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Introduction
Mr. Chairman and members of the Subcommittee: I
appreciate the opportunity to appear before you. I am Donald deKieffer, attorney
at deKieffer & Horgan in Washington D.C. My firm specializes in the practice
of international regulatory law. I have over thirty years of experience in trade
law and policy development and have worked for more than a decade in tracking
and investigating international diverters. Today I will testify regarding the
diversion and global counterfeiting of pharmaceutical products. Although many of
the clients I represent are pharmaceutical companies, I am neither speaking on
their behalf nor on behalf of the pharmaceutical industry in general.
The objective of my testimony is to inform this
committee of the existence of an active pharmaceutical diversion trade and to
demonstrate how failure to control this practice opens the door for the entry of
counterfeit drugs into the United States. I will first present a foundational
background on the law regarding drug imports. Secondly, I will discuss the
nature of the diversion problem and its influence on criminal activity, the
pharmaceutical market, and governmental regulatory agencies, in particular the
FDA. Thirdly, I will propose possible avenues to pursue in the development of
solutions to these problems.
Overview
Drug Classifications
Controlled substances are classified into five
different schedules. The schedules are distinguished from each other based on
the potential for drug abuse. Schedule I identifies substances with a high
potential for abuse that do not currently have an accepted medical treatment use
in the United States, such as heroin and marijuana. Schedules II through V are
controlled substances with legitimate medical purposes, such as Ritalin and
Valium. Schedules II through V also include "lifestyle drugs." These
substances, such as Viagra, target disorders affecting the quality of life
rather than specific diseases. Lifestyle drugs are commonly abused prescription
substances. Additional controlled substances, such as OxyContin, which are not
lifestyle drugs, are also abused.
Diversion
International diversion is the importation of
products originally intended for distribution in another country. Pharmaceutical
diversion involves substances classified in schedules II through V. A classic
diversion scheme begins when drugs that are produced in the United States are
either sold at low prices or are given philanthropically to other countries.
Corruption and fraud in the countries of destination permits third parties to
obtain large quantities of U.S. produced drugs at low costs. These drugs then
make their way back into the U.S. market for resale at going market rates, thus
generating large profits for the diverters.
Closely related to diversion is the practice of
parallel importing, which is the importation of patented drugs by third parties
without the authorization of the patent owner. Drugs produced by U.S.
pharmaceutical companies are available for a lower cost in other countries where
the foreign governments fix pharmaceutical prices. Diverters purchase these
drugs abroad and redistribute them in the U.S. market, thus undercutting the
U.S. market price and making a tremendous profit.
Another subcategory of diversion is smuggling.
While diverted products re-enter the country under the guise of legal imports,
smuggled drugs are routed into the country through illegal means. Smuggling is
the preferred means of re-importing diverted drugs. These pharmaceuticals mainly
come across customs borders or through the mail system with fraudulent
documentation. The sheer volume of diverted drugs entering the country prevents
customs officials from detecting or seizing more than a mere fraction of them.
Counterfeiting
Many foreign countries permit the cross border
exchange of imitation patented drugs manufactured in countries other than the
United States. Counterfeit drugs are a tremendous problem in countries with lax
import regulations. Counterfeit pharmaceuticals are often purchased to replenish
the dwindling drug supplies that result from diversion. These counterfeits are
not subject to any form of production regulation, and once they get mixed into
the system they are essentially indistinguishable from the legitimate product.
While counterfeit drugs are not yet rampant in the United States, the loosening
of import regulations leads to a climate that increases the potential for
counterfeit distribution.
Diversion is a Trojan Horse for counterfeits.
Drugs are no longer part of a regulatory infrastructure once they leave the
control of the originally intended recipient and enter the channels of
diversion. Many of these drugs pass through countries where there is rampant
corruption and fraud in the drug industry, and counterfeits are in abundance.
Because there is no way to monitor where the diverted products have been or how
they have been handled, it is highly likely that counterfeits will unknowingly
be mixed with diverted drugs. Counterfeit products then enter the U.S. system
mixed with legitimately produced U.S. drugs.
