Vous êtes sur la page 1sur 110

Dockets ManagementBranch (HFA-305)

Food and Drug Administration


5630 Fishers Lane Rm 1061
Rockville MD 20852

Re: Prescription Drug Importation; Docket No. 2004N-0115,69 Fed. Reg.


12810 (March 18,2004)

The PharmaceuticalResearchand Manufacturersof America (PhRMA) is

pleasedto submit commentsregardingprescription drug importation to the Task Force

convenedby the Secretaryof Health and Human Services(HHS) in accordancewith

section 1122 of the Medicare Prescription Drug, Improvement, and Modernization Act of

2003 (MMA), Pub. L. No. 108-173. PhRMA representsthe country’s leading research-

basedpharmaceuticaland biotechnology companies,which are devoted to inventing

medicines that allow patients to lead longer, healthier, and more productive lives.

Investing more than $33 billion annually in discovering and developing new medicines,

PhRMA companiesare leading the way in the searchfor cures.

PhRMA believes that opening the U.S. drug supply to widespreadforeign

importation, while politically expedient,is ill-conceived and dangerousand will put

thousandsof American consumersat risk. PhRMA thus opposessuch efforts for the

following reasons,as elaboratedin the body of our comments:

l Importation schemesare unsafe. At a time when we are struggling to combat


counterfeit drugs and tighten security at our borders, we should be searchingfor
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 recognizesthat there is no
technological “magic bullet” or inspection processthat can protect against
adulteratedor counterfeit foreign drugs. Consequently,implementing importation
would jeopardize the safety of millions of American consumers.
. Impotiation would not result in cost savings. There is no indication that
implementing a responsibleimportation scheme(assumingone even exists)
would result in cost savings. The costs of counterfeit-resistanttechnologiesand
industry and government testing and inspectionslikely would run billions of
dollars each year, and the costs of defending against unmeritorious product
liability claims would add substantially to that number. Even if there were cost
savings,the law does not require that these get passedon to consumers. If the
experiencein Europe is any guide, any cost savings resulting from foreign
importation will be capturedby the parallel traders rather than passedon to
consumers.

0 Importation is badpublic policy. Importation of foreign drugs is nothing more


than an endorsementof, and attempt to import, foreign price control practices.
These have been a disasterin foreign countries, limiting patient accessto new
medicines and significantly restricting researchand developmentactivities in
foreign countries. American patients deservebetter. For individuals who lack
prescription drug coverageand cannot afford their medicines,there are better and
safer ways to obtain neededmedications,including company patient assistance
programs,discount card programs,“‘shoppingaround,”and, most significantly,
the new Medicare drug benefit.

SUMMARY

For several years now, public policy makers have looked for ways to

addressrising health care costs in the United States. Prescription drugs are the best value

in health care - saving lives, reducing pain and suffering, keeping people out of hospitals

and nursing,homes,and reducing other forms of health care spending. Nevertheless,

prescription.drugs play a steadily increasingrole in the maintenanceof health and the

treatment of illness. Spendingon prescription drugs has, therefore, increasedin recent

years.

The growth in prescription drug spendingshould be placed within the

larger context of health care expenditures. Notwithstanding growth in use of and

spendingon medicines,prescription medicines account for only a small proportion of

health care spendingand growth in health care spending, According to the Centersfor

ii
Medicare & Medicaid Services(CMS), of every health dollar spent in the U.S., only

about 10.5 cents is spent on outpatient prescription medic5nes.r In addition, according to

a report issuedby the Kaiser Family Foundation,prescription drug spendingincreases

have begun to moderatesomewhat,and today hospital spendingis rising faster than

spendingon prescription medicines.2

Until December,Medicare - unlike nearly all private health insurance

plans - did not cover most prescription medicines usedby its 40 million elderly and

disabled beneficiaries,despite the growing role of medicinesin maintaining health and

treating illness. Other state and federal programs (like Medicaid) did cover prescription

drugs, but payors (both public and private) chafed at the prospectof seemingly high

short-term expenditureson medicine, even when those costs would ultimately defray

longer-term costs to the health care system.

Although membersof Congress- both Democrat and Republican- sought

for yearsto enact a Medicare prescription drug benefit, that law would not take final

shapeuntil the summer of 2003. On December8,2003, PresidentBush signed into law

the most ambitious reform of Medicare in the program’s 3%year history. All Medicare

beneficiaries are eligible this June for a Medicare-endorseddiscount card that offers

discountson prescription medicines.The lowest income seniorsare eligible for $600 (per

individual, or $1200 per couple) this year, and again next year, to help them afford their

prescription.medicinesuntil the full Medicare prescription drug benefit begins in 2006.

In 2006, all Medicare beneficiarieswill be able to enroll in plans that cover prescription
1
Centersfor Medicare & Medicaid Services, “National Health Expenditures,”8
January2004, httn://www.cms.gov/statistics/nhe.
2
“Trends and Indicators in the Changing Health Care Marketplace, 2004 Update,”
Kaiser Family Foundation (May 2004).
. ..
111
drugs. Plans may vary somewhat,but in general,individuals can choosea prescription

drug plan and pay a premium of about $35 a month. They will pay the first $250 of their

prescription drug costs, and Medicare will pay 75 percent of the costs (and individuals

the remaining 25 percent)between $250 and $2,250. Once an individual has reached

$3,600 in out-of-pocket spending,Medicare will pay 95 percent of the costs, and

individuals will be responsiblefor the remaining 5 percent. Individuals with low incomes

and low assetswill not have to pay premiums or deductiblesand will only pay a small co-

payment for eachprescription needed. Other people with low incomes and limited assets

will get help paying the premiums and deductible, and the amount they pay for each

prescription will be limited.

Negotiation of a workable prescription drug benefit took several years. In

the meantime,policymakers looking for a “quick fix” to rising health care costs beganto

look favorably at the foreign practice of imposing price controls on medicines. The result

was section 804 of the FederalFood, Drug, and Cosmetic Act (FDCA) - initially enacted

in 2000 and then revised in 2003 and tacked onto the back of the Medicare law. This

provision, in its current form, would allow the commercial importation of price-

controlled drugs from Canada- despite a steadily increasingvolume of counterfeit

medicines in the global market, despitegrowing evidencethat drugs from third world

countries are shippedthrough Canadato the United States,and despite the dangerto

American patients from medicines that have been stored, shipped,and handled by third

parties outside the jurisdiction of the U.S. Food and Drug Administration (FDA).

The new law does not take effect unlessthe Secretaryof HHS determines

that importation would not raise safety issuesand would produce cost savings for

iv
American consumers. These commentsexplain PhRMA’s position that prescription drug

importation is unsafe,will not lead to any significant cost savings,and would be bad

public policy.

The U.S. regulatory system governing development,approval, and

marketing of new drugs is the most complex and comprehensivein the world. The U.S.

does not recognizeany other drug approvalsas equivalent to a full new drug application

(NDA) approvalby the FDA, and we have not enteredinto a working Mutual

Recognition Agreement with respectto any other country’s version of “good

manufacturingpractices.” Further, foreign health agenciesare neither willing nor able to

ensurethe safety of drugs exported from their countries to the United States. Indeed,

even fully-developed countries decline to prohibit transshipmentof medicines through

their borders, and some - like Canada- explicitly exempt those drugs from their laws.

Even today, with our closed distribution system and “gold standard”of

approval, tens of thousandsof unapproveddrugs - often counterfeit, sometimes

ineffective and unsafe, always unapprovedand outside FDA’s jurisdiction - enter the

United Statesthrough the mail. FDA’s inability to effectively implement the Prescription

Drug Marketing Act of 1987 has contributed to the problem, but FDA and U.S. Customs

have also repeatedlyconfirmed that they lack the resourcesto monitor the influx of these

illegal drug imports at the border. The solution thereforeis to strengthenour border and

law enforcementcapabilities to enforce current law, not to throw up our hands and repeal

the law altogether.

Despite the safety threat - which has been documentedby FDA, law

enforcement,and the media - proponentsof legislation arguethat importation can be

V
made both ,safeand cost-effective. Importation cannot, however, be made safe with

creative legislative alternativesto a system of full FDA approval and oversight,

compliancewith Good Manufacturing Practice (GMP) and Good Distribution Practice

(GDP) requirements,and completely closedborders. Among other reasons,importation

directly contradicts a core principle in the FDCA: that a medicine’s safety must be proven

rather thanassumed. Furthermore,end-producttesting is contrary to the concept of

GMPs, which is premised on the notion that a product’s integrity can be assuredonly if

the process.by which it is manufactured,packaged,labeled, stored, and shipped is fully

under control and capableof audit at any time by FDA. Counterfeit-resistanttechnology

available today is not a “silver bullet” for preventing the distribution of counterfeit

products imported from foreign nations. A closed distribution systemfeaturing electronic

“track and u-ace”technology will not be ready for deploymentfor severalmore years.

None of these%olutions” - technology, testing, resources- addressesthe fundamental

problem with importation: that it provides the opportunity for the criminal, and the

merely sloppy, to endangerAmerican patients,whether intentionally or inadvertently.

America’s research-basedpharmaceuticalmanufacturershave long been held to the most

rigorous pre-clinical and clinical product testing requirements,manufacturingprocess

validation requirements,and pre- and post-approvalGMP requirementsin the world.

American patients deservenothing less.

Further, implementing importation will not lead to lower consumerdrug

prices. Neither section 804 nor any of the pending importation bills requirescost savings

to be passedon to consumers. Experiencein the EuropeanUnion, where parallel trade is

legal, demonstratesthat the savings from inter-country price differentials are capturedby

vi
parallel importers and not passedon to consumers. Many of the “safety” measures

describedby prescription drug importation advocates- such as implementation of a track

and trace pedigreesystem or universal deployment of counterfeit-resistanttechnology -

would have the counter-productiveeffect of substantially raising costs to the healthcare

system in the United States. Appropriating adequatefunds for FDA, U.S. Customs, and

law enforcementagenciesto inspect all imports and enforce the law would seriously

strain the federal healthcarebudget. A prescription drug importation schemewould lead

to an explosion in unmeritorious tort litigation againstinnocent parties, while injured

consumerswould be challengedto find, and bring to justice, counterfeiters,foreign

importers and other bad actors who truly might be at fault. This, too, would result in

additional costs to the system.

Finally, prescription drug importation is bad policy. Most importantly, a

decision to implement prescription drug importation is a decision to import foreign price

controls. Pharmaceuticalprice controls inevitably deny patients accessto important new

medicines. They also discourageresearchand developmentof new medicines,depress

and distort international trade in pharmaceuticals,and affect U.S. jobs. Foreign

pharmaceuticalprice controls force Americans to subsidizemedical researchand

developmentfor the rest of the world. Importing price-controlled drugs will support and

encouragethe foreign practice of price-controls, undermining one of the only free

markets for medicines in the world, and effectively endorsetheseoutcomes. Importation

of prescription drugs from abroadcould also violate U.S. intellectual property rights,

upsetting the careful balancebetween encouragementof innovation and ensuring patient

accessto new medical discoveries.

vii
While importation is often hailed as the only solution for individuals who

lack prescription drug coverageand cannot afford their medicines, in fact there are better,

safer ways to ensurethat patientshave accessto affordable medicines. As noted, all

Medicare beneficiariesare eligible for a Medicare-endorseddiscount card that will offer

discounts on prescription medicines.Further, in 2006, all Medicare beneficiarieswill be

able to enroll in plans that cover prescription drugs. Patient assistanceprograms

sponsoredby pharmaceuticalcompaniesare available to all uninsuredAmericans who

meet income eligibility requirements. Pharmaceuticalcompany discount card programs

are anotherway for seniors and the disabled to save money on prescription medicines. In

addition, many statesoperateprescription assistanceprogramsfor lower income

Medicare beneficiaries. Shopping around among pharmaciescan also yield savings for

consumers. Finally, generic drugs available in the U.S. are often considerablyless

expensivethan foreign, non-FDA approveddrugs, and they offer a solution for many

who cannot<afford their medicine.

...
VI11
TABLE OF CONTENTS

I. BACKGROUND ......................................................................... ........................... 1

A. The U.S. regulatory system governing development,approval, and


marketing of new drugs is the most complex and comprehensivein
the world . ............................................. .............. ....... ................................. 1

B. Respondingto constituent pressurestemming largely from the lack of


Medicare coveragefor prescription drugs, Congressin 2000 enacted
- and in 2003 revised- legislation permitting commercial
reimportation of prescription drugs that have been outside the
control of the manufacturerand beyond the oversight of FDA. ................ 6

II. COMMENTS .................................................~...........~..........................................


10

A. Implementing importation would jeopardize the safety of millions of


American consumers. ... ................... ........................... .. .........‘................... 10

1. Even today, with our closed distribution system,tens


of thousandsof unapproveddrugs - often counterfeit,
sometimesineffective and unsafe,always unapproved
- enter the United Statesthrough the mail . ...a.................*............10

2. FDA and U.S. Customshave repeatedlyconfirmed that


they lack the resourceseffectively to monitor the influx
16
of illegal drug imports. ........................~....*....................*...............

3. Congressand FIBS should tighten the pharmaceutical


distribution chain in the United Statesrather than open
the bordersto foreign products. ..,.,........f...........,..........................23

B. Importation cannot be “made safe”with creative legislative alternatives


to the current gold-standardsystem,with full FDA approval and
oversight, GMP and GDP compliance,and completely closed borders... 29

1. Importation directly contradicts a core principle in the


FDCA: that a medicine’s safety must be proven rather than
29
assumed. . ..................... ............~...........‘.........................................

2. Safety and quality cannot be “tested into” a product. . ............. ..... 33

3. Counterfeit-resistanttechnology available today cannot,


by itself, prevent the distribution of counterfeit products
39
imported from foreign nations. ..~.................................................

ix
4. A closed distribution system featuring electronic “track
and trace”technology, though essentialto the fight against
counterfeiting and diversion, will not be ready for
deploymentfor several more years. ...*...*..................*............s......
48

5. Foreign health agenciesare neither willing nor able to


ensurethe safety of drugs exported from their countries
to the United States. ..................*..................................................50

6. Parallel trade in Europe has raised safety issues,led to


consumerconfusion, and increasedcounterfeiting operations..... 59

6. A prescription drug importation schemewould lead to an explosion


in unmeritorious tort litigation against innocent parties, while injured
consumerswould lack any real recoursefor their injuries ................. ...... . 68

D. Importation will not lead to lower consumerdrug prices. ..................... ... 76

1. Neither the MMA nor any of the pending importation bills


requirescost savings to be passedon to consumers..................... 76

2. The savings from inter-country price differentials are captured


by parallel importers, and not passedon to consumers................ 76

E. Importation of foreign drugs is an endorsementof, and attempt to


import, foreign price control practices-which are bad for patients,
harmful to innovation, and poor public policy *.e......*................................
81

1. A decision to implement prescription drug importation would


be tantamountto a decision to import foreign price controls. ...... 81

2. Prescription drug price controls in foreign countries have had a


detrimental impact on patient accessto new medicines. .............. 83

3. Prescription drug price controls have a negative impact on


researchand development. .....................*......................................87

4. Foreign pharmaceuticalprice controls force Americans to


subsidizemedical researchand developmentfor the rest
93
of the world . ........ ......f........................................~..........................

5. Importation of prescription drugs would harm consumersand


undermineinnovation through its impact on U.S. intellectual
property rights. .................... ................~.........................................94

III. 97
CONCLUSION *......t...............*..........................~..........,............*..........................

X
I. BACKGROUND
A. The U.S. regulatory system governing development, approval, and
marketing of new drugs is the most complex and comprehensive in the
world.
The United Statesregulatory system governing development,approval,

and marketing of new drug products is nearly a century old. It has becomemore

comprehensiveand more rigorous over time. In 1938, the FederalFood, Drug, and

Cosmetic Act (FDCA>p which remainsin 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.4 Beginning in 1962, FDA gained explicit authority to demand

proof that a drug is effective and to prescribethe tests that a manufacturermust perform

before its product can be approvedfor marketing? Over the last half century, numerous

amendmentshave expanded,strengthened,and refined the regulatory scheme.6These

amendmentsinclude the Prescription Drug Marketing Act of 1987 (PDMA), which

closed the medicine supply to products that have circulated overseas,beyond the

jurisdiction of FDA and outside the control of the manufacturer. FDA now regulates

virtually every stagein the life of a prescription drug sold in the U.S., from pre-clinical

3
Pub. L. No. 75717,52 Stat 1040 (1938).
4
21 U.S.C. 0 355(d)(l).
5 Act of October 10, 1962, Pub. L No. 87-781,76 Stat 780, codified at 21 U.S.C. 5
355(d)(5).
6
See,,e.g.,the Durham-HumphreyAct, Pub. L. No. 82-21565 Stat. 648 (1951)
(concerningprescription requirement);the Drug Listing Act of 1972, Pub. L. No. 92-387,
86 Stat. 559 (1972); the Orphan Drug Act, Pub. L. No. 97-414,96 Stat. 2049 (1983)
(subsequentlyamended);the Drug Price Competition and Patent Term RestorationAct of
1984, Pub. L. No. 98-417,98 Stat. 1585 (1984); the Drug Export Amendmentsof 1986,
Pub. L, No. 99-660,100 Stat. 3743 (1986), the Prescription Drug Marketing Act of 1987,
Pub. L. No. lOO-293,102 Stat. 95 (1988) (subsequentlyamended);the Generic Drug
EnforcementAct of 1992, Pub. L. No. 102-282,106 Stat. 149 (1992); and the
Prescription,DrugUser Fee Act, Pub. L. No. 102-571,106 Stat. 4491(1992).

1
testing in aSnimals
and human clinical trials before the drug can be marketed, to

manufacturing,labeling, packaging, and advertising when the drug is marketed,to

monitoring actual experiencewith the drug after its sale to consumers.

The FDCA prohibits the introduction into interstatecommerceof any

“new drug” (which includes virtually all prescription drugs) that is not the subject of a

new drug application @ IDA) or abbreviatednew drug application (ANDA) that has been

approvedby FDA.7 Importation of a prescription drug constitutes introduction of that

drug into interstatecommerceand thus is subject to the FDA approval requirement.* A

drug product manufacturedin a plant that is not listed in the NDA or ANDA or

manufacturedaccording to specifications differing from those in the approved

application, even if made by the same company holding the approval, is an unapproved

drug that cannot be imported or otherwise introduced into interstatecommerce.’

Foreign versions of drugs that are approvedin the United Statesoften are manufactured

by companiesthat do not hold an approvedNDA 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 approvedNDA or AMlA and thus is unapproved. For these

reasons,the importation of a drug purchasedin a foreign country will usually violate the

statutory requirementfor FDA approval.

Some drugs available overseasare manufacturedin the United Statesand

then exported. The FDCA prohibits the importation (sometimescalled the ‘“reimporta-

tion”) of thesedrugs, even if they are manufacturedin full compliancewith the approved

7
See21 U.S.C. $3 331(d), 355(a).
8
See21 U.S.C. 9 321(b).
9
21 U.S.C. 95 331(d) & 355.

2
NDA.1° Congressaddedthis prohibition on reimportation to the law in the PDMA, after

a seriesof hearingsdocumentedadulteratedand counterfeit drugs entering the country.

In 1984, for instance,nearly two million counterfeits of G. D. Searle’sOvulen 21 birth

control pills were found to have been shippedto Miami and New York from Panama. In

198S,1800zbottles of Eli Lilly’s antibiotic Ceclor capsulesenteredMiami and Boston

from Singapore. The products containedEli Lilly’s active ingredient, but the capsules,

labels, lot numbers,and packagingwere all fake. The Energy and CommerceCommittee

concludedthat permitting reimportation of U.S.-origin goods “prevents effective control

or even routine knowledge of the true sourcesof merchandisein a significant number of

cases,“lr As a result, “pharmaceuticalswhich have been mislabeled,misbranded,

improperly stored or shipped,have exceededtheir expiration dates,or are bald

counterfeits, are injected into the national distribution system for ultimate sale to

consumers.~‘lzFurther, “the very existenceof the market for reimported goods provides

the perfect cover for foreign counterfeits.“13After finding that “[llarge amountsof drugs

are being reimported to the United Statesas American goods returned”; that “[t]hese

imports are a health and safety risk to American consumersbecausethey may have

becomesubpotentor adulteratedduring foreign handling and shipping”; and that “[tlhe

ready market for prescription drug reimports has been the catalyst for a continuing series

of frauds againstAmerican manufacturersand has provided the cover for the importation

10
21 U.S.C. 9 381(d).
11
H.R, Rep. No. 76,100th Cong., 1st Sess.6-7 (1987).
12
Id.
13
Dangerous Medicine: The Risk to American Consumersfrom Prescription Drug
Diversion and Counterfeiting, 99th Cong., 2d Sess.22 (Comm. Print 99-2 1986).
3
of foreign counterfeit drugs,“r4 Congressprohibited the reimportation of approveddrugs

that have left the United States.”

There is an exception to this prohibition ~forthe original manufacturer,

who is part of a closed system and subject at all times to FDA authority and oversight.16

The manufacturer’sown importation of drugs that have never been outside its control is

comparableto shipmentsbetween its manufacturingplants and warehouseswithin the

United States. It is completely different from the importation of drugs that have been

14
Pub. L. No. lOO-293,s 2.
15
The record supporting the PDMA was extensive and unambiguous,and the
prohibitionjon reimportation was not controversial. In June 1985, the staff of the
Subcommitteeon Oversight and Investigations of the House Committee on Energy and
Commercepublished its first report on the drug diversion problem. Staff of
Subcommitteeon 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 SeeMay Not Be What You Get (Comm. Print 99-R
1985). This report discussedthe Ovulen 21 incident and laid the groundwork for the
PDMA provision prohibiting reimportation. The subcommitteeconvenedthe first of
eight public hearingson drug diversion and counterfeiting on July 10, 1985. Over two
years, the committee would hear from state and federal law enforcementofftcers, private
investigators,state drug and narcotic agents,Customs officials, FDA officials,
pharmacists,diverters, U.S. attorneys,pharmacy and pharmaceuticaltrade associations,
pharmaceuticalsalesrepresentatives,and senior enforcementofficials from state
regulatory agencies. Two more Subcommitteereports were released,“Dangerous
Medicine: The Risk to American Consumersfrom Prescription Drug Diversion and
Counterfeiting,”99th Cong., 2d Sess.(Comm. Print 99-2 1986), and “Uncertain Returns:
The Multimillion Dollar Market in ReimportedPharmaceuticals,”99th 2nd. Cong., Sess.
(Comm. Print 99-GG 1985). Final legislation passedin early 1987. As Mr. Waxman
pointed out on the day it passedthe House, the PDMA “is a very important public health
measure. It will provide additional assurancesto American consumersthat drugs they
purchasewill always be safe and effective. . . The bill was developedafter one of the
most extensive investigationsthe Energy and CommerceCommittee has conductedon a
health-relatedmatter. . . . [The Subcommittee]discoveredthat all the efforts of the FDA
to approvedrugs for safety and effectivenesscould 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,“[tlhe bill is not
controversial and has enjoyed bipartisan support.”
16
21 U.S.C. 0 381(d)(l).

4
placed into: the wholesale and retail distribution systemsof foreign countries, where they

are no longer subject to FDA jurisdiction.

