Routing

As modern “miracle drugs” play a growingrole in medical practice, drug prices in Americasoar far beyond prices in the rest of the world. Yetour law prohibits Americans from buyingAmerican-made drugs abroad at those prices and“reimporting” them to the United States. Thathas led many Americans, and even some stateand local officials, to ignore the law and go toCanada and Mexico for their drugs; to the pas-sage in the House last year of a bill lifting the banon reimportation; and to similar bills now in theSenate—legislation that Health and HumanServices Secretary Tommy Thompson recentlycalled “inevitable.”

The ban’s defenders raise several concerns.The safety of reimported drugs cannot be guar-anteed, they say. Moreover, lifting the ban willamount to reimporting the foreign price con-trols that largely explain the price differences—and that will dry up the funds needed for theresearch and development that produces mod-ern drugs. Food and Drug Administration regu-lations impose extraordinary costs on drug com-panies, they add, but when companies go torecoup those costs, they find that only inAmerica, with its relatively free market, can theydo so. The rest of the world, with socialized med-

ical systems, will simply not pay market prices,they claim, or if threatened with product with-drawal will steal the patents and produce thedrugs themselves. But ban defenders also arguethat price discrimination enables companies toexploit different levels of demand and hence tomaximize profits, to the benefit of all; yet theonly way to enforce that market segmentation,they contend, is through an American ban onreimportation.

As a practical matter, however, Americans endup paying for most of the costs of drug R&Dwhile the rest of the world rides free—and that ispolitically unsustainable, as events are demon-strating. The current ban should be lifted, there-fore, not to encourage reimportation, but toallow the incentives to surface that will “force”wider use of market practices and the interna-tional trade regimes that reflect such practices.The last thing we want, however, is to move awayfrom today’s regulated market to the kind offorced trade that one prominent bill now in theSenate, backed by the AARP, would impose. Thatwould indeed import foreign price controls, end-ing the pharmaceutical revolution the world’scapital markets underwrite here at home and themiracle drugs it produces.

Drug ReimportationThe Free Market Solution

by Roger Pilon

_____________________________________________________________________________________________________

Roger Pilon is vice president for legal affairs at the Cato Institute where he holds the B. Kenneth Simon Chair inConstitutional Studies and is the director of Cato’s Center for Constitutional Studies.

Executive Summary

No. 521 August 4, 2004

Introduction

Doctors today rely on pharmaceutical“miracles” only dreamed of half a century ago,prescribing “wonder drugs” where surgery wasonce the only option. But drugs cost toomuch—at least that’s what many Americans,especially senior citizens living on fixedincomes, have been telling their Congressmembers.1 And they are especially upset tolearn that drugs made in America cost far lessabroad,2 yet American law forbids them frombuying those drugs abroad and “reimporting”them to America.3

In growing numbers, therefore, Americanshave been ignoring the law and buying theirdrugs abroad, mostly in Canada and Mexico, orfrom Internet firms buying abroad.4 Food andDrug Administration officials charged withenforcing the law have generally looked the otherway when individuals have violated the law, butlately they’ve cracked down on American firmsengaged in drug reimportation on a larger scale.5

In addition to citizen action, however, a numberof state and local officials have revolted againstthe ban, some threatening to import drugs fortheir own public programs, others actuallyimporting them.6 And, increasingly, members ofCongress are speaking out as well.7

Political momentum is thus building torevisit the reimportation ban. Last year, to thesurprise of many, the House did take action tolift the ban.8 Similar bills are now in theSenate.9 And although the administration hasopposed such bills, Health and HumanServices Secretary Tommy Thompson said inMay that legislation is “inevitable,” thus sig-naling a possible change in the administra-tion’s position.10 When Americans see thedrugs they use, most made in America, sellingnext door at a fraction of what they’re sellingfor here at home, and see their own govern-ment telling them they can’t buy those drugs,they know intuitively that something iswrong. It is becoming increasingly clear tomost observers, therefore, that this arrange-ment is politically unsustainable.11

Yet the issue is not as easy as critics of theban too often suppose. Even if safety con-

cerns proved negligible, it is not simply amatter of allowing cheap drugs to be import-ed from price-controlled countries and there-after all will be well, as too many in Congressseem to believe.12 Nor of course is it a matterof vilifying drug companies, as many inCongress have done—ignoring the fact that itwas Congress that enacted the ban in the firstplace.13

There are reasons the ban was enacted. Toget to the bottom of things, therefore, we willhave to examine those reasons. After doingso, it will be clear that reimportation is notthe main answer to the problem of high drugprices, although lifting the ban on reimpor-tation is a step toward addressing that prob-lem. At bottom, as with so many other polit-ical issues today, the ultimate solution to thehost of problems surrounding drug reimpor-tation is a free market. But the argument forthat contention has to be set forth in slow,deliberate steps, beginning with the princi-ples of a free market as they apply in the caseof pharmaceuticals. I will do that largely inthe abstract, relegating such evidence as maybe useful to endnotes, the better to keep thefocus on the main line of argument.

Why Drugs Cost So Much

FDA RegulationIn a truly free society, pharmaceuticals

would be manufactured and sold like anyother product, on the basis of elementaryprinciples of property and contract, togetherwith common law rules concerning the dis-tribution of risk. Long ago, however, weabandoned that free market regime for amore paternalistic statutory scheme and theensuing regulations the FDA writes andadministers. Today, before the first pill can beoffered for sale to the public, a drug compa-ny must go through years of costly researchand development to satisfy FDA require-ments that a drug be not only safe but effica-cious for its intended use.14

The implications of assuming that thepublic is so risk averse or so unable to judge

2

In growing numbers,

Americans havebeen ignoring the

law and buyingtheir drugs

abroad.

and assume risk are many, but two stand out.First, given that today it takes 12 to 15 yearson average from discovery of a new com-pound to FDA approval,15 the process heavilydiscounts the risk of not having a drug avail-able for those it may help during that period:in the name of safety and efficacy, that is,many who would be willing to shoulder therisk of an unsafe or inefficacious drug are leftto suffer because the FDA has not yet author-ized the drug for sale.16 Here, basic marketprinciples—freedom of contract and assump-tion of risk—cry out for greater recognition.This objection to the current regime follows awell-traveled path, of course.17 Suffice it to saythat a more flexible FDA approach to safetyand, even more, efficacy, would better balancethe competing risks.

Second, and more to the point here, anFDA process that allowed greater scope forindividual consent could reduce substantiallythe extraordinary up-front costs drug compa-nies begin incurring long before they are ableto bring a drug to market. Reducing thosecosts would reduce consumer prices, onewould imagine. An April CongressionalBudget Office brief addressed the up-frontcosts of drugs by citing a recent study: “whenall relevant economic costs are taken intoaccount, including costs from unsuccessfulcompounds, an average of about $800 millionin R&D spending is incurred for each inter-nally produced new compound reaching themarket.”18 In few industries is the ratio ofR&D costs to those of manufacturing andmarketing greater. The first pill is enormouslyexpensive. The second costs almost nothing toproduce.

PatentsThat brings us to the crucial role that

patents play in the pharmaceutical industry.Given the industry’s enormous R&D costs,companies can attract capital to underwritethose up-front costs over long periods only ifthose offering it are assured of seeing a goodreturn on successful investments. And theywill be so assured only if the drug that even-tually emerges receives a patent—a property

right that excludes others for a time frommaking a generic copy of the drug. Since theissue of compulsory licensing and patenttheft will arise below, it is crucial to securehere an elementary but too often discountedpoint: without patents, and the propertyrights they secure, there would be few miracledrugs beyond those underwritten by publicfunds. To be sure, one can debate whether theprivate or the public sector more efficientlyfunds pharmaceutical research, but we haverelied on the former for the most partbecause the evidence suggests that it is betterthan the public sector at discovering andexploiting entrepreneurial opportunities.19

Thus, far from being an impediment in afree market, as some argue, a patent simplysignifies the product of past investment; itrecognizes a “monopoly,” for a time, on useof that product. Like other property rights,patents ensure the production of goods thatare then traded in the market. As with thesimplest of property rights—ensuring thatthose who grow crops over time will be ableto reap them in time, absent which we wouldall still be hunters and gatherers—so too withpharmaceutical patents: those who risk theirassets over time to bring new drugs intobeing must receive the rewards available forsuccessful ventures, absent which we wouldhave no new drugs. To later deny thoserewards in either case, crops or drugs, takesproperty belonging to the owner.

But unlike ordinary property rights,patents recognize the underlying claim onlyfor a period of time—currently, 20 years—after which the invention can be copied byanyone. That 20-year patent clock starts tick-ing, however, from the time the companyfirst applies for FDA approval. As one observ-er notes, “given the glacial pace of the FDA’stesting and approval process, the effective lifefor drug patents is about nine years, as com-pared to around 18fi years for otherpatentable products.”20 Here too, then, isanother explanation for the high cost ofdrugs. The shorter the time the company hasto recoup its extraordinary R&D costs, themore it will need to charge per unit sold,

3

In few industries is theratio of R&Dcosts to those ofmanufacturingand marketinggreater.

other things being equal, before the patentexpires and the drug is available for others tocopy. Thus, if a company’s up-front R&Dcosts are not reduced by shortening the timerequired for FDA approval, and even if theyare, lengthening the effective life of thepatent to equal that available for other prod-ucts, whether through ancillary patents orotherwise, would enable the company torecoup those costs over a longer period oftime and, presumably, charge less per unitsold during that period.21

PricingThat brings us to the complex issue of

pricing. Companies don’t seek simply torecoup their up-front costs, of course, but tomaximize their return on investment. Thus,even if those costs play a crucial part in drug-pricing decisions (pricing below cost will notkeep a company in business for long), a com-pany’s main goal—the reason it’s in businessto begin with—is to maximize profits, whichis perfectly proper, and why congressionalcomplaints about “price-gouging” and thelike are so misplaced. Drug companies arenot welfare agencies, after all. They servemankind by creating and selling new drugs.And the incentive to do so is the profit theyhope to make. The greater the profits, thegreater the incentive. That is why price con-trols on drugs or on anything else are soshortsighted, as history from antiquity totoday amply demonstrates.22

But pricing is hardly an exact science, as awalk through any supermarket will reveal. In adynamic free market, prices for goods and ser-vices are constantly adjusting, reflecting anynumber of constantly changing factors. Drugprices are no exception. Even when a companyhas a “monopoly”—the sole drug for a particu-lar condition—its ability to price is limited bythe ability and willingness of buyers to pay.More precisely, such a company will maximizeprofits for that drug only by finding the opti-mal price for doing so, not some mythical“maximum” price. Far more often, however, adrug is competing against other drugs, includ-ing generics. And in the end it is primarily

competition—that is, the ability of buyers toturn elsewhere—that keeps prices in check.

