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S. HRG. 112–729 

SHORT-SUPPLY PRESCRIPTION DRUGS: SHINING 

A LIGHT ON THE GRAY MARKET 

HEARING 

BEFORE THE

COMMITTEE ON COMMERCE, 

SCIENCE, AND TRANSPORTATION 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

JULY 25, 2012 

Printed for the use of the Committee on Commerce, Science, and Transportation 

( 

(II) 

SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

JOHN D. ROCKEFELLER IV, West Virginia, Chairman 

DANIEL K. INOUYE, Hawaii 

JOHN F. KERRY, Massachusetts 

BARBARA BOXER, California 

BILL NELSON, Florida 

MARIA CANTWELL, Washington 

FRANK R. LAUTENBERG, New Jersey 

MARK PRYOR, Arkansas 

CLAIRE MCCASKILL, Missouri 

AMY KLOBUCHAR, Minnesota 

TOM UDALL, New Mexico 

MARK WARNER, Virginia 

MARK BEGICH, Alaska 

KAY BAILEY HUTCHISON, Texas, Ranking 

OLYMPIA J. SNOWE, Maine 

JIM DEMINT, South Carolina 

JOHN THUNE, South Dakota 

ROGER F. WICKER, Mississippi 

JOHNNY ISAKSON, Georgia 

ROY BLUNT, Missouri 

JOHN BOOZMAN, Arkansas 

PATRICK J. TOOMEY, Pennsylvania 

MARCO RUBIO, Florida 

KELLY AYOTTE, New Hampshire 

DEAN HELLER, Nevada 

ELLEN L. DONESKI, Staff Director 

JAMES REID, Deputy Staff Director 

JOHN WILLIAMS, General Counsel 

RICHARD M. RUSSELL, Republican Staff Director 

DAVID QUINALTY, Republican Deputy Staff Director 

REBECCA SEIDEL, Republican General Counsel and Chief Investigator 

(III) 

C O N T E N T S 

Page 

Hearing held on July 25, 2012 ............................................................................... 1 

Statement of Senator Rockefeller ........................................................................... 1 

Statement of Senator Boozman .............................................................................. 39 

Statement of Senator Klobuchar ............................................................................ 84 

Statement of Senator Lautenberg .......................................................................... 86 

Statement of Senator Begich .................................................................................. 87 

Statement of Senator Thune ................................................................................... 89 

WITNESSES

Virginia Herold, Executive Officer, California Board of Pharmacy ..................... 41 

Prepared statement .......................................................................................... 44 

Hon. Tom Harkin, U.S. Senator from Iowa ........................................................... 46 

Prepared statement ..........................................................................................

Dr. David Mayhaus, Chief Pharmacy Director, Cincinnati Children’s Hospital 

Medical Center; Member, Executive Committee, Children’s Hospital Association Pharmacy Forum ..................................................................................... 47 

Prepared statement .......................................................................................... 49 

Hon. Elijah E. Cummings, Ranking Member, U.S. House Committee on Oversight and Government Reform ............................................................................ 51 

Prepared statement .......................................................................................... 53 

John Coster, Ph.D., R.Ph., Senior Vice President, Government Affairs and 

Director, NCPA Advocacy Center, National Community Pharmacists Association .................................................................................................................... 55 

Prepared statement .......................................................................................... 57 

John M. Gray, President and CEO, Healthcare Distribution Management 

Association (HDMA) ............................................................................................. 60 

Prepared statement .......................................................................................... 61 

Patricia Earl, Industry Analyst, National Coalition of Pharmaceutical Distributors (NCPD) .................................................................................................. 62 

Prepared statement .......................................................................................... 64 

APPENDIX

Allan Coukell, Director, Medical Programs, Pew Health Group, The Pew 

Charitable Trusts, prepared statement .............................................................. 95 

Letter dated August 2, 2012 to Chairman John D. Rockefeller IV, Committee 

on Commerce, Science, and Transportation from Curtis Rooney, President, 

Healthcare Supply Chain Association ................................................................ 98 

Letter dated August 31, 2012 to Hon. John D. Rockefeller, Committee on 

Commerce, Science, and Transportation from John M. Gray, President and 

CEO, Healthcare Distribution Management Association ................................. 111 

Mark Snyder, Chief Executive Officer, Superior Medical Supply, Inc., prepared statement ................................................................................................... 99 

Response to written questions submitted by Hon. Roger F. Wicker to: 

Virginia Herold ................................................................................................. 107 

Dr. David Mayhaus .......................................................................................... 109 

Dr. John Coster ................................................................................................ 109 

John M. Gray .................................................................................................... 112 

Patricia Earl ...................................................................................................... 112 

Response to written questions submitted by Hon. John Boozman to: 

Virginia Herold ................................................................................................. 108 

Dr. David Mayhaus .......................................................................................... 109 

Dr. John Coster ................................................................................................ 111 

John M. Gray .................................................................................................... 112 

Patricia Earl ...................................................................................................... 114 

(1) 

SHORT-SUPPLY PRESCRIPTION DRUGS: 

SHINING A LIGHT ON THE GRAY MARKET 

WEDNESDAY, JULY 25, 2012 

U.S. SENATE, 

COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION, 

Washington, DC. 

The Committee met, pursuant to notice, at 2:35 p.m. in room 

SR–253, Russell Senate Office Building, Hon. John D. Rockefeller 

IV, Chairman of the Committee, presiding. 

OPENING STATEMENT OF HON. JOHN D. ROCKEFELLER IV, 

U.S. SENATOR FROM WEST VIRGINIA 

The CHAIRMAN. Good afternoon. This hearing will come to order, 

and it should be an interesting hearing. Others will be appearing, 

do not despair. 

We are holding this hearing today because some, I would say, 

very unscrupulous people have figured out a way to make a quick 

buck at the expense of sick patients, hospitals, and, in the end, our 

entire health care system. For the past few years, hospitals all over 

the country have been struggling with the terrible problems of drug 

shortages: they don’t have certain drugs when they need them. 

The drugs that have been in short supply are not allergy drugs. 

They’re not blood pressure pills. They tend to be cancer drugs, powerful drugs that doctors need to treat cancer patients and/or to perform surgery. These drugs, in their shortage, make it very difficult 

and sometimes impossible for doctors and for hospitals and nurses 

and other health care professionals to do their job, which is to care 

for us when we’re critically ill. 

A West Virginia hospital recently told me about two young ovarian cancer patients who traveled several hours to reach the hospital and start their treatment. When they arrived, the hospital 

had to send them home. The hospital had to send them home because it didn’t have the needed drug. They didn’t say it didn’t exist. 

They just didn’t have it. 

The main purpose of this hearing today is not to talk about the 

causes of drug shortages on a general scale. There have been hearings in other committees about this issue. I know that the Food 

and Drug Administration and the drug industry are working hard 

to avert shortages, and I applaud them and urge them to keep up 

their work. There would be nothing more terrifying than to think 

about being in a hospital and needing a drug, and you can’t get it, 

because somebody else is hoarding it and jacking up the price on 

it. 

2 

What we are here to talk about today are the opportunists who 

suddenly appear when drugs are in short supply. They are profiteers, people who exploit the misery of sick patients to make a quick 

buck. We usually call them gray market companies. There are 

other names that are ascribed to them, but we’ll stick with gray 

market companies. 

These gray market companies seem to know when drugs are in 

shortage—that is their leverage, their key to success—even before 

the hospitals know it. And they always seem to be able to get their 

hands on short-supply drugs, even when authorized prescription 

drug distributors don’t have them in stock. 

For the past few months, my friends, Senator Harkin, who I believe is coming, and Congressman Elijah Cummings, who I’m pretty sure is coming—he’s running a meeting now but I think he 

wants to make a statement, and I want him to. I’m hopeful also 

that Senator Enzi might be here. He certainly is invited. We would 

be honored to have him. And myself—all of us have been investigating who these gray market companies are and where they’re 

getting their drugs. 

At this point, I ask unanimous consent to insert our staff report 

on this investigation into the record of this hearing. 

What we have found is that our drug distribution system has 

weak points, and gray market companies know exactly how to exploit weak points. We have learned that there are people in the 

drug supply chain who ignore their professional and business obligations and sell their drugs to gray market companies instead of 

to doctors and to patients or hospitals. This is the report. 

We have carefully mapped out dozens of cases where prescription 

drugs that should have been delivered to hospitals and administered to sick patients instead spent weeks circulating in the gray 

market. We’re not sure about everything that happens to the drugs 

when they are being passed from hand to hand in the gray market, 

but here’s one thing we do know. Every company in the chain 

charges a big markup. 

By the time the gray market has done its work, a cancer drug 

that originally costs maybe $10 or $12 has become a drug that 

costs $500 or even $1,000. You’re talking about markups of 1,000 

percent or more. And the person who makes the drug, the distributor who distributes the drug, to the hospital who needs the 

drug—but in between is the gray market, these little boxes of people who are using shortages to drive up the cost of—the profit they 

can make. 

This kind of price gouging is disgusting to me and, obviously, indefensible. Not even gray market companies themselves are willing 

to defend it. I invited the five companies we looked at in this investigation to testify at this hearing. They all declined my invitation, 

and that’s because they all know what they’re doing is wrong. I 

could subpoena them. We’ve subpoenaed some of their records, and 

maybe some day I’ll subpoena them, just because I like to see people who don’t do good things squirm. 

We need to close down this gray market, I would suggest to you, 

and do a better job making sure that prescription drugs are safe 

and affordable. And that’s what I look forward to talking about 

today. 

3 

[The information previously requested follows:] 

‘‘SHINING LIGHT ON THE GRAY MARKET’’ 

An Examination of Why Hospitals Are Forced to Pay Exorbitant Prices for 

Prescription Drugs Facing Critical Shortages 

Staff Report prepared for: Senator John D. Rockefeller IV, Chairman, Senate Committee on Commerce, Science, 

and Transportation, Senator Tom Harkin, Chairman, Senate Committee on Health, Education, Labor, and 

Pensions, Representative Elijah E. Cummings, Ranking Member, House Committee on Oversight and Government Reform—July 25, 2012 

TABLE OF CONTENTS

Executive Summary 

I. The Growing Shortages of Drugs Used to Treat Critically Ill Patients 

A. The Impact of Drug Shortages on Patients and Hospitals 

B. The Causes of Drug Shortages 

C. The Appearance of Gray Market Companies 

D. How Drug Distribution Chains Typically Work 

E. Background on Congressional Investigation 

II. Findings 

A. Exorbitant Prices Charged for Drugs in Gray Market 

1. Significant Markups Throughout Gray Market Distribution Chains 

2. Similar Results Found for All Five Shortage Drugs Examined 

3. Additional Information on Gray Market Chains 

B. How Drugs Enter the Gray Market 

1. Drugs Entering Gray Market Primarily Through Pharmacies 

2. Some Pharmacies Selling Their Entire Inventories Into Gray Market 

3. Using Pharmacies as Purchasing Agents for Shortage Drugs 

4. Establishing Fake Pharmacies 

5. Common Ownership and Shared Employees 

6. Wholesalers Handling the Drugs Have Disciplinary or Licensing Problems 

Conclusion 

Appendix 

Executive Summary 

This investigation has examined a group of companies that buy and sell prescription drugs that hospitals and other health care providers urgently need to treat 

their sick patients. Operating outside of authorized distribution networks, these 

‘‘gray market’’ companies take advantage of drug shortages to charge exorbitant 

prices for drugs used to treat cancer and other life-threatening conditions. These 

companies’ questionable business practices put patients at risk and cost the United 

States health care system hundreds of millions of dollars each year. 

The Role of Gray Market Companies in Drug Shortages 

Over the past several years, a growing number of prescription drugs sold in the 

United States have experienced supply shortages. Because these shortages have 

been most severe among a group of injectable drugs used to treat patients with cancer and other serious illnesses, they have had a particularly serious impact on hospitals. Hospitals across the country have struggled to provide appropriate care to 

their patients and have spent hundreds of millions of dollars managing the administrative and clinical problems drug shortages cause. 

During drug shortages, hospitals are sometimes unable to buy drugs from their 

normal trading partners, usually one of the three large national ‘‘primary’’ distributors, AmerisourceBergen, Cardinal Health, or McKesson. At the same time, hospitals are deluged by sales solicitations from gray market companies offering to sell 

the shortage drugs for prices that are often hundreds of times higher than the prices 

they normally pay. Hospital pharmacists have been both angered and confused by 

4 

these offers. They have asked, ‘‘why the hospitals can’t get these products but the 

‘scalpers’ can.’’ 

Gray Market Drugs ‘‘Leak’’ Out of Authorized Distribution Chains 

The drug ‘‘pedigree’’ documents reviewed in this investigation show that some 

short-supply injectable drugs do not reach health care providers through the manufacturer-wholesaler distributor-dispenser chain that policymakers and industry 

stakeholders present as the typical model for drug distribution. Instead, these drugs 

‘‘leak’’ into longer gray market distribution networks, in which a number of different 

companies—some doing business as pharmacies and some as distributors—buy and 

re-sell the drugs to each other before one of them finally sells the drugs to a hospital 

or other health care facility. 

In more than two-thirds (69 percent) of the 300 drug distribution chains reviewed 

in this investigation, prescription drugs leaked into the gray market through pharmacies. Instead of dispensing the drugs in accordance with their professional duties, 

state laws, and the expectations of their trading partners, these pharmacies re-sold 

the drugs to gray market wholesalers. Some pharmacies sold their entire inventories 

into the gray market. The wholesalers in turn sold the drugs—usually at significant 

markups – to other gray market companies. 

In the drug chain illustrated below, which documents the shipment of 25 vials of 

a chemotherapy drug called fluorouracil in September 2011, the leakage point was 

a Maryland pharmacy called Priority Healthcare. Instead of dispensing the drug to 

patients, the owner of this company, Marianna Pesti, sold the vials to a New Jersey 

distributor called Tri-Med America, which was owned by Ms. Pesti’s husband, Gabor 

Szilagyi. The drugs were sold five more times before reaching their end user, a hospital in California. 

Gray Market Companies Aggressively Mark Up Drug Prices 

As the drugs pass through these gray market distribution chains, they are significantly marked up, sometimes to prices that are hundreds of times higher than the 

prices that hospitals and other health care providers normally pay. The markups 

in these chains often bear no relation to the companies’ cost of purchasing, shipping, 

or storing the drugs. Instead, they reflect an intent to take advantage of the acute 

demand for short-supply drugs by charging health care providers exorbitant prices. 

In the example above, each company in the chain marked up the vials by large 

margins, two by more than 100 percent, even if they never took physical custody 

of the vials or only held them for a short time. The hospital that purchased the drug 

ended up paying $600 per vial for a drug that a pharmacy had purchased for $7 

per vial. Hospitals purchase short-supply drugs at these exorbitant prices because, 

as one hospital explained, ‘‘We have no other choice . . . We have to take care of 

our patients.’’ 

Other significant findings of this investigation are: 

‘‘Fake Pharmacies’’ Acquire Prescription Drugs from Authorized Distributors and 

then Sell Them Into the Gray Market. The investigation has identified a number 

of businesses holding pharmacy licenses that do not dispense drugs, but instead 

appear to operate for the sole purpose of acquiring short-supply drugs that can 

be sold into the gray market. 


725RPT1.eps
5 

1 U.S. Food and Drug Administration, A Review of FDA’s Approach to Medical Product Shortages, 8 (Oct. 31, 2011). 2 Id. at 9 (2005–10 shortage numbers). See also U.S. Food and Drug Administration, Overview: 

U.S. Drug Shortage Trends, Reasons for Drug Shortages, FDA’s Role, View of the Future, 10 

(July 2012) (2011 shortage numbers). ASHP defines a drug shortage as ‘‘a supply issue that affects how the pharmacy prepares or dispenses a drug product or influences patient care when 

prescribers must use an alternative agent,’’ Rola Kaakeh, et al., Impact of Drug Shortages on 

U.S. Health Systems, Vol. 68 American Journal of Health-Systems Pharmacy, 1811 (Oct. 1, 

2011). 

‘‘Drug Brokers’’ Recruit Pharmacies to Purchase Drugs for the Gray Market. 

Some gray market wholesalers gain access to shortage drugs by recruiting pharmacies to act as their purchasing agents. 

Gray Market Business Practices Are Widespread. Pedigree and price information 

collected for five different short-supply injectable drugs, documenting the activities of 125 different companies, showed similar patterns of leakage and aggressive gray market price markups. For all five drugs, units normally costing $10 

to $20 were regularly marked up to prices of $200 or more while they traveled 

through the gray market. 

Gray Market Drugs Are Marked Up as They Quickly Pass from Owner to Owner. 

On average, the prescription drugs examined in this investigation were owned 

by three to four different gray market businesses before being sold to a hospital; 

most of the drugs traveled through the gray market in five days or less. 

Gray Market Companies Sometimes Charge Hospitals Significantly Different 

Prices for the Same Drug Product on the Same Day. Gray market companies 

sold units of the exact same drug product to different hospitals on the same day 

at significantly different prices. On the same day, for example, a gray market 

company sold a drug to a U.S. military hospital for $315 per unit, and sold the 

exact same drug product to another hospital for $215 per unit. 

I. The Growing Shortages of Drugs Used to Treat Critically Ill Patients 

The Food and Drug Administration (FDA) defines a drug shortage as ‘‘a situation 

in which the total supply of all clinically interchangeable versions of an FDA-regulated drug is inadequate to meet the current or projected demand at the patient 

level.’’ 1 Federal government officials and health care professionals have observed a 

growing rate of shortages in recent years. According to drug shortage tracking conducted by the FDA’s Center for Drug Evaluation and Research (CDER) and the 

American Society of Health-System Pharmacists, drug shortages more than quadrupled between 2005 and 2011. For example, CDER reported that drug shortages 

increased from 61 in 2005 to 251 in 2011.2

Figure I—FDA Count of U.S. Drug Shortages 

The rising number of drug shortages has been concentrated primarily in the area 

of generic sterile injectable drugs, liquids packaged in sterile glass vials that are 

‘‘parenterally’’ administered to the body through syringes or an intravenous (i.v.) administration set. Drugs administered in this manner reach their target treatment 

area more quickly than oral drugs, but also carry greater risks of infection and comVerDate Nov 24 2008 13:17 Feb 28, 2013 Jkt 075679 PO 00000 Frm 00009 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\79524.TXT JACKIE

725RPT2.eps
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3David E. Golan, et al., Principles of Pharmacology, 3rd Edition, 30–31 (2012). 4 Id. 

5 U.S. Food and Drug Administration, supra note 2, at 10. 6 IMS Institute for Healthcare Informatics, Drug Shortages: A Closer Look at Products, Suppliers, and Volume Volatility, 7 (Nov. 2011). 7 Id. at 3. 8See, e.g., Senate Committee on Health Education Labor & Pensions, Prescription Drug Shortages: Examining a Public Health Concern and Potential Solutions, 112th Cong. (Dec. 15, 2011) 

(written statement of Sherry Glied, Ph.D., Assistant Secretary for Planning and Evaluation, Department of Health and Human Services). 9Waning Cancer Drug Supplies a Growing Concern at St. Jude Children’s Research Hospital, 

The Commercial Appeal (Mar. 25, 2012). 10 American Hospital Association, AHA Survey on Drug Shortages (July 12, 2011). 11See, e.g., Senate Committee on Health Education Labor & Pensions, Prescription Drug 

Shortages: Examining a Public Health Concern and Potential Solutions, 112th Cong. (Dec. 15, 

2011) (statement of Dr. John Maris, Chief of the Division of Oncology, Children’s Hospital of 

Philadelphia); Senate Committee on Finance, Drug Shortages: Why They Happen and What They 

Mean, 112th Cong. (Dec. 7, 2011) (statement of Dr. Patrick Cobb, Oncologist, Frontier Cancer 

Center, Billings, MT); Chemotherapy Shortage Prevents Patients from Getting Treatment, The 

Daily Oklahoman (Aug. 26, 2011) (quoting Erin Fox, Pharm.D, Manager, Drug Information 

Service, University of Utah Hospitals and Clinics, on the difficulty of using alternative treatments during drug shortages: ‘‘That’s what makes a chemo shortage very difficult. These aren’t 

easy drugs to switch out like Legos.’’). 12Kaakeh, supra note 2, at 1818. 

plications caused by incorrect dosages.3 Administering a drug intravenously usually 

requires a trained health care professional who can carefully monitor the dosage 

and the patient’s reaction to the drug.4

Of the 251 drug shortages the CDER reported in 2011, 182 of the shortages (73%) 

involved sterile injectables.5 An October 2011 analysis of short-supply drugs conducted by the IMS Institute for Healthcare Informatics also found that most of the 

reported shortages involved generic sterile injectable drugs. The largest number of 

drugs in this group (20) were sterile injectables used in chemotherapy treatment for 

cancer patients.6 In its report, IMS noted the group of patients who were most directly affected by these shortages: 

The drug shortage problem is almost entirely affecting generic injectable drugs, 

which means that the impacted patients are mostly acute care patients being 

treated by providers in hospitals and out-patient facilities. Of the total generic 

injectable market, half are on the shortages list.7

The sterile injectables in shortage have also included frequently-used items such 

as anesthetics for surgery, ‘‘crash cart’’ drugs used in emergency rooms, and electrolytes for intravenous feeding.8 A representative of the American Society of HealthSystem Pharmacists recently commented that the shortages have ‘‘the potential to 

affect almost every patient that comes into a hospital.’’ 9

A. The Impact of Drug Shortages on Patients and Hospitals 

According to many health care professionals, the recent widespread shortage of 

sterile injectable drugs has had a serious impact on patients suffering from cancer 

and other life-threatening conditions. Nearly all hospitals across the country (99.5%) 

reported experiencing at least one serious drug shortage from January to June 

2011.10 When drugs are unavailable, health care providers are sometimes forced to 

delay treatments or procedures, or to make the difficult choice to use an alternative 

treatment. Either choice can lead to negative consequences. Delaying treatment can 

allow conditions to worsen or can even lead to death, while alternative therapies 

may be less effective than shortage drugs or may cause more significant side effects.11

Hospitals also spend a significant amount of money and administrative resources 

managing drug shortages. A 2011 American Society of Health-System Pharmacists 

(ASHP) report estimated that drug shortages cost hospitals more than $400 million 

a year, including the higher costs that hospitals pay to purchase shortage drugs and 

the cost of labor that is dedicated to managing the shortages.12 Increased labor costs 

associated with drug shortages include time that pharmacists, physicians, nurses, 

and other staff spend searching for shortage drugs or alternative treatments. Some 

hospitals have dedicated staff members to managing shortages on a full-time basis. 

B. The Causes of Drug Shortages 

Policymakers have offered a number of different explanations for why drug shortages occur. The short-term supply of a drug may drop because a manufacturer shuts 

down a production line to investigate a quality problem, or upgrade or repair its facilities. In the case of sterile injectables, which are usually manufactured by only 

7 

13 U.S. Department of Health and Human Services, Office of the Assistant Secretary for Planning and Evaluation (ASPE), Office of Science and Data Policy, ASPE Issue Brief: Economic 

Analysis of the Causes of Drug Shortages (Oct. 2011). 14 Id. 15 Id. 16 U.S. Government Accountability Office, Drug Shortages: FDA’s Ability to Respond Should 

be Strengthened, 22–23 (Nov. 2011) (GAO–12–116). 17 IMS Institute for Healthcare Informatics, supra note 6, at 9. 18Group purchasing organizations, or ‘‘GPOs,’’ are organizations that act as purchasing intermediaries between medical product vendors and the hospitals, pharmacies, and other health 

care providers that are members of the GPOs. Among other things, GPOs negotiate the prices 

for which drug manufacturers sell prescription drugs to GPO members. Typically, drug manufacturers ship their products to wholesalers who then sell the drugs to health care providers 

at GPO-negotiated prices. 19See e.g., Senate Committee on Finance, Drug Shortages: Why They Happen and What They 

Mean, 112th Cong. (Dec. 7, 2011) (statement of Rena M. Conti Ph.D., Assistant Professor of 

Health Policy and Economics, University of Chicago); See also Ali Yurukoglu, Medicare Reimbursement and Shortages of Sterile Injectable Pharmaceuticals (National Bureau of Economic 

Research, Working Paper No. 17987 at 7) (April 2012)) (online at http://www.nber.org/papers/ 

w17987.pdf?newlwindow=1). 20 Institute for Safe Medication Practices (ISMP) Medication Safety Alert, Gray Market, Black 

Heart: Pharmaceutical Gray Market Finds a Disturbing Niche during the Drug Shortage Crisis 

(Aug. 25, 2011). More than half of respondents reported daily solicitations. 21Premiere Healthcare Alliance, Buyer Beware: Drug Shortages and the Gray Market (Aug. 

2011) (quoting one solicitation as stating ‘‘[w]e only have 20 of this drug left and quantities are 

going fast’’). 22 Id. 

two or three companies and require specialized equipment and processes, it is difficult for competitors to quickly increase their production to make up for this lost 

production.13 In some cases, manufacturers stop or slow down production because 

they cannot obtain the Active Pharmaceutical Ingredients (API) they need to 

produce the drugs.14

According to an FDA review of 127 drug shortages reported in 2010 and 2011, 

the most common cause for shortages was manufacturers’ decisions to shut down 

facilities to address drug quality problems.15 A Government Accountability Office 

(GAO) analysis of 15 drug shortages occurring in 2009 and 2010 found that 12 of 

the shortages were caused by ‘‘manufacturing problems.’’ 16 Manufacturers themselves have reported to ASHP that the top reason for these shortages was ‘‘production-related issues and increased demand.’’ 17

Other observers have pointed to the broader business dynamics of the generic 

sterile injectable market to explain the recent shortages. They argue that the strong 

bargaining power of group purchasing organizations (GPOs) and Medicare Part B 

reimbursements tied to the ‘‘Average Sales Price’’ cause manufacturers to operate 

with only very small profit margins.18 According to these observers, manufacturers 

do not make the investments necessary to increase their capacity to produce the 

drugs, and potential competitors have no financial incentive to enter the market, because they have little or no ability to raise the prices of their products.19

C. The Appearance of Gray Market Companies 

As a growing number of sterile injectable drugs went into short supply in 2010 

and 2011, hospitals around the country began receiving increasing numbers of telephone, fax, and e-mail solicitations from ‘‘gray market’’ drug companies.20 These 

companies claimed to have supplies of short-supply drugs that the hospitals could 

not obtain through their normal distribution channels. The companies’ offers generally mentioned the fact that the drugs were in short supply and often suggested 

that their supplies were very limited.21

The gray market companies appeared to be taking advantage of supply shortages 

to sell the drugs at prices much higher than hospitals paid their normal suppliers. 

An analysis by the Premier Healthcare Alliance of 636 solicitations made to hospitals in early 2011 found that gray market companies were selling short-supply 

drugs at prices that were on average 650% higher than the prices hospitals paid 

for the drugs through their group purchasing agreements. In some cases, companies 

were selling the drugs at markups as high as 3,000% to 4,000% over their typical 

contract prices.22

In May 2011, for example, Mark Richerson, the pharmacy director of Christus 

Santa Rosa Health Care in San Antonio, Texas, reported that Allied Medical Supply, a gray market company based in Miami, had offered to sell him 2-gram vials 

8 

23Drug Shortages, Skyrocketing Prices Anger Pharmacists, San Antonio Express-News 

(May 3, 2011). 24 Id. 25 Institute for Safe Medication Practices, supra note 20. 26 Id. 27See, e.g., Eric T. Rosenthal, Frustration Over Gray-Market Drugs Lingers Throughout Nation, Journal of the National Cancer Institute (Feb. 22, 2012) (‘‘Our pharmacy purchasing department receives [gray market] solicitations every day, but we disregard them all. We have a 

very conservative, black-and-white approach and will not use any drugs that come from outside 

our regular wholesalers or manufacturers.’’). 28San Antonio Express-News, supra note 23. See also Shortages Are Often Costly for Hospitals, West Central Tribune (Nov. 17, 2011) (quoting the pharmacy director at Rice Memorial 

Hospital in Willmar, Minnesota as saying that the hospital tries to avoid purchasing prescription drugs from secondary wholesalers ‘‘if at all possible’’ and has only made such purchases 

‘‘on occasion where there literally were no other options’’). 29 John VanEeckhout, Financial Implications of the Drug Shortage Crisis, Children’s Hospitals 

Today (Winter 2012). 30Transcript of Workshop, Food and Drug Administration, Center for Drug Evaluation and 

Research, Drug Shortage Workshop (Sept. 26, 2011) at 316–17 (statement of Scott Meacham, Executive Vice President & Chief Commercial Officer, APP Pharmaceuticals). 31 Id. at 69 (statement of Erin R. Fox, Pharm.D, Manager, Drug Information Service University of Utah Hospitals & Clinics). 

of the shortage cancer drug cytarabine for $995 per vial.23 The hospital’s normal av- erage purchase price for the drug was $15.76 per vial. Mr. Richerson told the San 

Antonio Express-News: 

I don’t understand this shortage, and it makes me angry because the drug is 

unavailable for patients who need it. . .What I want to know is, how did these 

distributors get this drug when no one else has it, and what is the basis for 

their pricing? Isn’t this kind of price gouging illegal? 24

Many hospital pharmacists and purchasing agents like Mr. Richerson were frustrated and angered by gray market solicitations. When the Institute for Safe Medication Practices (ISMP) surveyed a large group of hospitals in July and August 

2011, it received hundreds of comments complaining about the gray market solicitations and asking ‘‘why hospitals can’t get these products, but the ‘scalpers’ can.’’ 25

Hospital pharmacists also ‘‘reported feeling pressured by physicians and hospital administrators to purchase medications from the gray market.’’ 26

Choosing between having no supply of a drug or purchasing the drug at an exorbitant price from an unknown gray market company raised difficult ethical and business questions for hospitals. While some hospitals set policies to buy drugs only 

through their regularly trusted networks,27 others decided to buy drugs from gray 

market companies because, as one hospital pharmacist explained, ‘‘[w]e have no 

other choice . . . We have to take care of our patients.’’ 28 According to a report in 

a recent newsletter of the National Association of Children’s Hospitals and Related 

Institutions (NACRI): 

Some children’s hospitals refuse to deal with the gray market in any capacity. 

Others only purchase from gray market distributors when they’ve exhausted all 

other outlets for access to a drug critical in a life-threatening situation for a patient and if the pedigree contains documented proof of origin and transfer. 

There are risk management and quality and efficacy issues in addition to the 

exorbitant cost of gray market drugs. The astronomical cost of the gray market 

cannot be passed on to the patient or payer, so it must be absorbed by the hospital.29

Many hospitals and other stakeholders expressed concern about the safety of 

drugs purchased from gray market companies because they did not understand how 

gray market vendors obtain short-supply prescription drugs. During a recent FDA 

workshop on drug shortages, an executive of drug manufacturer APP Pharmaceuticals explained, ‘‘we don’t know how it gets there either. We’re as perplexed as 

the customers are, the health care professionals are.’’ 30 A representative of the University of Utah Health System explained during the workshop why it had implemented a policy not to purchase prescription drugs from gray market vendors: 

Now we feel like there are very significant safety issues with these products. 

We don’t know where they’ve come from. We don’t know if they’ve stored [sic] 

properly, so it’s been our hospital’s policy not to purchase from these companies, 

and we have not ever purchased from those companies.31

The Fox Chase Cancer Center in Philadelphia will not purchase prescription 

drugs in the gray market for the same reason: ‘‘It’s not because of the cost issues, 

9 

32 Jaimy Lee, Providers Fuel Gray Market: Some Sell While Others Buy During Drug Shortage, 

Modern Healthcare (Sept. 5, 2011). 33Short of Drugs, Hospitals Wary of ‘Gray Market,’ St. Petersburg Times (Nov. 7, 2011). 34 ‘‘In the U.S., wholesale drugs in bulk containers are often repackaged into smaller containers prior to sale to an end user. Repackaging operations are performed by independent entities, wholesale distributors, or by distribution centers owned by large pharmacies.’’ Food and 

Drug Administration, Counterfeit Drug Task Force Report (October 2003). 35 Authorized distributors of record are ‘‘distributors with whom a manufacturer has established an ongoing relationship to distribute such manufacturer’s products.’’ 21 U.S.C. 