Notwithstanding the statutory prohibition on importation of unapproved

drugs, in the early 1990sFDA articulated a policy of “enforcement discretion”with

respectto personalimportation of certain unapproveddrugs.17Under this policy, FDA

personnelmay permit the importation of a drug if: (1) it is clearly intended for personal

use; (2) thenintendeduse of the drug is clearly identified; (3) the drug is intendedfor

treatmentof a serious condition for which satisfactory treatmentis not available in the

U.S.; (4) the drug is not known to presenta significant health risk; and (5) the drug is not

approvedin the U.S. FDA officials will presumecommercial use, rather than personal

use, if the supply exceedswhat one personmight take in three months. FDA guidelines

direct agencypersonnelto look for either: (a) the inclusion of the name and addressof a

doctor licensed in the U.S. and responsiblefor the patient’s treatmentwith the product, or

(b) evidenci=that the product is intendedfor the continuation of treatmentbegun in the

foreign country. The personaluse policy does not apply to the importation of

unapprovedforeign versions of drugs available in the United States,or to reimportation

of drugs in violation of the PDMA. It applies only to the personalimportation of drugs

for which there is no approvedU.S. source. Importantly, importation within the four

corners of this policy remains technically illegal. The policy representsa limited exercise

of enforcementdiscretion in the interest of individual patient treatment.‘*

17
SeePDA Regulatory ProceduresManual, “Coverage of PersonalImportations.”
18
FDA has repeatedlyexpressedconcernsabout the safety of mail-order personal
imports, and in 2001 the agencyrecommendedthat the policy be rescinded. SeeLetter
from Food and Drug Administration Acting Principal Deputy Commissionerto Secretary
of Health and Human Services(requestingthat HHS Secretaryrevoke the personal
5
B. Responding to constituent pressure stemming largely from the lack of
Medicare coverage for prescription drugs, Congress in 2000 enacted -
and in 2003 revised - legislation permitting commercial
reimportatiou of prescription drugs that have been outside the control
of the manufacturer aad beyond the oversight of FDA.
In 2000, Congressauthorizedan additional exception to the prohibition on

reimportation. The Medicine Equity and Drug Safety Act (MEDS Act) addeda new

section 804 to the FDCA under which pharmacistsand wholesalerswould be permitted to

import drugs from a list of designatedcountries, including Canadaand the countries of

the EuropeanUnion.rg During the debateon the MEDS Act, however, concernswere

voiced that section 804 would be ineffective (at reducing consumerprices) and unsafe

(by allowing the influx of counterfeit and adulteratedproducts). Congressrespondedto

theseconcernsin part by delaying implementationuntil the Secretaryof 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 coveredproducts. Secretary

Donna Shalalaconcludedon December26,2000, that it was “impossible . . . to

demonstratethat [importation] is safe and cost effective.“2o Similarly, SecretaryTommy

Thompson,citing an analysisby FDA on the safety issuesand an analysisby his planning

importation:mail policy) (May 24,200l); see also Examining Prescription Drug


Importation; A Review of a Proposalto Allow Third Partiesto Reimport Prescription
Drugs, Hearing before the Subcommitteeon Health of the Committee on Energy and
Commerceof the U.S. House of Representatives,10th Cong. 2d Sess.40 (July 25,2002)
(“[W]e standby that recommendationand believe that we should work with the Congress
to develop legislation that would indeed give FDA the ability to screenthesedrugs and
turn them back.“) (William K. Hubbard, Senior Associate Commissioner); Continuing
Concernsover Imported Pharmaceuticals,Hearing before the Subcommitteeon Oversight
and Investigations of the Committee on Energy and Commerceof the U.S. House of
Representatives,107th Cong. 1st Sess.48,62,72,76 (June 7,200l) (Hubbard).
19
Pub. I. No. 106-387,114 Stat. 1549,1549A-35 (2000).
20
Letter from SecretaryDonna Shalalato the Hon. William J. Clinton
(December26,200O).

6
office on the cost issues,decidednot to “sacrifice public safety for uncertain and

speculativecost savings.“21

In the recently enactedMedicare drug benefit legislation, Congress

replacedthe MEDS Act with a new section 804. Reimportation languagewas included in

the drug benefit legislation - despiteenactmentof a prescription drug benefit for

Medicare beneficiaries- primarily becauseproponentsof importation were working

separatelyfrom the Medicare confereesto addressaccessissues. As explainedbelow

(page 98), the new Medicare discount card, fully operationalon June 1, and the drug

benefit that will be available on January 1,2006, provide safe and effective ways for low-

income Americans to accessaffordable medicines. Company and state patient assistant

programs,as well, are available to help the uninsured. Theseoptions are all safer than

the importation of foreign products.

The new language,in section 1121 of the MMA, would permit

reimportation only from Canada,and it would not permit the reimportation of controlled

substances,:biological products, infused drugs (including peritoneal dialysis solutions),

intravenously injected drugs, drugs inhaled during surgery, or parenteraldrugs that the

Secretaryfinds pose a threat to public safety.22Under the new provisions, reimported

drugs must still comply with sections501,502, and 505 of the FDCA. That is, they must

not be adulterated,misbranded,or unapprovednew drugs.23

21
Letter from SecretaryTommy G. Thompson to SenatorJamesJeffords (July 9,
2001). ’
22
21 U.S.C. 3 384(a)(3).
23
21 U.S.C. 3 384(c).

7
The MMA permits reimportation by pharmacistsand wholesalersthat

registerwith FDA and provide the name of a registeredagent.% For each shipment, the

importer must submit information and documentationto FDA. Besidesbasic information

such as the”quantity of drug shipped,the date shipped,and the origin and destination of

the shipment, the importer must documentthe lot number and sourceof the drug and

establishthe drug’s chain of custody. The importer must also test samplesof the drug for

authenticity and degradation.” The importer must certify that the drug is approvedfor

U.S. marketing and is not adulteratedor misbranded,and must provide recordsfrom a

qualified laboratory showing the drug complies with establishedspecifications and

Congressagain included a requirementthat the Secretarydetermine

importation would be safe. Thus none of theseprovisions takes effect, and no new

imports arelauthorized,unless and until the Secretarycertifies that importation will not

raise safetyissues and will lead to savings for consumers. In order to make any such

certification, the Secretarymust conduct a careful and thorough factual investigation.”

The contours of this factual investigation will necessarilyoverlap those of the study
24
21 U.S.C. 8 384(a)(l) & (f).
2.5 21 U.S.C. 8 384(d)(l)(J)(III)(aa). Somewhatmore lenient sampling rules apply
where the import is shipped directly from the first foreign recipient of the drug. In
contrast, much more lenient pedigree(chain-of-custody)rules apply where the import is
not shipped from the first foreign recipient. In other words, when a product has been
shippedthrough multiple foreign locales, the law substitutesslightly more rigorous
testing (testing of a statistically valid samplefrom eachbatch in all shipments,rather than
testing a statistically valid sample of the shipmentsthemselves),but it abandonsany
pretenceof documentinga chain of custody.
26
21 U.S.C. 5 384(d)(l).
27
FDA has been unambiguousand unwavering in its position that importation is
unsafe. A complete list of FDA statementsto this effect since 2000 can be found in the
Appendix. Any certification under the MMA that importation can be done safely would
need to explain the basis for a complete reversal in position.

8
required under section 1122 of the MMA, which directs the Secretaryto “conduct a study

on the importation of drugs into the United Statespursuantto section 804 of the Federal

Food, Drug, and Cosmetic Act (as addedby section 1121 of this Act).”

The ConferenceReport issuedon November 21,2003, elaborateseleven

topics that should be addressedin the study report2* Those are:

1. the limitations, including limitations in resourcesand in current legal


authorities that may inhibit the Secretary’sability to certify the safety of
imported drugs (addressedon pages23-39 and 59-68 of thesecomments);

2. the pharmaceuticaldistribution chain and the need for, and feasibility of,
modifications in order to assurethe safety of imported products (addressed
on pages23-39 of thesecomments);

3. whether anti-counterfeiting technologiescould improve the safety of


products in the domestic market as well as products that may be imported
(addressedon pages23-29,39-50 and 59-68 of thesecomments);

4. the costs borne by entities within the distribution chain to use anti-
counterfeiting technologiesthat may be required to provide import
security (addressedon pages42-44 of thesecomments);
5. the scope,volume and safety of unapproveddrugs, including controlled
substances,entering the United Statesvia mail shipment (addressedon
pageslo-16 of thesecomments);

6. the extent to which foreign health agenciesare willing and able to ensure
the safety of drugs being exportedfrom their countries to the United States
(addressedon pages50-59 of thesecomments);

7. the potential short- and long-term impacts on drug prices and prices for
consumersassociatedwith importing drugs from other countries
(addressedon pages76-97 of thesecomments);

8. the impact on drug researchand development,and the associatedimpact


on consumersand patients, if importation were permitted (addressedon
pages81-97 of thesecomments);
9. the agencyresources,including additional field personnel,neededto
adequatelyinspect the current amount of pharmaceuticalsentering the
country (addressedon pages16-23 of thesecomments);

28
SeeEL Rep. No. 108-391, at 833-834.

9
10. the liability protections, if any, that should be in place if importation is
permitted for entities within the pharmaceuticaldistribution chain
(addressedon pages68-75 of thesecomments);and

11. ways in which importation could violate U.S. and international intellectual
property rights and additional legal protectionsand agencyresourcesthat
would be neededto protect those rights (addressedon pages81-97 of these
comments).

The Departmentof HHS conveneda Task Force on Drug Importation to

compile information and assist in respondingto the eleven issues. As part of this effort,

HHS has openeda public docket and is requestingpublic comment. PhRMA’s comments

follow. For each section of our comments,we indicate the issue in the House Report on

which we are offering comment.

II. comNTs
A. Implementing importation would jeopardize the safety of millions of
American consumers.
1. Even today, with our closed distribution system, tens of
thousands of unapproved drugs - often counterfeit, sometimes
ineffective and unsafe, always unapproved - enter the United
States through the mailF9

According to testimony provided in June 2003 by Elizabeth Durant,

Executive Director of Trade Compliance and Facilitation at the U.S. Bureau of Customs

and Border Srotection, “[m]illions of packagescome through mail and expresscourier

facilities each year. Thousandsof packages,particularly in the mail, are found to contain

illegal and unapprovedpharmaceuticals.‘“0 Further, Customs estimatesthat “10 million

29
This section of our commentsrespondsto item 5 on page 9 (the requestfor
information about the scope,volume, and safety of unapproveddrugs, including
controlled substances,entering the United Statesvia mail shipment).
30
Testimony of Elizabeth Durant, Executive Director of Trade Compliance and
Facilitation at the Bureau of Customs and Border Protection, before the House Energy
and CommerceSubcommitteeon Oversight and Investigations (June 24,2003).

10
people cross the land border annually carrying the sameunapprovedproducts.“31 Other

publicly-available data corroboratetheseestimates. For example, according to Juniper

Research,a businessand market researchcompany in Darien, Connecticut, U.S.

consumersspent $700 million in 2002 on prescription drugs from foreign online

pharmacies,and were estimatedto spendapproximately $1.4 billion in 2003.3’

According to IMS Health Consulting, a pharmaceuticalinformation company,Americans

spent $695,million on prescription drugs from Canadain 2003, comparedwith $414

million in 2002.33A poll conductedin June 2002 identified over 1 million U.S.

consumersusing the Internet as a meansto accessprescription medicines from Canadian

pharmacies,34This figure was also reportedby the Kansas City Star and the Toronto Star

in July 2003.35

Theseillegal prescription medicine imports come from all over the world.

In the first of two seriesof “blitz” exams conductedby FDA and Customs in 2003,1153

imported drug products were examined.36 The overwhelming majority of theseproducts

31
Id.
32
Jodi S. Cohen, “Defiant StoresOffer Rx for Rising Cost of Drugs; Businesses
Help SeniorsBuy CheaperMedicine from Canada;U.S. Suit Says the Drugs Aren’t
Safe,”Chic&go Tribune (September12,2003).
33
Bob,Tedeshi,“Looking to CanadianWeb Pharmaciesfor Savings,”New York
Times (March 8,2004).
34
Testimony of Elizabeth A. Wennar, M.P.H., D.H.A, Presidentand CEO, United
Health Alliance Bennington, Vermont, and Principle, Healthfnova, Manchester,Vermont,
before the House GovernmentReform Subcommitteeon Human Rights and Wellness
(April 3,2003).
35
SeeDavid Olive, “Big PharmaBlames Canada,”The Toronto Star (July 17,
2003); Matt Stems, “Demand PushesDrugs via Canada;Illegal or Not, Salesto U.S.
Thriving,” Kansas City Star (July 30,2003).
36
The first blitz exams were conductedin the Miami and New York (JFK) mail
facilities from July 29-31,2003, and in the San Francisco and Carson,California mail
facilities from August 5-7,2003. The secondblitz exams were conductedin the Buffalo,
11
- 1019 or 88 percent-were illegal unapproveddrugs.37 Of the drugs examined, 15.8

percent (161) enteredthe U.S. from Canada;14.3 percent (146) from India; 13.8 percent

(141) from:Thailand; and 8.0 percent (83) from the Phihppines. The remaining drugs

came from other countries. In a secondseriesof blitz exams,FDA and Customs

examined 1006 packages. FDA determinedthat 80 percenthad been exportedfrom

Canada,16 percent from Mexico, and 4 percentfrom Japan,the Netherlands,Taiwan,

Thailand and the United Kingdom.38 Further, as explained below (page55), many of the

drugs shippedfrom Canadaclearly originated in a third country.

The prescription medicines entering the United Statesvia illegal

importation,include dangerous,unapproved,and counterfeit medicines. For example,

they include:

? Drags that are improperly labeled. Many of the drugs that were
examinedby FDA and Customs during the import blitzes did not contain
adequatelabeling or instructions for proper and safe use. Some products
containedforeign labeling, some containeddual labeling (labelmg in
English and anotherforeign language),and several containedno labeling
whatsoeverand were offered in loose plastic bags or tissue paper. Others
were shippedin containersthat appearedto be intendedfor pharmacists,
without U.S.-approvedpatient labels.

* Controlled substames. Examiners discoveredover 25 different controlled


substances,including: Ratio-Lenoltec with codeine,codeine,Valium
; (diazepam),Ativan (lorazepam),Tylenol 3 (containing codeine),Xanax,
anabolic steroids,and clonazepam,all of which are controlled substances
with potential for abuseand all of which can be dangerousif taken
inappropriately or without a doctor’s supervision. Thesecontrolled
substancescame from Canada,Costa Rica, Guatemala,Malaysia, New

Chicago, Dallas and Seattlemail facilities and the Memphis and Cincinnati courier hubs,
in November 2003.
37
“FDA/U.S. Customs Import Blitz Exams Reveal Hundredsof Potentially
DangerousImported Drug Shipments,”PressRelease,U.S. Food and Drug
Administration, PO3-73(September29,2003).
38
SeeFDA PressRelease,January27,2004.

12
Zealand,Peru, the Philippines, Taiwan, Thailand, and the United
Kingdom.

Q Potentially-recalled drags. Blitz exam results revealedthat American


consumerswere sent SereventDiskus and Flovent Diskus from Canada.
Both medicines are used to treat asthmaand chronic obstructive
pulmonary disease(COPD). Flovent Diskus is approved,but not currently
marketed,in the United States. Shortly after the secondseriesof blitz
exams, certain lots of the Canadianversions of thesemedicineswere
recalled in Canadabecausethere were concernsthat their delivery systems
might not function properly and might deliver too little of the drugs, or
none at ah. The FDA-approved version ,of SereventDiskus, sold in the
U.S. through legitimate marketing channels,did not have the delivery
system problem and was not subject to the recall. In the United States,
FDA issueda consumeralert about the illegally-imported Canadian
products, but it is possible that American consumersnever learnedof the
recall.

0 Unapprovedforeign versions of FDA-approved drags. Every aspectof


an FDA-approved drug has been reviewed by FDA. Drugs approvedby
foreign regulatorsare different from U.S. drugs, and the differencescan be
) significant. Due to foreign regulatory requirements,a foreign version may
contain different excipients, for example,or different coloring. Foreign
variations from the U.S. standardsin potency and purity may raise
concernsrelating to both safety and effectiveness. Sometimesuse of the
FDA-approved version will require the supervision of a health care
professional. Examples of the foreign versions found by FDA and
Customs in the blitzes include:

l APO-Tamox - an unapproved,foreign version of the anti-cancerdrug


Tamoxifen.

l APO-Warfarin - an unapproved,foreign version of the blood thinner


Warfarin. According to the FDA, the potency of war-far-inmay vary
dependingon how it is manufactured,and the drug must be carefully
administeredand monitored by a health professionalin order to
prevent seriousbleeding complications.

l APO-Carbamazapine- an unapproved,foreign version of the anti-


convulsant drug carbamazapine,which requiresinitial screeningand
monthly monitoring of blood and platelet counts to ensureits safe use.

l APO-Allopurinal - an unapproved,foreign version of a drug used in


the managementof various types of cancer. This drug requires
periodic monitoring of kidney function during the first few months of
treatment and can causekidney failure with underlying renal disease.

13
0 Al&azathioprine - an unapproved,foreign version of an
immunosuppressantdrug. This drug can causeseverebone marrow
depressionand can be associatedwith increasedrisk of infection and
cancerdevelopment. The FDA-approved version of this drug requires
close monitoring of blood counts.

0 Human growth hormone -- a widely-used drug indicated for a number


of conditions in both children and adults. It can have serious side
effects (for example,it can unmask or worsen diabetesand cause
elevation of pressurein the brain) if used inappropriately or in
excessivedoses.

* Drugs requiring tisk managementand/or resti’cted distribution programs.


Canadian-manufacturedisotretinoin, a drug used to treat severeacne,was
shippedwithout any assurancethat its use would be monitored by a physician.
In the U.S., isotretinoin is subject to a stringent risk managementplan, under
which providers are required to screen,educate,and monitor patients to avoid
seriousrisks, such as birth defects that may occur following its use. U.S.
prescribersare also expectedto attest,prior to prescribing the drug, that
pregnancytesting has been done to confirm the patient is not pregnant.

e Drugs that require initial screening or periodic monitoring of patients.


Some that were discoveredduring the import blitzes include:

0 Casodex,usedfor the treatment of prostatecancer. A medical


professionalmust rule out baselineliver diseaseprior to treatment
initiation and must monitor liver function tests periodically during
treatment.

l Warfarin, an anticoagulantthat requiresinitial and periodic monitoring


of blood parametersto avoid bleeding problems.

l Clomid, used to treat ovulatory dysfunction. A medical professional


must rule out liver, thyroid, and adrenaldysfunction and should also
perform monitoring during treatmentto avoid ovarian hyper-
stimulation.

l Metformin, an oral hypoglycemic that requiresregular monitoring of


blood parameters,as well as ongoing assessmentsof kidney function
to reducethe risk of lactic acidosis.

* Tarnoxifen, a drug for which a medical professionalmust rule out


uterine malignancy prior to and regularly during treatment.

* Elavil (amitriptyline), an anti-depressantfor which cardiovascular


disordersmust be ruled out before treatmentbegins.

14
* Lithium carbonate,an anti-psychotic used to treat manic depression.
Individualized dosing and careful monitoring of serum levels are
required to avoid life-threatening toxicity.

* Drugs with clinically-significant drug-drug interactions. Unapproved


versions of Zocor (simvastatin), imipramine, ketoconazole,Viagra
(sildenafil citrate), and tramadol were discoveredduring the import
blitzes. Thesemedicines are associatedwith clinically-significant
interactionswith other drugs that a purchasermay be taking.

7 Biological products that should be administered by a health care


professional and that are not licensed by FDA. Influenza Virus Vaccine
is approvedin Canadabut not licensedby FDA. This vaccine was
discoveredduring one of the blitzes.

e Animal drugs not approvedfor human use. Clenbuterool,a drug


approvedfor the treatmentof airway diseasein horses,was shippedfrom
Costa Rica and China. This drug, which is used illicitly by athletesas a
performance-enhancingdrug, has not been approvedfor human use by the
FDA and has been bannedby the International Olympic Committee.

* Drugs withdrawn @onathe market. Consumersalso import drugs that


have been withdrawn from the U.S. market. For example, FDA and
Customs found a shipment of Buscapinafrom Mexico. This appearedto
be a foreign version of the drug Dipyrone, which was removedfrom the
U.S. market in 1977 after reports that U.S. patients had developedsevere
blood disorders,some fatal.

In testimony before the House GovernmentReform Subcommitteeon Human

Rights and Wellness, and later before the House GovernmentReform Committee, FDA’s

Associate Commissionerfor Policy and Planning has provided additional descriptionsof

the medicines that are illegally imported.

* Drugs that should be dispensedonly in small amounts. Mr. Hubbard


said, “A secondexample I will give, this is an anti-depressantdrug. It
should only be dispensedin very small amounts,about 30. This is several
hundred. This drug is prescribedfor a relatively high-risk population for
overdose. This drug should not be given in large amountsto patients. The
Canadianpharmacy sent this individual about ten months worth of that
drug.” He addeda secondexample: “The next individual apparentlyhad
epilepsy and bought a drug called Gabapentin,which is usually dispensed
in 30-day increments. This is what the Canadianpharmacysent this
gentleman. This is about four yearsworth of the drug. Thesedrugs start

15
expiring in six weeks. So most of the time this patient takes thesedrugs,
they will have been expired and ineffective.‘y39

a Drugs that require refrigeration. Hubbard also noted “drugs for


osteoporosis,for glaucoma,and insulin for diabetics.”He explained
“[tlhey are required to be refrigerated.If they’re not refrigerated,they’re
very complex proteins that break down and becomeineffective . . . . I’ll
even note that in the caseof one pharmacy,the place where it says, ‘keep
refrigerated’is where they put their label. So that is a dangerously
ineffective drug. In all three cases,those came from Canadaorderedover
an Internet site, we believe.“40

* Counterfeit products lacking active ingredient. On February 4,2004,


Z FDA issued a warning to the public about a foreign Internet site selling
counterfeit contraceptivepatches.Thesecounterfeit patchescontainedno
active ingredient and thereforeprovided no protection againstpregnancy.
The Internet site, www.rxpharmacy.ws, apparentlywas operatedby
American Style Productsof New Delhi, Jndia.41

2. FDA and U.S. Customs have repeatedly confirmed that they


lack the resources effectively to monitor the influx of illegal
drug in~port.s.~~
While proponentsof importation have arguedthat importation can be done

safely, regulatorshave statedtime and time again that resourceconstraintshampertheir

ability effectively to enforce current law and to handle the increasingstream of drugs

39
Testimony of William K. Hubbard,Associate Commissionerfor Policy and
Planning, U.S. Food and Drug Administration, House GovernmentReform Committee
(June 12,2003).
40
Id.
41
Testimony of William K. Hubbard, Associate Commissionerfor Policy and
Planning, D.S. Food and Drug Administration, House GovernmentReform Committee
Hearing (March 18,2004). On February 12, the FDA took action againstthree additional
Internet sites associatedwith the sale of counterfeit contraceptivepatches
(www.usarxstore,com,www.euroneanrxpharmacv.com,and www.Peneric.com). The
counterfeit contraceptivepatcheswere purported to be an FDA-approved product.
Instead, customersreceivedpackagesof patcheswithout the active ingredient necessary
to make the:patcheseffective. The counterfeits were sent in plastic zip-lock bags without
identifying materials, lot numbers,expiration dates,or any other labeling information.
42
This section of our commentsrespondsto item 9 on page 9 (the requestfor
information,about “the agencyresources,including additional field personnel,neededto
adequatelyinspect the current amount of pharmaceuticalsentering the country”).

