The Drug Channels blog delivers timely analysis and provocative opinions on pharmaceutical economics and the drug distribution system. It is written by Adam J. Fein, Ph.D., one of the country's foremost experts on pharmaceutical economics and channel strategy. Learn more...

Wednesday, February 27, 2008

Cardinal's Customer Problems Deepen

As I suspected, Cardinal Health’s (CAH) new role as supply chain enforcer is angering some of the customers who have been tagged as “diverters.”

According to Cardinal Health's Compliance Efforts Rile Some Customers, two pharmacies have so far sued Cardinal over the way in which the company is identifying purported diverters. (Alternate link from the Wall Street Journal site: Cardinal Health's Compliance Efforts Rile Some Customers.) Per the article:

“Community Drugstore, a specialty pharmacy focusing largely on pain management, said in a lawsuit filed in Delaware that Cardinal improperly stopped supply without any evidence that the store had engaged in wrongdoing. A federal judge in December ordered Cardinal to restore Community Drugstore as a customer.”

“In the other lawsuit, an Oklahoma federal judge in December ordered Cardinal to resume supplying controlled substances to Ken's Discount Pharmacy, a longtime Norman, Okla., pharmacy that had said it would go out of business in days without some action. The court said it appeared that Cardinal had stopped supplying the pharmacy and had placed the drugstore on an 'exclusion' list as an arbitrary reaction to compliance issues between Cardinal and the DEA. The plaintiff said the pharmacy, located across the street from a major medical facility, had suffered a hydrocodone shortfall after Cardinal limited its supply.”

You can read Cardinal’s PR spin in the article, but these stories echo the experience of Evergreen Professional Center Pharmacy that I describe in One Pharmacist’s View of Cardinal’s DEA Issues. I also want to give a shout out to regular reader PBMGuru, who was the first to predict legal action in a comment on Cardinal Sins (Again) from last November.

BTW, Dinah Brin of Dow Jones is the only national reporter who has been following Cardinal’s deepening problems with the DEA. Dinah is apparently a fan of my humble ol’ Drug Channels blog because she included a quote from yesterday’s post in her story. Thanks, Dinah!

Tuesday, February 26, 2008

Cardinal's Latest DEA Deal

Time for another installment in the continuing adventures of Cardinal Health and the Kingdom of the Crystal Meth, now showing in Stafford, TX!

Last Friday, Cardinal Health (CAH) told suppliers that it would discontinue all controlled substance and List 1 Chemical shipments from its Stafford distribution center for retail independent, Medicine Shoppe and Medicap pharmacies only. The move was announced to retail independent customers yesterday. Read Cardinal's letter online here.

As regular Drug Channels readers know, Cardinal had its license to distribute controlled substances suspended by the DEA in Washington, Florida, and New Jersey. While there’s no official DEA suspension, Cardinal has been negotiating with the DEA over the Company’s Stafford, TX distribution center (as I discuss in Fresh DEA News from Cardinal.)

The interesting twist -- and the likely reason that the facility's license was not suspended -- is that Cardinal will be discontinuing shipments only to the retail independent pharmacies from Stafford. The “legitimate controlled substance needs” (their words) of these customers will be serviced from another Texas facility. However, per Cardinal's letter: “We will continue to provide controlled and non-controlled products to acute care, regional chain and national chain customers out of our Stafford (Houston) distribution center.”

Yikes! I can't imagine that this statement will help Cardinal to regain or build market share among independents. Let’s hope that Cardinal’s “contingency plans” have progressed since their Washington license was suspended. (See One Pharmacist’s View of Cardinal’s DEA Issues.)

So what does this move signal about supply chain security? Are retail independent pharmacies now considered to be the weak link in guarding our supply chain against counterfeits and diversion—a demand-side security problem that just won’t go away?

Monday, February 25, 2008

*NEW* CA Pedigree Legislation

Today’s lesson: If at first you don’t succeed, change the rules!

Two bills were introduced last week that would modify California’s pedigree legislation.

Just to be crystal clear: Don’t stop planning for January 1, 2009. Obviously, there can be no guarantee that either the proposed legislation will pass or that the Board of Pharmacy will vote for a delay to 2011. Nevertheless, the likelihood of a delay or phased implementation just went up again.