Counterfeiting in the U.S. is already existent to
a certain extent. For example, between 1991 and 1995 the FDA and U.S. Customs
officials seized enough evidence to incriminate Flavine International Inc., a
New Jersey based company, in a counterfeit drug scandal. Flavine bought bulk
amounts of veterinary antibiotic ingredient base and other human antibiotics
from an unapproved source in China for considerably less than the price of the
legitimate products. Flavine then resold the material to unsuspecting U.S. drug
companies at an inflated rate. The scheme posed a risk to animals and humans
because the counterfeit drugs were of unknown potency and quality. Six patients
in Denver suffered toxic reactions.
More recently, the FDA has been investigating
cases of counterfeit injectable drugs. Instances of counterfeit Serostim, a
growth hormone used by AIDS patients, Nutropin, also a growth hormone, and
Neupogen, a cancer drug, have been detected in the past month. 1 FDA
investigations are ongoing and it is not yet clear whether the drugs were
produced in the United States or overseas. At least some of these products ended
up in U.S. pharmacies and were actually distributed to customers who experienced
adverse reactions. 2
Current Regulations and Laws
Regarding Drug Importation
The federal government has jurisdiction to
control pharmaceutical importation into the United States. The FDA, DEA and U.S.
Customs are the federal agencies primarily responsible for overseeing drug
import regulation.
The law effectively prohibits the importation of
any drugs, including foreign made versions of U.S. approved drugs, that have not
received FDA approval to demonstrate they meet the federal requirements for
safety and effectiveness. 3 FDA approved drugs can only re-enter the country if
they are being shipped directly back to the manufacturer. When customs officials
receive a shipment that contains non-approved pharmaceuticals intended for
commercial distribution they notify the local FDA district, and the FDA assumes
responsibility for deciding whether or not to seize the goods. FDA personnel are
also responsible for monitoring mail importation. Customs officers from the
customs mail division will examine a parcel and set it aside if it appears to
contain a drug that the FDA has specifically requested be held or an
FDA-regulated article that appears to represent a health fraud or an unknown
risk to health.
The rules governing personal importation of
approved drugs from foreign countries vary slightly. Congress recently
stipulated that a United States resident may import up to fifty dosage units of
a controlled medication without a valid prescription at an international land
border. 4 Medications must be declared on arrival, be for own personal use, and
be in their original container. The FDA has the ability to exercise discretion
in the enforcement of this law and may permit the entry of unapproved drugs
under extenuating circumstances, such as the continued treatment by a foreign
doctor. However, this policy does not apply to foreign-made chemical
versions of drugs available in the U.S. The FDA cannot assure that such products
have been properly manufactured and are effective. Their use would present an
unreasonable risk. Additionally, the FDA reserves the right to refuse entry or
seize any drug it considers unapproved and, therefore, illegal. 5
The DEA has recently contributed additional
regulations designed to help control pharmaceutical imports from foreign
markets. According to the DEA, consumers must have valid prescriptions to
legally obtain controlled substances. Consumers cannot legally purchase
controlled substances from foreign Internet sites and have them shipped to the
U.S. unless the consumer is registered with DEA as a controlled substance
importer and acts in compliance with DEA requirements. 6
Nature and Consequences of
Pharmaceutical Diversion
Promotion of Criminal Conduct
Failure on the part of the U.S. government to
control pharmaceutical diversion encourages criminal behavior both domestically
and internationally. The ease with which pharmaceutical drugs are smuggled
across the border makes diversion enticing as a low-risk criminal activity with
high economic returns. Diverters and counterfeiters are able to exploit the
American public because of increasing frustration surrounding the high cost of
medications and a market that has been traditionally free from unapproved or
dangerous products. The proliferation of an American gray market, therefore,
invites the theft of American drug products in foreign countries, thus
completing the vicious circle of criminal conduct.
