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S. HRG. 110–1189 

POLICY IMPLICATIONS OF PHARMACEUTICAL 

IMPORTATION FOR U.S. CONSUMERS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON INTERSTATE COMMERCE, 

TRADE, AND TOURISM 

OF THE

COMMITTEE ON COMMERCE, 

SCIENCE, AND TRANSPORTATION 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

FIRST SESSION 

MARCH 7, 2007 

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

( 

(II) 

SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION 

ONE HUNDRED TENTH CONGRESS 

FIRST SESSION 

DANIEL K. INOUYE, Hawaii, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

JOHN F. KERRY, Massachusetts 

BYRON L. DORGAN, North Dakota 

BARBARA BOXER, California 

BILL NELSON, Florida 

MARIA CANTWELL, Washington 

FRANK R. LAUTENBERG, New Jersey 

MARK PRYOR, Arkansas 

THOMAS R. CARPER, Delaware 

CLAIRE MCCASKILL, Missouri 

AMY KLOBUCHAR, Minnesota 

TED STEVENS, Alaska, Vice Chairman 

JOHN MCCAIN, Arizona 

TRENT LOTT, Mississippi 

KAY BAILEY HUTCHISON, Texas 

OLYMPIA J. SNOWE, Maine 

GORDON H. SMITH, Oregon 

JOHN ENSIGN, Nevada 

JOHN E. SUNUNU, New Hampshire 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

JOHN THUNE, South Dakota 

MARGARET L. CUMMISKY, Democratic Staff Director and Chief Counsel 

LILA HARPER HELMS, Democratic Deputy Staff Director and Policy Director 

MARGARET SPRING, Democratic General Counsel 

CHRISTINE D. KURTH, Republican Staff Director and General Counsel 

KENNETH R. NAHIGIAN, Republican Deputy Staff Director and Chief Counsel 

SUBCOMMITTEE ON INTERSTATE COMMERCE, TRADE, AND TOURISM 

BYRON L. DORGAN, North Dakota, 

Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

JOHN F. KERRY, Massachusetts 

BARBARA BOXER, California 

MARIA CANTWELL, Washington 

MARK PRYOR, Arkansas 

CLAIRE MCCASKILL, Missouri 

JIM DEMINT, South Carolina, Ranking 

JOHN MCCAIN, Arizona 

OLYMPIA J. SNOWE, Maine 

GORDON H. SMITH, Oregon 

JOHN ENSIGN, Nevada 

JOHN E. SUNUNU, New Hampshire 

(III) 

C O N T E N T S 

Page 

Hearing held on March 7, 2007 .............................................................................. 1 

Statement of Senator DeMint ................................................................................. 4 

Statement of Senator Dorgan ................................................................................. 1 

Statement of Senator Snowe ................................................................................... 6 

Statement of Senator Vitter .................................................................................... 5 

WITNESSES

Barnett, Nelda, Member, Board of Directors, AARP ............................................ 73 

Prepared statement .......................................................................................... 74 

Lutter, Ph.D., Randall W., Acting Deputy Commissioner for Policy, Food 

and Drug Administration, HHS .......................................................................... 8 

Prepared statement .......................................................................................... 13 

Schondelmeyer, Pharm.D., Ph.D., Stephen W., Professor of Pharmaceutical 

Economics and Director, PRIME Institute, College of Pharmacy, University 

of Minnesota ......................................................................................................... 65 

Prepared statement .......................................................................................... 68 

Schultz, William B., Partner, Zuckerman Spaeder, LLP ..................................... 56 

Prepared statement .......................................................................................... 58 

Tauzin, Hon. W.J. Billy, President and CEO, Pharmaceutical Research and 

Manufacturers of America (PhRMA) .................................................................. 31 

Prepared statement .......................................................................................... 34 

Vernon, Dr. John A., Assistant Professor, Department of Finance, University 

of Connecticut School of Business ....................................................................... 60 

Prepared statement .......................................................................................... 62 

APPENDIX

Canadian Pharmacists Association, the Ontario Pharmacists’ Association, and 

the Best Medicines Coalition, joint prepared statement ................................... 95 

Pitts, Peter, President, Center for Medicine in the Public Interest, prepared 

statement .............................................................................................................. 97 

Response to written question submitted by Hon. Byron L. Dorgan to Randall 

W. Lutter, Ph.D. ................................................................................................... 100 

(1) 

POLICY IMPLICATIONS OF PHARMACEUTICAL 

IMPORTATION FOR U.S. CONSUMERS 

WEDNESDAY, MARCH 7, 2007 

U.S. SENATE, SUBCOMMITTEE ON INTERSTATE COMMERCE, TRADE, AND

TOURISM, COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION, Washington, DC. 

The Subcommittee met, pursuant to notice, at 9:30 a.m. in room 

SR–253, Russell Senate Office Building, Hon. Byron L. Dorgan, 

Chairman of the Subcommittee, presiding. 

OPENING STATEMENT OF HON. BYRON L. DORGAN, 

U.S. SENATOR FROM NORTH DAKOTA 

Senator DORGAN. We’ll call the hearing to order. 

This is a hearing of the Subcommittee of the Commerce Committee. The Subcommittee on Interstate Commerce, Trade, and 

Tourism is here today to consider an issue of importation of prescription drugs, FDA-approved prescription drugs. 

I’m joined by the Ranking Member on the Subcommittee, Senator 

DeMint. Senator DeMint, welcome. And we will have some others 

join us momentarily. 

There had previously been two votes scheduled for 10 o’clock this 

morning. They have just been postponed until this afternoon. So, 

we will not now be interrupted by votes. 

Let me ask that the door be closed, please. 

We’re here today to consider a matter that literally can mean the 

difference between life and death for many Americans, and that is 

the cost of prescription medicines. Clearly, there are some miracle 

drugs that are available in this country, thanks to substantial research by the National Institutes of Health, by the pharmaceutical 

industry and others. But miracle drugs offer no miracles to those 

who can’t afford them. And the question we’re going to ask today 

is whether we believe that American consumers ought to pay the 

highest prices in the world for prescription medicines. My answer 

to that is, of course, no. I don’t believe they should be paying the 

highest prices in the world. I think the American taxpayers already 

heavily subsidize research, through the tax code, and we pay for 

basic research at the NIH that’s led to many breakthroughs for 

wonder drugs currently marketed by prescription drug manufacturers. 

Today, we’re considering whether we should continue to allow 

the prescription drug companies, or the pharmaceutical industries, 

to dictate the prices that U.S. consumers pay for prescription 

2 

drugs, or whether we ought to allow a little price competition into 

the marketplace for prescription drugs. 

Today, we will talk about prescription drugs, and we will only 

refer to, and mean, FDA-approved prescription drugs. 

Should we allow the safe importation of FDA-approved medicines 

from Canada and other Western industrialized nations? This routinely has happened for a couple of decades in Europe, through 

parallel trading. If you’re in France and want to buy a prescription 

drug from Italy; or in Spain and want to buy one from Germany, 

the parallel trading system has worked well for European consumers, with no safety issues at all. 

Given the substantial price differences between products sold in 

the U.S. and abroad, it will come as no surprise that the American 

people feel strongly about this and already do import some prescription drugs. Let me use a chart to show the difference in pricing. And I’ll show two bottles of Lipitor. Lipitor is a fairly common 

prescription drug in this country for lowering cholesterol levels. 

These two bottles contain exactly the same pill, produced in exactly 

the same FDA-approved plant in Ireland. The only difference is, 

one is shipped to Canada, one is shipped to the United States, one 

is $1.83 per tablet, the other is $3.57 per tablet. Same bottle, same 

pill, produced in the same place, different prices. The American 

taxpayer is charged just about double, and I think that’s unfair. 

The same is true with a good many other drugs—Prevacid, Zocor, 

Nexium, Zoloft, and so on. 

[The information referred to follows:] 

Senator DORGAN. The question before the Congress has been 

now, for some long while: Can we allow for the safe import of preVerDate Nov 24 2008 06:50 Jan 16, 2013 Jkt 075679 PO 00000 Frm 00006 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\77867.TXT JACKIE

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3 

scription drugs from FDA-approved plants in other countries? My 

answer to that is yes. I believe that we have produced a bipartisan 

piece of legislation—cosponsored by many Members of Congress. 

The Pharmaceutical Market Access and Drug Safety Act of 2007— 

Senator Snowe, Senator Grassley, Senator Kennedy, Senator 

McCain, Senator Stabenow, and many, many others have cosponsored this legislation. We believe it puts in place an effective regulatory framework to make the importation of FDA-approved drugs 

safe for consumers, and gives consumers the opportunity to use the 

market system for FDA-approved drugs, to avoid having to pay the 

highest prices in the world. 

We have witnesses today with a wide variety of views on this 

subject. It will be interesting to hear them. Some are among the 

most vigorous defenders of the pricing strategy by the prescription 

drug companies, others say we ought to put market-price competition to work for consumers. 

Let me be clear that my goal is not to force Americans to go to 

Canada to purchase prescription drugs, but, rather, to create a little competition in the marketplace so that we can put real downward pressure on domestic drug prices. I believe that what is happening currently is wrong. I think it’s unfair. Some say that, ‘‘Well, 

it doesn’t matter. We now have prescription drug coverage for senior citizens.’’ 

There are tens of millions of citizens—in fact, 43 percent of the 

uninsured American adults, aged 19 to 64—I have a chart to show 

on that—18 percent of insured adults did not fill prescriptions because of cost. The result is that paying the highest price in the 

world is diminishing opportunities for healthcare for a good many 

Americans, and we believe the marketplace ought to be used to 

provide a fair break for American consumers. When I say ‘‘we,’’ I’m 

speaking the royal ‘‘We,’’ of course. I’m sure there are—well, I 

know there are some in Congress that would disagree with that. 

[The information referred to follows:] 

4 

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

DeMint. 

STATEMENT OF HON. JIM DEMINT, 

U.S. SENATOR FROM SOUTH CAROLINA 

Senator DEMINT. Thank you, Mr. Chairman. Appreciate you 

holding these hearings. And I do take Lipitor, and if there are any 

in there you’d let me have, I’d really appreciate that. 

[Laughter.] 

Senator DEMINT. Could save me $300. 

But I appreciate everyone being here, particularly the ones who 

are going to be on the panel. And what I hope we can have today, 

maybe, is a little intellectual honesty. There are so many of us who 

are supportive of free trade and the value of that and how that 

keeps prices down, how that keeps competition in this country and 

outside of this country. It needs to apply to prescription drugs. It 

doesn’t make sense for the Food and Drug Administration to say 

it’s OK to import all kinds of food products from all over the world 

that are much more difficult to put in tamper-proof containers than 

pharmaceuticals, and then say that it’s not safe to import pharmaceuticals, particularly reimport the drugs that have been made 

here in blister packs that are tamperproof. It doesn’t make sense 

to take that tack. It doesn’t make sense to say it’s dangerous to import drugs that were made in America, when a lot of the ingredients for all the drugs in this country are imported in bulk, which 

are much easier to contaminate than finished drugs that are in 

tamperproof containers. It’s very obvious to me that safety is not 


dor2.eps
5 

an issue. It’s just a distraction. And I want to hear that explained, 

particularly from Dr. Lutter today. 

We know the issue is with other countries and trade agreements. 

We’re afraid, the pharmaceutical companies are, that if they don’t 

honor the fixed prices in Canada and other parts of the world, that 

these countries will simply take their patents and produce their 

drugs. This is a trade issue which the Administration needs to address. I hear folks say that, by us reimporting from Canada, that 

we’re importing socialism. In fact, what we’re doing now is, we are 

propping up socialism in Canada and other parts of the world. We 

charge American consumers a higher price, and then allow other 

countries to dictate a lower price for their citizens, allowing Americans to subsidize and pay for our own drug products in other parts 

of the world. It’s difficult for me to find any intellectual honesty in 

the arguments against allowing Americans to buy drugs from any 

part of the world that are FDA-approved from FDA-approved or 

certified facilities. 

So, I’m very interested in the discussion today. And, again, all I 

ask for is some intellectual honesty and consistency. 

Thank you, Mr. Chairman. 

Senator DORGAN. Senator Vitter? 

STATEMENT OF HON. DAVID VITTER, 

U.S. SENATOR FROM LOUISIANA 

Senator VITTER. Thank you, Mr. Chairman. And thank you for 

convening this important hearing. 

I guess I round out the spectrum of opinion on the panel by saying amen to everything that was said before me, because I also am 

a—an ardent supporter of reimportation, which I know can be done 

safely, completely protecting American consumers. And I say that 

about those of us up here, because I think it makes an important 

point. We obviously represent different points on the political spectrum. Maybe we define the political spectrum, I don’t know. But we 

all agree on this issue, and I think we all share the clear majority 

consensus opinion of the American people. 

I’ve been working on this issue since I was in the House. It’s 

been a top priority of mine, including as I came to the Senate. I 

want to thank and salute the Chairman for his leadership on this. 

He and Senator Snowe have one of the leading bills, and I appreciate all of their leadership on it. 

I have a separate bill that’s very similar in many ways, and certainly has exactly the same goal, which is supported by Senator 

DeMint and others. And I completely agree with the previous comments, that this is a matter of political will—not technology, not 

what is possible, but what is the—when will we have the political 

will to get this done for the good of the American people? Besides 

my broadbased reimportation bill and my work with Senator Dorgan and others on their measures, I’ve also been involved in a couple of amendments that have passed. In particular, I teamed up 

with Senator Stabenow to pass language prohibiting trade agreement barriers to reimportation. Up until that point, there was a 

very, very onerous practice which was becoming established of the 

Administration using bilateral trade agreements to insert anti-reimportation language through those trade agreements. And the 

6 

threat was being posed that even if we were to be able to pass significant reimportation legislation, if you had all these trade agreements out there, with many, many countries, reimportation would 

still be blocked through that route. I’m happy to say we put an end 

to that practice—first, with this amendment on an appropriations 

bill, and that led to the current USTR abandoning, and stating 

very clearly to me and others that she would abandon this practice 

of trying to negotiate those provisions in trade deals. 

Also, more recently, we were able to pass a significant amendment, again, on an appropriations bill, to prevent the enforcement 

of the law against United States consumers who are coming home 

from Canada with amounts of prescription drugs from Canadian 

pharmacies that were simply for personal use. That passed the 

Congress overwhelmingly. It has now gone into law. And I would 

also note that, after dire predictions about what that would cause, 

the safety concerns and everything else that would cause, I don’t 

know of any documented cases of problems that that has, in fact, 

caused. 

But we do need to go further. We do need a full-blown reimportation bill to establish all of the safety procedures that we need to 

ensure the American people safe drugs in a true free-market environment. 

And I would certainly echo Senator DeMint’s comments. I believe 

in free trade. I believe in global commerce. I don’t understand why 

all of that stops, and all of those rules go out the window completely when we get to prescription drugs. It doesn’t occur when we 

talk about food and other products that clearly have safety implications. We do things to guard against safety violations in those 

areas. It doesn’t when we talk about products which may be subsidized in other countries. We certainly try to fight that subsidization. But, you know, free trade doesn’t come to a grinding halt with 

regard to those other products because of those concerns. So, I 

would echo Senator DeMint’s call for intellectual honesty and consistency on this topic. 

Thank you. 

Senator DORGAN. Senator Snowe is the principal cosponsor of the 

Pharmaceutical Market Access and Drug Safety Act of 2007. We 

have 31 cosponsors in the United States Senate, spanning the ideological spectrum. My expectation is that the Congress will have to 

address, and the Senate will address, this legislation, at long, long 

last, this year. Senator Snowe, thank you. 

STATEMENT OF HON. OLYMPIA J. SNOWE, 

U.S. SENATOR FROM MAINE 

Senator SNOWE. Yes, thank you, Mr. Chairman. And I thank you 

very much for holding this hearing, once again, on a critical issue 

facing so many American consumers. And I want to applaud you 

for the leadership that you provided in shaping the legislation that 

we are considering here in the Senate, and hopefully in the overall 

Congress, and before this Committee. 

It’s unfortunate that we’re at a point that we have not been able 

to enact this legislation. This is about the tenth Senate hearing 

that’s been held on the subject since 2004. It’s been repeatedly 

studied. One-third of the Senate, as the Chairman indicated, is coVerDate Nov 24 2008 06:50 Jan 16, 2013 Jkt 075679 PO 00000 Frm 00010 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\77867.TXT JACKIE
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sponsoring this legislation. In fact, 2 years ago, the Commerce 

Committee adopted an amendment to the FCC reauthorization 

based on our legislation. But, despite that, we’ve obviously faced 

considerable resistance and barriers to enacting this legislation. 

And what is tragic in all of this is that 70 percent of the American people support drug importation. And for a very good reason, 

because of the skyrocketing increases in the cost of medications, exceeding two and even three times the rate of inflation. And I think 

that the penalties that ultimately are imposed by cutting off supplies to pharmacies in Canada, for example, is another way of placing tremendous burdens on the American consumer, and forcing 

them to ultimately look to sources that might end up being counterfeit drugs. And so, we set up a system in this legislation that 

I think undeniably provides for the security of the medications 

coming across the border from Canada or from the European Union 

and other countries, that have demonstrated, over decades, that 

parallel trading can work, and can work safely. And that’s what 

our legislation is designed to do. With FDA-approved, registered, 

and inspected, facilities—and, the fact is, many more inspections 

than is required now currently under law for those FDA-approved 

facilities, and then, second, setting up a pedigree, being able to 

track the medication. We also provide for the financing for the administration of this program, as well. 

So, I think that we have identified every conceivable and legitimate concerns about how we’re going to import these medications, 

and we will do so on a safe basis. We’ve addressed all of those initiatives in this legislation. Furthermore, it provides savings to the 

consumer, according to Congressional Budget Office. 

In addition to all of that, I think the American consumer deserves to have a break when it comes to prescription drug prices 

in this country. We pay the highest prices of any consumers in the 

world. And I think that is inappropriate, given the investments the 

America taxpayer makes in research and development, without 

question. And the industry has not had to operate under the competition which would ultimately benefit the American consumer. 

And so the American consumer has paid a price in more ways than 

one. 

And so, in drafting this legislation, we designed a safe system, 

above and beyond everything else. It is possible to implement. It 

is doable, it is reasonable. And I think that, frankly, the time has 

come—hopefully it’s going to be this year. We can assure safety. 

That’s what it’s all about. It’s not simply certifying safety, our legislation assures safety through a systematic process that requires 

every facet to be determined and certified and monitored by the 

FDA. And with the requirements that are necessary in dispensing 

prescriptions and certifying people’s histories and verifying their 

prescriptions, and also tracking drug shipments, and the entire history and chain of custody. 

So, with that, Mr. Chairman, I appreciate your leadership on this 

matter. Hopefully, we can get above and beyond and address the 

questions here today, and hopefully we can pass this legislation. 

Senator DORGAN. Senator Snowe, thank you very much. 

I don’t think there’s much question but that there is a majority 

on the Commerce Committee now in support of reimportation legisVerDate Nov 24 2008 06:50 Jan 16, 2013 Jkt 075679 PO 00000 Frm 00011 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\77867.TXT JACKIE
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lation. It’s my intention to work very hard to move it out of the 

Commerce Committee and get a vote on it, on the floor of the Senate. Identical legislation has been introduced in the U.S. House, 

and my hope is that, at long, long last, perhaps the America consumers will be treated fairly. 

We are, first, joined by Dr. Randall Lutter, who’s the Acting Deputy Commissioner for Policy at the Food and Drug Administration. 

Dr. Lutter, we appreciate your being here, and you may summarize your testimony. We have added a copy of your full testimony, 

which I read last evening. And we appreciate your being here. 

STATEMENT OF RANDALL W. LUTTER, PH.D., 

ACTING DEPUTY COMMISSIONER FOR POLICY, 

FOOD AND DRUG ADMINISTRATION, HHS 

Dr. LUTTER. Thank you very much, Mr. Chairman and members 

of the Committee—Subcommittee. I’m Randall Lutter, Acting Deputy Commissioner for Policy at the U.S. Food and Drug Administration, and I very much appreciate the opportunity to discuss the 

important issues relating to importation of prescription drugs. 

At FDA, our statutory responsibility is to assure the American 

public that the drug supply is safe, secure, and reliable. FDA remains deeply concerned about unapproved imported pharmaceuticals whose safety and effectiveness cannot be assured because 

they originate outside the closed system we’re fortunate to have in 

the United States. 

In 1987, due to widespread distribution of imported counterfeit 

drugs, including antibiotics and birth control pills, Congress passed 

a law that strengthened the oversight of domestic wholesalers and 

only allows a drug manufacturer to import a drug originally made 

in the U.S. and then sent abroad. The conclusion of Congress reflected, in current law, is that the safety and effectiveness of imported drugs is best assured by carefully limiting how prescription 

drugs can be imported into the U.S. as part of a closed drug distribution system. 

The Department of Health and Human Services convened a task 

force in 2004 to examine issues related to drug importation as it 

was directed to study by Congress as part of the Medicare Modernization Act. We have copies of the report available to anyone 

here. The report drafted by this task force clearly outlined significant safety and economic issues that must be addressed before the 

widespread importation of unapproved prescription drugs can be 

permitted. The report is still, we believe, the most comprehensive 

examination of the issue, and we continue to find evidence supporting some of its findings. 

Key findings identified in the task force report include the following. There are significant risks associated with the way individuals are currently importing drugs that violate the Food, Drug, and 

Cosmetics Act. It would be extraordinarily difficult and costly for 

personal importation to be implemented in a way that ensures the 

safety and effectiveness of imported drugs. Overall savings from legalized commercial importation will likely be a small percentage of 

total drug spending, and developing and implementing such a program would incur significant costs and require significant additional authority. 

9 

The public expectation that most imported drugs are less expensive than American drugs is not generally true, especially in the 

case of generic drugs marketed in the U.S. And legalized importation may raise liability concerns for consumers, manufacturers, distributors, pharmacies, and other entities. 

The Internet today has created an extraordinary unregulated 

marketplace for the sale of unapproved drugs, prescription drugs 

dispensed without a valid prescription, and products marketed with 

fraudulent health claims. Patients who buy prescription drugs from 

a rogue website are at risk of suffering adverse events, and some 

of them can be life-threatening. These risks include, most importantly, therapeutic failure due to lack of effect because the drug 

doesn’t contain the correct dose prescribed by a physician or active 

ingredients, and potential side effects from inappropriately dispensed medications, dangerous drug interactions, or drug contamination. 

Patients are also at risk because they often don’t know what 

they’re getting when they purchase some of these drugs from 

websites. Although some patients may receive the genuine product, 

others may unknowingly receive counterfeit copies that contain 

inert or harmful ingredients, drugs that are expired and have been 

diverted to illegitimate resalers, or dangerous subpotent or superpotent products that are improperly manufactured. 

I’d like to show you a couple of slides to illustrate just a few examples highlighting our concerns with imported drugs, and my 

written statement further describes these concerns and illustrates 

some cases. 

The first slide—I don’t know if you can see it from there, but the 

first slide identifies a phenomenon that we first reported in December of 2005 in a press release called ‘‘Bait and Switch.’’ Consumers 

had placed orders on Internet websites that appeared to be Canadian, and we intercepted, at international mail facilities, parcels 

which were coming into the country from other countries—in particular, India, Israel, Costa Rica, and Vanuatu. And about—nearly 

half of the parcels coming in from those countries had documentation indicating that they had been shipped in response to orders on 

apparently Canadian websites, and almost 85 percent of those parcels, in fact, originated from 27 countries all over the globe. Consumers were not getting what they thought they were buying. 

10 

The second slide shows a scheme where consumers are sent 

drugs containing the wrong active ingredient, which is potentially 

a very harmful practice. This was reported only recently, in, actually, February, last month, of 2007. Consumers ordered drug A, for 

example, for insomnia, they received a confirmation from a second 

website, the credit card’s statement lists purchase from a third 

website, and then they received Haloperidol tablets, which are used 

for the treatment of schizophrenia. Some people sought emergency 

medical care because they received the wrong active ingredient in 

these instances. 


PIPIC1.eps PIPIC2.eps
11 

FDA understands that Congress and the public are concerned 

about the high price of some prescription drugs. FDA currently has 

a very successful generic drug approval program that brings lowercost versions of brand name drugs to U.S. consumers. In general, 

FDA-approved generic drugs are less expensive, not only compared 

with the brand name innovator product that are sold in the United 

States, but also generally less expensive than generic drugs available abroad that would appear to be comparable. 

And you may be surprised to learn—and this is slide 3—that a 

survey conducted—also in January of 2007—revealed that approximately half of the drugs intercepted at one international mail facility are available as FDA-approved generics in the United States. 

And, even more surprising, of those generic equivalents, over 40 

percent are available at some national retail pharmacy chains for 

about $5 each. That’s less than the shipping price for most Internet 

sellers. 

Next slide. In this survey, we also saw examples of products that 

U.S. consumers ordered from foreign sources that cause us grave 

concern. Warfarin is a blood-thinner that requires routine and very 

careful blood monitoring by physicians. Another drug that was 

intercepted is Amoxicillin. These could—if misused, may contribute 

to antibiotic resistance. Antibiotics should only be used if a bacterial infection, as opposed to a viral infection, occurs. Another 

drug that we intercepted is Dipyrone, an analgesic which was removed from the U.S. market in 1977, due to serious adverse health 

concerns. Methotrexate, a cancer drug, requires careful monitoring 

for potential serious toxicities. These are examples of some of the 

drugs that we’ve found in this survey that cause us to think very 

carefully about safety concerns of Internet purchasing. 


PIPIC3.eps
12 

Consumers may be obtaining these types of products without 

valid prescriptions, and without the appropriate supervision of a 

physician. 

Slide 5, the final one, deals with a drug of special importance 

these days. We’ve uncovered counterfeit Tamiflu. This concerns us 

greatly, given the implications not only for seasonal flu, which is 

associated with deaths of more than 20,000 Americans annually, 

but also the Tamiflu may be useful in the event of a pandemic flu. 

As a public-health agency, we understand very much the importance of protecting public health, not only through regulation and 

enforcement, but also through education and collaboration. FDA’s 


PIPIC4.eps PIPIC5.eps
13 

website contains extensive information for consumers about drug 

importation, buying drugs online, counterfeit drugs, our enforcement activities, and potential public-health threats. Our website 

also provides resources to report problems with FDA-regulated 

products or websites that could be selling fake or harmful products. 

The standards for drug review and approval in the U.S. are unsurpassed in the world, and the safety of our drug supply mirrors 

those high standards. However, despite these very real risks, a substantial number of Americans are obtaining prescription medications from foreign sources. Many drugs purported to be from Canada are actually from other countries that lack regulatory oversight. And FDA cannot assure the safety or effectiveness of these 

drugs. 

Thank you very much for the opportunity to testify, and I look 

forward to responding to questions that you may have. 

[The prepared statement of Dr. Lutter follows:] 

PREPARED STATEMENT OF RANDALL W. LUTTER, PH.D., ACTING DEPUTY

COMMISSIONER FOR POLICY, FOOD AND DRUG ADMINISTRATION, HHS 

Introduction 

Mr. Chairman and Members of the Subcommittee, I am Randall W. Lutter, Ph.D., 

Acting Deputy Commissioner for Policy at the U.S. Food and Drug Administration 

(FDA or the Agency). Thank you for the opportunity to discuss with you the important issues relating to the importation of prescription drugs. 

At FDA, our statutory responsibility is to assure the American public that the 

drug supply is safe, secure, and reliable. For more than 60 years, the Federal Food, 

Drug, and Cosmetic (FD&C) Act has helped to ensure that Americans can be confident that when they use an FDA-approved drug, the medicine will be safe and effective and will work as intended in treating their illness and in preventing complications. In carrying out this responsibility, we work, through a variety of steps, 

to do all we can under the law to make medicines accessible to patients and help 

doctors and patients use them as effectively as possible. These include: expanding 

access to essential unapproved treatments that are being studied under FDA investigational new drug applications; approving generic medicines; reducing the time 

and cost of showing that new medicines are safe and effective; and providing upto-date information for health professionals and patients to allow them to obtain the 

benefits and avoid the risks associated with medicines. That is the primary mission 

of the thousands of dedicated staff, including leading health care experts, doctors, 

and scientists who work tirelessly at FDA in public service for the American people. 

FDA remains immensely concerned about unapproved, imported pharmaceuticals 

whose safety and effectiveness cannot be assured because they originate outside the 

closed legal structure and regulatory system we are fortunate to have in the United 

States. 

The FD&C Act requires that FDA approve each new drug as safe and effective 

before marketing. It also authorizes FDA to oversee the production of drugs that are 

the subject of approved applications, whether manufactured in a facility in the U.S. 

or a foreign country and imported into the U.S. by the manufacturer. By the 1980s, 

Congress recognized that some foreign entities were importing counterfeit drugs as 

well as improperly handled and stored drugs into the U.S. For example, at that 

time, millions of counterfeit birth control pills from Panama found their way into 

the U.S. drug distribution system. In another case, a counterfeit version of a widely 

used antibiotic entered the U.S. drug distribution system from a foreign source. 

These types of activities posed significant risks to American consumers. In 1987, 

Congress passed the Prescription Drug Marketing Act (PDMA), which strengthened 

oversight of domestic wholesalers and added the provision to the FD&C Act— 

801(d)(1)—that generally prohibits anyone except a drug’s manufacturer from reimporting into the U.S. a drug originally manufactured in the U.S. and then sent 

abroad. 

The conclusion of Congress, reflected in current law, is that the safety and effectiveness of imported drugs is best assured by carefully limiting how prescription 

drugs can be imported into the U.S. as part of a closed drug distribution system. 

In the case of legally imported drugs, the chain of custody is known for an FDAVerDate Nov 24 2008 06:50 Jan 16, 2013 Jkt 075679 PO 00000 Frm 00017 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\77867.TXT JACKIE
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approved drug manufactured in an FDA-inspected facility using FDA-approved 

methods before it is introduced into the U.S. distribution system. 

In 2003, Congress tasked the Department of Health and Human Services to examine issues related to drug importation. A task force, chaired by then U.S. Surgeon 

General Carmona, examined the relevant data, considered testimony from the public 

and health experts, and then issued the ‘‘Report on Prescription Drug Importation’’ 

(Task Force Report). This Task Force Report clearly outlines significant safety and 

economic issues that must be addressed before the widespread importation of unapproved prescription drugs can be permitted. Even though 2 years have passed since 

the Task Force Report was issued, it is still the most comprehensive examination 

of the issue and we continue to find evidence confirming its findings. 

Some of the key findings identified in the Task Force Report include the following: 

• There are significant risks associated with the way individuals are currently 

importing drugs that violate the FD&C Act. 

• The integrity of the distribution system must be ensured. 

• It would be extraordinarily difficult and costly for ‘‘personal’’ importation to be 

implemented in a way that ensures the safety and effectiveness of the imported 

drugs. Regulating personal importation could be extraordinarily costly, on the 

order of $3 billion a year based on 2003 estimates of the volume of packages 

entering the U.S. 

• Overall national savings from legalized commercial importation will likely be a 

small percentage of total drug spending, and developing and implementing such 

a program would incur significant costs and require significant additional authority. 

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

• Legalized importation of now-unapproved drugs will likely adversely affect the 

future development of new drugs for American consumers. 

• The effects of legalized importation on intellectual property rights are uncertain 

but likely to be significant. 

• Legalized importation raises liability concerns for consumers, manufacturers, 

distributors, pharmacies, and other entities. 

Keeping unsafe drugs away from American consumers is an enormous task, as we 

are faced with a deluge of drugs at points of entry into the U.S. originating from 

all over the world. We are continually assessing this issue to determine how FDA 

can best protect American consumers from this threat. 

The Internet has created an extraordinary, unregulated marketplace for the sale 

of unapproved drugs, prescription drugs dispensed without a valid prescription, and 

products marketed with fraudulent health claims. Patients who buy prescription 

drugs from a rogue website are at risk of suffering adverse events, some of which 

can be life threatening. These risks include therapeutic failure due to lack of effect 

because the drug does not contain the correct dose or active ingredient and potential 

side effects from inappropriately-prescribed medications, dangerous drug interactions or drug contamination. Patients are also at risk because they often don’t 

know what they are getting when they purchase some of these drugs. Although 

some patients may receive genuine product, others may unknowingly receive counterfeit copies that contain inert or harmful ingredients, drugs that are expired and 

have been diverted to illegitimate resellers, or dangerous sub-potent or super-potent 

products that were improperly manufactured. 

Efforts of Federal and state authorities have kept infiltration of counterfeit drugs 

in the U.S. drug supply chain to a minimum. Our success is a result of the extensive 

system of laws and our enforcement efforts. In recent years, however, FDA is challenged by efforts of increasingly well-organized counterfeiters who are often located 

overseas, backed by sophisticated technologies and criminal operations, intent on 

profiting from drug counterfeiting at the expense of American patients. To respond 

to this domestic emerging threat, FDA has been working with manufacturers, 

wholesalers, retailers, other Federal and state government entities, standards bodies, and others to implement measures to further secure our Nation’s drug supply. 

When FDA learns of schemes intended to use the drug supply to harm U.S. consumers, we actively work to prevent them to the fullest extent of the law. A recent 

case illustrates why American consumers ordering prescription drugs from Canadian sources cause FDA great concern. In August 2006, FDA advised consumers not 

to purchase prescription drugs from various websites, including www.RxNorth.com, 

that have orders filled by a firm in Manitoba, Canada, following reports of counterVerDate Nov 24 2008 06:50 Jan 16, 2013 Jkt 075679 PO 00000 Frm 00018 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\77867.TXT JACKIE
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feit versions of prescription drug products being sold by these companies to U.S. 

consumers. FDA is investigating these reports and is coordinating with international law enforcement authorities on this matter. Laboratory results to date have 

found counterfeits from these websites, destined for the U.S. market, of the following drug products: Lipitor, Diovan, Actonel, Nexium, Hyzaar, Ezetrol (known as 

Zetia in the United States), Crestor, Celebrex, Arimidex, and Propecia. 

In addition, just last month, FDA issued an alert to consumers who placed orders 

for specific drug products over the Internet (Ambien, Xanax, Lexapro, and Ativan), 

but instead received a product that, according to preliminary analysis, contains 

haloperidol, a powerful anti-psychotic drug. Reports show that several consumers in 

the U.S. have sought emergency medical treatment, after ingesting the suspect 

product, for symptoms such as difficulty in breathing, muscle spasms, and muscle 

stiffness. Haloperidol can cause muscle stiffness and spasms, agitation, and sedation. Identifying the actual sellers or websites has been challenging because of the 

deceptive practices of many commercial outlets on the Internet. Currently, the origin of these tablets is unknown but the packages were postmarked in Greece. Preliminary investigation has identified some of the responsible websites and we are 

currently pursuing both domestic and foreign leads. Details of additional cases are 

included in an appendix to this testimony. 

In an effort to gauge the volume and scope of drugs coming into the U.S., we routinely survey international mail facilities. A recent finding confirms our concern that 

buying drugs from foreign sources pose specific risks to U.S. citizens. An FDA operation in 2005, called ‘‘Bait and Switch,’’ found that nearly half of the imported drugs 

that FDA intercepted from four selected countries (India, Israel, Costa Rica, and 

Vanuatu) were shipped to fill orders that consumers believed were placed with ‘‘Canadian’’ pharmacies. Of the drugs being promoted as ‘‘Canadian,’’ 85 percent appeared to come from 27 countries around the globe. Many of these drugs were not 

adequately labeled to help assure safe and effective use and some were found to be 

counterfeit. 

FDA also works with U.S. Customs and Border Protection on their surveys at 

international mail facilities. In the last 6 months, FDA has assisted in two such operations. These operations revealed that we are still fighting the same issues we 

have seen in the past: 

• Almost all of the pharmaceuticals found in mail parcels continue to be subject 

to refusal of admission because they violate the FD&C Act. 

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

• A survey conducted in January 2007 revealed that of the 462 drug products 

intercepted and examined at one international mail facility, over half were 

drugs that are available as FDA-approved generic drug products in the U.S. and 

are most likely cheaper in the U.S. than abroad. Of those products examined, 

with generic equivalents, over 40 percent are available at national retail chains 

that offer certain generic drugs for $4 each. This is less than the shipping price 

of most Internet sellers. 

Last year, an FDA investigation found that many foreign medications, although 

marketed under the same or similar-sounding brand names as those in the U.S., 

contain different active ingredients than the U.S. products. For example, in the 

U.S., ‘‘Flomax’’ is a brand name for tamsulosin, a treatment for an enlarged prostate, while in Italy, the active ingredient in the product called ‘‘Flomax’’ is 

morniflumate, an anti-inflammatory drug. 

FDA also has found 105 U.S. drug brand names that are so similar to drugs marketed in foreign countries that consumers who fill such prescriptions abroad may 

receive a drug with the wrong active ingredient. For example, in the United Kingdom, ‘‘Ambyen,’’ a brand name for a drug product containing amiodarone, used to 

treat life-threatening abnormal heart rhythms, could be mistaken for ‘‘Ambien,’’ a 

U.S. brand name for a sleeping pill. Consumers taking medications containing active 

ingredients not prescribed by their physician increase their risks of unnecessary 

side effects and possibly serious adverse outcomes. 

FDA also publishes Import Alerts to field personnel about potentially dangerous 

drugs being offered for import into the U.S. Field personnel use this information to 

halt shipments of potentially dangerous products at the borders. For example, last 

month FDA added 39 known foreign suppliers of unapproved isotretinoin (known by 

the brand name Accutane) to an existing Import Alert, ‘‘Unapproved New Drugs 

Promoted in the U.S.’’ The unsupervised use of isotretinoin carries significant potenVerDate Nov 24 2008 06:50 Jan 16, 2013 Jkt 075679 PO 00000 Frm 00019 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\77867.TXT JACKIE
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tial risks, including birth defects and even fetal death, and may cause serious mental health problems. For this reason, the approved medication should only be taken 

by persons taking part in a specific risk management program closely monitored by 

their personal physician. Consumers receiving isotretinoin from these foreign 

sources are not likely taking part in the risk management program. 

As a public health agency, we understand the importance of protecting the public 

health not only through regulation and enforcement, but also through education and 

collaboration. FDA’s website (www.fda.gov) contains extensive information for consumers about drug importation, buying drugs online; counterfeit drugs, enforcement 

activities, potential public health threats, as well as resources to report problems 

with FDA regulated products or websites that could be selling fake or harmful products. 

FDA coordinates with other governmental bodies and meets regularly with other 

Federal agencies and state officials to share information and identify opportunities 

for partnering in enforcement actions. Some of the Federal agencies that are FDA 

partners include U.S. Customs and Border Protection, U.S. Drug Enforcement Administration, U.S. Immigration and Customs Enforcement, U.S. Postal Service, and 

the Federal Bureau of Investigation, just to name a few. We also work with organizations representing consumers, health care practitioners, industry, and others. 

These relationships are essential to keep the Agency abreast of emerging issues, to 

leverage resources, and to best protect American consumers. 

FDA understands that Congress and the public are concerned about the high cost 

of prescription drugs. FDA currently has an efficient generic drug approval program 

that brings lower cost versions of brand name drugs to U.S. consumers. In most instances, FDA-approved generic drugs are less expensive than generics sold abroad. 

Prompt approval of generic drug product applications is a priority for FDA. Resources for generic drug approvals have consistently increased. Moreover, both the 

number of generic drug applications FDA receives and the number of applications 

FDA’s Office of Generic Drugs (OGD) approves continue to increase each year as 

well. OGD recently instituted many new practices and procedures to help expedite 

the generic drug application review process. Because of these efforts, on the very 

day that the last controlling patents or exclusivities expired on an innovator product, OGD has approved at least one generic drug application in most cases. Recent 

examples of approvals when the exclusivities expired include pravastatin 

(Pravachol); sertraline (Zoloft); simvastatin (Zocor); and ondansetron (Zofran). Multiple versions of these products from various manufacturers are currently on the 

market. 

Last year, 21 applications for meloxicam (Mobic), a product with no patent or exclusivity protection blocking approval, were approved. (This product is used to relieve the signs and symptoms of osteoarthritis and rheumatoid arthritis.) The cost 

to consumers of this product dropped dramatically after these generic approvals. 

Using OGD’s ‘‘cluster’’ team approach, many of these applications were approved in 

just over 9 months. These approvals will result in many generic alternatives available for patients potentially saving millions of dollars in medication costs for consumers and the Federal Government. 

The standards for drug review and approval in the U.S. are the best in the world, 

and the safety of our drug supply mirrors these high standards. However, despite 

the very real risks, a substantial number of Americans are obtaining prescription 

medications from foreign sources. U.S. consumers often seek out Canadian suppliers, sources that purport to be Canadian, or other foreign sources that they believe to be reliable. Many drugs purported to be from Canada are actually from 

other foreign countries that lack regulatory oversight and FDA cannot assure the 

safety or effectiveness of these drugs. 

Thank you for the opportunity to testify. I look forward to responding to any questions you may have. 

APPENDIX

Drug Importation Cases 

Provided below are summaries of selected cases FDA investigated that pertain to 

drug importation. 

Counterfeit Percocet®, Viagra® and Cialis® Tablets: In January 2007, an individual in Philadelphia who purchased thousands of counterfeit drugs over the Internet from China, including Percocet, Viagra and Cialis, was sentenced in the Eastern 

District of Pennsylvania on charges related to trafficking in counterfeit goods and 

other counterfeit prescription drug related charges. The defendant sent samples of 

various medications to a counterfeit pharmaceutical manufacturer in China to be 

copied and manufactured. After the counterfeits were made in China, the medicaVerDate Nov 24 2008 06:50 Jan 16, 2013 Jkt 075679 PO 00000 Frm 00020 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\77867.TXT JACKIE
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tion was then shipped to the defendant in Philadelphia for eventual sale on the 

Internet and other venues. The United States Attorney said of this case: ‘‘When you 

go around government safeguards to either the Internet or the street to purchase 

prescription medication, you have no idea what you’re getting. The reality is that 

you might wind up taking something that is ineffective, as we saw in this case, or 

downright dangerous.’’ 

This Office of Criminal Investigations (OCI) case, worked jointly with U.S. Immigration and Customs Enforcement (ICE), U.S. Drug Enforcement Administration 

(DEA), U.S. Postal Inspection Service and the Philadelphia Police Department, was 

part of a much larger OCI–ICE counterfeit drug investigation. 

Clandestine Drug Manufacturing of Internet Drugs: In 2006, eleven individuals 

and an Atlanta, Georgia-based company were indicted by a Federal grand jury on 

multiple felony charges relating to a scheme to sell adulterated and unapproved new 

drugs over the Internet. The defendants in this case opened up a pharmaceutical 

manufacturing facility in Belize where they made over 24 different prescription 

medications. The defendants marketed the drugs through ‘‘spam’’ e-mail advertisements where they claimed the drugs were Canadian generic versions of brand name 

drugs. Some of the drugs the defendants made were unapproved versions of 

Ambien®, Valium®, Xanax®, Cialis®, Lipitor®, Vioxx® and others. These drugs were 

then purchased by and shipped to U.S. consumers and to various drug wholesalers. 

Dextromethorphan deaths: On April 12, 2006, two men were sentenced in the 

Southern District of Indiana Federal Court to 77 months incarceration after pleading guilty to introducing a misbranded drug into interstate commerce; specifically, 

dextromethorphan (DXM), a cough suppressant, which they sold over the Internet 

through their website. 

This case started in 2005 after five young people died after ordering and consuming DXM from the defendant’s website. DXM is an anti-tussive (cough suppressant), which is approved for over-the-counter cough medications. The defendants 

purchased the raw ingredients from a firm in India, manufactured the finished 

product, and sold the DXM through their website. The defendants marketed the 

DXM by falsely claiming that DXM was a chemical used for research and development rather than a drug for human consumption. DXM is often abused by some in 

order to experience a ‘‘high.’’ 


307lutt.eps
18 

Counterfeit Viagra®, Cialis®, and Lipitor®: In January 2006, an individual from 

the state of Washington was convicted for his involvement in the importation of 

counterfeit drugs from China including Viagra, Cialis and Lipitor and the subsequent distribution of those counterfeit drugs. In this joint OCI–ICE investigation, 

cooperation was sought and received from the Chinese government. As a result of 

this cooperation, the Chinese authorities arrested eleven individuals in China and 

recovered significant amounts of counterfeit drugs and counterfeit drug packaging. 

The defendant was sentenced in October 2006 to 10 month’s incarceration. 

Consumers Warned of Receiving Incorrect Medication in the Mail: In February 

2007, FDA issued an alert to consumers who placed orders for various medications 

such as Xanax®, Ativan®, Lexapro®, and Ambien®, over the Internet. Instead of receiving the products they ordered, these consumers instead received a product containing haloperidol, a powerful anti-psychotic. Some of these consumers sought 

emergency medical treatments for a variety of symptoms after ingesting the suspect 

product. In all instances, consumers received the suspect medication in packaging, 

which was postmarked from Greece. FDA is attempting to identify the actual vendors and source of the suspect medication, but the illusive nature of the Internet 

and the deceptive practices of many Internet pharmaceutical businesses are making 

identification of the actual supplier of these medications problematic. This investigation is ongoing. 


