U.S. DRUG IMPORT BILL HAS SERIOUS IMPLICATIONS FOR CANADA

Page 35 U.S. DRUG IMPORT BILL HAS SERIOUS IMPLICATIONS FOR CANADA Guy W. Giorno, Lynne Golding, Vincent Routhier, and Philippe David Fasken Martineau DuMoulin LLP INTRODUCTION Legislation currently before the United States Congress could negatively affect the supply and price of prescription drugs in this country, unless Canadian officials take steps to address the situation. At issue is a House of Representatives bill, 1 H.R. 2427, the Pharmaceutical Market Access Act of 2003, that would permit the re-importation of prescription drugs from Canada into the United States. If the legislation passes the Senate and is implemented, then the consequences could include higher prices for brandname drugs sold in Canada, or supply shortages in the Canadian market. BACKGROUND At present the U.S. pharmaceutical industry sells prescription drugs in Canada at prices substantially lower than those south of the border. 2 A 30-year old federal law prohibits re-importation or "gray market" trades. Under the Federal Food, Drug, and Cosmetic Act, a drug manufactured in the United States and exported to a foreign country may not be re-imported to the U.S. except by the drug's own manufacturer. 3 A person other than the manufacturer may reimport only in the event of emergency medical care, and at the discretion of the Secretary of Health and Human Services. 4 In other limited circumstances, individuals may legally import drugs from foreign countries, but only if there is no U.S. substitute for the product. Perhaps the most significant restriction contained in the current law is that drug reimports are only allowed if the H.H.S. Secretary certifies that importation does not create a risk to public safety. Essentially this gives the administration a right of veto over drug imports, as the previous two Secretaries have refused to certify that imports are safe. The bill passed by the House of Representatives would remove the Secretary's effective veto over drug imports. LEGISLATIVE CONTEXT Drug importation is caught up in the much larger issue of Medicare reform. This summer, the Senate and the House of Representatives both passed different Medicare reform bills. 5 A Conference Committee has been working to resolve the differences, with the House Speaker and Senate Majority Leader setting October 17 as the deadline for the Conference to complete its report in time for both houses to vote on the legislation before yearend. As a number of issues remain unresolved, it is possible that no Medicare reform legislation will be agreed to during the current session of the 108th Congress. However, even if legislation is not enacted

Page 36 this year, drug importation is a major issue that will not go away. SENATE VERSION The Senate proposal concerning drug importation is part of its larger Medicare reform bill, the Prescription Drug and Medicare Improvement Act of 2003, S. 1. Title VIII of S.1 permits pharmacists and wholesalers to re-import U.S.-manufactured prescription drugs, but only from Canada. 6 In addition, individuals would be allowed to import prescription drugs (up to a 90-day supply) for personal use, provided that they possess a valid prescription and purchase from a licensed Canadian pharmacy registered with the Health and Human Services Secretary. 7 However, all of these new provisions "shall become effective only if the Secretary of Health and Human Services certifies to the Congress that the implementation of this section will (1) pose no additional risk to the public's health and safety; and (2) result in a significant reduction in the cost of covered products to the American consumer." 8 H.H.S. Secretary Tommy Thompson has said that he would not be able to certify the absence of additional risk, meaning that if the legislation passes in this form then Canadian re-imports would still be prohibited. S. 1 would impose a number of safeguards, including the following: Requiring importers to test the drugs for authenticity, degradation and compliance with established specifications and standards. 9 Making each Canadian establishment involved in exporting prescription drugs to the United States register with the H.H.S. Secretary. l0 Imposing strict labeling requirements, including the name and quantity of the active ingredient of the drug, its dosage form, the date on which it was shipped, its point of origin and the price paid. 11 The Senate version would allow the H.H.S. Secretary to cancel the program within 18 months if there is substantial evidence that the detriments of the program outweigh the benefits. 12 HOUSE OF REPRESENTATIVES POSITION During the Conference negotiations, the official House of Representatives negotiating position on the drug re-import issue is reflected by bill H.R. 2427, the Pharmaceutical Market Access Act of 2003. There are four key differences between H.R. 2427 and Title VIII of S. 1: 1. The House bill contains no prerequisite that the Secretary of Health and Human Services certify that implementation would pose no additional risk to health and safety. 2. H.R. 2427 would allow imports from more than 30 countries, including Canada. 3. The House would allow not just pharmacists and wholesalers but also "qualifying individuals" to import drugs. 13 4. The House bill would force the H.H.S. Secretary to implement the legislation within six months of its passage. 14 H.R. 2427 also provides that drugs being imported into the United States must be labeled and packaged using counterfeitresistant technologies. 15 These must be

