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Canada’s Internet Pharmacies Thriving On Business From U.S.

Friday December 26, 2003

Low costs of prescriptions attract seniors, criticism
Cyril T. Zaneski

WINNIPEG, Manitoba , December 21, 2003(The Baltimore Sun) - Encased by iron bars and hidden behind frosted windows of what looks like an abandoned storefront, one of Canada’s most successful Internet pharmacies is quietly thriving on a street known for a different kind of drug traffic.

Like a speakeasy from the U.S. Prohibition era, the company, CanadaMeds.com, ushers employees and visitors into the building through a secret, guarded side entrance.

"We don’t want the neighbors to get any ideas about what’s behind these walls," chief executive Mike Hicks said.

But tens of thousands of American seniors have found the company, sometimes with help from their Web-savvy grandchildren and children. Every day, they send about 1,000 prescriptions by fax and phone to this storefront, which - along with more than 175 other Internet pharmacies in Canada - is booming beyond their owners’ wildest expectations.

Enticed by bargain prices for prescription drugs across the border, the budget-conscious seniors are defying a U.S. Food and Drug Administration ban on importing prescription drugs. They are expected to spend about $900 million this year on drugs from Canada.

The grass-roots rebellion has spread to statehouses and city halls, which face their own cash crunch meeting double- digit increases in prescription drug costs as tax revenues plunge.

Governors of at least 13 states and elected officials in dozens of jurisdictions - including Boston; Burlington, Vt.; and Montgomery County, Md. - are drawing up plans to help employees and retirees import drugs. Springfield, Mass., has already begun direct imports from Canada for its employees, saying it expects to cut its annual $18 million drug bill in half.

Montgomery County, whose County Council expects to take up the import issue next month, could shave $8 million to $30 million off its annual $68 million drug bill by buying north of the border for its 40,000 employees, according to the plan’s sponsor, Councilman Tom Perez.

Unconvinced by FDA claims that Internet purchases from Canada might be allowing unsafe counterfeit drugs into the U.S. market, Perez said: "The real safety issue is the suffering of Americans who need drugs and can’t afford them."

With the tide of prescription drug imports rising, the politically powerful pharmaceutical industry lobbied heavily to defeat measures in Congress this year that would have legalized the cross-border drug trade; it has moved recently to restrict drug supplies in Canada.

The Bush administration, meanwhile, has turned up the volume on warning consumers that buying imported drugs is illegal and could open the gate for a flood of counterfeit medicines funneled through Canada.

Seeds for the Internet pharmacy business were planted in this prairie province in late 2000, when a young pharmacist made a bundle selling Nicorette gum at half the U.S. price on eBay.

Today, Manitoba - whose barrel-chested economy is built on a foundation of manufacturing, farming, mining and forestry - is gaining a reputation for cultivating Internet pharmacy companies as well as wheat crops. The industry is fertilized by affordable real estate, low wages and a supportive provincial government.

Change without notice

"There are 65 of these pharmacies here that I know of, but that number may have already changed since this morning," said Ron Guse, registrar of the Manitoba Pharmaceutical Association, which regulates provincial pharmacies. "It’s a phenomenally lucrative business, and it is growing all across Canada."

The new pharmacies are gobbling up corners of suburban office parks and building shiny new offices in tiny farm towns. Others, like CanadaMeds, have expanded into several vacant storefronts, including that of a traditional drugstore that moved across the street.

The nation’s largest Internet pharmacy, Mediplan Health, which sprouted in March 2001 from the Nicorette gum sales, claims 140,000 U.S. customers that it serves from a former farm machine shop more than two hours west of Winnipeg.

Girding for continued growth, Mediplan, which does business on three Web sites as RxNorth.com, CanadianDrugstore.com and Mediplanhealth.com, opened a gleaming 18,000-square-foot office across from a chicken farm a half-hour south of Winnipeg, in Niverville.

The new plant, which employs 12 people now, is expected to have 200 at work by early next year, said Suzy Funk, Mediplan’s assistant director of operations.

"We expect we’re going to be doing 2,000 prescriptions a day here by the end of January," Funk said.

The Internet pharmacies’ expectation for continued growth comes despite President Bush’s signing this month of landmark legislation that will add a prescription drug benefit to the Medicare program in 2006 to help 40 million elderly and disabled Americans.

Seeking larger share

But few here expect the Medicare overhaul to provide more than a Band-Aid for seniors who rely on its drug benefit. So Internet pharmacies are making a bid to get a larger share of the estimated $192 billion that Americans spend each year on prescription drugs.

The companies are trying to establish independent accreditation to assure American consumers of the safety of the Canadian pharmacies and helping states and municipalities set up Web sites to help government employees buy imported drugs.

"The only thing that will end the Internet pharmacy industry in Canada is if U.S. pharmacy prices come into line," said David MacKay, executive director of the Canadian International Pharmacy Association, which represents about 25 Internet drugstores. "But how long is it going to take before Congress decides to leverage its purchasing power, put price pressure into place or impose price controls as this country does?

"Right now, it’s the pharmaceutical industry leveraging U.S. drug prices."

Most U.S. analysts believe that the Medicare drug benefit in the short run will drive drug prices even higher.