I'M JUST A BILL

You can read the text of the proposed bills at these links:

SB 1307 (introduced by CA State Senator Ridley-Thomas)

SB 1270 (introduced by CA State Senator Cedillo)

SB1270 is more interesting of the two because it potentially changes the January 1, 2009, implementation date. The text looks like a placeholder to me:

“This bill would instead impose the pedigree requirement and the prohibition against selling, trading, transferring, or acquiring a dangerous drug without a pedigree on an unspecified date, authorize the board to extend the compliance date to an unspecified date in those specified circumstances, and make conforming changes.” (emphasis added)

Right now, the CA Board of Pharmacy only has the ability to delay implementation of e-pedigree requirements until 2011 if the board determines that “manufacturers or wholesalers require additional time to implement electronic technology to track the distribution of drugs within the state.” (See CA Pedigree: Going to '11?) Unfortunately, the Board’s decision making process regarding the 2009 deadline seems dysfunctional and unnecessarily opaque, as I describe in Pedigree and Obscenity.

I’ve been told that additional legislation may be on the way, especially with regard to phased implementation such as a risk-based approach to serialization. You can read more about California’s legislative process here.

AND SPEAKING OF SERIALIZATION...

I will be attending SecurePharma2008 on Tuesday morning. If you'll be there, please stop by and see me at the Secure Symbology booth at 10:30 AM on Tuesday. I’m always looking for good story ideas and tips for Drug Channels.

I'll be at the booth with other members of Secure Symbology’s Advisory Board of Directors. But please don’t call us booth babes!

Friday, February 22, 2008

One Pharmacist’s View of Cardinal’s DEA Issues

Drug Topics just published a fascinating Letter to the Editor from Richard Molitor, Manager of the hospital-owned Evergreen Professional Center Pharmacy in Kirkland, WA. His pharmacy was directly affected when the DEA suspended Cardinal Health’s (CAH) license to distribute controlled substances. I contacted Richard directly and he was kind enough to provide me with some additional details (as well as the photo).

In Fresh DEA News from Cardinal, I asked whether an unfair burden is being laid on a corporation that never asked to be a police force. In my opinion, the experience of Evergreen Professional Center Pharmacy illustrates the risks to pharmacies and patients when wholesalers are (explicitly or implicitly) asked to become enforcers without normal due process protections.

THE VOICE OF THE CUSTOMER

You can read Richard’s complete Letter to the Editor online, but here are the key quotes:

  • “The week prior to the official DEA shutdown, Cardinal sales reps contacted their accounts (including ours), advising them to increase their on-shelf inventory of controlled substances in order to cope with the pending logistical nightmare.”

  • “Cardinal cancelled the ability of several West Coast accounts (including our outpatient pharmacy department) to order controlled substances. This jeopardized our pharmacy's ability to support our hospital's discharging surgical, inpatient, hospice, and oncology patients.”

  • “Notification from Cardinal came in the form of a fax sent by the corporate director of quality and regulatory affairs late on a Monday (after the sender, based in Ohio, was no longer available for contact). The fax stated that our account was cancelled in part due to ‘recent excessive quantities ordered’ as well as ‘a risk that diversion will occur if we continue to fill controlled substance orders.’”
OK, we can all see the irony in asking customers to order in advance of the suspension and then penalizing those same customers for actually following their sales rep’s advice! Like many large companies, it sounds like there was poor communication between the head office and the field.

DO (NOT) PROCESS

Apparently, the DEA now considers distributors and wholesalers to be responsible for ensuring that a pharmacy is only dispensing prescriptions issued for a legitimate medical purpose by an individual practitioner acting in the usual course of professional practice.

In a private email to me, Richard told me that Cardinal “didn't seem too willing to allow due process for their customers. Instead, based upon some ill-obtained assessment of 'risk,' they decided to shut us off as well as to restrict (via rationing, once I'd screamed loud enough about being cut off) further ordering (which nearly required our 250-bed hospital to shut down since the Inpatient Pharmacy couldn't get the injectable meds they routinely use).”

While a wholesaler or pharmacist should always “exercise diligence and caution” (as Tom Connelly wrote in his comment last week), I am not aware of formal rules or guidelines to define the precise level of diligence or caution, especially when there is uncertainty about whether an ordering pattern might represent purchases for diversion.

