepared, propagated, compounded, and/or processed in

an establishment that was duly registered with FDA

as required by section 360. Finally, under section

352(f), a drug is misbranded if its labeling does not

bear adequate instructions for use.

The MMA provides that drugs imported from Canada

must comply with the misbranding provisions of section 352.12 The MMA’s importation provisions do not

appear to limit the authority in section 381(a), which

requires FDA to refuse to admit into the U.S. any drug

that appears to be misbranded.13 Finally, the MMA

requires the manufacturer of a prescription drug (as

defined at section 384(a)(3)) to “provide an importer

written authorization for the importer to use, at no cost,

the approved labeling for the prescription drug.”14

27

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 2
As we previously noted, drugs that do not comply

with section 352 cannot be imported. Moreover, FDA

is required to refuse admission to any drug that

appears to be misbranded. The drugs that are permitted to be imported under the MMA, however, are

FDA-approved drugs – or drugs that, if labeled with

the FDA-approved labeling, would be FDA-approved

drugs. Since misbranded products cannot be introduced into interstate commerce and drugs that

appear misbranded can be refused admission, the relabeling of the drugs that importers are permitted to

import under the MMA with the FDA-approved labeling appears to be a practical problem that importers

– to whom the manufacturers of such drugs are

required by the MMA to provide a written authorization to use the approved labeling at no cost – would

have to deal with.

The requirement in the MMA that manufacturers

allow importers to use their FDA-approved labeling

raises an additional practical problem that will need

to be addressed: Are importers allowed to reproduce

the FDA-approved labeling? Sanctioning the use of

reproduced labeling may make the job of law

enforcement more difficult. Certain drugs packaged

with labeling that appears to have been reproduced

on a color copier could be legally shipped in domestic commerce under the MMA, thus making it more

difficult to differentiate counterfeit drug labeling

from those reproduced drug labeling authorized by

law. This concern applies even if, as in the case of the

MMA, the drugs being re-labeled are FDA-approved

drugs (or drugs that, if labeled with the FDAapproved labeling, would be FDA-approved drugs).

The labeling requirements in section 352 would raise

even more difficult questions if Congress were to

amend section 384 to authorize the importation of

drugs that had not been approved by FDA. Under section 352(a), a drug is misbranded if its labeling is

false or misleading in any particular. If Congress were

to amend section 384 to permit or require labeling or

re-labeling of an unapproved Canadian “version” of

an FDA-approved drug with the labeling of its FDAapproved counterpart, it would do violence to the

reasons for which the misbranding provisions of the

FD&C Act exist. As noted above, drugs are not considered substitutable in the U.S. unless they have been

shown to be bioequivalent under the standard in section 355. Thus, not only could such re-labeling mislead parties in the distribution chain regarding the

identity of the drug they are receiving, the labeling

would be literally false if the imported product contains different inactive ingredients, has a different

manufacturer, or otherwise differs in some material

respect from the FDA-approved version. Such differences could affect safety to the extent that individuals may be allergic to particular ingredients or certain

active ingredients interact differently with different

inactive ingredients.

Under section 352(c), a drug is misbranded if any

information that is required by or under authority of

the FD&C Act to appear on its label or labeling is not

prominently placed thereon. Such information

includes expiration dates, specific product warnings,

and lot numbers. Foreign labels may not contain all

of the required information, so a foreign drug may be

misbranded when it is offered for import into the U.S.

This is true, even if the drug inside the foreign label

meets the requirements of the FD&C Act.

Under section 352(o), a drug is misbranded if it was

not prepared, propagated, compounded, and/or

processed in an establishment that was duly registered with FDA, as required by section 360. If

Congress amends section 384 to authorize importation of unapproved drugs, section 360 must be

addressed. Many foreign drugs are not manufactured

in establishments that are properly registered with

FDA, and so are misbranded under section 352(o)

when sold into the U.S.

Under section 352(f), a drug product’s labeling must

also bear adequate directions for use. 21 CFR 201.5

defines adequate directions for use as “directions

under which the layman can use a drug safely and for

the purposes for which it is intended.” In the case of

prescription drugs, this is a highly technical requirement. A series of Federal cases holds that all unapproved prescription drugs lack adequate directions

for use as a matter of law. 15

There are two significant exemptions from section

352(f). First, 21 CFR 201.100 exempts prescription

drugs from section 352(f) under certain specified cir28

CHAPTER 2 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION
cumstances. Under MMA, this regulation is significant because the FDA-approved prescription drugs

imported by pharmacies or wholesalers would have

to comply with its requirements to avoid being misbranded under section 352. However, the exemption

in 201.100 extends only to approved drugs (or their

components). Thus, while the regulation offers a

potential safe harbor for the drugs that are eligible

for importation under MMA, it would need to be

revised if Congress decided to amend section 384 to

authorize importation of unapproved foreign drugs.16

Second, under section 353(b)(2), a prescription drug

lawfully dispensed pursuant to a valid prescription is

also exempted from 352(f) (and 352(c) and (o), as

well) so long as its label still displays certain basic

information.

This second exemption would need to be addressed if

Congress were to amend section 384 to authorize

importation of unapproved new drugs. The exemption in section 353(b)(2), however, applies only to

drugs that are lawfully dispensed pursuant to a valid

prescription to individual consumers; by definition, it

does not extend to drugs sold in wholesale distribution. Thus, the exemption would not apply in the case

of a foreign pharmacy that sold drugs to a U.S. pharmacy or U.S. wholesaler, regardless of whether those

drugs were FDA-approved.

Although not all misbranded drugs necessarily pose a

safety risk, the FD&C Act and its implementing regulations clearly contemplate that labeling is a component of the safe use of a drug product.17 The importation of drugs whose labeling did not meet the legal

standards set forth in section 352 would be less safe

compared to the current standards.

4. 21 U.S.C. 351, Adulteration 

Section 351 sets forth the adulteration provisions in

the FD&C Act. Foreign drugs that are adulterated

may not be legally imported into the U.S. pursuant to

section 331(a).

The adulteration requirements in section 351 range

from general to highly technical. One has particular

relevance under MMA.

Section 351(a)(2)(B) states that a drug is adulterated

for purposes of section 331(a) unless it is manufactured and held in conformance with current good

manufacturing practice (cGMP).18 The concept of

cGMP is intended in part to assure that drugs are

properly handled and stored at all times before they

are dispensed to consumers. One of the fundamental

concerns about the importation of foreign drugs is

that there is no way to assure that they have been

appropriately stored, processed, and packaged.

This uncertainty impacts the Secretary’s ability to certify whether implementation of MMA would pose no

additional risk to the public health. When Congress

added section 381(d)(1), it made a finding that drugs

held abroad “were a health and safety risk to

American consumers because they may have become

subpotent or adulterated during foreign shipping and

handling.” 19

MMA modifies section 381(d)(1). To address the

issue of potential mishandling of drugs, it requires

that certain tests be performed on imported drugs,

and that Canadian sellers involved in the importation

of drugs into the U.S. be registered with the Secretary.

To certify, the Secretary must conclude that these provisions are sufficient to address the concerns that

Congress identified when it enacted section 381(d)(1)

in the late 1980s. Unfortunately, however, tests may

not always substantiate whether a drug has been

held in conformance with cGMP. Moreover, without

a consistent physical presence abroad, it will be difficult to assess how different registrants actually handle the drugs they ship into the U.S.

The preceding concerns that Congress expressed in

the 1980s about drug potency also implicate sections

351(b) and (c). These provisions state that a drug is

adulterated if its strength differs from, or its purity or

quality falls below, that which it purports to possess.

These provisions are intended to help assure that

drugs meet manufacturing specifications and do not

contain dangerous impurities. These concerns apply

to many foreign drugs offered for sale into the U.S.,

especially many of the unapproved new drugs shipped

to the U.S. in small packages from countries with less

developed regulatory systems. One practical limitation, however, is that it is very difficult to determine

29

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 2
whether a drug violates section 351(b) or (c) from

mere visual inspection alone. To ascertain the purity

of a drug, FDA typically must test it, and such tests are

costly and extremely resource-intensive.

This concern is addressed to some degree by the

MMA, to the extent that drugs imported into the U.S.

must be manufactured and held in compliance with

cGMP and must first be tested. However, no testing

scheme is foolproof. In addition, as a practical matter,

the opportunities for adulteration increase as the distribution chain and number of entities handling the

products increase. The practical limitations of such a

scheme are addressed elsewhere in this report. To

ensure compliance with cGMP, FDA may need to

inspect the facilities of the Canadian sellers.

Assuming that inspections were required, a memorandum of understanding (MOU) with Canada to permit such inspections, or for Canada to carry out such

inspections on FDA’s behalf, would be needed.20

If Congress were to amend section 384 to authorize

importation of unapproved drugs, the legal concerns

related to adulteration would increase significantly.

In the case of the U.S.-approved drugs at issue in the

MMA, the primary concern is not how the drugs were

manufactured—they were presumably manufactured

in compliance with cGMPS since they were made in

an FDA-inspected facility pursuant to an approved

NDA—but whether the products were appropriately

held while in foreign commerce. In the case of unapproved drugs, the concerns extend to all phases of the

drug’s development, and FDA has no assurance

whether unapproved drugs were manufactured in

compliance with cGMP.

As with the misbranding provisions, exempting certain foreign drugs from the pre-approval requirements of section 355 would not address separate violations of section 351. Any importation program that

authorized importation of unapproved new drugs

would have to comply with the provisions of section

351, or exempt imported drugs from section 351’s

requirements and ensure that sufficient alternative

safeguards are in place to assure an equivalent level

of safety.

5. 21 U.S.C. 381(a), Imports 

Section 381(a) governs how FDA and CBP evaluate

and process drugs that are offered for import into the

U.S. Under section 381(a), FDA must refuse to admit

any drug that “appears” (based on examination of

samples or otherwise) to be an unapproved new drug

within the meaning of section 355, an adulterated

drug within the meaning of section 351, or a misbranded drug within the meaning of section 352.

When FDA samples such products, it must provide

notice of that fact to the drug’s owner or consignee,

either of whom has the right to appear before the

agency and present testimony.

The “appearance” standard is the key to section 381

because it compels government investigators to

refuse to admit suspect drugs into the U.S. This

refusal of admission does not have to meet the same

evidentiary burden required to prevail in a civil action

under sections 332 or 334. In this respect, section

381(a) is the single most significant legal obstacle to

the importation of unapproved or misbranded foreign

drugs into the U.S., including Canadian “versions” of

FDA-approved drugs.

Even if importation is limited to U.S.-approved drugs,

FDA still must contend with whether those drugs

“appear” to be adulterated because they have been

handled in a manner inconsistent with section 351

(with which they have to comply under MMA), outside the U.S. (and therefore outside of Federal and

state oversight). Thus, even in the case of the MMA,

the Secretary would need to consider whether the

FDA-approved drugs being imported into the U.S. had

not been adulterated while abroad. Since, as noted,

visual inspection reveals little about how a drug was

handled, government investigators are confronted

with a difficult challenge.

It is important to note, however, that drugs that

“appear” to be unapproved, adulterated, or misbranded are entering the U.S. now; this is primarily a

function of the volume of personally imported drugs

that is streaming into the U.S., which is so great that

FDA and CBP do not have sufficient resources to

inspect them all.21 The number of personal drug

parcels that are shipped into the U.S. in violation of

30

CHAPTER 2 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION
the FD&C Act already far exceeds the number that the

government has the resources to inspect and interdict.

Under section 381(a), FDA must meet certain notice

and due process requirements before it can return

noncompliant drug products to the sender, or authorize their destruction. Under 381(a), FDA shall detain

any drug that appears to be adulterated, misbranded,

or an unapproved new drug. FDA is required to notify either the owner or the consignee of that drug of

such detention and must provide them with an

opportunity to be heard regarding how the drug complies with the FD&C Act. These notice and hearing

requirements consume government resources and

thus may impact FDA’s ability to effectively and efficiently process the high volume of drugs (both legal

and illegal) that would be offered into the U.S. under

any importation program. Thus, to free resources to

help FDA inspect the large volume of drugs that

would be imported under MMA, legal changes would

be needed to amend 21 U.S.C. 381(a) to permit FDA

to interdict noncompliant drug products without providing notice and opportunity for hearing in all cases.

6. 21 U.S.C. 381(d)(1), American Goods

Returned

Section 381(d)(1) is often referred to as the

“American goods returned” provision. Under section

381(d)(1), if a prescription drug was originally manufactured in the U.S. and then sent abroad, the only

person who may import that drug back into the U.S.

is the original manufacturer. This is true even if the

drug complies with the FD&C Act in all other respects.

Section 381(d)(1) was passed as part of the PDMA, in

part because Congress found that American goods

returned were “a health and safety risk to American

consumers because they may have become subpotent

or adulterated during foreign shipping and handling.”22 Congress viewed storage and handling of

prescription drugs as an important component of

cGMP, without which there was significant risk that

drugs would be adulterated or otherwise substandard.

The MMA modifies section 381(d)(1) by allowing persons other than the manufacturer to re-import U.S.-

manufactured, FDA-approved drugs that had been

sent abroad. However, as noted above, the cGMP

concerns at the heart of 381(d)(1) would still apply to

imported drugs. In the absence of 381(d)(1), equivalent protections with respect to the tracking, storage

and handling of imported drugs would likely need to

be imposed and developed in order to assure that

imported drugs meet the same safety and effectiveness standards as those that have been held in the

U.S. at all times. The MMA offers some new safeguards, (in addition to the requirement of compliance

with cGMP), such as product testing and registration,

which the Secretary must assess against the concerns

that prompted Congress to adopt section 381 (d)(1)

in the first place—risks involving adulteration, mishandling, and counterfeiting.

7. Title 19 of the U.S. Code, Trademarks

19 U.S.C. 1526 prohibits the importation of merchandise of foreign manufacture if the label bears a trademark owned by a citizen or corporation in the U.S.,

unless written consent of the trademark owner is produced at the time of entry. This provision is relevant

to drug importation because, as discussed above, the

MMA appears to authorize importers to label

Canadian drugs with FDA-approved labels. In most

instances, both a drug’s trade name and trade dress

are protected intellectual property. However, the

MMA requires the manufacturer of the FDA-approved

drug to authorize the importer to use, at no cost, its

approved drug labeling. To the extent such labeling

could result in confusion along the distribution chain

and inadvertent substitution of non-bioequivalent

drugs, it raises both safety concerns and intellectual

property issues. The intellectual property issues are

discussed further in Chapter 9 of this report.

8. State Pharmacy Laws

The requirements of the FD&C Act notwithstanding,

foreign pharmacies that dispense drugs into the U.S.

also typically violate state pharmacy laws. Most

states prohibit a pharmacy from dispensing drugs to

its citizens unless the pharmacy is licensed in that

state. Moreover, the autonomy of each state legislature makes it difficult to solve this problem by conditioning the legality of importation on compliance

31

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 2
with state law. To do so, FDA and CBP would have to

reconcile such a Federal importation law with licensure requirements on a state-by-state basis.

For example, presume a Canadian online pharmacy

that obtained state licenses to dispense drugs into

Montana, Nevada, and Oregon, but still attempted to

dispense drugs into other states as well. Assume that

other Canadian pharmacies operated in a similar

fashion, having just a handful of state licenses. How

could FDA field investigators be expected to know

which foreign pharmacies could legally dispense into

which states? Would they have a master list to consult? If so, who would keep it updated? How? And,

when processing the imported drugs, would FDA personnel be allowed to rely on a package’s address to

determine whether it appeared to be legal (i.e.,

whether it was intended for Nevada as opposed to a

state in which the pharmacy at issue was unlicensed)? Such obligations likely would frustrate the

efficiency of the import evaluation process and

aggravate the resource concerns tied to the notice

and hearing requirements in section 381(a). Finally,

as noted above, concerns regarding intellectual property could affect whether Canadian labels are able to

comply with state laws.

B. Resource Limitations 

While the volume of imported drugs has increased

enormously, neither FDA nor CBP has received additional resources or authorities to process these shipments. Chapter 5 of this report provides a more

detailed discussion of the types and amount of

resources that would be needed for FDA to adequately inspect the current amount of imported pharmaceuticals. It is likely that legalizing importation would

increase the volume of imported drugs even further.

In addition, FDA would have to build a program capable of managing the types of activities specified in

MMA and implement any additional measures necessary to ensure the health and safety of the American

public.

Based on the importation program proposed by the

MMA, additional issues to be addressed would

include, but may not be limited to, the elements

noted in the chart below. Numerous issues identified

would require additional statutory and regulatory

authority, as well as concomitant resources. It is difficult to predict the actual costs of an importation

program without specific information on the type of

program, however, it is clear that any program would

need substantial resources for infrastructure, IT

needs, personnel, and associated required measures.

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CHAPTER 2 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION
33

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 2

ISSUE

Eligible Products 

Excluded Products

Exporters

Importers

Limits on

Personal Importation

Pedigree

Labeling and 

Disclosure Requirements

Packaging Requirements

Authority to Stop Imports

Adverse Event Reporting

Reporting of Quality Problems 

by Importers

Recall

Inspections

Means of Monitoring 

Impact on Public Health

Means of Terminating Some or 

All Imports on an Emergency

Basis

Limiting Ports of Entry

ASSOCIATED ACTIVITIES

• Development and maintenance of list of eligible products.

• Public dissemination of information about which products are eligible.

• Additional manufacturing inspections.

• Develop list of excluded products.

• Update list.

• Guidance and rulemaking for registration policies and procedures, including submission, denial, suspension,

revocation, and bond forfeiture.

• Partnerships with foreign health authorities to verify status of exporters.

• Development and maintenance of an electronic database.

• Enforcement.

• Adequacy of notice regarding eligible exporters.

• Guidance and regulation development for registration policies and procedures, including necessary information, submission, recordkeeping requirements, denial, suspension, revocation, and bond 

forfeiture.

• Partnerships with states to verify licensure including State enforcement of licensure, etc., and good standing.

• Development and maintenance of an electronic database.

• Enforcement against unregistered importers.

• Examination of any necessary changes to the personal importation policy.

• Examination of packages. Inadequacy of resources.

• Return and/or destruction of illegally imported drugs.

• Enforcement against those facilitating personal imports.

• Guidance or rulemaking re: pedigree requirement.

• Enforcement.

• Partnerships with foreign health authorities to verify transactions.

• Rulemaking re: any additional labeling requirements for imported drugs.

• Development and maintenance of electronic repository of labeling.

• Enforcement.

• Partnerships with states to ensure that pharmacists comply with labeling requirement.

• Rulemaking re: any additional packaging requirement for imported drugs.

• Enforcement.

• Monitoring packages at border and destruction and/or return to sender.

• Working agreements with Customs.

• Statutory due process.

• Guidance or rulemaking re: reporting for imported drugs.

• Adequacy of adverse event reporting.

• Monitoring and following-up on adverse events.

• Guidance or rulemaking on when, where, and how to report.

• Receipt and follow-up on reports.

• Enforcement.

• Guidance or rulemaking on recall procedures.

• Management of recalls.

• Develop inspectional program; Conduct inspections; Analyze results.

• Enforcement if adverse inspectional results.

• Develop sampling and testing plan.

• Conduct sampling and testing.

• Analyze, disseminate, and act on results.

• Means of Terminating Some or All Imports on an Emergency Basis Monitoring for risks to health.

• Communication to field and public.

• Limiting Ports of Entry.

• Rulemaking.

• Enforcement.
1 For the most part, where we discuss “importation” in

this chapter, we are referring to commercial importation.

2 Because importation under MMA is limited to Canada,

the discussion in this Chapter addresses importation

from Canada, unless otherwise noted.

3 Intellectual property laws would impact an importation

program as well. See Chapter 9 of this report for an

analysis of the impact on intellectual property rights.

4 Drug importation may also impact other U.S. laws and

regulations that are enforced by agencies, such as CBP

and the U.S. Postal Service, however, a legal analysis for

these agencies was not performed for this report.

5 Under 21 U.S.C. 321(p), a “new drug” is defined to

include “any drug . . . the composition of which is such

that such drug is not generally recognized, among

experts qualified by scientific training and experience to

evaluate the safety and effectiveness of drugs, as safe

and effective for use under the conditions prescribed,

recommended, or suggested in the labeling thereof . . .

.” This definition is broad enough to include all prescription drugs offered for sale into the U.S. from abroad.

6 See 21 U.S.C. 355(a), (b), and (d).

7 ANDAs may also be approved for drugs that differ from

the approved innovator drug in terms of an active ingredient, dosage form, strength, or route of administration.

Drugs approved through this mechanism are not therapeutically equivalent to the innovator product and, thus,

not substitutable.

8 If, as the MMA provides, the drugs allowed into the U.S.

are restricted to FDA-approved drugs, there are other

potential safety concerns discussed elsewhere in this

chapter that are not tied directly to the pre-approval

process in section 355. Limiting importation to FDAapproved drugs may limit the number of drugs eligible

for importation for a number of reasons, including the

product-specific scope of an NDA approval, as discussed

above, and other reasons, including a manufacturer’s

ability to limit foreign sales of its FDA-approved drugs,

which are elaborated in detail in Chapter 7.

9 See United States v. Baxter Healthcare Corp., 712 F.

Supp. 1352 (N.D. Ill. 1989), aff’d, 901 F.2d 1401 (7th Cir.

1990).

10 See 21 CFR 314.70(b).

11 See 21 CFR 314.70(b)(2)(vi).

12 21 U.S.C. § 384(c)(1).

13 21 U.S.C. § 384(k) provides that “[n]othing in this section limits the authority of the Secretary relating to the

importation of prescription drugs, other than with

respect to section 801(d)(1) as provided in this section.”

14 21 U.S.C. § 384(h). Trademark and other issues associated with this provision are discussed in Chapter 9.

15 See U.S. v. Articles of Drug, 625 F.2d 665, 673-75 (5th

Cir. 1980); U.S. v. Baxter Healthcare Corp., 712 F. Supp.

1352, 1359 (N.D. Ill. 1989), aff’d, 901 F.2d 1401 (7th Cir.

1990); U.S. v. Premo Pharmaceutical Laboratories Inc.,

511 F. Supp. 958, 977 n.23 (D.N.J. 1981).

16 See 21 CFR 201.100(c)(2).

17 See 21 CFR 201.5.

18 See 21 CFR Parts 210 and 211.

19 P.L. 100-293, Section 2(4).

20 See Chapter 6 of this report for a discussion of the

issues associated with such agreements.

21 See Chapters 1 and 5 of this report for additional discussion of the current volume of imported drugs and the

agency resources necessary to adequately inspect these

packages.

22 P.L. 100-293, section 2(4).

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CHAPTER 2 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION
CHAPTERTHREE

35

Impact on the Pharmaceutical Distribution System

CHAPTER HIGHLIGHTS:

The drug distribution network for legal prescription drugs in the U.S. is a “closed” system that involves several players (e.g., manufacturers, wholesalers, pharmacies) who move drug products from the point of manufacture to the end user, and provides the American public with multiple levels of protection against receiving unsafe, ineffective, or poor quality medications. This system evolved as a result of legislative requirements that drugs be treated as potentially dangerous consumer goods that require professional oversight

to protect the public health. The result has been a level of safety for drug products that is widely recognized

as the world’s “gold standard.” Legalized importation of drugs in such a way that creates an opening in

the “closed” system will likely result in some increase in risk, as the evidence shows that weaknesses in the

oversight of drug regulation and the distribution system have been exploited. For example, doing so would

increase the opportunity for counterfeit and other substandard drugs to enter and be dispersed into the U.S.

drug distribution system.

KEY POINTS:

• The U.S. distribution system is a relatively closed system. Legalizing importation will open this system

likely resulting in some increase in risk.

• Importation increases the opportunities for counterfeit and other substandard drugs to enter and be

dispersed into the U.S. drug distribution system.

• A commercial importation scheme could be feasible with adequate resources and authorities where

specific measures could be implemented to maintain a closed distribution system with necessary

checks and balances. However, it would be extraordinarily difficult to achieve this result if personal

importation were legalized.

• Additional authorities and resources may be needed to create a U.S.-based registration and licensure

scheme for importers and exporters.

• To maintain current levels of safety, standards of practice at the level that currently exist in the U.S.

would need to apply to all foreign drug suppliers under a commercial importation program. In addition, Memoranda of Understanding (MOU) may be needed with the affected countries to ensure

effective enforcement.

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 3
I. WHAT WE SOUGHT COMMENT ON

Congress asked HHS to assess the pharmaceutical

distribution chain and the need for, and feasibility of,

modifications in order to assure the safety of imported products.

To further explore this issue, we asked for

comment on:

• Is it appropriate or necessary to limit importation

to specific persons (e.g., pharmacists, wholesalers,

individuals under certain circumstances) and how

would such limitations impact the availability of

these products?

• Should a U.S. licensure or certification process be

implemented for foreign entities?

• Is it appropriate for the U.S. to impose additional

requirements for the import distribution system to

assure safety?

• What processes and criteria would be necessary to

ensure (i.e., certify) that a specific importer abides

by the standards of pharmacy practice that are at

least as rigorous as U.S. standards? Would limiting the number of countries from which importation be permitted make the certification less costly

and more effective?

• Should legal importation be limited to wholesale

shipments?

• Should legal importation by individuals be restricted to pharmacies that serve citizens of the exporting country or those that only export?

• Does FDA or other agencies need additional

authorities to inspect facilities making products

intended for export to the U.S.? What types of

inspection authority?

• Would additional requirements for drug pedigree

and track and trace records be useful in assisting

in the assurance of the security of these imports?

What other mechanisms would be required to

enable tracking to ensure compliance with U.S.

laws and regulations or requirements for importation?

• Would special import packaging and prior notification be useful?

• What reporting requirements would be needed for

adverse events and how would they be enforced?

What about foreign reporting requirements?

II. WHAT THE COMMENTS SAID

Many comments discussed concerns about the safety

of a drug importation program. Several comments

suggested limiting importation to wholesalers and

pharmacies. Some stated that they want the benefit

of lower-cost imported drugs, but they want to go to

their local pharmacy to get their prescriptions. Others

noted that limiting importation to commercial entities,

rather than individuals, would help to maintain the

relatively closed distribution system in the U.S. Other

comments noted that the closed distribution system in

the U.S. has ensured a safe drug supply in this country,

and that introduction of drugs that have not been

maintained within the control of the U.S. distribution

system could permit counterfeit, adulterated, misbranded, or other problem products to enter the U.S.

distribution system. Several comments suggested

that importation be limited to wholesale shipments

because it would be impossible to monitor the influx

of the enormous volume of small packages that would

be entering the U.S. daily if personal importation were

legalized. Still other comments suggested legalizing

drug importation only from licensed Canadian pharmacies to licensed U.S. pharmacies.

Of the comments that supported drug importation,

several stated that importation should be restricted

to foreign pharmacies and wholesalers that are

licensed in the foreign country by a reputable, governmental entity, are routinely inspected, and that

comply with the usual and customary practice for dispensing and distributing drugs. A few comments suggested that either the states or FDA accredit exporting pharmacies and wholesalers and that they be

subject to oversight by the accrediting entity.

Many comments supported the use of a pedigree to

document the chain of custody of the drug. They

believed that it is important to document the movement of the drug from the manufacturer through

each subsequent sale or transaction until it ultimately reaches the consumer. Some comments, although

supportive of the concept, were critical of paper

pedigrees because they can be forged. However,

these comments also noted that the widespread

adoption of an electronic pedigree is many years

away.

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CHAPTER 3 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION
Comments did not suggest specific processes or criteria to ensure that a specific exporter would abide by

standards of practice that are at least as rigorous as

U.S. pharmacy standards. A few comments pointed to

the verified internet pharmacy practice site (VIPPS)

program that is managed by the National Association

of Boards of Pharmacy as a means of certifying and

credentialing internet pharmacies. They noted that

this system maintains rigorous standards to ensure

that internet pharmacies follow usual and customary

pharmacy practice standards. We received no comments on whether limiting the countries from which

importation is permitted would make a certification

process less costly or more effective, or both.

We received no specific comments discussing

whether personal importation should be restricted to

Canadian pharmacies that serve a significant number

of citizens; however, several comments noted that if

the pharmacies are good enough for Canadian citizens, they should be good enough for U.S. citizens.

These comments appear to presume that the pharmacies currently selling drugs into the U.S. are the same

pharmacies serving Canadian citizens. Other comments expressed concern that pharmacies that are

set up in foreign countries specifically for export may

be used as portals for transshipment of unregulated

drugs into the U.S., especially if the foreign government does not closely oversee these ‘for export only’

pharmacies.

A few comments suggested that FDA would need

additional authority to conduct foreign inspections at

foreign manufacturing facilities and to certify the production lines they make.

One comment suggested that the value of special

packaging for imported drugs would be limited, but

that prior notification, with reasonable time frames,

would be useful.

Some comments recognized that a system must be

established to address adverse events or quality

problems with imported drugs. One comment stated

that both the U.S. and Canada have sufficient reporting systems and should share the information. A few

comments noted that physicians need to be educated

to ask where the patient got the medication if they

suspect that an adverse event is associated with the

drug.

III. DISCUSSION

A. Overview of the Current U.S. Drug

Distribution System

The current regulatory system provides the American

public with multiple levels of protection against

receiving unsafe, ineffective, or poor quality medications. First, as required under the FD&C Act, FDA

maintains high standards for prescription drug

approval.

Second, once the drug is approved, the manufacturer

must continue to comply with cGMP regulations to

ensure that the quality of the product is systematically evaluated throughout the manufacturing process.

The specific registered facility where the product is

manufactured remains subject to periodic inspection

by FDA.

Third, pharmacies and wholesalers who sell or distribute prescription drugs in the U.S. must be licensed or

authorized by the states in which they operate.

