Before The Senate Committee On Health, Education, Labor, & Pensions

TESTIMONY OF THE
BIOTECHNOLOGY INDUSTRY ORGANIZATION

BEFORE
THE COMMITTEE ON
HEALTH, EDUCATION, LABOR, & PENSIONS
OF THE
UNITED STATES SENATE

IMPORTATION OF PRESCRIPTION DRUGS

MAY 20, 2004

The Biotechnology Industry Organization (BIO) appreciates the opportunity to present the views of the industry and our members on the issue of legalizing prescription drug importation. BIO represents more than 1,000 biotechnology companies, academic institutions, state biotechnology centers and related organizations in all 50 U.S. states. BIO members are involved in the research and development of health care, agricultural, industrial, and environmental biotechnology products. BIO agrees with many in Congress and elsewhere that patients should have access to the prescription drugs they need - including the life-saving products developed by our member companies - and wants to work with Congress to find the right ways to ensure this. We do not believe legalizing importation of prescription drugs is the right solution for a number of reasons that are explained more fully below.

Legalizing prescription drug importation will put Americans at risk of obtaining products that do not meet the Food and Drug Administration's (FDA) high standards for ensuring safety and effectiveness - standards that have made the U.S. prescription drug market the safest in the world. The wholesale importation of prescription drugs across American borders will also jeopardize all U.S. consumers, not just those individuals who choose to obtain their prescription drugs from a foreign source.

Allowing the importation of prescription drugs with the intention of importing foreign government-imposed price controls will do little to curb growing drug costs while seriously threatening the continued innovation of the U.S. biotechnology industry and the patients who rely on its medical advancements to treat debilitating and often life-threatening illnesses. Further, current legislative proposals designed to establish an importation framework would erode intellectual property rights that serve as the backbone of America's biotechnology industry and would have seriously negative implications for U.S. trade policy.

Prescription Drug Importation Is Unsafe

BIO strongly opposes the legalization of prescription drug importation, even though current legislative proposals exempt many biological and biotechnology products, because it would open the floodgates to a variety of unsafe prescription products.

The FDA has testified on multiple occasions that the U.S. prescription drug supply already is constantly under attack from a variety of increasingly sophisticated threats. Opening our borders, the FDA has asserted, would enable certain unscrupulous entities to circumvent the agency's standards for ensuring drug safety and effectiveness and peddle unapproved and perhaps dangerous products to U.S. consumers. Even if biologics and certain biotech products are exempt, counterfeiters and other criminals will likely find a way to shop dangerous versions of our products across the border.

Biological/Biotechnology Products Are Unique

We applaud Congress for recognizing the unique and sensitive features of products developed by the biotech industry and, therefore, exempting them from the proposed importation framework. Many biologics and other biotech medicines are particularly susceptible to adulteration, degradation and virtually undetectable counterfeiting. Moreover, many of our products cannot be safely administered by a patient and, therefore, require the intervention and/or supervision of a health care provider. As a result, our products are often not available in the U.S. through out-patient prescriptions, nor available at the local pharmacy.

Yet, patients and the FDA, through its sting operations, have been able to acquire biological and biotechnology products through Internet sites and through other questionable means. In many of these cases, these products were packaged improperly, maintained at temperatures that hastened their degradation or completely destroyed their effectiveness or were diluted, concentrated or otherwise dangerously adulterated. Obviously, the illegality of the transactions did not prevent them from occurring. To legalize importation for virtually all prescription drugs will do little to protect against further entry of unsafe medicines and will likely increase the availability of unsafe or, at the very least, ineffective biotechnology medicines.

Wholesale Importation Is Not Individual Importation

Questions about the safety and the integrity of the prescription drug supply are real and valid. The Congressional Budget Office recently issued a report on prescription drug importation, noting, with respect to cost savings, that although one patient filling a prescription in a foreign pharmacy may realize savings, the same would not necessarily be true for the entire health care system. This analogy can also be extrapolated to safety concerns. If an individual chooses to travel to a foreign country to fill a prescription or to order prescription drugs from an unknown source via an Internet site, that individual is making a decision to accept the risk associated with that transaction.

Legalizing wholesale importation is not the same as personal importation. Wholesale importation will result in an intermingling of foreign drug products with those that have been approved as safe and effective through the FDA's gold-standard approval process. This means that every person filling a prescription will face the possibility of receiving a "second class" drug product. It will be irrelevant that a consumer chose to take the risk of filling a prescription from a foreign source while a different consumer has chosen not to: both will be forced to take the risk that their prescription medicine is a second-tier medicine.