§ 353(e)(3)(A). 36Pew Charitable Trusts, Pew Health Group, After Heparin: Protecting Consumers from the 

Risks of Substandard and Counterfeit Drugs, 63 (July 12, 2011) (online at http://www.pew 

health.org/reports-analysis/reports/after-heparin-85899367953). 

but the main thing is: If I can’t be absolutely sure of the integrity of the drug, then 

I can’t administer it to a patient.’’ 32

Some hospital pharmacists believe that gray market wholesalers contact them to 

learn which drugs the hospitals are having trouble acquiring so that the gray market wholesalers can quickly attempt to buy quantities of those drugs. A drug buyer 

at All Children’s Hospital in St. Petersburg, Florida, explained, ‘‘[t]hey will ask you, 

‘What are you having a hard time getting?’ ’’ She said that answering the question 

is ‘‘the worst thing you can do, because then they will go and buy it all up from 

the manufacturers.’’ 33

D. How Drug Distribution Chains Typically Work 

A typical drug distribution chain has three elements: (1) a manufacturer, which 

creates and sells a prescription drug to (2) a wholesale distributor, which then sells 

the drug to (3) a hospital or pharmacy, which dispenses it to patients. (See Figure 

II). 

Figure II—Commonly Understood Drug Distribution Model 

In some cases, additional authorized parties might be involved in these chains. 

Drug manufacturers sometimes sell their products to ‘‘repackagers,’’ before the 

drugs are distributed.34 In addition, large ‘‘primary’’ distributors sometimes sell 

drugs to ‘‘secondary’’ distributors, which then sell the drugs to pharmacies or hospitals. Such sales to secondary distributors comprise only a small percentage of primary distributors’ sales. Distributors that have an ongoing relationships with manufacturers serve as ‘‘authorized distributors of record’’ (ADR) for the manufacturers.35

About 85 percent of all revenues in the wholesale market are generated by three 

national distributors—AmerisourceBergen, Cardinal Health, and McKesson—that 

serve as ADRs for many manufacturers.36 Distributors that predominantly buy prescription medicines from the manufacturers and predominantly distribute them directly to health care providers such as hospitals and pharmacies are called ‘‘priVerDate Nov 24 2008 13:17 Feb 28, 2013 Jkt 075679 PO 00000 Frm 00013 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\79524.TXT JACKIE

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37 Healthcare Distribution Management Association, HDMA Fact Sheet on PDMA (online at 

http://www.healthcaredistribution.org/presslroom/pdmalfacts.asp). 38 Id. 39 Under Federal law, the wholesale distribution of drugs is defined as the ‘‘distribution of 

drugs . . . to other than the consumer or patient.’’ 21 U.S.C. § 353(e)(3)(B). 40 According to the Model Pharmacy Act, the ‘‘Practice of Pharmacy’’ means ‘‘the interpretation, evaluation, and implementation of Medical Orders; the Dispensing of Prescription Drug Orders; participation in Drug and Device selection; Drug Administration; Drug Utilization Review 

(DUR); the Practice of Telepharmacy within and across state lines; Drug or Drug-related research; the provision of Patient Counseling; the provision of those acts or services necessary to 

provide Pharmacist Care in all areas of patient care, including Primary Care, Medication Therapy Management, Collaborative Pharmacy Practice, the ordering, conducting, and interpretation 

of appropriate tests, and the recommendation and administration of immunizations.’’ National 

Association of Boards of Pharmacy, Model State Pharmacy Act § 104. 41Letter from Brian J. Smith, Senior Vice President, General Counsel and Secretary, Hospira, 

to Senate Commerce Committee Chairman Rockefeller, Senate Health, Education, Labor, and 

Pensions Committee Chairman Harkin, and House Oversight and Government Reform Committee Ranking Member Cummings (Jan. 5, 2012). 42Primary Wholesale Distributor, Policy Statement on Secondary Market Sales. 43Primary Wholesale Distributor, Wholesaler Safe Product Practices. 

mary’’ distributors.37 ‘‘Secondary’’ distributors are also sometimes ADRs, and they 

obtain access to drugs from primary distributors or other sources.38 Figure III shows 

the FDA’s illustration of a typical distribution chain. 

Figure III—FDA Drug Distribution Model 

Distributors and pharmacies play distinct roles in the distribution chain and are 

subject to different regulatory and licensing requirements. Under Federal law, distributors have the authority to purchase drugs from manufacturers and deliver 

them to pharmacies, hospitals, and other parties that are not patients.39 Pharmacies 

are the end point of the chain, responsible for dispensing the drug in a manner that 

is consistent with the appropriate treatment of a patient.40

In addition to the obligations that come with their licenses as distributors or 

pharmacies, companies involved in drug distribution chains often also have contractual obligations to their trading partners. Most large distributors purchase drugs 

from manufacturers pursuant to ADR agreements, which sometimes restrict the distributors’ freedom to buy and sell the drugs. The drug manufacturer Hospira, for 

example, requires its ADRs to commit that ‘‘they will purchase Hospira products directly from Hospira, and only sell Hospira products to end users of our products.’’ 41

Primary wholesale distributors commonly place similar ‘‘own use’’ restrictions on 

their customers. For example, one of the primary wholesale distributors requires 

most of its customers that hold themselves out as ‘‘Final Dispensers,’’ such as pharmacies, to certify ‘‘that they do not and will not redistribute prescription pharmaceuticals purchased from [that primary wholesale distributor] into the Secondary 

Market.’’ 42 The same primary wholesale distributor also requires its secondary 

wholesaler customers to sell to ‘‘Final Dispensers’’ the pharmaceutical products they 

purchase from that primary wholesale distributor.43 Another primary wholesale distributor typically requires its final dispenser customers to agree to use purchased 


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44 E-mail from Primary Wholesale Distributor to Senate Committee on Commerce, Science, 

and Transportation Staff (July 19, 2012). 45Food and Drug Administration, Counterfeit Drug Task Force Report (October 2003). 46 Eric T. Rosenthal, The ‘Gray Market’ Raises Concerns about Cost, Safety, Ethics, Journal 

of the National Cancer Institute (Feb. 8, 2012). 47 U.S. House Committee on Oversight and Government Reform Democrats, Cummings Investigates Potential Prescription Drug Price Gouging (Oct. 5, 2011) (online at http://democrats.oversight.house.gov/index.php?option=com_content&view=article&id=5445:graymarket&catid=146:democratic-agenda&Itemid=107). 48Senate Committee on Commerce, Science, and Transportation, Senate Chairmen Join 

Cummings’ Investigation of ‘‘Gray Market’’ Drug Companies (Dec. 15, 2011). 49Senator Rockefeller issued a Senate Commerce Committee subpoena to one company, Superior Medical Supply, that refused to respond voluntarily to an information request. 50See 21 U.S.C. § 353(e)(1)(A). Drug manufacturers and authorized distributors of record are 

exempt from the Federal pedigree requirement. 

products for their ‘‘own use’’ and its secondary wholesaler customers to agree to sell 

purchased products only to final dispensers.44

Ensuring that drugs pass through as few hands as possible on their way to patients helps to ensure the integrity and safety of the drug supply chain. According 

to the FDA, counterfeit drugs are most likely to be introduced as part of a drug supply chain involving multiple wholesalers.45 Dr. Michael Link, Immediate Past President of the American Society of Clinical Oncology, has expressed the same concern 

about drugs that pass through multiple gray market vendors, ‘‘[i]t’s not just the 

price gouging and taking advantage of patients, it’s also the idea that when you buy 

gray market drugs it doesn’t have the legacy of the drug. It’s not the same quality 

assurance and you don’t know its authenticity.’’ 46

E. Background on Congressional Investigation 

In October 2011, House Committee on Oversight and Government Reform Ranking Member Elijah Cummings opened this investigation by sending information request letters to five gray market companies that were aggressively marketing five 

prescription drugs to hospitals that were at the time in short-supply, according to 

the FDA.47 Four of the drugs are used to treat various forms of cancer, and one is 

used to treat seizures during pregnancy. The letters asked the companies where 

they had obtained the short-supply drugs they were offering for sale and how much 

they were charging hospitals for the drugs. 

Manufacturers Treatment Distributor Receiving 

Information Request 

Cytarabine APP, Bedford, Hospira Leukemia in children 

and adults 

Allied Medical Supply, 

Inc., Miami, FL 

Fluorouracil APP, Mylan, Teva Colon, stomach, breast, 

and pancreatic cancer 

PRN Pharmaceuticals, 

Rockville, MD 

Leucovorin APP, Bedford, Teva Advanced colon cancer Premium Health Services 

Inc., Columbia, MD 

Magnesium 

Sulfate 

American Regent, APP, 

Hospira 

Seizures during 

pregnancy 

Reliance Wholesale, Inc., 

Miami, FL 

Paclitaxel APP, Bedford, Hospira, 

Sagent, Sandoz, Teva, 

Pfizer (started in 2012) 

Breast and ovarian 

cancer 

Superior Medical Supply, 

Inc., Superior, CO 

In December 2011, Senator John D. Rockefeller IV, Chairman of the Senate Committee on Commerce, Science, and Transportation, and Senator Tom Harkin, Chairman of the Senate Health, Education, Labor, and Pensions Committee, joined Ranking Member Cummings in the investigation.48 Since that time, the three Members 

of Congress have requested information from more than 50 prescription drug manufacturers, distributors, and pharmacies.49 Staff has also talked to a large number 

of industry experts, regulators, and stakeholders about how short-supply prescription drugs are distributed, marketed, and sold. 

A key source of information in this investigation has been ‘‘drug pedigree’’ documents, which record the distribution route a drug has traveled since it left the manufacturer. Many businesses that distribute drugs in the United States are required, 

either by state or Federal laws, to provide these pedigrees to their customers.50

12 

Congressional investigators carefully studied 300 of these ‘‘paper pedigrees,’’ 

which list the names of all parties that purportedly took possession of the drug and 

the dates of their possession. The 300 pedigrees show 125 different companies that 

were involved in selling short-supply prescription drugs. Staff used the pedigrees to 

reconstruct how and when drugs entered gray market distribution chains and contacted companies listed in the pedigrees to collect information regarding the prices 

for which they purchased and re-sold the drugs. Staff obtained specific information 

from the companies listed on 58 of the pedigrees, including the prices for which they 

purchased and sold the drugs and the dates they possessed them. 

II. Findings 

A. Exorbitant Prices Charged for Drugs in Gray Market 

Documents obtained during the investigation demonstrate that drug wholesalers 

often charge exorbitant prices to health care providers for drugs facing critical national shortages that are used to treat cancer and other life-threatening illnesses. 

These inflated prices are often the result of unnecessarily long distribution chains 

that include significant markups at almost every level. 

1. Significant Markups Throughout Gray Market Distribution Chains 

The short-supply generic injectable drugs examined in this investigation did not 

reach doctors and patients through the typical distribution chain model described 

above. Instead of following the distribution route policymakers and industry stakeholders expect them to follow, these drugs were diverted into longer ‘‘gray market’’ 

distribution networks in which a number of different companies bought, sold, and 

transferred them. 

Figure IV—‘‘Gray Market’’ Drug Distribution Model 

As Figure IV demonstrates, the drugs were not dispensed directly to the hospitals, 

but instead ‘‘leaked out’’ of their authorized distribution chains and were bought and 

sold by additional companies before reaching the hospitals. As they traveled through 

these longer gray market chains, the drugs were marked up to prices that were 

often hundreds of times higher than the prices the hospitals and other health care 

providers normally paid for them. 


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51See section II.B.4. of this report for further discussion of Priority Healthcare. 52Gray market drug distributors sometimes cite shipping costs as one of the reasons they 

mark up the per unit price of the drugs they sell. But in many transactions examined in this 

investigation, the gray market companies billed shipping as a separate line item cost on their 

invoices. The shipping costs varied, but generally were less than $100 per invoice. In some 

transactions, the gray market companies never took physical possession of the drugs and instead 

arranged for drugs to be ‘‘drop shipped,’’ directly from the company from which they purchased 

the drugs, to the customer to which they sold them. 

Figure V—‘‘Gray Market’’ Shipment of 25 Vials of 2.5g/50mL Vials of Fluorouracil 

Figure V illustrates how 25 vials of fluorouracil, a sterile injectable drug used to 

treat colon, stomach, breast, and pancreatic cancer, traveled from its manufacturer, 

APP Pharmaceuticals, to Sonora Regional Medical Center in Sonora, California. At 

the time of these transactions, September 2011, fluorouracil was on the FDA’s list 

of shortage drugs. 

On September 20, 2011, the primary distributor, McKesson, sold the vials to Priority Healthcare, a pharmacy that was then licensed in Maryland.51 Instead of dispensing the drug to a doctor treating cancer patients, on September 22, 2011, Priority sold the vials to a New Jersey distributor called Tri-Med America, which in 

turn sold the vials to DTR, another New Jersey distributor. In total, eight companies in four different states took ownership of the drug before a gray market distributor sold it to the California hospital on September 27, 2011. 

As Figure V shows, there were significant price markups at each level of this gray 

market distribution chain. McKesson originally sold the vials to Priority Healthcare 

for $7 per vial. As they moved through the gray market distribution chain, the vials 

increased in price to $600 per vial, about 85 times their initial price, at an increase 

of 8,471%.52

2. Similar Results Found for All Five Shortage Drugs Examined 

The pedigree and price information that was collected on the five sterile injectable 

drugs that were the subject of this investigation show a similar pattern. In almost 

all instances, the drugs were sold by a primary distributor to a buyer that the primary distributor expected to act as a dispenser, at prices that reflected the negotiated rates of manufacturers, distributors, and dispensers. Instead of dispensing 

the drugs to doctors and patients, however, the expected dispensers re-sold the 

drugs to gray market companies, which marked up the drugs to exorbitant prices 

before selling them to hospitals. In other words, gray market companies diverted 

part of the existing scarce supply of drugs, and then sold it back to legitimate end 

users at highly inflated prices. 

The price markups examined in the course of this investigation bear little or no 

relation to the companies’ costs of purchasing, shipping, or storing the drugs. Instead, they reflect an intent to take advantage of the acute demand for short-supply 

drugs by charging health care providers exorbitant prices. The appendix to this report provides examples of gray market distribution chains through which each of 

the five drugs traveled to hospitals in 2011. 

Exhibit IV in the Appendix for example, documents how two vials of cytarabine, 

a sterile injectable drug used to treat leukemia patients, were marked up by almost 

4,900% by a succession of gray market distributors before being sold to the MisVerDate Nov 24 2008 13:17 Feb 28, 2013 Jkt 075679 PO 00000 Frm 00017 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\79524.TXT JACKIE

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53 Allied may have been able to charge such a high markup for cytarabine while the drug was 

in shortage, in part, because there is no alternative drug for treating the form of leukemia 

known as acute myeloid leukemia. Shortage Worsens of Leukemia Drugs, Wall Street Journal 

(Apr. 14, 2011). 54 As discussed below in section II.B.5., Edison Pharmacy and IDD share common ownership. 

The common ownership likely explains why Edison Pharmacy was willing to ‘‘sell’’ paclitaxel to 

IDD without marking the price up. As discussed in Section II.B.6., the owner of IDD pleaded 

guilty to Federal criminal charges in 2011. 55Staff were able to determine the number of days during which the drugs traveled through 

the gray market in 51 of the 58 drug distribution chains that were part of the ‘‘vertical review.’’ 

sissippi Baptist Health System for $995 per vial on March 18, 2011. Allied Medical 

Supply, the gray market company that sold the vials to the hospital, had purchased 

the vials two days earlier for $399 per vial. Allied added $596 to the cost of each 

vial before selling them to Mississippi Baptist Health System.53

Exhibit III in the Appendix shows that price markups could be substantial even 

in cases where small numbers of gray market actors handled the drug. In the transaction shown there, 30 vials of paclitaxel, which is used to treat breast and ovarian 

cancer patients, were sold to the Heartland Regional Medical Center in St. Joseph, 

Missouri on July 20, 2011 for $185 per vial. The New Jersey pharmacy that leaked 

these vials into the gray market had purchased them on June 15, 2011 for $8 per 

vial from the drug wholesaler H.D. Smith. The two gray market parties that handled the vials before they were sold to the hospital—a New Jersey distributor called 

Investigational Drug Delivery (IDD) and a Colorado distributor called Superior Medical Supply—marked them up by $177 per vial, or 2,213%.54

3. Additional Information on Gray Market Chains 

As part of the investigation, congressional investigators carefully analyzed 58 

drug distribution chains from beginning to end; these ‘‘vertical reviews’’ included establishing purchase and sale prices for all of the individual transactions within the 

58 chains. Some of the most significant results of this analysis were the following: 

• In more than half of the transactions, prices for the drugs increased by $200 

per unit or more while traveling through the gray market. In six chains, the 

price increase was $500 or more per unit. The largest increase was $975 per 

unit. 

• On average, drugs traveling through these gray market chains were owned by 

three to four separate business entities before reaching the hospital or provider 

that administered the drugs to a patient. 

• Most of the drugs traveling through the gray market (60.8%) were sold to hospitals within five days or less after they entered the gray market.55 In 13 

chains, the drugs remained in the hands of gray market companies longer than 

10 days. 

Figure VI—Distribution of Number of Days in the Gray Market, from Authorized 

Distributor to Hospital or Provider’s Office 

The drug distribution chains that congressional investigators examined also 

showed that gray market wholesalers sometimes sold units of the exact same drug 

to different hospitals on the same day at significantly different prices. For example: 


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56The pharmacies that purchased drugs from ADRs and sold them to secondary distributors 

included members of the independent pharmacy networks of each of the three national primary 

distributors. 57 As noted in section II.B.4. below, a husband-wife team owned both Tri-Med America and 

Priority Healthcare. 

• Reliance Wholesale charged Madigan Army Medical Center in Washington $315 

per unit for a magnesium sulfate product when it charged Twin Cities Community Hospital in California $215 per unit for the same product. Reliance Wholesale had purchased the magnesium sulfate for $100 per unit. 

• Reliance Wholesale charged the VA Medical Center-Reno $450 per unit for a 

magnesium sulfate product when it charged Sacred Heart-St. Mary’s Hospital 

in Wisconsin $349 per unit. Reliance Wholesale had paid $245 per unit for the 

product. 

• Superior Medical Supply charged Children’s National Medical Center in Washington, DC, $400 per vial for a paclitaxel product when it charged Heartland 

Regional Medical Center in Missouri $325 per vial for the same product. Superior had purchased the product for $200 per vial. 

The hospitals that purchased short-supply drugs through the 300 gray market 

chains staff reviewed include a range of small and large hospitals, urban and rural 

hospitals, for-profit hospitals, and military, veteran, and other nonprofit hospitals 

located in all regions of the United States. To estimate the financial impact that 

gray market purchases have on hospitals, congressional investigators compared actual gray market prices for one form of each of the five drugs reviewed to hospitals’ 

contract price for the same drug product. The per-unit costs in the gray market were 

dramatically higher than the hospitals would have incurred to purchase the same 

drugs from their primary wholesale distributors: 

• Staff’s analysis revealed that hospitals overspent nearly $750,000 on over 2,100 

units of the five prescription drugs examined as a result of purchasing the 

drugs from the gray market instead of their normal distributors. The more than 

2,100 units included in this analysis are just a fraction of the total number of 

drug units that were sold in the 300 gray market chains. 

• For example, hospitals that usually pay $12 to purchase a 2 g, 20 mL vial of 

the cancer drug cytarabine instead paid an average of $736 per vial to purchase 

that product in the gray market. 

• Instead of paying $9 per 500 mg/mL, 2 mL vial package of magnesium sulfate, 

hospitals paid an average of $307 per package to purchase them on the gray 

market. 

B. How Drugs Enter the Gray Market 

Based on a review of documents obtained during the investigation, it appears that 

shortage drugs are leaking into the gray market primarily through entities that 

hold pharmacy licenses. It also appears that gray market drug companies are taking 

advantage of a patchwork of inconsistent state regulations to obtain drugs through 

questionable and sometimes illegal means. 

1. Drugs Entering Gray Market Primarily Through Pharmacies 

In more than two-thirds (69 percent) of the 300 short-supply drug distribution 

supply chains reviewed in this investigation, the drugs entered the gray market 

through pharmacies. These pharmacies purchased their drugs from manufacturers’ 

ADRs, but instead of dispensing the drugs in accordance with their state laws, their 

professional duties, and their contractual obligations, these pharmacies re-sold the 

drugs to wholesalers.56 The wholesalers in turn sold the drugs—usually at significant markups—to other gray market entities. The pharmacies do not appear to have 

had any other reason for purchasing these drugs—all of which are predominantly 

used by health care professionals in a hospital setting –than to sell them into the 

gray market. 

For example, in the distribution chain involving fluorouracil illustrated in Exhibit 

I of the Appendix and described in Section II.A.1 above, a company called Priority 

Healthcare, which held a pharmacy license issued by the State of Maryland, was 

the first entity to purchase the drug from the authorized primary distributor, 

McKesson. Rather than selling the drug to a health care provider or to patients, Priority Healthcare sold it to a gray market wholesaler, Tri-Med America, at a significant markup.57 In addition to the manufacturer, seven entities owned the drug before a gray market distributor finally sold it to a medical center for $600 per vial. 

16 

58Letter from Mackie A. Barch, Managing Director of HealthRite Pharmaceuticals to Ranking 

Member Elijah E. Cummings, House Oversight and Government Reform Committee (Apr. 20, 

2012). 59 Code of Maryland Regulations 10.34.22.02(23) (defining a ‘‘wholesale distributor’’ as ‘‘[a] retail pharmacy that conducts wholesale distribution, if the wholesale distribution business accounts for more than 5 percent of the retail pharmacy’s annual sales’’). 60 E-mail from Maryland Board of Pharmacy to House Committee on Oversight and Government Reform, Minority Staff (Apr. 25, 2012). 61 E-mail from Alton Chatmon, Owner, Morning Star Pharmacy, to House Committee on Oversight and Government Reform, Minority Staff (Apr. 17, 2012). 62 New Jersey Statutes § 24:6B–14. 63Letter from Prince Dennis, Owner, B&C Health Services, to House Committee on Oversight 

and Government Reform, Minority Staff (Mar. 27, 2012). 64 According to a 2011 survey of hospital pharmacists, ‘‘[m]ore than 13% of respondents reported receiving solicitations, mostly weekly, from gray market vendors who wanted to purchase 

vital medications in short supply from the hospital, presumably to sell to other hospitals at 

steeply inflated prices. Institute for Safe Medication Practices, supra note 20. 65Three pharmacies refused to respond to this information request: PMO Pharmacy of Pearl, 

Mississippi, Polk’s Discount Drugs of Brandon, Mississippi, and Ranch Pharmacy of Scottsdale, 

Arizona. 66 E-mail from broker to pharmacy owner (June 13, 2011). 67 E-mail from broker to pharmacy owner (Aug. 19, 2011). 

2. Some Pharmacies Selling Their Entire Inventories into Gray Market 

Evidence that some pharmacies are selling short-supply injectable drugs to gray 

market wholesalers suggests that these pharmacies are not complying with their 

states’ pharmacy laws that limit re-sales. Some states allow pharmacies to re-sell 

portions of their inventories in emergency circumstances, while other states permit 

up to 5% of pharmacies’ annual sales to come from re-selling their drugs. The parameters of these exceptions rules vary from state to state. Some states’ rules appear to be intended to resolve local supply problems by allowing pharmacies to sell 

drugs to each other, while other states’ rules may permit pharmacies to re-sell their 

drugs to wholesalers. 

Documents obtained during the investigation indicate that some pharmacies are 

clearly exceeding these limited re-sale exceptions. For example, in a letter to Ranking Member Cummings, the owners of a Maryland pharmacy called HealthRite 

Pharmaceuticals reported that from March 2011 to February 2012, the pharmacy 

sold 100 percent of its products to a distributor business they also owned.58 These 

sales appear to violate a Maryland law that requires pharmacies to obtain separate 

wholesaler licenses if they re-sell more than 5 percent of their products.59 On April 

10, 2012, HealthRite Pharmaceuticals informed the Maryland Board of Pharmacy 

that it had ceased operations.60

Similarly, a New Jersey pharmacy, Morningstar Pharmacy, reported that, from 

March 2011 to February 2012, all of its revenues came from re-sales,61 which appears to violate New Jersey pharmacy laws. New Jersey law permits pharmacies to 

engage in ‘‘the sale, purchase or trade of a prescription drug, or an offer to sell, purchase or trade a prescription drug for emergency medical reasons.’’ 62

In addition, some pharmacies appear to sell to wholesalers portions of their inventories that exceed the 5 percent thresholds. For example, B&C Health, a Maryland 

pharmacy, reported that 21 percent of its gross sales came from drug sales to wholesalers.63

3. Using Pharmacies as Purchasing Agents for Shortage Drugs 

Documents obtained during the investigation indicate that wholesalers and independent brokers often approached pharmacies and convinced them to purchase 

shortage drugs on their behalf, promising significant profits.64 Twenty-one of the 25 

pharmacies that responded to requests for information about their purchases and 

sales of shortage drugs stated that wholesalers or brokers representing wholesalers 

had asked them to purchase shortage drugs for them.65

For example, an e-mail from a pharmaceutical consultant to a pharmacy owner, 

dated June 13, 2011, states, ‘‘[w]e guarantee our Pharmacies 20 percent or more 

every time.’’ 66 Another e-mail from an outside buyer to a pharmacy owner on August 19, 2011, stated, ‘‘please look at your distributor site as soon as you can for 

these items. The more you find, the more you make.’’ 67

Pharmacy owners told congressional investigators that brokers sometimes approached them directly to try to convince them to buy shortage drugs. One pharmacy owner stated that a broker came into her pharmacy and conducted ‘‘a presentation and provided credentials’’ to convince her to buy shortage drugs on his beVerDate Nov 24 2008 13:17 Feb 28, 2013 Jkt 075679 PO 00000 Frm 00020 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\79524.TXT JACKIE
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68 E-mail from pharmacy owner to House Committee on Oversight and Government Reform, 

Minority Staff (Apr. 14, 2012). 69 E-mail from pharmacist to House Committee on Oversight and Government Reform, Minority Staff (June 7, 2012). 70 E-mail from pharmacy owner to House Committee on Oversight and Government Reform, 

Minority Staff (May 22, 2012). 71 E-mail from pharmacy owner to House Committee on Oversight and Government Reform, 

Minority Staff (Mar. 29, 2012). 72 E-mail from broker to pharmacy owners (Sept. 22, 2011). 73 E-mail from Erin Fox, Manager of the University of Utah Drug Information Service, to 

House Committee on Oversight and Government Reform, Minority Staff (July 22, 2012). 74Fax from broker to pharmacy owner (Sept. 15, 2011). 75 E-mail from pharmacy owner to House Oversight and Government Reform, Minority Staff 

(June 12, 2012). 76Local Pharmacy Faces a Barrage of Charges, The Bakersfield Californian (Mar. 22, 2012). 77 Id. 78 Id. 79See, e.g., California Department of Consumer Affairs, Board of Pharmacy, Citation and 

Fine, Citation Number CI 2011 49887, Medical Arts Pharmacy, Phy 45941 (citing and fining 

Medical Arts Pharmacy for acting as a purchasing agent for Priority Pharmaceuticals, Dubin 

Medical, Gulf Coast Pharmaceuticals, and Vital Healthcare); California Department of Consumer Affairs, Board of Pharmacy, Citation and Fine, Citation Number CI 2011 49813, Los 

Altos Pharmacy at El Camino Hospital, Phy 50153 (citing and fining Los Altos Pharmacy at 

El Camino Hospital for acting as a purchasing agent for Priority Pharmaceuticals). 

half.68 Another pharmacist told investigators that a broker approached the pharmacist at a trade show, introduced the pharmacist to other pharmacy owners that 

had purchased shortage drugs for him, and promised a 20 percent profit margin for 

doing the same.69 Other pharmacy owners who sold drugs to wholesalers were motivated by the desire to alleviate shortages. For example, the president of one pharmacy told investigators that his pharmacy was ‘‘approached by a wholesaler/distributor . . . with the idea to redistribute the pharmaceuticals to vendors and pharmacies in need.’’ 70

Brokers and consultants who convinced pharmacists to purchase shortage drugs 

on their behalf established close relationships with routine contact. One pharmacist 

informed investigators that pharmacists were placed on e-mail distribution lists 

‘‘sometimes twice a day’’ circulating ‘‘a list of drugs they are looking for.’’ 71 One 

such e-mail from a broker to a pharmacist dated September 22, 2011, directed the 

pharmacist as follows, ‘‘[p]lease check your distributors as soon as possible and let 

me know what’s available how much and the price.’’ 72 Attached to the e-mail was 

a spreadsheet that contained a list of drugs. According to the Drug Information 

Service at the University of Utah, virtually all of the drugs listed in the spreadsheet 

were in short supply as of that date.73

Figure VII is a ‘‘protocol’’ document obtained during the investigation that guides 

a pharmacy owner through the purchase and subsequent sale of shortage drugs to 

gray market drug companies.74 As the document indicates, brokers sometimes 

placed orders directly using a pharmacy’s account.75 In addition, brokers created invoices for the pharmacies to facilitate the shipping process. 

According to a report in the Bakersfield Californian, the California Board of Pharmacy recently cited more than 50 pharmacies for acting as purchasing agents for 

gray market companies. The Board cited the pharmacies for unlawfully selling 

short-supply prescription drugs to a San Diego-based drug distributor named Priority Pharmaceuticals and, in some instances, other distributors.76 According to the 

Board, the pharmacies received lists of drugs that Priority Pharmaceuticals wanted 

them to order and used their ‘‘ordering ability with a [primary] wholesaler to purchase [the] drugs’’ for the purpose of reselling them to Priority Pharmaceuticals.77

The distributors then distributed the drugs ‘‘to government hospitals and other 

health care facilities at’’ what the Board described as ‘‘exceedingly high markups.’’ 78 The Board determined that the pharmacies violated the California Business 

and Professional Code by acting as ‘‘purchasing agents’’ for Priority Pharmaceuticals.79

Figure VII: Protocol for Brokers’ Use of Pharmacies as Purchasing Agents 

Below is the proper protocol for the entire operation 

• I will place an order via log-in or drop ship (‘‘Ardie’’ will be the PO name) 

• When the product arrives, immediately send me the invoice/packing slip with 

lot #, exp date, and your pharmacy cost via fax or email (remember time is of 

the essence) 

• Within a couple hours I will send a PO & Fed EX Label for the product via 

fax or email 

18 

80 E-mail from broker to pharmacy owner (Jan. 20, 2012). 81Letter from J. Patrick Connell, Ellis, Painter, Ratterree & Adams LLP, representing Vital 

Healthcare to Minority Staff, House Committee on Oversight and Government Reform (May 31, 

2012). 82Letter from Jose Torres, Harford Health Services, Inc., to Senate Committee on Commerce, 

Science, and Transportation, Majority Staff (June 11, 2012). 83 E-mail from Ismail Kabook, Optimal Pharmaceuticals, to House Committee on Oversight 

and Government Reform, Minority Staff (May 29, 2012). 84 E-mail from North Carolina Department of Agriculture and Consumer Services to Minority 

Staff, House Committee on Oversight and Government Reform (June 12, 2012). 85 E-mail from North Carolina Department of Agriculture and Consumer Services to former 

International Pharmaceuticals employee (Jan. 3, 2012). 86 North Carolina Board of Pharmacy, Miscellaneous Inspection Report (Sept. 19, 2011). 87 E-mail from North Carolina Department of Agriculture and Consumer Services to former 

International Pharmaceuticals employee (Jan. 3, 2012). 

• I will schedule a pick up Fed Ex and verify this with my contact at the pharmacy 

• The pharmacy will then make sure the product is packed properly, place the 

pre-paid label on the box, and make sure it ships. If a Packing Slip is provided, 

place the packing slip in the box with the product. The Purchase Order will stay 

at the pharmacy. 

Documents obtained during the investigation also reveal that brokers and consultants monitor the release of new drug shipments from manufacturers and their distributors. For example, on January 20, 2012, one broker sent an e-mail indicating 

that a new batch of metoprolol had been released, and asked various pharmacies 

to buy up the shortage drug, ‘‘we jsut [sic] found some it’s been a release find it 

get sale it [sic].’’ 80 Metoprolol is a drug used to improve survival after a heart attack and in the treatment of heart failure. 

Wholesalers operating in the gray market purchased a significant portion of prescription drugs through pharmacies. For example, Vital Healthcare, a gray market 

company based in Georgia, estimated that it uses brokers to locate approximately 

25 percent to 35 percent of its annual 123,700 unit prescription drug sales volume.81

Similarly, Harford Health Services, a Maryland company, purchased 25 percent of 

its $2 million prescription drug volume from pharmacies between March 2011 and 

February 2012.82 During the same time frame, California-based Optimal Pharmaceuticals told investigators that it purchased 44% of its total volume from pharmacies.83

4. Establishing Fake Pharmacies 

Documents obtained during the investigation identified numerous entities that appear to have established ‘‘fake pharmacies’’ to gain greater access to shortage drugs. 