307lutt1.eps 307lutt2.eps
19 

Counterfeit Drug Arrest in Hong Kong: In September 2006, an individual from 

China was arrested by officers of the Hong Kong Customs and Excise Department 

based on a Federal arrest warrant issued by the U.S. District Court for the District 

of Colorado. The defendant was arrested in Hong Kong after meeting with an undercover OCI agent who posed as a buyer of over 400,000 counterfeit Cialis and Viagra 

tablets. This investigation also involved the sale of several thousand counterfeit 

Tamiflu® capsules that were manufactured in China and shipped to the U.S. Information developed by OCI and ICE was shared with Chinese authorities, which led 

to the August 2006 arrests of four individuals in China. Furthermore, information 

developed during this joint OCI–ICE counterfeit drug investigation was the basis for 

the previously mentioned counterfeit Percocet investigation in Philadelphia, PA. In 

addition to the arrest in Hong Kong, three other defendants in the U.S. have pled 

guilty to counterfeit drug charges. This case is ongoing. 

Counterfeit Viagra® and Cialis®: In July 2006, a man was arrested by OCI and 

ICE agents after several transactions in the Houston, Texas area where significant 

quantities of counterfeit Viagra were sold to an undercover ICE agent. Subsequent 

to the arrest, counterfeit Viagra and Cialis valued at approximately $600,000 were 

seized. The drugs were manufactured in China and sent to the suspect in Houston 

for distribution. The suspect was charged with trafficking in counterfeit goods and 

other related counterfeit drug charges and remains incarcerated as a potential flight 

risk. The defendant pled guilty in this case in October 2006 but has not yet been 

sentenced. Other defendants have been arrested and are awaiting judicial action. 

This joint OCI-ICE investigation is ongoing. 

FDA Warns Consumers of Canadian Website Shipping Counterfeit Medications: In 

August 2006, FDA published a warning to consumers about counterfeit medications 

shipped from RxNorth, a company based in Manitoba, Canada, which operates several websites. RxNorth, which operates as Mediplan Prescription Plus Pharmacy 

and Mediplan Global Health, were shipping counterfeit medications from various 

countries to American consumers who were ordering a variety of medications 

through the RxNorth and affiliated websites. Although this is an ongoing investigation, FDA issued a press release alerting consumers about these websites because 

of the potential dangers of counterfeit medications. 

Counterfeit Lipitor® Tablets: In August 2005 in the Western District of Missouri, three businesses and eleven individuals were indicted for their involvement in a $42 

million conspiracy to sell counterfeit, smuggled and misbranded Lipitor and other 

drugs and for participating in a conspiracy to sell stolen drugs. These indictments 

are the result of an ongoing OCI investigation that was begun by OCI in April 2003 

involving the manufacturing, smuggling, and the interstate distribution of counterfeit pharmaceuticals. To date, twelve defendants have been convicted; one received 

a nine- year term of imprisonment. Additional defendants are awaiting trial. 

Senator DORGAN. Dr. Lutter, thank you for being here. 

It’s hard for me to know where to start with respect to your testimony. 

The task force you referred to in the first paragraph was largely 

a joke. Creating a task force with Dr. McClellan, Dr. Crawford, and 

so on, to tell us what they think about drug importation? Creating 

a task force of people who largely oppose drug importation to tell 

us that they largely oppose it? That was a joke, in my judgment. 

So, I place little credibility in that. 


307lutt3.eps
20 

Let me just say to you, as well, when Tommy Thompson left government, the Secretary of HHS, we met at the elevator on the second floor of the Capitol one day after he had retired and left government, and as we greeted each other, he said, ‘‘By the way’’—to 

me—‘‘By the way, keep on that prescription drug issue, the importation issue. You’re right about that.’’ So—that’s after he left the 

government. 

But let me ask you, did you study the piece of legislation that 

Senator Snowe and I have introduced, with respect to the safety 

considerations in that legislation? 

Dr. LUTTER. I have been briefed on it, and I’ve discussed it with 

staff. I have not read it in detail. 

Senator DORGAN. But most of your testimony had nothing to do 

with that, isn’t that correct? Your testimony is about the seizure 

of counterfeit medicine or importation from unapproved venues and 

so on? So, your testimony had little to do with the legislation that 

Senator Snowe and I and 31 Senators have introduced. Why is that 

the case? 

Dr. LUTTER. The concerns that we have with importation currently are related, Senator, to the risks that we see currently, and 

that is that people are now buying unapproved products over the 

Internet in a manner that we think is unsafe. And we think we 

have a key responsibility to communicate that to the public so that 

they understand the safety risks that they face when buying unregulated, unapproved products from foreign sources. 

Senator DORGAN. You’ll find no objection from the four of us on 

this panel at all about that. That’s not the point of this hearing. 

No one, that I’m aware of, has suggested that we allow unauthorized drugs, drugs not approved by the FDA, drugs coming in from 

Internet sites that have not been approved—I don’t think anyone 

is suggesting that. So, I guess you have won—won a debate we’re 

not having. Congratulations. 

But the fact is, we’ve introduced a piece of legislation, with nearly one-third of the Senate, that has very specific—very specific safety issues. Would you testify about your evaluation of those safety 

issues? 

Dr. LUTTER. I’m sorry, the safety issues pertaining to? 

Senator DORGAN. In the—well, we have introduced legislation 

that has nearly a third of the Senate as cosponsors of the legislation. We have included issues dealing with safety in that legislation, because much of your testimony dealt with safety. We’ve included provisions, that are very significant provisions, that address, for example, the first time we went through this, where 

Donna Shalala refused to certify, and set out four conditions that 

needed to be met. We meet all these four conditions in this legislation that responds to the Executive Branch issues. My question for 

you is, how do you respond to those, or do you believe there is not 

the capability to provide for safe reimportation of FDA-approved 

drugs from FDA-approved plants or FDA-approved sites? Do you 

believe that is impossible? 

Dr. LUTTER. My understanding, Senator, from the invitation was 

that you wanted me to talk about the policy implications of importation broadly. And if you wish, we will be very happy to offer techVerDate Nov 24 2008 06:50 Jan 16, 2013 Jkt 075679 PO 00000 Frm 00024 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\77867.TXT JACKIE
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nical assistance on the legislation, in particular, if you request us 

to do so. 

Senator DORGAN. Let me ask it a different way, then. As I indicated in my opening statement, Europe has a system of parallel 

trading. They’ve had it for a couple of decades. German can buy 

from Spain; an Italian can buy from France, under parallel trading, 

a prescription drug that is an approved drug. Let me ask you 

whether you think we are as capable as the Europeans in establishing—providing you the resources, and then establishing a system by which, with FDA approval and FDA certification, that a 

U.S. consumer can safely reimport an FDA-approved drug that has 

never left the chain of custody, an FDA-approved chain of custody? 

Do you—— 

Dr. LUTTER. I think, surely, Senator, the Americans are as capable as Europeans in that regard, but there’s a key distinction with 

respect to that model, and that is that Brussels, as the capital of 

the European Union, can establish regulations which apply to all 

countries. And I believe, Senator, that the form of importation that 

we’re talking about in the United States lacks a clear parallel, in 

the sense that the foreign countries from which we would be importing are ones that are not governed by any ‘‘international government,’’ if you will, in the way that Brussels governs countries 

that are members of the European Union. 

Senator DORGAN. Well, that’s a novel answer, because the proposal in our legislation deals with plants in foreign countries that 

the FDA has already approved. It deals with an Internet seller that 

the FDA would have approved and certified. So, we’re not talking 

about a regime outside of the FDA’s approval process. My question 

is—the FDA—the FDA approved the plant that this Lipitor was 

produced in, in Ireland. I assume the FDA actually sends people 

to this plant and says, ‘‘Yes, you can produce this medicine in this 

plant, and you can ship this medicine to the U.S. consumer, and 

we believe that is safe.’’ Is that correct? 

Dr. LUTTER. Yes, sir. 

Senator DORGAN. All right. And if the FDA approves a foreign 

plant that is a production facility for this medicine, and a foreign— 

a distribution system to move that, in a closed system, to a U.S. 

consumer, tell me where the safety implications are. 

Dr. LUTTER. Well, I think the issue, Senator, is that, when we 

inspect a foreign facility that is manufacturing an FDA-approved 

product, that this is very necessary and essential to ensure that 

that product meets FDA standards. But there may be another facility, even another line, even another building within that same 

manufacturing facility, which isn’t inspected by us. And the question is, if that product is not inspected by us, what is our ability 

to ensure that it meets our standards? And that’s, I think, a key 

distinction to follow. 

Senator DORGAN. What about the case today? How do you assure 

this comes from the line that you’ve inspected, and not the line 

that you didn’t inspect? 

Dr. LUTTER. Well, I have trouble recognizing the bottle from its 

distance. 

Senator DORGAN. It’s Lipitor. 

22 

Dr. LUTTER. If that’s the Lipitor which is manufactured in Ireland, then that’s inspected by an FDA inspector at the plant in Ireland, and it is shipped from Ireland to the United States. 

Senator DORGAN. Well, let me—my colleagues wish to ask questions. Let me ask you a simpler question, if I might. In Emerson, 

Canada, there’s a one-room drugstore. And I went there one day 

with a group of senior citizens from Fargo, North Dakota. And just 

miles across the border, in this little one-room drugstore, they purchased their prescription drugs that, 10 miles on the other—on the 

U.S. side of the border, they would have had to pay substantially 

more money for. These were citizens who didn’t have a lot of 

money. And they made their purchases in this drugstore, and 

showed me their savings, and were excited about it. And my understanding of the chain of custody in Canada is such that you would 

not be concerned about someone buying a prescription drug in a 

Canadian drugstore. Would you agree with that? Do you believe 

the chain of custody of drugs in Canada, with respect to the drugs 

that go from the producer to the wholesaler to the drugstore, is essentially as safe as the chain of custody in the U.S.? 

Dr. LUTTER. FDA has no particular expertise in the regulatory 

system of Canada. 

Senator DORGAN. The FDA has already answered that question 

affirmatively previously. 

Dr. LUTTER. But, in general, it is very, very well respected as 

being safe and adequate for Canadians. 

Senator DORGAN. Essentially has the same type of chain of custody with the same safety circumstances as the U.S.? 

Dr. LUTTER. It’s widely seen that way. 

Senator DORGAN. And that’s what the FDA has previously said. 

If that’s the case, then at least you and I can probably agree that 

the importation of that drug purchased in the one-room pharmacy 

in Emerson, Canada, brought back across the border, is not a safety issue. Is that correct? 

Dr. LUTTER. There are a collection of safety issues that people 

need to be concerned about. In January of last year, we issued a 

report on our website dealing with confusing brand names. And it 

illustrates an example that many people don’t—aren’t aware of, of 

a regulatory function performed by FDA in the United States that 

many people recognize is valid, which isn’t often appreciated, and 

that is that in the United States when a new product comes to 

market, we ascertain whether or not the proposed brand name for 

that product is one that is similar to existing brand names, or so 

close that it could be confused by pharmacists dispensing medications. In the case of Americans taking prescriptions and filling 

them abroad, there’s no such function provided by FDA or any 

other regulatory body. So, Americans taking prescriptions, even 

crossing the border, if you will, to a pharmacist that they think is 

entirely reliable in other circumstances, should be aware that the 

name of the product does not necessarily translate across the border to one that is otherwise equivalent. 

Senator DORGAN. Yes. Well, that’s the—a new defense, the confused-pharmacist defense, I guess. I don’t understand. I don’t understand, at all, why the FDA, given the resources—and our legislation gives them the substantial resources they need—cannot do 

23 

what others in the world are able to do, and that is stand up for 

the consumers of this country, give them a safe supply of drugs, 

allow a little market—a little bit of the market system to play a 

role in putting downward pressure on market prices. What you are 

supporting, Dr. Lutter, is a circumstance in which we do have price 

controls in this country. The price controls are imposed by the 

pharmaceutical industry. They’re the ones that impose the price 

controls. And, by the way, they say, ‘‘Well, we really can’t make 

any money, except in the U.S. That’s why we have to charge the 

U.S. consumer the highest prices.’’ Well, why did they repatriate 

60-plus-billion dollars when this Congress, regrettably, gave them 

a five and a quarter percent—gave all industry a five and a quarter 

percent sweetheart tax rate if they could—if they would repatriate 

money from abroad. The pharmaceutical industry repatriated 60- 

plus-billion dollars. Clearly, they’re making money elsewhere by 

charging much lower prices. 

And I—you probably detect I’m enormously frustrated, have been 

for a long while, with the FDA coming here, telling us what they 

can’t do. I’m very interested in finding out what they can do to try 

to help consumers. And I think, you know, your first consumer’s 

‘‘bait and switch’’—I think yours was ‘‘bait and switch.’’ You came, 

talking about counterfeit drugs. There’s nothing in legislation that 

any of the four of us have been talking about that has anything to 

do with counterfeit drugs. It has to do with safe reimportation of 

FDA-approved drugs. 

Senator DeMint? 

Senator DEMINT. Dr. Lutter, I, too, am disappointed in the testimony. We all know that the status quo is not acceptable, and we 

know denying importation and not having any kind of approval or 

certification is not working. The whole point of this legislation is 

to create a safe system. 

Am I right in saying that the FDA oversees the importation of 

fruits, vegetables, meats, fruit juice, beer, wine from all over the 

world? Do you have a system that does that? 

Dr. LUTTER. We inspect those products at the border, yes, Senator. 

Senator DEMINT. But you’re responsible for the health of the 

American people when it comes to products coming in from all over 

the world that we eat and drink. 

Dr. LUTTER. We are responsible for the safety of food and beverages that we regulate, yes. 

Senator DEMINT. And I would assume that’s a very complex system of understanding points of origin and what is brought in, who 

the suppliers are. I assume the FDA is very involved with making 

sure that these products are safe. 

Dr. LUTTER. These products, unlike drugs, do not contain active 

pharmacological ingredients that are being prescribed to sick people. 

Senator DEMINT. But they could have disease, they could be 

tainted, there could be a lot of dangers, right? 

Dr. LUTTER. There are problems of food-borne illness, and we actively fight that domestically in imported products. 

24 

Senator DEMINT. OK. Are you aware that most of the—or a lot 

of the drugs that are made in this country are made from imported 

ingredients? 

Dr. LUTTER. I’m aware that there’s active trade, if you will, in 

active pharmaceutical ingredients. 

Senator DEMINT. Does the FDA inspect these foreign plants 

where these ingredients are made? 

Dr. LUTTER. We inspect facilities where active pharmaceutical ingredients are manufactured. 

Senator DEMINT. Well, isn’t it possible that the line you inspect 

is not the line they actually ship these ingredients to the United 

States? 

Dr. LUTTER. I suppose it’s possible. The question is whether or 

not it would be violating our regulations. And I’d have to get back 

to you on that. 

Senator DEMINT. Is it not the exact same situation you’re saying 

you can’t do with finished products? 

Dr. LUTTER. I’m not sure I follow your questioning. 

Senator DEMINT. Is not the situation with finished products, as 

far as developing some international safety system, very similar, if 

not exactly the same, as assuring that the ingredients for the same 

pharmaceuticals—— 

Dr. LUTTER. Yes—— 

Senator DORGAN.—are safe? 

Dr. LUTTER.—Senator, let me try—if I could try and answer your 

question, and that of Chairman Dorgan, in a slightly different way. 

And I’m sorry that you’re disappointed with the testimony. I 

thought I was being invited to talk about policy implications of imported drugs, broadly, rather than the particular bill that 

you’re—— 

Senator DEMINT. We’re well aware of the Administration’s position, and we really didn’t need that repeated today. And we have— 

there are several good proposals, with a lot of detail, which the Administration is very aware of. There’s no reason that we can’t have 

some testimony as to what the possibilities are of creating these 

safety—or safeguards that we’ve got in this legislation. So, I—forgive me for being impatient, but I see a lot of inconsistency in what 

we’re talking about. If the drugs that are made in this country 

come from ingredients from inspected plants, you’re telling me that 

you can somehow guarantee that safety, but, if they’re made here 

and put in tamperproof containers and sent to some other country 

that is within an FDA-inspected distribution system, that somehow 

that’s not safe. It—I hope you realize that what you’re saying is 

very difficult to absorb. 

Dr. LUTTER. A key concern that we have with, I think broadly 

speaking, the type of proposal that you’re endorsing is, the implications for FDA of having to approve the foreign products, because 

you’re asking me to speak particularly about the legislation. I’m 

not prepared to offer technical assistance, but I have been briefed 

on the broad theme, so let me speak a little bit about—— 

Senator DEMINT. You do know what we’re doing now, as far as 

inspecting plants for the ingredients of pharmaceutical products 

that are made in this country—foreign plants. I mean you’re aware 

25 

of your policies and procedures, and how that’s done—I’m assuming 

you are. 

Dr. LUTTER. Yes. 

Senator DEMINT. OK. 

Dr. LUTTER. But then if the proposal were for the FDA to allow 

commercial importation of FDA-approved products that are made 

abroad, presumably it’s the foreign versions of FDA-approved products that are already for sale in the United States. If that were the 

legislative proposal that’s being considered, then I think the question is, what does this really mean for FDA program management 

and the review of such applications? And one way of thinking about 

this is, really it amounts to a substantial new FDA program that 

would review applications for foreign products to see if they’re safe, 

effective, and equivalent to U.S. products. So, it looks a little bit 

like our generic drugs program. And our generic drugs program 

currently has roughly 200 employees who are approving 500 abbreviated new drug applications annually. And that gives you some 

idea of the magnitude of the task that we would be faced with if 

one were to set up a program wherein we would have to approve 

foreign products as safe and effective and equivalent to U.S.—— 

Senator DEMINT. You realize what we’re asking—— 

Dr. LUTTER. We believe this is a very, very significant expansion 

of an existing FDA program. 

Senator DEMINT. But you realize what we’re asking is not to approve a drug that’s made in another country, but just to create a 

safety loop of distribution, that we can oversee, that’s primarily reimporting products that were made in the United States, under 

FDA approval and certified plants, that are—— 

Dr. LUTTER. But it’s—— 

Senator DEMINT.—reimported into this country. 

Dr. LUTTER. Senator, I’m not familiar with the details of the legislation that we’re discussing. If you want technical assistance—on 

it, I’m very happy to come and offer that at a later time. 

Senator DEMINT. Well, I think that’s probably what we’re going 

to need to do. 

Thank you, Mr. Chairman. I yield. 

Senator DORGAN. Let me call on Senator Snowe, as the—OK, 

Senator Vitter. 

Senator VITTER. Thank you, Mr. Chairman. 

Dr. Lutter, I take it that your testimony comes out of the FDA’s 

central mandate to protect safety, including of prescription drugs. 

Is that correct? 

Dr. LUTTER. Yes, sir. 

Senator VITTER. Is there any greater mandate or responsibility 

that FDA has? 

Dr. LUTTER. Our overall mission is to protect and promote public 

health, and that’s our overall mission. 

Senator VITTER. So, is there any other—is there any greater 

mandate than that safety—— 

Dr. LUTTER. No. 

Senator VITTER.—concern that you have? And so, these sort of 

problems and dangers are very concerning to you because of that 

mandate, I assume. Is that correct? 

Dr. LUTTER. Yes, sir. 

26 

Senator VITTER. So, what regulatory regime—what solution are 

you putting in place in light of these dangers? 

Dr. LUTTER. These dangers are very problematic from the viewpoint of protecting Americans and promoting—their public 

health—— 

Senator VITTER. That’s my point. So, what’s the FDA’s solution 

to this? 

Dr. LUTTER. Our key solution—I need to back up and say why 

this is so problematic, and then I’ll elaborate on the solution. This 

is very problematic precisely because there’s a huge volume of imported parcels coming into international mail facilities, which contain unapproved products. We don’t know where they’re from, we 

don’t know what they are, and we lack the resources, we lack the 

ability to identify what they are at the border, and to stop them. 

Therefore, our key program is to emphasize, instead, public education, to tell consumers what risks they face buying these products on the web. Everybody has a home computer, they think they 

can click on the keyboard, they think they can find an international website, they see somebody reassuring, wearing a white 

coat and with a stethoscope, and they think they can buy something that is what their doctor really wants them to have and is 

equivalent to what their U.S. trained and licensed pharmacists 

would give. And they discover, instead, that that’s not the case. 

And we think that our key job, and one of the most effective ways 

that we can communicate these risks is to go public with them. 

And that’s why what you see here is a collection, if you will, of the 

messages that we’ve communicated to the public and to you. 

They’re on our website, they’re in our press releases over the last 

year and a half, indicating—in fact, going way back before then, 

about the risks that Americans face when they buy these drugs on 

the Internet—— 

Senator VITTER. So protecting safety is your top mandate. This 

sort of stuff is happening. You have highlighted that. That’s a big 

danger. And so, the FDA response is to tell people, ‘‘Don’t do it.’’ 

That’s basically the solution, the FDA’s solution. 

Dr. LUTTER. That has been the—— 

Senator VITTER. How has that strategy been working? How effectively have you reduced the activity of getting drugs from abroad? 

What are the statistics there? 

How’s that strategy working? 

Dr. LUTTER. We wish we had statistics on that. We do not. The 

best available statistics that we have to date are the ones that we 

released in December 2004, and we have no updates since then. It’s 

very difficult for us actually to count the volume of drugs coming 

in at the border, because we don’t always know what parcels are 

containing pharmaceutical products. 

Senator VITTER. And what were those statistics from December 

2004? 

Dr. LUTTER. December 2004, we estimated, given the data that 

we had, that there were 10 million parcels arriving annually at 

international mail facilities, and they contained roughly 25 million 

prescriptions. 

Senator VITTER. And was that on the rise, or was—— 

27 

Dr. LUTTER. That had definitely been rising over—relative to recent years. 

Senator VITTER. OK. You get the sense that, in light of your solution to the problem, that that trend has been reversed? Do you 

think it’s declining right now? 

Dr. LUTTER. The broad perception is that it has declined, but it’s 

unclear as to why. The key reason that it may have declined is the 

success of Medicare Part D, which provides prescription drug coverage to elderly Americans over 65. 

Senator VITTER. Well, maybe I’m just out of step with the broad 

perception. It is not my perception that it has declined. It is my 

perception that it’s increased 50-fold, up to the point that you are 

talking about, and has continued to grow from that point. I don’t 

know at what rate. I don’t know if the pace has slowed. But my 

perception is that it is a curve that is going up and up. 

So, I would just suggest that, when the FDA’s top mandate is 

safety, when the FDA knows there are problems out there, and 

dangers, and your only solution is press releases that say, ‘‘Beware,’’ I would propose that it’s patently clear that that is a failed 

strategy and that if you take your mandate seriously, you’d better 

do something else, like a regulatory regime. What’s your response 

to that? 

Dr. LUTTER. Well, the regulatory regimes that we implement are 

under the authority of the laws that we’ve been entrusted to administer. And the key challenge here with respect to the international mail facilities, it’s virtually impossible. My predecessor 

testified it would take an army to actually identify what are the 

problems—what parcels at the border contain pharmaceutical products and what they are, given the procedures and the due process 

that we’re asked to follow. We cannot stop these at the border with 

the resources that we have. And the key reason for that is essentially the impossibility of identifying what each parcel contains, 

and then examining them to see what they may contain before 

making decisions on what to do with them. 

Senator VITTER. Well, I would just end by saying I agree with 

you, it’s impossible to set up that system to stop parcels at the border. What is possible is to regulate the sources that are allowed to 

come into the country to advertise those to the American people, 

so the American people have confidence in those sources, and use 

those sources. That’s the sort of regulatory regime I’m talking 

about, which, of course, the FDA, right now, has full authority to 

implement. 

Thanks. I have no further questions. 

Senator DORGAN. Senator Snowe? 

Senator SNOWE. Thank you, Mr. Chairman. 

You were saying that you don’t have the resources. I think the 

point of this legislation is that we provide you the resources, and 

the funding provided in our bill was estimated by CBO as being 

more than adequate to implement this legislation and allow FDA 

to do what you would be required to do. So, if you had these resources, would you be able to do what is required in this legislation? 

Dr. LUTTER. We believe there are a variety of technical issues associated with the legislation, as I understand it, and we probably 

28 

should look forward to a different opportunity to offer the technical 

assistance that’s been provided. But I think a key question is the 

ability to stop the imports at the border, at the international mail 

facilities; in particular, the ability to stop them, provided that there 

is a implicit message being conveyed through legalization of commercial imports about the safety of foreign products themselves. 

And the question is, even if one had a regulatory system that allowed for FDA review of the foreign equivalents to ensure that 

those were safe and effective, and we were given adequate resources to ensure that, and then, of course, we’d have to see whatever resources—whether these were, in fact, adequate—but, even if 

we had that, there’s a question of, how do you actually stop the 

problem that Senator Vitter has just alluded to at the border? 

Senator SNOWE. Well, I don’t think there’s anything magical 

about it. It’s really having the will to do it. I’m sensing you’re either unable or unwilling. If we gave you the resources and gave 

you the statutory authority—and that’s what we have outlined in 

this legislation, you know, that we import from manufacturers in 

more than 40 countries, where you may, on average, inspect a 

plant once every 7 years? In our legislation, we require inspections 

randomly, but not less than 12 times a year—12 times a year for 

wholesalers which import, as well as for those exporting pharmacies which would directly serve consumers. So, you know, I just 

don’t understand why we’re hearing here today, I think, you know, 

bureaucratic intransigence about coming up with a way in which 

to allow it to happen. And, while you’re talking about American 

consumers misled by buying drugs from ‘‘bait and switch’’ and Canadian websites. Well, FDA could list which ones are legitimate for 

consumers. I mean, why isn’t there the can-do spirit? Instead it’s 

can’t-do, and we’re seeing everything done to deny consumers access to affordable medications. And we are talking about brand 

name drugs. You were referring to generics earlier. What we’re 

talking about is brand names, frankly, because consumers don’t 

have access to affordable brand name medications. So, that’s what 

our legislation addresses. 

Can you tell me, in the incidence of counterfeiting, what do you 

have for statistics here in the United States? Do you have a rate 

of counterfeiting? Because there’s obviously a serious problem within our borders. Do we have a rate of incidence regarding counterfeiting? 

Dr. LUTTER. Senator, if I could just go back to one—— 

Senator SNOWE. Yes. 

Dr. LUTTER.—comment you made a moment—— 

Senator SNOWE. Yes. 

Dr. LUTTER.—ago, about why we don’t list legitimate foreign 

websites, and that’s really that we have no ability to know which 

ones are legitimate, because they can take down their websites, 

they can change the names, we don’t have authority to inspect foreign pharmacies to see what they’re doing. So, as much as—— 

Senator SNOWE. Well, we would give you that, under our legislation. See, that’s the—— 

Dr. LUTTER. We’d be happy to review that legislation in detail 

and get back to you on that. 

Senator SNOWE. So—OK. 

29 

Senator SNOWE. Well, it is amazing that you weren’t, because 

this has been an outstanding issue, frankly, for a decade here. I 

mean, this is not a new issue. I think Senator Dorgan introduced 

that bill, back in 1999—and in 2000 we saw the MEDS Act passed. 

Now we have, you know, run the gamut on establishing the standards and getting advice from all, you know, corners on this debate, 

and perspectives, and getting the very best advice how to go about 

certifying it. 

So, on the rate of incidence of counterfeiting within our borders, 

do you have any idea what the magnitude is? 

Dr. LUTTER. We had a public meeting as part of a counterfeit 

drug task force in February of last year. We were very concerned 

about developing an estimate. We asked that of all the attendees 

in the public meeting, and we got no reliable estimates of the prevalence of counterfeit drugs in the United States. That’s essentially 

because it’s extremely difficult even for a trained pharmacist to distinguish between an authentic and a counterfeit product. We have 

opened, last year, 54 new criminal investigations into counterfeiting in the United States. That’s a significant increase in the 

rate of newly opened counterfeit cases relative to about 6 years ago, 

around 2000. We’d had several years in a row where we were opening less than ten cases annually. So, in that sense, what we perceive is that there’s increased sophistication, increased networks 

establishing counterfeit drugs in the United States, but we have no 

estimates on the prevalence. We believe that it’s very low. We believe that the overwhelming share of all—of finished pharmaceutical products sold in the United States are safe and effective, 

genuine FDA-approved articles. 

Senator SNOWE. Well, we wrote a letter to the Commissioner of 

FDA, back in October, asking for details upon which blanket warnings are issued regarding counterfeit drugs. Do you have any specific data on seizures of prescription drugs at the border? Do you 

have any data so that we know specifically what the basis was for 

claims of counterfeiting? 

Dr. LUTTER. Well, I think it depends a little bit on the nature 

of the seizure. Some of them are ongoing criminal investigation 

cases, so I’m not sure that’s something that we wish to talk about. 

In other instances, we have conducted blitzes of intercepting all 

products, and partly to motivate the public health messages, that 

we think are so important to communicate to the American public 

the risks of imported drugs. And, in those instances, we undertake 

some analysis of the nature of the products, yes. 

Senator SNOWE. Well, the—first of all, I think that would obviously be helpful to everybody to know exactly what was the basis 

for the seizure, what was the information and data to support it, 

what was it all about, because it would be helpful to everybody to 

know exactly, you know, what issues were involved, useful to all 

of us in this process. But I guess the point here is the need to be 

setting up a system. And, you know, I sense that if you have the 

resources, and the statutory authority, it could be done. I mean, we 

do oversight in over 40 countries, in terms of manufacturing medications that come in use here in the United States. 

So, what’s the issue, really? 

30 

Dr. LUTTER. The letter accompanying the December 2004 HHS 

Task Force Report on Importation was signed by Secretaries 

Thompson and Evans of Commerce, and it outlined conditions 

under which commercialized drug importation, could in principle, 

would have to be satisfied in order for it to be done safely. And 

those are available there. I think you’re familiar with several of 

them. It’s included that it should be limited to Canada, and it said 

that it should be limited only to a set of drugs that was relatively 

high volume and where there was reason for there to believe that 

there would be significant savings. And it also limited it to products where there are no special handling concerns, such as biologics 

or injectables, which are relatively easy to counterfeit, that these 

are issues that were outlined there, and that we share as being important to address in any potential legislation. 

Senator SNOWE. Yet, on the other hand, you know, we can talk 

about the European Union being engaged in parallel trading for 30 

years without consequence, without incidence. There has been a 

truly remarkable track record. There’s no reason why we can’t import, based on the safety standards that have been included in this 

legislation and the resources which the bill provides to do it, and 

the requirement for numerous inspections on the part of the FDA. 

So, I think that, when you consider all of that, it’s a very different 

system. We just don’t employ a simple certification, we set which 

standards have to be in place, and the resources in which to do it. 

And I think that’s the critical difference from other approaches. 

Thank you, Mr. Chairman. 

Senator DORGAN. Thank you. 

Dr. Lutter, because of the confusion here, what I’d like to do is 

send you a series of questions about the legislation that I have described, and ask for the FDA’s response to those questions, giving 

us your evaluation of the safety provisions in the legislation. So, we 

will do that—with your willingness to respond to them, we’ll do 

that within the next week, get those questions to you. 

Dr. LUTTER. Thank you. 

Senator DORGAN. All right. Thank you for being here, Dr. Lutter. 

Thank you for your testimony. 

The second panel today that we will hear from will be Billy Tauzin, CEO of PhRMA. Bill Tauzin is a former colleague of ours who 

served in the U.S. House for many years. John Vernon is a Professor of Finance at the University of Connecticut. He has a Ph.D. 

from the City University of London, and a Ph.D. in Health Policy 

and Management from the Wharton School of Business, University 

of Pennsylvania. Stephen Schondelmeyer is Professor and Head of 

the Department of Pharmaceutical Care & Health Systems, University of Minnesota. William Schultz is a Partner at Zuckerman 

Spaeder, LLP, previously was Deputy Commissioner for Policy at 

the Food and Drug Administration. And, finally, Nelda Barnett, a 

Member of the Board of Directors of the AARP. 

We thank the five of you for being with us today. And I—we will 

begin with our former colleague, former Congressman Tauzin. 

Mr. TAUZIN. Mr. Chairman, thank you very much. 

Senator DORGAN.—if you will pull that microphone closer to you, 

we’d appreciate it—you may proceed. 

31 

STATEMENT OF HON. W.J. BILLY TAUZIN, PRESIDENT AND 

CEO, PHARMACEUTICAL RESEARCH AND MANUFACTURERS 

OF AMERICA (PHRMA) 

Mr. TAUZIN. Thank you very much, Senator. 

I haven’t had the chance to be on this side of the podium for a 

while, so let me first thank you, Senator, for allowing me to come 

and visit with you today on this important topic. You’ve pinned it 

correctly, it is a matter of life and death. And I want to talk a little 

bit about that today. 

I’ve given you an extensive written testimony. I won’t read that, 

but I’ll call your attention to parts of it, beginning on page 2, which 

tell the story about where we’ve been, so that we can get some idea 

about where you and others might want to go, or not go, in the future, when it comes to drug safety in our country. 

I was in the Congress in 1987 when Chairman John Dingell executed a series of hearings on this important topic. I was then a 

Democrat, working with Chairman Dingell on the issue, and we 

had some extraordinary hearings. It was prompted by a discovery, 

in 1984, that nearly 2 million counterfeits of G.D. Searle’s Ovulen 

21 birth control pills had been brought into our country as counterfeits. And there was a great deal of information developed in that 

series of hearings. I call it to your attention. You ought to go back 

and read it. It basically describes why the 1988 PDMA was passed, 

why Congress, in 1988, decided to prevent the reimportation of 

drugs that have left the control of the manufacturer and had gone 

out into the marketplace in other countries, and might be part of 

the process of reimporting those products into our own country 

after they’ve left that chain of control. 

The Commerce Committee, in that series of hearings, concluded, 

and I quote, that the—‘‘permitting reimportation of U.S.-origin 

goods prevents effective control of even routine knowledge of the 

true sources of merchandise in a significant number of cases.’’ It 

went on to say that, ‘‘the reimportation resulted in pharmaceuticals 

which had been mislabeled, misbranded, improperly stored, or 

shipped.’’ As you know, it’s not just whether the drug contains the 

right content, it’s how well it’s been handled, whether it’s been refrigerated properly, handled properly, stored properly, labeled properly. In fact, we concluded that reimportation resulted in those 

pharmaceuticals entering the country that had exceeded their expiration dates or were flat-out, bald counterfeits, and that they were 

being injected into the national distribution system for ultimate 

sale to American consumers. 

The Committee further concluded—and this is very, very important, Mr. Chairman—that the very existence of the market for reimported goods here provides the perfect cover for foreign counterfeits, and, as a result of those findings, Chairman Dingell, the Congress, in the House and the Senate, concurred in the adoption, in 

1988, of the prohibition against reimportation. There was an exception. The exception was, as you described it today, for the manufacturer, the original manufacturer in a foreign country, to be able to 

ship into this country. However, in those cases, the manufacturer 

controlled the chain of custody, from the plant inspected by the 

FDA all the way through the market into the United States. In effect, we, in 1988, said, ‘‘Look, we’re not going to let drugs that have 

32 

gone out of the chain of custody come back into this country, because we can’t trust it. Counterfeiting is too serious,’’ in 1988, ‘‘for 

us to trust that system.’’ We said, ‘‘We’re going to put it on the 

backs of the pharmaceutical industry to be responsible, from the 

manufacturing plant overseas to the consumer in America, for that 

chain of custody, and the FDA will manage that inspection and 

that safety system.’’ We, in effect, created a closed regulatory system to protect American consumers from the dangers of these imports. 

Now, that was 1988. And the simple question I ask you today is, 

have things gotten better or worse? Madam Snowe, you asked that 

question, just a minute ago, ‘‘What’s the status? Is it getting better 

or worse?’’ Mr. Vitter, you asked it, ‘‘What’s the status in this country?’’ I call your attention to two articles, one of which I’ll send over 

to the desk, which is an article that was included in Parade magazine in The Washington Post on March 5. What I want to quote 

from, a New York Times article that came out on February 20 entitled ‘‘In the World of Life-Saving Drugs, a Growing Epidemic of 

Deadly Fakes.’’ For a long time in this debate in Congress, the 

question has been, show us the bodies, where are the bodies? Well, 

the bodies are piling up all over the world. Read the article. According to this article, estimates of deaths now caused by fakes run 

from the tens of thousands a year to 200,000 or more. The World 

Health Organization has estimated that a full fifth of the 1 million 

annual deaths from malaria would be prevented if the medicines, 

in fact, were genuine and were taken properly. China is obviously 

the biggest problem, the source of most of these counterfeits. The 

article goes on to say that the counterfeiters in China are not selling them to the Chinese. They’re smarter than that. They understand they’d get hauled off to jail if they start killing Chinese citizens with fake drugs. The article goes on to say they don’t want 

anybody beating down the door in the middle of the night, dragging 

them away, so they make their drugs for sale outside the country. 

It goes on to say that not only do the pills look correct, as did the 

cardboard boxes and the blister packaging and the foil backing, but 

they found 12 versions of tiny holograms added to prevent forgery, 

even a secret X–52 logo visible only under ultraviolet light was 

present. 

What they’re basically saying is, they can’t tell the counterfeits 

from the real products anymore. When they’re out of that chain of 

custody, when you permit them into this system, you’re literally allowing an open door for those types of products to come into America. 

The most frightening aspect of what’s going on in the world, Mr. 

Chairman, is that these counterfeiters are beginning to make drugs 

that appear to work. For example, they’ll contain drugs that apparently fool the patients into thinking the pills are working. The Parade article tells the real story. It’s not necessarily the toxic chemicals that are found in a counterfeit drug that are killing people. It’s 

the fact that they’re getting drugs that don’t contain the active ingredients that you’re supposed to have to get people healthy and 

to battle disease. 

Now, it’s one thing for your constituents to walk across the border and to buy a drug if they really want to take that chance in 

33 

Canada. By the way, I’ve got a letter from Canada saying they will 

not, and cannot, be responsible for the safety of drugs imported 

from Canada into the United States. That’s our job, over here, to 

make sure it’s safe. And it’s one thing for a citizen to voluntarily 

walk across the border and buy those drugs; it’s another thing for 

me to bring my child to a hospital, in America, where those counterfeit drugs have been brought in and mixed in with the safe system we have, and for me not to even know that my child is getting 

a drug that is not only doesn’t contain the ingredients necessary to 

save his life, but, in some cases, may be diluted, polluted—even 

contain pond water, in some cases, we’ve discovered. So, it is a 

matter of life or death, Mr. Chairman. 

Now, as I said, some things have changed since 1988. You know, 

I’m no longer a Democrat. I became a Republican. I’m no longer in 

Congress. I left. Some people say both of those are good things. But 

the bad thing is, this is getting worse, not better. And opening the 

door to it, to American consumers, who unknowingly will be taking 

these fake products in increasing numbers, is the scariest thing I 

can think of right now. 

Look at the Parade article. The Parade article talks about 

600,000 Lipitor tablets that were discovered, counterfeited, received 

by patients like you, taking them, thinking they’re taking the cardiovascular medicine they need, and taking nothing but cornstarch. 

Fake products. Look at it, and you’ll see some numbers, Senator 

Snowe and Mr. Vitter, 40 million estimated by the National Association of Boards of Pharmacy in this country—40 million fake prescriptions already in America, getting worse. And we’re only a 1 

percent problem, according to them. In the world, it’s becoming a 

20-percent problem. In the parallel trade in Europe, it’s growing 

rapidly. Three countries in the former Soviet Union are now in the 

EU, and the counterfeits in those countries are enormous. In 

Borat’s Kazakhstan, for example, our researchers tell us, 50 percent of the drugs there are likely counterfeit. The same is true in 

Mexico today. 

Open those borders, given our closed regulatory system, and open 

it up to those drugs, that’s what the FDA’s trying to tell you would 

be a serious mistake for consumers in America. That’s the life-ordeath decisions we have to make here. 

Let me conclude. When I officially retired from Congress in 2005, 

I was already gone. I had left in 2004, when I was diagnosed with 

cancer, as you know. 

I didn’t leave to take a job with the pharmaceutical companies 

or the Motion Picture Association. I left to go to Johns Hopkins and 

M.D. Anderson to battle for my life. And there were some tough 

moments. I took the last sacrament and said goodbye to my family 

during that process. I got a very generous finding at M.D. Anderson, that I had a five percent chance to live. Thanks a lot. But 

somehow I survived. 

And in that worst year of cancer, of surgery and treatments and 

chemo and radiation, they gave me 3 weeks off. I took one of those 

weeks to come to work here in Congress. That’s the one week I 

spent working with you in 2004, when I left for cancer treatment. 

And I gave one speech to Congress. I’ve got a copy with me today. 

That speech I gave was to the Appropriations Committee on the 

34 

House side. It was a Cassandra warning. I brought it to you. I’ll 

give it to you, Mr. Chairman. It was a warning. It was a plea to 

Congress to please end the filibuster in the Senate and pass the 

energy bill that contained $20 billion for my City of New Orleans, 

Mr. Vitter, to save us from what happened. I talked about going 

down and seeing the simulation of the storm that was coming. I 

talked about the fact that New Orleans was about to drown. And 

I begged Congress, in that one appearance in 2004, not to have to 

come back one day with a red-faced commission and admit that we 

could have stopped it and we didn’t do anything about it before it 

happened. I concluded with these words, ‘‘Please help me place into 

law some system that the Corps and the great people of my state 

can collectively work to begin doing something about the 35 square 

miles of wetlands. That’s the only—that the critical land mass— 

that’s the barrier between us—life and death. That’s the barrier between us and the storms that churn in the Gulf that are about to 

destroy not only the cities and the communities, but the lives of the 

people I represent.’’ That was the one speech I gave in 2004. Nobody listened. 

I’m going to ask you, please, Mr. Chairman, as one who’s just 

gone through it, who’s had to count on a medicine to save my life, 

whatever you do on this issue, take seriously the admonitions of 

Donna Shalala, take seriously the admonitions of Tommy Thompson, take seriously the admonitions of the current Secretary, when 

they tell you that they cannot—they cannot, today, stop this flood 

of imports that is only a one percent problem in America today, 

that’s a 20 percent problem in the world. 

Senator DORGAN. Mr. Tauzin—— 

Mr. TAUZIN. It is a matter of life or death. Don’t accept responsibility for the consequences of opening that door wide open to all of 

these fakes. 

Senator DORGAN. Mr. Tauzin—— 

Mr. TAUZIN. Thank you, Mr. Chairman. 

Senator DORGAN.—thank you very much. 

[The prepared statement of Mr. Tauzin follows:] 

PREPARED STATEMENT OF HON. W.J. BILLY TAUZIN, PRESIDENT AND CEO, 

PHARMACEUTICAL RESEARCH AND MANUFACTURERS OF AMERICA (PHRMA) 

Mr. Chairman, Senator DeMint, and Members of the Subcommittee: 

Thank you for the invitation to participate in today’s hearing on pharmaceutical 

importation. My name is Billy Tauzin and I am the President and Chief Executive 

Officer of the Pharmaceutical Research and Manufacturers of America (PhRMA). 

PhRMA is the Nation’s leading trade association representing research-based pharmaceutical and biotechnology companies that are devoted to inventing new, life-saving medicines that help achieve longer, healthier, more productive lives. 

Much has changed since the debate over legalizing importation began nearly a 

decade ago. Unlike the situation in 2000, millions of seniors who lacked prescription 

drug insurance and were paying for their medicines out-of-pocket now have comprehensive prescription drug insurance through Medicare Part D. Today, we know 

much more than we did in 2000 about the growing problem of counterfeiting and 

the seriousness of the problem. Moreover, we have evidence that foreign governments are not willing or interested in taking responsibility for assuring the safety 

of drugs imported into the U.S. 

My testimony today begins by reviewing current law governing drug safety and 

importation. This portion of my testimony also explains that importation would effectively circumvent the other drug safety provisions carefully constructed over the 

course of nearly a century. My testimony then focuses on five main points: (1) Importation opens our borders to drugs from anywhere in the world and there is no 

35 

plausible way of limiting importation to Canada or Western Europe; (2) Safety testing, inspections, chain of custody requirements and other attempts to ‘‘guarantee’’ 

safety provide no assurances that imported drugs will be safe; (3) Projections of potential cost-savings from importation are very small and the largest beneficiaries 

are arbitrageurs; (4) Importation is not free trade, it is price controls which lead to 

delays and denials in patients’ access to medicines; and (5) There are better, safer 

alternatives for patients to access needed medicines, including the Partnership for 

Prescription Assistance (PPA) and Medicare Part D for seniors and the disabled. 

Overview of Current Law Related to Importation 

Over the years, a number of bills have been proposed that would legalize the commercial and personal importation of unapproved prescription drugs from foreign 

countries. It is my belief that opening our closed system in this way would circumvent a system that was carefully constructed and developed over the years to 

protect the health and safety of the American public. 

