U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

95–083—PDF 2004

S. HRG. 108–730

INTERNATIONAL TRADE AND PHARMACEUTICALS

JOINT HEARING

BEFORE THE

SUBCOMMITTEE ON INTERNATIONAL TRADE

AND THE

SUBCOMMITTEE ON HEALTH CARE

OF THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

APRIL 27, 2004

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

CHARLES E. GRASSLEY, Iowa, Chairman

ORRIN G. HATCH, Utah

DON NICKLES, Oklahoma

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

RICK SANTORUM, Pennsylvania

BILL FRIST, Tennessee

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MAX BAUCUS, Montana

JOHN D. ROCKEFELLER IV, West Virginia

TOM DASCHLE, South Dakota

JOHN BREAUX, Louisiana

KENT CONRAD, North Dakota

BOB GRAHAM, Florida

JAMES M. JEFFORDS (I), Vermont

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

KOLAN DAVIS, Staff Director and Chief Counsel

RUSSELL SULLIVAN, Democratic Staff Director

SUBCOMMITTEE ON INTERNATIONAL TRADE

CRAIG THOMAS, Wyoming, Chairman

ORRIN G. HATCH, Utah

CHARLES E. GRASSLEY, Iowa

GORDON SMITH, Oregon

OLYMPIA J. SNOWE, Maine

BILL FRIST, Tennessee

TRENT LOTT, Mississippi

JIM BUNNING, Kentucky

MAX BAUCUS, Montana

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

BOB GRAHAM, Florida

JAMES M. JEFFORDS (I), Vermont

TOM DASCHLE, South Dakota

JOHN F. KERRY, Massachusetts

SUBCOMMITTEE ON HEALTH CARE

JON KYL, Arizona, Chairman

OLYMPIA J. SNOWE, Maine

BILL FRIST, Tennessee

JIM BUNNING, Kentucky

DON NICKLES, Oklahoma

CRAIG THOMAS, Wyoming

RICK SANTORUM, Pennsylvania

GORDON SMITH, Oregon

ORRIN G. HATCH, Utah

TRENT LOTT, Mississippi

JOHN D. ROCKEFELLER IV, West Virginia

TOM DASCHLE, South Dakota

BOB GRAHAM, Florida

JAMES M. JEFFORDS (I), Vermont

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

JOHN BREAUX, Louisiana

MAX BAUCUS, Montana

(II)

(III)

C O N T E N T S

OPENING STATEMENTS

Page

Kyl, Hon. Jon, a U.S. Senator from Arizona, chairman, Subcommittee on

Health Care .......................................................................................................... 1

Thomas, Hon. Craig, a U.S. Senator from Wyoming, chairman, Subcommittee

on International Trade ........................................................................................ 3

Breaux, Hon. John B., a U.S. Senator from Louisiana ......................................... 4

Santorum, Hon. Rick, a U.S. Senator from Pennsylvania ................................... 5

Graham, Hon. Bob, a U.S. Senator from Florida .................................................. 6

Smith, Hon. Gordon, a U.S. Senator from Oregon ................................................ 7

Baucus, Hon. Max, a U.S. Senator from Montana ................................................ 8

AGENCY WITNESSES

Aldonas, Hon. Grant D., Under Secretary for International Trade, U.S. Department of Commerce, Washington, DC .......................................................... 11

Shiner, Hon. Josette Sheeran, Deputy, U.S. Trade Representative, Washington, DC ............................................................................................................. 14

Hubbard, William K., Associate Commissioner for Policy and Planning, Food

and Drug Administration, Washington, DC ...................................................... 17

PUBLIC WITNESSES

Calfee, John E., resident scholar, American Enterprise Institute, Washington,

DC .......................................................................................................................... 40

Anderson, Gerard, professor, Johns Hopkins School of Hygiene and Public

Health, Baltimore, MD ........................................................................................ 42

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Aldonas, Hon. Grant D.:

Testimony .......................................................................................................... 11

Prepared statement .......................................................................................... 53

Responses to questions from Senators Grassley, Kyl, Graham, and Lincoln ................................................................................................................. 70

Anderson, Gerard:

Testimony .......................................................................................................... 42

Prepared statement .......................................................................................... 77

Responses to questions from Senators Kyl and Lincoln ................................ 91

Baucus, Hon. Max:

Opening statement ........................................................................................... 8

Prepared statement .......................................................................................... 94

Breaux, Hon. John B.:

Opening statement ........................................................................................... 4

Calfee, John E.:

Testimony .......................................................................................................... 40

Prepared statement .......................................................................................... 96

Responses to questions from Senator Grassley .............................................. 115

Graham, Hon. Bob:

Opening statement ........................................................................................... 6

Hubbard, William K.:

Testimony .......................................................................................................... 17

Prepared statement .......................................................................................... 120

Responses to questions from Senators Kyl, Rockefeller, and Lincoln .......... 140

Page

IV

Johnson, Hon. Tim:

Prepared statement .......................................................................................... 144

Kyl, Hon. Jon:

Opening statement ........................................................................................... 1

Prepared statement .......................................................................................... 148

Rockefeller, Hon. John D., IV:

Prepared statement .......................................................................................... 152

Santorum, Hon. Rick:

Opening statement ........................................................................................... 5

Shiner, Hon. Josette Sheeran:

Testimony .......................................................................................................... 14

Prepared statement .......................................................................................... 154

Responses to questions from Senators Lincoln, Kyl, Rockefeller, Graham,

and Grassley .................................................................................................. 160

Smith, Hon. Gordon:

Opening statement ........................................................................................... 7

Thomas, Hon. Craig:

Opening statement ........................................................................................... 3

Prepared statement .......................................................................................... 170

COMMUNICATIONS

Advanced Medical Technology Association (AdvaMed) ........................................ 173

Families USA ........................................................................................................... 180

Generic Pharmaceutical Association (GPhA) ........................................................ 184

Pharmaceutical Research and Manufacturers of America (PhRMA) .................. 192

(1)

INTERNATIONAL TRADE AND

PHARMACEUTICALS

TUESDAY, APRIL 27, 2004

U.S. SENATE,

SUBCOMMITTEE ON INTERNATIONAL TRADE AND THE

SUBCOMMITTEE ON HEALTH CARE,

COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to notice, at 10:00 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Jon Kyl (chairman of the Subcommittee on Health Care) and Hon. Craig Thomas

(chairman of the Subcommittee on International Trade) presiding.

Also present: Senators Lott, Snowe, Santorum, Smith, Baucus,

Breaux, Graham, and Lincoln.

OPENING STATEMENT OF HON. JON KYL, A U.S. SENATOR

FROM ARIZONA, CHAIRMAN, SUBCOMMITTEE ON HEALTH

CARE

Senator KYL. This joint hearing of the Subcommittees on Health

Care and International Trade of the Senate Committee on Finance

will come to order.

I want to begin by thanking Chairman Grassley for scheduling

this unique joint subcommittee hearing. We do not often have joint

subcommittee hearings, but I think that the subject matter today,

covering both health care and international trade, is an issue that

is uniquely suited to this format.

So, I want to thank the chairman of our other Subcommittee on

International Trade, Senator Thomas, for co-chairing the hearing

today. We are going to be trading off our responsibilities as the day

goes on.

I was very pleased that our Trade Representative, Ambassador

Zoellick, raised the issue of prescription drugs, really, for the first

time in trade negotiations in the recently concluded U.S.-Australia

Free Trade Agreement, and that he expects to raise this issue in

future negotiations.

I have long thought that the prescription drug price controls employed by foreign countries amount to an unfair trade practice because they block the access of U.S. product to foreign markets, but

worse is that the price controls impose unacceptable burdens on

the United States as our consumers end up paying the bulk of the

cost for research and development, probably up to 60 percent more

for most prescription drugs compared to the citizens and countries

that use price controls.

2

I think the answer in the United States is not that we should

adopt price controls, which is a solution that has tremendous down

sides that I hope we can explore in today’s hearing, but rather than

we should continue to work with other countries to reduce or eliminate their price controls. The primary reason to use trade negotiations to address foreign price controls on prescription drugs is the

health and well-being of the American people, and people all

around the world.

Because the United States is the only major country to allow

market price for pharmaceuticals and medical devices, companies

are forced to finance the bulk of their research and development

costs through prices charged to U.S. consumers.

They simply cannot recoup their R&D costs in countries that impose price controls, and the resulting cost shift of the R&D burden

to United States consumers is unfair.

Another result, is that much of the pharmaceutical R&D has migrated from Europe, which had been the R&D leader to the United

States. We actually in-source tens of thousands of research jobs in

the industry from foreign-based companies.

But while jobs and the breakthrough therapies that are created

are a tremendous benefit, the American consumers cannot continue

to finance this medical R&D for the entire world.

As Dr. Mark McClellan, the former Commissioner of the FDA

noted, ‘‘Everyone’s effort to get a free ride on new drugs will grind

the global development of new drugs to a halt.’’ He said, ‘‘It is unfair to Americans who are bearing an increasing share of the burden and cannot be expected to do so indefinitely.’’

While Americans have begun objecting to this unfairness, the

wrong solution, as I said, in my view, is to move toward price controls in this country. If Americans import price control drugs from

other countries, we are, in effect, adopting the price controls of

those countries. The long-term effects of such a policy could be devastating to future R&D breakthroughs.

As the Wall Street Journal editorialized just yesterday, ‘‘The politicians and lobbyists in the U.S. who have been clamoring for drug

re-importation laws to lower the cost of prescription medicines

could do well to look at the devastation price controls have brought

to Europe’s drug industry.’’

In fact, I believe, from a situation where about two-thirds of the

new drugs were being produced in Europe, now it is probably less

than a third, with the shift coming to the United States precisely

because we do not have drug control prices here yet.

It takes 10 to 15 years, and costs more than $800 million to do

the research and testing to successfully bring a new medicine to

patent. Only 250 of the 5,000 screened compounds enter pre-clinical testing, and only one of five drugs that enter clinical trials is

approved as a new medicine. Only 3 out of 10 marketed drugs

produce revenues that match or exceed average R&D costs.

If U.S. companies had to finance breakthrough drugs only with

the prices that were set by governments, we could well see pharmaceutical companies scale back their R&D activities. Many companies have, for example, already reduced, or even ended, their research and production of antibiotics. We may find that other areas

face similar threats as a result of price controls.

3

We have an opportunity to begin reversing this trend. I think we

should begin by discussing the negative repercussions of price controls with our allies in the G–8 and Organization of Economic Cooperation and Development.

Our European allies have seen the flight of their drug companies’

R&D activities to America. They understand the effect price controls have had on their economies and they know that price controls inevitably lead to shortages, shortages in available drugs and

a reduction in the development of new, innovative pharmaceuticals.

The world has not yet felt the full impact of price controls reducing the supply of drugs because the United States is making up

much of the difference for others by paying the bulk of the world’s

R&D expenses.

But if we were to adopt price controls, either by allowing re-importation or by adopting actual price controls, the result for future

health of the world would be devastating. I look forward to hearing

the testimony of our two panels today as we will be exploring how

the United States can address this very serious issue.

Before I introduce the panelists, let me turn to the Ranking

Member of the Trade Subcommittee, Senator Thomas.

OPENING STATEMENT OF HON. CRAIG THOMAS, A U.S. SENATOR FROM WYOMING, CHAIRMAN, SUBCOMMITTEE ON

INTERNATIONAL TRADE

Senator THOMAS. Thank you all for being here. This is a topic all

of us have been concerned about in many ways. So, I think it is

important for us to deal with some of the issues that we will talk

about today.

We have an aggressive trade strategy to open world markets to

U.S. goods. To be successful, the United States needs to negotiate

agreements that eliminate barriers, create transparency and level

the playing field for domestic companies doing business abroad.

Whether it is an automobile manufacturer, an agricultural producer, or a soda ash processor, opening up the world for U.S. business must remain a top priority for our trade negotiators.

We will hear testimony today from two very strong panels, I believe, regarding international trade, the impact on the U.S. pharmaceutical industry, and I look forward to that.

It is no secret that we pay the highest price for name-brand prescription drugs in the world. There is also wide acknowledgement

that the U.S. industry faces significant trade barriers throughout

the globe that inhibit their ability to operate in a fair and open

market.

Many countries have erected trade barriers through the use of

government-set price controls, volume restrictions, reference pricing, and decision-making processes that are often non-transparent.

In addition, lax enforcement of intellectual property rights contributes to the trade difficulties the industry encounters.

So I think that price setting is sort of, in a way, similar to a tariff that is put on the goods. It has a great impact on what happens

here. To deal with these, Congress passed the Trade Act of 2002,

which established a primary objective of tightening the regulatory

practices that create market distortions and effectively deny U.S.

companies global access.

4

As we know, the issue of regulatory practices relating to pharmaceuticals was one of the last items resolved in the recently completed Australian Free Trade Agreement negotiations. It is a sensitive issue for the folks in Australia, and I respect their concerns.

But it is an issue that deserved to be on the table, and one that

needs to be raised in future negotiations.

I will look forward to hearing more about the Australian negotiations and how the administration will address the Trade Act of

2002’s objective on regulatory practices.

In addition, I welcome witness comments on how negotiations

down the road will impact the drug industry and consumers around

the world, including the United States. Identifying the objective is

easy. Achieving the objective is the challenge.

So I thank my friend for sharing in this hearing and hope we can

deal to the basic issues and not talk so much about the details, but

really kind of get down to the issue of what it means and what we

might do about it. Thank you.

Senator KYL. Thank you, Mr. Chairman.

Now, to John Breaux.

OPENING STATEMENT OF HON. JOHN BREAUX, A U.S.

SENATOR FROM LOUISIANA

Senator BREAUX. Thank you very much, Mr. Co-Chairmen. I do

not know if I am giving the position of the Democratic side on this

issue or not. I would suspect that there would be a little bit of a

disagreement in my thoughts on this issue.

But, very briefly, it is very clear that we pay a lot more for

brand-name drugs in the United States than they do in most parts

of the world. The reason for that, is because most parts of the

world have artificially controlled prices. They fix prices, something

that this country does not allow in any area that we do commercial

business in. We believe in a free market.

So it is ironic, I think, that some would say the solution to the

problem of the fact that drugs cost too much in the United States

is to import another country’s system of fixing prices arbitrarily by

government fiat, something that we would never do in this country

because it would be contrary to our beliefs in a free market system

and free competition.

It is clear that U.S. consumers are getting stuck with the bill for

research and development by the rest of the world. Our companies

have to charge higher prices in this country because they are arbitrarily, by government fiat, forced to abide by a government edict

on what they can sell their products for in other countries.

When other countries do that in other areas, we file charges

against them. For instance, in the area of pork from Canada, where

we currently have an industry filing a petition against Canadian

pork producers because they get illegal subsidies on pork. Our position has been, we are not going to let them import pork into this

country freely because the Canadian government gives them illegal

subsidies.

The same thing is true with wheat from Canada. The Canadian

Wheat Board arbitrarily gives more generous assistance to wheat

monopolistic practices in Canada. So our members of Congress say,

well, do not bring wheat in from Canada because they have unfair

5

government practices over there that arbitrarily allow for a cheaper

price.

How about timber from Canada? There are cases against Canadian timber producers because the Canadian government gives

their producers of timber special deals on property that grows timber in their country.

So our people in this country say, do not just open the door for

Canadian timber because of artificial practices in that country

which make the price arbitrarily lower than it should be.

But when it comes to drugs, some of our same folks are saying,

oh, it is all right to import their price-fixing practices. This is not

so much a fight against domestic producers as it is against governments that arbitrarily fix prices.

The answer to this, and I am glad we are having this hearing,

is to look at it from a trade perspective to find out exactly what

practices in foreign governments have created the situation where

our consumers are being forced to pay for research and development for the entire rest of the world. Solve that problem and then

we can get a fair price overseas, which would lower the prices in

this country to our consumers.

I thank you for having these hearings.

Senator KYL. Thanks for that excellent statement, Senator

Breaux.

Senator Santorum?

OPENING STATEMENT OF HON. RICK SANTORUM, A U.S.

SENATOR FROM PENNSYLVANIA

Senator SANTORUM. I would like to associate myself with the remarks made by the Senator from Louisiana. I think he said it right

on, and with the other two speakers, would just thank the chairmen for holding this hearing.

The concern I have, is if we do not do a better job on the international front, then the prairie populism fires that are spreading

across this country to do something about controlling drug prices

here could have a devastating impact on an industry that is saving

lives and improving the quality of life, not just for people here in

America, but for everybody around the world. It could have a devastating impact on the economy of this country. We hear a lot of

talk around this table about out-sourcing.

If there is one place that we have seen in-sourcing, it is in the

pharmaceutical industry. The industries in Europe and in other

areas around the world are collapsing and they are coming here.

Why? Because we support the industry and the other countries do

not.

You do not hear people screaming and crying about French, German, and other companies moving production and moving research

off their shores and onto our shores, and there is a reason for that.

We are about to enter into debates—or at least many would like

to, and we actually have in the past—whether it is re-importation

or a whole host of other things that could kill the golden goose.

I am very hopeful that this hearing will send a very strong message to the Trade Office, that we see this as a principle failure on

the part of the United States in the area of trade negotiations, not

a failure of our pharmaceutical industry to do what they should be

6

doing, which is to research new drugs, employ people to do it, and

save lives.

Thank you.

Senator KYL. Thank you, Senator Santorum.

Senator Graham, would you like to make an opening statement?

OPENING STATEMENT OF HON. BOB GRAHAM, A U.S. SENATOR

FROM FLORIDA

Senator GRAHAM. Thank you, Mr. Chairman.

Let me raise another concern that we can review during this

hearing. I am concerned about the interpretation that is being

given to what is referred to as Annex 2C pharmaceuticals within

the Australian-U.S. trade agreement that has been submitted to

this committee for consideration.

There is an interpretation, specifically of Paragraph 2, ‘‘Transparency,’’ that the effect of this is going to be to make it more difficult for Federal agencies, such as the Veterans Administration, to

negotiate for preferential prices for the pharmaceuticals that are

purchased.

I would like to get some discussion of whether that is a legitimate concern or not. My particular interest in this, is that not only

has the very successful negotiation of the VA resulted in a cost to

our taxpayers and to our veterans that is about half of what the

cost for pharmaceuticals would be if they purchased it through, for

instance, the average wholesale cost, but it also has set a standard

by which we can encourage other Federal agencies to be equally aggressive on behalf of taxpayers and beneficiaries.

We have had a great debate as to whether it was appropriate for

the Prescription Drug Medicare Reform Act that we passed the end

of last year to enclose a prohibition on the negotiation for the best

prices for Medicare beneficiaries. I think it was a serious, serious

error and I would not like to do anything in a trade agreement that

seemed to reinforce that prohibition.

I also am concerned, and would state again, I am sorry that Senator Grassley is not here, because he is the particular recipient of

this request.

That is, at the earliest possible moment, and certainly prior to

the Memorial Day recess, that this committee should hold a hearing on the Prescription Drug and Medicare Reform Act, focusing

particularly on the fact that there is such an egregious cost in comparison to what we thought the cost was going to be.

We thought this rather, what I have referred to as ‘‘Yugo’’ class,

prescription drug benefit was going to cost $400 billion. Now we

find that the ‘‘Yugo’’ is going to cost about $535 billion.

I would like to find out why there is this discrepancy and what

steps are available to us, such as eliminating the prohibition on

Medicare negotiating for better prices that will reign the cost of

this program back to where we had originally considered it.

So, Mr. Chairman, I would like, through you, to make that request of the chairman and Senator Baucus, who has joined us, that

we have a hearing on the legislation, why it is so much more expensive than we had been led to believe, and what we can do about

it, and to have that hearing as soon as possible, certainly before

the Memorial Day recess.

7

Senator KYL. Thank you, Senator Graham. I will be sure to pass

it on. I am sure you will, and Senator Baucus will as well.

I would note that there are two estimates. The CBO estimate is

the one that we had to work with, as you know. Then there was

the later estimate by the administration. No one really knows

which estimate is closer to the truth, and until the bill is implemented we will not know.

The second point I would make, is that there were efforts to try

to put cost containment on the bill, efforts that Senator Baucus can

perhaps address. But he felt that that was an impossible burden

for the bill to carry, and as a result, it does not have legislative cost

containment efforts on it.

I am going to call upon Senator Baucus next, if that is all right

with Senator Smith, then close our opening statements with Senator Smith.

Senator BAUCUS. That is fine, if you want to go first.

Senator KYL. All right. Senator Smith, then we will close with

Senator Baucus.

OPENING STATEMENT OF HON. GORDON SMITH, A U.S.

SENATOR FROM OREGON

Senator SMITH. Thank you, Mr. Chairman, for hosting today’s

hearing to discuss what I believe is a significant challenge facing

America’s consumers, the rising price of prescription drugs.

