Generic Zocor Hits $5 per Month

With very little notice by the press, Kmart Corporation became the first discounter to add simvastatin (the generic form of Zocor®) to its discount generic program at $15 for 3 months. See Kmart Expands 90-Day Generic Program to Cover Additional Drug Offerings.

To be honest, I’m surprised that Wal-Mart Stores Inc (NYSE:WMT) has not added simvastatin to its discount list yet. I suspect that they are waiting for a more auspicious time to announce the move, such as when the news about Part D direct negotiations dies down. I predicted this move in November, so perhaps I’ll just keep repeating it until the prediction comes true.

Wal-Mart’s Real Impact

I still maintain that Wal-Mart's $4 generic program will hurt supermarkets, independents, and other discounters more than major chains such as CVS Corp (CVS) or Walgreens (NYSE WAG). The chains compete on convenience and service, so they are much less vulnerable because customers with third-party insurance do not save much versus standard co-pays.

Thus, I find Kmart’s move even more surprising since other discounters and mass merchants are backing off. Costco Wholesale Corp (NASDAQ:COST) ended its $4 drug plan in December while BJ’s Wholesale Club (NYSE:BJ) announced its exit from the pharmacy business.

Generic Sourcing Models

The generic economics of companies like Costco and BJ’s are not comparable to Wal-Mart. There are at least two reasons that Costco can not source generics as cheaply as Wal-Mart.

• Lower volumes -- Rx sales at Wal-Mart are more than 10 times sales at Costco, while BJ’s had less than $60 million in total Rx sales.
• Wholesaler margin -- Costco buys generics through a wholesaler (McKesson Corp). Wal-Mart buys generics directly from the manufacturer, just like the larger chains and PBM mail order operations.

Even so, Wal-Mart does not necessarily get the best price on generics. Wal-Mart buys lower volumes of generics than the big 3 wholesalers -- AmerisourceBergen Corp (NYSE:ABC), Cardinal Health Inc (NYSE:CAH), and McKesson Corp (NYSE:MCK), McKesson Corp – and lower volumes than the large chains -- CVS Corp (NYSE:CVS) and Walgreens (NYSE:WAG).

Nevertheless, Wal-Mart’s product acquisition costs are still lower than the independents and supermarkets that buy through wholesalers. I also estimate that Wal-Mart has been able to add the incremental pharmacy volume with little incremental dispensing costs. (See my analysis from December: Sloppy reporting about Wal-Mart).

What’s Next?

I think Wal-Mart has a much larger plan to take pharmacy market share away from supermarkets and independents. Check out their new Neighborhood Market store design – it looks like a pharmacy chain to me, not a big box. (Unfortunately, I no longer have a need for the "celebrity hairstylist" who was there to celebrate the new store design.)

Stay tuned for Wal-Mart’s announcement of simvastatin!

TRAX Supply Chain Integrity conference

I will be delivering the State of the Industry opening address at this year’s TRAX Pharmaceutical Supply Chain Integrity conference in May. My talk is called “Building a Truly Secure Supply Chain to Drive Patient Safety.” And unlike this blog, you’ll get to see me live and in color. (Hopefully, a good thing...)

If you check out the agenda, you'll realize that this will be a great event for anyone with an interest in the future of the pharmaceutical supply chain. There will be speakers from Pfizer Inc, Genzyme Corp, Merck & Co, Cardinal Health Inc, Bristol-Myers Squibb Co, Eli Lilly and Co, and Boehringer Ingelheim. Other speakers come from regulatory agencies and technology companies. IMO, the informal conversations and interactions among all these groups will really make the event worthwhile.

Details:
TRAX: Pharmaceutical Supply Chain Integrity
Tremont Grand Hotel, Baltimore, MD
May 2-4, 2007
Website: http://www.traxsummit.com

Hope to see you there!

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Source: http://DrugChannels.blogspot.com

Real News about Fake Drugs

Last week brought an unprecedented motherload of counterfeit-related press releases and news stories. Line them up side by side and you’ll understand why most companies will be forced into DIY Supply Chain Security.