The diversion trade also facilitates the abuse of
prescription drugs in the U.S. An estimated four million citizens in the United
States are addicted to prescription drugs. 7 Many of these products are
lifestyle drugs, such as Viagra, weight control products, or tranquilizers.
There is also a serious problem with the misuse of other legitimate medications.
For example, the pharmacological effects of OxyContin, a central nervous system
depressant designed principally as a pain medication for cancer victims, make it
a substitute for heroin. 8 OxyContin overdoses have been the cause of over forty
deaths on the East Coast in the last year. 9 Much of the illegal OxyContin
supply comes from diverted sources. Diversion increases the ability of
individuals to receive drugs through improper channels without a prescription,
thus fostering the opportunity for misuse of these products.
Destruction of the Pharmaceutical Market
Diverters regularly import undetected
pharmaceuticals into the United States. Since 1997, more than 4,600 foreign drug
manufacturers have shipped to the United States without being inspected by the
FDA. 10 Additionally, Congress has relaxed the regulations on the importation of
controlled substances by allowing U.S. citizens to legally import limited
amounts of price-controlled drugs from Mexico and Canada for personal
consumption. 11 Slackening of import standards increases the likelihood of
diverted drugs devastating the U.S. pharmaceutical market.
Diversion, in the form of parallel importing, is
a violation of intellectual property rights. Included in most patents is the
exclusive right to the use, including importation and exportation, of the
patented good. Intellectual property rights are the financial basis of the
pharmaceutical industry. The more diverted and counterfeit drugs permitted to
enter the country, the less control the patent holders maintain. Taking away the
intellectual property rights of the pharmaceutical industry will render patents
meaningless and will create major financial set backs for the market.
Pharmaceutical companies may have to freeze research and development and may not
be able to financially justify pouring resources into the creation of new and
improved medications.
Diverted drugs destroy the predictability of
supply and demand in the pharmaceutical industry. The U.S. government does not
artificially control drug prices. The U.S. pharmaceutical producers have not
traditionally competed with international drug distributors, principally for
regulatory reasons. The result has been that pharmaceutical companies have
freedom to incidentally set prices for the products they develop. Consequently,
as happens in many different markets, drug prices are disproportionate to actual
production cost. However, inflated prices are necessary to offset the marketing
cost of the specific product, to finance research and development of new
products, and to subsidize medical assistance to struggling nations. In a
regulated system such as this, the pharmaceutical industry bases production on
predicted market needs. Diverters destroy the market balance when they enter
unknown and unregulated surpluses of any product into the country through the
channels of diversion. Companies are unable to maintain any sort of meaningful
records regarding the distribution and consumption of drugs and cannot react
proportionately to the market need.
Diverters exploit the price disparities between
U.S and foreign pharmaceutical prices. Pharmaceutical companies provide drugs to
other countries either philanthropically or at much lower prices than they are
sold domestically. Diverters capitalize on this price differential by obtaining
low priced drugs in other countries. They are then able to undercut the market
price when re-selling drugs back in the U.S. This practice generates a surplus
in the American market and prevents pharmaceutical companies from meeting their
projected sales quotas. Ironically, customers are not the ones financially
benefiting from diverted drug sales. Diverted drug products often barely
undercut the normal retail prices. However, because diverters obtain the drugs
at a fraction of U.S. resale prices, the diverters assume a tremendous profit
while the customers reap only a fractional benefit.
The entrance of diverted drugs and counterfeit
products into the market creates a financial liability for the pharmaceutical
industry. Prescription drugs carry a strict liability for the producers. Strict
liability means that drug companies are completely accountable for their
products and must bear the cost of lawsuits and fines, regardless of any
question of negligence. Counterfeit drugs may easily be mixed with diverted
products. Counterfeit drugs are dangerous because they are entirely foreign
substances masquerading as the genuine product, and they may not even consist of
the same ingredients that they profess to contain. There is a high likelihood
that customers who unsuspectingly ingest these products may be adversely
affected. It is difficult, even for a professional, to distinguish between
counterfeited and legitimate drugs. Since these counterfeit products are
difficult to distinguish, companies may find themselves liable for situations
that were not of their own causing. The potential financial hit that the
pharmaceutical industry will bear, as a result of liability, will adversely
affect the financial stability of U.S. drug companies.