For many Americans, the cost of prescription drugs continues to

place necessary life-sustaining treatments out of reach. It is no

wonder, when you consider that the price of prescription drugs has

increased, on average, by 16 percent per year since 1999.

We have all heard the stories, the tragic stories about seniors

forced to choose between drugs and food, or rent, or other necessities. It is tragic, because behind each of these stories is a person

who needs help.

The rising costs of prescription drugs impacts all of us, young

working families, middle-aged empty nesters, and business owners.

According to a February, 2004 Commonwealth Fund report, 23 percent, or almost 40 million non-elderly adults in America did not fill

prescriptions because of associated costs.

Our businesses also bear the burden of high prescription drugs.

As a businessman, I was responsible for securing health care for

my employees and their families. But over the years, the average

cost has increased and has become more and more difficult.

According to the Kaiser Family Foundation and the Health Research and Educational Trust, monthly premiums for employersponsored health insurance in 2003 increased by 13.9 percent, the

third consecutive year of double-digit increases, which means the

average company paid about $6,650 to cover one of its employees

with family health insurance.

Mr. Chairman, I think that is something I hope Republicans will

focus on, is the burden of providing health insurance. Many companies are beginning to drop it now, or cannot provide other increases

in salaries because they are being oppressed so much by these spiraling health care costs.

Unfortunately, prescription drugs are what are leading these and

it is making our companies, too often, uncompetitive in the interVerDate 11-MAY-2000 09:51 Feb 23, 2005 Jkt 095484 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 95083.000 SFINANC2 PsN: SFINANC2
8

national community. But all too often, I find that many in Washington become too caught up in telling stories of hardship and pain

and forget about finding the solutions that will help our constituents.

So, I commend my colleagues for holding this hearing today,

which will provide a chance to discuss the reasons that America’s

consumers pay significantly higher prices than other industrialized

nations for prescription drugs and identify solutions that will ultimately lower prices for Americans because, have no doubt, we must

act.

We must change the focus of the debate to look at developing solutions that will lower prices in the United States, making these

treatments more accessible. No longer can we simply sit back and

accept that Americans will pay higher prices, that we will fund

R&D costs for the rest of the industrialized world. The people of

my State will no longer accept that premise.

Now, I know that some have argued that the United States benefits from paying higher prices. We get access to new drugs more

quickly, 4 months versus the 7- to 19-month wait in the European

countries. But quick access to drugs does not matter to the 25 percent of working-aged adults and the 25 percent of seniors who cannot afford their prescription medications.

I am committed to working with all of my colleagues, including

Senator Judd Gregg, who chairs the Health Committee, to explore

all opportunities to lower prescription drug prices. I plan to consider a variety of options, including re-importation and using trade

negotiations to secure better-priced drugs.

I am certain this hearing will provide needed insight into the

progress being made by USTR in negotiating the Australian trade

agreement, and to identify other opportunities where the U.S. Government can work with its trading partners from industrialized nations to address the inequity of prescription drug prices.

Thank you, Mr. Chairman.

Senator KYL. Thank you, Senator Smith.

We will close, now, with Senator Baucus, then go to our witnesses.

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR

FROM MONTANA

Senator BAUCUS. Thank you very much, Mr. Chairman. Thank

you, Senators Kyl and Thomas, for holding this subcommittee hearing.

Subcommittees do not often hold hearings. I think that is a mistake, frankly. I think that should change. I know the Chairman is

a bit constrained with his schedule, but I would urge him, and others to encourage him, frankly, to have more subcommittee hearings, because I think we can cover a lot more ground with them.

I am glad, very much, that we are having this one here today.

In particular, I welcome more hearings on drug pricing policy.

Clearly, it is an extremely important issue. We all know it will become even more important once the Medicare drug benefit is implemented.

Medicare beneficiaries and other consumers tell me that drug

prices are rising at twice the rate of inflation. They tell me that

9

the government should not stand in the way when Americans want

to import cheaper drugs from Canada or from Europe.

Employers, health plans, and insurers tell me that the cost of

prescription drugs is one of the fastest-growing components of

health care costs in the United States, and they tell me that rising

health care costs are affecting the ability of U.S. companies to compete internationally. I hear that often from a lot of the CEOs.

We need to address these issues or risk the consequences to the

long-term, especially to the long-term health we have in this country and to our long-term competitiveness of our economy.

U.S. pharmaceutical manufacturers tell me that other countries

have imposed restrictive pricing measures on their products. They

tell me that these price controls are unfair, anti-competitive, and

a root cause of higher prices in the United States.

So, clearly, we have work to do. We need to learn more about the

mechanisms that other countries use to determine drug prices. We

also need to learn more about how prices are determined by payors

here in the United States. Frankly, we should also devote more resources and attention to comparative drug effectiveness studies.

The United States is clearly behind on this front.

My sense is that there is not a single best answer to high and

rising drug prices. Some claim that other countries use pricing

mechanisms that are too restrictive, lack transparency, and that

artificially hold down prices through government strong-arming

tactics. But leaving drug pricing entirely to drug manufacturers

may not be the best idea, either. The market has not contained

prices that provider plans and employers pay for drugs here in the

United States.

And it is my understanding that some countries actually have

more, not less, transparency in the way that coverage and pricing

decisions are made than we do in the United States. Transparency

means that there is an open, public process for determining which

drugs are covered, at what price, and why.

In the end, we must find a balance between patient access and

fair pricing mechanisms. The U.S. Government may have something to learn from other nations in this regard. A balanced pricing

policy must take into account the ability of consumers to get the

drugs they need. We must consider U.S. trade policy and the interests of U.S. companies abroad. With regard to Medicare and other

public programs, we must also consider the interests of the taxpayers.

So this hearing is a good opportunity to explore these issues:

what are other countries doing? What can we learn from them?

What can they learn from us?

Just a few words about re-importation. I am encouraged by new

efforts to address head on the safety concerns about imported pharmaceutical drugs. Safety has been the main roadblock to moving

forward on re-importation.

Chairman Grassley’s bill and the bipartisan bill introduced last

week provide thoughtful approaches to safety concerns that seem

like reasonable policy to me. I may have differences with specific

provisions of the bills, but they are a good starting point to moving

forward.

10

I would add, however, that re-importation strikes me as a shortterm fix and not a long-term solution to the higher drug prices that

Americans pay. I am concerned that re-importation may encourage

further movement of jobs outside of the United States.

If U.S. drug companies begin selling more drugs from Canada,

they may start producing more drugs in Canada and U.S. jobs may

move to Canada as a result. I am concerned that American drug

manufacturers may react to re-importation in ways that harm

other countries, and ultimately, American consumers.

If a large share of the American drug-buying market starts buying lower-priced drugs from Canada, American manufacturers may

cut back the amount of drugs that they supply to Canada. Canadians may not get the drugs that they need, and ultimately Canada

may react by restricting the ability of Americans to re-import drugs

from Canada.

So we need to start thinking about the long-term implications of

re-importation and about potential solutions to address these problems before they even arise.

I thank you, Mr. Chairman, and I appreciate your holding this

hearing.

Senator KYL. Thank you, Senator Baucus.

I would just close our comments by nothing that both Senators

Breaux and Baucus spent hundreds, if not thousands, of hours in

the conference committee——

Senator BAUCUS. Along with you, Mr. Chairman.

Senator KYL. Right. And one of the things that we focused on

constantly through that process was ways in the new Medicare bill

that we could reduce prices. One comment that Senator Baucus

just made reminded me.

There are several different mechanisms that we put in the new

Medicare bill designed to try, each in their own way, to help bring

the cost of drugs down. There is no single magic bullet that I think

that we could look to as the only way to accomplish the effort.

I suspect you are as frustrated as I am that some are looking for

immediate results with a bill that is just now becoming implemented, and probably suggest that we ought to give a little bit of

time for it to be implemented, too, before we rush into new solutions. That is an editorial comment. You are welcome to disagree,

if you would like.

Let me introduce our panel, now. We have a great panel today,

a first panel, then a second panel. Senator Thomas will chair that

part of the hearing.

First, is Hon. Grant Aldonas, Under Secretary of the U.S. Department of Commerce, whose responsibilities include expanding

export opportunities for our businesses, enforcing trade agreements, and enforcing U.S. trade law to deter unfair trade practices.

He is going to discuss the impact of price controls in other countries on U.S. prices.

The Honorable Josette Shiner, Deputy U.S. Trade Representative, Executive Office of the President. Ms. Shiner is responsible for

supervising U.S. trade negotiations in a variety of places, including

Australia, importantly, as well as other regional and bilateral trade

issues, and in addition, supervises the Trade Office’s Departments

11

on Economic Analysis, Labor, Environment, Trade Capacity Building, and Public Outreach.

She will discuss the efforts to eliminate price controls, the recent

Australia agreement, and the United States’ access to foreign markets and the effect on our economy.

Third, William K. Hubbard, Associate Commissioner for Policy

and Planning of the Food and Drug Administration. Mr. Hubbard

will discuss the impact of price controls on research and development, the regulatory processes of other countries as compared to

the processes here in the United States, and will also mention concerns about consumer safety.

We are delighted to have all three of you here. Secretary

Aldonas, you may begin.

STATEMENT OF HON. GRANT D. ALDONAS, UNDER SECRETARY

FOR INTERNATIONAL TRADE, U.S. DEPARTMENT OF COMMERCE, WASHINGTON, DC

Mr. ALDONAS. Thank you, Mr. Chairmen, I guess I should say,

under the circumstances. It is a pleasure to be back in front of the

Finance Committee.

It is an incredibly important issue. Just by way of background,

to echo some of the comments of the members, this past year I had

the privilege of going across the country as a part of the President’s

manufacturing initiative, in 23 roundtables, talking with American

manufacturers, from very large companies to very small companies,

from folks who bend metal to folks who are engaged in research

and development in the pharmaceutical industry.

I have to say, the comments I heard from manufacturers echoed

much of what the Ranking Member was saying about the impact

of price increases in the United States and the cost of health care.

A lot of our manufacturers are seeing their productivity gains eroded by rising health care costs.

They were not alone in that. Obviously, rising energy costs, torts,

litigation, a number of different things were eroding our competition competitiveness, but frankly they focused most on health care.

That is one of the reasons why I think it is important to be looking

at the issue of price controls abroad from a trade perspective.

There are tools available to us. I think my written testimony documents some of that. I would ask that that be submitted for the

record, and I just want to summarize some of my thoughts here.

As a starting point, I thought it might be useful to go back to

where I started with the pharmaceutical industry in the early

1980’s when I was at USTR and responsible for Latin America and

the Caribbean.

At the time, we were fighting for basic intellectual property protection and to remove high tariffs and a lot of other trade barriers

that were really designed to foster home-grown pharmaceutical industries in places like Brazil.

The fact that we are now talking about price controls as barriers,

as well as the impact on pricing in the United States, reflects that

we have made a lot of progress. In the intervening 15, 20 years,

we have succeeded in establishing a broad framework of intellectual property protection, which is essential for the success of our

pharmaceutical companies worldwide.

12

We have also had a great deal of success in terms of beating

down many of the ostensible barriers, the barriers at the border

that are the first sort of trip wire in terms of market access that

our firms face.

Congress gave us a lot of support in that, and now Congress has

asked us to take the next step. As a part of trade promotion authority, the administration was asked, now, to pursue issues like

price fixing and many of the other sorts of things, the exclusions

from coverage, the heavy government regulatory systems that you

find in a lot of other countries that limit the returns to our industry in terms of their sales.

My point in providing some of that context is just to underscore

that we still do have issues in these areas where trade agreements

can be relevant, so just before touching on price fixing I do want

to compliment Josette and my colleagues from USTR.

For example, if you think about the proposal in the WTO that

the administration has put forward which would eliminate all tariffs on manufacturing goods, that is one of the quickest ways to get

where we need to go in many parts of the development world on

behalf of our industry.

To the extent that, as a part of the CAFTA, we have negotiated

the immediate elimination of tariffs on 83 percent of the goods that

will be going to Central America, that is the kind of arrangement

that can be helpful again in eliminating the initial barriers that

our industry faces.

At the same time, I also want to reflect a little bit on my time

in private practice, where I spent a good deal of time with pharmaceutical companies working on issues like R&D pooling.

The very fact that they were engaging in R&D pooling reflected

that we had made progress. You would not be pooling R&D on an

international basis in the absence of the ability to gain access to

these markets.

Having said that, it also reflected something more fundamental,

which is the pernicious effect of the price control systems abroad.

They literally were driving industry out of Europe and into the

arms of American pharmaceutical companies because pharmaceutical companies in Europe could not generate a rate of return

that was necessary for them to stay in business. At the end of the

day, some of the issues I faced as a lawyer were a direct result of

the consolidation of a research-based pharmaceutical industry in

the United States.

It is the one market where they can generate a return commensurate with the heavy investment they make in research and development, and the heavy regulatory costs that they bear in terms of

gaining approvals under FDA and its equivalents abroad.

So, there is a huge cost element that our industry bears, frankly,

for the world, and there is not a sufficient rate of return worldwide.

Now, what happens? Under those circumstances, it is not just a

question, as far as I am concerned, about the direct effect on prices.

There is a much broader impact as a result of these systems.

Like in all things in life, you tax any activity, you get less of it.

These price controls work as an implicit tax on the ability of firms,

on a global basis, to do the research and development which will

provide benefits to an aging society in OECD countries, the develVerDate 11-MAY-2000 09:51 Feb 23, 2005 Jkt 095484 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 95083.000 SFINANC2 PsN: SFINANC2
13

oped countries, as well as find new and innovative medicines which

would go after the root causes of poverty in the developing world.

So, to the extent that our friends think, in the short-term, that

they are limiting costs by imposing price controls, it is a shortsighted effort that limits the overall benefit that the industry could

provide if it could fully gain the rate of return they have a right

to expect as a result of the investment R&D.

We bear the cost, not only in terms of the direct impact on prices,

but also because there is an overall global limit on the ability to

bring new and innovative medicines to the market. So, in effect,

taxpayers and consumers are paying twice as a result of these foreign price control systems.

Now, what do we do, under the circumstances? The way to go

after this problem, there are a number of different areas. Obviously, Congress has directed us, in the context of trade promotion

authority, to go after it in the context of trade negotiations, and

USTR has been successful in going after these issues with Australia.

But I also want to raise one cautionary note, which is, the truth

is, we are not engaged in free trade area negotiations with many

of the countries that have the most pernicious price control systems.

If you look at the system in Japan, which in effect has the double

damage of both knocking down the price that our guys can return,

and then averaging up the price that generics charge, in effect,

what they are doing is subsidizing the generic industry at the same

time they are taking a rate of return away from the new and innovative part of the practice.

Well, what does that do under those circumstances? In my perspective, what it does is it actually undercuts the benefits of things

that we negotiated as part of the WTO and the intellectual property framework. If you think about a 20-year patent monopoly that

creates the incentive for further innovation, and what you do is set

limits on prices as an economic matter, you are eroding the benefits

of the things that we tried to negotiate in the context of WTO, because people cannot take full advantage of the 20-year patents.

We have to use other tools in those areas, with Japan and the

OECD countries, if we are not directly at the negotiating table with

them in an FTA. What we have done successfully, I think, really

across the government in tandem between USTR, Commerce, as

well as many of the other players, FDA included, is work in terms

of our advocacy. This is where I want to stop.

The one thing that gives me hope in all this is the recognition

in Japan and Europe that they have an aging society. To be able

to maintain their standard of living or increase their standard of

living, the one thing they must do is raise their productivity.

Thankfully, as a result of the efforts of the Congress, as well as

quick action by the President, I think what we have got is very

strong growth in the United States, certainly rising productivity,

which has had a dramatic impact on our future and our ability to

raise our standard of living. That is not true in Japan and Europe.

They lag far behind.

These sorts of systems that the government manage are part and

parcel of the problem. I think what they are beginning to realize

14

is, as they go forward, when there are fewer workers to pay for the

seniors that are going to become a part of their own social safety

net, eventually the system breaks down. What it really needs is

more competition.

Ultimately, the best way to solve these problems is to reward innovation and then expand the generic market so it provides the

price competition on substitutable drugs that sets an outward

bound on prices as an economic matter.

So in one sense, it would be better to try and actually use the

market in this instance to resolve many of the issues that both our

European and Japanese friends face as an economic matter than

relying on further price controls that have the effect of shifting the

burden onto the back of U.S. taxpayers and shifting the burden forward to future generations in the United States, as well as countries abroad.

Thank you very much.

Senator KYL. Thank you very much, Secretary Aldonas.

[The prepared statement of Secretary Aldonas appears in the appendix.]

Senator KYL. Ambassador Shiner, please.

STATEMENT OF HON. JOSETTE SHEERAN SHINER, DEPUTY

U.S. TRADE REPRESENTATIVE, WASHINGTON, DC

Ms. SHINER. Chairman Kyl, Chairman Thomas, Senator Baucus,

and members of the committee, first, I want to thank you for your

leadership on this issue. It is very, very critical. As we all know,

the United States is the world’s leading innovative economy. We

produce two-thirds of the world’s innovative pharmaceuticals, and

so these issues are very central and critical to our trade agenda.

First, I would like to give you a little bit of background to

USTR’s work on this critical area of trade, and then talk about

some of the new issues that have arisen, the directives given in

TPA, how we have implemented those in our negotiations with

Australia, and how we are looking forward.

I think in the United States, part of why we are so successful as

an innovative economy is because we recognize how important it is

to have the types of regulatory regimes that foster innovation, and

also we have been the world’s leader in the protection of intellectual property rights, which are at the heart and soul of innovative

industries.

Those two key goals have been very much at the foundation of

our trade negotiating objectives with countries around the world.

I am very proud of the fact that the Office of the USTR, working

with Congress throughout the 1990’s and to today, has successfully

led efforts to build a worldwide system of intellectual property protections that reward innovation. Today, we see that TRIPs-compliant laws are pretty much present in every major trading nation in

the world.

In our FTAs, we take those intellectual properties to an even

higher level, and it enables our industries to enjoy increased protections in those countries that we do the FTAs with.

Other issues that we have been deeply involved in are fighting

the rising tide of counterfeiting, the theft of patents for pharmaceutical drugs, and the proliferation of dangerous and unsafe counVerDate 11-MAY-2000 09:51 Feb 23, 2005 Jkt 095484 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 95083.000 SFINANC2 PsN: SFINANC2
15

terfeit goods. These are other key parts of our agenda globally on

pharmaceuticals.

We are also working globally, regionally, and bilaterally to knock

down the barriers that our pharmaceutical companies face in markets throughout the world.

My testimony includes—written testimony that I ask be submitted—examples of the results that we achieved in the WTO, in

NAFTA, and in various free trade agreements regarding this, and

also in bilateral consultations with countries such as Korea, Japan,

China, Canada, and Mexico.

Most recently, as pointed out, I, and others at USTR, worked

closely with this committee in our Australia FTA, which was the

first to include special provisions addressing market access for

pharmaceuticals.

In this agreement, we were able to commit with Australia to several common principles that I think are very key to the kinds of

goals mentioned here today by the committee.

They include: (1) the vital role that innovative pharmaceuticals

play in delivering high-quality health care; (2) the importance of research and development in developing critical medicines, and of

government support for R&D, including through IPR protection; (3)

the need to promote timely and affordable access to innovative

pharmaceuticals through transparent, expeditious, and accountable

procedures; and, finally, (4) the need to recognize the value of innovative pharmaceuticals through procedures that appropriately

value their therapeutic significance.

These principles were reflected throughout our agreement with

Australia on a medicines working group, and also numerous improvements in the regulatory, transparency, and procedures in

Australia’s PPS system, which represents more than 90 percent of

the market in Australia.

We urge Congress to act quickly when we send up the U.S.-Australia FTA, so that we can begin implementing these and get on

with our Medicines Working Group.

I would like to explain a little bit of what we learned in the process of Australia. If you look at the issue of price controls, which are

present in most economies regarding pharmaceuticals, they are

very complex systems.

We have learned that you really have to customize your approach

to each country because the approach taken is different. But there

are a number of common elements that we will see country by

country.

One, of course, in every country, our companies have to go

through the process of getting regulatory approval for the medicines to be able to be sold in the country. But once they do that,

if there is a government health care system, they also have to go

through a strenuous effort to get listed on the government formulary.

Often, this is the only market available in a country. It will be

90 percent of the market, so not to be on the government formulary

basically means your medicine is blocked from that economy.

After that, they have to go through a whole process of determining what they will get paid for that medicine. TPA refers to the

16

goal of addressing reference pricing. Often, we will see various

forms of reference pricing used.

Some countries will use reference pricing in setting a price ceiling, which will be based on a basket of prices from other countries.