The regulatory system that governs development, approval, and marketing of new 

drugs in the United States is the most complex and comprehensive in the world. 

To ensure that Americans have the safest drug supply in the world, it has become 

increasingly comprehensive and more robust over time. As far back as 1938, the 

Federal Food, Drug, and Cosmetic Act (FDCA) 1—which remains in place today— 

prohibited the marketing of any drug not shown to be ‘‘safe for use under the conditions prescribed, recommended, or suggested’’ in its labeling.2 In 1962, the Food and 

Drug Administration (FDA) obtained explicit authority to demand proof that a drug 

is effective and to prescribe the tests that a manufacturer must perform before its 

product can be approved for marketing.3 Since that time, several amendments have 

expanded, strengthened, and refined the regulatory scheme.4 These include the Prescription Drug Marketing Act of 1987 (PDMA), under which Congress, following an 

investigation of incidents of counterfeit drugs reaching American consumers, closed 

the U.S. prescription drug supply to products that have circulated overseas, beyond 

the jurisdiction of FDA and outside the control of the manufacturer. 

As a consequence of this comprehensive framework, FDA currently regulates virtually every stage in the life of a prescription medicine sold in the U.S., from preclinical testing in animals and human clinical trials before the medicine can be marketed, to manufacturing, labeling, packaging, and advertising when the drug is marketed, to monitoring actual experience with the drug after its sale to consumers. In 

particular, the FDCA prohibits the introduction into interstate commerce of any 

‘‘new drug’’ (which covers virtually every prescription drug) that is not the subject 

of a FDA-approved new drug application (NDA) or abbreviated new drug application 

(ANDA).5

Importation of a prescription medicine constitutes introduction of that medicine 

into interstate commerce and thus is subject to the FDA approval requirement.6 If 

a company that holds an approval for a drug manufactures a version of that drug 

product in a plant that is not listed in the relevant NDA or ANDA or fails to manufacture according to specifications in the approved application, FDA considers that 

version an unapproved drug, and it cannot be imported or otherwise introduced into 

interstate commerce.7 Foreign versions of drugs that are approved in the United 

States often are manufactured by companies that do not hold an approved NDA or 

ANDA. Even if the foreign version is made by a company with a U.S. approval, the 

foreign version often does not comply with the terms of the approved NDA or ANDA 

and thus is unapproved. That is because the U.S. has some of the toughest drug 

approval requirements in the world. For these reasons, the importation of a drug 

purchased in a foreign country will usually violate the statutory requirement for 

FDA approval—requirements that have been established to protect consumers and 

that no one would advocate repealing. Yet permitting importation of drugs not meeting these standards would have the same effect as repealing current consumer protections, since these unapproved drugs would be mixed into the U.S. drug supply. 

There are occasions where some drugs that are available overseas are manufactured in the United States and then exported. But in those instances, the FDCA 

prohibits the importation (or ‘‘reimportation’’) of these drugs, even if they are manufactured in full compliance with the approved NDA.8 Congress added this prohibition on reimportation to the law in the PDMA, following a series of hearings that 

documented adulterated and counterfeit drugs entering the U.S. In 1984, for instance, nearly two million counterfeits of G.D. Searle’s Ovulen 21 birth control pills 

were found to have been shipped to Miami and New York from Panama. Based on 

a robust record and exhaustive investigation, the U.S. House of Representatives 

Committee on Energy and Commerce concluded that permitting reimportation of 

U.S.-origin goods ‘‘prevents effective control or even routine knowledge of the true 

sources of merchandise in a significant number of cases.’’ 9 The Committee further 

36 

found that reimportation resulted in ‘‘pharmaceuticals which have been mislabeled, 

misbranded, improperly stored or shipped, have exceeded their expiration dates, or 

are bald counterfeits, are injected into the national distribution system for ultimate 

sale to consumers.’’ 10

The Committee also concluded that ‘‘the very existence of the market for reimported goods provides the perfect cover for foreign counterfeits.’’ 11 As a result of 

these findings and the conclusion that reimportation posed a grave risk to consumers, Congress prohibited the reimportation of approved drugs that have left the 

United States.12

There is an exception for the original manufacturer, who is an integral part of 

this closed regulatory system and subject to FDA authority and oversight at all 

times.13 However, in such instances, the manufacturer’s own importation of drugs 

that have never been outside its control is comparable to shipments between its 

manufacturing plants and warehouses within the United States. It is entirely different from the importation of drugs that have been placed into the wholesale and 

retail distribution systems of foreign countries, where they are no longer subject to 

FDA jurisdiction. 

Notably, FDA has a very limited exception to the statutory prohibition on importation of unapproved drugs which it developed in the early 1990s when it announced 

a policy of ‘‘enforcement discretion’’ with respect to personal importation of certain 

unapproved drugs.14 Under this policy, FDA personnel may permit the importation 

of a drug if: (1) it is clearly intended for personal use; (2) the intended use of the 

drug is clearly identified; (3) the drug is intended for treatment of a serious condition for which satisfactory treatment is not available in the U.S.; (4) the drug is not 

known to present a significant health risk; and (5) the drug is not approved in the 

U.S. FDA officials will presume commercial use, rather than personal use, if the 

supply exceeds what one person might take in three months. FDA guidelines direct 

agency personnel to look for either: (a) the inclusion of the name and address of a 

doctor licensed in the U.S. and responsible for the patient’s treatment with the product, or (b) evidence that the product is intended for the continuation of treatment 

begun in the foreign country. However, the personal use policy does not apply to 

the importation of unapproved foreign versions of drugs available in the United 

States, or to reimportation of drugs in violation of the PDMA. Rather, it applies only 

to the personal importation of drugs for which there is no approved U.S. source. 

This kind of importation remains technically illegal. The policy represents a limited 

exercise of enforcement discretion in the interest of individual patient treatment.15

In 2000, Congress authorized an additional exception to the prohibition on reimportation. The Medicine Equity and Drug Safety Act (MEDS Act) added a new 

section 804 to the FDCA under which pharmacists and wholesalers would be permitted to import drugs from a list of designated countries, including Canada and 

the countries of the European Union.16 During the debate on the MEDS Act, however, concerns were voiced that section 804 would be ineffective (at reducing consumer prices) and unsafe (by allowing the influx of counterfeit and adulterated 

products). Congress responded to these concerns in part by delaying implementation 

until the Secretary of HHS could ‘‘demonstrate’’ that the law would pose no additional risk to public health and safety and that it would result in a significant reduction in the cost of covered products. Secretary Donna Shalala concluded on December 26, 2000, that it was ‘‘impossible . . . to demonstrate that [importation] is 

safe and cost effective.’’ 17 Similarly, Secretary Tommy Thompson, citing an analysis 

by FDA on the safety issues and an analysis by his planning office on the cost 

issues, decided not to ‘‘sacrifice public safety for uncertain and speculative cost savings.’’ 18

As part of the Medicare Prescription Drug, Improvement and Modernization Act 

of 2003, Congress replaced the MEDS Act with a new section 804. Reimportation 

language was included in the drug benefit legislation—despite enactment of a prescription drug benefit for Medicare beneficiaries—primarily because proponents of 

importation were working separately from the Medicare conferees to address access 

issues. Notably, however, the drug benefit that became available to seniors in 2006 

provides much safer and effective ways for Americans to access affordable medicines. Company and state patient assistant programs that can help the under and 

un-insured also exist. These options are all safer than the importation of foreign 

products. 

This reimportation language in section 804 of the FDCA differs markedly from existing legislative proposals. The legislation would only permit reimportation from 

Canada and it would require reimported drugs to comply with sections 501, 502, 

and 505 of the FDCA. In other words the drugs could not be adulterated, misbranded, or unapproved new drugs.19 Most importantly, the provisions require that 

the Secretary determine importation would be safe and create significant cost savVerDate Nov 24 2008 06:50 Jan 16, 2013 Jkt 075679 PO 00000 Frm 00040 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\77867.TXT JACKIE
37 

ings before it can proceed. To date, no Secretary has been able to make such a determination. 

Importation of Medicines into the U.S. That Have Been Outside the 

Jurisdiction of the FDA Is Inherently Unsafe 

Importation of medicines into the U.S. that have been outside the jurisdiction of 

FDA is inherently unsafe. There is no assurance that an imported drug meets FDA’s 

stringent requirements for quality, purity, safety, effectiveness or proper labeling. 

As FDA has documented, many of these imported drugs are unapproved, contaminated, counterfeit, or have been stored, handled or shipped under substandard conditions. 

The current system has been effective in the U.S. for protecting public health, but 

it faces increased threats with the proliferation of Internet pharmacies outside the 

U.S. and outside the jurisdiction of FDA. The safety concerns that exist today are 

many. A recent example illustrates the potential dangers and reinforces concerns 

over proposals to legalize importation. According to FDA, recently patients ordering 

drugs online for depression and insomnia instead received schizophrenia medication 

that caused them to seek emergency medical treatment for breathing problems. Side 

effects ranged from muscle spasms to difficulty breathing. According to FDA, while 

none of the cases resulted in death, in at least three cases, patients required a trip 

to the emergency room.20 Legislation that would legalize the importation of medicines would place significant, additional burdens on our current system and will increase safety concerns that exist today. 

Proponents of importation believe that with certain modifications—such as end 

product testing, chain of custody provisions, requiring the use of anti-counterfeiting 

technology, or limiting importation to Canada—importation can be done safely. The 

fact is no modification can guarantee safety that equals the safety of the current 

closed system that Congress established in 1987 precisely to protect consumers from 

the dangers of importation—dangers that have not abated in the intervening 20 

years. 

Limitations on Safety Testing 

The safety, quality, and authenticity of pharmaceutical products that are imported into the United States cannot be assured by inspection and/or testing programs to meet the levels of safety, quality and authenticity achieved in today’s system. Although terminal testing (i.e., testing a product after it has been manufactured) may provide some useful information about product quality and safety, such 

testing is inherently limited and can never, by itself, guarantee the safety and quality of products as complex as pharmaceuticals. As the FDA and other experts recognize, the only way to assure the safety and quality of pharmaceutical products is 

to strictly control the conditions under which they are manufactured and distributed. 

cGMP Requirements: Safety and Quality Cannot Be ‘‘Tested Into’’ A Product 

FDA’s current Good Manufacturing Practice (cGMP) regulations are based upon 

the fundamental quality assurance principle that quality, safety, and effectiveness 

‘‘cannot be inspected or tested into a finished product’’ but instead ‘‘must be designed and built into a product.’’ 21 FDA has reiterated this bedrock principle on numerous occasions, most recently in connection with its 2003 initiative to modernize 

the cGMP regulations.22

Consequently, those regulations impose strict controls on all aspects of the manufacturing process, including (1) the qualifications and responsibilities of employees 

and consultants; (2) the design and maintenance of manufacturing facilities; (3) the 

design, construction, cleaning and maintenance of manufacturing equipment; (4) the 

receipt, storage, testing and acceptance of pharmaceutical raw materials and components, including containers and closure systems; (5) the manufacturing process 

itself, including reprocessing procedures; (6) the packaging and labeling of finished 

drug products; (7) the storage and distribution of final products; (8) required laboratory testing procedures; and (9) recordkeeping requirements.23 Failure to satisfy any 

of these cGMP requirements renders the affected drug product ‘‘adulterated’’ and 

thus illegal in the United States—even if testing fails to reveal any obvious deficiencies in the product.24

The cGMP regulations recognize that routine end-product testing is inherently 

limited and cannot be relied upon as the sole basis for assuring quality and safety 

for a number of reasons. First, many end-product tests have limited sensitivity and 

may fail to detect substances, such as impurities or degradants that are present in 

a drug product at low levels.25 If these substances are dangerous at low levels or 

have an adverse effect on product quality (e.g., accelerate degradation of active ingredient), the end-stage testing will fail to reveal that the drug product may be unVerDate Nov 24 2008 06:50 Jan 16, 2013 Jkt 075679 PO 00000 Frm 00041 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\77867.TXT JACKIE
38 

safe, unstable or ineffective. In essence, such testing would yield an unacceptably 

high rate of ‘‘false negatives,’’ i.e., finding no quality or safety problems when such 

problems actually exist. 

Second, drug products often are extremely complex, and end-product testing does 

not reveal all variations that may occur in the product that may impact on safety 

and effectiveness. Even seemingly minor changes in manufacturing process or storage conditions may introduce variations in the product, such as new impurities, that 

cannot be predicted or easily tested. Oftentimes, these variations can have a significant impact on safety and effectiveness. For example, testing might be conducted 

to demonstrate that a drug product contains the proper strength of a specific active 

ingredient; however, such testing would not detect other variations in the product 

caused by manufacturing changes, such as increased pill hardness or contamination 

with cleaning chemicals, that could have a significant impact on safety and effectiveness. While dissolution and impurity testing might be added to the battery of 

tests conducted on the drug product, such testing still would not detect meaningful 

variations in the drug product, such as new or different impurities or changes in 

the drug’s stability profile. Because of the complexity of drug products, end-product 

testing simply cannot measure all of the possible variations that could affect safety 

and effectiveness. 

Because of these significant limitations, FDA does not rely upon terminal testing 

alone to assure the safety and quality of drug products. Instead, through application 

of the cGMP regulations, FDA seeks to minimize the variability in the manufacturing process itself. As FDA recognizes, safety and quality cannot be ‘‘inspected or 

tested into’’ a drug product; they must be built into the product through rigorous 

approval requirements and strict controls over the conditions under which drugs are 

manufactured and distributed. 

Limitations of Safety Testing of Imported Drug Products 

These significant limitations on the use of end-product testing to assure safety 

and quality are not restricted to the manufacturing context but apply with even 

greater force to the importation context as well. Safety, quality, and authenticity 

cannot be ‘‘inspected or tested into’’ imported drug products any more than it can 

be inspected or tested into domestic drug products. These attributes instead must 

be built into imported drugs by strictly controlling the distribution system. The 

greatest assurance that drug products are safe, effective, and authentic comes from 

maintaining a closed, closely-controlled distribution system. 

Testing for Counterfeits 

Counterfeit drug trafficking is one of the primary safety concerns associated with 

importation. FDA estimates that counterfeits make up 10 percent of the global 

medicines market.26 The latest estimates by the World Health Organization (WHO), 

the Organisation for Economic Co-operation and Development (OECD), and the 

Pharmaceutical Security Institute (PSI) show that ‘‘. . . 50 percent of illegal Internet sales are counterfeit.’’ According to the WHO, ‘‘. . . the message for now is: do 

not take the risk of buying your medicines from unknown sources, such as the Internet. If you must buy from the Internet, ensure that the website is that of a pharmacy you know and trust.’’ 27

A recent article in the Financial Times reinforces concerns with counterfeit medicines. A report by the International Narcotics Control Board, which monitors compliance with U.N. drug conventions, cited ‘‘growing concerns’’ about the unregulated 

market for medicines that is exposing patients to ‘‘serious health risks’’. The report 

‘‘expresses concern about the rise in counterfeit drugs . . .’’ and the health risks of 

the Internet medicines market. Financial Times reports that, ‘‘The findings mark 

the latest escalation in international concern about the mixing of criminal, narcotic 

and prescription medicines, and heightened worries about counterfeit drugs.’’ 28

According to a February 2005 Business Week report, ‘‘The global counterfeit business is out of control, targeting everything from computer chips to life-saving medicines.’’ The story reported that, ‘‘Chinese police last year conducted raids confiscating everything from counterfeit Buick windshields to phony Viagra. In Guam, the 

Secret Service uncovered a network selling bogus North Korean-made pharmaceuticals, cigarettes and $100 bills.’’ The report also found that Pakistan and Russia 

are ‘‘huge producers of fake pharmaceuticals.’’ 29

And, the problem is expected to grow quickly over the next several years. In fact, 

a study by the Center for Medicine in the Public Interest estimates that counterfeit 

drug sales will reach $75 billion in 2010, a 92 percent increase from 2005.30 Both 

the FDA and industry have grappled with this problem for years and have devised 

many strategies for combating the problem both domestically and internationally. 

Indeed, FDA issued its final report detailing new strategies for keeping counterfeit 

39 

drug products from entering the U.S. drug supply. Significantly, none of these strategies relies upon end-product testing as the sole, or even a significant, weapon in 

the fight against counterfeits, effectively illustrating why such reliance on testing 

can not achieve adequate levels of safety in the importation context. 

This is because end-product testing simply is not adequate to identify counterfeit 

drugs or prevent them from entering the U.S. drug supply. While random sampling 

and inspection might be acceptable in the manufacturing context, it will never be 

sufficient to detect counterfeit drugs entering the U.S. from abroad. This is because 

‘‘counterfeits can easily be commingled with authentic product, either by the case, 

by the bottle, or by the pill . . .’’ 31 Consequently, as FDA itself concludes, ‘‘[n]o random sampling plan will be able to detect and protect against such criminal conduct 

since the threat does not depend upon the nature of the reimported product, but 

upon the integrity of those handling it.’’ 32

This would suggest that in order to identify counterfeits, an inspection and testing 

program requiring authentication of all drug products offered for importation would 

be necessary. Such inspection and testing would be extremely cumbersome and expensive. Large shipments would need to be removed from shipping containers and 

broken down into individual units for inspection. Then each individual unit would 

need to be inspected or analyzed separately before being repacked into shipping containers. 

Yet even if a 100 percent inspection program were feasible from a practical perspective (which it is not), it still would not be sufficient to assure the safety and 

authenticity of imported drug products. This is because both visual inspection and 

product testing have significant practical and scientific limitations. 

Visual Inspection 

Visual inspection of drug packaging and labeling is not a viable method for accurately identifying counterfeits. From a practical standpoint, drug packaging and labeling—and the overt counterfeit resistant features incorporated therein (e.g., colorshifting inks, holograms)—are too varied and numerous to provide for the real time 

verification of drug products. It simply is not realistic to expect inspectors to be familiar with the wide variety of overt features used on the thousands of different 

drug products likely to be imported. This problem will be exacerbated by the need 

to rotate overt features on a regular basis to stay one step ahead of the counterfeiters. 

Second, packaging and labeling, and even counterfeit resistant technologies, can 

themselves be counterfeited, often within 12–18 months. The counterfeiters are becoming increasingly sophisticated and are making use of advanced technologies to 

duplicate the packaging and labeling of authentic drugs. As a result, counterfeit 

products are becoming increasingly difficult to detect, even to trained experts. Given 

the sophistication of today’s counterfeiters, visual inspection can no longer be expected to reliably detect counterfeit products presented for import. 

Finally, visual inspection is of little or no value when a drug product has been 

repackaged. Such repackaging removes or destroys the drug’s original packaging 

and labeling as well as any counterfeit resistant technologies incorporated by the 

manufacturer. In such situations, inspectors conducting a visual inspection would 

have little or no basis for determining whether a product is authentic because they 

would have no authentic product against which to compare it. This likely will be 

a major problem because virtually all drugs that are imported have foreign packaging and labeling and thus would need to be repackaged prior to importation. Repackaging is subject to minimal oversight, and it was implicated in a recent counterfeiting incident, including one that led to the recall of 200,000 bottles of counterfeit 

cholesterol-reducing medicine. 

Chemical Analysis and Authentication of Covert Features 

Covert features and chemical analysis offer more accurate methods of authenticating drug products, but they have their own limitations. Most significantly, such 

methods do not provide real time verification of a drug’s authenticity. Covert features and taggants typically require specialized equipment or testing to authenticate 

and can and should be authenticated only by the manufacturer. These tests often 

cannot be performed onsite or require a manufacturer’s representative to travel to 

the site. In addition, tests for taggants may take up to several days to perform in 

order to accurately determine whether the drug is counterfeit or not. This may be 

problematic if a large amount of drug is of questionable authenticity as it would 

have to be withheld from commerce until the testing is completed. 

Chemical analysis of imported drugs has another problem. Since random sampling 

methods likely could not be employed (for the reasons discussed above), chemical 

analysis would need to be performed on all drug products offered for importation. 

40 

This not only would be prohibitively expensive but also counterproductive, since 

such testing would destroy the very products being tested. 

Further, according to the Department of Health and Human Services’ Task Force 

report on importation, issued in December 2004, while a number of new anti-counterfeiting technologies show potential for assuring the safety and authenticity of 

prescription medicines, until they are universally adopted they cannot be relied 

upon to secure the safety, efficacy, and integrity of the global market. The report 

also found that ‘‘widespread adoption of authentication technologies, while theoretically able to secure the U.S. drug supply, is a daunting task that could raise the 

cost of imported drugs thereby reducing any expected savings from importation.’’ 33

Estimates from the Congressional Budget Office (CBO) suggest a counterfeit-resistant technology mandate could substantially increase the cost of any importation 

scheme. The mandate in H.R. 2427 (an importation bill introduced in the 108th 

Congress) could ‘‘raise the cost of prescription drugs by as much as $2 billion in the 

first year.’’ CBO found that the cost of such a mandate would be ‘‘significant.’’ 34

Finally, the identities of covert features and chemical taggants incorporated into 

drug products are (for good reason) closely held secrets by manufacturers. In addition, for the many drug products that do not incorporate taggants, there is no simple 

laboratory test that can verify authenticity. Consequently, authenticity testing 

would either have to be conducted by the manufacturer or would require the disclosure of trade secret information by the manufacturer to the laboratory or facility 

conducting the test. 

Safety Testing 

Safety testing for imported products suffers from many of the same limitations as 

authenticity testing and has some additional limitations as well. Visual inspections, 

for example, would be even less effective at identifying safety problems than authenticity problems. This is because most safety problems do not leave overt visual clues. 

Accordingly, visual inspection likely would not detect dangerous impurities in a 

drug product; stability problems caused by improper storage conditions; or degradation of the active ingredient. On the contrary, visual inspection is likely to identify 

only the most obvious safety problems, such as opened or water-damaged drug products. 

Likewise, chemical testing does not provide an adequate assurance of the safety 

or quality of imported drug products. As discussed above, end-product testing has 

significant limitations because of the complexity of many drug products and the lack 

of sensitivity of many tests. Just as in the manufacturing context, end-product testing of imported drugs simply cannot measure all of the possible variations that 

could affect safety and effectiveness. 

For all of these reasons, the safety, quality, and authenticity of pharmaceutical 

products that are imported into the United States cannot be assured by inspection 

and/or testing programs but instead must be based on strictly controlling the conditions under which they are manufactured and distributed. This means maintaining 

to the greatest extent possible the closed distribution system in the U.S. that Congress enacted to reduce risks to U.S. consumers. 

Chain of Custody Requirement Does Not Guarantee Safety of Imported 

Drugs 

The inclusion of a chain of custody provision, otherwise known as a drug pedigree 

requirement, also does not equate to today’s closed system and the level of safety 

it provides. In testimony on July 9, 2002, before the Senate Special Committee on 

Aging, FDA stated: 

‘‘Because we could not go certify and look in the other countries, the bill that 

they refuse to implement or decline to implement would have replaced the normal quality control system with a testing process with a paper or so-called pedigree process that attempted to follow the trail of the drugs, but both Secretaries 

[Shalala and Thompson] found that the paper process could be forwarded by 

faking documents and that you really couldn’t adequately test these products, 

either economically or feasibly.’’ 35

It is inappropriate and dangerous to rely solely on chain of custody or pedigree 

papers to authenticate an imported medicine. Such documents can be easily forged, 

for example. According to the HHS Task Force report on importation, ‘‘Paper pedigrees, which are in use today, have significant limitations. They are subject to failures to keep adequate records and can be forged, thus making them an unreliable 

means for documenting the chain of custody.’’ 36

41 

Limiting Importation to Canada Does Not Guarantee Safe Importation 

On its face, limiting importation to drugs imported from Canada appears to be 

safe. In practice, a drug could be imported from anywhere in the world, as long as 

it entered into the U.S. through Canada. There is no effective way to prevent the 

transshipment of drugs from Third World countries into Canada and then into the 

U.S. The FDA has already warned that if importation from Canada were enacted 

into law, Canada could become a gateway for counterfeit drugs. 

First, the Canadian government is on record saying that while it regulates drugs 

manufactured for its citizens, it cannot vouch for the safety of medicines that are 

then exported to the U.S. According to its then-Assistant Deputy Minister, Health 

Canada, ‘‘The Government of Canada has never stated that it would be responsible 

for the safety and quality of prescription drugs exported from Canada into the 

United States, or any other country for that matter.’’ 37

Second, buying medicines from a Canadian website does not guarantee the product actually came from Canada or that it is safe and effective. For example, last 

August, the FDA issued an advisory to consumers warning them against purchasing 

prescription drugs from websites that have orders filled by Mediplan Prescription 

Plus Pharmacy or Mediplan Global Health in Manitoba, Canada (pharmacies that 

were ‘‘certified’’ by the Canadian International Pharmacy Association), following reports of counterfeit versions of prescription drug products being sold by these companies to U.S. consumers. Lab analysis of the intercepted products found counterfeit 

versions of several popular medications, including medicines for high cholesterol, 

gastroesophageal reflux disease (GERD), arthritis-related pain, high blood pressure 

and breast cancer.38

According to FDA, ‘‘In our experience, many drugs obtained from foreign sources 

that purport and appear to be the same as U.S.-approved prescription drugs have 

been of unknown quality. We cannot provide adequate assurance to the American 

public that the drug products delivered to consumers in the United States from foreign countries are the same products approved by FDA.’’ 39 A FDA analysis of three 

commonly prescribed drugs purchased from a website advertised as Canadian 

showed that so-called ‘‘Canadian Generics’’ bought from the website were fake, substandard and potentially dangerous. One was a controlled substance. According to 

FDA, ‘‘This firm shipped drugs that were the wrong strength, including some that 

were substantially super-potent and that pose real health risks as a result, drugs 

that didn’t dissolve properly, drugs that contained contaminants, and drugs that 

should not have been given because of potentially dangerous drug interactions.’’ 40

In a series of ‘‘blitz exams’’ FDA discovered that drugs were being imported from 

alleged Canadian websites that were in fact from other parts of the world. According 

to then-FDA Commissioner, Mark McClellan, ‘‘During the import blitz, we have examples where our examinations revealed that products were manufactured in countries other than Canada, yet were exported from Canada. For example, at the Dallas, Seattle and Buffalo mail facilities, imported drugs were encountered which were 

manufactured in Canada, Mexico, Costa Rica, India, Pakistan, New Zealand, Taiwan, Thailand, and a host of other countries. However, in some cases, the drugs 

that had obviously been manufactured in other countries were exported from Canada.’’ 41

A more recent FDA investigation reconfirmed the fact that many drugs being ordered from so-called Canadian pharmacies are in fact from other parts of the world. 

In December 2005, FDA announced the results of an operation in August of that 

year to confiscate parcels containing pharmaceuticals from India, Israel, Costa Rica 

and Vanuatu—43 percent of which had been ordered from Canadian Internet pharmacies. Of the drugs being promoted as ‘‘Canadian,’’ 85 percent actually came from 

27 countries around the globe. Then-acting FDA Commissioner Andrew C. von 

Eschenbach stated, ‘‘These results make clear there are Internet sites that claim to 

be Canadian that in fact are peddling drugs of dubious origin, safety and efficacy.’’ 42

Recent news reports have found that some Canadian pharmacies now acknowledge that they are going to foreign countries to get their drugs to sell to U.S. consumers. An April 6, 2006, New York Times article reported that the Canadian online 

pharmacy industry is selling foreign drugs, instead of Canadian drugs, to American 

patients.43 The article states that, ‘‘At their peak in 2004, the online pharmacies 

employed about 4,000 Canadians. That number has decreased to 3,000 with the 

squeeze in profits, company closings and the purchasing and stockpiling of supplies 

in Europe, Australia and New Zealand.’’ According to Daren Jorgenson, founder of 

Winnipeg-based Canadameds.com, ‘‘We’re filling 50 percent of our prescriptions 

[from international pharmacies].’’ Jorgensen’s website boasts, ‘‘Not just from Canada 

any more! Choose your country and your savings!’’ 44

The President and Owner of CanadaRx.net has also confirmed that his medicines 

are not coming from only Canada. According to Harvey Organ, ‘‘I can get drugs from 

42 

all over the world.’’ 45 A Bloomberg news article reported that CanaRx Services Inc., 

‘‘has joined other Canadian Internet pharmacies in finding sources of drugs from 

partners in the U.K., Continental Europe, Israel, Australia and India.’’ 46 This is 

particularly troubling since according to a study by Temple University for Pharmaceutical Health Service Search, India is a worldwide leader in the production of 

counterfeit drugs with as much as 35 percent of the world’s drug counterfeiting originating in that country.47

This is confirmed by data from Industry Canada, which shows significant increases in pharmaceutical imports into Canada in 2006 from the previous year. For 

example, according to the data, imports of pharmaceutical products into Canada 

were up significantly from many countries, including, for example: Singapore up 165 

percent; Argentina up 913 percent; Bulgaria up 255 percent; Jordan up 823 percent; 

and Mexico up 284 percent, to name a few.48

Expanding importation beyond Canada presents additional safety concerns 

If importation were to be legalized beyond Canada, further safety concerns exist. 

While proponents of importation point to parallel trade 49 in the European Union 

(EU) as evidence that importation beyond Canada can be done safely, they often ignore the problems that exist with parallel trade in terms of safety. Specifically, EU 

member states have struggled with counterfeit drugs, safety issues arising from improper storage and handling, and safety issues arising out of repackaging and rehandling. 

Parallel Trade and Introduction of Counterfeit Drugs 

First, parallel trade in Europe has facilitated the introduction of counterfeit medicines in the destination countries. For example, in January 2005, the Council of Europe (CoE) released a report on counterfeit medicines in the EU. According to the 

CoE report, ‘‘Based on the results of the surveys conducted by the CoE, the counterfeit medicine problem is not insignificant in Western Europe and estimates provided 

by several respondents indicate that the problem is not likely going away in the 

foreseeable future. It affects all countries of the world. It is no longer safe to assume 

that the problem does not exist to any real extent in Western Europe and thus can 

safely be ignored by authorities in the latter. Although it can be assumed that Western Europe is relatively less affected by the counterfeit medicine problem than Eastern Europe, it has to be borne in mind that counterfeit medicines probably regularly 

transit through and exit Western Europe.’’ 50 If importation were legalized, these 

counterfeit medicines could then make their way into the U.S. 

The CoE report found that parallel trade in the EU provides for the inadvertent 

entry of counterfeit drugs. According to the report, ‘‘The existence of a significant 

level of parallel trade in the EU, in the absence of adequate controls on repackaging 

and relabeling, provides an opportunity for the inadvertent entry of counterfeit 

medicines into the market. . . . Furthermore, parallel trade means that any counterfeit product within the legitimate distribution chain in one MS [Member State] 

can easily contaminate other MSs.’’ 51

European health officials have discovered counterfeit versions of a cholesterol-lowering medicine in the supply chains of the U.K. and Netherlands. A parallel trader 

illegally purchased the counterfeits from outside Europe and sold it to a large 

wholesaler within the U.K. Dutch health authorities also found counterfeit cholesterol-lowering medicines in their own country’s pharmacies.52

At a meeting of the WHO’s International Medical Products Anti-Counterfeiting 

Taskforce in 2006, the European Commission announced that in the past years, it 

had witnessed 27 cases of counterfeit drugs in the legitimate supply chain. In addition, the EC saw another 170 cases through the Internet and what it calls the ‘‘illegal’’ supply chain.53

According to an investigation into the links between organized crime, terrorism 

and counterfeit medicines conducted for the Stockholm Network by a former detective superintendent, ‘‘There is no effective method within the U.K.—or to a greater 

or lesser extent across Europe—of identifying counterfeited pharmaceuticals before 

they are dispensed.’’ The report also found that the ‘‘rapid, legal growth in the 

movement of medicines around the world via parallel trade in Europe and re-importation into the United States provides more opportunities for counterfeit and substandard medicines to enter the legitimate distribution chain.’’ 54 A study by Patricia 

Danzon, a health care economist from the Wharton School, University of Pennsylvania, found, ‘‘Although parallel importers are required to obtain a license, chemical 

testing for equivalence is not performed, and instances of counterfeit products have 

occurred.’’ 55

43 

Importation from any EU Country Would Open the U.S. to Drugs from Every EU 

Country 

Because of the free flow of goods between members of the EU, any legislation that 

permits the importation of pharmaceuticals from any country in the EU is essentially permitting the entry of drugs from every country in the EU—it simply is not 

possible to prevent importation that includes any EU country from including every 

one of the EU countries. This would include, for example, a number of Eastern European countries with either known counterfeiting problems or neighbors with 

known counterfeiting problems. Many of these countries do not have pharmaceutical 

infrastructures even roughly comparable to ours. The WHO, in their 2006 estimates, 

warned that the countries in the former Soviet Union have counterfeit rates up to 

20 percent.56 As of 2007, there are three former Soviet Union countries in the 27 

member European Union, this number will grow. As the EU expands, the risk of 

counterfeits from countries with weaker regulatory systems, such as the Ukraine is 

likely.57

EU Countries Not Willing to Police Drugs Exported to the U.S. 

Aside from growing concerns over counterfeit medicines in the EU, there also does 

not appear to be a willingness among countries in the EU to implement protections 

to ensure the safety of drugs exported to the U.S. if importation were legalized in 

the U.S. As part of the HHS Task Force’s investigation into the feasibility of prescription drug importation, it requested comment from foreign health agencies on 

their willingness or ability to implement new or additional protections to ensure the 

safety of exported or transshipped drugs. However, no comments from foreign health 

agencies directly addressed this point. Further, none outlined a specific strategy for 

new steps to collaborate with the U.S. Government on the effective oversight of importation. The Task Force report stated, ‘‘Foreign governments have little incentive 

and limited resources to ensure the safety of drugs exported from their countries, 

particularly when those drugs are transshipped or are not intended for import . . . 

If foreign health agencies were willing to ensure the safety and effectiveness of 

drugs exported from their countries to the U.S., one would expect a greater global 

response.’’ 58

Parallel Trade and Improper Storage of Medicines 

Significant health issues are associated with improper storage of medicines during 

transit. Parallel imported goods must pass through the hands of various international trading organizations, and it is not always possible for regulatory authorities to ensure sufficient physical monitoring and sampling of these products. A 

WHO/World Trade Organization (WTO) Workshop paper found, ‘‘while parallel importers may themselves be required to comply locally with stringent drug wholesale 

regulations, there are many ways to circumvent drug regulations.’’ 59

Parallel Trade and Safety Problems Associated with Repackaging and Re-Labeling 

Parallel trade requires both repackaging and re-labeling, which can introduce a 

variety of safety problems. For example, parallel traders often discard the anti-counterfeiting measures that some packaging now incorporates. One member state medicines agency commented on a safety problem with parallel imports, which it attributed to relabeling. In its report for the years 1998–2002, the German Medicines 

Agency (BfArM) states: 

Events worth mentioning in connection with parallel trade: 

2001–2002 

Complaints from consumers and diabetics associations related to reduced activity of imported insulin preparations; Results of the investigation: insulin content of the checked products, which are about to be administered by means of 

a pen, is in order, but possibly the functionality of the pens is affected by inappropriate relabeling of the vials; In essence products that are centrally approved 

in the EU are involved; Consequence of parallel import approval procedure: directions for proper labeling.60

Importation Violates the Entire Approach to Ensuring the Safety of the U.S. 

Pharmaceutical Distribution System 

The cornerstone of the U.S. pharmaceutical distribution system is total control of 

the process—from selection of raw materials, design of the manufacturing process, 

packaging of a final product, evaluation of storage conditions and careful selection 

of the distribution pathway. Importation is at odds with this system, increasing the 

chances for substandard, adulterated and counterfeit medicines to enter our system. 

44 

Clearly, no one would propose relaxing the current system for drugs produced under 

FDA jurisdiction, yet importation effectively does just that. 

The examples mentioned here, and countless others not mentioned here, illustrate 

that legalizing importation opens an avenue for unscrupulous counterfeiters. In 

order to continue assuring American patients that the medicines they take are safe 

and effective, and meet the highest standards, the current system for manufacturing 

and distribution of pharmaceuticals must be maintained. Only the current system, 

with its full battery of quality testing conducted by the manufacturer, coupled with 

complete knowledge of the domestic distribution process can assure the safety Americans expect. 

Evidence Suggests Minimal Cost-Savings from Importation 

While importation is often identified as a way to reduce the cost of medicines for 

patients, the evidence suggests otherwise. Savings are not as significant as claimed 

for several reasons, including the fact that middlemen—or arbitrageurs—often benefit considerably more than patients and price differentials between the U.S. and 

other countries are often exaggerated. 

Government Reports Find Cost-Savings from Importation Minimal 

The HHS Task Force report on prescription drug importation found, ‘‘Total savings to drug buyers from legalized commercial importation would be one to 2 percent of total drug spending and much less than international price comparisons 

might suggest. The savings going directly to individuals would be less than 1 percent of total spending. Most of the savings would likely go to third party payers, 

such as insurance companies and HMOs.’’ 61

Similarly, according to an April 2004 CBO analysis of H.R. 2427 (an importation 

bill that would have allowed importation from 25 countries), savings would amount 

to approximately 1 percent of total projected spending on drugs between 2004 and 

2013. Most of these projected savings don’t even materialize for more than half a 

decade. Permitting importation only from Canada, according to CBO, would produce 

a ‘‘negligible reduction in drug spending.’’ 62

State Importation Experiments Have Failed to Show Savings 

Several states and localities that have examined importation have caste additional doubts on potential savings that may accrue from importation. For example, 

the State of Illinois began its I-SaveRx program in October 2004 to allow people to 

refill prescriptions using foreign pharmacies. The state worked with pharmacies in 

Canada, the UK, Australia and New Zealand and the program was later expanded 

to four other states. According to the Chicago Tribune, in the first 19 months of the 

operation, the program served only 3,689 Illinois residents—and another 1,265 individuals in four other states, despite a massive promotional campaign by the state 

that utilized 521 workers in 28 state agencies at a cost of nearly $1 million.63

According to a January 2005 Washington Post article, Montgomery County, Maryland’s plans to make Canadian prescription drugs available to employees has ‘‘hit 

a snag’’ after an analysis by the county school system concluded that importation 

of prescription drugs from Canada wouldn’t save as much money as hoped and could 

be more expensive than domestic sources for drugs. In reaction to the findings, Superintendent Jerry D. Weast, in a confidential memo to the Board of Education (detailed by the Washington Post) wrote, ‘‘In many cases, purchasing medications from 

Canada would prove to be more costly.’’ 64

In November 2003, the Massachusetts Group Insurance Commission, the insurance administrator for state employees and retirees, examined importation from a 

state perspective and found, ‘‘the potential savings [of importation] would not be 

worth the liability risks and the disruption of existing insurance contracts.’’ 65

European Experience with Parallel Trade Demonstrates Profits to Middlemen, Not 

Savings to Patients 

The European experience with parallel trade has demonstrated that the practice 

financially benefits middlemen rather than patients. According to a study by the 

London School of Economics (LSE) and Political Science, profits from parallel imports accrue mostly to the benefit of the third party companies that buy and resell 

the medicines, not to patients. Specifically, the LSE study found that, ‘‘Although the 

overall number of parallel imports is continuing to increase, healthcare stakeholders 

are realizing few of the expected savings . . . profits from parallel imports accrue 

mostly to the benefit of the third-party companies that buy and resell these medicines.’’ The study found savings to insurance organizations ranged from .3 percent 

to 2 percent, while parallel trader mark-ups ranged from 12 percent to 54 percent.66

45 

Prescription Drug Price Comparisons Between the U.S. and Other Countries are 

Often Deeply Flawed and Exaggerated 

Supporters of importation often point to retail prices in the U.S. and compare 

those prices to government controlled prices in Canada and various other countries 

as evidence that importation will provide a means to lower prices for U.S. consumers. As with all products, prices vary from country to country for a host of reasons including income differences and exchange rates. For pharmaceuticals, government-imposed reimbursement and price controls in other developed countries are 

another factor generating cross-national price differences. While the price paid for 

a given medication may be cheaper in a foreign country than it is in the U.S., it 

is not always the case and such comparisons are flawed for a number of reasons. 

Before addressing these flaws, I note that the current debate sometimes seems 

to incorrectly assume that medicines are the only product for which prices vary 

internationally, and that this suggests manufacturers somehow engage in inappropriate practices. In fact, prices for computers, food, cars and other consumer goods 

in the U.S. are not priced the same as they are in Italy, Canada, France, or any 

other country. This has been graphically illustrated in the new car market. An article published in the Associated Press, ‘‘Auto Industry Attacks Canadian ‘Gray Market’ Discounts,’’ illustrates this point. The article notes that, ‘‘Savings from the 

cross-border trade can be substantial. For example, a loaded Dodge Caravan costs 

$31,000 in the U.S., but just $21,000 in U.S. dollars in Canada, said David Pierce, 

owner of Pierce’s Superstores in Great Falls, Mont.’’ Mr. Pierce went on further to 

say, ‘‘[T]hat even his wholesale cost is $6,500 more than is charged a retail customer 

in Canada . . . even when he’s charged a customer $2,000 for an aftermarket warranty, the Caravan he has bought from Canadian exporters will cost $8,000 less 

than the same model meant for American showrooms.’’ 67

Most price comparisons also ignore the fact that pricing differentials on other 

health care services vary more from country to country than do pricing differentials 

for medicines. According to a study by Patricia M. Danzon and Michael F. 

Furukawa that compared average price levels for pharmaceuticals in eight countries—Canada, Chile, France, Germany, Italy, Japan, Mexico and the U.K.—relative 

to the U.S., U.S.-foreign price differentials are roughly in line with income and 

smaller for drugs than for other medical services.68 In fact, when looking just at 

health care, drugs account for only about 7 percent of the lower per capita spending 

in Canada than the U.S., while other health care services account for about 93 percent of the lower health care costs paid by Canadians.69

Further, only a small minority of consumers in the U.S. pay the ‘‘retail’’ price for 

prescription drugs. The overwhelming majority pay substantially discounted prices 

through pharmacy benefit managers (PBMs) and health plans, many of which negotiate on behalf of tens of millions of patients and are part of the way that U.S. imposes market-based cost containment in contrast to the government price controls 

imposed in parts of Europe and Canada. As mentioned above, for Medicare beneficiaries, passage of the Medicare prescription drug benefit has increased the number of Medicare beneficiaries with comprehensive prescription drug coverage from 

24.3 million (or 59 percent) in 2005 to 39 million (or 90 percent) today. This coverage has amounted to average savings of $1,200 per beneficiary. According to a 

January 2006 investigation by AARP, Medicare drug plans that cover all of a beneficiary’s drugs can cost less than buying the same drugs across the border. The 

AARP calculation, which took into account premiums, deductibles, and copayments, 

was based on real combinations of drugs taken by beneficiaries living in different 

parts of the country, as well as the cost of six commonly used brand name drugs.70

Like Medicare beneficiaries, insured Americans enjoy significant discounts on the 

medicines they purchase as a result of large, powerful purchasers (often representing tens of millions of Americans) such as pharmacy benefit managers (PBMs) 

and managed care organizations. A PBM ‘‘can negotiate discounts at both ends of 

the pricing chain: from the manufacturer and from the retail pharmacy.’’ 71 A study 

in Health Affairs found ‘‘to the extent ‘list’ prices fail to report the impact of discounts and rebates in the United States, alleged price advantages in Canada are 

overestimated. It is likely that only Americans who find themselves without prescription drug coverage are charged prices that exceed Canadian prices.’’ 72

Even those consumers who buy at retail can save considerably depending on 

where they buy their drugs in the U.S. For example, according to the New York City 

Council’s Investigations Committee Chair Eric Gioia, ‘‘At a time when Americans 

are flocking to Canada for cheap prescription drugs, New Yorkers could be saving 

more than 50 percent on their prescription drug purchases just by traveling to a 

different borough.’’ An investigation conducted by Council Member Gioia’s committee staff found that by traveling to a pharmacy perhaps only a few blocks away 

from where they usually shop, consumers could save up to $80 on a single prescripVerDate Nov 24 2008 06:50 Jan 16, 2013 Jkt 075679 PO 00000 Frm 00049 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\77867.TXT JACKIE
46 

tion.’’ 73 Similar studies have been done in other parts of the country and have resulted in similar findings.74

Finally, generics now make up about 60 percent of all prescriptions in the U.S., 

a much higher percentage that in most developed countries. Generic medicines are 

often priced at significant discounts in the U.S. compared to Canada and represent 

a viable option for patients looking to lower their health care costs. FDA conducted 

an analysis of prices actually charged on customer invoices for a sample of the detained foreign generic medications encountered in the shipments. FDA converted 

the price paid to U.S. dollars and checked the prices at four U.S. pharmacies. In 

every instance, a U.S. pharmacy price for the FDA-approved generic drug was less 

than what consumers had paid for the foreign generic drug ordered from Kohler’s 

Drugstore in Canada.75 In light of the heavy use of generics in the U.S., price comparisons that focus on only a few brand drugs while excluding generics also exaggerate cost differences experienced by consumers. 