After obtaining these drugs, the ‘‘pharmacies’’ typically did not dispense the drugs 

to patients pursuant to their pharmacy licenses, but instead sold them to wholesalers they also owned or in which they had interests. 

LTC Pharmacy and International Pharmaceuticals: LTC Pharmacy, a pharmacy 

in Durham, North Carolina, purchased drugs in short supply and transferred 

them to International Pharmaceuticals, a wholesaler located in the same building, which then sold them into the gray market. Jessica Hoppe owned both companies. Between May 23, 2011 and Sept. 19, 2011, a quarter of the prescription 

drug products invoiced to International by LTC were on the FDA shortage list 

as of April 2012.84 State regulators in North Carolina found that, ‘‘International 

Pharmaceuticals and LTC Pharmacy willfully violated NC wholesaler prescription drug distribution laws,’’ 85 and LTC Pharmacy ‘‘is not an operating pharmacy.’’ 86 Licenses for both companies have recently been surrendered or denied.87 Figure VIII below shows photos that the North Carolina Board of Pharmacy Inspectors took of LTC Pharmacy. 

19 

88This transaction is also discussed in section II.A.1. 89State of New Jersey Department of Health and Senior Services, Wholesale Drug Project Revocations (online at http://nj.gov/health/foodanddrugsafety/revlsus.shtml) (accessed June 7, 

2012). 90Maryland Board of Pharmacy, Consent Order: In the Matter of Priority Healthcare, LLC 

(Oct. 19, 2011) (online at http://www.dhmh.maryland.gov/pharmacy/docs/FormalOrders/P/ 

Priority%20Healthcare,%20LLC%2010-19-11.pdf). 91Maryland Board of Pharmacy, Establishment Detail (online at https://license.mdbop.org/ 

verification/veri/establishmentDetail.asp?PermitNo=PW0275) (accessed June 10, 2012). 92See Maryland Secretary of State, Articles of Incorporation for a NonStock Corporation (filed 

Aug. 5, 2005) (listing Brenda Marshall as the incorporator for Columbia Med Services, LTD at 

9693 Gerwig Lane Unit 1R, Columbia MD 21046); Maryland Secretary of State, Articles of Organization of Columbia Medical Distributors, LLC (filed Jan. 22, 2002) (listing Brenda Lee Marshall as the initial member of Columbia Medical Distributors at 9687–C Gerwig Lange, Columbia, MD 21045). 

Figure VIII—Photos of LTC Pharmacy Taken by North Carolina Board of Pharmacy 

Inspectors 

Priority Healthcare and Tri-Med America: A husband and wife team, Marianna 

Pesti and Gabor Szilagyi, established a pharmacy and a wholesale company. On 

multiple occasions, the couple purchased the cancer drug fluorouracil, transferred it to their own wholesaler, and then sold it to another gray market drug 

company at significant markups, sometimes on the same day as the original 

purchase. Exhibit I in the Appendix illustrates one such transaction.88 New Jersey officials have recently revoked Tri-Med America’s license.89 Maryland state 

regulators found that Priority Healthcare committed numerous violations of 

state law.90 Priority Healthcare is no longer in business.91

Columbia Med Services and Columbia Medical Distributors: Columbia Med 

Services, a pharmacy in Maryland, transferred short-supply drugs without a 

wholesaler license to Columbia Medical Distributors, a wholesaler in Maryland, 

which then sold them into the gray market. The companies were owned by the 

same person and were located in the same industrial office complex.92 Figure 

IX below shows photos of Columbia Med Services’ location. 

Figure IX—Photos of Columbia Med Services 


725RPT9.eps 725RPT10.eps
20 

93 North Carolina Department of Agriculture and Consumer Services, Inspection Report (Apr. 

23, 2012). 94 E-mail from North Carolina Board of Pharmacy to North Carolina Department of Agriculture and Consumer Services (Mar. 22, 2012). 95 North Carolina Department of Agriculture and Consumer Services, Inspection Report (Mar. 

28, 2012). 96Letter from Mackie A. Barch, Managing Director of HealthRite Pharmaceuticals, to Ranking 

Member Elijah E. Cummings, House Committee on Oversight and Government Reform (Apr. 20, 

2012). 97Several pharmacies outside of this local area also sold drugs into this network through 

Avenel Pharmacy. 98See New Jersey Department of the Treasury, Division of Revenue, Certificate of Formation 

for Investigational Drug Delivery Limited Liability Company (filed Jan. 14, 2011) (listing Hank 

Incognito and Stephen F. Corba, Jr. as members/managers); New Jersey Certificate of Incorporation for Avenel Pharmacy, Inc. & Registration of Alternate Name of Avenel Pharmacy, Inc., d/ 

b/a Avenel Surgical & Pharmaceuticals (filed July 7, 2003 & July 7, 2010) (listing Hank Incognito as president and director & Nunzio Gallo as director); New Jersey Department of the Treasury, Division of Revenue, Certificate of Formation for Investigational Drug Delivery Limited Liability Company (filed Jan. 14, 2011) (listing Hank Incognito and Stephen F. Corba as members/ 

managers); New Jersey Department of the Treasury, Division of Revenue, Certificate of Formation for Sewaren Innovative Pharmaceutical Packaging Limited Liability Company (filed Feb. 

4, 2011) (listing Hank Incognito as authorized representative); New Jersey Certificate of Incorporation for N G H I, Inc. & New Jersey Department of the Treasury, Division of Revenue, Renewal Notice and Filing Form for Alternate Business Name for N G H I, Inc., d/b/a Edison Pharmacy (filed Dec. 19, 2003 & Dec. 29, 2003) (listing Hank Incognito as director & Nunzio Gallo 

as owner & director); Service a Priority at Edison Pharmacy, Courier News (June 6, 2011) (identifying Hank Incognito and Nunzio Gallo as the co-owners of Avenel Pharmacy and Edison Pharmacy). 99 Id. 

J&A Pharmaceutical Services and North, Inc.: J&A Pharmaceutical Services, a 

pharmacy in North Carolina, sold drugs without a wholesaler license to North, 

a licensed wholesaler. Both entities were located at the same address and had 

the same owner.93 The North Carolina Board of Pharmacy found that J&A 

Pharmaceutical Services ‘‘ordered numerous injectable medicals, also found on 

the FDA Drug Shortage List, with no records of dispensation for any of them 

from June 2011 through December 2011.’’ 94 J&A voluntarily surrendered its 

pharmacy license in March 2012.95

HealthRite Pharmaceuticals and AmeriSure Pharmaceuticals: According to its 

owner, AmeriSure Pharmaceuticals ‘‘was established and licensed under Maryland law to act as a wholesaler for any drug procured by HealthRite,’’ a pharmacy licensed in Maryland. Both companies were owned by the same individual 

and were located in the same address. HealthRite informed Ranking Member 

Cummings that the company sold all of its drugs to AmeriSure.96

5. Common Ownership and Shared Employees 

Pedigree chains reviewed in this investigation reveal that groups of companies 

routinely worked together to procure shortage drugs. In some cases, these business 

dealings were not arms-length transactions because the companies had common 

owners or shared employees. 

For example, a network of seven companies in New Jersey all located within a 

30-mile radius routinely worked together to obtain and sell drugs that were in short 

supply. Companies with pharmacy licenses—Avenel Pharmacy, Old Bridge Drug 

and Surgicals, Red Bank Pharmacy, Sewaren Innovative Pharmaceutical Packaging 

(SIPP), Colonia Natural Pharmacy, and Edison Pharmacy—used their pharmacy licenses to obtain shortage drugs from various ADRs.97 As Figure X illustrates, rather 

than dispensing these drugs to patients, the pharmacies sold the shortage drugs to 

one of the network’s wholesalers, Avenel Pharmacy or Investigational Drug Delivery 

(IDD), which operated as the network hub. These wholesalers then re-sold the shortage drugs to other secondary wholesalers at a markup. Exhibit III in the Appendix 

shows how 30 vials of the cancer drug paclitaxel traveled through this network and 

were later sold to a hospital in Missouri. 

Hank Incognito was an owner, officer, and/or director of four of these companies, 

IDD, Avenel Pharmacy, SIPP, and Edison Pharmacy, at the time of the transactions 

examined in this investigation.98 Nunzio Gallo was an owner or director of Avenel 

Pharmacy and Edison Pharmacy when the transactions occurred.99

The investigation also uncovered a network of Kentucky pharmacies that purchased shortage drugs for the same Kentucky wholesaler. In this case, a licensed 

wholesaler, Central Compound Pharmacy Supply, routinely purchased drugs from 

local pharmacies—Bluegrass Pharmacy, the Medicine Shoppe of Springfield, Hurst 

21 

100 All of these listed pharmacies also held Kentucky wholesale distribution licenses. 101 Central Compound Pharmacy Supply website, Meet The Team! (online at http:// 

centralpharmacysupply.com/career.html) (accessed July 22, 2012). 102 United States v. Phillip Giannino, Case No. 05–00315–16–CR–W–ODS (W.D. Mo. entered 

Dec. 15, 2009). 103 Illinois Department of Financial and Professional Regulation, News (Apr. 28, 2011) (online 

at http://www.idfpr.com/Forms/DISCPLN/1103ldis.pdf). 104The United States Attorney’s Office, District of New Jersey, Fourth Man Pleads Guilty in 

$40.8 Million Mortgage Fraud Scheme (Aug. 16, 2011) (online at www.justice.gov/usao/nj/ 

Press/files/Williams,%20Michael%20Plea%20News%20Release.html). 105Defendant’s Plea Agreement, United States v. Stephen F. Corba, Jr., Case No. 1:11–cr– 

00523–JEI–1 (D.N.J. May 13, 2010). 

Discount Drugs and Medicine Centre Pharmacy.100 Gary Smith signed pedigree documents for these pharmacies and identified himself as the ‘‘compliance manager’’ for 

the pharmacies. Central Compound Pharmacy Supply’s website identifies Gary 

Smith as part of its ‘‘team.’’ 101

Figure X—Network of New Jersey Companies that Sell Shortage Drugs 

6. Wholesalers Handling the Drugs Have Disciplinary or Licensing Problems 

Some of the pedigree chains congressional investigators examined include secondary distributors whose owners have a history of disciplinary actions. 

For example, Alliance Wholesale Distributors of Richton Park, Illinois purchased 

and sold cytarabine and leucovorin. Phil Giannino, its owner, was sentenced in Federal court in late 2009 for conspiracy to defraud the United States by distributing 

diverted pharmaceutical drugs. The court ordered him to pay almost $4 million in 

restitution.102 Based on this conviction, Illinois revoked Mr. Giannino’s pharmacist 

license and Alliance Wholesale Distributors’ drug distributor license in 2011, stating 

that, ‘‘Giannino is prohibited from being employed or otherwise working for an Illinois wholesale drug distributor in any capacity.’’ 103

Stephen F. Corba, Jr., a managing member of Investigational Drug Delivery 

(IDD), was involved in the purchase and sale of magnesium sulfate and paclitaxel. 

In August 2011, Mr. Corba pleaded guilty to conspiracy to commit wire fraud and 

conspiracy to commit money laundering in a $40 million mortgage fraud case.104 His 

sentence is pending, and he has already agreed to a $489,000 forfeiture order.105

It is difficult for state regulatory agencies to stay abreast of disciplinary actions, 

revocations, and non-renewals of wholesalers entities operating in other states. For 

example, the state of North Carolina chose not to renew the wholesaler license for 

International Pharmaceuticals in December 2011 as a result of the company ‘‘willfully violat[ing] NC wholesale prescription drug distribution laws for an extended 

period of time during 2011.’’ 106 As of March 2012, International Pharmaceuticals 


725RPT11.eps
22 

106 E-mail from North Carolina Department of Agriculture and Consumer Services to former 

International Pharmaceuticals employee (Jan. 3, 2012). 107 Commonwealth of Kentucky Articles of Incorporation for KY Meds Inc. (filed Jan. 10, 2012) 

(listing Jennifer Colon, former Sales Manager for International Pharmaceuticals, as the President and Owner); E-mail from Jessica Hoppe, Sales Manager for KY Meds Inc., to pharmacy 

owner (July 13, 2012). 108Kentucky Board of Pharmacy, License Verification Details; Ohio Board of Pharmacy, License Center; and Pennsylvania Department of Health, Drug Device and Cosmetic Program 

Public Lookup (July 16, 2012). 

period of time during 2011.’’ 106 As of March 2012, International Pharmaceuticals 

still had active wholesaler licenses in at least 23 other states; these other state licenses referenced the company’s primary license in North Carolina. In addition, the 

owner and sales manager of International Pharmaceuticals and LTC Pharmacy recently opened a new wholesaler business called ‘‘KY Meds’’ in Kentucky.107 This 

company has already obtained wholesaler licenses in Kentucky as well as two other 

states.108

Conclusion 

This investigation has found that gray market companies that operate outside of 

authorized distribution networks take advantage of drug shortage situations to 

charge exorbitant prices for drugs used to treat cancer and other life-threatening 

conditions. Gray market drugs leak out of authorized distribution chains, often 

through pharmacies that sell to wholesale distributors, and are sold to end users 

at aggressively marked-up prices. The questionable business practices of the distributors and pharmacies engaged in gray market sales result in higher health care 

costs and potential risks to patients. 


725APP1.eps
23 


725APP2.eps 725APP3.eps

Exhibit II 

"Gray Market" Drug Distribution Shipment 

Four Packs of Magnesium Sulfate SDV SO% 2Sx2mL 

()n.op." , .. Go . ........ , 1Q,MJ1l-11/O/1l 

Markup " 1082% 

.-_ .... ........ -- ... ,,-- .-

$22 $26 $90 

Purcha.e Price Pe r Pac k 

Exhibit III 

"Gray Market" Drug Distribution Shipment 

30 Vials of Paclitaxel 30mg/SmL 

tlnoto ...... Go .... ....., ..,15/11- '/2011' 

$260 

Markup" 2213% 

.--~ .-..-

..... -- .-

Pu,cha,~ P'ic~ P~' Vial " 

, 

" ,,, $185 
24 


725APP4.eps 725APP5.eps

Exhibit IV 

"Gray Market" Drug Distribution Shipment 

Two Vials of Cytarabine 19m 

""", ...... 6< .. _: JJI7/U -l/Wll 

Markup = 4815% 

.--"' .... . .... 

---'-

-

"Gray Market" 

..... . ,.----------- -- -... ..o.i1~ 

$20 $3S $350 $399 

Purchase Prke Per Via l 

Exhibit V 

"Gray Market" Drug Distribution Shipment 

50 Vials of leucovorin 200mg 

Ones" "'.6<.., ....... , .""'\ -0""'11 

$995 

Markup = 3317% 

.~~~ ~ ......... -- ............. - .-

$12 $13 

Purchase Price Pe,Vi.1 

"Gray Market" 

$185 $210 $240 $410 
25 


725APP6.eps

PEDlGAEE FOA EXHIBIT I 

_~_"STOIIY 

---""- - --

-

r __ 

..-,-- --

--

-

r __ 

..-,-- --
26 


725APP7.eps

PEDIGREE FOR EXHIBIT 1 

"M!N""~I~ __ 

-,"'DII.g_ .... -

--

'--

----,--

--

-

=--- 0.-' __ 

--

-....... - ---,--
27 


725APP8.eps

PEDIGREE FOR EXHIBIT I 

"wMIR' .. m1i="(!ij,5ffl12mlr.~~.-- 0-,010..;_ .... _ 

--

,-- -.---1_-

--

-

T __ 

--

~I_-
28 


725APP9.eps

• SAMPLE SOUCITATIONS TO HOSPITALS EXHI8ITVII 

-

__ IhojIII ..... __ ...... __ II~.""" .. ., __ .......... .. _ _pt_ n.._~ ........... _ .... .,..."._of ___ _ ThII __ ·buor_" ___ ", ___ 

_ .~_""_"'''''''.I_'''_'''''""",""of_II''''I0'''_ ... pIrMo''''''_''",skI 

1'vo_ .... _IIIoru.nd .. _ updalos,.,lhtASH' "'''''ro<''moI.w. r ... 100 _.l/oot1lotof .... p_1 __ ",IIIII_II'II.If' •• Ioot_bvll'-lIoIIloholpNloo.,.,... . . ,..Iworl,._I1.,.-tt.' ___ .. _____ .... _ , .. _l ... """ 

h ", 

-

w-.,.-....,.II ... Z01I 

INCOMING: 

41616--093I-44V ............. I2O.SI05_ ... ~(DS61} 
29 


725APP10.eps

SAMPLE SOLICITATIONS TO HOSPITALS 

A V AIU.BLE ETA F1UDAYIMOh"DA Y: 

Pr-...ta. 5ml25 pKt ~ .211 ~ S3OO. 

~2Sml15 pKt O'229-3OfotO ~SICI5 ... 

Ashhzaayc.tY!OOq 10pockOI4+11 'IS ~ S!!I9 .. 

nm......-"-!IOaIeplos0.6-01 tlO~ '195 .. 

Mitomycin Sm8 20m! Olls-<l5l24 FI SIM 

Mi ..... ycln ~5OmlOI08-U no FLSU,4. 

v~ ... 5mli0 pod 23«1-10.15 ~ $?SO. 

Fl~ doc::zs..,. 5ml 02'12-45 flO pc: 11M ... 

G~ 5ml25 pocl.OOI6-54f20pc: $lIS. 

~'" 5Omf: lOaIlIOpd:OCJIM..(tl 'IS pc:SI05 .. 

Atropinellill'm .,. lmil! '** 0«11 -25 "O~ SIOS FI 

Levophed 4m1 3375-<14.24 pc: $245 ... 

Xec........, ~ 25 pod. 3795--4.9f20 pc FI $86.50. 

KcwoIoc 3Om&:IS pod. 3795-01 no pc: $86,50 .. 

D\&oxiaUIP..5"", 2m! ZI pod< UIIl-35 .211 pc: J1'P .. 

r.aaadulllp -''''' 2mi10 J*:k 0260-10 f9 pc Ia ....... m • 

HydrcocydM 5Om& 1".)25 ..... 3601-2516 '" OIoclt $19Ou 

Hyd:raJcyzIae 5Om& 10m! 25 1*& 5610-25 riO pc $339 .. 

0- IOma 1",1l5 1**0367-25 ' IOpcSII5.50. 

FolIc ICid 5Om,t 10m! 0184-10 ~ pc: S6S • 'i-20ll datlDa 

EKHIBITVlI 
30 


725APP11.eps

SAMPLE SOLICITATIONS TO HOSPITALS Dex~ 30m} 0165-30 180 pc. $loiS IS 

Veam:mium 10ml 0931""" '18 $1(15 IS In stock 

Chorionic gonaditropln 10.000u lOInl 0025-10 ,100vW. In.tock $124 ea 

Leuco 350'. 0054-01'40 pc: $95 ea 

Sod chI40mJ 25 pack 6660-75115 pc: $120 ell. 

Labe!olol Smg 4mllO ptek 2339-3"30 pc Sl09 eI. 

LabetololSmg 2Oml2267·20,50 pc $15.99 n 

Neoatipine SIlIII01ml10pack0382-10'20pcSI85 Ita 

NcMtigarin 1:1000 10 pack 027().-10 "S pc $109 

Neocigmine 1:2000 2S plock ()()34..2514 pc:: Inatod. S305 ea 

NEW SHORTAGES and UPDATES 

EXHISiTVII 

Lorazepam Injection 2 mglml (updated 5/9/2011) Baxterhu 1oratep&lD'2mgImL..10 mLvw.(NDC 

10019-0102·10) cunendy available {or distribution. The 2lllg1mL. 1 mL vial prese:nb.Uon (NDC lQOI9-0102-OI) 

will be on beck order umil the end of ApI'll. Bedford hal alllon:zepa.m injection ~Qtions on long-term b.ck 

order IIJId the campeny cannot ettlJnI.te , rdetse.ute. HospiN hat all pretentJotions anticipated to be rdeued in 

mid to late April. 2011. Please note that 21ng/mll rnL iSeeure prefilled ~ (NDC Q0409-1985..(l5) and 4mw'ml 

ImLCazpuj~t ~ (NDC Q4(J9..1539-31) are tempor:uUrunavaih~e. A¥'m hu Loruepam InjectKm lvaihble. 

Methylphenidate HCI (updated 5/1012011) ....,.; bd_wi';' ,","''Y~ond __ 

!oFf arden. Expect 1pO!'1Idic b.ckorders for the no;t couple of montha. M&Ilinckrodt op«U to have continued 

gradtW improvem.ent aver the Dl!Xt twO tnonthl. with full ~ by July 2011. UCB hQ aU presentations of 5 rna 

JR. a.vailable. All UCB presen,tatioIll of 10 mg IR. 20 me IR. and 20 m.g ER. are out of arock. i:he out. of.tOck tablet. 

ate expected to be on Intermlttent backorder until,pproxima.tely May 20. Wat&o:n oontinues to have product: ,wiLab~ . 

~ Injection (updared 5/1012011) TevII huamibdn 250 tngfmL 2 mL(NDC 007m-9032-(3) 

and " roL (NDC 00'703--9().4()..(8) Yia.b on alJoeatioo. H, P~ cannot obtain product from their wholaa.ier, 

pletie Mve the wholesa.ler amQIX Teva directly to plllCe an emergency order, Bedford anticipate. ~ of the 

SOOmg and 19 presenJ.adomln late May. The lOOmg preaenbUion hu been diIcondnued. - . 

Amphetamine Mixed Salts, ER Capsule. (updated 5/10/2011) Shin """'" ina""" p""",,, 
31 


725APP12.eps

BICNU (CarmutiDl!) Injection, 100 ma (NDC 00015-3012-60) c:::::J(5/1O/2011) BriIlcIM,.... SquIbiI boo 1l0lU ~ on b.clt order oM tho """'pur at!-.. m- dow oflo.-M.y 2011. 

~ ..... ",~cIeloyo._.......r..c-..r. 

BumetlI.Ilide I.Djection (Updaled 5/IMOII) Koopin Io....m..ln& to.a.-tho 0.25 .,.m.r.. 4 mL ... 

NIX; 0t0'}-1412.(M.; 0.151111'.mL; 4 mLN<rnpb vtoll\"DC0f09·IU2-49, u.. 0.25 o:o&fmL; 10 mL YIol NIX:04()9. 

Ifl2-IOl 0.25 .... ~ ...... tho 10 mLNOVIpIuo YIol NDCOt09·1412·5O .. thor be<amo nolloWo. ~ 10 

colldnuiD& to procIuoo ODd ru- p""",,", .. It......,_ rvaUobl •• Boxtc hoi oil bwMtWdoO.25 IDfImL Injecdotll 

on b.clt or<hr. BodIot<l will ba", oJl ~ antlcipoud fbr RlooM wiI:bIn <he ""'" 3·montbt. 

Cilplatin injection I Dl.gfruL solution (updated 5/1012011) Al'P 1o~lOoJlocale • 

....... occw: 50 ml....w (NIX: 633l3-O10)'51), 100 mL YIol (NDC 6332l-0103-6S) uo12OO mL vi.! (NDC6332l0103-61). T ... __ tDRI.- dopIacIa ......... I ..;.t.-50 mL..w (NDC 001'1))-5741·11) uo1l00 

ml. ...... (NDC007(I3..574-ll).II--....n.wt. Btdbd--lr!..oIl)* ............ ~ 

Cytanbine Injec:ticm (powderfor ftmnatitution) (updated 5/10/2011) Ro ..... oflledli:ltd·. ._"'_"~LD_IyMo,:_IOO",&I" __ "'<h._3-~tIIo:lOO""_tlti<nl 

In tho ...... 6-....... 1ho. The.q __ boo beao dloamrim.... APP boo _ oblo to tnu.. ~ lO bolp 

oddr.-

~ 

tho .-. """,..u...1eO oddiIloaal.,pplJoo 10 boo..z-d by """ of ApoB. HoopIro...m bo&in ru-ou., laaaf1~ml2Oml ... aaApilll. 2011. 

Diltiaz.eDl.Injection 5 mglmL (updated 5/10/2011) -"'1o~1 bodtOtdaoltuadaa ... 

aD «dOl ...... __ tho ~,..:dxl nalloIJIlliy. 5 mL Y\aI (NDC 10019·510-01) Ad.cIIdcaoI prodD« w-. 

ooq>e<l<d ~ IhIo ~ ODd .. """aMI 01 Mo,. JII mL Y\oI (NDC 1001~510-02) • ProcIIi<:t..m boo .... Ilablo -' oIloCo;y. 25 mL v\ol (NOC 1001<)..510-0.1) • Produa. 

m-~ by IIIld /qttiI end ODd of M.y. Produc:t will boo modo ovoJlobio .. It It ,eJ.oood. 

HooF> will 110", dI\dazom 5 "'i"ml. 5 mL (NDC 00409-1 111 -(1) or.I5mtfmI: 10 mL vIalo (HOC 00409-1111-0:1) .....u.bIelote-April.n.loo.a;mlADD-V ....... vIalo(NDC~_ ... boo:k __ &D_ .... datoo '" raId·AprIL 201 L ~ ouppIlto olthoADD-V.-,. vIalo_ ...... bIo _ <tiNa ...... 

1Iodbd~ ..... ofaD pnMSI..o....loI Il00 ..... 3-'-. 

Dcwlrubic:i.D.(adriamycin) lyophili2ed powder (updated 5/10/2011) lItdI'otdandcipo. ... 

rea-oIo1lp_lnthonoxt6-DIOI>.ba Si>ootapd",,"'~dda)'i 

Etoposide .,lution for iDjectian (updated 5/10/2011) Wf:mI.....,....*-oI500"'&~ 

ID -IJ May, l,la tho ... _tho. ...... l00 .... 1D tho ... 6--"0, Tn.. '-ToJ-r 20 mt/mLdWaD for 
32 


725APP13.eps

EXHIBIT :.'II 

IUloperidol Decanoate Injection (updated 511012011) Tcoo boooll~"" I.ookord ... 

0nJ00>.M<Nd 

~ 

boo HaldoI 0--. nailaI>lo iD.50 -.'mL I mL ~ iD. 3 CIOUDl (NDC~) 

ODd 100 "'I"IDL I mL........-(NDC0004S4.Z5+-14). liP, boo ~ ......... .....n.bI.t ... !(I 

oqImI. 5 mL vIaIo (NDC 63323-OI69..s~ 100 "'I'mL' mL '" U-"DC 633234171..(l5) ODd lOO..,.rmL 11111. vIaIo 

(NDC 633l).Oo17I..{1I) ODd. !(I malmL I mL vIaIo (NDC 63323-046').OI).nI Nb.e;"~ .. they boo:>!Ile .voJlabl .. 

IedIord boo alI~ .. 01 .. Ho.)aporidoI ~ 6amdm.oo4. 

I.euc:morin Calciu.m Lyophilized Powder for Injection (upditNl5l10J2011) Sodb<I 

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39 

I turn now to my esteemed Ranking Member, Senator Boozman, 

from the great state of Arkansas. 

STATEMENT OF HON. JOHN BOOZMAN, 

U.S. SENATOR FROM ARKANSAS 

Senator BOOZMAN. Thank you, Mr. Chairman, very much. And I 

appreciate your efforts and appreciate that of the staff working so 

hard in this particular area. 

I agree with Chairman Rockefeller. It is indefensible that we 

have cancer patients that have to wait to get chemotherapy. No 

hospital should pay $1,000 for a drug that only costs a few bucks. 

But I think we are missing the bigger picture. Drug shortages are 


725APP23.eps
40 

the root of the problem. I hear about shortages all across Arkansas 

nearly every day. Shortages create significant problems. 

This hearing is really about supply and demand. No one pays $250 for a loaf of bread. There are no 8,000 percent markups in a 

competitive market. In this investigation, four of the five cases involve generic injectable cancer drugs. These drugs are very inexpensive. Some cost $5 or $6. Some have been around for many, 

many years, and they save lives. There should be no shortage of life-saving $6 drugs, period. But 

today, companies are producing dozens of these generic cancer 

drugs at or near a loss. This is the real danger. This is the real 

threat to patients. Artificial Medicare drug pricing caps have created this problem. Aggressive FDA oversight has exacerbated this 

problem. And Ezekiel Emanuel, President Obama’s health advisor 

said, ‘‘the long-term solution is to make the production of generic 

cancer drugs more profitable.’’ 

We need to reform Medicare pricing and address the root of the 

problem. It’s not a complicated problem. It’s not an expensive problem. But it’s a very, very serious problem. 

Second, before we use this investigation as a justification for new 

Federal rules, I think we should stop and ask, are state pharmacy 

boards and regulators enforcing the laws on the books? 

The fact is, people have oversight responsibilities under current 

law. There’s no reason to expect people to comply with new layers 

of rules if they’re violating the ones that currently exist. 

Yes, we can create a new Federal agency. We can pass restrictions and burden manufacturers, distributors, and pharmacists 

with red tape. But, again, there’s no substitute for people fulfilling 

their responsibilities. Shell pharmacies simply should not exist. If 

they do, someone is not doing their job. 

In addition, as we talk about secondary distributors and reselling, there is a story that we should keep in mind, and I actually 

was part of this. In 2005, Hurricane Katrina hit New Orleans. It 

was a disaster in every sense of the word. Thirteen thousand evacuees were sent to Fort Smith, Arkansas. Many needed medical attention. Time was short, and the Federal Government was unresponsive. 

Thankfully, a pharmacist named John Vinson coordinated an incredible emergency response. Community leaders, independent 

pharmacists, secondary distributors, chain pharmacies, and wholesalers all came together. It was all hands on deck. They aggregated, resold, and dispensed drugs. Their actions kept many out of 

the hospital, and they saved many lives. 

As we move forward, let’s not forget that secondary distributors 

and intermediary drug markets serve a critical role. In times of 

tightened supply and limited stockpiles, they help address gaps in 

the supply chain. Across Arkansas, we have compound pharmacists 

who register as distributors and pharmacists. They have been critical throughout the drug shortage emergency. Without them, doctors could not perform needed surgeries. In rural or neglected 

areas, distributors can plug holes in the system or address needs 

that may go overlooked. 

Like nearly every industry, pharmacists also need backup options. They need tools to unload excess stock and flexibility to adVerDate Nov 24 2008 13:17 Feb 28, 2013 Jkt 075679 PO 00000 Frm 00044 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\79524.TXT JACKIE
41 

dress sudden spikes in demand. So, again, let’s not forget the necessary role that distributors and pharmacists play. 

Last, it’s time we learn our lesson about healthcare consolidation. From the manufacturing plant through the distribution system, pharmacy, clinic, and hospital, we’ve seen so much consolidation. If we expect to meet the growing healthcare needs of every 

American, we need choices. Choices satisfy niche markets. Choices 

facilitate competition. Regulations that crowd out smaller actors 

eliminate choices. So we’ve got to move carefully. 

Mr. Chairman, again, I thank you so much for your efforts in regard to bringing this important problem forward, and I really look 

forward to our witnesses today. 

The CHAIRMAN. Thank you very much, Senator Boozman. 

Actually, I’m looking at an interesting situation, because Elijah 

Cummings is doing exactly this kind of work in the House, and I’m 

looking at his name plate. But the Congressman is not here. So 

let’s decide this is what we’re going to do. I want, please, Virginia 

Herold, Dr. David Mayhaus, John Coster, John Gray, and Patricia 

Earl all to come forward and take a seat at the table. 

Senator BOOZMAN. Mr. Chairman, as they come forward, can I 

ask that the hearing be kept open for 2 weeks for additional statements and questions for the record? 

The CHAIRMAN. Absolutely. 

Senator BOOZMAN. Thank you, Mr. Chairman. 

The CHAIRMAN. And then I thought also if Senator Harkin 

comes—I’ve been to his committee on coal-related things, coal mine 

safety, and he has me sit at the dais. So I’m inviting him to sit at 

the dais. And I think if Senator Enzi comes, he should also sit at 

the dais and ask questions and stay as long as they want. 

If Elijah Cummings comes—he’s conducting a hearing and will 

be continuing to after he makes a statement. So I may have him 

come to the dais and just make his statement. But there’s still 

plenty left to do. 

So, Virginia Herold, let’s start with you. You’re the Executive Officer of the California Board of Pharmacy. 