Some countries actually determine that their price will be no higher than the lowest price paid, others use a median price, so they

will compare prices from a basket of other countries.

Another form of reference pricing that we see, is they will compare the prices within a therapeutic class of pharmaceuticals, including comparing to generics within that class.

So, for example, in one country we have dealt with, there is a

whole group of new drugs that address the pre-diabetes condition,

and in some countries those drugs were compared to insulin, which

has been on the market for many years and is generically available, and has a very low cost. So, these new, innovative drugs are

priced at the same level, and, therefore, the innovation is clearly

not rewarded.

Part of the problem is, many of these systems provide no fair

hearing to make a case for a drug in its pricing. They do not provide appeals. They do not provide even an explanation of how they

come up with the prices set.

Often, they do not allow a readjustment of the prices over the

years, and in many cases we see they do not adjust the prices once

set for inflation. So if a price of a drug was set in 1988, it might

be the same today as was paid then. So, you get a whole system

in place, and often there is no access to even understand how the

decision-making process is made.

For example, in China, they review their formulary only once

every 2 years. Sometimes they miss the review, and so we have a

situation in China where they have listed no new drugs since 1998.

So, you have a market access issue. You have an issue of populations of people being denied access to critical medicines that can

improve health. Yet, again, our companies do not have a right to

make the case for more frequent hearings.

So I think the study of OECD practices that we are doing with

Commerce is very critical. We need to understand each country and

how they are set up in order to understand how best to address

these issues.

In part, what happens when we are arguing these issues abroad,

is it bumps into the social good of rewarding innovation and R&D,

and it also bumps into the social good of providing affordable access

to medicines. Often, these national health care systems, as you

know, are a very deep part of the fabric of countries and it is not

politically popular, and many countries claim politically feasible, to

address these issues in a bilateral dialogue.

I think part of what we have been trying to do is understand how

these systems work, work with countries to understand how these

systems can deny or limit access to critical medicines, and also

make the case for how we all have an interest in developing R&D

globally, and how we all have to contribute to understanding how

to foster that so that we can keep seeing critical medicines developed.

We find this is not a case that we necessarily have to push alone.

Many countries are understanding this, and many countries have

17

seen R&D leave their country and come here, as pointed out by

members of the committee, because their climate for innovation is

not adequate.

So we are finding greater awareness. We are getting some traction in making the case. We have had a number of successes. We

do feel that the agreement we have with Australia can really lay

the groundwork for the work we do with other countries and other

FTAs, because we think the guiding principles that are in that

agreement can guide us in our future FTA negotiations.

One issue we have, is finding the right and most effective forums

to raise these issues. As you know, medical issues have been raised

in our regulatory dialogue with Japan, for example, and in the

OECD forum.

It is most effective to raise them in the environment of an FTA

negotiation, but we do not have, in the near future, any FTA negotiation scheduled with major developed countries where these are

really the most critical issues—countries that could afford to bear

a bigger burden of research and development. So, we look forward

to your guidance and wisdom on these issues, and to working with

you to chart a course forward.

I would like to just recognize that Ambassador Zoellick has

named an Assistant USTR to focus on pharmaceutical policies. It

is Ralph Ives, who is also our Assistant USTR for the Asian Pacific.

This is the team that I worked with to negotiate the Australia

FTA, so we have developed some expertise. We realize that this

issue requires a lot of expertise.

His deputy, Barbara Weisel, is here today. Barbara will also be

part of that team that extends the knowledge that we gained in

those negotiations to other countries and our discussions with

them.

So, thank you very much.

Senator KYL. Thank you very much.

[The prepared statement of Ms. Shiner appears in the appendix.]

Senator KYL. Finally, Commissioner Hubbard.

STATEMENT OF WILLIAM K. HUBBARD, ASSOCIATE COMMISSIONER FOR POLICY AND PLANNING, FOOD AND DRUG ADMINISTRATION, WASHINGTON, DC

Mr. HUBBARD. Thank you, Mr. Chairman, for inviting the Food

and Drug Administration here today.

I have a written testimony, as others do, but I will just make a

few brief remarks.

While FDA’s responsibility does not cover drug pricing, we do

have important responsibilities for providing access, assuring access, to affordable medicines.

As you know, drugs are generally a bargain compared to things

like surgery and hospitalizations, and other medical interventions.

So, having access for patients for drugs is very important.

Drug companies spend hundreds of millions of dollars developing

new drugs each year, and FDA works very hard to make sure that

those drugs get on the market fast. We are very proud of the fact

that our scientists get important, new, innovative drug therapies

on the market as fast, or faster, than anywhere else in the world.

18

But many Americans do not realize that generic versions of

brand-name drugs are actually cheaper, and we also work very

hard on that. That is an area where we really do have an ability

to impact price, because, in fact, generic medications are often half

the cost of both either brand-name or generic medications in other

countries, Germany, Italy, even Canada.

So, it is very important that people recognize that over one-half

of prescriptions in the country written each year are for generic

medications, and that Americans can actually access cheaper drugs

that way. FDA works very hard to get those generic drugs on the

market just as quickly.

But despite that, many Americans cannot afford the brand-name

medicines they buy, and they are angry. We all hear about the

anger from members. It clearly forces them to go to other countries

to look for drugs. They go to Canada and other places, and sometimes in an almost desperate search for other drugs. We are concerned about what they find when they get there.

I think the Clerk has a handout, and I will just give you an example of what real Americans are actually confronted with in this

circumstance.

This was an e-mail that one of our employees received that offered Canadian generics at a very good price, and it is a very attractive offer. You get Lipitor, Viagra, and other wonderful medications at a very good discount. So, we checked to see where the server was that sent this information, and it was in Dandong, China,

which borders North Korea, the location of the recent explosion in

the train station the other day. So we thought, well, these are Chinese counterfeits. So, we made a purchase.

We gave a false name and credit card, and the drugs arrived a

few days later. We bought Ambience, a sleep aid, Viagra, and

Lipitor. They arrived a few days later in a brown manila envelope,

with a return address of Miami, Florida, a postmark of Dallas,

Texas, and a reorder address in the country of Belise.

So we called the reorder number and asked, where are you? They

said, we are in the United States. So, we had a different person call

back again and ask where they were, and they said they were in

Belise. Then we called the credit card company and said, well, who

did you pay for this? Who got the money? They said, it is a company in St. Kitts, which is a Caribbean island.

I think the point in this, Mr. Chairman, is there was no Canadian connection at all. They were connections in China, in the

United States, and South America and the Caribbean, but not in

Canada.

But the patient is told, you are going to get this. This is Pfizer’s

version of Lipitor sold in Canada. It is made on the same line in

Ireland. It may be just as good as the Lipitor we would buy from

our corner drugstore. FDA has no way of assuring that. But I can

promise you, I would have a lot more confidence in this than I

would in this other thing.

So, that highlights what FDA sees as the real problem here,

when people, in desperation, go seek these foreign drugs. We are

very concerned about the safety aspects. In fact, we are offered a

position being very opposed to re-importation and to some of the

ideas members of the Senate have.

19

As former Commissioner McClellan testified just a couple of

weeks ago, our concern is based upon these safety concerns about

how to do this properly. We certainly would like to work with the

Senate and the House. If the policy choice is made to bring in imported drugs, we would like to work with them to make sure that

it can be done safely.

With that, I will end my remarks.

[The prepared statement of Mr. Hubbard appears in the appendix.]

Senator KYL. All right. Thank you. All of those statements are

excellent, and all statements will be put in the record. This was

very, very enlightening. There are so many questions to ask.

Let me start, though, with two. I will ask the first of Grant

Aldonas, and then the second, to Ambassador Shiner.

Because we do not have immediate bilateral negotiations with

any countries coming up, or at least very soon, particularly the

countries that we are primarily concerned about here, you mentioned the fact that we would have to find other tools, other contexts in which to raise these issues.

Then Ambassador Shiner pointed out, and this is a very important point that I want to reiterate, because I found the same thing

with regard to Australia and New Zealand, there is an apparent

willingness, if we inform ourselves and ask the right questions, to

at least consider the American point of view in things like the

transparency, the appeals process, in other words, the processes by

which the American companies would go through to get a drug listed on the formulary, to get, ultimately, a price, to get it reviewed

properly, and so on. There is a willingness to look at those procedural things.

But these countries, as with American Social Security or Medicare, have their own versions that are sacrosanct politically. The

last thing in the world that they want is for us to be raising, in

bilateral trade negotiations, those highly-charged political issues.

Therefore, the question really to both of you, coming at it from a

slightly different way, is given the fact that there are no great bilateral opportunities quickly coming along, and given the additional fact that those kinds of negotiations may highlight to the

populace of the country involved political issues that make it very

difficult for them to respond to our concerns, are there other contexts in which the issues can be raised?

I mentioned the G–8 meeting, meetings of the OECD countries,

where you can have a group of countries sitting around at a table

discussing the issue in a way that eventually results in some policy

changes, but that are initiated in their country within the political

context that they have to deal with in order to achieve a result that

ends up with their consumers paying a fairer share of the burden

than is the case today.

Mr. ALDONAS. Mr. Chairman, the first and most important thing

is, oftentimes we think of trade negotiations only when we are

there in the context of the WTO or in the context of an FTA, trying

to produce an agreement that we would bring to the Senate at

some point.

20

The fact of the matter is, we are engaged in negotiations every

day with virtually every country around the world about the trade

barriers that our companies face.

Oftentimes, the advocacy has to take the form of saying, how can

we create a cooperative framework in which we can get what we

want out of the process, but allow them to save face as a part of

the process.

In fact, we have seen that work with Japan and medical devices.

They have begun to recognize the problems inherent in their system. For years, they had a similar sort of methodology on medical

devices as they do on pharmaceuticals.

By sitting down with the Japanese and talking through the

issue, the openness that you described, Mr. Chairman, to consider

the perspective that we bring to the table, we have actually had an

impact on their pricing methodology for the benefit of our medical

equipment manufacturers.

We are now engaged in regular consultation with them, sort of

once every 6 months, on health care, which is pushing them on the

pharmaceutical side as well.

I do want to come back to the point I made earlier, as well. There

is a reason that both, I think our European friends and the Japanese are interested in that dialogue, because they recognize they

have a fundamental economic problem.

We have an issue, as I was saying earlier, about the erosion of

competitiveness in this country with respect to rising health care

costs, but we are keeping up with it because of the dramatic rise

in productivity. That is not the case in Japan and Europe.

So the fact that they recognize their own problem or are trying

to grapple with the political constituencies that are invested in the

current system in their own societies, that has left them open to

say, can we find another vehicle.

Now, within that framework, some of what we have been doing

in response to the request from Congress on the pricing study has

led us to think about whether you cannot pursue something similar

in the context of the OECD.

It can be a very powerful tool in terms of persuading other countries if we can get some objective analysis about the problem, and

that is one of the next steps we will take, I think, when we are

done with the study ourselves. Sorry for the filibuster. [Laughter.]

Senator KYL. With the yellow light left, go ahead.

Ms. SHINER. I agree with what Grant said. I think the key here

is to present this as a problem where we are all trying to find winwin solutions. I think when it is presented that way, everyone has

a vital interest and access to critical medicines. Everyone has a

vital interest in fostering the development of critical medicines.

On that, there is global consensus. I do not think there is any

one country that I have dealt with that feels they have the solution

to all of these challenges that we face. So part of the question is,

how do you enter this equation? Do you do it through trade,

through health ministers?

I think, in part, you have to look at fostering an international

dialogue on how we are sure that we are fostering research and development and how we are avoiding a race to the bottom on prices

21

that will ultimately hurt the very research and development that

we need.

So, I think that dialogue is possible. We have talked about the

OECD as being a good forum for that, because these are countries

that fundamentally are wealthier and can afford to at least have

the discussion about how we do this than the countries that are

truly already struggling with just getting basic access to be able to

afford medicine.

So, I think it is a critical dialogue. I know that no country feels

they have solved the answer to it, and we are looking at all the

possible ways we might be able to discuss it.

Senator KYL. Thank you.

Senator Thomas?

Senator THOMAS. Ms. Shiner, you mentioned a couple of things.

You talked about obtaining market access. What good is market access if the prices are being set?

Ms. SHINER. Well, they are both flip sides of a coin, so you have

to work on both issues. There are often different sets of regulations

that you have to deal with. So, one phase of what we deal with is

making sure that our medicines that are produced by us, the creative products of our industry, are able to be sold.

I mean, sometimes we have a basic problem of even getting them

listed. Once they are listed, we then have to deal with at least getting a fair hearing for their products and adequate pricing.

So, sometimes we can have success in one avenue and we get stymied on the other, sometimes we have success in both. For example, in our recent lead-up to the JCCT with China, we brought up

two factors. One, that they had not updated their formulary since

1998, and it is a problem, again, for their citizens, in addition to

our innovative industries, and that they were also looking at

across-the-board price cuts in all medicines, not targeted. So, we

were able to bring that up and get delays and access both of those.

Senator THOMAS. Let us talk about the topic here, and that is,

we are talking about price setting that has caused us then to have

to pick up the costs. You are off on all these other things. What

does that have to do with price setting?

Ms. SHINER. That was the issue we were discussing with China,

is they were setting the price and cutting it.

Senator THOMAS. We are talking about all these other things. We

really need to have some answers to the question of, what do you

do about price setting in trade negotiations?

Ms. SHINER. Senator, we have raised this issue in many, many

countries. We continue to. We have had a number of successes in

this area. There is nothing, per se, in WTO rules or anything that

the United States would even accept that prohibits price controls

generically, even though we think it is bad market economics.

Senator THOMAS. I would like to talk to Mr. Aldonas. So you

would be opposed to a tariff on it, right? You would work against

the tariff?

Mr. ALDONAS. Right.

Senator THOMAS. What is the difference between tariffs and price

setting? It basically says you cannot charge more than this, so that

is about the same as a tariff. We say we cannot do anything about

that, but we can without tariffs. I do not quite understand that.

22

Mr. ALDONAS. No. I actually think you can try and tackle both.

One of the first and most important things, in direct response to

your question, is one of the reasons companies continue to try and

introduce the products in the market, even though they have limits

on the prices, is that, A) it introduces the product and helps create

demand among consumers, and hopefully demand for changes in

the system so that the products are covered and they get a remunerative return.

The other thing that I think is important to focus on, is not only

talking with governments about their price-setting systems, but

also why the market might be a more effective response.

Lastly, I think the other thing that is important for our pharmaceutical manufacturers, even in the face of price controls, Mr.

Chairman, is the fact that they are actually part of the broader

supply chain, where our health care service providers represent a

certain standard and our pharmaceutical companies want to make

sure that they are supplying the most innovative medicines so that

the folks they serve, our health care service providers, stay ahead

of the competition and continue to expand their markets. So, there

are a variety of reasons why they stay in the market.

What they are finding in some cases, though, is they are bailing

out. Pfizer has bailed out of France because they literally cannot

generate the return they need for the sale of certain products.

Senator THOMAS. I understand there is a considerable amount of

major consolidation in the industry.

Mr. ALDONAS. That is true.

Senator THOMAS. Does that have any particular impact on this,

do you think?

Mr. ALDONAS. I think it does, because the Europeans have become persuaded that they are the source of their own problem in

terms of driving the research-based pharmaceutical industry offshore to the United States. So, I think they are coming at it, as

the Europeans usually do, from the point of view of industrial policy.

But they are recognizing this is a self-imposed cost. That is one

of the reasons why I think there is some reason for discussion with

the Europeans about changing the underlying systems, because

they realize how much they penalize themselves.

I will say, they are doing it again on chemicals, where they have

a set of regulations now that are going to be driving the chemical

industry of the United States. But the consolidation that you described, Mr. Chairman, is a direct reflection of the policies they

adapted on price controls.

Ms. SHINER. Can I just add, briefly, one of the differences between price controls and tariffs is that price controls typically, in

most of the countries we deal with, deal with both imports and domestically produced product.

So, it does not just apply to imports or just to U.S. products, but

all medicines that are delivered in the system. So, it is different in

the sense that, for example, many European countries have different ways of controlling prices, and it also hurts their innovative

industries.

Senator THOMAS. If they have any.

Ms. SHINER. Yes. Any left.

23

Senator THOMAS. Yes. Thank you.

Senator KYL. Good. Thank you.

Senator Baucus?

Senator BAUCUS. Thank you, Mr. Chairman.

I am told, and I want you to confirm this, is it true that R&D

has really not decreased in the drug industry, but that the rate of

return has decreased over the last several years? If they are not

the big, blockbuster, breakthrough drugs, even though R&D spending has not decreased, but in fact, increased slightly, is that true?

If so, why? What is the reason?

Mr. ALDONAS. I think the overall spending has, in fact, stayed at

that level. What it has not done, is increase. What we are doing

right now, I think, is seeing a fundamental shift in the pharmaceutical industry, where the next really tranche of what the pharmaceutical will do is a technological leap. We are moving heavily

into the direction of biotechnology as opposed to the chemistry that

is involved.

Senator BAUCUS. The point is, science just has not come up with

the breakthroughs. Sometimes science moves in leaps and starts.

It is not a continues curve.

Mr. ALDONAS. Right.

Senator BAUCUS. So, it is true, I think, that R&D has increased,

but that there have been no breakthroughs.

I have a question about what would happen to United States

drug pricing if, for example, all controls, or controls, generally,

were taken off of prices in Europe, in Australia, and whatnot.

I mean, the basic argument that some make is that we have to

pay excessively high R&D because those other countries have price

controls, and that keeps prices down and it keeps R&D down, and

so forth.

Well, let us assume, for instance, that there were no, or essentially no, pricing controls in other countries. Let us assume, therefore, that the prices rose in those countries.

What effect would that have in the United States, the drug pricing? Would it necessarily follow that the United States’ drug pricing would automatically fall?

Mr. ALDONAS. Not necessarily. It would depend on——

Senator BAUCUS. Why might it not fall?

Mr. ALDONAS. Markets are segmented in this industry, for a

number of different reasons. Part of it, is you have companies

which are trying to make sure that the quality and safety they put

on the market that people associate with their brand name, as my

colleague from the FDA was describing, is something that they can

protect and they can continue to ensure consumers that the name

‘‘Pfizer’’ represents something in the marketplace. So, they are very

careful about using their intellectual property to segment markets

so they can provide that assurance for themselves.

They license to a particular dealer in another country so that

what they are engaged in is something that is subject to their quality controls, as a practical matter. So, markets are segmented for

different reasons.

But I would say, overall, if what you did was see the elimination

of price controls, you would see a much greater expansion of

generics worldwide, and what you would see is much stronger comVerDate 11-MAY-2000 09:51 Feb 23, 2005 Jkt 095484 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 95083.000 SFINANC2 PsN: SFINANC2
24

petition in the area of substitutable products, which we have seen

over the recent years in the expansion of the generic industry,

which is now 50 percent of our market. It is that which will set

the outside bound on prices of new and innovative medicines.

In fact, our friends in Japan and our friends in Europe would do

much better if what they were doing was relying on the market to

set that sort of outward bound rather than having government bureaucrats try and second-guess the market as to what drugs are

substitutable.

Senator BAUCUS. My question, though, is assuming they were to

let go, what effect would that have on prices in the United States?

That is my question. You are saying that prices in the United

States would not necessarily fall.

Mr. ALDONAS. Not necessarily, but my expectation is that they

would.

Senator BAUCUS. And I am asking, why would they? I am just

speaking, not argumentatively, but just for purposes of discussion

here. Say Medicare is the largest purchaser of drugs in the United

States. Medicare pays what the pharmaceuticals charge, essentially. If that continues, why would prices necessarily fall in the

United States?

Mr. ALDONAS. Two reasons. One, again, I would expect, with the

elimination of price controls, you would see stronger competition

from generics, which would set an outward bound on prices. It

would have the effect of putting prices down.

The other thing is, you would really have a system worldwide,

not just in the United States, that rewarded the true innovators

and penalized the companies that were not engaged in innovation.

That is not what we have right now worldwide.

So in both respects, both price competition from generics as well

as competition from new and innovative medicines, because they

can secure a decent rate of return, you would see a limit on the

prices that even the innovators in the market can charge.

Senator BAUCUS. A lot of this is theory. Sometimes practice collides with theory.

Mr. ALDONAS. That is true.

Senator BAUCUS. What I am getting at is, theoretically, people

have a lot of information about drugs, but as a practical matter,

it is so complex, they really do not know what they are buying or

getting, except for what they see on television, sometimes.

So, I just do not know the degree to which the market works

here, as well in a public policy sense as it does in other areas, like

I say, in buying a car or buying a refrigerator, for example.

This reminds me of where trade collided with environmental policy as we try and negotiate trade agreements, and it has collided

with labor rights. We gnashed our teeth and ground our way

through it and we finally found some solutions. But in the beginning, people looked at them totally differently. They could not combine the two together.