Importation Is Not Free Trade, it Is the Importation of Foreign Price 

Controls 

Some who support importation have argued that importing prescription drugs 

from other countries is a means to utilize the free market to bring lower cost medicines to American consumers. Apart from the likelihood that for the reasons specified above importation will not achieve the cost reductions claimed by its proponents, this argument also ignores the fact importation would promote trade in 

medicines that are subject to government price controls—the antithesis of free trade. 

Economists and trade experts have argued that importation is not a free market 

principle, but rather is a mechanism to ‘‘import’’ a foreign government’s price control 

regime. For example, according to John E. Calfee, American Enterprise Institute 

(AEI), ‘‘Congress should dismiss all possibility of these scenarios by rejecting the 

drug importation legislation. It should not fall into the trap of thinking that as long 

as controls over U.S. prices were introduced by the government of a foreign country 

we would still have a free market. We wouldn’t have a free market, and we wouldn’t 

get the benefits of one.’’ 76

Commentary in The Wall Street Journal explained, ‘‘In effect, re-importation of 

drugs would import something else to the U.S.: price controls, where the lack of 

such practices is the oxygen that allows pharmaceutical research to thrive. Drugprice controls are pernicious. While controls on oil and other products tend to be 

short-lived, as voters eventually object to the resulting shortages, the effects of drug 

regulations are more difficult to observe since they mainly affect medicines that 

haven’t been invented yet.’’ 77

The lack of a free market in Europe has led to a decline in the European pharmaceutical market and an exodus of the pharmaceutical industry from Europe to the 

U.S. The exodus from Europe results in part from the more hospitable business climate in the U.S.—for example, the science and technology base in the U.S. and the 

opportunity for public-private research partnerships—the European pharmaceutical 

industry and the European Commission, however, concluded that the exodus results 

primarily from the price control policies and cost-containment measures that lead 

to a lack of competition in the European market. The European Federation of Pharmaceutical Industries and Associations (EFPIA) has explained that the ‘‘European 

pharmaceutical industry has lost its competitiveness because there is a problem of 

price—and innovation is not compensated.’’ 78 EFPIA adds, ‘‘Europe lacks a climate 

which favours and rewards innovation. . . . Compared to the U.S., Europe is seen 

as a less attractive R&D investment location in terms of market size and incentives 

for the creation of new biotech companies.’’ 79

According to a report by the U.S. Department of Commerce, price controls maintained by OECD countries reduce the amount of global pharmaceutical R&D below 

what it would otherwise be under market conditions similar to those in the U.S. The 

study estimates that this reduction falls in the range of $5 billion to $8 billion annually, once prices were fully adjusted. Based on an estimated cost of developing a new 

drug, an increase in R&D of $5 billion to $8 billion could lead to three or four new 

molecular entities annually once markets fully adjust.80

By using simulation experiments under multiple price control scenarios, John A. 

Vernon, an economist at the University of Connecticut, estimated that the pharmaceutical industry’s output of new medicines under price controls would significantly 

decline. Regulation of pharmaceutical prices in the U.S., similar to what is done in 

Europe, could have a ‘‘precipitous effect on pharmaceutical innovation in the long 

run.’’ 81 Importation of prescription drugs could also have significant implications for 

U.S. intellectual property rights for prescription drugs, potentially upsetting the 

careful balance between encouragement of innovation and ensuring patient access 

to new medical discoveries. 

47 

Price Controls Often Lead to Delays and Denials in Access to New Medicines 

As nearly all would agree, new medications are a critical element of quality health 

care. Yet many patients in countries that employ cost-containments measures, such 

as price controls, often wait years before gaining access to breakthrough drugs. According to the Department of Commerce report, ‘‘Such controls can also delay or reduce the availability of some innovative medicines in foreign countries, with the effect of limiting competition and requiring national health systems to forego the benefits of these innovations in reducing health care costs.’’ 82 These restrictions on patients’ access to medicines through government price controls in not an approach 

that would benefit U.S. patients. 

While drug approval is handled in the European Union by a centralized body 

called the European Medicines Agency (EMEA), each Member State of the EU has 

control over price and reimbursement decisions. In the majority of Member States, 

a marketing authorization alone is not sufficient to enable a prescription drug to 

actually be sold. The medicine will only appear on the market once the competent 

authorities have set a price and/or the medicine has been registered on the positive 

list defining the conditions under which it is covered by public health care insurance 

for residents of the particular Member State. According to a report by the G10 Medicines Group, ‘‘The price negotiating systems and reimbursement structures in a 

number of Member states can lead to significant delays.’’ 83

This was corroborated by a February 2003 report in Business Week, which stated, 

‘‘Once a drug is approved by the European Agency for the Evaluation of Medicinal 

Products, national governments must debate whether to make the drug available 

through their health systems and at what price. The process, which usually involves 

negotiations with manufacturers, who are under pressure to extend deep discounts, 

can drag on for several years. . . . As a result of price controls, European consumers 

are heading toward second-class citizenship when it comes to access to medicine.’’ 84

In some markets, patients must wait more than 2 years after marketing approval 

before gaining access to a new medicine (if at all).85 European Union Directive 89/ 

105 requires that applications to the competent authorities to secure a price or reimbursement for new medicines must be decided within 90 days, or 180 days where 

it is necessary to agree price before applying for reimbursement.86 Only 7 countries 

presently comply with the requirement for countries to provide decision within 180 

days: U.K., Germany, Denmark, Sweden, Ireland, Cyprus and Estonia. Poland has 

approved only a handful of new medicines for the past 8 years, and Austria, Belgium, France, Greece, Czech Republic, Italy and Slovenia have delays of over 300 

days. Again, this approach, which is inherently part of government price control 

schemes, is a poor precedent of policy in the U.S. 

An ongoing analysis by the European Federation of Pharmaceutical Industries 

and Associations (EFPIA) indicates that many EU Member states are not meeting 

the standard set out in the EU Directive 89/105 as of June 2006. For example, patients in very few EU countries have access to all new medicines that received marketing authorization from EMEA between January 1, 2002 and December 31, 2005. 

In fact, doctors in only 2 of 18 EU countries monitored can prescribe all medicines 

approved during this time period to their patients. In the other 16 countries between 55 percent and 79 percent of EMEA approved medicines are available. The 

average waiting time for these medicines becoming available varies widely.87

Government Price Controls and Related Policies Lead to Less Diffusion of New 

Medicines 

A 2002 survey entitled, ‘‘Diffusion of Medicines in Europe,’’ found shortfalls in the 

diffusion of state-of-the-art medicines between European countries for 20 key diseases. The study noted that the shortfalls in diffusion of new medicines was in large 

part the result of European price containment measures. According to the study, 

‘‘The most important factors for the diffusion of innovative medicines are policy related. Some examples are drug pricing policies, insufficient recognition of the (global 

and long term) economic effects of innovative medicine, inadequate governmental 

planning and last but not least cost containment strategies of every kind.’’ 88

For example: 

Cardiovascular Disease—In Germany, 87 percent of all patients with coronary 

heart disease there was a lack of provision of modern lipid-lowering drugs. 

In Italy, 83 percent of eligible patients did not receive statins. 

Diabetes—In Germany, 30 percent of at least 4 million diabetes patients are not 

treated with drugs at all. 

48 

Multiple Sclerosis—In France, ‘‘less than 50 percent of patients [with Multiple 

Sclerosis] eligible for treatment with beta interferons actually receive it (only 

10,000 from about 25,000 to 30,000).’’ 

Schizophrenia—In France it is estimated that there are 4.4 schizophrenia sufferers for every 1,000 people aged between 31 and 50 years, but only 2.4 people 

for every 1,000 are treated. For the treated patients the level of the use of innovative second generation drugs continues to be at a very low level. 

Depression—‘‘The European average shows that only 18 percent of patients with 

severe depression received treatment with antidepressants.’’ 

In Germany, of the percent of patients treated with antidepressants, ‘‘only one in three received an up-to-date treatment with modern antidepressants (SSRIs). 

The other 8 percent are treated with older substances with more side effects or 

less effective drugs like herbal preparations.’’ 

In France, ‘‘recent studies have shown that 50 to 70 percent of patients with 

symptomatic depression are not treated at all, either with interpersonal or 

behavioural psychotherapies nor with antidepressant medication or a combination of both.’’ 

Safe Alternatives in the U.S. for Those That Cannot Afford Their Medicine 

While importation is often hailed as the only solution for individuals who lack 

prescription drug coverage and cannot afford their medicines, in fact there are better, safer ways to ensure that patients have access to affordable medicines. 

PhRMA member companies have long offered patient assistance programs to expand access to medicines for patients. In 2005, PhRMA joined with public and private voluntary organizations to create the Partnership for Prescription Assistance 

(PPA), which offers a single point of contact to about 475 patient assistance programs and sources of government assistance. So far, the PPA has helped more than 

3 million patients find programs that provide free or nearly free medications. In 

2005, pharmaceutical companies gave away $5 billion in medicines to patients in 

need. More than 1,300 partners make up the PPA, including groups such as the 

American Academy of Family Physicians, the American Cancer Society, Easter 

Seals and the National Association of Chain Drug Stores. 

In addition to the PPA, since January 1, 2006, Medicare beneficiaries have had 

access to comprehensive prescription drug insurance. They have a wide range of coverage choices at various price points, including prescription-drug only plans and 

‘‘Advantage’’ plans that also cover hospital and physician services. The new Medicare benefit has greatly expanded access to prescription drugs for older Americans, 

many of whom have substantial medicine needs. First year indications show that 

the results are even better than anticipated—for seniors and for the health care system. For example, according to an Amundsen Group study, average out-of-pocket 

costs for beneficiaries who had no drug coverage in 2005 and who have enrolled in 

coverage through Medicare Part D have been reduced by half, despite an increase 

in the number of medicines used. Further, the percentage of previously uninsured 

patients who spend more than $50 out-of-pocket per month fell from 34 percent in 

2005 to 18 percent in 2006.89

State PAP programs, Medicaid and SCHIP are also options available to patients 

who cannot afford their medicines. Today, there are millions of people eligible for, 

but not taking advantage of such programs. Helping to ensure patients are enrolled 

in such programs, which provide coverage for all services, not just medicines, would 

be a step toward better care for millions of patients. 

The solutions detailed above provide practical options for many individuals to access affordable medicines that will not risk their health and safety. 

Conclusion 

Importation schemes are unsafe. At a time when we are struggling to combat 

counterfeit drugs and tighten security at our borders, we should be searching for 

ways to close existing loopholes in the drug distribution chain, not creating new 

ones by opening up the borders to foreign imports. While some believe importation 

can be done safely, even FDA recognizes that there is no technological ‘‘magic bullet’’ or inspection process that can protect against adulterated or counterfeit foreign 

drugs. Consequently, implementing importation would jeopardize the safety of millions of American consumers. 

Importation would not result in cost savings. There is no indication that implementing importation would result in cost savings. The costs of counterfeit-resistant 

technologies and industry and government testing and inspections likely would run 

billions of dollars each year. If the experience in Europe is any guide, any cost savings resulting from foreign importation will be captured by the parallel traders rather than passed on to consumers. 

49 

Importation is poor public policy. Importation of foreign drugs is nothing more 

than importation of foreign price control practices. These have been a disaster for 

patients in foreign countries, limiting access to new medicines and significantly restricting research and development activities in foreign countries. American patients 

deserve better. For individuals who lack prescription drug coverage and cannot afford their medicines, there are better and safer ways to obtain needed medications, 

including the Medicare drug benefit, other government programs such as Medicaid, 

SCHIP and State PAPs, PPA, and shopping for lower prices in safe, legal U.S. pharmacies. 

Endnotes 1Pub. L. 75–717, 52 Stat 1040 (1938). 

2 21 U.S.C. § 355(d)(1). 3Pub. L. 87–781, 76 Stat. 780 (1962), codified at 21 U.S.C. § 355(d)(5). 4See, e.g., the Durham-Humphrey Act, Pub. L. 82–215, 65 Stat. 648 (1951) (concerning prescription requirement); the Drug Listing Act of 1972, Pub. L. 92–387, 86 

Stat. 559 (1972); the Orphan Drug Act, Pub. L. 97–414, 96 Stat. 2049 (1983) (subsequently amended); the Drug Price Competition and Patent Term Restoration Act of 

1984, Pub. L. 98–417, 98 Stat. 1585 (1984); the Drug Export Amendments of 1986, 

Pub. L. 99–660, 100 Stat. 3743 (1986), the Prescription Drug Marketing Act of 1987, 

Pub. L. 100–293, 102 Stat. 95 (1988) (subsequently amended); the Generic Drug Enforcement Act of 1992, Pub. L. 102–282, 106 Stat. 149 (1992); and the Prescription 

Drug User Fee Act, Pub. L. 102–571, 106 Stat. 4491 (1992). 5See 21 U.S.C. §§ 331(d), 355(a). 6See 21 U.S.C. § 321(b). 7 21 U.S.C. §§ 331(d), 355. 8 21 U.S.C. § 381(d). 9 H.R. Rep. 76, 100th Cong., 1st Sess. 6–7 (1987). 

10 Id. 11 ‘‘Dangerous Medicine: The Risk to American Consumers from Prescription Drug 

Diversion and Counterfeiting,’’ 99th Cong., 2d Sess. 22 (Comm. Print 99–2 1986). 12The record supporting the PDMA was extensive and unambiguous, and the prohibition on reimportation was not controversial. In June 1985, the staff of the Subcommittee on Oversight and Investigations of the House Committee on Energy and 

Commerce published its first report on the drug diversion problem. Staff of Subcommittee on Oversight and Investigations of the House Committee on Energy and 

Commerce, 99th Cong., Report on Prescription Drug Diversion and the American 

Consumer: What You Think You See May Not Be What You Get (Comm. Print 99– 

R 1985). This report discussed the Ovulen 21 incident and laid the groundwork for 

the PDMA provision prohibiting reimportation. The subcommittee convened the first 

of eight public hearings on drug diversion and counterfeiting on July 10, 1985. Over 

2 years, the committee would hear from state and Federal law enforcement officers, 

private investigators, state drug and narcotic agents, Customs officials, FDA officials, pharmacists, diverters, U.S. attorneys, pharmacy and pharmaceutical trade 

associations, pharmaceutical sales representatives, and senior enforcement officials 

from state regulatory agencies. Two more Subcommittee reports were released, 

‘‘Dangerous Medicine: The Risk to American Consumers from Prescription Drug Diversion and Counterfeiting,’’ 99th Cong., 2d Sess. (Comm. Print 99–2 1986), and 

‘‘Uncertain Returns: The Multimillion Dollar Market in Reimported Pharmaceuticals,’’ 99th 2nd. Cong., Sess. (Comm. Print 99–GG 1985). Final legislation 

passed in early 1987. As Mr. Waxman pointed out on the day it passed the House, 

the PDMA ‘‘is a very important public health measure. It will provide additional assurances to American consumers that drugs they purchase will always be safe and 

effective. . . . The bill was developed after one of the most extensive investigations 

the Energy and Commerce Committee has conducted on a health-related matter. 

. . . [The Subcommittee] discovered that all the efforts of the FDA to approve drugs 

for safety and effectiveness could be for naught if the wholesale distribution system 

didn’t handle drugs properly or allowed counterfeit drugs to be passed along to consumers.’’ 133 Cong. Rec. 10962 (May 4, 1987). He added, ‘‘[t]he bill is not controversial and has enjoyed bipartisan support.’’ 13 21 U.S.C. § 381(d). 14See FDA Regulatory Procedures Manual, ‘‘Coverage of Personal Importations.’’ 15FDA has repeatedly expressed concerns about the safety of mail-order personal 

imports, and in 2001 the agency recommended that the policy be rescinded. See Letter from FDA Acting Principal Deputy Commissioner to Secretary of Health and 

Human Services (requesting that HHS Secretary revoke the personal importation 

mail policy) (May 24, 2001); see also Examining Prescription Drug Importation: A 

Review of a Proposal to Allow Third Parties to Reimport Prescription Drugs, hearing 

50 

before the Subcommittee on Health of the Committee on Energy and Commerce of 

the U.S. House of Representatives, 107th Cong. 2d Sess. 40 (July 25, 2002) (‘‘[W]e 

stand by that recommendation and believe that we should work with the Congress 

to develop legislation that would indeed give FDA the ability to screen these drugs 

and turn them back.’’) (William K. Hubbard, Senior Associate Commissioner); Continuing Concerns over Imported Pharmaceuticals, Hearing before the Subcommittee 

on Oversight and Investigations of the Committee on Energy and Commerce of the 

U.S. House of Representatives, 107th Cong. 1st Sess. 48, 62, 72, 76 (June 7, 2001) 

(Hubbard). 16Pub. L. 106–387, 114 Stat. 1549, 1549A–35 (2000). 17Letter from Secretary Donna Shalala to the Hon. William J. Clinton (December 

26, 2000). 18Letter from Secretary Tommy G. Thompson to Senator James Jeffords (July 9, 

2001). 19 21 U.S.C. § 384(c). 20Gregory Lopes, ‘‘Patients Get Wrong Drugs Online; Anti-Psychotics Substituted 

for Depression, Insomnia Medicine,’’ The Washington Times: February 17, 2007. 21 61 Fed. Reg. 20104, 20105 (May 3, 1996). 22See Draft Guidance for Industry: PAT—A Framework for Innovative Pharmaceutical Manufacturing and Quality Assurance (August 2003); see also Guideline on 

General Principles of Process Validation (May 1987). 23See 21 CFR Part 211. 24 21 U.S.C. § 351(a)(2)(B). 25See Guideline on General Principles of Process Validation at 3. 26See FDA, Counterfeit Drugs Questions and Answers, available at: http:// 

www.fda.gov/oc/initiatives/counterfeit/qa. 27World Health Organization, ‘‘WHO and partners accelerate fight against counterfeit medicines; Up to 50% of medicines sold through rogue websites are fake,’’ November 15, 2006. 28 ‘‘Internet Medicines Market ‘Poses Risk to Patients’ Health,’’ Financial Times 

Online, March 1, 2007. 29 Business Week, ‘‘Fakes!’’ February 7, 2005. 30 21st Century Health Care Terrorism: The Perils of International Drug Counterfeiting, Center for Medicine in the Public Interest, September 20, 2005. 31Letter dated July 17, 2002, from FDA to the Honorable Thad Cochran. 32 Id. 33 Report on Prescription Drug Importation, HHS Task Force on Drug Importation, 

U.S. Department of Health and Human Services, December 2004. 34 Congressional Budget Office, ‘‘Would Prescription Drug Importation Reduce 

U.S. Drug Spending,’’ April 29, 2004. 35Statement of William K. Hubbard Senior Associate Commissioner, Policy, Planning and Legislation FDA before the Special Committee on Aging U.S. Senate: July 

9, 2002. 36 Report on Prescription Drug Importation, HHS Task Force on Drug Importation, 

U.S. Department of Health and Human Services, December 2004. 37Diane Gorman, Assistant Deputy Minister, Health Canada, Letter to The Washington Post, May 9, 2003. 38FDA News, FDA Warns Consumers Not to Buy or Use Prescription Drugs from 

Various Canadian Websites that Apparently Sell Counterfeit Products, P06–123, August 20, 2006. 39Letter from FDA to Robert P. Lombardi, Esq. of The Kullman Firm: 

February 12, 2003 http://www.fda.gov/ora/import/kullman.htm. 40FDA Test Results of Prescription Drugs from Bogus Canadian Website Shows 

All Products are Fake and Substandard, FDA Press Release, P04–65, July 13, 2004. 41 ‘‘Recent FDA/U.S. Customs Import Blitz Exams Continue to Reveal Potentially 

Dangerous Illegally Imported Drug Shipments,’’ FDA Press Release, P04–07, January 27, 2004. 42FDA News, ‘‘FDA Operation Reveals Many Drugs Promoted as ‘Canadian’ Products Really Originate From Other Countries,’’ December 16, 2005. 43 Clifford Krauss, ‘‘Kinks in Canada Drug Pipeline,’’ New York Times: April 6, 

2006. 44Leonard Zehr, ‘‘Internet Pharmacies Aim Overseas,’’ Globe and Mail: 

February 6, 2005. 45 Christopher Rowland, ‘‘Drugs from Anywhere; As Importation Networks 

Spread, Concerns for Consumer Safety Grow,’’ The Boston Globe: December 16, 

2004. 46 ‘‘FDA Seizes Drugs Imported Under States’ Program, Supplier Says,’’ 

Bloomberg: March 9, 2005. 

51 

47 ‘‘Pharmacists React to CanaRx Exploring Importation of Drugs from India, 

Bloomberg Article Reveals Canadian Internet Pharmacy is Considering Use of 

Drugs From Country Associated with Counterfeits,’’ Yahoo News: March 16, 2005. 48 Industry Canada, Trade Data Online, Canadian Imports, Pharmaceutical and 

Medicine Manufacturing, 2005–2006, available at: http://strategis.ic.gc.ca/ 

sclmrkti/tdst/tdo/tdo.php. 49Parallel trade is a legal practice in the EU and involves a supplier who buys 

drugs in low-cost member states, often in Southern Europe, and sells them at a discount in countries where prices for that product are higher, often in Northern Europe. The essential purpose of this practice is arbitrage between countries with different prices. 50 Jonathan Harper; MB ChB, BSc (hons), MBA, ‘‘Harmonised provisions for legislative and administrative procedures applicable to counterfeit medicines in the 

Council of Europe Member States,’’ nuary 2005. 51 Id. 52http://safemedicines.org/resources/documents/Pfizercftwo-pager.pdf. 53Dr. Nils Behrndt, Deputy Head of Pharmaceuticals Unity, DG Enterprise and 

Industry, ‘‘Combat Counterfeit Medicines—Views From a Regional Organisation 

(EU),’’ WHO Conference, Rome 16–18 February 2006, slide 4. 54Graham Satchwell, ‘‘A Sick Business—Counterfeit Medicines and Organised 

Crime,’’ Press Release, November 8, 2004. 55P. Danzon, The Economics of Parallel Trade, PharmacoEconomics (1998). 56World Health Organization, ‘‘WHO and Partners Accelerate Fight Against 

Counterfeit Medicines; Up to 50 percent of Medicines Sold Through Rogue Web 

Sites are Fake,’’ November 15, 2006. 57 ‘‘Parallel Trade in Medicines,’’ Social Market Foundation, May 2004. 58Department of Health and Human Services (HHS) Task Force on Drug Importation, chaired by Surgeon General Richard H. Carmona, ‘‘Report on Prescription 

Drug Importation,’’ December 21, 2004. 59Guy Woods, Lacuna Research Limited, ‘‘Session V—Market Segmentation: techniques, actors, and incentives; Governmental Measures: Role of regulatory authorities,’’ http:www.wto.org/English/tratople/tripsle/hosbjorlpresentationsle/26 

woodsle.pdf. 60 BfArM report on the activities for the years 1998–2002 on page 39 (see: http:// 

www.bfarm.de/de/DasBfArM/publ/BfArMlBerichtlBd01.pdf.) 61Department of Health and Human Services (HHS) Task Force on Drug Importation, chaired by Surgeon General Richard H. Carmona, ‘‘Report on Drug Importation,’’ December 21, 2004. 62 ‘‘Would Prescription Drug Importation Reduce U.S. Drug Spending,’’ Congressional Budget Office, April 29, 2004. 63 Crystal Yednak and Rick Pearson, ‘‘Audit Slams State Drug Plan: But 

Blagojevich Plans Expansion,’’ Chicago Tribune: September 20, 2006. 64Tim Craig, ‘‘Savings Uncertain in Import Drug Plan,’’ Washington Post: January 

14, 2005. 65 Christopher Rowland, ‘‘Drug plan isn’t worth the savings: Canada imports seen 

bringing liability risks,’’ Boston Globe: November 21, 2003. 66London School of Economics and Political Science, ‘‘The Economic Impact of 

Parallel Trade,’’ November 2003. 67 ‘‘Auto Industry Attacks Canadian ‘Gray Market’ Discounts,’’ The Associated 

Press, May 31, 2002. 68P. Danzon and M. Furukawa, ‘‘Prices and Availability of Pharmaceuticals: Evidence from Nine Countries,’’ Health Affairs, Web Exclusive, 29 October 2003. 69OECD Health Data 2003—2nd ed. (Table 9: Total Expenditure on Health, Per 

capita US$ PPP, available at: http://www.oecd.org/dataoecd/1/33/2957325.xls. 

Table 14: Total expenditure on pharmaceuticals and other medical non-durables, 

percent Total expenditure on health, available at: http://www.oecd.org/dataoecd/ 

12/58/2957414.xls.) 70 ‘‘The New Math Cheaper than Canada? The Drug Benefit May be the Better 

Deal,’’ Accessed on February 1, 2006 at http://www.aarp.org/bulletin/Medicare/ 

newlmath.html. 71 ‘‘Report to the President, Prescription Drug Coverage, Spending, Utilization and 

Prices,’’ Department of Health and Human Services, April 2000. 72S. Morgan, M. Barer and J. Agnew, ‘‘Whither Seniors’ Pharmacare: Lessons 

from (and for) Canada,’’ Health Affairs, Vol. 22, No. 3, May/June 2003. 73 ‘‘City Council Reviews Legislation Allowing Consumers to Compare NYC Prescription Drug Costs Online,’’ Press Release, The Council of the City of New York, 

Office of Communications, October 12, 2004. 

52 

74 Associated Press Newswires, ‘‘Cost of prescription drugs vary statewide,’’ June 

24, 2003; Associated Press, ‘‘Survey finds price differences in prescription drugs,’’ 

September 25, 2003; ‘‘Prescription drug prices vary at area pharmacies,’’ St Louse 

Business Journal: May 2003; City Council Reviews Legislation Allowing Consumers 

to Compare NYC Prescription Drug Costs Online,’’ Press Release, The Council of the 

City of New York, Office of Communications, October 12, 2004; Mary Massingale 

‘‘Advocates: Shop around for prescription drugs,’’ The State Journal-Register 

(Springfield, IL), June 27, 2003. 75 U.S./Canadian Price Comparisons, U.S. Food and Drug Administration, October 

2004, http://www.fda.gov/oc/opacom/hottopics/importdrugs/canadrx.html. 76 John E. Calfee, ‘‘The High Price of Cheap Drugs,’’ The Weekly Standard: July 

21, 2003. 77 James K. Glassman and John R. Lott, Jr., ‘‘The Drug World’s Easy Riders,’’ 

Commentary, The Wall Street Journal: July 23, 2003. 78 EFPIA, ‘‘In figures 2004,’’ http://www.efpia.org/Objects/2/Files/infigure 

2004Maintrends.pdf. 79 Id. 80Pharmaceutical Price Controls in OECD Countries, Implications for U.S. Consumers, Pricing, Research and Development, and Innovation, U.S. Department of 

Commerce, International Trade Administration, Washington, D.C., December 2004. 81 John A. Vernon, ‘‘Simulating the Impact of Price Regulation on Pharmaceutical 

Innovation,’’ Pharm Dev Regul (2003). 82Pharmaceutical Price Controls in OECD Countries, Implications for U.S. Consumers, Pricing, Research and Development, and Innovation, U.S. Department of 

Commerce, International Trade Administration, Washington, D.C., December 2004. 83 European Commission, ‘‘High Level Group on Innovation and Provision of Medicines, Recommendations for Action,’’ G10 Medicines Report, (Brussels, Belgium: European Commission, May 7, 2002). 84Kerry Capell, ‘‘Europe Pays a High Price for Cheap Drugs,’’ Business Week: February 17, 2003. 85 ‘‘Delays in Market Access,’’ Cambridge Pharma Consultancy (a unit of IMS 

Health), December 2002. 86 Id. 87 ‘‘Patients Waiting to Access Innovative Therapies—The Patients W.A.I.T. Indicator’’ accessed from http://www.efpia.org/content/Default.asp?PageID=173 on 

March 2, 2007. 88O. Scho ̈ffski, ‘‘Diffusion of Medicines in Europe,’’ Prepared for the European 

Federation of Pharmaceutical Industries and Associations (EFPIA), September 2002. 89The Amundsen Group, ‘‘Medicare Part D: Improving Care for Beneficiaries 

Without Drug Coverage,’’ 27 October 2006. 

The New York Times—February 20, 2007 

IN THE WORLD OF LIFE-SAVING DRUGS, A GROWING EPIDEMIC OF DEADLY FAKES

By Donald G. McNeil, Jr. 

Asia is seeing an ‘‘epidemic of counterfeits’’ of life-saving drugs, experts say, and 

the problem is spreading. Malaria medicines have been particularly hard hit; in a 

recent sampling in Southeast Asia, 53 percent of the antimalarials bought were 

fakes. 

Bogus antibiotics, tuberculosis drugs, AIDS drugs and even meningitis vaccines 

have also been found. 

Estimates of the deaths caused by fakes run from tens of thousands a year to 

200,000 or more. The World Health Organization has estimated that a fifth of the 

one million annual deaths from malaria would be prevented if all medicines for it 

were genuine and taken properly. 

‘‘The impact on people’s lives behind these figures is devastating,’’ said Dr. Howard A. Zucker, the organization’s chief of health technology and pharmaceuticals. 

Internationally, a prime target of counterfeiters now is artemisinin, the newest 

miracle cure for malaria, said Dr. Paul N. Newton of Oxford University’s Center for 

Tropical Medicine in Vientiane, Laos. 

His team, which found that more than half the malaria drugs it bought in Southeast Asia were counterfeit, discovered 12 fakes being sold as artesunate pills made 

by Guilin Pharma of China. 

A charity working in Myanmar bought 100,000 tablets and discovered that all 

were worthless. 

53 

‘‘They’re not being produced in somebody’s kitchen,’’ Dr. Newton said. ‘‘They’re 

produced on an industrial scale.’’ 

China is the source of most of the world’s fake drugs, experts say. In December, 

according to Xinhua, the state news agency, the former chief of China’s Food and 

Drug Administration and two of his top deputies were arrested on charges of taking 

bribes to approve drugs. 

The director, Zheng Xiaoyu, was in office from the agency’s creation in 1998 until 

he was dismissed in 2005 after repeated scandals in which medicines and infant formula his agency had approved killed dozens of Chinese, including children. 

‘‘The problem is simply so massive that no amount of enforcement is going to stop 

it,’’ said David Fernyhough, a counterfeiting expert at the Hong Kong offices of Hill 

& Associates, a risk-management firm hired by Western companies to foil counterfeiters. 

The distribution networks, he said, ‘’mirror the old heroin networks,’’ flowing to 

Thai distributors with financing and money-laundering arranged in Hong Kong. The 

penalties are less severe than for heroin. 

Daniel C. K. Chow, an Ohio State University law professor and an expert on Chinese counterfeiting, said he believed that the authorities would pursue counterfeiters ‘’ruthlessly’’ for killing Chinese citizens but be more lax about drugs for export. 

‘‘The counterfeiters aren’t stupid,’’ he said. ‘‘They don’t want anyone beating down 

the door in the middle of the night and dragging them away, so they make drugs 

for sale outside the country.’’ 

A spokesman for the Chinese Embassy in Washington said that he had ‘’no idea’’ 

whether most of the world’s counterfeits came from China, but that Mr. Zheng’s arrest proved China was cracking down. He also said counterfeiters would get the 

same punishment no matter whom they hurt. 

Many of the fake artesunate pills found by Dr. Newton’s team were startlingly 

accurate in appearance—and much more devious in effect than investigators had 

suspected. 

Not only did the pills look correct, as did the cardboard boxes, the blister packing 

and the foil backing, but investigators found 12 versions of the tiny hologram added 

to prevent forgery. 

In one case, even a secret ‘‘X–52’’ logo visible only under ultraviolet light was 

present, though in the wrong spot. 

Another hologram was forged by hand, Dr. Newton said, by someone who obviously spent hours with a pin and a magnifying glass making tiny dots on a circle 

of foil to imitate the shimmer. 

But the most frightening aspect appeared when the pills were tested. Some contained harmless chalk, starch or flour. But the latest, he said, contained drugs apparently chosen to fool patients into thinking the pills were working. 

Some had acetaminophen, which can temporarily lower malarial fevers but does 

not kill parasites. Some had chloroquine, an old and now nearly useless antimalarial. 

One had a sulfa drug that in allergic people could cause a fatal rash. 

And some had a little real artemisinin—not enough to cure, but enough to 

produce a false positive on the common Fast Red dye test for the genuine article. 

Those would not merely fool a laboratory, Dr. Newton noted. They could also foster drug-resistant parasites, so if patients were lucky enough to get genuine 

artemisinin treatment later, they might have already developed an incurable strain 

and could die anyway. 

Such resistant strains could spread from person to person by mosquito and ultimately render the drug ineffective, as already happened with chloroquine and 

Fansidar, two earlier malaria cures. 

‘‘We make no apology for the use of the term ‘manslaughter’ to describe this criminal lethal trade,’’ Dr. Newton and his co-authors said last year in an article in The 

Public Library of Science Medicine. ‘‘Indeed, some might call it murder.’’ 

In the United States, finding counterfeit drugs in pharmacies is very rare, ‘‘but 

we’ve seen a lot from Internet sellers posing as legitimate pharmacies,’’ said Dr. 

Ilisa Bernstein, director of pharmacy affairs for the Food and Drug Administration. 

Thus far, few counterfeits of life-saving drugs have been found in the United 

States. Most are drugs used or abused for fun, like Viagra, the painkiller Oxycontin 

and sleeping pills. Investigators have, however, found fake statins, which could 

eventually lead to a heart attack, and fake Tamiflu, which could be fatal in a pandemic of lethal flu. 

Fake drugs have a long history; the film noir masterpiece ‘‘The Third Man,’’ based 

on a real criminal case, involves adulterated penicillin in post-war Vienna. 

54 

And in the 1600s, after conquistadors discovered that South American cinchona 

bark cured malaria, Europe was flooded with fake bark. ‘‘It caused a great loss of 

confidence in it as a cure,’’ Dr. Newton said. ‘‘We’re seeing history repeat itself.’’ 

The problem with antimalarials is worst in Asia, but is growing rapidly in Africa. 

For example, in September, Nigerian authorities found $25,000 worth of counterfeit malaria and blood pressure drugs concealed in a shipment of purses from China. 

The temptation for counterfeiters is likely to grow because money to fight malaria 

is being poured into the Third World. President Bush’s $1.2 billion Malaria Initiative avoids the problem by buying directly from Western pharmaceutical companies like Novartis, said Dr. Trenton K. 

Ruebush II, an adviser to the initiative. 

By contrast, the Global Fund to Fight AIDS, Tuberculosis and Malaria gives 

money directly to poor countries to buy their own drugs, and sends auditors to follow up. But 80 percent of the world’s nations, pharmacology experts estimate, lack 

drug agencies capable of detecting sophisticated counterfeits. 

‘‘The countries are supposed to purchase from W.H.O.-qualified manufacturers, 

but there are places where things can go wrong where we wouldn’t necessarily have 

control,’’ said Dr. Bernard Nahlen, the fund’s malariologist. ‘‘In some countries, 

there is, let’s say, a certain lethargy about paying attention to these issues. You 

have to take the government’s word for it, and anybody can pull the wool over anybody’s eyes.’’ 

The Global Fund, which appointed a new director on Feb. 8, is considering adopting central purchasing, a spokesman said. 

A global alert system for counterfeit drugs has existed for 16 years, first by fax, 

and now on the World Health Organization website, said Dr. Valerio Reggi, chief 

of the anticounterfeiting task force created last year by the organization. 

‘‘But it isn’t used very much,’’ he said. ‘‘Regulators are human beings, and it’s difficult to identify a benefit for those who report to it.’’ 

Dr. Reggi said the task force would try to change that by drawing attention to 

the problem and getting harsher laws passed. As he pointed out, in many countries, 

‘‘counterfeiting a T-shirt means 10 years in jail, but counterfeiting a medicine can 

be a misdemeanor.’’ 

Parade Magazine—February 18, 2007 

PRESCRIPTION DRUGS SEEMS SAFE, BUT BEWARE—IS YOUR MEDICINE DANGEROUS TO

YOUR HEALTH

By Tom Zoellner 

Some call it the most perfect crime in medicine: Buy some empty gelatin capsules, 

fill them with worthless powder, print up a phony label and sell them to a drug 

wholesaler who has no scruples or just chooses to look the other way. The 

unsuspecting consumer who buys the drugs from his corner pharmacy will almost 

certainly never discover why he is getting sicker instead of better. This is called 

‘‘drug counterfeiting,’’ a business that has expanded in the last 5 years. Phony drugs 

already have taken the lives of several Americans, and the perpetrators have 

walked off with nearly $35 billion in black market profits. 

Thankfully, the chances are fairly slim that your daily pills could be fakes, but 

the problem is worsening as counterfeiters become more savvy. The World Health 

Organization estimates that up to 10 percent of the medications sold globally are 

actually counterfeit. The number in the United States is much lower—experts peg 

it at 1 percent—but the practice is growing as dealers of illicit street drugs like cocaine and Ecstasy discover there are more profits and less risks in selling phony 

tablets of drugs like Ambien, Lipitor and Cipro. 

‘‘We’re seeing a lot more of this than ever before,’’ says John Theriault, vice president for global security at the pharmaceutical giant Pfizer. The problem has become 

serious enough for Pfizer to develop its own private team of 17 former law-enforcement agents to investigate counterfeit drugs. Theriault, an ex-FBI agent, says his 

team has come across drug labs in homes, hotel rooms and overseas warehouses. 

Phony pills are put in conventional plastic bottles that sometimes have labels 

soaked off from legitimate shipments. One such case in 2003 involved as many as 

18 million tablets of bogus Lipitor that had been manufactured in Costa Rica. The 

counterfeiters had purchased their ingredients from the Hong Kong office of a Swiss 

company and even embossed the fake product with a real-looking Pfizer logo. The 

‘‘Lipitor’’ was then marketed through a drug wholesaler operating in the Midwest 

and sold through legitimate pharmacies. The pills reached Pfizer’s attention only 

after American customers began to complain about their bitter taste. It’s possible 

55 

that more than 600,000 people could have received bottles containing the fake 

Lipitor tablets. 

But not every counterfeit drug is cooked up in an illicit lab. Some unscrupulous 

suppliers have been known to boost their profits by ‘‘uplabeling’’—for example, passing off a 10mg dose of a drug as 40mg. Expiration dates may be altered too. Experts 

say the vulnerabilities in the supply chain also can be traced to secondary drug 

wholesalers, who face pressure to keep costs low and may not be inclined to scrutinize the source of their purchase. Where the drug changes hands several times, 

that’s where you have the problem, says one industry expert. The bogus drugs go 

from a wholesaler’s warehouse to a retail pharmacy and into a consumer’s medicine 

cabinet. 

Not surprisingly, the Internet is another common source of counterfeits. Directto-consumer websites offer great deals that are literally too good to be true. ‘‘You 

can find plenty of ‘Canadian’ sites that aren’t really Canadian,’’ says Pfizer spokesman Bryant Haskins. ‘‘They’re decorated with maple leaves, but we’ve tracked them 

to Belize, Russia, Vietnam—all over the place.’’ 

The deception often goes further than that. ‘‘Overseas counterfeiters are also 

known for selling ‘generic’ versions of drugs where no generics exist,’’ points out 

Joan Todd of Eli Lilly and Company. ‘‘The consumer assumes that somebody out 

there is regulating this. But anybody can set up a website and sell fake medicine.’’ 

In one notorious case, Lilly investigators found a machine used to create bogus 

drugs in which a toilet seat had been jerry-rigged into the device. ‘‘This obviously 

does not adhere to good manufacturing procedure,’’ remarks Todd dryly. 

Last year, the U.S. Food and Drug Administration investigated 53 cases of drug 

counterfeiting—up from six just 5 years ago. Though it is difficult to chart how 

many people unwittingly ingest counterfeit drugs each year, the injuries and deaths 

likely number in the hundreds. Experts say that thousands of Americans doubtlessly have been affected without even knowing it. 

Most ersatz-drug fatalities almost certainly have escaped notice, explains 

Haskins. Autopsies are not routine for the sick or elderly, and few doctors would 

ever suspect that the drugs they prescribed were nothing more than useless filler. 

What harms a patient is usually not toxic substances in the phony drug but a lack 

of the potentially lifesaving medication they are supposed to be receiving. 

Besides, drug counterfeiters rarely set out to kill their customers—such a move 

would invite police attention and run contrary to their economic interests. The logic 

is similar to that of a parasite, which seeks not to kill the host but to feed off it 

for as long as possible. This is why expensive drugs that treat long-term conditions 

such as AIDS are the most likely to be counterfeited. Erectile-dysfunction drugs are 

also a prime target because of the big money involved—and the disinclination of 

many patients to complain about a lack of results. 

Solving this problem will not be quick or easy. Rep. Mike Rogers (R., Mich.) has 

proposed raising the penalties for prescription drug counterfeiters from 3 years in 

prison to 20 years, putting the perpetrators on an equal plane with heroin dealers. 

The bill he proposed died in committee last session but was reintroduced earlier this 

month. 

The Food and Drug Administration also has encouraged drug companies to track 

their pills after they leave the factory. GlaxoSmithKline, for example, now inscribes 

its pills and packages with invisible text symbols to authenticate its product. But 

these markings would be checked only after a counterfeit suspicion arises. 

Tracking is becoming easier, however, with a technology known as Radio Frequency Identification (RFID), an advanced variety of bar code that is now used in 

the E-ZPass highway toll system, among other places. This technology would allow 

officials to scan entire pallets of drugs instead of checking individual barcodes. Such 

a system would make it hard to slip bogus products into the supply chain, because 

drugs could be tracked from factory to pharmacy counter. Progress with RFID has 

been slow due to the high costs involved. So far, only limited shipments of expensive 

drugs like the painkiller Oxycontin contain RFID tags on their labels. 

One thing everyone agrees on: The problem is becoming widespread, and the supply chain is still vulnerable. Up to 40 million of the prescription bottles handed out 

in the U.S. today are filled with substances that aren’t what they claim to be, according to the National Association of Boards of Pharmacy. 

‘‘If the system becomes further compromised, it will get to the point where it’s 

very difficult to fix,’’ says Carmen Catizone, the association’s executive director. 

‘‘Imagine someone going to the emergency room for a heart attack and being given 

counterfeit drugs by the hospital staff. This could cripple the whole health-care system.’’ 

56 

How to Protect Yourself 

Here are a few precautions you can take to avoid counterfeit drugs: 

Don’t buy prescription drugs online unless it’s through the website of a legitimate 

pharmacy. 

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

on the pills. 

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

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

Learn more about the counterfeit drug problem in America: 

On its website, the U.S. Food and Drug Administration posts the latest warnings 

about counterfeit drugs and offers other important consumer information. http:// 

www.fda.gov/oc/initiatives/counterfeit/. 

Report a suspicious drug: 

The National Fraud Information Center/Internet Fraud Watch (NFIC/IFW) tells 

you step-by-step how to notify authorities if you think a drug you’ve bought is fake. 

http://fraud.org/fakedrugs/. 

Senator DORGAN. I’ve given you a bit more time. 

You’ve chaired these hearings before in the Congress, and—— 

Mr. TAUZIN. I apologize. 

Senator DORGAN.—understand we have five witnesses on this 

panel, and I want to hear the rest of them. But we appreciate your 

testimony. 

William Schultz is a partner in Zuckerman Spaeder. He was previously the Deputy Commissioner for Policy at the Food and Drug 

Administration, which is the position that Dr. Lutter now holds. 

Mr. Schultz, thank you for being with us, and you may proceed 

with your testimony. 

STATEMENT OF WILLIAM B. SCHULTZ, PARTNER, 

ZUCKERMAN SPAEDER, LLP 

Mr. SCHULTZ. Thank you, Mr. Chairman and members of the 

Committee. I appreciate the opportunity to testify on the Pharmaceutical Market Access and Drug Safety Act of 2007, S. 242. 

This carefully crafted and comprehensive bill, if enacted, would 

significantly improve the safety of drugs used by patients in the 

United States today. It would also make safe, affordable drugs 

available to many Americans who are, today, using drugs for which 

no generics are available, and who can’t afford the brand prescription drugs that they need. 

One only has to listen to the testimony of Dr. Lutter to understand why this bill would improve the safety of drugs used in this 

country today. As Dr. Lutter has told us, today we are being flooded with counterfeit and otherwise unsafe drugs. We also know that 

every year American patients purchase millions of prescriptions by 

mail order from Canada. I think Dr. Lutter said the 2004 report 

had the number 25 million prescriptions coming across the borders 

in that year. 

So, the question before Congress is not whether to allow patients 

to import drugs from Canada because, as a country, we already do 

that. Instead, I submit that the real question before the Committee 

is whether S. 242 will make drugs imported from Canada safer. 

There are at least five reasons why American citizens will be significantly better off if S. 242 is enacted. 

57 

First, the bill will carefully regulate Canadian exporters and U.S. 

importers. Even the FDA, at times, has conceded that drugs from 

legitimate Canadian pharmacies are safe. They’re probably as safe 

as drugs sold in the United States. The problem is that, today, 

American consumers have no way of knowing which drugs they 

purchase are from legitimate exporters and which ones are not. 