The world of drug pricing is further com-plicated, however, by the presence of large buy-ers, public and private, who are able to negoti-ate prices that are generally unavailable toindividual buyers. And that greatly compli-cates efforts to make meaningful price com-parisons in both the domestic and the inter-national contexts. As one close student of thesubject put it, “there is no ‘right’ answer to thequestion of how high drug prices are in theUnited States relative to drug prices in othercountries.”23 Still, the evidence at home doesseem to suggest that drug prices are increasingfaster than other prices. Thus, an AARP studyreleased in late May found that “prices forthose brand-name prescription drugs mostfrequently used by older Americans and avail-able in January 2000 increased, on average, acumulative 27.6 percent over the four-yearperiod 2000 to 2003 as compared to a generalinflation rate of 10.4 percent.”24

Reports such as that, of which there is noshortage, may or may not be accurate. At theend of the day, however, that is likely besidethe point, for as a practical matter, Americansthemselves are increasingly making interna-tional price comparisons for the drugs theyregularly use, and that is what is driving thecurrent debate—and driving ordinary citizensto buy abroad, where they generally find theirdrugs selling far more cheaply.25 This is a caseof perception becoming reality, which nonew price-comparison study is likely tochange. Indeed, proponents of the reimpor-tation ban cannot on one hand minimizeinternational price differences, which theysometimes do,26 while on the other handcomplaining about letting cheap foreigndrugs back into the country. Americans seethe differences with their own eyes.

The Ban on Reimportation

Rationales for the BanWhat then is the rationale for the reimpor-

tation ban? Given that people generally want

4

In the end it is primarily

competition—thatis, the ability of

buyers to turnelsewhere—thatkeeps prices in

check.

to buy where prices are low, relatively speak-ing, why are Americans being told by their gov-ernment that they cannot look abroad to buythose lower-priced drugs? For some time, drugcompanies have pointed to safety concerns byway of an answer, but regarding imports fromdeveloped countries, the evidence does notseem to support those concerns.27 Nor hassafety been a serious issue in the EuropeanCommunity, where “parallel trade” in phar-maceuticals has been taking place for sometime.28 After all, ordinary business reasons andthe ability of developed legal systems toimpose liability give drug companies and ven-dors an incentive to ensure drug integrity.Moreover, if the reimportation ban is lifted,yet reimportation emerges as merely a threataimed at encouraging international priceadjustments, as will be urged below, then thesafety issue will be moot because there will belittle or no reimportation.

We come then to the main argument sup-porting the ban: If the ban were lifted, it is said,that would be tantamount to importing for-eign price controls; and soon enough thatwould afford drug companies insufficientfunds for the R&D that is necessary to contin-ue producing the miracles of modern medi-cine.29 That is a serious argument. It cutsagainst proposals for domestic price controlsas well, of course. But it implies, first, that therest of the world, paying far lower prices thanAmericans are paying for the same drugs, is“free riding” on Americans’ contributions todrug R&D, and, second, that there is nothingwe can do about it, that this situation is some-how set in stone. The first implication is true:as with the cost of international defense,Americans are paying the lion’s share of thecost of drug R&D, while the rest of the worldrides free or at well below true cost.30 The sec-ond implication, however, is probably nottrue, yet we will never know whether foreignersare unable or unwilling to pay their “fairshare” of drug R&D as long as drug compa-nies, shielded by the reimportation ban, havelittle incentive to test it. As long as theAmerican market affords them sufficient rev-enue to cover R&D costs and more, companies

will have little incentive to press the issue, to“force” market pricing on socialized medicalsystems abroad, not least because anythingthey earn there now, in those essentially“closed” systems, is so much additional rev-enue.

The basic underlying question, then, isthis: Why are there, in essence, two sets ofprices for the same drugs—market prices inAmerica, and far lower prices abroad? Thereare two main explanations for this state ofaffairs. The first, just sketched, is more a wayof looking at the matter: it portrays drugcompanies, not without reason, as some-thing like hapless victims of socialized med-ical systems abroad, taking what they are for-tunate enough to be offered by “monopsony”buyers—foreign bureaucrats, the sole buyersfor their systems, whose interest in control-ling spending trumps any interest in provid-ing citizens with better medicine.31 Regret-tably, that pretty much characterizes howsocialized medical systems work. On thisview, then, after an American company com-pletes the arduous FDA approval process andis finally authorized to market its new drug,it looks out at basically one free market,America, where it prices its drug at an opti-mal, profit-maximizing level. In the rest ofthe world the company has to accept whateach national system is willing to pay becauseany higher demand, backed by a threat towithhold product, would be met by a coun-terthreat from the country at issue to stealthe patent and produce the drug itself.32 Wewill return to this argument presently.

The second explanation for there being twosets of prices looks more to economic theorythan to political reality. Although it dovetailswith the first explanation, it portrays the com-pany not as a victim but as the driving force,segmenting markets and pricing drugs differ-ently in each market. The company accepts theworld as it is, assumes that some buyers arewilling or able to pay more than others, andthen seeks to maximize its profits in light ofthose differences in demand. Thus, the compa-ny charges high prices where it can and lowerprices in other markets. In each market seg-

5

Americans arepaying the lion’sshare of the costof drug R&D,while the rest ofthe world ridesfree or at wellbelow true cost.

ment the company tries to find the optimalprice for its product—the price that will maxi-mize its profits—but that varies from market tomarket according to the demand in each mar-ket. The net result, however, is a win for all: oneprice set high would exclude too many poten-tial buyers and hence generate too little profit;one price set lower than many buyers would bewilling to pay will also generate too little prof-it. Segmenting the market and pricing differ-entially will maximize aggregate welfare.33

Keeping Markets SegmentedWhether the assumptions underlying this

second explanation for price discriminationare correct in the case of drugs—and whether,in particular, companies have correctly calcu-lated the demand in each market, especiallyin an essentially nonmarket context—is anopen question, of course: we will turn to itshortly. But one thing is clear: price discrimi-nation can be sustained only if sellers inlower-price markets do not resell to higher-price markets, or buyers in higher-price mar-kets do not gravitate to lower-price marketsto make purchases—precisely what is hap-pening today with pharmaceuticals. In someprice discrimination cases that problem doesnot arise since sellers can unilaterally estab-lish and enforce rules to preserve market seg-mentation: date-of-purchase rules for airlineseats, for example, or time-of-viewing rulesfor theater seats. In those cases not only canthe seller keep the markets segmented byenforcing the rules that do so, but the buyercan take advantage of lower prices simply byfollowing the rules—seeing an afternoonrather than an evening show, for example. Inthe international drug context, however,manufacturer-sellers have less control, espe-cially with the advent of the Internet. And asparallel trade expands, undercutting theprice discrimination schemes sellers rely onto maximize profits, the system for generat-ing capital to underwrite drug R&D is under-cut as well.

We come, then, to the nub of the matter. Ifmarket segmentation is indeed the most effi-cient arrangement for producing and mar-

keting drugs, how can it be preserved consis-tent with the principles of a free society—con-sistent with exchanges being grounded onconsent and force being used only to securerights? Plainly, if those standards are to bemet, there is only one legitimate way that seg-mentation in this context can be preserved:drug companies must sell drugs in low-pricemarkets on the explicit understanding thatthey not be resold to buyers in high-pricemarkets. As a condition of receiving a lowerprice, that is, buyers must agree not to resellto certain others. Companies can bring thisresult about through either no-resale con-tracts or label licenses that specify the condi-tions of purchase. Such no-resale devices areperfectly consistent with a free market: theyviolate no one’s rights because prospectivebuyers in low-price markets have no right tobuy from otherwise unwilling manufacturer-sellers, and prospective buyers in high-pricemarkets have no right to buy from would-besellers in low-price markets unwilling to risklosing the benefit of their bargain by breach-ing the no-resale contract or label license.34

It appears, however, that American drugcompanies have mainly avoided that consen-sual route to preserving segmented markets(but, see below). Instead, in 1987 they went toCongress, asking Congress to treat whatshould be a contract matter as a trade matter.By statute, Congress prohibited foreigndrugs, whether made in America and shippedabroad or made abroad in the first instanceby American companies, from being import-ed into the United States by anyone exceptthe original American manufacturer.35 Facedessentially with a private law problem, eventhough the buyer on the other end may havebeen a government or a quasi-governmentalentity, companies sought a public law solu-tion—a statutory reimportation ban. Andtherein lie difficulties.

The main difficulty is this: absent a no-resale contract or label license, governmentforce is being used not to secure rights but toviolate rights by blocking trade. The statuteis keeping willing sellers and willing buyersapart—indeed, Canadian provincial officials

6

Price discrimination

can be sustainedonly if sellers in

lower-price markets do not

resell to higher-price markets.

are actually encouraging reimportation,36 andAmerican buyers of course are more thanhappy to accept those offers. In a case inwhich perception is reality, the perception ofthe average American is that his own govern-ment is preventing him from buying drugswhere they’re selling cheaply—and worse still,doing so at the behest of greedy drug compa-nies out to maximize profits. And he’s right!