16
being illegally imported into the U.S. If they cannot adequatelyenforce current law, they

clearly could not protect the public safety if importation were legalized.

In March 2004, for example, SecretaryThompson told SenatorCochran

that FDA is “‘strapped”and that it does not have enoughresourcesto ensurethat imported

drugs are safe:

SenatorCochmn: Mr. Secretary,we’ve had some debates


and votes on amendmentshere in the Senaterelating to
importation of pharmaceuticalproducts from other
countries. Are there sufficient funds in this budget request
to deal with the problem of counterfeit or unsafe
pharmaceuticalproducts that may enter the United States
from other countries?
SecretaryThompson: I don’t think so, Senator. I think it’s
a growing problem, and we are doing the best job possible.
As you know, I requestedof this Congressearly on when I
came on to get enoughinspectorsto deal with some things,
with food. We have increasedit, but overall, I still think
that there’s a good chanceof having counterfeit drugs. And
we seethat every time we stop. We had, as you know,
some inspectionsat the border not too long ago, one in July
and in Septemberand October of this year. And about 87
percentof the drugs that came in were either mislabeled or
mispackaged. Some were counterfeit, some were not
certified by FDA or approvedby FDA. So there are a lot of
drugs that still are coming into America that are not
regulatedby FDA.
Sen. Cochran: Are we making an effort to bring this to the
attention of our friends around the world and try to get help
there in those countries?
SecretaryThompson: We are. We have a very strong,
aggressiveoutreachprogram to other countries, especially
to Canada. But Canadahas pretty much indicated that it’s
not their problem, and it’s our problem and that we should
addressit ourselves. We have startedhearings. Last Friday
was the first hearing. I set up a commission, headedup by
SurgeonGeneralCarmona,to take a look at reimportation,
importation, as well as ways in which we can develop.
We’ve also set up a task force on counterfeit drugs. And
we announcedthat a couple of weeks ago. We’re working
with the FederalTrade Commission and the Departmentof

17
Justice in regardsto that. We are quite aggressive. But
your questionwas: Is there enoughresources?I don’t think
there is, becauseFDA is very strappedwith all of its
demands. And this is a huge problem, and if, in fact, we
are going to have reimportation, we’re going to have to
have more resourcesin order to make sure that those [sic]
reimportation of drugs are [sic] safe.43
Earlier the samemonth, the Commissionerof FDA (now the

Administrator of CMS and a member of this Task Force), Dr. Mark McClellan, testified

before the SenateCommittee on Commerce,Science,and Transportationthat FDA and

Customs face competing priorities and are “‘unableto visually examine many of the

parcels containing prescription drug products that arrive through the mail and private

courier serviceseach day.“@ He addedthat although FDA “works hard to inspect many

legitimate manufacturing facilities selling drugs to Americans through legitimate FDA-

regulatedchannels,including facilities located in the United Statesand abroad,”the

agencyhas L’neitherthe legal authority nor the resourcesto assurethe safety of drugs

from outside the federal and state system of regulating drugs.‘A5 Administrator

McClellan made similar commentsin 2003 in a letter to RepresentativeTauzin regarding

one of the importation bills introduced that year. In this letter, he wrote that the “sheer

volume of importation that could result from enactmentof this bill would easily

overwhelm our alreadyheavily burdenedregulatory system.“46

43
Testimony of Tommy G. Thompson, Secretaryof Health and Human Services,
SenateAppropriations Committee, Subcommitteeon Labor, Health and Human Services
and Education (March 25,2004).
44 Testimony of Dr. Mark B. McClellan, Commissionerof Food and Drugs, Hearing
before the Committee on Commerce,Scienceand Transportation,United StatesSenate
(March 11,2004).
45
Id.
46
Letter from Mark B. McClellan, M.D., Ph.D., Commissioner,Food and Drug
Administration to the HonorableW.J. “Billy” Tauzin (July 18,2003) (re H.R. 2427).

18
Other FDA officials have made the samepoint. In November 2003, for

example, the Associate Commissionerfor Regulatory Affairs, John Taylor, told the

SenateCommittee on Commerce,Science,and Transportationthat the agencywas

“doing its best to stop the increasingflow of violative drugs into this country,” but that

the task was “daunting,“47 He addedthat “[elach day thousandsof packagescontaining

prescription drugs are imported illegally into the United States’”and noted that “while the

volume of imported drugs has increasedenormously,FDA has not received additional

resourcesor authority to addressthese shipments,in contrastto the casefor food security

at the border.“48 Further, FDA’s risk-basedenforcementstrategyis “overwhelmed by the

number of incoming packagesthat must be evaluated”which “presentsa significant

ongoing challengefor the Agency.“4g The volume of importation that could result from

enactmentof a bill to legalize importation ‘“could easily overwhelm our already heavily

burdenedregulatory system.‘“’

In June 2003, Mr. Taylor told a subcommitteeof the House Energy and

CommerceCommittee that “[wlith the available resourcesand competing priorities

facing the agency,experienceshows that we are unable to visually examine the large

volume of parcels containing prescription drugs that arrive in the mail and courier

47
Testimony of John M. Taylor, III, Associate Commissionerfor Regulatory
Affairs, Food and Drug Administration, before the Committee on Commerce,Science
and Transportation,United StatesSenate(November 20,2003).
48
Id.
49
Id.
50
Id.

19
serviceseach day.‘“r When askedby RepresentativeDavis about the solution, he

expresseddoubt whether any amount of increasein resourceswould ever be sufficient:

Mr. Davis: What exactly would you suggestthat Congress


needsto do to be a part of the solution here? We are
spendingmost of the day talking about the problem so far,
and it is easyto sit here and criticize you, but what we are
entitled to and what the public is entitled to, [sic] for you to
be painfully direct for us as to exactly what Congressneeds
to do to be part of the solution here because,if you are not
part of the solution on this, you are part of the problem.
Mr. Taylor: I, quite frankly - I guessas a starting point,
looking at some comprehensivesolution that just doesn’t
, focus at providing additional resourcesbecause,as I stated
earlier, providing us additional investigatorsdoesn’t seem
to be the answers,and no matter how many investigators
you provide us, it seemsthat basedon the numbers,we
would still struggle to look at all thesepackagesand
prevent their entry into the United States.
Mr. Davis: Mr. Chairman, if I could just finish this last
question, and I will stop there. What else besides
resources?
Mr. Taylor: Well, I guesswhat I am saying is that
resourcesaren’tthe answer. It is some type of
comprehensivesolution that focuseson why people are
purchasingtheseproducts and importing them into the
United Statesseemsto be the answer.52

The agency’s Senior Associate Commissionerfor Policy and Planning,

William Hubbard, told the samecommittee that simply providing FDA more resources

would not fii the fundamentalsafety problem. ChairmanGreenwoodasked,“if you use

this current system that you have in place, the number of personnelthat you would need

to really have a pretty foolproof systemwould be unrealistic. . . . So isn’t it the casethat

51
Testimony of John M. Taylor, III, Associate Commissionerfor Regulatory
Affairs, Food and Drug Administration, before the House Energy and Commerce,
Subcommitteeon Oversight and Investigations (June 24,2003).
52
Id.

20
we really need to changethe system that we use to approachthis problem rather than

simply cahfor more resources?”Mr. Hubbard responded, ‘“I think that is correct. . . . I

have 537 investigational FTEs devotedto this task, and those bodies don’t just handle

pharmaceuticalproducts. They handle foods, biologics. They are involved in preventing

the spreadof BSE to this country. They are involved in taking stepsto prevent the

monkeypox outbreak from growing. They are involved in homelandsecurity and food

safety. So those Xl-some-odd people are vested with a large job, and it is simply not

one that the resources- increasingthe resourceswill not really causea big dent. We

really needto changethe system.‘“53In 2001, Mr. Hubbard commentedin a letter to

RepresentativeTauzin on an amendmentoffered by RepresentativeGutknecht to allow

personalimportation: “[t]he increasedvolume of potentially dangerousimported drugs

would place an additional strain on an already compromisedU.S. regulatory approachto

protecting consumersfrom unsafepersonalimportations.‘“4 And in a hearing before the

Oversight and Investigations Subcommitteeof the House CommerceCommittee in 2001,

he commentedthat FDA does not have the resourcesto look at “small packages.‘55

Representativesof U.S. Customs agreethat the task of monitoring

imported drugs is already overwhelming. One official commentedat the same hearing in

2001 that “[dletecting prohibited pharmaceuticalsamong the tens of millions of parcels


53
Testimony of William Hubbard,Associate Commissionerfor Policy and
Planning, Food and Drug Administration, before the House Energy and Commerce,
Subcommitteeon Oversight and Investigations (June24,2003).
54
Letter from William Hubbard, Senior Associate Commissionerfor Policy,
Planning and Legislation to The Honorable W.J. “Billy” Tauzin, Chairman, House
Energy and CommerceCommittee and The Honorable John Dingell, Ranking Member,
House Energy and CommerceCommittee (July 17,200l).
55
Testimony of William Hubbard, Senior Associate Commissionerfor Policy and
Planning, before the House Committee on Commerce,Subcommitteeon Oversight and
Investigations (June 7,200l).

21
passingthrough our mail facilities each year presentsa massive challenge.“56She

explained, “[o]ur limited resourcesrequire a risk managementapproachwith which we

utilize advanceintelligence, records of past seizures,and other factors to locate packages

that presentthe most significant threat.“57 The government’sinability to inspect imports

was amplified in an exchangewith RepresentativeDingell:

Mr. Dingell: Ms. Durant, two questions. A simple yes or


no answer I think will suffice. In your CarsonCity project,
in 4 or 5 weeks Customs inspectorscould have stopped
approximately 16,000parcels containing pharmaceuticals
or somethingthat appearedto be a pharmaceutical. Is that
correct?
Ms. Durant: That is correct.
Mr. Dingell: It is also true that FDA could processonly a
tiny fraction of these,approximately 30 a day? Is that
right?
Ms. Durant: That is also correct.
Mr. Dingell: So they could only then have reviewed a
minute portion of this?
Ms. Durant: That is correct.

If FDA and Customs lack the resourcesnow to inspect the millions of

packagesthat cross the border annually, when drug importation is illegal, they would

surely be helplessif ten or twenty times that volume crossedthe borders under a legalized

drug importation scheme. Further, paradoxically, as Congressbuilds more and more so-

called safety provisions into an importation scheme,the crushing burden on FDA and

Customswill increase. If biologics are to be excluded,for example, and if unapproved

56
Testimony of Betsy Durant, Office of Trade Programs,United StatesCustoms
Service, Before the House Committee on Commerce,Subcommitteeon Oversight and
Investigations (June 7,200l).
57
Id. Seealso Testimony of Betsy Durant, Office of Trade Programs,United States
Customs Service, Before the House Committee on Commerce,Subcommitteeon
Oversight and Investigations (May 25,200O).

22
and misbrandeddrugs are to be exchrded,then someonemust check each of the millions

of packagescrossing the border. Cost-savingsand safety, in a sense,may be flip-sides of

the samecoin. Just as the Secretaryneedsto determinewhether importation can be done

in a way that will guaranteethe safety of the patient, he will also needto consider the

fiscal impact of increasingthe FDA and Customsbudgetsby several orders of magnitude

in order to implement “safety” provisions.

3. Congress and HHS should tighten the pharmaceutical


distribution chain in the United States rather than open the
borders to foreign products?*

a) FDA’s inability to fully implement the PDMA has


contributed to the domestic diversion and counterfeiting
problem that endangers American consumers.
One basic tool for helping to preservethe safety of our country’s drug

supply is the maintenanceof a closed distribution system. This objective is not always

met, but where there are deviations, safety issuesinevitably arise, and the integrity of the

drug supply.is compromised. In a closed distribution system, the manufacturerships

drug product to a distributor, who in turn ships to the pharmacy for dispensingto the

patient. Mqltiple distributors may becomeinvolved, but the key is that each transaction

in the supply chain is documentedand tracked, so that the pedigreeof the product

involved can be traced and verified by lot at any point in the chain of distribution.

The drug distribution chain in U.S. commerceis not entirely closed, in

part due to limitations in the law. Counterfeit and tainted products surfacefrom time to

58
This?sectionof our commentsrespondsto the items 1,2, and 3 on page 9 (the
limitations in resourcesand in current legal authorities that may inhibit the Seeretary’s
ability to certify the safety of imported drugs; the pharmaceuticaldistribution chain and
the need for, and feasibility of, modifications in order to assurethe safety of imported
products; and whether anti-counterfeiting technologiescould improve the safety of
products in the domestic market as well as products that may be imported).

23
time, and the public health is put at risk. Domestic challengesthus remain great. These

challengeswould, however, be multiplied significantly by the addedcomplexities and

burdensof an expandedinternational supply of drugs from various wholesalersand

pharmacies.

The PDMA and the Prescription Drug Amendments of 19925gamended

the FDCA to establishrequirementsfor the distribution of prescription drugs that are

designedto:promote integrity in the pharmaceuticaldistribution system. These

provisions require secondarywholesale drug distributors to provide purchasersa

statement,also called a “pedigree,”that identifies eachprior sale, purchase,or trade of

the drug.@

FDA published regulationsthat would require that the pedigreealso

include the proprietary and establishednamesof the drug, its dosage,the container size,

the number of containers,lot or control numbersof the drug being distributed, the

businessname and addressof all parties to each prior transactioninvolving the drug

(starting with the manufacturer),and the date of eachprevious transaction!l However,

FDA has repeatedlystayedtheseregulations and refusedto implement the pedigree

requirementsof the PDMA, due to concernsthat it would not be feasible for secondary

wholesalers,to obtain the information necessaryto provide the required pedigrees. Most

recently, FDA stayed the regulationsuntil December1,2006, in order to permit industry

59
Pub.!L. No. 102-353,106 Stat. 941(1992).
60 21 U.S.C. 3 353(e)(l)(A).
61
21 C.F.R. 8 208.50. The requirementthat the pedigreeinclude the namesand
addressesof all parties involved in each prior transactioncomes directly from section
503(e)(l)(A) of the FDCA.

24
to develop and implement a track-and-tracesystem that it is hoped will “accomplish and

surpassthe:goalsof PDMA.“62

Pendingdevelopmentand adoption of new technology to track drug sales

and other transfersthrough the distribution chain, the absenceof an establishedpaper

pedigreeis a seriousweaknessin current law that would be greatly exacerbatedby new

drug imports. No easy fix is in sight. FDA’s inability to put the full pedigree

requirementsof the PDMA into effect is part of the problem.63However, the PDMA

itself has critical limitations. In particular, the PDMA doesnot require that authorized

distributorsof record provide the inforrnation to secondarywholesalersneededto create a

completepedigreefor each drug. In a 2001 Report to Congress,FDA noted that in order

to enablesecondarywholesalersto achieve full compliancewith the PDMA’s pedigree

requirement,Congresswould have to amendsection 503(e) of the PDMA to enable

secondarywholesalersto obtain pedigreeinformation from all prior purchasers,including

authorizeddistributors.64Although Congresshas consideredthe issue,it has not yet

acted on FDA’s recommendationto amendthe PDMA.

Without a pedigreefrom secondarywholesalers,there is no legally-

required documentthat ensurestraceability back to the drug manufacturerand guards

against drugs that are counterfeit or that are stored in an inappropriatemanner, This

createsa major obstacleto full traceability, and it may permit unscrupulousparties to

62
69 Fed. Reg. 8105,8107 (February23,2004).
63
See,e.g., First Interim Report of the SeventeenthStatewide Grand Jury, No.
SCO2-2645(Fla. 2003) (http;//myfloridalegal.com/grandjuryl7.pdf) (“IW]e canclude that
both FDA and [Florida] DGH have failed to aggressivelyenforce their respectivepaper
pedigreelaws. We believe that strict enforcementof our pedigreepaper law is essential
to protecting the public from drug counterfeiters.“).
64 The Prescription Drug Marketing Act: Report to Congress,June 2001, at 22-23.

2.5
“launder” counterfeit or diverted drug products through unknowing distributors and break

the recordedchain of custody. This loophole in the PDMA, exacerbatedby FDA’s

inability toimplement its regulations,already createsa weaknessin the strong protections

afforded American consumers. This weaknesswould be greatly compoundedif the

pharmaceuticaldistribution chain were expandedto accommodatelegal imports of

prescription drugs.

b) Congress should impose tougher penalties for


counterfeiting and other violations.
The inadequatepenaltiesavailable for violations of the PDMA and

statutesprohibiting counterfeiting drug products presentanotherobstacleto protection of

the public from unsafe imports. The maximum penalty for a felony drug counterfeiting

violation isthree years imprisonment and/or a $10,000 fine. That penalty can be imposed

only upon a finding that the counterfeiter actedwith intent to defraud or mislead.65

Compareti far more stringent penalty for counterfeiting anotherproduct, such as

currency, and the penalties for distributing illicit drugs.*

This disparity underscoresthe leniency in the prescription drug

counterfeiting laws, and weakensthe ability of the law to deter wrongdoers. In addition,

the statutory schemedoes not adequatelypunish those who have some indication that

they are receiving counterfeit drug products and deliberately fail to act upon that

knowledge,“forexample by failing to conduct basic due diligence to ensurethe product’s

65
21 U.S.C. 8 333(a)(2). The fine may be subject to enhancementpursuantto 18
U.S.C. $$3571.
66
See 18 USC. 0 485 (providing for fine and/or up to E-year term of
imprisonment for the act of counterfeiting U.S. currency); 21 U.S.C. $841 (establishing
terms of imprisonment for distribution of controlled substances,ranging up to life in
prison for seriousviolations).

26
pedigreeis; accurate,or by overlooking obvious red flags such as deeply discounted

prices or suspiciouspackaging.

In short, the statutory schemedoes not permit FDA to seek adequate

penaltiesfor parties that counterfeit pharmaceuticalproducts or that otherwise knowingly

underminethe safety of the U.S. drug distribution system. Becausethe penalties are

imposed by statute,FDA and prosecutorsmay not unilaterally impose greaterfines or

seek a longer prison term for violators, although in some circumstancesprosecutorscan

allege additional legal violations, such as mail fraud and conspiracy. The net result is

inadequate.deterrence,
and a further limitation on the ability of current legal authorities to

ensurethe safety of drug imports.

4 Congress should impose stricter wholesaler licensing


requirements.
Drug wholesalersare subject to a variety of state laws with differing

standardsof enforcement,permitting unscrupulouswholesalersto establish operations

where they:will face the least regulation. All 50 statesrequire wholesaledrug distributors

to be licensed, and some states- notably Florida and Nevada -have instituted stricter

regulatory oversight. Typically, statesrequire backgroundchecks of wholesalersfor

felony convictions before issuing a license, establish drug storageand handling

requirements,and require record keeping. Requirementsvary, however, and wholesalers

have an incentive to locate their operationsin the states‘with the least stringent rules.

FDA has published Guidelines for State Licensing of Wholesale

Prescription Drug Dealers, set forth in 21 C.F.R. part 205. FDA’s regulationsestablish

minimum standardsfor state licensing authorities, ensuring at least a basic level of

regulatory consistencyacrossthe 50 states. FDA has not, however, audited each state’s

27
regulations,and related enforcementoperationsto ensurethat they actually comply with

FDA standards. FDA can begin to close the loopholesin the distribution system by

drafting strongerminimum standardsfor licensing and oversight of wholesale operations,

and by ensuringthat statesimplement the tighter standards. This would be one step

toward raismg the level of state oversight of wholesaledistributors acrossthe country.

However, until FDA has addressedthe issue of inconsistent,often lax, state licensure and

regulation of wholesale operations,this will remain a major weaknessin the distribution

chain. Thelresult is a diminished ability to ensurethat tainted imports will not flow over

the borders,into the wholesalerdistribution system, and to patients,without appropriate

regulatory control and oversight.

d) Congress should more strictly regulate repackaging.


Drug repackagingoperationsmay also createan opportunity for subpotent,

adulterated,or otherwise problematic drug products to enter the market. Drug products

are routinely repackagedafter shipment from the manufacturingfacility. Certain

repackagingis performed, for example, when health maintenanceorganizations(HMOs)

or hospitals:repackagedrugs for internal distribution; such practicesrarely createthe

opportunity’for distribution of counterfeit or diverted drugs. However, repackagingis

also undertakenby other entities in the distribution chain and may pose a threat to public

health.

For example, an unscrupulousrepackagermay dilute the drug before

packagingit in new containers,to give the appearanceof greaterquantity, or drugs may

be adulteratedduring the repackagingprocess. Drugs may also be repackagedusing

inferior or substandardmaterials,which may result in product quality deterioration.

Repackaginginterferes with tamper-resistantfeaturesand counterfeit-resistant


28
technologiesthat manufacturersbuild into original product packaging,thereby

undermining the effectivenessof such innovations.

Impiementation of the PDMA pedigreerequirementis the best meansof

limiting repackagingoperations. The threat to the system posedby repackagingcan also

be addressedby increasedFDA surveillanceover relevant entities in the drug distribution

chain, including frequent inspectionsof repackagingfacilities to ensurecompliance with

GMPs and record keeping requirements. However, until the pedigreerequirementis in

place and PDA has increasedits facility inspections,the practice of drug repackagingwill

remain a significant weaknessin the distribution chain and will continue to pose a threat

to public safety. This threat would grow if an expandedvolume of imports were to begin

to flow to repackagersfor further distribution.

B. Importation cannot be “made safe” with creative legislative


alternatives to the current gold-standard system, with full F’DA
approval and oversight, GMP and GDP compliance, and completely
closed borders.
1. Importation directly contradicts a core principle in the F’DCA:
that a medicine% safety must be proven rather than assumed.67

Inherent in the federal regulatory schemegoverning development,

approval, and marketing of new drug products is the requirementthat a manufacturer

prove to FDA that its drug is safe and effective. The burden of proof falls on the

manufacturer,and the processof developing the data to meet this burden takes many

years. In the pre-clinical testing stage,for example,a manufacturerconducts laboratory

and animal tests to evaluatethe safety of its new compound. In the secondstage,before

performing any clinical trials in humans,the manufacturersubmits an investigational new

67
This section of our commentsrespondsto item 1 on page 9 (limitations that may
inhibit the Secretary’sability to certify the safety of imported drugs).

29
drug application @ND) to FDA!” Every IND must contain sufficient pharmacological

and toxicological data to show that it would be reasonablysafe to conduct clinical trials

in humans6’ An IND must also detail the drug’s chemical composition, structural

formula, proposeddosageform, and proposedroute of administration; the investigative

plan and proposedclinical trial protocols; any prior human experience(including foreign

data); and prior withdrawals from investigation or marketing.70If FDA is satisfied that

the pre-clinical animal data do not demonstratean unacceptablesafety risk to humans,the

drug sponsormay begin clinical studies in humans.71

During the clinical program, the sponsortests the drug for safety and

efficacy in small dosesand multiple doses,in healthy volunteers and patients, and in

varying demographicgroups. Following the clinical trials, the drug sponsorprepares

and submits an NDA, seekingFDA’s permission to manufacture,distribute, and market

the drug in the United States. Among other things, the NDA must include the preclinical

data, such as laboratory and animal studies,evaluatingthe drug’s pharmacologyand

toxicology;i2 data on the mannerin which the drug is absorbed,distributed, metabolized,

and excretegin humans(pharmacokineticand bioavailability data);73clinical data

obtained from administering the drug to humans,including data demonstratingthe drug is

safe under the proposedconditions of use;74a description of the proposedmethodsby

68
21 C.F.R. 0 312.40.
69
21 C.F.R. 8 312.23(a)($).
70
21 C.F.R. $312.23.
71
21 C.F.R. Q 312.21,312.40.
72
21 U.S.C. § 355(b)(l)(A); 21 C.F.R. 8 314.50(d)(2).
73
21 C.F.R. 0 314.50(d)(3).
74
21 U.S.C. 0 355(d)(5); 21 C.F.R. 0 314.50(d)(5).