Under the bill, the FDA will approve each Canadian exporter, and 

the exporters from other countries that the agency designates as 

having acceptable drug-approval systems. The bill also directs FDA 

to list safe Canadian sources on the Internet so that patients can 

know which Canadian exporters are legitimate. 

Second, under the bill, the FDA would regularly inspect foreign 

plants that manufacture drugs exported to the United States. Although, as was pointed out before, to date FDA does inspect foreign 

facilities that manufacture U.S. drugs, it does not inspect plants 

that manufacture Canadian drugs, even if they are imported into 

the United States. 

Third, the bill allows U.S. wholesalers and pharmacies to import 

drugs from Canada, and this system would allow for even more 

complete protection, because it provides for monitoring the chain of 

custody from the manufacturer to the wholesaler. A mechanism is 

also provided for FDA to examine any differences between the imported drug and the drug sold in the United States. 

Fourth, the bill has an innovative provision that would direct the 

Federal Reserve Board to issue regulations to stop credit card payments to persons illegally exporting the drugs to the United States. 

And, fifth, the bill provides the FDA with the necessary resources. Today, the agency has little or no resources to inspect foreign facilities that inspect Canadian drugs—manufacture Canadian 

drugs or to monitor imports. The user-fee provision in the bill 

would provide those resources. 

Mr. Chairman, today consumers are purchasing millions of dollars of low-cost prescription drugs from Canada. They are also purchasing inferior drugs from Canada and other countries in an effort 

to gain access to affordable medicines. But, today, consumers do 

not know how to separate the good drugs from the bad drugs. This 

bill would create a stream of safe and affordable drugs from Canada and other countries certified by FDA. It will make it easier for 

the agency to keep unsafe drugs out of the United States, to the 

great benefit of American patients. 

Let’s not forget what’s at stake here. There are many important 

drugs that patients in this country need for which low-cost, generic 

drugs are not available. These same drugs are available in Canada 

at a significantly lower price, often at savings as much as 50 percent. If this were any other product, our trade policy would allow 

consumers to purchase a less-expensive alternative, if they wished. 

And this is not just a matter of saving money, as it is with most 

products. For many patients, it’s a matter of their health, because 

they cannot afford the drug at the U.S. price. Today, the only way 

for these patients to protect their health is to break the law, and, 

even when they do so, they do it at the risk of importing fraudulent 

and a potentially unsafe product. S. 242 will make those patients 

law-abiders. It includes important measures which will go a long 

58 

way toward assuring that the drugs being imported in this country 

are safe and effective. 

I’d be happy to answer any questions. 

[The prepared statement of Mr. Schultz follows:] 

PREPARED STATEMENT OF WILLIAM B. SCHULTZ, PARTNER, ZUCKERMAN SPAEDER, LLP 

I appreciate the opportunity to testify on the issue of drug importation. I have 

been working on issues related to food and drug law for my entire career. I have 

worked on these issues as a public interest attorney, a Congressional staffer, an 

FDA official and now as an attorney in private practice. I have worked on issues 

related to patients obtaining drugs from foreign sources both inside and outside of 

the Food and Drug Administration. During my tenure with FDA, I initiated a study 

of the sale of prescription drugs over the Internet. This examination was precipitated by, among other things, concerns over patients obtaining illegal drugs from 

foreign sources. During my time in private practice, I became involved with issues 

related to the importation of drugs from Canada. In 2003, I represented a Canadian 

pharmacy that wanted to develop a mechanism for U.S. citizens to legally obtain 

FDA approved prescription drugs at lower prices. The following year, I represented 

the State of Illinois during its efforts to assist their citizens in obtaining lower 

priced prescription drugs from Canada. Specifically, I helped these clients understand FDA requirements and policies in this area. 

I am here today to express my support for the Pharmaceutical Market Access and 

Drug Safety Act of 2007 (S. 242). This legislation addresses a substantial and serious problem—patients illegally obtaining potentially dangerous prescription drugs 

from foreign sources. For the reasons discussed below, I believe this bill would significantly advance public health by creating a safe means for U.S. citizens to obtain 

lower-priced prescription drugs from countries that have appropriate protections in 

place through an FDA-controlled mechanism. 

In my testimony today, I will start by discussing the problem with the current 

system of regulation and then explain why I think this legislation would give U.S. 

citizens far more protection than they have today. 

I. Consumers Currently Are Purchasing Drugs From Foreign Sources and 

Current Law Is Not Protecting Them 

The Food Drug and Cosmetic Act (the ‘‘FD&C Act’’) does not permit individuals 

to purchase prescription drugs from Canada or any other country. Nevertheless, 

U.S. consumers are doing just that, and for all practical purposes, much of this activity has been blessed by FDA. For example, FDA regularly permits patients to 

bring with them into the United States a 90-day supply of drugs that they purchased outside of the United States. Even though this activity is technically illegal, 

as a matter of its enforcement discretion FDA permits the import of prescription 

drugs for personal use. This policy has been in effect for many years, during both 

Democrat and Republican administrations. 

In other instances, FDA policy does not permit the activity. For example, there 

is a well-known and widespread practice of consumers illegally purchasing prescription drugs from foreign Internet websites and mail order companies. Although FDA 

has not condoned this practice, it has not been able to effectively stop it. As FDA 

has repeatedly told Congress, thousands of packages containing prescription drugs 

from foreign counties enter the United States daily. Neither FDA nor U.S. Customs 

and Border Protection (‘‘Customs’’) can effectively police this practice. Moreover, the 

law, as it currently stands, makes it extremely difficult and burdensome for FDA 

and Customs to stop the illegal packages that they are able to identify. 

It is not difficult to understand why consumers import drugs from Canada and 

other countries. The price difference between prescription drugs purchased in the 

United States and those purchased in Canada is significant. The difference can be 

as much as 50 percent. For many patients, this is the difference between being able 

to obtain needed medicines and forgoing such medicines. In recent years, the number of prescription drugs being brought or shipped into the United States from Canada and other counties has been rising dramatically. 

Because the FD&C Act does not specifically permit patients to obtain their prescription drugs from foreign countries, it does not include any protections for consumers who are engaging in it. As FDA has repeatedly told Congress, the risks to 

patients are real and they are great. Most patients are probably receiving medicines 

that are comparable to those sold in the United States. But others may be receiving 

medicines that are expired, subpotent, contaminated or counterfeit. The labeling 

59 

may be in another language, thus depriving the patient of important information 

about the drug. Moreover, if the patient experiences problems and they manage to 

trace it to the drug (which is not likely since they usually assume the drug they 

got is safe and effective), they probably have no recourse. FDA’s ability to take action against foreign suppliers is quite limited. The current system leaves American 

patients who obtain their prescription medicines from foreign countries completely 

unprotected. 

II. The Bill Would Give Patients Who Receive Their Prescription Drugs 

From the Designated Countries Important Protections 

S. 242 recognizes, as have even FDA officials, that prescription drugs sold by Canadian pharmacies are safe. The challenge is to prevent the import of unsafe drugs 

from Canada and other countries. The bill addresses this issue in two ways. First, 

it creates a mechanism for individuals to obtain prescription medicines for their personal use from registered Canadian pharmacies (or from pharmacies in another permitted country if FDA determines that that country’s pharmacy laws are equivalent 

to Canada’s). Second, it creates a mechanism for U.S. pharmacies and wholesalers 

to commercially import medicines from a defined set of countries under controlled 

conditions. Both provisions require that the drug be an FDA-approved drug and be 

manufactured in an FDA-inspected facility. I will discuss each of these provisions 

separately. 

A. Personal Importation 

S. 242 creates a legal mechanism for Canadian (and potentially other FDA designated) pharmacies to ship drugs to U.S. consumers who have a valid prescription. 

As I stated earlier, U.S. citizens have been receiving low price drugs from Canada 

for many years. By formalizing and adding specific requirements for individual supplies, the bill is adding protections for those citizens. I believe the protections in the 

bill address many of the concerns that have been raised by opponents of the practice. For example, FDA must approve and inspect the Canadian exporter. Today 

many of the drugs that are sold in the United States under approved new drug applications are manufactured in facilities located in foreign countries and FDA has 

the responsibility for inspecting those plants. 

For Canadian exporters, the bill directs FDA to inspect no less than 12 times annually, which far exceeds FDA’s inspection frequency domestically. Moreover, exporters are required to mark their packages in a way that allows FDA and Customs 

to identify legal imports. In addition, FDA can require exporters to incorporate 

anticounterfeiting technology or track and trace technology. The protections are designed to address the concerns that Canadian drugs are not actually coming from 

Canada or that Canada will become a dumping ground for counterfeit drugs and 

FDA will not be in a position to police the activity. Moreover, the bill directs FDA 

to publicly list safe sources of Canadian drugs so that patients will be directed to 

the sources listed by the Agency. Finally, by including a user fee for exporters, the 

legislation will ensure that FDA has the resources it needs to implement these provisions. 

B. Commercial Importation 

S. 242 also creates a mechanism for wholesalers and pharmacies to import prescription drugs from Canada, the European Union, Australia, New Zealand, Japan, 

and Switzerland. It includes safeguards to ensure that such products are safe. 

Wholesalers and pharmacies that want to participate must register with FDA. They 

must provide a full chain of custody and FDA may require anticounterfeiting technologies. Again, the bill includes requirements that are more protective than those 

imposed for drugs sold domestically. S. 242 also requires manufacturers of a drug 

sought to be imported to notify FDA of any differences in their drug from the U.S. 

approved version. FDA must approve the difference before the drug can be imported. 

Again, I applaud the sponsors of the bill for including user fees to ensure that FDA 

has the means to oversee the program as intended. The bill also allows FDA to ease 

its way into the new system by limiting the number of participating pharmacies and 

wholesalers and then allowing that number to increase gradually over time. 

By creating a pathway for bulk importation, the bill provides a broader mechanism that allows consumers to obtain less expensive prescription drugs. If consumers have domestic access to lower-priced prescription drugs, they will not feel 

compelled to obtain their drugs from illegal, foreign sources. This legislation will significantly decrease the number of patients turning to illegal Internet pharmacies or 

mail order companies for their medications. 

60 

C. Stopping Illegal Imports 

I believe that this legislation will succeed because it also attacks the problem defensively; in other words it includes provisions that make it easier for FDA to stop 

the illegal importation of drugs. Under current law, FDA is required to go through 

a number of time consuming steps if it wants to detain an illegally imported drug. 

Here a simple notice to the intended recipient of the drug explaining how they can 

import drugs legally from Canada is all that is required. Moreover, the bill directs 

the Federal Reserve Board to issue regulations to stop credit card payments to persons illegally exporting drugs to the United States. In my opinion, this dual approach to the problem of illegal drugs entering the United States—namely provisions to stop the entrance and provisions to permit a safe legal alternative—is an 

excellent way to effectively protect American consumers. 

III. Conclusion 

I support this legislation because it creates legal pathways for consumers to obtain lower priced prescription medications from designated foreign sources. As I 

stated earlier, these pathways are critical to patients who simply cannot afford prescription medicines at the prices they must pay in this country. This is the solution 

for patients who otherwise must either forgo their medicine or obtain it illegally and 

thus, potentially unsafely. 

Opponents of this legislation have repeatedly expressed concern that it opens the 

door to dangerous foreign drugs entering the U.S. I disagree. These opponents are 

ignoring the world as it exists today and has for many years—where a growing 

number of Americans regularly import prescription drugs from Canada and other 

countries. In 2004, an HHS task force reported that in 2003 approximately 12 million prescription drug products had entered the U.S. from Canada alone. The report 

estimated that an equal amount currently is coming in from the rest of the world. 

I firmly believe that if Congress creates a legal mechanism for providing lower cost 

drugs, consumers will no longer resort to buying substandard or possibly dangerous 

drugs off of illegal Internet websites or mail order companies. Patients are resorting 

to this practice because their only other option is to go without their medicine. This 

legislation creates options: it creates pathways to ensure that patients have access 

to safe and effective, lower-priced medicines. Moreover, the bill puts an end to 

FDA’s current policy, which effectively condones the breaking of the very laws FDA 

has been created to enforce. For this reason, I support passage of this legislation. 

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

questions. 

Senator DORGAN. Mr. Schultz, thank you very much for your testimony. 

Next, we will hear from Dr. Vernon, John Vernon, Professor of 

Economics at the University of Connecticut. 

Dr. Vernon, thank you for being with us. 

STATEMENT OF DR. JOHN A. VERNON, ASSISTANT PROFESSOR, DEPARTMENT OF FINANCE, 

UNIVERSITY OF CONNECTICUT SCHOOL OF BUSINESS 

Dr. VERNON. Thank you. 

Mr. Chairman and members of the Committee, thank you for inviting me to testify on the policy implications of pharmaceutical importation. 

My name is John Vernon, and I am a professor in the School of 

Business at the University of Connecticut, and a Faculty Research 

Fellow with the National Bureau of Economic Research. I also 

serve part time as Senior Advisor for Economic Policy at the FDA, 

though my testimony will be based on academic research I have 

undertaken at the University of Connecticut. The opinions I am 

about to express are entirely my own. 

My testimony is neither in support of, nor opposition to, importation. Rather, I am only advocating that a balanced economic perspective be adopted on this important public policy issue, one that 

places the economic costs of importation on equal footing with the 

61 

economic benefits. To date, I do not think this has occurred. The 

economic costs, I fear, have received relatively little attention. 

For the purposes of the points I wish to make, let us assume that 

a new importation policy will be effective in achieving its objective, 

it will significantly reduce drug prices in the U.S. Precisely how 

importation will achieve this objective is the subject of some debate, but one possibility is through a forced sales provision. 

To begin, the economic benefits of pharmaceutical importation 

are obvious. U.S. consumers will pay lower prices for their prescription drugs. This is because most foreign governments regulate drug 

prices. The benefits of regulated prices are readily apparent and 

straightforward to measure. The same, however, cannot be said 

about the costs. This may explain why they have received less attention. Please allow me to explain. 

Once a new pharmaceutical has been developed, which typically 

takes 12 to 15 years, and all the safety and efficacy data have been 

collected and analyzed, the marginal cost of a single pill is quite 

small. This is because the final product of the R&D is essentially 

just new information, much like computer software, information 

that has taken many years and hundreds of millions of dollars to 

obtain. In the absence of pharmaceutical patents and intellectual 

property rights and the ability of firms to price their products well 

above marginal cost, no firm or investor would invest the time or 

money needed to develop this information. Thus, there must be a 

sizable reward to induce the R&D. As is, only three out of every 

ten new drugs generate returns in excess of average R&D costs. 

Pharmaceutical importation, precisely to the extent it is successful in lowering U.S. drug prices, will reduce the incentives to invest 

in R&D. The expected returns on R&D projects will fall, and some 

projects will be terminated, and some projects may not be initiated. 

The result will be a decline in the rate of pharmaceutical innovation. Fewer new drugs will be developed, and it will take longer to 

find cures for many diseases. Unlike the benefits of the policy, the 

costs of the policy are more difficult to appreciate and quantify. 

This is because of the time lag and uncertainty associated with the 

R&D process. 

My research is focused on these costs, and, specifically, the economic relationships between pharmaceutical prices, profits, and 

R&D. My colleagues and I have studied the sensitivity of R&D 

spending to pharmaceutical prices and profits, using a variety of 

research methods. I will now summarize these results, and specifically the results from two recently published studies. Now, these 

studies have been vetted by the academic peer-review process and 

published in professional economics journals. 

The first study used publicly available, firm-level data and exploited observed differences in U.S. and non-U.S. pharmaceutical 

profit margins. Using established economic models and statistical 

techniques, we estimated that a new policy that reduces pharmaceutical profit margins in the U.S. to non-U.S. levels will cause 

firm R&D spending to decline by between 25 and 35 percent. Pharmaceutical importation will theoretically have this effect. 

The second study used publicly available, industry-level data, 

and studied the direct link between U.S. drug prices and industry 

62 

R&D spending. We estimated that for every 10 percent reduction 

in U.S. drug prices, industry R&D spending will fall by 6 percent. 

In sum, the empirical evidence suggests R&D spending is very 

sensitive to pharmaceutical prices and profits, as predicted by economic theory. This is in contrast to some of the noneconomic notions one often hears, such as, ‘‘Lower prices and profits won’t reduce R&D spending, because firms will still have enough profit to 

cover their R&D,’’ and, ‘‘These firms have to invest in R&D. What 

else are they going to do?’’ 

The point of my testimony is that the benefits associated with 

lower U.S. drug prices will unequivocally come at a cost: lower levels of R&D and a reduced rate of innovation. It is imperative, I 

think, that these costs be balanced carefully against the benefits of 

importing price-regulated pharmaceuticals from abroad. This is 

particularly true in light the recent evidence on the significant contributions of pharmaceutical and medical R&D to human health 

and life expectancies in the U.S. 

Thank you. 

[The prepared statement of Dr. Vernon follows:] 

PREPARED STATEMENT OF DR. JOHN A. VERNON, ASSISTANT PROFESSOR, DEPARTMENT OF FINANCE, UNIVERSITY OF CONNECTICUT SCHOOL OF BUSINESS

Mr. Chairman and members of the Committee, thank you for inviting me to testify today on the policy implications of pharmaceutical importation. My name is 

John Vernon and I am a professor in the School of Business at the University of 

Connecticut and a Faculty Research Fellow with the National Bureau of Economic 

Research (NBER). I also serve part-time as Senior Adviser for Economic Policy in 

the Office of Policy and Planning at the Food and Drug Administration, but my testimony will be based on academic research I have undertaken at the University of 

Connecticut. The opinions I am about to express are entirely my own; they do not 

necessarily reflect those of the institutions and organizations with which I am affiliated. 

As you will soon see, my testimony is neither in support of, nor in opposition to, 

importation. Rather, I am only advocating that a balanced economic perspective be 

adopted on this important public policy issue—one that places the economic costs 

of importation on equal footing with the economic benefits. To date, I do not think 

this has occurred: the economic costs of importation have received relatively little 

attention. 

For the purposes of the points I wish to make, let us assume a new importation 

policy will be effective in achieving its objective: it will significantly reduce drug 

prices in the U.S. Precisely how importation will achieve this objective is the subject 

of some debate, but one possibility is through a forced-sales provision (such as that 

contained in the recently reintroduced Pharmaceutical Market Access and Drug 

Safety Act of 2007). 

To begin, the economic benefits of pharmaceutical importation are obvious: U.S. 

consumers will pay lower prices for their prescription drugs. This is because most 

foreign governments regulate drug prices, and importing drugs from these markets 

is simply an indirect price control—albeit one set by foreign governments.1,2 The 

benefits of lower, government-regulated prices are readily apparent and straightforward to measure. Unfortunately, the same cannot be said about the costs. This 

may partially explain why they have received less attention in the debate. Allow me 

to explain. 

Once a new pharmaceutical has been developed (which typically takes 12–15 

years), and all the safety and efficacy data have been collected and analyzed, the 

marginal manufacturing cost of a single pill is quite small. This is because the final 

product of the pharmaceutical R&D is essentially just new knowledge and information (much like computer software): information that has taken many years and 

hundreds of millions of dollars to obtain. In the absence of intellectual property 

rights (pharmaceutical patents), and the ability of drug companies to price their 

products significantly above marginal manufacturing costs, no investor or firm 

would be willing to invest the time and financial resources necessary to discover and 

develop this information. Thus, there must be a sizable reward to induce the R&D. 

63 

As is, only 3 out of every 10 new pharmaceuticals generate returns in excess of average R&D costs (Grabowski and Vernon, 2000). 

Pharmaceutical importation, precisely to the extent it is successful in lowering 

U.S. drug prices, will reduce the financial incentives to invest in R&D.3 The expected returns on individual R&D projects will fall and some projects will be terminated (or not initiated). This is because these projects will no longer generate expected net returns for the firm’s shareholders.4 The result will be a decline in the 

rate of pharmaceutical innovation: fewer new drugs will be developed and it will 

take a longer time to find cures for many diseases, all else considered.5 Unlike the 

benefits of the policy, which will produce immediate and observable savings through 

lower drug prices, the costs are more difficult to appreciate and quantify.6 This is 

because of the considerable time lag and uncertainty associated with the R&D process, which, as already noted, is very long, costly, and risky.7 My academic research 

has focused on these costs, and specifically the economic relationships between pharmaceutical prices, profits, and R&D.8

The sensitivity of R&D spending to pharmaceutical prices and profits has been 

studied with a variety of different research methods, including standard retrospective statistical analyses of industry and firm-level data, prospective simulation analyses, and financial event studies (Vernon, 2003, 2004, 2005; Giaccotto, Santerre and 

Vernon, 2005; Abbott and Vernon, 2007; Santerre and Vernon, 2006; Golec, Hegde, 

and Vernon, 2006; Golec and Vernon, 2007). The research findings have been strikingly consistent and robust. I will summarize the results from two recent studies 

(Vernon, 2005; Giaccotto, Santerre, and Vernon, 2005). Both have been vetted by the 

academic peer-review process and have been published in professional economics 

journals. 

The first study utilized publicly available, firm-level financial data and exploited 

observed differences in U.S. and non-U.S. pharmaceutical profit margins (the latter 

were used to proxy profit margins in the presence of price regulation). Using established economic models and statistical techniques, we estimated that a new policy 

that reduces pharmaceutical profit margins in the U.S. to non-U.S. levels will cause 

firm R&D spending to decline by between 25 and 35 percent, all things considered. 

An importation policy that imports regulated prices from foreign markets will theoretically have this effect on U.S. profit margins. 

The second study adopted a slightly different approach and used publicly available, industry-level data to study the direct link between U.S. drug prices and industry-level R&D spending (Giaccotto, Santerre, and Vernon, 2005). In this study, 

we estimated that for every 10 percent reduction in U.S. drug prices, industry R&D 

spending will decline by approximately 6 percent. This finding is consistent with an 

earlier study that also analyzed industry-level pharmaceutical R&D (Scherer, 1996; 

2001). 

In sum, the empirical evidence suggests firm R&D spending is very sensitive to 

pharmaceutical prices and profits, as economic theory predicts. This is in direct contrast to the ubiquitous noneconomic notions one often hears, such as ‘‘lower prices 

and profits won’t reduce R&D spending because firms will still have enough profit 

to cover their R&D’’ and ‘‘these firms have to invest in R&D, what else are they 

going to do?’’ 

The point of my testimony today is that the benefits associated with lower drug 

prices in the U.S. will, unequivocally, come at a cost: lower levels of R&D and a 

reduced rate of pharmaceutical innovation. It is imperative that these costs be balanced carefully against the benefits of importing price-regulated pharmaceuticals 

from abroad. This is particularly true in light of the recent evidence on the significant contributions of pharmaceutical and medical R&D to human health and life 

expectancies in the U.S. (Murphy and Topel, 2003; Lichtenberg, 2002). 

Endnotes 1 It is important to note that importing patented pharmaceuticals from outside the 

United States is not a free trade issue. This is a common misunderstanding. The 

rationale for free trade is based on the doctrine of comparative advantage: where 

countries specialize in the production of goods and services for which they are, comparatively speaking, low-cost producers, and then trade freely with other countries 

that are doing the same thing. Free trade is good for U.S. consumers, the U.S. economy, and the global economy. But pharmaceutical prices in Canada and elsewhere 

are lower because drug prices are regulated in those markets, and not because those 

countries have a comparative advantage in the production of pharmaceuticals (in 

the absence of price regulation, it is likely that prices would still be lower outside 

the U.S. because of lower per capita real income). It is imperative to understand 

that the real issue at hand is intellectual property rights. If patented pharmaVerDate Nov 24 2008 06:50 Jan 16, 2013 Jkt 075679 PO 00000 Frm 00067 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\77867.TXT JACKIE
64 

ceuticals are imported from abroad, the U.S. patent system is circumvented, and 

price controls will be indirectly imposed on pharmaceuticals in the U.S. 2 It is likely that even in the absence of price regulation foreign drug prices would 

still be lower outside the U.S. because of lower per capita income levels (see Danzon 

and Towse (2003) for a detailed discussion and analysis. 3Some researchers have suggested that an importation policy that reduces drug 

prices in the U.S. will actually increase firm profits (which would lead to increased 

R&D spending). But this ‘‘argument’’ assumes firm managers are currently not acting in the best interest of the firm’s shareholders and are, for lack of a better word, 

stupid. This ‘‘argument’’ does not have any economic merit. 4The implicit argument being put forth is a net present value (NPV) argument. 

A real options framework, in the parlance of modern finance theory, will generate 

the same prediction (see Golec, Hegde, and Vernon, 2006). 5The phrase ‘‘all else considered’’ is important here. The relevant comparison for 

assessing the impact of an importation policy on R&D spending and innovation is 

the counterfactual event of no importation policy. R&D and innovation are driven 

by a number of factors and even if an importation policy is enacted real R&D spending may continue to grow over time, but it would grow at a slower rate than would 

have been the case if the policy were not enacted. The relevant measure of the effect 

of policy is one that holds all other factors constant: the comparison of the reality 

with the counterfactual. Some of the research I will mention in this testimony can 

easily be taken out of context. For example, if the statement is made that pharmaceutical importation will reduce R&D by x percent, this is x percent relative to the 

level of R&D spending in the absence of the policy, not R&D spending in absolute 

terms. 6To more formally consider the balancing of the costs and benefits with respect 

to a policy allowing pharmaceutical importation, the following may provide some 

clarification. Once a pharmaceutical product has been brought to market, pricing 

above marginal cost results in an underutilization of the new product (from a social 

welfare perspective). These costs are referred to as static inefficiency costs. Thus, 

a tradeoff exists between providing incentives for research and development (R&D), 

and thus innovation, and consumer access to today’s medicines: this is the balance 

the U.S. patent system tries to strike. While there is nothing sacrosanct about the 

current structure of the U.S. patent system for pharmaceuticals, or indeed the existing rate (and stock) of R&D investment, what is immediately apparent is that allowing importation of prescription drugs from price-regulated markets, while it will expand access to medicines already developed (the aforementioned benefits), it circumvents the U.S. patent system and allows foreign governments to set the price 

of pharmaceuticals in the U.S. This, as I have mentioned, will reduce the future 

supply of new drugs. These costs are referred to as dynamic inefficiency costs. The 

optimal policy (or patent system) will minimize the sum of the static and dynamic 

inefficiency costs. 7The term risk here refers to the technical risk of an R&D project, which is the 

likelihood it will make it through the various stages of drug development and become a marketed product. This is quite different from financial risk, which is the 

risk faced by an investor who holds the market portfolio, i.e., the relevant risk for 

determining the project’s cost of capital (or discount rate). 8While understanding how R&D spending may be affected by pharmaceutical importation is important, what is most relevant is how this change in pharmaceutical 

R&D spending will influence innovation and public health. Obviously, measuring 

the costs associated with forgone future innovation is a near impossible task: there 

are many variables that can affect the outcome. However, because there is an overwhelming tendency for public policy debate to focus on the short-run benefits of 

lower (regulated) drug prices, it is critical that efforts be untaken to at least approximate the magnitude of what the corresponding costs would be in terms of lower 

levels of innovation. Only then can the benefits of lower drug prices be weighed 

against the costs to determine if the policy is a good one. A very rough first approximation of the social costs associated with various pharmaceutical price-reduction 

policies (measured in terms of life years and dollars) may be found in Vernon (2004). 

References 

Abbott, T. and Vernon, J.A. (2007) ‘‘A Financial Simulation Model of the Firm 

Pharmaceutical R&D Investment Decision: Implications for a New U.S. Price Control Policy.’’ Forthcoming, Managerial and Decision Economics, Summer 2007. 

Danzon, P.D. and Towse, A. (2003) ‘‘Differential Pricing for Pharmaceuticals: Reconciling Access, R&D, and Patents.’’ With Adrian Towse. International Journal of 

Health Care Finance and Economics, 3: 183–205, 2003. 

65 

DiMasi, J.A., Hansen, R.W., Grabowski, H.G. (2003) ‘‘The Price of Innovation: 

New Estimates of Drug Development Costs.’’ J Health Economics. 22:151–185. 

Giaccotto, C., Santerre, R.E. and Vernon, J.A. (2005) ‘‘Drug Prices and R&D Investment Behavior in the Pharmaceutical Industry’’ (with Rexford Santerre and 

Carmelo Giaccotto) Vol. 48, Issue 1, 195–214 2005. Journal of Law and Economics. Golec, J., Hegde, S., Vernon, J.A. (2006) ‘‘Pharmaceutical Stock Price Reactions 

to Price Constraint Threats and Firm-Level R&D Spending’’ NBER Working paper 

# w11229, Cambridge, MA. 

Golec, J. and Vernon, J.A. (2006) ‘‘European Pharmaceutical Price Regulation, 

Firm Profitability, and R&D Spending’’ NBER working paper # w12676, Cambridge 

MA. 

Grabowski, H.G. and Vernon, J.M. (2000) ‘‘The Distribution of Sales Revenues 

from Pharmaceutical Innovation.’’ Pharmacoeconomics. 18 Supplement 1: 21–32. 

Lichtenberg, F.R. (2002) ‘‘Sources of U.S. Longevity Increase, 1960–1997.’’ National Bureau of Economic Research, working paper 8755, Cambridge, MA. 

Murphy, K.M. and Topel, R.H. (2003) ‘‘The Economic Value of Medical Research;’’ 

in Measuring the Gains from Medical Research; edited by Kevin M. Murphy and 

Robert H. Topel, The University of Chicago Press. 

Santerre, R, and Vernon, J,A, (2006) ‘‘Assessing the Gains from A Drug Price Control Policy in the U.S.’’ Vol. 73, Issue 1 (July) 2006. Southern Economic Journal. Scherer, F.M. (1996) ‘‘Industry Structure, Strategy, and Public Policy,’’ Harper 

Collins College Publishers. 

Scherer, F.M. (2001) ‘‘The Link Between Gross Profitability and Pharmaceutical 

R&D Spending.’’ Health Affairs. Sept./Oct.; 20:216–220. 

Vernon, J.A. (2003) ‘‘Simulating the Impact of Price Regulation on Pharmaceutical 

Innovation.’’ Pharmaceutical Development and Regulation. 1(1): 55–65. 

Vernon, J.A. (2005) ‘‘Examining the Link Between Price Regulation and Pharmaceutical R&D Investment.’’ 14:1 2005: 1–17. Health Economics. Vernon, J.A. (2003) ‘‘The Relationship Between Price Regulation and Pharmaceutical Profit Margins.’’ Applied Economics Letters. Volume 10, 2003. 

Vernon, J.A. (2004) ‘‘New Evidence on Drug Research and Price Controls.’’ Regulation: The Cato Journal of Business and Government, Volume 27, Issue No. 3, 2004. 

Senator DORGAN. Dr. Vernon, thank you very much. We appreciate your testimony. 

Dr. Schondelmeyer, why don’t you proceed. You’re from the University of Minnesota? 

Dr. SCHONDELMEYER. Yes. 

Senator DORGAN. And we appreciate, very much, your being here 

today. 

STATEMENT OF STEPHEN W. SCHONDELMEYER, PHARM.D., 

PH.D., PROFESSOR OF PHARMACEUTICAL ECONOMICS AND 

DIRECTOR, PRIME INSTITUTE, COLLEGE OF PHARMACY, 

UNIVERSITY OF MINNESOTA 

Dr. SCHONDELMEYER. Ja, you betcha. 

Thank you very much, Mr. Chairman and members of the Committee. I’m Steve Schondelmeyer. I’m a professor of pharmaceutical 

economics and management at the University of Minnesota, where 

I direct the PRIME institute that does research on pharmaceutical, 

economic, and policy issues. My comments today are my own, and 

not those of any other body or organization. 

I appreciate the opportunity to address this Committee, would 

remind you, as others have, that we still have a number of Americans who do not have health insurance or prescription drug coverage. So, the new Medicare Part D program certainly has helped 

drug coverage in America for some Americans, but it hasn’t solved 

the access to drug therapy problems throughout the country, and 

there are still a number of people who do not have access. 

Also, coverage does not solve the affordability problem, it only 

shifts it from the individual to the other private or public sources 

66 

who are paying for the drugs for those individuals. In fact, I would 

argue that coverage, especially when that coverage is under public 

programs, increases the importance of examining price as a part of 

the issue, because now we are paying for the costs of those medications out of the public coffers, and it is a cost to each of us, as taxpayers. And I think we all have a responsibility to use those resources wisely. 

My comments today will be focused upon the potential role of 

drug importation and its expected impact on market prices and the 

presence of counterfeits in the U.S. marketplace. 

Drug importation, I think, can be an important tool in this marketplace if we use it wisely and carefully. 

Consumers are very price-sensitive. That’s, in fact, why they go 

to Canada or the Internet to buy this same drug, the exact same 

drug, at a lower price. They are trying to express their demand. 

They’re screaming in the marketplace, saying, ‘‘We need lower 

prices on drugs,’’ but the manufacturers don’t seem to hear that 

very well. 

I think prescription drug coverage for some, or even all, consumers does not solve this affordability problem, because Medicare 

Part D, in particular, we subsidize the costs of that program. And, 

again, that puts it on the public rolls. Provision of coverage under 

public programs without meaningful market-based pressures and 

negotiation of price is much like writing a blank check to the pharmaceutical companies. And I think that’s much the position we’re 

in. 

Other developed countries have brand name prices that are 25 

to 60 percent lower than the price for the same drugs in the U.S. 

marketplace. While the U.S. may be willing to pay premium prices 

compared to other countries, we continue to experience this ever 

growing price premium compared to other countries, and not only 

is the price higher, but year-to-year increases in prices go up in the 

U.S. on average 3 to 7 percent a year; in other countries, the prices 

may go down 3 percent or up 3 percent in a range of about plus 

or minus 3 percent. The rate of growth of prices is much slower in 

other countries, as well. And that also creates a problem, and creates that gap of difference in price between the U.S. and other 

countries. 

Yes, generics are an important part of the competitive pharmaceutical marketplace, but generic—and generics hold down U.S. 

drug expenditures, but they don’t address the problem of the person who needs a single-source, brand name prescription drug that 

does not have a generic alternative. Generics aren’t the answer. 

They might be, in a market sense, a part of the answer, but, for 

each individual patient who needs a specific drug, they hold no 

promise. 

If no drug is available for an individual consumer, they face that 

monopoly price of the brand name country. As has been noted, the 

EU has experienced parallel trade for a number of years, and a 

large share of the trade in pharmaceuticals that occurs in the EU 

in certain countries comes through parallel trade and importation. 

Importation, I think, is an important part of the big picture related to affordability of drugs in a society. The U.S. represents 

about 51 percent of the total manufactured-drug purchases in the 

67 

developed world. The EU countries are about 25 percent, and Canada is less than 5 percent. So, collectively, Canada and the EU are 

about 30 percent, the U.S. is 50 percent. If we took and—totally 

opened up with reimportation, I won’t sit here and tell you that we 

will see EU or Canadian prices in the U.S., but we’ll move closer 

to them. We will see the U.S. price go down some, we will see the 

EU and Canadian prices go up some. The end equilibrium price is 

much more likely to be close to the U.S. price than it is to the Canadian or European, primarily because we’re such a larger share 

of the market to begin with. But I think we could easily see 12 to 

20 percent drops in most drug prices in the U.S. 

But, even more importantly, I think we would see a slowing of 

the rate of growth of those prices over time, which is as much a 

problem as the price itself. Both are important, both must be 

tracked. 

Let me remind you, as we heard earlier today, that Congress 

passed the Prescription Drug Marketing Act of 1987, 20 years ago, 

and that Act required a pedigree, a paper or electronic process for 

maintaining the documentation of the source of origin and the traveling of that product through the channels of distribution. It wasn’t 

until 1999 that the FDA first even promulgated regulations, nearly 

12 years after the Act was passed. FDA had a law on the books 

they could have implemented that would have assured we knew 

where our product came from, and how it traveled through the 

market, and how it went out and came back into the U.S., and who 

made it, and where it was. They just recently have promulgated 

and begun to implement rules related to that pedigree. I think we 

need to look back at that pedigree process and move that ahead as 

quickly as we can to make sure we can assure we know where all 

the product in the marketplace comes from, and that it is safe and 

effective. 

Major wholesalers and chains in the U.S. also have international 

operations in Canada, in Europe, in Mexico. And they’re ready, 

today. They’re doing business in those markets. It would take very 

little for them to begin to import products from their Canadian operations, their European operations, other sites. 

The newer and most expensive drug products are the ones that 

are most often counterfeited. Why? Because they have the highest 

price and the highest profit margins, and the highest gross margin 

compared to their actual marginal cost of production. 

Let me conclude by recommending that I think we need to encourage that pedigree process as quickly as possible. We need to 

eliminate or closely regulate the sale of drugs over the Internet, 

both domestically and internationally. That’s not how you’re going 

to—that isn’t going to lower prices in the U.S., as a whole; it does, 

for each individual that buys there, but not for the market, as a 

whole. 

Second, establish a pedigree system that must be initiated at the 

manufacturer level, must be—cannot be unreasonably withheld by 

the manufacturer from wholesalers and end-purchasers, and is required as the product passes to the wholesaler and pharmacy or 

any other end-purchaser. 

Third, set uniform standards for the pedigree system so that we 

don’t end up with a multiplicity of State requirements that would 

68 

proliferate and complicate the process and the cost of implementing 

the pedigree system, and bog it down, basically. 

Fourth, authorize importation of pharmaceuticals through normal channels of distribution, manufacturers, wholesalers, chain 

warehouses, and community pharmacies. 

Finally, prohibit manufacturers from manipulating the supply as 

a means of limiting importation from the markets with lower 

prices. 

I would argue, members of the panel, that if you allowed importation through normal channels, your constituents could go to their 

corner drugstore and get their prescription at the same price that 

they find on the Internet or in Canada. They won’t be using the 

Internet anymore, and FDA won’t have to worry about shutting 

down those Internet sites, because your constituents will have a 

way to get that lower price that they’re demanding. 

Thank you very much. 

[The prepared statement of Dr. Schondelmeyer follows:] 

PREPARED STATEMENT OF STEPHEN W. SCHONDELMEYER, PHARM.D., PH.D., 

PROFESSOR OF PHARMACEUTICAL ECONOMICS AND DIRECTOR, PRIME INSTITUTE, COLLEGE OF PHARMACY, UNIVERSITY OF MINNESOTA

Thank you, Mr. Chairman and members of the Senate Subcommittee for this opportunity to provide input into your deliberations regarding policy implications of 

pharmaceutical importation. I am Stephen W. Schondelmeyer, Professor of Pharmaceutical Economics at the University of Minnesota, College of Pharmacy where I 

also serve as Director of the PRIME Institute. The PRIME Institute focuses on 

pharmaceutical research involving management and economics. These remarks are 

my own views based upon my extensive research and experience with the pharmaceutical marketplace throughout the past thirty years, during which I have studied 

the economic behaviors and pricing policies of the pharmaceutical industry and have 

developed a broad understanding of the dynamics of the pharmaceutical marketplace. In particular, I have also examined the structure and financing of both private and public pharmaceutical benefit programs. 

This Committee is considering issues that influence access to pharmaceuticals, 

one of the most important components of the health care system. Keep in mind that 

prescription drugs have a universal demand. That is, everyone in society needs prescription drugs at some point during their lifetime. Virtually everyone has used, will 

use, or should have used prescription drugs during their lifetime. During any given 

week one-half of the adult population uses one, or more, prescriptions and more than 

three-fourths of the population age 65 and over uses one, or more prescriptions. 

While the new Medicare Part D drug program has provided coverage for many 

seniors and disabled, there are still about 47 million Americans with no health insurance and no prescription drug insurance. Affordability is still a problem for those 

uncovered person who must pay for their own prescriptions. Also, coverage does not 

solve the affordability problem, it simply shifts the issue of affordability from the 

individual to private or public sources. Employers are struggling with rising health 

care and prescription drug costs. Also, the total cost of the Medicare Part D drug 

program to society is a major cost that the Federal Government will struggle with 

in the years ahead. Coverage does not make price irrelevant, and in fact, public program coverage makes the price of prescription drugs an even more important policy 

issue for Federal and state governments. My comments today will be focused upon 

the potential role of drug importation and its expected impact on market prices and 

the presence of counterfeit drugs in the U.S. market. Drug importation is an important tool that, if used properly, can facilitate increased access and decreased presence of counterfeits in the market. 

There are several major prescription drug issues which the Committee should address as part of health care reform. I want to address four issues, which are specifically mentioned in the Health Security Act, and which should be incorporated into 

any other package that emerges to reform health care in the United States: 

1. economic forces are driving the demand for importation of pharmaceuticals; 

2. generics are an important competitive factor in the U.S. market, but generics 

do not eliminate the need for more rational pricing of brand name drugs; 

69 

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

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

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

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

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

8. manufacturers will attempt to control supply to maintain prices. 

Economic Forces Driving the Demand for Re-importation 

Consumers are very ‘‘price sensitive,’’ that is, they are not willing to pay higher 

drug prices when the same drug is available in the market at a lower price. Consumers have been shopping with their feet (by traveling to Canada or Mexico) and 

with their fingers by shopping on the Internet. The behavior of consumers indicates 

that many are screaming that price does matter, but drug firms are not listening 

to these cries. Uninsured consumers may have to choose ‘‘your money or your life’’ 

when it comes to certain prescription drugs. In other words, a number of persons 

needing prescription drugs may have to forego needed prescriptions due to lack of 

resources and, or, high drug prices. This may include individuals without drug insurance coverage and persons covered by public programs with limited resources 

such as state Medicaid programs, state and Federal HIV–AIDs programs, and the 

Medicare Part D drug benefit. The total cost of the Medicare Part D drug program 

is projected to be considerably above the original projections. 

Private employers are also concerned about rising health and drug benefits costs 

that are choking off corporate profits and global competitiveness. International drug 

prices do differ at the firm level and at the product level, if not also at the market 

level. While examination of drug prices at the aggregate market level is of interest, 

it is not particularly relevant to the individual who needs a specific drug product 

in the U.S. market. Consumers do not buy a ‘‘market basket’’ of drugs, but rather 

they buy only the one, or a few drugs, that they need at the time. Prices set by 

drug firms on the basis of differences in income levels across countries may have 

some logic from a macroeconomic perspective, but this approach does not take into 

account the income disparities experienced within a specific country. In particular, 

the U.S. has much greater income disparity and diversity than most other developed 

countries. Based on the price discrimination practiced by drug firms, the cash payers in the U.S. market pay the highest prices in the U.S., and for that matter the 

world, yet the U.S. cash payers are often among the lowest income persons within 

the U.S. Those without health and drug insurance may include part-time workers, 

workers who are at minimum wage and without employer-based health insurance, 

and others with limited resources. Lack of coverage for the individual, when not 

subsidized, still means the person has to pay the full cost of drug therapy. 

Prescription drug coverage for some, or even all, consumers does not solve the affordability problem. Coverage benefits the individual when a public subsidy is provided to help cover the cost of drugs, but we all bear the total cost of drugs provided 

through tax-subsidized public programs. Provision of coverage under public programs without meaningful market-based pressure and negotiation of the price is essentially the same as writing ‘‘blank checks’’ for pharmaceutical firms. Other hearings in Congress have explored and examined the possible ways that the Medicare 

Part D drug program may exercise market negotiation power for better prescription 

drug prices. 

Other developed countries (Canada, the EU, and others) have brand name drug 

prices that are 25 percent to 60 percent below the U.S. prices of the same drugs. 

While the U.S. may be willing to pay a premium price compared to other countries, 

we continue to experience an ever-growing price premium compared to other developed countries. Not only are the brand name drug prices typically higher in the U.S. 

than in other developed countries, but these other countries usually experience annual drug price changes in the range of plus or minus 3 percent versus price 

changes in the United States that may vary from plus 3 percent to plus 10 percent 

or more. 

Generic Are an Important Competitive Factor 

Generics are an important competitive factor in the U.S. prescription drug market, but do not solve the affordability and pricing problems. Certainly generics help 

to hold down the total U.S. drug expenditures. Even though generics account for 

more than one-half of all outpatient prescriptions filled in the United States each 

year, their relatively low prices result in generics accounting for about 15 percent 

to 20 percent of total drug expenditures. People are not going to Canada, or the 

Internet, to buy the $4 generic prescriptions that are available through selected 

70 

Wal-Mart and Target stores. This limited set of generics, accounts for about 1 percent to 3 percent of total drug expenditures for persons who choose to go to WalMart or Target stores. 

In most cases, generics are less expensive in the U.S. than in Canada, or other 

developed countries. Generics may help lower the overall, weighted average market 

price, but generic prices are not relevant to the individual who needs a specific 

brand name medication with no generic alternatives. If no generic is available for 

your prescription, then you may face the monopoly brand name price in the United 

States. 