Let’s start with the bad news from last Wednesday: Significant Bipartisan Drug Importation Legislation Introduced in the Senate. I’ve written about the supply chains dangers of reimportation (See A Big Win for ... Counterfeiters and Politicians), so I find it highly ironic that the proposed legislation includes “drug safety” in its title. More irony: Wholesalers and importers/exporters absorb 80% or more of the price differences between European countries, so the savings will be minimal. (See London Calling: Fake Drugs Get Real from last August.)

The next day, EPCglobal ratified an international standard format for an electronic pedigree document. (Did anyone else besides me attend a celebratory pedigree bash this weekend?) The theoretical benefit of an ePedigree standard will be interoperability across the supply chain, most importantly (in my view) from wholesalers to retailers. SupplyScape, which now claims to be the “inventor of the electronic pedigree solution for the pharmaceutical supply chain” (can that be true?), issued follow-on press releases on both Thursday and Friday.

RxUSA (of PDMA-injunction fame) also jumped into the fray last week with its own 24-point plan for supply chain security, including their call for a "standardized Federal form for pedigree papers." This quixotic wish list is unlikely to get serious consideration, but I no longer doubt RxUSA's tenacity on these issues.

Unfortunately, we have to get retail pharmacies to buy only from wholesalers that supply pedigree in the very few states that have bothered to implement pedigree laws. (See Thank You for Buying Counterfeits.) SupplyScape claims that an impressive “200 million drug bottles” have electronic pedigrees already, but it’s not clear if a meaningful number are being read by dispensing pharmacies.

Curiously, The National Association of Boards of Pharmacy Warns About the Continued Dangers of Counterfeit Prescription Drugs on Thursday, but somehow neglected to mention EPCglobal’s ePedigree standard. Instead, the NABP chose to focus almost exclusively on non-U.S. cases of counterfeiting, apparently viewing consumers and Internet pharmacies as the problem.
While true, the NABP deftly sidesteps the culpability of retail pharmacies that buy outside the legitimate supply chain.

Savor the spin by comparing the NABP’s first bullet point about the Detroit indictment with the actual indictment, which focused primarily on cigarette diversion to avoid state taxes. (Thank you, Google!) Better yet, check out Doug Albers’ guilty plea on the DOJ website, which states: “Beginning in 2000, the Missouri Board of Pharmacy had advised Albers that he could not purchase pharmaceuticals from out-of-state distributors unless the distributor was licensed in Missouri. Albers admitted today that, despite those warnings, he had not taken any investigatory or prohibitory steps to confirm OTS Sales was only purchasing from Missouri licensed brokers.”

Looks to me like Boards of Pharmacy have been asleep at the wheel. Perhaps that’s why Eliot Spitzer deputized Cardinal Health Inc (NYSE:CAH) to spy on its pharmacy customers. (See Cardinal's Sins.) Feel free to insert your own fox-and-the-henhouse joke here.

P.S. Last week’s rash of counterfeit-related news was overshadowed by the Medicare Part D debate. Many pundits, analysts, and bloggers have already commented on the Democrat’s legislative posturing, so I’ll refrain since I’ve already written about the issue previously on this blog. Check out Kaiser’s Daily Health Policy Report for a summary as of last Friday.

Source: http://DrugChannels.blogspot.com

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 afein@pembrokeconsulting.com.

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Source: http://DrugChannels.blogspot.com

2007 Trends: Democrats Take Over (4 of 4)

Here is the fourth of four posts about major health care trends that I am watching for 2007 along with links to my posts from last year. The first three trends are:

• Trend 1: Pharmacy Infrastructure Integration
• Trend 2: Lobbying for Retail Pharmacy Profits
• Trend3: DIY Supply Chain Security

Trend 4: Democrats take over

Democrats have health care on their mind, especially with the 2008 Presidential election starting to heat up. The Washington Post had a good overview last week. See Shift in Congress Puts Health Care Back on the Table.