30
which the drug will be manufactured,processed,and packed;” a detailed chemical

descriptionof the drug and its active ingredient;76a list pf eachpatent claiming the drug,

drug product, or method of use, or a statementthat there are no relevant patentsmaking

such claims;77and the drug’s proposedlabeling.78

In order to permit marketing, FDA reviewers must find that the drug

satisfies two fundamentalrequirementsof the FDCA - that it is ‘Leffective”and “safe.”

The sponsormust have “substantial evidence”that the drug will have the effect it

purports to have, under the indicated conditions of use?’ “Substantial evidence”means

evidencefrom adequateand well-controlled clinical studies.80The drug also may not be

approvedumessthere are “adequatetests by all methodsreasonablyapplicableto show

whether or not such drug is safe for use under the conditions prescribed,recommended,

or suggestedin the labeling thereof.“81 Approval of an NDA can take anywherefrom six

months to three years.82

In short, the FDCA createsa systemwhere a drug must be proven safe

before it may enter the drug supply. Importation would flip this system on its head. The

World Health OrganizationQVEIO)has found, and FDA has repeatedlytold Congress

75 21 U.S.C. 8 355(b)(l)(D); 21 C.F.R. 0 314.50(d)(l)(i)-(iii).


76
21 U.S.C. 8 355(b)(l)(B)-(C); 21 C.F.R. 8 314,50(d)(l)(i)-(iii),
77
21 C.F.R. 3 314.50(h)-(i).
78
21 U.S.C. 0 355(b)(l)(F), 21 C.F.R. 13314.50(e).
79
21 U.S.C. 0 355(d), 21 C.F.R. 5 314.105(c).
80
21 U.S.C. 0 355(d).
81
21 U.S.C. 6 355(d)(l).
82
“NDA Approval Rates for NDAs Received FY 1993-2002and Approved within
36 Months”:< www.fda.gov/cder/present/MedianAPtime/LifeTables/
NLifeTable2NDA.htm> (visited February 18,2004).

31
and the public, that the drug supply circulating in commerceoutside the United States

contains a high percentageof counterfeits and cannot be assumedsafe. The rising

volume of counterfeit and adulteratedmedicines have been describedin the press and

documentedby FDA.83 And still, proponentsof importation would open the borders. A

“show us the bodies” approachto the U.S. bordersis fundamentally inconsistentwith the

83
See;e.g., “Counterfeit Drugs Becoming a Big and DangerousBusiness,”CBN
NEWS (April 16,2004); “‘Online Drugs Raise Warning,” SeattEePost (April 15,2004);
“Pharmacy,BossJailed, Fined For Smuggling In Bogus Viagra,” The Straits Times (April
14,2004); “Scramble Is On To Fight Fake Drug Market,”Associate Press Newswires
(April 12,2004); “Health Experts Warn About Growing Danger of Counterfeit Drugs,”
The Partnership for SafeMedicines (April 82004); “‘Drug Firms Decry Importation,”
Los Angeles Times (April 6,2004); Joyce Primo-Carpenter, “A Matrix of Drug Quality
Reports on :USAID-Assisted Countriesby the U.S. PharmacopeiaDrug Quality and
Information (USP DQI) Program,”USP Global Assistant Initiatives (March 30,2004);
“The menaceof fake drugs in Nigeria,” HeaZthyskepticism.org(March 22,2004); “16-
year old receivescounterfeit Epogen,”Fox 5 Navs (March 1,2004); “Drug regulators
study global treaty to tackle counterfeit drugs,”The British Medical Journal (February
28,2004); FDA, “Combating Counterfeit Drugs” (February 18,2004); “Counterfeit drugs
and the dangerto Westchester,”TheJournal News.com(February 16,2004); “‘Fake
drugs, real threat: Seizuresof counterfeit prescription medicines and arrestsare on the
rise, causing new concerns. The FDA insists the country’s supply of pharmaceuticalsis
safe,”Los Angeles Times (February9,2004); “‘Rx Drugs: Rising Arrests Over
CounterfeitsExamined,“American Health Line (February9,2004); “FDA Deems Some
Birth Control PatchesFake,” TheAssociated Press (February4,2004); “Despite U.S.
Crackdown Cities Still Offer Imported Meds,” ConnecticutPost (January30,2004);
FDA NEWS, “Recent FDA/U.S. Customs Import Blitz Exams Continue to Reveal
Potentially DangerousIllegally Imported Drug Shipments”(January27,2004); “On the
trail of the world-wide web of fake lifestyle drugs,”Independenton Sunday (January 18,
2004); “ExPosCof company selling bogus Viagra forces British-owned website to close,”
Independenton Sunday (January l&2004); “‘Anti-Counterfeit Stepsby Drugmakers
Sought; Legislators’Goal Is to Halt Illegal Sales,”The WashingtonPost (January 17,
2004); “U.S. panel probesway to fight fake medicines,”Reuters (January 16,2004);
“The growing problem of counterfeit prescription drugs,”NBC Nightly Nays (January
l&2004); ‘Exposed - the fake Viagra racket,”Independenton Sunday (January 11,
2004); “Drug WholesalersFace StateEfforts To Tighten Rules,”The Wall StreetJournal
(January8,2004); “Business & Innovation Life Sciences: Pharmaceuticals;Feeling
Lucky? That Drug You’re Counting on May Not Be What It Appears. As Counterfeiters
Become More Sophisticatedat Copying Drugs Like Viagra, Above, The Industry Is
ScramblingFor Ways To Protect Its Wares,”The Boston Globe (January5,2004). These
arejust the examplesfrom the first four months of 2004.

32
premiseof the FDCA that a medicine must be affirmatively proven safe before FDA will

permit it toibe sold to consumers.84

2. Safety and quality cannot be ‘“tested into” a product.85

a) End-product, or terminal, testing is contrary to the


concept of GMP embodied in the F’DCA.
FDA’s GMP regulations are basedon the fundamentalquality assurance

principle that quality, safety, and effectiveness“cannot be inspectedor tested into a

finished product,”but instead must be designedand built into a product.86FDA has

reiteratedthis bedrock principle on numerousoccasions,most recently in connectionwith

its 2003 initiative to modernizethe GMP regulations.87

GMP is a systemsapproachthat requiresa company to build quality

directly into the entire mauufacturing operation,in order to ensurethat the processitself

84
The requirement that a medicine be proven safe was crafted by Congressin
responseto ia tragic incident involving an unproven product. In September1937, more
than 100 people - many of them children - died after taking a product called “‘Elixir
Sulfanilamide,”a sulfa-basedproduct used to treat infections like strep throat, The
manufacturerhad used diethylene glycol (now known as antifreeze)as a solvent, without
performing safety testing. Congressrespondedin 1938 by requiring “premarket
notification” for new drugs. Before a new drug could be marketed,it was required to be
testedon humansin accordancewith investigational new drug (IND) regulations
promulgatedby FDA. When sufficient data were obtained under the IND to demonstrate
the safety of the drug, the manufacturerwas required to submit a new drug application
(NDA) for the drug to FDA. If FDA did not disapprovethe NDA within sixty days after
filing, the NDA becameeffective and the drug could be marketed. FDA now servesas a
gatekeeper,ensuring that any drug sold to American patients has beenproven safe. If the
supportersof importation prevail, however, Congresswill essentiallyturn back the clock
to 1937, when products were marketeduntil proven dangerous,and public health
measurescame only after tragedy struck.
85
Thissection of our commentsrespondsto item 1 on page 9 (limitations that may
inhibit the Secretary’sability to certify the safety of imported drugs).
86
61 Fed. Reg. 20104,20105 (May 3,1996).
87
SeeDraft Guidancefor Industry: PAT - A Framework for Innovative
PharmaceuticalManufacturing and Quality Assurance(August 2003); see alsa Guideline
on GeneralPrinciples of ProcessValidation (May 1987).

33
is under control and thereforewill consistently produce a drug product that meets

designatedspecifications. The GMP regulationsimpose strict controls on every aspect

of the manufacturingprocess,including: (1) the qualifications and responsibilities of

employeesand consultants;(2) the design and maintenanceof manufacturingfacilities;

(3) the design, construction, cleaning, and maintenanceof manufacturing equipment; (4)

the receipt, storage,testing, and acceptanceof pharmaceuticalraw materials and

components,including containersand closure systems;(5) the manufacturing process

itself, including reprocessingprocedures;(6) the packagingand labeling of finished drug

products; (7) the storageand distribution of final products; (8) required laboratory testing

procedures;and (9) recordkeepingrequirements.88 Failure to satisfy any of theseGMP

requirementsrendersthe affected drug product “adulterated”and thus illegal in the

United States- even if testing fails to reveal any obvious deficienciesin the product.89

The GMP requirementof the FDCA - which is part of the approval

processand;continuesto apply when a drug is marketed- embodiesthe theory that a

product’s integrity can be assuredonly if the processby which it is manufactured,

packaged,labeled, stored, and shipped is fully under control and capableof audit at any

time by FDA. Importation - which would permit an unapproveddrug to enter the

medicine supply upon end-producttesting (not even necessarilyof the drug, perhaps

merely of a sampling from eachlot) at the point of entry - flips this theory on its end.

As the GMP regulationssuggest,end-producttesting is inherently limited

and cannot be relied upon to ensurethe quality and safety of drug products. Many end-

product tests have limited sensitivity and may fail to detect substances,such as impurities
88
See21 C.F.R. Part 211.
89
21 U.S.C. (5351(a)(2)(B).

34
or degradants,that are presentin a drug product at low levels.go If thesesubstancesare

dangerousat low levels or have an adverseeffect on product quality (e.g., they accelerate

degradationof active ingredient), the end-stagetesting will fail to reveal that the drug

product may be unsafe,unstable,or ineffective. In essence,such testing would yield an

unacceptablyhigh rate of “false negatives,”i.e., finding no quality or safety problems

when such problems actually exist.

Also, drug products often are extremely complex, and end-producttesting

does not reveal all variations that may affect safety and effectiveness. Even seemingly

minor changesin manufacturingprocessor storageconditions may introduce variations

in the product, such as new impurities, that cannot be predicted or easily tested. These

variations can have a significant impact on safety and effectiveness. For example,

testing might be conductedto demonstratethat a drug product contains the proper

strengthof a specific active ingredient; however, such testing would not detect other

variations in the product causedby manufacturing changes,such as increasedpill

hardnessor :contaminationwith cleaning chemicals,that could have a significant impact

on safety and effectiveness. While dissolution and impurity testing might be addedto the

battery of tests conductedon 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. Becauseof the complexity of drug products, end-product

testing simply cannot measureall of the possible variations that could affect safety and

effectiveness.

90
SeeGuideline on GeneralPrinciples of ProcessValidation, supra note 87, at 3.

35
Becauseof thesesignificant limitations, FDA does not rely upon terminal

testing alone to assurethe safety and quality of drug products. Instead,through the GMP

regulations$nd guidancedocuments,which implement the GMP requirementin the

FDCA, FDA seeksto minimize the variability in the manufacturingprocessitself. Safety

and quality cannot be inspectedor tested“into” a drug product; they must be built into

the productthrough rigorous approval requirementsand strict controls over the

conditions under which drugs are manufacturedand distributed.

b) There are technological and practical impediments to


the use of end-product testing to assure the authenticity,
safety, and quality of imported prescription drugs.
End-producttesting is inadequateto assurethe authenticity of imported

drugs. While random sampling and inspection may be helpful 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 pi11.“91Therefore,as FDA concludes,“[n]o

random sampling plan will be able to detect and protect againstsuch criminal conduct

since the threat does not dependupon the nature of the reimportedproduct, but upon the

integrity of those handling it.y7g2It follows that, in order to identify counterfeit imports,

an inspection and testing program would needto authenticateall-drug products offered

for importa&on. This would be cumbersomeand prohibitively expensive. Large

shipmentsTould need to be removed from shipping containersand broken down into

individual units, and each individual unit would needto be inspectedor analyzed

91
Letter from Lester M. Crawford, D.V.M., Ph.D., Deputy Commissionerof FDA,
to the Honorable Thad Cochran (July 17,2002).
92
Id.

36
separatelybefore being repackaged, Not surprisingly, therefore,in its final report

detailing new strategiesfor keeping counterfeit drug products out of the U.S. drug supply,

FDA did not cite end-producttesting as a sufficient, or even significant, weapon in the

fight against counterfeiting.g3

Even if a 100 percent inspection program (whether visual inspection or

chemical testing) were economically feasible, it would not be sufficient to ensurethe

authenticity of imported products. Visual inspection of drug packaging and labeling, for

example, is not a workable meansof identifying counterfeits. Drug packagingand

labeling - and the overt counterfeit-resistantfeaturesincorporatedtherein (color-shifting

inks, for example, and holograms)- are too varied and numerousto permit real-time

verification,of drug products. It is not realistic to expect inspectors(let alone pharmacies

and patients) to be familiar with the wide variety of overt featuresused on the thousands

of different drug products likely to be imported. This problem will be exacerbatedby the

need to rotate overt featureson a regular basis to stay one step aheadof counterfeiters.

Further, ev& counterfeit-resistanttechnologiescan be themselvescounterfeited,often

within 18 to)24 months.g4Finally, visual inspection is of little or no value when a drug

product has,beenrepackaged.Repackagingremovesor destroysa drug’s original

packaging and labeling, as well as any counterfeit-resistanttechnologiesincorporatedby

the manufacturer. Virtually all drugs that are imported will have been repackagedto

93
Combating Counterfeit Drugs: A Report of the Food and Drug Administration, at
www.fda.gov/oc/initiatives/counterfeit/report02 04.html (February 18,2004) (“Final
Counterfeit Report”).
94
In one situation, counterfeitersreplicated the Pfizer logo, blister card, foil backing
on the pill pack, and hologram of Pfizer’s product. In anothersituation, counterfeiters
offered a purported Lilly product over the internet even though the drug had not yet been
approvedin the United Statesor anywhereelse in the world.

37
substitute U.S. packagingand labeling for foreign packagingand labeling. A visual

inspection after repackagingwould be pointless. Visual inspectionsthereforecan not ,be

expectedto reliably detect counterfeit products destinedfor import.

Examinations of products for covert features,and chemical analysis of

products, are more accurateways to authenticateimported drug products, but they too

have limitations. First, they do not allow real-time verification of a drug’s authenticity.

Authentication by meansof covert featuresand chemical taggantstypically requires

specializediequipmentand testing methods. Thesetests often cannotbe performed

onsite. Tests for taggants,in particular, may take severaldays to conclude. Second,as

noted above, random sampling methodscannot be used to eliminate the presenceof

counterfeit drugs; chemical analysiswould thereforeneedto be performed on every drug

product offered for importation. This would be prohibitively expensive. It would also be

counterproductive,becauseit likely would destroy the very products being tested.

Further, covert features,chemical taggants,and authenticationtesting methods are - for

good reason- secretsclosely held by the manufacturers. Authenticity testing would need

to be performed by the manufacturer,or by a third party to whom the manufacturerhas

disclosedthis sensitive information. While there are significant legal impedimentsto

requiring such disclosure,there are also practical ones: sensitive information could fall

into the wrong hands. Finally, not every drug product includes chemical taggantsand

covert features. As to thesedrugs, no laboratory test would verify authenticity.

Safety testing of imported pharmaceuticalssuffers from many of the same

limitations as does authenticity testing, and it has some additional limitations. Visual

inspectionsfor safety issues,for example,would be even less effective at identifying

38
safety problems than at identifying counterfeits. Most safety problems leave no visual

clues. Visual inspection would not detect dangerousimpurities in a drug product,

stability problems causedby improper storageconditions, or degradationof the active

ingredient, to give a few examples. It is likely to reveal only the most obvious safety

problems, such as openedor water-damagedproducts. Chemical testing for safety issues

has significant limitations becauseof the complexity of many drug products and the lack

of sensitivity of many tests. Just as in the manufacturingcontext, end-producttesting in

the importation context cannot measureall of the possiblevariations in a product that

could affect its safety and effectiveness. Moreover, this testing would be extremely

expensiveand, like authenticity testing, would in many casesrequire the manufacturerto

divulge trade secrets.

3. Counterfeit-resistant technology available today cannot, by


itself, prevent the distribution of counterfeit products imported
from foreign nations.95

a) Although a number of counterfeit-resistant technologies


are available today to de’tect and deter counterfeiting
these teclmologies are inherently limited.
Counterfeit-resistanttechnologiesavailable to detect and deter

counterfeiting include overt and covert featuresincorporatedinto the packagingand/or

labeling of a product, as well as chemical taggantsincorporatedinto the drug product.

Overt featuresinclude holographic images,special stickers, inks of gradatedcolors, and

threadsin the container label, all of which can be used to verify that a container is

authentic. Covert featuresinclude special inks, threads,and materials that are known

95
Thissection of our commentsrespondsto items 3 and 4 on page 9 (whether anti-
counterfeiting technologiescould improve the safety of products in the domestic market
as well as products that may be imported).

39
only to the ~manufacturerand require special equipment,(for example, a UV light source)

to identify.. Covert featuresalso include small amountsof a chemical taggant

incorporatedinto the pharmaceuticalpreparation. Chemicalscan be part of the bulk

formulation of the active ingredient or can be incorporatedinto the gel capsuleor film

coating of the pill. A company can also use the known analytical composition of the

formulation for authenticationpurposes. For example,defmed impurity profiles and/or

amountsof different inactive ingredientsas well as dissolution patternscan be tested to

determinea drug’s authenticity. Thesetechnologiesare all limited, however, as

explained in the paragraphsthat follow.

First, thesetechnologiesare merely resistantto counterfeiting; they are not

counterfeit-proof. Experts believe that counterfeit-resistantfeaturesmust be changed

regularly, as counterfeiterswill reliably duplicate them.g6The experienceof the Bureau

of Printing and Engraving, with respectto U.S. currency, demonstratesthe point. The

U.S. governmentusesa number of different counterfeit-resistanttechnologiesin its bank

notes, including color-shifting inks, embeddedthreads,and micro-printing. At the same

time, in order to stay aheadof counterfeiters,the governmentredesignsthe notes and,

specifically; the counterfeit-resistantfeatures,every sevento ten years. Despite this, new

U.S. currency is counterfeitedquickly. The governmentrecently introduced the third

new $20 bill in ten years- completewith a watermark image engrainedinto the paper, an

embeddedvertical plastic strip, and color-shifting ink (the appearanceof which changes

in hue from copper to green as the bill is tilted) - and three weeks later, the pressreported

96
FDA Counterfeit Drug Task Force, Interim Report, U.S. Departmentof Health
and Human Services,Food and Drug Administration (October 2003), at 17.
40
that “a bunch of computer-generatedphonies have turned up.9997
According to an October

2003 CNN*report, counterfeit bills were found in and aroundBrockton, Massachusetts,

and Elkhart, Indiana.98

Moreover, as technology improves, counterfeiting gets easier. According

to a report to Congresspreparedby the Secretaryof the Treasury, “the Secret Service

suspectsthat the counterfeiting of U.S. currency may becomeprogressively easieras the

generally available technology improves and the cost of computer equipment (including

printers and scanners)decreases.”” For example, “[e]ounterfeiting with laser color

printers is likely to increasewith the affordability of the printers. Similarly, the growing

use of the Internet is expectedto aid counterfeiting.“loo “Once a currency note is scanned

and the resulting electronic image is enhanced,”the report explains, “the image can be

transmitted:electronically,including over the Internet, and printed in batchesof any size

by individuals who would be unable to make the image themselves.‘Y1o1


Criminals who

counterfeit labeling and packagingfor prescription medicinesrely on similar computer

and laser print technology.

Second,as explainedearlier, counterfeit-resistanttechnologiesdo not

provide real time verification of a drug’s authenticity. Covert featureswill require off-

site testing and time. It is not realistic to expect Customs inspectors,distributors,

pharmacistsiand patients to be familiar with the wide variety of overt featuresused on


97
“New $20 Not So Counterfeit-Proof,”MSNBC Report (October 30,2003).
98
“Bogus Bills: Counterfeit New $20 Bills Starting to Appear,” CNN Daybreak
(October 31,2003).
99
Report to the Congressby the Secretaryof the Treasury, “The Use and
Counterfeiting of United StatesCurrency Abroad, Part 2” (March 2003).
loo Id.
101
Id.

41
the thousandof drug products avai1able.i” Furthermore,unlessevery foreign country

simultaneouslyapprovedthe use of identical overt and covert counterfeit-resistant

features- which is unlikely - some imported drugs will always be unprotected.1o3

Third, as explained earlier, counterfeit-resistanttechnologiesare rendered

uselessif a .drugproduct is repackaged. Repackagingis common in the industry and -

becauseforeign versions of drugs approvedin the United Stateswill have foreign

packaging and labeling - may be an inevitable part of a drug importation scheme.lo4The

practice is subject to only minimal oversight, and it has been implicated in recent

counterfeiting incidents, including one that led to a recall of 200,000bottles of

counterfeit Lipitor in early 2003.105

Fourth, effective counterfeit-resistanttechnology would be prohibitively

expensive. ‘Estimatesfrom FDA and the Congressional‘Budgetoffice (CBO) suggesta

counterfeit-resistanttechnology mandatecould substantially increasethe cost of any

importation:scheme. For example, after initial discussionswith the Bureau of Printing


102
It is not clear whether it would be appropriateor feasible to establisha centralized
electronic databaseto solve this problem. Since using such a databasewould be time
consuming,.pharmacistsprobably would not use it on a routine basis for authentication
purposes. I& addition, it is not clear who would maintain this database,have accessto it,
or updateit., Becausecounterfeit-resistantfeatureswill needto be changedregularly, the
databasewould need multiple entries for the samepackage,significantly complicating
efforts to authenticateparticular drug products. If the databasewere publicly available,
counterfeiterswould have easy accessto all of the measurescurrently being used. A
centralizeddatabasecould thus serve as a more valuable resourcefor counterfeitersthan
for pharmacistsand patients.
103
If some foreign regulatory authorities required counterfeit-resistantpackaging for
their domestic markets to deviate, even in some minor way, from the packaging approved
by FDA, the number of legitimate counterfeit-resistantpresentationswould exponentially
increase,leading to even more pharmacistand consumerconfusion.
104
Both the Grassleybill (S. 2307) and the Dorgan bill (S. 2328) contemplatethe
importation of unapprovedforeign versions of U.S.-approveddrugs.
105
SeeDavid Schwab,“Clamping Down on Counterfeits- Fed Report to Outline
Ways to Control Fake Medicines,” The Star-Ledger (September25,2003).