Fourth, there are limited channels of entry into the

American drug supply, thereby reducing the opportunity to place counterfeit or poor quality medications

into the U.S. commercial distribution system. Today,

prescription drugs on U.S. pharmacy shelves generally arrive either directly from a manufacturing facility,

domestic or foreign, that meets FDA requirements, or

from a U.S. wholesaler who receives the approved

drug from a manufacturing facility that meets FDA

requirements. Together, FDA and the states can exercise oversight of every step within the commercial

drug distribution chain from the manufacturing of the

product to the point of sale to the consumer. One

exception to this process is when the original U.S.

manufacturer re-imports its own FDA-approved product into the U.S. However, even in this instance, the

manufacturer must possess documentation that the

product is authentic, has been properly handled, and

is (as necessary) relabeled for the U.S. market. And,

since the manufacturer is best equipped to evaluate

the authenticity and quality of the re-imported drug,

37

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 3
the law allows only the original U.S. manufacturer to

bring its own U.S.-made drugs back into the U.S. This

helps assure that U.S.-made drugs that were mishandled abroad are not placed into U.S. commerce by

other importers who do not have sufficient familiarity with the drugs to recognize if their quality or

integrity has been compromised.

The U.S drug distribution system is a relatively closed

system that involves several players (e.g., manufacturers, wholesalers, retailers) who move drug products

from the point of manufacturing to the end user who

dispenses the drug to the patient. As part of this system, each player is accountable to maintain the

integrity of the product in its possession as it moves

through the supply chain, which ensures that the product the consumer receives will be safe and effective

and is of high quality. This system is intended to ensure

that the American public does not consume drugs that

do not meet FDA and state standards. Once a product

leaves this closed system, FDA’s ability to assure that it

is an authentic FDA-approved product or being properly handled is significantly hampered.

Figure 3.1 shows several models that are used to

move prescription drug products through the U.S. distribution system.

B. Vulnerabilities in the U.S. Drug

Distribution System

Even though the U.S. drug distribution system is

among the safest in the world, vulnerabilities in the

system create opportunities for unscrupulous activity.

FDA’s Counterfeit Drug Task Force Report1 describes

several of these vulnerabilities. Such activities

include counterfeiting, diversion, incomplete pedigrees, inadequate or no authentication, repackaging,

tamper-evident packaging, and illegal importation.

38

CHAPTER 3 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION

Figure 3.1
1. Counterfeit Drugs

Counterfeiting of medications is a particularly devious practice. Drug counterfeiters not only defraud

consumers, they also deny ill patients the therapies

that can alleviate suffering and save lives. Although

we received different figures describing the global

prevalence of counterfeit drugs, it is clear that in

some countries counterfeiting is endemic—with

some consumers having a better chance of getting a

fake medicine than a real one. In many more countries, counterfeit drugs are common. In the U.S., a relatively comprehensive system of laws, regulations,

and enforcement by Federal and state authorities has

kept counterfeiting rare, so that Americans can have

a high degree of confidence in the drugs they obtain

through legal domestic channels. In recent years,

however, there have been growing efforts by increasingly well-organized counterfeiters backed by

increasingly sophisticated technologies and criminal

operations to profit from drug counterfeiting at the

expense of American consumers. Figure 3.2 illustrates that the number of counterfeit cases FDA has

opened over the last seven years has been rising

steadily.

2. Diversion 

Diversion is the sale of drugs outside of the distribution channels for which they were originally intended. Diverted drugs can originate domestically, when

there is illegal redirection of prescription drugs from

otherwise legitimate sources. For example, free samples supplied to health care providers or lower-priced

drugs intended for nonprofit clinics or Medicaid programs may be diverted and illegally sold into the U.S.

distribution system. Additionally, diverted drugs can

originate in a foreign market. For example, diversion

occurs when donated or lower-priced product that is

intended for use in one country is, instead, shipped to

and sold in another country where the market price is

higher. Counterfeit drugs also are associated with the

practice of diversion. Diversion facilitates the entry

of counterfeit drugs into the U.S. distribution system.

Those individuals or entities who sell or purchase

diverted drugs are less able to verify the integrity of

these drugs because they are purchased outside the

normal distribution chain and without the usual regulatory safeguards. This allows unscrupulous peddlers

to commingle counterfeit, substandard, or otherwise

adulterated or misbranded products with authentic

drugs in the U.S. distribution system.

3. Incomplete

Pedigrees

A pedigree is a statement

of origin that traces the

drug from the point of

manufacture and contains

information about all

transactions that the product undergoes until it

reaches the end user. It is

also referred to as “chain

of custody” documentation. Not all wholesalers

are required to provide

pedigrees under Federal

law. However, when they

are required, products with

incomplete pedigrees,such

as pedigrees that are missing one or more transac39

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 3

Figure 3.2
tions along the chain of distribution are more difficult

to track and trace to establish authenticity than products that have complete pedigree information.

4. Inadequate or No Authentication

It is important for purchasers in the U.S. drug distribution chain to have confidence that the products they

are purchasing are genuine articles (i.e., by authenticating the product). Counterfeiters are using tools

and processes to copy drug products and their labeling and packaging to such an exact degree that even

the manufacturer of the authentic product has difficulty determining whether a product is real or fake.

On the other hand, there are new and emerging technologies that can be used to identify counterfeits.

Unfortunately, at this time, these authenticating technologies often are not incorporated into the drug

product, labeling, or packaging.

5. Repackaging

Repackaging may destroy the anti-counterfeiting

measures used in the original packaging and labeling

of the drug. It may also provide a point of entry for

expired, adulterated, or counterfeit drugs into the distribution system because they may be repackaged in

a way that makes them appear to be legitimate products. Finally, counterfeit and diverted product may be

commingled with authentic product during the

repackaging process, thereby finding its way to an

end user.

6. Tamper-Evident Packaging

Currently, many prescription drug products do not utilize tamper-evident features. Without tamper-evident

features, the original packaging may be reused for

counterfeit or diverted product so that it is more easily passed off as legitimate product. The reuse of old

prescription drug containers found in trash facilities

or taken from hospitals and clinics is also a significant

problem; because no tamper-evident feature has to

be replicated, this packaging can be reused easily to

distribute counterfeit, adulterated, or unapproved

drugs. While tamper-evident packaging can be an

important part of a company’s anti-counterfeiting

approach, it has limits because counterfeit products

can be repackaged into legitimate-appearing packaging (including features intended to mimic legitimate

tamper-evident features).

7. Importation

When consumers purchase medications from outside

the U.S. (e.g., internet purchases, cross-border purchases), whether safe or unsafe, a portal of entry is

created for counterfeit drugs into the U.S. distribution

system. Counterfeiters can take advantage of this

entryway by combining many small purchases from

foreign countries into one and selling them to U.S.

wholesalers or other unsuspecting entities. Due to the

extensive resources involved in preventing small

quantities of drugs from entering the U.S., as the volume of unapproved drug imports increases, it is more

difficult for FDA to use its existing resources to identify and stop unsafe importations.

C. Recent Efforts to Strengthen the U.S.

Drug Distribution System

FDA’s Counterfeit Drug Task Force report, which was

released in February 2004, includes a comprehensive

framework for securing the pharmaceutical supply

chain against modern counterfeit threats. The FDA

Counterfeit Drug Task Force reached the following

conclusions about securing the Nation’s drug supply:

• Implementation of new technologies is needed

to better protect our drug supply;

• The adoption and common use of reliable track

and trace technology is feasible by 2007 and

would help secure the integrity of the drug supply chain by providing an accurate drug “pedigree;”

• Authentication technologies for pharmaceuticals

have been sufficiently improved so that they can

now serve as a critical component of any strategy to protect products against counterfeiting;

• Adoption of electronic track and trace technologies is necessary to accomplish and surpass the

goals of the PDMA;

• States must adopt and enforce strong, proven

anti-counterfeiting laws and regulations;

• Increased criminal penalties could help to deter

counterfeiting and more adequately punish those

40

CHAPTER 3 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION
convicted;

• All participants in the drug supply chain should

adopt secure business practices;

• FDA must develop a system that helps ensure

effective reporting of counterfeit drugs and

strengthens FDA’s rapid response to such reports;

• FDA must educate consumers and health professionals about the risks of counterfeit drugs and

how to protect against these risks; and

• FDA must collaborate with foreign stakeholders

to develop strategies to deter and detect counterfeit drugs globally.

We find that the efforts of the National Association of

Boards of Pharmacy in updating the Model Rules for

Licensure of Wholesale Distributors, if and when

adopted by all of the states, would make a significant

impact in ensuring that wholesalers who distribute

drugs in the U.S. are legitimate and take the necessary steps to maintain the integrity of the U.S. drug

supply. Although some states are beginning to consider adoption of these Model Rules, we are aware of

only three states that have adopted these or similar

laws to date. Without stronger state laws for the

licensure of wholesale distributors, legalized drug

importation would create avenues for unscrupulous

wholesalers to capitalize on access to global markets

to obtain counterfeit, adulterated, substandard, and

otherwise questionable drugs, and introduce them

into the U.S. drug supply chain.

D. Need and Feasibility of Modifications

to Ensure Safety of Foreign Imports

In assessing whether modifications to the U.S. drug

distribution system are needed or feasible to ensure

the safety of foreign imports, it is important to consider commercial importation separate and distinct

from personal importation. Under a commercial

importation scheme, although there potentially could

be tens of thousands of participants involved in

importation transactions, with adequate resources

and authorities, specific measures could be implemented to maintain a closed distribution system with

necessary checks and balances. However, under a

personal importation scheme, each individual consumer becomes an importer who has limited knowledge and resources to ensure the legitimacy of entities that offer drugs for sale, particularly over the

internet. As discussed earlier in this report, the sheer

volume of packages that would come in under a personal importation scheme would make it extraordinarily difficult for FDA and CBP to adequately inspect

drugs for compliance, regardless of the specific

requirements under the importation program. It

would be nearly impossible to maintain a closed distribution system in this “buyer beware” environment.

1. Commercial Importation

a. Licensure scheme

Although an exporting wholesaler or pharmacy may

be licensed or registered in the exporting country, the

usual and customary standards of practice in that

country may be different than those in the U.S. As

discussed later in this report, many laws and regulations in foreign countries do not extend to exporters

or to the products they export, which would create

openings in the distribution system.

A number of comments noted that an essential component of maintaining a safe system is knowing who

is involved in the distribution chain and ensuring that

they abide by the required rules and regulations. Only

then could FDA guarantee the safe and proper handling of the drugs and assure that only legal drugs

are imported. Consequently, under a legalized commercial importation program, foreign wholesalers

and pharmacies would need to abide by a level of

standards of practice that are at least as rigorous as

U.S. wholesale and pharmacy standards. This may

include registration and licensure in the U.S. by a

state or Federal entity, and consist of, among other

things, background checks, periodic inspections, minimal standards for storage and handling, due diligence, and recordkeeping requirements.

Additional statutory authority and resources may be

needed to create a U.S.-based registration and licensure scheme for importers and exporters. In addition,

Memoranda of Understanding may be needed with

the affected countries to ensure effective enforcement, such as agreement that the U.S. government

can inspect entities in the foreign country.

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HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 3
b. Chain of Custody 

A reliable pedigree that documents the chain of custody of the drug product from the point of manufacturer to the point of dispensing is crucial to ensure

that the integrity of the product is maintained while

it is abroad. Paper pedigrees, which are in use today,

have significant limitations. They are subject to failures to keep adequate records and can be forged,

thus making them an unreliable means for documenting the chain of custody.

Mass serialization, which involves assigning a unique

number to each case, pallet, and package of drugs, is

considered the most effective way to secure and

monitor the movement of drugs through the distribution chain. Both private and public efforts to implement radio-frequency identification (RFID) as a

means of mass serialization to create a de facto electronic pedigree are currently underway. FDA’s

Counterfeit Drug Task Force Report urged the adoption and common use of RFID as the standard track

and trace technology in the U.S. by 2007.

Migration to RFID as a primary means of creating an

electronic pedigree is voluntary for the private sector.

FDA did not issue any regulations or requirements for

implementation. Rather, FDA is relying on the

momentum and enthusiasm demonstrated by the private sector towards implementation. At the same

time, some wholesalers and retailers may find it economically infeasible to purchase the necessary technology as early adopters, leaving part of the distribution chain to rely on other means to document the

chain of custody. However, even in these instances

(which are expected to be rare), these U.S. wholesalers and retailers will be doing business within the

U.S. closed distribution system, which provides for

other checks and balances in the system.

The current RFID efforts are focused on securing the

domestic drug supply. Although there are discussions

to create a comprehensive, global RFID system, adoption would be many years away. Even when RFID is

fully implemented in the U.S., it cannot be relied upon

to secure products that leave the U.S. The widespread

implementation foreseen in the U.S. will allow the

RFID-tag on products to be read seamlessly as they

travel in and out of warehouses, distribution centers,

and retailer establishments, creating an electronic

pedigree. This would not be the case for an imported

product, even if it originated in the U.S. When an

RFID-tagged product leaves the U.S., it could be handled by many entities that are outside the U.S. closed

system and may not be RFID-equipped. Even if an

RFID-tagged drug product comes into the U.S. from an

RFID-equipped exporter, there is no way to know who

else handled the product, whether it was handled or

stored appropriately, what other countries the product

passed through, or even whether it was opened and

the contents replaced with counterfeit, adulterated, or

substandard product.

c. Prior notice

One mechanism raised by the comments that is used

by FDA and CBP to aid in prioritizing their efforts to

evaluate food imports is the prior notice requirements. The Public Health Security and Bioterrorism

Preparedness and Response Act of 2002 (the

Bioterrorism Act)2 requires that FDA receive prior

notice of food imported into the U.S. Under the

Bioterrorism Act, information is provided electronically to CBP and FDA in advance of an imported food’s

arrival to the U.S. Such information includes, among

other things, identification of the submitter, including

name, telephone and fax numbers, email address,

firm name and address; mode of entry (e.g., boat,

plane, truck); identification of the manufacturer;

country of production; shipper information; and anticipated arrival information. FDA uses this information

in advance of the arrival to review, evaluate, and

assess the information, and determine whether to

further inspect or hold the imported food.

Although FDA only recently implemented the prior

notice system for foods in December 2003, the experience and lessons learned from developing, implementing, and running this system could be evaluated

to determine if it would be feasible to implement a

similar system for a drug importation program and

what, if any, modifications should be considered.

New statutory authority and sufficient resources may

be needed to develop, implement, and carry out a

prior notification system for imported drugs.

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CHAPTER 3 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION
d. Markings/Country of Origin 

Consumers want to know if the drug product they are

taking was distributed first in foreign commerce or if

it is an FDA-approved product that was manufactured

at an FDA-inspected facility and was subject to the

requirements of the current domestic drug distribution system at all times. Furthermore, without any

markings on the package indicating that the product

was imported under an importation program or listing the country of origin, domestic and foreign product can become commingled as they travel through

the U.S. drug distribution system. This foreign versus

domestic distinction could be maintained if a reliable

chain of custody pedigree followed the product

through the supply chain, however, as discussed

above, it may be several years before a reliable pedigree system is available. The addition of country of

origin information to the labeling of non-FDA

approved drug products would also provide more

accurate and useful information when reporting an

adverse event to FDA.

e. Inventory Control

We heard from the comments that if importation

were legalized, U.S. warehouses and distribution centers that import drugs would need to have processes

and procedures in place to distinguish and segregate

imported drug products from domestic drug products

in their inventory. Some pharmacies may not want to

purchase the imported product or some consumers

may not want to get the imported product if it is not

FDA-approved. As a result, unless a wholesaler or

retailer deals solely in U.S. inventory, control and

recordkeeping systems would have to be modified to

meet this new demand.

f. Labeling

Sections 352 and 352(b)(2) of the FD&C Act and their

implementing regulations set forth labeling requirements for prescription drugs. These requirements are

important to ensure the safe and effective use of the

drug. The labeling for prescription drugs is approved

by FDA and is specific for each drug. Even if an

imported foreign drug is chemically identical to an

FDA-approved product, it may not have the FDAapproved labeling for the product. Under a legalized

importation program, accommodation would need to

be made in the U.S. drug distribution system for the

re-labeling of imported drugs unless the U.S.-

approved labeling is accompanying the product.

Re-labeling of imported drugs raises several concerns. First, re-labeling raises a drug safety issue

because it leaves the product vulnerable for product

mix-ups in the process. Second, as mentioned above,

the labeling is specific for each drug. Merely attaching the labeling for one drug product to another drug

product may not be appropriate if there are differences in the imported and domestic product, such as

inactive ingredients or dyes.

g. Testing/Authentication

It is critical to guarantee that the imported drug is

authentic product. As discussed in Chapter 6, foreign

health agencies do not guarantee the safety and efficacy of exported products from their countries.

Furthermore, opportunities exist for drugs to be illegally transshipped through a foreign country and

imported into the U.S. In this situation, imported

drugs may appear to be coming from one country, but

actually originate in another country and just pass

through the exporting country. A safe distribution

system cannot exist when transshipment occurs

because the source of the drugs and the integrity of

the drugs are called into question.

Testing or authentication of the imported drug can

verify if the active ingredient is present. However,

these tests cannot identify the purity and potency of

the product. Furthermore, there is no single technology or machine that could do this test for all products

as they enter the country and, even if there was, it

would be prohibitively resource intensive and logistically impossible to test all imported products. Even

if this could be done, it would slow down the access

and availability of drugs while the results were pending. Nonetheless, a significant testing regime of

imported products would be needed to ensure the

safety of imported drug products.

3

43

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 3
h. Oversight of International Recalls

Recalls are actions taken by a manufacturer to

remove a drug from the market. Recalls may be conducted voluntarily by a manufacturer or by FDA

request. We heard from a number of comments that

if importation were legalized, a system to monitor

recalls of foreign drugs would need to be established

so that American consumers would know when a foreign drug is recalled. This system would have to distinguish between the foreign version and the FDAapproved version because recalls do not always cover

all versions of a drug.

2. Personal Importation

We find that it would be extraordinarily difficult to

modify the U.S. pharmaceutical distribution system in

any way to ensure the safety of imported drugs by

individuals under a personal importation program

without increasing the risks to patients of receiving

substandard medicines. Personal importation creates

numerous vulnerabilities in the drug distribution system, making it extraordinarily difficult to ensure that

imported drugs are safe and effective, and putting

patients at risk.

1 Combating Counterfeit Drugs, Safe and Secure: A Report

of the Food and Drug Administration, February 2004; U. S.

Department of Health and Human Services, Food and

Drug Administration, Rockville, Maryland 20857.

2 Pub. L. 107-481.

3 Furthermore, a requirement to test all products would

raise liability concerns for the U.S. government because

it would preclude the application of the discretionary

function exception to the Federal Tort Claims Act. This is

discussed in more detail in Chapter 10.

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CHAPTER 3 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION
CHAPTERFOUR

45

Role of New Technologies

CHAPTER HIGHLIGHTS:

There are a number of anti-counterfeiting technologies that show potential for effectively assuring the

authenticity of drugs and, thus, for combating the counterfeiting of drugs. Some examples include holograms, color shifting inks, and watermarks currently employed for U.S. currency. So-called “track and

trace” technologies, such as radio-frequency identification (RFID) and sophisticated bar coding, can provide effective monitoring of a drug’s movement from the point of manufacture through the U.S. distribution chain. Although these new and emerging technologies are promising, until they are fully adopted

internationally they cannot be adequately relied upon to secure the safety, efficacy, and integrity of the

global market to safely import prescription drugs into the U.S.

KEY POINTS:

• There are promising new and emerging anti-counterfeiting technologies; however, until they are universally adopted, they cannot be adequately relied upon to secure the safety, efficacy, and integrity of

the global market to safely import prescription drugs into the U.S.

• Widespread adoption of authentication technologies, while theoretically able to secure the U.S. drug

supply, is a daunting task that could raise the cost of imported drugs, thereby reducing any expected

savings from importation.

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 4
I. WHAT WE SOUGHT COMMENT ON 

Congress asked HHS to assess the role of new technologies in drug importation. This includes estimating

the costs borne by entities within the distribution

chain to utilize anti-counterfeiting technologies that

may be required to provide import security and analyzing whether anti-counterfeiting technologies could

improve the safety of products in the domestic market as well as those products that may be imported.

To further explore this issue, we asked for

comment on:

• Is it feasible to impose anti-counterfeiting technologies on drugs not subject to U.S. regulatory

requirements and what is their ability to prevent

counterfeit or otherwise unsafe drugs?

• Comment on implementation of technologies discussed in FDA’s recent counterfeit drug initiative

to assure security of imported drugs.

• What are the costs associated with implementing

these new technologies?

• Identify the magnitude of the counterfeit drug

problem currently in the U.S.

• To what extent are internet pharmacies contributing to the problem?

II. WHAT THE COMMENTS SAID

Many comments favored the use of anti-counterfeiting

technologies as a means of ensuring product authenticity; however, several noted that because these technologies can ultimately be defeated, they must be

changed every 12-24 months. It was also noted that

repackaging, either domestically or internationally,

inactivates any anti-counterfeiting features that had

been applied to the product by the manufacturer.

Some comments cautioned against tracking anti-counterfeiting technologies as a solution for drug importation because they are only effective when they are

used with other methods to ensure product integrity.

Several manufacturers noted that they have already

started to incorporate authentication technologies into

their products and packaging. Some noted that they

are using a risk-based analysis to determine which

products are in need of these measures first. Some

comments noted that it can take between 6-12 months

to incorporate and validate the use of authentication

anti-counterfeiting technologies, in many cases, FDA

approval is needed before the product can be marketed with the feature. Some comments noted that

authentication technologies are costly, while other

comments said that the overall cost of using these

technologies is minimal considering the profits generated from drug products.

Many comments stated that RFID is very promising for

tracking and tracing drug products and as a means of

minimizing the risk of counterfeit drugs being introduced into the drug distribution system. They noted

that this technology would be extremely difficult (if not

impossible) to forge and would allow identification of

the product and where it has been since it left the

manufacturer. Although RFID is promising, many comments acknowledged that implementation of RFID

throughout the domestic drug distribution system is

many years away. Currently, members of the U.S. drug

supply chain are conducting small-scale feasibility

tests using RFID. Several firms have announced they

will tag one or more of their products in the near

future.

Some comments suggested that tamper-evident and

unit-of-use packaging would be useful as a means to

minimize the risk of counterfeiting.

Limited information was provided on the costs associated with authentication and track and trace anticounterfeiting technologies. One comment noted that

it would cost about a penny per unit to incorporate

anti-counterfeiting technologies into and to validate

the product.

In identifying the magnitude of drug counterfeiting in

the U.S., the comments relied on the figures reported in

FDA’s Counterfeit Drug Task Force Final Report. No

new data or numbers were presented. Some comments discussed drug counterfeiting as a global problem, but they did not provide data to quantify it on a

global scale.

Of the comments that discussed internet pharmacies,

most noted that it was difficult to distinguish legitimate foreign websites from rogue websites. Several

46

CHAPTER 4 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION
comments expressed concern that foreign internet

pharmacies provide an easy way for counterfeiters to

get their fake drugs into the U.S. A few comments discussed actual incidents where consumers received

counterfeit drugs from internet websites. Some comments stated that they were satisfied with the drugs

they received from foreign internet pharmacies and

were confident that the drugs were identical to the

drugs they received from U.S. pharmacies. Many comments were concerned that internet pharmacies compromise patient safety, and because their location is

often disguised or unknown, the source of drugs may

also be unknown or questionable. Several comments

recommended that internet pharmacies be licensed or

certified and be subject to the same regulations and

oversight as traditional pharmacies.

III. DISCUSSION

A. Overview of Current Anti-Counterfeiting

Technologies

It is clear that counterfeiters are sophisticated, wellfunded, and have significant technological capabilities

to copy prescription drugs. FDA’s Counterfeit Drug Task

Force found that there is no single “magic bullet” that

provides long-term assurance to secure the Nation’s

drug supply. Rather, the Counterfeit Drug Task Force

stated that a multi-layer approach, utilizing rapidly

improving and advancing anti-counterfeiting technologies, can provide a great level of security. Currently,

there are two general classifications of anti-counterfeiting technologies: “authentication technology” and

“track and trace technology.” Figure 4.1 lists some

types of anti-counterfeiting technologies.

1. Authentication Technologies

Authentication technologies are used to verify that a

product is genuine and not a fake. Manufacturers are

currently using a variety of authentication technologies

on a product-by-product basis. Authentication technologies may be overt (easily visible to the eye, such as

color shifting inks and holograms), covert (not visible

to the eye, requiring special equipment to visualize,

such as chemical markers, fluorescent inks, and invisible bar codes), or forensic (not visible to the eye,

requiring sophisticated analytic equipment to identify,

such as taggants and chemical markers). CBP and FDA

agents, pharmacists, and consumers could easily identify overt technologies. However, special equipment

(e.g., readers) or forensic analysis would be needed in

order to authenticate a product, packaging, or labeling

on which covert technologies are used. A few covert

technologies allow rapid authentication, which could

be useful at points of entry into the U.S.

Authentication technologies are useful and needed.

However, we acknowledge the limitations as well—

that any single technology can be defeated and the

technologies used to protect drugs must be changed at

frequent intervals. Moreover, incorporating authentication technologies into the product, packaging, or

labeling may increase the cost of drugs. New manufacturing processes, feasibility testing, new quality

control procedures, re-labeling, FDA approval of the

new technology for the product, and the cost of the

feature itself lead to additional costs. The costs are

aggravated if such technologies are changed or modified at frequent intervals for any particular drug product.

2. Track and Trace Technologies

Track and trace technologies assign a unique number

to packages, cases, or pallets of drugs. This number is

used to identify the product as it moves through the

distribution chain. The unique number can be incorporated into an electronic tag (RFID) or into a barcode.

The unique number is then “read” and associated with

other product-specific information that is in a database, which can be used to verify that the product is

authentic and list all of the transactions associated

with the product, creating an electronic pedigree.

RFID involves the attachment of electromagnetic

chips/tags that contain specific product information

and a unique serial number. The system includes the

tags, antennae affixed to the tags, readers to receive

data from the tags, and an information database that

is used to manage the data. RFID may be the most

promising way to accomplish track and trace because

it does not require line of sight “reading” and has

numerous associated benefits, including inventory

management, theft control, recall management, and

reduced labor costs due to automation.

47

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 4
B. Use of Anti-Counterfeiting Technologies

to Control Domestic and Imported Drugs

1. Authentication 

FDA’s Counterfeit Drug Task Force report suggested the

use of one or more authentication technologies on drug

products, particularly those likely to be counterfeited.

The Counterfeit Drug Task Force did not recommend

that FDA require the use of authentication technologies. Rather, they noted that the decision to deploy

authentication technologies is best made by the manufacturer, based on a product specific risk-benefit analysis. Manufacturers are just starting to incorporate overt

and covert technologies in drugs likely to be counterfeited. However, an infrastructure for authenticating

products with authentication technologies is not available yet in the U.S. To be useful for participants in the

U.S. drug distribution system, all participants would

have to have the ability to authenticate the product.

This means that they would need appropriate devices

to authenticate covert measures, know what the legitimate overt measures are on the genuine product and

how to authenticate those measures, and develop an

up-to-date system for communicating changes, since

manufacturers will be changing authentication measures frequently to stay ahead of

counterfeiters. There is a significant amount of development,

implementation, and education

that must be done in the domestic

market to fully integrate authentication into the U.S. distribution

system.

In order to assure the safety of the

U.S. drug supply using these technologies, multiple, frequently

changing authentication technologies would likely be needed

for drugs eligible for importation.

Additionally, one or more of these

technologies would need to allow

for rapid, accurate authentication

at a point of entry into the U.S.

A manufacturer of a FDA-approved drug product may

have to file an application supplement with FDA if

authentication technologies are added to the product,

packaging, or labeling. Authentication measures cannot simply be added to imported products without

regard for the impact they may have on products they

are intended to authenticate. These measures could

affect the stability of the product, obscure important

labeling information, leach into the product packaging,

or otherwise affect the safety, efficacy, or integrity of the

product. For these reasons, FDA would have to ensure

that any newly applied authentication technology did

not affect the quality of the drug product or its labeling.

We found that individual consumers are not in the best

position to know what is fake and what is genuine.

Also, the devices used to authenticate products are too

expensive for home use.

In summary, widespread adoption of authentication

technologies, while theoretically able to secure the U.S.

drug supply, is a daunting task that could raise the cost

of imported drugs, thereby reducing any expected savings from importation. Moreover, given the complexity of the technologies used, the time and expense to

educate CBP and FDA agents, pharmacists, and wholesalers, and the sheer volume of products coming in, it

is possible that consumers will still be exposed to

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CHAPTER 4 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION

Figure 4.1
counterfeit, adulterated, or otherwise substandard

drug products that are shipped into the U.S.

2. RFID

FDA did not issue any regulations nor did the agency

require that the private sector implement RFID. Rather,

FDA is relying on the momentum and enthusiasm

demonstrated by the private sector to voluntarily

implement this technology. Recently, FDA released a

compliance policy guide1 that will facilitate private

sector RFID feasibility studies and pilot programs to

evaluate the use of this technology.

At the moment, some wholesalers and retailers may

find it economically infeasible to purchase the necessary electronic readers and software, leaving part of

the distribution chain to rely on other means to document the chain of custody. However, even in these rare

instances, these U.S. wholesalers and retailers will be

doing business within the U.S. closed distribution system, which provides other checks and balances.

As discussed in Chapter 3 of this report, the current

RFID efforts are focused on securing the domestic drug

supply and a global RFID system is many years away.

For RFID technology to ensure the security of imported

drugs, all custodians of the product would have to be

RFID-enabled, and RFID-enabled purchasers would

need to report inaccurate or suspicious pedigrees upon

receipt (e.g., if the last custodian listed on the pedigree

was not the seller or there was a suspiciously long period spent at a particular custodian’s facility). In addition, private sector feasibility studies are still underway

to assess development, implementation, and use of

RFID in the domestic market. Furthermore, it is virtually impossible for any single entity, government or otherwise, to mandate the use of RFID globally. Until RFID

is universally adopted and used in both the domestic

and international drug supply chain, it cannot be relied

upon to secure the safety, efficacy, and integrity of the

global market for imported drugs.