Well, we have some minimum standards, say the Jordan agreement, and so forth, and Chile, for example. Maybe the OECD is the

forum to look for it to try to find how they start to merge the two

together.

25

But trade is not health. Remembering our earlier constitutional

law of ours, health and safety, that is local. People, locally, want

to determine, culturally, their health policy, because health is a lot

more important than a car, frankly.

So, I just would like to hear you at some point—my time has run

out—some sort of threads of pursuit here, avenues of curiosity

here, how we might be able to get this thing here, somehow.

Mr. ALDONAS. Senator Baucus, if I could, just to pick up on your

point, I agree with you that even in the United States the market

does not function as well as it could. Markets are fundamentally

about information. You are absolutely right about the information

available to consumers.

But, really, it is the market that should drive more information

in front of the consumer. If there is anything we can do to make

sure that information is available for consumers so they make an

informed choice, the greater likelihood that when they are in front

of the CVS pharmacy out in Arlington that they will opt for the generic. But that is the sort of thing where I think we can use the

tools of the market to reinforce where we want to go.

Senator BAUCUS. I appreciate that. My time has expired. I apologize to the Chairman.

Senator KYL. I think the second panel, too, might have some information on the very important question you asked.

Senator Breaux?

Senator BREAUX. Thank you very much to the panel. Let me just

state, as I said in my opening comments, there is no question that

the rest of the world is sticking it to U.S. consumers of pharmaceuticals because of the arbitrary fixing of prices in these other

countries requiring manufacturers here to charge more for their

product in our market than they are able to get back from other

parts of the world in which they sell.

Some people will argue that, well, the solution to the problem for

U.S. consumers is to import their system into our country and that

we are going to have their price fixing system apply to our consumers. I think that is so totally contrary to everything else we do

in trade. I wanted to ask you, Grant, about the concept.

There are members who would point out that we should not

allow the unrestricted export of pork products from Canada to the

United States because of illegal subsidies in their country, that we

should not allow the unrestricted import of wheat products from

Canada because the Canadian Wheat Board grants monopolies to

their producers, allowing them to have a lower price, or for

softwood lumber, that we should not, for instance, allow unrestricted imports of their products from Canada into this country because of the fact that, in Canada, they give industry very favorable

terms on leasing Federal property, keeping the price down.

So, there are so many examples of why we say there is an answer to this problem. It is to go after these unfair practices and fixing of prices in these countries in order to create a level playing

field. But are the examples I gave you not analogous to what we

are talking about here? Here is a government that arbitrarily fixes

prices. They say they do. They set prices. Here is the price fixing.

What is the difference in the products that I pointed out as opposed

to what we are talking about here?

26

Mr. ALDONAS. Well, you raise a good point, Senator Breaux, in

the sense that you have got an endemic problem in Canada where

they set the price on a whole host of things. They opt for a particular economic model, and that has an impact on wheat, certainly. In terms of lumber, the fact that the provinces set the price

of timber below the market value has a dramatic impact.

From my perspective, since the Commerce Department is supposed to be the voice of manufacturing, I do have real concerns

about importing the impact of the price fixing abroad, because in

effect what you are doing——

Senator BREAUX. There is no question it would be good for our

consumers because we would be getting cheaper lumber, we would

be getting cheaper wheat, we would be getting cheaper pork products if we did that.

Mr. ALDONAS. That is true.

Senator BREAUX. Is that not true?

Mr. ALDONAS. Yes.

Senator BREAUX. So what is wrong with that?

Mr. ALDONAS. Well, the problem at the end of the day is about

where you want the investment to take place, and whether you

really are concerned about American industry. If what you want is

a research-based industry in the United States, which in fact is a

model for what we want in U.S. manufacturing, with heavy investment in innovation, the protection of their brands, safety and quality assurances to the world market that gives them an advantage

in the marketplace, the sort of thing that you want to do is ensure

that you have protected those values. And we have the trade laws

in these other areas for precisely that reason, as a practical matter.

Senator BREAUX. All right. Here is the problem. I look at it as

a trade problem. The rest of the world is sticking it to us with their

trade policies in the pharmaceutical industry. Transparency is one

thing. You all did a great job with Australia, saying, let us see

what you are really doing. All right. We find out what they are

doing. They are fixing prices. Then you are going to say, all right,

do not do that.

Now, which member of Parliament in Canada, or which member

of Parliament in Australia is going to be the first one to introduce

a bill to increase prices of pharmaceuticals in their country?

Who is going to do that? Unless there is some huge hammer that

somebody has to put over their heads, they are not going to do it.

We can have all the transparency in the world and they are not

going to move one inch unless there is a reason to do it that we

can give them.

Now, what reasons can we give them to raise prices of drugs in

their country?

Mr. ALDONAS. Well, I think what you can do, is say the ultimate

goal is lowering the cost to the consumer, and there is a better way

to get there. The fact of the matter is,——

Senator BREAUX. I do not know what better way. It works pretty

good when you just arbitrarily fix the prices.

Mr. ALDONAS. Having a hammer always helps, to make sure you

have it in your back pocket. On the other hand, I think Senator

Baucus and I have seen, in the case of British Columbia, they recognize they have got a system that is so poor in its performance

27

in terms of selling timber, they are finally moving on the political

front to eliminate the system and move toward auctions. The reason is, they had to see their own economic interest in it.

So, I think part of it is the persuasion that these countries that

are the principle problems here, Japan and Europe in particular,

really do have a vested interest in making sure they move in the

direction of the market at this stage.

Ms. SHINER. Can I also add to that?

Senator BREAUX. Sure.

Ms. SHINER. I think we can also effectively make the case that

we are not looking at more spending, but maybe smarter spending.

If you look at the patterns around the world, for example, Americans use a far greater percentage of generic drugs.

Also, generics are much lower-priced here in the United States.

We reward innovation, and then when it goes off patent, the price

drops and there is less reward in the generic zone.

In other countries, you see often the opposite happening, that

generics get a far greater share of the health care budget, and also,

for example, in Europe, only 16 to 18 percent of the market is

generics. In the United States, it is over 50 percent.

Senator BREAUX. They fix the prices of brand names and they increase the price of generics because a lot of the generics are being

produced in their countries.

Ms. SHINER. Right.

Senator BREAUX. This is not a surprise.

Ms. SHINER. So, in part, we are not necessarily arguing for something that would change the budget, just for smarter spending that

would reward innovation.

Senator BREAUX. Thank you all.

Senator KYL. One other thing I think we have discovered, is that

they are beginning to realize that they are having to ration some

of these drugs, and the health concerns of their own citizens might

eventually rise to be a big consideration.

Senator Santorum?

Senator SANTORUM. Well, Senator Breaux asked a lot of the

questions I was going to ask, and asked them better than I did. So,

thank you, Senator Breaux. I appreciate those comments.

That is the problem. I hope that you are hearing it loud and

clear, at least from many members up here, that we have serious

concerns that we would like to see you folks act upon with respect

to trade negotiations and this subject, and it is costing American

consumers.

I think the point you make, I think it is also costing the consumers in other countries quality health care. I think that is our

greatest pitch that we can make to the rest of the world, that they

have to begin to participate.

You are seeing it in Europe, that it is costing them quality jobs,

because a lot of those jobs are coming to my State. The research

jobs are consolidating. They are consolidating in Pennsylvania,

New Jersey, North Carolina, and places like that, and we thank

you. We hope you continue.

The fact of the matter is, the concern I have, is that there are

colleagues up here on this panel, and there are many colleagues

who are not on this panel who want to adopt the Canadian pricing

28

system—it is called re-importation of drugs—or they want to adopt

the Australia prices, so we can re-import from Australia.

My question to you is, if we do not solve this problem quickly and

Congress does something, I would say, ill-advised in passing re-importation, what do you see as the impact on this country and our

ability to come up with any kind of rational scheme of trade negotiations?

Mr. ALDONAS. Senator, I think we will see what we have seen in

Europe. There will be disinvestment in the United States, a loss of

employment opportunities, and, frankly, loss of an industry that is

a huge multiplier in terms of what it provides, not only in terms

of direct employment and sales in the United States, but some of

the things that help our health care providers offer the premier

health care in the world, and have created new export markets as

a result.

So if that is the thing you want to destroy, which in many respects is the future of American manufacturing, that model, probably the surest way to do it is to limit the rate of return that these

companies can generate, not just in the United States, but worldwide.

Ms. SHINER. One of the trade areas that this kind of bumps into

is the area of what we call parallel imports, where we give, under

our intellectual property rights, the owner of a patent the right to

distinguish what market their product sells in.

Importation also conflicts with that very important trade principle that we have seen for our innovators to be able to keep control of the value of their products. So, that is one area that would

need to be addressed as we look at that issue.

Senator SANTORUM. Senator Baucus mentioned this, and I am

just curious. If we pass re-importation, I would assume, if you are

a drug company and you have re-importation from ‘‘Canada’’—and

as we have seen from this, re-importation from Canada does not

necessarily mean Canada—what would be the reaction with sending your drugs to Canada in the first place if you knew that that

was going to undermine your market here in the United States?

Mr. ALDONAS. You would be less interested in sending the drugs

to Canada, frankly. The thing that you just showed, and that our

friend from FDA brought, is the single biggest problem that companies face. If you think what they are investing in is not just the

research and development, it is the development of the brand

name, Pfizer, Lipitor, those sorts of things. As long as you see that

sort of thing, it is destroying value every day it is in the market.

Senator SANTORUM. I want to ask Mr. Hubbard. Senator Thomas

and I were looking at some of these drugs. All these drugs have

gone generic? Have their patents expired?

Mr. HUBBARD. Oh, no. No. No.

Senator SANTORUM. I did not think so.

Mr. HUBBARD. Oh, not at all.

Senator SANTORUM. So these are ‘‘generic’’ equivalents to drugs

that really should not have any generic equivalent available.

Mr. HUBBARD. That whole document is a lie. Everything on there

is a lie.

29

Senator SANTORUM. This is what we want to legitimize with people who want to re-import drugs from Canada. This, I assume,

would be a legal thing under a re-imported drug statute.

Mr. HUBBARD. Well, depending on how it passed, it could be.

Sure.

Senator SANTORUM. Can I ask, did you test these drugs to see

if they were what they were supposed to be?

Mr. HUBBARD. We have not yet, but we do not really need to.

This is a picture of them. They may have active ingredient in them.

We have seen some of these foreign products where the counterfeiter will put a little active ingredient in, so when you do your initial test it comes out positive, so you think that it is really the

drug.

Then you have got to do much more sophisticated testing to determine whether it is really therapeutically the same, and I do not

think we have gotten to that level yet. But it is clearly a counterfeit drug.

Senator SANTORUM. Thank you. Go ahead.

Ms. SHINER. We have also found medicines with cement inside,

and other materials that would be toxic.

Senator SANTORUM. Is it not true that maybe a small part of the

reason drugs are more expensive here, is we have a much more

stringent process to get drugs approved in this country and it costs

more?

I mean, we are concerned about safety to the point where we

drive up the cost of drugs in this country because we want to make

sure that our consumers are getting a safety product.

Mr. ALDONAS. Yes. I mean, it is not only that we are concerned

about safety. In fact, when a company like Pfizer goes all the way

through FDA’s process, what they are guaranteeing to the world,

and FDA is guaranteeing to the world, is this is the best damn

product on the market.

If you have things that are constantly chipping away at that, like

the sorts of things that get sold on the Internet, you can imagine

the loss of value in terms of the investment.

Also, the expense that they have gone through at FDA just so

they can have that imprimatur at the end of the day. And while

I do not think our Canadian friends would say that they do not

have a system that is comparable to FDA’s, I am confident that

ours is the best.

Ms. SHINER. Ours is definitely the gold standard. As you travel

and look at these systems, we have created the gold standard.

Senator SANTORUM. Gold standard also means most expensive,

does it not?

Mr. ALDONAS. Absolutely.

Ms. SHINER. But the consumer confidence in our regulatory system—in trade negotiations you bump into this all the time, a lack

of consumer confidence in those countries in the regulatory system

and the fear over new products and approvals. The fact that we

have that confidence here is vital.

Mr. HUBBARD. Senator, may I say, I have often said, using a car

analogy, the Americans are making the Mercedes and the Hondas,

and the foreign countries are making the Pintos and Vegas. So,

clearly the drugs here are the best.

30

Mr. ALDONAS. But he is not biased.

Senator KYL. Senator Graham?

Senator GRAHAM. Well, we may be making the Hondas, and what

was the other car?

Mr. HUBBARD. Mercedes.

Senator GRAHAM. Mercedes. But we are paying the Rolls Royce

price for them as well.

I think, to pick up on the questions that Senator Santorum has

just been asking, is part of this question of why was there such an

egregious overrun in the estimated cost of the prescription drug

bill?

It would be very helpful if we could have a more general hearing

on what are the practical means by which we can make quality,

safe, regulated prescription drugs more available to the American

consumer.

Now, I happen to have some serious questions of what I learned

about the capitalist system in Economics 101, was that it was driven by supply and demand. I cannot see how effective trade negotiation, which reaches the goal of, for instance, causing Australia to

give up its democratic processes of making judgments as to how

they will operate their health care system, is going to have any effect on prices inside the United States.

I do not come to this alone. This is a report that was issued by

our International Trade Commission. This is a commission made

up of Presidential appointees, Senate-confirmed individuals whose

job is to look at U.S. impacts of trade policies.

It says, on page 3, ‘‘Studies reviewed in this chapter indicate that

such regulations,’’ such as the Australia regulations, ‘‘affect prices

within the home country, but there is less evidence that regulations in one country directly affect prices in other countries.’’ That

would be what you would expect from an open demand-supply-driven economic system.

So, I am afraid that the amount of time that we are spending on

this issue, if the question is what can we do to reduce costs for

American consumers, that we are probably overly investing and

ought to be looking at some of the kind of issues that Senator

Santorum has just raised that really do have the potential of doing

so. That is the end of my comment.

Two questions. One, there is concern that provisions in this

agreement will have the effect of reducing the ability of U.S. Federal agencies, such as the Defense Department through the TriCare

program, the Veterans Administration, the Medicaid and the Medicare program in affecting prices inside the United States through

effective negotiation. Is that a concern that we should be concerned

about?

Ms. SHINER. Senator, our agreement with Australia explicitly

carves out government procurement, as in our VA and DoD systems. We work very closely with our departments to ensure that

it would keep intact our entire program. So, it explicitly carves out

government procurement.

Senator GRAHAM. Is that in the annex?

Ms. SHINER. Yes. It is in Annex 2. You will note there is a footnote right under there, Footnote 1 under ‘‘transparency that carves

out government procurement.’’

31

Senator GRAHAM. Would, for instance, what the VA is doing, or

what I think Medicare ought to be doing, come within that carveout?

Ms. SHINER. I am sorry. What you think VA should be doing?

Senator GRAHAM. No, what it is doing. The VA is very aggressively negotiating with pharmaceutical companies and is getting

better than a 50 percent, on average, discount.

Ms. SHINER. Right.

Senator GRAHAM. Would that be covered by this carve-out?

Ms. SHINER. Yes. All the VA programs are covered by this carveout. It is all government procurement and all DoD programs, are

covered by this carve-out.

I will also point out that, in this FTA negotiation, we were the

side with, really, the trade concerns, because, again, we represent

two-thirds of the world’s innovative medicines. Those are sold heavily into Australia.

We have a letter that deals with the transparency concerns in

the PBS that applies to their PBS system, which represents more

than 90 percent of their market and is a vital concern to our industries.

In the Annex, I think these principles are ones that we subscribe

to and we have been promoting. Then in one area of government

procurement, it carves that out.

Senator GRAHAM. My time is almost out. I would like to ask a

second question. That is, in the Annex, Paragraph 1(d), there is a

statement about the need to ‘‘recognize the value of innovative

pharmaceuticals through the operation of competitive markets or

the adoption or maintaining procedures—and this is what I am

particularly interested in—’’that appropriately value the objectively

demonstrated therapeutic significance of a pharmaceutical.’’

The reality is, there has been active opposition, including by this

administration, to the requirement that pharmaceuticals provide

the same information of efficacy to the consumer as we do—for instance, I bought a bag of raisins. It has all kinds of information

about the efficacy of raisins.

But if I want to go down and try to evaluate, is Lipitor or Zocor,

or if there is—and I do not think there is a generic yet available—

which is the most efficacious, there is almost no information made

available to me, although that information is available.

Ms. SHINER. Yes.

Senator GRAHAM. Are we going to start advocating that we provide efficacy information to the consumers?

Ms. SHINER. The issue here was the right of our companies to be

able to make the case. In the United States, of course, my doctor

that I visit can advise to me which one he feels is of most therapeutic value. Under many government health care systems, that

choice is not there.

So, the opportunity to make that case is the principle that we

really felt was important, and often that is denied to either the

companies, or the medical profession are denied that opportunity

under certain national health care systems.

Mr. HUBBARD. Senator Graham, the Congress has instructed the

Department of Health and Human Services to begin to collect that

sort of data to compare effectiveness, and the Agency for Health

32

Care Quality Research is doing some of that, and also the Medicare

program will be doing that.

Senator GRAHAM. I know we can collect the information. But

when is the information going to be made available to the American consumer?

Mr. HUBBARD. Well, in fact, the goal is to compare drugs for their

effectiveness, and then disseminate that information. But in all

cases, that initial data comparison has not occurred, and that is

what Congress has asked the Department to do.

Senator GRAHAM. When do you think it will be available?

Mr. HUBBARD. Well, the FDA is not involved in that. Our job is

to approve it for safety. We do not do the comparative efficacy. So,

I am not that close to it. We can certainly get back to you on the

record on that.

Senator GRAHAM. Good. Thank you.

Senator KYL. Great.

Senator Smith?

Senator SMITH. Mr. Hubbard, is anyone pursuing a case against

these scheisters?

Mr. HUBBARD. Yes. We have had many cases like that. Unfortunately, Senator, there are all too many of them. There are hundreds, perhaps thousands, of those individuals, selling drugs that

are purported to be good, American drugs that are being purchased

from a foreign country, when in many, many cases we think it is

not an American drug to begin with, and could be counterfeit or

otherwise a problematic drug.

Senator SMITH. Do we pursue these people with Canada or do

they have a separate system?

Mr. HUBBARD. Well, Canada has no involvement in that. There

is no Canada connection, except for the fact that they claimed to

be in Canada.

Senator SMITH. I know from Canadian friends, selling drugs to

America is a major, major league industry in Canada right now. I

would think they would care about the representation of this being

their country. So are they pursuing these things?

Mr. HUBBARD. We have certainly heard expressions of concern.

But, just like the FDA, they cannot reach outside Canada to a business that may be in China, or the Caribbean, or Latin America.

Senator SMITH. I think your point is very well taken. I wish the

American people understood a little better the amount of fraud

that is out there in connection with the use of the name of Canada

and pharmaceuticals, because it is much more dangerous, I think,

than most people recognize.

I was with Senator Kyl in Australia in January and he and I and

our other colleagues on this trip spent a great deal of time talking

to the Australians about their drug policy and the need for transparency. Frankly, they were very transparent. They just told us

how they price fixed. [Laughter.]

I guess my question is, good work. You got them to disclose. But

we already knew it anyway. How will that impact American prices?

Will it affect us at all for any good?

Ms. SHINER. Of course, we were dealing with the right of our

companies to sell into Australia and that part of the equation is not

33

part of our trade agenda. I will only say that, since consumer

awareness is growing about pricing, and ultimately if you——

One of the things we negotiate, frequently, is the cost, for example, of CDs and DVDs. Some countries, in fact, have threatened to

put on price controls and just charge for the cost of the plastic, and

we would know that American consumers would be angry if they

were the only consumers paying for the part of the bill that paid

for the production.

I think that awareness is growing. I think that if more countries

did recognize innovation, then I think there would be demand here

and more awareness for lower prices, including from all of you. I

think that would have an impact.

Senator SMITH. Well, that demand is growing exponentially, because the more we learn about it the more we realize how set up

the American people are to foot the bill for the whole world. A lot

of us are getting tired of it and, frankly, are looking for the right

answer as to how to affect this.

I rather suspect that trade agreements, while it is important to

do this, are important to do, but I doubt they will have much impact on our ability to sell abroad or to lower American drug prices

at home.

So I appreciate you continuing to work on it. Please do. But also,

if you have got some ideas for how we can lower prices here that

do not destroy this innovative engine that we have in R&D in this

country, we are really hungry for some answers because they are

fairly elusive.

Having said that, it is my own belief that most of what is going

on here, is people are overstating the impact of trade agreements

on prices here or our ability to sell over there.