I view direct negotiations for Medicare as a long shot for Speaker Pelosi’s first 100 hours. (The draft text of H.R.4 The Medicare Prescription Drug Price Negotiation Act of 2007 looks like meaningless window-dressing with limited impact on the marketplace anyhow.) However, Congress seems likely to focus on how companies within the U.S. pharmacy infrastructure make money, putting PBMs and wholesalers under greater scrutiny. I would not be surprised to see new Congressional hearings about contracts, rebates, and chargebacks.

The proposed AWP settlement, along with the ongoing litigation around this pricing benchmark, will create further heat. The Wall Street Journal is also adding fuel to the fire with its muckraking against the pharmacy infrastructure with year-end articles on taming middlemen and Omnicare Inc. The theoretical saving from universal health care will also focus attention on the pharmacy infrastructure -- just listen to John Edward's weekend remarks or read Sunday's article in (where else) The New York Times.

• The Part D direct negotiations movement
• Additional Comments on the AWP settlement
• AWP Ain’t What Matters
• Are the Democrats helping Wal-Mart's Pharmacy

2007 Trends: DIY Supply Chain Security (3 of 4)

Here is the third of four posts about major health care trends that I am watching for 2007 along with links to relevant posts from last year. The first two trends are:

• Trend 1: Pharmacy Infrastructure Integration
• Trend 2: Lobbying for Retail Pharmacy Profits

Trend 3: DIY supply chain security

State and national governments had a mixed year in protecting the public from counterfeit drugs. Florida overcompensated for years of lax enforcement by finally implementing pedigree laws, although some last minute compromises created controversy. However, the FDA still couldn’t get the PDMA’s minimum standards implemented despite the U.S.’ crazy patchwork of regulation and inconsistent state-level enforcement. The international situation is even worse due to rampant parrallel trade. A new study by the U.K.'s Medicines and Healthcare Products Regulatory Agency claims that "...counterfeiters are targeting the UK's pharmaceutical supply chain, selling counterfeit drugs to wholesalers who supply the NHS
claims."

Now, Democratic Senators Gorgan and Vitter, among others in Congress, want to open up new gateways for counterfeits with the magic bullet of reimportation despite Canadian’s understandable reluctance to be our drugstore. Perhaps the FDA can take consolation in the fact that Canadian online pharmacy MediPlan is winding down, although the young founders left rich. Check out this hilarious screed by Robert Goldberg of DrugWonks.

As a result, private companies are being forced to shoulder the burden of protecting the drug supply chain with a do-it-yourself (DIY) model. Manufacturers in the U.S. are already investing resources into gaining visibility into the movement of their product from factory to patient. Overseas, Pfizer Inc, GlaxoSmithKline plc, and AstraZeneca plc have all announced plans to overhaul drug distribution in the UK, Europe’s major destination for parallel imports. The Cardinal Health Inc (NYSE:CAH) agreement with the New York Attorney General’s office will force the wholesaler to take over monitoring and enforcement activities that would normally be the responsibility of a state pharmacy board. (I’ll say more about the agreement soon.) Even RFID, the most hyped supply chain technology since B2B exchanges, is being developed by private efforts, not government mandate.

• H.B. 371 signed by Gov. Bush
• The Impact of the PDMA Injunction
• Pfizer's UK Deal: Change is Here!
• A Big Win for ... Counterfeiters and Politicians?
• Our Demand Side Counterfeit Drug Problem

2007 Trends: Lobbying for Pharmacy Profits (2 of 4)

This is the second of four posts about major health care trends that I am watching for 2007. The first trend is:

• Trend 1: Pharmacy Infrastructure Integration

Trend 2: Lobbying for Retail Pharmacy Profits

I believe that we are on the verge of a political debate about the most cost-effective way to dispense drugs. Profits on generic drugs now subsidize the branded pharma supply chain for wholesalers, retail pharmacies, and PBMs products. Generic margins are under pressure, most immediately under the proposed AMP rules for Medicaid. (I’ll comment more on AMP shortly.) Wal Mart Stores Inc (WMT) generic price war, which is premised upon this retail profit model, will heat up once it adds newer blockbusters such as generic Zocor (simvastatin). Independents continue to claim harm due to the “low and slow” (their words) payments by PDPs under Medicare Part D. BTW, I still maintain that Wal-Mart's $4 generic program will hurt supermarkets and independents more than major chains such as CVS Corp (CVS) or Walgreens (NYSE WAG).