Page 37 similar to the technologies used by the Bureau of Engraving and Printing when it prints United States currency, and must be incorporated into multiple elements of the packaging. ADMINISTRATION POSITION Two days before H.R. 2427 passed, the White House issued a strongly-worded statement of opposition. It called the bill "dangerous legislation" that would expose people to the risk of harm from unsafe or ineffective drugs, would be costly to implement, and would overwhelm the regulatory system of the Food and Drug Administration (F.D.A.). 16 If the Senate version prevails, then the H.H.S. Secretary is not likely to certify that drug reimportation poses no risks, meaning that the new legislation would not take effect. On the other hand, if Congress adopts a law (such as H.R. 2427) that does not require the Secretary's certification that re-imported drugs are safe, then the Administration has promised to implement it. LIKELY OUTCOME At this stage it is uncertain which version of the drug importation rules will appear in the final legislation. Two factors suggest that the House version faces an uphill fight. First, in July, a majority of Senators (53) signed a letter endorsing the requirement that the H.H.S. Secretary certify cost savings and the absence of risk before a law permitting re-importation can take effect. However, signatories later suffered embarrassment when it was revealed that a lobbyist wrote the letter for them; it is unknown whether all of them would still hold to the position contained in the letter. Second, a majority of the House representatives on the Conference Committee originally voted against H.R. 2427. Thus, despite the House's official position in negotiations with the Senate, it is uncertain how strongly the House members of the Conference Committee will advocate for the House version of drug import legislation. MEANWHILE, IMPORTERS, MANUFACTURERS AND REGULATORS TAKE ACTION Neither supporters nor opponents of drug imports are waiting idly for the Congressional debate to conclude. Imports are increasing, and manufacturers and regulators have responded. Some U.S. consumers and Canadian distributors are currently circumventing the import ban through Internet sales. According to several estimates, Canada is home to more than 100 Internet pharmacies, primarily located in Manitoba, that make low-cost U.S. prescription drugs available to Americans. 17 In response to this growing practise, U.S. pharmaceutical companies such as Pfizer, GlaxoSmithKline and AstraZeneca have begun curtailing the availability of drugs to Canadian distributors and retailers. 18 Drug companies have started to require that their Canadian customers sign undertakings promising not to ship drugs to the United States. Other drug companies have begun carefully monitoring their Canadian customers' purchases, looking for unusual volume increases that could indicate exports to the United States. The cumulative effect of these actions has been substantial price increases for several drugs imported into

