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Executive Summary

The House Commerce Oversight Subcmte.'s hearings on drug counterfeiting and diversion will begin on July 10. The initial hearing has been scheduled principally to release an investigative report by the subcmte. The report is said to present a description of the elements in the drug distribution chain which can create economic incentives to divert drugs, the sources of the diversion market, and price differentials offered by suppliers to non-profit institutions. The report also includes results of a survey of major mfrs.' experience with drug counterfeiting overseas. The subcmte. has reportedly concluded that the counterfeit Ovulen product that was discovered in the marketplace last fall was produced abroad and imported into the U.S. The counterfeit issue was the initial focus of the subcmte.'s investigation. No industry witnesses are scheduled to testify at the hearing, although a former govt. official who helped in the investigations will present testimony. Subsequent hearings on the subject are expected to extend beyond the summer. The other hearings will likely focus on proposed solutions to the current distribution problems and on the results of criminal investigations that are still pending. Such investigations reportedly are currently being pursued in Miami, Atlanta, and Los Angeles. One potential solution for lowering the incentives for diversion that has recently been floated in the trade involves single-level bid pricing combined with rebates at the end of the year, based on the number of units purchased. The rebates could be an alternative to the current bid pricing system. Such a plan, which reportedly resembles trade practice in the camera film industry, would be expected to decrease the incentive to abuse price differentials. Increases in Rx drug prices have prompted a separate hearing, which has been scheduled for July 15 by the House Commerce/Health Subcmte. The hearing is expected to focus on the rising costs of brandname drugs -- - which have soared over the last several years compared to price increases for finished goods generally ("The Pink Sheet" June 17, p. 3) -- - and administration efforts to make generics available as an alternative. To decrease the risk of diversion, at least one firm is already moving in the direction of single-level pricing. In a recent speech, Merrell Dow VP-Public Affairs Robert Ingram said his firm has decided to revise its bid pricing policy. According to Ingram, Merrell Dow now quotes to govt. buyers "bid prices which are significantly higher than in the past." The policy is designed "to decrease the price differentials between our qualified contract consumers (federal and state govt.) and drug whslrs. and retailers, thus minimizing competitive disadvantages to retail pharmacies," Ingram explained. "We are in effect moving toward a true one-price policy," which, he said, "should result in minimizing the possibility of diversion."

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