Tuesday, August 23, 2011

Drug Shortages and Gray Market Profiteering

Premier Healthcare Alliance just released Buyer beware: Drug shortages and the gray market, a fascinating but disheartening report on the secondary market for drugs facing shortage.

The report gathers innovative data about the financial underbelly of the gray market. The results aren’t pretty, with mark-ups on key generic oncology and critical care drugs averaging 650%.

It’s really depressing to see the illegitimate secondary market thriving. Someone out there must be buying drugs with questionable heritages and sky-high price tags. Otherwise, the gray market would vanish.

Fans of irony will appreciate the FDA’s July 14 decision to back away from full pedigree information due in part to a lawsuit by secondary wholesalers. Really?!?

Read on for some reflections on this crisis.


The drug shortage situation has recently hit the national media, including USA Today, CBS Evening News, The New York Times, and many others.

The Premier report makes an important contribution by adding new facts to the debate. (By now, you know how I feel about data.)

Premier gathered sales offers made to its acute-care members over a two-week period earlier this year. They collected 1,745 examples of gray market offers sent to 42 acute care hospitals. All drugs offered were manufacturer back-ordered or unavailable drugs. They were able to identify the prices and NDCs for 310 different generic drugs with a Premier contract price.

Here are the five highest mark-ups for manufacturer back-ordered drugs:
  • Labetalol (cardiology): 4,533%
  • Cytarabine (oncology): 3,980%
  • Dexamethasone 4mg inj. (oncology and rheumatology): 3,857%
  • Leucovorin (oncology): 3,170%
  • Propofol (critical care sedation and surgery): 3,161%
Ouch. I highlighted a related anecdote in 2009’s Gray Market: I'm Not Dead Yet, but the Premier data is a comprehensive look at mark-ups.


There were 18 secondary vendors, although a few vendors accounted for most of the volume. (See the table on page 3.) Premier turned that information over to “the government.”

Who has jurisdiction here. FBI? DEA? FDA? CSI:Miami?

It’s scarily plausible that some secondary vendors are technically playing by the rules given the crazy patchwork of laws and regulations across the country. Check out HDMA’s ever-evolving map of Distributor Licensing and Pedigree Requirements by State. I presume that gray market vendors will likely gravitate to the 20 states with no legislation or regulation.

And just to be clear:
  • The national and regional pharmaceutical wholesalers no longer participate directly in the secondary market. Inventory Management Agreements (IMAs) and Fee-for-Service agreements dramatically reduced secondary market activity in the U.S. wholesale channel. This has limited product leakage into the gray market and closed a significant entry point for counterfeit drugs. Cardinal Health (NYSE:CAH) even had to promise Eliot Spitzer that they would stay away from secondary markets. See Cardinal's Sins.

  • Pharmaceutical Research and Manufacturers of America (PhRMA) issued a statement over the weekend reminding everyone that the “the majority of drug shortages have involved generic drugs.” This is true. There are well-established procedures by which brand-name manufacturers notify both the FDA and the trade about shortages.

How do these mysterious vendors get access to drugs in short supply?

Who knows? It could be legitimate product being sold out the back door of a pharmacy or a provider. It could be stolen product. Heck, it could even be outright counterfeits being sold to take advantage of the shortage. Criminals can view the ASHP drug shortages web page and label a vial of water as anything they want.

As I have been sad to point out, stolen products have a disturbing tendency to find their way back into the legitimate supply chain, typically when a pharmacy purchases from a shady vendor. Examples here, here, and here.


I sympathize with the conundrum facing hospitals when drugs are in short supply. As Premier notes:
In times of shortage, pharmacies may have no choice but to purchase from companies that are not among their traditional contracted suppliers...In order to avoid an unwitting purchase from the gray market, pharmacies must take additional steps and perform due diligence to ensure that the products are genuine, safe and handled appropriately, in accordance with all state and federal laws.
Well, good luck with that. Premier’s recommendations (page 6-7) are reasonable but essentially boil down to “Caveat Emptor” for an overburdened hospital pharmacy buyer. Hardly the way we want our pharmaceutical supply chains to function.