It’s especially tricky for the big 3 wholesalers – AmerisourceBergen (ABC), Cardinal Health (CAH), and McKesson (MCK) – because each company serves 20,000 or more active customer accounts placing millions of total orders per year. Most companies will (rationally) become very risk-averse about any questionable situations when faced with uncertainty.

I’m no lawyer (see disclaimer below), but I’m fairly certain that companies do not have to abide by the restraints and procedures of due process as enshrined in our Constitution. Therefore, the risks to pharmacies and patients will increase if wholesalers are (explicitly or implicitly) asked to become judge, jury, and executioner on behalf of the DEA.

Any of my pharmacist readers care to weigh in on this topic?

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P.S. BTW, Richard operates his own webpage with links to pharmacy-related materials. True Molitor fans can also see Richard’s vacation photos, proving once and for all that pharmacists travel the globe, too.

Tuesday, February 19, 2008

The Price Might Be Right

I just read an interesting new report about drug price comparison web sites run by 10 U.S. states. But the wide variations in pharmacy prices for a common, high volume generic make me wonder about the efficiency of the pharmacy market and the value of apparent transparency.

10 STATES, MANY PROBLEMS

The Center for Studying Health System Change just released a study called State Prescription Drug Price Web Sites: How Useful to Consumers? I’m not familiar with the organization, but I found the report to be very useful.

Consumers in 10 states can compare the price of selected prescription drugs at different pharmacies. These sites provide the retail pharmacy price, which is usually measured as the “usual and customary price” charged to Medicaid. In theory, these prices could help uninsured or underinsured consumers shop around for lower prices.

Unfortunately, the data provided by these sites are apparently not always usable. The report documents some predictable problems, including:

  • Infrequent and incomplete updates of price data
  • Few reporting pharmacies
  • Small number of drugs reported
  • Inconsistent use of modern web search tools
SHOPPING FOR SIMVASTATIN

Florida has a one of the better sites and is highlighted in the new report.

Just for fun (!), I compared the pharmacy prices listed on the Florida site (http://www.myfloridarx.com/) for simvastatin (generic version of Zocor) 40 MG tablet. I searched pharmacies in Hialeah, FL, which is an urban market included in the new report.

Prescription price data was available for 40 out of 70 pharmacies:
Average = $115.54
Range: $9.70 to $221.43

Since I’m a wild and crazy guy, I also dug up Florida’s Maximum Allowable Cost (MAC) data, which tells me the maximum ingredient cost reimbursement to a retail pharmacy for filling a Medicaid script. MAC data for Florida’s Medicaid program are also available online here, although not in a consumer friendly format. (I love the Internet!)

There are 40 NDCs on the Florida MAC list for simvastation 40 mg. Price per tablet is $1.8995 per tablet, so a 30-day script is $56.99. Florida’s Medicaid dispensing fee was $4.23, making total pharmacy reimbursement $61.22 for this script.

Now here is something interesting: the cash price at three chains is *below* the MAC reimbursement from Medicaid. The Hialeah list included 8 Walgreens (WAG) pharmacies ($59.99), 3 CVS pharmacies ($54.59), and 1 Wal-Mart (WMT) pharmacy ($54.54). In other words, Medicaid pays more than a cash pay customer.

Correction (2/20/08): Medicaid does not pay more than a cash customer at a given pharmacy because the pharmacy can not be reimbursed by Medicaid for more than its Usual & Customary charge. However, an uninsured cash-pay customer buying at Walgreens would pay less than Medicaid would pay to a pharmacy with a U&C above the Medicaid reimbursement rate. Thanks to Marc for the clarification. See the comments below for more details.

THE MYTH OF TRANSPARENCY

While Florida’s site does a reasonable (but incomplete) job in comparing retail prices, a payer or consumer would still not have a clue about the allocation of revenue and profits associated with a simvastatin prescription.

The retail pharmacy price from an individual script gets divided between the manufacturer, the wholesaler, the pharmacy, a health plan, and/or the third-party managers who oversee the whole process. It’s almost impossible to know how various rebates, discounts, and reimbursement structures have influenced the drug’s cost to an individual pharmacy. Publication of Average Manufacturer Price (AMP) data, which would provide one data point for actual acquisition cost, is off the table for now. (Granted, this mystery and complexity allows people like me to earn a living by understanding the inner workings of this system.)