STATEMENT OF VIRGINIA HEROLD, EXECUTIVE OFFICER, 

CALIFORNIA BOARD OF PHARMACY 

Ms. HEROLD. Chairman Rockefeller and members of the Committee, thank you for the invitation to come and speak before you 

today. I’m Virginia Herold. I’m the Executive Officer of the California State Board of Pharmacy. 

The Board of Pharmacy in California licenses pharmacies, pharmacists, drug wholesalers. We are the largest regulator of pharmacists in the country. We have over 40,000 pharmacists licensed 

with us. Within the state of California, we have 6,200 community 

pharmacies, another 500 hospital pharmacies, and 500 wholesalers 

located within the state. We have another 700 wholesalers located 

out of state that are licensed to ship into California legally. 

The Board’s paramount mandate, which is expressly stated in 

California law, is consumer protection. So, above all else, that is 

our focus. 

California state law provides the limited circumstances under 

which a pharmacy may provide prescription drugs to any entity. 

42 

You have a copy at the back of my testimony. One of the provisions 

provides that a pharmacy may furnish prescription drugs to another pharmacy or wholesaler to alleviate a temporary shortage of 

a dangerous drug that could result in the denial of healthcare and 

only in quantities sufficient to alleviate the shortage. Violations 

can be charged up to $5,000 per occurrence. This would mean per 

invoice, for example. 

In the fall of 2011, the Board initiated an investigation following 

a pharmacist’s inquiry to the Board about the legality of the pharmacy ordering prescription drugs from another wholesaler in short 

supply. These sales would be initiated at the behest and solicitation 

of the second wholesaler who informed the pharmacy that the prescription drugs were declared as temporarily short. Thus it would 

be OK. We have a provision in California state law that very much 

limits when a pharmacy can sell drugs to a wholesaler. 

The pharmacy’s role would be to act as a purchasing agent for 

the wholesaler, purchasing drugs specifically on a list of prescription drugs in short supply that the wholesaler provided the pharmacy. The arrangement between the pharmacy and wholesaler was 

financial. The pharmacy would be paid an agreed amount, typically 

10 percent over invoice plus shipping expenses. 

As of today, the Board has identified cases in which 55 pharmacies purchased drugs in short supply for this one wholesaler on 

514 occasions, totaling wholesale prices over $330,000. Each of the 

pharmacies and their pharmacists in charge have been cited and 

fined in various amounts up to $70,000 for violation of California 

law. Appeals of these citations and fines are currently pending, and 

the wholesaler has not yet had discipline completed. So we are still 

going through the process. 

However, these actions and investigations are very important, we 

believe, to share with the Committee. And we are hoping and looking to the Committee as finding ways to secure additional means 

to provide safeguards into the supply chain. 

The Board’s investigations generally identified that, one, a pharmacy would be visited by a sales agent representative of the wholesaler, who explained the dire impact that the drug shortages presented to the patients and healthcare providers and stressed the 

inability of the wholesaler to obtain these drugs on its own. The soliciting wholesaler advised it was another source of pharmaceuticals for medical facilities and needed these medications. 

Sales were triggered from a list that the wholesaler released 

each week to the pharmacies that was titled ‘‘Items We Are Looking For.’’ The pharmacies involved were all independent community 

pharmacies. The drugs were principally medication that would be 

used by hospitals and rarely would be needed by community pharmacies. 

The Board did not find cases where the pharmacies purchased 

drugs for their own patients as well. All drugs were purchased exclusively for the wholesaler, using the list. The pharmacies had no 

independent knowledge of the shortage. They would sometimes 

verify once they were told there was a shortage of the drug. But, 

generally, that shortage was made at the time of purchase from 

their primary wholesaler. 

43 

Some of the pharmacies seemingly circumvented the allocation 

that was set up by manufacturers by making multiple orders on 

the same day at different times so that they could maximize what 

they purchased. For example, one pharmacy ordered one drug 12 

times in 1 day to maximize the amount purchased. Other times, 

very large orders were made. For example, we had another case 

where 30 boxes—each box had 25 units or vials—of a particular 

short-supply drug—were purchased, which is far in excess of what 

the community pharmacy would have ever needed, in fact, this particular drug is used in hospitals for infants. It’s a very select drug. 

Pharmacies were typically paid 10 percent over the invoice for 

the drugs they purchased for the wholesaler. However, the wholesaler also sought direct access to the pharmacy’s primary wholesaler ordering systems, which was granted by 23 of the 55 pharmacies. This allowed the wholesaler to directly order the drugs it 

sought without the active involvement of the pharmacy. For this 

access, the pharmacy was paid 12 to 15 percent, a higher rate. 

Several pharmacies also sold drugs in short supply to several 

other wholesalers, including several wholesalers out of California 

who are not licensed to do business in the state. The wholesaler 

made considerably more when it resold the short-supply drugs than 

the 10 to 15 percent it paid the pharmacy to obtain the drugs. 

Some of the extreme examples include a Naval hospital that paid 

6,246 percent markup for a drug over what—— 

Senator ROCKEFELLER. Could you repeat that? 

Ms. HEROLD.—6,246 percent, and it was very much like the situ- ation you gave. This was a drug that was $1.50 per container. They 

charged over a hundred and something dollars per vial for that. 

There was another hospital that had another drug that they paid 

over 1,200 percent markup to get the drug. So this was a distortion 

of the market allocation system that was set up to ensure everyone 

had fair access. 

The wholesaler also resold over 10 percent of the short-supply 

drugs it had purchased to other wholesalers, not to pharmacies or 

healthcare providers. Hence, they’re now reshipping the product 

throughout the supply chain. The Board also documented cases 

where the wholesaler resold the entire quantity it purchased from 

the pharmacy to another wholesaler. 

The Board moved forward with these cases because instead of alleviating the shortage of drugs, the wholesaler instead removed 

more drugs from the availability in the legitimate supply chain 

which had allocations in place to most equitably distribute the 

product. We believe that it increased the shortage of the drugs and 

dramatically increased the cost of these drugs to other healthcare 

entities and thus to patients. 

That concludes my remarks. 

[The prepared statement of Ms. Herold follows:] 

44 

PREPARED STATEMENT OF VIRGINIA HEROLD, EXECUTIVE OFFICER, 

CALIFORNIA STATE BOARD OF PHARMACY

Dear Chairman Rockefeller, Ranking Member Hutchison and Committee Members: 

Good afternoon. 

I am Virginia Herold, Executive Officer of the California State Board of Pharmacy. It is a privilege to be given this opportunity to address the Committee on 

California’s efforts to address some of the unethical and illegal behavior surrounding 

manipulation of prescription drug shortages by wholesalers and pharmacies, to the 

detriment of the public health. As I speak today, our investigations and resultant 

enforcement activities that I describe below are not yet fully completed. 

The California State Board of Pharmacy licenses pharmacies, pharmacists, drug 

wholesalers and other entities that dispense, ship, transport or store prescription 

drugs and devices into, throughout and from California. The board is the largest licenser of pharmacies and pharmacists in the country—nearly 40,000 pharmacists, 

6,200 community pharmacies and 500 wholesalers are located in California and licensed by the board. The board’s paramount mandate, which is expressly stated in 

the California Business and Professions Code, is consumer protection. 

California state law provides the limited circumstances under which a pharmacy 

may provide prescription drugs to any entity. One of the provisions provides that 

a pharmacy may furnish prescription drugs to another pharmacy or wholesaler to 

alleviate a temporary shortage of a dangerous (or prescription) drug that could result in the denial of health care and only in quantities sufficient to alleviate the 

temporary shortage. Violations can be charged up to $5,000 per occurrence (e.g., invoice). A copy of this code section is provided as an attachment to this testimony. 

In the fall of 2011, the board initiated an investigation following a pharmacist’s 

inquiry about the legality of the pharmacy ordering prescription drugs in short supply from its primary wholesaler, expressly for sale to another wholesaler. These 

sales would be initiated at the behest and solicitation of the second wholesaler, who 

informed the pharmacy that the prescription drugs were declared as temporarily 

short and thus these sales were legal. 

The pharmacy’s role would be to act as a purchasing agent for the wholesaler, 

purchasing drugs specifically on a list of prescription drugs in short supply that the 

wholesaler provided to the pharmacy. The arrangement between the pharmacy and 

wholesaler was financial: the pharmacy would be paid an agreed amount, typically 

10 percent over invoice, plus shipping expenses. 

The board initiated an investigation of the California wholesaler making this solicitation, which yielded hundreds of invoices from 55 California pharmacies that 

had sold prescription drugs in short supply to this wholesaler, at the wholesaler’s 

request. The board next investigated each of the 55 pharmacies, interviewing the 

pharmacists-in-charge or others who had knowledge of the sales. Again, invoices 

were obtained from each pharmacy. 

As of today, the board has identified cases in which 55 pharmacies purchased 

drugs in short supply for the wholesaler on 514 occasions, totaling wholesale prices 

of over $330,000. Each of the pharmacies and their pharmacist-in-charge have been 

cited and fined in various amounts up to $70,000 for violation of California law. Appeals of these citations and fines are currently pending. The wholesaler has not yet 

had discipline completed. Thus none of these actions and investigations is fully concluded. However, we are sharing this information to the Committee in hopes of securing enhanced ways to stop the practices identified by the board. 

The board’s investigations generally identified that: 

1. A pharmacy would be visited by a sales agent/representative of the wholesaler, 

who explained the dire impact that drug shortages presented to patients and 

health care providers, and stressed the inability of the wholesaler to obtain 

these drugs on its own. This soliciting wholesaler advised that it was another 

source of pharmaceuticals for medical facilities, and needed these medications. 

2. Sales were triggered from a list the wholesaler released each week to the pharmacies titled ‘‘Items we are looking for.’’ 

3. The pharmacies involved were all independent, community pharmacies. 

4. The drugs were principally medication that that would be used by hospitals 

and rarely would be needed by community pharmacies. The board did not find 

cases where the pharmacies purchased drugs for their own patients needs’— 

all drugs were purchased exclusively for the wholesaler using the list. 

5. The pharmacies had no independent knowledge of the shortage. 

45 

6. Some of the pharmacies seemingly circumvented the allocation system set up 

by manufacturers by making multiple orders on the same day at different 

times. For example, one pharmacy ordered acetylcysteine 12 times in one day 

to maximize the amount purchased. Other times, large orders were made (30 

boxes of 25 vials of magnesium sulfate). 

7. Pharmacies were typically paid 10 percent over invoice for the drugs they purchased for the wholesaler. 

8. However, the wholesaler also sought direct access to the pharmacies’ primary 

wholesaler ordering systems, which was granted by 23 pharmacies—allowing 

the wholesaler to directly order the drugs it sought without the active involvement of the pharmacy. For this access, typically the pharmacy was paid 12 to 

15 percent over invoice. 

9. Several pharmacies also sold drugs in short supply to other several other 

wholesalers, including several wholesalers out of California who were not licensed to do business in the state. 

The wholesaler made considerably more when it resold the short supply prescription drug than the 10 to 15 percent it paid the pharmacy. Some of the extreme examples include: 

1. Labetalol sold to a Naval hospital: 6,246 percent markup. 

2. Leucovorin sold to a hospital: 996 percent markup. 

3. Famotidine sold to a hospital in Georgia: 1240 percent markup. 

4. Calcium gluconate sold to a hospital in Los Angeles: 441 percent markup. 

The wholesaler also resold about10 percent of the short supply drugs it had purchased to other wholesalers, not to pharmacies or health care providers. These 

wholesalers were charged lower fees (e.g., sometimes 40 percent over the price paid 

by the wholesaler). The board also documented cases where the wholesaler resold 

the entire quantity purchased to another wholesaler. 

The board moved forward with these cases because instead of alleviating the 

shortage of these drugs, the wholesaler instead removed more drug from availability 

in the legitimate supply chain, which had allocations in place to most equitably distribute the product. We believe that it increased the shortage of the drugs and dramatically increased the cost of these drugs to other health care entities, and thus 

to patients. 

This concludes my statement. Thank you again for this opportunity. 

Attachment of Section 4126.5, California Business and Professions Code 

4126.5. (a) A pharmacy may furnish dangerous drugs only to the following: 

(1) A wholesaler owned or under common control by the wholesaler from whom 

the dangerous drug was acquired. 

(2) The pharmaceutical manufacturer from whom the dangerous drug was acquired. 

(3) A licensed wholesaler acting as a reverse distributor. 

(4) Another pharmacy or wholesaler to alleviate a temporary shortage of a dangerous drug that could result in the denial of health care. A pharmacy furnishing dangerous drugs pursuant to this paragraph may only furnish a 

quantity sufficient to alleviate the temporary shortage. 

(5) A patient or to another pharmacy pursuant to a prescription or as otherwise 

authorized by law. 

(6) A health care provider that is not a pharmacy but that is authorized to purchase dangerous drugs. 

(7) To another pharmacy under common control. 

(b) Notwithstanding any other provision of law, a violation of this section may 

subject the person or persons who committed the violation to a fine not to exceed the amount specified in Section 125.9 for each occurrence pursuant to a 

citation issued by the board. 

(c) Amounts due from any person under this section on or after January 1, 2005, 

shall be offset as provided under Section 12419.5 of the Government Code. 

Amounts received by the board under this section shall be deposited into the 

Pharmacy Board Contingent Fund. 

(d) For purposes of this section, ‘‘common control’’ means the power to direct or 

cause the direction of the management and policies of another person whether 

by ownership, by voting rights, by contract, or by other means. 

46 

The CHAIRMAN. You did OK. 

Ms. HEROLD. I came in under 5 minutes, and I wasn’t sure I’d 

do it. I talked as quickly as I could. 

The CHAIRMAN. Thanks a lot. You did a good job. 

At this point, I’d like to interrupt and have Chairman Tom Harkin, who is head of Labor, Education, Health, and several other 

things—chairs that committee—and he’s very much involved in 

this, and I want him to—and if Mike Enzi comes, I hope—and Elijah Cummings is also coming a few minutes out. 

But we welcome any words you have to say. 

STATEMENT OF HON. TOM HARKIN, 

U.S. SENATOR FROM IOWA 

Senator HARKIN. Well, thank you, Mr. Chairman, and I thank 

the panel for letting me intervene at this moment. I’m sorry I’m a 

bit late in getting here. 

But, first of all, I want to thank you, Chairman Rockefeller, for 

your great leadership in this area and for working with us on our 

committee and also with the House committee, also. This truly is 

a problem that cries out for something to be done. It’s not just costs 

that I heard you commenting about on these huge markups. It’s 

also about patient safety, too. How do we know just how safe some 

of these drugs are when they go through four or five or six different 

hands? 

And we’ve had instances in our committee of people saying that 

expiration dates were changed. Different things were taken out of 

vials and put into other vials. So it has to do with safety, also. 

Mr. Chairman, when we did the FDA reauthorization bill recently that the president just signed into law, we had great bipartisan agreement on the upstream side of the drug safety issue in 

terms of where the drugs come from to the manufacturer. And we 

gave the FDA a lot more authority to police that and to make sure 

that both the non-pill form type of drugs, the bulk drugs coming 

in, but also the finished drugs coming in were under heightened 

scrutiny from here on. 

What we did not have bipartisan agreement on—general agreement on—was the downstream side, which you’re looking at right 

here, and that is from the manufacturer on down to the patient, 

to the purchaser. And, hopefully, we can find agreement on how to 

move ahead. It’s very complicated. I’ve looked at this in great detail. It’s a very complicated issue, but that doesn’t mean it’s not 

solvable. It is solvable, and we just have to do it. 

Just last week, the FBI and the U.S. Attorney in Manhattan 

charged 48 people in connection with a massive scheme in which 

crooks bought HIV/AIDS medications from Medicaid patients and 

then sold them to prescription drug wholesalers, who got the drugs 

back into the hands of pharmacies and patients. So a system where 

drugs sold for cash on street corners can make their way back to 

legitimate pharmacies—a system that is crying out for some kind 

of reform. 

So your hearing today moves us a step forward. In that way, the 

work done by your committee, Chairman Rockefeller, and mine and 

Congressman Cummings’, I believe, will better define the problem. 

And I’m committed to work with you, Mr. Chairman, and our rankVerDate Nov 24 2008 13:17 Feb 28, 2013 Jkt 075679 PO 00000 Frm 00050 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\79524.TXT JACKIE
47 

ing members to practice and to get a system in there where—we’ve 

got the upstream, and now we have to make sure that we get this 

gray market thing out of the system so that we can keep the price 

of drugs down and also make sure they’re safe for patients. 

So thank you very much, Mr. Chairman. And I thank our panel 

for letting me intervene. 

The CHAIRMAN. Thank you very much, Chairman Harkin. 

Chairman Harkin and I came into the Senate the same year, and 

we’re fairly inseparable. 

Senator HARKIN. That was in the last century, wasn’t it? 

The CHAIRMAN. Yes, it was. All right. 

Now, Dr. Mayhaus, I’m having a trauma over pronouncing your 

name correctly. 

Dr. MAYHAUS. You are pronouncing it correctly—Mayhaus. 

The CHAIRMAN. Good. OK. You are the Chief Pharmacy Director 

of the Cincinnati Children’s Hospital Medical Center, where my 

wife and my children all got tested for allergies. 

Dr. MAYHAUS. I hope they had a great experience. 

The CHAIRMAN. Just a little plug. 

Dr. MAYHAUS. OK. Good. 

The CHAIRMAN. Please go ahead. 

STATEMENT OF DR. DAVID MAYHAUS, CHIEF PHARMACY 

DIRECTOR, CINCINNATI CHILDREN’S HOSPITAL MEDICAL 

CENTER; MEMBER, EXECUTIVE COMMITTEE, CHILDREN’S 

HOSPITAL ASSOCIATION PHARMACY FORUM 

Dr. MAYHAUS. Chairman Rockefeller and members of the Committee, my name is David Mayhaus, and I am Chief Pharmacy Director at Cincinnati Children’s Hospital Medical Center. I am 

grateful for the opportunity to speak to you today, not only on behalf of Cincinnati Children’s, but also as a member of the Executive Committee for the Children’s Hospital Association Pharmacy 

Forum. 

My goal today is to describe the process Cincinnati Children’s 

uses for managing drugs when they reach critical shortages and 

how these issues have impacted our pharmacy operations over the 

past 5 years. 

Cincinnati Children’s is a tertiary care research facility that was 

recently ranked third in the nation among all Honor Roll Hospitals 

in U.S. News and World Report’s Best Children’s Hospital ranking. 

Within Cincinnati Children’s, the Division of Pharmacy is an extremely busy unit, dispensing approximately 7,500 doses per day. 

When there is a sudden drug shortage crisis, the impact can be felt 

throughout our entire system. 

Today, at Cincinnati Children’s, there are currently 30 drugs 

that we are actively managing on a daily basis. The buyers that 

work for me check our primary wholesaler or the manufacturer on 

a daily basis. We meet several times a day to discuss where we are 

and possible mitigation plans. Our buyers spend 30 percent of their 

time just dealing with drug shortages and trying to prevent Cincinnati Children’s from experiencing a crisis. 

As Chief Pharmacy Director, approximately 10 percent of my 

time is also dedicated to these issues, including what I am doing 

here today, appealing to you to assure an adequate supply of mediVerDate Nov 24 2008 13:17 Feb 28, 2013 Jkt 075679 PO 00000 Frm 00051 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\79524.TXT JACKIE
48 

cations to our patients. Everything we do is in the best interest of 

our pediatric patients. 

Once a drug is determined to be in shortage, our clinical pharmacists identify our utilization pattern and estimate the number of 

base supplies that we have in inventory. If the anticipated length 

of the shortage exceeds our current supply, we develop a mitigation 

plan which could include purchase of the gray market in extreme 

cases. 

Our goal at this point is to extend the amount of inventory until 

the drug is released to the market. Work also begins at this stage 

with the impacted medical divisions to explore if various safe alternatives and treatments exist. 

The vast majority of drugs purchased for Cincinnati Children’s 

are from two primary wholesalers. At the point all inventory of the 

affected drug has been exhausted, regular wholesalers and manufacturers have no product, and the mitigation plan has run its 

course, Cincinnati Children’s has in the past looked for alternative 

wholesalers for the product. Let me be clear. Cincinnati Children’s 

only uses these alternative wholesalers as a last resort when it is 

determined that the absence of the drug could cause harm to one 

of our small patients. 

In these extreme cases, Cincinnati Children’s has very specific 

due diligence procedures for obtaining drugs from alternate wholesalers, which includes an examination of the drug pedigree. Over 

the past 12 months, Cincinnati Children’s has purchased only nine 

out of the 2,800 different line item drugs from these alternative 

wholesalers. 

As a medical team, it was determined that all these drugs were 

critical. In fact, three of them are drugs used to maintain life support during a code. Cincinnati Children’s believed running out of 

the stock of these drugs was not an option and would have the potential to cause significant harm to our patients. 

Critical chemotherapy drugs have been frequently reported in 

short supply. One specific example is when we needed to purchase 

a very important chemotherapy called Cytarabine that was in short 

supply. Cytarabine is used to treat acute lymphoblastic leukemia 

and is the drug our oncology division firmly believes has the most 

efficacy for treatment. 

After careful consideration and the due diligence described above, 

and because there is no treatment alternative for this particular 

disease, Cincinnati Children’s did, in fact, purchase this drug from 

alternative wholesalers. Because of this purchase, we did not run 

out of this important drug, and all the patients received all the appropriate doses. 

It is a daily reality that our buyers in the division receive e-mails 

and phone calls from alternative wholesalers. It is our experience 

that the call activity increases when a new or critical drug goes 

into a shortage situation. The prices vary from wholesaler to wholesaler. Cincinnati Children’s has had the experience of the price 

changing rapidly, even between phone calls, within the same alternative wholesaler, depending on the market activity and the critical nature of the drug. 

These business practices are not the normal procedure for our 

primary wholesaler or any other of our activities within the pracVerDate Nov 24 2008 13:17 Feb 28, 2013 Jkt 075679 PO 00000 Frm 00052 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\79524.TXT JACKIE
49 

tice of pharmacy. As you can surmise, it is also a fact that in all 

of our purchases through alternative wholesalers, Cincinnati Children’s did, in fact, pay substantially more than our normal contracted price. In some cases, the price exceeded 35 times the normal pricing. 

Finally, on behalf of my colleagues at the other children’s hospitals across the country, I would like to conclude by thanking this 

committee for its efforts to gain a full understanding of the complexity of this issue. As Cincinnati Children’s has seen over the 

past 5 years, the fragile nature of the pharmaceutical supply chain 

does have a direct correlation to the treatment of our patients. At 

Cincinnati Children’s, safety is paramount, and there is nothing 

more important to the institution than making sure a child gets 

the right care in the appropriate setting with the very best quality 

and competency that can be delivered. 

Thank you for allowing me to share our experiences with you 

today, and I would be happy to respond to questions later. 

[The prepared statement of Dr. Mayhaus follows:] 

PREPARED STATEMENT OF DR. DAVID MAYHAUS, CHIEF PHARMACY DIRECTOR, 

CINCINNATI CHILDREN’S HOSPITAL MEDICAL CENTER; MEMBER, EXECUTIVE

COMMITTEE, CHILDREN’S HOSPITAL ASSOCIATION PHARMACY FORUM

Chairman Rockefeller and members of the Committee, my name is David 

Mayhaus and I am the Chief Pharmacy Director at Cincinnati Children’s Hospital 

Medical Center. I am grateful for the opportunity to speak to you today not only 

on behalf of Cincinnati Children’s, but also as a member of the Executive Committee 

for the Children’s Hospital Association Pharmacy Forum. My goal today is to describe the process Cincinnati Children’s uses for managing drugs when they reach 

critical shortage and how these issues have impacted our pharmacy operations over 

the past five years. 

Cincinnati Children’s was recently ranked third in the Nation among all Honor 

Roll hospitals in U.S. News and World Report’s Best Children’s Hospitals ranking. 

Our institution is ranked in the top 10 for all of the pediatric specialties ranked. 

On the research side, Cincinnati Children’s is one of the top two pediatric recipients 

of grants from the National Institutes of Health. In FY 2011 there were over 1 million patient encounters at Cincinnati Children’s from 48 states and over 50 countries. Cincinnati Children’s operates over 570 registered beds including a Heart Institute, a Perinatal Institute and a Cancer and Blood Disease Institute. Cincinnati 

Children’s division of pharmacy is a large facility which dispenses approximately 

7,500 doses per day. When there is a sudden drug shortage crisis the impact can 

be felt through our entire system. 

Our division of pharmacy consists of 150 FTEs. Three of these FTE are pharmacy 

buyers. These buyers are responsible for managing the inventory of approximately 

2800 line items of drugs. Over the past several years, more and more time has been 

dedicated to management of medications that are in short supply. Over time I have 

seen it grow to the point where today our buyers spend 30 percent of their day just 

dealing with drug shortages and trying to prevent Cincinnati Children’s from experiencing a crisis. In addition to our drug buyers; clinical pharmacists and directors 

spend an inordinate portion of their time monitoring drug supply which can range 

from modification of therapy, to alternative medications. Our pharmacists have contacted manufacturers, wholesalers and alternative suppliers to get what we need. 

As Chief Pharmacy Director approximately 10 percent of my time is also dedicated 

to these issues including what I am doing today, appealing to you to assure adequate supply of medications for our patients. 

Today at CCHMC there are currently 30 drugs being actively managed on a daily 

basis and approximately an additional 70 where there have been concerns about 

shortage in the recent past. The buyers who report to me check our primary wholesaler on a daily basis for the 30 drugs on the critical list. We meet informally several times a day as a group and discuss where we are and possible mitigation plans. 

As a pediatric institution, it is vitally important to continually monitor the drug 

shortage market and react quickly to the changes. 

50 

There are several mechanisms to determine new and ongoing drug shortages. The 

3 most important are the American Society of Health-System Pharmacists (ASHP) 

website, The FDA website and the Children Hospital’s Association’s pharmacy directors and buyers list serve. Other less helpful mechanisms are the primary wholesaler and manufacturer notifications. It is the experience of Cincinnati Children’s 

that these last two tend to be delayed in their announcement of shortages. For these 

reasons we applaud the Senate for their passage of the Senate Bill 3187, the FDA 

user fee legislation, which will create an early-warning notice system that will give 

providers like myself more timely notice ahead of a critical shortage. 

Everything we do is in the best interest of our pediatric patients. Once a drug 

is determined in shortage, our clinical pharmacists identify our utilization pattern 

and an estimate for days supply is developed. If the anticipated length of the shortage exceeds our current supply, we meet to develop a mitigation plan which could 

include purchase from the gray market in extreme circumstances. Our goal at this 

point is to extend the amount of inventory until the drug is released to the market. 

Work also begins at this stage with the impacted medical divisions to explore if various safe alternatives in treatment exist. Mitigation plans could include: reducing 

the dosing guidelines within medical staff approval for the affected drug, changing 

the current distribution from readily available to pharmacy dispensed therefore 

maximizing product or changing to a similar drug in the pharmaceutical class. None 

of these decisions would be made without complete and thorough consultation with 

the medical team. 

The vast majority of the drugs purchased from Cincinnati Children’s are from two 

primary wholesale companies. At the point all inventory of the affected drug has 

been exhausted, regular wholesalers have no product and the mitigation plan has 

run its course, Cincinnati Children’s has in the past looked to alternative wholesalers for product. Let me be clear, Cincinnati Children’s only use these alternative 

wholesalers as a last resort when it is determines that the absence of the drug could 

cause harm to our patients. 

In those situations where Cincinnati Children’s decides to purchase a drug from 

an alternative wholesaler, we follow extensive due diligence procedures including 

checking the prescription drug pedigree. 

Over the past 12 months Cincinnati Children’s has purchased only 9 out of 2,800 

different line item drugs from these alternative wholesalers. As a medical team it 

was determined that all of these drugs were critical and in fact three of them are 

drugs used to maintain life support during a code. Cincinnati Children’s believes 

running out of stock of these drugs is not an option and would have had the potential to cause significant harm to our patients. 

Critical chemotherapy drugs have been frequently reported to be in short supply. 

One specific example is approximately 18–24 months ago the institution needed to 

purchase a very important chemotherapy (Cytarabine) that was in short supply. 

Cytarabine is used to treat Acute Lymphoblastic Leukemia (ALL) and is the drug 

that our number three ranked oncology division firmly believes has the most efficacy 

for treatment. After careful consideration and the due diligence described above and 

because there is no treatment alternative for this particular drug, Cincinnati Children’s did in fact purchase this drug from alternative wholesalers. Because of the 

purchase, we did not run out of this important drug and all patients received the 

appropriate dose. 

It is a daily reality that the buyers in our division receive e-mails and phone calls 

from alternative wholesalers. It is our experience that the call activity increases 

when a new or critical drug goes into a shortage situation. The prices vary from 

wholesaler to wholesaler. Cincinnati Children’s has had the experience of the price 

changing rapidly, even between phone calls, within the same alternative wholesaler 

depending on the market activity and the critical nature of the drug. These business 

practices are not the normal procedure for our primary wholesaler or for any other 

activity within the practice of pharmacy. As you can surmise, it is also a fact that 

in all of our purchases through alternative wholesalers, Cincinnati Children’s paid 

substantially more than our normal contracted price. In some cases this price exceeded 35 times more than normal pricing. 

Finally, on behalf of my colleagues at the other children’s hospitals across the 

country, I would like to conclude by thanking this Committee for its efforts to gain 

a full understanding of the complexity of these issues. As Cincinnati Children’s has 

seen over the past five years the fragile nature of the pharmaceutical supply chain 

does have a direct correlation to treatment for patients. At Cincinnati Children’s 

safety is paramount and there is nothing more important to the institution than 

making sure a child gets the right care, in the appropriate setting with the very 

best quality and competence that can be delivered. 

51 

Thank you for allowing me to share our experiences with you today and I will 

be happy to respond to questions. 

The CHAIRMAN. Thank you very much, Dr. Mayhaus. You spoke 

in a quiet manner, but your testimony was very potent. 

And now I would once again call upon my colleagues and our witnesses to allow a very distinguished visitor, Elijah E. Cummings, 

who is Ranking Member of the Oversight and Government Reform 

Committee in the House, who has been working on this and so 

many other issues. We’ve done a number of things together, and 

we’ve been in each other’s daises, so to speak. But he has something he would like to say on this, and I hope that my colleagues 

and the witnesses will listen carefully to what he has to say, because then he has to go right back and continue chairing a hearing. 

STATEMENT OF HON. ELIJAH E. CUMMINGS, RANKING MEMBER, U.S. HOUSE COMMITTEE ON OVERSIGHT 

AND GOVERNMENT REFORM 

Mr. CUMMINGS. Thank you very much Chairman Rockefeller and 

Ranking Member Hutchison and members of the Committee, and 

I thank you for inviting me to testify here today. Let me also extend my personal thanks to Chairman Rockefeller and Chairman 

Harkin and their staffs for their great work during this investigation and for their comprehensive report issued today. 

If I may, I would like to focus briefly on why I launched this investigation and what we found so far and what we can do about 

it. I initiated this investigation last year after receiving a heartfelt 

letter from Brenda Frese. Brenda is the head coach of the women’s 

basketball team at the University of Maryland, and these are pictures of Brenda and her son, Tyler. 

Brenda wrote to me about a critical shortage in a drug called 

Cytarabine, which treats leukemia in children. Let me read what 

she wrote. ‘‘Without Cytarabine, many leukemia patients won’t be 

cured and they will die. What makes this hit home even more for 

me and my family is that my 3-year-old son, Tyler, is a leukemia 

patient who has benefited from Cytarabine,’’ end of quote. 

As we began investigating this shortage, we found something 

very disturbing. Hospitals such as Johns Hopkins, the University 

of Maryland, and others told us that even though they could not 

get the drug from their authorized distributors, they were being inundated with phone calls, e-mails, and faxes from gray market 

companies offering the shortage drugs and others at highly inflated 

prices. They were outraged by this and so was I. 

Based on the information provided by the hospitals, we started 

with five drugs facing critical shortages, and we identified five gray 

market companies marketing them at exorbitant prices. We asked 

these companies where they were getting these drugs and how 

much money they were making by selling them. Based on their initial responses, we expanded our investigation to cover 125 different 

companies, and we reviewed 300 different drug transaction chains. 

The report issued today does a terrific job laying out the facts in 

detail. So let me highlight one example that illustrates our findings. 