What really drives prices, is our companies need to show a bottom-line return. That is what is ultimately driving prices up here,

and we have got to somehow figure out what works, to sell the eggs

without killing the goose.

Mr. ALDONAS. Senator Smith, if I could just add, I do not disagree with you about the individual trade agreement. I think it is

a first step. A lot of what the transparency rules apply to is not

just the pricing mechanism, but your ability to get coverage of your

drug.

So, it is that basic market access hurdle, then you have better

information about how you get through the process and make sure

you are appropriately listed and your innovations are appropriately

rewarded. So, there is some value to it. It is a very good start.

In the sense that what we are trying to do is create a broad policy environment throughout the developed world, which every other

country uses these price fixing mechanisms or limits on coverage,

we have got to start somewhere. This is the thin end of the wedge,

as far as I am concerned. Overall, I think the system will have a

significant impact.

Senator SMITH. One final question, Mr. Chairman, that I think

is really important to understand.

Now, I was relieved to learn from the Australians that when they

set prices, they just tell them what they are going to buy and the

price they are going to buy it at.

34

But I do not believe they threaten them with disclosure of their

patents. Are there countries that do threaten with disclosure? Is

Canada one of those? Are there any countries where there is really

no negotiating at all, it is just all a fraud and it is done by compulsory means?

Mr. ALDONAS. Well, just to be clear, when you say disclose a patent, one of the things that we do under the patent laws is ensure

disclosure of the mechanism so people can try and improve on a

prior art, but allow people to protect their rights and that initial

investment. So, there is real value, in one sense, to the disclosure.

The problem I think you are focusing on might come home to

roost in Japan, though. What they have the effect of doing by averaging prices between generics and the innovative medicines, is penalizing the guys who have invested in all of the R&D and they

are providing a subsidy to the generics.

So, in one sense they are providing these economic rents that are

due to the research and development to the guys who are not investing anything in R&D. Perversely, like a lot of protections in the

marketplace, they do not actually encourage competition. They encourage sloth on the part of the generic industry in Japan, so as

a consequence they do not provide competition that would actually

help limit the price rises.

Senator SMITH. I would just simply suggest, that is where trade

agreements can be of the greatest importance for the future, is to

eliminate that kind of thing.

Ms. SHINER. If I could just point out, since the adoption of TRIPs,

no country has used a compulsory license. Canada used to in the

1980’s, and, in part because of our discussions with them during

NAFTA, in part because of TRIPs, they have given up that practice

and no longer do that.

So, we have not seen any incident of that since the introduction

of TRIPs, which requires, if a country, in an emergency situation

or other uses a compulsory license, if they did—and there has not

been an incident of it—to provide remuneration to the industry. So,

we have not seen that used.

Senator KYL. For the record, would you indicate what ‘‘TRIPs’’

stands for?

Ms. SHINER. Trade Related Intellectual Property Rights.

Senator KYL. Thank you.

Senator Snowe?

Senator SNOWE. Thank you, Mr. Chairman.

I think it is interesting, how this discussion turns into, re-importation is actually a front for importing price controls. The issue is

creating a competitive marketplace.

I think, on the other hand, it also is true that we ought to do

everything that we can to make sure that we have an open trading

relationship with those countries when it comes to pharmaceuticals, as well as opening up the marketplace.

As I understand it, even if you were to remove the price controls,

it does not mean to say a government still would negotiate a set

price with pharmaceuticals for their prices, similar to what the

Veterans Administration does currently on behalf of their veterans,

and the DoD. So, they would continue to negotiate a price, even if

35

they did not have price controls. Would that not be the case, if they

had a single pair system?

Mr. ALDONAS. Yes, in the sense that what you would end up

doing is having the foreign government buying the drugs much like

the VA does.

Senator SNOWE. Yes.

Mr. ALDONAS. Would it necessarily be the case if they wanted the

result of more competition in the marketplace to try and bring

prices down? No. They ought to be opting for a model that is more

driven by the market rather than trying to substitute their judgment for the real price that should be charged for a new and innovative medicine.

Senator SNOWE. I agree. But the whole issue is re-importation.

Ms. SHINER. May I?

Senator SNOWE. Go ahead.

Ms. SHINER. I just wanted to add on your question, not all governments that we deal with institute price controls. Some just do

the reference pricing, where they set a price within a therapeutic

class and there are different applications of that.

I think the key difference here, my health insurer negotiates

prices. Everywhere in the market, there are negotiated prices. The

problem is, when you have a monopoly buyer in countries where it

is 90 percent of the market, they have such power that it is kind

of a ‘‘take it or leave it’’ deal on the pricing. So, we see those very

low. But some of them do not have an overall cap, as we see in

Canada.

Senator SNOWE. And why would the previous trade agreements,

like NAFTA, for example, have exempted pharmaceuticals? I am

just interested. The intent, obviously, of these trade agreements,

was to eliminate trade barriers. Why were pharmaceuticals exempted?

Mr. ALDONAS. Well, they were not exempt, in the sense that

what we were doing was negotiating, for example, direct reductions

in tariffs on access for our pharmaceuticals.

We were negotiating the elimination of limits on our service providers that go into the market that carry American pharmaceuticals with them as part of the health care they provide, limitations on investments. Our companies could go down there and actually establish themselves as a marketing and sales office.

A lot of things included in NAFTA actually are very helpful in

terms of market access. Mexico also, at least as I understand it,

does not have the same sorts of systems we are seeing in the case

of Japan and the European countries.

But, having said that, if the issue is Canada, it is a legitimate

question to say, what was the reason that this particular element

was not covered?

Senator SNOWE. I think the only other industry exempted was

oil. Am I correct?

Mr. ALDONAS. Log exports.

Senator SNOWE. Yes. Right.

Ms. SHINER. At the time of NAFTA with Canada, we were dealing with the compulsory licensing issue, which was the major concern. I think it is fair to say that there has not been a consensus,

36

in this country or abroad in the past, to use trade negotiations to

try to change fundamental national health care systems.

As stated in the panel, people have seen trade as one thing, and

health care being kind of sacrosanct, and a lot of these countries

are very loathe to do that.

But where we do have a trade-related issue, we have pushed it

very strongly. With Canada, the improvements on compulsory licensing were the most egregious part of that.

Senator SNOWE. Mr. Hubbard, in describing some of the safetyrelated issues in this chart, the bill that we introduced addressed

many of those questions that we asked.

Mr. HUBBARD. That is correct, Senator Snowe.

Senator SNOWE. Are you familiar with the bill that we introduced, and some of the issues there?

Mr. HUBBARD. Yes, Senator Snowe.

Senator SNOWE. So in terms of your statement in this chart, we

just do not want our legislation to be mischaracterized in any way

regarding the safety-related issues that we addressed, because I

think that that is critically important.

In fact, counterfeiting is more preponderant in this country. We

have got a big problem with counterfeiting in America. So, there

is no question that we ought to be addressing the counterfeiting of

drugs being imported, and that is what we do.

The anti-counterfeiting technology that is used on $20 bills, by

all accounts, has been a remarkable success. So, we have a number

of issues that have been incorporated in our legislation. Are you familiar with them?

Mr. HUBBARD. I am somewhat familiar with the legislation.

Senator SNOWE. You are somewhat familiar with them.

Mr. HUBBARD. Yes.

Senator SNOWE. Because I think it is important here. The FDA

has had a long time in which to address this issue. In fact, you

were required to do pedigrees back in 1992, I think, by Congress,

so you can track the custody of medications. I mean, there are

many ways in which to address this issue and many opportunities

the FDA has had to address this issue. So, I think it is important.

I just wanted to dispel any mischaracterizations here in the part

of re-importation when it comes to safety-related issues. We have

addressed every single one of those issues in the legislation that we

have introduced recently, and I think it is important to note that,

Mr. Chairman, because otherwise you are going to create the

wrong impression. This is one thing, but our legislation addresses

this issue.

We are only talking about FDA-licensed, licensed on the Internet,

licensed pharmacies on the Internet, FDA-approved manufacturing,

pharmacists, facilities in Canada. Their list would be approved.

The FDA will be inspecting these facilities, and so on, and so forth.

So, this sort of thing would not occur under our legislation. We

provide the means to do it. I think it is important to do that, because we have taken the steps in this legislation to address the

issues and the hurdles of safety certification by FDA and the

Health and Human Services, and it has not happened.

So we are saying, all right, we understand. We share those same

concerns. We want to make sure these sorts of things do not hapVerDate 11-MAY-2000 09:51 Feb 23, 2005 Jkt 095484 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 95083.000 SFINANC2 PsN: SFINANC2
37

pen. This cannot happen under the provisions within our legislation.

I think it is important to recognize that so that we begin to take

charge and be proactive rather than being an impediment and a

barrier to overcoming some of these problems so that we can have

some more price competition.

Hopefully, countries will change with respect to their price controls, and so on, and so forth. But in the meantime, I think American consumers deserve to be paying lower prices for their medication, should not be paying the highest prices in the world.

So one of the ways of doing it, is to take the steps we are doing,

and also to open up the marketplace for more competition rather

than subjecting Americans to a very rigid system of high prices.

Senator KYL. If there is any response, please do it quickly, if you

would.

Mr. ALDONAS. Senator Snowe, I just wanted to put in a pitch for

Customs as you think about the enforcement side, because a lot of

this comes home to roost with the Customs Service, and they are

terribly over-burdened right now.

Senator SNOWE. Yes. And we provide resources for that as well.

Thanks.

Senator KYL. I am going to call on Senator Lincoln, now, but I

am going to have to leave for a moment here. Senator Thomas is

going to chair the next panel. If there is no objection, what I would

like to do is suggest that at the conclusion of Senator Lincoln’s

question, any further questions be submitted in writing, with the

record to be open through Friday for submission of those questions,

as well as any other statements people have, so that we can then

move on to the second panel.

Is there any objection to that process?

Senator BREAUX. I just had one question I thought he could probably answer very quickly.

Senator KYL. All right. Fine. I will let Senator Thomas deal with

that. I will try to get back. I want to personally thank all of you

for a very enlightening hearing.

Senator Lincoln?

Senator LINCOLN. Thank you, Mr. Chairman. Thanks to our

panel for joining us today on such a very, very important issue to

our Nation, to the economy, and more importantly to all the seniors

out there that we hear from day in and day out with the incredible

needs they have.

Just a couple of questions, and I will submit the rest of mine for

the record to be answered. I know that there have been a lot of

questions that have already been asked that I was interested in,

and I apologize for being late, but I know some of those have already been answered.

I guess, Mr. Hubbard, one of the things I have been concerned

about, and hearing about some of these trade negotiations and

other things that have been going on, and the practices in other

countries, are we also concerned about effectiveness of the new and

innovative drugs that are out there?

Are we interested in seeing that these new and innovative drugs

are really better than those that are already on the market? I know

that is a part, or a component of some of these other countries in

38

terms of what they determine in terms of what they are going to

pay, or how they are going to set their standards.

Mr. HUBBARD. Well, the standard for FDA to approve a drug, is

that it be safe and effective.

Senator LINCOLN. Right.

Mr. HUBBARD. So it must be safe, and it must work. However,

we do not make effectiveness comparisons when we approve a drug

with other drugs. There is a growing movement toward doing that,

and Senator Graham asked about that.

In fact, other parts of my parent department, Health and Human

Services, are undertaking such comparative effectiveness studies to

determine whether a given high-priced drug is, indeed, more effective than a given lower-priced drug, so that the doctor and patient

really know what the most cost-effective treatment is.

FDA attempts not to make cost-effectiveness decisions, because

that is not our charge and it could get us off into a different sort

of mission than ensuring the safety and basic effectiveness of a

drug.

Senator LINCOLN. Well, in light of how far we have grown in this

country and FDA has grown, do you feel like it is an area that FDA

could grow into?

Mr. HUBBARD. We are certainly very supportive of the need to do

it. It is just that the FDA side is to try to focus on getting the drug

on the market for that prime decision on safety and efficacy. But

we are very supportive of what other agencies are doing to compare

drugs so that the most effective treatment is identified.

Senator LINCOLN. So you do not really think that the FDA has

a role to play.

Mr. HUBBARD. Well, we do in the sense that we often oversee the

study data, the clinical trials that collect the information about a

given drug.

Senator LINCOLN. You just do not want to interpret it.

Mr. HUBBARD. But other folks are doing that interpretation, and

we believe they are in a better position to do that.

Senator LINCOLN. Well, with their evidence and their interpretation, do you think it is an effective tool in terms of dealing with

how we look at the cost effectiveness of the drugs that we have?

Mr. HUBBARD. Absolutely. Former Commissioner McClellan, who

is now running the Medicare and Medicaid programs, is very much

making that a point of his tenure there, which is to determine for

the taxpayer that is paying for these drugs what the most cost-effective treatment is. That process is, if anything, going to be more

rigorous in the future.

Senator LINCOLN. Good. So you think you will be working with

those efforts.

Mr. HUBBARD. Yes.

Mr. ALDONAS. Senator Lincoln, if I could just say, it is all about

informing the consumer and then letting the market work. The

more information that is available to the consumer about the effectiveness of the drugs, the price of the drugs, and to their care provider, the better off we are going to be.

Frankly, it is a system I would rather see our trading partners

adopt because it makes more sense to have the market determining

39

what the outward bound of substitutability is than to have a government bureaucrat make that decision, at the end of the day.

Senator LINCOLN. I do not disagree with you. I just think that,

in light of what we see in terms of information, I mean, I watch

these commercials. My husband is a physician. I have to look over

and say, what is this going to do for me that is going to make me

feel like running out in this field of daisies? [Laughter.]

I mean, what is my problem? Information is a good thing, but let

us make sure that it is productive information and something that

is going to be helpful.

One of the questions I had for you all, was that we have seen

there are more American drug companies that are producing overseas and that, basically by their own admission, production costs

are cheaper and so they are able to do that.

Why have we not seen a difference in our drug prices? If, in fact,

all of these things are true, you would think that because of that

our drug prices would go down as well. If they are finding that they

are moving a larger percentage of their production overseas, then

we would see a decrease in our costs.

Mr. ALDONAS. I guess I would look at the problem economically

in just a slightly different fashion, which is that you have a number of companies that have huge cost burdens in terms of manufacturing in the United States. It is tort litigation, energy costs, just

run down the list.

Senator LINCOLN. Health care costs.

Mr. ALDONAS. And effectively what they are trying to do, is make

sure they can generate a decent rate of return. There is an outward

bound on how much they can price even new, innovative medicines,

where at some point someone says, I will go without it rather than

pay the price at the end of the day. So they try and find other ways

to make sure they can still generate a rate of return and keep their

product on the market. A lot of them are through cost savings.

What you are seeing in the pharmaceutical industry is no different, of course, than what we are seeing in manufacturing across

the board, which is, how do you maintain a base of manufacturing

in the United States while remaining cost competitive globally and

generating the rate of return that your investors want to see so you

can keep investing in the R&D that is going to carry you forward.

So, I think what they are engaging is a cost containment strategy

of their own. Really, I think the right way to look at it economically, although this is hard to explain to my mother-in-law back in

Minnesota, is that the prices would be higher in the absence of

their ability to engage in those cost containment strategies, and

that what they would end up, then, is having to charge more as

a way of trying to generate the rate of return for their R&D.

Senator LINCOLN. But, again, that increase in cost would only be

incurred by American seniors and not seniors across the globe.

Mr. ALDONAS. That is true. That is the fundamental problem.

Senator THOMAS. Could we see if we could wind up here?

Senator LINCOLN. You bet. I will just submit the rest of mine for

the record. Thank you, Mr. Chairman. Thank you.

[The questions appear in the appendix.]

Senator THOMAS. Thank you very much.

Senator Breaux?

40

Senator BREAUX. I just had one other follow-up question, and

thank the Chairman.

Perhaps, Grant, you may be able to address it. If I were a pharmaceutical company and I found that I was exporting 70,000 pills

to Canada, and the Canadian market only required 50,000 pills, I

make a decision, I am going to sell what the market needs in Canada to Canada, but I am not going to sell them more than they

need. Are there any rules or regulations that require a producer of

any product to sell more to a country than they can market and

sell in that country?

Mr. ALDONAS. No.

Senator BREAUX. All right. Thank you.

Senator THOMAS. All right. Thank you.

Well, thank you very much. This was an excellent panel. We will

be continuing to work in this area. You may have some other questions submitted for written return in the next few days. So, thank

you.

We are going to move on to our next panel now. It consists of

John Calfee, resident scholar, American Enterprise Institute, and

Gerard Anderson, professor, Johns Hopkins School of Hygiene and

Public Health.

All right. Thank you, gentlemen. I appreciate you being here. I

think it is very important that we get some observations and information from a different group, and you all more represent the private sector.

So, Mr. Calfee, if you would like to begin, sir.

STATEMENT OF JOHN E. CALFEE, RESIDENT SCHOLAR,

AMERICAN ENTERPRISE INSTITUTE, WASHINGTON, DC

Mr. CALFEE. Thank you, Mr. Chairman.

Senator THOMAS. By the way, your whole statement will be put

in the record, so if you would like to summarize.

Mr. CALFEE. Thank you. I will summarize, briefly.

I am honored to be here. I am an economist at the American Enterprise Institute for Public Policy Research. My comments are my

own.

I have supplied written testimony in which I discuss mainly five

points, which I will briefly summarize, and then at the end make

some specific suggestions for relatively simple things that some of

the countries we have been talking about could do that I think

would make things somewhat better.

My first point is very simple and familiar, which is the economically advanced nations of the world, other than the U.S., do, in

fact, control drug prices and they do push those prices down below

what they would normally be.

We do not know how far down they push those prices. We do

know that almost certainly the prices in Canada, Australia, Germany, France, et cetera, those prices would almost certainly be

lower than the prices in the U.S. if there are no controls whatsoever, because those countries have smaller per capita incomes and

prices tend to track per capita incomes. But there is quite a bit of

evidence that the prices in those countries are, in fact, quite a bit

lower than could be accounted for by income disparities.

41

The second point, is that the patients in nations with price controls have faced substantial delays in the introduction and the use

of innovative drugs. These delays appear to be caused primarily by

the requirement that has been mentioned several times today, that

when a new drug is approved, that drug also has to go through a

second process of registration that focuses on dealing with prices.

A recent study of 85 chemical entities in 25 countries found that

new drugs were launched far more slowly in nations that do require a separate registration or price approval process.

Third, pharmaceutical price controls do discourage the development of innovative, new drugs. This point is not a matter of contention amongst economists. As some people have mentioned today,

price controls are one reason why Western Europe is no longer a

dominant force in drug development as they were as recently as 15

or 20 years ago.

In 1990, European pharmaceutical firms out-spent American

firms on research and development by roughly 8 billion euros to 5

billion euros, and by 2000 the situation was much reversed. U.S.

firms were out-spending European firms by 24 billion euros to 17

billion euros.

In 1988, American manufacturers developed only 19 of the 50

best-selling drugs worldwide. By 1998, the situation again was very

different. U.S. manufacturers were selling 33 of the top 50 drugs.

By 2001, they were selling 8 of the top 10 drugs worldwide. In biotechnology, the most innovative sector, the pattern is quite striking. U.S. manufacturers now account for 14 of the top 15 biotechnology drugs in the world.

Fourth, there is reason to believe that economically advanced nations are beginning to use price controls as a tool for free riding

on pharmaceutical R&D paid for by American consumers. The reason is simple: the medical benefits of innovative drugs apply pretty

much to patients everywhere.

The marginal costs of manufacturing and distributing most drugs

are small compared to development costs. Nations are, therefore,

tempted to set prices that are sufficient to cover marginal costs,

but are too low to motivate the innovative R&D that we all need

and we are all waiting for.

This point, I would emphasize, has been developed at some

length in the speeches of former FDA Commissioner Mark McClellan, who, as you know, is also an economist in addition to being

a physician.

Fifth, as I mentioned earlier, I do believe that there are relatively simple things that the nations we are discussing today

could undertake that would improve the situation to a fairly substantial degree.

I propose a brief list of those measures. One, again, something

that has been mentioned several times, these nations could use

more generic drugs and they could let competition force generic

prices downward.

Two, these nations could permit a more efficient pharmacy retailing sector. Some nations, especially Germany, limit competition in

the pharmacy retailing sector that props prices up. It provides

them with scant incentives to minimize their costs. If they were to

42

reform this system, they would get lower retail prices and there

would also be room for more reward for innovative drugs.

Three, these nations could eliminate heavy-handed disincentives

for the use of innovative drugs. France, for example, has a system

in which, if a drug is priced just slightly above the governmentstipulated reference price, the patient has to pay the entire cost of

the drug rather than paying for the difference. This is a strong disincentive to using innovative drugs. It is a strong disincentive to

developing innovative drugs.