C. Costs of Anti-Counterfeiting

Technologies

We received inadequate information to assess the

potential costs borne by entities in the distribution

chain to utilize anti-counterfeiting technologies. Most

of the technologies are still in the nascent stages of

development and use, so any estimates at this point

would be unreliable. It is clear, however, that use of

these technologies may increase the cost of drugs,

whether domestic or imported. The extent of this

increase is unknown.

Some of the costs associated with using anti-counterfeiting technologies include:

• Purchase of the technology;

• Purchase of associated equipment (e.g., barcode

scanners, RFID readers, access to electronic databases) and services;

• Integrating the technology into the manufacturing

process;

• FDA review, if required, for the technology;

• Adopting new anti-counterfeiting measures as old

ones are defeated;

• Creation of infrastructure throughout the distribution system; and 

• Educating users, including CBP and FDA.

It is important to note that the costs of incorporating

anti-counterfeiting measures are likely to be offset by

the benefits that anti-counterfeiting measures will provide, for both authentication and track and trace technologies. These include:

• Improved inventory management and control

(with resulting reductions in inventory expenses

for distributors and pharmacies);

• Reduced labor cost due to automation;

• Reduced theft and product loss due to other causes;

• Reduced diverted product;

• Improved ability to recall product;

• Protection of drugs from intentional tampering;

and

• Protection of drugs from being used in an act of

terrorism.

1 FDA, “FDA Announces New Initiative to Protect the U.S.

Drug Supply Through the Use Of Radio-frequency

Identification Technology,” November 15, 2004. Accessed

on 12/1/04 at

www.fda/gov/bbs/topics/news/2004/NEW01133.html.

49

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 4
50
CHAPTERFIVE

51

Agency Resources Associated with Drug Importation 

Activities

CHAPTER HIGHLIGHTS:

FDA currently has about 3,800 employees assigned to field activities (e.g., inspections) involved in

protecting the many thousands of products that make up the Nation’s food, drug, biologic, medical

device, and veterinary drug supply. Of the 3,800 field staff, 450 are involved in investigative import

activities. Only a limited number of FDA inspectors are available to staff the 14 international mail

facilities in the U.S., where they historically have had to inspect a small number of large commercial

pharmaceutical imports. FDA managers have repeatedly noted that the large number of personal drug

shipments coming into the international mail and courier facilities is overwhelming the available staff.

This report finds that despite significant efforts, including joint efforts with CBP and import alerts/bulletins, FDA currently does not have sufficient resources to ensure adequate inspection of current levels and categories of personal shipments of prescription drugs entering the U.S. With respect to commercial shipments, based on the information presented to the Task Force, FDA would need a meaningful investment, among other things, in new information technology and personnel, as well as

appropriate standards to ensure adequate inspection of commercial quantities of drug products if

importation were legalized.

KEY POINTS:

• There are not sufficient resources currently available to ensure adequate inspection of current levels

of prescription drugs entering the U.S.

• To maintain adequate inspection of current levels of commercially imported pharmaceutical products

requires significant investment in information technology and personnel, among other things.

• There is no realistic level of resources that could ensure that personally imported drugs are adequately inspected to assure their safety since visual inspection, testing and oversight of all personally

imported prescription drugs are not feasible or practical at this time.

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 5
I. WHAT WE SOUGHT COMMENT ON

As part of its study, Congress asked HHS to estimate agency resources, including additional field

personnel, needed to adequately inspect the current amount of pharmaceutical products entering

into the country. This estimate shall detail the

number of field personnel needed in order to

appropriately secure all ports of entry.

To further explore this issue, we asked for

comment on the following:

• Information on prioritizing components of an

importation program.

• Should federal appropriations, user fees, or other

means cover the costs of a program?

• What programmatic changes would be needed to

generate and collect data about imported products?

• Other than FDA, are there other federal agencies

that would need funding? Any non-federal entities?

II. WHAT THE COMMENTS SAID

There were no comments that provided information on prioritizing components of an importation

program. Many comments stated that FDA would

need significantly greater resources to examine

imported products for quality, purity, safety, and

effectiveness. One comment noted that FDA currently has inadequate resources to handle drug

importation issues nationwide, and its investigative

authority is limited relative to its ever-increasing

law enforcement responsibilities. One comment

stated that an importation program would demand

incalculable resources. Another comment stated

that the costs required to ensure the safety of

imported drugs could be in the range of billions of

dollars.

One comment suggested that importers should pay

user fees to finance the cost of an importation program. Others disagreed, stating that those fees

would be passed on to consumers, resulting in

diminished cost savings. Some comments suggested that significant and continuing additional

appropriations to FDA should finance the cost of an

importation program.

Many comments stated that various government

agencies other than FDA, including CBP, would also

need adequate resources.

III. DISCUSSION 

A. General

Because little information was submitted to adequately address this issue, we sought input and

information from FDA. The analysis that follows is

based on experience FDA has had with imported

drugs.1 To date, physical inspections have been conducted on a very small percentage of imports. In

order to ensure these are done in a risk-based or

“directed”2 manner, information technology (IT) systems are critical. One of the reasons why regulating

personal importation is extraordinarily difficult

relates to the cost of screening imported drugs to

evaluate whether they meet U.S. standards for safety and efficacy. Much of this cost relates to the legal

requirements the agency must follow in screening

these products and the time required to perform

these functions. This chapter estimates this burden

and also describes the IT systems currently in place.

A more integrated and improved IT system is needed to cope with the volume of imported drugs

entering the U.S. This would be critical under any

scheme to legalize drug importation.

There are also additional resources expended by

other agencies that are not reflected in this report.

These include the resources associated with the

import responsibilities of CBP, many of which precede the import responsibilities of FDA. CBP told

us it has the primary responsibility for the 312 ports

of entry into the U.S., and provides the initial IT system support that feeds information into FDA’s

Operational and Administrative System for Import

Support (OASIS). Currently, CBP is involved in

upgrading the IT systems relied upon by FDA. The

U.S. Postal Service (USPS), the Department of

52

CHAPTER 5 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION
Justice (DOJ), and other Federal and state agencies

also provide support and expend resources. For

example, FDA has been involved in legal actions to

address the illegal importation of unapproved

drugs into the U.S., which require the assistance of

DOJ and often other Federal and state agencies.

According to FDA, the vast majority of commercial

pharmaceutical imports are reviewed electronically

through OASIS. This database system includes

information fed to it by CBP, derived from custom

brokerage forms, as well as agency generated data.

Although OASIS automatically screens FDA regulated products, a number of entries require additional manual review of information in FDA’s

Center for Drug Evaluation and Research (CDER),

for Biologics Evaluation and Research (CBER), and

Center for Veterinary Medicine (CVM) Center-specific registration databases. Currently, there is no IT

integration of Center databases with OASIS. FDA

told us that the current process to access these

databases, review the information they contain,

and make a decision based on that information is

inefficient and difficult for the import reviewers in

the field. Improvements could include enhanced

processes for data retrieval from those databases.

Improved IT capability would also help FDA personnel address import-related concerns that extend

beyond the inspection of pharmaceutical products.

To effectively share information, more information

will need to be available to a wider audience.

Without adequate funding, such improvements will

not be possible; however, it is difficult to predict the

level of funding that would be needed.

Improvements in IT for individual drug databases

are also necessary to ensure adequate import

screening. For example, improvements such as

FDA’s eDRLS (electronic drug registration and listing) initiative, impacting registration databases,

would require significant investment of resources.

B. Personnel

The responsibility within FDA to inspect imported

drugs entering the U.S. falls primarily on the Office of

Regulatory Affairs (ORA). We are aware that there

are a number of activities beyond the border inspections carried out by FDA Centers/Offices that are critical to the success of the inspectional activities.

Many of these non-border functions involve postmarket compliance and import support activities carried out by the Centers. The Centers also provide

financial support for the ORA border functions.

Inspection of imported pharmaceutical products is

a labor intensive activity which requires a significant number of staff.This could possibly be reduced

through the use of improved IT systems.

C. Current Inspections

1. Commercial Inspections

There are 312 customs ports at which products and

persons cross into the U.S. Of the 312 ports, approximately 95 are non-courier ports through which

shipments of pharmaceutical product entered in FY

2003. There are multiple border crossings that are

not fully staffed by FDA. There are some ports that

are not covered at all, covered only for certain

hours, for certain days, or on call from a distance.

The total number of ORA personnel with responsibility for all FDA import activities is currently 450

investigators and 276 laboratory analysts.

Pharmaceutical products entering the U.S. includes

bulk and finished dosage forms. All commercial

shipments should be reviewed as “line entries”

through OASIS. A line represents a broker’s entry of

an imported product. Each line can represent a

varying amount of drug product. For example one

line could be ten boxes or 200 boxes of the same

drug product. The total number of lines for commercial pharmaceutical products was approximately 197,420 in FY 2003 out of over nine million total

lines of imported products under FDA’s jurisdiction.

For FY 2004, FDA estimates that there will be

234,930 lines of pharmaceutical products.

After review of the commercial lines through

OASIS, a certain portion of the entries may be

53

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 5
required to submit additional information or to

undergo physical inspection. Of the approximately

197,420 lines of commercial pharmaceutical product, approximately 5,124 detentions occurred

(excluding courier detentions discussed below).

Each detention represents one line. Each detention

required an individual determination that the

detention met the legal standard required under

section 381. Each detention also required FDA personnel to comply with the notice and due process

requirements set forth in section 381. Detentions,

investigations, and testing are all follow-up activities to the initial line entry review, are labor-intensive, and are heavily dependent on an adequate

number of personnel.

We find that there are not sufficient resources available to ensure adequate inspection of current levels

of prescription drugs entering the U.S for personal

importation. The U.S. drug supply has experienced

an increase in the incidence of counterfeit drugs

and theft from both domestic and international

sources. In addition, illicit diversion and theft of

prescription drugs in domestic and international

markets has increased dramatically in recent years

causing an increased vulnerability to the introduction of counterfeit drugs and further compromising

legitimate distribution channels. The public health

implications stemming from this problem have

never been greater, and the likelihood of a crisis

increases exponentially as relatively fewer

resources are available to address the problem. In

order to address these anticipated increases, as well

as expected increases in the volume of legally and

illegally imported drugs, additional field personnel

for FDA would be essential. Additional field personnel could be used to conduct examinations above

the current level to address anticipated increases in

volume. They also could do more “directed” inspections, where needed, to keep potentially harmful

drugs from entering the U.S. distribution system or

reaching the U.S. consumer.

According to FDA, new technology and replacement

of obsolete equipment at FDA’s Forensic Chemistry

Center Laboratory is needed. Up-to-date laboratory

instrumentation would allow more rapid screening

of counterfeit pharmaceuticals for harmful chemicals

or conditions that might cause a life-sustaining drug

to be ineffective. Additional analytical chemists

would provide forensic support for the increasing

number of counterfeit and diverted pharmaceutical

investigations conducted by FDA. Laboratory analysis is critical for providing the data needed by FDA to

evaluate authenticity, assess risk, develop an appropriate response to protect the public from harm, and

support criminal prosecutions.

2. Personal Importation

Personal shipments of imported drugs may not contain the U.S.-approved formulations or include the

U.S.-approved label and required patient information. FDA exercises enforcement discretion through

its personal importation guidance policy (described

in the background section of this report) to allow

certain products into the U.S. These personal shipments enter through courier/express consignment

ports, international mail facilities, and various ports

as personal baggage with travelers, including

“foot” traffic at border crossings. Most drugs coming in through personal shipment, however, do not

comply with FDA’s personal importation policy.

Even with any reasonable amount of additional

resources, FDA would not be able to adequately

screen these shipments as explained below.

There are 14 international mail facilities and a large

number of ports through which mail and travelers

enter with personal pharmaceutical products. The

greatest number of personal drug importations are

shipments sent through international mail facilities,

with lesser but significant amounts coming

through land borders. There is no data systematically collected by FDA or CBP on the amount of

mail that comes into the international mail facilities that contains drugs and thus it is difficult to

provide accurate counts of non-commercial pharmaceutical imports. Nonetheless, FDA and CBP

were able to provide various estimates of the mail

by extrapolating data collected from several mail

blitzes conducted at the various international mail

54

CHAPTER 5 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION
facilities. These blitzes are described in more detail

in Chapter 1 of this report. In addition, IMS data

provides some insight into the volume of personal

prescription drug importations from Canada. These

data, discussed further in Chapter 1 of this report,

provide a perspective on the resources required to

inspect the current level of personal importations

and what might be necessary if some type of personal importation were made legal. By any measure, there has been a steady increase in the volume

of personal importations and in the number of

detentions issued by FDA.

FDA told us that there are no data systematically

collected on the number of mail packages set aside

daily by CBP for examination by FDA. FDA does

collect some data in OASIS on mail and baggage

inspections conducted by the agency. The data

reflect the number of lines examined and the number of lines detained, but not the number of individual packages reviewed. The data, however, provide some general information on the number of

illegal, unapproved drugs that continue to flow

into the U.S. as personal importations that are

detained by FDA. These data are contained in

Figure 5.1 provided by FDA. The number of lines

inspected is based only on estimates provided by

FDA field personnel after the inspections of the

packages. The number of detentions is based on

the actual number of notices sent to individuals

detailing the number of lines of product detained.

FDA’s blitz data also provides some insight into the

volume of illegal personal importations that continue to flow through the international mail facilities and also provides a perspective on the time

and costs associated with the review and processing of packages. FDA estimated that it took ten

minutes to open and process a single envelope

with one non-labeled suspect drug and an estimated three hours to open and process a large package with multiple suspect drugs not labeled in

English. This processing did not include the procedures involved with detaining suspect packages.

Figure 5.2, provided by FDA, details two examples of

the FDA staff time required to process the 300 packages set aside by CBP for FDA during the November

2003 blitz activity. The figure provides the average

time and cost per package to process the packages.

Typical activities conducted at the mail facility

include opening the mail packages, examining the

products enclosed, searching references to determine

the nature of the product, recordkeeping, photographing the product, and securing the product in

locked wall lockers at the facility. In some instances,

samples also were taken for testing. The support and

follow-up activities noted in the chart include processing detentions, refusals, releases, and notices.

Figure 5.2

These figures provide the basis for estimating the

55

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 5

Mail and

Baggage

FY 2003

FY 2002

FY 2001

Detentions of

Unapproved Drugs

(Based on Lines)

12,911

7,915

2,447

Number of 

Lines Inspected 

by FDA

Containing 

Drugs Including

Antibiotics

(Estimated by 

Field Personnel)

14,280

8,526

3,405

Seattle Southwest

District Import 

Office District 

Office

Days of Blitz 11/4-7/2003 11/4-6/2003

FDA staff (full or part-time 

at mail facility) 6 3

Hours (working at facility on blitz) 88.75 44

FDA staff (full or part time 

outside of mail facility) 9 3

Hours (spent in support/follow-up 

including processing detentions) 757.5 790

Total Hours (mail facility and 

support/follow-up) 846.25 834

Average hours spent 

per package (including support 

activity) (300 packages examined) 2.82 2.78

Average cost of examining 

and processing each package $267.90 $264.10

Figure 5.1
NYK-DO JFK

Buffalo 7

Newark

CHI-DO Chicago 2

DET-DO Detroit 0.6

FLA-DO Miami 2

LOS-DO Carson (Los Angeles) 3

SJN-DO Virgin Islands .05

SAN-DO Oakland

San Francisco 2

Honolulu, HI

SWID Dallas-Fort Worth 0.6

SEA-DO Tacoma 0.2

TOTAL 16.91

District Mail Facility Covered Actual

Office Resources

(Full Time 

Equivalent)

resources necessary to ensure the adequate inspection of current levels of personally imported drugs.

Current estimates of personal mail importations from

Canada alone are approximately five million packages per year (as described in more detail in Chapter

1). There is no systematically collected data, however, that is available to estimate the number of personal importations from countries other than Canada.

Using the blitz data and the figure of five million

packages from Canada, we estimated that approximately 50 percent of the mail packages enter from

countries other than Canada. This equates to ten million packages entering the U.S. with imported prescription drug products based on the estimates from

FDA’s prior experience with personal shipments, to

examine ten million packages would be estimated at

nearly $3 billion ($3 billion = $264.10 per package x

10 million packages). Even assuming that a different

and lower level of inspection could be considered

adequate, and assuming additional resources are

available to upgrade IT systems, the costs would be

significant.

The number of FDA employees assigned to the international mail facilities has increased over the last few

years. The total number of ORA staff who work

at international mail facilities is currently 16.91 for

most of FY 2004. At one facility, coverage in 2001

was once a week with one investigator; in 2004, this

facility has full-time coverage with three investigators. The total number of FDA staff hours at international mail facilities is noted in Figure 5.3.

FDA also shared with us data for inspections and

detentions conducted at courier facilities. There are

both commercial and personal shipments shipped

through courier facilities, so it is difficult to determine

the exact number that are strictly personal importations. FDA field offices estimate that a large portion

of the detentions are for personal, not commercial,

importations. There are 29 courier/express consignment ports through which such drugs entered.

Personal shipments through the 29 courier/express

consignment ports are reviewed as line entries similar to commercial line entries. The Figure 5.4 data

captures both commercial and personal importations

and detentions.

Figure 5.4

D. Activity Cost Estimates 

FDA has provided us with the current average costs

for individual agency work tasks associated with ORA

inspection of imported drugs (Figure 5.5). This is a

cost based on current levels of total activity and the

total number of ORA staff assigned to the duties

noted. These figures reflect staff and associated costs

for FY 2003.

56

CHAPTER 5 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION

Figure 5.3

FY 2004* - FDA Staffing of International Mail

Facilities

Source: FDA

*The information was collected during FY 2004 but may not

reflect FDA staff activity that occurred during the entire FY 2004.

Courier Detentions of Lines Containing

Unapproved Drugs Drugs

(Based on Lines)

FY 2003 6,588 91,766

FY 2002 11,787 64,967

FY 2001 5,710 42,326
While these costs may be used to estimate the costs

of performing these specific activities as the volume

of the pharmaceutical imports changes, they would

not be accurate predictors of total costs if volume

were to increase dramatically. This is true because

costs will rise due to inflation and other pressures in

the future years. Personnel costs, facilities, transportation, communications, IT and security related

costs are likely to change the costs in future years.

The costs reflected in the chart below are based on

the current compliance tools available and the current level of enforcement. As FDA changes its operations to address the risks of increasing volume, the

costs will change. Compliance activities may consume more import resources than they do now as the

volume and types of compliance activities change.

For example, the cost of performing an import field

exam to determine if a proposed drug entry appears

to violate the FD&C Act is one way to estimate the

cost of preventing that shipment from entering

domestic commerce. However, it does not estimate

FDA’s costs to further investigate that product, should

it become necessary.

Figure 5.5

Calculation of Costs for Individual Inspection

Activities FY 2004

1 Drug importation may also impact other U.S. laws and

regulations that are enforced by agencies, such as CBP

and the U.S. Postal Service, however, an impact analysis

for these agencies was not performed for this report.

2 A “directed” inspection is an in-depth inspection in

which an investigator has been charged with obtaining

specific information about an FDA-regulated commodity.

Such an inspection may include obtaining detailed information concerning the origin of a product, its manufacturing, shipping and storage conditions, documentation

of the chain of custody of the product, etc. It may also

include the collection of a physical sample for subsequent analysis by the Agency.

57

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 5

Inspections of Imported Pharmaceutical Products

Type of Activity Estimated Cost

Per Task for 

FY 2004

Line Entry Review $11

Detentions $76

Import Field Exams $76

Import Sample Collection and Analyses $2,062

Counterfeit Analyses $3,729
58
CHAPTERSIX

59

Role of Foreign Health Agencies

CHAPTER HIGHLIGHTS:

Just as the U.S. is responsible for the safety and effectiveness of drugs made available to its citizens, foreign governments give priority to ensuring the safety of drugs used by their citizens. Foreign governments

have little incentive and limited resources to ensure the safety of drugs exported from their countries, particularly when those drugs are transshipped or are not intended for import. No country expressed any

interest or willingness to ensure the safety and effectiveness of drugs exported from their country in any

expansion of legal U.S. importation. Although we specifically solicited them, few comments were submitted by foreign governments, and none outlined a specific strategy for new steps to collaborate with the

U.S. government on the effective oversight of importation, suggesting that they are not willing or do not

have the means to ensure the safety of exported products and that the primary safety responsibilities

would have to remain with the U.S.

KEY POINTS:

• The U.S. is responsible for the safety and effectiveness of drugs made available to its citizens.

• Foreign governments give priority to ensuring the safety of drugs used by their citizens. Foreign governments have little incentive to ensure the safety of exported drugs.

• The lack of meaningful comments or response to direct inquiries from foreign governments suggests

that foreign governments are not willing or do not have the means to ensure the safety of exported

products.

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 6
60

CHAPTER 6 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION

I. WHAT WE SOUGHT COMMENT ON

Congress asked HHS to determine the extent to which

foreign health agencies are willing and able to ensure

the safety of drugs being exported from their countries to the U.S. To further explore this issue, we asked

for comment on the extent to which foreign health

agencies are willing or able to implement new or

additional protections to ensure the safety of exported or transshipped drugs.

II. WHAT THE COMMENTS SAID

One foreign health agency commented that the regulation of drug safety worldwide is based on the premise that each country is responsible for the safety of

products made available to its citizens. This foreign

health agency, as well as several provincial regulatory

agencies, noted that the law in their country would

not allow for the export or transshipment of products

that did not comply with its own laws. We received

conflicting information as to whether it is legal for

Canadian pharmacies to refer American consumers to

other countries.

Multiple comments stated that fewer protections exist

for exported or transshipped products. One comment

examined the laws in 25 countries worldwide and

found that, while most impose regulatory requirements related to the domestic distribution and sale of

pharmaceutical products, almost all countries, including the U.S., impose a lesser level of regulation on

products intended for export to other countries and

most countries do not regulate products that are

merely transshipped through their territory. This comment concluded that, based on its examination, the

laws in many of the countries surveyed cannot guarantee the safety, quality, or efficacy of products

exported to the U. S.

No comments directly addressed the extent to which

foreign health agencies are willing or able to implement new or additional protections to ensure the

safety of exported or transshipped drugs. One comment suggested the development of international

standards and agreements that confirm and enforce

patient care as the primary goal, such as the development of a mutual international recognition for the

licensing of wholesalers, pharmacists and pharmacies

located in Canada and the U.S., and development of

memoranda of understanding regarding which laws

are enforced and enforceable for the safety and benefit of the patient, as many cross-border businesses

require disclaimers, agreements and powers of attorney that remove patient autonomy as a condition of

sale. This comment also suggested that the cross-border pharmacy sale of drugs under the authority of a

prescription should be limited or temporarily suspended until U.S. and Canadian authorities establish an

information exchange process to openly and reliably

share information.

III. DISCUSSION

The top priority of each foreign health agency is to

ensure the safety and effectiveness of drugs for its

own citizens, as it is in the U.S. Even if foreign health

agencies were able, they have little incentive to guarantee the safety and effectiveness of exported drugs,

given their limited resources and the possibility of

drug shortages for their citizens. Even if foreign

health agencies were willing to help ensure the safety and effectiveness of drugs exported from their

countries to the U.S., FDA would still need to verify in

some way that the drugs are safe and effective under

U.S. standards for U.S. consumers.

As the comments highlighted, the ability of foreign

regulatory authorities to ensure the safety and effectiveness of exported drugs is complicated by two distinct, practical problems. First, most countries impose

a lesser level of regulation on products intended for

export to other countries, such as the U.S. Second,

many countries do not regulate products that are

merely transshipped through their country. In both

cases, the result is that most foreign governments currently do not have the legal or regulatory tools available to guarantee the safety, quality, or efficacy of

products exported to the U.S.

Many Americans import prescription drugs from

Canada or Mexico, due to their proximity to the U.S.

Canadian Federal and provincial law is based on the

premise that each country is responsible for the safety of drug products made available to its own citizens.

Health Canada does not assure that products being
sold to U.S. citizens are safe, effective, and of high

quality, and does not intend to do so in the future.1

We have no indication that Mexico would be willing

to do anything different.

In addition to Health Canada, we also heard from

three Canadian provincial regulatory authorities: the

Manitoba Pharmaceutical Association, the Quebec

Order of Pharmacists, and the Ontario College of

Pharmacists. Overall, the provincial regulatory

authorities told us that pharmacists within their jurisdiction are of the same competence as American pharmacists and that products that are Canadianapproved would be safe for American consumers.

Even with safety protections in place, the provincial

regulatory authorities pointed to issues raised by

importation such as transshipment and illegitimate

websites.

The Manitoba Pharmaceutical Association identified

patient safety and product quality and safety as a

major concern and provided us with a list of points

that would need to be addressed if the importation of

drugs from Canada is legalized. Additionally, this

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HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 6

If parallel importation works for the European Union, why can’t it work for the U.S.? 

The European Union (EU) is comprised of 25 countries or "Member States." One of the goals of the EU

is to promote the free flow of goods among Member States, much as the U.S. Constitution does for trade

between the states in the U.S.

The EU Charter permits a wholesaler in Member State "A" to buy prescription drugs from a wholesaler

in another Member State "B" and sell those products in Member State "A." This practice is called "parallel importation" or "parallel trade." Parallel traders buy pharmaceuticals in Member States with

lower prices (usually imposed by the government) and sell them in other Member States with higher

prices or government reimbursement rates.

Importantly, the EU has established a regulatory scheme for pharmaceutical products, which governs

market authorization, distribution, and handling among the Member States. The EU's European

Medicines Agency (EMEA) is responsible for protecting and promoting the public health and brings

together the scientific resources of the EU Member States to ensure a high level of evaluation and supervision of medicines in Europe under one marketing authorization, including one authorized physician

label and patient leaflet, which is valid throughout the EU. This centralized regulatory oversight is critical to ensuring that pharmaceuticals flowing between EU countries are safe, effective, properly labeled,

and manufactured in a uniform manner.

A drug importation model in which consumers import drugs into the U.S. from Canada or other countries

is very different from the practice of parallel trade between the Member States of the EU. The correct

analogy for the sale of drug products from one Member State (such as Spain) to another Member State

(such as Germany) is not the sale of drug products between Canada and the U.S., but rather the sale of

drug products from one U.S. state to another. This is because the laws and regulations governing the

marketing authorization, including labeling and manufacturing of the products, is controlled at the

Federal/European level and assures that the product is indeed the same whether it is sold in Maryland or

Virginia (or in Spain or Germany). However, the laws and regulations between the U.S. and other countries are not the same, and there is no central regulatory body that has authority over the U.S. and the

other country. Therefore, there is no assurance that drug safety, efficacy, purity, potency, handling, labeling, manufacturing, and storage would be the same between the U.S. and other countries, unlike the

assurance that exists as there is under the parallel importation/trade system in the EU.
province recommended that importation be limited or

temporarily suspended until these issues are resolved.

The Quebec Order of Pharmacists stated that although

they exercise oversight over the professional practice

of pharmacy, they cannot control drugs that transit

through their border that are not intended to reach

their consumers. The Ontario College of Pharmacists

told us about the increasing number of illegitimate

pharmacy websites. In some cases, enforcement

action is taken; however, we were told that such

actions are extremely resource intensive.

The U.S. does work closely with Canada and Mexico to

determine ways to work together to promote and protect the public health. In February 2004, Federal agencies in Canada, Mexico, and the U.S. signed a trilateral cooperation charter to increase communication,

collaboration, and the exchange of information

among the three countries in the areas of drugs, biologics, medical devices, food safety, and nutrition to

protect and promote human health.2

We also solicited input from European health agencies

for inclusion in this report. Switzerland’s health

agency, Swissmedic, stated that drugs imported into

the U.S. from licensed Swiss pharmacies would meet

Swiss requirements for safety, efficacy, and quality.3

Swissmedic noted, however, that transshipment of

drugs through Switzerland makes the distribution system vulnerable to counterfeiting and fraud.

Swissmedic concluded that although they can do a lot

to help guarantee the safety of drugs exported to the

U.S., they cannot give complete assurance that drugs

imported by U.S. consumers would be safe and effective, or otherwise meet U.S. standards.

We requested comment, but did not receive information, from the European Commission (EC). One comment provided detailed information on Europe’s practice of parallel trade of pharmaceuticals across national borders within the European Union’s (EU) internal

market. Only two foreign health agencies, Health

Canada and Swissmedic, provided information to us

on their willingness or ability to assure the safety of

drugs exported to U.S. consumers. If foreign health

agencies were willing to ensure the safety and effectiveness of drugs exported from their countries to the

U.S., one would expect a greater global response. On

the other hand, if a foreign health agency were interested in ensuring the safety and effectiveness of

exported drugs, international agreements such as

mutual recognition agreements (MRA) and memoranda of understanding (MOU) would be useful tools to

set standards for drug safety and effectiveness.

An MRA is an agreement between two countries that

provides for official mutual reliance on portions of a

foreign regulatory system. Development of MRAs is

extremely time-consuming and would require significant resources to put in place. Currently, one MRA is

in place for the purpose of assisting the U.S. with certain aspects of the drug review and approval process

(e.g., GMP inspections); however, we have been told

by FDA that it has not yet entered the operational

phase because the U.S. is pursuing other approaches

to drug agency cooperation at the moment. In addition, it would no doubt be problematic for the U.S. to

rely completely on foreign regulatory systems to

review and approve drugs for U.S. consumers.

MOUs are non-binding arrangements between governments to carry out programs of cooperation; in this

case, cooperation with respect to a drug importation

program. In the importation context, the governments of exporting countries could agree to ensure

that products from their country destined for the U.S.

meet certain safety standards. As mentioned above,

for a variety of reasons, foreign health agencies have

little incentive to ensure the safety and effectiveness

of drugs bound for the U.S. market, making MOUs difficult to negotiate. Even if the U.S. were able to enter

into an MOU with a foreign health agency to help

ensure that drugs exported to the U.S. meet FDA standards, FDA would still need to obtain such verification.

This might involve FDA inspections of certain foreign

facilities, FDA review of certificates of analysis, FDA

testing of certain products, etc. Such inspections by

FDA of foreign facilities in another country would likewise require an agreement between FDA and the regulatory authorities of the other country to permit FDA

to carry out inspections in that country.