Legalizing Importation Devalues the FDA Approval System

Drug importation would call into question the value and the viability of the FDA approval process. Recently introduced importation legislation, requires prescription drug manufacturers, who have non-FDA approved but foreign approved drugs, to submit an FDA application for approval. The application must state the differences between the foreign-made product and their U.S. counterpart. While this legislation technically allows the FDA to reject these applications, the legislation's clear message is an anticipation of FDA approval. Indeed, FDA will be required to make public all such notices and applications. The same public pressure that is driving this legislation will make it extremely difficult for FDA to disapprove an application. Therefore, the FDA will be required to approve drugs for distribution in the United States that have not undergone the same safety and efficacy tests as their United States counterparts. Importation legislation will allow foreign approved drugs to completely circumvent the FDA approval process.

Unrealistic Expectations for FDA Make Enforcement Impossible

Requiring the FDA to carry out numerous requirements and examine voluminous paperwork under a new importation program will not and cannot make an inherently bad system safe. It would be impossible for the FDA to register, monitor and regulate importers and exporters, ensure that all incoming drug products are in accord with proper prescriptions, and inspect parcels, products and facilities to ensure product safety with the intensity required under such a program.

Those who will recognize the infeasibility of enforcing these requirements will be those who least intend to abide by them - criminals, counterfeiters, smugglers, and others whose only goal is to make the most money in the easiest fashion without regard to whether the so-called prescription products they peddle are safe or effective. An importation program would needlessly compromise the safest drug supply in the world.

Prescription Drug Importation Will Hurt the Economy and Threatens Biotechnology Innovation

In addition to threatening the safety and integrity of the U.S. prescription drug supply, there are other valid economic reasons to oppose drug importation.

The biotechnology industry is a thriving, growing, creative force on the U.S. economic landscape. The industry provides numerous employment opportunities and a thriving tax base for many communities around the country. The biotechnology industry is a key economic component in California, Pennsylvania, Massachusetts, North Carolina, and Maryland, to name a few. National and state policies that encourage the biotech industry's innovation and foster its growth will not only provide an economic boost but will also provide fertile ground for the development of treatments and cures for patients all over the country and the world. Policies and legislation that discourage innovation will have the opposite effect - squelching a positive economic and public health force.

Importation Will Have a Negative Impact on Investment

Investment in the U.S. biotechnology industry is based on an expectation that a product's success will reap benefits not only for patients but also for future industry projects and investors. That expectation can be fulfilled if a successful product remains in a favorable competitive environment for a reasonable period of time. Investors will not look favorably on the possibility of imported products quickly becoming competitors of FDA-approved products, nor will they look favorably on what will become, essentially, a system of foreign-imposed price controls on FDA-approved products.

The vast majority of biotechnology companies across the U.S. are small companies with no products yet available on the market and without significant revenue or profits. To fund the costly and lengthy periods of research and development, biotech companies rely heavily on three primary sources of capital: (1) private investment capital, (i.e., institutional or venture investors); (2) public investment capital (i.e. the stock markets - mutual fund investors and individual investors); and, (3) capital obtained from partnerships with other companies (e.g., pharmaceutical companies).

The capital markets are acutely sensitive to factors that threaten to limit current or future profitability for any company or industry sector. We see examples of this on a daily basis: if a public company unexpectedly announces an event that could adversely impact future earnings, the stock price plummets resulting in millions, if not billions, in lost market value. Frequently, depending on the nature of the event, an announcement by one company will also have a negative effect on other stocks in the same sector, because of the fear that something similar could happen to those companies. Broader pronouncements that threaten to limit the profitability of an entire sector have even greater significant adverse consequences.

To understand this, one need only remember the early nineties, when the suggestion of widespread healthcare reform caused a precipitous decline in healthcare stocks, in aggregate valuations, and in the subsequent flow of investment capital into the health care sector. It is worth remembering that this tide was only reversed when the specter of healthcare reform was substantially reduced. Other examples of how quickly the capital markets respond to a perceived threat to future profitability include the Clinton-Blair gene patent pronouncement, when a mis-statement by a White House press secretary caused the immediate loss of billions of dollars in market value for the biotech industry. In that situation, there was no policy change, yet the bottom literally fell out of the biotechnology market as stock prices plummeted within a matter of a few hours of the statements.

These examples illustrate the sensitivity and vulnerability of investment in the biotechnology sector. Legalizing prescription drug importation will have at least the same desultory impact and probably a greater one. The question is whether Congress and patients want to take the chance that prescription drug importation - which is arguably not even a long-term solution to the identified problem of escalating drug costs - will adversely affect biopharmaceutical innovation. BIO is certain that it will affect biotechnology innovation in a way that could slow the development of new products, or perhaps stop such development in its tracks.