Healthy competition is one factor that can allow a free market to provide the benefits of transparency. For example, consumer involvement in Medicare Part D is lowering costs and changing behavior. (See Part D and Generics.) However, the wide and apparently persistent variations in pharmacy prices for a common, high volume generic make me wonder whether consumers are getting the true benefits of market competition among pharmacies.

Wednesday, February 13, 2008

The Dark Side of Pharmacy Efficiency

Please read yesterday’s USA Today article Speed, High Volume Can Trigger Mistakes.

As I note in Pharmacy Profits & Part D, current reimbursement models are benefiting higher volume, more efficient pharmacies. This article asks: Will efficiency come at an unacceptable price?

The article links prescription errors at the two largest retail chains -- CVS Caremark (CVS) and Walgreens (WAG) -- to factors such as pharmacist workload, volume incentives for pharmacists, and a corporate emphasis on throughput. As background, you may want to look at my comparison from last July of average Weekly Prescriptions Per Pharmacy.

Why do I think this is a must-read article for all readers of Drug Channels?

  • It highlights the real human consequences underlying any breakdowns (preventable or not) in our system of pharmaceutical distribution.

  • The article gives time to both critics and defenders of high-volume pharmacy.

  • You may be motivated to examine your own prescriptions before swallowing a pill. (Walgreens actually has a very useful online Drug Information tool with pictures of specific pills.)

  • There is a very cool interactive graphic of a prescription’s path through the pharmacy.

Frustrated Pharmacists

I also encourage you to browse through the 250+ comments. Yes, an inevitable number of comments are either: (a) personal stories about dispensing errors, or (b) rants against corporations, the US healthcare system, pharmaceutical manufacturers, etc.

However, I also found many thought-provoking and troubling comments from pharmacists, most of whom feel frustrated by the current system. Here are some excerpts:

I worked as a retail pharmacist for a period of time and can tell you that when somebody drops off a prescription they always have two questions: How much is this going to cost and how long is it going to take? Most throw in real relevant questions like "Where is the motor oil and is it the motor oil that was in the sale flyer last week?"

Stories like this are difficult for me to read. I am very proud of my profession, and have been for the over 20 years I have practiced pharmacy. Yes, we do make mistakes. I have made mistakes myself. To those who seem to indicate that pharmacists do not care, you have no idea what you are talking about. Every mistake I have made has caused me anguish. Any mistake I make is one too many, but unfortunately I have not been able to be perfect. If you think a $500 fine would clear my conscience, you could not be further from the truth.

One of my biggest concerns as a pharmacist is trying to properly council a patient on their medication as they talk on their cell phone. I try to wait until they are done talking, but then some of them get upset that I am making them wait. Would you talk on your cell phone in your doctor's office as he or she examined you? I would not. I am not saying that this occurrence absolves the pharmacist from properly counciling a patient, just that the patient also has the responsibility to listen.

I am a pharmacist and I am sick of the public treating their local pharmacy like a fast food chain. They expect a prescription in minutes and expect perfection. People don't understand that these medications are DRUGS, with side effects. I agree that the profession does need a makeover and additional staffing. I have a Doctor of Pharmacy degree but I don't get enough time to actually talk to patients about their medication because I'm busy checking over 500 scripts a day.

I was constantly pressured into filling prescriptions faster. The statements from the drug executives about the pharmacist exercising "professional judgment" are a joke. These companies don't care about anything but the bottom line. I was not treated as a professional; I was treated like a machine that churned out prescriptions. The stress was unbearable. I constantly worried that I was going to kill somebody. The workload was impossible and the help was insufficient.

We expect our prescriptions to be delivered to us like fast food, handed to us in fifteen minutes or less out of a drive through window. I am a pharmacist and routinely face customers who become hostile when told that it may take half an hour or 45 minutes to fill their prescriptions. Everyone thinks that they are the only person when needs medicine and that the pharmacy staff should just work faster to help them out.

You can also read the perspectives of two pharmacist bloggers here and here.