1 Health Canada, Letter from Diane C. Gorman, Assistant

Deputy Minister, to Richard H. Carmona, Surgeon General

of the U.S. Public Health Service, June 1, 2004.

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CHAPTER 6 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION
2 Food and Drug Administration Talk Paper, “Canada,

Mexico, and the United States Sign Charter,” February

27, 2004. Accessed at

www.fda.gov/bbs/topics/NEWS/2004/NEW01028.html on

11/4/04.

3 Swissmedic, Letter from Klaus-Joerg Dogwiler, Executive

Director, to Murray M. Lumpkin, Senior Associate

Commissioner for International Activities and Strategic

Inititatives, U.S. Food and Drug Administration, August

27, 2004.

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HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 6
64
CHAPTERSEVEN

65

Effects of Importation on Prices and Consumer Savings

CHAPTER HIGHLIGHTS:

Consumers seek to import prescription drugs from other countries in part because they believe they can

save money if they purchase their drugs from outside the U.S. In many instances, U.S. consumers have

been able to purchase from abroad foreign versions of U.S.-approved brand name drugs at lower prices.

However, based on an analysis of actual data on drug prices and volumes, this report finds that total

savings to consumers from legalized importation under a commercial system would be a small percentage relative to total drug spending in the U.S. (about one to two percent). These savings are much

smaller than some specific international comparisons of retail prices for certain drugs might suggest.

Under any safe, legalized commercial importation program, when the scope is limited, intermediaries

would likely capture a large part of the price differences. (This is based on evidence from European

countries where some form of importation is legal.) 

This report also finds that generic drugs are often cheaper in the U.S. compared to international prices for

similar drugs. Other independent studies have reached similar conclusions. The prices foreigners pay for

generic drugs are on average 50 percent greater than Americans pay for generic drugs. Furthermore, there

is evidence that greater use of U.S.-approved generic drugs by Americans could reduce drug spending by

billions of dollars annually. In addition, to the extent that prescription drugs are eligible for importation

from the same company at a lower price than in the U.S., potential quantity constraints imposed by manufacturers or foreign governments would limit the eligible supply and the benefits to U.S. consumers.

KEY POINTS:

• Total savings to drug buyers from legalized commercial importation would be one to two percent

of total drug spending and much less than international price comparisons might suggest. The

savings going directly to individuals would be less than one percent of total spending. Most of the

savings would likely go to third party payers, such as insurance companies and HMOs.

• Under legalized commercial importation, intermediaries may capture a large part of the potential

savings.

• Savings from legal commercial importation would likely to be limited because the total volume of

imports may not be as large as expected.

• Estimates of direct savings for E.U. countries where importation is legal range from less than one

percent to 2.5 percent of total drug spending in those countries.

• About 30 percent of total drug spending may be unchanged by legalizing commercial importation

because about that much is now spent on products that are inappropriate for importation (e.g.,

drugs that are inhaled during surgery, injectables, biologics, and controlled substances) or generally unavailable abroad for less (e.g., generic products).

• The prices foreigners pay for generic drugs are on average 50 percent greater than the prices

Americans pay for generic drugs. Furthermore, there is evidence that greater use of U.S.-approved

generic drugs by Americans could reduce drug spending by billions of dollars annually.

• Americans have a greater choice of newly launched pharmaceutical products than foreigners. In

recent years, more than 40 percent of new drugs were launched first in the U.S.

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 7
I. WHAT WE SOUGHT COMMENT ON 

Congress asked HHS to assess the potential shortand long-term impacts on drug prices and prices for

consumers associated with importing drugs from

other countries.

To further explore this issue, we asked for

comment on:

• What is the evidence on savings for patients

from existing parallel importation programs? 

• In legalized systems of parallel importation, to

what extent do international differences in drug

prices translate into price differences “captured”

by middlemen or arbitragers? 

II. WHAT THE COMMENTS SAID 

A few comments stated that legalizing Canadian

drug importation could save a significant amount of

money. Some of these comments presented data that

retail Canadian drug prices average 40 percent less

than U.S. retail prices.

Many comments expressed concern for the shortterm impact on the Canadian drug supply. Some evidence was presented that some Canadian provinces

are experiencing shortages for some drugs and this

trend is increasing. These comments noted the discrepancy in the size of the U.S. market and the

Canadian market and suggested that if the drugs

intended for Canadians were exported to the U.S.

legally and on a commercial basis, then the Canadian

drug supply will suffer and Canadian patients will be

at risk. Health Canada1 announced that potential

shortages might arise from legalizing commercial

importation. Some comments asserted that up to 40

percent of the Canadian drug supply is diverted to the

U.S. A few comments noted that despite agreements

between drug manufacturers and Canadian wholesalers and pharmacies that drugs will not be sold to

U.S. citizens, drugs are being diverted to export pharmacies.

A number of comments stated that drug importation

would not significantly reduce drug prices in the U.S.

Some of the reasons mentioned include the belief

that the drugs will pass through so many hands that

each transaction will add cost to the drugs and ultimately drive the cost back up to U.S. prices.

Several comments cited research from the London

School of Economics, which quantified the economic

impact of parallel trade in six countries. These

researchers found that there is little evidence of savings to consumers or inter- or intra-country competition effects or price convergences. One comment

stated that the London School of Economics study is

flawed because the authors did not look at all products that were imported under parallel trade and only

examined a small portion of those drugs that are

imported.

Other comments suggested that parallel trade could

work in the U.S. and offered ways to construct a parallel import scheme. For example, a few of these

comments stated that parallel importation should be

limited to countries that have regulatory systems

comparable to the U.S.

III. DISCUSSION

A. Overview 

Based on these public comments, extensive review of

both the published peer-reviewed literature and

analysis of proprietary data from IMS Health, Inc.,2 we

have assessed the effects of legalizing commercial

importation on U.S. prices and consumer savings. We

obtained and analyzed proprietary data from IMS on

prices, sales, quantities, and other information for ten

countries including the U.S. We also considered price

data reported to CMS under the Medicaid program.

Throughout this chapter we will discuss the IMS data;

Appendix A provides a detailed discussion of how our

data were selected. We assess a change in policy that

would allow drugs equivalent to FDA-approved products to be imported into the U.S. from a significant but

unspecified set of countries belonging to the

Organization of Cooperation and Economic

Development.

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CHAPTER 7 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION
Although many proponents of legalizing drug imports

argue imports would greatly help U.S. consumers, the

existence of lower prices abroad is not sufficient to

ensure significant savings from legalizing commercial

importation. The volume and type of foreign drugs

that may be imported is also critical in determining

total savings — a measure valuable to national policy-makers. In addition, the importers’ share of total

savings, their compensation for the costs of finding

and shipping the drugs, bearing liability risk, and

complying with applicable safety regulations, may be

quite large. In this chapter, we analyze the impact of

these factors on the likely savings to drug buyers. We

find that savings from legalizing drug imports would

likely be a small percentage of total drug spending, a

finding similar to that of the Congressional Budget

Office.

3

Savings from legalized commercial importation will

likely be small as a percent of total drug spending

because of three factors.

• U.S. drug buyers—families, HMOs and insurance

companies, etc. —may get a discount much less

than the full difference between U.S. prices and

foreign prices. U.S. drug buyers may get discounts

of only 20 percent or less, with the rest of the difference between U.S. and foreign prices going to

commercial importers that find less expensive

drugs abroad and import them in compliance with

applicable safety regulations.

• About 30 percent of total drug spending may be

unchanged by legalizing commercial importation

because about that much is now spent on products that are inappropriate for importation (e.g.,

drugs that are inhaled during surgery, injectables,

biologics, and controlled substances) or generally

unavailable abroad for less (e.g., generic products).

• The foreign supply of patented brand-name drugs

may be limited relative to the total volume of such

drugs consumed in the U.S. market. Imported

drugs may be around 12 percent of total use of

such drugs in the U.S., depending on the scope of

any importation program, because drug companies have incentives to impede exports and some

foreign governments may curtail exports to preserve access to low-priced drugs.

These figures, which are derived and discussed below,

suggest that overall savings from legalizing commercial drug importation may be small—one to two percent of total drug spending.4 This amount would be

between roughly $2 billion and $4 billion per year,

based on U.S. spending in 2003 on pharmaceutical

products described below.

Individual consumers (as distinct from insurance

companies and government programs that buy

drugs) would enjoy only some of the total savings

because only a small fraction of all spending on drugs

comes directly out of their pockets. The MMA, when

fully implemented, will offer drug coverage to the

over-65 population. In 2001, 26 percent of all spending on retail prescriptions was paid for out-of-pocket

by people under-65 years of age.5 Thus, the total savings from legalized importation that go directly to

consumers may be less than one percent of total

spending.

The finding that overall savings will likely be a small

percentage of overall drug spending is consistent

with the observation that some individuals may enjoy

significant savings. Uninsured people who buy

chronic use patented name-brand drugs on a regular

basis may enjoy meaningful savings if they are able

to buy safe and effective foreign versions of U.S.

drugs for significantly less than what they would pay

for U.S. drugs. This analysis finds, however, that savings in aggregate may be small relative to overall

spending on drugs.

To put in perspective the idea that consumer savings

from commercial importation are small, we note that

potential savings from commercialized importation

may be less than the savings available to U.S. drug

buyers by switching from more expensive brandname products to exclusive use of FDA-approved

generic products already on U.S. pharmacy shelves.

We base this conclusion on an assessment of the

magnitude of such savings using detailed information

on products containing 29 unpatented molecules

described later in this chapter. As described in

Appendix E, we find evidence that savings from full

use of FDA-approved generics could reach billions of

dollars per year, or a few percentage points of total

drug spending. An analysis of IMS data from 2003,

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HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 7
combined with estimates prepared by CBO regarding

generic drug utilization, indicate that in 2003, U.S.

consumers could have saved as much as an additional $17 billion on U.S.-approved drugs by purchasing

available generic substitutes for brand name drugs.

We note that estimates presented in this chapter are

quite uncertain because of data limitations. There is

little relevant precedent for legalizing commercial

importation of pharmaceutical products. Alternative

assumptions about particular parameters, especially

the amount of foreign drugs that might be imported

into the U.S., could affect overall estimates of savings.

Alternative assumptions consistent with the data presented here would do relatively little to change the

bottom line that savings to drug buyers would be

small as a percent of total drug spending.

The relationship between perceived large international price differences and our findings of small likely

savings is illustrated in Figure 7.1, which reflects the

relative prices and volumes of branded and generic

drug products in the U.S. in 2002. Distances along

the horizontal axis in Figure 7.1 measure the percent

of doses prescribed per year, the vertical axis measures the price per dose expressed as a percent of the

branded price per dose, and area reflects total spending on prescription drug products. Generic drugs

account for approximately 63 percent of total doses

prescribed, but slightly less than a sixth of all spending, according to IMS Health, IMS National Sales

Perspective (TM), 2002, because they are less expensive. Spending on some branded drug products

accounting for six percent of all doses will be unaffected by importation, either because they are drugs

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CHAPTER 7 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION

Figure 7.1
of special concern (e.g., biologics and injectables), or

because foreign versions of a U.S. drug are produced

and manufactured abroad by a foreign corporation

that has only a licensing agreement with the FDAapproved manufacturer. Most spending would continue to be on domestic branded drugs and at prices

unaffected by importation because foreign supply is

small and limited relative to U.S. demand. Drug manufacturers commonly charge different prices to different buyers in the U.S. Spending on the four percent

of total doses that would be imported would not be

at the foreign price, which is approximately 60 percent of the U.S. price, but instead at an imported price

significantly above the foreign price because of

markups by intermediaries. Savings to U.S. drug buyers would be the unshaded rectangle at the top left

of the figure. Given these assumptions, savings to all

drug buyers would amount to less than two percent

of total drug spending. Most of the savings would go

to third party payers, such as insurance companies

and HMOs. Savings that go directly to consumers, as

opposed to insurance companies and other thirdparty payers, may be a fraction of one percent.

In the rest of this chapter, we gauge 1) potential discounts on foreign drugs, taking both foreign prices

and intermediaries’ markups into account, 2) spending on drugs likely to be unaffected by importation

because the drugs are unsuitable for importation or

unavailable abroad for less, and 3) the likely volume

of imported drugs, given the incentives that manufacturers’ and foreign governments will face to restrain

exports.

B. Potential Discounts to U.S. Drug Buyers 

A first step in assessing the potential consumer savings from commercial importation is measuring existing price differences among countries. This is not a

simple exercise, however, as there is no single definition of a drug nor is there a single measure of price.

A second step, presented at the end of this section, is

to estimate how much intermediaries may charge for

importing foreign drugs. Together, these estimates

suggest the potential discounts to U.S. drug buyers

for imported drugs.

1. Existing Research 

The academic literature includes several detailed, systematic, and methodologically sound comparisons of

international drug prices. F.M. Scherer6 provides a

useful and recent discussion of pricing and research

and development incentives. Perhaps the most comprehensive work, by Patricia M. Danzon and Michael

F. Furukawa,7 indicates that in 1999, Japanese prices

were higher than U.S. prices, and other foreign prices

ranged from six percent to 33 percent lower than U.S.

prices. While they assess a variety of price measures,

they focus on estimates that define drug products as

a specific molecule and indication, or a specific molecule and indication and strength. They use dose as

a measure of quantity, impute discounts of approximately eight percent to U.S. branded drug prices, and

rely on manufacturer prices, rather than wholesale or

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HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 7

Why do individual consumers find

that they do save money when they

buy brand name drugs from Canada,

but this report says there will be little or no savings?

Individual consumers who purchase brand

name drugs from Canada may, in particular

cases, save money. However, under a legalized

commercial importation program, the system

costs associated with the development, implementation, and additional safeguards needed

to ensure safety and efficacy of the drug products, will affect the potential savings that an

individual consumer would enjoy. Experience

with other countries that do permit importation shows that intermediaries

(exporters/importers) will take a large portion

of the price differences. Additionally, because

the importable supply will be limited, there

may be an increased demand for products

exported from Canada, thus, increasing their

price. Finally, third party payers (e.g., HMOs,

insurance companies) will also take a portion

of the potential savings before the drug product reaches the consumer.
retail measures. These results are for a sample that

includes both branded drugs available from a single

innovator company and generic drugs marketed by

companies that compete after patents have expired.

International price differences vary according to

whether drug products are produced by innovator

companies holding patents (brand-name drugs) or by

companies that market products as generics after

patents have expired. Danzon and Furukawa state

that for brand-name drugs, France and Italy have the

lowest prices (approximately 40 percent below U.S.

levels), Canada is nearly as low, while the U.K. prices

are about 25 percent below U.S. levels.

Danzon and Furukawa report U.S. generic prices are

significantly lower than foreign prices. In Italy, generic prices are nearly double the level of U.S. generic

prices. Earlier research by FDA also found that generic drugs were generally cheaper in the U.S. than in

Canada.8

2. Our Analysis of Price Differences 

Our own assessment of the prices of different drugs

reaches similar findings. Comparing the prices manufacturers charge, we find that foreign prices for topselling11 brand name products that represent nearly

45 percent of the U.S. market in 2002 were approximately 60 percent12 of the U.S. price during 2003. For

this estimate, prices are dollar per kilogram of the

active ingredient, with an adjustment for the salt content. Appendix A provides discussion of how the topselling drug products were selected for this study.

To summarize price differences, we calculate price

indices using U.S. quantities (kg or IU) as weights.13

U.S. quantities are used because we are interested in

effects on U.S. buyers.

While the IMS data we use—from its MIDASTM database—are widely acknowledged to be the best available for systematic international price comparisons,

they do not include payments and accounting adjustments that do not appear on invoices. We adjust for

discounts and rebates using data from CMS on average manufacturer’s price, a measure that reflects

prices for all non-Medicaid sales to retail pharmacies

and some hospitals with independent pharmacies.

We also adjust prices for Medicaid discounts by using

the share of total retail drug spending by Medicaid,

based on prescription sales data provided by IMS

Health, IMS National Prescription Audit (TM), 2003,

and the Medicaid price net of rebates, as reported by

CMS. Our assessment of these prices for the top-selling products in our dataset indicates that market

prices including Medicaid are slightly less than the

IMS invoice prices for comparable transactions.

Applying these off-invoice adjustments to manufacturers’ prices to both the retail sector and the hospital sector suggests that manufacturers’ prices to hospitals and retail distributors together are somewhat

lower than prices to retail establishments alone.

Figure 7.2 shows that in several countries, foreign

prices for the retail and hospital sectors combined

tend to be approximately 60 percent of U.S. prices,

when prices are measured in this way.

These international price comparisons may overstate

future international price differences because they

use 2003 data and, therefore, do not take into

account the declines in U.S. prices anticipated as seniors gain health insurance coverage for drugs and

health insurers negotiate price discounts with drug

companies.

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CHAPTER 7 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION

Why are drugs cheaper in

Canada?

Unlike the U.S., many countries, including

Canada, regulate prices for drug products.

Prices are regulated directly or indirectly

through controls on reimbursement, limits on

overall spending, or limits on the rate of return

on capital.9 For example, Canada’s Patent

Medicine Prices Review Board regulates the

prices manufacturers may charge in Canada.

Manufacturers who launch a product in the U.S.

often may not charge the same price in Canada

as they do in the U.S. due to these Canadian

government controls.10
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HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 7

Figure 7.2

Figure 7.3
The international price differences presented here are

also likely to significantly overstate current international price differences because the value of the dollar relative to other currencies, such as the Euro, has

declined markedly since 2003. To the extent that the

value of the dollar relative to other currencies

remains lower than it was in 2003, estimates of savings from legalized commercial importation that we

present here may be too high.

For a large set of widely available off-patent molecules, U.S. prices of generic products are lower than in

foreign countries, a conclusion broadly consistent

with earlier research.14 We find, however, that nonMedicaid prices for generics are even lower than

expected, because the off-invoice discounts and

rebates that manufacturers report to CMS are large

relative to the invoice prices reported by IMS. In particular, we find that these off-invoice adjustments on

average are approximately 24 percent of the invoice

price. We lack sufficient information on the best

prices to adjust U.S. prices to take into account the

Medicaid discounts—though such adjustments

would serve to lower further the low prices of U.S.

generics. As shown in Figure 7.3 the prices foreigners

pay for generics are more than 50 percent greater

than prices Americans pay, provided prices are averaged using U.S. quantities. (Poland is an exception.)

The exact price difference is somewhat sensitive to

the method of estimating prices. In particular, if we

assume that the off-invoice adjustments apply to all

of the IMS data we consider, and not just the products for which we have information for both CMS and

IMS prices, international price differences may be

lower or higher.

3. Internet Prices

The preceding analyses of manufacturer’s prices offer

little specific information about prices paid by U.S. residents who lack health insurance and are paying for

prescription drugs directly out of their own pockets.

We have therefore conducted a limited quantitative

assessment of internet pharmacies describing themselves as American or Canadian.15 For a set of topselling drugs,we find that the lowest internet pharmacy prices available to U.S. consumers for branded

drugs are approximately 37 percent less in Canada

than in the U.S., while U.S. generic drugs are approximately 32 percent lower in price than Canadian

generic prices. See Appendix B for a discussion of price

differences among internet pharmacies. A more comprehensive and systematic comparison of international retail prices is very difficult. IMS does not maintain

retail price information by payer type outside the U.S.,

in part because only a negligible share of total drug

spending in some foreign markets is by consumers

who are not covered by national health insurance.

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CHAPTER 7 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION

Case Study: Cost of Generic

Drugs 

CBP recently detained more than 400 packages containing 808 prescription drug products at the Miami mail facility. FDA reviewed

a list of the drugs contained in these packages and observed that about half of the

drugs were foreign generic drugs or drugs for

which there were generic versions available

in the U.S. The detained packages appeared to

be sent to U.S. addresses from a source in the

Bahamas by a Canadian pharmacy, Kohler's

Drugstore of Hamilton, Ontario, which recently set up an internet operation

(www.canadarx.net) to do business with

American consumers. FDA analyzed the prices

charged to the customers that was listed on

the invoices of the detained foreign drug

products. Invoice prices were converted to

U.S. dollars and the prices at four U.S. pharmacies were evaluated for comparison. In

every instance, a U.S. pharmacy price for the

FDA-approved generic drug was less than

what consumers had paid for the foreign

generic drug ordered from Kohler's Drugstore

in Canada. Even some of the brand name

products could be purchased from one of the

U.S. pharmacies at a price within twenty dollars of the Kohler price. For further information on generics, see Appendix E.
4. Accounting for International

Differences in Drugs

Comparisons of drug prices are greatly complicated

because many pharmaceutical products are slightly

different in different countries. Dosage form,

strength, or package size tends to vary across countries, complicating a direct comparison. Moreover, a

comprehensive comparison of products across countries would essentially have many “blanks” because

few products would be sold the same way in every

country. For example, esomeprazole is sold in the U.S.

as 20 mg and 40 mg tablets in quantities of 30, 90,

100, and 1000, while in Canada it is sold as 20 mg

and 40 mg capsules in quantities of 14, 28, 56, 70,

and 100. Zolpidem is sold in both the U.S. and U.K.

as five and ten mg film-coated tablets. In the U.S.,

package sizes range from four tablets to 500 tablets

while the only package sizes sold in the U.K. are 28

and 30. The only identical matches are the 10 mg,

30-tablet packages. Comparing prices of products

that are identical in terms of molecule, dosage form,

strength, and package size would mean that 86 percent of the products in our IMS dataset would be

excluded. In Appendix C, we analyze the loss of

observations in our IMS dataset as we use more specific definitions of a drug.

One alternative approach that we adopt here is to

define a drug at a more aggregated level, such as all

products having the same active ingredients. With

this approach, we have far fewer “blanks” and can

make comparisons ignoring dosage forms and package sizes, although we may lose some precision by

not comparing identical products. As explained in

Appendix C, alternative definitions of drug product

do not significantly affect our findings.

5. Drug Prices Vary Within Each Country

Of course, these comparisons of average prices in different countries may mask important variations in

price within a country. In the U.S., uninsured consumers generally pay the highest prices, but they face

a variety of prices for the exact same product, even in

the same metropolitan area. A recent article focusing on the retail price of 17 prescription drugs shows

that consumers can save on average more than 40

percent on prescription drug prices by shopping from

the lower range stores compared to the higher range

stores in the Washington D.C. area.16 Moreover, one

Washington D.C. area chain’s drug prices “averaged

about 34 percent lower than the average for the

area’s highest priced chain,” and six percent below

the average U.S. online/mail-order pharmacy.17 

6. Intermediaries’ Share

The final step in assessing possible discounts that

drug buyers might experience with legalized commercial importation is an evaluation of the intermediaries’ share of potential savings. Intermediaries that

bring drugs from foreign markets to the U.S. will likely receive a large part of the gains from importation.

They will bear the costs of searching for drugs in lowpriced countries, and the sundry costs of keeping and

managing inventory, as well as shipping products to

willing wholesalers, or retail pharmacies and hospitals in the U.S. In addition they will bear the costs of

complying with regulations intended to ensure safety

equivalent to that associated with drugs distributed

through the conventional channels.

While it is difficult to assess how much of the gains

from trade will go to intermediaries, the E.U. experience with legal commercial drug importation may be

instructive. Elements of market structure appear similar although there may be differences in the importance of economic incentives to buy cheaper drugs.

The E.U. experience suggests that the intermediaries

will consume a large part—one half or better—of

potential savings. A recent study of drug importation

within the E.U. published by the London School of

Economics18 suggests that such intermediaries may

take so much of the gains that the price reduction

observed by consumers is negligible. This study indicates that profits to importers were six times greater

than savings to drug buyers, and that the benefits to

patients were nearly nil. A separate paper by Mattias

Ganslandt and Keith E. Maskus19 show that gains to

importers in Sweden “could be more than the gain to

consumers from lower prices.” See appendix D for

more on importation in the E.U. Additionally, a recent

analysis of importation in the E.U. suggests that the

savings that reach consumers are small as a percent

of total drug spending. In Denmark, Germany,

73

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 7
Netherlands, Sweden, and the U.K., estimated savings

as a percent of total drug spending ranged from less

than one percent to 2.5 percent.20

Discounts for imported drugs may also reflect consumer’s perception of risk—a belief that imported

drugs are inferior to conventional FDA-approved

drugs. Consumers may believe that the foreign drugs

are not as safe and effective as FDA-approved products because of inferior manufacturing abroad. In

addition, there may be risk associated with the handling of the drugs in the distribution chain that begins

overseas and lacks sufficient regulatory oversight at

the border. These discounts, thus, raise questions

about whether the associated savings justify the

increased risk, a topic not addressed in this chapter.

Intermediaries would consume a large part of potential savings even if both personal and commercial

importation were legalized. In this case, firms that

import commercial volumes would bid for any sizable

inventories of importable drugs in exporting countries. Such bids would generally exceed bids by internet pharmacies trying to export to individual U.S. consumers, because the costs of commercially importing

and distributing drugs are much less than the costs of

personal importation. The costs of driving or flying a

single shipment of 10,000 bottles to the U.S. are vastly less than the costs of shipping 10,000 bottles separately to that many separate destinations. Moreover,

a small truckload of high value drugs would earn its

owner such high profits, if imported from Canada or

France, that legalized commercial importation would

make it difficult for internet pharmacies seeking to

export drugs to keep drugs in stock. As a result,

Americans seeking to buy drugs from foreign internet

pharmacies may find that the drugs are unavailable

because legalizing commercial importation would

consume a substantial share of possible savings, in

part because it would draw supplies of importable

drugs away from internet pharmacies.

Combining the earlier estimates on price differences

and these estimates of the intermediaries’ markups

74

CHAPTER 7 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION

Figure 7.4
suggests discounts to U.S. drug purchasers will average 20 percent of the price of equivalent U.S. pharmaceutical products.

C. Eligibility and Availability of Drugs for

Importation

The existence of cheaper drugs abroad does not necessarily imply that these drugs would be available for

U.S. consumers to purchase. For a variety of reasons,

such drugs may be ineligible or unavailable for importation. Lower-priced foreign drugs generate savings

only to the extent that they can be obtained at those

prices.

The MMA would prohibit importation of biologics,

injectables, controlled substances, intravenous (IV)

products and certain parenterals, and drugs inhaled

during surgery. In addition, many of the drugs available in other countries are not from the same firm or

the same dosage form as the U.S.-approved drug and

would probably not be eligible for importation. A

review of our data indicates that drugs equivalent to

19 percent of spending in our data set potentially

would be ineligible for importation.

Generics account for approximately nine percent of

spending on drugs in our dataset. Taking into

account the drugs that are both generic and ineligible

for other reasons (see above), 25 percent of spending

in our dataset is on drugs that are ineligible for

import, or likely to be unavailable abroad at lower

prices.

Savings from importation also may be limited

because some new drugs are not available in other

countries, although such limits to savings appear

modest. This occurs largely because a number of new

drugs are launched in the U.S. before they are sold in

other countries. As a percent of total drug launches,

this number has been growing. The data in Figure 7.4

suggests that, prior to 1995, less than 20 percent of

new drugs were launched first in the U.S., whereas

more recently more than 40 percent of new drugs

were first launched in the U.S. This trend shows that

Americans have a greater choice of newly launched

pharmaceutical products than foreigners.

75

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 7

Figure 7.5
Ten percent of all recently approved new active substances (NASs)21 are unavailable outside the U.S. This

conclusion was reached using data on the number of

NASs approved and marketed in each of 11 countries

from IMS Health, IMS Chemindex (TM), 2003. Our

analysis focuses on NASs launched between January

1, 1994 and December 31, 2003.22 U.S. residents had

access to 63 percent of all NASs launched anywhere

in the world during this period. The UK was second

with 58 percent, and Germany third with 56 percent.

We present the results of this analysis in Figure 7.5.

We also considered the availability of drugs in other

countries cumulatively. Ten percent of the NASs

approved in the U.S. over the last ten years would not

be available for importation from these nine industrialized countries.

According to data from IMS Health, IMS National

Sales Perspectives (TM), 2003, total sales of all single

ingredient products using these molecules was about

$1.09 billion in 2003, or approximately 0.5 percent of

aggregate U.S. sales.23

Under the MMA and under recent legislative proposals, foreign drugs may also be unavailable for importation if the products are not sold by the same corporation. Of those drugs potentially eligible for importation and having the same molecule and dosage

form as in the U.S., five percent are not available from

the same corporation overseas as in the U.S. Figure

7.6 shows how the percent of sales from products

available for importation among potentially eligible

products is constant as the number of potential

exporting countries grows.

We also note that our analysis of the top two hundred drugs sold by retail pharmacies in 2003, eliminating those drugs that would not meet the criteria

set forth in the MMA for importation, shows that the

fifty best-sellers account for about half of the $142

billion spent in the U.S. on prescriptions in 2003 in

retail pharmacies.

24

In summary, these data collectively suggest that pharmaceutical drugs representing about 30 percent of

76

CHAPTER 7 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION

Figure 7.6
total U.S. drug spending will not be imported. This

estimate assumes 25 percent of spending is for ineligibles and generics, 0.5 percent of spending is for

NASs not approved abroad, and five percent of

spending is on drugs that are unavailable abroad in

the same dosage form and from the same manufacturer. Conversely, for purposes of this analysis, 70 percent of spending is on drugs likely to be imported or

eligible for importation under the MMA and recent

legislative proposals.

D. Low Volume Available for Importation

Savings from legalizing commercial importation is

likely to be limited because the total volume of

imports may not be as large as expected given the

price differences. The volume may be limited because

drug companies, and even foreign governments, may

decide to restrict exports to the U.S. Furthermore, the

size of the U.S. market and the availability of drugs

abroad suggest that drug importation would be modest. Finally, although the EU has for several years

adopted a policy of encouraging parallel trade among

member states, imports in the importing countries do

not dominate markets for pharmaceuticals. We elaborate on these points in this section, after discussing

briefly why trade in pharmaceutical products is different from international trade generally.

Legalizing drug imports could have a fundamentally

different effect than suggested by the writings of

Adam Smith on the merits of free trade. Trade liberalization typically creates incentives for producers in

exporting countries to increase production.