Four, these nations could permit something that is controversial

everywhere, and that is direct-to-consumer advertising of prescription drugs. The evidence here, and the evidence in New Zealand,

is that DTC advertising is a potent force for making consumers better informed about new treatments, and that might be useful in situations in which patients are actually waiting for new treatments

to be made available on the market.

Five, these nations could provide for greater medical and patient

input in setting prices, perhaps using something along the lines of

an FDA advisory committee in which medical practitioners and patient groups would have a say in how prices are set and have a say

in how rapidly drugs are introduced in the market.

Six, these nations could explore arrangements similar to what

the pharmaceutical benefit managers use in this Nation. I think

that the PBM price negotiating process might be a model for an alternative way in which these nations could deal with drug prices.

Seventh, and finally, I would suggest that wealthy nations of the

world should explicitly—which they have not done yet—rule out

any threats of compulsory licensing in connection with negotiating

prices.

That concludes my oral remarks, Mr. Chairman.

Senator THOMAS. All right. Thank you very much.

[The prepared statement of Mr. Calfee appears in the appendix.]

Senator THOMAS. Mr. Anderson?

STATEMENT OF GERARD ANDERSON, PROFESSOR, JOHNS

HOPKINS SCHOOL OF HYGIENE AND PUBLIC HEALTH, BALTIMORE, MD

Mr. ANDERSON. Thank you. Mr. Chairman, members of the Senate Finance Committee, my name is Gerard Anderson and I am a

professor at Johns Hopkins University.

In my oral testimony this morning, I would like to make six

points. My first point, is that other industrialized countries have

invested considerable resources and capital in developing the appropriate use of pharmaceuticals and monitoring pharmaceutical

prices.

Currently, however, the U.S. has no strategy for determining appropriate price or utilization for pharmaceuticals. Because we have

done so little, it seems unfair to ask these other countries to

change their programs.

My second point, is that our analysis shows that the U.S. pays

twice as much for a market basket of 30 commonly prescribed

pharmaceuticals as other countries. We are the outlier, not these

other countries.

43

My third point, is that some other countries invest more on pharmaceutical research and development than the U.S. Recent data

from the OECD shows that Sweden, Denmark, the U.K., and Belgium spend more on pharmaceutical R&D per capita than the

United States does.

My fourth point is, even if these other countries paid more for

pharmaceuticals, prices in the U.S. would not necessarily go down.

You have talked about this today.

This hearing talks about the advisability of the U.S. Trade Representative to negotiate with these countries to raise their pharmaceutical prices in order to equalize their support for research and

development across industrialized countries.

In order to implement this approach, the U.S. Trade Representative would need to have a target price level and encourage each

country to pay this target price. This raises two important issues.

First, there would need to be an international standard to negotiate pharmaceutical prices. Two potential metrics that have been

used in other countries are a desired level of research and development or a desired profit margin. What metric would be used to visualize the appropriate price?

Second of all, I am not sure what price level would be used

through the negotiation, what would be determined by the negotiation. We are the outlier. We are paying twice as much as these

other countries.

As part of a trade negotiation, would the U.S. be willing to accept

a lower price for pharmaceuticals if international standards were

adopted? I doubt it. In any case, my bottom line is that the trade

negotiating strategy strikes me as pharmaceutical price fixing on

an international scale.

Another approach is to rely on the free market. In my economics

classes at Johns Hopkins, I teach about the free market and how

it works best for certain goods and services. However, one situation

where the free market does not work is when there is only one seller. This is known as a monopoly.

Pharmaceutical companies are given patents on brand-name

drugs. There is a legitimate reason for them to receive a patent,

perhaps the most important being that they foster the pharmaceutical research and development.

However, because of this patent protection and the resulting monopoly for that specific drug, it is misleading to state that the

brand-name drugs in the United States are purchased in a free

market environment. Monopolies just do not respond to the market

forces.

Because pharmaceutical companies are given a governmentgranted monopoly for a certain drug, they have no reason to lower

their prices in the United States, even if these prices were raised

in other countries.

Generic drugs are different. There is competition for generic

drugs because other manufacturers can compete on the basis of

price and quality. It is not surprising, therefore, that generic drugs

are often much less expensive in the U.S. than other countries.

My fifth point, is that economic theories suggest, therefore, that

even if the U.S. Trade Representative were able to negotiate lower

44

prices in other countries, the pharmaceutical companies would still

maintain their prices in the U.S. for these brand-name drugs.

My sixth, and final, point is that the U.S. should use prices in

these other countries as the benchmark for the prices it pays for

pharmaceuticals, especially in the Medicare program.

I would advocate, in fact, the approach that the Bush administration used in response to the anthrax scare. The Bush administration needed to purchase 100 million capsules of Cipro, and Tommy

Thompson negotiated, on behalf of the government, a reduction

from $1.77 to 95 cents.

Does it matter that the U.S. pays higher prices for pharmaceuticals? A basic tenet of economics, is opportunity costs. If we pay

higher prices for pharmaceuticals, we get beneficial pharmaceutical

research and development. However, there are trade-offs.

For example, lower prices for pharmaceuticals would allow the

Medicare program to eliminate the donut hole in the Medicare drug

benefit.

My written testimony shows how 50 percent lower prices for

pharmaceuticals would allow the Medicare program to spend exactly the same amount of money and eliminate the donut hole, and

this 50 percent is what the other countries are paying. So, Congress has a real choice: higher pharmaceutical prices and more research and development, or the elimination of the donut hole in the

Medicare program.

Thank you, Mr. Chairman and members of the committee for the

opportunity to testify this morning. I would be happy to answer

any questions.

[The prepared statement of Mr. Anderson appears in the appendix.]

Senator THOMAS. Thank you both very much.

Mr. Calfee, do you think trade negotiations can have some impact on the costs in the United States?

Mr. CALFEE. I think that negotiations could have some impact on

improving the R&D environment. Whether that will have a direct

impact on prices in the U.S., I think, is fairly questionable.

I think in the short run, that what several people have said is

basically correct, that if they relax the price controls in these other

nations, if they provide greater rewards to R&D, that would not

have much of a short-run effect on prices within the United States.

It might have a pretty strong effect down the road because it

means that new drugs would arrive more rapidly and you get more

competition. In the short run, however, I am not sure we are going

to get much price relief from dealing with the other nations.

Senator THOMAS. So you do not think the idea that we offset

R&D by having higher prices here, but pick up a market by having

lower prices somewhere else is the case.

Mr. CALFEE. No. I think what is happening, is that R&D is impeded. It is slowed down by the fact that the other nations are

avoiding paying more for new drugs.

Now, when you slow down R&D you get a lot of bad things happening. Especially, you do not get some new drugs you otherwise

might get, but also you get less competition in the markets. So, you

would get somewhat more competition, but it takes a little while

for that to develop.

45

Senator THOMAS. Mr. Anderson, I get the impression that you believe the price setting by other countries would be something we

ought to do in the United States.

Mr. ANDERSON. It is something that we ought to consider, yes.

I think that we need to know how much we pay for different drugs

that are therapeutically equivalent so that we can decide and give

to the consumer the information about what are therapeutically

equivalent drugs. That is what Senator Lincoln and Senator

Graham were asking for, and I think that we should do, yes.

Senator THOMAS. Information is quite different than setting

price.

Mr. ANDERSON. It is. And I think ultimately for the Medicare

program, you have to look at the trade-offs. For me, the trade-off

is elimination of the entire donut hole and lower pharmaceutical

prices. Personally, I would rather have no donut hole and lower

pharmaceutical prices, but that is the choice that you have to

make.

Senator THOMAS. All right.

Well, let me ask the two of you, just in a short sentence or two,

what would you do, if you were in charge of the world, about the

costs of pharmaceuticals in the United States?

Mr. CALFEE. I think that there are some things the FDA could

do that might help to some extent. There are some drug approvals

that take longer than they should. Manufacturer regulations, I

think, have become quite inefficient. I think that would have some

short-run effect on pharmaceuticals. I think that liability reform

would help with pharmaceutical prices.

Beyond that, I think that what we are really counting on is the

development of new drugs and this huge wave of patent expirations

that we are in the middle of, and the arrival of new generic drugs.

In almost every therapeutic category you can mention, we have

either had, or are about to have, major blockbuster drugs going generic. There is a generic version of a statin drug.

There are generics in some of the basic heart medication drugs,

cancer drugs. Zocor is going to be going generic in a year or two.

We are going to see a lot of prices going down, as well as new drug

prices going up.

Senator THOMAS. Mr. Anderson?

Mr. ANDERSON. Essentially what we have done, is given these

drug companies, for brand-name drugs, a monopoly. The way you

handle monopolies is to try to control the prices through some type

of rate setting. We have a whole variety of different rate setting

systems to deal with monopolies, and I think we should explore

those various options.

Senator THOMAS. Do you not think doing away with what you

call a monopoly would take away the incentive to create new

drugs?

Mr. ANDERSON. I think I would not want to get rid of patent protection at all. So, that is essentially what gives you the ability to

create a monopoly.

Senator THOMAS. It sounds a little like you are contradicting

yourself there. That is a monopoly.

Mr. ANDERSON. Essentially you have created a monopoly to develop research and development. What we are talking about is,

46

what is the rate of return that you should receive? It is no different

than if you deal with a utility like an electrical company. They

have a monopoly, so the question is, what is the rate of return on

their capital that is appropriate?

Senator THOMAS. If you have government control, like utilities.

Mr. ANDERSON. And when I worked in the Reagan administration I had an opportunity to help develop the Medicare prospective

payment system, and that is essentially a rate setting mechanism

that we developed.

Senator THOMAS. Senator Breaux?

Senator BREAUX. Thank you very much. I thank the panel members as well. It was really interesting. The one experience that we

have had in this country in fixing pharmaceutical prices is in Part

B under Medicare, where we fixed the price of the reimbursement

rate to oncologists for cancer drugs.

We were over-paying them by a couple of hundred million dollars

every year, so the last Medicare bill had to say, look, we have tried

to fix prices for cancer drugs and we have screwed it up so bad,

we are going to have to eliminate it, because we were over-paying

them. We were not under-paying them, we were over-paying them.

It was just a great example of how a price fixing mechanism at the

government level does not work.

It is interesting, I think, Mr. Calfee. I was looking at your statement. Of course, even without price fixing in lower income countries, the price of our product manufactured here is going to sell

for less in that country than it does in this country.

We sell cars that are made in the United States cheaper in Canada than we sell them in the United States. Why? Not because of

price controls, but because the per capita income in Canada is substantially less than it is in the United States.

Open heart surgery in Mexico is probably a lot cheaper than it

is in Houston or in New Orleans, or anywhere else in this country

because that is what the market is going to bear.

The problem becomes when it is also an additional fixed price because of government price controls that I think I am very concerned about.

Can you give me any concept as to why generics are so much

more expensive in Europe, for instance, than they are in this country?

Mr. CALFEE. Well, most of those countries have not passed anything like the Hatch-Waxman Act here. The Hatch-Waxman Act

gives a pretty smooth, open path for creating a generic drug and

getting it on the market and manufacturing it. You can have several different manufacturers.

In some of the European countries, it is not that way. We do not

have a law that says this is what you are allowed to do, these are

the procedures you can follow, this is how you get a generic on the

market. The result is that, in some cases, it is hard to enter the

market.

It is intentionally made hard to enter the market by some of

these countries because they want to preserve either a very small

number of domestic generic firms or some of their domestic firms

still have branded drugs in the market where they do not want to

get generic competition.

47

So if those countries were to enact something like we have in the

Hatch-Waxman Act and remove price controls, they would get

cheap drugs very rapidly. One or two countries have moved in that

direction, such as Canada and Britain, and they are getting a good

generic market.

Senator BREAUX. Mr. Anderson, one of your recommendations,

the fifth one, is that the United States should use prices in other

countries as a benchmark price for the price we charge our consumers in this country.

Do you limit that to pharmaceuticals or would you say that the

benchmark price of what we charge products in this country should

be based on another country’s price, even though that country may

have a per capita income of 50 or 100 percent less than the United

States?

I mean, we could find some lesser developed countries that the

price of the product is really very, very low. Should that become

the benchmark price of what we sell that product for in this country?

Mr. ANDERSON. Well, I think you have to look at it market by

market. So if you are talking about hospitals or you are talking

about physician service, most of the expenditures are for labor. So

for a country that has very low labor costs, I would not expect the

U.S. to have similar prices to those countries.

However, if we are talking a product like pharmaceuticals which

is a product that you can buy, or computers, or something like that,

I would expect that the United States would, in fact, pay similar

prices.

Senator BREAUX. Why would we set our benchmark price on a

country that has a 50 percent lower per capita income? How can

we say that, because their per capita income is so much lower than

the United States’, that the price of that product in that country

should be the benchmark for the price in the United States when

their per capita income is half of what our country’s is?

Mr. ANDERSON. I think we could set it up so that it is similar

to countries like Canada, like the U.K., like Germany, like Luxembourg, which have similar levels of income to us. If we want to pay

20 percent more to subsidize pharmaceutical research, that is fine

with me. The question is, why should we be paying 100 percent

more? Our incomes are not 100 percent higher than those other

countries’.

Senator BREAUX. Well, why not try to get them to allow a market

price to occur within their boundaries based on what their market

would charge as opposed to what the government says it should

charge?

Mr. ANDERSON. Well, I think when you do not have a monopoly—

you have essentially given these countries a monopoly when we

have given them a patent to sell drugs for a period of time—there

is no alternative. If you have a problem with low blood levels, red

blood cells, the only choice that you have got is Epo. It is a single

monopoly and there is one company that sells it, and that is

Genentech.

So, they have a monopoly to sell that product, and they do—and

any economist would tell you should—sell it at the highest price

48

they could possibly get it in a free market. So, the only way to negotiate with that is to have an equally powerful purchaser.

Senator BREAUX. My time is up.

Senator THOMAS. Thank you.

Senator Santorum?

Senator SANTORUM. To liken a patent to monopoly, I think,

misses what Senator Thomas suggested, which is, we have patents

to encourage people to develop. If you are saying that we are going

to give you a patent but the patent does not mean anything, then

I can guarantee you, I do not know of anybody who is going to be

applying for patents any time soon to create new medicines. But

you said very clearly that that is all right with you, as long as you

get maximum prescription drug costs covered.

I think that is a legitimate point to make, but I think you need

to make it a little bit more explicitly than you have. You are willing to sacrifice a lot of new drugs and cures in the future to have

cheap drugs today. If that is your point, I accept that point.

I think it is a legitimate point to make, and I think there are

probably people here on the panel that agree with you. But I think

couching a lot of terms that might not be as obvious to folks who

are listening is not necessarily a clear statement of your position.

But I think I have stated it clearly. Is it not?

Mr. ANDERSON. Yes. I think you also could get more research and

development through expansion of the NIH. The NIH is a major research and development activity.

Senator SANTORUM. That is what you were talking about. You

suggested earlier that other countries spend more money on R&D

than the United States, but you are suggesting that countries

spend more, not drug companies in those countries. Right?

Mr. ANDERSON. Drug companies in those countries spend more

money, according to the data from the OECD, per capita—not total,

but per capita.

Senator SANTORUM. Oh. Per capita.

Mr. ANDERSON. So it would not be fair for Sweden to spend more

than the United States given that they have got about 10 million

and we have 280 million. But on a per capita basis, they spend

more. They spend about $100 per person, and we spend $46 a person on pharmaceutical R&D.

Senator SANTORUM. Again, I am not too sure that is a relevant

comparison. It all depends on whether you happen to have a large

pharmaceutical plant in your country, and whether one was started

there. Obviously, you have consolidations and you have plants moving to and fro.

So, to pick out one of the few countries left in Europe, as you

mentioned, just a handful that actually still have some sort of

pharmaceutical research, maybe a better comparison would be to

see what the EU spends versus what the United States spends,

and take something with a similar market instead of taking a

small country that may have one large research facility that skews

the whole equation. So, I am not too sure that is a fair comparison.

I will ask you that question, for the record, since I assume you

do not have the answer as to what the EU spends per capita versus

the United States.

Mr. ANDERSON. I do have, on specific countries.

49

Senator SANTORUM. I understand that. But if you could give me,

for the record, what the total EU spends per capita versus the

United States, that would be helpful to me.

Mr. ANDERSON. Sure.

[The information appears in the appendix.]

Senator SANTORUM. Mr. Calfee, you mentioned that compulsory

licensing was still a problem. If you heard the testimony from before, they suggest that compulsory licensing is no longer a problem.

Who is telling the truth here?

Mr. CALFEE. What I was referring to, is the fact that, under the

TRIPs agreement, compulsory licensing is still lurking in the background for so-called medical emergencies. People in the industry

tell me that they fear that if they give some of these nations an

ultimatum and say, we are not going to sell at the price that you

specify, we are willing to sell at a higher price but not the price

you specify, that at some point some of these nations could say, if

that happens, we will declare a national emergency and we will engage in compulsory licensing. It has not happened. It is not clear

that they could pursue that under WTO rules, but no one knows.

All I am suggesting, is that at some point these nations might

say——

Senator SANTORUM. Those laws are still on the books in these

countries, in other words.

Mr. CALFEE. The Canadian law is still on the books, the compulsory licensing laws. All I am suggesting is that they simply say explicitly, when we are negotiating prices, we will never resort to

compulsory licensing in order to extort lower prices.

Senator SANTORUM. And they have not done that.

Mr. CALFEE. They have not done that.

Senator SANTORUM. I thought I read something around the time

of the anthrax scare that Canada actually was threatening compulsory licensing with respect to Cipro.

Mr. CALFEE. I believe they did, and then they retracted that

threat. But I believe they did do that.

Senator SANTORUM. So it is still a live threat.

Mr. CALFEE. Yes.

Senator SANTORUM. All right. Thank you, Mr. Chairman.

Senator THOMAS. Senator Kyl?

Senator KYL. Thank you. I appreciate both of you being here to

testify.

When I went to Australia and New Zealand, one of the first

things I had to dispel was that I was there as a representative of

the pharmaceutical companies. I want to make it very clear, as a

predicate to my question, that my concern is the health and wellbeing of American citizens, health care consumers, as well as people in other countries.

My motivation for being involved in this issue is to ensure that

the best mechanism that we have for inventing and getting to market these new lifesaving drugs is preserved and protected as much

as possible, not just for us here in the United States, but for people

in other countries as well.

Of course, the means by which that research occurs is a combination of government support. We have doubled, we have more than

50

doubled, the NIH funding. There is not any other part of the government where we have done that much increase.

I think that is great, because I think that, other than freedom,

Americans primarily are concerned about their health care. Just

ask anybody who has had a sudden illness in the family. They drop

everything else and they will do anything to return their family

member to health. It is the most important thing to us.

That being the case, I supported the Medicare bill, which puts

a whole lot of money into availability of prescription drugs, with a

lot of mechanisms to try to reduce the price of those drugs as much

as possible.

But I see another area where we have got a problem, and that

is that the American consumer is having to carry most of the burden of the research and development of the production of these new

drugs.

If that continues to happen, we will follow the lead of these other

countries who have found it politically impossible to charge what

the drugs really cost, so they fix the prices, number one, then they

subsidize that, number two.

And you have already seen the hue and cry here in America to

follow suit to do something to reduce the cost of drugs, including

importation and price fixing. of course, there is no free lunch.

That is certainly the case with the development of these innovative, very expensive to develop, new products. So, somebody has to

pay for it, and fixing prices makes it impossible. As you acknowledged, there is a trade-off there.

What I would suggest, is that we ought to be primarily concerned, and our number-one value here ought to be the highest

quality medicine that we can possibly provide at a cost that is acceptable to people.

First of all, that assumes people should have a choice in the matter, that there just should not be a single payor government system

that makes that decision for them, either as a specific matter or

as a matter of pricing, and, second, that there be some choices involved, which implies competition.

Now, what I found in looking abroad was the beginnings of a rationing system. It is just beginning, but it is taking some countries

far longer than the United States to get certain new drugs to market.

It is impossible for some of these countries to pay the subsidized

costs of some of the brand-new, more expensive drugs. As a result,

they are not making them available to their citizens.

So, I want to ask a couple of questions in regard to that. One has

to do with the new report by the Bain Company, which you may

be familiar with, but another has to do with the Business Week article about a year ago which pointed out that, with regard to Europe, there is this lengthy listing pricing process, as a result of

which, the article concluded, ‘‘European consumers are heading towards second-class citizenship when it comes to access medicines.

For example, in France, as many as 60,000 people have multiple

sclerosis. An estimated 2,000 new cases are reported each year, yet

less than half of the French patients diagnosed with MS are treated with life-saving medicines.’’

51

So, it is not just American consumers, but people abroad that

might be suffering under the policies of their government. I would

like to ask you to comment on it.

