The U.S. Pharmaceutical Supply Chain – The Gray and Black Market

Posted on | May 30, 2017 | 1 Comment

Mike Magee

With the U.S. Pharmaceutical supply chain, what you see is not what you get. As we saw last week there are roughly 4 1/2 billion prescriptions filled each year. Just under 50% of American residents have filled 1 prescription in the past 30 days. The 1st Tier drug supply chain above describes the players who are visible to Americans. But underneath this layer lies an invisible and deeply corrupted 2nd tier. If you think I’m talking about counterfeit drugs from overseas, you are only partly correct.

For nearly two decades, Pfizer and the pharmaceutical industry in its wake, have been waging a pitched battle against reimportation of drugs from Canada and beyond. This effort came naturally to Pfizer since its popular CEO Ed Pratt had fought a decade long battle to protect the companies intellectual property rights which reached fruition in 1994 GATT trade agreements.

Intellectual property rights are a critical cornerstone to the integrity of geographic market based pricing. Parallel imports, from Canada for example, represent an end-run around US based pricing and the standard 1st tier distribution profit sharing conventions. It’s all about profitability, but since Pfizer couldn’t say that they have hidden behind a very real but marginal issue – drug counterfeiting. This was disingenuous on a number of levels which I’ll return to in a moment.

One small element of the sophisticated public affairs and government relations campaign to prohibit drug reimportation into the US was to sow fear where ever and when ever possible. This opaque process saw the light of day briefly in 2010 when the industry funded American Council on Science and Health penned a Wall Street Op-Ed signed by their Medical Affairs lead, Gilbert Ross MD. In the piece, he inadvertently spills the real truth when he writes, “But there is an even more important reason why importing drugs is dangerous. Importing foreign drugs or reimporting American-made drugs is a back-door way of introducing price controls in America. Many foreign countries, including Canada, impose price controls on drugs, which is why reimporting American-made drugs is cheaper than simply buying drugs that haven’t left the country.”

By then, embargoes against reimportation were well enforced after two terms under Bush and an agreement tied to PhRMA support of Obamacare. Part of the reason they prevailed tracks back to over a decade of hard labor by Pfizer employee, John Theriault, who had joined the company in 1996 straight out of the FBI where he had served for 25 years as a Special Agent in the Bureau’s Senior Executive Service.

Originally focusing on the brazen IP violations of countries like India and Brazil that copied and sold products atom for atom, his work had evolved by 2002 as he headed up an in house drug SWAT team of around forty investigators from the FBI and Homeland Security. Testifying before Congress in 2002, he stated that “Soon after we launched Viagra, we began receiving reports that it was available in markets where it had not yet been approved. We made purchases of the product in those markets and tested for authenticity. In most cases we found authentic product that had been diverted from approved markets. But in one instance, a man in New Delhi complained that the product was not effective. We tested it and found our first counterfeit.”

Around this time John briefed our group in Corporate Affairs on the issue. The first two-thirds of his presentation was familiar to me, and carried no surprises. But he then flashed a slide with the words “gray market”, a term I was unfamiliar with, and my ears perked up. Like many other doctors, I had presumed that the pharmaceuticals I prescribed to my patients had been produced by FDA approved pharmaceutical firms, utilizing highly regulated Good Manufacturing Practices. Those products made their way to the local pharmacy or hospital, I believed, by passing though one of maybe two or three major distributors, who took their commission, and maintained a careful record of each and every product transfer.

What I learned that day was that nothing could be further from the truth. The reality was that there were three major distributors, AmerisourceBergen, Cardinal Health, or McKesson ,who controlled the flow of perhaps 80% of the nation’s drugs between manufacturer and the distribution chain of 60,000 pharmacies. But there were also nearly 1000 other players – small businesses, legally moving product in and out of the system for profit, and no one was able to assure the integrity of the system. As a result, original product was routinely being repackaged, adulterated, forged and counterfeited, within the many cracks of the disintegrated and irrational US health care system.