42
and Engraving, FDA estimatedthe counterfeit-resistanttechnology mandatein the

PharmaceuticalMarket Access Act of 2003 (H.R. 2427) could “raise the cost of

prescription drugs by as much as $2 billion in the first year.“r06 In a cost estimateof the

samebill, CBO statedthat the cost of the provision mandatingthe use of anti-

counterfeitmg technology would be “signif”rcant.“1o7According to CBO, “the cost of this

requirementto the affected entities would exceedthe annual threshold specified in

UMRA [Unfunded MandatesReform Act] ($120 million in 2003, adjustedannually for

inflation) in each of the first five yearsfor which the mandatewould be effective.““’

Further, “the requirementsfor counterfeit-resistantpackagingwould increasethe cost of

producing prescription drugs, and some or all of those costs would be passedthrough to

the consumer.“1o9

The high cost of counterfeit-resistanttechnologiescould ultimately

underminethe very purposeof any foreign drug importation scheme. In its analysis

comparing the prescription drug importation provisions of H.R. 2427, the Medicare

reform bills (H.R. 1 and S.l as they enteredconference),and prior importation law (with

the MEDS Act not implemented),the CongressionalResearchService (CRS) noted that

the pharmaceuticalindustry would face the cost of the development,manufacture,and

ongoing mgntenance of the packagingtechnologiesto deter tamper and counterfeiting.

According to CRS, the “U.S. consumerwill likely end up bearing a significant portion of

106
Letter from FDA CommissionerMark McClellan, M.D., Ph.D. to Chairman W.J.
“Billy” Tauzin (July l&2003).
107
CBO, Cost Estimate, H.R. 2427, The PharmaceuticalMarket Access Act of 2003
(November 19,2003).
108
Id.
109
Id.

43
all of thesecosts through taxes and increasedprices.“r’* The Secretary’sevaluation of

the supposedcost-savingsassociatedwith importation must take this cost into account.

W Unit-of-use packaging will not eliminate the


counterfeiting problem.
Although some have suggestedthat pharmaceuticalmanufacturersadopt

“unit-of-us@’packaging to addressthe counterfeiting problem, there are legal, economic

and practical impedimentsto its widespreadadoption in the United States,and in any

event it can still be counterfeited.

Unit-of-use packagingis %ny container closure system designedto hold a

specific quantity of drug product for a specific use and dispensedto a patient without any

modification [by the pharmacist] except for the addition of appropriatelabeling.“l’l 4

“unit of use:’can be packagedin bottles (for example, a 30-pill bottle, sold to and sold by

the pharmacistas such, with nothing more than the addition of appropriatelabeling) or in

blister packaging (for example, a blister card of seven days worth of a particular product).

Most non-solid oral dosagepharmaceuticalproducts (e.g., ophthalmic drops, nasal

sprays,inhalers, creams,and ointments) are packagedin unit of use, but very few solid

oral dosage,forms(e.g., tablets and capsules)are packagedin this format.

Increaseduse of unit-of-use packagingcould help combat counterfeiting

by reducing (but not eliminating) repackaging,thereby ensuring that counterfeit-resistant

technologiesemployed by the original manufacturerremain intact throughout the

110
CRS, CRS Report for Congress,“Importing Prescription Drugs - Comparisonof
the Drug Import Provisions in the Medicare Reform Bibs, H.R. 2427, and Current Law”
(October 8,>003).
111
Final Counterfeit Report, supranote 93, at 4.

44
distribution chain all the way to the patient. There are, however, significant impediments

to widespreadadoption of unit-of-use packaging.

First, even with a generalmove to unit-of-use packaging, companiesmay

needto continue producing a variety of packagesizes. Decisions on packagingformat

are typically driven by market demandand vary from product to product. The dispensing

system in the United Statesis heterogeneous,with over 80,000 dispensingsites including

chain and independentpharmacies,hospital pharmacies,managedcare organizations,

mail order pharmacies,clinics, and doctor’s offices. Each of thesecustomersmay have a

different preferencedependingon its dispensingpractice. While many pharmacieshave

adjustedinventory control proceduresand moved to “just in time” inventory (where

inventory is restockedautomatically basedon salesand $hereforemore market-

responsive),this may not be universal practice. Where it is not the practice, of course,a

pharmacymay need to have a variety of packagesizes on hand.

A proliferation of unit-of-use packagingpresentationsmight also be

requiredby virtue of the product’s dosing regimen and safety profile. For pills where the

dosageregimen is one pill a day, it is economicalto design blister packs that will hold the

requisite amount. For dosing regimensof two or more per day, small bottles are a more

economicalpackaging unit. Further, any move to unit-of-use packaging must

accommodattemedicineswhere there may be various dosing regimens. It is common for

anti-infectives to have variable dosing regimens(e.g., 7,10,14, or 21 days; in the caseof

some oral ar@fungals,one or two pills could constitute a full dosing regimen). A

proliferation of unit-of-use packagingoptions for each drug could take up considerable

45
pharmacy shelf spaceand causeconfusion in filling prescriptionswhen the appropriate

packageun# is not available.

1 Second,the ConsumerProductsSafety Commission (CPSC) regulations

implementmg the Poison PreventionPackagingAct (PPPA)ri2 createa disincentive for

manufacturersto use unit-of-use packaging. Current regulationsrequire testing of

packaging formats. In the caseof a cap or vial closure system, CPSC regulationsdefine a

clear pass/fail standard- “test failure” occurs if a child removesthe cap. (Packagingis

deemedchild-resistant if there are no test failures in a certain percentageof tests.) In the

caseof unit-of-use packaging, CPSC regulationsestablisha subjective standard- a test

failure occurs if a child “opens or gains accessto the number of individual units which

constitute the amount that may produce seriouspersonalinjury or serious illness.y7113

Therefore,before adopting unit-of-use packaging, a sponsormust determinethe amount

that may causea somewhatvaguely defined “serious personalinjury or serious illness” in

a child, submit toxicological data to CPSC, wait for CPSC confirmation of its conclusion

as to the number of units the opening of which would constitute failure, and then test the

package. If the packagefails, the investment of time and money cannot be recovered.

This discouragesuse of unit-of-use packaging. It is unclear under current law whether

the CPSC will permit “type testing”for unit dose formats (a practice whereby a package

type that has successfullypassedprotocol testing may be used for other products without

112 15 U.S.C. 8 1471 et seq.


113 16 C.F.R. Cs1700.2O(a)(2)(ii).

46
additional testing), and the lack of clarity compoundsthe disincentive to adopt this

method of packaging.‘14Many manufacturersthereforeopt for bottles.

In any event, from a technological standpoint,unit-of-use packaging is not

difficult to counterfeit. For instance,while unit of use packaging is generally prevalent in

Europe, as explained below (page 66), a number of pharmaceuticalcompanieshave

discovered,counterfeitpackaging in ED member states. Indeed, in its final report on

counterfeiting, FDA recognizedthat unit-of-use packaging“does not createa sufficiently

high level of security to justify its use as a stand-aloneanti-counterfeiting measure.“‘rs

4 Tamper-evident packaging will not defeat


counterfeiters.
Nor will tamper-evidentpackagingprovide the magic bullet to defeat

counterfeiters. To be sure, tamper-evidentpackagingmay provide some marginal

protection against counterfeit drugs. Examples of tamper-evidentpackaginginclude:

film wrappers,blister packaging,heat shrink bandsor wrappers,bottle mouth inner seals,

tape seals,Qreakablecaps, and sealedtubes. Over-the-counter(OTC) mediciaes have

been required to have tamper-evidentpackagingfor a number of years, and many

prescription drugs incorporatesimilar features. Like u&-of-use packaging,however,

114
The Healthcare CompliancePackagingCouncil (HCPC) filed a petition with the
CPSC in March 2003 requestingthat the Commission permit type-testingof unit dose
formats. In “May, the Commission declined to docket the petition on the grounds that
“current CPSC regulationsimplementing the PPPA do not restrict a company from
relying on Child resistanttest data generatedby the packagemanufactureror from testing
of similar packagesfor a different substance.”Letter from StephenLumberg, Assistant
GeneralCounsel, CPSC, to Peter G. Mayberry, Executive Director, HCPC (May 27,
2003). Nots&hstanding this helpful clarification, there is still considerableuncertainty
about the use of type testing. The establishmentof performanceand design standards-
for example through an establishedstandardsorganization- would facilitate type testing
and reducethis hurdle to unit-of-use packaging.
11s
Finaf Counterfeit Report, supra note 93 at 4.

47
tamper-evidentpackagingis not difficult to counterfeit. And like overt counterfeit-

resistantfeatures,tamper-evidentpackaging is rendereduselessby repackaging. Tamper-

evident packagingis therefore only moderatelyuseful as an anti-counterfeiting

technologyYand FDA has thus concludedthat it should not be used as a “stand alone”

anti-counterfeiting technology.l16

4. A closed distribution system featuring electronic Yrack and


trace” technology, though essential to the fight against
counterfeiting and diversion, will not be ready for deployment
for several more years.ll’
A closed distribution system is the best way to assurethe integrity of the

U.S. pharmaceuticalsupply. As discussedabove, a closed system is one where product is

shipped directly from the manufacturerto the distributor and then on to the pharmacy and

finally, the patient. Each businesstransactionin the supply chain is recordedand a

pedigree,ultimately tracing each lot back to the manufacturer,is maintained. Ideally, this

pedigreewould be generatedand maintainedelectronically in order to permit the

authenticationof drug products in real time at any point in the distribution system. An

electronic “track and trace”system - which can track drug products in real time

throughout the distribution system from manufacturerto patient and provide an electronic

pedigreevouching for the authenticity of distributed drug products - is critical to a truly

closed distribution system.r”

116
Final Counterfeit Report, supranote 93 at 5.
117
This section of our commentsrespondsto item 3 on page 9 (whether anti-
counterfeiting technologiescould improve the safety of products in the domestic market
as well as prcducts that may be imported).
118 Simply coding packaging at the pallet or caselevel, as some have suggested,will
not fully assureauthenticity down to the individual packagingunit. In fact, it may lead to
a false senseof security as countlessindividual packagia;gunits coming from different
48
Constructing a national electronic pedigreesystem, however, is a daunting

task that will take considerabletime and resources. Before such a system can be

implement&d,complex technological,legal, regulatory, and fmancial issuesneedto be

resolvedby and among FDA and all interestedstakeholdersthroughout the distribution

chain, including manufacturers,primary wholesalers,secondarywholesalers,hospitals,

and pharmacies.

Stakeholdershave not yet agreed,for example, on the optimal technology

for track and trace. Bar code technology has been employedfor a munber of years to

control inventory and for product identification. Within the UCC/EAN standardssystem

there is a Global Individual Asset Identifier that incorporatesserialized identification of

individual packageunits. This lends itself to automatedtrack and trace. Unfortunately,

bar codes require packagingto be actively scanned,and at some distribution levels this

could be prohibitively labor intensive. BecauseRadio FrequencyIdentification (RFID)

chips emit a signal permitting passivereading, this may be more suited to an automated

system. Rl?ID is not yet, however, a fully-validated technology. As the technology

becomesmore robust, it may be the better substitutefor printed bar codes.

Even after a technology has been selectedand validated, there remain

significant hurdles to implementing a national track-and-tracesystem. Decisions must be

made about construction, management,and ownership of the databaseor databasesused

to maintain jandupdatethe code on each drug, as it passesthrough the distribution chain.

It is not clear, for example,whether there will be one centralized databaseor many

manufacturer-specificdatabases.Ownership of the data and accessto the data need to be

casesin the same lot or different lots are bundled together and shipped. At this point, the
ability to track and trace is lost.

49
resolved. @ Ithe caseof multiple databasesthere will have to be a centralized routing

system so that information on eachproduct will get to the appropriatemanufacturer’s

database.Also, eachpackagingunit must be labeled with a unique serial identification

(whether a;bar code or RFID). Each manufacturerwould have to have its own assigned

list of numberswith a leading prefix to assurethat there are no duplicate numberswithin

the overall system. The National Drug Code (NDC) number is suitable to this task as it

identifies both the product and the manufacturer. The remainderof the data field can be

used for the serial number. Since each transactionwill have to be registered,all

distributors, pharmacies,and other dispensingsites will, needequipmentto read the

serialized information. Manufacturerpackaginglines will have to be modified to print

serializedbar codes or incorporateRF‘ID chips.

The full cost of constructing,validating, and implementing a track-and-

trace system is unknown, but it will likely take at least five years to select a technology,

validate it, resolve theselegal and practical issues,and construct a system.

5. Foreign health agenciesare neither willing nor able to ensure


the safety of drugs exported fmm their countries to the United
States.ll

a) The Canadian government is neither willing nor able to


ensure the safety of drugs exported from Canada to tie
United States,
Although some proponentsof drug importation arguethat importation

would be safe if limited to drugs imported from Canada,the Canadiangovernmentis

neither willing nor able to ensurethe safety of drugs exporte from Canadato the United

119
Thissection of our commentsrespondsto item 6 on page 9 (the extent to which
foreign health agenciesare willing and able to ensurethe safety of drugs being exported
from their countries to the United States).

50
States. Under Canadianlaw, drug products that are not manufacturedfor consumptionin

Canadaor sold for consumptionin Canada- and drugs that were, but have since been

repackagedand relabeled- fall outside the scopeof the CanadianFood and Drugs Act,

provided they are labeled for “export” and bear an export certificate. With evidence

mounting of transshipmentof pharmaceuticalsthrough Canadato American customers,

the Canadiangovernmenthas statedthat it will not guaranteethe safety and effectiveness

of drugs exported from Canadato the United States.

Health Canada’sTherapeuticProductsDirectorate regulatesmedicinal

products under the Food and Drugs Act and its implementing regulations. The scheme

generally prohibits the sale of any drug product unlessthe transactionfalls within a listed

exception. ‘For example,one exception permits sale if - (1) the drug is the subject of a

Notice of Compliance (NOC) issuedby the relevant Minister, and (2) the patient presents

a valid prescription to a pharmacist.120In addition to imposing a premarketapproval

requirement,Canadianlaw prohibits the fabrication, packaging,labeling, distribution,

import, and:wholesaleof a drug except in accordancewith an “establishmentZicense.“121

Further, all drug establishmentsinvolved in theseactivities must comply with Canadian

GMP regulations.122Finally, the Health Productsand Food Branch Inspectorateregularly

inspectsall establishmentlicense applicantsand holders for compliancewith GMP

120
An NOC issuesafter the sponsorsubmits a New Drug Submission(NDS), which
is the Canadianequivalent of an NDA. An NOC is issuedpursuantto Regulation
C.OS.O04(l)i(a).
121
Regulation C.OlA.004.
122
Regulation C.02.003.

51
regulations,and it has considerableenforcementauthority over establishmentlicense

holders for:violations of the Act and regulations.123

Health Canadaregulationsstate that “no personshall import into Canada

for sale a food or drug the sale of which in Canadawould constitute a violation of the#Act

or theseRegulations.“124The agency interprets this to require that all imported products

comply with all requirementsof the Act, whether or not intendedfor re-export.125The

Act neither expresslypermits nor expresslyprohibits the export of drug products that

have been imported, manufactured,or sold for the Canadianmarket. Nor is there an

exception from the generalNOC requirementfor exportedproducts.

Notwithstanding the preceding,Section 37 of the Act provides that the Act

as a whole does not apnlv to products for export, if the exporter notifies the Health

Products and Food Branch Inspectorateand signs an export certificate, indicating that -

(1) the drug products are labeled for export, (2) the drug products were not manufactured

for consumptionin Canadaand are not sold for consumptionin Canada,and (3) the drug

products do+not contraveneany known requirementof law in the country to which they

are being shipped. Section 37 thus seemsto significantly limit the power of the Canadian

governmentto regulateproducts purchasedin a third country and transshippedthrough

Canadafor sale to Americans even if it wanted to regulatesuch products. According to

this provision, a party who manufactures,packages,distributes, or exports theseproducts

need not obtain Canadianmarketing approval, need not comply with Canada’s

123
See,e.g., www.hc-sc-gc.ea/bpfb-dgpsa/inspectorate/pol-001
l-tc-e.html
(inspection policy).
124
Regulation A.01.040.
125
Seem.hc-sc.gc.ca/hpfb-drzPsa/inspectorate/midesomm imuort e.html
(importation and exportation policy).

52
establishmentlicensing requirements,need not comply with Canadiangood

manufacturingpractice requirements,and is not subject to the Canadiangovernment’s

inspection or enforcementauthority.

Further, if a Canadianentity obtains a product intendedfor the Canadian

market, and repackages(or relabels)it for the American market, intending to sell the

product to Americans rather than Canadians,it may invoke the sameexemption. Health

Canadahas taken the position that the safety and quality of products exported from

Canadaare!mattersfor the drug regulator in the destinationcountry.126In Health

Canada’sview, theseproducts fall outside its mandateand its jurisdiction. Again, then, if

the exporter identifies the product as intended for export, signs an export certificate, and

notifies the Inspectorate,its activities will fall outside Health Canada’sjurisdiotion.

In recent years, there has been an explosion in pharmaceutical

transshipmentthrough Canada. According to FDA, while 80 percent of the parcels in its

secondseriesof blitz exams (discussedabove,page 11) were exportedfrom Canada,not

all of theseproducts originated in Canada. Some had been imported into Canadaand

then exported into the United States. For example, FDA Commissioner(now CMS

Administrator) McClellan noted that “at the Dallas, Seattle, and Buffalo mail facilities,

imported drugs were encounteredwhich were manufacturedin Canada,Mexico, Costa

Rica, India, Sakistan, New Zealand,Taiwan, Thailand, and a host of other countries.

However, in some cases,the drugs that had obviously been manufacturedin other

countries were exported from Canada.“127In testimony last year, FDA’s Associate

Commissionerfor Policy and Planning, William Hubbard, gave an additional example.


126
“Taking Responsibility for Drug Safety,” The Washington Post (May 21,2003).
127
SeeFDA PressRelease,January27,2004.

53
He describedan 82-year-old man who bought two drugs from a web site basedin

Arizona that offers to sell Canadiandrugs. The patient instead received drugs “made in

India.” Agording to Hubbard, “this gentlemanapparentlyhad prostateenlargementand

epilepsy, but what he receivedwas a Tupperwarecontainer,and in that Tupperware

container..i were drugs for prostateenlargementwith no labeling, no warnings or

anything and the drug for epilepsy. But the really unique thing about this story is that it

had a funny return addresson it - India. And in fact, it says on the package,made in

India. He was told on that web site and when he made the phone call that he was getting a

U.S. produceddrug, sold in Canada,and sold back to him. He got Indian drugs that are

not approved,have no labeling, no information and he called the FDA and was outraged

why are we letting this stuff in.“12s

Data from Industry Canada,a departmentof the CanadianFederal

government,corroboratethe evidenceof transshipmentfound by FDA. According to

Industry Canadadata, between September2002 and September2003, there was a

significant increasein Canadianimports of pharmaceuticalsfrom countries such as

Singapore,Ecuador, China, Argentina, South Africa, and Thailand, to name a few.12’

The Industry Canadadata are presentedin the table that follows. The majority of these

countries have documentedcounterfeiting problems, and none has a Mutual Recognition

Agreement (MRA) with Canadaon good manufacturingpractices (GMP) for prescription

medicines. According to a recent report by Prudential Financial, which relied on the

Industry Canadadata, Internet drug sellers appearto be increasingly obtaining their


12s
Testimony of William K. Hubbard, Senior Assodate Commissionerfor Policy,
Planning and Legislation, U.S. Food and Drug Administration, before the House
GovernmentReform Subcommitteeon Human Rights and Wellness (June 12, ‘2003).
129
Industry Canada,Trade Data Online, at cwww.strategis.ic.ga.ca>.

54
product (for shipment into the U.S.) from countries such as Bulgaria, Singapore,

Argentina, South Africa, and Pakistan.13o

Source:Industry Canada,Trade Data Online, -mww.strategis.ic.gc.ca>(20 November2003)

With proponentsof importation pointing to Canadianexports as the

solution, and with evidenceof transshipmentmounting, the Assistant Deputy Minister of

Health Canadarecently wrote to the Washington Post to state her government’sposition

on the safety and quality of products exported from, or through, Canadato the United

States.‘“’ She explained that Health Canadacould not guaranteethe safety and

effectivenessof drugs exported to the United Statesand noted that the Canadian

governmenthad not agreedto assumeany responsibility for the safety of these drugs.

Importing countries, alone, are responsiblefor ensuringthe quality, safety, and

effectivenessof drugs intendedfor their markets.

In short, therefore,the Canadiangovernmentis neither willing nor able to

ensurethe safety of the rapidly increasingnumber of pharmaceuticalsexported from, and

130
Diane Duston and Tim Anderson, “Importation of Drugs into the U.S. Appears
Difficult to Stop - Puts Low Pressureon EPS,”Prudential Financial Equity Research
(October 8,2003).
131
“Taking Responsibility for Drug Safety,”The W;ZshingtonPost (May 21,2003).

55
through, Canadato patients in the United States. Although the new section 804 is limited

on its face to drugs imported from Canada,Canada’sfailure to prohibit transshipment

through its ‘borders- and its refusal to regulatethose products- meansthat, in fact,

section 804 permits importation of drugs from anywherein the world. There is no

assurancethat theseproducts will be safe, effective, or - indeed- even what they purport

to be.

b) Other developed countries also do not apply the same


strict regulatory standards to products shipped through
their borders to the United States as to products
intended for their own citizens.
Although section 804 of the FDCA nominally limits importation to drugs

from Canada,its predecessor(the MEDS Act) permitted importation from the countries

listed in section 802@)(1)(A).132Severalpending importation bills would permit

importation from more countries than just Canada.133For this reason,and because- as

132
When the MEDS Act was enacted,these countrieswere: Australia, Austria,
Belgium, Canada,Denmark, Finland, France,Germany, Greece,Iceland, Ireland, Israel,
Italy, Japan,Liechtenstein,Luxembourg, the Netherlands,New Zealand,Norway,
Portugal, South Africa, Spain, Sweden,Switzerland, and the United Kingdom. When
section 802@)(1)(A) was enacted,thesecountries were deemed- though not without
controversy.- to have sophisticateddrug approval systems“comparableto” that of FDA.
See,e.g., Sen. Rep. 99-225 at 2 (“Under the bill, drugs coveredby the amendmentsmay
only be exportedto certain countries and under certain conditions. The drugs may be
shippedto three categoriesor tiers of countries . . . [including] [dleveloped countries with
sophisticateddrug approval systemscomparableto that of the Food and Drug
Administration.“) Rather than listing the countries in the EuropeanUnion by name,
however, section 802@)(l)(A) refers to “the EuropeanUnion or a country in the
EuropeanEconomic Area.” On May 1,2004, the EU expandedto include the Czech
Republic, Cyprus, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and
Slovenia.
133
S. 2307 (Grassley)would permit importation from Canadaand then, two years
later, from Australia, the EuropeanUnion (EU) and EuropeanEconomic Area (EEA)
countries, Japan,and New Zealand (i.e., unlike the MEDS Act, not Israel, Switzerland, or
South Africa). The EEA includes, in addition to the EU member states,Norway, Iceland,
and Liechtenstein. S. 2328 (Dorgan) would permit importation from Canada,Xinitially,

56
explained in the prior section - the limitation in section 804 is illusory, the Task Force

must considerwhether a broader rangeof countries regulateexported and transshipped

products as rigorously as they do products intendedfor their domestic markets.