Yet even if American drug companies haveput consensual mechanisms in place to try tostaunch parallel trade, enforcement throughan American statutory ban on reimportationis problematic. It is sometimes said that resort-ing to a ban is necessary because drugs, onceshipped abroad, can pass through several ven-dors, making contract enforcement difficult.37

That may be so, but notice what this approachto enforcement comes to. Foreign govern-ments or their agents buy at prices insufficientto sustain drug R&D—on threat, some say, ofstealing the patent; in doing so they agree notto resell the drugs in higher-price markets;then they breach those no-resale agreements—and the American government steps in, not toinsist that foreign governments abide by theterms that bind them, but to restrict the free-dom of American citizens who are no parties to theagreement. Is it any wonder that Americans areupset over this arrangement? They see foreign-ers buying American drugs at a fraction ofwhat they have to pay. Then when foreignagencies offer to resell those drugs to themcheaply, their own government tells them theycan’t accept the offers. And to add insult toinjury, Americans bear the enforcement costsas well. However rationally compelling marketsegmentation, price discrimination, and sec-ond-best statutory enforcement schemes maybe, this arrangement, as unfolding events aredemonstrating, is politically unsustainable.38

Removing the Reimportation Ban

Free Market OptionsWhat, then, is to be done? Clearly, the

reimportation ban seeks to protect market

segmentation the easy but wrong way.Although it can be made to appear otherwise,it comes across to most as restricting thewrong parties, American citizens. It should beremoved. That will leave American drug com-panies with two options: continue to practiceprice discrimination using contractual mech-anisms to do so, but enforce those agree-ments through litigation or self-help (with-holding product), not through legislation; or,if enforcement should prove too difficult, toocostly, or illegal, adjust international pricessufficiently to discourage reimportation.

No-resale contracts. Taking those optionsin order, it seems that companies face amixed situation with no-resale contracts,which are illegal in much of the world—andin the European Community in particular—as restraints on trade.39 In Europe that hasled to a thriving “gray market” in drugs: toparallel exports that are undercutting drugcompany profits there.40 To be sure, no-resalecontracts do restrain trade, but that’s whatcontracts do generally: if A agrees to buygoods from B, those are goods that won’t bebought from C or D or by E or F. No-resalecontracts are little different. Because they arevoluntary on both sides, benefit both sides,and violate no third-party rights, they shouldbe perfectly legitimate. To maximize its prof-its, the company is offering country A a lowerprice than the optimal price toward that endoffered to country B; it can offer that lowerprice, however, only if country A agrees not toresell the drugs to buyers in country B.Absent that no-resale agreement, the compa-ny will have to charge country A a price highenough to discourage exports to country B—or sell it no drugs at all.

Where such contracts are legal, however, acompany has two standard ways to enforcethem. It can litigate, seeking to hold thecountry to its bargain through injunctiveand/or compensatory remedies. Or it canwithhold supplies; and if sued as a result, itcan offer the country’s breach as a defense.

But as drugs pass through the hands ofmore vendors, as is common, enforcementbecomes increasingly difficult. In that case

7

The reimporta-tion ban seeks toprotect marketsegmentation theeasy but wrongway.

the self-help remedy of limiting supplies is acompany’s only real option.41 And that will beits remedy as well where no-resale contractsare illegal and drugs are sold on an informal,tacit understanding that they are intended forthat country’s market only. In either case,however, the company should deal straight-forwardly with the country—telling it, ineffect, “You police your vendors to preventreselling abroad or you will get no more drugsat this low price.” Nothing in that proposi-tion offends free trade principles. Moreover, itgets the incentives right, placing the burdenof enforcement on the right party. The coun-try benefiting from the low price has theincentive to restrict exports of the drug. Itshould not fall to the American government,whose citizens are paying the highest prices,to restrict imports.

But if the country in question won’t orcan’t police its vendors—indeed, if it encour-ages reselling, as noted above—the companythen will have no choice but to withhold sup-ply or raise prices; for if it continued to sell atprices insufficient to cover its actual costs,including R&D, the below-cost exports toprofit-making markets would eventually driveit to insolvency. More generally, however, in alarge and complex world, it may turn out, withthe reimportation ban removed, that compa-nies will be unable to stanch the movement ofdrugs from lower- to higher-price markets; orthe cost of doing so may prove too much. Ineither case, companies then will need torethink their pricing strategies.

Repricing drugs. Yet even if market seg-mentation could be maintained without theban, other considerations could move com-panies to rethink their pricing strategies. Forwe would still be left with price discrimina-tion—and with the perception amongAmericans that drug companies are gougingthem while giving the rest of the world a low-price ride. No one likes paying more thanothers—being treated unequally and hence,many believe, “unfairly.” It is that perception,of course, that has mainly brought us to thispolitical pass, not the average American’smisunderstanding of economic theory. The

virtues of market segmentation and price dis-crimination may be compelling on the chalk-board, but if their practice leads to seriouscalls for domestic price controls, profit maxi-mization may have to take a back seat toprofit optimization—calculating for politicalreaction—even if the former would be ofgreater net social value.

On balance, however, it might not be allthat bad if removing the ban “forced” com-panies to rethink their pricing strategies.After all, the whole theory of market segmen-tation and price discrimination turns on theidea that there is an optimal price for eachdrug in each market; yet absent a real mar-ket—which doesn’t exist abroad, defenders ofthe ban say—we have no way of knowingwhat that price is. Governments abroad sim-ply dictate what they are willing to pay.42

Drug companies garner market prices only inAmerica. In the rest of the world they sell atprices insufficient to recover costs, includingR&D, were that the only market. Shielded bythe ban, they never have to test marketsabroad to see what the true demand is. Withthe ban removed, however, if companies can-not limit reimportation sufficiently by con-tract or clampdowns on supply, they wouldhave to raise prices abroad and/or reducethem here sufficiently to discourage thereimportation that would otherwise under-cut their American profit-making market.They would be “forced,” in a word, to shiftsome of the true costs of modern medicinesto those who have avoided paying them foryears, thanks to the reimportation ban, andoff the shoulders of Americans.

Removing the reimportation ban shouldnot be seen, therefore, as tantamount to reim-porting foreign price controls, as manydefenders of the ban have argued.43 For withthe ban removed, other measures aimed atenforcing price discrimination unavailing,and companies thus “forced” to demand mar-ket prices abroad, prices should adjust suffi-ciently to discourage reimportation and theadded costs reimportation would involve.Indeed, once permitted, reimportation shouldbe seen simply as a threat—a measure at hand,

8

Once permitted,reimportationshould be seen

simply as athreat—a measure

at hand, if needed, to keepprices in check.

if needed, to keep prices in check. There mayhave been a time when the poor Swiss,Germans, and French could not afford the lat-est pharmaceutical miracles. We are long pastthat time—and long past time for the free rideto end.

Does that mean that truly poor countrieswould have to pay market prices for drugs aswell? No, not if drug companies wished tosupply those countries with drugs at dis-counted prices or even free—provided theywere able to police any exports, of course. Abetter way to handle this matter, however,would be to stop viewing drug companies ascharitable organizations. Just as we oughtnot to compel doctors, lawyers, or anyoneelse to do charitable work (with lawyers, as acondition of licensure), so too we ought notto expect private, profit-making entities to bepublic servants. If people around the worldwish to engage in such charitable work, thereare international organizations dedicated tothat end, able to draw on private voluntaryand, if necessary, public nonvoluntaryresources to underwrite the costs of suchprograms and to buy drugs at prices compa-nies are willing to accept. It is important tokeep commercial and charitable undertak-ings separate—for the integrity of both.

Compulsory LicensingToday, however, we undertake such inter-

national charity very differently, as part of alarger, problematic process called “compulso-ry licensing.” I will touch upon the charitableuse of that process in a moment, but first weneed to address the objection raised by thosewho defend the reimportation ban, that if for-eign countries were “forced” to pay marketprices for drugs, they would force compulsorylicensing on drug companies: faced with risingprices, that is, foreign countries would licensea domestic company, which does not hold thepatent, to manufacture the drug as a “gener-ic,” thereby stealing the patent from its right-ful owner. Given that threat, ban defenderscontinue, drug companies are forced to acceptthe price the country offers for a drug ratherthan a market price. In effect, the foreign

country is telling the company, “Take what weoffer or we’ll steal your product.” The compa-ny accepts the offer, on this view, only becauseit is able to make up the difference in theAmerican market, thanks to the reimporta-tion ban. Hence the fear, with the ban lifted,about “reimporting foreign price controls,”which would make the drug business a losingproposition.44

That view appears to be something of anoverstatement, although the facts and historyhere are not entirely clear. Without question,compulsory licensing occurs, and horror sto-ries can be found.45 In fact, the process is sanc-tioned by the World Trade Organization’sAgreement on Trade-Related Aspects ofIntellectual Property Rights (WTO TRIPSAgreement),46 which all developed and mostdeveloping nations have signed. In its agree-ments over the years, the WTO has been trying“to strike a balance between promoting accessto existing drugs and promoting research anddevelopment into new drugs.”47 As that for-mula suggests, the “access” the WTO seeks topromote is not meant to be achieved throughmarkets, for which a “balance” could be struckusing the price mechanism, but throughinroads on patents—yet not to such an extent,apparently, as would compromise drug R&D.We have here, of course, the familiar strugglebetween more- and less-developed countries,with the less developed seeking to impose legalobligations of assistance on both developedcountries and the businesses that thrive inthem. Notwithstanding that agenda, recentevents seem to be moving in a direction thatshould mitigate somewhat the fears of reim-portation opponents.