It costs more than $800 million and anywhere from 5 to 10 years to develop a new pharmaceutical product; biotechnology products can require even greater costs and longer time frames. Since many biotechnology companies are not yet profitable because they do not yet have products on the market, they must maintain a high rate of capital investment for long periods of time to stay in business. This investment is based on an expectation of return. National policy or legislative changes that affect the potential viability of the market for a new biotechnology product will affect the willingness of investors to take this risk.

Biotechnology development is an extremely high-risk venture. Of the many wonderful ideas that this creative industry generates, only a small handful result in FDA-approved new products. Our member companies are dedicated to finding the next biological-based treatment or cure. They are willing to devote enormous energy, creativity, and resources to this endeavor, even though they know success is difficult and elusive. But no treatment or cure will come without this research. And this research and development cannot be undertaken without the commitment of substantial financial resources, most of which come from the highly sensitive capital market. Some may argue that the pro-forma (and we believe unenforceable) exemption of biotechnology products from importation legislative proposals will resolve these economic concerns. However, it is important to remember that many BIO member companies use the fruits of biotechnology as part of their drug discovery and development efforts, although the products themselves may not be manufactured using biotechnology processes. Such companies would be severely affected by the legalization of drug importation regardless of whether biological products are exempted.

The unrestricted importation of drugs that are sold to foreign suppliers under the foreign-government imposed (or "negotiated") price controls will reduce the profitability of the companies that developed the drugs. In fact, that is precisely the objective of the advocates of importation - to use it as a mechanism to reduce prices for consumers artificially, and thereby reduce company profits as a result. The immediate and unavoidable impact of reducing economic profitability is a reduction in investment in an industry that requires such capital to fund further innovation. Quite simply, reduced profits (via price controls or any other mechanism) mean less investment capital to support drug research and development.

De facto implementation of price controls via importation will not create a corresponding reduction in drug development costs. It will still cost the same to discover, test, validate through clinical trials, manufacture and ultimately sell a new product. The failure rates experienced during the product development process will still be the same. The costs and risks will remain the same, but the potential return will be greatly diminished. As a result, companies will have no choice but to further limit their development efforts to only those drugs that have the highest potential profitability in the face of price controls. Drug candidates that could potentially help many patients and that were once considered viable opportunities under a free-market pricing system will be abandoned because they will no longer be sufficiently profitable in a world of de facto price controls.

Importation's effects on institutional capital flow into the biotechnology sector will be even more harmful. Merrill Lynch published an industry research report in May 2004 that found that during 2001, 2002, and 2003 there was a net outflow of $500 million, $3.0 billion, and $1.0 billion in capital from biotech/healthcare investment funds for each respective year. This represents a net reduction of $4.5 billion in available investment capital for public biotechnology companies. In 2003 alone, there was an estimated $12.7 billion in financing need (i.e., amount of new investments sought by biotechnology companies), yet at the same time there was an overall net outflow of $1 billion from biotech/healthcare investment funds. In short, the amount of available investment capital diminished while the need for capital increased.

While the trend regarding the flow of investment capital out of biotechnology funds has reversed somewhat this year, the current appetite for investment capital among public biotechnology companies continues to outstrip the current supply. Currently nearly 60 percent of all biotechnology companies have less than two years of cash, and nearly 30% percent have less than one year of cash. In 2004, more than $4.7 billion of new financing demand has entered the market (i.e., amount of capital sought by companies in the public markets). During the same timeframe, less than $1 billion of new capital has entered the sector. The current rate of capital demand is nearly five times greater than capital supply for public biotechnology companies.

Less product innovation is the long-term effect of inadequate capital supply. If companies have fewer dollars available to invest in research, they will be unable to support the research and development required for finding and creating new medicines. Companies will scale back or eliminate research and development projects that could result in new medicines. They will also slow the growth or even reduce their research and development staff, causing the loss of many high quality, tax-paying jobs.

As the baby boom generation continues to age, the need for safer, more effective, and more cost-effective medicines is clearly increasing. Entrepreneurial innovation is the driving force that could ultimately enable us to address the growing national healthcare burden by providing more medically and economically effective ways to improve human health and treat disease. The best hope to address the growing challenge is to stimulate increased investment before the national need becomes too acute, and the only available option becomes the use of current medicines and implementation of widespread healthcare rationing. In a climate of price controls, vital investment capital will flow elsewhere, and innovation in the biotechnology sector will largely become a thing of the past.

