Testimony

July 11, 2006

INTRODUCTION
Good morning, Chairman Souder and Members of the Subcommittee, I am Randall W. Lutter, Ph.D., Associate Commissioner for Policy and Planning, at the U.S. Food and Drug Administration (FDA or the Agency). Thank you for the opportunity to testify about FDA's efforts regarding counterfeit prescription drugs.

While the United States drug supply is among the safest in the world, we believe there are increasingly sophisticated threats from drug counterfeiters. Organizations and individuals who peddle fake medicines put unsuspecting patients at risk, by exposing them to unknown contaminants and denying them medicines known to be safe and effective at treating their medical ailments. Counterfeit drug products and illicit drug diversion are major concerns to FDA. Our focus is to protect the public health and I will discuss measures FDA has taken and continues to take to fight phony medicines.

I serve as co-chair of FDA's Counterfeit Drug Task Force. The Task Force was established in 2003 and consists of senior FDA officials. Our mission is to develop recommendations for steps FDA, other government agencies, and industry could take to minimize the risks to the public from counterfeit drugs getting into the U.S. drug distribution system. Today, I would like to highlight some of the work of the Task Force and some of the recommendations made in the Task Force's 2006 Report.

Definition of Counterfeit Drugs under the Federal Food, Drug, and Cosmetic (FD&C) Act

U.S. law defines counterfeit drugs as those sold under a product name without proper authorization, where the identity of the source of the drug is knowingly and intentionally mislabeled in a way that suggests that it is the authentic approved product. This definition can apply to brand name products, generic products, or the bulk ingredients used to make the drug product. Counterfeit drugs under this definition may include products without the active ingredient, with an insufficient quantity of the active ingredient, with the wrong active ingredient, or with packaging that falsely suggests the drug was manufactured by the FDA-approved manufacturer.

This definition focuses on fraud and deception toward the consumer (i.e. when persons falsely believe they are receiving the genuine FDA-approved product) and generally does not include products that are marketed as being similar to or a foreign version of an FDA-approved drug. Those types of products are also illegal, but referred to as "unapproved new drugs," not counterfeit drugs.

Combating Prescription Drug Counterfeiters
Although our experience (and that of our stakeholders) tells us that the number of counterfeit drug products entering the U.S drug supply chain remains low, the Agency has witnessed an increase in counterfeiting activities and a greater capacity to introduce counterfeit drugs into legitimate drug distribution channels. The number of newly initiated counterfeit drug cases has risen from just a few years ago. In fiscal year (FY) 2004, FDA's Office of Criminal Investigations (OCI) initiated 58 counterfeit drug cases, a significant increase from the 30 cases initiated in FY 2003 and from an average of less than 10 cases per year in the 4 years before 2001. Although the number of counterfeit drug cases opened by OCI in FY 2005 dropped to 32, preliminary numbers of such cases opened at this point in FY 2006 suggests that there will be an increase in line with the number of cases opened in FY 2004. Fortunately, most of the counterfeit drugs at issue did not reach consumers because we focused our resources and proactively developed investigations. We believe that this proactive strategy enabled us to identify and interdict counterfeit drug products before they entered retail distribution.

Let me stress that the number of opened OCI counterfeit drug investigations should not be relied upon as a measure of the volume of counterfeit drugs, or as an indication of the prevalence of drug counterfeiting, in the U.S. These are simply numbers of newly opened cases: a single case may involve several types of counterfeit drugs being offered for sale, and multiple doses of each of these drugs.

Nearly 4 billion prescriptions were filled last year. That means a very large volume of drugs is moving through the supply chain. The sophistication and precision of some counterfeit copies of legitimate drugs make a reliable estimate of the number of counterfeits impossible. However, we believe that existing regulations and the vigilance by most supply chain stakeholders keep the prevalence of drug counterfeiting in the U.S. very low. An appendix to this statement contains recent examples of significant OCI counterfeit drug and drug diversion cases. Many of these cases were successful because of our joint efforts with other enforcement agencies such as U.S. Immigration and Customs Enforcement (ICE).