In brief, under the 2001 Doha Declarationand the agreement pursuant to it that wasreached last August,48 member nations mayimpose compulsory licensing of a drug ifefforts to obtain the drug “on reasonable com-mercial terms and conditions” have beenunsuccessful or “in the case of a national emer-gency or other circumstances of extremeurgency or in cases of public non-commercialuse.”49 On their face, those terms allow greatlatitude, of course. Quite apart from the mean-

9

There may havebeen a time whenthe poor Swiss,Germans, andFrench could notafford the latestpharmaceuticalmiracles. We arelong past thattime—and longpast time for thefree ride to end.

ing of “national emergency” and “extremeurgency,” the language would appear, morebroadly, to allow for compulsory licensing evenwhen the country is unable to negotiate a price“on reasonable commercial terms”—or if itsintent is “public non-commercial use,” whichmight mean for its socialized medical pro-gram. To be sure, the patent owner must bepaid “adequate remuneration.”50 And the drugmust be produced “predominantly for the sup-ply of the domestic market,” a limit on exportthat gave rise to the August agreement.51 As aprotection for patents, however, the “balance”is precarious. And “least-developed” countriesmay practice compulsory licensing until theyear 2016.52

To put all of this in perspective, one moreissue needs attention. After the 2001 DohaDeclaration, there remained an “access” prob-lem, for although the compulsory licensingprovisions helped less-developed countries,they were of no value to even poorer countriesthat had little or no capacity themselves tomanufacture drugs; and the “no-export” provi-sion just noted prohibited the former coun-tries from exporting generics produced undercompulsory licensing to the latter. LastAugust’s agreement eased the no-exportrestriction, therefore, allowing generics to beexported, but only to such very poor coun-tries.53 Taken as a whole, however, the focusand tenor of the agreement suggest that the“balance” these documents mean to strike ismainly, if not entirely, for the benefit of theworld’s poorer countries. As a September WTO“Fact Sheet” puts it, these provisions “aim toensure the beneficiary countries can importthe generics without undermining patent sys-tems, particularly in rich countries. Theyinclude measures to prevent the medicinesfrom being diverted to the wrong markets.”54

The no-export provision is thus key tounderstanding the TRIPS Agreement as itnow stands. In fact, to allay fears that compul-sory licensing might lead to widespreadexports of drugs manufactured under suchconditions,

23 developed countries are listed in the

decision as announcing voluntarilythat they will not use the system toimport. . . . Another 10 countries aboutto join the EU said they would only usethe system to import in national emer-gencies or other circumstances ofextreme urgency, and would not im-port once they had joined the EU. . . .And 11 more said they would only doso in national emergencies or other cir-cumstances of extreme urgency.55

That still leaves countries free to imposecompulsory licensing, of course, provided theconditions for doing so are met. But it sug-gests that national emergencies or helpingthe poorest countries are the main purposesfor compulsory licensing; the practice is notmeant to be a bargaining chip in price nego-tiations, even though cases in which develop-ing countries so used it can be found.

Still, this issue in all of its reaches needs tobe monitored closely, especially if the U.S.ban on reimportation is lifted. If developedcountries that negotiate low prices do not orcannot restrict exports, and drug companiesare thus “forced” to renegotiate those prices,the compulsory licensing provisions of theTRIPS Agreement could be abused even bysuch countries.56 At that point, the U.S. gov-ernment would need to think about reim-posing the reimportation ban, for we wouldbe reimporting what are, essentially, stolengoods. We would no longer have a regime offree trade—trade unencumbered by anythingbut rules about property and contract,reflecting the preconditions of trade. Instead,we would have a regime that strikes at thosevery preconditions.

The problem at bottom, however, is withthe TRIPS Agreement itself, which tries tosolve a poverty problem by turning privatedrug companies into public charities. Asnoted above, rather than stealing the patent,which is what compulsory licensing amountsto, it would be far cleaner if private and pub-lic charitable institutions in the developedworld left private enterprise alone and simplypooled their resources to buy drugs on the

10

The problem, atbottom, is with

the TRIPSAgreement itself,

which tries tosolve a poverty

problem by turning private

drug companiesinto public

charities.

market for the world’s poorest nations.Under such an arrangement, free from thethreat of patent seizures, companies woulddoubtless offer deep discounts, if only for thegood-will value. By contrast, the presentarrangement, with its compulsory licensing,not only distorts the drug market, shiftingthe costs of international charity back toAmerican drug consumers, but providesample opportunity for developing countries,neither rich nor poor, to game the system.And compulsory licensing raises safety con-cerns as well. It is far better for charitableorganizations to buy discounted drugs froman original, reputable manufacturer than totry to save a few dollars by buying them froma manufacturer who stole the patent throughcompulsory licensing. Those are precisely thedrugs that give rise primarily to safety con-cerns.

SummaryIn summary, then, the American reimpor-

tation ban should be lifted as part of a largereffort to better discipline drug prices byexpanding the scope for market principles tooperate. Americans pay the bulk of the hugedrug R&D costs because the ban shields drugcompanies from having to charge marketprices abroad; to that extent, therefore,Americans subsidize those socialized medicalsystems as well. With the ban removed, drugcompanies will still be free to segment mar-kets and price differentially; but they willhave to police those arrangements throughno-resale contracts, withholding supplies, orexport controls enforced by the countriesthat benefit from discounted drugs. Failingthat, companies will have to adjust prices,raising them abroad and/or lowering themhere sufficiently to discourage the reimporta-tion that would otherwise undercut the prof-its that support future drug R&D. And in theinternational treaty arena, the U.S. govern-ment should continue to press for the expan-sion of free trade principles and furtherrestrictions on compulsory licensing, movingideally to the complete separation of com-mercial and charitable undertakings.

Reimportation Bills Currently in Congress

In GeneralCurrent law respecting drug reimporta-

tion is a maze of regulations too complex tosummarize here. Lifting the ban should be arelatively simple matter, but the bills now inCongress aimed at doing so are anything butsimple, largely because they build on and pre-serve most of that law, often in ways that areunclear or inconsistent with free marketprinciples. Thus, they seek to establish aregime that at once allows American firmsand citizens to import deeply discounteddrugs while at the same time assuring theAmerican public that the drugs are safe, endsthat often conflict. Labeling and dosage reg-ulations could limit supply, for example, ascould regulations requiring imported drugsto be made only in FDA-approved facilities.And supply limits like those lead often tohigher prices. Thus, just as safety regulationsraise the cost of domestic drugs, so too couldregulations aimed at ensuring the safety ofreimported drugs.

More generally, however, we need to askwhat the aim of these bills is. Is it to encouragereimportation—or simply the presumedeffects of reimportation? If the former, doesthat make sense—manufacturing a drug inAmerica, only to send it abroad and then bringit back? Isn’t that a roundabout way to reducedrug prices—using foreign price controls, ineffect, as price-reducing filters? If that’s whatreimportation amounts to, why not justimpose price controls ourselves and be donewith the export/import business? The reasonwe don’t is because enough members ofCongress realize the folly in that, thankfully.The reason drug companies don’t reduce pricesfrom the start, however, is because they don’thave to—thanks to the reimportation ban. Ifthe aim, then, is not so much to encouragereimportation but to lower domestic prices,why not just lift the reimportation ban? Pricesshould then adjust naturally. Doubtless theywill rise abroad—lifting the ban will “force”

11

The Americanreimportationban should belifted as part of alarger effort tobetter disciplinedrug prices byexpanding thescope for marketprinciples tooperate.

companies to demand market prices there—and/or fall at home—all from the mere threatof reimportation (and assuming the failure ofother measures aimed at enforcing price dis-crimination, as discussed above). Companieswill not sell drugs cheaply abroad and dearly athome as long as they know that people caneasily get on the Internet or on a bus and buythem abroad. And with prices thus adjusted,that will resolve the safety issue, for there willbe, in fact, little or no reimportation.

Still, the safety issue cannot be ignoredbecause the threat to buy abroad must becredible; if consumers are concerned aboutthe safety of reimported drugs, that is, theirthreat will be compromised, which is whydrug companies repeatedly raise the issue. Forthat reason, therefore, legislation will have tochoose between letting the consumer bear therisk, limiting protection to after-the-factrecovery through litigation, or providingbefore-the-fact safety regulations, with alltheir potential costs. If FDA safety regulationis the choice, as is likely, then given the largeraim of facilitating reimportation—at least inprinciple if not in fact—that regulationshould be tied directly to safety. It should notserve as a vehicle to frustrate reimportation.

But at the same time, if market principlesare to rule, neither should regulations restrictcompanies from trying to maximize profitsby segmenting markets and pricing differen-tially. Thus, companies should be free to pro-duce and package drugs variously, to employno-resale devices, and to resort to such self-help measures as raising prices or limitingsupplies to foreign purchasers who mightotherwise breach no-resale contracts orignore label licenses. Indeed, the last thing wewant is to move from a regime in which tradeis restricted to one in which it is forcedthrough measures compelling trade. Safetyregulations could restrict trade unnecessarily.Other regulations could force trade. It is thelatter that will mainly concern us here.

In the HouseLast July, by a surprising vote of 243 to

186, the U.S. House of Representatives

passed a bill aimed at lifting the drug reim-portation ban. Spearheaded by Rep. GilGutknecht (R-MN), H.R. 2427, thePharmaceutical Market Access Act of 2003,would amend Section 804 of the FederalFood, Drug, and Cosmetic Act to permitpharmacists, wholesalers, and “qualifyingindividuals,” meaning ordinary citizens, toimport prescription drugs from 25 developedcountries, mostly in Europe. Unlike previousmeasures, the bill does not require the secre-tary of Health and Human Services to certifythat certain safety and cost-saving require-ments have been met—the “poison pill” thatcurrently blocks reimportation. Thus, itopens the door to reimportation. And itwould add a new section 505B to the FFDCAto require drug companies to incorporatevarious tamper-resistant technologies in allprescription drug packaging.

H.R. 2427 has the virtue of being a rela-tively simple bill. Nevertheless, it retains a pro-vision from current law that warrants con-cern. When Congress amended the FFDCA byenacting the Medical Equity and Drug SafetyAct of 2000 (MEDS Act)—which alloweddrugs to be reimported, but only after HHScertification—it added a subsection to section804 that prohibited manufacturers from con-tracting to prevent the sale or distribution ofimported products.57 That provision, aimedat frustrating company efforts to in turn frus-trate drug reimportation, is inconsistent withmarket principles, of course; companiesshould be free to sell their products on what-ever terms they wish—in this case, terms thatseek to preserve market segmentation andprice discrimination. Shortly after H.R. 2427passed in the House, however, Congressenacted and the president signed theMedicare Prescription Drug, Improvement,and Modernization Act of 2003, whichrepealed the MEDS Act’s prohibition on con-tractual restrictions on drug imports.58 Thus,companies are now free to try to frustratedrug reimportation through contractualdevices. That freedom should be preserved byany drug reimportation legislation Congressenacts in the future.

12

The last thing wewant is to move

from a regime inwhich trade is

restricted to onein which it is

forced.

In the SenateS. 2328. Two bills now in the Senate are

given some chance of passing. On April 21,Sens. Byron Dorgan (D-SD) and OlympiaSnowe (R-ME), along with eight others, intro-duced S. 2328, the Pharmaceutical MarketAccess and Drug Safety Act of 2004. On June15, the powerful AARP gave its support for thebill.59 S. 2328 is anything but simple. In part,upon enactment it would allow individuals,for their own and their family’s personal use,to import a 90-day supply of FDA-approveddrugs from Canada. Individuals traveling out-side the country would be allowed to bringback for their personal use a 90-day supplyfrom Canada, Australia, current EU countries,Japan, New Zealand, or Switzerland, or a 14-day supply from another foreign country.Within 90 days of enactment, pharmacistsand wholesalers would be allowed to importdrugs from Canada and, beginning one yearfrom enactment, from the aforementionedcountries. Much in the bill concerns safety—licensing, chain-of-custody tracking, labelingand relabeling, and the like.