The retail pharmacy industry now realizes that the reimbursement debate will not be fought solely on the basis of economics. Just look at the TRICARE situation. NACDS and NCPA lobbied successfully to remove mail order provisions from the 2007 National Defense Authorization Act even though the Congressional Budget Office estimated that the Pentagon could save $1.5 billion from 2007 to 2016 if the mail-order-pharmacy option was signed into law. Similar efforts are now underway to mitigate the effects of the projected $8.4 billion savings from the Deficit Reduction Act.

• The Attack on Generic Profits in Drug Channels
• Sloppy reporting about Wal-Mart
• Wal-Mart Raises the Stakes
• Will unbundling crush pharmacy profits?
• McClellan and the magic AMP

2007 Trends: Integration (1 of 4)

Happy New Year! I’m back from vacation – tanned, rested, and ready for 2007! (Well, OK, not really tan, but definitely rested and ready. )

Here is the first of four posts about major health care trends that I am watching for 2007 along with links to relevant posts from last year.

Trend 1: Pharmacy Infrastructure Integration

I expect more consolidation within the U.S. pharmaceutical infrastructure – the network of companies that facilitate dispensing and payment of pharmaceuticals -- PBMs, GPOs, wholesalers, retailers, providers, et al. These formerly distinct sectors now find themselves competing for similar profit streams due to cross-industry consolidation. The CVS Corp (CVS) - Caremark Rx Inc (NYSE:CMX) deal, if not undone by a more traditional horizontal combination with Express Scripts Inc (NASDAQ:ESRX), illustrates this trend.

In 2007, I’d expect even more creative combinations as profit models continue to converge. I would not be surprised to see a Big 3 drug wholesaler acquire an acute care GPO such as Amerinet, Novations, Premier, or MedAssets, or a chain pharmacy to combine with a provider a la CVS Corp (NYSE:CVS) and MinuteClinic. However, I do not expect pharmaceutical manufacturers to forward-integrate into the pharmacy infrastructure so as to avoid strategic debacles such as Merck-Medco.

• Consolidation of the US Pharmaceutical Infrastructure
• The 3PL vs. Wholesale battle heats up
• CVS-Caremark: Why Now?
• Rite-Aid + Brooks-Eckerd: Will three wrongs make it Rite?
• Walgreens' Future: I see dead canaries

Trend #2 coming tomorrow!

P.S. I was fortunate to vacation in Jamaica with my family in December. You may be surprised – or perhaps disappointed – that I was not perusing pages from the December 22 Federal Register on the beach. Instead, I enjoyed Walter Isaacson’s highly readable and thoroughly fascinating biography of Ben Franklin, Philadelphia’s second most famous citizen (after Rocky Balboa, of course).

Santa's Supply Chain

This is my final post of 2006. I'm grateful for the positive response to my blog and very much appreciate the many positive emails and comments that I have received since launching 6 months ago.

Let's wrap-up the year with some homegrown Drug Channels supply chain humor, straight from the pages of The Wall Street Jovial:

Santa's Supply Chain Keeps Pace, Despite Changes

I will be back with my outlook for 2007 on January 2. Until then, have a great holiday!

Adam

Catching up on AMP and PDMA

Here are a few noteworthy news items on AMP and PDMA that I want to recommend:

1. Roundtable: Deficit Reduction Act (Pharmaceutical Executive, Nov. 2006)

I believe that 2007 could go down as the year of Average Manufacturer Price (AMP). I still believe that AMP will ultimately have a much bigger impact than many people expect. (See my June post McClellan and the magic AMP for background.) This roundtable article has some good insights about:

• The class of trade issue
• The use of AMP for rebates vs. reimbursement
• Implications of a public release

I recently heard that CMS will be issuing guidance on AMP very soon. Keep an eye on this apparently obscure issue because it will change life for PBMs, wholesalers, retailers, and insurers.

