Thursday, March 01, 2012

DEA Beats Back Cardinal’s Challenge

They fought the law, but the law won.

Yesterday, a judge dissolved the temporary restraining order against the DEA, thereby permitting the agency to suspend Cardinal Health’s license to distribute controlled substances from its Lakeland distribution center. See Judge allows DEA to suspend Cardinal license. (Note that Cardinal can still distribute other drugs from Lakeland.)

While I lack access to behind-the-scenes facts, I still contend that the DEA is off base here. In the meantime, the shutdown could provide a slight benefit to AmerisourceBergen (NYSE:ABC) and McKesson (NYSE:MCK). However, Cardinal seems much better prepared vs. 2008, so market share losses should be minimal...unless the DEA decides to go medieval on their assets.

Read on for key background documents, including Cardinal's intriguing challenge to the DEA's basic logic. We are on a slippery slope, folks. Pay attention because you could be next.

Here are a few of the legal items:
According to the Reuters story, the judge sided with the DEA, saying:
"I think DEA is correct that companies have an obligation to police themselves...and to be proactive in assessing whether diversion (of controlled substances) is taking place.”
I disagree. As I wrote in Cardinal Fights a Misdirected DEA, the DEA is going after the wrong actors in the U.S. drug distribution system. Manufacturers and wholesalers are too far removed from the prescribing physician or the much vaunted patient-pharmacist relationship.

Last week, Cardinal published an intriguing two-page defense in Cardinal Health Discussion Regarding Pharmaceutical Drug Volumes. By arguing that volume is neither necessary nor sufficient to “prove” diversion, it challenges the "obvious" nature of the DEA's actions. And don’t forget that Cardinal was relying on assurances from CVS Caremark, which represents about 25% of its total drug distribution revenues. (See Exhibit 47 on page 91 of my most recent wholesaler report.)

Here’s another way to think about this whole episode.

Out there in the wide world, there are folks who abuse alcohol. To stop alcoholism, should we shut down a beer wholesaler that delivers a case of Thunderbird to a liquor store? Should the government impose a production quota on vodka manufacturers, a la the DEA’s shortage-inducing quota of ADHD meds?

And why stop with alcohol? Should Sysco, the country’s largest foodservice distributor, be liable for delivering products to a restaurant that serves food loaded with trans fats? 

The DEA's war on manufacturers and wholesalers will continue to ramp up. Get ready to start breaking rocks in the hot sun...


  1. I'm having a difficult time finding documentation that justifies the DEA: This isn't the real problem. Will DEA shut down ALL wholesalers abilities to provide pharmacies controls? How about the DEA go into the controlled substances wholesale business themselves? This decision needs challenged. Every buying group in the country along with the top 10 wholesalers needs a class-action suit filed against the DEA and force this agency to fight the problems in more intelligent manners. (Go after, doctors, pain clinics, monitor multiple fills, surveillance individuals)

  2. Tremendous perspective.  Thanks, Adam.

  3. breaking rocks in the sun...i love that one

  4. breaking rocks in the sun......maybe i'm a little slow. whatup with this?

  5. So just to assess the situation: it is the DEA's job to identify and shut down pharmacies that distribute illegally. The DEA, apparently, did not identify and shut down the pharmacies in question (at least, not for quite a while). Wholesalers, who don't have the job of identifying and shutting down pharmacies that distribute illegally (But still seem to at least make attempts to), also didn't identify said pharmacies. If failing to identify illicit pharmacies is cause to shut down wholesaler facilities, wouldn't that sort of imply that there should be cause to shut down the DEA?

    Okay, I'm being facetious, but still: It seems like the DEA is going after wholesalers because the wholesalers aren't doing the DEA's job for them.



  6. Another twist: A federal appeals court has temporarily halted the DEA's effort to shut down a prescription drug distribution facility. See Court Stays Effort to Shut Drug Distribution Facility.

  7. t-dahlgrenMarch 06, 2012

    The article notes two CVS pharmacies wre involved, but does not describe the other involved parties.  Were all pharmacies, or were any physician offices/pill mills getting their purchases direct from Cardinal?

    If so then the volume argument becomes even worse as even the most legitimate pain clinic will show a tremendously disproportionate usage of controlled substances.

  8. Darshan KumarMarch 13, 2012

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