Although Sen. Dorgan’s website claimsthat S. 2328 “is the Senate companion toH.R. 2427,”60 two differences stand out, thesecond starkly.61 First, S. 2328 addresses apatent-law matter that might otherwiseblock reimportation. The bill protects phar-macies, wholesalers, and individuals fromsuits for patent infringement as follows:

It shall not be an infringement to use,offer to sell, or sell within the UnitedStates or to import into the UnitedStates any patented invention undersection 804 of the Federal Food, Drug,and Cosmetic Act that was first soldabroad by or under authority of theowner or licensee of such patent.62

That provision is noteworthy. Here, in brief,is why.

Upon issue, a U.S. patent protects the rightof the owner to exclude others from making,using, selling, offering to sell, or importinginto the United States the patented inven-

tion.63 In general, however, once the product issold, absent any agreement between seller andbuyer to the contrary, the buyer may resell theproduct. This “first-sale rule” or “exhaustiondoctrine” is said to exhaust any resell right thepatentee might claim, for with the first sale,presumably, he has been fairly compensatedfor his product.

Patent law is country specific, however:thus, an inventor must apply for a patent inevery country in which he wants his patentprotected, and national patents must beenforced country by country. That has led toa degree of uncertainty in patent law, even inthe United States, especially after a 2001 deci-sion by the U.S. Court of Appeals for theFederal Circuit, Jazz Photo Corp. v. United StatesInternational Trade Commission.64 There thecourt held that a sale exhausts a U.S. paten-tee’s sale rights only if it takes place in theUnited States; if it takes place in a foreignjurisdiction, the patentee’s right is notexhausted. Thus, the court applied the “terri-torial exhaustion” doctrine, not the “interna-tional exhaustion” doctrine whereby a saleanywhere exhausts the patentee’s right. Eventhough the patentee had sold the productabroad, and had been paid for it, he retainedhis right to prevent the new owner fromreselling it in the United States.

The Jazz Photo decision has been criti-cized,65 and rightly so. Indeed, with any ordi-nary nonpatent sale, the act of selling, absentan agreement to the contrary, would alienatethe seller’s control over subsequent salesregardless of where the first sale took place.Yet here, under the territorial exhaustionrule, that same act does or does not alienatethe seller’s right based simply on where thesale is made, even though the same substan-tive law may be in place in both jurisdictions.A matter that should be addressed throughcontract law—controlling resale of a product—is addressed instead through property law, thelaw of patents. The issue here, after all, is notthe theft of an invention—the proper busi-ness of patent law—but the reselling of aproduct for which the inventor/owner hasalready been paid. Properly, that payment

13

S. 2328 wouldkeep companiesfrom preventingreimportationthrough what is,in fact, an overextension ofpatent law principles.

should sever his control over subsequentsales.

Nevertheless, Jazz Photo is the controllingAmerican law today, and its implications fordrug reimportation are clear. A company cansell a drug abroad, yet retain the right to pre-vent the buyer from reselling the drug here—not as a matter of contract but of patent law.It is to address that problem, therefore, thatS. 2328 would enact, in effect, the interna-tional exhaustion doctrine for pharmaceuti-cals. Such a provision would keep companiesfrom preventing reimportation throughwhat is, in fact, an overextension of patentlaw principles.

This matter has been further clouded,however, by the United States–Australia FreeTrade Agreement that Congress just ratifiedon July 15, which contains a provision thatappears to establish the territorial exhaus-tion rule between the parties. Article 17.9.4 ofthe treaty reads:

Each Party shall provide that the exclu-sive right of the patent owner to pre-vent importation of a patented prod-uct . . . without the consent of theowner shall not be limited by the saleor distribution of that product outsideits territory, at least where the patenteehas placed restrictions on importationby contract or other means.66

The main part of that provision seems to saythat patentees can prevent reimportation ofdrugs sold abroad—that is, can block applica-tion of the international exhaustion rule. Atthe same time, the force of the “at least” provi-so, recognizing a patentee’s restriction of reim-portation through contract, is unclear sincethe territorial exhaustion rule alone wouldallow a patentee to prevent reimportation.Perhaps the “at least” proviso should be readas a necessary condition—that is, as requiring apatentee to contract for the right to preventreimportation in order to preserve it. If that isthe purport of “at least,” it corrects for the mis-taken, court-imposed territorial exhaustionrule (although it doesn’t explain the language

preceding it). Alternatively, perhaps the provi-so anticipates that a court might revisit andreverse the Jazz Photo decision and incorporatethe international exhaustion rule in Americanlaw. If that were to happen, companies wouldneed to resort to contractual mechanisms totry to forestall reimportation. That would bethe right way to do it in any event, rather thanthrough patent law.

In the patent area, then, the Dorgan-Snowebill moves in the right direction. Unfortunately,that cannot be said of the second area of the billthat should concern us—the part designed toprevent drug companies from “gaming the sys-tem,” as Sen. Snowe’s press materials put it.67

Companies would be prevented “from takingactions that would have the effect of thwartingdrug importation,” those materials say; anyonewho takes such actions would be in violation ofthe Clayton Act, risking treble economic dam-ages.

Under its section 27, “Restraint of Trade,”S. 2328 would prohibit companies fromdirectly or indirectly charging higher pricesto foreign exporters or domestic importersthan to those who do not export or import;denying or restricting supplies of drugs toforeign exporters or domestic importers;publicly, privately, or otherwise refusing todo business with registered exporters orimporters; changing the color, dosage form,or place of manufacture of drugs so they areno longer FDA approved; or engaging in anyother action that the Federal TradeCommission determines would unfairlyrestrict competition. In other words, compa-nies would be prohibited from taking any ofthe actions they might otherwise legitimatelytake to try to maximize profits by segment-ing markets and pricing differentially—enter-ing no-resale contracts, incorporating labellicenses, limiting supplies, or raising prices.

Thus, in addition to removing the reim-portation ban—the illegitimate means ofenforcing market segmentation—the Dorgan-Snowe bill would deprive companies of legiti-mate means of doing business. Its aim, clearly,is to force something close to equal interna-tional pricing. That may (or may not) be a

14

In the patent area, the Dorgan-Snowe bill moves

in the right direction.

Unfortunately,that cannot be

said of the partdesigned to

prevent drugcompanies from

“gaming the system.”

desirable result, but in a free society it has tocome about by legitimate means, not by pro-hibiting companies from doing what theywould otherwise have a perfect right to do.68

Indeed, the sponsors of this bill have issuedstatements that indicate that they really dowant to force prices toward equality—butequality at levels set by socialized medical sys-tems abroad. Sen. Dorgan writes, for example,“The Pharmaceutical Market Access Act wouldcreate a competitive marketplace so thatAmericans can purchase FDA-approved drugsat the much lower prices available in othercountries.”69 Sen. Edward Kennedy, a bill spon-sor, echoes that view: “Bipartisan legislationintroduced by Senators Dorgan, Snowe,McCain, Daschle, myself, and others will, atlong last, give American patients a fair deal. . . .It will enable U.S. consumers to buy FDA-approved drugs at the same fair prices as theyare sold abroad.”70 Taking a swipe at drug com-panies in the process, Sen. McCain defendssecuring that result with the measures justnoted: “Putting profits before patients, [drugcompanies] have limited the supply of phar-maceuticals to Canadian pharmacies andwholesalers who export to the United States. . .. . [O]ur bill seeks to close potential loopholesthat would allow companies to game the sys-tem and unfairly discriminate against pharma-cists or wholesalers.”71 And in a frequently-asked-questions sheet that Sen. Snowe’s officeissued when S. 2328 was introduced, the spon-sors’ misunderstanding of market principles isclearly indicated: “[This bill] merely extends thebenefits of free trade to buyers of prescriptiondrugs. . . . Drug manufacturers today are sub-verting the free market by charging higherprices to Americans for drugs than they chargeto patients in other countries. . . . ”72 If marketpractices don’t “force” uniform prices, thesesenators apparently will. But under currentconditions, those will not be market prices.Instead, they will be prices set by foreign diktat.

S. 2493. On June 2, Sen. Judd Gregg (R-NH), chairman of the Health, Education,Labor, and Pensions Committee, introduceda different drug reimportation bill on behalfof himself, Sens. Gordon H. Smith (R-OR),

Susan Collins (R-ME), Norm Coleman (R-MN), Jeff Sessions (R-AL), Trent Lott (R-MS),and Michael B. Enzi (R-WY). Since the HELPCommittee has jurisdiction over this issue,the Gregg bill may have the best chance ofpassing. It is also the bill the administration,were it to get behind any bill, would be mostlikely to support.73

Dubbed the Safe Importation of MedicalProducts and Other Rx Therapies Act of2004, S. 2493 is both more modest and morerestrictive than S. 2328. In general, uponenactment, it would allow individuals, withcertain restrictions,74 to import a 90-day sup-ply of drugs for personal use from Canada orthe 15 countries that were members of theEuropean Union as of December 31, 2003.The bill would give the FDA one year fromenactment to create a regulatory system forthe commercial importation of drugs fromCanada and three years to expand the systemto those 15 European countries the secretaryof HHS had certified as eligible to export.Thus, under the Gregg bill, reimportationwould take longer to open up and fewercountries would be included in the plan.Moreover, HHS retains substantial authorityto block reimportation.

With regard to safety, both S. 2493 and S.2328 read more like regulations than statutes;in fact, the provisions are so detailed, especial-ly in the Gregg bill, that one is tempted to saytheir aim is more to discourage than to allowimportation. The licensing, record-keeping,and Internet pharmacy regulations in theGregg bill, for example, run detailed pageafter page. Yet S. 2493, unlike S. 2328, doesnothing to block the illegitimate patent lawrights of drug companies to prevent reimpor-tation of already sold drugs, as discussedabove. On the other hand, neither does itimpose the illegitimate market restrictions ofthe Dorgan-Snowe bill. Thus, rather than tryto force international prices toward equality,it would allow companies to try to segmentmarkets and price differentially. On balance,therefore, the Gregg bill is probably a betterbill from a free market perspective than itsbipartisan counterpart, although the patent

15

The sponsors ofS. 2328 haveissued statementsthat indicate thatthey really dowant to forceprices towardequality—butequality at levelsset by socializedmedical systemsabroad.

law omission, the temporal and geographiclimits, and the extraordinary regulatory over-lay need to be addressed before the bill can besaid to be consistent with free market princi-ples.