Prescription Drug Importation Imports Foreign Government Price Controls

The importation issue is not just about the importation of drugs - it's about the importation of price controls. Importation would not even be a topic of discussion today were it not for the fact that foreign governments have arbitrarily imposed pricing restrictions on companies that develop new, safer and innovative medicines, and then elect to sell them outside the United States. That is a global trade issue that must be addressed. Why should foreign countries be allowed to force U.S. consumers and companies to subsidize their healthcare costs? Without the innovations provided by the U.S. biotechnology and pharmaceutical industry their health care costs would surely be far higher, and the quality of life experienced by many patients far less, than it is today.

Biotechnology is the future of medical innovation. The promise of the Human Genome project, huge breakthroughs in biological sciences, and the astoundingly escalating understanding of human genetics will result in products created by this industry. Policies that stymie the biotechnology industry will interfere with the fulfillment of this promise for every patient waiting for a cure.

Just recently, a study was published demonstrating that the U.S. is losing its technological edge in the physical sciences. The authors found that, as measured by patents issued, scientific prizes received, graduate students studying in one country versus another, and other measures, by countries such as China, Japan, and India, are on the road to surpassing the U.S. However, the U.S. still leads the way in biotechnology innovation. This country is without peer in terms of understanding disease and developing the most biologically and genetically appropriate ways to treat disease. The reason this country is so successful, and the reason our patients have the best chance at the latest and best medicine, is that our national policies foster innovation. We do not have prescription price controls because such controls hinder and discourage innovation. We do not have international parallel trade because those trade policies stifle innovation. We have strong protections for intellectual property because such protections foster and reward innovation. Biotechnology innovation will deliver on its promise if the country delivers on policies that allow it to thrive.

Importation Proposals Threaten Patent Law

Prescription drug importation legislation also erodes intellectual property rights. One bill that has been introduced would prevent U.S. manufacturers from enforcing their patents against foreign products that, if marketed in the U.S. under current law, would violate the patent on the U.S. product. In other words, even though the foreign product is imported into the U.S. market in direct competition with the U.S. FDA-approved drug, the manufacturer would be denied any recourse under U.S. patent laws. Again, the impact on the biotechnology industry of such a change to patent rights would be enormous. In many cases, companies in this industry own very little except their intellectual property. The entire value of the company may be attached to the existence of intellectual property rights to a material or a means to achieve specific activity from certain kinds of biological agents. The message of such legislation is loud and clear: the U.S. is not willing to protect patent rights associated with pharmaceutical innovation. This message alone is enough to discourage investment and smother innovation.

Prescription Drug Importation Does Not Guarantee Cost Savings

Further, although this legislation is intended to be a mechanism to provide patients with lower priced prescription drugs, the Congressional Budget Office and numerous economists have challenged the assumptions of substantial cost savings, noting both the unique features of the world pharmaceutical marketplace and the substantial costs that would be incurred by middlepersons in the import/export scheme that certainly would be passed along to patients. Recently introduced bills provide numerous requirements that were not even envisioned by the economists who looked at earlier legislation, so these transaction costs would be significantly higher. Additionally, examination by economists of European parallel imports shows that the expected significant savings for consumers have not materialized, although tidy profits have been made by the traders. Moreover, none of the bills guarantee that the cost differential obtained by the importer/exporter is actually passed along to the consumer.

Conclusion

BIO is strongly opposed to any attempt to legalize prescription drug legislation. We believe that any form of drug importation will harm our industry and will, more importantly, harm the patients we are dedicated to helping. No exemption is fail-safe, and the ingenuity of criminals cannot be underestimated. They will find ways around the myriad requirements proposed by these bills, and no on-paper "exemption" for biologics will stop them from dealing in whatever product they believe will be the most lucrative.

There can be no doubt that incursions into trade policy, intellectual property protection, and economic incentives for U.S. business - all of which are part of this legislation - will have unintended consequences. The benefits of a free-market economy for U.S. citizens and for this country's economic well-being are well-accepted. There will be harm when legislative policy attempts to distort the free market by imposing requirements and penalties designed to perturb what the market otherwise achieves on its own. This is particularly true when the incursions and perturbations are directed at one and only one industry and at one set of products.

BIO agrees with those who believe that patients need access to our life-saving and life-enhancing products. Health coverage helps this happen, and we encourage the Congress to take action to reduce the number of uninsured Americans and increase assistance in purchasing their prescriptions to those in need. We also support the new entitlement under Medicare, which will help all Medicare beneficiaries - most of whom are our senior citizens - with their prescription drug needs. Until that prescription benefit takes full effect, the Medicare discount card will help many. Whether one supports the new Medicare benefit or not, or believes the discount card is sufficient or not, both of these mechanisms at least do no harm to the future of innovation and the future possibility that treatments and cures will be available for those who need them. Legalizing importation is not the answer to prescription drug access. Its promise is false and its dangers are real.