Thursday, February 07, 2008

Fresh DEA News from Cardinal

Uh oh.

Cardinal Health (CAH) disclosed yesterday that the DEA is now focusing on a fourth Cardinal facility in Stafford, TX. No suspension yet, but the DEA is clearly crawling all over the company, as I predicted two months ago.

Cardinal also announced a number of new actions that suggest (to me) that they are now treating these issues seriously. Nonetheless, I wonder to what extent a corporation should take on monitoring and enforcement activities that are typically the responsibility of state Pharmacy Boards or Health Departments.


According to a 10-Q filed yesterday (available from Cardinal’s Investor page):
“[T]he DEA issued an Order to Show Cause, dated January 30, 2008, pertaining to the license to distribute controlled substances held by the Company’s Stafford, Texas distribution center (the “Stafford Order”). The Stafford Order did not suspend the facility’s license to distribute controlled substances, and no hearing date has been set.”

For non-lawyers, an Order to Show Cause is “is a type of court order that requires one or more of the parties to a case to justify, explain, or prove something to the court. Courts commonly use orders to show cause when the judge needs more information before deciding whether or not to issue an order requested by one of the parties.” (Source: Wikipedia)

So if I understand the legalese correctly, Cardinal has to convince the court *not* to suspend its license to distribute controlled substances from Stafford TX, as the DEA has apparently proposed. However, there is not yet a date for this hearing.

BTW, I don't mean to pick on Cardinal. As I pointed out on Tuesday, McKesson (MCK) may have similar issues and is apparently "negotiating a temporary restriction of its authority to distribute some drugs from a limited number of its distribution centers, in hopes of avoiding a general suspension of a controlled-substance distribution license." (per Cardinal Health: DEA Issues Order For Facility from Dow Jones.)


Cardinal certainly seems to be paying attention to these issues judging by the new activities listed in the 10-Q:

  • “Established a new centralized supply chain security and anti-diversion function accountable to executive management”

  • “Begun implementing technological enhancements to augment the Company’s controls against the diversion of controlled substances”

  • “Suspended the distribution of controlled substances to certain pharmacies based on the nature of activity in the pharmacies’ accounts”
Of course, this list will be familiar to anyone who has read the company’s settlement with the New York State Attorney General’s office in December 2006.

While I am glad to see Cardinal stepping up, I still question whether an unfair burden is being laid on a corporation that never asked to be a police force. Here are a few questions running through my mind:

  1. Are Cardinal’s new initiatives a tacit acknowledgment that the state pharmacy boards didn’t do their job in monitoring rogue pharmacies? Where is the accountability for the Pharmacy Boards in Washington, Florida, and New Jersey?

  2. How much responsibility should a wholesaler have for the behavior of its customers? (Check out the lively debate on this topic in the comments to my Dec. 12 Drug Channels post.)

  3. As I noted in Pedigree and Obscenity, the California’s Board of Pharmacy is woefully underfunded relative to its grand ambitions for 2009. Can we look forward to additional mandates requiring companies to provide quasi-government surveillance services on January 1, 2009?

So, what do you think? Can any of my readers shed some light on the apparently widening problems at Cardinal?


  1. "How much responsibility should a wholesaler have for the behavior of its customers?" Good question.

    Thirty years ago your primary wholesaler sent a rep into your pharmacy once a week. That guy (they were all men and they all wore neckties and suits or at least sport coats) knew what your store was doing and if he caught a whiff that something funny was going on, he passed the word up the ladder to the warehouse manager who would call his connection at the state board or division of drug control who would then make a visit and inspection. And if your CDS purchases exceeded some kind of base percentage, the wholesaler would make a call to the board and you'd get inspected. If you were running a clean store, you had nothing to worry about.

    Today, you might see a wholesaler rep in your store once a quarter and since they've all gone regional, the warehouse VP probably doesn't even know how to reach the state boards in any state but the one he's in.

    So if a pharmacy is doing $40K a month with a wholesale facility and 90% of that is CDS, but most of that is generic (generating higher profits) it's entirely possible the facility would rather not "rock the boat" and jeopardize the good numbers the pharmacy is generating for that facility.

    Of course, I may be totally off-base speculating about the motives of my hypothetical wholesaler. But retail pharmacists are expected to exercise diligence and caution about the prescriptions we dispense--why not hold the wholesalers to a smilar standard?

    Tom Connelly, RPh
    Sun Pharmacy
    Rising Sun, MD

  2. Tom,

    I see your point, but your example (90% CDS, lots of generics) represents a hypothetical, easy-to-spot situation. In practice, the large wholesalers have 10,000 or more active customer accounts placing millions of total orders per year. The challenge comes from sorting the customers and/or orders into three groups:
    1. Non-purchasers, i.e., no diversion
    2. Possible purchase for diversion
    3. Purchase for diversion (your example)

    While groups 1 & 3 might be easy to spot, there are probably many orders that will fall into a fuzzy middle area. Hence Cardinal’s discussion of software solutions to flag problems.

    While I agree a supplier should "exercise diligence and caution," I am not aware of formal rules or guidelines to define the *level* of diligence or caution, especially for orders in the fuzzy middle. Perhaps these issues will become clear if we find out exactly what actions (or non-actions) led the DEA to suspend Cardinal's licenses.


  3. Cardinal has been in trouble in the past for numerous situations and I am not a huge fan however I think this has become more of a witch hunt. There is no way a wholesale can determine what "every" customer is doing even if a customer is flagged by the wholesaler- it is impossible. I think the focus should be more on the physician who is writing the script to be filled.
    In addition, there are some true issues of pain management and if the physician and pharmacy check and fill, why should Cardinal be to blame? We should concentrate more on real issue which is physicians wrongfully writing phony scripts.

  4. too bad you don't know "The Rest of the Story"


  5. Ok, Jim, I'll bite: What is the "rest of the story?"

    Feel free to email me if you'd like to share something off-the-record.


  6. With all the divertion hoopla,perhaps it may behoove the DEA to put tracking devices on those hi-jacked tracker-trailers-one of which last month left unaccounted >20,000,000 hydrocodone bitartrate Tabs.


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