Conclusion

“Drug reimportation” has become thefocus for a host of drug problems that havebecome political problems primarily becausedrugs are so highly regulated, both here andabroad. The natural solution to such prob-lems is to allow greater scope for marketforces. That is the correct intuition, whichanimates, initially, all of the proposals forlifting the reimportation ban now in place inAmerica. However varied or mistaken the dif-ferent proposals may be, they all turn on thebasic idea that free markets and the competi-tion they encourage, not price controls, arethe way to produce more and better drugs atlower prices. Indeed, what is the reimporta-tion ban if not an impediment to free tradeand a free market?

This study has brought to the surface sev-eral issues that need to be addressed if we areto move toward a free market in drugs. First, aslong as risk-averse regulators assume that allAmericans are equally risk averse, the long andcostly FDA approval process will continue toimpose huge up-front costs on drug compa-nies, costs that will have to be recovered if newdrugs are to be produced in the future. Ratherthan continuing with a one-size-fits-allapproach to risk, therefore, measures shouldbe developed to allow less risk-averse tastes tobe satisfied, thereby potentially reducing thoseup-front costs.

Second, and closely related, the lifespan ofthe drug patent that follows upon that longprocess should equal the average life-span ofall other patents. However complex the eco-nomics of drug patents, we know intuitivelythat a shorter patent life discourages invest-ment and raises product prices. At the sametime, the central purpose of patents—toencourage and protect intellectual property—

should guide patent law. Congress has thepower to enact the international exhaustionrule, which would sever a company’s controlof its product (not its invention) after thefirst sale. It should do so. But Congress andthe administration both should also work tobetter secure patent rights through interna-tional treaties. In particular, commercial andcharitable undertakings should be sharplyseparated, for the integrity of both, and drugcompanies should not be used as charitableinstitutions.

Third, drug companies should be free tomarket their products as they wish, with theaim of maximizing profits for the benefit ofshareholders, retirees, and all who wouldbenefit from greater investment in drugR&D. That means companies should be freeto exploit different levels of demand, to seg-ment markets and price differentially, and totry to secure those arrangements with con-tractual mechanisms, supply controls, andpricing decisions. At the same time, buyersshould be free to accept offers from willingsellers. Thus, the American reimportationban, which restricts buyers, should be lifted.

If the ban were lifted, no one knows exact-ly how things would evolve. Clearly, drugcompanies would continue to have an inter-est in seeing to the integrity of their products.As for marketing, companies would need toemploy no-resale contractual devices if theywanted to secure market segmentationschemes. But if they were unable to enforcethose widely enough, or if such devices weremade illegal, as in the Dorgan-Snowe bill, weneed only look to Europe to see the result.Because no-resale devices are illegal there, a“gray market” has emerged in which drugsare moving increasingly from low-price tohigher-price markets, increasingly undercut-ting profit margins. The situation there canbe sustained at present only because thelucrative American market enables drugcompanies to endure it.

Were the American market to be threat-ened by a similar “race to the bottom,” com-panies would be forced to rethink their pric-ing strategies. They would have no choice but

16

However varied or mistaken the

different propos-als may be, they

all turn on thebasic idea that

free markets andthe competitionthey encourage,

not price con-trols, are the wayto produce moreand better drugs

at lower prices.

to abandon their market segmentationschemes and adjust prices internationally,moving them toward equality, even thoughthe net profits that resulted would be sub-optimal and there would be less money forR&D. That result is what the Dorgan-Snowebill would try to force. That is a mistake. No-resale devices, pressed by companies with anincentive to see them enforced, and enforcedby countries with an incentive to enforcethem, should be given a chance. If the EU willnot allow them, or individual countries willnot enforce them, then let prices rise toequality in Europe, with the threat by com-panies to withhold product if price demandsare not met. Still, companies should be freeto try to segment markets, even if the historyof such efforts is not entirely promising. Inan increasingly transparent world, free frompolitical restraints, prices tend to movetoward equality. If that is the natural courseof things, we should not try to force thatresult but simply allow it to happen. The firststep toward that end is to lift the Americanreimportation ban.

Notes1. See, for example, Donald L. Barlett and James B.Steele, “Why We Pay So Much For Drugs: How theClamor for Cheap Canadian Imports Is HeatingUp the 2004 Campaign and Giving Washington aHeadache,” Time, February 2, 2004, p. 44.

2. It is difficult to generalize about cross-countryprice comparisons, but in 2002, according toCanada’s Patented Medicine Prices Review Board,U.S. patented drug prices were 67 percent higher,on average, than those in Canada. PMPRB,Annual Report (Ottawa, Ontario: 2002), p. 23.

America constitutes by far the world’s largestdrug market. According to IMS Health, Inc., dur-ing the 12 months concluding with April 2004,drug purchases in North America, measured indollars, constituted 49 percent of total world pur-chases, 94 percent of which were American pur-chases, which means American purchases consti-tuted 46 percent of world purchases. See http://www.imshealth.com/vgn/images/portal/cit_40000873/40/42/49941481IMS_Retail_DM_APR04_.pdf.

3. The term “reimportation” is used here to refer tothe importation into the U.S. of a drug that was

first manufactured in the U.S. and then exported,or to the importation of a drug that was manufac-tured by a U.S. manufacturer outside of the U.S. forsale abroad. The Medicine Equity and Drug SafetyAct of 2000, P.L. 106-387, 114 Stat. 1549, amendssection 801(d)(1) of the Federal Food, Drug, andCosmetic Act, 21 U.S.C. §381(d)(1), which waspassed as part of The Prescription Drug MarketingAct of 1987, by adding a new section 804. As thusamended, current law permits reimportation from25 named developed countries, but only by themanufacturer or by licensed pharmacists or whole-salers, and only after the secretary of Health andHuman Services has certified that certain safetyand cost-saving requirements have been satisfied—the “poison pill” that has blocked commercialreimportation. Individuals may not bring drugsinto the U.S., but the FDA has had a lenientenforcement policy that allows individuals to bringin a 90-day supply for their personal use. “Coverageof Personal Importations,” Regulatory ProceduresManual, Office of Regulatory Affairs, FDA, http://www.fda.gov/ora/compliance_ref/rpm_new2/ch9pers.html.

4. Barlett and Steele; Bernard Simon, “Big Sales ofCut-Rate Drugs From Canada,” New York Times,October 30, 2003, p. W7.

5. “Firm That Imports Drugs from CanadaClosed,” Washington Post, Nov. 7, 2003, p. A32. CeciConnolly, “FDA Steps Up Enforcement on DrugImports,” September 30, 2003, p. A2; “FDA WarnsCanaRx Services about Its Illegal Internet Websiteand Mail Operation Obtaining Unapproved andPotentially Risky Drugs from Canada,” FDA News,September 16, 2003, http://www.fda.gov/bbs/top-ics/ NEWS/2003/NEW00946.html.

6. Portland, Maine, is now following Springfield,Massachusetts, and Montgomery, Alabama, ininstituting a program to import drugs fromCanada for its municipal employee health plans.WSJ.Com/The Daily Scan: “Maine to ImportDrugs from Canada,” June 28, 2004. States thathave begun to pursue the issue include Alabama,California, Illinois, Massachusetts, Minnesota,New Hampshire, Vermont, Washington, andWisconsin. Steve Lawrence, “Calif. Oks Web Site toBuy Canada Drugs,” Associated Press, May 27,2004; “Highlights from the States,” CongressDaily/A.M., February 23, 2004; “Governor Hints HeMay Bend Drug Laws: Blagojevich May FollowOther States in Importing Cheaper Prescriptions,”Chicago Daily Herald, April 21, 2004. MontgomeryCounty, Maryland, a Washington, D.C., suburb, isalso studying the issue. Matthew Mosk, “Mont-gomery to Study Buying Canadian Drugs,”Washington Post, November 5, 2003, p. B1.

7. Geoff Earle, “It’s Do or Die for Drug Bill: Senators

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Claim 60 Votes for Legislation Allowing Reimpor-tation from Canada,” The Hill, June 1, 2004, p. 1;“U.S. Congress Support Grows for CanadianPrescription Drugs,” Dow Jones Newswire, April 21,2004.

8. H.R. 2427, the “Pharmaceutical Market AccessAct of 2003,” passed on July 24, 2003. On May 21,2004, 228 members of the House sent a letter toSenate Majority Leader Bill Frist, urging theSenate “to move quickly on pending Rx drugimportation legislation.”

9. S. 2307, the “Reliable Entry for Medicines atEveryday Discounts through Importation withEffective Safeguards Act of 2004,” sponsored bySen. Charles Grassley (R-IA), introduced April 8,2004; S. 2328, the “Pharmaceutical Access andDrug Safety Act of 2004,” sponsored by Sens.Byron Dorgan (D-ND), Olympia Snowe (R-ME),Edward M. Kennedy (D-MA), John McCain (R-AZ), Thomas Daschle (D-SD), Trent Lott (R-MS),Debbie Stabenow (D-MI), Tim Johnson (D-SD),Mark Pryor (D-AK), and Russ Feingold (D-WI),introduced April 21, 2004; S. 2493, the “SafeImportation of Medical Products and Other RxTherapies Act of 2004,” sponsored by Sen. JuddGregg (R-NH), Gordon H. Smith (R-OR), SusanCollins (R-ME), Norm Coleman (R-MN), JeffSessions (R-AL), Trent Lott (R-MS), and MichaelB. Enzi (R-WY), introduced June 2, 2004.

10. Vicki Kemper, “Passage of Drug Import BillSeen as Inevitable: The Health Secretary’sObservations Do Not Reflect a Policy Change, anOfficial Says,” Los Angeles Times, May 5, 2004, p. A1.

