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Executive Summary

FDA and U.S. Customs officials do not adequately inspect pharmaceutical imports at American ports, House Commerce/Oversight Subcmte. economist David Nelson maintained at a July 10 hearing on drug diversion and counterfeiting. "There is probably no less attention paid to pharmaceuticals than other goods that enter the U.S., unfortunately; but there is certainly not enough attention being paid," Nelson testified. Displaying "entry documents associated with two of the counterfeit Ovulen 21 shipments," Nelson pointed out that "the FDA stamp of approval was applied." Photocopies of the documents indicated that they recorded receipt in Miami of bogus oral contraceptives shipped from Panama. "Why Ovulen 21, an American product, should be coming in from Panama might make most of us curious," the staffer said. "But it doesn't apparently worry the average FDA inspector." Nelson told the subcmte. that "it shouldn't be surprising that neither FDA nor Customs pays much attention to these [entry] papers; they are agencies that are overwhelmed, particularly in South Florida." For example, Nelson said, "the Southwest regional headquarters of the Customs Service last year issued instructions at their ports that 80% of all merchandise had to be bypassed. That is to say there was to be no inspection of the paperwork at all." The manner in which a shipment of counterfeit Ovulen 21 was seized in New York "by fluke" illustrates the lack of vigilance by inspectors, Nelson maintained. He said the New York example is the "kind of exception that proves the rule." Noting that Customs conducts periodic spot checks "to try to figure out how much they're missing by bypassing all these entries," Nelson said a Customs clerk, who read the newspaper the day the reports broke regarding the counterfeit contraceptive, remembered that during a spot check the previous day "there had been an Ovulen 21 entry which she had passed on." Nelson said the clerk "recalled the entry, and Customs was able to seize the goods on the premises of a Long Island importer." Nelson added that FDA inspectors will leave the agency's "rubber stamp" with a Customs clerk. "When we were in New York at JFK [Kennedy Airport], for example," he said, "one of the Customs inspectors told me that from time to time, apparently for significant periods of time, there's been no one there from FDA, and the stamp is just repeatedly turned over to the Customs inspector, who is told just to check off every entry." The subcmte. staff report released at the hearing indicates that shipments of the counterfeit drug that reached the distribution network often changed hands several times before reaching the retail level, passing through various "daisy chain distribution" routes on its way to pharmacy shelves. "The rapid chain of resales and the movement of goods from region to region provides an excellent illustration of the operation of the diverslon market," the subcmte. said. In one example, American Medic Sales, Inc. of North Miami acquired 3,351 units of 21-tab packages of counterfeit Ovulen and sold them on June 20, 1984 to Marchar Labs of Walnut, Calif. for $3 per package plus half the profit of the product's future resale by Marchar. "On about June 22, Marchar sold the entire lot to H&H Pharmaceuticals [doing business as] Medicine Man Pharmacy of Seattle, Wash., for $5 per package," the report states. Consequently, "half of the profit, or $1 per package, was remitted to American Medic Sales by Marchar." Legitimate Mfrs., Whslrs., Retailers At Mercy Of System No One Can Control -- Subcmte. Report On June 28, the report continues, "H&H sold the goods to Harry's Pharmacy of Palos Heights, Ill. for $6.50 per package." The subcmte. staff noted that Harry's Pharmacy "apparently sold" approximately 1,275 packages at retail; the average whsle. price of the tablets was "about $11.50-$12.00 per package." In November 1984, after the existence of the counterfeit product was widely reported, "Harry's returned the goods to H&H, which was about to return them to Marchar when the pills were seized by FDA," the report states. The subcmte. report indicates that diversion in itself, which is spawned by competitive pressures to offer lower prices, would not be objectionable if it did not open the door to counterfeits and otherwise substandard products. "If foreign counterfeits could be kept out of the domestic market, if expired products were not relabeled, and if all pharmaceuticals were properly shipped and stored, the diversion market would be the consumer's friend." However, the report continues, "this is clearly not the case, The result is that legitimate mfrs., whslrs., and retailers are at the mercy of a system that neither they nor anyone else really controls." The diversion market is supplied through counterfeits, products that are discounted for export and then re-imported, false nonprofit institutions, nonprofit hospitals which divert excess inventory, samples that are sold by salesmen or by doctors to distributors, and theft, the report notes. All these tributaries Mow into the main stream -- - the diversion market."

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