Page 38 Canada. 19 Meanwhile, acting on behalf of the F.D.A., the U.S. Department of Justice has begun actively enforcing the drug re-importation ban. For example, an injunction was recently sought in U.S. District Court in Oklahoma to prevent Rx Depot and its affiliate, Rx Depot of Canada, from importing prescription drugs from Canada and selling them in the U.S. at reduced prices. 20 Provincial pharmaceutical bodies and the Canadian Medical Association are reminding health care professionals that it is unlawful for them to sell drugs to patients they have not met. For years now, the Manitoba Pharmaceutical Association has been dealing with some members' practise of selling prescription drugs into the United States. 21 Despite increasing scrutiny of drug exports/imports on both sides of the border, the attractiveness of low cost drugs for U.S. consumers remains intense. Even state and municipal governments are considering reimports under health care plans for current and retired state employees. 22 NEGATIVE CONSEQUENCES FOR CANADA Should Congress adopt the drug-import liberalization proposed by H.R. 2427 (or similar legislation), the implications for Canada could be serious. also have a negative impact on Canadian consumers. The nonpartisan Congressional Budget Office has examined the reimportation issue, and concluded that, "If manufacturers were unable to limit the supply of drugs entering the U.S. market from Canada, the likely result would be that brand-name drug prices in Canada would rise much more than the price in the U.S. would decline. 23 Strong action by domestic authorities would be needed to protect Canadian patients and remedy the U.S. law's adverse effects on Canada. For example, export control licensing requirements could stem the export of prescription drugs. In light of these developments, our Strategic Counsel Practise Group and Health Law Practise Group have been carefully monitoring the issues surrounding cross-border trade in prescription drugs. Fasken Martineau's long-standing relationship with major Canadian pharmaceutical companies (through a dedicated Biotech and Pharma Group) gives us insight into this pressing issue. Further, our experience and expertise in government relations and public policy position us to continue to represent clients' interests effectively as the situation develops. 2003 Fasken Martineau DuMoulin LLP If significant volumes of drugs are reexported to the United States, then the remaining supply might not be sufficient to meet Canadians' needs. The problem could be exacerbated if manufacturers are forced to curtail products' availability to Canadian retailers. Further, continuing price increases would

Page 39 NOTES 1. Passed July 25, 2003, by a 243-186 vote. 2. Recent studies by Health Canada indicate that drug prices in the United States are 67 percent higher than prices for the same drugs in Canada: "Some Successful Models Ignored as Congress Works on Drug Bill," The New York Times, September 4, 2003. 3. 21 U.S.C. 81(d). 4. Id. 5. Medicare Prescription Drug and Modernization Act of 2003, H.R. 1, passed June 27, 2003, on a vote of 216-215. Prescription Drug and Medicare Improvement Act of 2003, S. 1, passed June 27, 2003, on a vote of 76-21. 6. Inserted as an amendment to S. 1, adopted June 20, 2003, on a 62-28 vote. 7. S. 1, Title VIII, Sec. 801(a), enacting Sec. 804(k)(3) of the Federal Food, Drug, and Cosmetic Act. 8. S. 1, Sec. 801(c). The Senate unanimously passed the amendment containing the certification requirement. 9. S. 1, Sec. 801(a), enacting Sec. 804(d) of 10. S. 1, Sec. 80l(a), enacting Sec. 804(f) of 13. H.R. 2427, Sec. 4(1)(b), amending Section 804 of the Federal Food, Drug, and Cosmetic Act. 14. H.R. 2427, Sec. 4(1)(a). 15. H.R. 2427, Sec. 5, amending Title V of the Federal Food, Drug, and Cosmetic Act. 16. Executive Office of the President, Office of Management and Budget, "Statement of Administration Policy: H.R. 2427" (July 23, 2003). 17. "Canada Caught Up in Drug War," The Globe and Mail, September 11, 2003. 18. "Canada May Stop Drug Sales to U.S.," The Detroit News, August 13, 2003. 19. "Canada's Internet Pharmacies Hurting from Industry Steps to Halt U.S. Sales", The China Post (www.chinapostcom.tw), September 9, 2003. 20. "Feds Target Firm Importing Canadian Drugs", CNN.com, September 11, 2003. 21. "E-Pharmacies under Attack: Association Wants Province to Ban Practise", The Winnipeg Free Press, June 16, 2002. 22. "Illinois Considers Buying Drugs in Canada", The New York Times, September 16, 2003. 23. Congressional Budget Office, Cost Estimate of H.R. 1 and S. 1 (July 22, 2003). 11. S. 1, Sec. 80l(a), enacting Sec. 804(e) of 12. S. 1, Sec. 80l(a), enacting Sec. 804(n) of