11. The private sector is speaking out also: “Thenation’s two largest chain drug stores, CVS andWalgreens, launched a challenge to the nation’sdrug manufacturers yesterday by calling on theBush administration to develop a legal, safe chan-nel for Americans to buy imported drugs.”Christopher Rowland, “2 Chains Urge OK forDrug Imports: CVS, Walgreens Add to GrowingSupport,” Boston Globe, May 6, 2004, p. E1.

12. The Senate bills, noted above, are clear exam-ples of this: they are written in great detail, asthough their passage would lead to a regime ofregular reimportations rather than to interna-tional price adjustments by drug companies toward off reimportation—the more likely scenario.

13. There is no shortage of congressional dema-goguery against drug companies from both sidesof the aisle: for example, Sen. Dan Burton (R-IN):“He accuses the FDA of acting ‘in lockstep with thepharmaceutical industry’ to protect prices andprofits. ‘They are allowing the theft, this robbery, togo on,’ he charges.” William M. Welsh, “Once Just a

Trickle, Canada’s Rx Drugs Pouring Into USA:Seniors Seek Bargains; FDA Cracks Down,” USAToday, October 7, 2003, p. A1; Sen. Byron Dorgan(D-ND): “The American consumer is being cheatedand the FDA is driving the getaway car.” PBSNewshour, March 12, 2004, http://www.pbs.org/newshour/bb/health/jan-june04/drug_03-12.html; Rep. Rosa DeLauro (D-CT): “It is timethat this Congress stop acting as a wholly ownedsubsidiary of the pharmaceutical companies andstep up to its responsibility to the consumers ofthis nation.” Sheryl Gay Stolberg, “House PassesDrug Bill: Battle Is Likely in Senate,” New YorkTimes, July 26, 2003, p. A11.

14. Safety has been an FDA concern from the out-set. Efficacy, a much more problematic and costlyissue, became a concern in 1962 with the Kefauver-Harris Drug Amendments of the Food, Drug, andCosmetic Act. See, for example, Sam Peltzman, “AnEvaluation of Consumer Protection Legislation:The 1962 Drug Amendments,” Journal of PoliticalEconomy, vol. 81, no. 5 (1973), pp. 1049–1091.Peltzman’s study suggests that the new regulationsimposed by the 1962 amendments resulted in adecreased number of new drug approvals in theyears following the amendments. According toPeltzman’s data, an average of 41.5 new chemicalentities and 297.9 other new drugs were introducedbetween 1951 and 1962, compared with an averageof only 16.1 new chemical entities and 94.4 othernew drugs introduced between 1963 and 1970.

15. That figure comes from the PharmaceuticalResearch and Manufacturers of America, http://www.phrma.org/issues/researchdev/lead.cfm.

16. In 1987 the FDA introduced a “compassionateuse” policy that allows individuals to seek approval,on a case-by-case basis, to use “experimental”drugs. The regulations for gaining approval, how-ever, are complex and burdensome. See http://www.access.gpo.gov/nara/cfr/waisidx_03/21cfr312_03.html and http://www.fda.gov/cdrh/devadvice/ide/print/early.html#emergencyuse.

17. See, for example, Milton Friedman: “The FDAhas done enormous harm to the health of theAmerican public by greatly increasing the costs ofpharmaceutical research, thereby reducing thesupply of new and effective drugs, and by delayingthe approval of such drugs as survive the tortuousFDA process.” Quoted in Durk Pearson andSandy Shaw, Freedom of Informed Choice: FDA VersusNutrient Supplements (Neptune, N.J.: CommonSense Press, 1993), p. 39. See also Peltzman.

18. “Would Prescription Drug ImportationReduce U.S. Drug Spending?” CBO Economic andBudget Issue Brief, April 29, 2004, citing Joseph A.DiMasi, Ronald W. Hansen, and Henry G.

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Grabowski, “The Price of Innovation: NewEstimates of Drug Development Costs,” Journal ofHealth Economics 22 (2003), pp. 151–85.

19. A recent NBER working paper suggests, forexample, that because private investment in drugR&D is driven by the market, private investors aremore likely to abandon a project if costs are toohigh or returns are too low. Abandonment is lesslikely with public funding because each taxpayerbears only a small part of the risk of an unsuc-cessful project, and there is no price mechanismto direct the decision to abandon. See Eduardo S.Schwartz, “Patents and R&D as Real Options,”NBER Working Paper 10114, November 2003.

20. Gary Hull, “Pharmaceutical Patents Deservethe Same Protection as Other Property Rights,”Barron’s, June 2, 2003, p. 46.

21. It appears that the Medicare PrescriptionDrug and Modernization Act of 2003 provides forpatent term extensions in some cases. Under theact, the term of a patent eligible for extension maybe extended by the time equal to the regulatoryreview period for the approved product. 35 U.S.C.§156 (2004).

Economists are often heard to say that “sunkcosts” are irrelevant to pricing decisions. But theyare not irrelevant to investment decisions. Thehigher such costs, the further out the start of theperiod of recovery, and the shorter that period,the riskier the investment, other things beingequal. That is part of what drug companies mean,after all, when they explain high drug prices bypointing to high up-front costs. And the mainrationale for patent protection is to enable com-panies to price at a level that will enable them torecover those costs—costs that a generic competi-tor would not have incurred and hence would notneed to recover. Increasing the effective length ofthe patent could reduce a drug’s price per unit byforestalling cheaper generic competitors, eventhough new patented competitors will come onstream over time.

22. Robert Schuettinger and Eamonn Butler,Forty Centuries of Wage and Price Controls: How Not toFight Inflation (Thornwood, New York: CarolineHouse Publishers, Inc., 1979) See also, James K.Glassman, “Price Controls and the Economics ofMedical Innovation: Part One,” USA Next, vol. 1,no. 2, p. 5: “Because of price controls on drugsand the inevitable rationing that accompaniessuch controls, Germans spend more time in thehospital than Americans and lose more workingdays through sickness.” Citing Jim Gilbert andPaul Rosenberg, “The High Cost of Europe’s ‘FreeRide’ in Pharmaceuticals,” paper presented at the2004 annual meeting of the Governors of theWorld Economic Forum for Healthcare, Davos,

Switzerland, January 22, 2004, http://www.bain.com.

23. Patricia M. Danzon, “Making Sense of DrugPrices,” Regulation 23, no. 1 (Spring 2000): 57.

24. AARP press release for David J. Gross, StephenW. Schondelmeyer, and Susan O. Raetzman,“Trends in Manufacturer Prices of Brand NamePrescription Drugs Used by Older Americans,2000 Through 2003,” May 25, 2004, http://www.aarp.org/Articles/a2004-05-25-drugs.html.On June 30, 2004, PhRMA issued a press releasechallenging the AARP report, http://www.phrma.org/mediaroom/press/releases/30.06.2004.1037.cfm.

25. Thus, an aide to Rep. Gil Gutknecht (R-MN),who has led the reimportation effort in theHouse, last year compared the costs of severalcommon patented drugs if purchased inGermany or in Minnesota. The prices forCoumadin, for example, were $28.44 in Germany,$92.66 in Minnesota; for Glucophage, $15.50 and$45.21, respectively; for Tamoxifen, $56.34 and$102.19. Those are the types of comparisons ordi-nary citizens are likely to make. See http://www.gil.house.gov/IssueItems/PDrugs/Comparison2004.pdf. See also note 2 above.

26. Danzon.

27. “I have held four hearings in my capacity asChairman of the House Government ReformSubcommittee on Human Rights and Wellnessregarding the safety and efficacy of imported phar-maceuticals. Despite clinging to claims of the dan-gers of counterfeit and misbranded drugs, the phar-maceutical industry as well as the FDA have beenunable to cite a single incident of adverse healthreactions caused by Canadian imported FDA-approved prescription drugs.” Rep. Dan Burton (R-IN), quoted in “October 28, 2003—Boston ForumDelivers Resounding Message: Affordable Rx Drugsfor All Americans,” Committee on GovernmentReform, http://reform.house.gov/WHR/Hearings/EventSingle.aspx?EventID=587.

28. “Parallel trade” arises when goods intended bya manufacturer for sale in one market, usually ata lower price, are resold by other than the manu-facturer in another market, usually at a higherprice.

29. See, for example, Doug Bandow, “The FreeMarket Mirage of Reimportation,” Institute forPolicy Innovation Policy Report 180, May 2004,http://ipi.org; Sally C. Pipes, “Cheap Drugs fromCanada are a Harmful Illusion,” San FranciscoChronicle, January 22, 2004, p. A19; James K.Glassman, “Importing Socialism,” Tech Central

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Station, July 23, 2003, http://www.techcentralsta-tion.com/0723 03B.html; James K. Glassman andJohn R. Lott Jr., “The Drug World’s Easy Riders,” AEINews & Commentary, July 23, 2003, http://www.aei.org/news/newsID.18078,filter./news_detail.asp; John E. Calfee, “The High Price of CheapDrugs,” The Weekly Standard 08, no. 43 (July 21, 2003).

30. “This year, Americans, who account for a frac-tion of prescription drug use worldwide, will pay forabout half of all pharmaceutical spending world-wide. By contrast, citizens of the world’s thirdlargest economy, Germany, paid less than 5 percent.The same kind of drug payment disparity is true formany other developed nations who have about asmuch ability to pay as Americans do.” MarkMcClellan, then FDA commissioner, “Remarksbefore the First International Colloquium onGeneric Medicine,” Cancun, Mexico, Sept. 25, 2003,http://www.fda.gov/oc/speeches/2003/genericdrug0925.html. See also Bandow, p. 17; “Pharma-ceutical Price Controls Abroad: An Unfair TradePolicy,” Republican Policy Committee, Nov. 6,2003.

31. “If Canada and Europe paid market prices fordrugs, even more pharmaceuticals would be avail-able to fight disease and save lives around theworld. But that’s a fantasy; they won’t. The bestthe world can hope for is a continuation of thecurrent process—which is another example ofhow Americans, often maligned by others fortheir selfishness, are, in fact, carrying heavy bur-dens for the rest of the world.” Glassman andLott.

32. Bandow, p. 10.

33. See, for example, Milton Friedman, “MiltonFriedman and the Reimportation Debate,” TechCentral Station, February 2, 2004, http://www.techcentralstation.com/020204D.html; Richard A.Epstein, “A Perversion of Free Trade,” Tech CentralStation, July 24, 2003, http://www.techcentralstation.com/ 072403F.html.