The 25 countries listed in footnote 132 generally require that

pharmaceuticalproducts intendedfor domestic distribution be pre-authorizedfor

marketing. They typically also require manufacturersto hold manufacturer’s

authorizationsand distributors to hold distributor authorizations. They impose some

version of “good manufacturingpractices,”although GMP requirementsvary from

country to country, and they often impose “‘good distribution practice”(GDP)

requirementson distributors. Some require import licenses,some require export licenses,

and most inspect manufacturersand sometimesalso importers and exporters. Products

intendedsolely for export, however, are usually subject to fewer regulatory requirements

and less scrutiny than products intendedfor domestic consumption. Further, like Canada,

most of thesecountries do not regulateproducts merely transshippedthrough their

bordersfor’another destination,such as the United States.

In nearly every one of these25 countries,pharmaceuticalsimported or

manufactureddomestically for a foreign market are @ subject to the samerigorous

regulatory requirementsas pharmaceuticalsintendedfor domestic distribution. Most

jurisdictions do not apply the full rangeof their laws (marketing authorization,

and then from Australia, Canada,membersof the EU on January1,2003, Japan,New


Zealand,and Switzerland (i.e., unlike the MEDS Act, not Switzerland, South Africa, or
EA countries). It is unclear whether the restriction to countries that were member of the
EU prior to its recent expansionwould be enforceable,in light of the practice of parallel
trade within the EU.

57
manufacturer’slicense, GMP, distributor’s license, and GDP) to products that are

imported or manufacturedsolely for export.

With one exception (Norway), every country expressly or implicitly

excludes some transshippedproducts from its laws. These products, which may be

destinedfor the United States,do not have to meet the samestandardsas do products

intendedfor domestic use. Some countries (like Canada)explicitly exempt transshipped

products from local law. In other countries- Australia, Greece,Iceland, and the United

Kingdom, for example-there is an exemption for transshippedproducts if certain

conditions are met. For example, in Australia, transshippedproducts are not regulatedif

there is no manufacturing in the country, the goods are continuously within the control of

a single person, and the goods do not clear customs. In Greece,transshippedproducts are

not regulatedif they are not subject to a LCmanufacturing


alteration.” Similarly in Iceland,

transshipmentis not subject to licensing or oversight unlessproducts are subject to

manufacturing. In other countries- like Luxembourg, the Netherlands,and South Africa

- the exemption is available provided the products are stored in customswarehouses.

(By way of contrast, Switzerland does not regulatetransshippedproducts, but takes the

position that products storedin customswarehouseshave been imported and are subject

to local law-) In some countries, the standardsfor the transshippedproducts are expressly

lower; in Japan,for example,it is lawful to import expired medicine, repackageit as a

new product, and export it to a foreign destination. The practice is prohibited only if the

Japanesegovernmentdeemsthe products “decomposed”or otherwise harmful.

In short, then, a rule that would permit importation of pharmaceuticals

from the EuropeanUnion and other developedcountries like Japanand Australia would

58
not ensurethe safety of imported products. Nearly every country subjectsexported

products to a lower level of regulation than domestic products, none prohibits

transshipment,and many exempt transshippedproducts from their laws. This meansthat

the importation of drugs from thesecountries is tantamountto the importation of drugs

from anywherein the world. There is no assurancethat theseproducts are safe, effective,

or - indeed- even what they purport to be.

6. Parallel trade in Europe has raised safety issues,led to


consumer confusion, and increased counterfeiting
operations.134
Parallel trade in the EU/EEA is different from the importation

contemplatedby section 804 or the bills presently pending in Congress. First, the

principles governing parallel trade within the EU/EEA are basedon Article 28 of the

EuropeanCommunity Treaty, which provides that goods may circulate freely between all

member states.13’This principle sets asideregulatory and intellectual property

constraintsthat otherwise would prevent or restrict parallel trade in medicines. Second,

Article 28 does not apply to imports from third countries into the EU/EEA and as a

practical matter there is little parallel importation of medicinesfrom countries outside the

EEA, becauseregulatory and intellectual property considerationsgenerally preclude this.

134
This section of our commentsrespondsgenerally to the questionwhether
importation can be done safely, as well as to items 1 and 3 on page 9 (limitations that
may inhibit the Secretary’sability to certify the safety of imported drugs, and whether
anti-counterfeiting technology could improve the safety of products in the domestic
market as well as products that may be imported).
135
Article 28 of the EC Treaty prohibits quantitative restrictions on imports and
exports and all measureshaving equivalent effect betweenmember states. A direct
consequenceof this principle of free movement is the classic “‘Cassis de Dijon” doctrine
of the EuropeanCourt of Justice that a product lawfully on the market in one member
state must be able to circulate freely within the whole of the EU, subject to objectively
justifiable exceptions. The sameprinciple is containedin Article 11 of the Agreement on
the EuropeanEconomic Area (EEA).

59
Third, under EU rules, products placed anywhereon the EU/EEA market are the subject

of marketing authorizations,basedon harmonizeddata requirements,and they are

manufacturedand distributed in accordancewith harmonizedrules and standards.

Regulatorsand consumersin the importing member state can therefore generally be

confident that the rules in the exporting and intermediatemember statesare sufficient to

ensurethe safety, quality and efficacy of imported product. None of thesefacts would

be true in the United States,if section 804 (or alternative importation legislation) were

implemented.

Despite thesedifferences,which both obviate some legal impedimentsto

importation and moderatethe safety concerns,a number of safety issueshave arisen in

the EU due to parallel trade. These issuesshould be a warning to American policymakers

consideringthe implementation of section 804 or the enactmentof alternative importation

legislation.‘Specifically, EU member stateshave struggledwith (1) safety issuesarising

from improper storageand handling, (2) safety issuesarising out of repackagingand re-

handling, (3) parallel import of drugs withdrawn from the market, (4) counterfeit drugs,

and (5) diversion of drugs from developing countries.

First, significant health issuesare associatedwith inappropriatestorageof

goods during transit. Parallel imported goods must passthrough the handsof various

international trading organizations,and it is not always possible for regulatory authorities

to ensuresufficient physical monitoring and sampling of theseproducts. A final

WHO/WTG Workshop Paperdiscussesthis issue.136The report commentsthat “what is

136
Guy Woods, Lacuna ResearchLimited, “Session V - Market Segmentation:
techniques,actors, and incentives; GovernmentalMeasures:Role of regulatory
authorities”
<httn://www.wto.org/english/traton e/t&s ekosbior presentations el26woods e.udf>.
60
not known, especially where parallel imported goods have passedthrough the handsof

various international trading organisations,as they most certainly will have done, is how

material has been handledwhilst in transit.” It points out that products passthrough

“countries having high temperaturesand humidity -where not all warehousesare climate

controlled’”and that goods are exchanged“en route to local retail outlets within

equatorial and tropical climates.” Thus, it adds,“inevitably products will be affected by

external environmentalconditions and somewill inevitably reachpatients out of assay.”

For some products shipped in this manner,“it is not enoughfor it simply to be dispensed

and consumedwithin its expiry date.”

The report adds,“while parallel importers may themselvesbe required to

comply locally with stringent drug wholesaleregulations,there are many ways to

circumvent drug regulations.” For example,“[kleeping goods in transit at the warehouse

of a third party freight forwarder or courier” is one techniqueused “to ensurethat

material of marginal, or dubious, quality is physically kept well away from the licensed

wholesalerand out of reach of the regulatory authorities.” The report explains, “[flrom

theseoff site locations dealerscan safely offer samplesto prospectivecustomersand can

both neutralise shipmentsand break bulk - all without breaking national medicine control

regulations.” The report concludesthat “regulatory authorities can really only tackle this

problem by physical monitoring and sampling.” This solution is limited, however;

“sampling cannot be done on all products in all locations, all the time: most nations

simply do not possessthe border control and chemical analysis resourcesneeded

methodically to check incoming consignments.”

61
Second,parallel trade requiresboth repackagingand re-labeling,which

can introduce a variety of safety problems. For example,to ensurethat a product is

suitable for the destinationmarket, the parallel trader will needto modify product

labeling and packageinserts to ensurethat they conform to the linguistic requirementsin

the destination country. There is a risk of generatingerrors during translation of both the

product labeling and packageinsert, which in turn may confuse the pharmacistor

consumer. Errors in the translation of key information could result in seriousinjury.

Further, implanting linguistic changesinevitably requiresrepackagingand relabeling, and

hencemanipulation of the product.137Any manipulation has the potential to result in a

deteriorationin quality of the product. Also, parallel tradersoften discard the anti-

counterfeit measuresthat some packagingnow incorporates. They can also theoretically

discard temperaturecontrol printing or devices on packaging.

One member state medicines agencyrecently commentedon 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 connectionwith parallel trade:


2001-2002:
Complaints from consumersand diabetics associations
related to reducedactivity of imported insulin preparations;
Results of the investigation: insulin content of the checked
products,which are to be administeredby meansof a pen,
is in order, but possibly the functionality of the pens is
affected by inappropriaterelabeling of the vials; In essence
products that are centrally approvedin the EU are involved;

137
Parallel tradershave generally found that the use of (translated)labels affixed to
the innovator’s original primary and secondarypackaging makesthe resulting products
unappealingto consumersin the destination country. Tradersthereforestrongly prefer to
repackageproducts.

62
Consequencefor parallel import approval procedure:
directions for proper labeling.13s
Parallel tradersmay also need to modify an imported product to conform it

to presentationrequirementsin the destination country. For example, it is common

practice for tradersto repackagetablets to take into accountnational variations in pack

sixes. They may also separateor combine blister packs to meet local requirements,which

can result in the break-up or combination of product batches. It has also become

common for parallel traders to cut up blister packs, where this is necessaryto comply

with local requirements. Not only can this practice result in the separationof product

batches,but it has been known to result in the deletion of batch numbers.

In the Paranovu case,13’


for example, the parallel trader repackaged

medicines in new external packagingwith a uniform appearanceand in the trader’s own

style - albeit bearing the innovator’s trademarksand the statementthat the products had

been manufacturedrespectively by “Bristol-Myers Squibb,”“Boehringer Ingelheim,” and

“Bayer,” togetherwith the indication “imported and repackagedby Pamnova.” Also, in

order to parallel trade the Bayer product Adalat from Greeceto Denmark, Paranova

repackagedthe Greek product (originally sold as packagesof three blister packs of 10

tablets) into 10 blister packs of 10 tablets. In order to trade in Vepesid and Vumon, the

samecompany removed the vials and ampoulesfrom their surroundingpadding, and

attachedto :eacha new self adhesivelabel. The vials and ampouleswere then replacedin

the original padding and put in the new external packaging. In the caseof Mycostatin,
138
BfArM report on the activities for the years 1998-2002on page 39 (See:
http://www!~bfarm.de/de/DasBfArM/publ/BfArM Bericht BdOP,ndf>).
139
Joined CasesBristol-Myers Squibb v. Paranova A/S (C-427/93), C. H. Boehringer
Sohn,Boehringer Ingelheim KG and Boehringer Ingelheim AIS v. Paranova AIS (C-
429/93), and Bayer Aktiengesellschaftand Bayer Denmark A/S v. Paranova A/S (C-
436/93), 1996 E.C.R. I-3457.

63
Atrovent, Berodual and Berotec, the importer also coveredthe original labels of the

flasks or inhalers with its own labels. In the packagingof Mycostatin, Paranovareplaced

the spray in the original packagingfor the inhaler with a spray from a sourceother than

Bristol-Myers Squibb.

In the &rim-Pharm case,l’Om


’ order to import pharmaceuticalproducts

into Germanyfrom France,Portugal, and Spain, the trader repackagedthe products to

comply with local Germansizes. In some cases,blister packs were cut into smaller sizes.

This occasionally resultedin loss of batch numbers,in which casethe number was

reprinted by the trader. Cutting sometimesalso resultedin the loss of days from week

indicators on the back of blister packs.

The EuropeanCourt of Justice has found that a trademarkowner may

opposerepackagingwhen it “involve[es] a risk of the product inside the packagebeing

exposedto tampering or to influences affecting its original condition.” In particular, the

court consideredthat the condition of the product could be affected if “the external or

inner packagingof the repackagedproduct, or a new set of user instructions or

information, omits certain important information or gives inaccurateinformation

concerningthe nature, composition, effect, use or storageof the product,” or if “the

packagingof the repackagedproduct is not such as to give the product adequate

protection.“141In one casein the United Kingdom, Mr. Justice Laddie identified

140
Joined casesC-71/94, C-72194 and C-73194, Eurim-Pharm Arzneimittel GmbH v
Beiersdorf AG, Boehringer Ingelheim KG and Farmitalia Carlo Erba GmbH, 1996
E.C.R. I-3603.
141
Id. ln Paranova, supra note 139, the Court referred also to the insertion by the
parallel importer of an extra article designedfor the ingestion and dosageof the product
that does not comply with the method of use and the dosesenvisagedby the
manufacturer.

64
instanceswhen it would be relatively easy to show prejudice to a product’s quality due to

repackaging.142Theseinclude: damageto, or removal of product from, blister packs, or

removal of.pre-filled syringes from sterile packaging. Absent prejudice to product

quality, he found no fault with doing whatever is necessaryto commercialize a product

including re-boxing and relabeling and use of an importer’s own livery (e.g., use of the

importer’s marks and different colors). He added,however, that repackagingmay lead to

confusion, and that the potential exists for an increasein the mis-dispensationof

products. For example,a busy pharmacistmight select the wrong product for a patient

owing to a changein a product’s box color.

In addition to pharmacistconfusion, relabeling and repackagingmay result

in a decreasein consumerconfidence in the products. This might be true of medicines

not in the languageof the destination country, or medicines in re-stickeredboxes. A

decline in consumerconfidencemay have economic repercussions,but the European

courts have also suggestedthat it could affect product efficacy.‘43

Third, in some cases,parallel trade rules in the EU have resultedin the

continued availability of products in somejurisdictions despitetheir withdrawal by the

marketing authorization holder. In the Rh&e-PouZenc’Rorer case,for example, a UK

parallel importer was granteda marketing authorization to parallel trade a gel cap

formulation of the Rhone-PoulencRorer (RPR) product Zimovane (INN zoplicone), a

142
Glaxo Group Limited and Others v. Dowelhurst Limited and Others [2003], 2
C.M.L.R. 8.
143
In joined casesC-266187 and C-267/87, The Queen v Royal Pharmaceutical
Society, 1989 E.C.R. 1295, the ECJ suggestedthat, becauseof “psychosomatic”reasons,
the use of a parallel imported product may have a negative impact on treatment.

65
hypnotic used for the short-term treatmentof insomnia.144The company had withdrawn

the product from the UK market when abuseof the product becamecommon in Scotland,

and had replacedit with a powder tablet formulation. Since abusehad not occurred in

other member states,the gel formulation remainedon sale in most continental countries.

RPR soughtjudicial review and the matter was referred to the ECJ. Although the court

concededthat formulation differencescan have significant safety implications, it ruled in

favor of the UK regulator’s decision to maintain in force the parallel import licensesfor

the original gel cap formulation, despite the apparentpublic health concerns. Its

judgment was contrary to the views of the EuropeanCommission and of the French

government.

Fourth, parallel trade in Europe has also facilitated the introduction of

counterfeit medicines in the destination countries. Numerous studiesof parallel trade

have confirmed this fact. In a survey of parallel trade in five countries - Denmark, the

United Kingdom, the Netherlands,Ireland, and Germany- from 1990 to 1997, the

National Economic ResearchAssociatesfound that five pharmaceuticalcompanies

operating in Europe and participating in the study cited instanceswhere the cptality of

their product had been compromisedduring the parallel import process,and three

companies,cited instanceswhere counterfeit product had reachedpharmaciststhrough

parallel trade.145A recent article noted that in 2002, Swiss customsofficers uncovered

evidenceof possible deliveries of around 22,000 counterfeit Viagra tablets with a market

value of SwFr 500,000 ($410,000). According to the article, “[t]he Swiss experience

144
SeeCaseC-94198,The Queenv. The Medicines Control Agency, exparte Rh&ne-
Poulenc Rarer Ltd and May & Baker Ltd., 1999 E.C.R. I-8789.
145
N/E/R/A, Survey of Parallel Trade (1997) (conductedfor Interpharma).

66
with counterfeit medicines is that they are almost never passeddirectly to doctors or

pharmaciesbut are smuggledthrough importers and wholesalerswho are often unable to

tell whether the medicines are counterfeit or not.“146A blue-ribbon panel chaired by the

Israeli Ministry of Health Director GeneralDr. YehoshuaShemerreviewed proposed

importation legislation and found that it highly probable that some of the parallel

imported drugs would be unsafe. Specifically, accordingto the study, there was a risk of

counterfeit drugs that would not meet the quality requirementsof the western world. The

report concludedthat parallel importation of drugs to Israel would involve “potential

risks to public health.7’147

Finally, although the EC treaty (and the EEA treaty) enablesparallel trade

only among member states,the EU/EEA have struggledwith the import of

pharmaceuticalproducts from third countries. For instance,concernsabout the illegal

import of HIV, malaria, and tuberculosisproducts from developing countries into the EU

have (also in the context of the Doha developments)resultedin the adoption of Council

Regulation.(EC) No. 953/2003.r4* This Regulationprohibits re-importation of certain

listed products from designatedcountries and is aimed at ensuringthat theseproducts

exported to developing countries at cheapprices are not re-importedby parallel traders

into the Community. The Regulation requiresthat a permanentlogo is affixed on any

146
“EP to ConsiderAnti-Counterfeit Measures,”Scripp Pharma (January 14,2004).
147
Commission to InvestigateParallel Importation of Drugs to Israel, Final Report,
Israeli Ministry of Health Director GeneralDr. YehoshuaShemer(December 1997). The
Governmentof Israel withheld the report from the legislature when the proposal was
under consideration,and the legislation was adoptedin early 1999. The report was
finally releasedin the summer of 2000, when Israel’s SupremeCourt orderedthe
governmentto releaseit.
148
Council Regulation (EC) No 953/2003 of May 26,2003 to avoid trade diversion
into the EuropeanUnion of certain key medicines,2003 O.J. (L135) 5.

67
packaging or product and any document used in connectionwith the approvedproduct

sold at tiered prices. At the time the Commission proposedthis Regulation, regulatory

authorities were taking action againstthe illegal imports of HJY treatmentproducts from

third countries.

C. A prescription drug importation schemewould lead to an explosion in


unmeritorious tort litigation against Lmocent parties, while injured
consumers would lack any real recourse for their iqjuries.14g
As the discussionof safety issuesin Section A of thesecomments

explained, patients could be harmedby imported drugs in a variety of ways. Harm could

occur, for example, if a legitimate FDA-approved product is counterfeited,and the

imported counterfeit contains the wrong amount of active ingredient, no active

ingredient, or a toxic substitute. Harm could occur if a legitimate product has been

stored, shipped,or handledby third parties in a way that introduced contaminantsor

affected its stability and purity. Harm could occur where the potency of a foreign drug is

not the same as that of the FDA-approved drug for which it is intendedto substitute,

resulting in an over- or under-dose,or where the imported product causesside effects or

drug-to-drug interactions that would not be expectedwith the FDA-approved version.

Consumerconfusion resulting from labeling differencesor dosing differencesbetween

U.S. and foreign products could result in medication errors. Many of the parties

associatedwith the drug’s manufacture,import, distribution, and delivery to the patient

(or, in the caseof a dangerouscounterfeit, with the manufactureof legitimate product)

would be entirely innocent of wrongdoing and unable to prevent the injury. Nonetheless,

149
This section of our commentsrespondsto item 10 on page 10 (liability
protections,thatshould be in place if importation is permitted).

68
in eachcasetheseparties could face the burden of defending suits alleging injury arising

from the imported products.

First, parties in the distribution chain could expect negligenceclaims.

Negligence is the failure of a responsiblepersonto exercisethe degreeof care required to

dischargethe duty resting on him. The elementsof a negligenceaction under state law

are a legal duty of reasonablecare owed by defendantto plaintiff, a breach of that duty,

and injury proximately causedby that breach. A defendantis held to the standardof care

that a reasonablepersonwould exerciseunder similar circumstances. Whether that

standardof care createsa legal duty turns on a number of considerations,including the

foreseeability and likelihood of injury, the burden of guarding against injury, and the

consequencesof placing that burden on the defendant. Plaintiffs sometimesseek to

impose a duty of care on a defendantwhen a product is used as intended, and sometimes

when a product is used in a mannerthat is not intendedbut that is foreseeable.

Plaintiffs could try to invoke negligenceagainstmanufacturers,importers,

other distributors, physicians, or pharmacies. A plaintiff might attempt to establish,for

example,that given FDA’s longstandinginsistencethat imported drugs are unsafe,injury

to patientswho take imported drugs is foreseeableand perhapseven likely, thus creating

in the “reasonablemanufacturer/importer/distributor/doctor/pharmacy”
a duty of care to

potential patients. Once imports are legalized, plaintiffs might allege that knowledge of

the risks presentedby imports createsa duty for theseentities and individuals to take

stepsto prevent the foreseeabledangers,for example by warning the patient of the

potential risks.

69
Plaintiffs could conceivably seek to assertadditional negligencetheories

againstimporters, distributors, pharmacies,and others more directly involved in the

imports. FFr example, a plaintiff might arguethat importers and distributors negligently

transporteddrugs into and throughoutthe United States,subsequentlyleading to patient

harm. Importers and distributors are particularly susceptibleto a claim that they were

negligent in failing to recognizeand investigateproblemswith the drugs at their source,

such as improper handling and storageand incomplete recordkeepingpractices.

Pharmacies,also, might face negligenceclaims. A plaintiff injured by an

imported drug sold by a bricks-and-mortarpharmacymight try to attribute the harm he

suffered to the pharmacywhere he purchasedthe drug, on the ground that a pharmacy has

an obligation to ensureit provides only safe drugs (i.e., unadulterated,properly labeled

drugs of the correct potency). To the extent imported drugs pose a known risk to

patients, a plaintiff might allege that a pharmacywas negligent if it failed to take

adequatestepsto ensurethe quality and integrity of the drugs it dispenses. Similarly,

plaintiffs might arguethat pharmacieshave a duty to identify any differencesbetween the

foreign import version of the drug and the version in U.S. commerce. To minimize these

risks, pharmaciesmay have to devote significant resourcesto due diligence activities.

Thesebroad and malleable negligencetheoriescould createsubstantial

exposureto suits from personalinjury attorneysagainstthose involved in importing

drugs. Even where the linkage betweenlegitimate salesoverseasand eventual harm to a

plaintiff in the U.S. is attenuated,manufacturersand other commercial entities in the

distribution,chain might presentattractive targets and would thus be required to defend

70
againstsuch claims, however speculative. The burden of mounting a defensein court

againsteven speculativechargescan be substantial.

Second,plaintiffs may bring suit under the tort theory of strict liability, or

the nearly identical contract theory of breach of implied warranty of merchantability.

Each theory may be premisedupon an inherent defect in a product or upon the

defendant’sfailure to warn.

Plaintiffs could seek to hold eachparty that plays a role in delivering

pharmaceuticalsto the ultimate consumerstrictly liable if that consumeris injured by a

defective drug. A plaintiff might arguethat the dangerousconditions presentedby

foreign drugs, for example,were inherent in the foreign distribution and U.S. import

scheme,and thus existed and were known at the time the manufacturerintroduced the

drugs into that schemeor a downstreamparty purchasedthe drugs for resale.

