Sunday, January 07, 2007

Cardinal's Sins

Two weeks ago, Cardinal Health Inc (NYSE:CAH) said it agreed to pay $11 million to settle an investigation by New York Attorney General Eliot Spitzer’s office into improper trading of pharmaceuticals on the secondary market.

The actual Assurance of Discontinuance highlights internal communications about Cardinal’s historical activity with secondary wholesalers (a.k.a. Alternate Source Vendors). More significantly, the Business Reforms in the agreement also provide a roadmap for supply chain security that manufacturers and wholesalers should adopt with appropriate modifications.

A Peek Behind the Curtains
The investigation turned up some very interesting internal information about Cardinal’s past activities before it renounced secondary market activity in 2005. (See “Findings” in paragraphs 1 through 18.) Here are two representative statements:
  • In a 2003 internal Cardinal e-mail to a compliance officer, one executive addressed the issue of “smaller vendors” which provided “unique opportunities” to Cardinal. Although acknowledging that the vendors are “high risk,” the writer concluded that “[s]ince we need the margin from these high risk vendors we will continue to buy from them.” (para 5)
  • 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. Cardinal subsequently discontinued its business relationships with these entities. (para 9)
While reading these statements, please note the following statement in paragraph 22: “Cardinal is willing to enter into this Assurance without admitting or denying the OAG’s findings.” I have not personally reviewed any materials cited in the document. The Attorney General may have misinterpreted the meaning of these emails or taken the statements out of context. You should read the complete document yourself and make up your own mind.

Business Reforms
The Business Reforms (Paragraphs 25 through 33) are the most thought-provoking part of the agreement. Cardinal agrees to:

  • Buy only from manufacturers and not from secondary wholesalers (28)
  • Sell only to wholesalers that certify compliance with “Wholesaler Safe Product Practices” (Appendix B) and pass appropriate pedigrees or pedigree information to all such Wholesalers when and as required by any federal or state law. (29.c.)
  • Create and execute a customer audit program to verify accuracy of certification (31.b.v)
The agreement also addresses the demand side counterfeiting problem (See Thank You for Buying Counterfeits) by requiring Cardinal to monitor customer more carefully. For instance, Cardinal must:
  • Create firmwide “know your customer” mechanisms to detect customers who are reselling prescription pharmaceuticals into the Secondary Market. (31.b.i)
  • Require closed-door pharmacy customers to certify that they will not redistribute or divert (31.b.ii.)
  • Gather, monitor, and analyze sales data to detect instances of possible diversion of prescription pharmaceuticals (31.c.)
To me, it looks like Cardinal taking on the monitoring and enforcement activities that should be the responsibility of state boards of pharmacy. Are these business reforms a tacit acknowledgment that most state pharmacy boards are not doing their job?

A Modest Proposal
This agreement has special significance given the hubbub caused by the successful injunction filed by secondary wholesalers against the FDA’s planned implementation of the pedigree requirements of the PDMA. (See my December posts, such as No PDMA for you! and It's Official: PDMA is Back On Hold.)

While we wait for federal pedigree law to be settled (2007?) and an RFID-enabled track-and-trace infrastructure to arrive (2017?), I would like to make the following suggestions:
  1. AmerisourceBergen Corp (NYSE:ABC), McKesson Corp (NYSE:MCK), and all other pharmaceutical wholesalers should voluntarily adopt the Business Reforms outlined in the agreement.
  2. All secondary wholesalers should immediately certify their compliance with the Wholesaler Safe Product Practices in Appendix B.
  3. Manufacturers should require all Authorized Distributors of Record (ADRs) to adopt the Business Reforms or lose ADR status.
  4. Prior to authorizing any reimportation legislation, Congress should require all non-US pharmacies to certify their compliance with a retail-oriented version of the Safe Product Practices in Appendix B. (How about it, Senator Vitter? Check out Of Spammers and Senators first.)
Wholesalers and/or Democratic Senators can send their hate mail to



  1. 1-allows any ADR to do a full audit of the secondary they open; this allows them a list of our customers that they can refer to their sister companies.
    2-requries us to agree not to resell any product bought from ADR to any other secondary- or primary ad for that matter- only sales to end users allowed. Sounds like restraint of trade to me. Why have a pedigree system at all? Will this provision be dropped if/when RFID or some other universal electronic track and trace system be instituted?
    3-many more conditions which mean you could not buy product anyway
    4-full pedigree compliance with the laws, which is a requirement anyway.

    By all ADR's adopting this guideline, I see this as an end run around the pedigree laws and just another vehicle to put legitimate secondary distributors out of business. Of course, that has been the goal all along.

  2. For those who don't know, Gene Alley is Vice-President of the NCPD, a newly-formed alliance of secondary wholesalers. He is also president & founder of STAT Pharmaceuticals.

    Needless to say, secondary wholesalers want little additional oversight over their businesses by either the government or a perceived competitor.

    See my comments in The Impact of the PDMA Injunction for why I believe that secondary wholesalers must be willing to provide complete transparency to manufacturers about their business practices and product sources.