Diversion also affects world pharmaceutical
markets and finances criminal conspiracies. Many countries, such as South
Africa, Israel, Russia and the Philippines have open borders with respect to the
importation and exportation of pharmaceutical products. Open border countries
have lost strict regulatory control of their drug markets. For example, in South
Africa over fifty percent of the medication supplied to the government ends up
stolen. Open border countries have also experienced a corresponding surge in
counterfeit medicine entering under the guise of parallel imports. Frequently,
the counterfeits enter the country as a means of replenishing the drug supply
depleted due to the diversion of the legitimate drugs to more lucrative markets
in Europe and America. Consequently, the medicines intended for a particular
population are not getting to the people that need them; in their place, false
and dangerous counterfeits are being provided, and criminals reap the financial
benefit.
Undermining the FDA
The American public is currently frustrated with
high priced pharmaceuticals. There is an outcry for access to pharmaceutical
products that are cheap, readily available, efficacious, and safe. However,
permitting diversion and parallel imports is not a viable solution. Safe and
efficacious products come at a cost. The entrance of diverted and counterfeit
drugs into the U.S. will destroy drug control regimes currently in place and the
FDA will lose its ability to monitor and control drug production and
distribution in this country.
Increased diversion traffic through inefficient
monitoring at the border will prevent the FDA from controlling drug entry and
distribution. Unchecked pharmaceuticals currently enter the country through the
mail system and across the Mexican border. Due to the sheer volume, this influx
of drugs basically goes unmonitored by federal regulatory groups such as the
FDA. As a result, drugs in this country are being distributed and sold without
proper authorization. This diminishes the ability of the FDA to control the
distribution of drugs. Citizens are able to access "lifestyle" drugs
and potentially addictive substances without prescriptions or the direction of a
physician. Consequently, the FDA is losing its ability to manage prescription
drug use.
Counterfeit drugs present a danger to citizens
because the FDA is unable to monitor the products for quality and safety.
Counterfeit drugs, principally produced in countries such as India, are
imitations of U.S. made products. However, it is impossible to know for certain
what these medications contain, how they were produced, where they were stored,
or the potential side effects of ingestion. By allowing the diversion trade to
persist, the likelihood of distribution of these potentially lethal medications
increases, and the FDA loses the ability to regulate the quality and safety of
products being distributed to the unsuspecting U.S. public.
Diverted drugs that leave the control of the
original distributor place consumers in jeopardy because the means of shipment
and storage are unregulated. Diverted drugs enter and exit the hands of multiple
unknown parties before they eventually reach a consumer. These drugs are
commonly stolen in bulk from government agencies in foreign countries and are
routed through countries such as Mexico before they reach consumers in the
United States. Most drug products have specific instructions regarding storage
temperature and expiration date. With diverted drugs, there is no guarantee that
the products were properly handled during shipping and storage. The FDA has
always exerted strict controls on the production and distribution of drugs in
the United States. Consumers have learned to expect pharmacies and drug
distributors to provide safe medications. Allowing diverted drugs into the
country will destroy the FDA’s ability to guarantee safety and will increase
the danger to consumers who may unknowingly purchase and ingest these products.
Counterfeit drugs that enter under the guise of
parallel imports likely come from unapproved locations. Both counterfeit drugs
and diverted drugs are huge risks to the citizens of this country. The FDA has
traditionally been able to approve the production location of drugs and foreign
products. When drugs are smuggled into the country, there is no way of knowing
where they have traveled. Additionally, counterfeit drugs entering the country
through diversion may have been produced anywhere. The FDA is, therefore, losing
its ability to control and monitor the production sites for pharmaceuticals
being imported into this country.
