Cardinal Health, one of the “Big Three” of the drug wholesaling business, has settled New York’s investigation against it for $11M and agreed to reforms of its business practices. Cardinal is ranked 19th on the Fortune 500 list of America’s largest corporations.
The underlying problem dealt with the company’s purchase and sale of drugs out of the “secondary market,” instead of buying them directly from manufacturers. This gray market in drugs involved some 6,000+ wholesalers as of 2005 when New York’s investigation began, and before changes started to sweep through the industry. Many of those changes I had previously documented on my Counterfeit Drug Resource Page.
The existence of so many secondary wholesalers — who are licensed by a hodgepodge of regulations that vary from state to state — led some to buy and sell pharmaceuticals without knowing exactly where they had been and who had owned them in the past. This opened a gaping hole for counterfeit medications to leak into the legitimate drug supply system. The purchase of such mystery medicines was widely condemned and led to changes by major wholesalers in 2005.
Secondary market trading is not illegal on its face, but can create opportunities for the introduction of unreliable drugs, including counterfeits, into the marketplace. In recent years, there has been an increase in the number of cases of counterfeit drugs in the American supply chain. Secondary market trading also can create an opportunity for companies to divert drugs from their intended distribution channels. Diversion into the secondary market, often to take improper advantage of manufacturer discounts, can begin a series of trades from wholesaler to wholesaler that makes it difficult to trace the origin of a drug and impossible to ascertain its authenticity.
The investigation determined that Cardinal purchased drugs from certain alternate source vendors, despite risks associated with buying from those vendors, to take advantage of higher available profit margins. Cardinal also sold pharmaceuticals to certain customers even in the face of evidence that those customers may have been illegally diverting the drugs outside their intended channels of distribution.
A review of the AG’s findings, which does not seem to appear in newspaper accounts of this settlement, represents in my view a devastating indictment of the conduct of Cardinal Health, which appeared to act in a reckless disregard for the safety of consumers. This will be the subject of a follow-up post.
As per the AG’s office, Cardinal will pay $3 million to New York State, $7 million to a non-profit health research corporation called Health Research, and $1 million to the attorney general’s office to cover costs of the investigation. But wait… there’s much more…it appears it isn’t just about money but about forcing better business practices:
In addition to adopting the Wholesaler Safe Product Practices, Cardinal has agreed that in the regular course of its business it will:
— Buy pharmaceuticals directly from manufacturers and not on the secondary market from alternate source vendors;
— Sell pharmaceuticals only to wholesalers who have certified their compliance with the Wholesaler Safe Product Practices, and have agreed to allow audits of those certifications;
— Adopt “know your customer” provisions and monitor for customer diversion; and
— Hire an external auditor to conduct periodic reviews of its compliance with the settlement.
As I wrote on November 27th , I was one of the people the attorney general had dropped a subpoena on, for the records I had obtained and created in my own investigation regarding the counterfeit drugs taken by a Long Island teenager, Tim Fagan, after he had undergone an emergency liver transplant. It’s nice to see the investigation has paid dividends for New Yorkers, not just in financial recovery, but in a safer pharmaceutical supply chain.
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more secondary drug trading fallout
over a year ago drug wholesaler cardinal health announced it would stop trading drugs in the secondary market. such trading was a lucrative sideline for cardinal, offering the potential for much higher margins than the traditional …posted by David E. Williams of the Health business blog @ January 04, 2007 5:49 PM