Parallel Trade Is Present in the European Union Market 

All EU countries engage in some parallel trade (importation) for prescription 

drugs. Greater than 10 percent of the drug supply flows through parallel trade in 

the U.K., the Netherlands, and Denmark. According to IMS Health, the European 

market ‘‘is a market that has exactly the same high quality requirements’’ across 

member countries. Parallel trade occurs and depends upon: price level in the destination country; price difference compared to the source country (∼20 percent or 

more will lead to parallel trade); product volume available in the source country; 

product volume demanded in the destination country; costs of transportation, customs, and product verification; assurance that market conditions allow importers to 

make a reasonable profit; and legal and regulatory conditions that support the 

rights of importers. 

Parallel trade with importation, and re-importation, is a part of the ‘‘big picture’’ 

needed for affordable drugs in a society. Importation, and re-importation, will help, 

but will not completely solve the pricing concerns for prescription drugs. Re-importation will not deliver Canadian, or EU prices to the United States, but some equilibrium price in between the U.S. price and the developed world price will be 

achieved. Keep in mind that the U.S. is the single largest pharmaceutical market 

in the world. For the 12 months ending in December 2006, the manufacturer prescription sales to the developed world were about $388 billion and to the total world 

were about $555 billion. The U.S. represents about 51 percent ($198 billion) of the 

manufacturer sales to the developed world. In contrast, the top five countries in Europe are about 25 percent ($96 billion) and Canada is 3.5 percent ($14 billion) of 

manufacturer prescription sales to the developed world. 

Manufacturer 

Sales 

($ in billion) 

Percent of 

Total 

World 

Percent of 

Selected 

World 

Total World $554.7 100.0 

Developed (Selected) World 388.3 70.0 100.0 

U.S. 197.8 50.9 35.7 

Europe (Top 5) 95.5 24.6 17.2 

Canada 13.7 3.5 2.5 

Australia/New Zealand 5.8 1.5 1.0 

Japan 56.7 14.6 10.2 

Latin America 18.7 4.8 3.4 

Parallel trade through importation, or re-importation, from Canada, the EU, and 

selected other developed countries will not deliver Canadian, or European prices, to 

the U.S. in the long run (more than 2 years). Importation, or re-importation will 

deliver a developed world equilibrium price less than the U.S. price and more than 

the Canadian or EU price. In fact, the equilibrium price will be closer to the U.S. 

price than to the EU or Canadian price since U.S. accounts for more than 50 percent 

of market for developed countries while the other countries in the proposed parallel 

trade market are about 30 percent of the developed countries market. U.S. prices 

may decrease about 12 percent to 20 percent after implementation of parallel trade. 

As important as the price decrease, would be the effect on price changes over time. 

Parallel trade would most likely lead to slower inflation in brand name prices than 

the U.S. is accustomed to paying. The inflation rate would probably slow to about 

2 percent to 4 percent per year rather than 4 percent to 7 percent per year. 

The Drug Supply in the United States is Safe, But Counterfeits Exist in the 

Market 

‘‘The U.S. drug supply chain is probably the safest one in the world, and we’re 

working hard to keep it that way,’’ said Tom McGinnis, Director of Pharmacy Affairs, U.S. Food and Drug Administration (FDA). McGinnis went on to say ‘‘There’s 

a lot of money to be made in knocking off these kinds of products if you can get 

them into the distribution system.’’ [Traffic World, Journal of Commerce, ‘‘Securing 

the Drug Pipeline,’’ June 20, 2005] The FDA estimates that less than 1 percent of 

U.S. drugs are counterfeit or adultered. The most frequently counterfeited drugs are 

71 

those with the highest prices (e.g., cancer and hematoligic agents) and the highest 

volume (e.g., Lipitor). ‘‘America has become the go-to market for counterfeiters because we pay the highest prices of anyone in the world,’’ says Katherine Eban 

[Eban, K., Dangersous Doses: How Counterfeiters are Contaminating America’s Drug 

Supply.] High prices for drugs with relatively low marginal costs play a role in determining the types of drug products that are the target of counterfeiters. Lowering 

prices through parallel trade may, in fact, reduce the likelihood of counterfeits. 

While importation of drugs from Canada and other countries is illegal, the current 

policy in the United States has been a somewhat passive tolerance of personal importation from Canada via the Internet and mail or through ‘drug trips’ to Canada 

or Mexico. This has resulted in sort of an individualized ‘wild west’ environment for 

prescription drug importation. That is, Americans can usually import prescription 

drugs via the Internet or in person as long as no one is watching and the quantity 

is limited (e.g., a 1 month to 12 month supply). This informal policy of allowing ad 

hoc importation does little, if anything, to prevent counterfeits and may also be 

harmful to patients by fragmenting their prescription drug records. With fragmented prescription drug records, physicians, pharmacists, and pharmacy benefit 

managers are less likely to have the information necessary to properly advise the 

patient on drug use, interactions, and potential consequences. 

Congress passed the Pharmaceutical Drug Marketing Act in 1987, twenty years 

ago. The Act required that a ‘‘pedigree’’—paper or electronic—be maintained to document the origin and source of a drug product all the way from the manufacturer 

to the end dispenser. The FDA did not even promulgate proposed regulations until 

1999, and it announced in 2004 that it would delay the effective date of those rules 

until December of 2006. Certainly, the technology for these pedigrees has changed 

substantially over the past twenty years. Today, electronic pedigrees in various 

forms appear to be far more efficient than paper pedigree procedures. The pedigree 

can authenticate the source of a drug product and it may also serve as a means to 

track-and-trace a drug throughout the distribution chain and even for recalls, if 

needed for a drug product. After more than twenty years, it is time that this pedigree process be implemented. 

If the pedigree process was in place, then the traditional drug distribution channels could effectively maintain the quality of the drug supply whether the drug 

originates in the U.S. or is imported by the manufacturer, wholesaler, or pharmacy. 

One step in this direction has been the recent action by the Healthcare Distribution 

Management Association (HDMA) in 2003. The HDMA adopted voluntary Guidelines for Pharmaceutical Distribution System Integrity, which encourages distributors to carefully scrutinize each of their business partners both upstream and downstream. 

Wholesalers and Chains Are Positioned for a Global Market 

In the year 2000, the National Wholesale Druggist Association (NWDA) changed 

its name to the Healthcare Distribution Management Association (HDMA). As described in the trade publication known as The Pink Sheet, ‘‘The change from emphasis on a ‘national’ organization to one defined by ‘health distribution’ comes as 

NWDA members face the legislated opportunity of moving products across borders 

to take advantage of different pricing levels.’’ [FDC Reports, The Pink Sheet, Vol. 

62, No. 44, Oct. 30, 2000, p. 19] Indeed, major wholesalers and chains already have 

international operations and connections with Canada, Mexico, and European Union 

countries. ‘‘McKesson has operations to the north and south of the U.S. border that 

could help the company implement an import provision.’’ [FDC Reports, The Pink 

Sheet, Vol. 62, No. 44, Oct. 30, 2000, p. 8] 

Bindley Western (now part of Cardinal Health) ‘‘CEO Bill Bindley told an Oct. 25 

(2000) conference call that ‘‘we’re looking at drug import legislation, as are our competitors . . . if there is opportunity, you can be assured that we’ll be trying to take 

advantage of it.’’ [FDC Reports, The Pink Sheet, Vol. 62, No. 44, Oct. 30, 2000, p. 

8]. Cardinal Health has wholesaling operations and interests in Canada and Europe. 

In addition to wholesalers, ‘‘some chains already operate internationally, ‘looking at 

a global market is something they’re already accustomed to,’ ’’ added Mary Ann 

Wagner, Senior V.P., Regulatory Affairs, National Association of Chain Drug Stores 

(NACDS). ‘‘NACDS members that operate in Canada include Cardinal’s Medicine 

Shoppe, Costco, and Wal-Mart. Chains could import drugs through their own distribution centers or agreements with wholesalers.’’ [FDC Reports, The Pink Sheet, 

Vol. 62, No. 49, Dec. 4, 2000, p. 14] 

Non-traditional Distribution Channels Need to Be Eliminated or Monitored 

There are, or have been in recent years, thousands of wholesalers in the United 

States although only about 46 of these firms are traditional, full-line drug wholeVerDate Nov 24 2008 06:50 Jan 16, 2013 Jkt 075679 PO 00000 Frm 00075 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\77867.TXT JACKIE
72 

salers. The three largest wholesalers (McKesson, Cardinal Health and 

AmeriSourceBergen) accounted for 92.7 percent of the U.S. pharmaceutical wholesale market in 2004. [HDMA Foundation, 2005–2006 HDMA Factbook: Industry 

Overview, 2005, p. 22] 

Brand name drug firms are themselves, in part, responsible for many of the large 

number of faux wholesaler firms registered with states such as Florida and California. Most of these firms are not traditional wholesalers, but rather they are endpurchasers such as clinics and physician’s offices. These end-purchasers have been 

induced to register as wholesalers by the pricing scheme of one or more brand name 

pharmaceutical firms so that the ‘registered wholesaler’ can benefit from special 

pricing when purchasing high cost specialty drugs from these certain manufacturers. These faux wholesaler pricing schemes have most commonly been developed for 

specialty drug products (e.g., oncology and hematological drugs) sold to, and administered by, clinics and physicians’ offices. The faux wholesaler may buy a larger 

quantity than required for their own needs in order to qualify for certain levels of 

volume discounts from the manufacturer and then they re-sell the excess quantity 

of product purchased to other clinics or physician’s offices. 

For example, the pricing scheme of TAP Pharmaceuticals for their Lupron product 

provided favorable pricing to clinics and physicians that were registered as wholesalers. The favorable prices to faux wholesalers were also hidden from private and 

public third party payers. This pricing scheme was the subject of legal actions that 

led to settlements with the U.S. Department of Justice ($875 million) and with a 

class action group of plaintiffs. This proliferation of faux wholesalers to qualify for 

certain discounts created opportunities for counterfeit, stolen, or diverted drug products to also enter the distribution system. In some cases, the large wholesalers 

would buy drug product back from these faux wholesalers through what has come 

to be know as the ‘‘gray market.’’ 

The newer and most expensive drug products, also known as specialty drug products, have been one of the most often targets of counterfeiters. These drug products 

are targets because they have both very high prices and very high profit margins 

above the marginal cost of production for both legitimate and counterfeit product. 

One manufacturer (i.e., Johnson & Johnson) has taken steps (Jan. 19, 2004) to assure that drug wholesalers ‘‘purchase J&J products directly from the manufacturer, 

in an effort to reduce counterfeits.’’ [FDC Reports, The Pink Sheet, Vol. 65, No. 50, 

Dec. 15, 2003, p. 37] ‘‘J&J’s current policy has stipulated that customers who purchase Procrit or any other Ortho Biotech product from a different source will have 

their account status immediately terminated. The more stringent policy will likely 

better secure the supply chain.’’ This policy requirement by J&J is not expected to 

pose a major challenge for the three largest wholesalers (AmeriSourceBergen, 

McKesson, and Cardinal) because these firms have committed to ‘‘eliminating purchases from secondary wholesalers as part of anti-counterfeit measures.’’ [FDC Reports, The Pink Sheet, Vol. 65, No. 46, Nov. 10, 2003, p. 31] 

Manufacturers Will Attempt to Control Supply To Maintain Prices 

Even if importation is allowed, drug firms will try to limit importation by limiting 

supply into the lower-priced markets. This phenomenon has already been seen in 

Canada in response to Canadian importation into the U.S. market. ‘‘In a Jan. 3 

(2003) letter, GSK (GlaxoSmithKline) said it would stop selling drugs to any Canadian distributor whose pharmacy clients are suspected of selling them to U.S. customers.’’ The letter states ‘‘GSK will refuse to supply our products through your distribution centers until such time that we are satisfied that you are complying with 

our Terms and Conditions of Sale.’’ [FDC Reports, The Pink Sheet, Vol. 65, No. 3, 

Jan. 20, 2003, p. 27] ‘‘Other companies, including Merck, have previously sent letters to their purchasers to remind them of similar reimport rules. GSK’s move, however, appears to be the first time a company has set out consequences for failure 

to comply.’’ The actions of GSK and other manufacturers have had some impact on 

drug supply in Canada. Keep in mind that the United States represents about 50 

percent of the world pharmaceutical market, while Canada is only about one-tenth 

that size, or 5 percent of the world market. 

Health Canada has also conducted inspections of ‘‘Canadian pharmacies that are 

thought to be acting as wholesalers for the purpose of exporting drugs to the U.S.’’ 

The Executive Director of the Canadian National Association of Regulatory Authorities told the DHHS task force on drug importation at its April 27, 2004 meeting 

that if pharmacies ‘‘are purchasing drugs from other pharmacies, they’re acting as 

wholesalers. And if they don’t have an establishment (wholesale) license, that would 

be illegal. The Canadian authority is also looking for ‘‘unapproved drugs being dispensed.’’ [FDC Reports, The Pink Sheet, Vol. 66, No. 18, May 3, 2004, p. 40] The 

73 

Health Canada official pointed out that ‘‘in terms of the exportation of drugs to the 

U.S., there’s nothing federally (in Canada) that prevents that (importation).’’ 

Recommendations 

The following recommendations are made to facilitate importation (and re-importation), while minimizing counterfeits in the U.S. market. Consumers and private 

and public programs are far more likely to benefit from importation through the traditional distribution channels in the United States. Internet purchases would drop 

dramatically, or virtually disappear, if American consumers can get the lower prices 

of foreign markets at their corner drug store. Also, the pharmacist can maintain a 

complete medication history and more appropriately provide counseling and medication therapy management. 

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

and international. 

2. Establish a pedigree system that: (a) must be initiated at the manufacturer 

level, (b) can not be unreasonably withheld from wholesalers and end-purchasers, and (c) is required as product passes to wholesaler and pharmacy, or 

other end purchaser. 

3. Set uniform standards for the pedigree system so that a multiplicity of state 

requirements do not proliferate and complicate the process (and cost) of implementing the pedigree system. 

4. Authorize importation of pharmaceutical products through ‘‘normal channels 

of distribution’’ (i.e., traditional wholesalers, chain warehouses, and community 

pharmacies). 

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

Senator DORGAN. Dr. Schondelmeyer, thank you very much. 

Finally, we will hear from Nelda Barnett, who’s a member of the 

Board of Directors of the AARP. 

Ms. Barnett, you may proceed. 

STATEMENT OF NELDA BARNETT, MEMBER, 

BOARD OF DIRECTORS, AARP 

Ms. BARNETT. Mr. Chairman and members of the Committee, I 

am Nelda Barnett, a member of AARP Board of Directors. Thank 

you very much for including AARP in your discussions about the 

implication of prescription drug importation for U.S. consumers. 

Americans need affordable prescription drugs, but, for too many 

people, the price of drugs is beyond their means. Recent AARP 

studies reveal that drug prices continue to rise much faster than 

the rate of inflation. Our members tell us that these high prices are 

the single greatest barrier to obtaining needed medication. 

Rising prescription drug prices affect every segment of the population. Though tens of millions of Medicare beneficiaries are now 

getting help with their prescription drug costs through Medicare 

Part D, beneficiaries are still feeling the effects of rising prescription drugs—costs—in the form of higher premiums, deductibles, copayments, and, for some beneficiaries, lack of coverage in the donut 

hole. 

Escalating prescription drug prices continue to hamper employers’ ability to provide health insurance coverage for their workers 

and families. Pressures also squeeze public programs at both the 

State and Federal level. Rising prescription drug prices plague 

Medicaid and put pressures on states’ ability to maintain current 

coverage levels, let alone expand eligibility to meet the increasing 

need as fewer employers provide access to affordable healthcare 

coverage. 

74 

1 John A. Poisal, et al., Health Spending Projections Through 2016: Modest Changes Obscure 

Part D’s Impact, Health Affairs, 21 Feb. 2007. 

Finally, rising prescription drug prices particularly hurt the almost 47 million Americans who lack health insurance. These individuals pay most of the highest prices in the world for the—for 

their prescription drug needs. Some don’t fill prescriptions, because 

they cannot afford to do so. 

Importation is not the sole solution to soaring drug prices in the 

United States, but it will create downward pressure on drug prices 

and provide consumers some immediate relief. 

The simple fact is that importation is already happening. Many 

Americans already purchase their drugs from other countries. The 

trend is growing, and we have a responsibility to ensure that 

Americans can access lower drug costs safely. 

Safety is critical in any importation system. The Dorgan-Snowe 

bill ensures safety and provides consumer protections, including 

anti-counterfeiting and anti-tampering requirements, mandatory 

labeling and chain-of-custody requirements. My written statement 

outlines these safety precautions and protections. 

I would also like to add that a system of safe importation cannot 

be realized if the industry curtails supply. We believe that a vital 

component of the Dorgan-Snowe bill are the provisions that seek to 

prevent the drug industry from cutting off supply to countries engaging in importation to the United States. 

AARP has endorsed the Dorgan-Snowe importation legislation, S. 

242. We believe it meets the challenge of designing a prescription 

drug importation program that will ensure the integrity of pharmaceuticals and provide consumers access to lower-cost drugs. 

Our members want Congress to enact bipartisan legislation this 

year to allow for safe, legal importation of lower-cost prescription 

drugs. AARP is pleased to see this Committee and Members of 

Congress from both sides of the aisle moving forward on this issue. 

We understand the challenges Congress faces in designing a program that ensures the integrity of pharmaceuticals, but does not 

create an overly burdensome process that would prevent consumers 

from gaining access to lower-cost prescription drugs. We believe the 

Dorgan-Snowe legislation meets that threshold, and we urge its enactment this year. 

Thank you, again, for inviting us here, and I’m happy to answer 

any questions. 

[The prepared statement of Ms. Barnett follows:] 

PREPARED STATEMENT OF NELDA BARNETT, MEMBER, BOARD OF DIRECTORS, AARP 

AARP is pleased that the Committee is moving forward with the issue of prescription drug importation. Congress has been considering legislation to provide for importation of lower-priced prescription drugs for well over a decade, and we strongly 

urge you and your colleagues to take action this year to enact S. 242, the Pharmaceutical Market Access and Drug Safety Act. We believe this legislation includes 

measures to ensure the safety of imported prescription drugs, while at the same 

time allowing Americans to gain access to lower-priced prescription drugs. 

Prescription Drug Prices Continue to Rise at Unsustainable Rates 

Prescription drug costs continue to rise. Recent reports estimate that total spending on health care is expected to double by 2016, and much of this is due to rising 

prescription drug costs.1

75 

2David J. Gross, Leigh Gross Purvis, and Stephen W. Schondelmeyer, Trends in Manufacturer 

Prices of Brand Name Prescription Drugs Used by Older Americans, 2006 Year-End Update, 

AARP Public Policy Institute Data Digest #DD154 (Washington, D.C.: AARP), March 2007. 3 Id. 

4 AARP Knowledge Management, Medicare Price Negotiation of Prescription Drugs—A National Poll February 12, 2007, page 8, available at: http://assets.aarp.org/rgcenter/health/ 

rxlnegotiation.pdf. 5 HHS Task Force on Drug Importation, Report on Prescription Drug Importation, December 

2004, at 11–12. 

A recent AARP study revealed that, on average, pharmaceutical manufacturer 

prices for the 193 brand name drugs most widely used by older Americans rose at 

nearly twice the rate of general inflation in 2006.2 Reversing the trend between 

2004 and 2005, when the average rate of increase in manufacturer drug prices fell, 

the 2006 average growth rate of 6.2 percent represents an up-tick from the 2005 

average increase of 6.0 percent. For the 153 brand-name drugs that were in the 

market since 2000, this translates into a cumulative average price increase of 53.6 

percent, over two-and-one-half times the general inflation rate of 20.1 percent over 

the same period.3

The new Medicare prescription drug benefit is helping tens of millions of Medicare 

beneficiaries better afford their prescription drugs. However, even with this new 

program, Medicare beneficiaries are still feeling the effects of rising prescription 

drugs costs in the form of the higher premiums, deductibles, co-payments and—for 

some beneficiaries—lack of coverage in the donut hole. 

Medicare beneficiaries are not the only group impacted by rising prescription drug 

prices. Escalating prescription drug prices continue to hamper employers’ ability to 

provide health insurance coverage for their workers and families. In addition employers are increasingly eliminating or curtailing their retiree prescription drug coverage. 

Pressures also continue to squeeze public programs at both the state and Federal 

level. Rising drug prices also plague Medicaid, and put pressure on states’ ability 

to maintain current coverage levels. These prices also hamper states’ ability to expand eligibility to meet the increasing need as fewer employers provide access to 

affordable health care coverage. 

Finally, rising prescription drug prices particularly hurt the almost 47 million 

Americans who lack health insurance. These individuals pay among the highest 

prices in the world for their prescription drug needs. Some don’t fill prescriptions 

because they cannot afford to do so. 

Public Support for Importation Grows 

For the millions of Americans without drug coverage and those with limited coverage, importation is seen as an option to obtain access to affordable medications. 

A recent AARP poll found that AARP members overwhelmingly support Congress 

allowing for the importation of drugs from Canada and Europe.4 While AARP does 

not believe prescription drug importation is the sole solution to soaring drug prices 

in the United States, we do believe it is one way to begin to secure lower priced 

drugs. 

Our members and their families question why brand name drug prices in Canada 

and other industrialized countries can be lower—sometimes by as much as 50 percent lower—than prices in the U.S. It is a national embarrassment that people from 

all over the world come to the United States to access our advanced medical systems 

while many of our own citizens need to look outside our borders in order to afford 

their prescription drugs. 

The simple fact is that importation is already happening. In 2003, Americans purchased approximately 12 million prescription drug products (valued at almost $700 

million) from Canada alone.5 As prescription drug prices continue to rise, more and 

more individuals are choosing to import prescription drugs. We have a responsibility 

to ensure that Americans who choose to import prescription drugs do so safely. Congress can no longer afford to do nothing but hope that the millions of Americans 

who purchase prescription drugs from abroad do so without dire consequences. 

Congress Should Act Quickly to Pass the Dorgan-Snowe Legislation 

We believe that Congress should enact legislation that provides appropriate safeguards while at the same time ensuring a workable system for prescription drug importation. Currently, many prescription drugs sold for market in the U.S. are already manufactured abroad and brought into the U.S. safely and legally by prescription drug manufactures. If these manufacturers can import drugs safely and legally, 

then a process can be created to allow American consumers to safely import drugs. 

76 

S. 242 balances the challenge of designing a prescription drug importation program to ensure the integrity of pharmaceuticals while at the same time providing 

consumers access to lower price prescription drugs. We strongly urge you and your 

colleagues to enact S. 242 this year. 

Dorgan-Snowe Ensures the Safety of Imported Drugs 

Access to lower-priced prescription drugs isn’t enough. These prescription medications must be safe and efficacious. Recent news reports highlight an increasing 

problem with the use of counterfeit drugs. Implementing a system of safety procedures could begin to alleviate this serious problem. 

AARP supports the approach taken in S. 242 to create a system that provides for 

importation of safe, effective pharmaceuticals. The legislation first legalizes personal 

importation from Canadian pharmacies and wholesalers. Regulation of the Canadian pharmacy system closely resembles its U.S. counterpart, and drugs purchased 

from Canada can be as safe as drugs purchased in the United States. 

Under the legislation, importers and exporters must agree to allow their place of 

business to be inspected by the Food and Drug Administration (‘‘FDA’’) not less than 

twelve times per year. The legislation also tasks the FDA with the responsibility 

of ensuring that the prescription drugs imported from abroad are comparable to 

drugs available in the U.S. market. If the difference between the foreign drug and 

its U.S. counterpart is minimal, the FDA can allow the drug to be imported into 

the U.S. However, if the difference is significant, a supplemental application may 

be required. If the supplemental application would not be approved, the FDA will 

prevent the importation of the prescription drug. 

To ensure that the FDA isn’t besieged with inspection and certification requirements, the legislation allows the FDA to phase-in its review of registered importers 

and exporters, provided that priority is given to entities that can process a high volume of sales. Likewise, the legislation also permits the FDA to phase-in its review 

of foreign versions of FDA-approved drugs to determine whether they are the same 

as their U.S. counterparts. AARP believes that phasing in these provisions will further bolster the safety of the importation plan by providing FDA the opportunity 

to conduct thorough inspections and review. 

Pedigree Requirements 

One way of effectively ensuring the safety of pharmaceuticals is the institution 

of pedigree requirements—the ability to trace a drug from the point of origin to the 

point of dispensing. In order to accomplish this task in an expanded international 

arena, the Dorgan-Snowe legislation mandates that importers and exporters may 

only purchase prescription drugs from a manufacturer or entity that can establish 

a drug’s pedigree. These requirements include identification of the drug’s prior sale 

or transaction and contractual authority to inspect records to determine whether an 

entity engaged in the system is in compliance with applicable safety and other 

standards. AARP believes that standards such as these are crucial to protecting the 

quality and efficacy of imported pharmaceuticals. 

In order to ensure safety, pharmaceuticals imported from another country should 

be equipped with anti-tampering materials and anti-counterfeiting measures. As the 

technology in this area progresses, imported pharmaceuticals should be equipped 

with state-of-the-art devices, such as bar codes, and specialized ink, or other appropriate technology. The Dorgan-Snowe bill requires the use of anti-tampering and/ 

or track-and-trace technologies to prevent counterfeiting of imported drugs. 

Finally, S. 242 provides that pharmaceuticals imported by wholesalers and pharmacies be labeled in such a way as to indicate to the consumer that the drug has 

been imported under the new system. Consumers will thus expect to realize some 

savings from these pharmaceuticals. 

Anti-Gaming Provisions 

We recognize that some manufacturers are already curtailing their drug supply 

to Canada and other countries, which could lead to supply shortages or fear of retribution by entities that engage in importation. An importation proposal that does 

not seek to prevent entities from pressuring those who engage in importation will 

amount to nothing more than an importation system in name only. Our members 

do not want hollow promises of importation—they want legislation passed that will 

allow them the opportunity to fill their prescription safely and at a lower price. 

Therefore, AARP believes that anti-gaming provisions are a vital component of 

any importation legislation. The Dorgan-Snowe legislation seeks to prevent entities—particularly pharmaceutical manufactures—from eliminating or curtailing 

drug supply to those who engage in importation of prescription drugs to the U.S. 

so that the system can work as Congress intends. 

77 

Protection from Rogue Internet Pharmacies 

Many consumers who choose to purchase prescription drugs from abroad do so 

through Internet pharmacies. Unfortunately, many consumers fall victim to rogue 

Internet pharmacies due in part to the inability to distinguish between reputable 

and fly-by-night operations. 

The Dorgan-Snowe legislation instructs the FDA to maintain a website listing approved pharmacies. Having the FDA website as the point of contact for a list of approved pharmacies provides consumers with an official, secure source of information 

on safe drugs. However, not all consumers have access to the Internet; therefore, 

the legislation provides that the FDA must also maintain a toll-free number where 

consumers can get information on approved foreign sources. 

Conclusion 

The Dorgan-Snowe legislation provides for a safe and effective system for allowing 

importation of prescription drugs. Our members, and all Americans, need Congress 

to enact this bi-partisan, legislation this year. We are pleased to see this Committee 

and Members from both Houses of Congress and both sides of the aisle moving forward on this issue. AARP pledges to work with you to make safe importation a reality. 

Senator DORGAN. Ms. Barnett, thank you very much for being 

here. 

And thanks, to all five of you, for offering testimony today, testimony that is varied and different, and comes to different conclusions about this issue. We recognize it’s a controversial issue. And 

that’s precisely why we have asked witnesses to provide varied 

viewpoints. 

Dr. Schondelmeyer, you heard Dr. Lutter, and you heard former 

Congressman Tauzin, describe—I think Billy Tauzin’s comment 

was, ‘‘open the door to those products to come in,’’ referring to the 

legislation that would allow importation. I think Mr. Lutter described the counterfeits and the specter of reimportation compromising our drug supply, amplifying the problem of counterfeits, and 

so on. You disagree with that? And you have indicated in your testimony, I believe, that you feel that safety provisions in the Dorgan-Snowe bill would, in fact, strengthen our confidence in the 

drug supply. Can you respond to that? 

Dr. SCHONDELMEYER. Sure, I’d be glad to, sir. 

First of all, I believe that the current system we have is much 

like the Wild West environment, where people can do about anything they want, in terms of buying prescription drugs on the 

Internet, as long as they keep the quantities low and they don’t get 

caught in the process; or they can go across the border to Canada 

and Mexico, and we kind of look the other way and let them do it. 

And that’s—so, the door is open. The back door, the front door is 

open already. I think the system proposed by the Snowe-Dorgan 

bill and similar bills really defines a process that closes the system 

and says, ‘‘We will use the traditional channels, the channels that 

FDA knows and works with. We will ask FDA to finally give us a 

pedigree chain-of-custody system that they’ve had authority to do 

for 20 years, and haven’t done.’’ And I think that will close the system and help keep counterfeits out of the market, rather than 

make them more available. 

Senator DORGAN. Mr. Tauzin, what’s wrong with that analysis, 

if anything? 

Mr. TAUZIN. Well, there’s a lot wrong with it. And we’ll be happy 

to comment in much larger degree to you, to all of the points that 

we think are weak in the draft we’ve seen. 

78 

But one of the most important parts, for example, is that the 

FDA, under the bill, has no control over the shipper and where the 

drugs are coming from. There is no authorization, no possibility, as 

you heard from FDA, for them to regulate unregulated manufacturers in China and India and Kazakhstan, or wherever it may be 

coming from. The bill opens up importation, as you know, to many 

more countries—29 more countries—than does the current law, 

which applies to Canada. And even if you limited it to Canada, 

we’re told that the drugs coming into Canada are coming from 

many other sources. There are figures we can give you on the incredible rising number of imports into Canada from strange sources 

around the world of drugs manufactured in establishments not regulated by the FDA, not controlled, nor even registered with the 

FDA. Under this bill, they would remain unregistered, uncontrolled, uninspected, and they would be allowed to ship into the authorized receivers in this country of those products, and they would 

be commingled with the supply in this country. It is—— 

Senator DORGAN. But, Mr. Tauzin—— 

Mr. TAUZIN. It is not a simple task. And my final thought, Mr. 

Dorgan, is—I mean, we’re obviously willing to work with you on 

this. The law requires that if Donna Shalala and Mr. Thompson 

and Mr. Leavitt had been able to certify the safety, that importation would be allowed. The problem is, they have not been able to 

do so. It is not as easy as has been described here. And even, I 

think, the attempts in this bill to address those issues are going 

to fall woefully short. But we’ll be happy to have those conversations with you about why we think that’s true. 

Senator DORGAN. I’ll give you a chance to respond in a bit again, 

except I would observe that the counterfeiting that is described by 

you and Mr. Lutter is occurring under today’s circumstances. And 

I believe that the legislation that we have drafted will, in fact, substantially reduce the opportunity for that. But let me ask Mr. 

Schultz. 

Mr. Schultz, you, in a previous life, were the Deputy Commissioner for Policy at the FDA. You believe that, with proper resources, that there can be a regime of reimportation that does not 

threaten or compromise our prescription drug supply in this country. Is that correct? 

Mr. SCHULTZ. Yes. And I’ve reviewed your bill. There are always 

going to be constructive suggestions and improvement and so on, 

but it’s a very comprehensive, sophisticated approach that, most 

importantly, gives the agency resources to do the job. 

Senator DORGAN. Let me ask if there’s any of you on the panel 

who believes that the U.S. consumer should pay the highest prices 

in the world for brand name prescription drugs. Now, that, I believe, is now the case. You can contest that, if you like. But if that 

is the case—and I believe it is—does anybody believe that is the 

fair method of pricing prescription drugs, that the U.S. consumer 

should bear the highest cost? 

Mr. TAUZIN. I don’t. 

Senator DORGAN. You don’t? 

Mr. TAUZIN. I think we have failed miserably in insisting that 

other people around the world bear the cost of R&D. Charlie Rangel, in an interview, Sunday, made it very, very clear. CongressVerDate Nov 24 2008 06:50 Jan 16, 2013 Jkt 075679 PO 00000 Frm 00082 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\77867.TXT JACKIE
79 

man Rangel said, ‘‘You know, Americans pay the R&D expenses— 

for a lot of things, not just pharmaceuticals—for the rest of the 

world, and they don’t bear a responsible share of the cost.’’ And 

that’s true. And that’s a failure of our trade policies. 

Senator DORGAN. So—— 

Mr. TAUZIN. But importing their price control systems into our 

country is not free trade, and it is not the kind of stuff that is going 

to lead to the investment in R&D and new drugs that we need for 

the world, much less for this country. 

Senator DORGAN. So, if the consumer in the U.S. pays the highest prices in the world—80-year-old man sitting on a straw bale on 

a farm in southern North Dakota tells me his wife is fighting 

breast cancer for 3 years—3 years. They drive back and forth to 

Canada, because it’s the only way they could afford Tamoxifen, at, 

you know, 80 percent discount. If—this is the case for American 

consumers, that they—— 

Mr. TAUZIN. Mr. Chairman, I read your story, a number of times. 

Tamoxifen, today, under the Medicare Part D, which is available 

to that couple you met, would cost 30 cents a day now. 

Senator DORGAN. Yes, which—— 

Mr. TAUZIN. The prices—we’ve got a chart we’ll show you, of the 

top ten medicines, where actually the prices under Medicare Part 

D coverage, where insurance—where seniors now have available 

coverage with those drugs—are lower than Canadian prices. 

Senator DORGAN. That would work if you were 77 years old, but 

not if you’re 57 years old. 

Mr. TAUZIN. Well, as a matter of fact—— 

Senator DORGAN. So, it’s part pragmatic—— 

Mr. TAUZIN.—that’s why we put the PPA program together. 

Senator DORGAN. But—— 

Mr. TAUZIN. This year, we’ve reached the 3.5 million mark of patients we’ve added to free medicine programs in this country, who 

are in that category, Mr. Dorgan. What we’re saying is, there are 

better alternatives—— 

Senator DORGAN. I commend the industry for that, Mr. Tauzin, 

but—— 

Mr. TAUZIN. Thank you. 

Senator DORGAN.—that is not a substitute for fair pricing. And 

I asked the question, anybody think that the current system, in 

which we pay the highest prices, is a fair system? All of you, I 

think—I don’t think anybody volunteered to say, ‘‘Yup, sign me up. 

I think Americans ought to continue to pay the highest prices.’’ If 

that is the case, then the question isn’t whether we have a change, 

the question is, what is the change to try to resolve that? 

Now, Dr. Vernon, you came with a study that says if you cut 

prices—that is, create a circumstance in which the market system, 

the U.S. consumer can access, through the market system, the 

FDA-approved drug at a lower price, the price it’s being sold at in 

much of the rest of the world—if you do that, it would necessarily 

reduce the amount of research and development expenditures by 

the pharmaceutical industry. I understand the math of that, but I 

don’t understand the circumstances of why you connect that price 

to R&D. How about connecting that to marketing, for example? My 

80 

1PhRMA, Profile; Appendix: PhRMA Annual Member Survey (Washington, D.C.: PhRMA). 

2 Burrill & Company, analysis for PhRMA, 2006 and 2007. Includes PhRMA research associates and nonmembers. 3 IMS Health, Integrated Promotional ServicesTM and CMR, 5/2006. 

4 Congressional Budget Office, Research and Development in the Pharmaceutical Industry; October 2006. 5 U.E. Reinhardt, Perspectives on the Pharmaceutical Industry; Health Affairs, September/October 2001 6 J.S. Weissman et al.. ‘‘Physicians Report on Patient Encounters Involving Direct-to-Consumer Advertising.’’ Health Affairs Web Exclusive, April 28, 2004. 7Federal Trade Commission and Department and the Department of Justice, Improving 

Health Care: A Dose of Competition; July 2004. 8 C. Lenfant, ‘‘Clinical Research to Clinical Practice: Lost In Transition?’’ The New England 

Journal of Medicine, August 28, 2003. 9Dubois. R., et al., ‘‘Growth in Use of Lipid-Lowering Therapies: Are We Targeting the Right 

Patients;’’ The American Journal of Managed Care, October 2002. 

feeling is that most of the drug industry spends more on marketing 

and promotion than they do on research and development, or—— 

Mr. TAUZIN. That’s not true. 

Senator DORGAN.—at least it’s a very—well, we’ll have the 

record—— 

Mr. TAUZIN. OK. 

Senator DORGAN.—you may submit for the record—— 

Mr. TAUZIN. Yes, we will—— 

Senator DORGAN.—your evaluation—— 

Mr. TAUZIN.—do that. 

Senator DORGAN.—of that. 

[The information previously referred to follows:] 

ADDITIONAL STATEMENT OF W.J. BILLY TAUZIN, PRESIDENT AND CEO, 

PHARMACEUTICAL RESEARCH AND MANUFACTURERS OF AMERICA (PHRMA) 

Mr. Chairman, I wanted to address the issue you raised regarding how much drug 

companies spend on research and development, marketing and direct-toconsumer 

advertising. 

The biopharmaceutical industry spent $55.2 billion in 2006 on research and development according to data from PhRMA’s Annual Survey 1 and an independent analysis by Burrill & Company, an increase from $51.8 billion in 2005.2 By way of comparison, the biopharmaceutical industry spent $11.4 billion on marketing and educational activities in 2005, including $4.2 billion on direct-to-consumer ads, according to IMS Health.3 Notably, in October 2006, CBO reported, ‘‘The pharmaceutical 

industry is one of the most research-intensive industries in the United States. Pharmaceutical firms invest as much as five times more in research and development, 

relative to their sales, than the average U.S. manufacturing firm.’’ 4

Some critics of the biopharmaceutical industry have claimed companies spend 

more on marketing than on research. First, they reach this flawed conclusion by categorizing all selling, general, and administrative expenses reported in filings to the 

Security and Exchange Commission (SEC) as ‘‘marketing costs.’’ However, this lineitem includes such non-marketing costs as free medicines provided to low-income 

patients through patient assistance programs, distribution and shipping expenses, 

systems and IT support, and corporate functions (i.e., legal, communications, dues, 

procurement, utilities and property taxes). As Princeton professor Uwe Reinhardt 

has written, ‘‘the [selling, general and administrative] category represents many expenses other than selling expenses and should not be seen as an estimate purely 

of outlays on marketing, as the industry’s critics occasionally do.’’ 5 I hope that we 

can agree that these comparisons are not grounded in fact. 

Second, the critics who make this point also fail to acknowledge that marketing 

expenditures help bring patients into treatment for previously untreated or undertreated conditions,6 and help improve compliance with physician-prescribed treatment.7 Moreover, there is a gap in ‘‘translating research findings into medical practice.’’ 8 Bringing health professionals FDA-regulated information regarding prescription medicines can help bridge this gap.9 Early intervention and improved compliance for conditions like high blood pressure, diabetes, and cardiovascular disease 

can help patients remain healthier and avoid high health care costs. 

81 

10FDA Press Release. ‘‘FDA Approves New Drug Treatment for High Blood Pressure;’’ March 

6, 2007. 11Lawrence Altman and Andrew Pollack. ‘‘2 New Drugs Offer Options to Fight H.I.V. in Novel 

Ways’’. The New York Times, February 28, 2007. 12Marilyn Chase, ‘‘Emerging Drugs Show Promise Against HIV.’’, The Wall Street Journal. 

February 28, 2007. 

The pharmaceutical industry’s investment in the discovery of new medicines is 

yielding important results for patients. For instance, just over the last few weeks, 

the FDA has approved a medicine that represents an entirely new approach to 

treating high blood pressure 10 and press reports 11,12 indicate promising trial results 

for three new medicines to treat HIV, including two that are entirely new approaches to attacking this virus and one that overcomes resistance to earlier drugs 

of its type. 

At the same time that medical advances continue to meet patients’ health care 

needs, medicines remain a small part of overall health spending. According to the 

latest estimates by the Centers for Medicare & Medicaid Office of the Actuary 

(OACT), spending on prescription medicines accounted for 10 percent of national 

health spending in 2005, and 8.5 percent of overall growth of health care costs. 

Other services accounted for over 91 percent of overall cost growth. In 2005, prescription drug spending growth slowed for the sixth consecutive year, reaching its 

lowest level (5.8 percent) since 1977. 

Senator DORGAN. But the fact is, it’s a—if not, it’s a very close 

second. And this morning I once again, as I was getting ready for 

work, was asked if I shouldn’t ask my doctor about several kinds 

of prescription drugs. A substantial amount is spent on marketing 

and promotion. Did you study whether reducing the expenditure for 

direct television ads, for example, asking me whether I could ask 

my doctor if the purple pill was right for me or for my colleague 

Senator Snowe—if they reduced that expenditure, could that amplify and help with additional research and development? 

Dr. VERNON. I appreciate that question. And I would add that all 

businesses and companies, and politicians, for that matter, invest 

in marketing. It’s part of the business practice. And firms make decisions on how much they’re going to invest in R&D based upon expected future returns. To the extent that marketing expenditures 

enter into that, or other factors, it will impact R&D investment. 

However, the focus of our study was on how we can measure expected returns by the industry, and identifying the precise empirical link between those expected returns, prices, and profits, and 

R&D spending. 

Senator DORGAN. Who commissioned the study, Dr. Vernon? 

Dr. VERNON. This was not commissioned, and it was not funded. 

This was part of my doctoral research and also some of the first 

few papers I published when I was on the faculty at the University 

of Connecticut. 

Senator DORGAN. But you’ve previously done work for the pharmaceutical industry. 

Dr. VERNON. I have previously received funding from various organizations, including the pharmaceutical industry, that’s correct. 

Senator DORGAN. Ms. Barnett, the AARP supports this piece of 

legislation. I think it goes without saying—and I shouldn’t have to 

say it at this hearing, but I will—I don’t think there’s anyone that 

would in any way ever suggest that they want to compromise our 

drug supply or do anything to diminish the safety of our drug supply. The testimony by Mr. Tauzin and others today, about counterfeits—counterfeit drugs—is disturbing to all of us. That is existing 

under a circumstance where importation really doesn’t exist in any 

82 

managed way. But tell me, about what you think about Mr. Tauzin 

alluding to the fact that, ‘‘Look, since we now have Medicare Part 

D, you’ve got access to prescription drugs’’—Mr. Tauzin described 

Tamoxifen. Tell me why the AARP is supporting this legislation, if 

you have Medicare Part D. 

Ms. BARNETT. Medicare Part D will only cover up to a certain 

part before the consumer then has to go into the donut hole, and, 

at that point, you don’t reach the amount, necessarily, that is 

there, that cost. But, on the other hand, not all people—over half 

of our members are ages 50 to 64, and they’re not—Medicare and 

the prescription drug benefit is not available to them. 

Senator DORGAN. Can I just complain about starting—getting letters from the AARP at age 35 or whenever it was I—— 

Ms. BARNETT. Of course you can, but you don’t—— 

[Laughter.] 

Senator DORGAN.—whenever it was I started getting them in my 

mail? I mean, I didn’t feel old at that time. 

Ms. BARNETT. Was this perceived 35 or was it actual 35? 

[Laughter.] 

Senator DORGAN. No, it was—it was actually perceived. 

Senator Snowe? 

[Laughter.] 

Senator SNOWE. Thank you very much. 

And I want to welcome the panel. 

Former Congressman Tauzin, you were mentioning about former 

Secretary of Health and Human Services, Secretary Shalala. And, 

it’s interesting, to examine the three objections that she had—if I 

can find them here—back in 2000, when she said that it was ‘‘impossible for me to demonstrate that importation is safe and costeffective.’’ First, she said, based on the provision which ‘‘allows 

drug manufacturers to deny U.S. importers legal access to the 

FDA-approved labeling that is required for reimportation.’’ Two, 

that ‘‘the drug reimportation provision fails to prevent drug manufacturers from discriminating against foreign distributors that import drugs to the United States.’’ And, third, that ‘‘the reimportation system has both authorization and funding limitations . . . 

the law requires that the system end 5 years after it goes into effect.’’ 

So, all of those issues, in one way or another, have been addressed by our legislation. So, I don’t think it’s safe to say that you 

can characterize those three problems, as she mentioned them as 

issues upon which she had to oppose the legislation. She was required to certify for safety. She didn’t have the resources, and she 

only had a simple certification. So, we have addressed all of those 

issues in our legislation. 

Mr. TAUZIN. She was required to certify two things, as the current law requires the Secretary to do, that is, not only that you satisfy all the safety concerns, which we—which we agree, with her 

and the current Secretary, cannot be safely satisfied, even with this 

legislation. And we’ll elaborate, as I said, further to you on that. 

And, second, the cost-effectiveness of doing it. CBO estimated a 

cost savings, if you did pass this bill, of 1 to 2 percent over 10 

years, with no cost savings at all in the first 5 years. That’s CBO 

estimates. There have been some other experiences that—you don’t 

83 

have to take my word for it. Go to Massachusetts and check with 

their program. They abandoned importation when they discovered 

that prices in America were actually lower for many drugs, including the generic products—— 

Senator SNOWE. Yes, but isn’t that the choice of the consumer? 

Mr. TAUZIN. I’m sorry? 