Diverted drugs may contain incorrect
informational material and directions or may be mislabeled entirely. Medications
are, of course, dangerous when misused and req uire specific instructions as per
their usage. Divergence from these requirements may prove extremely harmful and
potentially lethal. Diverted goods are often taken from their original packaging
and distributed to many different importers. The potential is high that drugs
may be mislabeled or put into packages that lack the appropriate informational
material. As the diversion trade increases, the FDA will in turn lose control
over the packaging and instructions accompanying large quantities of drugs in
this country.
Additionally, the diversion trade destroys
systems of record keeping for the U.S. drug industry. With products being
illegally mailed into the country and smuggled across the borders, it is
impossible for the FDA or the drug industry to keep track of what is currently
on the market. This makes it easier for people to obtain drugs illegally and
promotes the abuse of prescription products.
Potential Solutions
There needs to be better cooperation between the
government agencies in charge of enforcing laws relating to diversion and
counterfeit trade. According to a report issued by the U.S. General Accounting
Office, the efforts of the FDA, DOJ, DEA and Customs do not always support each
other. 12 For example, sometimes the FDA releases packages of drugs detained by
Customs in an effort to conserve resources. These kinds of actions are
counterproductive, undermine the law, and send mixed signals to the individuals
involved. 13 Laws have been put in place to control diversion; however, it needs
to be clear who is in charge of enforcement. Efficacious systems of detection
and seizure as well as substantial penalties for abusers must be implemented and
enforced.
Foreign Internet pharmacies dealing in illegal
imports need to be eliminated. An abundance of Internet pharmacies situated in
foreign countries advertise prescription drugs. These sites do not require
individuals to have a prescription from their doctor in order to obtain drugs.
Although DEA regulations and the Controlled Substances Act allow individuals to
bring limited quantities of controlled substances into the U.S for personal use,
these regulations do not apply to shipments into the U.S. from foreign Internet
pharmacies. It is illegal to purchase drugs from such sites. These pharmacies
are aware that they are engaging in illegal activity. Many sites explicitly
justify their practice and include instructions on how to avoid having the
packages seized by U.S. Customs. This problem needs to be attacked at the
source. There must be a crack down on foreign Internet pharmacies dealing in
illegal importation.
The government should look for solutions to help
support/subsidize providing affordable prescription drugs for the elderly and
others who are unable to afford necessary medications. The diversion trade seems
to be supported in part by frustrated Americans seeking cheaper drugs. It is
contended that many of these individuals are seniors who are on tight budgets
and cannot afford the medications they require. The government should consider
providing a means-tested subsidization for U.S. citizens unable to afford the
medications they require. Providing medication to those who are feeding the
diversion market will reduce the demand for smuggled drugs.
Penalties for prescription drug abuse must be
increased. It is currently very difficult to detect prescription drug abuse, and
many people fail to even recognize it as a crime. Harsher penalties may decrease
the demand for diverted pharmaceuticals and naturally cause that market need to
decrease.
Finally, there needs to be cooperation between
government agencies and the pharmaceutical industry in creating better systems
for overseeing philanthropic drug distribution in other countries. Much of the
aid that is sent to struggling countries is well intended. However, it has been
proven time and time again that these countries lack the infrastructure and
integrity to properly distribute the products to the intended recipients. It is
counterproductive to provide mass quantities of free or low-priced medication to
countries that cannot properly handle or distribute it. Until a more reasonable
infrastructure can be put in place, bulk deliveries of U.S. pharmaceuticals to
underprivileged countries should be severely restricted.
There likewise needs to be a better system of
tracking drugs destined for distressed markets where there is a possibility of
corruption or diversion. There are FDA approved means of marking both drugs and
packaging that would allow customs officials to quickly and efficiently monitor
what crosses the border. Such a system would help catch diverted products before
they entered the market.
Conclusion
In summary, drug diversion is a crime. Its
occurrence is increasing. By permitting this practice to continue, the
government will open the way for counterfeit drugs to enter the U.S., foster
criminal conduct both internationally and domestically, harm the pharmaceutical
market, and undermine the regulatory structure of the FDA. Measures should be
taken to recognize and address these issues.
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