FDA's Counterfeit Drug Initiative
In 2004, the Task Force issued a report outlining a framework for public and private sector actions that could further protect Americans from counterfeit drugs. This framework called for a multi-layer approach to address the problem and included the following measures:

• Secure the product and packaging;
• Secure the movement of drugs through the supply chain;
• Secure business transactions;
• Ensure appropriate regulatory oversight and enforcement;
• Increase penalties;
• Heighten vigilance and awareness; and
• International cooperation.

To implement these measures, the 2004 Task Force Report stated, among other things, that:

• Widespread use of electronic track and trace technology would help secure the integrity of the drug supply chain by providing an accurate drug "pedigree," which is a record of the chain of custody of the product as it moves through the supply chain from manufacturer to pharmacy;
• Radio Frequency Identification (RFID) is a promising technology as a means to achieve electronic pedigree (e-pedigree);
• Widespread adoption and use of electronic track and trace technology would be feasible by 2007; and
• The effective date of certain regulations related to the implementation of the Prescription Drug Marketing Act (PDMA) should be delayed until December 1, 2006, in order to give stakeholders in the drug supply chain time to focus on implementing widespread use of e-pedigree.

In 2005, the Task Force issued an annual update report, which assessed FDA's and industry's progress toward implementing the 2004 recommendations. In the 2005 Report, the Task Force found, among other things, that:

• Stakeholders had made significant progress in developing and implementing RFID technology during the previous year;
• FDA was encouraged by the progress stakeholders, standard-setting bodies, and software and hardware companies had made toward implementing an e-pedigree for drug products and that we were optimistic that progress would continue in an expeditious manner toward meeting a 2007 goal of widespread use of e-pedigree across the drug supply chain;
• If it appeared that the 2007 goal would not be met, FDA planned to consider options for implementing the provisions of the PDMA rulemaking that are the subject of the stay; and
• FDA would identify what we could do to address obstacles to the widespread adoption of RFID. As the Task Force continued to monitor the adoption and implementation of e-pedigree and electronic track and trace technology, we recognized that adoption across the U.S. drug supply chain was slower than originally anticipated. To determine whether widespread use of e-pedigree by 2007 was still feasible, and to solicit public comment on the implementation of certain PDMA-related regulations, we held a public meeting on February 8 and 9, 2006. Our objectives for the meeting were to:
• Identify incentives for, as well as any obstacles to, the widespread adoption of RFID across the U.S. drug supply chain and possible solutions to those obstacles;
• Solicit public comment on the implementation of the pedigree requirements of the PDMA and the use of an e-pedigree; and
• Learn the state of development of electronic track and trace and e-pedigree technology solutions.

In June of this year, the Task Force issued its most recent report, based on an extensive fact-finding effort. The report contained recommendations that were fully endorsed by the Acting Commissioner and this testimony provides some highlights from the report. (The FDA Counterfeit Drug Task Force Report: 2006 Update is included in the Appendix to this testimony.)

Prescription Drug Marketing Act (PDMA)
The PDMA, as modified by the Prescription Drug Amendments of 1992 (PDA), amended the FD&C Act to, among other things, establish requirements related to the wholesale distribution of prescription drugs in interstate commerce. Section 503(e)(1)(A) of the FD&C Act requires that "�each person who is engaged in the wholesale distribution of a drug�who is not the manufacturer or authorized distributor of record of such drug shall� provide to the person who receives the drug a statement�identifying each prior sale, purchase, or trade of such drug (including the date of the transaction and the names and addresses of all parties to the transaction.)"

In December 1999, FDA published final regulations (Title 21, Code of Federal Regulations (CFR) part 203) related to the PDMA that were to take effect in December of 2000. After publication of these regulations, FDA received numerous communications from stakeholders objecting to the requirements in 21 CFR ��203.3(u) and 203.50. These provisions define the phrase "ongoing relationship" as used in the definition of "authorized distributor of record" (ADR), set forth requirements regarding an identifying statement (commonly referred to as a "pedigree"), and define the fields of information that must be included in the pedigree.

FDA delayed the effective date for those provisions several times until 2004 because of issues raised by stakeholders. They contended that some secondary wholesalers may not receive pedigree information from their suppliers who meet the PDMA's definition of "authorized distributor" because the PDMA does not require ADRs to provide pedigrees. They expressed concern that their inability to meet the regulations' requirements would frustrate sales and drive them out of business.