Legalizing drug importation, however, would not

increase production of legitimate drugs abroad

because the products likely to be imported are generally all patented and controlled by a single seller.

Such a seller’s patents amount to a legal monopoly

under which it is economically rational to charge different prices in different countries, according to differences in income and other economic and institutional factors. Legalization of importation in a highprice country such as the U.S. would generally reduce

profits by shifting sales to the low-price country,

thereby reducing, rather than increasing, overall

incentives to produce.

To preserve their profitability, firms may decide to

respond in a variety of ways.25 They may restrict shipments to foreign wholesalers, to other entities

involved in exports to the U.S., or to an exporting

country as a whole. Drug companies may adopt

packaging and labeling that are not the FDAapproved labeling, thereby increasing the costs to

firms wishing to import drugs. They may shift production to facilities that are not inspected by FDA, thereby rendering products from such facilities ineligible

for importation under most legislative proposals.

Drug manufacturers may delay product launches in

foreign countries prone to export to the U.S., thereby

reducing the period of the product life when trade

would undercut U.S. sales.

Foreign governments may not stand idly by if importation into the U.S. reduces the supplies of inexpensive drugs in their countries. Statements by Canadian

groups suggest that there will be significant pressures on foreign governments, including the

Canadian government, to take actions to protect the

supply of inexpensive pharmaceutical products in

their countries. Canadian pharmacists have already

experienced some difficulties in finding drugs

because much of the supply is going to internet pharmacies that export pharmaceutical products to the

U.S. A survey of pharmacists in Manitoba found that

over 80 percent reported that more drugs were in

short supply compared to six months earlier.

26 They

also reported having to increase the time and effort

they spend to ensure they have adequate supplies of

drugs for their customers. Two Canadian patient

advocacy groups told us that importation has already

caused problems for Canadian patients and that

legalization of the practice in the U.S. “would exacerbate the problem.”27 These statements suggest that

there will be significant pressures on foreign governments, including the Canadian government, to take

actions to protect their supply of inexpensive pharmaceutical products.

Foreign drug supplies in many countries that might

export to the U.S. are sufficiently small relative to U.S.

drug consumption as to raise questions about the

sustainability of high-volume exports from those

countries. Figure 7.7 shows the total standard units

(i.e., doses) distributed by each country for a set of

77

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 7
top-selling U.S. drugs likely to be imported.

The total number of standard units sold in Canada,

France, Germany, and the UK amounts to less than 50

percent of the number sold in the U.S. Adding

Australia, Greece and Poland raises the total number

of doses available to approximately 60 percent. If 20

percent of the standard units for this set of top-selling drugs came from this set of countries (with the

exclusion of Japan, where prices tend to be higher

than in the U.S.), supplies in those countries would

have to fall by that amount, or production would

have to increase by that much to make up the shortfall in supply.28 But the supply of drugs imported to

the U.S. in this case would amount to roughly 12 percent of the total U.S. market. (.12 = .6 x .2) This scenario presumes that drug companies and foreign governments acquiesce to the export of quantities equivalent to one in five prescriptions sold in local markets

and that supplies are limited to quantities from

approved countries, without inviting transshipment

or counterfeit drugs. Greater volumes of imports into

the U.S. would require even greater volumes of

exports from those foreign countries, which we

believe would be relatively less likely due to quantity

constraints.

Our detailed IMS data identify imported products in

Germany and the UK, two members of the EU in

which imported drugs has become increasingly

important. Using products from our dataset of 54

top-selling molecules that are common to both countries, we find that the total volume of imported drugs

increased during the last ten years, reaching highs in

78

CHAPTER 7 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION

Figure 7.7
2002 of approximately five percent of total standard

units in Germany and approximately 22 percent of

total standard units in the UK. Imports as a percent

of total standard units fell in both countries from

2002 to 2003. These data suggest limits to the

growth of imports. In particular, in a regulatory environment that encouraged parallel imports and discouraged or prohibited actions by governments of

exporting countries and by drug companies to deter

parallel imports, trade may have reached a plateau. 29

1 Macafee, Michelle, “Health Canada has Plan for Drug

Shortages Caused by Internet Trade: Documents,” June

6, 2004, October 15, 2004. Accessed at http://www.globalaging.org/health/world/2004/short.htm on 11/4/04.

2 IMS Health is an independent collector of global pharmaceutical information and data, with offices in

Plymouth Meeting, Pennsylvania.

3 Congressional Budget Office, “The Pharmaceutical

Market Access Act of 2003,” CBO Cost Estimate,

November 19, 2003. Accessed at

http://www.cbo.gov/ftpdocs/48xx/doc4852/hr2427.pdf

(hereinafter cited as CBO, 2003.) on 11/4/04.

4 Our estimate of savings for drug buyers generally—1.7

percent— may be calculated as 40 percent price difference x 0.7 of all spending for drugs eligible for import x

0.12 of the drugs actually imported, x 0.5 of total potential savings going to drug buyers. Individual consumers

as a group would realize savings equivalent to a small

fraction of this amount.

5 Agency for Healthcare Research and Quality.

“Prescription Medicines-Mean and Median Expenses per

Person With Expense and Distribution of Expenses by

Source of Payment: U.S., 2001,” May 28, 2004, October

15, 2004. Accessed at

http://www.meps.ahrq.gov/MEPSNet/TC/TC13.asp?File=

HCFY2001&Table=HCFY2001_PLEXP on 11/4/04.

6 F.M. Scherer (2004) Scherer, F.M, “The Pharmaceutical

Industry – Prices and Progress,” The New England

Journal of Medicine, 2004, 351(9): 927-932.

7 Danzon, Patricia M. and Furukawa, Michael F, “Prices

and Availability of Pharmaceuticals: Evidence From Nine

Countries,” Health Affairs Web Exclusive, October 29,

2003. Accessed at

http://content.healthaffairs.org/cgi/reprint/hlthaff.w3.521v1

on 11/04/04.

8 Food and Drug Administration, White Paper, “Generic

Drug Prices in the U.S. Are Lower Than Drug Prices in

Canada,” November 2003. Accessed at

http://www.fda.gov/oc/whitepapers/drugprices.html

(hereinafter cited as FDA, 2003) on 11/4/04.

9 HHS Importation Task Force, Presentation of Patricia M.

Danzon, Listening Session #4, April 27, 2004.

10 HHS Importation Task Force, Transcript of Listening

Session #4, April 27, 2004.

11 Top-selling products are defined as products that are

large sellers, in terms of sales. In addition, our top-sellers had to meet a number of other criteria that are specified in Appendix A. Based on these additional criteria,

some top-selling products were excluded from our

analysis; therefore, our list of top-selling products is not

the definitive list of all U.S. top-sellers.

12 This estimate is based on data, excluding Japan, presented in Figure 7.2.

13 To compute a price index, we calculate, for the products

common to the U.S. and another country, the ratio of the

cost of buying the U.S. quantities of these products at

foreign prices divided by the cost of buying them in the

U.S. The mathematical expression for this index is

Price Index = 

where ∑ denotes the sum over all common products (i),

P is the price, Q is the quantity, and the subscripts i,USA

and i,C represent molecule i in the USA or in foreign

country C respectively. We define the product as the

molecule and the quantity as kilograms (or IU).

Appendix C explores several alternative definitions.

14 FDA, 2003.

15 We report elsewhere in this study evidence that some

internet pharmacies describing themselves as Canadian,

in fact, have no physical presence in Canada.

16 Washington Consumers’ Checkbook, “Prescriptions for

Less,” Spring/Summer 2004, (13): 72-81.

17 In calculating the price index scores, equal weight was

given to each drug regardless of its importance in the

budget of representative consumers.

18 Kanavos, Panos; Costa-I-Font, Joan; Merkur, Sherry and

Gemmill, Marin. “The Economic Impact of

Pharmaceutical Parallel Trade in European Union

Member States: A Stakeholder Analysis.” LSE Health and

Social Care London School of Economics and Political

Science, January 2004, Table 6.20, Page 181.

19 Ganslandt, Mattias and Maskus, Keith E. “Parallel

Imports and the Pricing of Pharmaceutical Products:

Evidence from the European Union,” Journal of Health

Economics, 2004, 23(5):1035-1057. Ganslandt and

Maskus stand by this statement, which appears in their

original paper, although it is absent from the version of

the paper published in the Journal of Health Economics.

(K. Maskus, telephone conversation, October 12, 2004.)

20 See Appendix D of this report.

21 NASs include all therapeutic drugs containing a new

chemical entitity (NCE), new therapeutic biologics and

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HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 7
new vaccines. FDA defines an NCE as a new drug for

which the active moiety has been previously approved

or marketed in the U.S., but for which the particular new

salt, new ester, clathrate or other noncovalent derivative

or the unmodified base (parent) compound is not

already approved or marketed in the U.S.

22 Scrip Magazine. PJB Publications Ltd, January 1994 -

1999 and February 2000-2003.

23 IMS Health, IMS National Sales Perspectives (TM), 2003,

extracted September 2004.

24 Drug Topics, March 8, 2004.

25 CBO, 2003.

26 Yenra, “Pharmacist and drug shortages in Canada,”

November 21, 3003. October 15, 2004.

http://www.yenra.com/internet-pharmacy/

27 Kaiser Network, “Prescription Drugs Supporters,

Opponents of Prescription Drug Reimportation Make

Case Before Federal Panel,” Daily Health Policy Report,

April 15, 2004, October 15, 2004. Accessed at

http://www.kaisernetwork.org/daily_reports/rep_index.cf

m?hint=3&DR_ID=23210

28 Figure 7.2 presents the total quantity of drugs for all

products using the 54 top-selling molecules. If instead

we focus only on those drugs that might be eligible for

import, dropping biologics, injectables, drugs inhaled

during surgery, and controlled substances, etc. the volume of products sold in other countries relative to the

U.S. consumption is virtually the same as presented here.

29 The peak in 2002 may be related to a recommendation

by the Advocate General to the European Court of

Justice to uphold an earlier Court of First Instance (CFI)

decision restricting imports.

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CHAPTER 7 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION
CHAPTEREIGHT

81

Impact of Importation on Research and Development and

Consumer Welfare

Chapter Highlights:

One of the most frequently debated issues surrounding drug importation is whether the legalization

of importation would reduce research and development (R&D), including spending on discovery,

development, and launching of new drugs. Based on both an empirical analysis of drug data and a

review of previous studies, this report finds that, by shifting sales to countries with price controls for

new drugs, importation would reduce overall U.S. pharmaceutical industry revenues. Since revenues

would fall without a reduction in the cost to produce new medicines, profits would likely fall, as well

as spending on R&D. Consequently, legalized importation would likely adversely affect incentives for

R&D, thereby slowing the flow of new drugs. This report also finds that since annual R&D spending

would drop, importation could result in between four to eighteen fewer new drugs introduced per

decade, at a substantial cost to society. Furthermore, if there were a likely reduction in innovative

new drugs, the foregone consumer benefits associated with loss or delay in new therapies may significantly offset any anticipated savings from legalized importation, depending on uncertainties.

Key Points:

• Legalized importation would adversely affect incentives for R&D, thereby slowing the flow of

new drugs and reducing benefits to future drug consumers and adversely affecting public health.

• Estimates of the reduced benefits to future drug consumers may range from $0.5 billion to $2

billion per year without including gains from having better generics in the future. Reduced benefits may significantly offset savings from legalized importation.

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 8
I. WHAT WE SOUGHT COMMENT ON 

Congress asked HHS to assess the impact on the

research and development of drugs—and the associated impact on consumers and patients—if importation were permitted.

To further explore this issue, we also

asked for comment on the following:

What would be the impact on research and development of drugs and the associated impact on consumers and patients, if changes in importation laws

were to be implemented?

II. WHAT THE COMMENTS SAID

Several comments stated that price controls, whether

imported or mandated, would result in a reduced

return on investment for American pharmaceutical

companies and would adversely impact R&D. One

comment stated that, for most of the past century,

Europe led the world in pharmaceutical innovation.

Within the last ten years, the U.S. overtook Europe,

both in terms of investment and output of its innovative activity (e.g., NMEs). The comment argued that

price control policies and cost-containment measures

in Europe have led to a lack of competition, resulting

in reduced R&D and fewer new drugs. This comment

also cited studies on how pharmaceutical price regulation would affect future drug innovation. The studies cited confirmed a link between price controls and

reduced innovation.

A pharmaceutical company cited academic research

estimating that the R&D process for a drug generally

costs over $800 million and takes up to 15 years. This

comment stated that if U.S. pharmaceutical companies were forced to reduce their investment in R&D,

the rate of development of new cost-saving pharmaceutical innovations, and new, more efficacious therapies would slow significantly.

A few comments stated that the perception of future

profits greatly influences the amount pharmaceutical

companies spend on R&D. If potential profits are

reduced or eliminated, future development would be

reduced. A comment noted that risky healthcare R&D

projects must be justified by their potential payoffs in

order to maintain capital flows into the industry.

Finally, several comments noted that, because U.S.

pharmaceutical companies are the current world

leader in innovation, American consumers benefit

greatly by having earlier access to the best and

newest treatments, and the American economy benefits as well.

III. DISCUSSION

In this chapter we assess the likely magnitude of R&D

that might be lost if drug importation were legalized.

In our assessment, we consider the effects of legalized importation on R&D and future welfare in three

parts: the effect of importation on prices, revenues

and R&D spending; the effect of reduced R&D spending on discovery, development, approval, and launch

of new drugs; and finally, the effect of new drugs on

patient welfare. In presenting our assessment we

also discuss the key uncertainties in our estimates.

Our analysis is based not only on the public comments but also on a comprehensive review of the

peer-reviewed and professional economics literature

and on discussions with economic experts.

Our analysis shows that legalizing importation would

adversely affect R&D of new drugs, causing future

drug consumers to forego the health benefits associated with innovation. By shifting sales from countries

with high prices to countries with low prices that are

maintained through price controls, importation would

reduce revenues. Since revenues would fall without

any reduction in cost, profits and cash flow would be

expected to fall, and spending on R&D would drop.

Reduced R&D spending would delay the discovery

and introduction of New Active Substances (NAS),1

thereby depriving consumers of new treatments for

disease. Based on this likely chain of events, we

believe legalized importation would have a negative

impact on R&D, drug development, and the welfare of

future drug consumers.

We note that estimates of the impact on R&D from

legalizing commercial importation may be too low

because they do not reflect any costly defensive

measures that drug companies might take in

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CHAPTER 8 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION
response. The costs of such measures may make the

development of innovative new drugs less financially

attractive. We lack information to revise our estimates of the impact on R&D to take into account the

costs of such potential defensive measures.

We also note that our estimates of the adverse

effects of importation on R&D implicitly presume that

drug companies do not take costly measures to curtail imports into the U.S. As the cost of such measures might further reduce the net returns to developing and marketing new drugs, the adverse effects of

importation on R&D and future patient welfare may

be larger than estimated here.

A. Reductions in Revenue Reduce

Spending on R&D

Our point of departure in analyzing the effects of

reductions in drug companies’ revenues on R&D

spending is a convenient assumption that a reduction

in spending on prescription drugs is one percent.

According to CBO,

2 importation would reduce drug

spending in the U.S. by one percent. While the effects

of legalized commercial importation on spending on

drugs may be slightly larger, as explained in the preceding chapter, R&D effects are essentially proportional to assumed changes in spending. Thus, R&D

effects consistent with alternative estimates of consumer savings can be derived by rescaling appropriately the estimates described below. Our analysis

identifies changes in global sales and profit resulting

from legalized importation and the ensuing reduction

in R&D spending.

According to the analysis in Chapter 7, drug company sales revenue will fall by more than the assumed

one percent savings to drug buyers. Intermediaries—

who move drugs from other countries to the U.S. —

will bear the cost of any new safety measures, as well

as the costs of collecting, storing, and shipping drugs,

thereby earning a share of the gains from importation. Estimating the size of intermediaries’ take is difficult because their activities will constitute an entirely new and different industry. As discussed in Chapter

7, we use a conservative estimate for the impact of

intermediaries of 50 percent. This suggests that the

decline in net revenue to pharmaceutical companies

from legalized importation would be approximately

two percent of U.S. sales revenue.

Published economics research suggests declines in

revenues and expected profits will generally lower

incentives for new drug development. In an assessment of severe declines in expected revenues, Ernst

R. Berndt observes,

...the likely result would be the termination of

some existing R&D projects, especially those

where, other things equal, the payoff is further

in the distance. Preclinical research ... would

be particularly susceptible to reduced revenue

expectations.3

We therefore expect a decline in the return to industry investments to result in reduced R&D effort,

including a reduction in preclinical research, although

the magnitude of such reductions will vary with the

size of any declines in revenues.

Since sales of pharmaceutical products in the U.S. represent approximately 45 percent of 2003 global sales

(see Figure 8.1),4 the loss in global sales is approximately 0.9 percent (0.9% = 45% x 2%). We note that

U.S. drug manufacturers stand to lose at least 5.3 percent (5.3% = 0.9% / 17%) of global profits under this

scenario, given the conservative assumption that long

run profits in the drug industry average approximately 17 percent.5 The economics literature has assessed

the effect of changes in revenues on R&D spending,

although there is still ongoing debate. To evaluate

this effect, we reviewed three key peer-reviewed

papers and conducted our analysis based on the different methodologies discussed in these papers. The

results in these papers suggest that the potential

response of R&D spending to changes in sales revenue may vary by a factor of two.

In the first paper, F.M. Scherer6 finds that research

expenditures vary predictably with changes in gross

margins. In particular, a one percent change in gross

margins (defined as revenues minus cost of goods

manufactured, excluding depreciation, selling costs,

and overhead cost allocations) has historically been

associated with a 0.6 percent change in R&D outlays.7 Scherer bases this conclusion on a time series

83

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 8
analysis of annual, industry-level data for the U.S.

from 1962 through 1991. As gross margins are

approximately 70 percent of revenues, the postulated

percent decrease in revenues will result in a 2.9 percent decline (2.9% = 2% / 70%) in gross margins —

assuming that all costs remain fixed. A 2.9 percent

decline in gross margins would then generate an

expected 1.7 percent (1.7% = 2.9% x 0.6%) reduction in R&D outlays.

In a more directly related study, Carmelo Giaccotto,

Rexford Santerre, and John Vernon8 find an elasticity

of R&D intensity (defined as R&D as a percent of

sales) with respect to real drug prices of 0.58, suggesting that a ten percent drop in real prices – and

hence revenues (assuming that quantity is constant)9

– would lead to a 5.8 percent reduction in R&D intensity. Thus a one percent decline in prices and, hence,

spending would be associated with a 0.58 percent

reduction in R&D intensity, and a 1.6 percent

decrease in R&D spending. Under the current scenario, in which legalized importation could generate

a one percent (direct) reduction in spending and a

two percent (indirect) reduction in pharmaceutical

company revenues, the Giaccotto et al. result would

suggest a 2.6 percent reduction in R&D expenditures.

Finally, John A. Vernon,10 expanding on previous work

by Henry Grabowski and John Vernon,11 finds a

reduction in prices and revenues will influence R&D

expenditures through two mechanisms: a cash flow

effect and an expected profits effect. The empirical

results obtained by Vernon12 rely on the assumption

that pharmaceutical prices and profit margins in the

U.S. become equivalent, on average, to those found in

non-U.S. markets. Vernon observes, “[a] new law

legalizing the re-importation of pharmaceuticals into

the U.S. would plausibly satisfy this requirement.”13

Applying similar assumptions and the results

obtained by Vernon to our current example suggest

that a two percent reduction in prices/revenues

would generate a 3.2 percent reduction in R&D

expenditures through cash flow and expected profits

effects.

14

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CHAPTER 8 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION

Figure 8.1 Pharmaceutical Sales by Country* (2003)

Worldwide Sales = $492 B illion
To calculate the total change in R&D spending we

need to apply these estimated percentage changes to

total baseline spending on R&D. According to the

Center for Medicines Research International (CMRI),

worldwide pharmaceutical R&D spending was

approximately $50 billion in 2003.15 We note that

estimates of expenditure on pharmaceutical research

and development, especially global estimates, vary

widely depending on the source of information. The

variability comes in part from the lack of a consistent

definition of R&D, and therefore what kinds of costs

to include in the estimate. Accounting practices vary

depending on company practice and the entities to

which figures are reported. Some companies include

marketing expenses apparently unrelated to research

or development. Others report rather large estimates

for “other” R&D without specifying what activities in

fact are being funded. We also note that this estimate is for private sector R&D. Government entities

such as the National Institutes of Health also contribute to R&D, but we are assuming this contribution

would not be affected by legalized drug importation.

Because the MMA precludes the importation of

injectable drugs and biologics specifically, we have

not considered any potential impact on biotech R&D

spending in this analysis. Based on the Goldman

Sachs Global R&D Outsourcing Model, PAREXEL

reports that total biotech R&D spending was $14.4

billion in 2003.16 The elasticities derived earlier imply

that the reduction in R&D spending as a result of

legalized importation will range from about $850

million to $1.6 billion. Following Scherer,17 legalized

importation would generate an annual decrease in

R&D of about $850 million ($50 billion x 1.7%),

whereas applying results obtained by Giaccotto et

al.

18 would generate an annual decrease in R&D

spending of approximately $1.3 billion ($50 billion x

2.6%). Applying the assumptions and results from

Vernon19 suggests the decline in R&D spending associated with a two percent decrease in revenues

would be about $1.6 billion ($50 billion x 3.2%).

Because Scherer20 and Giaccotto et al.21 relied on U.S.

data (and not global data) to derive their coefficient

estimates, our use of the $50 billion worldwide R&D

spending estimate may overstate the impact of

reduced U.S. sales to some degree. However, we

assume that drug firms consider worldwide revenues

in making their R&D decisions, regardless of location.

As a result, the estimate of $50 billion for world-wide

R&D spending figure is appropriate for estimating the

impact of reduced U.S. sales on the R&D expenditures

of all firms in the pharmaceutical industry.

The value of R&D spending may vary substantially

with how it is spent. In particular, we note that not

all R&D spending is for innovative NASs. Research by

the Tufts Center for the Study of Drug Development

(CSDD) suggests that approximately two-thirds of

total out-of-pocket R&D spending is associated with

the development of new medicines (an average of

$282 million per new drug).22 About a third is spent

post-approval (an average of $140 million per

approved drug) for long-term safety and efficacy

studies in broader patient populations or specific

patient groups, and the development of new indications and/or new formulations.

23 Post-approval R&D

spending may increase sales, but does not generally

produce products that offer therapeutic advantages

comparable to those of NMEs. For purposes of this

analysis we assume that diminished spending on

R&D will be split between NASs and other purposes

(such as new indications, dosing regimens, or formulations for approved active substances) in the same

proportions as the current spending on R&D (i.e.,

67% for NASs and 33% for other purposes). Thus,

according to this analysis, legalized importation could

reduce R&D spending on new drugs/NASs by

between $570 million ($850 million x 67%) and $1.1

billion ($1.6 billion x 67%) annually.

B. R&D Spending and the Development of

New Drugs

There is relatively little information in the peerreviewed literature—or in the comments submitted

to us—concerning the relationship between pharmaceutical R&D spending and the rate of development

of new drugs.

The most recent and oft-cited estimate of the cost of

developing a new drug is by DiMasi et al.,

24 who estimated an average cost of $802 million (in 2000 dollars) per investigational, self-originated therapeutic

compound reaching the U.S. market. The term “self85

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 8
originated” refers to a subset of drugs for which all

steps in the development process were performed by

the innovator firm or patent holder. This estimate

reflects capitalization of the out-of-pocket costs to

ten multinational pharmaceutical firms (eight in the

top-20 worldwide) of developing self-originated compounds with a mean FDA approval date of 1997,

including losses on unsuccessful research and the

opportunity cost of capital. Assuming the same

growth rates of 7.4 percent25 in the inflation-adjusted capitalized costs of drug development between

this most recent work and comparable earlier work,

DiMasi estimated that the capitalized cost for a drug

approved in 2001 would be approximately $1.1 billion26 in 2002 dollars. Under these same assumptions, we estimate that the development cost of a

drug approved in 2003 is approximately $1.3 billion

(in 2003 dollars).

There are several reasons to be cautious in using this

figure. This estimate may be high relative to the cost

of developing all new drugs, because it applies only

to self-originated new drugs marketed by large multinational pharmaceutical companies. The DiMasi

estimate does not apply to all new drugs (NMEs and

biologics) approved by FDA. Our own analysis of all

92 NMEs and biologics approved by FDA from 2001-

2003 found that only 54 (59%) were developed by

large multinational pharmaceutical firms.

Furthermore, many of the kinds of compounds

excluded from the DiMasi analysis are orphan drugs

and/or drugs developed by relatively small entities.

Orphan drugs, by definition, are used to treat very

small patient populations and their clinical trials are

generally much smaller and less expensive than those

included in the DiMasi analysis. Thirteen (14%) of the

92 NMEs and biologics approved by FDA from 2001-

2003 were orphan drugs. Thus, new compounds

excluded from the DiMasi data set are likely to be less

expensive to develop. Second, there may be varying

returns to scale, so that the last new compound costs

differ from the average, but we have little evidence

concerning this aspect of R&D. Third, this estimate

does not net out any revenues that drug companies

may earn from licensing out the results of early drug

research. Finally, the estimate capitalizes drug development costs to the point of FDA approval which, for

slightly more than one-half of such products, is after

approval elsewhere in the world.

Notwithstanding these cautions, the DiMasi estimate

is credible enough to provide useful insights. It is

derived using methods reviewed by the

Congressional Office of Technology Assessment,

which in 1993 concluded that an earlier report by

DiMasi on the cash outlays required to bring a new

drug to market and the time profile of those costs

provided a reasonably accurate picture of the mean

R&D cash outlays for new compounds first tested in

humans between 1970 and 1982.

If we divide the reductions in new drug related R&D

expenditures estimated previously by the $1.3 billion

figure, we find a potential reduction of between 0.44

($570 million / $1.3 billion) and 0.85 ($1.1 billion /

$1.3 billion) fewer new drugs introduced per year as

a result of legalized importation. In other words, this

would translate into between approximately four and

nine fewer new drugs over a decade, given the

assumption that importation would provide consumer savings of one percent. If the savings from

importation were larger than the one percent

described here, the adverse R&D effects would

increase proportionately, that is, the amount of

money spent on R&D would decrease proportionately. Moreover, the decline in the number of new drugs

introduced could essentially double to between eight

and eighteen per decade if R&D expenditures are

reduced by two percent. Given the uncertainty about

the magnitude of consumer savings, an estimate for

the number of new drugs that would not be introduced ranges from four to as many as 18 drugs per

decade.

C. Development of New Drugs, Public

Health and Consumer Welfare

While some new drugs have obvious, enormous public health value — the Salk polio vaccine, the first

anti-retrovirals, or statins — many others provide

much more modest benefits. A few recent papers

have tried to assess these benefits in a way that could

generate an average value. This literature is split

between those writers who seek to estimate quantitatively the effects of new drugs on public health,

measured as declines in mortality or morbidity, and

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CHAPTER 8 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION
those who instead focus on the value of new drugs in

economic terms, i.e., in terms of what buyers are willing to pay for them. We turn briefly to the former, and

then focus on the latter.

Frank R. Lichtenberg27 has researched the effects of

new drugs on human health and reported finding

very large effects. In a 2004 paper, Lichtenberg

attempts to measure the effects of new chemical

entity (NCE) launches on longevity. Using data covering diseases borne by people in 52 countries from

1982 to 2001, Lichtenberg estimates that between

the years 1986 and 2000, the average annual

increase in life expectancy attributable to NCE

launches was nearly 3 weeks. Moreover, he reports

that NCE launches accounted for 0.79 years, or some

40 percent of the increase in longevity that these

countries enjoyed from 1986 to 2000. These results

suggest that a significant part of recent public health

gains around the world may be attributed to access

to new medicines. This result underscores the extent

that other countries are benefiting from R&D efforts

financed largely by U.S. consumers. These benefits

are potentially very large, since recent economic

research suggests that the value to consumers of

improvements in health has in the U.S. historically

been similar in magnitude to economic growth as

conventionally measured.

These results are limited in their direct applicability to

determining the impact on U.S. consumers alone,

however, because Lichtenberg’s estimate of the effect

of NCEs on longevity is an average effect for all 52

countries in his sample. Since these countries have a

wide range of incomes and levels of economic development, his estimates are not appropriate for an

analysis of impacts in the U.S. Furthermore, since

Lichtenberg provides no specifics as to how the U.S.

differs from this average, we are unable to estimate

the effect of NCEs in the U.S. based on his analysis.

But even if the impact on life expectancy in the U.S. is

a fraction of the overall global average, the adverse

impact of reduced drug innovation on the health of

Americans who use pharmaceuticals is significant.

An alternative approach would value new drugs in

terms of their market impact, using economic measures of the benefits to consumers and producers. For

goods and services unrelated to medicine, economists typically measure the value of such goods to

consumers by their willingness to pay. While applying such measures to drugs is methodologically difficult, the authors of a recent study found under plausible assumptions, that total drug sales provide a

lower bound estimate of total social surplus, i.e., the

gains to both producers and consumers.28 In addition, they find that one-third of this amount provides

an approximate measure of the benefits to consumers of the new patented drug. Consumers benefit from new drugs by having a broader array of effective therapies and their spending on the new drug is

thus a measure of the value of the new drug to them.

This approach, however, can generate uncertain estimates of value. We believe that it may overstate

somewhat the benefits of new drugs because it does

not fully account for the substitution in drug use

away from older products and towards newer ones.

More importantly, it may significantly understate the

total benefits to consumers of new drugs because it

reflects only the gains from having access to the

patented drug during its patent life. Of course consumers benefit after patent expiration from having

access to inexpensive generic substitutes, and these

benefits may in principle be relatively large.

