By Gilbert M. Gaul and Mary Pat Flaherty
Washington Post Staff Writers
Thursday, October 23, 2003
WINNIPEG, Manitoba -- Billy Shawn was never much of a student. He barely survived high school, skipped college and spent most of the next two decades wandering around the globe in search of the perfect wave.
But the 45-year-old surfer was no slouch when it came to business. With a natural gift for marketing, he opened a Web site in October 2000 selling inexpensive Canadian drugs to American seniors. His instincts told him that regulators in the United States would look the other way.
"I knew their hands would be tied politically," he said. "That's what I counted on for our success: friction between them being regulators and being beholden to the politicians."
Shawn's instincts proved dead-on. Although officials from the Food and Drug Administration have repeatedly said that buying drugs from Canada is illegal and unsafe, the agency does little about the surging trade in cross-border prescriptions.
Shawn's Internet pharmacy, the Canadian Drugstore, or tcds.com, now has $55 million in annual sales. It is one of approximately 120 Canadian online pharmacies selling about $700 million worth of prescription drugs each year to Americans. The drugs being sold are not narcotics, but are for such conditions as heart problems, arthritis and high cholesterol. In Manitoba, a rural province in the Canadian heartland and a hotbed for Internet drugstores, sales to American seniors now outpace the provincial health program's drug budget, according to interviews and records.
A combination of new technology, regulatory gaps and a growing demand for low-cost drugs is reshaping the U.S. drug distribution chain and fueling an entire new industry in cross-border prescription sales.
In effect, Canada has become the United States' favorite drugstore for seniors -- and its de facto Medicare drug benefit.
In recent months, the issue has captured national attention, with debates in Congress, protests by seniors, threats by U.S. drug companies to curtail shipments to Canadian pharmacies and announcements by several state and local governments that they intend to use Canadian drugs for their employee health plans.
Yet while many applaud the Canadian drugs as a lifeline, the Canadian traffic poses new challenges for state and federal regulators and highlights loopholes in a U.S. system that prides itself on being the toughest in the world.
"By and large, most of the drugs coming in from Canada are coming in illegally," said FDA Commissioner Mark B. McClellan. The agency "doesn't have the resources to monitor and inspect each and every drug shipment at the border," he said.
In fact, the FDA rarely looks, interviews and records show. Most shipments are simply allowed through.
For Canadians, the sales evoke unique paradoxes of their own. Rural provinces such as Manitoba welcome the jobs and tax revenue generated by the Internet pharmacies. But Canadian officials worry about potential drug shortages and a backlash if U.S.-based drug manufacturers raise prices.
"I don't think the [Canadian] drug laws were intended to benefit Americans' shopping on the Internet," said Barbara Wells, head of the National Association of Pharmacy Regulatory Authorities in Ottawa.
Drug prices are low in Canada for two reasons: the weaker Canadian dollar and price breaks from pharmaceutical companies negotiated by the Canadian government in return for patent protections.
The Internet pharmacies trade on those discounts, buying cheaper drugs intended for Canadians and reselling them at a profit in the high-priced U.S. market.
"We knew we had great margins," said Shawn, whose Toronto-based Web site started with a handful of workers and now has 150 employees. "There was a price in the U.S. and a price in Canada. We could create a price somewhere in the middle that makes your customer happy, you make money and everybody wins."
Charles Specht, 62, a retired county worker who lives near Pittsburgh, began buying online from Canada in 2002 to save on his heart and blood pressure medications. Specht said he takes as many as 12 pills a day. By importing his medicines from Canada, he slashed his costs for a three-month supply from $600 to $350.
Such price disparities are not unusual, economists said. Prices vary from country to country depending on economies and government rules. In the United States, drug companies are able to charge more because they do not face a single government buyer able to bargain down prices.
"Private insurers are weak in the U.S., which is what the pharmaceutical industry wants," said Uwe Reinhardt, an economics professor at Princeton University. "There are all of these insurers, each with very little market power. . . . That is the reason why the U.S. pays the highest prices."
Spokespeople for pharmaceutical companies said prices are higher in the United States in part because Americans are picking up a greater share of expensive research. The drug companies also questioned the safety of the drugs being imported from Canada.