Just keeping up

Tim McBride, a health care expert at Washington University in St. Louis, for one, said the benefit to seniors will quickly be outstripped by drug costs.

"With drug costs already rising between 10 and 15 percent a year, seniors may not see any net savings at all, really," he said.

The average senior spends $2,322 a year for prescription drugs - $999 of that is out of pocket, with the rest covered by retiree health coverage, government programs, charity or private insurance, according to the nonpartisan Kaiser Commission on Medicaid and the Uninsured.

About 5 percent of seniors spend $4,000 a year or more for drugs, the commission says, and 47 percent of those have no health care.

For seniors with heavy drug expenses, Canadian pharmacies are a godsend - drugs there are sold at roughly half of U.S. prices. Reasons for the price gap between the two countries are complicated by many factors - from differences in currency values to the propensity of Americans to file lawsuits in medical matters.

But there is one clear, simple difference: Canada controls drug prices; the United States does not.

The job of Canada’s Patented Medicine Prices Review Board is to guarantee that prices charged by pharmaceutical manufacturers for a patented drug are "not excessive" compared with prices of comparable medicines. If the board finds a drug is too expensive, it is empowered to order a company to cut the price.

Average annual increases of patented drug prices in Canada have fallen substantially since the board was started in 1987 and have been far below those in the United States.

Whether to follow the lead of Canada was a major focus of the congressional fight over the Medicare bill. The Republican majority prevailed in the debate, arguing that price regulations would stifle research and development of new drugs.

Drug companies spent 9.9 percent of their Canadian sales on R&D last year, the price review board reported. That’s little more than half the 18 percent that companies spent on research in the United States, according to the drug industry’s trade group, Pharmaceutical Research and Manufacturers of America, or PhRMA.

Price controls would stifle research efforts that could develop drugs to protect aging baby boomers from Parkinson’s, Alzheimer’s and other diseases, said John Calfee, health care analyst at the American Enterprise Institute. "The drugs we will need are more important than the ones we already have," Calfee said.

Maryland Health Secretary Nelson J. Sabatini agrees with Calfee. The issue should not be drug price controls for the United States, he said, but rather getting other nations to share research costs: "We’re paying for R&D for the rest of the world, and that’s not fair."

Maryland has so far not chosen to join other states that are considering Canadian import programs. Facing rising drug costs and declining tax revenues, the governors of Minnesota, Illinois, New Hampshire, Iowa, Michigan and Wisconsin, among others, are leading a movement toward establishing such programs.

Supply and demand

Sabatini does not think such programs make sense. "If everybody starts doing that, there aren’t going to be enough drugs for the Canadians," he said. Drug importation is not a new issue in border states. Seniors in Minnesota and North Dakota have been driving to pharmacies in Canada for more than 20 years, said Peter Wyckoff, executive director of the Minnesota Senior Federation. People seeking discounts have swelled the federation’s membership by one-third this year - to 29,000.

"Every one of those people is in need of affordable drugs," Wyckoff said. "So we make them honorary Minnesotans."

Enforcing an extremely unpopular U.S. ban on imports has fallen to the FDA. "We’ve got very clear and strict statutory mandates to regulate these products," said William Hubbard, the agency’s associate commissioner for planning. "It’s just very difficult for us."

Hubbard is a master of understatement. The agency is stuck in a very sour political pickle.

The agency has looked the other way to avoid busting seniors who import medicines for their personal use. And it has avoided wagging fingers at governors such as Democrat Rod R. Blagojevich of Illinois and Republican Tim Pawlenty of Minnesota, who openly challenged the FDA to stop them from launching import programs.

Instead, the agency has focused on issuing grim warnings that Internet shoppers can’t be assured that the imported drugs were not manufactured by a counterfeiter in Pakistan or Bulgaria.

Out of reach

Even the FDA’s investigations of Canadian drug exporters have been hamstrung. Just one of 58 investigations the agency launched in the past four years of Internet drugstores has focused on a Canadian company, CanaRx Services Inc., the Ontario-based company that acts as middleman between Canadian pharmacies and the Springfield, Mass., prescription drug program. That investigation is continuing, Hubbard said. "The foreign sites we can’t reach as easily," he added.

The FDA hopes it can squeeze the Canadian pharmacies by enlisting parcel carriers and credit card companies, Hubbard said. It’s not clear, though, what the FDA can do to persuade the companies to cooperate. Credit card companies, particularly, are concerned that their cooperation would raise customers’ privacy concerns, he said.

While the FDA has struggled, Congress has slapped the agency around from both directions. Last summer, the House voted narrowly to legalize Canadian drug importation, but the measure failed in the Senate and was not included in the final Medicare bill. PhRMA spent $85 million lobbying against legislation to legalize Canadian drug importation, said Sen. John McCain, an Arizona Republican who co-sponsored the failed Senate measure.

"I’ve literally had meetings on Capitol Hill where I’d had a member of Congress chew me out in the morning for not letting this stuff in, and then in the afternoon had somebody else chew me out for letting it in," Hubbard said. "The final question is this, do you want to provide access to those cheaper drugs and accept the risk?"

Wyckoff and other advocates of drug importation say the FDA has framed the issue incorrectly. "The issue is not the safety of drugs from Canada," he said. "The issue is drug costs in the United States."