In 2004, FDA further delayed the effective date until December 1, 2006, because we were informed by stakeholders in the U.S. drug supply chain that industry would be able to adopt electronic track and trace technology by 2007. When widely adopted, this technology would create a de facto universal e-pedigree that would document the movement of the drug from the place of manufacture through the U.S. drug supply chain to the final dispenser. If properly implemented, a universal e-pedigree could meet the statutory requirements in section 503(e) of the FD&C Act.

FDA is committed to minimizing opportunities for counterfeiters and diverters to infiltrate our nation's drug supply with counterfeit drugs. Our extensive experience with counterfeit and drug diversion cases reveals that the secondary wholesale market is where much of the illegal activity occurs. Based on our recent fact-finding effort, we can no longer justify continuing the stay. Many supply chain stakeholders told FDA that the regulations should go into effect. In addition, some states are moving forward with their own pedigree laws. Allowing the stay to expire will provide clarity in the prescription drug supply chain by distinguishing who is an ADR, and would therefore be exempt from providing a drug pedigree, from non-ADRs who must provide a pedigree.

Although the regulations do not provide for a phased-in approach to pedigree implementation, FDA has issued a draft compliance policy guidance (CPG) for public comment that reflects the risk-based approach that FDA will use to focus its enforcement efforts regarding the pedigree regulations. The focus will be on prescription drug products that are most vulnerable to counterfeiting and diversion or otherwise involved in illegal activity. The CPG should help law-abiding secondary wholesalers adjust to the regulations by giving them an idea of where and how to focus their initial resources as they come into compliance. FDA is currently receiving comments on the draft CPG and will expeditiously review and analyze them. We expect to issue a final CPG before December 1, 2006, effective for one year.

Recommendations for Electronic Track and Trace Technology
FDA stated, in the 2006 Task Force Report, that although significant progress has been made to set the stage for widespread use of e-pedigree, this goal, unfortunately, will not be met by 2007. FDA is optimistic that the considerable momentum and interest in widespread implementation of e-pedigree will continue and remains committed to working with stakeholders to expeditiously make this happen.

The 2006 Task Force Report also states that FDA continues to believe that RFID is the most promising technology for implementing electronic track and trace in the prescription drug supply chain and that stakeholders should move quickly to implement this technology. FDA recognizes that implementing an RFID-enabled drug supply chain is challenging and urges manufacturers to take a risk-based approach to implementation by first tagging the products that are most vulnerable to counterfeiting and diversion, based on factors such as the sales price, volume sold, demand, ease of counterfeiting, and prior history of counterfeiting or diversion, among other things. Stakeholders urged FDA not to mandate RFID in order to give the private sector time to continue with developing standards and build the appropriate and necessary infrastructure. We listened to their concerns and did not require RFID use at this time.

The 2006 Report also considered several technical issues related to adoption of electronic track and trace technology that were perceived as obstacles to implementation and are in need of resolution. These include:

• Mass serialization and unique identification of each drug package;
• Universal pedigree with national uniform information; and
• Privacy issues and the need for consumer education about RFID and the labeling of RFID-tagged drug products in order to help prevent unauthorized disclosure of personal information.

CONCLUSION
FDA's vision of a safe and secure prescription drug supply chain is based on transparency and accountability by all persons who handle the prescription drug throughout the supply chain. With the implementation of the pedigree regulations in December 2006, FDA expects that supply chain stakeholders will move quickly to adopt electronic track and trace technology, implementing RFID or an alternative track and trace technology in a phased-in approach. Although there are important issues that still need resolution, these issues should not hinder the forward progress and momentum toward widespread adoption. In the meantime, FDA believes that public health would be better protected if all stakeholders work cooperatively to enable all distributors to pass pedigrees.

FDA will do its part in effectively enforcing the law, in conjunction with other Federal, state, and local entities, to protect Americans from criminals who attempt to undermine the public health by introducing counterfeit and diverted prescription drugs into the U.S. drug supply. At the same time, stakeholders must remain vigilant in their responsibility to provide safe and effective drug products to U.S. patients.