First, let me put up a chart that shows how things are supposed 

to work. Under normal circumstances, drugs go from manufacturVerDate Nov 24 2008 13:17 Feb 28, 2013 Jkt 075679 PO 00000 Frm 00055 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\79524.TXT JACKIE
52 

ers to distributors to hospitals, pharmacies, or other healthcare 

providers that dispense them to patients. But that is not what happens in the gray market. In the gray market transactions, shortage 

drugs are being diverted into a much longer distribution chain. 

Let me show you an example, the transaction involving 

Fluorouracil. This drug is used to treat various forms of cancer, including colon cancer, stomach cancer, breast cancer, and pancreatic 

cancer. As you can see, instead of the three stops, in this case there 

are nine. The main problem is that each one of these entities 

marked up the price of the drug. Let me show you how much. 

This is the same chart now listing the prices for each trans- action. The drug started at $7—listen to what I’m saying—$7 per 

vial when it was sold by the authorized distributor. It was later 

sold for $50, then $69, then $95, then $275, then $375. And, remember, it started at $7, and it was sold finally to a hospital at 

an astonishing $600. Something is wrong with that picture. That 

was for a single vial of this cancer drug, more than 85 times its 

initial price. 

This was not an isolated incident. We found this same pattern 

with all the drugs we examined. This system makes absolutely no 

sense for patients who need these critical drugs or for hospitals 

that treat them. The current system allows this network of private 

companies to boost their profits, and for what? For doing nothing 

but charging offensively high prices, increasing the overall cost of 

our nation’s healthcare system, and raising significant safety concerns as these drugs criss-cross the country with markups at every 

single stop. 

So how could this happen? How do these gray market drug companies get their hands on these drugs when our hospitals cannot? 

And I guarantee you almost every single hospital in this country, 

if you ask them about it, will tell you they’re experiencing the same 

thing. 

The answer is through pharmacies. In more than two-thirds of 

the drug sale chains we examined, gray market companies were 

able to buy shortage drugs from entities with pharmacy licenses. 

In the same chain we have been discussing, you can see that the 

third company was a pharmacy named Priority Healthcare. Rather 

than dispensing the drug to patients, this pharmacy sold it to a 

gray market wholesaler called Tri-Med America, which then sold it 

down the line. 

During our investigation, we discovered that Priority was actually a fake pharmacy. It sold all of its drugs to Tri-Med and none, 

absolutely none, to patients. We also discovered that the owner of 

the pharmacy was married to the owner of Tri-Med, the gray market wholesaler. State regulators found that the pharmacy committed numerous violations of state law, and the wholesaler’s license has now been revoked. 

Again, this was not an isolated incident. In North Carolina, for 

example, an individual named Jessica Hoppe set up two companies, 

LTC Pharmacy and International Pharmaceuticals, a pharmacy 

and wholesaler. But when state regulators went to inspect these 

companies, this is what they found. They reported that LTC Pharmacy, and I quote, ‘‘was not an operating pharmacy,’’ and that, 

quote, ‘‘no dispensing has taken place since opening,’’ end of quote. 

53 

Licenses for both companies have now been surrendered or denied. 

However, just last week, we learned that the owner has now 

opened a new company, just under a different name and in a different state. 

Even legitimate pharmacies are being used by unscrupulous gray 

market companies to obtain access to shortage drugs. Gray market 

companies and their brokers have been approaching pharmacies, 

asking them to buy drugs on their behalf and promising big profits 

in return. 

For example, an e-mail to one pharmacy said, and I quote, ‘‘We 

guarantee our pharmacies 20 percent or more every time,’’ end of 

quote. Another e-mail encouraged a pharmacy to locate shortage 

drugs, saying, and I quote, ‘‘The more you find, the more you 

make,’’ end of quote. Some gray market companies even dupe pharmacies into believing that buying shortage drugs for them would 

help needy patients obtain drugs faster. In fact, all they were doing 

is artificially driving up prices. 

The good news is that there is something we can do about this, 

and we must do something about it. In May, I introduced legislation, and there are two provisions I would just like to highlight as 

I close. 

First, my bill would prohibit wholesalers from buying drugs from 

pharmacies. There is no legitimate reason for wholesalers to do 

this, and this is how many shortage drugs are being diverted into 

the gray market. 

Second, my bill would create a national wholesaler data base 

that would allow state boards of pharmacy to share information 

more easily. One of the biggest challenges state regulators face is 

monitoring enforcement actions in other states. We have already 

found examples of gray marketers being shut down in one state, 

only to open their doors in another. 

Let me close by emphasizing again why this investigation is so 

very, very important. As Brenda Frese said to me in her letter last 

year, this is a matter of life and death. And nobody, absolutely nobody, should be allowed to profiteer at the expense of patients by 

jacking up the price of drugs in critically short supply. 

We’re talking about kids, with leukemia in some cases, children 

with life threatening illnesses. And these companies are taking advantage of them to boost their own bottom lines. 

Again, I want to thank Chairman Rockefeller and Chairman 

Harkin, and I want to thank you for lending to us and helping us 

with your phenomenal staffs. They have been absolutely incredible, 

and we really do appreciate them. Without your direct involvement 

and your sustained leadership, there is absolutely no way we would 

have uncovered as much as we did during this investigation. 

And I apologize because I have to run back to the House. I’m 

managing a bill. But, again, thank you and may God bless. 

[The prepared statement of Mr. Cummings follows:] 

PREPARED STATEMENT OF HON. ELIJAH E. CUMMINGS, RANKING MEMBER, U.S. 

HOUSE OF REPRESENTATIVES, COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

Chairman Rockefeller, Ranking Member Hutchinson, and Members of the Committee, thank you for inviting me to testify. Let me also extend my personal thanks 

to Chairman Rockefeller, Chairman Harkin, and their staffs for their great work 

during this investigation and for the comprehensive report issued today. 

54 

If I may, I would like to focus briefly on why I launched this investigation, what 

we have found so far, and what we can do about it. 

[Figure 1: http://democrats.oversight.house.gov/images/stories/GrayMarketFigur 

e1%283%29.pdf] I initiated this investigation last year after receiving a heartfelt letter, http://democrats.oversight.house.gov/images/stories/freselettertocummings.pdf, 

from Brenda Frese. Brenda is the head coach of the women’s basketball team at the 

University of Maryland, and these are pictures of Brenda and her son Tyler. Brenda 

wrote to me about a critical shortage in a drug called cytarabine, which treats leukemia in children. Let me read what she wrote: 

Without cytarabine, many leukemia patients won’t be cured and will die. What 

makes this hit home even more for me and my family is that my three year 

old son Tyler is a leukemia patient who has benefited from cytarabine. 

As we began investigating this shortage, we found something very disturbing. 

Hospitals told us that even though they could not get the drug from their authorized 

distributors, they were being inundated with phone calls, e-mails, and faxes from 

gray market companies offering this shortage drug and others at highly inflated 

prices. They were outraged by this, and so was I. 

Based on information provided by the hospitals, we started with five drugs facing 

critical shortages, and we identified five gray market companies marketing them at 

exorbitant prices. We asked these companies where they were getting these drugs, 

and how much money they were making by selling them. Based on their initial responses, we expanded our investigation to cover 125 different companies, and we reviewed 300 different drug transaction chains. 

The report issued today does a terrific job laying out the facts in detail, so let me 

highlight one example that illustrates our findings. 

[Figure 2: http://democrats.oversight.house.gov/images/stories/GrayMarketFigur 

e2%283%29.pdf] First, let me put up a chart that shows how things are supposed 

to work. Under normal circumstances, drugs go from manufacturers to distributors 

to hospitals, pharmacies, or other health care providers that dispense them to patients. But that is not what happens in the gray market. In gray market transactions, shortage drugs are being diverted into much longer distribution chains. 

[Figure 3: http://democrats.oversight.house.gov/images/stories/GrayMarketFigur 

e3%283%29.pdf] Let me show you an example. This transaction involved 

fluorouracil, which is used to treat various forms of cancer, including colon, stomach, 

breast, and pancreatic cancer. As you can see, instead of three stops in this case, 

there were nine. The main problem is that each one of these entities marked-up the 

price of the drug. 

[Figure 4: http://democrats.oversight.house.gov/images/stories/GrayMarketFigur 

e4%283%29.pdf] Let me show you how much. This is the same chart, now listing the prices for each transaction. This drug started at $7 per vial when it was sold 

by the authorized distributor. It was later sold for $50 . . . $69 . . . $95 . . . $275 

. . . $375 . . . In the end, it was finally sold to a hospital for an astonishing $600. 

That was for a single vial of this cancer drug—more than 85 times its initial price. 

This was not an isolated incident. We found this same pattern with all of the 

drugs we examined. This system makes absolutely no sense for patients who need 

these critical drugs or for hospitals that treat them. The current system allows this 

network of private companies to boost their profits. And for what? For doing nothing 

but charging offensively high prices, increasing the overall costs to our Nation’s 

health system, and raising significant safety concerns as these drugs crisscross the 

country with mark-ups at every stop. 

So how could this happen? How do these gray market drug companies get their 

hands on these drugs when hospitals cannot? The answer is through pharmacies. 

In more than two-thirds of the drug sale chains we examined (69 percent), gray 

market companies were able to buy shortage drugs from entities with pharmacy licenses. 

[Figure 5: http://democrats.oversight.house.gov/images/stories/GrayMarketFigur 

e5%283%29.pdf] In the same chain we have been discussing, you can see that the 

third company was a pharmacy named Priority Healthcare. Rather than dispensing 

the drug to a patient, this pharmacy sold it to a gray market wholesaler called TriMed America, which then sold it down the line. 

During our investigation, we discovered that Priority was actually a fake pharmacy. It sold all of its drugs to Tri-Med and none to patients. We also discovered 

that the owner of this pharmacy was married to the owner of Tri-Med, the gray 

market wholesaler. State regulators found that the pharmacy committed numerous 

violations of state law, and the wholesaler’s license has now been revoked. 

Again, this was not an isolated incident. In North Carolina, for example, an individual named Jessica Hoppe set up two companies—LTC Pharmacy and InterVerDate Nov 24 2008 13:17 Feb 28, 2013 Jkt 075679 PO 00000 Frm 00058 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\79524.TXT JACKIE
55 

national Pharmaceuticals, a pharmacy and a wholesaler. But when state regulators 

went to inspect these companies, this is what they found. 

[Figure 6: http://democrats.oversight.house.gov/images/stories/GrayMarketFigur 

e6%283%29.pdf] They reported that LTC Pharmacy was ‘‘not an operating pharmacy’’ and that ‘‘no dispensing has taken place since opening.’’ Licenses for both 

companies have now been surrendered or denied. However, just last week, we 

learned that the owner has now opened a new company, just under a different name 

and in a different state. 

Even legitimate pharmacies are being used by unscrupulous gray market companies to obtain access to shortage drugs. Gray market companies and their brokers 

have been approaching pharmacies, asking them to buy drugs on their behalf, and 

promising big profits in return. For example, an e-mail to one pharmacy said this: 

‘‘We guarantee our Pharmacies 20 percent or more every time.’’ Another e-mail encouraged a pharmacy to locate shortage drugs, saying this: ‘‘The more you find, the 

more you make.’’ 

Some gray market companies even duped pharmacies into believing that buying 

shortage drugs for them would help needy patients obtain drugs faster, when in fact 

all they were doing is artificially driving up prices. 

The good news is that there is something we can do about this. In May, I introduced legislation, and there are two provisions I would like to highlight. First, my 

bill would prohibit wholesalers from buying drugs from pharmacies. There is no legitimate reason for wholesalers to do this, and this is how many shortage drugs are 

being diverted into the gray market. 

Second, my bill would create a national wholesaler database that would allow 

state boards of pharmacy to share information more easily. One of the biggest challenges state regulators face is monitoring enforcement actions in other states. We 

have already found examples of gray marketers being shut down in one state only 

to open their doors in another. 

Let me close by emphasizing again why this investigation is so important. As 

Brenda Frese said to me in her letter last year, this is a matter of life and death. 

Nobody should be allowed to profiteer at the expense of patients by jacking up the 

price of drugs in critically short supply. We’re talking about kids with leukemia in 

some cases—children with life-threatening illnesses—and these companies are taking advantage of them to boost their bottom-line. 

I would like to thank Chairman Rockefeller and Chairman Harkin once again, as 

well as your staffs. Without your direct involvement and your sustained leadership, 

there is no way we would have uncovered as much as we did during this investigation. Thank you. 

The CHAIRMAN. Thank you very much, Congressman Cummings. 

You’re a remarkable person, and we wish you well. 

Again, I’ve never sort of done this before. So, again, I want to 

apologize to my colleagues that were all sort of looking at me in 

a slightly skeptical way. But, fortunately, we work on the seniority 

system here, so there’s not much you can do about it. 

[Laughter.] 

The CHAIRMAN. However, now I want to go to John Coster, who 

is Senior Vice President of Government Affairs and Director of the 

NCPA, which is the National Community Pharmacists Association. 

Please. 

STATEMENT OF JOHN COSTER, PH.D., R.PH., SENIOR VICE 

PRESIDENT, GOVERNMENT AFFAIRS AND DIRECTOR, NCPA 

ADVOCACY CENTER, NATIONAL COMMUNITY PHARMACISTS 

ASSOCIATION 

Dr. COSTER. Chairman Rockefeller, Senator Boozman, members 

of the Senate Commerce Committee, I’m John Coster, Senior Vice 

President of Government Affairs for the National Community Pharmacists Association. I am also a licensed pharmacist in the states 

of New York, Maryland, and Virginia. Thank you for conducting 

this hearing and for allowing us to submit our views on this very 

important and timely issue. 

56 

NCPA represents the owners and operators of 23,000 independent community pharmacies in the United States. We appreciate your focusing this hearing on the issues surrounding the 

shortages of prescription drugs. While most of the drug shortages 

to date have been experienced by hospitals and other institutional 

settings for injectable and infusion drugs, many community pharmacies also experience daily shortages of vital prescription medications. 

How do community pharmacies manage an inventory of thousands of drug products on their shelves and also handle drug shortages? Pharmacy inventory is a function of many factors, including 

local prescribing patterns and patient populations served. Pharmacies do their very best to efficiently manage their inventories because drug products are very expensive. 

A typical independent community pharmacy has a great deal of 

capital invested in inventory items, likely hundreds of thousands of 

dollars. Over 90 percent of the average independent pharmacy’s 

dollar inventory is tied up in prescription products. However, the 

last message a pharmacist wants to deliver to a patient standing 

at the counter is that their drug is not in stock or, worse, temporarily unavailable. 

The relationship between community pharmacies and their 

wholesale distributors is one of critical importance to manage inventory and prevent shortages. Community pharmacists rely heavily on their wholesalers to ensure that they have the necessary access to virtually all medications at all times in order to ensure that 

their patients’ needs are met. 

Most community pharmacies rely on a primary wholesaler to 

meet the majority of their ongoing prescription drug needs. However, community pharmacies typically need to have at least one or 

more backup or secondary wholesalers that they can call upon in 

the event that there is a shortage. 

Recently, there have been troubling reports of shell pharmacies, 

fake pharmacies, paper pharmacies that seem to have been established for the sole purpose of buying medications in short supply 

from primary wholesalers in order to sell them to unethical secondary wholesalers. NCPA condemns these activities and applauds 

the Committee for its investigative work in this area. No pharmacy, whether fake or legitimate, should be in the business of acting as a conduit to facilitate the activities of an illegitimate gray 

market. These few pharmacies cast a pall over all the good community pharmacies that do work in their communities. 

It is our understanding that the Committee’s investigation focuses mainly on injectable and infusion drugs that are not typically 

sold to or dispensed by community pharmacies. These aberrant 

purchases by these pharmacies should have been a warning signal 

to wholesalers selling these drugs that something could be wrong. 

How was it that some of these pharmacies could open and operate in the first place? Typically, state boards conduct an onsite investigation of any new pharmacy. However, sometimes in certain 

situations boards may issue a temporary license with the permanent license withheld pending the results of an actual inspection. 

Beyond the appreciated actions already taken by Congress to address drug shortages in the recently enacted FDA bill, Congress 

57 

continues to examine ways to further secure the supply chain. We 

support these discussions and want to continue to serve as a resource on the best way to achieve these objectives in a seamless, 

efficient, patient-oriented manner. 

What practices do pharmacies currently use to address shortages 

of medications? First, it is in the normal course of business that 

community pharmacies return outdated or short-dated products to 

wholesalers or distributors. We need a way to do this in order to 

return product because of the significant amount of capital tied up 

in these returns. 

Second, at times, where permitted by law, pharmacies do sell inventory to other pharmacies. For example, some state practice acts 

allow retail pharmacies to sell a small amount of their inventory 

in certain situations. Pharmacies will do this on occasion to alleviate temporary shortages. 

Finally, some states permit appropriate licensed pharmacy sales 

to wholesalers. These sales are also permitted to alleviate a temporary shortage of drugs. In surveying our members, however, we 

have found very few that actually do this. 

We want to work with the Committee to assure that community 

pharmacies can continue to manage their inventories while being 

able to meet their individual prescription drug needs. For example, 

we support the implementation of Federal standards for wholesale 

distributors. In addition, there should be greater emphasis on the 

importance for all participants in the supply chain to perform their 

due diligence with respect to business partners. 

In conclusion, it is necessary for pharmacies to have options to 

address temporary shortages in the marketplace. We urge Congress 

to not take actions that might limit the ability of pharmacies to 

take care of their patients. The primary and secondary wholesale 

markets play an important role in ensuring that all patients have 

seamless access to virtually all products they require. Having said 

that, it is unethical for pharmacists to act as a conduit for the illegitimate gray market, which is contrary to the goals of providing 

the best patient care. 

We appreciate the opportunity to provide our views to the Committee, and I look forward to answering any questions. 

[The prepared statement of Dr. Coster follows:] 

PREPARED STATEMENT OF JOHN COSTER, PH.D., R.PH., SENIOR VICE PRESIDENT, 

GOVERNMENT AFFAIRS AND DIRECTOR, NCPA ADVOCACY CENTER, NATIONAL

COMMUNITY PHARMACISTS ASSOCIATION

Chairman Rockefeller, Senator Boozman, and Members of the Senate Commerce 

Committee. I am John Coster, Ph.D., R.Ph., Senior Vice President of Government 

Affairs for the National Community Pharmacists Association. I am a licensed pharmacist in the states of New York, Maryland, and Virginia. Thank you for conducting 

this hearing and for allowing us to submit our views on this very important and 

timely issue. NCPA represents the owners and operators of more than 23,000 independent community pharmacies in the United States. Our members provide about 

40 percent of all outpatient prescription drugs in the United States. We are also 

major providers of pharmacy services to long term care and assisted living facilities. 

Our members are also prevalent in urban and rural areas. 

We appreciate your focusing this hearing on the issues surrounding the shortages 

of prescription drugs. While most of the drug shortages to date have been experienced by hospitals and other institutional settings for injectable and infusion drugs, 

many community pharmacies also experience daily shortages of vital prescription 

medications. In particular, recently there have been critical shortages of medications 

58 

to treat ADD and ADHD. The newly enacted FDA law will take important steps to 

help address these types of shortages, as well as require better coordination between 

FDA and the Drug Enforcement Administration (DEA) on determining and updating 

the quotas for the production of these medications. We appreciate the bipartisan 

steps that Congress took to address this shortage situation. 

Pharmacies Rely on Combination of Wholesalers 

How do community pharmacies manage an inventory of the thousands of drug 

products on their shelves and handle drug shortages? Pharmacy inventory is a function of many factors, including local prescribing patterns and the patient population 

served. Pharmacies do their best to efficiently and effectively manage their inventories because drug products are very expensive. 

A typical independent community pharmacy has a great deal of capital invested 

in inventory items, likely hundreds of thousands of dollars. Over 90 percent of the 

average independent pharmacy’s dollar inventory is tied up in prescription products. 

However, the last message a pharmacist wants to deliver to a patient standing at 

the counter is that their drug is not in stock, or worse, is temporarily unavailable. 

The relationship between community pharmacists and their wholesale distributors 

is one of critical importance to manage inventory and prevent shortages. Community pharmacists rely heavily on their wholesalers to ensure that they have the necessary access to virtually all medications at all times in order to ensure that patient 

needs are met. Most community pharmacists rely on a primary wholesaler to meet 

the majority of their on-going prescription drug supply needs. However, community 

pharmacists typically need to have at least one or more ‘‘back-up’’ or secondary distributors that they can call upon in the event that their primary distributor for 

some reason cannot meet their needs at any particular time. 

The term ‘‘primary wholesaler’’ generally describes entities that purchase the vast 

majority of their product directly from drug manufacturers. This market is highly 

concentrated, as the ‘‘big three’’ wholesalers generate approximately 85 percent of 

all revenues from pharmaceutical wholesaling in the United States. Most manufacturers typically limit the number of entities that they will sell to directly and most 

do not sell directly to smaller companies that are not interested in purchasing extremely large, bulk amounts 

The term ‘‘secondary’’ wholesaler generally describes distributors that do not purchase the majority of their products directly from a pharmaceutical manufacturer. 

They often play an important role for patients and pharmacies by serving as a 

‘‘back-up’’ source of supply to pharmacies who may use a primary wholesaler for 

their usual and expected day-to-day needs. They also provide necessary competition 

for the primary wholesalers which helps keep costs down. 

Illicit Activities by ‘‘Shell’’ Pharmacies and Gray Market Distributors 

Unethical 

Recently, there have been troubling reports of ‘‘shell pharmacies’’ or ‘‘paper pharmacies’’ that seem to have been established for the sole purpose of buying medications in short supply from primary wholesalers in order to sell them to seemingly 

unethical secondary wholesalers. NCPA condemns these activities and applauds the 

Committee for its investigative work in this area. No pharmacy should be in the 

business of acting as a conduit to facilitate the activities of an illegitimate gray market. 

It is our understanding that the Committee’s investigation focuses mainly on 

injectable and infusion drugs that are not typically sold to or dispensed by most 

community pharmacies. The aberrant purchases by these pharmacies should have 

been a strong warning signal to wholesalers selling these drugs to these pharmacies 

that something could be wrong. 

How was it that these shell pharmacies could even open and operate in the first 

place? Typically, state boards of pharmacy conduct an on-site inspection of any new 

pharmacy; however, sometimes boards may issue a temporary license with the permanent license withheld pending the results of an actual inspection. 

Efforts to Curb Unacceptable Practices Should Not Harm Patient Care 

Beyond the actions already taken by Congress to address drug shortages in the 

recently-enacted FDA bill, Congress continues to examine ways to furthers secure 

the pharmaceutical supply chain. We support these discussions and want to continue to serve as a resource to Congress on the best ways to achieve these objectives 

in a seamless, efficient, patient-oriented manner. What current practices allow pharmacies to address shortages of medications to meet patient needs, while managing 

their inventory? 

First, it is in the normal course of business that community pharmacies return 

outdated or short dated products to wholesalers or distributors, or products that 

59 

were sent to the pharmacy in error. Pharmacies need a way to return products because of the significant amount of pharmacy capital tied up in these returns. We 

appreciate that our business partners work with us on taking back these returns, 

and we urge Congress to continue to allow us to return these products. 

Second, at times, where permitted by law, community pharmacies do sell pharmaceutical products to other pharmacies. For example, some state pharmacy practice 

laws allow retail pharmacies to sell a small amount of their inventory in certain situations. Pharmacies will do this on occasion to alleviate temporary shortages, to assure that patients are able to receive needed drugs, or to assure that ‘‘short dated’’ 

drugs will not be wasted before they expire. We believe that this is an appropriate 

practice. This helps to facilitate the functioning of the market and helps to assure 

timely and appropriate cost effective patient care. This is particularly important in 

rural areas where daily wholesaler deliveries may be more sporadic. 

Finally, some states permit pharmacy sales to wholesalers. These sales are permitted to alleviate a temporary shortage of drugs. In surveying our members, however, we have found very few that hold both types of licenses. Having said that, we 

think that this situation contrasts with the unethical practices found by the Committee where a pharmacy was knowingly buying short supply inventory it knew it 

would not use and did not need, with the intended purpose of selling it into the illegitimate gray market. 

However, one of the options discussed to address the issues identified by the Committee is a potential prohibition of pharmacies selling drug products to wholesalers. 

While this would appear to be a logical solution to the problem, we ask the Committee to carefully consider whether this option would have unintended consequences for patients. 

Supply Chain Partners Need to Know Their Customers 

We would want to work with the Committee to assure that community pharmacies can continue to manage their pharmaceutical inventories, while being able 

to meet the prescription drug needs of individual patients, including in shortage situations. 

For example, NCPA supports the implementation of Federal standards for wholesale distributors, as well as a proposed lot-level tracking system for prescription 

drugs that will make it much easier to keep track of the purchase and sale of pharmaceuticals. Uniformly raising the bar for all entities that wish to engage in this 

line of business should provide a greater assurance for all participants in the supply 

chain that they are doing business with a legitimate entity. 

In addition, there should be greater emphasis on the importance for all participants in the supply chain to also perform their ‘‘due diligence’’ with respect to their 

business partners. NCPA currently publishes a manual that provides assistance to 

pharmacists who are seeking to open their own pharmacy and a portion of this document deals with the selection of a wholesaler or wholesaler(s). The manual includes a list of questions that each pharmacy should ask before retaining the services of any wholesaler. Notably, NCPA also stresses the fact that every pharmacy 

needs to have more than one wholesaler ‘‘because no wholesaler can offer every 

product that you may need to stock.’’ 

In conclusion, it is necessary for pharmacies to have options to address temporary 

shortages in the marketplace. We urge Congress to not take actions that might limit 

the ability of pharmacies to take care of their patients. The primary and secondary 

wholesaler markets both play an important role in ensuring that all patients have 

seamless access to virtually any product that they may require. 

Having said that, it is unethical for pharmacists to act as a conduit for the illegitimate gray market, which is contrary to the goal of providing the best patient care 

at the lowest cost. Problems or questionable practices should certainly be investigated and addressed, but any solution needs to be carefully tailored so that the 

pharmaceutical supply chain is not unduly disrupted and patients do not suffer due 

to shortages that may occur. We appreciate the opportunity to provide our views to 

the Committee and I look forward to answering any questions. 

The CHAIRMAN. Thank you very much, Mr. Coster. 

And now Mr. John Gray, who is President and CEO of 

Healthcare Distribution Management Association. 

60 

STATEMENT OF JOHN M. GRAY, PRESIDENT AND CEO, 

HEALTHCARE DISTRIBUTION MANAGEMENT ASSOCIATION 

(HDMA) 

Mr. GRAY. Thank you. Good afternoon, Chairman Rockefeller, 

Ranking Member Boozman, members of the Senate Commerce 

Committee. I’m John Gray, President and CEO of the Healthcare 

Distribution Management Association. I want to thank you for the 

opportunity to come here and provide an overview of the pharmaceutical distribution system with respect to the critically important 

issue of drug shortages. 

We applaud the Committee’s efforts to address the shortage issue 

and some of the resulting symptoms, including gray market diversion of products in short supply. For purposes of the discussion 

today, I’ll reference a recent report from the Premier Healthcare 

Alliance that defines the gray market as a parallel market that is, 

quote, ‘‘unofficial, unauthorized, or unintended by the original manufacturer,’’ end quote. 

Given that context, and to distinguish HDMA members from the 

gray market, I’ll share with you information about the primary 

pharmaceutical distribution industry. HDMA is the national association representing those primary healthcare distributors, which 

we consider the vital link between manufacturers and providers in 

our nation’s healthcare system. 

Approximately 90 percent of all pharmaceutical product sales in 

the United States today flow through HDMA’s 34 distributor members. Each business day, HDMA member companies ensure that 

more than nine million prescriptions and healthcare products from 

more than 1,100 manufacturers are delivered safely and efficiently 

to nearly 200,000 healthcare providers, which include pharmacies, 

hospitals, nursing homes, clinics, and other healthcare entities. 

Our provider customers generally place orders for prescription 

medicines by 8 p.m. in the evening and receive deliveries from the 

distributors the next morning. 

Wholesale distribution is defined as, quote ‘‘the distribution of 

prescription drugs to persons other than a consumer or a patient.’’ 

HDMA members are these primary wholesalers. That is, our members are predominantly Authorized Distributors of Record, as designated by the pharmaceutical companies themselves. Our members purchase the majority of product directly from pharmaceutical 

manufacturers and sell only to appropriately licensed healthcare 

providers and entities. 

In 1988, the Prescription Drug Marketing Act, PDMA, was enacted to increase safeguards in the drug distribution system by preventing the introduction and retail sale of substandard, ineffective, 

or counterfeit drugs. It has also helped define the pharmaceutical 

distribution industry as we know it today. Our distributor members 

operate in accordance with the requirements set forth in the PDMA 

as well as licensing rules and standards in all 50 separate states. 

HDMA and its members are strong advocates for increased 

wholesale licensure standards and a uniform Federal pedigree system to enhance the safety and security of the pharmaceutical supply chain. In addition to fundamentally addressing counterfeit and 

diverted medicines, Federal pedigree, we believe, will be a major 

61 

tool and useful in discouraging gray market activities associated 

with drug products in short supply. 

Effectively addressing the drug shortage problem is a difficult 

and complex challenge for the entire healthcare community, in 

large part because the shortage typically appears with little or no 

warning and often requires significant resources to manage. HDMA 

member companies are working hard to improve communications 

within our supply chain and, where possible, to mitigate the impact 

of these shortages. 

Distributors do not manufacture the products, so we can do little 

about the root causes of the shortages. However, we do play an important role in helping coordinate and share information about the 

shortages when they arise. Distributors are typically notified of a 

shortage by a manufacturer or provider partner. 

Once that information is received, our distributors communicate 

with their manufacturer partners about product availability to understand the scope and expected duration of the shortage. They 

then work as quickly as possible with customers to fill orders, to 

the extent they are able, based usually upon each customer’s historical purchasing patterns. And, if necessary, distributors work 

with customers and the manufacturers to identify alternative product options. 

HDMA, in collaboration with all its distributor members, manufacturers, and providers, recently completed voluntary industry 

guidelines on improving communications with the supply chain in 

the event of these kinds of shortages. We hope this effort, combined 

with the enhanced wholesale licensure standards and a uniform 

federal pedigree system, will contribute to the better management 

of product shortage issues in the future. 

HDMA is committed as an organization to work with the Congress, all relevant regulatory agencies, and the entire supply chain 

to develop the necessary collaborative solutions that mitigate the 

impact of drug shortages and the impact that these have on the 

most important stakeholder, our patients. 

I thank you again for the invitation to participate, and I look forward to the Committee’s questions. Thank you very much. 

[The prepared statement of Mr. Gray follows:] 

PREPARED STATEMENT OF JOHN M. GRAY, PRESIDENT AND CEO, HEALTHCARE

DISTRIBUTION MANAGEMENT ASSOCIATION

Good morning Chairman Rockefeller, Ranking Member Hutchison and Members 

of the Senate Commerce Committee. I am John Gray, president and CEO of the 

Healthcare Distribution Management Association (HDMA). Thank you for the opportunity to provide an overview of the pharmaceutical distribution system with respect to the critically important issue of drug shortages. 

We applaud the Committee’s efforts to address the drug shortage issue and some 

of the resulting symptoms, including gray market diversion of products in short supply. 

For the purposes of our discussion today I will reference a recent report from the 

Premier Healthcare Alliance that defines the gray market as a parallel market, 

‘‘that is unofficial, unauthorized or unintended by the original manufacturer.’’ Given 

that context, and to distinguish HDMA members from the gray market, I will share 

with you information about the primary pharmaceutical distribution industry. 

HDMA is the national association representing America’s primary healthcare distributors—the vital link between manufacturers and providers in our Nation’s 

healthcare system. Approximately 90 percent of all pharmaceutical product sales in 

the United States flow through HDMA’s 34 distributor members. Each business day, 

62 

HDMA member companies ensure that more than nine million prescription medicines and healthcare products from more than 1,100 manufacturers are delivered 

safely and efficiently to nearly 200,000 healthcare providers including, pharmacies, 

hospitals, nursing homes, clinics and other healthcare entities. Our provider customers generally place orders for prescription medicines by 8 p.m. in the evening 

and receive deliveries from their distributors the next morning. 

Wholesale distribution is defined as the ‘‘distribution of prescription drugs to persons other than a consumer or patient.’’ HDMA members are primary wholesalers, 

that is our members are predominantly Authorized Distributors of Record (ADRs), 

as designated by pharmaceutical manufacturers. Our members purchase the majority of product directly from pharmaceutical manufacturers and sell only to appropriately licensed healthcare providers and entities. 