"People assume Canadians look an awful lot like Americans," said Chris Viehbacher, president of GlaxoSmithKline's U.S. pharmaceutical operations. "Therefore, if Canada approves something, it must be the same. In fact, each government puts in different [safety] regulations."
In January, Glaxo, the world's second-largest pharmaceutical maker with revenue of $31.8 billion, announced that it would curtail shipments to Canadian wholesalers supplying the Internet pharmacies. Several other companies quickly followed suit. Unruffled, the Internet operators have turned to loose networks of pharmacies scattered across Canada to augment their supplies.
"It really hasn't had much effect," said Kris Thorkelson, owner of CanadaDrugs.com, a Winnipeg-based Internet pharmacy with annual sales of $100 million.
Andy Troszok, vice president of the Canadian International Pharmacy Association, a trade group, criticized the U.S. firms. "We account for less than one-half of 1 percent of their sales," he said. "So it isn't because of our size. Basically, I think we've embarrassed them and drawn attention to their huge profits."
The growing market for cheap Canadian drugs has also spawned U.S.-based brokers who help to arrange cross-border prescriptions. Brokers such as Cheryl Gaddie of Thief River Falls, Minn., help seniors fill out paperwork and compare prices online. They then steer their clients to Canadian pharmacies that pay the brokers for the business.
Gaddie's Canada HealthCare Discount Centre, located in the foyer of a large medical clinic, receives 10 percent of the sales she directs to Drake Pharmacy in Winnipeg. The business started out slowly but is now generating more than $70,000 in sales a month, she said. During a visit last February, several elderly customers braved sub-zero temperatures to place their orders.
"I'm not getting rich on this, but there is a steady demand," Gaddie said.
In a few years, the number of brokers has swelled to several hundred.
Earlier this year, the FDA sent warning letters to a number of brokers, saying that they were facilitating the illegal importation of prescription drugs. This month, the Justice Department sought to get an injunction to temporarily close Oklahoma-based Rx Depot, which operates 85 storefronts nationwide. The case is pending.
"They know they can't go after the senior citizens directly," said Carmen Catizone, executive director of the National Association of Boards of Pharmacy. "They feel these guys [brokers] are commercialized and nobody really cares if they put them out of business."
If drug companies continue to squeeze the supply to Canadian Internet pharmacies, Troszok said, Americans will turn to online pharmacies in other countries "where counterfeiting is huge and the regulatory systems are far less rigorous."
For the moment, Americans are turning to Canada for brand-name drugs, not cheaper generics.
At Thorkelson's CanadaDrugs.com., shelves of popular American brand drugs, including Lipitor, Fosamax, Vioxx and Nexium, fill the cavernous 9,000-square-foot space in an industrial park across the railroad tracks from downtown Winnipeg. The company does carry some generics, Thorkelson quickly points out, but Americans appear "to prefer brand names."
Thorkelson said demand is driven by multibillion-dollar advertising and marketing campaigns financed by U.S. drug companies. "It increases our sales. No question about it," he said.
He said he and his colleagues know they skirt U.S. law. "We're completely aware," he said. "We've been aware from when we started. From our perspective, it's legal because American authorities aren't enforcing the strict reading of FDA regulations."
Across the prairie, in the tiny farming community of Minnedosa, RxNorth.com, an online pharmacy with sales of more than $40 million annually, has transformed the local economy. The Web site went from selling Nicorette gum to a full menu of drugs, moving from a storefront into a warehouse. With about 200 employees, the company is now the largest employer in town.
"If you are unemployed in Minnedosa, it's because you choose to be," said Pat Graham, the former head of the Chamber of Commerce, who once worked for RxNorth.
Today, there are 60 Internet pharmacies spread across the province, employing upward of 1,500. "For a small jurisdiction, that's very significant," said Maryann Mihychuk, Manitoba's minister of Industry, Trade and Mines. "It's a very dynamic new niche . . . and I am proud to back it."
Not everyone is as enthusiastic.
In February 2001, the Ontario College of Pharmacists swooped down on Billy Shawn's Toronto office and confiscated computers and paperwork. Shawn was fined for technical violations of the law and later agreed to pay a $20,000 fine and donate $125,000 to the University of Toronto Pharmacy School.
Shawn rebuilt his business, offering discounts of as much as40 percent on Lipitor and other popular drugs. The wave of Americans soon returned.