2. Injunction May Slow Momentum for RFID E-Pedigrees (RFID Update, Dec. 12 2006)

Check out this interesting article on PDMA that quotes Jayne Juvan, my favorite (and the only?) healthcare law blogger, as saying: "Ultimately, the courts tend to favor the government in cases such as this that allege Equal Protection Clause and Due Process Clause violations when the rational basis test applies." She's referring to the RxUSA et al case against the FDA.

The article also calls Drug Channels a "pharmaceutical law blog," which almost offends me. Maybe I should sue?

Thank You for Buying Counterfeits

Can’t get enough PDMA news?

Well, head over to Jayne Juvan’s surprisingly readable legal analysis of the recent injunction entitled RX USA Wholesale v. Department of Health & Human Services: A Legal Perspective. Jayne is a fan of yours truly, so allow me to return the compliment and suggest you read her thought-provoking perspective. She concludes: "Despite this victory, the Plaintiffs in this case have a long way to go, as the litigation only began a few months ago and this is only one hurdle among many that the Plaintiffs must overcome."

I was immediately reminded of a scene from the very funny movie Thank You for Smoking in which the main character (a Washington lobbyist) is asked by his son: "Dad, why is American government the best government?" Without looking up, Dad the lobbyist quickly replies:"Because of our endless appeals system." (This is a great DVD and an even funnier book, so make haste and pick it up today.)

More prosaically, I believe that the very concept of “pedigree” may need to be reconsidered. Counterfeits enter via diversion in the secondary market. But counterfeit sellers require counterfeit buyers, a problem that is not directly solved by pedigree requirements of the PDMA.

In Our Demand Side Counterfeit Drug Problem, I describe three rules that must be followed for pedigree to make the supply chain safer:

1. Pharmacy buyers must demand pedigree documents (electronic or paper) from wholesalers and be able to validate the authenticity of these documents.
2. Pharmacy buyers must only purchase from wholesale distributors in the “Normal Distribution Channel” or wholesale distributors that are willing and able to supply pedigree.
3. Consumers must (a) refuse to do business with any pharmacy that does not adhere to the preceding two rules, and (b) be able to validate a pharmacy’s compliance with these rules.

Rules 1 and 2 are on hold, at least outside Florida. Unfortunately, consumers and their political representative seem intent on ignoring rule 3. (See Of Spammers and Senators.)

In response, the National Association of Boards of Pharmacy launched a new website in November called http://www.dangerouspill.com/, complete with self-congratulatory press release. Like its PhRMA-sponsored counterpart http://www.buysafedrugs.info/, the NABP site aims to educate consumers about the dangers of buying counterfeits.

Business Week also jumped on the bandwagon this week with Bitter Pills, an article outlining the dangers of ordering drugs from “shady online marketers.” (Good tip!) Business Week helpfully portrays the sordid world of online pill sales as a cartoon, although I don't think my kids will be seeing that cartoon on Nickelodean following The Fairly Oddparents!

These worthy efforts aim at consumers. But I must note that the NABP and PhRMA sites sidestep the culpability or responsibility for pharmacy buyers to follow safe sourcing practices. Yes, I know that the NABP Model Rules outline various “Criminal Acts” associated with knowingly handling counterfeit drugs. Even legitimate pharmacists sometimes purchase in the secondary market. For example, a 2004 study found that two-thirds of hospital pharmacy directors use secondary wholesalers as a resource to obtain needed supplies during a product shortage. (Source: A research article published in the American Journal of Health-System Pharmacists.)

The industry sites do not help consumers identify legitimate pharmacies nor do they provide a way to validate that a pharmacy is behaving ethically in its sourcing practices. “End-to-end” visibility is a long way off, so we in the industry must confront the pharmacy buyer problem sooner or later, regardless of the endless appeals that are likely to dog the FDA's attempts to implement the PDMA.

The Impact of the PDMA Injunction

What will the injunction against the Prescription Drug Marketing Act (PDMA) mean in the pharmaceutical industry? (For background, see No PDMA for you! and It's Official: PDMA is Back On Hold.)