Applying this research might provide one basis for

describing roughly the value to consumers of foregone R&D in dollar terms. Based on data presented

in an FDA report to Congress, the present discounted

value of sales of a new drug over 15 years is approximately $5.4 billion.29 We assume for the purposes of

this analysis that the present discounted value of lifetime sales of a new drug is $5 billion, and that onethird of this amount, $1.7 billion goes to drug buyers—including households, government agencies,

and private third party payers—in the form of consumer surplus. Combining this information with our

previous estimates of 0.44 to 0.85 fewer NCEs might

suggest a loss in consumer benefits of between $0.75

billion and $1.5 billion due to legalized importation

that would reduce consumer spending by one percent. This estimate is likely to be significantly too

low, however, because it ignores the benefits to consumers of lower prices associated with the generic

drugs that enter the market after patent expiration.

87

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 8
D. Social Welfare from Loss in R&D and

Cost Savings

As noted previously, the analysis in this chapter

assumes that the reduction in drug spending from

legalized importation would be one percent—

approximately $2 billion annually. This reduction in

spending reflects not merely a transfer from drug

companies to intermediaries and consumers, but also

a real cost in the form of reduced future innovation.

Our analysis suggests that the cost of this lost innovation may be worth between $0.75 billion and $1.5

billion per year, ignoring both potential delays

between importation and reductions in R&D activity

or new drug launches, and the benefits to consumers

from future access to better generics. If the reduced

revenues to drug companies from legalized importation affected sales of newly launched drugs with a

seven-year lag, then the cost of the lost R&D would

fall by approximately 30 percent, assuming a five percent discount rate. The results of the preceding analysis of R&D effects estimating one percent consumer

savings are summarized below in Figure 8.2.

R&D effects for a scenario where savings to U.S. consumers are two percent would be double those presented in Figure 8.2. In these cases the reductions in

spending and the consumer losses from not having

access to new medicines would also be twice as

large.Taking into account the uncertainty in the effect

of legalized commercial importation on drug spending in the U.S., estimated reductions in the benefits to

future drug consumers may range from $0.5 billion to

$2 billion per year, without including gains from hav88

CHAPTER 8 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION

Figure 8.2

1. Assumes importation reduces U.S. drug spending by

one percent, and global R&D is $50 billion annually.

2. Assumes 67% of R&D is spent on NCEs, and 33% of

R&D is for joint products, new dosage forms, and other

innovations.

3. Based on inflation-adjusted DiMasi et al.

30 cost

estimate of $802 million to develop a new drug.

4. Following Berndt et al.,31 gains to consumers can

be roughly estimated to be about a third of the present

discounted value of sales of NCEs.

5. Discounted at 5% interest over 7 years to account

for delay between R&D expenditures and output.
ing access to future generic versions of new drugs.

Thus, the reduction in drug spending due to legalized

importation may be significantly offset by estimated

losses to future consumers from reduced R&D.

1 According to Scrip World Pharmaceutical News, New

Active Substances (NASs) include all therapeutic drugs

containing an NCE, new therapeutic biologics and new

vaccines, but exclude non-therapeutic drugs. FDA

defines an NCE (or an NME) as a new drug for which

the active moiety has not been previously approved or

marketed in the United States. These terms include nontherapeutic compounds used in diagnostic imaging but

exclude biologicals. In this report we reference New

Chemical Entities (NCE) and New Molecular Entities

(NME) - the terms can be used interchangeably. In

summary, the difference between NASs and NCEs/NMEs

involve the inclusion/exclusion of biologicals and imaging agents. We have used all three terms in this study

based on the sources of the information.

2 Congressional Budget Office, H.R. 2427, “The

Pharmaceutical Market Access Act of 2003,”CBO Cost

Estimate, November 2003.

3 Berndt, Ernst R., “Pharmaceuticals in U.S. Health Care:

Determinants of Quantity and Price,” The Journal of

Economic Perspectives, Fall 2002, 16(4): 61.

4 IMS Health, IMS Country Sales Report (TM), 2004.

5 Average net income for branded pharmaceutical companies was 20 percent of revenue in 2001 according to The

Centers for Medicare & Medicaid Services, “Health Care

Industry Market Update; Pharmaceuticals,” January

2003, Figure 8, Page 21. Accessed at

http://www.cms.hhs.gov/reports/hcimu/hcimu_01102003

.pdf on 11/4/04.

6 Scherer, F.M., Industry Structure, Strategy and Public

Policy. New York: HarperCollins College Publishers, 1996

(hereinafter cited as Scherer, 1996).

7 Scherer, 1996: 388.

8 Giaccotto, Carmelo, Santerre, Rexford, and Vernon, John,

“Explaining Pharmaceutical R&D Growth Rates at the

Industry Level: New Perspectives and Insights,” AEIBrookings Joint Center for Regulatory Studies, Related

Publication 03-31, December 2003. Accessed at

http://www.aeibrookings.org/publications/abstract.php?pid=411 on

11/10/04. (hereinafter cited as Giaccotto et al. (2003)).

Also forthcoming Journal of Law and Economics (2005).

9 We believe that the change in quantity will be negligible

due to general price insensitivity on the part of insured,

Medicare and Medicaid patients. We also believe supply

constraints and the impact of intermediaries and restrictions on imports of certain types of drugs will limit

potential savings.

10 Vernon, John A. “Examining the Link Between Price

Regulation, Importation, and Pharmaceutical R&D

Investment.” Journal of Health Economics. Forthcoming

2004. Accessed at

http://www.aei.brookings.org/admin/authorpdfs/page.ph

p?id=930 (hereinafter cited as Vernon, 2004) on

11/4/04.

11 Grabowski, Henry and Vernon, John, “The Determinants

of Pharmaceutical Research and Development

Expenditures,” Journal of Evolutionary Economics.

2001, vol.10: 201-215.

12 Vernon, 2004.

13 Vernon, 2004: 22.

14 The results obtained by Giaccotto et al. may be represented as:

where R&D denotes research and development outlays,

S denotes sales and P denotes real prices. From this

relationship it can be shown that:

Legalized importation is expected to reduce drug spending/real prices by 1 percent (direct effect) and reduce

pharmaceutical industry revenues by 2 percent (indirect

effect) after taking intermediaries into account. Thus the

implied impact on R&D is therefore:

15 Accessed at: http://www.cmr.org/news.asp on

11/18/2004

16 PAREXEL International Corporation, “Pharmaceutical

R&D Statistical Sourcebook 2004/2005,” PAREXEL

International Corporation, Waltham, MA, 2004.

17 Scherer, 1996.

18 Giaccotto et al. (2003)

19 Vernon, 2004.

20 Scherer, 1996.

21 Giaccotto et. al. (2003)

22 Tufts Center for the Study of Drug Development,

“Therapeutic Class a Critical Determinant of Drug

Development Time and Cost,” Impact Report, Volume

6, Number 3, May/June 2004.

23 DiMasi, Joseph A, Hansen, Ronald W. and Grabowski,

Henry G. “The Price of Innovation: New Estimates of

Drug Development Costs”, Journal of Health Economics,

22(2), March 2003:151-185. Accessed at

http://www.cptech.org/ip/health/econ/dimasi2003.pdf ,

(hereinafter cited as DiMasi, et al., 2003) on 11/4/04.

24 DiMasi et al., 2003.

25 DiMasi, et al., 2003 page 180.

26 DiMasi, et al., 2003 page 181.

27 Lichtenberg, Frank R., “The Impact of New Drug

Launches on Longevity: Evidence from Longitudinal,

Disease-Level Data from 52 Countries, 1982-2001,

89

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 8
NBER Working Paper Series, 2004.

http://www.nber.org/papers/w9754 on 11/4/04.

28 Berndt, Ernst R; Gottschalk, Adrian H. B; Philipson, Tomas

and Strobeck, Matthew W, “The Prescription Drug User

Fee Acts: Towards an Economic Evaluation – I”. Paper

presented at NBER Frontiers in Health Policy Research,

June 24th , Washington D.C. Accessed at

http://www.nber.org/confer/2004/fhs04/berndt.pdf on

11/04/04.

29 DHHS, FDA, “The Pediatric Exclusivity Provision: Status

Report to Congress”, January 2001: 48-49. Accessed at

http://www.fda.gov/cder/pediatric/reportcong01.pdf on

11/4/04. The cited data were reformatted to better

reflect annual sales since initial marketing date and converted from 1999 to current (2003) dollars using the

GDP deflator before estimating the present value using

a five percent discount rate.

30 DiMasi et al., 2003.

31 Berndt et al., 2004.

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CHAPTER 8 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION
CHAPTERNINE

91

Impact on Intellectual Property Rights

CHAPTER HIGHLIGHTS:

Intellectual property rights have evolved over many years to strike a balance between, on the one hand,

providing incentives for innovation through grants of exclusive rights over new ideas or products and, on

the other hand, ensuring that knowledge and products are widely disseminated and accessible to provide

the maximum benefit to society now and in the future. As with most new ideas and products, inventors

of pharmaceuticals may obtain patents and other intellectual property protections for their products that

provide certain exclusive rights. The challenge policymakers face is to ensure that intellectual property

protection for pharmaceuticals provides adequate economic incentives to develop new drugs while facilitating access to affordable medicines.

An exhaustive legal analysis of the implications of allowing importation of patented pharmaceuticals to

which intellectual property protections apply would require further study. However, it is clear that importation could impact the intellectual property rights of developers of pharmaceutical products and could be

subject to challenge under domestic law, including possibly the U.S. Constitution, and international intellectual property rules.

KEY POINTS:

• Legalizing importation would impact the intellectual property rights of drug manufacturers.

• Unless intellectual property rights are statutorily changed if importation is legalized, importation of

some products may be subject to legal challenge under patent, trademark, and/or copyright law.

• Legalization of importation could raise constitutional issues of “just compensation” under the Fifth

Amendment.

• It is likely that intellectual property rights holders will exercise their rights to the fullest extent available under the law and the effects may impact the availability of imported drugs.

• Although states may have immunity from suits for patent infringement under the Eleventh

Amendment, immunity may not extend to local governments.

• International agreements recognizing intellectual property rights may be affected by the legalization

of importation.

• It is outside the scope of HHS’s responsibility, expertise, and jurisdiction to protect intellectual property rights. Issues associated with intellectual property rights should be handled by those with current

responsibility to do so.

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 9
I. WHAT WE SOUGHT COMMENT ON

Congress asked HHS to identify ways in which importation could violate U.S. and international intellectual

property rights and to describe the additional legal

protections and agency resources that would be

needed to protect those rights.

To further explore this issue, we asked for

comment on:

• What kinds of protections from unapproved competitors would be available for generic manufacturers that have undergone the FDA abbreviated

new drug application process? 

• If foreign pharmacies export generics that are

approved in their own countries but not in the

U.S., will that undermine the incentive for generic

companies to seek U.S. approval?

II. WHAT THE COMMENTS SAID

Though the comments did not directly address the

question of protections for generic manufacturers,

several comments raised concerns about the erosion

of the U.S. generic market and the U.S. generic

approval systems. One comment suggested that

legalizing importation would violate constitutional

and North American Free Trade Agreement (NAFTA)

rights.

A few comments suggested that importation would

be a disincentive to challenge patents and bring

generic products to market earlier, and would disrupt

the balance created by the Drug Price Competition

and Patent Term Restoration Act of 1984, commonly

known as the Hatch-Waxman Amendments.

1 Other

comments suggested that generic production would

be affected because Canada has a compulsory licensing scheme in the event of medical emergencies.

A number of comments noted that an importation

system should take into account U.S. laws that provide incentives for innovation. One comment noted

that the evidence suggests that the pharmaceutical

industry is one in which patent rights are absolutely

essential to supporting R&D and development of new

products. One comment stated that one of the problems is lack of a private right of action to enforce various exclusivities and patent protections. The comment went on to suggest that any importation

scheme would need to respect patent term restoration, pediatric exclusivity, 180-day exclusivity, data

exclusivity for conducting clinical trials, exclusivity for

orphan drugs, and exclusivity for a new chemical entity that does not have patent protection.

One comment stated that any drug developed on a

government grant should not be priced more expensively in the U.S. than it is in foreign countries.

Another suggested a set of additional exclusivities

beyond the patent laws that reward companies for

pediatric research or for introducing a new chemical

entity in the U.S. that does not have patent protection

or to restore market exclusivity lost in FDA review

time.

III. DISCUSSION

The protection of intellectual property rights in the

U.S. is enshrined in the Constitution, Article I, § 8,

clause 8, which grants Congress the power “To promote the Progress of Science and useful Arts, by

securing for limited Times to Authors and Inventors

the exclusive Right to their respective Writings and

Discoveries.” In addition to patent rights, Congress

has exercised this authority to establish trademark

rights to protect the owner’s mark, and copyright protections for writings and certain other works. The

challenge policymakers face with respect to pharmaceuticals is to ensure that intellectual property protection provides adequate economic incentives to

develop new drugs while facilitating access to affordable medicines.

Several provisions in existing intellectual property

law pose potential legal impediments to drug importation under the MMA. Importers and distributors

could be exposed to patent infringement liability.

Claims for trademark and copyright infringement

might also be brought against them.2 Under the

Eleventh Amendment, states may be exempt from suit

for some violations of these intellectual property

rights, but local authorities may not be. In addition,

under the Agreement on Trade Related Aspects of

Intellectual Property Rights (TRIPS Agreement) and

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CHAPTER 9 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION
other international agreements, the U.S. has made

commitments that may preclude it from permitting

the importation of products protected by these U.S.

intellectual property rights without the permission of

the right holder.3 Also, regardless of the scope of protection afforded by U.S. intellectual property laws,

manufacturers may include restrictions as part of

licensing and other private arrangements with foreign entities to prohibit sales into the U.S. market. In

short, implementation of section 1121 of the MMA

may conflict with intellectual property protections

and preexisting private agreements regarding intellectual property rights. Based on this assessment,

unless these intellectual property protections can be

reconciled with the MMA, they could complicate its

implementation. Further, such limitations on current

intellectual property protections may raise “just compensation” issues under the Fifth Amendment.

A. Patent Protections

Throughout the history of the U.S., Congress has provided patent protection with varying changes to the

terms and type of protection. Currently, the standard

term of patent protection is twenty years from the

date of filing with the U.S. Patent and Trademark

Office (USPTO), the agency responsible for reviewing

and issuing patents.

4 Extensions of the patent term

may be granted based on unreasonable delays in issuing a patent and delays in approval for marketing of a

pharmaceutical product.5 To be issued a patent, an

invention must be useful, novel and non-obvious.

6 A

patent can be obtained for a process, machine, manufactured article,composition of matter (including mixtures of ingredients and new chemical compounds)

and any new and useful improvements to them, as

well as isolated microbes, cultured cells, genetically

engineered animals, and asexually reproduced plants.

If the USPTO issues a patent on an invention, the

patent owner obtains the right to exclude others from

making, using, selling, offering to sell or importing

into the U.S. the patented invention.7

Patent laws are considered national in nature in that

the patents are enforceable only within the country that

issued the patent. At the same time, a U.S. patent does

not grant its holder any legal rights that can be

enforced in a foreign nation.To obtain intellectual property protection in a country other than the U.S., the

inventor must obtain a patent in that country. It would

be unusual for a pharmaceutical company to obtain a

patent in only one country. In today’s global economy,

patent applications are filed in multiple countries for

each innovative product. Although these patents may

involve the identical product, such as the same active

moiety, the resulting patents may not be precisely the

same in each country depending on the legal effect of

individual patent claims in each jurisdiction.

If a drug in the U.S. is the subject of a U.S.-issued patent

and the first sale of the drug takes place abroad, anyone who imports the drug into the U.S. without the consent of the patent owner will be subject to possible

patent infringement claims. For example, a distributor,

drug store owner, or patient could be sued by the

patent owner for patent infringement, even if the drug

was sold legitimately in a foreign country, because the

U.S. patent holder’s ownership rights are not affected or

“exhausted” by the foreign sale.

Under the “exhaustion” doctrine, the authorized sale

in the U.S. of a patented product by the patent holder

cuts off the patent owner’s rights to control the subsequent sale of that product in the U.S. The purchaser of the specific product may use the product, charge

others to use the product, or resell the product without any additional obligation to the patent holder. In

effect, the patent holder’s rights are “exhausted.”

Patent rights in the U.S. are not exhausted when the

drug is first sold, if the sale takes place abroad.

Therefore, anyone who, without consent of the patent

owner, imports a patented drug into the U.S. could be

liable for patent infringement in the U.S.

8 As a result,

CBP, which works closely with intellectual property

rights owners, may initiate enforcement actions to

detain or seize the infringing product.

B. Trademark Protections

Importation into the U.S. of drugs labeled for sale in

a foreign country also could constitute an infringement of a trademark owner’s mark if use of the mark

is likely to cause confusion, or to cause mistake or to

deceive the purchaser as to the origin of the mark, or

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HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 9
sponsorship, or approval by the trademark owner.9

Trademarks are generally distinctive symbols, pictures, or words that sellers will use to identify their

products.10 Trademark status may also be granted to

distinctive and unique packaging, colors or color

combinations, and product styles. The trademark

owner has the exclusive right to use the mark on the

product it was intended to identify.11 Trademarks may

be protected by Federal statute under the Lanham

Act,12 and by state statutes and common law. 13

Further protection of trademarks is provided by the

Tariff Act of 1930.14 Under the Tariff Act, it is generally unlawful to import into the U.S. any merchandise

of foreign manufacture if the merchandise or any

part, such as the label, package, or wrapper, bears a

trademark owned by a U.S. company or citizen of, or

by a corporation or association created or organized

within, the U.S., and registered with the USPTO in

accordance with the law and filed with the Secretary

of the Treasury, unless the written consent of the

trademark owner is produced at the time of import

entry.15 Such imports are subject to seizure at the

time of importation.16 There are certain personal and

regulatory exceptions to seizure, but, generally,

importation of pharmaceutical products that are protected by trademark would be a violation of the

trademark.

The MMA requires that the manufacturer of a prescription drug provide an importer written authorization for the importer to use (at no cost) the approved

labeling for the prescription drug. Accordingly, even

if the U.S.-approved labeling is intended to include

trademarks, liability for trademark infringement may

not attach to the importer. This requirement may

raise “just compensation” issues under the Fifth

Amendment, since trademark holders have a property interest in their trademark. This requirement could

raise questions under the TRIPS Agreement as well. In

addition, if pharmacists who dispense imported drugs

use the trademark on the container provided to the

patient, they may be subject to liability to the extent

the compulsory license does not extend to their use

of the trademark.

Moreover, “when there are material differences

between the domestic product and the foreign product bearing the same mark, most of the courts that

have considered the issue have excluded the [imported] goods, even when the holders of the domestic

and foreign trademarks are related companies, on

grounds of both safeguarding the goodwill of the

domestic enterprise, and protecting consumers from

confusion or deception as to the quality and nature of

the product bearing the mark.” Gamut Trading Co. v.

U.S. Int’l Trade Comm’n.17 Thus, to the extent an

imported drug may not be identical to an FDAapproved version marketed in the U.S., the case law

suggests that the imported drug may be excluded on

trademark grounds even when it bears the same valid

trademark as the FDA-approved drug.

C. Copyright Protections

The U.S. Copyright Act18 also may protect the intellectual property associated with certain imported drugs.

It is possible, although not as common as obtaining a

trademark, to assert copyright protection for certain

“writings” associated with drug products, including

the labeling or other related materials.

19 The copyright owner has the exclusive right to reproduce, distribute, display, or license a work, in addition to other

rights.

20 As a general rule, copyright protection for

works created after January 1, 1978, lasts for the life

of the author plus an additional 70 years.

21 For an

anonymous work, a pseudonymous work, or a work

made for hire, copyright protection lasts for a term of

95 years from the year of its first publication or a term

of 120 years from the year of its creation, whichever

expires first.22

Importation of copyrighted materials made in the U.S.

is governed by the “first sale doctrine,” which provides that the owner of a particular copy of a copyrighted item is entitled, without permission of the

copyright holder, to sell or otherwise dispose of that

copy as the owner of the copy sees fit.23 However,

under the MMA, the first sale doctrine may be inapplicable because under the requirements provided,

the U.S.-approved labeling must be provided at no

cost, and hence is not the subject of a sale at all. In

any case, the MMA’s requirement, under which

imported drugs presumably must be relabeled to bear

the U.S.-approved labeling, may preclude pharmaceutical companies from asserting copyright protections

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to prevent the use of the labeling or to collect damages under copyright law. However, as with trademarks, this requirement raises Fifth Amendment takings issues of “just compensation” for the lost property right associated with the copyright.

D. Importation by States and the Eleventh

Amendment 

Importation programs being set up by states and

other local jurisdictions raise the question of potential liability of such governmental entities for

infringement of intellectual property rights. The

Eleventh Amendment of the U.S. Constitution provides that a federal court may not adjudicate a lawsuit by a private person against a state, except under

certain limited circumstances.

Congress unsuccessfully attempted to abrogate the

Eleventh Amendment immunity of states to patent

infringement suits in 1992. The Supreme Court’s

opinion in Florida Prepaid Postsecondary Education

Expense Board v. College Savings Bank24 found that

the challenged legislation did not meet the requirements of the Eleventh Amendment. As a result, this

decision appears to uphold states’ immunity to

Federal suit for patent infringement if they choose to

import patented drugs. However, under Ex parte

Young,25 a plaintiff may still obtain prospective

declaratory or injunctive relief against individual

state officers who violate federal laws protecting

intellectual property while acting in their official

capacities.

It is unlikely, however, that the state immunity to

federal suit under the Eleventh Amendment would

extend to local governments under Florida Prepaid.

The Supreme Court has found that local governmental entities that act independently and raise

their own funds are not an arm of the state for purposes of immunity under the Eleventh

Amendment.26 Although local governments may

be able to claim immunity under the Eleventh

Amendment if they are considered an “entity created by the state,” such determinations would

have to be made on a case-by-case basis 27

E. U.S. International Obligations to Protect

Intellectual Property

The U.S. is party to numerous international agreements recognizing intellectual property rights, which

establish certain governmental obligations. For

example, the TRIPS Agreement among the members

of the World Trade Organization (WTO) requires the

U.S. (and the other member nations) to maintain

national laws to comply with the basic principles that

provide for the protection of intellectual property,

including prevention of unfair commercial use of

undisclosed data required as a condition of approval

for drug applications.28 In addition to the TRIPS

Agreement, the U.S. continues to negotiate intellectual property agreements with groups of countries and

individual nations that include, for example, more

detailed obligations regarding protection of data

required for drug marketing approvals and restrictions on importation into the U.S. without the authorization of the patent holder.

The TRIPS Agreement and other international agreements allow for the limitation of intellectual property

protections under certain conditions.29 These limitations have been cited as providing flexibility to promote public health initiatives, balancing innovator

rights against the accessibility of less-expensive medications, and encouraging competition among companies. Such exceptions might provide some protection for a drug importation program. However, some

countries may nevertheless question the consistency

of allowing drug importation given the international

intellectual property rules.

F. Additional Protections

1. Label Licenses 

A patent owner may use a “label license” to condition the sale of a patented (or unpatented) product.

A label license can be used by a drug manufacturer to

control the purchaser’s use or distribution of the

product in the U.S. or abroad under a patent infringement theory (if the drug is covered by a valid patent)

or by a contract theory (if it is not).30 For example, a

manufacturer might condition the sale of its drug

product to a distributor on an agreement that the

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HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 9
drug product only be sold in the country in which the

distributor is located or that only a certain amount be

sold in countries or areas other than that in which the

distributor is located. These types of agreements are

not unique to pharmaceutical products and are made

for a variety of reasons including supply concerns,

competitive advantage, or preferential treatment of

certain distributors. Currently, some U.S. drug manufacturers have limited their supply of drugs to

Canadian outlets. This practice has been defended as

an effort to prevent the illegal importation of the

drugs into the U.S. These particular actions have been

challenged as antitrust violations by various parties,

including State Attorneys General.31 

Under a contract theory, a drug manufacturer has the

ability to condition the sale of its product, assuming

there are no other legal violations such as antitrust

violations. See Mallinckrodt, Inc. v. Medipart, Inc.32

Even if legislation were enacted, or a new court decision overturned Jazz Photo Corp. v. ITC, this may not

prevent a manufacturer from restricting the distribution or importation of its product into the U.S by

enforcing the contract created by a label license.

G. Effective Enforcement of Intellectual

Property Rights

The drug importation provisions of the MMA must be

reconciled with existing intellectual property rights or

those rights should be modified to allow for the legal

entry, marketing, and use of the imported drugs, or

the importers of such products could face liability.

The same concerns extend to other intellectual property protections. Depending on how these issues are

addressed, constitutional concerns may arise as well.

For example, the MMA’s compulsory license requirement for a drug’s U.S.-approved labeling raises Fifth

Amendment takings issues, potentially requiring

compensation by the U.S. government for the rights

holder under the Fifth Amendment.

Reconciling the legalization of drug importation and

the intellectual property rights of innovator companies (and possibly generic companies) likely would

require major changes in current U.S. laws and international agreements. These issues are considerably

beyond the functions currently handled by HHS, and

are not primarily within its public health expertise.

1 Pub. L. 98-417.

2 There are other intellectual property rights provided

under statutory marketing exclusivity provisions.

Specifically, there are various exclusivity provisions generally administered by the FDA through its authority to

approve a drug for marketing which limit FDA’s authority

to approve certain categories of drug applications submitted by third parties during a fixed period of time.

Permitting a third party to import its own version of a

drug (as opposed to permitting re-importation of an

already approved drug, as provided for under the MMA)

during the period of exclusivity might raise questions

under marketing exclusivity rules in U.S. law and under

provisions in U.S. trade agreements that codify similar

rules.

3 TRIPS Article 28 states that a patent shall confer patent

owners a set of exclusive rights, including the right to

import. TRIPS Article 6, however, states that ‘nothing in

this Agreement shall be used to address the issue of the

exhaustion of intellectual property rights.’ Therefore,

World Trade Organization (WTO) members are permitted

to adopt a rule of international exhaustion, which would

allow parallel importation, without being challenged

under WTO dispute settlement rules.

4 35 U.S.C. § 154.

5 35 U.S.C. § 156.

6 35 U.S.C. §§101-103.

7 35 U.S.C. § 271(a).

8 Jazz Photo Corp. v. ITC, 264 F.3d 1094 (Fed. Cir. 2001).

In the case of a patented drug that is exported from the

U.S. and first purchased abroad, the Federal Circuit in

Jazz Photo held that a patent owner’s rights are not

exhausted by that foreign sale. Accordingly, anyone

who imports a patented drug into the U.S. without the

consent of the patent holder could be liable for patent

infringement in the U.S.

9 15 U.S.C. § 1125.

10 15 U.S.C. § 1127.

11 15 U.S.C. § 1115(b).

12 15 U.S.C. §§ 1051-1127.

13 Congress enacted the Lanham Act under Article 1,

Section 8, Clause 3 of the Constitution, an exercise

under its authority to regulate interstate commerce.

14 See 19 U.S.C. §1526.

15 19 U.S.C. § 1337(a)(C).

16 19 U.S.C. § 1337(d).

17 200 F.3d 775, 778-79 (Fed. Cir. 1999).

18 17 U.S.C. §§ 101 - 810

19 If copyright is available for such material under U.S. law,

it would be important to confirm that such compulsory

licensing is permissible under the TRIPS Agreement and

other international intellectual property regimes.

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20 17 U.S.C. § 106. 21 17 U.S.C. § 302.

22 17 U.S.C. § 302.

23 17 U.S.C. § 109(a); Quality King Distributors, Inc. v.

LAnza Research Int’l, Inc., 523 U.S. 135 (1998).

24 527 U.S. 627 (1999).

25 209 U.S. 123 (1908).

26 See Mt. Healthy City Sch’l Dist. Bd. of Educ. v. Doyle,

429 U.S. 274, 280 (1977) (“The bar of the Eleventh

Amendment to suit in federal courts extends to States

and state officials in appropriate circumstances . . . but

does not extend to counties and similar municipal corporations.”) 

27 See Florida Prepaid at 631.

28 See TRIPS Agreement, art. 39, Apr. 15, 1994, Marrakesh

Agreement Establishing the World Trade Organization,

Annex 1C, Legal Instruments—Results of the Uruguay

Round, 33 I.L.M. 81 (1994).

29 See, e.g., Under the TRIPS Agreement for:

Copyright – Article 13 (allows limitations or exceptions

for certain special cases which do not conflict with the a

normal exploitation of the work and do not unreasonably prejudice the legitimate interests of the right holder)

Trademarks – Article 17 (allows exceptions, for example,

for fair use of descriptive terms, provided that such

exceptions take account of the legitimate interests of

the owner of the trademark and of third parties) Patents – Article 27 (allows exclusions from patentability

for certain types of inventions, e.g., diagnostic, therapeutic and surgical methods for the treatment of humans

and animals); Article 30 (allows limited exceptions to

patent rights provided that such exceptions do not

unreasonably conflict with the normal exploitation of

the patent and do not unreasonably prejudice the legiti-

mate interests of the patent owner, taking account of

the legitimate interests of third parties); Article 31 (limi

-

tation permitting compulsory licenses to override patent

rights under certain conditions)

30 See, e.g., Pioneer Hi-Bred Int’l, Inc. v. Ottawa Plant

Food, Inc., 283 F. Supp. 2d 1018 (N.D. Iowa 2003).

31 In re GlaxoSmithKline PLC, Case No. MC 03-015992 (MN

Dist. Ct., 4th Jud. Dist.).

32 976 F.2d 700,(Fed. Cir. 1992)(upholding single use

restriction on patented medical device.).

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98
CHAPTERTEN

99

Liability Issues Related to Importation

CHAPTER HIGHLIGHTS:

This report identifies the liability issues raised if importation is legalized for entities within the pharmaceutical distribution system. This report notes that allowing prescription drug importation would have uncertain effects on the litigation exposure of manufacturers, distributors, doctors, and pharmacists.To deal with

these likely increased risks, entities in the pharmaceutical distribution chain may take additional costly

defensive actions. Perhaps the largest source of additional liability and/or litigation risk under a drug

importation system would be an increase in the number of injuries and poor disease outcomes if imported drugs are, as a class, less safe and effective.

KEY POINTS:

• Allowing prescription drug importation would have uncertain effects on the litigation exposure of

manufacturers, distributors, doctors, and pharmacists.