By the way, are either of you familiar with the Bain Company

report? If not, I will just submit a question for the record on that.

Senator KYL. Mr. Calfee, let me start with you.

Mr. CALFEE. I have read a summary of the Bain report. In fact,

I have read several summaries; I think they have marketed that

report in several venues. But it does look like a very useful report.

I do not think there is any doubt that European patients are beginning to lose out on some of the new drugs, that the new drugs

are arriving more slowly.

I think that in some cases the reason it takes so long to negotiate

a price is not because the two sides are having trouble agreeing on

things, but rather that the health authorities are dragging their

feet because they want to wait as long as possible before they pay

for a new therapy.

I would emphasize that when we talk about a trade-off between

getting new drugs or lower prices for the drugs that we already

have, we have to really beware in moving too far in the direction

of lowering the prices and waiting for new drugs.

I mean, the Europeans are showing us that that wait can be

quite some time. It will be a really, really long time if it turns out

that the U.S. is no longer supporting new drug development.

I think that we ought to bear in mind how rapidly drugs are becoming generic, of the extraordinary promise of drug development

that is now under way, and if we want to reduce prices, we ought

to reduce prices for people who are relatively poor rather than for

everyone, and make sure that R&D continues to flow. I think the

Bain report has a lot of interesting comments to make about the

trade-offs between these things.

Mr. ANDERSON. As a professor at Johns Hopkins University, research and development is our number-one product. So, I am absolutely in favor of research and development, as much as we can afford.

Senator Smith mentioned a Commonwealth Fund report, and let

me highlight the results of that. It was a survey done in 2001, and

it asked people in the U.K., Canada, Australia, New Zealand, and

the U.S. if they could not fill a prescription due to cost in the last

12 months.

What they found, was that 26 percent of Americans said that

they could not fill a prescription due to costs in the last 12 months;

Australia, 19 percent; New Zealand, 15 percent; Canada, 13 percent; the U.K., 7 percent. So, yes, we spend twice as much. We get

a lot more R&D. But our citizens are the ones who may be suffering. They are the ones who are having difficulty filling the prescription drugs.

Senator KYL. Yes. If we do not end up paying the cost by imposing a system of price controls on this country, they are not going

to be available to anybody at any cost.

Senator THOMAS. All right. Gentlemen, thank you very much. I

think this has been very interesting. One of the things that has not

been mentioned is the over-utilization of drugs. We might take a

look at that one of these days as well.

52

There may be some questions submitted to you in writing during

the next few days. Thank you very much.

The committee is adjourned.

[Whereupon, at 12:35 p.m., the hearing was concluded.]

(53)

A P P E N D I X

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

PREPARED STATEMENT OF GRANT D. ALDONAS

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

RESPONSE TO A QUESTION FROM SENATOR GRASSLEY

Question 1. I was disturbed by a recent article published in the April 27th edition

of The Washington Post in which it was alleged that the Administration has not

been effectively enforcing international trade agreements. As Chairman of the Finance Committee I am deeply concerned about effective enforcement of our international trade agreements.

I have attached the article, along with the report and speech upon which the article is based, for your review. Is the article and the material upon which it is based

accurate? If not, please describe which aspects of these materials are inaccurate.

Also, please outline what steps the Administration has taken and is taking to effectively enforce our international trade agreements.

Answer. This Administration is strongly committed to ensuring that our trading

partners fully comply with their trade agreements with us, and that our businesses,

workers, and farmers get the full benefits of the agreements we negotiate on their

behalf. To this end, the Commerce Department participates in the interagency effort

to actively monitor and enforce foreign country compliance with our international

trade agreements. Secretary of Commerce Donald Evans has emphasized that monitoring and compliance are the highest priority for all units within the International

Trade Administration.

We seek to resolve trade barriers before they become formal disputes. The scope

of the Administration’s enforcement activities, therefore, extends well beyond the

number of cases brought before the WTO or NAFTA tribunals. While formal dispute

settlement is sometimes the only way to ensure that trade commitments to the

United States are upheld, the most timely and effective way to achieve enforcement

goals is through other means. In fact, the vast majority of enforcement efforts are

brought to successful resolution without the need to resort to formal litigation.

A variety of mechanisms are employed to actively seek out compliance problems

and resolve them before they become disputes. Commerce, USTR, and the various

trade agencies and offices work to consult and negotiate solutions at the most effective level, applying numerous incentives and disincentives to persuade our trading

partners of the benefits of compliance with their trade obligations.

A good example of the value of multi-pronged enforcement efforts is the Administration’s recent success in assuring that China is meeting its WTO commitments.

Given the number of pressing bilateral issues this year, Secretary of Commerce

Evans and U.S. Trade Representative Zoellick co-chaired this year’s Joint Commission on Commerce and Trade, and Secretary of Agriculture Veneman also participated. In the course of these April 2004 meetings, the Administration was able to

resolve seven potential WTO cases involving high-technology products, agriculture,

and intellectual property protection that will benefit U.S. manufacturers, high-tech

workers and farmers.

We also participate in negotiating new agreements such as free trade agreements

and Commerce brings to the table experience in working with business and using

the negotiations to resolve problems we know about in particular markets. For example, an issue involving Australian standards on medical products was successfully resolved by keeping an open dialogue with Australia during FTA negotiations.

At Commerce, a vital aspect of our compliance programs is outreach, to let U.S.

exporters know that the government can help address many of the problems they

face in foreign markets. The Department uses as many government and private

sources as possible as ‘‘nets’’ to actively search for problems. The Department’s

Trade Compliance Center (TCC) actively searches for instances in which foreign

countries are not living up to their trade obligations, and maintains the Department’s ‘‘Trade Complaint Hotline,’’ www.export.gov/tcc/hotline, where U.S. businesses can register their complaints online. The TCC On-Line website, also at

www.export.gov/tcc, is a free service that provides the business community with

proven tools to maximize export opportunities.

The TCC also coordinates our Compliance Liaison Program, which is a public/private partnership of trade associations, Capitol Hill staff, state level counterparts,

and local business export councils to facilitate communication and prompt action on

compliance issues. Compliance Liaisons work with the TCC to refer constituent

market access or compliance problems.

Ensuring our trade rights requires systematic follow-up, and we are making every

effort to do so. Each trade agreement is assigned a Designated Monitoring Officer

(DMO), whose responsibility is to actively monitor compliance with the assigned

agreement. We have put in place special monitoring programs for China, Korea and

Japan and placed four Compliance Officers on staff at our embassies in China,

Japan and at our mission to the European Union in Brussels. We also learn about

potential problems from all different parts of the Department, including a worldwide

71

network of 150 posts in 78 countries and 107 Export Assistance Centers throughout

the United States, our industry and country desks, and trade agreement specialists.

The Office of Textiles and Apparel (OTEXA) works to ensure that all agreements

include tough rules of origin and anti-circumvention language. OTEXA, through the

Committee for the Implementation of Textile Agreements (CITA), is responsible for

penalizing factories and countries for illegal transshipment. CITA cooperates with

U.S. Customs and Border Protection (CBP) on enforcement efforts. CITA also takes

textile and apparel safeguard actions, when appropriate, under the World Trade Organization (WTO) Agreement on Textiles and Clothing (ATC) and the North American Free Trade Agreement.

Building upon its monitoring efforts, the Administration’s enforcement strategy

seeks to maximize the benefits of our trade agreements. When the Department receives a trade complaint, an expert team is formed to investigate and analyze the

problem. The compliance team examines the provisions of relevant trade agreements, consults with appropriate interagency staff, and develops a compliance strategy to resolve the issue. Our compliance program employs an active case management system to track and investigate compliance complaints. This database is available to domestic Commercial Service offices and overseas posts.

Compliance teams seek to develop convincing positions aimed at persuading foreign countries to comply with their obligations, short of formal dispute settlement.

Whenever possible, we try to prevent trade agreement compliance violations before

they start and attempt to resolve disputes by persuading parties to come into compliance voluntarily.

Our approach has had considerable success, many benefiting small- and mediumsized companies. Some examples of successes include: • Following the April 2004 meeting of the U.S.-China Joint Commission on Commerce and Trade (JCCT), Chinese officials suspended implementation of its

mandatory wireless encryption standard indefinitely, which had raised serious

questions of national treatment as well as technology transfer concerns. China

agreed to revise this standard and participate in international wireless

encryption standard bodies. • Compliance staff in Washington and China worked with a major U.S. software

company to ensure fair and WTO compliant treatment by Chinese authorities

in its valuation of software. After the Commerce team arranged for the company

to meet with China customs and explain its business in November 2003, the

company was not required to pay $7 million in supplemental duties. • Due to U.S. government efforts, China changed its end use certification requirement for certain information technology products and joined the WTO Information Technology Agreement. Over $3 million in exports were at stake. • U.S. officials raised the issue of India’s high textile tariffs and additional taxes,

which raised transparency and potential national treatment concerns, with Indian officials at several high-level meetings. Subsequently, on January 9, 2004,

India reduced the customs tariff on imports of most non-agricultural goods from

25 to 20 percent and eliminated a 4 percent Special Additional Duty. Approximately $500 million in potential U.S. textile exports were affected by the taxes.

• Following U.S. government advocacy, President Fox of Mexico signed a decree

that requires the Ministry of Health to check with the Intellectual Property Institute (IMPI) for valid patents before granting marketing approval for pharmaceuticals. The U.S. pharmaceutical industry had reported that Mexican officials

were granting marketing approval of pharmaceutical products without checking

for valid patents on the products, thereby costing U.S. pharmaceutical companies around $10 million.

• In January 2004, Egypt lowered rates on certain textile and apparel items to

the bound rates Egypt accepted during the Uruguay Round negotiations. This

action followed an Administration request for formal consultations with Egypt

at the WTO in Geneva in December 2003, as well as various meetings, including between former Commerce Deputy Secretary Bodman and Egyptian officials. . As much as $30 million in U.S. exports could have been at stake.

• As a result of work led by Commerce, Bangladesh Customs no longer subjects

a North Carolina company to unfair customs valuation treatment. The company

exports about $2 million worth of tire cord fabric to Bangladesh per year.

• As a result of USG advocacy, the Tanzanian government adopted many of the

textile regulation revisions requested by U.S. industry. The United States exports about $7 million of used garments to Tanzania per year.

At Commerce, we are looking for new ways to ensure compliance with our trade

agreements and help U.S. exporters. ITA is creating a new Investigations and Compliance Unit to ensure compliance with our trade agreements and combat violators

of IPR around the world. An individual with a prosecutorial background will lead

72

the unit, assisted by a team of experts. The new unit will pursue perpetrators along

the entire chain, including manufacturers and importers, and will exert pressure on

countries where problems are found. It will work with U.S. industry and coordinate

with other U.S. agencies, including PTO, to investigate allegations of piracy and

help develop trade compliance cases.

We are also working to form and launch the Unfair Trade Practices Task Force.

This task force will enhance and more effectively focus existing Department of Commerce resources to identify and challenge a wide range of unfair foreign government

practices. By identifying and rooting out distortive trade practices, whether through

advocacy, negotiation, or legal action, the Administration seeks to free U.S. firms

and workers from unfair competition.

The vast majority of U.S. compliance efforts are conducted successfully by pressing foreign governments directly through a variety of interagency channels. When

necessary, however, we work with USTR to build a strong case for formal dispute

settlement actions. For example, the Administration was not confident that repeated

efforts to urge China to remove a discriminatory tax on U.S. semi-conductors were

bearing fruit. Accordingly, the United States filed the first-ever WTO case against

China. As a result of consultations conducted under dispute settlement procedures,

the United States and China agreed on a resolution to the dispute that will ensure

full national treatment for U.S. integrated circuits in China, the world’s fastest

growing semiconductor market and an export market worth over $2 billion to American manufacturers. Whenever possible the Administration endeavors to reach favorable settlements that eliminate foreign violations of our trade agreements without engaging in prolonged litigation. In fact, we have resolved 22 of the cases we’ve

brought at the WTO without litigation.

There are situations, however, when enforcement can only be achieved through

litigation. When such cases arise, the United States has a long record of litigating

both aggressively and successfully. The United States has brought more cases (71)

at the WTO than any other country. Of those proceedings, we’ve won on the core

issues in 22 cases, resolved 22 in our favor without litigation, and did not prevail

on the core issues in only 3 cases. The remaining cases are still in litigation, consultations or otherwise inactive.

It is important to note that fewer cases are currently being brought by all countries in the WTO than in the past. There were just over half as many cases brought

in 2003 (28) than in the peak year of 1997 (46). This reflects both the pent-up demand among all countries to bring cases immediately following establishment of the

WTO and the adoption of the Understanding on Rules and Procedures Governing

the Settlement of Disputes, as well as the successful deterrent effect of formal dispute settlement proceedings. This trend is particularly evident with regard to the

most active members of the WTO in terms of using WTO dispute settlement, the

United States and the European Union. Both have been complainants and respondents in roughly the same number of cases every year.

RESPONSES TO QUESTIONS FROM SENATOR KYL

Question 1. The U.S. is hosting the G-8 Summit this summer. Several members

of Congress strongly believe that the issue of pharmaceutical price controls should

be added to the Summit agenda; that we simply cannot let this opportunity go by

without raising the issue. While I understand that the National Security Council

is charged with developing the agenda for the meeting, will you be able to work with

the NSC to add this issue to the agenda?

Answer. We worked with the NSC and USTR to propose the formation of a G8

working group on life sciences innovation prior to the launch of the June meeting

at Sea Island. Our goal was that, if agreed to, the working group would provide us

with a central focal point for discussions about aspects of our policies that are most

consistent with fostering life sciences innovation, and conversely, those practices

that could stifle life sciences innovation or inhibit the availability of innovative life

sciences goods and services. Unfortunately, the proposal for work on this issue was

not a topic that drew wide support from other members of the G8, which as you

know, operates by consensus. We will continue to look for other international opportunities to raise the importance of promoting market dynamism and fair and effective competition for life sciences goods and services.

Question 2. I am told that Japan continues to unfairly reduce reimbursement for

medical devices based on non-transparent criteria such as foreign average price adjustments, a type of reference pricing. What can the Commerce Department do to

address this problem?

Answer. Commerce will continue to strongly and consistently oppose any unfair

reductions in reimbursement prices for medical devices in Japan by raising our conVerDate 11-MAY-2000 09:51 Feb 23, 2005 Jkt 095484 PO 00000 Frm 00076 Fmt 6601 Sfmt 6621 95083.000 SFINANC2 PsN: SFINANC2
73

cerns in bilateral meetings and letters. This issue is one of our top priorities. In December, Secretary Evans wrote to both the Chief Cabinet Secretary and the Minister

of Health, Labor and Welfare to express concern that Japan would reduce prices for

medical devices in a way that would harm U.S. companies disproportionately. In his

letters, Secretary Evans specifically called attention to the Foreign Price Adjustment rule that you mentioned. Secretary Evans also raised this issue in letters to

Japanese Government officials in November and in meetings with them in October

2003 in Tokyo. Assistant Secretary for Market Access and Compliance William H.

Lash, III wrote to his Health Ministry counterpart in October to reiterate our opposition to the Foreign Price Adjustment rule. This was followed in December 2003

by a similar letter to the Ministry of Foreign Affairs by Deputy USTR Josette Shiner. We will continue such efforts at the highest levels as well as at the working level

in the U.S.-Japan Medical Devices and Pharmaceuticals Working Group. The Commerce Department chairs this Working Group, which is part of the USTR-led Regulatory Reform and Competition Policy Initiative under the U.S.-Japan Economic

Partnership for Growth (agreed to by President Bush and Prime Minister Koizumi

in 2001). Commerce expressed opposition to the Foreign Price Adjustment rule at

the most recent Working Group meeting in May in Tokyo. We plan to voice our concerns in the coming year during regular meetings of the Working Group under the

Regulatory Reform and Competition Policy Initiative.

RESPONSES TO QUESTIONS FROM SENATOR GRAHAM

Question 1. The March 1, 2004 Draft of Annex 2-C of the Australia Free Trade

Agreement covers pharmaceuticals. The document applies to federal healthcare programs in that it includes the terms ‘‘federal healthcare authorities’’, ‘‘federal

healthcare programs’’, and ‘‘federal healthcare agencies’’. I would like clarification

as to whether there are any existing or future U.S. programs that could be subject

to the Annex. Please clarify for me which, if any U.S. agencies or programs that

provide or arrange for coverage of prescription drugs (including, but not limited to

Medicare, Medicaid, VA, DOD, or any state operated pharmaceutical assistance program) would be exempted from the Annex through the footnote relating to procurement and which would be subject to the Annex. For example, the Medicare program

currently covers many drugs under Part B of the program. The Medicare program

determines which drugs are covered, and the reimbursement level, but does not actually procure the drugs. It seems to me that Medicare’s decisions regarding Part

B drugs would thus be subject to the Annex. Is that correct? I would like an answer

that responds specifically to each of the federal programs providing or reimbursing

for pharmaceuticals, directly or indirectly, as well as for state programs that are

wholly state financed and operated and those that are partially federally financed.

Please reference the specific language in the draft agreement that clarifies which

policy—the annex or the procurement chapter—applies to which agencies, programs,

or activities.

Could any future U.S. federal program that uses federal ceiling prices, Federal

Supply Schedule pricing requirements, or any federally-determined reimbursement

system, or any state pharmaceutical assistance program including those that are

partially financed through federal dollars be subject to the Annex? Please respond

to this question both in terms of programs that would have the federal government

actually taking ownership of the drugs, as well as any program in which the federal

government wholly or partially made payment for the drugs, but did not actually

possess the drugs at any time.

Answer. Procurement of pharmaceutical products by VA and DoD is excluded from

operation of the Annex by footnote 1. Procurement of pharmaceutical products by

state Medicaid agencies is excluded from the operation of the Annex because coverage and reimbursement decisions are made by state officials, not by Federal

health authorities. The Annex may apply to certain reimbursement decisions

concerningpharmaceuticals under Part B, and current Medicare practice is consistent with the Annex. As it has been established, Medicare, Part D, which will

take effect in 2006, will not be covered by the Annex since coverage and payment

decisions are not directly made by the Federal health authorities.

The applicability of the Annex to future programs would depend on how they were

structured. If the Federal government procured the drugs, the Annex would not

apply (footnote 1). If private parties or state officials made the coverage and payment decisions, the Annex would not apply. Federal matching payments to a state

for the purchase of a pharmaceutical product does not render the Annex applicable.

Question 2. Please clarify the terms ‘‘pharmaceutical formulary development and

management’’ (which appear to be subject to Chapter 15) versus ‘‘decisions regarding payment and coverage’’ or ‘‘procedures for listing of new pharmaceuticals or indiVerDate 11-MAY-2000 09:51 Feb 23, 2005 Jkt 095484 PO 00000 Frm 00077 Fmt 6601 Sfmt 6621 95083.000 SFINANC2 PsN: SFINANC2
74

cations or for setting the amount of reimbursement for pharmaceuticals’’ (which appears to be subject to Annex 2-C).

Answer. The Annex and accompanying documents do not contain a definition of

the terms referred to. However, the development of a formulary is generally a part

of the decisions relating to the listing of pharmaceuticals or indications for reimbursement purposes. Formulary management also would include promulgating and

implementing usage guidelines, negotiating contracts and incentive agreements, actively managing utilization, and other related activities.

Question 3. Could Annex 2-C be interpreted to apply when VA uses the formulary

to make decisions regarding payment and coverage, even though actual management and development of the formulary would be subject to Chapter 15 and not

Annex 2-C?

Answer. When the VA uses a formulary to make decisions regarding payment and

coverage, this is considered to be part of government procurement by the first sentence of footnote 1 and thus excluded from the operation of the Annex, but subject

to Chapter 15 on Government Procurement.

RESPONSES TO QUESTIONS FROM SENATOR LINCOLN

Question 1. Is there any evidence that prices in countries like Canada and Australia (who use their governments to negotiate prices) are lower than what the private sector in the United States can negotiate?

Answer. According to PhRMA, the U.S. pays more for pharmaceuticals on a per

unit basis than several countries with national health programs, including Canada,

Italy, France, the UK, Sweden, Germany and Switzerland. According to John Calfee

of the American Enterprise Institute, whose testimony you heard earlier, America’s

$126 billion annual expenditure on non-government prescription drugs is far larger

than the entire pharmaceutical market in any single European nation (Germany’s

being the largest at $20 billion) or the entire Japanese market, the second largest

in the world at $53 billion.

Question 2. The international market for pharmaceuticals and the determination

of prices across countries in the global market are influenced by a number of factors.