In 1988, the Prescription Drug Marketing Act (PDMA) was enacted to increase 

safeguards in the drug distribution system by preventing the introduction and retail 

sale of substandard, ineffective or counterfeit drugs. It also helped define the pharmaceutical distribution industry as we know it today. Our distributor members operate in accordance with the requirements set forth in the PDMA, as well as licensing rules and standards in all 50 states. 

HDMA and its members are strong advocates for increased wholesaler licensure 

standards and a uniform Federal pedigree system to enhance the safety and security of the pharmaceutical supply chain. In addition to fundamentally addressing 

counterfeit and diverted medicines, Federal pedigree may be a useful tool in discouraging gray market activities associated with drug products in short supply. 

Effectively addressing a drug shortage is a difficult and complex challenge for the 

entire healthcare community, in large part because a shortage typically appears 

with little or no warning and often requires significant resources to manage. HDMA 

member companies are working hard to improve communications within the supply 

chain and, where possible, to mitigate the impact of drug shortages. Distributors do 

not manufacture product and so can do little about the root causes of shortages. 

However, distributors do play an important role by helping to coordinate and share 

information about drug shortages when they arise. 

Distributors are typically notified of a shortage by a manufacturer or provider 

partner. Once information is received, distributors communicate with their manufacturer partners about product availability to understand the scope and expected duration of any shortage. They then work as quickly as possible with their customers 

to fill orders, to the extent they are able, usually based upon each customer’s historical purchasing patterns. If necessary, distributors work with customers and manufacturers to identify alternative product options. 

HDMA, in collaboration with its distributor members, manufacturers and providers, recently completed voluntary industry guidelines on improving communication between supply chain partners in the event of a product shortage. We hope this 

effort, in conjunction with enhanced wholesale licensure standards and a uniform 

Federal pedigree system, will contribute to the better management of product shortage issues in the future. 

HDMA is committed to working with the Congress, all relevant regulatory agencies and the entire supply chain to develop collaborative solutions that mitigate the 

impact drug shortages have on the most important stakeholder: the patient. 

I thank you again for the invitation to participate in this hearing and hope this 

overview was valuable to the Committee as it explores this important and timely 

topic. 

The CHAIRMAN. Thank you very much, sir. 

And, finally, Ms. Patricia Earl, who is the Industry Analyst for 

the National Coalition of Pharmaceutical Distributors. 

STATEMENT OF PATRICIA EARL, INDUSTRY ANALYST, NATIONAL COALITION OF PHARMACEUTICAL DISTRIBUTORS 

(NCPD) 

Ms. EARL. Great. It’s great to be last. Good afternoon. I would 

first like to thank Chairman Rockefeller, Senator Boozman, and 

distinguished members of the Ccommittee for the Committee’s 

strong leadership in addressing the critical problem of short-supply 

prescription drugs in the supply chain. I have submitted a more 

complete statement. But in this portion of my testimony, I would 

like to discuss the issues you have brought to light. 

63 

I have more than a quarter century of experience in the pharmaceutical supply chain and understand all sides of the distribution 

model. In addition to my experience in the distribution industry, I 

have served as an industry expert in Federal court proceedings involving supply chain practices. 

I’m here today to represent the views of the National Coalition 

of Pharmaceutical Distributors, NCPD, and its members, which are 

predominantly small and independent pharmaceutical companies. I 

cannot emphasize enough the value that small, or secondary, pharmaceutical distributors bring to the healthcare system. These organizations are there when no one else is, in the middle of the night, 

on the weekends, and in remote parts of the country where no one 

else wants to deliver because it’s not considered profitable. 

As a result, small distributors help save lives every single day. 

They save lives by making it their business to ensure that quality 

medicines reach a patient in the safest, fastest, and most cost-effective way possible, no matter the time or location. Few others can 

say the same thing. Their value is so profound that we have e-mail 

after e-mail from customers, including the NIH, thanking them for 

the help that they have provided to find medicine or deliver it at 

the last minute to save a life and at a reasonable price, a function 

primary wholesalers are simply not geared to perform. 

Despite their value, small secondary distributors have come 

under fire recently because few people really understand them or 

have the time to see where they fit in the supply chain. The arguments have ranged from accusations of price gouging to shifting 

product between multiple companies as a means to increase profit 

to working with fake pharmacies. 

These allegations are not grounded in reality. What’s more, these 

characterizations fail to reflect one basic fact of the market. There 

are thousands of small distributors that work with hospitals across 

the Nation. To remain competitive, they must comply with all laws, 

follow pedigree and handling requirements to the letter, and still 

offer an economical price point that allows for only a modest profit 

margin. If they do anything else, they run the risk of permanently 

losing a customer. 

See, hospitals comparison shop. If they don’t like a price offered 

by one company, they will call another. When it comes to working 

with secondaries, healthcare providers don’t face the same restrictions they do with the big three wholesalers. They are free to move 

their accounts elsewhere. This is a reality that every small distributor out there is well aware of. And they know that if they were 

to engage in the types of activities you accuse them of, they would 

not be in business very long. 

As you learn more about this industry which represents less than 

1 percent of all drugs bought and sold across the nation, you will 

see that the activities being painted as nefarious actually have legitimate and reasonable explanations. On the subject of price 

gouging, or markups, secondary distributors pay the highest prices 

for drugs in the entire U.S. supply chain, sometimes as much as 

91 percent more than one of the big three wholesalers would ultimately pay for the same product. 

What’s more, many people look at a pedigree and compare the 

cost the distributor paid for a drug to the price he sold it for and 

64 

assume the entire amount was pocketed as profit. That’s the furthest thing from the truth. Pedigrees do not show how much was 

spent on things like shipping, which can be much more expensive 

than the drug itself if the hospital needs it delivered overnight. 

On the subject of several companies being involved in the handling of a product, we are aware, Mr. Chairman, that you are in 

possession of a handful of pedigrees that show multiple distributors 

handled a product before it got to the patient. I do not know the 

circumstances that led to these situations, so I can’t defend these 

pedigrees specifically. But what I can say is that these incidents 

are anomalies. 

Our members work tirelessly to make sure that the route from 

the distributor to the customer is as straight as possible, because 

they want to get the product to those who need it as fast as possible, and because they know that they face stiff competition. Even 

when a drug is in short supply, more than one distributor can get 

it, and, as I said, hospitals comparison shop. 

So for every one pedigree you find that shows multiple touch 

points, we have literally tens of thousands of pedigrees that show 

only one or two distributors were involved and with a nominal profit realized. In fact, one NCPD distributor handles 1.2 million pedigrees every year. The handful of pedigrees in your possession do 

not even equal one-tenth of 1 percent of the number of products he 

handles in one year. 

Finally, on the subject of fake pharmacies, by law, pharmacies 

are allowed to sell a small portion, 5 percent or less, of their inventory to distributors as long as they comply with state regulatory requirements. In most cases, pharmacies take advantage of this law 

to sell drugs that will expire within 90 days that they do not believe they can dispense in that timeframe. 

Instead of letting them go to waste, many pharmacies will sell 

the products to an authorized distributor, both small independent 

companies as well as large wholesalers. The authorized distributor, 

in turn, will sell it to a medical provider that can use it immediately. Ultimately, this practice is a win-win. Drugs don’t go to 

waste. Pharmacies don’t lose large quantities of money on products 

that are expiring, and providers are able to get pharmaceuticals at 

a discounted rate. 

This is a legitimate and necessary practice and is not a fake 

pharmacy. Our members will not work with fake pharmacies or 

pharmacies that do not dispense drugs to patients and will report 

them to the proper authorities when they encounter them. 

That ends my oral presentation, and I urge you to read the more 

comprehensive testimony that I submitted. 

Thank you, Mr. Chairman, Senator Boozman, and members of 

this Committee. 

[The prepared statement of Ms. Earl follows:] 

PREPARED STATEMENT OF PATRICIA EARL, INDUSTRY ANALYST, 

NATIONAL COALITION OF PHARMACEUTICAL DISTRIBUTORS

Good afternoon, first I would like to thank Chairman Rockefeller, Ranking Member Hutchison and distinguished Members of the Committee for the Committee’s 

strong leadership in addressing the critical problem of short-supply prescription 

drugs in the supply chain. The record shortage of drugs we are currently experiencing has had an adverse effect on the health and safety of communities across 

the country, and is a contributing factor to rising healthcare costs. 

65 

I am here today to represent the views that the National Coalition of Pharmaceutical Distributors (NCPD) and its members, which are predominantly small and 

independent pharmaceutical distributors, have regarding the distribution of shortsupply prescription drugs and the role that the coalition’s members play in distributing the drugs in the U.S. supply chain. The three key issues presented in this 

discussion are ones that NCPD believes the Committee has brought to light for this 

hearing. 

I can offer this insight because I am an expert in the pharmaceutical distribution 

supply chain, having spent more than twenty-six years in the industry, working 

with large and small distributors as a senior executive on supply chain management 

as it relates to hospitals and group purchasing contracts, as well as running distribution centers. My background has resulted in me being called as an expert witness in Federal court cases 

Introduction 

In recent months, there has been a great deal of controversy and speculation 

swirling around the entire distribution chain offered by people who do not understand or have first-hand knowledge of how the health care supply chain fits together. The issues raised fit into three basic categories: 

1. So-called ‘‘price gouging’’ or mark-ups 

2. Several companies being involved in the handling of a product 

3. Fake pharmacies 

I will address each of these objections in turn, but I wanted to start by helping 

everyone here understand the various companies involved in supply chain management. 

Drug sales and distribution is a complex market with many key players, including 

‘‘primary’’ traditional wholesalers, who are members of HDMA, group purchasing organizations—otherwise known as (GPOs), and ‘‘secondary’’ distributors, members of 

NCPD. All play a vital role in ensuring that quality medicines reach a patient in 

the safest, fastest and most cost-effective way possible. Small distributors fill a gap 

in the market, offering versatility and flexibility that primary distributors can’t provider while also serving less profitable rural regions of the country. 

Role of Small Distributors—Filling A Gap 

I cannot emphasize enough the value that small—or secondary—pharmaceutical 

distributors bring to the health care system. These organizations are there when no 

one else is—in the middle of the night, on the weekends and in remote parts of the 

country where no one else wants to deliver because it’s not considered profitable. 

As a result, small distributors help save lives every single day. They save lives by 

making it their business to ensure that quality medicines reach a patient in the 

safest, fastest and most cost-effective way possible—no matter the time or location. 

Few others can say the same thing. 

Their value is so profound that we have e-mail after e-mail from customers—including the NIH—thanking them for the help they have provided to find medicine 

or deliver it at the last minute to save a life (and at a reasonable price)—a function 

primary distributors are simply just not geared to perform. 

Our members do this work as part of long standing relationships they have with 

health care providers in which they fill in the gaps when the primary has a drug 

shortage. The secondary distribution industry primarily serves smaller medical facilities, doctor’s offices and pharmacies, many of which are found in rural or other 

underserved locations around the country. As a practical matter, large distributors 

are organized to take advantage of volume sales; therefore, they set prohibitively 

high minimum monthly purchasing requirements for a health care provider to have 

an account with them and they organize their supply network around major population centers, where they are more likely to find facilities that meet their minimum 

requirements. They are not well suited to cost-effectively distribute medication to 

more remote locations. 

This is where secondary distributors come in. Hospitals, health care centers and 

pharmacies in rural locations and those too small to meet the minimums of large 

distributors rely on secondary distributors to fill critical needs for life-saving medicine. What’s more, every sector of the health care industry depends critically upon 

secondary distributors because they act as the safety-net in times of national shortages to secure and distribute scarce drugs in short supply. 

While they are crucial in getting life-saving drugs to critically ill patients, small 

distributors are on an individual basis, one of the smallest customers of ‘‘traditional’’ 

wholesalers. These same wholesalers do billions of dollars of sales to large hospitals, 

but will not supply smaller clinics and facilities. In addition, small distributors are 

66 

required to pay the highest acquisition cost offered in the U.S. supply chain, putting 

them at a competitive disadvantage. 

Despite their value, small, secondary distributors have come under fire recently 

because few people really understand them or have taken the time to see where 

they fit in the supply chain. The arguments have ranged from accusations of price 

gouging to shifting product between multiple companies as a means to increase profits to working with fake pharmacies. 

These allegations are little more than character assassinations and are not 

grounded in reality. What’s more, these characterizations fail to reflect one basic 

fact of this market: There are thousands of small distributors that work with hospitals across the Nation. To remain competitive, they must comply with all laws, 

follow pedigree and handling requirements to the letter and still offer an economical 

price point that allows for only a modest profit margin. If they do anything else, 

they run the risk of permanently losing a customer. 

That’s because hospitals comparison shop. If they don’t like a price offered by one 

company, they will call another. 

This is a reality that every small distributor out there is well aware of. And they 

know that if they were to engage in the types of activities you accuse them of, they 

would not be in business very long. 

As you learn more about this industry you will see that the activities you are trying to paint as nefarious actually have legitimate and reasonable explanations: 

1. So-Called ‘‘Price Gouging’’ Or Mark-Ups 

Drug prices are established on an intricate system that is far more complex than 

most free markets. Manufacturers set a number of price points for a product, including the Wholesale Acquisition Cost—or WAC—which is the lowest price at which 

a wholesaler or distributor can buy the product. As with many markets, hospitals 

and physicians can negotiate the price they are willing to pay for a drug. The more 

product a hospital or doctor expects to use, the more power they have in securing 

to negotiate a lower price. Neither large nor small distributors have the ability to 

influence drug price negotiations. To secure the best prices for patients, most hospitals belong to one of the major GPO’s, which leverage the strength of the collective 

buying power of their members when negotiating contracts with manufacturers. 

GPOs require hospitals to adhere to specific rules, such as select a primary wholesaler—generally one of the Big3: McKesson, Cardinal or AmerisourceBergen—and 

if their primary does not have a drug, they are prohibited from using another primary. Instead, they must contact their second-line—or ‘‘secondary—distributor to 

supply their needs. Secondary distributors are able to work with all of the primary 

wholesalers, plus their network of small distributors to locate and secure drugs, 

even those that are in short-supply. Because small distributors are not restricted 

by GPO contracts, they are able to use avenues that hospitals cannot, such as large 

distributors that compete with the hospital’s primary wholesalers. 

Small distributors have been inaccurately portrayed when it comes to the price 

of products. As I noted before, secondary distributors pay the highest prices for 

drugs in the entire U.S. supply chain—sometimes as much as 91 percent more than 

one of the Big 3 would ultimately pay for the same product. What’s more, many people will look at a pedigree and compare the cost a distributor paid for a drug to 

the price he sold it for and assume the entire amount was pocketed as profit. That’s 

the furthest thing from the truth. The reality is that the pedigree does not show 

how much was spent on things like shipping, which can be much more expensive 

than the drug itself if the hospital needs it delivered overnight. 

As I said before, every small distributor knows that the hospitals they work with 

are going to comparison shop. If a hospital doesn’t like the price that one secondary 

distributor quotes to them, they will call another. Or, if they need it right away and 

can’t risk losing it, they will buy it, but will find another secondary distributor to 

work with moving forward. When it comes to working with secondaries, health care 

providers do not face the restrictions they do with the Big 3. They are free to move 

their account elsewhere, so secondary distributors have to remain competitive and 

will often sacrifice their own profit margins to make sure they keep a customer. 

2. Number of Companies Involved in Distribution of A Single Product 

We are all aware, Mr. Chairman, that you are in possession of a handful of pedigrees that show multiple distributors handled a product before it made its way to 

a patient. While I cannot defend these pedigrees specifically because I do not know 

the circumstances that led to this situation, what I can say is that these incidents 

are anomalies. Our members work tirelessly to make sure that the route from distributor to customer is as straight as possible. No detours, no additional mark-ups, 

no changing of hands multiple times. Why? Because our members are concerned 

67 

about making sure the products get to those who need it as fast as possible, and 

because they know that they face stiff competition. Even when a drug is in a shortage situation, more than one distributor will still be able to get it, and hospitals 

comparison shop—looking for new ways to get the product at a lower price. 

So, for every one pedigree you can find that shows multiple touch points, we have 

literally thousands of pedigrees that show a straight line in which only one or two 

distributors were involved with only a nominal profit realized. In fact, one distributor that I work with handles 1.2 million pedigrees every year—enough to 

stretch more than 680 miles if laid end-to-end. And that’s just one distributor. The 

handful that you have shown would not even equal one-tenth of 1 percent of what 

the number of products he handles every single year. 

His focus—and the focus of all of our members—is to provide much-needed products at the most competitive price they can while still making a modest profit. If 

they did anything else, they would be out of business very quickly. 

3. Fake Pharmacies 

Under law, pharmacies are allowed to sell a small portion—5 percent or less— 

of their inventory to distributors, as long as they comply with state regulatory requirements. In most cases, pharmacies take advantage of this law to sell drugs that 

will expire within 90 days that they do not believe they can dispense in that timeframe. Instead of letting them go to waste, many pharmacies will sell the products 

to an authorized distributor—both small, independent companies, as well as large 

wholesalers—at a discounted rate. The authorized distributor, in turn, will sell it 

to a hospital, medical clinic or physician office that can use it immediately. 

Ultimately, this practice is a win-win—drugs don’t go to waste, pharmacies don’t 

lose large quantities of money on products that are expiring and providers are able 

to get pharmaceuticals at a discounted rate. This is a legitimate and necessary practice, and is not a fake pharmacy. 

Unfortunately, there is a small group of people out there who have discovered this 

and have set up a few ‘‘fake pharmacies’’ across the Nation. Fake pharmacies are 

those that buy and sell pharmaceutical products, but do not actually dispense drugs 

to patients. Let’s be clear here—dispensing pharmacies that exercise their right to 

sell a small portion of their inventories are legitimate. Only those that do not dispense drugs are fake pharmacies. 

It is the position of the NCPD that fake pharmacies are detrimental to the integrity of the entire health care supply chain. The coalition and its member companies 

constantly looking for companies operating in the black market and report any company they believe is operating a fake pharmacy. 

Further, it is the position of NCPD that legitimate pharmacies that sell a small 

portion of inventory into the supply chain are working to ensure that every drug 

in the supply chain is available to people in need and these operations should not 

be under scrutiny. 

Role That NCPD Members Played In Distributing Short-Supply Drugs 

Much activity has driven these secondary relationships that have been the realities for the pharmaceutical supply chain during this period of increasing short-supply of critical drugs. One of the practical circumstances that have fed the expansion 

of these relationships in the secondary distribution industry is the fact that this industry of small suppliers primarily serves as a safety-net or back-up supplier to all 

hospitals, both large and small in the U.S. Add to that, the fact that this industry 

is the primary supplier of all drugs to smaller medical facilities, doctor’s offices and 

pharmacies. Despite their crucial role in getting life-saving drugs to critically ill patients, they are also on an individual basis, one of the smallest customers of the 

‘‘traditional’’ wholesalers that do billions of dollars of sales to these large hospitals 

and are required to pay the highest acquisition cost offered in the U.S. supply chain. 

As a practical matter, every sector of the healthcare industry depends critically 

upon secondary distributors due to the fact that they act as the safety-net in times 

of national shortages to secure and distribute scarce drugs in short supply. 

During the protracted recent drug shortages, customers of the Big 3 wholesalers 

were placed on product rationing based upon historical purchase volumes. For the 

secondary distributors, who may by necessity have much smaller average monthly 

purchase volumes, this often meant receiving only a handful of items each month 

under rationing process—certainly not enough to satisfy the demands of the smaller 

facilities who depend upon the secondary distribution industry. Importantly, it also 

meant that secondary distributors were unable to meet the monthly purchasing 

minimums required to maintain a Big 3 account (not to mention those direct manufacturer accounts with similar minimums). The Big 3, other large ADR distributors 

and many manufacturers used the inability of secondary distributors to meet these 

68 

minimums as the justification for broadly terminating or closing secondary distributor’s accounts during 2010, 2011 and 2012. The real impetus underlying these terminations, however, appeared to be a desire of these larger entities to distance themselves from the widespread negative publicity about secondary distributors that had 

been engendered by the media and other’s false and misleading report alleging 

‘‘price gouging.’’ 

Despite losing their primary Big 3 accounts, the primary customer base and their 

loyal, secondary customer base continued to need critical medications to treat their 

patients. As a result secondary distributors found themselves clamoring to develop 

new supplier relationships that could replace the loss of their Big 3 accounts and 

ensure that these medications continued to be available for the health and welfare 

of underlying patients. These practical realities, as much as anything, drove increasing use by the secondary distribution industry of accepting short-supply drugs from 

multiple distributor links reflected on a small number of pedigrees that have surfaced during this committee’s investigations. However, given that these secondary 

suppliers do thousands for transactions per month leading to hundreds of thousands 

on annual basis, only a handful of these transactions seem to have been outside 

their normal distribution channels that in reality are pedigreed from the manufacturer . . . to an ADR wholesaler . . . to a distributor . . . to another distributor 

. . . and ultimately to the end dispenser. 

Doing The Right Things 

Many of the assertions made in recent reports include activities that are illegal 

and would cause a small distributor to lose its license, but more importantly would 

cause them to lose their loyal customers that support the business model of their 

entire segment. 

The NCPD members have stayed in business for the last 20 to 30 years (and even 

longer for some) because they bring a valuable service to their loyal customers. They 

know if they are perceived as ‘‘price gougers’’ and ‘‘profiteers’’, they will not get repeat business and their goals depend on that customer coming back to them monthin and month-out, not just in times of drug shortages. Again as a practical analysis 

of this segment would show, primary wholesalers guarantee to supply 98 percent 

of the non-backordered products 98 percent of the time, not 100 percent. Therefore, 

the business model for secondary distributors depends on them doing the right 

things, at the right times and keeping their customers coming back every month. 

If the implications that these companies routinely charge prices that are in excess 

of their usual and customary cost of the drugs plus a mark up that covers their 

higher cost of ordering, receiving, handling, packaging, shipping and special delivery 

that equates to their business model based on price gouging and profiteering, they 

would not have repeat customers—nor would NCPD be standing here today defending that practice. 

What we are saying is that drug sales and distribution is a complex market with 

many key players and at times on the surface, an analysis will find the anomalies, 

the special circumstances where higher mark-ups were passed from one distributor 

to another or a cost averaging model is used to achieve an average net profit on 

all items in certain categories. These selected examples are just samplings that reflect an example of what happens in a situation where a reaction to supply and demand rarely has anything to do with suppliers taking advantage of customers, but 

more to do with reacting to market conditions that included rationing, loss of access 

to products from normal supply chain and finding a solution to getting a critically 

needed product to fill a high demand request of a hospital that had a patient in 

life-threatening situations. 

NCPD represents the interests of small and independent reputable distributors. 

All member distributors go through a thorough background check and must meet 

all licensing standards. The NCPD and its members condemn all drug distribution 

activities conducted by ‘‘gray market’ distributors including stealing and selling 

drugs, setting up ‘‘fake’’ pharmacies, buying back drugs and reselling them, stockpiling drugs that are needed, and gross ‘‘profiteering.’’ The NCPD is actively and 

aggressively lobbying in support of the most comprehensive and stringent Federal 

pedigree standard for the industry. As part of this, the NCPD has pushed for enhanced licensure standards and penalties for all distributors who fail to comply with 

laws and standards. 

The NCPD recommends that hospitals work with their trusted secondary distributor to fill needs that primary distributors may not be able to provide and to 

report offers from a distributor they do not know or medicine that is offered at 

priced well below or well above that offered by other distributors to regulatory agencies. 

Thank you Mr. Chairman, Ms. Ranking Member and members of this committee. 

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Background Material 

Independent Distributor Industry Survival Challenged 

in 2012 by "Gray Market" Branding 

United States Senate Commerce Committee 

Hearing July 25, 2012 

rl' j ~ 1 NCPD I Coal,tion 

"",~I of 

,~ (~.(I 'h"~.",,,.1 D,stnbutors 

Prepared by Patricia Earl 

NCPD Industry Consultant and 

Secure Pharma Distributor Network 

Principal and CEO 

2006 National Coalition of Pharmaceutical 

Distributors Stood up and Fought for Orphaned 

Small Distributor 's Existence at FDA 

Outreach for Industry, Policy Makers and Legal Protection 

'G NCPD 15' 
70 


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Who is the NCPD? 

• Small, independent, reputable distributors that 

are regulated by the FDA, the DEA and every 

state in which we operate 

• Produce pedigrees for all Rx products distributed 

- Range from 100,000 - 1,000,000 and more annually 

• Engage in current good manufacturing practices 

- VAWD Certified through National Boards of Pharmacy 

• Provide heightened product quality assurance 

- Follow same warehouse SOP and shipping as BIG3 

• NCPD members adhere to bright, black and white 

regulations 

Basic Principles of Supply and Demand 

• The healthcare market is not immune to the basic 

principles of supply and demand. Supply represents how 

much the market can offer. The quantity supplied refers to 

the amount of a certain drug manufacturers are willing to 

supply when receiving a certain price. Price is a reflection 

of the supply and the demand. When there is a shortage, 

bad actors try to take advantage of the situation. 

• NCPD members do not engage in price gouging behavior 

even though market conditions are ripe for it because they 

know it is inherently bad business to Ugouge" customers 

that you want to come back and buy from you next week. 

You can't stay in business long unless your prices are fair 

and competitive and that is how NCPD members have 

done business with their long-standing relationships. 
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Small Distributors Act in a Clearinghouse 

Capacity to Fill the Gap for Shortages 

• Dr. Scott Gottleib, former FDA Administrator gave 

supporting testimony in Senate Finance Hearing on 

12/7/2011 that this industry has been providing a 

"clearinghouse to real/ocate the finite stock of drugs 

remaining when manufacturer has no supply to 

ship. " 

• They can react quickly when bottlenecks created by the 

largest distributors are not able to supply. 

• Certainly, "big" has advantages for the system, but to 

unfairly drive small distributors out of the supply chain 

will hurt providers and patients given the fact that they 

have been the only reliable, licensed sources for 

reallocating product in many life-saving situations. 

2011 Pharmaceutical Distribution Channel 

$3078 u.s. Product Supply Chain 

·°See HDMA 2011·2012 Factbook & "The Role of Distributor in U.S. Heallhcare Industry 
72 


725NCPD7.eps 725NCPD8.eps

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• 

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• 

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• 

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Drug Distribution is a Complex Marilet with Many Key Players 

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s.. The Ilolt of DIIlri><JIoto .. U s. -. I"""'Y, A lOll Ollldy pn<par«i 80cz & CO<'rIPl'I'\I. HDMA 2011·12 Fk1boOIo. 

GRAY MARKET DRUG REFORM AND 

TRANSPARENCY ACT of 2012 

Drug distribution is a complex market with many key players. 

Secondary distributors fill a gap that the large distributors can't service. 

Service less profitable rural regions and smaller providers that the large 

players will not service (i.e. minimum $20,000 - $50,000 monthly). 

Are required to pay much higher prices than large distributors which 

often receive chargebacks and rebates under large GPO contracts. 

Small distributors are blocked/restricted~ by the manufacturers and the 

GPO's from selling these contract items at the exclusive, often 

artificially-loss leader contract pricing between GPO and selected 

partners. 

Comparing prices offered under GPO contracts to those offered by 

small distributors is like comparing Walmar! to the corner mom-and-pop 

store. 
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What is NePD Trying to Accomplish? 

• NCPO supports federal pedigree legislation. Its members 

are the only companies required to authenticate drugs and 

pass pedigrees since 2006. 

• Supports the serialization of drugs for national track and 

trace system both at lot level and with 20 bar codes. Many 

of its members serialize drugs today for tracking and billing 

purposes where distribution in small unit of use packs. 

• Actively lobbying since 2006 in support of stringent federal 

licensure standards and penalties for those who fail to 

comply with laws and standards 

Condemns all activities by gray market including stealing 

and selling drugs, "fake pharmacies" buying back drugs 

and reselling them, stockpiling drugs that are needed and 

gross wprofiteering." 

Role of NCPD Member in Distributing 

Short-Supply Drugs 

• Served as back-up, secondary, safety-net. 

• Many drugs were being rationed by manufacturers 

and large wholesalers. 

• Member buys from same wholesalers. 

• They were rationed due to size and accounts 

closed by wholesaler due to negative publicity. 

• They had to find new suppliers and use multiple 

distributors when purchasing product for hospitals. 

• Accepted higher mark-ups on critical products in 

order to fill the immediate need of a hospital. 
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725NCPD11.eps 725NCPD12.eps

Pricing Perception is Not Reality 

Small distributor does not "profiteer" and full analysis 

data will dispel claims that price gouging is normal 

business practice: 

• Estimated revenues are about $13Mil. 

Average net operating income is about 7.5% 

Average products shipped are 144,000 units yr. 

• Average products with pedigrees 144,000 yr. 

Average cost of drugs is approximately $90 unit. 

If mark-up was 200% per unit, would have net operating 

profits in excess of $20 Mil. 

• None of NCPD members have reported net operating 

profits in excess of 10% of revenues. Many report losses. 

NCPD Condemns Fake Pharmacies 

• The NCPD does not support bad actors that create 

fake pharmacies in order to buy drugs from large 

wholesalers as a retail pharmacy and then resell 

the products as an intra-company transfer that redistributes those same products into the U.S. 

supply chain. 

• This is not a legitimate industry practice that is 

supported by the NCPD or its members. 

• These incidents are not common practice and 

should not be used to punish the companies that do 

all the right things. 
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Pharmacy - Distributor Five Percent Rule 

• State laws vary broadly in implementing 5% rule. 

• Some states will allow a combo license - retail 

pharmacy/wholesale distributor license. 

• NePD and its members support all state laws 

and licensing provisions and adhere to them. 

• Practical reality of the drug rationing situations 

during short-supply periods has driven some 

distributors to utilize the 5% rule to acquire drugs 

that were needed to meet their customer's 

needs in critical, life-threatening situations 

We Oppose a "One-Touch" System 

NCPD opposes a "One-Touch" system which would 

mandate that distributors only buy product from an original 

manufacturer, such as Pfizer, Teva or J&J etc. 

One-touch would prevent distributors from buying products 

from Authorized Distributors of Record such as 

AmerisourceBergen, Cardinal or McKesson because the 

product would be "touched twice H by two distributors 

before it was sold to a hospital, clinic or physician's office. 

NCPD members are small purchasers of pharmaceuticals 

and large manufacturers use the Authorized Distributor of 

Record (ADR) system to distribute products and require 

that small distributors purchase from an ADR. 
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Why Do We Oppose This System? 

• This system will eliminate pharmaceutical 

distributors and, in turn, preclude small clinics and 

doctors' offices from buying necessary medication. 

• Moreover, eliminating pharmaceutical distributors 

will add to the anti-competitiveness rampant in our 

health care market. 

• It won't fix drug pricing concerns or cure the drug 

shortage. 

• It would create an oligopoly, and you know 

happens to prices when that happens. 

Drug Prices - Price Gouging False Allegations 

Premier Healthcare Alliance's Ana!ysis "Navigating Drug 

Shortages in American Healthcare March 20, 2011 , 

Caleen Cherico, et al. leveled an accusation at "gray 

marketH distributors (price gouging). 

As a result of this report and a follow up article, Buyer 

Beware Drug Shortages Opening Door to Price Gouging 

by Mike Alkire, Premier Inc. Oct. 15, 2011 , "the 

secondary distributor industry is experiencing yet 

another unjustified attack on the business integrity of 

serving small, rural, underserved health care providers, just like them." 

It is disingenuous for Premier to attack secondary 

distributors, who must pay significantly higher prices for 

the same drugs that Premier's exclusive distributors get 

to sell at extraordinarily low contracted prices. 
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Drug Prices - Deeper Background 

Drug prices are established on an intricate system that is 

far more complex than most free markets 

• Manufacturers set a number of price points for a product, 

including Wholesale Acquisition Cost (WAC) - lowest 

price a small distributor can buy the product 

• GPO's leverage collective buying power when 

negotiating with the manufacturers 

• Large distributors buy at WAC and sell at GPO contract 

then get reimbursed from manufacturers to make them 

whole in transactions 

• Small distributors do not receive reimbursements from 

manufacturers or GPO pricing even if they sell same 

product to the exact same hospitals 

• Loss leaders by GPO who benefits from system is 

distorting the market. Shortage appears. NCPD member 

fills need and the appearance is worse than reality 

Small Distributors Inaccurately Portrayed in 

Price Gouging Accusations ... 

The Premier "study" unscrupulously implies that all small distributors 

are "gray market" because they charge exorbitant mark-ups. 

Premier omitted the fact that their own exclusionary contracts forced 

small distributors to pay the highest price from the manufacturers. 