• To deal with these increased risks, entities in the pharmaceutical distribution chain would likely take

additional costly defensive actions.

• Perhaps the largest source of additional liability and/or litigation risk under a drug importation system would be an increase in the number of injuries if imported drugs are, as a class, less safe.

• Two new causes of action could arise: 1) against pharmacists for a failure to warn about the drugs,

and 2) against state and other governmental entities for their roles in endorsing the importation of

drugs that cause injury.

• Some potentially liable parties could be unavailable to U.S. courts and, therefore, to consumers,

industry, or health care providers.

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 10
I. WHAT WE SOUGHT COMMENT ON

Congress asked HHS to identify the liability protections, if any, that should be in place if importation is

permitted for entities within the pharmaceutical distribution chain.

To further explore this issue, we asked for

comment on:

• What, if any, liability concerns would exist for

entities in the U.S. drug distribution system if

importation of drugs from another country were

permitted?

II. WHAT THE COMMENTS SAID

The majority of those who commented on this issue

noted that plaintiffs’ lawyers could use, but are not

limited to, four legal theories against those that participate in the distribution of prescription drugs: strict

liability, common law negligence, fraud/misrepresentation, and breach of implied warranty of merchantability. One comment noted that it is impossible to determine potential liabilities without knowing

which model of importation to apply to the analysis.

Several comments noted that, in the strict liability

context, courts have recognized that even when a

defendant is not engaged in the distribution of a

product, it may be held liable. Many comments

noted that the creation by states of websites to facilitate importation raises an issue as to whether the

facilitation puts the state in the same position as a

seller or distributor.

Several comments expressed concerns over the ability of U.S. citizens to seek redress should they be

defrauded or harmed by tainted foreign supply. These

comments noted that many of the bad actors would

be unknown or beyond the reach of the U.S. court system. The comments suggested that this will lead to

U.S. residents being harmed by fraudulent, mislabeled

or inappropriately shipped drugs - innocently or otherwise - and having no practical recourse.

III. DISCUSSION

We were asked to identify the liability protections, if

any, that should be in place if importation is permitted for entities within the pharmaceutical distribution

chain. The comments we received discussed liability

concerns rather than the protections that would be

needed to alleviate these concerns. Thus, this discussion focuses on potential liability concerns for individuals and entities within the pharmaceutical distribution chain if importation is legalized.

Allowing prescription drug importation would have

uncertain effects on the litigation exposure of manufacturers, distributors, doctors, and pharmacists. The

primary factor in determining litigation risk – the

number and severity of injuries – is not amenable to

analysis at this time. Liability risk would change in

small but significant ways due to importation, with

the net effect on exposure unclear and somewhat

dependent on the specific importation scheme adopted. Private contracting and litigation strategies and

theories could decrease the impact of importation on

the normal course of drug litigation.

Furthermore, many foreign internet pharmacies have

disclaimers and waivers purporting to release them

from liability, losses and damages, and all other

claims. Websites established by U.S. cities and states

that serve as a facilitator to these foreign internet

pharmacies also attempt to disclaim liability because

they view themselves as a provider of information

and not as a dispenser of drugs.

A. Current Tort Liability for Actors in the

Drug Distribution Chain

In analyzing the question of what additional litigation

or liability risk would result from an importation

scheme, it is important to separate those elements of

the risk that would be added by the legalization of

importation from those that are already inherent in

the manufacture, marketing, and distribution of prescription drugs. Because state tort law typically governs pharmaceutical personal injury cases, and tort

law varies from state to state, the results of a given

action could be vastly different depending on the

state where it is brought and the choice of law

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applied in that case. What follows, therefore, is a

general statement of principles common to a majority of jurisdictions.

Pharmaceutical personal injury cases are most often

heard by state, not federal, courts. Federal courts

generally do not have jurisdiction to hear state-law

claims unless there is complete diversity of citizenship between plaintiffs and defendants. In a given

pharmaceutical personal injury case, a plaintiff will

likely sue the manufacturer, all of the actors in the

chain of distribution, the prescribing doctor, and the

pharmacist. Because the doctor, hospital, or pharmacy is typically local, plaintiffs can dictate that cases

will stay in state court by including credible claims

against these parties.

In a given case, a plaintiff will assert (generally) strict

liability theories against the manufacturer and distributors and (generally) negligence claims against

the doctor and pharmacist.1 Thus, a plaintiff would

allege that the manufacturer incorrectly manufactured the product; that the distributor passed on the

defective product and is strictly liable; and/or that the

distributor improperly handled the product, compounding the manufacturing defect; that the doctor

inappropriately prescribed the drug given the plaintiff’s medical history and circumstances; and/or that

the pharmacist improperly dispensed the product or

dispensed the product with actual or constructive

knowledge that it would cause harm. In the event of

a judgment, a court in a comparative negligence

state would allocate fault to each of the defendants,

and to the plaintiff, if the plaintiff contributed to the

injury. Payment of the judgment would then follow

the state’s joint and several liability rules. Each of

these concepts is discussed in more detail below.

1. Negligence

Negligence liability in the pharmaceutical context

creates the same obligations as negligence liability in

any other context – there is a duty to act reasonably

given all the circumstances. All of the actors in the

drug distribution chain are currently subject to liability under negligence theories. The manufacturer, the

distributor(s), the retailer, the doctor, and the pharmacist all have some duty toward the ultimate consumer. If that duty is breached, and the breach causes damages, each may be susceptible to negligence

suits. Causes of action could include failure to manufacture the drug to specifications, failure to ensure

safe storage or transportation of the drug, failure to

include appropriate identification and tagging technologies, failure to adequately safeguard against

counterfeiting or tampering, or failure to design systems to authenticate drugs through the chain of distribution. The potential defendants in each such

cause of action vary with the specific facts. However,

pharmaceutical manufacturers, with both the most

resources and the most control over drug distribution, are usually the most vulnerable to lawsuits in

the event of injury.

2. Strict Liability

Actors in the chain of distribution also can be held

liable on theories of strict liability, or liability without

fault. Under strict liability, an injured plaintiff does

not need to show that the defendant’s actions were

unreasonable, only that the product caused the injury

and that the product was defective. Strict liability is

similar to a theory of implied warranty of merchantability, and the two actions have been consolidated by many states.

In general, strict liability attaches all the way down

the chain of distribution. If the product is defective

when it leaves an actor’s hands, the actor is strictly

liable, whether or not the actor has taken all possible

care in handling and inspection. Thus, if a defective

pharmaceutical product injures a consumer, the consumer has a cause of action against the manufacturer, any distributors, and, in some jurisdictions, the

pharmacist. There are three commonly recognized

product defects: manufacturing defects, design

defects, and defects in warnings or instructions. Each

of these theories is discussed in more detail below.

As a general matter, however, the Restatement (Third)

of Products Liability § 6(e) (1997) recommends that

distributors and retailers of pharmaceutical products

not be held liable for design defects or failure to

warn. Moreover, there is usually a right to indemnity

from the manufacturer if the downstream party can

show the product was defective when it left the

hands of the manufacturer.

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a. Manufacturing Defect

A defendant is liable for a manufacturing defect if the

product was not manufactured in accordance with

the manufacturer’s standards, whether or not the

manufacturer used reasonable care.2 If a defectively

manufactured product causes injury, there is liability

through the chain of distribution.3 Because of rigorous FDA regulation and monitoring of drug production facilities, manufacturing defect cases are quite

rare in the pharmaceutical context.

b. Design Defect 

A defendant is liable for a design defect if the product

poses an unreasonable risk of harm, and the harm

could have been reduced by the adoption of a reasonable alternative design.4 In the pharmaceutical context, however, most theorists and many jurisdictions

have decided that such a standard is too difficult,

given the inevitability of side effects from most pharmaceuticals. Thus, the Restatement endorses a standard where no cause of action arises for a design

defect if the drug’s benefits outweigh its harms for

some class of patient – in other words, a drug does

not give rise to liability if a reasonable physician

would prescribe the drug in some circumstances.5

This limited shelter does not protect a defendant from

failure-to-warn or manufacturing defect cases, however. In fact, appropriate warning and assiduous manufacture are particularly important for such “inherently

dangerous” products.

6 Design defect theories involving the packaging of the product can arise as well. If

the design of the packaging is at issue, there is no special protection for pharmaceuticals from the normal

application of products liability law.7 Such design

defect cases closely resemble negligence claims.

c. Failure to Warn

Generally, a defendant is liable for failure to warn or

instruct if warnings or instructions could have

reduced the foreseeable risk of harm and if the

absence of the warnings or instructions made the

product unreasonably unsafe. Again, for pharmaceuticals, this general standard has been adapted to the

unusual context. The Restatement applies the

“learned intermediary” rule in the pharmaceutical

context. Under this rule, manufacturers and distributors have no duty to warn individual consumers, as

long as they warn the “learned intermediaries” –

doctors and pharmacists – of any possible problems

with the drug.8 Nor are pharmacists generally liable

for failing to warn, as long as they accurately fill prescriptions. The patient’s recourse in a pharmaceutical

failure-to-warn case, then, is typically against either

the manufacturer for failure to properly warn intermediaries or the doctor for malpractice.

B. Liability Concerns if Importation is

Permitted

In a purely legal sense, the causes of action available

to plaintiffs injured by pharmaceuticals will not

change dramatically if importation is legalized.

Importation would, however, likely introduce complications that would make the litigation of these claims

more difficult. Perhaps the largest source of additional liability and/or litigation risk under a drug importation system would be an increase in the number of

injuries if imported drugs are, as a class, less safe

than U.S. products. Such an increase in injuries would

presumably lead to a corresponding increase in the

number of lawsuits and amount of liability. The

assessment of the likelihood of injury, however, is not

in most senses a legal question and is not thoroughly addressed here. What follows instead is an analysis of the changes in liability that would occur as a

result of allowing drug importation.9

1. Substantive Changes

There are three different scenarios to consider in

assessing the impact of importation on pharmaceutical liability: (1) drugs are defectively designed or

improperly manufactured by a domestic or overseas

manufacturer, resulting in litigation by the consumer

against those in the chain of distribution; (2) drugs

are mislabeled, misbranded, adulterated, improperly

dosed, etc., within the chain of distribution from the

manufacturer to the consumer, leading to litigation

against those in the chain of distribution; (3) drugs

are deliberately counterfeited or adulterated, leading

to litigation against the party that counterfeited or

adulterated the product, the manufacturer, and per102

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haps others in the chain of distribution.

Legalized importation would affect each of these scenarios differently. In Scenario One, where the defect

arises with the manufacturer, the importer and any

other additional agents who distribute the product

will be liable for defects under theories of strict liability in the same fashion as a current domestic distributor. In addition, if foreign manufacturers were

allowed to sell unapproved drugs in the U.S., they

would be strictly liable in the same fashion as a current approved manufacturer, assuming they are subject to U.S. law. Scenario Two may pose greater litigation exposure to manufacturers, since several of

their joint tortfeasors might be unavailable for procedural or other reasons which follow, again, assuming

they are subject to U.S. law.10

Scenario Three’s effect on litigation risk is ambiguous.

As a purely legal matter, if counterfeiting can be

proven, manufacturers and distributors will generally

have a strong defense to liability in such cases as

most states do not impose a duty to prevent the criminal acts of others.11 Proving the occurrence of counterfeiting in a specific case, however, is likely to be

difficult and, therefore, entail significant litigation

costs. Further, while this is a risk currently faced by

manufacturers and distributors, the difficulty in proving counterfeiting may be exacerbated in cases

involving imported drugs. Absent the availability of a

sample of the drug at issue, counterfeiting or adulteration would have to be shown either through the

manufacturer’s records regarding the manufacture

and testing of the product or, in the absence of such

records, evidence regarding the chain of custody of

the drug prior to sale. Depending upon the requirements imposed upon importers, evidence regarding

the chain of custody may be more difficult to acquire

for imported drugs, and would likely be significantly

more difficult to obtain for personally imported drugs.

Finally, if parties knew or should have known about

the counterfeiting or adulterating, and could have

acted reasonably to prevent such actions, then there

is a chance they could be held liable.

An additional, and relatively novel, cause of action

for failure to warn could arise under drug importation. Most states and the Restatement (Third) of

Products Liability currently adopt the “learned intermediary” rule, which relieves manufacturers of the

duty to warn consumers, so long as they warn doctors.12 Similarly, pharmacists are generally not

required to provide warnings because the law views

the doctor as best situated to give advice about side

effects and risk of injury. A few states have adopted

an unusual exception to this no-liability rule for pharmacists, however. In these jurisdictions, pharmacists

can be held liable for injuries resulting from an

unwarned substitution of a generic drug for a brand

name drug.13 In such a case, the pharmacist is the

only party able to warn of the harm, and so the logic

of the learned intermediary rule does not apply.

The same rationale might be applied to create a new

duty to warn in the case of importation. If, in fact,

imported drugs are either categorically or occasionally more dangerous, courts could impose a duty to

warn consumers that they are receiving imported

drugs and to warn of the attendant dangers. The

pharmacist (internet or otherwise), as the party most

aware that the patient was receiving imported drugs,

might bear the burden of warning of these dangers.

Indeed, the logic used to justify an exception to the

learned intermediary rule in generic substitution

cases is even stronger in the case of the substitution

of imported drugs. Generic drugs approved for sale

in the U.S. have, under the FD&C Act, been shown to

be therapeutically equivalent to the brand-name version of the same drug. Depending upon the type of

importation scheme adopted, a similar showing may

not have been made for imported drugs. This may be

particularly true in cases of personal importation,

which would be even more difficult to monitor and

regulate than commercial importation.

Finally, several of the comments suggested that

importation could cause companies to be held liable

despite having done nothing wrong. For negligence

actions, these suggestions are inapposite, since a

negligence judgment by definition requires that the

tortfeasor failed to exercise reasonable care under

the circumstances. Strict liability theories are known

as theories of liability without fault. However, even

under strict liability, it is necessary to allege both that

there was a defect in the product and that the defect

proximately caused the injury. As a result, if a defendant truly has done nothing wrong, that defendant

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should have a strong defense to liability under either

negligence or strict liability theories. As discussed

above, however, such a defense may be difficult to

prove in cases involving counterfeiting in which no

samples of the drug in question remain.

2. Procedural and Practical Hurdles

While prescription drug importation would lead to little substantive change in plaintiffs’ causes of action,

a variety of procedural and practical changes brought

on by drug importation could alter the conduct and

increase the cost of pharmaceutical personal injury

litigation. Some of the more noteworthy changes are

discussed here.

a. Personal Jurisdiction

For an American court to exercise jurisdiction over a

defendant, it must have personal jurisdiction over

that defendant. Personal jurisdiction is governed

both by state statutes and the U.S. Constitution. Each

state has a “long-arm” statute, which defines

whether and when states can exercise authority over

defendants with tenuous connections with the state.

In addition, the Supreme Court has adopted a “minimum contacts” test which defines the outer limits of

personal jurisdiction under the Constitution.14 In the

commercial context, the usual test for whether a

business can be held to account in a court is whether

the business has “purposefully availed” itself of the

services of that state.15 Mere placement of a good in

the “stream of commerce,” without more, does not

subject a defendant to the personal jurisdiction of the

state.

16 Many states’ long-arm statutes take jurisdiction to the maximum extent allowable under the

Constitution, although some states have narrower

long-arm statutes.

Under a drug importation scheme, it is possible that

some potentially liable parties would be out of the

reach of U.S. courts. For example, a purely Canadian

distributor who did not target advertisements or

other business operations to the U.S. and who sold

only to Canadian companies might be shielded from

the exercise of jurisdiction by any state court.

Similarly, a foreign drug manufacturer who did not

target its business operations to the U.S. and who

sold only to non-U.S. companies might also be shielded from the exercise of personal jurisdiction by a

state court. Unless the other defendants in an action

involving such a party could seek contribution17 in

foreign courts, the result of an unavailable defendant

could be that all of the remaining defendants would

carry greater litigation exposure. Even though courts

routinely assess responsibility to absent defendants, a

plaintiff cannot collect a judgment against a defendant if the court does not have personal jurisdiction

over that party. In such a case, if permitted under the

state’s joint liability rules, a plaintiff may choose to

collect the entire judgment from the present defendants and leave the paying defendants to seek contribution in a foreign court rather than trying to

enforce the judgment in a foreign court themselves.

b. Choice of Law / Forum Non Conveniens

In cases involving foreign parties and foreign causes

of action, state choice-of-law rules could select foreign tort law as the applicable law. While an analysis of Canadian or other foreign products-liability law

is beyond the scope of this discussion, it is fair to note

that many foreign countries are much less willing to

assess product liability damages than the U.S.

Under some circumstances, courts will decide not

only that they should use foreign law, but that the

entire case should be moved to a foreign country.

Such a decision could be made based upon the common law doctrine of forum non conveniens. As articulated by the Supreme Court in Gulf Oil Corp. v.

Gilbert,

18 granting a forum non conveniens motion

requires a balancing of the private and public factors

involved in a suit. Private factors include access to

sources of proof, ability to compel production of witnesses, and enforcement of a possible judgment.

Public factors include congestion of the courts, concerns about imposing jury duty on a community, and

the value of local courts deciding local controversies.

Even if the appropriate forum substantially reduces the

size and likelihood of a plaintiff’s recovery, a court may,

upon balancing the Gulf Oil factors, decline to take

jurisdiction and send the case to another venue.19

Furthermore, contracts between manufacturer and

distributor, distributor and pharmacy, and pharmacy

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CHAPTER 10 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION
and consumer might specify that any disputes arising

out of the sale of drugs be resolved in foreign courts.

It is unclear whether or how many courts would be

willing to enforce these contracts as, generally, courts

are reluctant to allow parties to contract out of tort

duties.

However, many courts do enforce reasonable forum

selection clauses.20 To the extent that successful

forum non conveniens motions or contractual choice

of law and choice of forum clauses would move some

cases abroad or lead to the application of foreign law,

manufacturers’ liability is likely to be reduced. Many

foreign courts, including Canadian courts, do not recognize any actions under strict liability, so fault must

be shown for a recovery. This greatly decreases the

likelihood that a manufacturer (either American or

foreign) would be held liable for the wrongful actions

of a foreign exporter/distributor. At the same time

this may frustrate a plaintiff’s ability to recover for

injuries from imported drugs.

c. Foreign Discovery

If importation is allowed, lawsuits involving imported

drugs may well require foreign discovery of nonparties, since records and other evidence related to the

suit would be located abroad. Such materials are

generally beyond the subpoena power of American

courts. Although the traditional mechanism of letters

rogatory, with respect to discovery from a foreign

entity that is not a party to the suit,21 makes such discovery possible (with the cooperation of foreign

courts), it is more time-consuming and expensive

than domestic discovery. In theory, foreign discovery

could greatly hamper the ability of both plaintiffs and

defendants to marshal facts and evidence for their

cases.

d. Proximate Cause

One significant worry, related to the problems of foreign discovery, is that tort victims injured by foreign

malfeasance will have a hard time pinpointing

responsibility for their injuries. To prevail in a tort

action under any theory of liability, the plaintiff must

show proximate cause – that the defendant’s act or

failure to act was a cause, close enough in space and

time, of the plaintiff’s injury. In a suit where all actors

along the distribution chain are alleged to have contributed to an injury, it is a common defense for each

potential tortfeasor to blame the other potential tortfeasors. If the acts giving rise to the injury took place

in a foreign country, with the associated difficulties in

discovery and investigation, allocating liability and

sifting through the various claims and cross claims

could be very complicated. In some cases, the causal

link between the tortious act and the eventual harm

could be obscured, and the plaintiff could lose for

failure to demonstrate proximate cause.22

Concerns about causation are particularly pressing in

cases where a party inside or outside the chain of distribution intentionally tampers with a pharmaceutical

product. As a general rule, actors are not liable for

the intentional crimes or torts of third parties, even if

the actor might otherwise have been held liable

under strict liability or negligence theories.

23 Courts

usually find that intervening intentional acts break

the chain of proximate cause leading from the negligence to the injury. However, though this is the

majority view, a minority of courts have found that

the intervening act does not break the chain of

causality, and that the negligent party can be held

liable even though the most immediate cause of

injury was the act of the intentional tortfeasor.

24

Thus, depending upon the jurisdiction, a manufacturer could potentially face a judgment even though the

injury was primarily caused by the intentional wrongdoing of an absent third party.

e. Preemption

Allowing the importation of prescription drugs may

affect the analysis regarding the preemption defense

sometimes available due to the FDA’s extensive regulation of drugs and medical devices. The U.S.

Constitution provides that the laws of the U.S. “shall

be the supreme Law of the Land . . . any Thing in the

Constitution or Laws of any State to the Contrary

notwithstanding.”25 Thus, in some circumstances,

federal statutes and agency regulations may preempt

state law or preempt a state from allowing a common law right of action to private citizens.26 Federal

law contains express provisions preempting state law

with respect to medical devices27 and non-prescrip105

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 10
tion drugs,28 making this defense is most relevant to

cases involving those products. Nevertheless, preemption remains available as a defense in cases

involving other products regulated by FDA. For example, it is possible for a manufacturer to show that the

FDA has affirmatively spoken as to the precise aspect

of the prescription drug challenged under state law

such that a state-law remedy would be prohibited.29

The requirements imposed under a legal importation

program could affect the viability of this defense. If

importation is limited to drugs meeting all current

FDA regulations, then presumably the preemption

analysis would be the same. If, however, drugs which

were not U.S.-approved drugs were allowed to be

imported, the defense would likely no longer apply as

to those drugs.

f. Joint and Several Liability

Nearly all states recognize a doctrine of comparative

liability. Thus, when several torts have combined to

result in injury to a plaintiff, a finder of fact allocates

responsibility among the tortfeasors, so that each

receives a percentage of the liability. H o w e v e r,

that allocation does not necessarily mean that each

tortfeasor is only responsible for his or her portion of

the debt. The traditional rule is one of joint and several liability, where the plaintiff could recover any

portion of the judgment from any of the tortfeasors.

Under such a system of pure joint and several liability, a plaintiff could collect one hundred percent of a

judgment from a tortfeasor found to be one percent

at fault. The tortfeasors are then left to pursue any

available actions for contribution among themselves.

A system of pure joint and several liability has important implications for liability under a drug importation scheme. If drugs were counterfeited, contaminated, altered, misbranded, mislabeled, etc., by a foreign party, an even slightly negligent (or under a strict

liability theory, slightly responsible) drug manufacturer, distributor, doctor, or pharmacist could be held to

account for the entire wrong. While this problem is

not unique to an importation system – the same

problem would occur if a domestic wrongdoer were

unreachable, either by reason of legal or practical

unavailability or insolvency – it could be aggravated

in a case involving foreign parties. In such a case, a

deep-pocketed, slightly responsible party could bear

the entire burden of payment despite bearing only a

small portion of the legal blame.

In assessing the weight of this concern, however, it is

important to note that, according to one comment,

only seventeen states still have a system of pure joint

and several liability. This comment finds that sixteen

states have adopted pure several liability, where each

tortfeasor is liable only for its comparative responsibility. Fourteen states have eliminated joint liability

for defendants whose portions of the fault are less

than some cutoff, often fifty percent. Under those

systems, a defendant one percent responsible would

never pay one hundred percent of the damages.

Several other states have adopted other reforms. At

the same time, such systems could leave an injured

consumer with an incomplete recovery for injury

resulting from imported drugs.

g. Adaptive Behavior

While entities within the distribution chain might have

strong defenses to claims under an importation regime,

companies would still accrue substantial expense

defending them. Composing answers to complaints, filing motions to dismiss, and participating in preliminary

discovery certainly carries some expense, particularly in

light of the complications discussed above.

It is possible, however, that parties will adjust to the

new litigation environment in ways that mitigate

some of these additional burdens. Manufacturers,

distributors, and importers faced with exposure from

the actions of downstream distributors or importers

have powerful incentives to take preventive measures

to minimize their liability. Indemnity and other riskallocating agreements, as well as insurance, are pervasive in the pharmaceutical industry. Thus, among

other options, entities in the pharmaceutical distribution chain could (1) choose to deal only with reputable downstream parties who will take adequate

precautions to prevent litigation and/or maintain

detailed records regarding the handling of the product; (2) do inspections and take other quality-control

steps before and after the product leaves their hands;

and/or (3) make sure that downstream parties are

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CHAPTER 10 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION
solvent or carry sufficient insurance so that contribution actions are more effective.

Certainly, all of these steps are costly. Thus, in assessing liability risk under proposed drug importation

schemes, it is important to consider the additional

monitoring and other transaction costs involved in

the potential options specified above as part of the

overall increase in costs of importation, even though

these costs will never be reflected in the form of settlements, judgments, or fees and expenses.

Moreover, such private ordering would take place in

the context of a complex legal regime. If, for

instance, it were illegal or cumbersome for manufacturers to refuse to deal with underinsured or disreputable distributors and exporters, the private ordering

system would be less effective in decreasing liability.

Certain kinds of antitrust enforcement or legislative

enactments may also affect the way companies deal

with liability risk.30 Finally, it is fair to note that such

private ordering might be more complicated, less pervasive, and less effective in the context of personal

(as opposed to commercial) importation.

3. Governmental Liability

Several states and municipalities have begun programs to buy, or to encourage their citizens to buy,

pharmaceuticals from Canada. For example,

Governor Doyle of Wisconsin provided testimony to

the Task Force outlining the program created by

Wisconsin to facilitate the importation of prescription

drugs from Canada by creating a state-sponsored

website linking Wisconsin residents to specific

Canadian sellers. Further, if a federal importation

scheme is adopted, the federal government could

become involved in facilitating the importation of

prescription drugs. In doing so, each of these governmental entities could be exposed to tort liability.

States as a general matter are immune from liability

for acts they take as sovereigns. All states, however,

waive their sovereign immunity under some circumstances, with the precise outlines of those waivers

varying from state to state. Depending on the terms

of a given state’s waiver, it may expose itself to civil

liability by participating in a drug importation

scheme. In Wisconsin, and in every other state and

municipality that has set up programs to encourage

drug importation from Canada, the state has included a very detailed disclaimer of all liability associated

with harm that may result from the drugs ordered.31

In those cases in which sovereign immunity is found

to have been waived, the effectiveness of the use of

disclaimers in preventing state liability is unclear. The

Uniform Commercial Code (U.C.C.) permits courts to

disregard such disclaimers under fairly discretionary

standards with respect to private parties.32 Courts

have in some cases ignored tort liability waivers, citing the need for protection of unsophisticated parties.33 Even if courts were to enforce these clauses in

cases involving state importation programs, the result

would most likely not be a reduction in total liability,

but simply a shift in liability from the state to private

parties involved in the transaction.

Municipalities may also incur liability through participation in importation schemes. In some cases, the

rules governing municipalities are the same as those

governing states. These municipalities, having

received delegations of state sovereignty, have the

same immunity and offer the same waivers as the

states. Other jurisdictions have found the opposite,

that liability is the general rule for municipalities,

with immunity the exception.34 On average, then,

municipalities should have more liability concerns

than states, but the rule as to municipalities varies

greatly from state to state.

35

Finally, depending on the nature of the federal government’s participation in implementing an importation scheme, it too might be subject to more protracted litigation. The federal government, in its waiver of

sovereign immunity under the Federal Tort Claims

Act,36 retains immunity for suits arising from a discretionary function of the government or from misrepresentations by the government. In most cases, these

exceptions to the U.S.’s waiver of sovereign immunity

would preclude liability. The manner in which any

importation statute and/or implementing regulations

were drafted, however, would be important in retaining the applicability of these exceptions.

For example, in interpreting the discretionary function

exception, the Supreme Court has held that if a regulation creates a “mandatory” duty, the government

107

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 10
cannot use the discretionary function exception as a

shield.37 The determination of whether a regulation

creates a mandatory duty involves a close and sometimes subtle reading of the language of applicable

laws and regulations to determine if the allegedly negligent government employee was indeed acting

according to discretion or mandate. Thus, the specific

wording of any statute or regulations would either preserve or waive federal sovereign immunity under the

discretionary function exception.

1 Several comments suggested that plaintiffs could also

advance theories of implied warranty of merchantability

or fraud/misrepresentation. State procedural or substantive law might encourage the phrasing of a case in these

terms, but the cause of action in a pharmaceutical personal injury case, is, for purposes of this chapter, essentially one for either negligence or strict liability.

Accordingly, these other causes of action are not

addressed at length here.

2 Id. § 2(a).

3 Id. § 1.

4 Id. § 2(b).

5 Id. § 6(c).

6 See Restatement (Second) of Torts § 402A cmt. k (1977).

7 See Elsroth v. Johnson & Johnson, 700 F. Supp. 151, 158

(S.D.N.Y. 1988), at 158.

8 Restatement (Third) of Products Liability § 6(d) (1997).

9 Under current law, a significant portion of imported

drugs are considered “unapproved.” The analysis here

does not address civil and criminal penalties that currently could apply for violations of the Food, Drug, and

Cosmetic Act. See 21 U.S.C. § 301 et seq. See Chapter 2

of this report for further discussion of some of the

potential conflicts between these provisions and legalized importation.

10 This is a significant caveat. See discussion on personal

jurisdiction in this Chapter.

11 See generally Restatement (Second) of Torts §314.

12 Id. § 6(d).

13 See, e.g., W. Va. Code § 305-12(b).

14 International Shoe Co. v. Washington, 326 U.S. 310

(1945).

15 World-wide Volkswagen Co. v. Woodson, 444 U.S. 286

(1980).

16 See Asahi Metal Industry Co. v. Superior Court, 480 U.S.

102, 112 (1987).

17 Under the principle of contribution, a tortfeasor against

whom a judgment is rendered may seek proportional

shares of the judgment from other joint tortfeasors.

18 330 U.S. 501, 508 (1947).

19 Piper Aircraft Co. v. Reyno, 454 U.S. 235 (1981). Given

the law on forum non conveniens, a manufacturing

defect case with only one foreign defendant is unlikely

to be moved to a foreign court. However, in a case

where the central allegation is of negligence taking

place abroad, where the witnesses and evidence were

abroad, and where the negligent party was involved in

drug distribution in a number of countries, one can easily imagine the case ending up in a foreign court.

