The DEA once again went after Cardinal Health (NYSE:CAH) by suspending the company’s controlled substances license at its Lakeland, FL, facility. Late Friday, Cardinal successfully won a temporary restraining order against the DEA. See Cardinal Health’s statement.
Kudos to Cardinal Health CEO George Barrett for standing up to an overzealous DEA. When this happened in 2007, Cardinal’s tentative and indecisive response led to major business losses, from which the company has never fully recovered. I'm curious to see how CVS Caremark (NYSE:CVS) reacts to last Friday's raid at 2 of its Florida stores.
As I explain below, the DEA started targeting wholesalers and manufacturers because they can't stop the real criminals—the patients abusing prescription drugs, the physicians running “pill mills,” and the pharmacies dealing these drugs.
And don’t even get me started on how the DEA has created a shortage of ADHD meds by putting manufacturers under their thumb…
WHERE WE’VE BEEN
Let’s take a trip down Drug Channels memory lane to put this incident in context.
In December 2006, Cardinal Health signed an Assurance of Discontinuance with then-New York State Attorney General Eliot Spitzer. See Cardinal's Sins (January 2007). One aspect of the agreement required Cardinal to gather, monitor, and analyze customer sales data to detect instances of possible diversion of prescription pharmaceuticals.
Nevertheless, during November and December of 2007, the Drug Enforcement Administration (DEA) suspended Cardinal’s licenses from three distribution centers. At one point, the suspensions prevented Cardinal from selling products to its own Medicine Shoppe franchisees. See Cardinal's Latest DEA Deal (February 2008).
Cardinal’s business with smaller pharmacies took a big hit. The nadir of sales losses from non-bulk customers occurred in mid-2008, when Cardinal reported sharply negative sales growth with its smaller customers even as the overall industry grew. See October 2008’s Cardinal: The Once and Future Wholesaler.
Cardinal resolved its license suspension by entering into a settlement agreement with the DEA in October 2008 and then focused on rebuilding sales with its smaller customers. In late 2008, the company launched its Suspicious Order Monitoring Program, as I discuss in A Quantum of Solace from Cardinal (December 2008).
THE DEA’S PURSUIT OF WHOLESALERS
About 4 to 5 years ago, the DEA decided to make wholesalers responsible for their pharmacy customers' illegal activities, whether or not the wholesaler actually knew what the pharmacy was doing. Many wholesalers, including McKesson (NYSE:MCK) and AmerisourceBergen (NYSE:ABC), have been caught up in these enforcement activities.
This strategy was summarized in 2008 Congressional testimony from Michele Leonhart, who is currently the Administrator of the DEA:
“As part of our effort to attack rogue Internet pharmacies that are supplying millions of doses of licit drugs, DEA has sought to disrupt the supply chain that makes diversion by these rogue Internet pharmacies possible. To that end, DEA has undertaken an important initiative to educate wholesale distributors, and when necessary, pursue administrative, civil, or other criminal action against wholesalers that distribute excessive amounts of controlled pharmaceuticals.” (See The DEA's Anti-Diversion Strategy.)Cardinal CEO George Barrett nicely summarized the DEA’s heavy-handed approach in last Friday’s conference call:
“Without providing us with an opportunity to be heard, the DEA issued an immediate suspension order for this facility. It took this extreme action based on the agency’s allegations that some of the prescriptions filled at 4 of the 2,500 pharmacies we serve out of the Lakeland facility were not written for legitimate medical reasons. I will point out here that, at the time we filled these orders, the pharmacies held valid state board of pharmacy and DEA licenses.”On the call, Barrett expressed frustration that the DEA has declined to provide clarity about expectations. He claims that the DEA is “unwilling to share valuable information” and uses “retrospective judgment as opposed to providing proactive clarity.”
WHY WE SHOULD ALL CARE
By chasing wholesalers and manufacturers, the DEA is simply going after the wrong actors in the U.S. drug distribution system. As the DEA surely knows, the real problems originate with consumers who abuse prescription medications, the physicians who operate “pill mills,” and the pharmacies that knowingly participate in diversion and abuse.
The risks to pharmacies and patients are enormous when wholesalers are forced to become judge, jury, and executioner on behalf of a government agency. Alas, corporations do not have to abide by the restraints and procedures of due process as enshrined in our Constitution. In the bad old days of 2008, Cardinal used aggressive tactics, presumably with the tacit approval of the DEA. See One Pharmacist’s View of Cardinal’s DEA Issues (February 2008).
Florida has long been America’s leader in counterfeiting and diversion, so the State Board of Pharmacy also doesn’t appear to be doing its job very well. See this 2007 chestnut from the Drug Channels archive: The Trouble with Florida.
Bottom line: The DEA continues to broaden its attack on the legitimate pharmaceutical industry. Pay close attention before you find yourself in the DEA's crosshairs.