In light of a booming secondary market, you may be surprised by the FDA’s recent reversal over pedigrees.

On July 14, the FDA proposed that wholesalers only document the chain of custody (“pedigree”) back to the last authorized distributor of record (ADR) that handled the drug rather than requiring pedigrees to be documented back to the manufacturer. Read this scintillating Federal Register notice.

As far as I know, the FDA is still enjoined from implementing the pedigree requirements of the 1987 (!) Prescription Drug Marketing Act due to a lawsuit victory by secondary wholesalers way back in December 2006. See No PDMA for You!

Submit your comments to the FDA by September 12, 2011.


The image for this post comes from a long-forgotten song from 1920. I learn so many fun facts researching Drug Channels!

To any readers under the age of 25: The music in the video is coming from something called a "record player," which is how we listened to our MP3s back in the olden days.

Click here if you can’t see the video.


  1. Nick OpalichAugust 23, 2011

    The source of drug purchases for secondary wholesalers come from "Closed Door" pharmacies. Closed Door pharmacies afford to purchase drugs under special GPO agreements. These drugs and their prices are not available to wholesalers or retailers due to exclusionary pricing and contract prohibitions placed on the "GPO and Closed Door" pharmacy members. Enter the secondary wholesaler who pays the Closed Door Pharmacy a mark-up as high as 35% and pay's cash to the pharmacy. The secondary wholesaler turns around and resells the drugs back to the primary wholesaler and the drugs that originated from the primary wholesaler to the "Closed Door" pharmacy arrives back in the primary wholesaler's inventory. The other means is the retailers are purchasing at a level they couldn't get because of the GPO restrictions. Honestly, GPO's root this kind of behavior and dismiss the perpetrators. 

    It is sad to see excessive profiteering continue specifically in Oncology. 

  2. Sad and disgusting behavior. The government forces hospitals to lose money on generic drugs and then secondary wholesalers come around to make a profit on the same drugs. Meanwhile, patients suffer.

  3. Submit your comments to the FDA by September 12, 2011.  Where's the link?

  4. I am a pharmacy buyer and I submitted information to Premier for this report. Many of us are highly interested in the Sept 21 hearing.
    The activities of the gray market are reprehensible and egregious. They are using highly emotional medical problems (cancer, premature births, etc), for which the medications are in short supply, and using it to make a profit. People are literally dying because of these shortages. Hopefully they can put a stop to this price gouging.

  5. Instructions for submitting comments are included in the Federal Register notice linked above.

  6. I think you are referring to the FDA's public workshop titled Center for Drug Evaluation and Research, Approach to Addressing Drug Shortage. It is scheduled for September 26, 2011.

  7. Adam, you mesh pedigree and the "hard to find" market as though the transactions weren't legitimate based on the offers not having pedigree verification -- where was that documented???  The secondary distributors are typically solicited by these hospitals at the last minute for a scarce product that is already at premium (secondaries don't get GPO pricing) and are forced to sell at cost-plus pricing. It's not fair to characterize GPO pricing as the baseline and then contrast it with what the secondaries must pay.  For every Premier buyer that is compalining, there are 10 hospital pharmacy buyers (trust me -- from major hospitals across the country) that absolutely love secondary distributors for coming through for them with product (typically at reasonable rates) when their primary distributor can't get it.

    The "hard to find" pharmaceutical distributor provides a very valuable channel for urgently needed supplies and often does it on a moment's notice -- ask the White House (flu vaccine), or the emergency aid workers the needed vaccinations after Katrina.

    Remember, secondary distributors are licensed and accredited distributors that perform a vital role in the distribution chain -- i.e., servicing the small accounts the "Big 3" don't want to handle.  You try and qualify your rambling blog by referencing the "illegitimate secondaries," but you manage to impugn the entire sector in your piece, Adam.

    Again, I'd encourage you to get out of Philly, and visit a secondary distributor before you tray and speak so authoratatively on this industry.

    Are you seriously advocating an oligopoly of three major distributors handling 100% of the nation's drug distribution???  Are you seriously arguing, in this economy, of closing out small businesses that provide daily products faithfully and typically with small profit margins??? 

