Monday, February 06, 2012

Cardinal Fights a Misdirected DEA

Does the Drug Enforcement Administration (DEA) understand the distribution system for legitimate, prescription drugs? It sure doesn't look that way.

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…


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).


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.”


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.


  1. William RothFebruary 06, 2012

    Adam, my understanding from speaking with industry sources that have encountered familiar investigations is that this has more to do with the lack of sufficient monitoring of downstream customers.  The big 3 successfully pointed to secondary distributors for years giving the DEA something else to chase, while never themselves applying a process to qualify either the pharmacy (physically assessing them) or applying critical thought to order volumes (because demand can be "lumpy").  Remember, it is tough to say no to generic demand because of the profit. In the end, tough to see the real story here and we are all going to be subject to spin and interpretation.

  2. Bill,


    I’m not claiming
    that every wholesaler is pure as the driven snow.


    As a matter
    of principle, I think the DEA has overstepped its mandate. It’s not right to
    treat legitimate pharmaceutical manufacturers of ADHD drugs like opium poppy
    growers in South America. It’s not realistic to deputize wholesalers for alleged
    illicit behavior by 0.001% of their pharmacy customers. Read the restraining order.


    What’s next?
    Holding McDonald’s responsible whenever a clinically obese man asks to supersize his bacon
    double cheeseburger?


    And just so
    there’s no confusion, I have no business relationship with Cardinal Health, nor
    do I provide any consulting services to wholesalers.



  3. While I don't necessarily agree with how the DEA has shifted the burden of  interpreting and enforcing their vague guidelines, according to the DEA press release on this specific issue, "The average pharmacy
    in the U.S. in 2011 ordered approximately 69,000
    oxycodone dosage units. Collectively, these
    two pharmacies, located approximately 5.5 miles
    apart, ordered over three million dosage units
    during the same year".It's hard to tell where the line is but speaking as a pharmaceutical distributor I think Cardinal may have crossed it.  I would never ship a fraction of this to any of my accounts.

  4. While that ordering pattern certainly sounds suspicious, none of us know the real story yet. 

    For example, most of Cardinal's sales to CVS Caremark are bulk shipments to a CVS-operated warehouse, which then redistributes to individual CVS pharmacies. So, it's quite likely that Cardinal shipped very little (or nothing at all) directly to the 2 CVS retail pharmacies. Nonetheless, with no warning, the DEA shut down Cardinal's shipments to *all* pharmacies serviced by the Lakeland DC. 

  5.  Jeff

    I would like to see your source that data. Please provide so we can see if it is truth or just some more dumb ass assessments for the uninformed.

  6. I think that's a shot at me but that's ok I've been called a lot worse.  My source is the front page of the DEA website.  Let me know if you need help finding it.