The reality is that smaller pharmaceutical distributors in the U.S. are 

legitimate, licensed, and highly regulated secondary suppliers to 

hospitals that need expedited orders. 

In fact, these secondary suppliers have provided a safety-net" for 

hospitals when the designated, exclusive primary wholesaler has 

run short of critical drugs. In other words, when a product is in short 

supply, secondary distributors fill orders at reasonable mark-ups that 

are negotiated with their long-standing customers, but without the 

advantage of the lower, negotiated GPO prices. 

Distributors want repeat business. If seen as gougers, would not get 

repeat orders. Normal course of business is modest mark-ups. 
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Premier Reports Uses Threat Tactics to End 

Business Relationships 

• Small distributors buy up available supplies and offer to 

see them to end purchasers at significantly higher prices 

• Going after secondary distributors, now labeled as "gray 

market" because they have been forced to deal with 

"hard-ta-find" medications. 

They have been labeled "gray market" companies 

indicating that how they practice business is not illegal, 

but may have a questionable business model. 

• Unsubstantiated accusations are that they hoard 

medications and prey on institutions desperate for these 

medications. 

• By selling these short supply meds at an exorbitantly 

higher price than the usual contract price. 

• Not the real story. 

"Premier has not revised their numbers or 

provided their analysis" 

Premier submitted this statement on Nov. 29, 2011 to NCPD 

when asked to put out a corrected press release ... 

"To compute the markups, we compared Premier's contracted 

price to the gray market price. In the case of Pharmaceutical 

Commerce, the reporter asked whether markups were still 

significant if they were compared to a vastly more expensive 

metric - the Wholesale Acquisition Cost (WAC). We were 

specifically asked if we still saw pricing gouging if we compared 

the gray market price to WAC. WE DID." 

Even using much high WAC price comparison, we found the gray 

market marking up propofol between 29% and 729%. 

Premier stated "We deliberately did not use WAC as the 

comparison in our report because hospitals do not pay WAC for 

drug products. The calculations in our report are more reflective 

of the added costs being passed to hospitals, consumers and 

other payors by the gray market. ~ 
79 


725NCPD21.eps 725NCPD22.eps

Premier Intentionally Distorted Facts 

• The failure to use WAC in the comparison is misleading 

because, as Premier knows since they created the 

policy, secondary distributors must pay the actual WAC 

price because of Premier's monopolistic, exclusive 

practices. 

• To not acknowledge the fact that they ignored WAC is 

leaving out an important, critical element of the analysis. 

Secondary distributors must pay WAC and to ignore it is 

an intentional distortion the facts. 

It is disingenuous for Premier to attack small distributors, 

who must pay significantly higher prices for the same 

drugs that Premier's exclusive distributors get to sell at 

extraordinarily low contracted prices. 

Effects of Anti-Competitive GPO 

Practice Lessening Competition 

prices in exchange for sale 

source GPO awards 

One supplier then corners 

the market for multiple 

years of contracts 

Artificial price controls drive 

competition to discontinue 

that product 

Limited distribution 

conspires to drive drugs 

commodity exchanges 

Artificially low pricing leads 

to unnecessary shortages 
80 


725NCPD23.eps 725NCPD24.eps

Propolol is the generic version 01 Diprivan , the 

anesthetic drug used in Hospital Operation Rooms 

Price: When No-Adverse Market On Major GPO 

Supply Issue: Contracts 

Manufacturer A Published Wholesale 

Acquisition Cost (WAC) $5.60 

GPO Contract Price $0.48 

Discount off Published Wholesale 

Acquisition Cost (WAC) $5.12 

Percent Discount Savings 91.43% 

Actual Pricing that a Small Distributor Pays lor 

Propolol when Purchasing lor Normal Supply 

Price Between Two Distributor Trading NoGPO 

Partners, i.e. an ADR to Distributor Contract 

The WAC Price to Authorized Distributors $5.60 

ADR Invoice Price to Small Distributor $6.60 

Cost Plus Invoice Price to Distributor $1.00 

Percent Markup on ADR to Distributor 17.86% 
81 


725NCPD25.eps 725NCPD26.eps

Selling Price that a Small Distributor Offers to 

Hospital at15% Markup on its Purchase Price 

Market 

Price If Market Supply Channel is Disrupted: Price 

Small Distributor Acquisition Price from ADR $6.60 

Sell Price to Hospital - Non GPO Eligible $9.25 

Cost Plus Mark-up on Sale to Hospital $2.65 

Percent Markup on Small Distributor Price 40.15% 

This Illustration Shows a 40% Markup to Cover the 

Costs of Picking, Packing, Handling and Shipping 

Transactions for Propofol. .. $2.65 for all services 

Cost Impact on hospital pricing as On VS. Off 

reported to GPO: Contract 

GPO negotiated contract price on APP 

product $0.48 

Non-GPO authorized distributor sale at 

WAC+ $9.25 

Additional Cost to Purchase Off-Contract 

Alternative $8.77 

Cost Impact for hospital reporting to GPO 1827% 
82 


725NCPD27.eps 725NCPD28.eps

Anti-Competitive Leveraging Disadvantage 

to Small Distributors 

• Manufacturer limited contract price and 

chargebacks to GPO-designated Wholesaler 

ONLY. 

• Manufacturer and ADR set price to small 

distributor. 

• Manufacturer and GPO restrict contract pricing to 

ADR's only. 

• Non-GPO sale is WAC plus reasonable mark-up 

by small distributor. 

• May include higher mark-up% for UPS Overnight, 

special handling, hazardous, refrigerated. 

Conclusion 

• NCPD members abide by bright black and white 

regulations. 

• We condemn "gray market" activities and "fake 

pharmacies" black market activities. 

• NCPD members would like to have level playing 

field to access contract prices - especially in 

times or national shortages. 

• We support the pedigree standard with 

enhanced licensure standards and penalties for 

distributors that fail to comply with laws and 

standards. 
83 

The CHAIRMAN. Thank you very much, Ms. Earl. And from my 

point of view, you represent the gray market. From your point of 

view, we’re talking about just a few—I should tell you that we have 

at least 300 pedigrees in our possession, and there are plenty more 

where they came from. 

Now, I want to—because we made life more difficult—to call first 

upon Senator Klobuchar and then Senator Lautenberg and then 

Senator Begich. 


725NCPD29.eps 725NCPD30.eps
84 

STATEMENT OF HON. AMY KLOBUCHAR, 

U.S. SENATOR FROM MINNESOTA 

Senator KLOBUCHAR. Very nice. Thank you, Mr. Chairman, and 

thank you to the witnesses here. 

I got involved in this issue a few years ago and introduced the 

first bill on this in the Senate on drug shortage. We had only a few 

authors and got more and more support as we went on. Senator 

Harkin agreed to do a hearing, and I think from there, we were 

able to get the early notification requirements in place, and I thank 

those of you who helped us with that issue. And this really came 

from patients and pharmacists in my state—where we believe you 

should always have excellent medical care, in Minnesota—that 

came to me, and we were able to get this done. 

But I thank the Chairman for continuing this fight and looking 

at this critical issue of the gray market, which is clearly a major 

part of the problem. It’s bad enough that we have the shortages. 

It’s even worse to think that there are people who are preying on 

those shortages and making money off of them. 

So my first question is of you, Ms. Herold. Distributors and pharmacies all need to be licensed by the states that they practice in. 

These licenses dictate the rules by which these companies and providers practice. California is known to have one of the most stringent set of regulations when it comes to the prescription drug supply chain. Even with these rules, your testimony describes a situation where a wholesaler was able to recruit pharmacies to purchase 

drugs in short supply and then divert them into the gray market. 

Is the investigation you described in your testimony an unfortunate anomaly, or is it a frequent occurrence? And how do you think 

we should fix this? 

Ms. HEROLD. I most certainly hope it is not a frequent occurrence. The difficulty we have with 6,200 pharmacies in the state, 

400 million prescriptions dispensed within the state during the 

course of a year, and 500 wholesalers, not to mention what’s coming in from outside through mail order or other sources—it’s a busy 

place. We only know what we know. And we exist for the bad 5 

percent, let’s say, that can’t operate without having a regulator in 

the space to assure that they follow laws, behave themselves, and 

that the public safety is enhanced by the healthcare providers. 

I don’t know. I will tell you that we have—I believe it’s three 

other investigations involving the very same thing. We did not find 

shell pharmacies in this case doing the kind of thing that your 

committee and Mr. Cummings has found. But we do have shell 

pharmacies that are bilking our state’s Medicaid program for millions of dollars. And when they go out and do an audit—surprise, 

there’s no pharmacy there. Now, where those drugs go, we don’t 

know, either. 

Senator KLOBUCHAR. Thank you. I appreciate that and your 

work. 

Dr. Mayhaus, we have a hospital that spent in excess of $1.5 million in extra fees for short-supply products and during the last year 

had to assign three full time pharmacists to handle the sourcing, 

shortage guidelines, alternatives, and communications around the 

shortages. Can you talk about what you think this is costing your 

hospital? 

85 

Dr. MAYHAUS. I think we’ve spent about $100,000 only over the 

last year. We’ve been very good in being able to maintain an adequate supply of drugs. So from a dollar amount of cost of goods 

sold, it’s only about that amount. We spend about 30 percent of our 

technician time in overtime to manage the drug shortage issue. 

Senator KLOBUCHAR. Thank you. And as you know, we have such 

limited funds right now for care. I just don’t think we should be 

spending it on that. 

Ms. Earl, as with any industry, there are good actors and bad actors, and your testimony clearly defends the actions of the distributors. However, what we’re trying to do is to figure out how to address the bad actors. We’re clearly seeing, as Representative 

Cummings’ chart showed and Senator Rockefeller’s investigation 

has shown, that there are people that are gouging. How do you 

think we weed out the bad actors from the good actors and get at 

this problem? 

Ms. EARL. You know, one of the aspects of our association, the 

National Coalition of Pharmaceutical Distributors, is our distributors that are part of our organization all are licensed by the States’ 

Board of Pharmacies. They all work with the FDA if they need to 

and the DEA. There’s a lot of regulations today that guide pharmacies and that could be used to weed out the bad actors. 

We do not support the bad actors, you know, the fake pharmacies 

or anyone who does price gouge. We would just like the paint brush 

that has been brushed against all small distributors, secondary distributors, to basically take into effect that there are a lot of—you 

know, hundreds and thousands of small distributors that have been 

working for 20 years, that they—— 

Senator KLOBUCHAR. You do acknowledge, though, if we see a 

case of a 750 percent markup in cost that we have a problem. 

Ms. EARL. Well, yes. I would say we have a problem. But I 

wouldn’t say that just because you can look at a pedigree and an 

invoice that you have found the root of that problem. You know, 

we have distributors today that have given us some documentation 

on some of the pedigrees that—when a hospital calls them—and I 

will give you—you know, I will say thank you to Dr. Mayhaus. My 

children go to that hospital. 

But yesterday or Monday, when we were on the phone for this 

hearing, getting ready for it, we had an e-mail come to five of our 

distributors that work with his hospital looking for pharmaceuticals, you know, on a secondary basis. And our distributors do 

that every day, and they do not price gouge, you know, in the routine normal business. Otherwise, they wouldn’t have repeat customers, like Children’s Hospital of Cincinnati, come looking for 

them. 

However, there are a lot of complexities and abnormalities in the 

way drugs are priced and the cost of shipping to receive an order. 

The inbound shipping to get the order to be able to process it and 

ship it out overnight to a hospital is sometimes 100 percent or even 

more for that drug. And that’s not taken into effect on a lot of the 

pedigrees that you’re looking at, because you can’t see the actual 

cost of the inbound freight. 

Senator KLOBUCHAR. I have to turn my time over here to other 

people. But, I mean, clearly, there must be some problem here 

86 

when we’re seeing these markups. Or you don’t see a problem at 

all? 

Ms. EARL. I see that there’s a problem in the way that the system is designed today. First of all, for secondary distributors, for 

the small distributors, because of the price that they do have to 

pay, it is the highest price out there. You know, they don’t have 

the advantage of being able to acquire and sell drugs at the lower 

price that Dr. Mayhaus’s hospital is used to buying them at. So 

they’ve got to buy them at a much higher price. And then they’ve 

got to pay the cost of processing that drug and the freight to get 

it there, because it’s—— 

Senator KLOBUCHAR. OK. I just think we are dealing with a lot 

more than the cost of the freight. And I will turn it over to my colleague. 

Thank you. 

The CHAIRMAN. Thank you, Senator Klobuchar. 

Senator Lautenberg. 

STATEMENT OF HON. FRANK R. LAUTENBERG, 

U.S. SENATOR FROM NEW JERSEY 

Senator LAUTENBERG. Thanks, Mr. Chairman. When I think of 

the situation that’s presented, it’s the equivalent of having a gun 

pointed at a person and threatening their health at every turn and 

seeing, apparently, a network that prospers with this kind of activity. 

Ms. Earl, in your written testimony, you claim that your members work tirelessly to make sure that the route from the distributor to the customer is as straight as possible. So you’re saying 

that the price differentials are fair. But this investigation shows 

that drugs sometimes change hands half a dozen times before 

reaching patients. Some of these companies never sell drugs to hospitals or patients. They’re effectively middle men. It’s like a trading 

market. 

How does having so many middle men benefit the patients? 

Ms. EARL. I do want to say, you know, we do not support the 

multiple transactions where it goes through multiple distributors 

before it gets to the patient. In the norm, our distributors—you 

know, most of our pedigrees, the thousands of pedigrees that we 

have that are done, are usually between one or two. You’ll see one 

or two distributors on there. 

The multi-pedigrees that you’re seeing now are anomalies. 

They’re extreme cases. I saw the one that’s up on the board there, 

and, you know, the first several distributors in there—where you’ve 

got five distributors in that chain outside of the manufacturer to 

the large wholesaler to the pharmacy, you know, they’re not our 

members. They’re not in our network. 

So how that’s getting into their hands—I think we do need to 

stop what’s happening on the fake pharmacies, the shell pharmacies—— 

The CHAIRMAN. Then don’t say they’re anomalies. Cancer is an 

anomaly, but it hurts, and it costs, and people die. So be straight 

with us. 

Excuse me, Senator Lautenberg. 

87 

Senator LAUTENBERG. That’s all right, because the questions 

here are being raised. I mean, is the gray marketplace a legitimate 

part of a mechanism that sells material when they have it, and upping the price, gouging the price? I’ve learned in this committee 

that drugs can be marked up as much as 85 times their original 

price. 

Is it your testimony that a markup of that magnitude is justified 

and appropriate? 

Ms. EARL. I do not believe that a markup—I think that there’s 

a lot more that goes into a markup than what you’re seeing. 

Senator LAUTENBERG. Such as? 

Ms. EARL. A markup is not all profit. A lot of that markup is expense that is incurred to acquire that drug and ship that drug. 

Senator LAUTENBERG. Well, then, they’re part of a price-gouging 

ring. I mean, if you’re saying divide it up enough and everybody 

gets a piece of it, that’s not so bad. But it’s what the final outcome 

is that’s the distressing part of this. 

Ms. EARL. Well, I didn’t say divide it up and everybody should 

put a markup—— 

Senator LAUTENBERG. No, but I said it, because that’s the way 

you frame it. You said that no one is making these gigantic profits, 

or you intimate that no one is getting these gigantic profits. But, 

nevertheless, there is this chain of people standing there, hands 

out, taking a little nip in part of this. 

And so you have to make up your mind. Is it justifiable that at 

the end, the patient is there, begging for mercy, begging for life, 

and having to pay an outrageous price? Now, you may not think 

it’s outrageous, but I think the chairman was very clear to say that 

it’s outrageous to the person who is, in many cases, breathlessly 

awaiting the medication to arrive that they can afford. 

Thanks, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator Lautenberg. 

Senator Begich to be followed by Senator Thune. 

STATEMENT OF HON. MARK BEGICH, 

U.S. SENATOR FROM ALASKA 

Senator BEGICH. Thank you very much, Mr. Chairman. 

And, Senator Klobuchar, to answer your question, in Alaska, our 

large medical hospital system has chosen to limit their activity, if 

at all, with the gray market. But it costs another $15 million for 

operations to deal with the pharmaceutical components of ensuring 

where they get it and all the things—so just to add that as part 

of your question to the individual here. 

Ms. Earl, I’m struggling here with your testimony. Let me ask 

you this. If the Committee gave you the list of the 300 folks, companies, would you submit to us if any of those are your members? 

I know associations like to hold their membership lists. So if we 

give you a list, will you tell us if any of these are your members? 

Yes or no? It’s not a complicated question. 

Ms. EARL. I would ask my NCPD, and they would have to give 

us permission to do that. 

Senator BEGICH. OK. Mr. Chairman, I’d want to put that on the 

record. 

88 

Second, have you ever, out of your association, kicked someone 

out for this type of activity? 

Ms. EARL. I’m not aware. 

Senator BEGICH. Have you ever kicked anyone out for any activities that might violate or come in question of their business practices? 

Ms. EARL. I will tell you that before we take new members in, 

we do vet the new—— 

Senator BEGICH. That’s not what I asked you. 

Ms. EARL. I know that’s not what you asked me. 

Senator BEGICH. So of members that are part of your organization—— 

Ms. EARL. I am not aware that we have kicked any members out. 

Senator BEGICH. So all your members are perfect. 

Ms. EARL. No. I’m not saying all of our members are perfect. 

Senator BEGICH. Can I ask you for the record—I’ve got limited 

time here, a very short time here. Can you provide to me or to the 

Committee, however it works here, anybody within your organization that has violated these types of issues—maybe law or ethically—that you just said this is not our practice—and submit that 

to the Committee so we can understand how your organization 

works? 

Ms. EARL. I believe we have some members that would be willing 

to share with you. But we haven’t seen the data, so I—— 

Senator BEGICH. Well, that’s what I’m asking. Forget about the 

report. What I’m asking you—you understand the problem. You 

said here on the record that seldom do your folks have more than 

one or two stops to the customer. OK? I’ll take you at that, and so 

show me the data. You must have lots of members who have never 

done this, so just show me that. 

We’re asking you now for the data, because you don’t necessarily 

like this data. So I want your data to prove differently. OK? That’s 

my question. 

I don’t know, Mr. Chairman. I’ll just put that out there. I don’t 

know what the right approach is. 

Also, you made a comment, ‘‘We don’t price gouge in the normal 

situation.’’ Now, I’m assuming you meant you don’t price gouge at 

all. 

Ms. EARL. I meant we do not price gouge. It is not a practice of 

our members to price gouge. If they did, they would be out of business and they wouldn’t, you know—— 

Senator BEGICH. Would they be out of your association? 

Ms. EARL. If we had proof that they were price gougers. 

Senator BEGICH. And let me just say this. As someone from Alaska, I understand shipping, you know. We’re still not part of the 

United States for some reason for some companies. So I’d buy your 

argument for a certain point of the debate, but there’s no way, because thanks to Congress, we have bypass now that gets to every 

village in our state at a reasonable rate to deliver products, especially pharmaceutical products. That’s why bypass mail is in place. 

So we are the most expensive place to get products to, and, you 

know, you’re shipping—pharmaceuticals are easy to ship. And 

when you talk about overnight in the worse conditions and having 

to deliver it to the hardest places in the country, Alaska is it. So 

89 

I do not buy from a $7 product—and, again, this is one example— 

to $600. I mean, you have to agree that there is a reasonableness 

we have to have in the pricing of product. Yes? 

Ms. EARL. Yes. I agree there’s a reasonable—— 

Senator BEGICH. Do you believe in a standard—I don’t know if 

this is the right question—but that we should be able to track the 

pedigree through an electronic system, like FedEx can track everything—I mean, the minute I place an order, within 15 seconds, I 

know where that order is, to the time it gets delivered to my door 

from a small company that I’ve ordered something from. Do you believe in that kind of tracking system? 

Ms. EARL. Yes, we do. In fact, our association—— 

Senator BEGICH. So you support it. 

Ms. EARL. Our association supports track-and-trace all the way 

down to the unit level, which Ginny’s state is also supporting at 

this point. Yes, I do believe that electronic track-and-trace is important. Our association does. 

Senator BEGICH. Mr. Chairman, I know my time is up here. 

But I guess on the flip side, Ms. Earl, I do recognize there is a 

need for some of these distributors in small amounts, because the 

large ones do control a lot of the market. I understand that. And 

your pricing question—I would encourage you, as many groups that 

I have worked with—when I was mayor of Anchorage, small cities 

joined together to create co-ops to buy products at a higher volume, 

lower price. But put that aside. I recognize that there is a role. 

But somehow we have to get at this, because, you know, you talk 

about people angry, when I caught onto this issue, it wasn’t long— 

I mean, I don’t know how many e-mails I’ve received from Alaskans 

about drug shortages and pricing of the drug shortages. And for 

people to take advantage of the situation is outrageous. 

Now, maybe a small amount—the point is it’s still happening, 

and we can argue at what degree it’s happening. But we need to 

figure this out, because the supply chain of pharmaceutical goods 

for health is critical. So I’ll just leave it at that. 

Mr. Chairman, thank you very much for allowing me a few minutes here. 

The CHAIRMAN. Thank you, Senator Begich. 

Senator Thune. 

STATEMENT OF HON. JOHN THUNE, 

U.S. SENATOR FROM SOUTH DAKOTA 

Senator THUNE. Thank you, Mr. Chairman. 

This issue does seem to be quite wrapped up in the issue of drug 

shortages. And I serve on the Finance Committee with Senator 

Rockefeller, as well, and the Finance Committee held a hearing 

last fall on the topic of drug shortages. And one issue that came 

up was the current pricing structure in Medicare for injectable 

medications that uses average sales price. I’m wondering if anybody would like to comment about whether you think that drug 

shortage issues can be attributed in any way to the pricing structure within Medicare. 

Dr. COSTER. Senator Thune, I can tell you from the community 

pharmacy perspective that those reimbursements for products both 

in Medicare and Medicaid come down. You tend to see some of the 

90 

suppliers get driven out of the market, because as the pressure is 

put on us, we try to put the pressure on them. And as they get 

driven out of the market because of the pricing pressures, you will 

see manufacturers leave the market, which may create a shortage 

situation. 

So we do think reimbursement policy in Medicare and Medicaid 

can have a direct effect on, at least, pharmacies’ abilities to buy 

certain medications, because if the manufacturers are not able to 

recoup some of their investments and maintain all the processes 

they need to comply with Federal regulations, they may just leave 

the market or go out of business. So we agree that reimbursement 

can have a direct impact on short-supply drugs. 

Senator THUNE. And it also seems that part of the problem stems 

from questions about the supply chain, which you’ve mentioned. 

And I’m curious as to whether you could give your opinion on what 

measures might be taken to tighten that supply chain. Does anybody want to take a stab at that? 

Ms. Herold? 

Ms. HEROLD. In California, we have on the books—it will take effect in 2015 on a staggered basis out to 2017 and a half—an electronic pedigree requirement that must start with the manufacturer. Every change of ownership has to be certified into the electronic pedigree, and not only just the change of ownership. The 

seller certifies into the pedigree that it sold the product to the specific buyer. The buyer specifically certifies to the seller that it’s 

buying the product. That’s creating a chain of custody. 

And, thus, when we, as a regulator, walk in and scan a product, 

we can see everywhere that product has been. And if there should 

be a gap in, suddenly, where the drug was acquired from, for example, we know that the point prior to that is where the introduction 

occurred. And so it allows us to police the distribution of drugs in 

California as well as across the nation, because Federal regulators 

are going to be looking at this, too, that they can use in investigations, because once that product goes across state lines, it’s very 

difficult to track. 

And there are rings of these things set up—much like what the 

FBI did in New York last week. Those products are moving from 

one location to another location, but almost always across multiple 

state lines. So it’s virtually impossible to track them as a state regulator. 

Senator THUNE. How many states have electronic pedigrees? 

Ms. HEROLD. We are the only state that has the depth of the requirement that we have. And it is a complex process—— 

Senator THUNE. Process to get there? 

Ms. HEROLD. Yes, it really is. But without that—you need to put 

the onus on each member of the supply chain to certify they are 

a legitimate and ethical buyer, and you do that every time you buy 

or sell a product, because without that, people will slip things in, 

and you won’t be able to do anything about it. And, regrettably, it 

needs to be done at the unit level, much like the FedEx tracking 

is. You have to track every single one of those packages, or else you 

don’t know where it is or where it’s been. 

Senator THUNE. Anybody else? 

Mr. Gray? 

91 

Mr. GRAY. In our organization, we’ve been working with Ginny 

for six or 7 years back to the development of the California law 

and, most recently, at the direction of the Congress here, for a uniform Federal pedigree. Our position has been since the adoption of 

California that what we need is a Federal system. It’s not enough 

to do something in California. Our members dealing in all 50 states 

need some consistency in the business process by which we ship 

drugs into every state. 

And Florida, for example, has a completely different paper-based 

pedigree system, quite different from California’s, but, nonetheless, 

it’s a pedigree system. So we have been proponents of, hopefully, 

getting the Congress to approve a national uniform pedigree system and work out the technology requirements to do that. 

But our members have been advocating this since 2004. And we 

got perilously close a month ago. We’re not giving up the fight on 

this one yet. We think this can have a large impact, just as Ginny 

described, as far as how we can keep an eye on all six of those 

steps and know where these drugs have been and whose hands 

they’ve exchanged for security reasons as well as cost. 

Senator THUNE. When did California put its pedigree system in? 

Ms. HEROLD. Initially, 2004. Then it was pushed back with respect to implementation four times. It started in 2007. It was then 

moved via legislation to 2009. The Board pushed it to 2011, which 

it did. And then, finally, in 2008, the current dates were established on a staggered basis so the supply piece could come up in 

stages. As the product moves through the supply chain, each stage 

of that supply chain will have an opportunity to make sure their 

component in it is working. 

Senator THUNE. Great. I see my time has expired. 

Thank you, Mr. Chairman. 

Senator BOOZMAN. Ms. Herold, I was impressed with your testimony. It sounds like you are doing your very best to police a very 

difficult situation. We appreciate the community pharmacies so 

much. In places like West Virginia and Arkansas and much of the 

country, that is the source of healthcare in very small communities. 

That’s one of the most respected professions in the country. 

We in Congress are at about 18 percent now. We’ve worked our 

way up from 12. So, again, we do appreciate it. This is an important hearing. But we shouldn’t lose sight of that. 

In your testimony, it sounds like the activities that were going 

on—and, again, I think Senator Rockefeller described them as despicable and things like that. We would all agree. But those were 

illegal under the current statutes that exist, weren’t they? I mean, 

it sounded like you got very aggressive and moved on them. 

Ms. HEROLD. Our first pedigree law in 2004 included the very 

provision that we’re prosecuting these pharmacies and the wholesaler under—that you don’t want a pharmacy in the business of 

wholesaling drugs. And when it gets over a nominal amount and 

very limited to address a specific shortage, they’ve crossed over, 

and profit becomes the motive, not healthcare. And when that occurs, that becomes a problem, and so we have—we are able to use 

that. 

The problem is in some cases, it’s the buyer, the hospital, pharmacy, that has to buy those drugs. It has no way of knowing where 

92 

that product has been. And we do not believe that a paper pedigree 

is a complete solution, because how do you know this piece of paper 

goes to that bottle? 

Senator BOOZMAN. The pedigree—was that put in place for $2 

injectables to treat cancer, or was that more put in place for the 

tremendous problem that we’ve got now with prescription pain killers and things like that? 

Ms. HEROLD. It was actually put in place because patients would 

go to California pharmacies with a legitimate prescription and 

often for AIDS or cancer drugs and walk out with a fake drug, because the drug was very valuable. And we couldn’t detect where 

this product came from with any certainty, and we couldn’t prosecute at a level we needed to to ensure the safety of the California 

public. So every single product, whether it’s $1 or $6,000 a dose— 

that product itself has to be pedigreed, with a few exceptions, but 

pretty much every single unit. 

Senator BOOZMAN. Right. And, again, what I’m trying to do is get 

at the root of the problem, not to address, really, Dr. Mayhaus’s 

problem so much of the $1 or $2 drugs that it seems like are so 

cheap now—they’ve been around forever—that it’s simply—because 

of the fact that Medicare and, thus, insurance companies will only 

pay so much, it gets to the point it’s not profitable to make them. 

The other problem that I see is if we add another layer—and, 

again, you guys are doing such a good job in California, and we 

could encourage the other states. My fear is if we layer more regulation and more hassle on the pharmacists, that increases their 

cost to the point where they don’t want to fool with them because 

they are such low priced drugs. 

Dr. Mayhaus, when you get in these terrible situations, you 

know, where you’re trying to supply medicines to your oncologists 

in treating these kids, when you reach out to people, what percentage do you feel like are people that are acting in good faith, you 

know, really busting their tails, trying to get out, to call around 

and see where the drugs are available, as opposed to the kind of 

people that we’d like to get rid of? 

Dr. MAYHAUS. We would definitely prefer 100 percent of our 

drugs to come through our primary wholesaler. And as I stated in 

my testimony, when we determine there’s a shortage and we run 

through our mitigation plan and there’s no drug in the market, 

then we do sometimes call the alternative wholesalers to see if they 

have a market for that. But we have paid an exorbitant amount 

of money for some of those drugs. 

The Cytarabine situation that I described earlier—our cost was about $12 through our buying group, and we did pay $966 for that. 

We bought six doses of that drug. It was for one particular patient, 

and if that patient would not have received Cytarabine, we believe 

that the outcome of that patient would have suffered. 

Senator BOOZMAN. Again, I’m glad that you mentioned that 

story, because that highlights the terrible problem that we’ve got 

and the problem that you face. I guess what I’m wondering is if we 

get rid of all of the secondary folks, are you still going to face that 

problem or not? 

Dr. MAYHAUS. I believe that the drugs will be available in the 

primary wholesaler. So if the drug is there, the primary wholesaler 

93 

or those distributors should have the drug and not the alternative 

wholesaler. 

Senator BOOZMAN. So you feel like the alternative wholesalers 

are stocking the drug to the extent that it’s causing a shortage. 

Dr. MAYHAUS. I do not think that, no. I think the drug is short, 

and somehow they react to the market. I’m not sure how that happens, but they tend to get the drug sometimes before we even know 

there’s a shortage. But they are not causing the shortage of the 

drugs, no. 

Senator BOOZMAN. Good. And, again, I guess my point is that we 

can address this problem and we should. I’d like to see the state 

boards address it—and, again, the pedigrees—for lots of reasons, in 

the sense of the other problems that we’re dealing with with prescription drugs, pain killers, you know, things like that, which 

would greatly help in that regard. 

But I think we’re misleading ourselves if we feel that dealing 

with the secondary issue, which needs to be dealt with for other 

reasons—to me, it’s like a big football game. If West Virginia and 

Arkansas were playing, and we were both undefeated, you’re going 

to have scalping because you’re going to have a shortage of tickets. 

So, hopefully, we can work together to make it such—if we can 

deal with this without overregulating—but also make it so that 

you’re not put in a position where you’ve got some child that desperately needs care and you’re faced with an $8 drug or whatever, 

paying $900 for it. 

Thank you, Mr. Chair. 

The CHAIRMAN. Thank you very much, Senator Boozman. Ms. 

Herold, you don’t have this situation in California? 

Ms. HEROLD. Actually, we do. But, as I said, we have not found 

the shell pharmacies operating in this realm, but, regrettably, we 

have pharmacies that are buying drugs at the behest of a secondary wholesaler. The pharmacy is buying the full allocation 

available to it from that wholesaler, and if it can, it will buy multiple times from that primary wholesaler so that it can maximize 

the amount of drug. 

They were told in a face-to-face meeting with the sales agent 

from the wholesaler—and I can’t call it anything else but a sales 

agent—that ‘‘we will pay you 10 percent over invoice, but you are 

helping alleviate a shortage. Patients are desperate, providers are 

desperate, and you can help.’’ 

The CHAIRMAN. But I’m reading here that you have a new law 

in California that will prevent these abuses. 

Ms. HEROLD. It won’t prevent them. It allows us to discipline 

when we identify them. 

The CHAIRMAN. And when you discipline them, what does that 

mean? 

Ms. HEROLD. Well, in this particular case, it means we cited and 

fined up to $70,000 the pharmacies, each, for their behavior. We 

cited and fined the pharmacists in charge, and, in many cases, 

they’re going to be required to take a 20-hour ethics course so this 

does not occur. And with the wholesaler, that’s still currently under 

investigation. We have not disciplined the wholesaler yet. 