20 See, e.g., M/S Bremen v. Zapata Off-Shore Co., 407 U.S.

1 (1972).

21 A letter rogatory is a formal request from a court in one

country to the appropriate judicial authorities in another

country requesting compulsion of testimony or documentary or other evidence or service of process.

22 Proving proximate cause can in some cases be facilitated by the doctrine of res ipsa loquiter. When a party has

exclusive control of an instrumentality that causes an

injury usually the result of negligence, res ipsa loquiter

creates a presumption of negligence. Thus, if a product

were known to be safe prior to reaching a Canadian distributor, and the Canadian distributor had exclusive control of the product during the time it became unsafe, the

court system could impute negligence to that distributor

without the need for direct proof of negligence or intentional malfeasance. However, most pharmaceutical

cases are poor candidates for the application of res ipsa

loquiter, as it would often be difficult to prove exclusive

control. Moreover, since most drugs can cause injuries

even absent negligence, an inference of negligence may

only be supported in cases involving an unusual pattern

of symptoms.

23 See Watson v. Kentucky & Indiana Bridge & R.R., 126

S.W. 146 (Ky. 1910).

24 See, e.g., Brauer v. New York Central & Hudson River

R.R. Co., 103 A. 166 (N.J. 1918) (negligence of railroad

created situation where thieves were able to steal plaintiff’s goods).

25 U.S. Const. art IV, cl. 2.

26 See, e.g., Medtronic, Inc. v. Lohr, 518 U.S. 470 (1996)

(finding that provision of federal law preempting state

law requirements regarding medical devices applied to

some state common law damage actions); Dowhal v.

SmithKline Beecham Consumer Healthcare, et al., 33 88

pP.3d 1 (Cal. 2004) (finding that state law suit challenging the warning label for non-prescription nicotine

replacement products was preempted by the FDA’s

approval of the precise warning at issue and disapproval

of various suggested changes).

27 See 21 U.S.C. § 360k.

28 See 21 U.S.C. § 379r.

29 See e.g., Ehlis v. Shire Richwood, Inc., 233 F. Supp. 2d

1189, 1196-1198 (D.N.D. 2002) aff’d, 367F.3d 1013 (8th

Cir. 2004) (finding that federal regulation of the label for

the prescription drug Adderall preempted state-law failure to warn claim).

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CHAPTER 10 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION
30 Certain kinds of activity in response to importation could expose pharmaceutical companies and their distributors

to antitrust liability, though it is beyond the scope of this

discussion to speculate as to the likelihood or magnitude of this risk.

Section 1 of the Sherman Act prohibits “contract, combination . . ., or conspiracy, in restraint of trade. . . .” 15

U.S.C. § 1. Section 1 has generally been read to prohibit, per se, horizontal combinations of competitors to

affect price or price related features. See United States

v. Trans-Missouri Freight Ass’n, 166 U.S. 290 (1895);

Catalano, Inc. v. Target Sales, Inc., 446 U.S. 643 (1980).

Commentators have worried that pharmaceutical manufacturers would respond to importation by reducing supplies to Canada, thereby preventing any significant level

of importation. But see United States v. Colgate &

Co., 250 U.S. 300 (1919) (noting that the Sherman Act

does not implicate the rights of companies to choose to

whom and under what conditions they will sell).

Pharmaceutical companies could also attempt to regulate by contract the prices their distributors charge.

Depending on how companies approached such price

management, they could be exposed to liability. See

Dr. Miles Medical v. John D. Park & Sons, 220 U.S. 373

(1911).

31 See, e.g.,

http://drugsavings.wi.gov/medicinelist.asp?locid=2&linkid

=17

32U.C.C.§ 2-302 (2003) (providing that courts may refuse

to enforce unconscionable contracts),U.C.C.§ 2-316

(2003) (limiting exclusions and changes in warranties).

33 Henningson v. Bloomfield Motors, Inc., 161 A.2d 69

(N.J. 1960).

34 See, e.g., Kimps v. Hill, 546 N.W.2d 151 (Wis. 1996).

35 It is worth noting that sovereign immunity for States is

independent of State immunity from Federal suit under

the Eleventh Amendment. This analysis focuses on sovereign immunity because tort law is grounded in the

common law, and tort claims are typically adjudicated in

State courts.

36 28 U.S.C. §§ 1346, 2671, et seq.

37 See Berkovitz v. United States, 486 U.S. 531 (1988) (finding that the discretionary function exception did not bar

claims that the FDA negligently licensed certain polio

vaccine which were premised upon the alleged failure to

comply with mandatory regulations governing the

licensing process.

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HHS REPORT ON PRESCRIPTION DRUG IMPORTATION CHAPTER 10
110
APPENDIX A: THE IMS DATASET

I. Drugs

A. Brand Name Drugs

For brand name drugs, we started with 60 best-selling brand name products, according to U.S. sales in 2002.

Because of data limitations, we dropped four products with more than one active ingredient, and found two

products with the same active ingredient. This left us with 54 separate molecules used in 56 brand name

products. A detailed explanation of the brand name drugs used in our analysis is below.

IMS Health provided sales and volume data on all comparable products marketed in ten countries based on

the 60 top-selling products, judged by sales in the U.S. in calendar year 2002. These top-selling 60 products

included four combination products (Advair Diskus, Augmentin, Lotrel, and Ortho-Tri-Cyclen). Additionally,

there were two pairs of products (Epogen/Procrit and Flonase/Flovent) containing the same active ingredients (epoetin alpha and fluticasone).

For our analyses, we eliminated the four combination products, because we could not identify comparable

combination products across countries, leaving the top 56 single ingredient products. Strength data were

not available for all active ingredients in combination products. Since two pairs of these 56 products had

the same active ingredients, we were left with products containing 54 different active ingredients. Thus, we

are analyzing all single ingredient products in the ten countries having the same active ingredients as the

top 56 single ingredient products marketed in the U.S. in 2002 based on retailer acquisition costs (or the

value of wholesaler sales). The 54 active ingredients in these 56 products are listed in Figure A.1.

111

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION APPENDIX

APPENDIX
112

APPENDIX HHS REPORT ON PRESCRIPTION DRUG IMPORTATION

1 atorvastatin

2 simvastatin

3 lansoprazole

4 omeprazole

5 epoetin alfa

6 olanzapine

7 celecoxib

8 sertraline

9 paroxetine

10 amlodipine

11 gabapentin

12 esomeprazole

13 risperidone

14 rofecoxib

15 pravastatin

16 oxycodone

17 alendronic acid

18 clopidogrel

19 citalopram

20 loratadine

21 venlafaxine

22 fexofenadine

23 bupropion

24 pioglitazone

25 infliximab

26 zolpidem

27 montelukast

28 cetirizine

29 rosiglitazone

30 pantoprazole

31 estrogenic substances,

conjugated

32 filgrastim

33 sumatriptan

34 enoxaparin sodium

35 quetiapine

36 sildenafil

37 rabeprazole

38 ciprofloxacin

39 rituximab

40 levofloxacin

41 ondansetron

42 fentanyl

43 azithromycin

44 fluticasone

45 interferon beta 1a

46 etanercept

47 valproate semisodium

48 ribavirin

49 metoprolol

50 docetaxel

51 levothyroxine sodium

52 fluconazole

53 donepezil

54 topiramate

Source: IMS Health, IMS MIDAS (TM), Q4/2003.

THE 54 ACTIVE INGREDIENTS

RANKED BY

IMS RETAIL ACQUISITION COSTS (FOR 56 PRODUCTS)

Figure A.1

2002 RANK 2002 RANK
B. Generic Drugs

For generic drugs, we started with a list from IMS of 50 top-selling active ingredient or combination products

(based on global sales in the second quarter of 2003) that were widely available in the ten countries in our

analysis. We dropped 21 products that were very old. The resulting data set of 29 molecules included two that

also appeared on the list of branded products. These two were omeprazole and metoprolol. A detailed explanation of the generic drugs used in our analysis is below.

We started with a list from IMS of 50 drugs based on sales of all products regardless of ingredient mix. IMS

highlighted those ingredients and combinations of ingredients where the three top-sellers were single ingredient products. Our assessment of the IMS list led us to realize that two important combination products should

probably be included in our selected list - amoxicillin/clavulanic acid and levodopa/carbidopa. These fixed dose

combination products are frequently sold in high volumes. For this reason, we chose them to be included in our

final selection, but only as fixed combinations.

The existence of some over-the-counter (OTC) strengths/dosage forms tends to complicate cross-country price

comparisons. Thus, if a generic entity was marketed as OTC, especially in the U.S., we excluded it from our list

of generics to study.

From the IMS-provided list of 50 generics we selected 31, including the two important combination drugs noted

above. In summary, the list of 31 drugs excludes very old drugs, drugs sold primarily in multi-ingredient products, and drugs often sold OTC. The list includes injectable drugs and drugs from most major therapeutic class113

HHS REPORT ON PRESCRIPTION DRUG IMPORTATION APPENDIX 

Figure A.2 THE TOP-SELLING 31 GENERIC DRUGS

1 omeprazole

2 amoxicillin/clavulanic acid

3 metformin

4 nifedipine

5 propofol

6 salbutamol

7 tamoxifen

8 enalapril

9 diltiazem

10 atenolol

11 cefuroxime axetil

12 levodopa/carbidopa

13 furosemide

14 warfarin

15 verapamil

16 lorazepam

17 clindamycin

18 vancomycin

19 tramadol

20 metoprolol

21 lisinopril

22 diclofenac

23 lovastatin

24 tizanidine

25 cefalexin

26 amiodarone

27 pamidronic acid

28 minocycline

29 aciclovir

30 doxazosin

31 megestrol

Source: IMS Health, IMS MIDAS (TM),

Q4/2003.

No. Generic No. Generic
A few widely used generics appear to be excluded, usually because they were not available in all ten countries.

Most notable is fluoxetine, which is not available in Japan.

All combination products, except the two listed above, were dropped from our analyses because of problems

encountered when identifying strength. When two combination products were removed from the database, it

was reduced to 29 generic entities. We analyzed all single ingredient products containing the 29 active ingredients listed above. Thus, innovator and branded products are included, but are identified as such based on our

knowledge of the market.

II. Countries

In its MIDASTM database, IMS possesses drug-marketing data from over 60 countries, which could be used for

price comparisons, but our budget limited the number of countries for which we could purchase data, as well as

the time frame the data would cover.

Legislative proposals to legalize importation of finished pharmaceutical products have been limited to countries

that are members of the Organization for Economic Cooperation and Development (OECD) with relatively

sophisticated drug regulatory processes. We sought to include a variety of countries that have the following

attributes:

• Are likely candidates for importation;

• Have well developed drug regulatory systems;

• Have varying kinds of drug price controls and price levels; and

• Are included in IMS’s MIDASTM database (for comparability).

III. Adjusting IMS (Invoice) Price Data to Reflect Market Prices

The IMS manufacturers’ sales data reflect invoice prices. These prices may not correspond exactly to market

prices in the U.S. because they exclude discounts, rebates, and chargebacks, which U.S. manufacturers use as a

matter of course. In most foreign countries, where the government controls prices and is the only important

buyer, such discounts, rebates and chargebacks are thought to be negligible. To create a full and complete comparison of the prices of drugs in the U.S. relative to prices in other countries, we need to estimate the difference

between the invoice prices reported by IMS and the actual prices received by manufacturers for U.S. sales after

deducting off-invoice payments and making accounting adjustments.

CMS collects data on the average manufacturer price (AMP) paid by retail pharmacies, wholesalers, and other

retail purchasers after discounts, rebates, and chargebacks are taken into account. Government agency and hospital sales are excluded. CMS provided these data for 2003 for products using the molecules in our dataset.

CMS identifies unique products in their data by the National Drug Code (NDC) number. Since our IMS data (IMS

Health, IMS MIDAS (TM), Q1/2003 - Q4/2003) did not include NDC numbers, we combined the two datasets by

use of an intermediary dataset, the National Sales Perspective (NSP) data that FDA purchases from IMS (IMS

Health, National Sales Perspective (TM), 2003 extracted October 2004). The NSP data includes NDC numbers.

For some products in our MIDASTM data set, we were unable to find matching products in the intermediary NSP

dataset, or in the CMS data on average manufacturing price. For the branded drugs in our original dataset, we

retained data on 40 of our 54 molecules and 66 percent of the data records. For the generic drugs, we retained

28 of our 29 molecules and 56 percent of the data records.

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APPENDIX HHS REPORT ON PRESCRIPTION DRUG IMPORTATION
To compare the prices of drugs in the U.S. with the other countries, we constructed a set of price indices weighted by U.S. consumption. We did this two different ways:

• We used only the products where we were able to match IMS’s data with CMS’s data. In this case, we used

CMS’s average manufacturer price data and the corresponding IMS quantities in the index calculation. Price

indices constructed using this method use only products for which the average manufacturers’ price is available, but neglects the IMS data for U.S. products for which this information is lacking.

• Applying to all products in our MIDASTM dataset, the average discounts computed as the ratio of total manufacturer sales in the U.S. in 2003 based on CMS’s prices and total sales of the same products based on

IMS’s prices. For the branded products, the CMS totals were about one percent higher than the IMS totals;

for generics, they were 24 percent lower. We then applied these discounts (surcharges) to all the retail sales

data in our original database. This method uses all the IMS data, but applies an average discount computed

using a subset of the data.

Both methods give generally consistent results.

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APPENDIX B: PRICE DIFFERENCES AMONG INTERNET PHARMACIES

Retail cash prices for drugs – the prices that uninsured Americans pay using credit cards at their pharmacies –

are difficult to compare internationally in a comprehensive and systematic way. All systematic prior research

uses wholesale or manufacturer prices. As a result, our assessment of retail prices likely to be paid by uninsured

people is limited to a relatively small number of drug prices that we can easily observe — those reported on the

internet, especially prices for internet pharmacies describing themselves as American or Canadian. See Chapter

1 for a discussion on how some internet pharmacies describing themselves as Canadian have, in fact, no physical presence in Canada.) Of course these internet prices are not necessarily representative of average market

prices in either country. Furthermore, we cannot apply standard methods of averaging price differences by

weighting prices by quantities sold, because information on the volume of sales is unavailable. Despite these

deficiencies, cash prices at internet pharmacies are of great importance to Americans whose budgets require

them to search for the very lowest drug price. To best portray price differences for these consumers we present

an analysis of internet drug prices.

The lowest internet pharmacy prices available to U.S. consumers for branded drugs are about 37 percent less at

Canadian pharmacies, while generics sold at U.S. internet pharmacies are approximately 32 percent less than

Canadian generic prices. We base this conclusion, which takes into account shipping costs assuming one prescription per shipment, on an assessment of the prices for 22 top-selling prescription drugs available from a single company, and five top chronic-use generics from U.S. and Canadian internet pharmacies. Our price information is from the website www.pharmacychecker.com. There is substantial variation around these averages. For

some branded drugs, the U.S. price premium varies greatly for different strengths and package sizes of the same

product.

The source of our data, the PharmacyChecker.com website, collects and assesses prices for pharmaceuticals from

30 Canadian and six U.S. online/internet pharmacies. According to the site, “PharmacyChecker.com LLC (“PC”)

collects, evaluates, and reports credentials, prices, and customer feedback regarding pharmacies that operate

online and through mail-order and fax (generally referred to as “online pharmacies” or “OLPs”). It is the leading independent source of information about online pharmacies.”

Prices on Branded Products — Internet Prices

Our analysis of branded drugs started with 30 top-selling drugs, based on U.S. sales and available from a single

source. Five of these 30 drugs are either not available, or are not available via the internet, in Canada (Procrit,

an injectable anti-anemia medicine for cancer patients,called Eprex in Canada; Epogen; Oxycontin, a pain reliever and Schedule II controlled substance; Remicade, an anti-inflammatory drug used against Crohn’s disease and

arthritis; and Ambien, prescribed to treat insomnia). We excluded Zyrtec and Allegra because they are available

OTC in Canada, and Claritin, which is OTC in both countries. As a result, this analysis included 22 drugs.

For each pharmaceutical product, we identified all instances where the same combinations of strength and package size were available in both countries. In a few cases, identical package sizes were not available, but, if the

sizes were similar (e.g., 28 tablets in Canada, 30 in the U.S.), we included the packages, but took the different

numbers of tablets into account in computing unit costs. All prices used in this analysis include shipping costs;

the prices are related to internet prices only. For drugs ordered from the Canadian pharmacies, shipping typically costs between 10 and 15 dollars. For drugs ordered from U.S. pharmacies, shipping typically costs between

zero and two dollars.

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For each matching product (active ingredient, dosage form, strength, and package size), we recorded the lowest

U.S. price and the lowest Canadian price. Then we took the ratio of the Canadian price to the U.S. price. In all,

there were 118 matching products for the 22 drugs. For all but one of these, the U.S. price was higher than the

Canadian price. Figure B.1 shows the distribution of the price ratios. On average, Canadian prices for branded

products are 63 percent of U.S. prices (or 37 percent lower than U.S. prices), with shipping included. Figure B.2

shows the range of price ratios for each of the 22 drugs and includes the 118 matching products. Clearly, the

difference in pricing between the U.S. products and Canadian products can depend on not only the drug, but also

the dosage form, strength, and package size.

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Source: Pharmacychecker.com March 10-11, 2004.

Note: Shipping costs are included assuming one prescription per shipment.

Figure B.1
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Figure B.2

Source: Pharmacychecker.com March 10-11, 2004.

Prices on Generic Products — Internet Prices

For the generic drugs, we started with seven top-selling chronic-use drugs for which the first U.S. generic entry

occurred in the last ten years. Our set of seven drugs represents all the generic entities first entering the U.S.

market in the last ten years that are sold in solid dosage form, not over-the-counter, and are not anti-infectives.

Two of these, alprazolam and clonazepam, were available only in the U.S. The remaining five are listed in Figure

B.3. Not all of these are available as generics in Canada. For each strength that is available in both countries,

we calculated the lowest price per pill, regardless of the package size. As with the name brands, we included

shipping costs in the prices.

For the five generic drugs (14 strengths) included in this analysis, we found that, on average, U.S. generic prices

were 32 percent lower than Canadian generic prices, when the products were purchased from internet pharmacies in each country. This includes shipping costs.
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Figure B.3

Source: Pharmacychecker.com March 10-11, 2004.

Note: For enalapril, which is not available as a generic in Canada, we use the price of the name brand equivalent.

Caveats

Different shipping costs complicate this analysis. Shipping costs per shipment are much higher in Canada, but exactly how this fact affects the average cost of buying drugs from U.S. and Canadian internet sources depends on how

many prescriptions are purchased with each shipment. The risks of buying drugs from foreign internet sources may be

higher than from U.S. internet sources, but a comprehensive comparison of such risks is very difficult.
APPENDIX C: METHODS OF COMPARING PRICES

To compare the prices of different drug products in different countries, we needed to determine what we meant

by a ‘product’ and how to measure its quantity. We examined numerous different methods before settling on

one that defines a product as the molecule and the quantity as the number of kilograms or international units

(IU). We based this determination on the logical consistency of the comparison and the amount of data each

comparison included or excluded.

Figure C.1, shows the results of four different methods of comparing prices:

• Defining a product as a molecule and using both kilograms (or IU) and standard units (SU) as the quantity

measure (a standard unit corresponds approximately to a dose), and 

• Defining a product as a molecule and dosage form (determined by the first character of the New Form

Code (NFC123)) and using both kilograms (or IU) and standard units (SU) as the quantity measure.

Other comparisons we examined but do not display include:

• Using ‘counting units (CU)’ as a quantity measure;

• Defining a product as the same molecule and 3-character New Form Code (NFC123);

• Defining a product as the same molecule, NFC123, and strength, and;

• Defining a product as the same molecule, NFC123, strength, and package size.

We decided against comparisons that use counting units or standard units as quantity measures and define

product at the aggregated levels of molecule or molecule/NFC1 because they fail to differentiate among different strengths of the same drug. For example, they would equate, if all existed in a country, 10 mg tablets with

20 mg, 40 mg, and 80 mg. Using kgs or IUs avoids these invalid comparisons. We decided against using the

more precise definitions of a product because they eliminated too much data. The three-character NFC lists as

separate dosage forms, for example, tablets, tongue soluble tablets, and soluble tablets, or, alternatively, coated

tablets, sugar-coated tablets, film-coated tablets, chewable-coated tablets, etc. Requiring, in addition, the same

package size eliminated nearly all the cross-country comparisons. Figure C.2 and C.3 show the number of data

records and molecules each different comparison included.

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HHS REPORT ON PRESCRIPTION DRUG IMPORTATION APPENDIX 

Figure C.1

Figure C.2
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Figure C.3
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APPENDIX D: IMPORTATION IN THE EUROPEAN UNION (E.U.)

Careful studies of the experience of the E.U. with legalizing trade in pharmaceuticals suggest that the practice

has had small effects on aggregate drug spending, and that intermediaries get a large share of the total gains.

A recent paper by Kanavos et al.1 reports that savings to drugs buyers from commercial importation were very

small because intermediaries retained most of the potential gains from trade. The authors studied drugs in six

therapeutic categories that were treatments for chronic illnesses. Their data set, however, represented only 14

to 28 percent of the various countries’ retail expenditures for prescription drugs.

In a separate study from the University of York, researchers calculated direct savings----excluding any savings

from lower prices on domestic drugs----to government health funds from parallel imports for five European countries that are net parallel importers: Denmark, Germany, the Netherlands, Sweden, and the U.K.2 IMS Health

reviewed this study and suggested the savings values reported for Germany and the U.K. were misstated and

should be, $126 million and $201 million, respectively.3 Using total drug sales for each country (manufacturers’

prices), we calculated the savings as a percent of total pharmaceutical sale.4 Using these values, savings as a

percent of sales range from 0.8 percent for Germany to 2.5 percent for Sweden.

Ganslandt and Maskus5 report that parallel trade in Sweden reduced prices by between 12 percent and 19 percent, but the total savings to drug buyers are less than these estimates because there were no imports for many

categories of drugs. In particular, the authors report that only 46 percent of the market captured in their data set

experienced entry, largely because prices and volume of the other products did not attract parallel importers.

Moreover, their dataset of the top 50 molecules represented about 37 percent of total Swedish wholesale sales

in 1998. Assuming that parallel imports were negligible outside their data set, savings in Sweden from importation were approximately two percent and 3.2 percent of total drug spending.6 Alternatively, an optimistic

assumption that savings are proportional to regulatory decisions to authorize imports would imply that the

imports outside the data set represent 42 percent of the total savings from imports, because their data on the

top 50 molecules represented about 58 percent of the total approvals for parallel imports in 1998. Thus, this

upper-bound estimate of savings in Sweden from imported drugs is between 3.5 percent and 5.6 percent of total

drug spending.7 We qualify this result by noting that the limited available supply of importable drugs has less

of an effect on the small Swedish market than it would on the large U.S. market. If the Swedish market faced

tighter supply constraints, the impact on drug spending would be smaller.

Figure D.1
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APPENDIX CHAPTER 1 HHS REPORT ON PRESCRIPTION DRUG IMPORTATION

Pa a e T ade n Ge many and he U K

B M

U K

G m y

W

W

sis m m M M M M

Using IMS data, we conduct two related analyses of the experience of importation in the E.U., focusing on two

countries thought to be important importers, the U.K. and Germany.

First, we evaluate the volume of imported drugs. For each molecule, we measure the volume of imported drugs

as the total doses (standard units) of all imported products divided by the total doses of all products. We find

that the average volume of imports measured in this way peaked in 2002 and fell slightly in 2003 as illustrated

in Figure D.2. The lack of continued recent growth in these estimates suggests that some supply constraints are

limiting increases in the volume of imported drugs.

Figure D.2

Source: Analysis completed by HHS based on prescription sales data from IMS Health, IMS MIDAS (TM), Q4/2003.

Second, we investigate whether increases in the volume of imports were associated with declines in the price of

drugs when measured as retail acquisition costs. In particular we assess whether molecules for which the

growth of import volume was high were also those for which the changes in wholesale price was modest or negative. We find no evidence that greater import volume reduced or avoided price increases. Our statistical analyses failed to show a relationship, because, as seen in the Figure D.3, rising imports did not seem to be associated with a declining premium of German or U.K. prices relative to those in the exporting countries.
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Ultimately, however, the experience of E.U. countries is limited in its ability to predict the effects in the U.S. if

importation became legal. All of the E.U. countries we researched have socialized healthcare programs that

include some form of prescription drug coverage. In the U.K. and Germany, the two countries with the largest volume of imports, consumers pay fixed fees per prescription for the majority of drug products prescribed during the

period our data covered.8 Methods of reimbursing pharmacists in Germany are actually disincentives for use of

parallel-sourced drugs.

9 Pharmacists are reimbursed at a fixed percent so they had a financial incentive to sell

more expensive products.

1 Kanavos, Panos; Costa-I-Font, Joan; Merkur, Sherry; and Gemmill, Martin, “The Economic Impact of Pharmaceutical Parallel

Trade in European Union Member States: A Stakeholder Analysis,” LSE Health and Social Care London School of Economics

and Political Science, January 2004 (hereinafter cited as Kanavos et al., 2004).

2 See Figure D.1; West, Peter and Mahon, James, “Benefits to Payers and Patients From Parallel Trade,” York Health Economics

Consortium, The University of York, May 2003 (hereinafter cited as West and Mahon, 2003).

3 IMS Health, “Parallel Trade in Europe –Assessing the Reality of Payer and Patient Savings,” September 1, 2004.

4 Ideally the percent savings should be calculated using total sales at the retail level, however, we did not have consistent

data for retail sales for the countries of interest. Using the manufacturer’s price overstates the percent savings, so these

estimates should be viewed as upper bounds.

5 Ganslandt, Mattias and Maskus, Keith E., “Parallel Imports of Pharmaceutical Products in European Union,” The Research

Institute of Industrial Economics (IUI) Working Paper No. 546, 2001.

6 The lower bound is .12 x .46 x .37, while the upper bound is .19 x .46 x .37.

7 The lower bound is .12 x .46 x .37 x (1+.42/.58), while the upper bound is .19 x .46 x .37 x (1+.42/.58).

8 Kanavos et al., 2004

9 West and Mahon, 2003; Kanavos et al., 2004; Tobin, Helena and Turner, Niel, “Parallel Trade 2003 A concise Guide,” PPR

Communications, Ltd., Cambridge, United Kingdom, 2003.

Note: These are indices of wholesale prices.

Source: Analysis completed by HHS based on prescription sales data from IMS Health, IMS MIDAS (TM), Q4/2003.

Figure D.3
APPENDIX E: POTENTIAL GENERIC SAVINGS

Consumers could save billions of dollars annually if they purchased generic versions of prescription drugs whenever these are available. Our examination of recent data on retail drug purchases estimates this potential savings. If consumers were to buy generic products whenever possible and no brand-name equivalents, we estimate savings to be approximately $17 billion.

For the 29 top-selling off-patent molecules described elsewhere, we obtained detailed 2003 retail price and

quantity data for generic products and their branded equivalents.1 We calculate potential savings as the difference between the price of a brand name product produced by an innovator or its licensee and the price of generic substitutes calculated as a weighted average of prices of generic products using a given molecule, dosage

form and strength. Thus, for each molecule, dosage form, and strength, we have the branded product and its

average retail price, plus the average retail price of a generic substitute.

The potential consumer savings from complete use of generic versions of products using these 29 molecules

would be approximately $700 million. According to our data for 2003, consumers spent approximately $2.1 billion in retail establishments buying branded versions of single ingredient products using the 29 molecules when

there was a generic equivalent available. If these purchases had been made at the prevailing average generic

price, retail expenditures would have been $1.4 billion— $700 million less.

The set of 29 molecules includes the top-selling generics, but represents a fraction of all branded pharmaceutical products that face generic competition. One way to project the savings for the universe of such products is

to use a 1998 report from the Congressional Budget Office that estimated that 27 percent of retail pharmacy

sales went to innovator products with generic equivalents.2 This estimate could be considered to be an upper

bound because it counts an extended-release dosage form as having generic competition versions even if all

generic products use only the original formulation. Consumers may be more reluctant to substitute in that

instance because they would lose the additional convenience of the extended release product.

CBO’s estimate that 27 percent of spending is on brand name products that face generic competition suggests

retail sales of innovator versions of multiple source drugs would now be about $50 billion.3 Complete use of

generics whenever they are available in the same dosage form and strength offers savings of about a third in

our data set ($700 million on spending of $2.1 billion on unprotected brand-name products). Applying this fraction to $50 billion suggests that complete use of generic substitutes for brand-name unprotected products could

save $17 billion.

Although we conducted this analysis using data from retail pharmacies only, we find that we reach a similar conclusion when we repeated our analysis using sales data based on all distribution channels including hospitals,

nursing homes, internet and mail-order.4 We used manufacturer sales covering 28 of the 29 drugs in the first

study. Across all distribution channels if branded multiple source drugs had been purchased at the average

generic price, the savings would be approximately $1.4 billion. Reasonable extrapolations to the universe of

branded drugs with generic equivalents would yield total savings in the billions of dollars. Thus, this finding supports our initial conclusion using retail level data.

1 Analysis completed by HHS based on prescription sales data provided by IMS Health, IMS National Prescription Audit (TM),

2003.

2 Congressional Budget Office, “How Increased Competition from Generic Drugs Has Affected Prices and Returns in the

Pharmaceutical Industry,” page 15, 1998. In the report, if generic versions of an innovator drug were available in any

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dosage form, then all sales of all dosage forms of the innovator drug were classified as being multiple source.

3 Estimated 2003 U.S. sales were $184 billion, according to Centers for Medicare & Medicaid Services (CMS) “Prescription

Drug Expenditures; Aggregate and per Capita Amounts, Percent Distribution and Average Annual Percent Change by Source

of Funds: Selected Calendar Years 1990-2013.

4 Analysis completed by HHS based on prescription sales data from IMS Health, IMS MIDAS (TM), Q4/2003.

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