Senator SNOWE. I mean, I think—isn’t that the choice of the consumer? I mean, why is the industry so—— 

Mr. TAUZIN. Well, but—— 

Senator SNOWE.—vigorously opposed—— 

Mr. TAUZIN.—but the problem is—— 

Senator SNOWE.—to it if—— 

Mr. TAUZIN.—the problem is, you’re not going to make it the 

choice of the consumer. I’ll be buying this stuff from my hospital 

when I go to the hospital, whether I want to or not. There’s nothing 

in this bill that says I can opt out. 

Senator SNOWE. Yes. Well, let me make another point here. Well, 

you can opt-out—you set up a safety system. That’s the point. Then 

the consumer makes the determination whether or not they want 

to have access to—— 

Mr. TAUZIN. I wish—— 

Senator SNOWE.—imported medications. 

Mr. TAUZIN. I wish—— 

Senator SNOWE. And you mentioned China. Can I just make—— 

Mr. TAUZIN. Yes. 

Senator SNOWE.—clear here? 

Mr. TAUZIN. Yes, go ahead. 

Senator SNOWE. China isn’t on our list. OK? I’m just—make that 

clear. And let me just say, the European Union’s been doing it— 

parallel drug trading without incident for the last 30 years, and 

they label what is imported and what is not. We don’t even have 

a system set up in the United States for counterfeiting. I mean, 

that’s the interesting point here. You know, for all that’s been mentioned about the preponderance of domestic counterfeiting, nothing 

has been done to address that. 

So, I think that the point is, here, we’re setting up a system, and 

you would have the labeling of imported medications, which I understand—because that could mean there would be more competitive pricing in the United States. So, I make that point—— 

Mr. TAUZIN. I invite you to check with the EU lately. Parallel 

trading is becoming a huge problem. They discovered two things. 

The arbitragers pick up all the savings. The consumers and the 

payers don’t get any savings. 

Senator SNOWE. Well—— 

Mr. TAUZIN. And the second thing is that counterfeiting is rising 

dramatically in Europe, and it’s coming from China. It goes 

through Thailand, it arrives in Europe, and—as it’s arriving in 

America from all of the countries that you list in the bill. You can’t 

control it as coming from only those countries anymore. 

Senator SNOWE. Well, you know—but I think it’s interesting— 

that where we manufacture—I mean, it’s on the map here—is all 

over the world. You know, as I said, over 40 countries in which we 

manufacture. And that’s what we’ve done. And we’re talking about 

FDA-approved facilities. And I think it’s very important to say 

84 

that. We do that with manufacturing medications in over 40 countries. We certainly can set up a system. And if you have recommendations how better to improve our legislation, I would hope 

that we would get those recommendations. And—— 

Mr. TAUZIN. Sure. And we’ll talk to you about it. 

Senator SNOWE. OK, great. 

And, Mr. Schultz, you’ve been in the position of our previous witness. You were former Deputy Commissioner for food—for Policy, 

Food and Drug Administration, is that correct? 

Mr. SCHULTZ. Yes. 

Senator SNOWE. OK. So, you’ve had a chance—and I know you 

responded to the Chairman’s question—and you may have some 

other follow-up recommendations on specifics—is that correct?—in 

our legislation. But, overall, do you think the framework that we 

have is doable? I mean, is this something that can be done for importation, based on our approach in this legislation? 

Mr. SCHULTZ. Yes. I think it’s a very sound approach. And I 

think the important point is that it’s going to improve things, in 

terms of safety. I don’t know if it’s going to be perfect, but it’s going 

to inject resources to the FDA, it’s going to allow FDA to inspect 

facilities, and, where there are commercial sales, it will require a 

chain of custody. So, this is a terrific improvement. 

I mean, if I could say a word about price, there are two points. 

One is, the people buying these drugs from Canada would be really 

shocked to know that CBO is saying they’re not going to save 

money because they’re saving money today. The second thing is 

that the reason those CBO estimates may have showed no savings 

is because so many people are doing it today. The problem is 

they’re not necessarily getting safe products. And what you’ve done 

in your bill is to set up a system where consumers will have much 

more assurance from FDA of safety. There’s never going to be a 

promise. There’s nothing risk-free. But we’ll be moving in that direction. 

Senator SNOWE. No, I appreciate that and would appreciate your 

future input on our legislation. So, if there’s anything we can do 

to make adjustments in that—— 

Senator DORGAN. If I might just—— 

Senator SNOWE. Yes. 

Senator DORGAN.—for Senator Snowe—this issue of savings, the 

CBO actually scored the bill that we offered to the FTC reauthorization, and they scored a savings of $6.1 billion over 10 years for 

the Government and $50 billion over 10 years for consumers. So, 

the CBO score, the most recent score for legislation nearly identical 

to that which we’ve reintroduced, does show a savings, both to the 

Government and the consumers. 

Senator SNOWE. Thank you. 

Dr. Vernon, you were focusing on the decline in R&D spending. 

And, obviously, we’ll look at the information that you’ve provided. 

But, you know, the industry has spent about, I think, $5.6 billion 

more. At least based on the 2004 numbers, in the United States 

than in Europe, even though our consumers are paying $87 billion 

on higher prices than, foreign consumers. So, I mean, I think that 

the fact is if you start to compare the R&D spending of the 12 largest pharmaceutical firms by revenue, it’s interesting—they have an 

85 

average R&D investment of 14.7 percent of gross revenues, and you 

compare that with other firms with high R&D requirements and 

low marginal costs of production, they have a similar investment 

rate. It’s 14.4 percent of gross revenues. And yet, they produce— 

if you’re talking about microprocessors, software, electronics—similarly situated, they produce products which they improve every 

year, and they’re offered at lower costs, and they do not increase 

pricing of old products at two and three times the rate of inflation. 

So, I don’t see, with importation that the problem is going to re- sult in R&D decline. That’s not to include, frankly, the $30 billion 

that’s spent by the American taxpayer in support of the National 

Institutes of Health and other means for the research and development for medications that consumers benefit from in other countries. And we’re paying the higher prices. 

So, I just don’t see where the argument is here that it’s going to 

have an impact on the research and development, given what we 

pay here in America today, given what the American taxpayer’s 

paying. I don’t see that the higher margin is increasing the rate of 

investment in the research and development. And you compare 

that with other companies, as you look at these charts—they’re 

similarly situated, and yet we don’t get the benefit of lower drug 

prices. 

Dr. VERNON. I appreciate that, and I would make a couple of remarks. 

The first is, I do agree that the U.S. is subsidizing R&D. And 

that’s because foreign markets and governments regulate drug 

prices, and, in the U.S., we largely do not. I would say, also, that 

the link between R&D spending and prices and profits is unequivocal, and is based on over two centuries’ worth of economists’ 

thought. And economists are united on that issue. So, I don’t think 

that’s a question. 

And I do have a question about the comparison you made between R&D intensities on the two charts you showed, Senator I 

think what’s relevant is pharmaceutical R&D spending to pharmaceutical sales—and I’m not sure, of those companies up there, if 

what was being represented was pharmaceutical R&D or total firm 

R&D to gross firm sales. Because a lot of the companies in the industry are diversified into various different types of businesses, I 

think that’s an important distinction that needs to be made. 

Mr. TAUZIN. Senator, can I add a—— 

Senator SNOWE. Yes. 

Mr. TAUZIN.—thought, too? The big difference in the R&D spending in our industry, as opposed to other industries, is that the moment they invent something and get a patent on it, they can go to 

market with it. On the other hand, our companies have to spend 

money, over 14 years of clinical trials, before their product can go 

to market within their 20 years of patent protection. So, there’s a 

very different economic model that, frankly, is getting very threatened today. But, at the same time, even the Japanese companies 

that are part of our organization do their R&D in America right 

now. Most of the European companies do their R&D in America 

today. They’ve left the countries, where the governments have initiated price controls, to come to this country to do their research and 

development. That’s a fact. 

86 

Senator SNOWE. Well, I’d just point out another quote here from 

Hank McKinnell, who is a former CEO of Pfizer, and he said, ‘‘It’s 

a fallacy to suggest that our industry, or any industry, prices a 

product to recapture the R&D budget spent in development.’’ 

Mr. TAUZIN. And he’s right. 

Senator SNOWE. So, I think—— 

Mr. TAUZIN. He’s right. But what he—what you fail to have there 

is the rest of his statement, which is that they price it in order to 

make sure they can cover the next 14 years of R&D development 

for the next product in the pipeline. 

Senator SNOWE. Yes, but the industry overall is pricing so that the American consumer pays $87 billion more—— 

Mr. TAUZIN. And we’re spending in—— 

Senator SNOWE.—than consumers in other countries—— 

Mr. TAUZIN.—we’re spending—— 

Senator SNOWE.—plus the $30 billion—— 

Mr. TAUZIN.—well over $60 billion in R&D—— 

Senator SNOWE. Plus—— 

Mr. TAUZIN.—every year. 

Senator SNOWE. Yes, but—plus the $30 billion by—financed by 

the Federal Government. 

And one more point by Hank McKinnell, because I think it is— 

it is an interesting point. He says, ‘‘Competition is good medicine 

for economies. Name an industry in which competition’s allowed to 

flourish—computers, telecommunications, small-package shipping, 

retailing, entertainment—and I’ll show you lower prices, higher 

quality, more innovation, and better customer service. There’s nary 

an exception. OK, there’s one. So far, the healthcare industry 

seems immune to the discipline of competition.’’ 

And I think that’s what it’s all about, and that’s what we’re striving for. I think we have an obligation to set up a system of safety 

and allow the consumers to make that decision in what they—— 

Mr. TAUZIN. Give us a chance to—— 

Senator SNOWE.—get benefit from. 

Mr. TAUZIN.—compete against another free market, and we’ll 

compete. But those are not free markets, Senator you know that. 

Senator SNOWE. Thank you. 

Mr. TAUZIN. Those are controlled markets. 

Senator SNOWE. Thank you. 

Senator DORGAN. Senator Vitter? 

Senator VITTER. Thank you, Mr. Chairman. 

First of all, with Billy Tauzin here, let me just, apart from this 

issue, setting this aside for a few seconds, let me thank you for all 

of your service and leadership to our state, which was exemplary 

throughout your career. 

Mr. TAUZIN. Thank you, David. 

Senator VITTER. And I personally appreciate that, and the people 

of Louisiana appreciate that. 

On this issue, Billy, you started your remarks by remembering 

your work with John Dingell—— 

Mr. TAUZIN. Yes. 

Senator VITTER.—going back to 1988. I guess one thing I would 

say is, what do you think the prescription drug inflation—cumulative inflation has been in those 19 years since 1988? 

87 

Mr. TAUZIN. Good question. Let me—— 

Senator VITTER. It’s been—— 

Mr. TAUZIN. Let me—— 

Senator VITTER. It’s been enormous. 

Mr. TAUZIN. Let me address it. It is not soaring. It is not enormous. AARP issued a report, I think, yesterday—again, doing what 

they always do, which is to compare a list of patent drug products 

that are used by seniors, and examines only those in the marketplace, instead of the whole prescription drug marketplace. If you 

look at the 60 percent of the drugs that are consumed in America 

that are generic, and combine them with the patent drugs that 

come out of this 14 year expensive process—combine them together, the inflation rate of drugs in America has been moderating 

over the last 5 years and is lower than the healthcare inflation rate 

again this year, falling every year. It is not soaring, it is not exponentially rising. It’s rising at a lower rate than healthcare inflation, 

and moderating every year. In fact, the number of new drugs coming off patent are alarming, frankly, because, as those new drugs 

come off patent, a lot of the companies are going to be in a very 

difficult position over the next 10 years. 

Senator VITTER. Well, first of all, I think what we’re largely talking about in this debate is nongenerics, because the generic issue 

is largely solved, in terms of price competitiveness in this country. 

So, I do think we’re basically talking about nongenerics. 

Mr. TAUZIN. Well, but you can’t—— 

Senator VITTER. And that—— 

Mr. TAUZIN.—you can’t—— 

Senator VITTER.—cumulative—— 

Mr. TAUZIN.—not talk about it. Do you know, in Canada, that 

generics cost about 167 percent of U.S. prices? You can’t just talk 

about one set of drugs. In—— 

Senator VITTER. Well, the problem—— 

Mr. TAUZIN. If you look at the ten—— 

Senator VITTER.—is, you don’t have generics for everything. 

Mr. TAUZIN. No, but if you look at the ten top drugs, six of them 

are generic variations—— 

Senator VITTER. Right. 

Mr. TAUZIN.—right now. And, as you heard, you know, when you 

look at the amount of time that a patent drug has left in its patent 

life, and the fact that these drugs are coming off pretty rapidly over 

the next 10 years, that 60 percent is likely to rise in this country. 

We’re one of the highest users of generic products in the world, at 

60 percent. It is working fairly well. Do we still have a problem of 

uninsured? Yes. And we ought to address that. 

But here’s another feature I hope you think about when you 

think about this bill and other bills on healthcare. We’re 10 percent 

of the market. The healthcare dollars spent in America, pharmaceuticals represent 10 percent of that. They represented 10 percent 

in 1978, and they represent 10 percent today. We are not the biggest problem in the healthcare cost equation. Ninety percent of the 

problem is in other healthcare cost areas. But do we have a problem making sure seniors have access to affordable prescriptions? 

Yes. That’s why we passed Part D. Do we have a problem with the 

20 some odd million Americans who are chronically uninsured? 

88 

Yes. We ought to address that. But to open the door to a problem 

that’s a one percent of problem in America today, that could become a 20 percent problem, in terms of counterfeits hitting this 

market. Just to try to solve a 10 percent or 7 percent problem, 

which is the difference in Canadian cost to Americans today. It is, 

I think, very risky, Senator Vitter. That’s all I’m asking you to 

think about. 

Senator VITTER. Well, my point is that, since 1988, nongeneric 

drug inflation has soared. Since 1988, as a result, this commerce 

across the border in these drugs has soared. And, of course, that’s 

directly related to price. 

And so, in—with that history behind us, in the current environment, I simply think it is an unworkable and unreasonable socalled solution to the safety issue to say we’re going to put our finger in the dike. It’s not working. We’re—we are being deluged with 

this issue, to some extent; and to, sort of, just say ‘‘no’’ isn’t a policy—— 

Mr. TAUZIN. We’re not saying there’s—— 

Senator VITTER.—it’s not a workable policy. 

Mr. TAUZIN. We’re not just saying no. We’ve instituted, this year, 

some very important initiatives. I want to tell you about them. 

First of all, the drug distributors in this country, their association, it’s finally kicked out the secondary marketers. They’re no 

longer a part of their association. 

If you look the problem in the U.S. drug marketplace in counterfeiting and uplabeling and the concern we have about danger to patients, it was primarily in that secondary market. That’s where the 

counterfeiters play. And they’re playing as good a game as they 

played with heroin. 

Second, Senator Vitter, we’re meeting, today, with the distributors and the pharmacists to see if we can’t accelerate the work on 

RFID technologies, nanotechnologies, to protect our system even 

better. 

We’re not just saying no. We’re doing things, we’re trying to protect the people under 200 percent of poverty who are uninsured 

today, with the PPA program—3.5 million new Americans covered 

with free drugs because of our program. We’re working on the uninsured problem all over America. We’re working with the distributors to come up with track-and-trace systems that are really good 

in this country. 

All I’m asking you to do is to understand that we can’t pass those 

laws for other countries. And the FDA can’t regulate the distribution chain in other countries. And if you expect them to do so by 

passing a bill, I just want to warn you, as I tried to warn you about 

New Orleans a few years ago, one day we’ll rue the day we opened 

up that flood. One day in this country, the deaths are going to pile 

up the way they’re piling up around the world with malaria right 

now. Please think about that. 

Senator VITTER. Let me suggest two other things we can do, and 

you all can be helpful to address the problem. One is to be more 

helpful and to not oppose generic reform. And, quite frankly, too 

often, in my opinion, the industry has been an obstacle to progenerics reform. 

Mr. TAUZIN. Yes, but Senator Vitter, I—— 

89 

Senator VITTER. The—— 

Mr. TAUZIN.—you know, I can’t speak for what happened more 

than 2 years ago, but I can tell you this, we are very open to working with you, and all of you, in making sure that drug prices are 

affordable and available in this country to people. That’s why we 

started the PPA program. We’ve got—we’ve got a very different organization today. Give us a chance to work with you. I think you’ll 

see a different face of this industry. 

Senator VITTER. The second area where I think we need a lot of 

work is trade policy. 

Mr. TAUZIN. Yes. 

Senator VITTER. This is all created by vastly different prices between U.S. and other countries. That is largely created by strong 

or weak price-control regimes elsewhere. 

Mr. TAUZIN. Exactly. 

Senator VITTER. Now, we essentially, in my opinion, do absolutely nothing to attack that through our trade policy. I’m not saying we have all the power to change that overnight, but we certainly have some leverage and some opportunity to attack that. In 

my opinion, neither the industry nor this administration does anything meaningful to attack that. And that price difference is what 

creates this entire debate. 

Mr. TAUZIN. Can I paint a quick picture before you—how difficult 

it is? Not only do we have countries like Thailand, which is a military government now, stealing patents, they’ve basically said 

they’re going to just take our patents and produce our products 

without regard to IP protection anymore. And they’re executing 

that right now in Thailand. 

Not only do we have situations like that, we’ve got the underdeveloped world that can’t afford to pay even generic prices for 

some life-saving drugs, like HIV drugs. And we’re trying to set up 

a system in the world to make sure critical life-saving medicines 

reach people in the underdeveloped world who, like in America, 

can’t afford their drugs. Mr. Chairman, we are trying to help that 

situation. 

Second, you have the developing world, the middle-index countries, if you will, who are, like Thailand, trying to literally take advantage of American R&D, and literally stealing from the American people, in my view, their rights to the R&D they’ve spent for 

these products. 

And then you’ve got the developed work that is not taking its fair 

share of responsibility for paying for that R&D. And I concur with 

you on that. We need a much stronger emphasis at our State Department on insisting that the—— 

Senator VITTER. Well—— 

Mr. TAUZIN.—developed world do a better job of paying for—— 

Senator VITTER. Again, on the—— 

Mr. TAUZIN.—it’s that simple. 

Senator VITTER.—trade front, the only activity I’ve seen, until we 

put a stop to it a couple of years ago, was an effort to embed antireimportation policy in trade agreements. That was the only effort 

I have ever seen, in terms of trade policy. I’ve seen no effort from 

the administration or the industry quite frankly, in trying to attack 

90 

the root issue of these price differentials, and trying to use all of 

our resources—— 

Mr. TAUZIN. Senator Vitter, I assure you, a lot of that—— 

Senator VITTER.—to solve that. 

Mr. TAUZIN.—goes on. We belong to international organizations, 

the IFPMA. We to work with EFPIA. We work with a group called 

Dolder, globally, trying to influence those decisions around the 

world. But, without the leverage of our government saying something is wrong when other countries can take advantage of the consumers in America who are spending their dollars on this R&D— 

without your leverage, they’re not going to change their policies. 

It’s that simple. 

Senator VITTER. Also want to briefly address the R&D issue, 

which is very important, in my mind. And let me state, up front, 

I’m not for reimportation to import price controls into this country, 

and that sort of argument against it is often made; I’m for reimportation, because I don’t think price controls can survive a fullbodied reimportation policy in this country and in other countries. 

And so, with that in mind, Dr. Vernon, you suggested that reimportation will basically drive down R&D. Does that take into account the possibility—the probability, in my mind—that if you have 

a full-bodied reimportation policy, it’s—it doesn’t simply import 

those prices that exist now in other countries, but it actually 

changes them, it raises them, as Dr. Schondelmeyer suggested, and 

lowers our domestic prices? 

Dr. VERNON. Well, I think that’s an excellent question, and a 

very—and the answer is very complicated, and I don’t have a full 

answer. I think that if reimportation were undertaken on a large 

scale, such that we had forced-sales provisions and we did see 

prices falling in the U.S., the question then is, would that have an 

impact on prices abroad? Many economists believe that prices 

abroad are lower, not just because of price controls and price regulation, but also because average per-capita incomes in those countries are lower. 

So, I don’t know that we would—exactly how that would play 

out. And it’s a very complicated issue, in terms of how these foreign 

governments would respond, and in terms of how the U.S. Government would interact with these foreign governments and—— 

Senator VITTER. Well, let me just suggest one of the things that 

would happen is, their buying pool would no longer be simply in 

their country; it would involve our country. And so, the per-capita 

income of that buying pool will increase. What I think you’re going 

to see is an equalization of prices. I’m not saying it would be immediate or complete. But I think what you would see is a drive toward 

equalizing prices worldwide. 

Dr. Schondelmeyer, you alluded to that a little bit. How do you 

think that would work with a robust reimportation policy? 

Dr. SCHONDELMEYER. If the U.S. began a full-bore reimportation 

policy, the Canadian Government, the EU countries, are going to 

have the drug companies coming into them the next day, and 

they’re going to be saying, ‘‘We can’t continue with the prices we’re 

paying you. We’ve got to change something.’’ It would disrupt the 

market, in the short run. But they will have to change something. 

91 

If we’re going to use average per-capita income as our measure, 

let’s look at the average per-capita income of the uninsured Americans. And it’s lower than most of those countries that are getting 

lower prices in other—in Europe, so why aren’t we giving that 

lower price to the 47 million—and that’s probably more people in 

America than most of those other countries, as well—why aren’t we 

giving them those lower prices, if we’re going to use that as our 

measure of how you price drugs? 

Senator VITTER. Let me just—— 

Dr. SCHONDELMEYER. I think it’s unfair to price the U.S. as an 

aggregate, because we probably have the greatest income disparities of any country in the world, or any major developed country 

in the world, compared to the European countries. And—— 

Mr. TAUZIN. Senator Vitter, can I tell you what Canada plans to 

do—— 

Dr. SCHONDELMEYER.—that makes a mess. 

Mr. TAUZIN.—if you pass this? They’re not going to lower their 

price. They’re going to raise their prices in Canada. What Canada 

has threatened to do, and what they’re likely to do, is to pass a bill, 

which they’ve got ready to go, which will ban bulk exports to America. They don’t want to become our pharmacy. And neither does 

Europe. And they say that very clearly in their policy. 

Senator VITTER. Well, again—and that gets back to trade, too. 

The question is, are we just going to allow that without consequence? I don’t think we should. So, I think there are ways to 

attack that. But, again, my point is, a robust reimportation policy 

doesn’t simply import prices from other countries to here, it 

changes prices worldwide—it lowers prices in this country, it increases artificially low prices elsewhere. And what I think it does 

is do nothing worldwide with regard to what’s available for R&D, 

but it redistributes where all that R&D money comes from so that 

we don’t have to pay 98 percent of it, or whatever very high percentage we pay alone as Americans. 

Mr. TAUZIN. There’s another feature, though. And the other feature that you can’t discount is the fact that other governments, because they are the payer—they have single-payer systems—have 

limited resources to pay for the drugs that are used by their citizens. And the way they handle that is, they cut off access. In Canada, for example, on average, 20 percent of the pharmaceuticals 

that are available to Americans are not available to citizens in 

Canada under their single-payer system. In Japan, only 69 of the 

top 100 medicines are available to their citizens under their singlepayer system. So, you won’t necessarily drive up their cost. What 

you’re more likely to do is to see more limitations on access to their 

citizens. I don’t want to see that—— 

Dr. SCHONDELMEYER. And it depends on—— 

Mr. TAUZIN.—imported into America, by the way. 

Senator DORGAN. Dr. Schondelmeyer, you wanted to respond to 

that. 

Dr. SCHONDELMEYER. Yes, it depends on which drugs we leave 

off of that system. If we leave off Nexium or Ambien CR or 

Clarinex that are very similar to other drugs that really don’t have 

any therapeutic difference, maybe we’re better off. 

92 

I would argue that we already have the effect of European price 

controls imported in our market in the prices that are being 

charged to Americans now. We don’t have free market pricing. We 

don’t have market-based prices. It’s been acknowledged. Dr. Vernon 

said that does affect our prices, and we essentially are subsidizing 

the rest of the world. So, the effect of that price-control system in 

Europe and in Canada is already in our market, and we’re paying 

for it. And unless we squeeze back gently in some way, we will continue paying that higher price. I think we have to squeeze back, 

in some way, to get those other countries—I think passing re-importation will work much faster than trade negotiations with other 

countries to tell them to raise their prices. If you start reimporting 

from their countries at their lower prices, those prices will go up 

much faster than any negotiations are going to accomplish on trade 

negotiations, country by country. 

Mr. TAUZIN. Well, but don’t leave with the perception that we’re 

just talking about Nexium. In Canada, you can’t get Avastin. 

That’s the drug that saved my life. You can’t get it in Japan. You 

can’t get it in Europe, in England and Wales. Both Avastin and 

Erbitux were deemed not cost-effective in those countries under 

their single-payer systems. So, don’t think it’s just a purple pill or 

a pill that you have of choice. Sometimes it’s the pill that’ll save 

your kid’s life. Don’t forget that. 

Senator DORGAN. Mr. Tauzin, you’ve lost none of your skill or aggressiveness. 

[Laughter.] 

Senator DORGAN. And we appreciate your being here. I appreciate the entire panel. 

I want to put a chart up, here, that shows you something that 

FDA Commissioner David Kessler has said in a letter to us. He 

talked about—our proposal, quote, ‘‘. . . provides a sound framework for assuring that imported drugs are safe and effective. Most 

notably, it provides additional resources to the agency to run such 

a program, oversight by FDA of the chain of custody of imported 

drugs back to the FDA-inspected plants, a mechanism to review 

imported drugs to ensure that they meet FDA’s approval standards, and the registration and oversight of importers and exporters 

to assure that imported drugs meet these standards that are not 

counterfeit.’’ 

I wanted to put that on the record, only because there’s a great 

debate about this, I—and I think you will admit we’ve tried to provide fair opportunity for alternative views with this hearing. It will 

not surprise you to know that Senator Snowe and I will very soon 

work with our colleagues on the Commerce Committee to try to 

move this legislation, and we would hope, obviously, to get a vote 

on the floor of the Senate. Identical legislation is existing in the 

U.S. House. 

And we will keep the record of this hearing open for 2 weeks. 

Should our witnesses wish to submit additional views, we will accept that. 

Mr Tauzin, you indicate you want to work with us on a range 

of things. We welcome that. 

Mr. TAUZIN. Thank you. 

Senator DORGAN. We would say the same to all of the witnesses. 

93 

Obviously, you know from my statements, and, I believe, from 

the statements of others on the panel here, that we feel strongly 

about this, and we represent constituencies across our country that 

feel, as I offered the question today, they feel that they shouldn’t 

be paying the highest prices in the world. They feel it’s unfair. 

And so, we hold a hearing today, invite you. All of you are great 

to come. 

Dr. Vernon, I wasn’t suggesting your research is worthless because of who you’ve previously worked with, but I did want to have 

that in the record. 

All of you have taken some time to be with us and driven from 

Connecticut and Minnesota and across the street—— 

[Laughter.] 

Senator DORGAN.—and Kentucky. And let me thank you for taking the time to be a part of this discussion. 

This hearing is adjourned. 

[Whereupon, at 11:55 a.m., the hearing was adjourned.] 

(95) 

A P P E N D I X 

JOINT PREPARED STATEMENT OF THE CANADIAN PHARMACISTS ASSOCIATION, THE

ONTARIO PHARMACISTS’ ASSOCIATION AND THE BEST MEDICINES COALITION

Do No Harm: Congress Should Leave Canadian Prescription Drugs Alone 

Canadian pharmacists, pharmaceutical distributors and patients are extremely 

concerned by the proposed Pharmaceutical Market Access and Drug Safety Act of 

2007, and its serious implications for the integrity of Canada’s prescription drug 

supply. 

We understand fully that your hearings will focus on the impact of this legislation 

on the United States and its citizens. As you proceed, however, we would urge you 

to widen your perspective to consider the repercussions of this legislation on Canadians and their healthcare system. 

Our representatives would have liked to make these arguments directly to you. 

Your committee has however decided to invite only a few organizations to speak at 

the hearings, excluding any representation from Canada, the country most directly 

affected by this proposed legislation. Under these circumstances, we urge you to consider the issues in this written submission. 

We would like to focus on three points. Allowing Canadian price-controlled medicines to be imported in bulk into the United States will have serious consequences 

for Canadians and will be of very little long term benefit to Americans. Not only 

will such a measure damage the Canadian drug supply, it will in all likelihood lead 

to increased drug prices for Canadians. The Pharmaceutical Market Access and 

Drug Safety Act of 2007 is a quick-fix solution to a complicated issue which will not, 

given the differences of scale between Canada and the United States, significantly 

reduce the cost of prescription drugs in your country. 

This proposed legislation also puts the health of Americans at risk by opening 

your borders to increased counterfeit drugs and criminal activity from outside North 

America. Although our submission does not address this issue in detail, we fully 

share the deep concerns expressed by organizations such as the American Pharmacists Association on this matter. 

1. A Threat To Canada’s Supply 

Canada’s supply of prescription medicines is not limitless. It is designed for the 

demands of a population of 30 million, not for a market ten times that size. 

Lipitor®, Zocor®, Prevacid®, Nexium® and Plavix® are among the top ten most 

prescribed medicines in the United States. Although widely prescribed in Canada, 

our domestic supply of these drugs could meet only a small fraction of U.S. demand. 

For example, the Canadian stock of Lipitor represents the equivalent of just 14 percent of U.S. demand. Similarly, Plavix stocked in Canada is sufficient to meet only 

nine percent of U.S. demand. 

Table 1.—Supply of Leading Prescriptions in the U.S. Available in Canada 

Rank (by number 

of prescriptions filled in the 

U.S.) 

Product Number of 

prescriptions: 

U.S.—2005 

(millions) 

Number of 

prescriptions: 

Canada—2005 

(millions) 

Canadian 

share of U.S. 

demand 

1 Lipitor 79,170 11,24 14% 

2 Zocor 27,839 1,77 6.4% 

3 Nexium 27,341 1,94 7% 

4 Prevacid 25,020 1,75 7% 

8 Plavix 23,973 2,15 9% 

Note: Based on 2005 figures, IMS Health. 

96 

1Marv Shepherd, Drug Importation Analysis: Comparison of the Canadian Pharmaceutical 

Market Size with the U.S. and Implications for Drug Importations, Center for Pharmacoeconomic Studies College of Pharmacy, The University of Texas at Austin, May 5, 2004, p. 

13, http://www.utexas.edu/pharmacy/research/institutes/pharmacoeconomics/ 

candrugmarket.pdf. 2 Canadian Pharmacists Association, Administrative Burden on Canadian Pharmacists Due to 

Drug Shortages, November 2004, http://www.pharmacists.ca/content/hcp/resourcelcentre/ 

practicelresources/pdf/DrugShortageReport-Final.pdf. 

At the request of some Members of Congress in 2004, Professor Marv Shepherd 

of the University of Texas at Austin provided a comparative analysis of the size of 

the pharmaceutical market in the United States and Canada. By comparing the 

total number of prescription drugs dispensed in Canada with the number of prescriptions filled in the United States every day, Dr. Shepherd calculated that Canada’s annual supply of prescription drugs would be exhausted in 38 days if U.S. 

residents were to purchase all their prescriptions in Canada.1

This scenario is obviously meant to draw out the worst-case outcome but it effectively illustrates that bulk imports by the United States will very significantly curtail the supply available to Canadians. Indeed, as Table 2 illustrates, if 10 percent 

of U.S. prescriptions were filled in Canada, this would lead to a minimal increase 

in the size of U.S. supply while significantly reducing the amount of drugs available 

to Canadians. 

Table 2.—Projected Increase on U.S. Supply if 10% of America’s Prescriptions Were Filled in Canada 

Rank Product Number of 

U.S. Prescriptions 

10% of Canadian 

Supply 

Projected increase 

based on 10% of 

U.S. prescriptions filled 

in Canada 

1 Lipitor 79,170,000 1,124,000 1.4% 

2 Zocor 27,839,000 177,000 0.6% 

3 Nexium 27,341,000 194,000 0.7% 

4 Prevacid 25,020,000 175,000 0.7% 

8 Plavix 23,973,000 215,000 0.9% 

Note: Based on 2005 figures, IMS Health. 

To further illustrate the differences in size between the two pharmaceutical markets, the number of U.S. seniors is greater than the total Canadian population. To 

supply just half of U.S. seniors, Canada would have to increase its total annual prescription drug supply by 2.5 times, an increase that pharmaceutical companies 

would not be capable of achieving. 

Shortages of prescription drugs are already on the rise in Canada. The Canadian 

Pharmacists Association reported in 2004 that 80 percent of pharmacists had experienced one or more drug shortages weekly. Pharmacists surveyed also stated that 

shortages were becoming more frequent.2 Shortages are caused by a variety of factors ranging from issues with the manufacturing process to shortages of raw materials and also exports to the Unites States through Internet pharmacies. It is clear, 

however, that actively seeking bulk purchases from Canada would seriously compound an existing problem with the Canadian supply. 

2. A Threat to the Integrity of Canada’s Price-Control Regimen 

If passed, the Pharmaceutical Market Access and Drug Safety Act of 2007 will, in 

effect, distort and disrupt the Canadian pharmaceutical market. It will do so by providing a strong incentive to big-box retailers present in Canada (either American 

owned or not) to re-route their stock of price-controlled pharmaceutical products for 

sale at a higher margin in their U.S. stores. This practice, known as ‘‘arbitrage,’’ 

would completely corrupt Canada’s price-control regimen. 

The resulting shortages will unavoidably lead to higher prices in Canada, negating the intended benefit of this legislation to the U.S. 

Canadian provinces already face tremendous pressure to keep the costs of 

healthcare manageable. This bill could seriously compromise the various measures 

put in place in Canada to negotiate lower prices for prescription medication. Not 

only would this legislation lead to shortages for Canadians, it could possibly force 

provincial governments to further limit the number of drugs placed on their 

formularies, thereby further penalizing Canadian patients by limiting their therapeutic options. 

3. Limited Benefit to the United States 

Although the impacts of bulk importation on Canada’s domestic drug supply and 

on Canadian patients is real, what is less clear is the net benefit the legalization 

of bulk imports would have on America’s supply and American consumers. 

97 

3Department of Health and Human Services, Report On Prescription Drug Importation, December 2004, p. 65, http://www.hhs.gov/importtaskforce/Report1220.pdf. 

Given the small size of the Canadian market, it comes as no surprise that the 

U.S. Department of Health and Human Services concluded in December 2004 that 

‘‘total savings to drug buyers from legalized commercial importation would be one 

to 2 percent of total drug spending and much less than international price comparisons might suggest. The savings going directly to individuals would be less than 1 

percent of total spending. Most of the savings would likely go to third party payers, 

such as insurance companies and HMOs.’’ 3

Conclusion 

Canada’s drug supply and price control systems were intended to meet the health 

care needs of Canadians, not to provide Americans with a quick fix or a band-aid 

solution to the cost of prescription drugs in your country. The real purpose of this 

bill is not the importation of cheaper prescription drugs, but rather the importation 

into the United States of Canadian price controls. The United States should not be 

cherry picking parts of Canada’s healthcare system. 

Once U.S. demand depletes Canadian stocks, prices will almost certainly rise, narrowing or possibly even eliminating the difference between U.S. and Canadian pharmaceutical prices. In short, there is no long-term advantage to be gained in raiding 

Canada’s regulated market. Further, there is always the likelihood that the Canadian Parliament would simply ban bulk exports of prescription drugs to the United 

States. The undersigned organizations have called on the government of Canada to 

institute such a ban, immediately, in order to protect the Canadian drug supply and 

pricing system and to protect Canadian patients. In fact, Canada’s Health Minister 

has recently indicated to our organizations a willingness to pass legislation that 

would do exactly this. 

The Pharmaceutical Market Access and Drug Safety Act of 2007 is deeply flawed. 

It will not solve the problems of high drug costs in the U.S. but will certainly increase prices paid by Canadians and restrict the number and quantity of prescription drugs available to Canadian patients. 

If adopted, it is clear that this proposed legislation will strain Canada-U.S. relations. We urge Members of Congress to consider this possibility. We call upon you 

to see beyond the narrow scope of domestic issues, and to consider the full range 

of consequences that would attend the passage of this legislation. 

JEFF POSTON, 

Executive Director, 

Canadian Pharmacists Association. 

MARC KEALEY, 

CEO,

Ontario Pharmacists’ Association. 

LOUISE BINDER, 

Chair,

Best Medicines Coalition. 

PREPARED STATEMENT OF PETER PITTS, PRESIDENT, CENTER FOR MEDICINE IN THE PUBLIC INTEREST

Mark Twain once said that there’s a simple solution to every complicated problem—and it’s usually wrong. 

The issue of broader access to safe and effective drugs is an extraordinarily complicated problem. 

And importation of foreign drugs is a simplistic solution with a container-full of 

unintended consequences. 

Let me get one thing out of the way right away. If you walk into a pharmacy in 

Windsor, Ontario and have your prescription filled by a real pharmacist—the drugs 

you receive will be both safe and effective. 

But—when the ‘‘learned intermediary’’—a doctor or pharmacist—is replaced by a 

greedy intermediary (a storefront drug dealer or an unregulated Internet site) then 

all bets are off. Profiteers masquerading as pharmacists bode poorly for both safety 

and effectiveness. Those who support importation of foreign drugs are endangering 

the lives of Americans. 

Recently an 81-year-old man suffering from epilepsy and an enlarged prostate 

purchased what he was led to believe were FDA-approved drugs from a website purportedly representing a Canadian pharmacy. 

98 

Upon receipt, he noticed that they were from India. He called the FDA, and we 

determined that not only were the drugs not from Canada, but they weren’t even 

approved for use in the United States. 

Nature abhors a vacuum. Large-scale importation (because those floodgates can’t 

be opened only part way) will create the silent sound of drugs crossing the border 

from Canada and thru Canada into the United States. 

And that vacuum won’t be refilled with safe and effective drugs. 

They’ll be replaced with unapproved knock-offs, gray market substitutes, counterfeits, and similares from South America coming into the U.S. thru Canada. In fact, 

that’s already happening today. 

Recently, the Canadian Health Minister who, under tremendous political pressure 

to continue a charade, instead told the truth about the cross-border drug trade and 

the dangers that it poses to both Americans and Canadians. 

‘‘I want to make sure that we don’t have . . . 250 million Americans buying drugs 

in Canada,’’ he said in an interview Dec. 12 on a CTV television show in Canada. 

‘‘We cannot be the drugstore for the United States.’’ 

Indeed. The Minister clearly sees that as the Internet pharmacy cowboys soak up 

the Canadian drug supply for their own profit, domestic Canadian pharmacists are 

reporting more and more shortages. 

What’s more, our neighbors to the north are becoming ever-more concerned about 

medicines from nations outside their regulatory purview—drugs that may be subpotent, superpotent, expired, or just plain counterfeit. 

The Canadian Health Minister recognizes the danger to the public health of Canada and his government is preparing to take action. Any American who wants a prescription from a Canadian pharmacy may soon be required to first visit, in person, 

with a physician in Canada. 

Why such a dramatic departure from previous practices? Consider this . . . 

Recently, a doctor in Toronto was indicted for co-signing 24,212 prescriptions for American patients he had never seen—at $10 a pop. Health Canada means business, because when doctors start selling their signatures, health care consumers are 

being sold a bill of goods. 

Canada’s new policy will end importation ‘‘as we know it.’’ The fantasy of ‘‘Canada-only’’ drugs will be showed to be just that. And, according to a recent poll, 54 

percent of Americans oppose importing drugs from European countries. 

The FDA is faced with enough challenges policing drug safety at home; do we 

really want them to stretch their resources even further and become responsible for 

drug safety globally? 

According to the recent report issued under the signature of Admiral Richard 

Carmona, the Surgeon General of the United States, opening up our borders to 

drugs ‘‘from Canada’’ would result in an uncontrollable influx of untested, impure, 

expired, and counterfeit drugs from around the world. That’s just a fact. It may not 

be politically popular, but facts are stubborn things. 

The various state and local websites promising something for nothing have received, according to a recent Wall Street Journal article, ‘‘Tepid response.’’ 

That article continues, ‘‘With great fanfare, at least nine states over the past year 

launched websites to help their residents buy inexpensive prescription drugs from 

Canada. But so far, the sites aren’t doing much business.’’ 

Fortunately, the American consumer is smarter than a lot of demagogues give 

them credit for. 

People ask me—aren’t the drugs from Canada coming into the U.S. genuine? Well, 

I can tell you this—the oxycontin and vicodin, the darvocet and the valium are— 

at least for now. 

Illegal, unsafe importation presents the very real danger of turning the Internet 

into the 21st century’s virtual drug cartel. And we must not let that happen. 

‘‘Buyer Beware’’ is bad health care practice and even worse health care policy. 

Americans deserve both safety and savings. Trade-offs are just not acceptable. 

When the Governor of New Hampshire said he was going to start allowing the 

importation of Canadian drugs, my sound-bite was that while ‘‘Live free or Die’’ is 

a great state motto, it’s irresponsible health care policy. 

But consider Minnesota. Recently Governor Tim Pawlenty launched a state-endorsed website called ‘‘Minnesota RXConnect.’’ This website provides both information on and facilitation to Canadian websites that illegally sell non-FDA approved 

pharmaceuticals. This action is unsafe, unsound, and ill-considered. 

When you recommend that citizens go outside of our regulatory system and enter 

into a ‘‘buyer beware’’ gray zone, you assist those who put profits before patient 

health and, by the way, shine a bright light on a path that can (and, indeed, is) 

used not only by profiteers masquerading as pharmacists, but by outright criminals 

who do not pause before actively feeding counterfeit drugs into the marketplace. 

99 

During pre-announced visit by Minnesota State officials Canadian pharmacies 

were observed engaging in dangerous practices. Minnesota state officials noted dozens of safety problems. For example: 

• One pharmacy had its pharmacists check 100 new prescriptions or 300 refill 

prescriptions per hour, a volume so high that there is no way to assure safety. 

• One pharmacy failed to label its products, instead they just shipped the labels 

unattached in the same shipping container, even when patients received multiple medications in one shipment. 

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

• One pharmacy had no policy in place for drug recalls. Representatives of the 

pharmacy allegedly said that the patient could contact the pharmacy about a 

recall ‘‘if they wished’’. 

• One pharmacy re-dispensed medicines that were not labeled and apparently 

had been previously returned by U.S. Customs. 

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

• All of the pharmacies generally allowed customers to fax in their own prescriptions. This not only fails to assure the validity of the prescription; it means that 

patients can get multiple drug orders from a single prescription, including for 

more risky drugs. 

• Only one of the pharmacies visited had a thermometer in their refrigerator to 

verify that labeled storage requirements were being met for refrigerated products. 

• Many drugs obtained through at least one of the pharmacies were apparently 

not even of Canadian origin, and many of the drugs were obtained from a difficult-to-follow path of writing and rewriting prescriptions across multiple Canadian provinces. 

• Equally concerning was the statement from one of the pharmacy presidents who 

allegedly said, ‘‘We won’t have any problems getting drugs. We have creative 

ways to get them.’’ 

And these were licensed Canadian pharmarcies! 

A one-time pre-arranged ‘‘visit’’ to any Internet pharmacy is no substitute for a 

comprehensive system for assuring the safety of the prescription drugs used by 

Americans. 

Minnesota officials knew these facts and still went ahead with their program. 

Wisconsin residents who used Governor Doyle’s website received unapproved 

generics in place of the brand name medicines they were promised—despite their 

contractual promise to the Governor that they would only provide ‘‘FDA-Approved’’ 

drugs. 

Sometimes a bargain is just too expensive—and nowhere is that more true then 

when it comes to counterfeit prescription medicines—the inevitable follow-on of the 

drug importation schemes under consideration by Congress. 

Around the world, millions of people are exposed to a real health threat every 

day—the danger of taking the wrong medication. This spreading problem has nothing to do with patients mixing up their pills. Rather, it’s caused by the proliferation 

of counterfeit drug traffickers, who are profiting immensely from selling fake medicines. 

To combat this threat, the FDA requires distributors to keep detailed records of 

the sources of the medications they dispense. But that’s a futile undertaking. Drug 

counterfeiters have become so sophisticated, they can produce drugs and packaging 

that cannot be differentiated from the real thing without complex chemical analysis. 

Paper ‘‘pedigrees’’ are next to useless. 

With huge profits, counterfeiting is increasing at a phenomenal pace. The Center 

for Medicine in the Public Interest estimates that counterfeit-drug commerce will 

grow 13 percent annually through 2010. Counterfeit sales are increasing at nearly 

twice the rate of legitimate pharmaceutical sales. 

Illegal drugs are a money machine. In 2010, it’s estimated that fake drugs will generate $75 billion in revenues—a 92 percent increase from 2005. And the risks 

of detection and prosecution are low. 

Authorities are concerned. The EU recently released statistics on counterfeit-drug 

sales in Europe. Canadian authorities have made some high-profile arrests. But 

overall, the results of enforcement have been marginal. 