Consequently,either party might at least face a strict liability lawsuit from patients

injured by foreign drugs, regardlessof the actual causeof the injury (e.g., improper

handling by an importer that renderedthe drug subpotentafter it left the manufacturer’s

control). A plaintiff might also arguethat a distributor or retail pharmacy should have

recognized,thesafety flaws in a distribution chain that flows through foreign sources.

Again, although we expect theseclaims ultimately would fail, innocent U.S.-based

defendantscould still face considerableexpensesin defending against the lawsuits in the

first instance.

Downstreamparties in the pharmaceuticaldistribution chain face an even

greaterpotential risk of liability under an implied warranty of merchantability theory,

becausethey more neatly fit the definition of a “merchant.” Pharmaciesmay face claims

71
under this theory; they are extensively regulatedby governmentalentities, staffed by

highly qualified, licensed professionalswho hold themselvesout to the public as having

specializedknowledge and skills, and sell drugs directly to their ultimate consumers.

Even if such a claim ultimately proves unsupportable,the defendantmay bear substantial

expensein defending against it.

Third, plaintiffs might bring suit under the tort theory of “failure to warn.”

The failure to warn of a product’s dangerouspropensitiescan give rise to a claim of strict

liability, breach of implied warranty of merchantability, or negligence. The purposeof a

warning is to apprisepeople coming into contact with a product of dangersof which they

may be unawareso that they may take appropriateprecautionsto protect themselves.

Particularly with respectto imported drugs that FDA has specifically

identified as potentially dangerous,plaintiffs could seek to make out an argumentfor

failure to warn with regardto pharmacies. In general,the ‘learned intermediary’

doctrine relieves pharmacistsof the duty to warn about possible dangersof prescription

drugs, for the patient’s physician is deemedto be in the best position to provide any

applicablewarnings to the patient about the drug. IIowever, courts in a number of states

have refusedto extend the protections of the learnedintermediary doctrine to pharmacists

who had specific knowledge of a particular dangerto the patient.

Doctors and other health care professionalsmay similarly face liability

claims. A court may conclude that a health care provider acted negligently in failing to

warn patients about the dangersof filling prescriptionsthrough non-traditional sources,

including Internet pharmacies. Medical professionalsare generally not held strictly liable

in tort, but are expectedto apply a reasonablestandardof medical care under the

72
circumstances. Given the level of attention devoted to this issue by the federal

government,media, and professional associations,a court may conclude that “ordinary

care”by a doctor or other health care provider includes giving adequatewarnings to

patients about the potential risks of imported drugs.

A plaintiff might also argue that the manufacturerwas aware of the danger

posedby imported drugs and failed to respondadequately,for example by changing the

labeling of foreign drugs to include a warning to eventualAmerican purchasersabout the

dangerof importation or by issuing a “Dear Doctor” letter to alert health care providers.

Again, although we would expect theseargumentsultimately to fail (in part because

foreign hegth agenciesmay not permit the inclusion of warnings in English to Americans

on products intendedfor their local market, and in part becauseimporters are likely to

repackagein any event), the burden of mounting a defenseis substantial.

Fourth, although thesetheorieswould be even more attenuatedthan the

prior claims, parties in the pharmaceuticaldistribution chain could conceivably face

claims of common law fraud or misrepresentationor claims of violations of state unfair

trade practices acts for reasonssimilar to those discussedabovewith respectto failure to

warn. While the elementsof thesecausesof action vary somewhat,they can all be fairly

describedas requiring a plaintiff to prove that the defendantmade a false representation

of a material fact with knowledge of its falsity for the purposeof inducing the plaintiff to

act thereon,and that the plaintiff relied upon the representationas true and acted upon it

to his damage. An omission as well as an affirmative representationmay give rise to a

claim of fraud, although in some statesthe concealmentmust have been done,with an

intent to deceive. Other statesdo not require an intent to deceive.

73
A patient might allege that a pharmacydispensingdrugs obtained from a

Canadiansourcehas committed fraud on the consumerif it fails to disclose that source

and thereby give the patient the option of filling his prescription elsewhere. A distributor

or wholesaler that does not fully disclose that a drug has a non-U.S. origin, or that it was

transshippedthrough anothercountry at some point, may face a complaint of deceptive

practices.

At the sametime, those who are truly responsiblefor consumerinjuries

likely would escapeliability altogetherbecausethey are unknown, located in a foreign

country or have forced U.S. consumersto sign a liability waiver. For the most part,

foreign counterfeitersand their accomplices(e.g., unscrupulousforeign wholesalers)who

are directly responsiblefor injecting dangerousdrugs into the U.S. drug supply will be

immune from suit becausethey either are unknown or are located in a foreign country

and thus, at least as a practical matter, are beyond the reach of most injured consumers.

Other responsibleparties, such as the cross-borderInternet pharmacies,also will have

insulated themselvesfrom liability by forcing American citizens to waive their right to

the protection of the U.S. product liability laws. Indeed, this is a standardpractice among

many Canadianinternet sellers and even among the few websites establishedby state

governmentsthat facilitate Canadianintemet sales. Consequently,injured consumers

will lack any real recoursefor their injuries.

In sum, the distribution chain that supplies drugs that could be imported

into the United Statesfrom foreign countries contains a wide range of parties that could

be exposedto liability claims under a number of tort theories. Most such claims could be

expectedto fail on the merits. However, eachparty would face substantiallitigation

74
risks. These suits would also burden the court system. Both would reducethe amount of

any “savings” from legalized drug imports. At the sametime, the truly responsible

parties would avoid liability, and injured American patients would have little true

recourse.

From the manufacturer’sperspective,without liability protections for

parties in the distribution stream,liability and litigation may depressinnovation and skew

drug developmentdecisions in undesirableways. The challengesof discovering and

develop&new pharmaceuticalcompoundshave never been higher. The American

public cannot afford for manufacturersto divert resourcesfrom researchand

developmentto non-productiveusessuch as defending frivolous lawsuits, as inevitably

would happen. Further, as companiesconsider competing researchprojects, they would

be required to weigh the relative risks of tort liability, and vital investment decisions

might thus be adverselyinfluenced. From the perspectiveof others in the distribution

chain, the risk of liability will make additional insuranceand contractualindemnification

provisions essential. The costs of such protection will undoubtedlybe passedalong to

patients, the ultimate consumersin this streamof commerce. Partiesunable to secure

adequateinsurancemay be forced to ceasetheir operations,thereby reducing market

competition and patient choice, The need for liability protections is thereforegreat. At

the sametime, it is difficult to imagine any protections that will be effective in practice.

75
D. Importation will not lead to lower consumer drug prices.15’

1. Neither the MMA nor any of the pending importation bills


requires cost savings to be passedon to consumers.
Although proponentsof legalized importation arguethat it will lead to

lower consumerdrug prices in the United States,nothing in the new section 804 of the

FDCA actually requiresimporters to pass along their savings. This is puzzling in light of

the fact that the drafters of the MMA took stepsto ensurethat lower prices would be

passedalong to Medicare beneficiaries. The new benefit will be provided by private

plans that negotiatewith manufacturerson behalf of patients. Negotiatedprices - prices

after taking into account all discounts,direct or indirect subsidies,rebates,and other price

concessions- must be disclosedto beneficiaries,and beneficiariesmust receive the

benefit of those prices, even if actual benefits are not payable. Similarly, beneficiaries

who chooseto enroll in a discount card program must have accessto drug prices

negotiatedby the card sponsor. The drafters of the MMA ensuredthat consumerswould

obtain the benefit of lower prices available to intermediaries. Importation schemeslack

this assurance.

2. The savings from inter-country price differentials are captured


by parallel importers, and not passed on to consumers.
Although proponentsof legalized importation arguethat it will lead to

lower consumerdrug prices in the United States,in fact, it likely will not. If importation

is implemented,commercial exportersin Canadaand commercial importers in the United

Stateswill be able to purchaseproducts at artificially low prices in price-controlled

jurisdictions like Canada,and then resell them at - or just below - market price in the
150
This section of our commentsrespondsto item 7 on page 9 (potential short- and
long-term impacts on drug prices and prices for consumersassociatedwith importing
drugs from other countries).

76
United States. This practice would be the equivalent of parallel trade in Europe, where a

supplier purchasesdrugs in SouthernEurope (where drug prices tend to be lower) and

resells them in Northern Europe (where drug prices tend to be higher). The European

experienceis that the parallel traderscapturethe benefit of this arbitrage,and consumer

prices in thk destination country drop very little, if at all.

Studies unequivocally establishthat parallel trade has little impact on

prescription drug prices in the destinationcountries. For example,prices in the United

Kingdom have droppedby less than two percent since parallel trade began,and in

Swedenthey fell by only four percent.rsl A paper releasedin September2002 by the

GermanAssociation of Research-BasedPharmaceuticalCompanies(WA) showed that

importers set their prices to competewith prices in the importing country. In Germany,

pharmaciesare given parallel import dispensingtargetsto meet. The quota for 2003 was

7 percent of the pharmacy’s total dispensedpharmaceuticals. Pharmaciesthat do not

meet their quota do not receive full reimbursementfrom the State for the pharmaceuticals

they have dispensed. Pharmaciesthat exceedtheir quota receive a credit that can be

rolled over to future reporting periods. In the past, parallel imported products had to

carry a price differential of at least 10 percent off the normal pharmacy sale price in order

to count toward the quota. VFA found that importers increasedtheir prices by this exact

difference in price and capturedany remaining difference in price as profit. Subsequent

regulationseliminated the requirementthat parallel imported products have a minimum

price difference; any parallel imported product may now count toward a pharmacy’s

quota. As a result, over time, the differences in price betweenimported products and

151
“E.U, Parallel Drug Trade Cited in U.S. Reimportation Debate,”Drug Industry
Daily (November 12,2003).

77
original products have shrunk. In a comparisonof local prices to imported prices for

eight commonly-imported drugs, the maximum difference in price was six percent,but

half of the products had a difference of only three percentor less. In addition, the authors

noted that the increasesin price by the importers “lie without exception above the

increasesin price by the manufacturer.“152

In Europe, the benefit of pharmaceuticalarbitrage accruesalmost entirely

to the parallel trader.ls3 Trade normally increaseseconomic welfare by permitting

consumersin importing countries to benefit from lower prices in exporting countries. In

the caseof innovative pharmaceuticals,however, the lower prices in exporting countries

generally reflect more aggressiveregulation, not lower real production costs.154There is

no “free trade”benefit, therefore, and parallel traderssimply capturethe pricing

difference causedby the aggressivepricing regulation in the sourcecountry. For

example, a study releasedin March 2001 examinedthe effects of parallel trade on the

pharmaceuticalindustry by reviewing data from the Swedish market from 1995 to 1998.

The Swedish market provided a natural test for the study’s authors,since before 1995

Swedenprohibited parallel imports of pharmaceuticalproducts. Swedenenteredthe

EuropeanUnion on January 1,1995, and thereforewas required to allow parallel imports.

The study found that the price of goods subject to import competition, including the

parallel-tradedproducts themselves,fell only four percentin the import market.

According to the authors,the data “fail to support the hypothesisthat prices for products
152
GermanAssociation of Research-basedPharmaceuticalCompanies(VFA),
Parallel Imports and Reimportation in the PharmaceuticalMarket: Misguided Health
Policy (September2002).
153
Patricia M. Danzon, The Economics of Parallel Trade, PharmacoEconomics
(1998).
1.54
Id.

78
subject to parallel trade convergebetween the exporting and importing countries.”

Further the study results “suggest that parallel-importing firms exploit a price difference

betweenthesemarkets of approximately 21 percent of the original manufacturer’sprice

in Sweden,“155In other words, the parallel-importing firms had a margin of

approximately 21 percent, and the price reduction to consumerswas only 4 percent.

To give anotherexample,in a survey of parallel trade in five countries-

Denmark, the United Kingdom, the Netherlands,Ireland, and Germany- from 1990 to

1997, the National Economic ResearchAssociatesfound that parallel importers took, on

average,a markup of 68 percentprior to sale in the destinationcountry, still allowing

them to undercut normal route wholesalersby an averageof 22 percent. The report noted

that differences in retail prices betweenparallel import and normal route products are

“much less marked,”indicating a substantialportion of the gain from parallel trade

accruesto the distributors, rather than the final purchasers.156


A more recent study from

the London School of Economics and Political Science’reachedthe sameconclusion: that

profits from parallel trade accruemostly to the benefit of the middlemen or parallel

importers.157The study analyzedthe impact of cross-borderbrand name prescription

trade within the EU by taking a sample of products from six product categories(proton

pump inhibitors, HMG CoA reductaseinhibitors (statins), ACE I inhibitors, ACE II


155
Mattias Ganslandtand Keith Maskus, Parallel Imports of PharmaceuticalProducts
in the EuropeanUnion (March 2001).
156
N/E/R/A, Survey of Parallel Trade (1997) (conductedfor Interpharma).
157
P. Kanavos et al., “The Economic Impact of PharmaceuticalParallel Trade in
EuropeanUnion Member States:A ShareholderAnalysis,” LSE Health and Social Care,
London School of Economics and Political Science,January2004. Seealso Press
Release,“New LSE Study ContradictsAccepted Benefits of EU PharmaceuticalParallel
Trade,”The London School of Economics and Political Science(November 2003). The
author of this study, PanosKanavos, gave a presentationto the Task Force at ‘theApril 14
public heating and has submitted commentsto this docket.

79
inhibitors, serotonin selective re-uptakeinhibitors, and atypical antipsychotic) acrossall

study countries. Thesecategorieswere chosensince they are used to treat a wide range of

disordersand have significant impact on patient health, as well as health care budgets.

The study found that parallel imports for 2002 salesto the six major destination countries

within the EU accountedfor only 0.3 percent to 2 percentof national medicine budgets,

representinga total savings of just $43.1 million over locally-developedand

manufacturedproducts. In contrast,the parallel importers who bought these same

medicines Bcrossthe EU made profits of 2622 million. According to the study, “[wlith

regardsto patients, no clear benefits through lower prices were found.” As the chart that

follows indicates,the study found extremely modest direct savings to insurance

organizations.

arallel Trader l+rkup

80
E. Importation of foreign drugs is an endorsementof, and attempt to
import, foreign price control practices- which are bad for*patients,
harmful to innovation, and poor public polic~.~~~
1. A decisionto implement presctiption drug importat$onwould
be tantamount to a decisionto import foreign price controls.
Legislation authorizing importation of foreign prescription drugs

essentially attempts to import foreign government price controls into the United States.15’

Most governmentsoutside the United Statesoffer some kind of national health insurance

that covers the vast majority of the population. These governmentsdominate the health

care marketplace and operate as monopsonistic purchasersof pharmaceuticalproducts.

Many of these governmentstake unfair advantageof this near-total control of the health
1.58
This section of our comments respondsto items’7,8, and 11 on pages9 and 10
(potential short- and long-term impacts on drug prices and prices for consumers
associatedwith importing drugs from other countries, the impact on drug researchand
development, and the associatedimpact on consumersassociatedwith importing drugs
from other countries, and ways in which importation could violate intellectual property
rights).
159
See, e.g., John E. Calfee, “The High Price of Cheap Drugs,” The Weekly Standard
(July 21,203) (“Congress should dismiss all possibility of these scenariosby 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.“); Doug Bandow, “Reimportation: Trojan Horse, Not Free Trade,”
Institute for Policy Innovation Publication (June 2003) (“Most important, however,
reimportation, no less than attempting to equalize prices internationally by legislative fiat,
would effectively apply foreign price controls on the American market. This is, in fact,
the policy’s objective.“); JamesK. Lassman& John R. Lott, Jr., “The Drug World’s Easy
Riders,” Commentary, The WuZZStreet Journal (July,23,2003) (“In effect, reimportation
of drugs would import something else to the U.S.: price controls, where the lack of such
practices isthe oxygen that allows pharmaceuticalresearchto thrive. Drug price 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 aresmore
difficult to observe,since they mainly affect medicines that haven’t been invented yet.“);
David B. Kendall, ‘cDon’t Import Foreign Price Controls on Prescription Drugs,”
ProgressivePolicy Institute (July 21,2003) (“Republicans have rightly opposed U.S.
price controls for Medicare prescription drugs, but they are wrong to consider:importing
foreign price controls. The Gutknecht legislation, which has 36 Republican co-sponsors
and 14 Democratic co-sponsors,runs contrary to a view held by a wide variety of
membersof Congress- including Democrats ranging from Sens.Edward Kennedy (MA)
to John Breaux (LA) - that price controls should be kept out of the Medicare debate.“).

81
care market to obtain drugs at below-market prices and avoid paying for the researchand

developmentcosts of those drugs. Their power is only magnified in many countriesby

compulsory licensing laws that permit the governmentto abrogatea company’s patent

rights if it doesnot accedeto the government’spricing demands.

Foreign governmentintervention in the pharmaceuticalmarket takes a

wide variety of forms. Europeangovernments,for example, employ measuresthat

include: referencepricing systems(Belgium, Germany,Norway, Spain, and others);

profit control schemes(the United Kingdom); across-the-boardprice cuts (Italy,

Hungary, Japan,and many other countries over the last decade);price freezes(Canada);

and product-by-productprice controls (all Europeancountries). Referencepricing

systemsvary considerablyaccording to the countries and products to which referenceis

made, the calculation method used to determinethe referenceprices, and the

reimbursementrules applicable. Some countries have formally adopted

pharmacoeconomicevaluationsas a mandatorystep in the price-setting process(Finland

and Australia) or as a prerequisitefor reimbursement(Belgium and Norway). Essentially

every country fixes an overall budget for public pharmaceuticalspendingor imposes

percentagelimits on growth in pharmaceuticalspending. In some countries (Austria,

Belgium, Italy, Germany, and France),the industry is responsiblefor budget overruns

and forced ‘to “rebate”or “pay back” to the governmentthe amount of public

expenditureson pharmaceuticalsthat exceedgovernmenttargets.

Foreign countries often impose price controls through measuresthat

discriminate againstimports and favor local producers. Countrieswithout a local

pharmaceuticalindustry tend to rely particularly heavily on pharmaceuticalprice controls

82
to balancetheir health care budgets. Local interests- such as generic producers,

wholesalers,and pharmacists- generally occupy a favored position within the system.

For example, Italy passeda law in 2002 imposing a blanket 7 percentprice decreasefor

all pharmaceuticalspriced above a certain threshold. The impact of the price decrease

fell overwhelmingly on the research-basedpharmaceuticalindustry that produceshigher-

value medicines and is, not coincidentally, largely foreign-based. In Australia, the prices

paid by the government’sPharmaceuticalBenefits Schemeto local pharmacistsare

indexed for inflation and rise every year. The Australian governmenthas adamantly

opposedallowing a comparableadjustmentfor inflation for pharmaceuticalproducts

which, again, are largely developedabroadand imported into the country.

2. Prescription drug price controls in foreign countries have had


a detrimental impact on patient accessto new medicines.
Foreign price control mechanismsoperateto deny patients accessin the

marketplaceto U.S.-madepharmaceuticalproducts. They do so first, by delaying the

availability of new products, and second,by denying the availability of new products.

First, since foreign national health insuranceschemestypically dominate

the domestic market for pharmaceuticals,a product effectively cannot be marketedin a

country until the national authorities have determinedits reimbursementprice. The price

control bureaucracyin almost every country is opaque,and the processof obtaining a

government-approvedprice can be lengthy. Delay can happenat any point: between the

date a company submits its pricing application and the date price approval was granted,

betweenthe date the company submits an application for reimbursementand the date the

company is informed about a reimbursementdecision, or betweenthe date the company

83
is informed of the reimbursementdecision and the date that decision is published in

official national reimbursementlists.16’

Delays are a problem in many countrieswithin the Organization for

Economic Cooperationand Development (OECD). In some markets, patients must wait

more than two yearsbefore they gain accessto new medicines.161For example,

EuropeanDirective 89/105 requiresthat applicationsto the competing authorities to

securea price or reimbursementfor a new medicine must be decidedwithin 90 days (or

180 days %hereit is necessaryto agreeto a price before applying for reimbursement).

Nevertheless,in all EU countries with formal pricing and/or reimbursementapproval

systems- with the exception of Ireland, Sweden,and Denmark - the responsible

regulatory bodies significantly exceedthe 90-day and 180-daydeadlines.‘” A 2002

survey found that in Belgium, it took an averageof 671 days for the governmentto grant

reimbursementand pricing statusto new medicines.163In Austria, Finland, France,

Greece,and Portugal, it took on averagebetween332 and 415 days.164The GlO

Medicines Group of the EuropeanCommission recently concludedthat the “price

negotiating.systemsand reimbursementstructuresin a number of [EU] Member states

160
The?time to publication can vary from 5 days in Franceto 76 days in Italy to 90
days in Belgium. CambridgePharmaConsultancy(a unit of IMS Health), “Delays in
Market Access”(December2002).
161
Id.
162
Id.
163
Id.
164
Id.

84
can lead to significant delays.“165In China, the situation is even worse: not a single new

product has been addedto the national governmentreimbursementlist for over 4 years.

Second,many governmentsuse highly restrictive formularies or other

policies (for example, limiting a drug to hospital use, or to use after failure of a first or

secondtreatment)to control accessto new medicines. Such an approachis bad policy

and bad medicine. A patient’s reaction to a medicine is highly individual, and the effects

of a drug can vary acrossa population. Nevertheless,some governmentsare willing to

substitutetheir judgments for the judgments of medical professionals,and they impose a

one-size-fits-all approachwith respectto medical needsby approving only one (or very

few) pharmaceuticalproducts to treat particular conditions. New Zealand,for example,

has long had one of the most restrictive formulary systemsin the world. The government

directly controls 75 percent of the market in New Zealand and indirectly controls the rest.

It typically permits very few medicinesper therapeuticclass. Market accessfor many

competing products that treat the samecondition is effectively and completely denied. In

Europe, as.aBusiness Weekwriter recently commented,“negotiations”between

manufacturersand the national health systemsover accessand the deepdiscounts

requestedon price “can drag on for several years”and “‘[a]s a result of price controls,

Europeanconsumersare headingtoward second-classcitizenship when it comes to

accessto medicines.“166

165
EuropeanCommission, ‘“High Level Group on Innovation and Provision of
Medicines,‘Recommendationsfor Action,” GlO Medicines Report (Brussels,Belgium:
EuropeanCommission, May 7,2002).
166
Kerry Capell, ““EuropePays a High Price for CheapDrugs,”Business Week
(February 17,2003).

85
Pricing controls and restrictive formularies in Canadasimilarly result in

reducedpatient accessto medicines. One recent study found that the Canadianfederal

new drug approval processtakes 13 percentlonger than the American new drug approval

process. A new Canadiandrug then faces more hurdles: the ten provinces. “Each

province has a review committee that must approvethe drug for its own formulary,” the

study author noted.167He quantified the delay: “[o]f 99 new drugs approvedby the

federal governmentin 1998 and 1999, only 25 were listed on the Ontario formulary.y’168

Moreover, i“the provincial approval times vary greatly from province to province. The

wait time for approval in Ontario is nearly 500 days.“169

A study conductedfor the EuropeanFederationof Pharmaceutical

Industries and Associations (EFPIA) in 2002 identified specific diseasestatesas to which

pricing policies and cost containmentstrategiesin Europe have resultedin suboptimal

medical care for patients:

* Cardiovascular disease. In Germany,87 percent of all patientswith


coronary heart diseasedid not receive modem lipid-lowering drugs. In
Italy, 83 percent did not receive statins.

o Diabetes. In Germany, 30 percentof the at least 4 million diabetes


patients are not treatedwith drugs at all.