    I know it's tempting to characterize the secondary industry as that which existed in south FL in the early 2000s and blame everything on these hard-wroking small businesses, but  that is not the case.  So homework and legit research is in order here, Adam.

    Adam, have you asked yourself why Premier might want the secondary sector not to be around?  Hint: follow the money.

    Lastly, most secondary distributors are NOT reaping exorbitant annual net profits.  From the Premier report and your disjointed analysis, you'd think they're all Fortune 100 companies.

    Again, lazy reporting...

  8. Whew, secondary wholesalers are a very sensitive bunch of folks! this comment is pretty typical. I always get plenty of
    mail every time I cover the topic because the legitimate secondary wholesalers don't want to be lumped
    in with the "bad apples."

    In case you don't know, I have often said that smaller, non-Big Three wholesalers play a valuable role in the industry. Check out page 6 of my last economic report on drug wholesaling industry for an example that has been widely read throughout the pharma industry.

    But we are talking about drugs that are apparently not available anywhere, yet somehow show up ready for sale at many multiples of the normal price. How exactly does that happen?

  9. I'd be surprised that the big 3 are engaged in secondary trading, i.e., buying and selling drugs from a non-manufacturer source. Why would they bother? Risk/reward doesn't make
    much sense these days.

    BTW, I publish all comments (positive or negative, accurate or not). Please
    note that you are in part criticizing me for comments made by others below my post.

  10. "But we are talking about drugs that are apparently not available anywhere, yet somehow show up ready for sale at many multiples of the normal price. How exactly does that happen?"

    Adam, maybe you should verify the answer to that question BEFORE you render a final analysis -- like you've done.  It's only fair

    Shouldn't you at least vet this issue with a small distributor and perhaps get the full story?  I think you would be surprised by the number of prominent customers (e.g., VA hospitals; major research/university hospitals; DOD facilities; and even the White House) that enjoy productive and consistent relationships with secondary distributors.  Nobody is trying to defend mark-ups, but it should be understood that hard-to-find product is only a small segment of the wide scope of services typically provided by these small businesses.  Again, these guys are typically responding to time critical calls in crisis situations (from panicking purchasers) involving scarce products.

    I'm sure you are aware that a major hospital is typically contractually prohibited from purchasing unforeseen excess of a given product during a shortage from a member of the Big-3 that isn't its primary distributor.  Where should that hospital go in these situations?

    Think about it, if the 650% mark ups were the norm, and not the extreme exception, wouldn't all of the shady small distributors actually be giant, Fortune 50 companies?

    At least sit down with a small distributor and hear the other side, Adam.  If you still feel the same way about this industry and the "hard-to-find" segment it serves -- you can at least print your blog with all of the facts in hand.

  11. Yes, I meant to call that out.  I did mention it in the first sentence:  "....numerous statements in this article, in the Premier report, and in at
    least one of the comments below that are either factually inaccurate....".  It would be nice for you to respond to some of the other comments I made. 

    I don't think I indicated that the big 3 are engaged in secondary trading, so not sure what your point was in bringing it up.  

  12. Interesting.  Yours is a "neutral observation" with an "independent" point of view, and all others are "rants". 

    So you make general statements and when caught and challenged, your response is to say "it's not my job".  Nice touch, Adam.

  13. Neutral, huh?

  14. Neutral = I am not a secondary wholesaler.

    Independent = I have no clients that are wholesalers (of any kind).

    Rant = Anonymous criticisms with no supporting data


    Here's a legitimate, genuine offer to demonstrate my sincerity.

    I'd be willing to post a *non-anonymous* guest post to Drug Channels that makes a fact-based argument on behalf of secondary wholesalers. Ideal length is about 600-800 words. Contact me privately by email. (Link below my photo.)

  15. Hi Adam,

    Very good article on the Drug Shortage situation.

    There are only 471 VAWD accredited wholesalers leaving many hundreds (thousand?) unaccredited. What is your opinion of an unaccredited drug wholesaler?


  16. As of 8/27/11, I have heard no response to my offer from the commentators above.


    No, not really.


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