One key factor is the large cost of R&D, which is global in nature. R&D expenditures remain the same regardless of how many consumers or countries are served

by the product. Because these costs cannot be easily attributed to any particular

consumer or country, the pharmaceutical industry faces the problem of how to assign costs to the different countries they serve. What can we do about this? Should

we enter into a discussion with countries with high R&D expenditures to make drug

prices more equitable or work together to reduce costs and provide incentives for

developing new medicines? Do we need new global accounting methods to assign

costs?

Answer. It is not clear that drug prices in the United States are directly affected

by prices in other markets. Academic literature as well as testimony at the April

27 hearing by non-government experts suggests that higher prices abroad would not

necessarily affect prices in the United States.

The area of most concern appears to be the impact of pricing controls on R&D

and innovation. Industry has strongly maintained that price controls are less conducive to R&D and innovation than a free market system for drug pricing. Certainly,

the figures support that conclusion. The U.S. has been producing new drug substances at sustained rates since 1985, while over the same period output among

Germany, France and the UK has plummeted (Robert Goldberg, Manhattan Institute). The U.S. is the leader in biotechnology, holding 70% of all genetic engineering

patents worldwide, and 72% of all biotech revenues come from U.S. companies

(Goldberg). American citizens have not only benefited from these new medicines,

which target such diseases as cancer, heart disease, and stroke, but have benefited

from the decline in hospitalization costs, fewer missed work days and other savings.

Moreover, since 1990, the pharmaceutical industry has grown twice as fast as the

overall economy. The industry is a significant source of new, highly skilled jobs and

is one of the nation’s largest employers, with approximately 223,000 employees nationwide (PhRMA Industry Profile 2003).

The Administration has been pursuing issues related to market access and intellectual property in our Free Trade Agreements (FTAs) and other negotiations. In

our Australia FTA, we obtained commitments from Australia to ensure greater

transparency and accountability in this drug reimbursement pricing decision process. We are currently considering what additional steps we might take.

Question 3. Will removing international barriers and pursuing market access for

pharmaceuticals result in lower prices for U.S. consumers? Will it help the private

insurance companies in the U.S. negotiate lower prices?

75

Answer. In the near term, increased market access and increased overseas sales

are not likely to impact significantly on prices in the United States. However, a

number of studies point to the connection between revenues, profits, and R&D and

the effects of higher R&D on innovation. Thus, there could be significant benefits

in the longer term with increased competition and more new drugs, which could

lead to significant savings from lower hospitalization costs, fewer missed work days

and other factors.

There are studies that indicate drug prices in a number of developed countries

have been lower than in the United States. Competition in the U.S. market generated by the new Medicare drug discount cards program already has resulted in

reductions off retail prices for both brand-name and generic drugs.

Question 4. How will trade agreements that provide more market access to the

U.S. pharmaceutical industry impact the VA National Formulary, the Medicaid Supplemental Rebate Program, and future attempts to enable Medicare to get the best

prices for drugs?

Answer. USTR has been working closely with the VA, DOD, HHS, FDA and other

relevant agencies to ensure that U.S. trade agreements would not impact the ability

of any of these programs to get the best prices for drugs. The Pharmaceutical Annex

to our FTA with Australia, for example, specifically excludes government procurement of pharmaceutical products, including pharmaceutical formulary development

and management for federal healthcare agencies. Programs that are implemented

at the state level, such as Medicaid programs, are not covered by the Pharmaceutical Annex.

U.S. agencies already comply with the requirements of the Government Procurement Chapter of the Australia FTA because the United States is a party to the

WTO Government Procurement Agreement. However, since Australia is not a signatory to the WTO GPA, the FTA opens new opportunities to both Australian and U.S.

firms.

Question 5. Although many consider pharmaceuticals to be a cost effective tool to

treat and, in some cases, reduce the disabling effects of many health conditions, as

well as possibly reducing the need for hospitalization, many countries are increasingly seeking ways to contain costs related to national consumption of pharmaceuticals. What are we doing in the United States in this regard?

Answer. Pharmaceutical products in the United States are in large part purchased

in a private, competitive market. This provides the best mechanism for balancing

the price and value of each drug to consumers. In recognizing value, the market provides economic incentives for innovation and the development of new drugs. The fact

that drugs are purchased in a competitive market (or the purchases are funded) by

people who have an economic stake in the purchase has led to a number of market

responses that have the effect of lowering drug prices from what they would otherwise would be: Pharmacy benefit managers developed to consolidate purchasing

power and provide services to consumers have reduced prices. The new Medicare

drug discount card is lowering prices through a similar mechanism. And purchases

of drugs under the new Medicare Part D by prescription drug plans will similarly

provide the benefit of aggregated purchasing power.

The United States is unique among industrialized countries in providing both

strong incentives to create new pharmaceutical products and also generating significant cost savings on proven drugs through highly competitive generic markets after

patent expiration. This dual approach has led to generic drugs accounting for a larger proportion of drug purchases (and at lower prices relative to the patented medicines) in the United States than in countries that do not have market-based systems. The United States also has enacted statutes designed to reduce drug prices

for certain purchasers, including the Medicaid rebate program (although competition

often results in prices lower than those that would be possible under the Medicaid

rebate program) and the Federal Supply Schedule for purchases by the Federal government and others who are permitted by statute to buy at the FSS prices (it should

be noted that the FSS relies in large part on negotiated prices in a competitive market).

Question 6. A recent report from the Institute of Medicine reveals that the VA

National Formulary is not more overly restrictive ‘‘than other public or private

formularies.’’ It also ‘‘rarely designates drugs or drug classes as absolutely excluded

or requires prior authorization of drugs as managed care formulary systems frequently do, nor does it impose tiered co-payments as is often the practice in managed care.’’ Also, only 0.4% of veteran complaints could be attributed to the VA Formulary. Do you know how citizens in other countries such as Australia feel about

their national health system’s pricing system? Do they feel that it is fair in ensuring

access to medically-necessary drugs?

76

Answer. You are correct in pointing out the relatively high satisfaction rate among

enrollees of the Veterans Affairs National Formulary (VANF) plan. The point of

VANF and similar strategies is to attempt to ensure fair and rational allocation of

health care resources through a systematic and explicit process on a national scale

and, as you have pointed out, many believe that the program is a success.

It is our understanding that Australians support the national health care system.

However, there are reports that indicate views in Australia differ about the process

for listing and pricing new drugs on the Pharmaceutical Benefits Scheme formulary

and its impact on the ability of Australian citizens to gain timely access to the most

innovative and ‘‘medically-necessary’’ drugs.

Question 7. My understanding of the Australian reference pricing system is that

if a drug is truly innovative, it will be paid for appropriately. How does the Australian reference pricing system ensure that patients have access to innovative

drugs?

Answer. The Australian Government uses a reference pricing system to control

the cost of pharmaceuticals it covers under its Pharmaceutical Benefits Scheme

(PBS). While there is no annual budget limitation on PBS expenditures, Australian

government officials acknowledge that the expected annual cost of each new drug

is a factor in determining PBS listings. Indeed, Australian government studies have

raised concerns about the availability of new drugs or new applications of drugs already on the PBS and have suggested alternative ways of increasing availability of

new drugs to Australian patients.

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

100

101

102

103

104

105

106

107

108

109

110

111

112

113

114

115

116

117

118

119

120

121

122

123

124

125

126

127

128

129

130

131

132

133

134

135

136

137

138

139

140

RESPONSES TO QUESTIONS FROM SENATOR KYL

Question 1. In the seizure of drugs that have been reimported or imported from

other countries to the Unites States, has the FDA tested the quality and substance

of the so-called analogous drugs for their chemical equivalency? If so, what are your

findings and when will they be available to the public?

Answer. The Food and Drug Administration (FDA) does not conduct routine laboratory analyses of products detained at U.S. borders. However, a recent example

described below, in which laboratory analysis of imported drugs was conducted, illustrates FDA’s concerns about the quality of drugs imported by U.S. consumers

from abroad. We also note that recent spot examinations, or ′′blitzes,′′ of foreign

drug shipments to U.S. consumers conducted by FDA and U.S. Customs and Border

Protection revealed that the vast majority of these packages contained illegal, unapproved drugs. Information about these examinations, and about other instances of

problem foreign drugs, such as counterfeit birth control patches that contained no

active ingredient, are posted on FDA’s website.

Within the last six months, FDA has examined two websites having identical web

pages headlined ′′Canadian Generics,′′ which were identified through spam e-mails

sent to consumers. FDA has purchased prescription drugs from both of these sites,

and has found that these drugs and the manner in which they are sold pose potential threats to the health and safety of consumers.

There is at least one Canadian flag on every page of these sites, as well as the

words ′′Canadian Generics.′′ The websites say, ′′Order Canadian to get the biggest

discounts!′′ Both of the URLs from which the orders were placed suggest the sites

are located in, and operated out of, Canada. Despite these representations, however,

we determined there is no evidence that the dispensers of the drugs or the drugs

themselves are Canadian. Theregistrants, technical contacts, and billing contacts for

both websites have addresses in China. The reordering website for both purchases

and its registrant, technical contact, and billingcontact have addresses in Belize.

The drugs were shipped from Texas, with a customer service and return address in

Florida.

FDA purchased drugs described by the website as generic Viagra, generic Lipitor,

and generic Ambien. None of these products, however, has a generic version approved in the U.S. or Canada. Both times, to obtain the drugs, an FDA investigator

posed as a consumer and filled out an on-line questionnaire. The investigator was

never asked to provide a prescription. After each purchase, the drugs arrived packaged in heat-sealed plastic bags within a manila envelope.

Ambien is a controlled substance with a substantial potential for addiction. In addition, for both purchases, FDA’s ′′consumer′′ said in the on-line questionnaire that

he is taking erythromycin: The use of Viagra with erythromycin is contraindicated

and, more importantly, there is a warning on the approved labeling for Lipitor about

concurrent administration of Lipitor with erythromycin. Despite these critical safety

issues, the website operators sent the drugs anyway.

The drugs received from the second purchase were tested in an FDA laboratory.

All three samples failed, using the brand-name manufacturer’s methodology. While

all three samples had some level of active ingredient, the ′′generic′′ Lipitor and

Viagra were found to be subpotent, while the ′′generic′′ Ambien was found to be

superpotent. Two of the three drugs failed the dissolution parameters of the brandname drugs. The third drug passed the dissolution testing, but only because it was

superpotent. Two of the three samples also failed purity testing, while all three

samples failed the USP criteria for content uniformity.

Question 2. There has been considerable discussion about the FDA’s role in guaranteeing the safety of drugs that are imported from countries such as Canada or

Mexico, because of the very high standard that has been set for pharmaceutical

manufacturing, distribution and storage. While I am not suggesting that we move

towards the path of importation, I would like for you to set a framework for the

discussion of how a United States agency, the FDA, would manage from afar the

operations in another country?

Answer. The practical problems associated with ensuring the safety and quality

of drugs imported from foreign pharmacies and wholesalers are substantial, because

FDA and state boards of pharmacy do not have authority over the drug distribution

chain outside the U.S., nor does FDA have the ability to monitor and regulate the

manufacture of drugs intended for markets other than the U.S.

Foreign pharmacies and wholesalers are not subject to FDA or state oversight, not

licensed in the U.S., not subject to review or inspection by U.S. regulatory bodies,

not required to meet U.S. standards for storage and safe handling of drug products,

and not subject to U.S. penalties for failure to comply with Federal or state requirements. The drug distribution system as it exists today is a ′′closed′′ system. Most

141

retail stores, hospitals, and other outlets obtain drugs either directly from the drug

manufacturer or from a small number of large wholesalers. FDA and the states exercise oversight of every step within the chain of commercial distribution, thereby

ensuring a high degree of product potency, purity, and quality.

Moving from the current ′′closed′′ distribution system with relatively few importers to an ′′open-border′′ distribution system would create opportunities for bringing

prescription drug products into the country outside the system of safety and effectiveness monitoring overseen by FDA. It would increase the risk that counterfeit,

misbranded, and adulterated drugs would show up on U.S. drug store shelves and

in American homes.

With respect to manufacturing, FDA drug approvals are manufacturer-specific,

product-specific, and they include many requirements relating to the product, such

as manufacturing location, formulation, source and specifications of active ingredients, processing methods, manufacturing controls, container/closure system, and appearance. The drugs must be produced in FDA inspected facilities. Drugs that are

imported outside of this regulatory process bypass these protections, and no amount

of visual inspection at U.S. borders can provide the same level assurance of safety,

quality and effectiveness as FDA’s drug approval process.

Last year, as part of the Medicare Modernization Act, Congress included language

authorizing a program of drug importation, but only if the Secretary of Health and

Human Services could certify that implementation of the program would not compromise the safety of the U.S. prescription drug supply. At the same time, Congress

directed the Secretary to conduct a comprehensive study and prepare a report to

Congress on whether and how importation could be accomplished in a manner that

assures safety. In February 2004, the Secretary created an intergovernmental task

force, chaired by Surgeon General Richard Carmona, to provide that analysis and

offer findings on how to best address this issue in order to advance the public

health.

The task force includes representatives from FDA, the Centers for Medicare and

Medicaid Services, Customs and Border Protection, and the Drug Enforcement Administration. The panel has brought together a wide variety of stakeholders to discuss the risks, benefits and other key implications of importing drugs into the U.S.

As an integral part of the study process, the task force held a series of six stakeholder meetings to gather information and viewpoints from consumer groups, health

care professionals, health care purchasers, industry representatives and international trade experts. A public docket for comments was opened as well. The task

force is continuing its examination of these issues and working to complete its work

as expeditiously as possible.

Question 3. Given the pharmaceutical industry’s inability to sustain its research

and development in light of international price controls, do you believe we can rely

on the government to perform or sponsor research that would continue the positive

trend we have seen in drug advancement?

Answer. There is no doubt that the pharmaceutical industry has contributed enormously to the development of new and improved medications. While government organizations such as the National Institutes of Health also contribute to this effort,

largely through basic research, the pharmaceutical industry plays a primary role in

using the knowledge gained through research to develop, test and seek regulatory

approval of new drugs.

The Medicare Modernization Act (MMA) enacted last year directed the Administration to prepare a report to Congress on the importation of drugs. The statutory

language and the conference report provide a detailed list of issues to be considered

in the importation study. Among those issues is ′′an assessment of the impact on

research and development—and the associated impact on consumers and patients—

if importation were permitted.′′ We understand that the Department of Commerce

is studying that issue as part of their report under section 1 123 of the MMA, and

that they are also working expeditiously to submit a timely report to Congress.

RESPONSES TO QUESTIONS FROM SENATOR ROCKEFELLER

Question 1. Much has been said about price controls in other countries stifling research and development on new and innovative drugs. Yet, I find it very hard to

believe that raising drug prices in other countries will lead to more research and

development and lower drug prices for Americans. Drug companies could use the increased revenue for additional marketing or they could simply pocket the money as

profit. As a 2001 Families USA report pointed out, U.S. drug companies that market

the 50 most often prescribed drugs to seniors spend almost two-and-one-half times

as much on marketing, advertising, and administration as they spent on research

and development—that’s $45.4 billion on marketing, advertising and administration

142

and only $19.1 billion on research and development. What assurances does the FDA

have that raising drug prices internationally will result in additional research and

development by U.S. drug companies?

Answer. Firms’ activities respond to economic incentives. Prices closer to market

levels would increase the incentive to research and develop new products that could

compete for these higher revenues. The magnitude and extent of drug companies’

response to less stringent government price controls is being addressed in the study

that the Department of Commerce is conducting in response to section 1123 of the

Medicare Modernization Act.

With respect to drug pricing, some of the world’s richest nations are driving the

world’s hardest bargains. Many high-income countries regulate their prices for new

drugs by setting them equal to those in other countries that already have rigid price

controls. As a result, many relatively wealthy countries are moving away from covering any significant part of the costs of pharmaceutical research and development.

They are leaving those costs for others to pay. But new drugs and devices are global

products—products that can and should provide similar benefits for everyone, regardless of where they live. It is important for all countries that benefit from new

medicines to share the cost of developing those products.

Question 2. The new Medicare law effectively prohibits seniors from importing

prescription drugs back into the United States from Canada and other countries at

lower cost. Although the new law contains a provision allowing reimportation from

Canada as long as the Secretary of HHS certifies the safety of such imports, HHS

has long opposed the reimportation of prescription drugs from other countries.

Under both the Clinton and Bush administrations, HHS has refused to implement

reimportation laws, maintaining that it cannot certify the safety of reimported prescription drugs. Can you tell us what it would take to certify the safety of drugs

that are made in America and reimported from other countries?

Answer. The practical problems associated with ensuring the safety and quality

of drugs imported from foreign pharmacies and wholesalers are substantial, because

FDA and state boards of pharmacy do not have authority over the drug distribution

chain outside the U.S., nor does FDA have the ability to monitor and regulate the

manufacture of drugs intended for markets other than the U.S.

Foreign pharmacies and wholesalers are not subject to FDA or state oversight, not

licensed in the U.S., not subject to review or inspection by U.S. regulatory bodies,

not required to meet U.S. standards for storage and safe handling of drug products,

and not subject to U.S. penalties for failure to comply with Federal or state requirements. The drug distribution system as it exists today is a ′′closed′′ system. Most

retail stores, hospitals, and other outlets obtain drugs either directly from the drug

manufacturer or from a small number of large wholesalers. FDA and the states exercise oversight of every step within the chain of commercial distribution, thereby

ensuring a high degree of product potency, purity, and quality.

Moving from the current ′′closed′′ distribution system with relatively few importers to an ′′open-border′′ distribution system would create opportunities for bringing

prescription drug products into the country outside the system of safety and effectiveness monitoring overseen by FDA. It would increase the risk that counterfeit,

misbranded, and adulterated drugs would show up on U.S. drug store shelves and

in American homes.

With respect to manufacturing, FDA drug approvals are manufacturer-specific,

product-specific, and they include many requirements relating to the product, such

as manufacturing location, formulation, source and specifications of active ingredients, processing methods, manufacturing controls, container/closure system, and appearance. The drugs must be produced in FDA inspected facilities. Drugs that are

imported outside of this regulatory process bypass these protections, and no amount

of visual inspection at U.S. borders can provide the same level assurance of safety,

quality and effectiveness as FDA’s drug approval process.

Last year, as part of the MMA, Congress included language authorizing a program of drug importation, but only if the Secretary of Health and Human Services

could certify that implementation of the program would not compromise the safety

of the U.S. prescription drug supply. At the same time, Congress directed the Secretary to conduct a comprehensive study and prepare a report to Congress on

whether and how importation could be accomplished in a manner that assures safety. In February 2004, the Secretary created an intergovernmental task force,

chaired by Surgeon General Richard Carmona, to provide that analysis and offer

findings on how to best address this issue in order to advance the public health.

The taskforce includes representatives from FDA, the Centers for Medicare and

Medicaid Services, Customs and Border Protection, and the Drug Enforcement Administration. The panel has brought together a wide variety of stakeholders to discuss the risks, benefits and other key implications of importing drugs into the U.S.

143

As an integral part of the study process, the task force held a series of six stakeholder meetings to gather information and viewpoints from consumer groups, health

care professionals, health care purchasers, industry representatives and international trade experts. A public docket for comments was opened as well. The task

force is continuing its examination of these issues and working to complete its work

as expeditiously as possible.

RESPONSES TO QUESTIONS FROM SENATOR LINCOLN

Question 1. While re-importing drugs from Canada is not a long-term solution to

our problem, how can we say there is a safety issue with Canadian drugs when

American companies’ overseas facilities produce drugs with minimal FDA oversight

and then ship them to the U.S.?

Answer. Overseas facilities that produce and ship drugs to the U.S. actually do

so with substantial FDA oversight. To obtain FDA approval for any drug, the sponsor must comply with FDA’s statutory and regulatory requirements in all respects,

regardless of the country in which it is based or whether the manufacturing plant

is located in the U.S. or abroad. FDA drug approvals are manufacturer-specific,

product-specific, and they include many requirements relating to the product, such

as manufacturing location, formulation, source and specifications of active ingredients, processing methods, manufacturing controls, container/closure system, and appearance. FDA must inspect the facilities in which the drugs are produced. By contrast, drug products that are produced for the Canadian or other markets are not

subject to FDA oversight.

Question 2. American drug makers are limiting supplies to Canadian pharmacies

that sell to U.S. customers ′′out of concern that Canadian patients could face shortages.′′ The question arises: why not just increase production, especially when the

marginal cost is negligible?

Answer. This is an issue that the pharmaceutical companies, rather than FDA,

would be able to address.

Thank you for your continuing interest in this important issue.

144

145

146

147

148

149

150

151

152

153

154

155

156

157

158

159

160

161

162

163

164

165

166

167

168

169

170

171

172

(173)

COMMUNICATIONS

174

175

176

177

178

179

180

181

182

183

184

185

186

187

188

189

190

191

192

193

194

195

196

197

198

199

200

Æ