I would like to thank the Subcommittee for this opportunity to testify today on this important issue. I would be pleased to respond to any questions.

Appendix A - FDA Testimony - July 11, 2006

Efforts of FDA's Office of Criminal Investigations (OCI)
FDA believes that the most important factor in preventing counterfeit drugs from reaching American consumers is protection of the nation's drug supply chain. A closed, secure distribution system deters illicit diversion and makes it more difficult for counterfeiters and other unscrupulous actors to introduce their dangerous products into the wholesale supply chain. OCI focuses a significant part of its enforcement efforts on investigations of illicit diverters and others who threaten the integrity of the drug supply chain. These enforcement efforts against illicit diverters have resulted in detection and dismantling of counterfeit schemes.

Below are examples of significant counterfeit drug cases that were closed in the past year:

Counterfeit Lipitor
Last year, three businesses and eleven individuals were indicted for their involvement in a $42 million dollar conspiracy to sell counterfeit, smuggled, and misbranded Lipitor and other drugs and for participating in a conspiracy to sell stolen drugs. To date the case has resulted in nine convictions, $2.8 million in forfeitures, and 12 others are under indictment awaiting trial, as well as $10,000,000 more in alleged proceeds to be forfeited. On June 30, 2006, one of the defendants was sentenced to nine years and six months in Federal prison and ordered to pay $1,806,905 in restitution to Pfizer, Inc.

16 People Arrested in $200 Million Drug Diversion Scheme
This joint OCI-multi agency investigation resulted in the September 21, 2005, arrests of 16 defendants based on charges in a 201 count Federal indictment related to a scheme to divert more than $200 million in fraudulently obtained pharmaceuticals.

Convictions in Illegal Blood Derivative Diversion Scheme
On March 29, 2006, two owners of a Florida pharmaceutical wholesale distributor were convicted of more than 247 criminal counts as the result of an extensive OCI investigation of an illegal medical products diversion scheme, which defrauded the Medicaid and Medicare programs of more than $45,000,000. The criminal counts included wire fraud, money laundering, conspiracy, and racketeering.

Nationwide Drug Diversion Investigation
In this still ongoing investigation, six individuals and six businesses in New York, Utah, New Jersey and California, were charged in a ten-count indictment with mail fraud and the unauthorized distribution of prescription drugs without pedigrees in connection with a major drug diversion operation. With the assistance of other Federal and state law enforcement agencies, OCI uncovered a scheme where several secondary wholesalers bought, sold and distributed drugs. To date, two individuals and two businesses have pled guilty to charges related to the failure to provide drug pedigrees as required under the Prescription Drug Marketing Act, money laundering and mail fraud.

Texas Pharmacist Convicted on Counterfeit Drug Charges
This joint OCI and U.S. Immigration and Customs Enforcement (ICE) case was initiated following the seizure of a package mailed from China containing several thousand counterfeit Viagra and Cialis tablets. On May 24, 2006, the pharmacist was convicted of conspiracy and counterfeit drug charges and is awaiting sentencing.

Kentucky Pharmacist Pleads Guilty to Illegally Selling Prescription Drug Samples and Agrees to Pay $10.5 MILLION
OCI uncovered a conspiracy involving a pharmacy owner in Kentucky who, along with others, obtained drug samples, repackaged them, and illegally sold them to the public.

California Man Arrested on Counterfeit Drug Charges
A California man was arrested on June 12, 2006, following an OCI investigation into the distribution of counterfeit drugs that he purchased from a Chinese supplier over the Internet.

Counterfeit Lipitor, Viagra, and Cialis
OCI and ICE conducted a joint investigation and assisted the Chinese authorities in determining the source of counterfeit drugs. As a result of this collaborative effort, Chinese authorities arrested 11 individuals who will be prosecuted by the Chinese government for their involvement in manufacturing and distributing counterfeit Lipitor, Viagra, and Cialis.

Counterfeit Risperdal and Zyprexa
Last year, one individual was sentenced to 30 months in jail for counterfeiting Zyprexa and Risperdal prescription labels and selling them to various individuals. A second individual was sentenced to 24 months in jail for the illegal wholesale distribution of prescription drugs and possession with the intent to distribute controlled substances.

Last Revised: July 12, 2006

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