34. Epstein, “A Perversion of Free Trade.”

35. See The Prescription Drug Marketing Act of1987, section 804.

36. “It’s a very dynamic new niche . . . and I amproud to back it,” said Maryann Mihychuk,Manitoba Minister of Industry, Trade, and Mines.Quoted in Gilbert M. Gaul and Mary Pat Flaherty,“Canada Is a Discount Pharmacy for Americans,”Washington Post, October 23, 2003, p. A17.

37. Epstein, “A Perversion of Free Trade.” See alsoRichard A. Epstein, “Once More into the Breach,”Tech Central Station, August 18, 2003, http://

www.techcentralstation.com/081803A.html,responding to Edward H. Crane and Roger Pilon,“Conservative Drug Split,” National Review Online,July 29, 2003, http://www.nationalreview.com/comment/com ment-crane-pilon072903.asp.

38. Responding to this argument, Epstein (“OnceMore into the Breach”) notes that “the law is filledwith all sorts of cases where actions are allowedagainst third parties because the direct remedy isblocked for some reason.” He then gives a few pri-vate law examples of enforcement actions againstthird parties and the reasons that purport to jus-tify them, all of which point to the consequencesof not doing so. Here, however, we have a publiclaw remedy for a private law problem—enforce-ment of a private contract, if there is one—andhence a kind of passive subsidy for the drug com-panies. Moreover, if consequences are our con-cern, the major consequence of this arrangementtoday is the political firestorm the free riding hasgenerated and the view, increasingly, that it ispolitically unsustainable.

39. European Union law prohibits all agreementsthat may affect trade between member states andhave as their object or effect the prevention,restriction, or distortion of competition withinthe common market. EC Treaty, article 81, http://europa.eu.int/comm/competition/legislation/treaties/ec/art81_en.html. Such agreements maybe inferred from the parties’ conduct. For exam-ple, the European Court of Justice found a pro-hibited agreement in Sandoz Prodotti Farmaceuticiv. Commission, in which Sandoz, a pharmaceuticalcompany, inserted into customers’ invoices theexpress words “export prohibited,” and the cus-tomers continued to purchase from Sandoz with-out complaint. Case C-277/87, Sandoz ProdottiFarmaceutici v. Commission, discussed in joinedcases C-2/01 P and C-3/01 P, Bayer v. Commission,http://europa.eu.int/smartapi/cgi/sga_doc?smartapi!celexplus!prod!CELEXnumdoc&lg=en&numdoc=62001J0002. The ECJ held that the cus-tomers’ conduct constituted tacit acquiescence toan export ban. However, in Bayer v. Commission,the ECJ did not find a prohibited agreementbetween Bayer UK and its wholesalers. Joinedcases C-2/01 P and C-3/01 P, Bayer v. Commission,http://europa.eu.int/smartapi/cgi/sga_doc?smartapi!celexplus!prod!CELEXnumdoc&lg=en&numdoc=62001J0002. In that case, Bayer UK refusedto fill all of the increasingly large orders from itsFrench and Spanish wholesalers because thewholesalers were exporting drugs to the UnitedKingdom, allowing consumers to purchase thedrugs much more cheaply than if they purchasedfrom Bayer UK, thereby severely undercuttingBayer UK’s sales.

40. See the statement by the European Federation

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of Pharmaceutical Industries and Associations,http://www.efpia.org/2%5Findust/paralleltrade.pdf. Compare that with the statement by theEuropean Association of Euro-PharmaceuticalCompanies, http://www.eaepc.org.

41. A number of the world’s largest pharmaceuticalcompanies have threatened to withhold or havewithheld product from foreign wholesalers andretailers suspected of reselling to Americans.Among those are Eli Lilly, Pfizer, GlaxoSmithKline,Wyeth, and AstraZeneca. See HDMA News MediaFactsheet, April 15, 2004, http://www.healthcaredistribution.org/resources/pdf_news/Drug%20Importation.pdf; Mark Jewell, “Lilly Ups Campaign toCurb Drug Imports,” Associated Press, March 31,2004; Christopher Rowland, “Pfizer TargetsCanadian Pipeline: Cuts Supply of Drugs toWholesalers It Links to US Mail-Order Deals,”Boston Globe, February 28, 2004, p. D1.

42. Bandow; Pipes; Glassman, “ImportingSocialism;” Glassman and Lott; Calfee; McClellan;and “Pharmaceutical Price Controls Abroad.”

43. Ibid.

44. Ibid.

45. See, for example, Gardiner Harris, “PfizerReports China Has Lifted Its Viagra Patent,” NewYork Times, July 8, 2004, p. C1.

46. For an overview of the TRIPS Agreement, July11, 2000, see “Pharmaceutical patents and theTRIPS Agreement,” http://www.wto.org/english/tratop_e/trips_e/pharma_ato186_e.htm.

47. Fact Sheet: “TRIPS and PharmaceuticalPatents: Obligations and Exceptions,” September2003, http://www.wto.org/english/tratop_e/trips_e/factsheet_pharm02_e.htm.

48. Ibid.; WTO News: “Decision Removes FinalPatent Obstacle to Cheap Drug Imports,” August30, 2003, http://www.wto.org/english/news_e/pres03 _e/pr350_e.htm.

49. “TRIPS and Pharmaceutical Patents,” article31(b).

50. Ibid., article 31(h).

51. Ibid., article 31(f).

52. WTO Press Release, “Council approves LDCdecision with additional waiver,” June 28, 2002,http://www.wto.org/english/news_e/pres02_e/pr301_e.htm.

53. The August agreement waives countries’ obliga-tions under Article 31(f) to use the compulsory

licensing system predominantly for the domesticmarket. See “Implementation of Paragraph 6 of theDoha Declaration on the TRIPS Agreement andPublic Health,” August 30, 2003, http://www.wto.org/english/tratop_e/trips_e/implem_para6_e.htm.

54. “TRIPS and Pharmaceutical Patents: Obligationsand Exceptions.”

55. Ibid., listing the 44 countries that have soagreed.

56. In a December 11, 2003, meeting with U.S.Trade Representative Robert Zoellick, then FDAcommissioner Mark McClellan, and officials fromthe leading pharmaceutical companies, Speaker ofthe House J. Dennis Hastert charged, “[i]t is wrongthat our friends in Canada use threats to steal thepatents of American drug companies in order tonegotiate lower prices.” “Hastert Meets With U.S.Trade Representative and FDA Commission onHigh Drug Prices; Pushes for Fairer Pricing forCanada and the United States,” http://www.speaker.gov/library/health/031211medicare.shtml.Canadian ambassador to the U.S. Michael Kerginpromptly responded with a December 16 letter toSpeaker Hastert: “Contrary to the allegationsmade in the press release, Canada does not ‘usethreats to steal the patents of American drug com-panies in order to negotiate lower prices.’ Canadaeliminated compulsory licensing in 1987. Drugcompanies that do not want to sell their pharma-ceuticals in Canada are certainly free not to.”“Ambassador Kergin’s Letter to House SpeakerDennis Hastert, 16 December 2003,” http://www.canadianembassy.org/ambassador/031216-en.asp?format=print.

57. Pub. L. 106-387, § 1(a) (title VII, § 745(c)(2)),114 Stat. 1549, 1549A-36 (October 28, 2000).

58. Pub. L. 108-173, § 1121(a), 117 Stat. 2464(December 8, 2003).

59. See Geoff Earle, “AARP backed drug bill toappease Dems, says GOP,” The Hill, June 17, 2004,p. 1.

60. Available at http://dorgan.senate.gov/legislation/rxdrugs.cfm.

61. A third important difference, not directlyrelated to securing market principles and so notdiscussed above, concerns S. 2328’s staggeredimplementation scheme. Since the Canadiandrug market is so small, it would be at least a yearafter enactment before supply sufficient to satisfythe American market could be on stream.

62. S. 2328, 108th Cong., § 4(f) (2004), amending35 U.S.C. §271 by adding a new subsection (h), asstated in the text above.

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63. 35 U.S.C § 271(a) (2000). See generally, John R.Thomas, “Patents and Drug Importation,” CRSReport RL32400, May 25, 2004.

64. 264 F.3d 1094 (Fed. Cir. 2001).

65. See, for example, Daniel Erlikhman, “Jazz Photoand the Doctrine of Patent Exhaustion: Implicationsto TRIPS and International Harmonization ofPatent Protection,” Hastings Communications andEntertainment Law Journal 25 (2003): 307.

66. Available at http://www.ustr.gov/new/fta/Australia/final/ausfta%20text%20june11%20rect.pdf. Similar provisions were included in the UnitedStates–Singapore Free Trade Agreement, enteredinto force January 2, 2004, http://www.ustr.gov/new/fta/Singapore/final.htm, art. 16.7.2, and theUnited States–Morocco Free Trade Agreement,passed by the Senate on July 21, 2004, and by theHouse on July 22, 2004, http://www.ustr.gov/new/fta/Morocco/final/index.htm, art. 15.9.4.

67. Available in author’s file.

68. As an indication that this bill is written to pro-hibit market segmentation and price discrimina-tion, section 27(c) allows a company to plead asan affirmative defense that its doing any of the

proscribed acts was not aimed at frustrating reim-portation.

69. Byron Dorgan, “Pharmaceutical Market AccessAct,” undated, http://dorgan.senate.gov/legislation/rxdrugs.cfm.

70. Edward M. Kennedy, “Statement at the Hearingon Re-importation of Prescription Drugs,” May 20,2004, http://kennedy.senate.gov/index_high.html.

71. John McCain, “Pharmaceutical Market Accessand Drug Safety Act of 2004,” Apr. 21, 2004, http://mccain.senate.gov/index.cfm?fuseaction=Newscenter.ViewPressRelease&Content_id=1259.

72. Available in author’s file.

73. See Kate Schuler, “Senate Committee Set toRevive Drug Import Debate,” CQ Today, July 16,2004; Kate Schuler, “Senate Bill on DrugImportation Heads to Markup, But Floor ActionUncertain,” CQ Today, July 12, 2004.

74. Personal imports for family members do notseem to be allowed, for example, and section812(b)(6)(A) requires the individual to have a pre-scription valid in a state, cosigned by a prescribingphysician in Canada or the permitted country.

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