The gray market was in fact the American market of choice. These lawful small operators diverted product approaching expiration dates to retailers who couldn’t make ends meet. They also sold high on the market when product supplies became scarce, hoarding them and then jacking up prices an average 650%. They sold back and forth to each other, with some “pharmacies” never serving a single customer, but rather selling only to other middle men. And now, with counterfeited drugs penetrating the supply, these middle men, who lived on the edge of law, were fast at work turning a “grey market” into a “black market”.

That day, two things were made clear to me. First was that nearly every pharmacy in the US was currently vulnerable to selling product that might be harmful. Second, that the argument that reimportation of drugs from Canada would expose Americans to a grave risk by infecting the vaulted US pharmaceutical distribution system was absurd. We had our own intra-US “drug arbitrage” system with an unlimited number of unregulated entry and exit points. The nationalized Canadian system was far more secure than our own. But that was not the conclusion drawn from this internal Pfizer meeting. Rather, it was decided to not raise the issue of the US “gray market” in pharmaceuticals, but instead focus on the problem of worldwide drug counterfeiting.

In 2004, John was back before the government’s Drug Importation Task Force and did raise the gray market issue, but in the process conflated it with the threat of overseas counterfeiters. He said, “In May 2003…with the recall of more than 18,000,000 repackaged ‘Lipitor’ tablets from the legitimate pharmaceutical drug supply in the U.S., the final truth came crashing down, exposing the vulnerabilities of our distribution system…To put that recall into perspective, more than 600,000 U.S. residents, after visiting their local pharmacy, or placing an order with their health plan by phone, mail or internet, may have received a thirty day supply of Lipitor that contained counterfeit tablets.”

These products didn’t originate in China or India but rather in Nebraska by distributor Med-Pro, and in Missouri by distributor, Albers Medical, and in Illinois by distributor Alliance Pharmaceutical. Alliance had received its’ supply from Med-Pro, and had in turn sold it to Prescription Rx, who had already filled over 4000 prescriptions before being caught up in the sting in October, 2003.

To his credit, John did warn the Taskforce that day that the US house was not in order and laid the blame on wholesalers. He said, “The traditional distribution chain, where a manufacturer sells to a wholesaler who sells to retailers, is well understood. However, when products start flowing from wholesaler to wholesaler to wholesaler, or from pharmacy to pharmacy to pharmacy, existing oversight mechanisms lose force. Therefore we believe that the provisions in the Prescription Drug Marketing Act of 1988 requiring wholesalers to provide their customers with a pedigree documenting the sales history of the pharmaceutical products they sell should be implemented immediately. Due to lobbying efforts by wholesalers, the regulations to implement this requirement have not yet been finalized.”

The “pedigree” he refers to is a tracking system, the use of new RFID electronic codes which Pfizer had already tested and found to be effective. The legislation to enforce nationwide pedigree tracking from original source has been rendered ineffective for over a decade by lobbyists for the trade associations representing members of the US drug cartel. PhRMA has remained relatively silent and impotent on the issue, as has the AMA, which has expended limited political capital. Tracking requirements vary state to state and FDA statements in 2016 provide guidance rather than enforcement.

As for Gilbert Ross MD who wrote his Op-Ed in the Wall Street Journal in 2010, he had not revealed his own “pedigree”. His license to practice medicine in New York had been revoked in 1995 for his role in his own pharmaceutical counterfeiting operation. For his part in defrauding the New York Medicaid program of $8 million dollars, he received a 46 month sentence, and lived for a time in Schuykill, Pennsylvania in a prison camp. The crime involved soliciting desperately addicted and homeless New Yorkers to provide their Medicaid numbers and undergo sham testing and treatments in return for prescriptions for drugs that had high resale value on the black and gray market. Ross and his partner received the Medicaid billings, and their “patients” profited by the street trade in diverted pharmaceuticals.

Currently PhRMA continues to expend much greater effort in blocking reimportation of drugs from Canada, a country with a much cleaner pharmaceutical distribution system than our own, than in eliminating a 2nd tier supply chain that has rewarded the likes of Martin Shkreli.