The FDA has not updated their PDMA resources page as of this morning, so it’s unclear what their formal strategy will be. Since I’m not qualified to opine on the FDA’s legal options, I’ll focus on a few business implications for manufacturers and wholesalers.

Manufacturers
This injunction should serve as a channel strategy wake-up call to manufacturers. In my opinion, senior executives in commercial operations at pharmaceutical companies should push their trade relations teams to develop formal channel management strategies. Frankly, the PDMA’s conception of “authorized distributor of record” is somewhat simplistic relative to channel management practices in other industries. (More on this topic below.)

I also want to reinforce my belief that manufacturers should invest more resources into gaining visibility into the movement of their product from factory to patient. Despite the RFID hype, the U.S. is still many years from a functional track-and-trace infrastructure, which was defined by Dr. von Eschenbach as “from the assembly line to the dispenser” at the NACDS/HDMA RFID conference. (See The FDA on PDMA.)

The Secondary Market
Let’s not delude ourselves –secondary markets will always exist when there are opportunities to arbitrage price differences between identical products being sold at different prices in different markets. In Europe, this arbitrage occurs as products are diverted across national borders and is called parallel trade. (See London Calling: Fake Drugs Get Real.) In the U.S., arbitrage also occurs as products are diverted between different classes of trade. Check out this graphical depiction of gateways into the U.S. supply chain.

While diverted or resold products are not necessarily counterfeits, all counterfeits enter via diversion in the secondary market. As the Chairman of the Subcommittee on Criminal Justice, Drug Policy and Human Resources noted in November 2005: “The FDA confirmed with Subcommittee staff that drug diversion was the entry point for every case investigated by that agency involving counterfeit drugs going into legitimate pharmacies.” Thus, any wholesaler operating in the secondary market should reasonably expect a higher level of scrutiny over their activities.

Secondary wholesalers
I am impressed by this legal victory, especially given my earlier skepticism. However, secondary wholesalers should recognize that manufacturers in many industries can and do legitimately limit the number of intermediaries that are authorized to sell its products. For example, Apple only allows iPods to be sold through authorized resellers.

The degree of distribution selectivity is a strategic channel design issue for a manufacturer, ranging from a single distributor (exclusivity) to an unrestricted number of distributors within a given market (intensive distribution). There is a large body of academic research on distribution channel selectivity in economics, law, and marketing supporting these channel strategies. Fans of academic jargon may enjoy reading an academic research paper on the topic that I published almost 10 years ago (available here), although the data did not include the pharmaceutical industry.

Given my comments about diversion above, secondary wholesalers must be willing to provide complete transparency to manufacturers about their business practices and product sources. Legitimate secondary wholesalers must be willing to clearly and unequivocally demonstrate how they differ from the unsavory wholesalers that traffic in potentially counterfeit product.

Big 3 Wholesalers
I believe that the introduction of Inventory Management Agreements (IMAs) and Fee-for-Service agreements now limit product leakage into the grey market, closing a significant entry point for counterfeiters. Drug makers literally pay for greater product security by purchasing data from wholesalers to monitor orders, inventories, and product movement in real-time.

In addition, wholesalers such as AmerisourceBergen Corp (ABC) and Cardinal Health Inc (CAH) publicly renounced secondary market sourcing, the HDMA tightened its membership requirements, and major pharmacy chains such as CVS committed to secure sourcing. My conversations with executives at the big 3 wholesalers – McKesson Corp (MCK), Cardinal Health, and AmerisourceBergen – have convinced me that these companies are genuinely committed to a secure supply chain.

Two more things

• Before we let the rhetoric about “extinction of small distributors” get out of hand, I must ask: How come we have not heard about secondary wholesalers going out of business in Florida after the July 1 implementation of state-level pedigree? Just wondering…
• I must be touching a nerve on this topic because a few individuals prefer to insult me via private emails. One of these fellows (“D.K.”) is too cowardly to disclose his affiliation in this matter. I have posted my opinions for all to see. Perhaps he will open himself up to the same scrutiny by posting a (non-anonymous) comment on this blog.