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Canada pharmacy charged in $78M drug export scheme

Is this a prescription for ending international online sales of medication to American buyers or is it just a placebo?

A newly unsealed federal indictment charges a major Canadian online pharmacy and a number of other related entities and people, including an American doctor, with conspiring to allegedly smuggle mislabeled and unapproved prescription drugs into the United States.

Pharmaceutical drugs
Scott Tysick | Getty Images

The indictment's highlights include allegations that some of the drugs sold to doctors by CanadaDrugs.com—ones used to treat cancer—were counterfeit, and that $78 million worth of medication was shipped to the U.S. as part of the scheme. In some cases, prosecutors claim, cancer drugs that were meant to be kept cold were not, and CanadaDrugs tried to cover up that fact.

But only one of the people charged in connection with the case, Ram Kamath of Illinois, has actually been arrested so far. Kamath, who is charged with a single count of conspiracy to smuggle goods into the U.S. was freed without bond, and recently was allowed to take a cruise to Alaska.

The allegations against Kamath are significantly less serious than the ones made against other defendants, and he faces the least possible maximum sentence, of five years in prison. He is accused primarily of agreeing to store temporarily a small amount of drugs in his refrigerator on behalf of Canada Drugs after the company told him they were recalling that shipment.

"He's pleaded not guilty and we're going to trial," said Kamath's defense lawyer, Michael Ettinger. "He's innocent."

Ettinger called Kamath, who is due to be arraigned in Montana next week, a "hard-working, honest guy." He noted that Kamath had helped design a planned drug importation program for the state of Illinois under then-Gov. Rod Blagojevich in 2004.

The other 13 people and companies charged are outside the U.S. It's not clear when, or even if, they will be extradited to face the felony charges that include smuggling, conspiracy and money laundering in federal court in Montana.

Also, Canada Drugs and its executives were not charged with selling prescription medication to individuals for personal use in the U.S., a practice the company continues to this day, and which advocates say help get millions of sick people much-needed drugs at prices that are much less than they would pay at an American pharmacy.

It is not clear that the prosecution will put a dent in such online retail sales by Canada Drugs, or any other pharmacy that exports prescription drugs to the U.S, even though it is technically illegal for Americans to import drugs from international pharmacies.

An American lawyer for Canada Drugs did not return a request for comment.

The U.S. Food and Drug Administration, which is playing a key role in the prosecution, declined to comment. A spokeswoman for federal prosecutors in Montana did not have an immediate comment when contacted by CNBC.

Critics of international online pharmacies are hailing the prosecution as a step in the right direction of protecting customers. But the company where Kamath worked as a consultant, PharmacyChecker.com, which verifies the legitimacy of online pharmacies, argues that the case is being used "to discredit safe personal drug importation."

The case comes as drug prices rose by an average of nearly 11 percent last year, well outpacing the rate of overall health-care inflation. A number of surveys have found that millions of Americans have difficulty affording the out-of-pocket charges for their medication, even if they have insurance.

According to the indictment unsealed in Montana, CanadaDrugs.com, its executives and related companies from 2009 through March 12 conspired to smuggle in medication to the U.S., which included "unapproved new drugs and misbranded prescription drugs."

The indictment charges that in 2011, Canada Drugs purchased what turned out to be counterfeit versions of the cancer drugs Altuzan and Avastin, and sold the drugs to U.S. customers.

In December 2011, after Canada Drugs allegedly learned that some of the Avastin it had purchased and shipped to the U.S. was possibly counterfeit, it moved to recall the drugs. The head of a Canada Drugs subsidiary then allegedly asked Kamath if he could store some of the Avastin in his house for a period of time, and "Kamath agreed," according to the indictment.

Prosecutors claim that Canada Drugs, after learning of the "serious breach of its supply chain" and that it might have distributed counterfeit Avastin, "made no attempt to notify the FDA or other authorities."

The indictment also alleges that "the Internet pharmacy industry funneled benefits to Kamath through the inspections he conducted" for PharmacyChecker.com, and that "in exchange, Kamath would help provide them with the veneer of legitimacy that comes with having been inspected by an 'independent' party."

The Alliance for Safe Online Pharmacies seized on the unsealing of the indictment, and called out PharmacyChecker.com even though the company is not charged with any wrongdoing.

"For years, millions of patients and physicians have relied upon PharmacyChecker.com and CanadaDrugs.com believing they are getting genuine drugs from a real Canadian pharmacy," said ASOP founder and executive director Libby Baney. "The [Justice Department] indictment evidences that these entities have been touting myths, giving U.S. physicians and consumers a false—and consequently dangerous—sense of confidence."

Baney said that "ASOP is excited about this, that this case is being brought."

"We're pleased to see that the government is focused on this public health threat," she said. "You don't have the ability to determine the quality or safety of these medications."

When CNBC asked why she thought the federal government was not prosecuting CanadaDrugs for direct sales to individuals with a prescription for their personal use, Baney said, "That's a really good question, I don't know the ins and outs of the case." She noted that such sales are just as illegal as the ones alleged in the pending indictment.

"I don't have any insight as to why the case is being brought this way," Baney said.

Gabriel Levitt, executive vice president of PharmacyChecker.com, pointed to a blog post by the company that said, "We are of course dismayed by the charges" against Dr. Kamath, "but we are confident that in the end Dr. Kamath will be exonerated."

Levitt, when asked about the indictment's claim the Kamath received "benefits" from the pharmacy industry, said "we charge fees for our verification program to cover cost," which he said was normal for many private credentialing companies.

"I believe the government is using highly misleading language to describe something that is very commonplace," he said.

In its blog, PharmacyChecker said, "You may be asking the same question we have been asking ourselves: If Dr. Kamath was not involved in the sale of Avastin by CanadaDrugs, nor in any aspect of CanadaDrugs' pharmaceutical sales, why was he included in this sweeping indictment? Does this reflect an attempt by someone in the FDA to punish Dr. Kamath for his prominent role in the development of safe personal drug importation. Is this simply the product of an overzealous FDA doing the bidding of the pharmaceutical industry?"

The blog also said that "years of verification by PharmacyChecker, and peer-reviewed empirical studies confirming the strength of our program, coupled with extensive use by Americans, have demonstrated that CanadaDrugs.com is a safe international pharmacy for personal drug importation."

Levitt said also cited a column he had written for TheHill.com

In that article, he wrote, "after 15 years of online pharmacy purchases, not a single American has been reported killed by a medication purchased over the Internet from an international online pharmacy that requires a valid prescription and does not sell controlled drugs. We're talking about Internet pharmacy companies that work with licensed pharmacies in many countriesnot just Canada."