Two years ago, when the FDA claimed that counterfeit drugs were being used to 

fund global terrorism, some politicians accused the agency of being in the pocket of 

100 

Big Pharma. Today, these same politicians are strangely silent. The recent news 

that North Korea has gone into the business of manufacturing and selling counterfeit drugs has put a muzzle on the anti-pharma gang. Trashing patents to produce 

generics is one thing. Manufacturing totally useless fakes is entirely different. 

It’s not a stretch to call it health care terrorism. 

The issue is global. National borders mean nothing to these criminals. Pharmaceuticals are easily smuggled, because medical supplies are a humanitarian need. 

Law authorities are frequently stymied. Our FDA must work with the World Health 

Organization, Interpol and other international public health and law enforcement 

organizations. Jurisdictions overlap. Fake drugs, substituted for the real thing, 

move under the cover of aid efforts. And then both can be sold to double profits. 

The war against prescription-drug counterfeiters is hampered by what is known 

as ‘‘parallel trade.’’ Individual drug packages—140 million last year—are imported 

to the countries of the European Union. Once inside the EU, a wholesaler is allowed 

to repackage each one before sale. 

The intent is humanitarian. But the potential for abuse—and illegal profits—is 

enormous. At the most basic level, drugs are mislabeled. Dosages are misstated; a 

label indicates tablets instead of capsules; expiration dates don’t match the medication; and labels are in the wrong language or outdated. 

Even when the ‘‘confusion’’ is unintentional, the results are dangerous. A drug 

purchased by a consumer from an Internet pharmacy purported to come from a British pharmacist could originate in any EU nation. In Britain, it’s estimated that parallel-traded medicines account for approximately 20 percent of all prescriptions 

filled. No one really knows what’s happening in America. 

Since the EU does not require the recording of batch numbers for parallel-imported medicines, there is no way to track shipments that are recalled. If a batch 

of medicines originally intended for sale in Greece is recalled, tracing where the entire batch has gone (e.g., from Athens to London through Canada to Indianapolis) 

is impossible. 

More dangerous than the lack of quality control is that such practices allow counterfeiters to integrate their products into legitimate supply chains. The WHO estimates that 8 percent to 10 percent of the global medicine supply chain is counterfeit—rising to 25 percent or higher in some countries. 

The largest counterfeit market with close proximity to the EU free trade zone is 

Russia, where approximately 12 percent of drugs are said to be counterfeit. Now 

that the Baltic nations of Latvia, Lithuania, and Estonia have joined the EU, the 

WHO has warned that there is increased risk of counterfeits entering the supply 

chain. 

It’s time to stop accusing the drug industry of crying wolf about counterfeit drugs. 

Policymakers must confront the serious business of ensuring that drugs entering 

our markets are legitimate and safe. It’s an area where mistakes are dangerous to 

everyone’s health. 

RESPONSE TO WRITTEN QUESTION SUBMITTED BY HON. BYRON L. DORGAN TO

RANDALL W. LUTTER, PH.D. 

Question. The main point of your testimony was that counterfeit drugs are entering the U.S. drug supply. You also talked about online pharmacies that consumers 

thought were in Canada but turned out to be located in other countries. I don’t 

think anyone disagrees that there are currently no regulations in place to protect 

consumers who are often forced to decide whether to import a prescription drug or 

forego filling a prescription altogether. 

Where we disagree is what should be done to protect consumers, which is the mission of your agency. As you know, I have introduced legislation with Senators 

Snowe, Grassley, Kennedy, McCain, Stabenow and many others to put in place an 

effective regulatory framework to allow consumers to safely import more affordable, 

FDA-approved prescription drugs from Canada and several other countries. I was 

troubled that you had not taken the time to read this comprehensive legislation. 

After you take the time to review our legislation, please let me know if you agree 

with the conclusion of Former FDA Commissioner David Kessler that the Pharmaceutical Market Access and Drug Safety Act of 2007: 

1. ‘‘Provides a sound framework for assuring that imported drugs are safe and 

effective.’’ 

2. ‘‘Provides additional resources to the agency to run such a program.’’ 

3. Ensures ‘‘oversight by FDA of the chain of custody of imported drugs back 

to FDA-inspected plants.’’ 

101 

1The 2004 HHS Task Force report noted that individuals in the U.S. imported from Canada 

some $695 million of drugs amounting to 12 million prescriptions in 2003. Assuming that each 

parcel contained two and a half prescriptions, the value of a parcel would be approximately 

$145, so that the revenues to FDA from each parcel would be about $3.62, if the fees were 

capped at 2.5 percent of the price of qualifying drugs being imported. But the HHS Task Force 

report notes that the cost of inspecting packages in 2003 was about $264 per package containing 

drugs, suggesting that the fees provided by the bill would be grossly inadequate for the tasks 

asked of FDA. Put differently, the fee revenue from importation of drugs from Canada at this 

scale, if capped at 2.5 percent of the price of the imported drugs, would provide less than $20 

million to FDA. The HHS Task Force report, however, noted that the total cost of inspecting 

Continued 

4. Provides ‘‘a mechanism to review imported drugs to ensure that they meet 

FDA’s approval standards.’’ 

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

If you disagree with Dr. Kessler, please provide a detailed explanation. 

Answer. Thank you for the opportunity to testify at the March 7, 2007, hearing 

entitled, ‘‘Policy Implications of Pharmaceutical Importation for U.S. Consumers,’’ 

before the Senate Subcommittee on Interstate Commerce, Trade, and Tourism. The 

Food and Drug Administration (FDA or the agency) is responding to address the 

March 9, 2007, correspondence you sent in follow up to that hearing. 

Your correspondence included statements made by former FDA Commissioner, 

David Kessler, at an April 19, 2005, hearing entitled, ‘‘Examining S. 334, to amend 

the Federal Food, Drug, and Cosmetic Act with respect to the importation of prescription drugs,’’ held by the Senate Committee on Health, Education, Labor, and 

Pensions. Dr. Kessler’s statements focused on the issues of safety, resources, supply 

chain security, and standards for approval of foreign versions of FDA-approved 

drugs. You asked that I explain my views on the ‘‘Pharmaceutical Market Access 

and Drug Safety Act of 2007’’ in the context of these issues. The bulk of this response details our views about these issues. 

I would like to start, however, by commending you for your efforts to address 

American consumers’ concerns regarding access to affordable prescription medications. Nevertheless, the agency continues to have concerns with enacting such a 

sweeping importation program and fears that intermediaries would likely swallow 

the bulk of cost-savings, preventing American consumers from enjoying much, if 

any, practical benefit from such a program. We expect such a result might lead consumers to continue to look for substantial savings on their prescription medications 

by seeking products outside the legalized importation system, just as some do now. 

We continue to observe that many consumers buy drugs from foreign Internet 

sources even though generic versions of those products are approved by FDA and 

such products are generally cheaper in the United States than abroad. 

We note that legalizing commercial importation may have unintended effects on 

protection of intellectual property and may reduce incentives for research and development, as noted in the 2004 report issued by the Health and Human Services’ 

(HHS) Task Force Report on Drug Importation. 

Safety Concerns 

We have safety concerns related to both the identification of unsafe and or noncompliant drug products and about the substitutability of foreign products for domestic products. 

Identifying Unsafe/Non-compliant Drug Products 

The section of the bill that would allow individuals to import a qualifying drug 

from a registered exporter would likely pose an overwhelming resource burden for 

the agency and create significant safety concerns. Under such a program, the anticipated high volume of products would make it extremely difficult for FDA and U.S. 

Customs and Border Protection officials to examine adequately all of the personally 

imported drug products to ensure that they comply. In fact, the HHS Task Force 

estimated that it would have cost $3 billion annually to examine and process each 

of the 10 million packages that entered the U.S. in 2003. Even if a lower level of 

examination were considered adequate, the costs to FDA would still be very high. 

Despite its registration and inspection fee provisions, the bill likely provides inadequate resources to conduct such examination on a routine basis. Resources are limited to 2.5 percent of the total price of qualifying drugs imported by registered exporters, an amount likely to be a small fraction of the cost of inspecting packages 

at international mail facilities.1 This is a particular concern because, once personal 

102 

all incoming shipments in 2003 (including products from countries other than Canada), would 

have amounted to nearly $3 billion, an amount more than 100 times greater. 

importation is given the appearance of legality, consumers may be less vigilant in 

scrutinizing the drug shipments they receive from abroad. 

S. 242 would establish a complicated system for the regulation of imported drugs. 

This complex system is so vast that it would be enormously resource-intensive, likely much greater than the proposed registration fees and inspection fees could support. The bill and its associated fees also do not appear to account for the costs of 

the increased volume of packages likely to inundate the U.S., or address the accompanying and likely substantial enforcement work that will arise as a result of legalized importation as more unscrupulous vendors set up shop to circumvent the new 

U.S. system. 

Lack of Substitutability 

The proposed bill provides a mechanism for foreign imported products to be approved for distribution in the U.S. even though these products may not be bioequivalent to the FDA-approved product. This mechanism seems to by-pass the existing drug approval process for drug products that are not bioequivalent to an FDAapproved product, which is through the submission of a new drug application (NDA) 

that is thoroughly reviewed for safety and efficacy. Ultimately, the bill appears to 

establish for imported drugs an alternative to FDA’s existing generic drugs program. 

The bill would allow non-bioequivalent products to be sold in the U.S. as approved 

‘‘variations’’ of the innovator product under the existing NDA, which would create 

confusion for doctors and pharmacists in prescribing or dispensing, respectively. Dr. 

Todd Cecil of the U.S. Pharmacopeia testified at the April 2005 Senate HELP hearing regarding pharmaceutical equivalence and bioequivalence and his concerns with 

this bill. In addition, doctors cannot anticipate which version of a drug product their 

patients will receive, and pharmacists may not know which version of a drug the 

doctor intended to prescribe. The possibility of confusion is significant and poses a 

real public health concern as this increases the chance of error in prescribing and/ 

or dispensing of medications. In addition, the domestic and foreign versions of prescription drugs may become commingled in the drug supply chain. It is unclear 

whether a patient will be able to specify if he wants the foreign version or the original FDA-approved version when he gets his prescription filled at the pharmacy or 

receives medication at a hospital or other medical treatment facility. 

Inadequate Resources 

It is uncertain whether the anticipated fee revenues will be realized because the 

market response to legalization of importation cannot be accurately predicted. This 

uncertainty could pose problems for FDA’s program, because large costs of starting 

and developing a program to regulate imports will have to be incurred even if the 

volume of legalized imports is initially low. Although the bill does assume certain 

sales volumes in the first several years for purposes of collecting inspection fees, 

with only a few registered importers and exporters participating initially, the high 

pro rata share of fees may actually discourage participation and make it difficult 

for FDA to collect fees at the designated levels. Even once a program is developed, 

the bill is not likely to provide the necessary funds to continue an adequate regulatory program if inspection fees are low because imports do not reach the anticipated levels. 

Supply Chain Security 

We are proud of FDA’s efforts with supply chain stakeholders and states to maintain a safe and secure drug supply in the U.S. that is premised on a closed, tightly 

regulated system. The type of drug importation program in the bill would increase 

the number of foreign entities FDA would have to monitor and regulate. It can be 

difficult for FDA enforcement to reach foreign entities violating our laws and regulations. This bill would open the door to more entities outside our domestic legal 

framework. We also have grave concerns for consumers who may be harmed from 

products from these foreign sources. The bill does not take into account protecting 

the rights of the consumer if they are injured after using one of these products. 

As we all agree, counterfeit drugs must be kept out of the U.S. drug supply chain. 

FDA is currently using its resources and authorities as efficiently as possible to secure the drug supply chain and protect American consumers from counterfeit and 

diverted drugs. Opening the U.S. drug distribution system to foreign markets would 

provide more opportunity for counterfeit drugs to enter our currently closed system 

and would significantly complicate FDA’s efforts to investigate irregularities in the 

drug supply chain. 

103 

Conducting foreign investigations and prosecutions is inherently costly and difficult and often is complicated by language barriers and issues of extraterritorial jurisdiction and extradition. We are concerned that the bill does not provide sufficient 

enforcement tools and penalties to deter foreign entities from introducing counterfeit 

or otherwise substandard drugs into the U.S. drug supply chain. 

Approval of Foreign Versions 

We believe the bill creates complicated application and inspection requirements 

for imported ‘‘foreign’’ versions of FDA-approved products. These requirements 

would be difficult to implement, as each foreign country has its own regulatory 

scheme and requirements for the information necessary to approve a drug product. 

FDA would essentially have to review foreign information in a foreign format, all 

in less time than is required for review of traditional NDAs. In addition, the bill 

would require imported ‘‘foreign’’ versions of a drug bear the labeling associated 

with the original FDA-approved product. This practice would essentially legalize the 

misbranding of these products, and raises concerns for FDA not only in the approval 

context but also in the counterfeits context. It is difficult enough for FDA and other 

Federal enforcement agencies to detect counterfeit drug products and packaging; 

creating a mechanism that would allow persons to label foreign drugs with reproductions of FDA-approved labeling would make it even harder to distinguish between ‘‘legal’’ foreign products and counterfeits. 

U.S. consumers currently have a number of options available to them when looking for affordable medications within the closed U.S. drug distribution system. Many 

essential drugs have a generic alternative and some even have many generics, 

which are generally less expensive than the brand product. We continue to find that 

many consumers currently buying foreign products are actually trying to purchase, 

or are unknowingly receiving, a foreign product that often is more expensive than 

the U.S. product. In addition, the consumers are at risk when receiving foreign drug 

products, as there are documented cases where the wrong medication was received 

(the haloperidol case mentioned in my testimony). Many pharmaceutical companies 

and Pharmaceutical Research and Manufacturers Association of America offer discounts and sometimes even free medications for consumers who cannot afford them. 

Medicare Part D has also helped some seniors cut their prescription costs. Consumers should not feel restricted to higher priced innovator (brand) products. 

Consumers must also understand that if a medication is costly, they should discuss other treatment options with their doctor and pharmacist, as most often there 

are lower-cost alternatives available. We will continue to strive to make more affordable medicines available to consumers, but we remain concerned about the implications of legalizing drug importation as one of those options. 

In conclusion, I would like to reiterate concerns about the economic implications 

of prescription drug importation, as stated in the 2004 HHS Task Force Report on 

Drug Importation. Even if all the safety concerns could be allayed, these concerns 

would remain: that savings to U.S. consumers would be small as a percent of total 

drug spending; that implementing such a program would incur significant costs; and 

that legalized importation would likely adversely affect the future development of 

new drugs for American consumers. In 2004, the HHS Task Force Report noted that 

generic drugs account for most prescription drugs used in the U.S. and that these 

are usually less expensive in the U.S. than abroad. We thus have a well-functioning 

system of intellectual property rights that balances the short-term interests of consumers with the long-term research incentives. 

Thank you for the opportunity to address some of our concerns with S. 242. 

104 

* The views expressed are those of Benjamin Zycher, and do not purport to represent the 

views of the Pacific Research Institute for Public Policy or of any of its officers or contributors. 1See, e.g., U.S. Department of Health and Human Services, Report on Prescription Drug Importation, December 2004, pp. 65–67. 2See Ibid., chapters 7 and 8. See also U.S. Department of Commerce, International Trade Administration, Pharmaceutical Price Controls in OECD Countries: Implications for U.S. Consumers, Pricing, Research and Development and Innovation, December 2004, chapters 2–4. 3See, e.g., Frank R. Lichtenberg, ‘‘Are the Benefits of Newer Drugs Worth Their Cost? Evidence From the 1996 MEPS,’’ Health Affairs 20(5), September/October 2001, pp. 241–51. 

ATTACHMENT 1 

PREPARED STATEMENT OF DR. BENJAMIN ZYCHER, SENIOR FELLOW IN ECONOMICS, 

PACIFIC RESEARCH INSTITUTE FOR PUBLIC POLICY * 

BEFORE THE COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS

U.S. SENATE—FEBRUARY 17, 2005 

Pharmaceutical Importation, Price Controls, Federal Price Negotiations, 

and the Interests of Consumers 

Thank you, Mr. Chairman, and distinguished members of this committee, for this 

opportunity to offer my perspective on the now-prominent issues of pharmaceutical 

importation, domestic/foreign pricing differentials, and the long-term economic effects of pharmaceutical price controls and Federal price negotiations, particularly in 

the context of consumer well-being. 

Well-known principles of economic analysis and existing bodies of data not subject 

to serious challenge yield several conclusions on the prospective adverse effects of 

the importation of price-controlled pharmaceuticals into the U.S. Moreover, the recent ‘‘free-market’’ argument favoring the importation of price-controlled pharmaceuticals is deeply flawed, as discussed below. Similarly, the perverse market effects 

of a possible imposition of Federal negotiating power—Federal ‘‘interference’’—in the 

context of the Medicare program are not difficult to predict. Alternatively, U.S. consumers would benefit from efforts to end the free ride that foreign consumers are 

able to obtain on U.S. research and development investments, financed largely by 

U.S. consumers. These central observations and some other ancillary arguments 

form the basis of my testimony today. 

I. Pharmaceuticals Subject to Price Controls Overseas Are Not ‘‘Cheap’’ 

The true economic cost of pharmaceuticals—that is, the real resource cost to the 

economy of developing and producing them—cannot be reduced without improvements in the economic and regulatory environment, a broad set of issues outside the 

scope of today’s hearing. The importation of drugs subject to foreign price controls, 

far from reducing real economic costs, by necessity would import those price controls 

into the U.S. in terms of prices received by manufacturers. To the extent that lower 

prices for consumers result, that would not represent a true reduction in ‘‘costs’’; instead it would be a wealth transfer from pharmaceutical producers and possibly 

from foreign consumers to U.S. consumers in the short run, with adverse consequences for U.S. consumers in long run, as discussed below. The more likely short 

run outcome for U.S. consumers, depending on market conditions, would be little 

or no price reductions but instead price increases for various market participants 

(intermediaries) in the supply chain, since the importation of price-controlled pharmaceuticals would not affect either market demand conditions or market supply 

conditions on the margin.1

In the long run—which is not necessarily a long period of time—it is incontrovertible that lower prices will reduce the marginal efficiency of investment, that is, the 

incentive to invest in the research and development of new pharmaceuticals.2 Since 

ultimately it is anticipated consumer demands—for cures, for disease alleviation, for 

better health, and for reduced suffering—that drive the research and development 

choices of profit-seeking firms, lower anticipated prices will reduce research and development investment and thus the future flow of new drugs. The adverse future 

effects in terms of fewer cures and greater suffering will be real economic costs attendant upon the importation of foreign price controls; but such costs will not appear directly in government budgets or private balance sheets, except to the (significant) extent that more-costly hospitalizations and other substitute medical procedures will be used in place of the drugs that will have failed to have been developed 

due to the long term effects of price controls.3 Thus will the adoption of price controls through the vehicle of the importation of price-controlled drugs mortgage the 

105 

4See U.S. Department of Commerce, op. cit., chapter 8. 5 In order to see this, suppose that market conditions shifted for some reason, yielding a reduction in future pharmaceutical demand and prices. That would shift the entire distribution 

of investment returns, but would not bias future returns in favor of losses. 6This seems to be the argument of Professor Kevin Outterson in his ‘‘Statement’’ to the Committee on Ways and Means, U.S. House of Representatives (undated), on the U.S.-Australia Free 

Trade Agreement. 7See S. 334, the ‘‘Pharmaceutical Market Access and Drug Safety Act of 2005’’; and S. 109, 

the ‘‘Pharmaceutical Market Access Act of 2005.’’ 8See fn. 1, supra. 9 An exception is marginal production cost for biologics, a topic outside the scope of this testimony. 10See, e.g., J. Dimasi, R. Hansen, and H. Grabowski, ‘‘The Price on Innovation: New Estimates of Drug Development Costs,’’ Journal of Health Economics, 22 (2003), pp. 151–185. See 

also Christopher P. Adams and Van V. Brantner, ‘‘Estimating the Costs of New Drug Development: Is It Really $802M?’’ December 2004. 

future in favor of the present by weakening incentives for research and development 

investment and other activities yielding streams of new and improved medicines. 

Based upon the recent experience in the non-U.S. OECD and upon simulation exercises and other analyses, the magnitude of this projected adverse research and development effect varies somewhat, although it is never predicted to be small.4 My 

view is that all of these estimates are biased downward because they fail to take 

into account the fact that the imposition of price controls, whether direct or indirect, 

introduces an asymmetry into the statistical distribution of future returns to research and development, in that the price controls have the effect of limiting (truncating) upside potential while leaving downside risk unaffected. This is an effect 

separate from the price reduction itself, the implication of which is that the long 

term effects of price controls in terms of a reduced flow of new and improved drugs 

is likely to prove larger rather than smaller.5

Some observers have argued that there can be an inefficiently large amount of 

pharmaceutical research and development investment, so that a reduced amount 

still may be efficient. High purported ‘‘profits’’ (either undefined or defined poorly) 

then are used to infer that current investment is too high.6 But if ‘‘profits’’ are 

(uncompetitively) high—adjusting for investment risk—we would expect to see significant entry into the market by new firms. We do not. 

More generally, the current emphasis by some commentators on total revenues or 

total profits as predictors of research and development incentives is incorrect. It is 

the marginal efficiency of investment for a particular research and development effort that is relevant. Consider, for example, a firm earning enormous profits, however defined; would it sink dollars into a project that it knows will not yield adequate returns (however broadly defined)? Regardless of overall revenues or profitability, firms have powerful incentives to make only efficient investments, that is, 

investments expected to yield at least normal rates of return with some allowance 

for risk. Price controls cannot further that outcome; and competitive capital markets 

will enforce such discipline. 

Finally, an accounting of the true cost of imported drugs subject to price controls 

must include some consideration of the safety problem, important socially in particular in the context of contagious diseases. That solutions to the safety problem 

are likely to prove highly elusive is evidenced by the fact that current legislation 

under discussion either shunts the issue aside completely, or apparently bestows an 

‘‘FDA-approved’’ imprimatur upon foreign plants not actually approved by the FDA.7

The safety problem is discussed in detail in the Department of Health and Human 

Services study noted above; I will not repeat its findings here.8

In short: As much as we want our medicines to be affordable, we also want them 

to be available when needed. 

II. U.S. Consumers Would Benefit From Policies Reducing the Foreign Free 

Ride 

The basic cost economics of pharmaceuticals are somewhat unique, in that large 

fixed costs (for research, development, and production facilities) are accompanied by 

small marginal production costs.9 The large fixed costs—over $800 million per 

drug 10—yield a body of knowledge, which itself is a classic collective (or ‘‘public’’) 

good in that those who can find ways to avoid paying their ‘‘fair’’ share thus obtain 

a free ride on the efforts of others to finance the research and development investment. Foreign price controls on drugs have the effect of yielding for foreign consumers just such a free ride at the expense of U.S. consumers. 

106 

11See Professor Kevin Outterson, op. cit., at p. 2. 12Whether U.S. producers face competitive or monopolistic market conditions, the increased 

prices from overseas would increase long run incentives to produce new drugs. Because demand 

is an inverse function of price—it is ‘‘downward sloping’’—the greater flow of drugs would put 

downward pressure on prices. 13The latter assumption would be highly questionable and inconsistent with the evidence, but 

that is an issue outside the scope of this testimony. 

Some have argued that policies designed to increase foreign prices would not yield 

benefits for U.S. consumers because ‘‘drug companies are under no obligation to 

lower U.S. prices as [foreign] prices increase.’’ 11

That argument is incorrect, regardless of the assumption one makes about the 

competitiveness of the U.S. pharmaceutical market. From the viewpoint of U.S. 

pharmaceutical producers, an increase in foreign prices analytically is equivalent to 

an increase in foreign demand; total perceived worldwide demand would increase, 

yielding an increase in the marginal efficiency of research and development investment, and so a long run increase in that investment and in the flow of new drugs. 

But, ceteris paribus, U.S. demand would not change, so that the increased long run 

supply of drugs would induce profit-seeking U.S. firms to reduce their U.S. prices, 

that is, would put downward pressure on U.S. prices.12 Again: This is true whether 

the U.S. market is viewed as perfectly competitive or as a perfectly discriminating 

monopoly.13 In the short run, it is unclear whether U.S. prices would fall; demand 

and cost conditions would not change, but producers might have incentives to cut 

prices in the expectation of increased competition over the longer term. 

III. The ‘‘Free-Market’’ Argument Favoring Drug Importation Is 

Fundamentally Flawed 

Some prominent supporters of free markets have argued recently in favor of the 

importation of price-controlled drugs. The argument in summary is that an end to 

the import ban would force pharmaceutical producers to negotiate more stringently 

with foreign governments over the prices for drugs, because the prospect of ‘‘cheap’’ 

foreign drugs flooding the U.S. market would make it difficult to preserve U.S. 

prices sufficient to cover high R&D costs. The producers also could insist upon ‘‘no 

foreign resale’’ provisions in contracts, which could be enforced by limiting sales to 

the foreign governments. 

This argument is fundamentally flawed. Most foreign governments under their 

patent laws reserve the right to engage in compulsory licensing under various conditions, one of which is a ‘‘failure to work the patent.’’ The precise meaning of that 

phrase is unclear, but to foreign officials it might mean a failure to sell all that is 

demanded at the controlled price. What is clear is that foreigners will not be happy 

to pay more for medicine. And so it is unlikely that foreigners faced with substantial 

increases in their drug costs would be fastidious in their adherence to the rule of 

patent or international trade law, as interpreted by U.S. drug producers and some 

U.S. officials. Indeed, compulsory licensing already has been used, so that price negotiations and trade environments are highly vulnerable even to implicit threats of 

patent theft. 

Moreover, under some prominent interpretations of patent law, producers control 

their patents but not the resale of their patented products. Would contracts to limit 

resale of price-controlled drugs, even if they could be negotiated and enforced, survive challenge under this interpretation? Such uncertainties inevitably will force the 

producers to sign agreements eroding their ability to recover R&D costs or to protect 

their intellectual property. 

The basic problem with the ‘‘free market’’ position in support of drug importation 

is that it tries to reconcile free markets domestically with price controls overseas. 

That is a circle that cannot be squared as long as foreign governments can steal 

patents; and in the final analysis, it is likely to be difficult and time-consuming to 

stop a government intent on doing so. What is needed instead are U.S. Government 

efforts, perhaps in the context of trade policy, designed to end the free ride that 

many foreigners now obtain at the expense of U.S. consumers. That many U.S. officials now attack drug producers—whose investments have saved millions of lives— 

rather than the foreign theft of U.S. intellectual property is unlikely to prove salutary. 

IV. Federal Price Negotiation Would Not Serve the Interests of Consumers 

Consider a large pharmacy chain or other sizable intermediary between pharmaceutical producers and consumers. That intermediary must balance two competing 

objectives, which actually are the objectives of its customers. It seeks to reduce 

costs, and thus prices for its customers; and it seeks to preserve a formulary broader 

rather than narrower, so that it can serve as broad a market as possible, that is, 

107 

14This essentially is monopoly power on the part of a buyer to force prices down. 15See, e.g., Sally C. Pipes, Miracle Cure: How To Solve America’s Health Care Crisis and Why 

Canada Isn’t the Answer, San Francisco: Pacific Research Institute, 2004, pp. 171–179. See also, 

Cambridge Pharma Consultancy, ‘‘Delays In Market Access,’’ December 2002. 16See Institute of Medicine, Financing Vaccines in the 21st Century, Washington D.C.: National Academies Press, 2004, ch. 5. See also, The Global Vaccine Shortage: The Threat To Children And What To Do About It, Proceedings of the Albert B. Sabin Vaccine Institute Ninth Annual Vaccine Colloquium, 2003, pp. 25–33. 

preserve more rather than less consumer choice. Both objectives are driven by competition among pharmacies and other intermediaries; that these objectives conflict 

is obvious, so that private sector intermediaries, reflecting the preferences of their 

customers, must find ways to balance them. 

The more obvious difference between such private sector intermediaries and the 

Federal Government is the sheer size of the latter as a purchaser; it is almost axiomatic that the Federal Government has more monopsony power 14 than private sector intermediaries. At a more subtle level, the Federal Government has incentives 

in terms of the cost/formulary tradeoff incentives that differ substantially from those 

constraining private sector intermediaries. Budget pressures are strong at all times, 

so that incentives to negotiate substantial price reductions are powerful. But the 

Federal Government is not a profit-seeking firm, so that its incentives to satisfy its 

‘‘customers’’ in terms of broad formularies must be attenuated through political 

processes; voting is simply a weaker constraint than the ability of customers to take 

their business elsewhere. This is a common problem with public sector services: The 

tradeoff incentives between cost (budget) reduction and preservation of service quality systematically are different from those constraining private sector choices. This 

bias in favor of price reductions as opposed to formulary availability is obvious overseas,15 and arguably has affected U.S. consumers in the vaccine market.16

V. Conclusions 

The interests of consumers are served by a pharmaceutical sector offering medicines both affordable and available. More generally, consumers are served by economic efficiency, that is, policies yielding an aggregate output basket as valuable 

as possible. Policies that bestow benefits upon one set of consumers at the expense 

of others, perhaps in the future, are inconsistent with that goal; in particular, price 

controls are fundamentally incompatible with the operation of free or competitive 

markets, with the institutions of free trade, and with the interests of consumers. 

It is incontrovertible that the importation of pharmaceuticals subject to foreign price 

controls will have the effect of importing the price controls themselves, with clear 

and substantial adverse effects over the long term in terms of research and development incentives and the flow of new and improved medicines. Other analyses suggest that such policies will not save much even in the narrow dimension of budget 

dollars and drug spending; and the longer term costs in terms of substitution of 

costly substitute medical procedures and reduced human health outcomes are obvious. This committee would be wise to reject efforts to allow the importation of pharmaceuticals subject to foreign price controls. 

Instead, the pursuit of consumer well-being would be served by policies—perhaps 

in the context of trade negotiations—ending the free ride that foreign governments 

have garnered for themselves, through the imposition of price controls, at the expense of the U.S. market. Noninterference—a farsighted policy incorporated into the 

2003 Medicare legislation—with competitive private sector negotiations will further 

those consumer interests as well. 

ATTACHMENT 2 

RESPONSE TO WRITTEN QUESTIONS SUBMITTED FOR THE RECORD BY THE COMMITTEE

ON HEALTH, EDUCATION, LABOR AND PENSIONS, U.S. SENATE TO DR. BENJAMIN

ZYCHER, SENIOR FELLOW, PACIFIC RESEARCH INSTITUTE FOR PUBLIC POLICY, MARCH 2005 

Dear Mr. Chairman, and Distinguished Members of this Committee: 

I submit respectfully for the record the answers below to the written questions 

addressed to me. 

Questions From Senator Enzi 

Question 1. As I am sure you are aware, every free trade agreement that the 

United States has signed recognizes the importance of allowing legitimate domestic 

regulation. Both WTO agreements as well as NAFTA explicitly permit governments 

108 

1 Note that profit-seeking firms generally have efficient and powerful incentives to preserve 

the economic value of their brand names and thus the safety and effectiveness of their products. 

In the context of the pharmaceutical market, the problem of contagion may introduce a distortion, and the cost of policing counterfeit drugs may yield an efficient role for government activity. See, e.g., Benjamin Klein and Keith B. Leffler, ‘‘The Role of Market Forces in Assuring Contractual Performance,’’ Journal of Political Economy 89(4), 1981, pp. 615–641. 2The issue of the efficient structure and length of patent rights in the pharmaceutical context 

is not addressed here. 3The imposition of price controls is very different from differential pricing. Such ‘‘price discrimination’’ is efficient, fully consistent with competitive market behavior, and makes consumers better off by allocating fixed costs in accordance with differing valuations placed upon 

the knowledge capital yielded by pharmaceutical innovation, thus moving the production of 

pharmaceuticals closer to the efficient level. 

to restrict imports for a number of important purposes, like protecting public health 

and safety, and national security. Do you believe that permitting importation of 

pharmaceuticals from foreign nations works against such trade agreements? 

Answer. Throughout the postwar GATT and more recent WTO negotiating rounds 

and through the NAFTA process, the central purpose of liberalized trade has been 

the improvement of economic productivity and thus the long term well-being of consumers. That improvement is achieved through the reduction of artificial barriers 

to efficient resource allocation, so that individuals, firms, and economies can exploit 

both their own comparative advantages and those of others as well. In short: The 

central goal of free trade agreements is an expansion in the value of overall economic output, and so a reduction in the aggregate level of real prices. International 

trade in pharmaceuticals is fully consistent with that goal, subject to safety and 

other public health considerations,1 and subject to the absence of other policies that 

might obviate the gains that trade otherwise would yield. In the context of the international pharmaceutical market, foreign price controls are foremost among such 

perverse policies. Because of the basic economic conditions of pharmaceutical development and production—for the most part fixed costs are high while marginal production costs are low—foreign governments have strong incentives to obtain a ‘‘free 

ride’’ on (a substantial part of) the fixed costs financed by U.S. consumers, by imposing price controls on retail transactions. These foreign price controls impose several 

types of inefficiency costs, foremost among them an inefficient reduction in incentives for the development of new pharmaceuticals. Accordingly, the importation of 

pharmaceuticals subject to foreign price controls necessarily would introduce those 

controls into the U.S., either at wholesale or at retail depending upon market conditions; such pricing distortions and the perverse long term effects attendant upon 

them are inconsistent with the efficiency goals of free trade agreements, and so indeed would ‘‘work against such trade agreements.’’ This inconsistency would take 

the form of reduced and distorted pharmaceutical investment over the long term, 

thus increasing real prices by reducing the future availability of new and improved 

medicines. That outcome obviously is at odds with the central goal of efficient investment in the context of free trade agreements, thus reducing rather than expanding the value of aggregate output and consumer well-being. 

Question 2. Trade agreements such as the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) and NAFTA require governments to 

protect intellectual property rights. These agreements are designed to ensure the 

continuing viability of industries involved in the research and development of innovative products, and to prevent unfair competition from companies who would otherwise free-ride on the technology developed by others. Do you think that unauthorized importation of prescription pharmaceuticals would undermine the value and 

purpose of U.S. patent rights? 

Answer. The central economic purpose of patent rights is the creation of a temporary stream of ‘‘monopoly’’ returns to investment in pursuit of efficient investment 

incentives for innovation and research and development.2 These returns are engendered by a (marginal) revenue stream temporarily higher than otherwise would be 

the case; accordingly, any policies that reduce such revenue streams artificially indeed ‘‘would undermine the value and purpose of U.S. patent rights.’’ The importation of pharmaceuticals subject to price controls obviously would reduce the (expected) revenue stream for the given drugs (or drug class), and so would have the 

effect of undermining the goals of the patent system. Indeed, even without importation of pharmaceuticals, and even without compulsory licensing or other such policies, the imposition of price controls overseas interferes with patent rights by reducing the marginal revenues yielded by introduction of a new or improved medicine. 

(Merely consider the extreme case of a drug the price of which is controlled at zero; 

the patent value would be zero as well.) 3

109 

4 In order to see this, consider the case of a highly profitable pharmaceutical producer; would 

it invest in a drug subject to severe (future) price controls merely because overall profits are 

high? It will do that no more readily than bury a $100 bill in the hope that a money tree will 

sprout. 5See, e.g., Frank R. Lichtenberg, ‘‘Are the Benefits of Newer Drugs Worth Their Cost? Evidence From the 1996 MEPS,’’ Health Affairs 20(5), September/October 2001, pp. 241–51. See 

also Kevin M. Murphy and Robert H. Topel, eds., Measuring the Gains From Medical Research: 

An Economic Approach, Chicago: University of Chicago Press, 2003. Even with an adjustment 

for the costs of substitute medical procedures, such measured ‘‘costs’’ underestimate the adverse 

effects of pharmaceuticals made unavailable by the prior direct or indirect imposition of price 

controls because they exclude the real but difficult-to-measure costs of increased mortality, morbidity, and suffering. 6 Note that because pharmaceutical producers have incentives to invest only in drugs the development and production costs of which consumers are willing to bear, the reduced prices in 

the short run are likely to be offset at least fully by the longer term higher costs of reduced 

drug availability, as a first-order approximation. Moreover, the imposition of price controls 

might not yield price reductions at retail even in the short run, as the difference between controlled prices and market value might be captured in whole or in part by various transaction 

agents (‘‘middlemen’’) under a broad range of market conditions. 7See U.S. Department of Commerce, International Trade Administration, Pharmaceutical 

Price Controls in OECD Countries: Implications for U.S. Consumers, Pricing, Research and Development and Innovation, December 2004, chapter 8. 

Note also that neither overall firm ‘‘revenues’’ nor ‘‘profits’’ is the correct criterion 

for determining whether investment incentives will be efficient; instead we must ask 

whether a policy affects the marginal expected returns attendant upon investment 

in a given drug.4

Question 3. You indicate that the magnitude of the projected adverse effect of importation on research and development varies somewhat, ‘‘although it is never predicted to be small.’’ You also mention that all of the estimates are biased downward. 

What do you see as the realistic potential effect on research and development? Do 

you feel that even if importation leads to price reductions, U.S. consumers would 

end up sacrificing choice in favor of cost? 

Answer. The importation of pharmaceuticals subject to price controls would yield 

both reduced consumer choice and higher overall health care costs. The reduced consumer choice would be one central adverse effect of the lessened research, development, and innovation that inexorably will be engendered over the long run by price 

controls. The higher overall health care costs will be caused by the substitution of 

hospital and other types of medical services in place of the pharmaceuticals that will 

have failed to have been developed over time.5 In the narrow context of the pharmaceutical market, any short term reduction in drug costs (prices) will be offset partially, fully, or more than fully by the higher real costs of reduced drug availability 

over the long term.6 The potential effect on research and development is difficult 

to measure, although a crude but unbiased approximation can be obtained by estimating the reduction in the present value of the expected future revenue stream for 

a prospective drug, and then comparing that reduced revenue base with the cost of 

developing new drugs, estimated at over $800 million in peer-reviewed journals, or 

perhaps with the present value of the expected costs of developing that prospective 

drug.7 Such analyses are reasonable as initial starting points for analysis, but they 

are likely to underestimate the adverse effect of price controls on research and development because they are static rather than dynamic; they fail to take into account the fact that the imposition of price controls, whether direct or indirect, introduces an asymmetry into the statistical (stochastic) distribution of future returns to 

research and development. This is an effect distinct from the price reduction itself: 

Ex ante, any given potential investment offers upside potential that is limited (truncated) by the price controls, while downside risks remain unaffected. The dynamic 

effect, therefore, is to shift the entire statistical distribution of possible returns 

downward (or to the left); this means that the standard static measurements of the 

adverse research and development effects attendant upon the imposition of price 

controls are biased downward. 

Question 4. The Department of Commerce study acknowledged that improvements 

to health care and life sciences are an important global source of gains in health 

and longevity. According to the study, ‘‘The development of innovative pharmaceutical products plays a critical role in ensuring these continued gains.’’ The report 

states that ‘‘economic incentives are essential’’ in order to encourage the continued 

development of new medicines. Do you think legalized importation would reduce the 

‘‘economic incentives’’ that are critical to the development of new medicines? 

Answer. It is incontrovertible that the imposition of price controls on pharmaceuticals, whether directly or indirectly in the form of competition from drugs subjected to price controls overseas, would weaken incentives to invest in pharmaVerDate Nov 24 2008 06:50 Jan 16, 2013 Jkt 075679 PO 00000 Frm 00113 Fmt 6601 Sfmt 6621 S:\GPO\DOCS\77867.TXT JACKIE
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8For most drugs marginal production costs are low and short run scale economies seem not 

to be particularly important; accordingly, supply conditions as a first approximation suggest that 

the increased demand for generics would not increase the prices of generic drugs substantially. 9See Charles-Andre Brouwers, Martin B. Silverstein, and Tory Wolff, Adverse Consequences 

of OECD Government Interventions in Pharmaceutical Markets on the U.S. Economy and Consumer, Boston Consulting Group, July 1, 2004, esp. exhibit 14. 

ceutical research and development. This is true under any set of assumptions about 

the competitiveness of the industry, about its maximand, or other parameters; the 

market for investment capital will recognize immediately the attendant reduction in 

expected returns to investment in this sector, and will reallocate some capital elsewhere. As discussed in footnote 4 above, such parameters as the overall profitability 

of the industry (or given firms) or overall industry (or firm) revenues are not relevant. For any given prospective investment in a new chemical entity or other developmental product, the capital market will ask whether expected returns (on the 

margin) justify the expected development costs. Price controls cannot improve the 

marginal efficiency of any such investment. 

Questions From Senator Kennedy 

Question 1. The Department of Commerce report suggests that the increased 

prices of name-brand drugs in Europe could be offset by reduced prices (and increased utilization) of generic drugs. Do you agree with that assessment? 

Answer. It certainly is true that name-brand and generic drugs in the short run 

are substitutes to some substantial degree. In the long run, they are more complementary, in that generic drugs over time cannot become generic drugs unless 

they are developed first as name-brand drugs. In the short run, an increase in the 

prices of name-brand drugs would increase the demand for generics; depending on 

supply conditions for the latter, increased utilization of generics would be expected 

to yield some savings that might be substantial.8 In the long run, increased prices 

for name-brand drugs would reduce the prices of generics by increasing competition 

among them. The reasons that generic prices seem to be higher in Europe than in 

the U.S. (abstracting from exchange rate issues and the like) are unclear; some attribute that condition to anticompetitive policies in Europe, but in my view a careful 

analysis of this question is yet to be done. As an aside, the elimination of European 

price controls unambiguously would make U.S. consumers better off, in the long run 

and possibly the short run, by inducing profit-seeking producers to reduce their U.S. 

prices. 

Question 1a. How much could Europe save with increased generic use? 

Answer. The best evidence that I have seen on this issue is presented in a 2004 

study by the Boston Consulting Group, which concludes in summary that an increase in European generic use to levels proportionate to those in the U.S. would 

reduce drug spending by 20 percent.9

Question 1b. Would increased generic savings impact innovation? 

Answer. Certainly there would be more innovation investment if competition from 

generics were reduced, that is, if name-brand drugs enjoyed more or longer ‘‘monopoly’’ positions. The presence of generics yields competition, as does the presence of 

name-brand competitors, sometimes called ‘‘me-too’’ drugs quite incorrectly. But the 

possible reduction in innovation yielded by competition from generics is not necessarily inefficient if we assume that patent periods are optimal and that other government policies are efficient also. In the context of Europe, if increased generic savings were caused by a loosening or removal of price controls, then such a shift would 

enhance innovation because the removal of the price control policies would improve 

the investment climate. In short, in the European context, the removal of price controls might induce a shift toward generics, which might increase the savings yielded 

by the use of generics, but that would be salutary for long run innovation because 

the removal of the price controls would improve investment incentives. 

Question 2. Would you agree that increased utilization of pharmaceuticals is beneficial to health status? 

Answer. Yes; see footnote 5 above. 

Question 2a. If so, should the Department of Health and Human Services and Department of Commerce reports have estimated the positive health impacts of increased consumer access to drugs due to lower prices? 

Answer. In the narrowest sense, the issue of what the HHS/DOC studies should 

have examined is a question for Congress. More broadly, the purported price and 

attendant health effects of ‘‘increased consumer access to drugs due to lower prices’’ 

in a real sense answers the question (qualitatively) before it has been asked: Price 

controls increase ‘‘access’’ in the short run but not the long run, so that the imVerDate Nov 24 2008 06:50 Jan 16, 2013 Jkt 075679 PO 00000 Frm 00114 Fmt 6601 Sfmt 6621 S:\GPO\DOCS\77867.TXT JACKIE
111 

proved health outcomes yielded by drug utilization in the short run must be 

weighed against the adverse long term health effects of reduced pharmaceutical research and development. Is it worth mortgaging the future in favor of the present? 

I believe not; but that is one crux of the debate over the importation of pharmaceuticals subject to foreign price controls. And so any such study must examine not 

only the short term effects of prospective policy shifts, but the long term effects as 

well. 

Question 2b. Should comparative effectiveness play a role in approval or R&D or 

marketing incentives? 

Answer. If ‘‘R&D or marketing incentives’’ are the products of market forces, then 

comparative effectiveness is a crucial parameter that should influence investment 

choices by producers, and market forces yield precisely that outcome. If, on the other 

hand, such incentives are imposed by regulators and other public officials—-if ‘‘evidence-based medicine’’ is used to allocate resources in a top-down decision process— 

then they would be highly inappropriate. Patients respond differently to given medicines; what is ‘‘effective’’ in the aggregate may not be ‘‘effective’’ for specific patients, 

who in consultation with their physicians should choose among alternatives for the 

best solutions to their respective conditions. Moreover, the differences in ‘‘effectiveness’’ can manifest themselves in ways essentially unobservable to analysts; consider a generic diuretic equal in ‘‘effectiveness’’ with some name-brand hypertension 

drug, but which causes the patient to visit the bathroom multiple times during the 

night, before work the next day. Only patients in consultation with their physicians 

can evaluate all the relevant tradeoffs in pursuit of ‘‘effectiveness;’’ government policy is too blunt an instrument to do so without the creation of important adverse 

effects in terms of patient well-being. 

Æ