Monday, February 11, 2008

Big WAC Attack

As regular readers know, I have boldly (foolishly?) predicted that "list price" pharmacy reimbursement models such as Wholesale Acquisition Cost (WAC) are unlikely to replace the long-maligned Average Wholesale Price (AWP) list price benchmark. Many people, including yours truly and the CFO of Medco Health Solutions (MHS), expected Average Manufacturer Price (AMP) to emerge as a new retail reimbursement benchmark rather than WAC.

While I may still be proven correct, events over the past few months have changed the near-term dynamic. The publication of AMP is on hold for now, while AWP may be getting a reprieve. And last week, the Department of Defense gave a big boost to WAC as a pricing benchmark for pharmacy reimbursement, breathing new life into this alternative list price.

AWP: NOT DEAD YET

Before turning to the latest WAC news, let's catch up on the fate of AWP.

As you may recall, Judge Patti B. Saris issued an order granting preliminary approval to the First Databank (FDB) settlement last June. There are two important elements of the settlement with regard to the publication of AWP:

  • The AWP-to-WAC markup would reduced to 1.20 (if an NDC’s ratio was higher)
  • FDB would stop publishing AWP no more than 2 years after the final court order
However, final approval of the settlement was subject to a fairness hearing. As I mentioned last month in Pharmacy Profits & PBM Contracts, a number of pharmacy associations objected to the proposed class settlement, including the Pharmaceutical Care Management Association (PCMA), the National Community Pharmacists Association (NCPA), the National Association of Chain Drug Stores (NACDS) and the Food Marketing Institute (FMI).

Guess what? Judge Saris rejected the settlement on January 22 and requested that the parties come back with a new settlement plan. Apparently, Judge Saris is also reluctant to force First Databank or Medi-Span to stop publishing AWP.

Another legal victory for retail pharmacy – you can see NACDS dance in the end-zone in this press release about the proposed settlement.

HOW ABOUT WAC?

Wholesale Acquisition Cost (WAC) has been touted as a replacement for AWP. WAC is the manufacturer's list price to drug to wholesalers or direct purchasers, excluding prompt pay or other discounts. (See Section 1847A(c)(6) of the Social Security Act.)

Nine states currently incorporate WAC into ingredient cost reimbursement formulas for retail Medicaid prescriptions. In addition, NACDS proposed WAC-based reimbursement for brand drugs in June 2005 Congressional testimony, a position that they reiterated in a February 2007 comments about AMP to CMS.

Even if the original settlement had gone through, WAC would still have been available, as indicated on FDB’s web site: “First DataBank will continue to publish all other available drug pricing information, including WAC, Direct Price, and suggested wholesale price, as well as our clinical drug information.”

TRICARE LIKES WAC

In case you don’t know, TRICARE provides a pharmacy benefit to all eligible Uniformed Services members called TRICARE Pharmacy Program Services (or TPharm to its friends). Eligible beneficiaries may fill prescription medications at military treatment facility (MTF) pharmacies; through the TRICARE Mail Order Pharmacy (TMOP); at TRICARE retail network pharmacies (TRRx); and at non network pharmacies. Express Scripts (ESRX) currently has both the retail pharmacy and mail order contracts.

On Tuesday, the Department of Defense issued a consolidated (TMOP & TRRx) Request for Proposal (RFP) for TPharm. You can savor the RFP for yourself by visiting the homepage for Solicitation No. H94002-07-R-0004. (Hey, my lucky number!)

I am quite intrigued to see that WAC is the pricing benchmark.

For example, the “Total Expected Government Cost for Reimbursement of Retail Network Pharmacy Costs” (or TEGCFRORNPC) is computed using WAC (minus a discount from WAC and plus a dispensing fee). The Government also provided average WAC data for non-specialty brand name, non-specialty generic, specialty brand and specialty generic prescriptions under TPharm. (See Section L Attachment 6.)

While the DoD validates WAC for now, I still expect computed (non-list) benchmarks to become the norm for retail pharmacy. In the meantime, I will take my own advice about forecasting: Give an event or a date, but never both.

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P.S. Check out the new Health Wonk Review, a collection of blog posts about health care and the pharma industry. My recent post about Wal-Mart is included.

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.

CARDINAL DIVERSION UPDATE

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.)

WHOLESALERS AS ENFORCERS?

