When New York Attorney General Eliot Spitzer settled two days ago with wholesale drug giant Cardinal Health regarding its trading of drugs with the secondary market, he published what I think is a devastating indictment of the company and how it risked the lives of consumers across the country. Why did Cardinal do this? Fom the AG’s press release is this:

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. (emphasis added)

For those new to the story, this is my post from yesterday on the announcement. While the press release was covered in the newspapers, most (all?) overlooked the specific findings that the AG’s office made regarding Cardinal’s sins. What follows are some of those findings, which give the very distinct appearance to me that Cardinal was being deceptive and/or turning a blind eye to the problem of counterfeits at the time. While problems have now been rectified, it doesn’t excuse the conduct that occurred when it happened.

In reading the AG’s comments below, I noted that when Cardinal employees discuss the risk-benefit issues involved when dealing with the secondary market and suspect medications, they apparently refer to their own risk — as opposed to the risk of patients who may need to take the life saving medications that they are busy trading around.

7. One employee in 2002 wrote an e-mail discussing a newspaper article on a spate of recent counterfeit drug cases. The article quoted one commentator’s view that criminals are bright, rational people “doing the risk-benefit analysis,” and shifting their activities to diverting and counterfeiting prescription drugs. The Cardinal employee wrote, apparently referring to that observation regarding counterfeiters,, “The article mentioned the risk reward ratio of price to penalty when caught.” He concluded: “We obviously need to earn money in this area, but have to manage risk.”

…

9. At times, Cardinal purchased from sources despite indications that the vendors may have been unsuitable. For example, in January 2004, one employee examined the pedigrees that Cardinal was receiving, and noted suspicious sources in the chain of custody — in his words — firms “which could be bad.” The employee asked that a plan be put together to review those entities. A Cardinal compliance employee indicated that he had already verified that those entities were licensed as wholesalers. That verification was one appropriate step but insufficient. It does not appear that there was any further response to the request for review, nor that the suspect vendors were excluded. The Investigation has shown that some of the entities the employee identified were, as he suspected, engaging in diversion….

10. In March 2004, Cardinal realized that it possessed an anabolic steroid product that customers might perceive as high-risk, although in fact there was no specific evidence of any product integrity issues. It sought to avoid such customer concerns by transferring this product from its trading company, which was known for buying from [alternate source vendors], to its “divisions,” which customers perceived as selling pharmaceuticals purchased from manufacturers. A Cardinal employee sent an e-mail to the head of the Trading Company, noting a substantial inventory in “an anabolic steroid that is on the restricted list due to potential counterfeit. There is plenty of room to pass our inventory to the divisions. What are your thoughts on moving this product to the divisions?’ The reply e-mail instructed simply: “Go ahead and move it.”

11. Cardinal repeatedly sold pharmaceuticals to customers that it knew or should have known were diverting pharmaceuticals. Prior to March 2005, Cardinal made numerous sales of pharmaceuticals to a Nevada company which purported to be a “closed-door” pharmacy that served only nursing homes. In a routine pattern, the Nevada company placed two orders at the same time. One was for products likely to be needed by its stated patient population of nursing home residents, typically in quantities of ones or twos, as would be expected for its needs. The other was for much higher quantities and included products unlikely to be needed by the nursing home residents. Despite this pattern, Cardinal continued to fill the company’s dual orders as described above. Investigation has shown that the company dispensed the products on the small-quantity orders to nursing home residents, and it transferred the products on the large-quantity orders to an affiliated wholesaler for resale on the Secondary Market….

12. Similarly, starting in January 2003, Cardinal was alerted that its customers in the Carrington network of closed-door pharmacies were diverting drugs. One warning came from a Cardinal sales representative who reported visiting the Carrington pharmacies and finding the doors locked, an “Administrative Assistant” on site but no pharmacist, about thirty large boxes awaiting pickup by UPS and delivery to a wholesaler in Kentucky, and purchase orders from a Florida wholesaler with directions to ship to the Kentucky wholesaler. One of the Administrative Assistants explained in detail the process by which the closed-door pharmacy received drugs and sold them to the wholesalers. Cardinal took steps to determine whether the Carrington pharmacies were engaged in diversion, but continued its sales, though at a reduced level, until September 2003. The steps taken by Cardinal, such as seeking assurances from Carrington executives and accepting those assurances, were, in light of other evidence known to Cardinal, inadequate. In December 2003, Cardinal finally severed its business relationship with Carrington after learning from law enforcement that Carrington was under criminal investigation…

13. Cardinal also sold pharmaceuticals to wholesalers who were at the same time on Cardinal’s excluded vendor list — in other words, wholesalers that Cardinal itself deemed sufficiently high-risk that it adopted the policy of never buying product that had passed through their hands. The Trading Company president noted as to one wholesaler in June 2003 that “several things that have happened in the past are making us feel we need to very closely examine our buying” from the wholesaler, while simultaneously noting that “we are fine” with selling to that same wholesaler. In another example from December 2003, the president reported that “we now have been asked by compliance” to add a certain wholesaler to the excluded vendor list, but “We can still sell to them.”

14. Cardinal made “third party” returns to manufacturers on behalf of other wholesalers regardless of where the wholesaler had purchased the product. As a former Cardinal employee testified: “[I]t wasn‘t worth our while to research whether we had [originally] sold it to the alternate source or to this third party or not.” Such practices can support the Diversion Market by giving unscrupulous customers an incentive to divert drugs and then “return” them for full credit….

One can only hope that the folks responsible have long since been fired. If not, then I think top management must have been complicit in the conduct.

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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