0 lMulti@‘esclerosis. In France,less than 50 percent of patients with


multiple sclerosiswho are eligible for treatmentwith beta interferon
actually receive the medicine.

l Schizophrenia. In France,there are 4.4 schizophreniasufferersper


1000 peoplebetween the agesof 31 and 50. Only 2.4, however, are
treated. For the treatedpatients, the level of use of innovative second
generationdrugs continuesto be at a low level.
167
William McArthur, “Prescription Drug Costs: Has CanadaFound the Answer?”
National Center for Policy Analysis - Brief Analysis No. 323 (May 19,200O).
168
Id.
169
Id.

86
. Depression. Across Europe, only 18 percent of patients with severe
depressionreceive treatmentwith anti-depressants.In Germany, 12
percent of patientswith severedepressionreceive treatmentwith
antidepressants.In France, 50 to 70 percentof patients with
symptomatic depressionare not treatedat all, whether psychotherapy
or medication or both.17’

3. Prescription drug price controk have a negative impact on


research and deveIopment.
Price controls diminish the value of pharmaceuticalpatents. A patent right

that gives the patent holder the exclusive right to sell his invention in a market, but that is

limited by a requirementthat the product be sold at a significantly reducedprice, is of

little commercial value to the right holder. A country cannot be said to adequatelyand

effectively protect intellectual property if that country puts in place regulationsthat

diminish the value of the patent rights granted.171As explained above (page82), many

countries practice referencepricing. This meansthat the price of a new drug is tied, by

law, to the Price of older and often off-patent medicines. By design, thesesystemsare set

up to compensateinnovative products at the samerate as generic products and undermine

the value of pharmaceuticalpatentsin that market. The delays causedby the

bureaucraticpricing process,also underminethe value of pharmaceuticalintellectual

property. By delaying market access,theseregimes depletepotentially valuable patent

170
0. Schiiffski, “Diffusion of Medicines in Europe,”preparedfor the European
Federationof PharmaceuticalIndustries and Associations (EFPIA) (September2002).
171
Becausethey diminish the value of intellectual property, foreign price controls are
a trade issue. The United Statesroutinely treats weak foreign patent laws as a major
trade issue. Indeed, the entire rationale for the WTO TRIPS Agreement was that rampant
international free-riding on innovation is a kind of trade barrier. Allowing copycat
manufacturersto pirate U.S. intellectual property, whether it is embodiedin software,
sound recordingsor medicines,underminesthe export possibilities of those industries.
Foreign laws that allow free-riding through other means- i.e., price controls - equally
diminish the value of U.S. intellectual property rights and hurt U.S. exportersthat rely on
intellectual property protection.

87
term that cannot be recoveredby the patent holder. Under Australia’s system, for

example,prices for new medicines are often set by referenceto existing medicines in a

therapeuticclass, regardlessof whether those other medicines are generic products. The

link with theseolder drugs continuesyear after year, so that when a referenceddrug goes

off-patent and its price falls, the price of the newer drug that is still on patent is

significantly diminished as well. The end result is that there is little reward for

innovation.172

For most of the past century, Europe led the world in pharmaceutical

innovation, In 1997, however, the United Statesovertook Europe for the first time both

in terms ofinvestment and in terms of the output of its innovative activity (i.e., new

molecular entities).173The latest data on new chemical and biological entities for the

period between 1998 and 2002 show that the U.S. leads all other countries in invention of

new molecules. Between theseyears, the U.S. pharmaceuticalindustry led the world as

the inventor of 77 new chemical and biological entities. The U.S. was followed by

Europe, which had 68, and Japan,which had 29. All other countries, combined, invented

just 4 new chemical and biological entities.174Over the past 10 years,R&D investments

have doubled in Europe to reach 17 billion in 2000, but they have multiplied nearly five

172
Various studiesconfirm that price controls discouragepharmaceuticalinnovation.
See,e.g., JacobArfwedson / CNE Health, Parallel Trade in Pharmaceuticals (July 2003)
(warning of “significant long run harms to innovation” if parallel trade continues in
Europe indefinitely); Patricia Danzon, The Economics of Parallel Trade,
Pharmacueconomics(March 1998) (finding that parallel trade reduceseconomic welfare
by undermining price differentials between markets. In the long run, “even high income
countries are likely to be worse off with uniform prices, becausefewer drugs will be
developed.“)
173
EuropeanFederationof PharmaceuticalIndustries and Associations, The
Pharmaceutical Industry in Figures (Brussels,Belgium: EFPIA, 2003) (“EFPW
Figures”).
174
Id. at 16.

88
times in the U.S. to reach24 billion in 2000.175Further, the Europeanshareof the world

pharmaceuticalmarket has decreasedfrom 32 percent to 22 percent over the past decade,

while the U.S. shareincreasedfrom 31 percentto 43 percent.176American companies

now file over 60 percentof pharmaceuticalpatent applications in Europe.‘” Of the top

ten worldwide products (rankedby salesvolume), six originated in the U.S., while only

three originated in Europe. In 1990, major Europeanresearch-basedcompaniesspent 73

percentof their worldwide R&D expendituresin the EU territory, whereasin 1999, they

spent only 59 percent in the EU territory. The U.S. was the main beneficiary of this

transfer of R&D investment.17*

The exodus from Europe results in part from the hospitablebusiness

climate in the U.S. - for example,the scienceand technology base in the U.S. and the

opportunity for public-private researchpartnerships. The Europeanpharmaceutical

industry and the EuropeanCommission have, however, concludedthat the exodus results

primarily from the price control policies and cost-containmentmeasuresthat lead to a

lack of competition in the Europeanmarket. Price controls compromisethe value of

patent rights, which in turn discouragesinnovation. EFPIA has explained that the

“European pharmaceuticalindustry has lost its competitivenessbecausethere is a

problem of price - and innovation is not compensated.Y7’EFPIA


79 adds,“Europe lacks a

climate which favours and rewards innovation. . . . Comparedto the U.S., Europe is

175
“Pfixer LeaderCalls for a New Relationship Between PharmaceuticalInnovation
and Europe:Governments,”P! Newswire European (February 11,2002).
176
Id.
177
Id.
178
Id.
179
EFPIA Figures, supra note 173.

89
seenas a less attractive R&D investment location in terms of market size and incentives

for the creation of new biotech companies.“18o

In a November 2000 report, the Directorate GeneralEnterprise of the

EuropeanCommission found that “the relative position of the U.S. as a locus of

innovationin pharmaceuticalshas increasedover the past decadecomparedto

Europe.7’1s1The authorsnoted that U.S. pharmaceuticalcompaniesare now the dominant

source of innovation and innovative drugs in the world, As a result, American patients

benefit greatly by getting early accessto the best and newest treatmentsthat

pharmaceuticalcompaniescan offer. Not only are the newest drugs sold to Americans,

but more and more of the drug developmentis being done by U.S.-basedcompanies.‘82

One market newsletter paraphrasedanalystsat SG Cowen thus: “[mlajor drug companies

are being left with little choice but to cut investmentsand managethe businessto

maintain returns. This meansreducedR&D and fewer new drugs in Europe than in the

U.S.A.“183

Not surprisingly, the mere threat of price controls in the United Stateshas

had a negative impact on the market value of pharmaceuticalfirms. During consideration

of the Heath Care Reform Act of 1993, when pharmaceuticalprice controls were

180
Id.
181
F. Pammolli et al., “Global Competitivenessin Pharmaceuticals:A European
Perspective,”preparedfor the Directorate GeneralEnterpriseof the European
Commission (November 2000).
1x2
Id.
183
“Govt drug price controls continue to threatenEurope’s pharma industry,”
Pharma m&k&letter (December23,2002).

90
proposed,firm market values dropped.“84 Venture capital in biotechnology similarly

dropped considerablyin 1994 and 1995, reflecting concern about proposedgovernment

regulation of health care spending. An analysisby Arthur D. Little of the annual growth

rate in biotechnology venture capital funding from 1993 to 2000 indicated declines of 6

and 16 percentin 1994 and 1995 respectively,before expandingagain in 1996.185A

survey by the Gordon Public Policy Center of Brandeis University, conductedduring the

Clinton Health Care Reform debate,found that more than 70 percent of U.S.

biotechnology firms feared that they would have to delay or curtail researchbecauseof

the negative impact of health care reform on capital markets.186According to a survey

conductedat that time by the trade associationBIO, nearly 40 percent of biotech

companiesworking to find treatmentsfor HIV/AIDS, cancer,and diseasesof the aging

delayed or cancelledresearchbecauseof capital shortfalls attributed to the health care

reform debate.ls7 Had the legislation actually passed,ProfessorsGrabowski (Duke) and

Vernon (Duke) hypothesizethat a substantialdecline in R&D and innovative activity

would have occurred.‘** In short, as ProfessorFrank Lichtenberg of Columbia University

has argued,perception of future profits greatly influences R&D spending,and “policies

184
SeeS. Ellison and W. Mullin, “Gradual Incorporation of Information:
PharmaceuticalStocks and the Evolution of PresidentClinton’s Health Care Reform,”
Journal of f;aw and Economics, Vol. XLIV (April 2001).
185
“Arthur D. Little Bio-PharmaceuticalStudy Finds Significant Link Between
Innovation and Market-BasedDrug Pricing,” PressRelease,Arthur D. Little (May 9,
2002).
186
“BIO Airlifts Scientists, CEOs into D.C. for Lobbying Push,”BiotechnoZogy
Newswutch.(August1,1994).
187
Id.
188
H.G. Grabowski and J.M. Vernon, “Returns to R&D on New Drug Introductions
in the 1980%,”Journal of Health Economics, Vol. 13: 383-406.
91
that threatento diminish future profits will reduceR&D investment today, even if they do

not affect current profits.“18g

Real world modeling by economistshas confirmed the link betweenprice

controls and reducedinnovation. ProfessorJohn A. Vernon (University of Connecticut)

recently demonstrated,for example, that regulation of pharmaceuticalprices in the U.S.

could have a “precipitous effect on pharmaceuticalinnovation in the long run.“1g0

Vernon’s objective was to examine, using simulation techniques,how pharmaceutical

price regulation would affect future drug innovation. Simulation experimentswere run

under multiple price-control scenariosto determinehow theseregulationswould affect

and alter the time path of new product innovation (relative to the baselinemodel without

price control regulation). ProfessorVernon found that under a cost-basedapproachto

regulating the top-performing drugs (i.e., drugs in the top three decileswith respectto

presentvalue, after-tax returns), over a 50-year time horizon that was considered,total

industry output would be reducedby between30 percent and 37 percent,relative to

innovative output in the absenceof price regulation. Under less extreme assumptions

about the effect of price regulation, the estimatewas found to rangebetween 6 percent

and 24 percent.1g1Vernon pointed out that the simulation experimentsprovide insight

into the potential consequencesof a pharmaceuticalprice control policy in the U.S.

In anotherstudy, researchersexaminedaggregatedata for the major

pharmaceuticalcompaniesin the U.S. to study the rate of growth in pharmaceuticalR&D

189
F.R, Lichtenberg, “Probing the Link Between Gross Profitability and R&D
Spending,”Health Affaairs,September/October2001: 221-222.
190
John A. Vernon, “Simulating the Impact of Price Regulation on Pharmaceutical
Innovation,”Pham Dev Rep2 (2003).
191
Id.

92
from 1952 to 2001. The paperinvestigated the impact of real drug prices on the R&D

spendingof major U.S. pharmaceuticalcompanies. The researchershypothesizedthat

drug prices’directly influence R&D spending. Their findings supportedthis expected

direct effect. Specifically, the findings suggestthat a 10 percent increasein real drug

prices results in nearly a 6 percentincreasein pharmaceuticalR&D spending,

Simulations basedon theseresults indicate that the value of pharmaceuticalR&D

spendingwould have been about 30 percentlower if the federal governmenthad limited

drug prices ,to the same rate of growth as the generalconsumerprice index price increases

during the period 1980 to 2001. Moreover, drug price controls would have resulted in

330 to 365 fewer new drugs being brought to market during that sameperiod of time.rg2

4. Foreign pharmaceutical price contriAs force Americans to


subsidize medical research and development for the rest of the
world.
The processof discovering and developing a new medicine is long and

complex. Today, the processof bringing a drug to market takes up to 15 years.lg3As a

result, the averagecost to develop a new drug has grown from $138 million in 1975 to

over $800 million today.lg4 The risks involved in the new drug developmentand

approval processesare also substantial. Of every 250 drugs that enter preclinical testing,

192
C. Giaccotoo, R. Santerre,and J. Vernon, “Explaining PharmaceuticalR&D
Growth Ratesat the Industry Level: New Perspectivesand Insights,“AEI-Brookiplgs
Joint Centerfor Regulatory Studies,Publication 03-31 (December2003).
193
J.A. DiMasi, “New Drug Development in U.S. 1’963-1999,”Clinical
Pharmacology & Therapeutics69(s) (2001).
194
J.A. DiMasi, R.W. Hansenand H.G. Grabowski, “The Price of Innovation: New
Estimate oftDrug Development Costs,”Journal of Health Economics 22 (2003): 151-185.

93
only 1 is approvedby the FDA.l” Only 3 out of 10 marketeddrugs produce revenues

that match or exceedaverageR&D costs.1g6

The pharmaceuticalindustry is a key componentto America’s high tech

economy. The pharmaceuticalsector contributed $229.2 billion in sales,$75.4 billion in

labor income, and nearly 1.1 million employeesto the U.S. economy in 1999 al0ne.l”

The averagewage in the industry is over $18 per hour. The industry is among the top

U.S. exporting industries, and ranks with the semiconductor,aerospace,and computer

industry in ‘thevalue of its exports.

By impeding the ability of the pharmaceuticalindustry to accessforeign

markets in a meaningful way, foreign governmentseffectively force U.S. consumersto

bear an unfair burden of the cost of researchingand developing new medicines. As

former FDA CommissionerMark McClellan recently remarked,‘We cannot carry the

lion’s shareof this burden for much longer.771g8


U.S. researchjobs and U.S.

manufacturingjobs are at stake.

5. Importation of prescription drugs would harm consumers and


undermine innovation through its impact on U.S. intellectual
property rights.
Importation under section 804 would also implicate the intellectual

property rights of pharmaceuticalmanufacturers,particularly with respectto trademarks

195
PhRMA, Based on data from the Center for the Study of Drug Development,
Tufts University, 1995.
196
H.G. Grabowski and J.M. Vernon, “Returns to R&D on New Drug Introductions
in the 198Os,”Journal of Health Economics 13 (1999).
197
Examining the Relationship betweenMarket-BasedPricing and Bio-
PharmaceuticalInnovation, study by Arthur D. Little (2002), at 24.
198
Mark McClellan, Speechbefore the First International Colloquium on Generic
Medicine (September25,2003).

94
and patents. Theseintellectual property rights, which are independentof government

standards,promote the public interest in distinct but equally important ways, specifically

by preventlng consumerdeceptionin the caseof trademarks,and promoting

pharmaceuticalinnovation in the caseof patents.

Trademarkrights serve, in part, to prevent potentially confusing or

deceptiveusesof a mark in connectionwith goods that ‘defy consumerexpectationsof

sourceor quality. In today’s global economy, the quality assurancefunction of the

trademarkIs of paramountimportance. Consumersrecognizethe trademarkas a seal of

consistentand predictable quality. Without exception, all PhRMA membershave

developedrigorous quality control standardsto ensurethat brand-nameproducts

consistently meet consumerexpectationsof high quality associatedwith American

prescription drugs. These standardsmeet and typically exceedthe FDA’s regulatory

requirementsand encompassall phasesof product testing, manufacturing, shipping,

handling, storage,packaging,marketing, tracking and authentication.

As owners of registeredtrademarks,PhRMA’s member companieshave

an exclusive right under federal trademarklaw to prevent the use of their marks in

connectionwith unauthorizedimports that fail to meet quality control standardsor differ

in other material respectsfrom authorizedbrand-nameproducts sold in the U.S. (such as

outright counterfeits or foreign versions of a manufacturer’sproduct that have been

improperly handled by others). As a matter of trademarklaw, theseunauthorizedimports

are deemed.tobe “non-genuine”and infringing becauseof the likelihood of consumer

confusion and deceptionthat arisesfrom material differencesin quality control or other

characteristics.

95
By facilitating the importation of foreign-sourcedcounterfeit and

adulterateddrug products, Section 804 not only would pose significant safety risks but

also would open the door to a large volume of infringing imports. As discussedin

Section 1I.B below, theseinfringing imports would be difficult or impossible to detect.

Consequently,by facilitating the use of famous trademarksin connectionwith infringing

imports, Section 804 will dilute the valuable goodwill associatedwith pharmaceutical

trademarksand potentially undermineconsumerconfidencein the integrity of U.S.

brand-namepharmaceuticals.

Our system of patent rights servesthe important purposeof promoting

innovation, Patentsprovide a time-limited incentive for companiesto invest in risky and

expensiveresearchand developmentactivities, while also providing for public disclosure

of novel inventions so that they add to the body of available scientific and technical

knowledge. Patentsare particularly critical to pharmaceuticalinnovation, given the

enormousexpenseand time neededto develop safe and effective drugs. The vast

majority of experimentaldrugs never make it to market, and even successfultherapies

require years of research,developmentand testing before meeting the FDA’s rigorous

approval process.

Drug importation presentspatent concernsbecauseU.S. patent rights

typically are not exhaustedthrough foreign sales. Patent rights, however, are difficult

and expensiveto enforce. The decision whether to bring an infringement action in the

first place is made on a case-by-casebasis, and even those actions that are filed present

many uncertaintiesin terms of the availability, timing, and effectivenessof any relief.

The certification of importation under section 804 would likely increasethe extent of

96
infringing activity and thereby as a practical matter weaken the protections provided

under our patent laws to encourageinnovation.

Many advocatesof importation have publicly acknowledgedas their

ultimate goal a distribution systemthat would totally abrogateintellectual property rights

as applied to imported drugs. For example, one bill currently pending is plainly intended

to override existing patent rights specifically with respectto drug importation.1gg

Legislation of this type would have far-reaching effects on the pharmaceuticalindustry

and its ability to maintain leadershipin developing innovative life-saving and life-

extending medicines. Such measuresalso raise substantiallegal concerns,including

under the Constitution.

III. CONCLUSION
While importation is often hailed as the only solution for individuals who

lack prescription drug coverageand cannot afford their medicines,in fact there are better,

safer ways to ensurethat patients have accessto affordable medicines.

Patient assistanceprogramssponsoredby pharmaceuticalcompaniesare

available to all uninsuredAmericans who meet income eligibility requirements. Roughly

65 percentof the uninsuredhave income levels at or below 200 percentof poverty, and

theseindividuals are eligible for many of the patient assistanceprogramsthat provide

medicinesfree of charge. Information on theseprogramscan be found at

www.helpingpatients.org,an interactive Web site maintainedby PhRMA and 48 of its

member companies. This online service, which is free and completely confidential, is

lgg PharmaceuticalMarket Access and Drug Safety Act of 2004, S. 2328, 108th Cong.
(2004) (proposing to amendfederal patent laws to require exhaustionof patent right upon
the first sale;by the patentee).

97
designedto help individuals find patient assistanceprogramsfor which they may qualify.

Last year alone, PhRMA membersprovided free prescription medicines to more than 6.2

million patients in the United States.

Pharmaceuticalcompany discount card programs are anotherway for

seniors and the disabled to save money on prescription medicines. Seniorswith income

levels at or below 200 percent of poverty, who lack prescription drug coverage,can

accessmedicines made by two PhRMA member companiesat a fixed monthly cost of

$12 to $15. Other company discount card programs offer seniors and the disabledwith

income levels at or below 300 percentof poverty discounts that rangefrom 20 to 40

percentoff retail prices.

Also, this June, all Medicare beneficiarieswill be eligible for a Medicare-

endorseddiscount card that will offer discounts on prescription medicines.The lowest

income seniorswill be eligible for $600 (‘perindividual, or $1200 per couple) ‘this year,

and again next year, to help them afford their prescription medicines until the full

Medicare prescription drug benefit begins in 2006. Once individuals have exhaustedthe

$600, threePhRMA member companieshave publicly statedthey will offer their

medicines free of chargeto theseindividuals.

Further, in 2006, all Medicare beneficiarieswill be able to enroll in plans

that cover prescription drugs. Plans may vary somewhat,but in general,individuals can

choosea prescription drug plan and pay a premium of about $35 a month. They will pay

the first $250 of their prescription drug costs, and Medicare will pay 75 percentof the

costs (and individuals the remaining 25 percent)between$250 and $2,250. Once an

individual has reached$3,600 in out-of-pocket spending,Medicare will pay 95 percent of

98
the costs, a;ndindividuals will be responsiblefor the remaining 5 percent. Individuals

with low incomes and low assetswill not have to pay premiums or deductiblesand will

only pay a small co-paymentfor eachprescription needed. Other people with low

incomes and limited assetswill get help paying the premiums and deductible and the

amount they pay for eachprescription will be limited.

In addition, many statesoperateprescription assistanceprogramsfor lower

income Medicare beneficiaries. For instance,the State of Wisconsin offers a program for

Medicare beneficiaries,which is typically a much better deal for Wisconsin seniorsthan

any Canadianweb site. According to a letter from FDA to Wisconsin Governor Doyle, a

patient taking the five most commonly-prescribeddrugs for seniors (Detrol, Lipitor,

Accupril, Aricept, and Prevacid) for 112 days would pay only $277.50under the Senior

Care Program in Wisconsin. If that samepatient bought the drugs from any of the

Canadianpharmaciesthat the Governor of Wisconsin identified for its citizens, he would

pay over six times that amount. In other words, a patient would pay $14.25 per day for

the Canadiandrugs, and only $2.35 for safe, FDA-regulated American drugs from his

local pharmacy.200

Shopping around among pharmaciescan also yield savings for consumers.

According &I John Graham,the author of a study by the.FraserInstitute, Canada’sleading

economic think tank, “We hear about Americans who claim that they save money, some

say up to 60 percent,by filling their prescriptions in Canada. That is very misleading

becausein some casesa consumercan save as much by bargain hunting at home as he

200
Letter from FDA, Associate Commissionerfor Policy and Planning, William K.
Hubbard to Wisconsin Governor Doyle (March 18,2004).

99
can by crossing the border,‘“203Numeroussurveys have been done by statesand cities

acrossthat country that show consumerscan and do save money by shopping”around.

For example, a survey by the Maine Bureau of Elder and Adult Servicesof prescription

drug prices within the State of Maine found that the retail price of 10 drugs commonly

used by seniorsvaried by as much as 60 percentin the 100 storesacrossthe statethey

Finally, generic drugs available in the U.S. are often considerablyless

expensivethan foreign, non-FDA approveddrugs, and they offer a solution for many

who cannot afford their medicine.

The solutions detailed aboveprovide practical options for many

individuals to accessaffordable medicinesthat will not risk their health and safety.

201
Me&ia Release,FraserInstitute, August 30,2001, cwww.fraserinstitute.ca>.
“State Survey RevealsWide Rangeof Prescription Drug Prices,”Maine Times
lzebruary 8,200l).

100