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?

Tuesday, February 05, 2008

New Signs of Rising Compliance Costs

Over the past few weeks, pharmaceutical wholesalers and healthcare products distributors have been reporting quarterly financial results for Q4 of 2007. At least three companies (so far) have reported costs of complying with supply chain security regulations that had a material impact on earnings per share.

As I see it, these examples are leading indicators for a troubling trend. No agency is taking a holistic, national view of the system or working to create an efficient, effective regulatory regime.
Instead, various agencies (Federal and State) are establishing diverse new reporting and regulatory requirements for pharmaceuticals.

Hopefully, all of these conflicting systems will make the pharmaceutical supply chain safer. In the meantime, manufacturers, wholesalers, and pharmacies are being forced to operate in a complex and mercurial enforcement environment, which could raise costs far beyond any purported safety benefits.

THE COSTS OF SAFETY

Today, it’s a few wholesalers under the microscope. Tomorrow, it could be the rest of us. So consider these examples to be potential early warning signs.

#1) The DEA suspended Cardinal Health’s (CAH) license to distribute controlled substances at facilities in Washington, Florida, and New Jersey despite the company’s December 2006 agreement to monitor pharmacies more carefully.

In last week’s release, Cardinal disclosed that efforts to fix the problems “may cost more than $30 million.” President and CEO Kerry Clark stated on the earnings conference call that “more than half” of the $30 million impact are expenses to control diversion, so I presume that the balance is a combination of fines, lost business from selling to diverters, and the “distraction” caused to the organization.

#2) McKesson (MCK) apparently has similar issues, although the DEA has not suspended any licenses as far as I know. On McKesson’s conference call last Friday, Chairman, President, and CEO John Hammergren disclosed a one-time non-tax deductible legal reserve related to diversion, stating:
“We are in discussions with the Drug Enforcement Administration and the U.S Attorney Offices to resolve claims around certain customer orders for selected controlled substances. We have been implementing improvements to our comprehensive controls and reporting procedures to avoid future claims of this type. And we've recorded a legal reserve of $13 million during the quarter within our Distribution Solutions segment and believe this reserve is adequate for the claims.”

#3) PSS World Medical Inc. (PSSI), a large med-surgical product distributors based in Florida, announced additional costs for pedigree in its fiscal third quarter release. The company has now “resolved outstanding issues with the Florida Department of Health regarding compliance with new state pharmaceutical pedigree regulations.”

From April through December of 2007, PSS incurred total costs of $6.2 million “associated with pedigree law compliance and settlement with the Florida Department of Health.” (I discussed PSS initial disclosure last June in Pedigree and Profits.) On a conference call, the company noted that it spent $800K in the fourth calendar quarter to ship product to its Florida customers from out of state locations.

WHAT ME, WORRY?

Each of these situations was triggered by the specific behavior of a single company. Yet I see a few reasons for manufacturers, wholesalers, and pharmacies to keep a close eye on these developments.

I worry that the California Board of Pharmacy will not provide consistent regulatory and compliance guidance. January’s enforcement committee meeting did not inspire confidence as I note in Pedigree and Obscenity. Despite their meager budget, the BoP could levy plenty of “gotcha” fines on manufacturers and wholesalers. Something makes me think that they’ll continue to give pharmacies a free pass…

Since today is Super Tuesday, let’s also not forget that all three Presidential candidates from the Senate (Clinton, McCain, and Obama) are co-sponsors of the Senate’s importation bill (Pharmaceutical Market Access and Drug Safety Act of 2007 S.242). The bill allows importation by wholesalers, pharmacies, and individuals -- subject to even more government requirements, some of which would conflict or undermine with the California pedigree system.

I won’t rehash the arguments against this bill -- you can scan through my posts in the Importation category at your leisure or just read my comments about Senator McCain’s viewpoints in Crazy Talk from John McCain. But consider the fact that the proposed importation bill explicitly limits the way a manufacturer can structure its distribution agreements and may force a pharmaceutical manufacturer to do business with secondary wholesalers that are known diverters.

My bottom line: multiple agencies are chasing the metaphorical floating Coke bottle of supply chain security. Heaven help us if a Charlie Brown gets his hands on it.

P.S. I was rooting for Underdog.