94 

The CHAIRMAN. So whether it’s an anomaly or not, if it’s just 1 

percent or 2 percent or 3 percent, whatever, you treat it seriously, 

and you find them and find ways to try to stop them. 

Ms. HEROLD. I don’t think we would become involved with a 1 

percent or a 2 percent over invoice that they bought from the pharmacy and then—— 

The CHAIRMAN. No. I mean of the total pharmacy population. 

Ms. HEROLD. Yes. We don’t believe it’s everyone. 

The CHAIRMAN. I know it isn’t everyone. But for those who it 

does affect, you have in whatever your new law is ways to find 

them and to discourage them from doing that, because they’re 

often—the wife may be the distributor and the husband may be the 

pharmacist. Right? 

Ms. HEROLD. We found exactly what your results of the Committee was in our investigations. And, early on, we reached out to 

Mr. Cummings, because at the same time he initiated his, we were 

doing ours, and we found pretty much the same thing. The only 

thing different was they were different players. 

The CHAIRMAN. Very well. We are meant to have a vote starting 

now, which means we’d better head down. 

Mr. Coster, you worked together with David Pryor, didn’t you? 

Dr. COSTER. I did, Senator, many years ago, and with many of 

your staff as well. 

The CHAIRMAN. I did get a letter a week ago. I wrote him back 

two nights ago. He’s well. 

Dr. COSTER. He’s doing well? Thank you. 

The CHAIRMAN. Yes. 

Dr. COSTER. He’s a great man. 

The CHAIRMAN. A great influence on my life. 

I want to thank you all. One thing I regret about this hearing 

is that there was so much—so many questions were addressed to 

Ms. Earl, because it means that we didn’t—I mean, for example, 

Dr. Mayhaus, there’s a whole bunch of questions I would have 

liked to have asked you. And you don’t really have a problem, so 

to speak. You always have what you need on hand, and that bears 

investigation, as to how you manage a hospital successfully like 

that. 

But, anyway, hearings are what hearings are. And in this case, 

what we’re trying to do—we’re an oversight and investigations 

committee here, in terms of this particular hearing. And we’re trying to root out bad behavior and disallow bad behavior. We’ve done 

that with the health insurance industry, and, as a result of that, 

they have now refunded about $4 billion of what they thought they 

could get away with charging to the premium payers. 

So, anyway, that’s what we do. And I very much appreciate you 

all taking the time to be here, and I’m sorry we didn’t do the questioning more thoughtfully. No, that’s not what I mean. Well, we’ll 

leave it at that. 

The hearing is adjourned. 

[Whereupon, at 4:10 p.m., the hearing was adjourned.] 

(95) 

1Pew Health Group. ‘‘After Heparin: Protecting Consumers from the Risks of Substandard 

and Counterfeit Drugs.’’ (2011) http://www.prescriptionproject.org/afterlheparinlreport. 2 United States Attorney’s Office, Southern District of New York. Manhattan U.S. Attorney 

Announces Charges Against 48 Individuals in Massive Medicaid Fraud Scheme Involving the 

Diversion and Trafficking of Prescription Drugs. July 17, 2012. http://www.justice.gov/usao/ 

nys/pressreleases/july12/prescriptiondrugs.html. Accessed July 20, 2012. 3 United States Attorney’s Office, Southern District of New York. Manhattan U.S. Attorney 

Announces Charges Against 48 Individuals in Massive Medicaid Fraud Scheme Involving the 

Continued 

A P P E N D I X 

PREPARED STATEMENT OF ALLAN COUKELL, DIRECTOR, MEDICAL PROGRAMS, 

PEW HEALTH GROUP, THE PEW CHARITABLE TRUSTS

Chairman Rockefeller, Ranking Member Hutchison, and members of the Commerce Committee, thank you for the opportunity to present testimony. I thank you 

for holding this hearing and for your efforts to reveal and address risks to our pharmaceutical supply. 

Through research and analysis, the Pew Health Group seeks to improve the 

health and well-being of all Americans by reducing unnecessary risks to the safety 

of medical and other consumer products and supporting medical innovation. 

The focus of my testimony today is the drug distribution system—the weaknesses 

in the system and the risks of counterfeit and stolen drugs. 

In July of 2011, Pew released a report entitled ‘‘After Heparin: Protecting Consumers from the Risks of Substandard and Counterfeit Drugs.’’ 1 The report, which 

underwent extensive external review, was based upon information from regulatory 

and public documents, peer-reviewed journal articles and interviews with dozens of 

supply chain experts from numerous perspectives. It was informed by a two-day conference we hosted in March 2011 that included representatives of brand and generic 

pharmaceutical manufacturers, active drug ingredient makers, major and secondary 

pharmaceutical wholesalers, chain and independent pharmacies, consumer and 

health professional organizations, the U.S. Food and Drug Administration (FDA), 

state regulators and independent supply chain experts. 

In our report we explain that numerous entities are involved in drug distribution, 

and the routes to market are not always simple. Drugs can be bought and sold by 

one wholesaler or by many before reaching a pharmacy. Drugs may be traded between distributors, and may travel back from distributors and pharmacies in local 

markets to major wholesalers through sales or returns before ultimately reaching 

patients. Some drugs travel through repackagers; some are transported by thirdparty logistics providers who do not actually purchase the drug; that is, the physical 

movement of drugs does not always conform to transfers of ownership, further complicating drug tracking. This potential for complexity is not inherently problematic, 

but absent sufficient safeguards bad actors are able to take advantage of weak links 

in the chain. 

Risks to the Drug Distribution System 

One of our key findings is that incidents of counterfeiting and drug diversion in 

this country—while thankfully far less common here than in other parts of the 

world—are a matter of serious concern. 

Just last week, on July 17th, the U.S. Attorney for the Southern District of New 

York charged 48 individuals in a large-scale criminal scheme to buy prescription 

drugs ‘‘on the street’’ from patients, re-package them and re-sell them back into distribution through licensed pharmaceutical wholesalers, who in turn sold the drugs 

to pharmacies.2

The scheme included medicines for HIV, schizophrenia, and asthma. If the patient 

labeling was apparent, the criminals would use solvents to remove it. If the medicine’s label was damaged or said the drugs were expired, a new, fake label would 

be printed and applied.3

96 

Diversion and Trafficking of Prescription Drugs. July 17, 2012. http://www.justice.gov/usao/ 

nys/pressreleases/july12/prescriptiondrugs.html. Accessed July 20, 2012. 4 United States Attorney’s Office, Southern District of New York. Manhattan U.S. Attorney 

Announces Charges Against 48 Individuals in Massive Medicaid Fraud Scheme Involving the 

Diversion and Trafficking of Prescription Drugs. July 17, 2012. http://www.justice.gov/usao/ 

nys/pressreleases/july12/prescriptiondrugs.html. Accessed July 20, 2012. 5 New York State Office of the Attorney General. A.G. Schneiderman Announces Arrests In 

$274 Million Black Market Prescription Drug Operation. April 4, 2012. http://www.ag.ny.gov/ 

press-release/ag-schneiderman-announces-arrests-274-million-black-market-prescription-drug-operation. Accessed July 20, 2012. 6 U.S. Food and Drug Administration. Update to FDA Alert About Stolen Insulin. August 26, 

2009. http://www.fda.gov/ForConsumers/ConsumerUpdates/ucm180320.htm. Accessed November 12, 2010. 7 Ciolek, Michelle M., Special Agent, Office of Criminal Investigations, U.S. Food and Drug 

Administration. Affidavit in support of search warrant. July 21, 2009. USA v. Altec Medical Inc. 

and RX Healthcare Inc. Document number: 8:09–cr–00814–WMC. 8Forsaith, Chuck. Corporate Director, Supply Chain Security, Purdue Pharma L.P. ‘‘Cargo 

Theft.’’ Presentation, 2010 PDA/FDA Pharmaceutical Supply Chain Workshop. Bethesda, MD. 

April 26–28, 2010. 9 United States Attorney’s Office, Southern District of Florida. Eleven Indicted in Pharmaceutical Thefts. May 3, 2012. http://www.justice.gov/usao/fls/PressReleases/120503–01.html. 

Accessed July 20, 2012. 

This scheme cost the Medicaid program an estimated half-billion dollars. But this 

crime is also a serious patient safety issue. Drugs were allegedly stored in inappropriate, sometimes egregious conditions. In some cases pills were removed from the 

bottles and handled loose 4—creating a risk for contamination. Disturbingly, we do 

not know the frequency and extent of crimes like this, but numerous, similar examples have been brought to light over the past decade. 

The United States currently has no national system to detect or prevent such incidents. The U.S. pharmaceutical distribution system is sometimes described as a 

‘‘closed’’ system, meaning that it is not legal to import drugs that were not manufactured for the U.S. market. However, the system is not closed in the sense that we 

have over a thousand individual licensed wholesalers, large and small, providing 

multiple points of entry to the legitimate distribution system. Sometimes medicines 

are bought and sold numerous times before reaching a pharmacy. Today we have 

learned about cases where pharmacies are not the last stop in the supply chain, selling drugs to wholesalers for further distribution. 

Legitimate companies—manufacturers, wholesalers, and pharmacies—work together to keep drug distribution safe, secure and efficient. But bad actors exist that 

are willing to take advantage of supply chain weaknesses for profit. 

A few additional examples will help to illustrate the nature of the risks. 

In another series of arrests this spring, the New York Attorney General announced that a pharmacy in New York had allegedly accepted bribes to purchase 

drugs sourced from the black market worth over $247 million from shell companies.5

Another threat is drug theft. In 2009, thieves stole a tractor-trailer containing 

129,000 vials of insulin. This drug, which needs to be refrigerated, disappeared for 

a number of months before being sold back into distribution.6 While most of the stolen drug was never recovered, the FDA has said that some of it was found at retail 

chain pharmacies in Texas, Georgia and Kentucky, having passed through the 

hands of licensed wholesalers in at least two other states.7

In another case, thieves stole $75 million worth of pharmaceuticals from an Eli 

Lilly warehouse in Connecticut. It was a sophisticated operation, the largest dollarvalue loss from a warehouse in U.S. history.8 The theft was in 2010. Just this 

spring, those stolen drugs were discovered stored in South Florida.9 One investigator who spoke at the Pew conference and who is an expert in pharmaceutical distribution crime believes that a scheme of drug thieves is to steal the product then 

hold it, hidden, for a year or two, letting the alarm die down before selling it back 

in to the system. 

Finally, we have incidents of outright counterfeits reaching unsuspecting American patients. This spring cancer patients in the U.S. were exposed to counterfeit 

Avastin®—a critical chemotherapy agent used to treat numerous types of the disease. In 2001, counterfeit Serostim®, a human growth hormone used to treat AIDSrelated wasting, was found in at least seven states and passed through multiple 

97 

10Serono, Inc. Serostim [somatropin (rDNA origin) for injection]. Press Release, January 2001. 

http://www.fda.gov/Safety/MedWatch/SafetyInformation/ 

SafetyAlertsforHumanMedicalProducts/ucm173895.htm. Accessed February 17, 2011. 11Otto, Alex. Counterfeit Serostim Found Nationwide. Pharmacy Today. American Pharmacists Association. March 1, 2001. http://www.medscape.com/viewarticle/406804. Accessed 

October 13, 2010. 12Dutchess Business Services Inc. v. Nevada State Board of Pharmacy. No. 46345. 

September 11, 2008. http://caselaw.findlaw.com/nv-supreme-court/1219556.html. Accessed 

February 17, 2011. 13Williamson, Joyce P. Statement of Serono before the task force on drug importation. http:// 

archive.hhs.gov/importtaskforce/session2/presentations/Serono.pdf, Accessed February 17, 

2011. 

wholesalers.10 11 12 EMD Serono, the manufacturer of Serostim,® has since put in 

place a secured distribution program, with a unique serial number assigned to each 

vial that must be verified by the dispensing pharmacy.13 It is an example of how 

drug distribution security can, and should, be improved. 

Finally, your own investigation highlights the potential of the drug shortage crisis 

to exacerbate existing supply chain weaknesses. When a pharmacy or hospital can’t 

obtain an essential drug from usual channels, they may purchase from unfamiliar 

sources. This supply chain flexibility is a good thing, and secondary wholesalers play 

an important role in optimizing distribution. But it also creates an opportunity for 

bad actors to introduce illegitimate product. We currently lack national standards 

for wholesaler licensure. Any such standards should address pharmacies that function as de facto wholesalers. 

A National Serialization and Traceability System to Secure Distribution 

The United States lacks strong uniform national standards for licensure of pharmaceutical wholesalers, and we lack a standard system for companies to keep track 

of our pharmaceuticals during distribution. There is currently no way to check 

whether an individual vial or bottle is authentic or counterfeit. 

Some state laws exist. California has put in statute a comprehensive system that 

would require manufacturers to put a serial number on each bottle or vial, and 

would require wholesalers and pharmacies to check the drugs they buy and sell to 

ensure they are authentic. California’s law is scheduled to come into effect three 

years from now. Despite the strength of the law, a patchwork of state requirements 

is not ideal either for companies or for consumers. 

Congress is now considering Federal requirements for drug distribution security. 

However a national standard that preempts state laws like California’s must not replace them with a weaker standard, especially one that would not prevent patients 

from receiving the kind of stolen and counterfeit drugs I have just described. 

To protect patients, a system must include the following two components: 

1. Unit-level Traceability 

The key to improved security of drug distribution is knowing who handles the 

drugs as they move from manufacturer, through a succession of wholesalers, to the 

pharmacy or hospital and, ultimately, the patient. 

Some have proposed a system to track drugs by the lot number, but a lot can contain numerous cases of many thousands of individual bottles or packs of vials. Each 

case or vial may be sold separately, and tracking by lot does not allow industry or 

regulators to ever know who bought and sold a given drug through distribution. 

Maintaining data about lots may provide an incremental benefit over the status 

quo, but it would fail to catch unsafe drugs in many scenarios. 

For example, if a bad-acting pharmacy agrees to sell expensive injectables out the 

back door to drug diverters, regulators that discover those drugs will not be able 

to tell where the vials left the legitimate system. They will only know the lot number—and this lot of drugs could have traveled through multiple distributors and 

reached multiple pharmacies. 

Also, if part of a lot is stolen and illicitly reintroduced into commerce, a pharmacist or patient will have no way to tell if the product on their shelf is compromised. However if unit-level data is kept, specific stolen unit serials could be 

identified. Even if manufacturers are willing to recall an entire lot when only part 

is stolen, shortage situations create a compelling public health argument that recalls be as targeted as possible. 

Today, some companies are required to track a drug’s transaction history through 

paper ‘‘pedigrees’’. An electronic system would be a welcome replacement to this 

paper-based paradigm—Congress should certainly not replace pedigrees with a 

structure that does less to capture chain of custody than today’s imperfect system. 

98 

14 Counterfeit Pharmaceutical Inter-Agency Working Group Report to the Vice President of 

the United States and to Congress. March 2011. http://www.whitehouse.gov/sites/default/ 

files/omb/IPEC/PharmalReportlFinal.pdf. Accessed April 22, 2011. 15 Administration’s White Paper on Intellectual Property Enforcement Legislative Recommendations. March 2011. http://www.whitehouse.gov/sites/default/files/iplwhitelpaper 

.pdf. Accessed April 22, 2011. 

2. Routine Checking to Identify Diverted and Counterfeit Drugs 

Most stakeholders agree that drug packages should bear unique serial numbers. 

A key reason to do this is so that pharmacies and others who handle the drugs use 

the numbers to verify the authenticity of the drugs. However, Congress is considering a proposal that would not require these serials to be checked before a drug 

reaches a patient. This act of checking alone could have prevented the massive 

criminal recycling of government subsidized drugs—a serial number that has been 

retired because it has already reached a pharmacy would be caught on its second 

trip around. Without required checking, a criminal could sell a recycled drug or a 

counterfeit drug with a fake serial number, and no one would detect it. They could 

also sell thousands of fake vials with the exact same serial number—real or phony. 

Pew supports required authentication of drug products by companies involved in 

distribution. Required checking would help ensure fake or otherwise flagged serials 

are caught, and not allowed to make it to patients. In addition to preventing crime, 

such a requirement would support enforcement of responsible purchasing by wholesalers and pharmacies 

Conclusion 

The risk of stolen or counterfeit products reaching and harming patients through 

the drug distribution system is small, but real. Recently, both the U.S. Counterfeit 

Pharmaceutical Inter-agency Working Group and the office of the U.S. Intellectual 

Property Enforcement Coordinator have recommended implementation of a trackand-trace system to secure drug distribution against counterfeits in separate March 

2011 reports.14 15 The impending implementation of California’s law creates momentum for a single national standard. We urge Congress to create a robust national 

system—one that protects patients today and provides the flexibility to ensure we 

can build upon it in the future. 

Thank you, and I welcome your questions. 

HEALTHCARE SUPPLY CHAIN ASSOCIATION

Washington, DC, August 2, 2012 

Chairman JOHN D. ROCKEFELLER IV, 

Committee on Commerce, Science, and Transportation, 

Washington, DC. 

Dear Chairman Rockefeller: 

I am writing on behalf of the Healthcare Supply Chain Association (HSCA) to request that this correspondence be included in the record for the hearing held before 

your Committee on July 25, 2012. We applaud you for holding this important hearing and examining these so-called ‘‘gray market’’ drug companies that drive up the 

cost of short-supply prescription drugs. The hearing and corresponding staff report 

entitled, ‘‘Shining Light on the ‘‘Gray Market’’: An Examination of Why Hospitals 

Are Forced To Pay Exorbitant Prices for Prescription Drugs Facing Critical Shortages’’ provided valuable insight into why hospitals and other health care providers 

sometimes struggle to obtain short-supply prescription drugs they need to treat patients suffering from cancer and other life-threatening conditions. 

We want to clear up any misstatements made by the witnesses for the National 

Coalition for Pharmaceutical Distributors attempting to blame Group Purchasing 

Organizations (GPOs). We also want to address any questions or misconceptions the 

reports mention of group purchasing organizations and the role they play in the 

supply chain may raise. Specifically, the report cites information from ‘‘some observers’’ that have linked ‘‘the broader business dynamics of the generic sterile 

injectable market to explain the recent shortages.’’ These observers argue that the 

bargaining power of the GPOs and Medicare Part B reimbursements tied to the ‘‘Average Sales Price’’ cause manufacturers to operate with only very small profit margins.’’ The facts are that GPOs have worked vigorously with hospitals, providers, 

manufacturers, distributors, the FDA, and Congress to bring critical issues related 

to drug shortages to light, to help find market-based solutions to managing and preventing shortages, and to help ensure that hospitals and patients have uninterrupted access to lifesaving drugs. 

99 

GPOs negotiate vigorously on behalf of our hospital members and clients. These 

negotiations are between extremely sophisticated parties, and while GPOs have continually demonstrated our success in lowering prices to bring savings to our members, clients and taxpayers, we do not have the ability—nor would it be in our interest—to force manufacturers into contracts that undermine their ability to deliver 

product. Drug companies regularly and quickly adjust pricing of GPO contracts 

when they experience shocks to production, and GPOs manage thousands of price 

changes annually, both increases and decreases. Drug shortages are a complex problem and one without an easy or overnight fix. GPOs are clearly part of the solution, 

and we support recent regulatory and legislative activities aimed at solving the drug 

shortage problems. As an industry, we are committed to mitigating this public 

health crisis. 

In addition, we are concerned that the materials submitted by the witness for the 

National Coalition for Pharmaceutical Distributors to the Committee contain inaccuracies and statements that should not go unchallenged. We would like to clear up 

the record on a few key points. For example, it was stated that GPOs limit access 

for ‘‘small distributors or only contract with the ‘‘Big 3.’’ In fact, GPOs contract with 

a range of distribution providers, including national, regional and family-owned 

businesses. Most GPOs have dozens of distributors on contract to provide members 

with maximum choice and flexibility. Also, any hospital can purchase off contract 

any time they choose—they often do so, especially in times of shortage. It is standard practice to include provisions in GPO contracts allowing any member to seek 

alternatives sources of supply in the instance of a product shortage. 

GPOs have been at the forefront of advancing private sector solutions to drug 

shortages and seeking common-sense policy solutions. The market realities are that 

some drugs, particularly older, generally low margin generics, may only have 1 or 

2 suppliers. The fact that GPOs only contract with 1–2 companies is not by choice. 

It’s because that’s all there is to work with. And if one of those companies experiences a problem, we all can see the results. Drug shortages are caused by a variety 

of reasons, but GPOs are not the problem but rather an important part of the solution. 

The Healthcare Supply Chain Association is a broad-based trade association that 

represents 15 group purchasing organizations, including for-profit and not-for-profit 

corporations, purchasing groups, associations, multi-hospital systems and healthcare 

provider alliances. The GPO industry stands ready to work with you and all parties 

to address today’s drug shortages. I appreciate the opportunity to correct the record 

and to share our role in the healthcare delivery system. We are proud of the savings 

we achieve for our customers and the contribution we make toward containing costs 

in an unstable pharmaceutical market. 

If you have any questions or would like additional information about GPOs, please 

do not hesitate to contact me. Thank you for your consideration of our comments. 

Sincerely, 

CURTIS ROONEY, 

President, 

Healthcare Supply Chain Association. 

PREPARED STATEMENT OF MARK SNYDER, CHIEF EXECUTIVE OFFICER, 

SUPERIOR MEDICAL SUPPLY, INC. 

Chairman Rockefeller, Ranking Member Hutchison, I thank you for the opportunity to submit written testimony for this hearing entitled: ‘‘Short-Supply Prescription Drugs: Shining a Light on the Gray Market.’’ I commend the Senate Commerce, 

Science and Transportation Committee for conducting oversight of the important 

issues surrounding our pharmaceutical supply chain. The serious and protracted 

drug shortages plaguing this country are undoubtedly a tragedy from the perspective of the patient who cannot obtain critically necessary medication, and all 

healthcare stakeholders and policymakers who will need to work together to resolve 

these dangerous shortages in a fashion that can truly benefit all patients in every 

healthcare sector. I strongly support the Committee’s effort to help ensure that patients receive the medication that they need and deserve. I offer this written testimony today to discuss the business practices of my company, Superior Medical Supply, Inc. (subsequently referred to as ‘‘Superior’’). 

Background 

Superior was formed in 2004 as a small family-held company to engage in nationwide wholesale pharmaceutical distribution. Superior suffered substantial losses in 

its first several years, due to the difficulty of establishing a competitive foothold in 

100 

the heavily-consolidated distribution industry. Early on, it became readily apparent 

that Superior, like most specialty distributors, could not offer competitive pricing in 

the large and lucrative hospital sector. Despite these competitive challenges, Superior has been able to establish a healthy customer base in its 8+ years as a specialty 

surgical distributor catering to the non-hospital sector. Because of this specialized 

customer base, Superior’s single largest inventory component is injectable medications, especially sterile injectables used in the operating room, most of which are 

produced in a generic, non-branded form. 

Today, Superior plays an important and indispensable role in the pharmaceutical 

supply chain primarily serving these smaller surgical facilities operating outside the 

hospital sector, including those facilities in more remote locations that are not well 

served by the larger primary distributors, including the Authorized Distributors of 

Record or ‘‘ADRs’’ for the drug manufacturers. Superior’s business model focuses on 

providing pharmaceuticals to these smaller medical facilities that otherwise cannot 

acquire them in the primary distribution market. The necessity of the smaller more 

flexible wholesaler couldn’t be more apparent than it is today, with monthly minimum purchasing requirements by the major wholesalers often exceeding $100,000/ 

month for a direct account, thus excluding most smaller facilities from participation 

in these accounts. 

As a specialty wholesaler, Superior currently serves hundreds of these small facilities as a primary—if not only—source of necessary medications, while also servicing thousands of other facilities, both large and small, as a supplemental or ‘‘secondary’’ source of supply. In many cases, Superior provides a very low volume of 

medications (such as one or two vials) to a facility in need, and necessarily incurs 

substantial overhead expenses in operating this low-volume, high-cost specialized 

service throughout the entire U.S. But, as noted, many of these smaller facilities 

necessarily depend upon the services of Superior and other specialty distributors to 

obtain their medications. If these smaller medical facilities and private physicians 

are to get the medications that they—and their patients—desperately need, secondary wholesalers like Superior must meet this demand. 

Superior prides itself on offering its customers the most favorable pricing possible 

under then-prevailing market conditions. As a smaller distributor, however, Superior must pay a proportionally higher ‘‘Wholesaler Acquisition Cost’’ or ‘‘WAC’’ to acquire its pharmaceutical supplies than the larger wholesalers—and this is generally 

true regardless of whether acquired directly from the manufacturer itself, a large 

primary wholesaler, or another secondary wholesaler. Like many specialty distributors, simply Superior lacks the economy of scale to qualify for more favorable volume-based pricing from many drug manufacturers and larger wholesale distributors 

and ADRs. As a result of this market dynamic, Superior’s customer pricing tends 

to be significantly higher than the larger wholesalers and ADRs even under normal 

market conditions where there are few critical drug shortages. The concentrated 

critical drug shortages, however, have made it more difficult and expensive for everyone to obtain their medications, including Superior’s specialized customer base. 

The medical and surgical facility customers of Superior definitely value the important service that they receive. Superior has a series of written customer testimonials 

which illustrate the strong regard that Superior is held in by its customers (sample 

testimonials can be viewed online at www.superiormedicalsupply.com). Some of 

these customer testimonials also highlight the difficulties faced by the customers 

who rely upon specialty distributors like Superior, including the escalating drug 

costs caused by these critical shortages. For example, as an attachment to this written testimony (Exhibit #1), I provide for the hearing record a recent testimonial 

from a surgery center in Casper, Wyoming, which both thanks Superior for its indispensable services but also bemoans the lack of better pharmaceutical availability 

and pricing to smaller facilities. I am attaching this exhibit for inclusion in the 

hearing record. 

Drug Shortages 

I described above how Superior’s business model serves many smaller surgical facilities as a primary source of their pharmaceuticals, particularly sterile injectable 

medications used in virtually every operating room in this country. This means that 

Superior’s customer base competes directly with the hospital sector for many of the 

same necessary OR drug supplies. To meet the needs of its specialized customer 

base, Superior has expended substantial time and resources in developing an extensive supply network that can offer its customers the best drug pricing possible 

under then-prevailing market conditions, particularly for generic injectables. 

As manufacturer backorders and other shortages of pharmaceuticals have intensified, however, Superior has found it increasingly difficult, if not impossible, to locate 

certain medications at favorable wholesale prices through the customary channel of 

101 

the larger primary wholesalers, including ADRs. These large wholesalers operate on 

a ‘‘just in time’’ inventory system that maintains only about one (1) week of stock 

on hand, so that when a drug shortage strikes the market, their inventory is almost 

immediately exhausted by the sudden spike in demand. When this happens, Superior is forced to purchase these backordered pharmaceuticals at a much higher price 

on the open market, or in other words, from other secondary wholesalers who have 

them in stock at the time. 

Thus, due to the Company’s specialized customer base, the shortages that you are 

now investigating have placed Superior squarely in the ‘‘hard-to-find’’ or backorder 

drug market as a matter of necessity. According to a recent Health and Human 

Services report, ‘‘in 2010, there were 178 drug shortages. . . . Currently, shortages 

are concentrated in the area of sterile injectable drugs, 132 of which are now in 

shortage.’’ Office of the Assistant Secretary for Planning and Evaluation, Office of 

Science and Data Development, U.S. Department of Health and Human Services, 

Economic Analysis of the Causes of Drug Shortages at 2 (October 2011). 

Thus, even though Superior’s business model is not focused upon servicing the socalled ‘‘hard-to-find’’ drug market, our participation in this particular market has 

necessarily increased substantially because of the concentration of these shortages 

in sterile injectables. These critical drug shortages have been so protracted in the 

generic injectable market, in fact, that Superior is now forced to acquire most of its 

inventory on the open market from other secondary wholesalers, rather than 

through its direct accounts with drug manufacturers and ADR wholesalers at a 

more favorable wholesale pricing. This market reality prompted Superior to form its 

Backorder Management Division to offer expertise in this ‘‘hard-to-find’’ marketplace 

as a specialized customer service. This group is specifically tasked with locating and 

acquiring backordered pharmaceuticals that our customers need and cannot otherwise locate. Though important to our customers, this service has not supplanted our 

primary model of distribution to our smaller medical facility customer base. 

It is important to note that this service is almost entirely reactive (not proactive). 

In response to customer requests, Superior expends substantial time and significant 

labor cost to locate the desired medications on the open market at the best price 

then available, but as a practical matter, this price point is always significantly 

higher than the price that would be paid under normal market conditions when Superior is able to obtain medications directly from the manufacturer or primary ADR 

wholesalers. Superior typically purchases these backordered medications only if the 

customer authorizes the particular purchase price. Superior typically receives hundreds of requests per week from both established and prospective customers desperately seeking these backordered medications. 

As the success of this Division grew, so did our customer base. Through customer 

referrals, industry word of mouth, and an outreach program, many hospitals too 

began to find value in utilizing Superior to fill in the gaps of medications that they 

could not acquire though their primary wholesalers. Over the last several years, and 

as the shortages had worsened, the customer base of hospitals that utilized Superior 

in this supplemental or secondary capacity had grown to several hundred customers 

strong. However, with the widespread publicity focused on secondary distributors 

servicing hospitals, Superior and many other specialty wholesalers have found it 

necessary to pull back from servicing hospitals as a matter of business survival. 

Many specialty distributors around the country have suffered substantial lost business from this negative publicity, forcing many to lay off more than half of their 

staff members in order to survive. Superior has now reduced its hospital base to 

only a handful of preferred customers, and intends to ultimately cease all distribution into this sector to minimize further business losses. Superior is not alone. We 

now receive numerous calls daily from hospitals around the country desperately 

seeking drugs. 

Although there are several drivers for drug shortages ranging from raw material 

deficiencies to manufacturing plant closures, the most prominent shortage type in 

Superior’s experience revolves around regional shortages. As noted above, the large 

primary ADR wholesalers operate on ‘‘just in time’’ inventory systems that maintain 

minimal stock on hand at any given time. In the hospital sector, virtually every hospital belongs to a Group Purchasing Organization or ‘‘GPO,’’ which obtains preferential ‘‘contract’’ drug pricing for its hospital members by leveraging their collective purchasing power and negotiating extremely favorable direct pricing from the 

drug manufacturers. The GPO product management and allocation systems are operated primarily by the largest wholesale distributors, which function by separate 

regional distribution centers (‘‘DCs’’) spread across the country; each hospital member is typically assigned to a single regional DC to obtain their pharmaceuticals at 

the favorable GPO contract price This GPO distribution structure is fundamentally 

flawed due to the lack of flexibility caused by the restrictive pricing and distribution 

102 

structure that hospitals are held to under their GPO contracts. This often results 

in situations where a hospital customer is told that a particular medication is on 

‘‘backorder’’ and unavailable, when in fact the same drug may be in stock in other 

regional DC’s of the same primary distributor, and is almost always available from 

other wholesalers within the region, particularly secondary wholesalers. 

In Superior’s industry experience, these regional DCs of the largest distributors 

actually compete with each other intra-company, resulting in a real disincentive to 

cooperate with each other to alleviate these regional drug shortages. The typical 

policies of these largest distributors also tend to discourage and effectively penalize—through, for example, cost-prohibitive transfer or service ‘‘fees’’—GPO hospital 

customers from acquiring products from another regional DC with product in stock. 

These situations result in a localized shortage to the hospital that cannot acquire 

pharmaceuticals through its GPO distributor, and must then go out on the open 

market to acquire these medications for its patients and necessarily pay a substantially higher price—often hundreds of times more—than the artificially low GPO 

contract price. This is where Superior and other secondary distributors typically 

enter the picture in servicing the hospital sector, performing a critical market reallocation function that the inflexibility of the GPO distribution system simply cannot accommodate. While hospitals must pay higher prices to acquire necessary 

medications from secondary distributors, there are undeniable benefits to the patients who avoid unnecessary suffering and death due to this critical role of distributors like Superior. 

Congressional Investigation Into the Pricing of Paclitaxel 

On October 5, 2011, Superior received letter from the Ranking Member of the 

House Oversight and Government Reform Committee, the Honorable Elijah 

Cummings (D–MD), requesting documents related to our purchase and sale of 

Paclitaxel. This drug is used to treat breast and ovarian cancer. A subsequent request for this information was made on December 15, 2011 by the following Members of Congress: Senator John Rockefeller, the Chairman of the Senate Committee 

on Commerce, Science, and Transportation; Senator Tom Harkin, the Chairman of 

the Senate Committee on Health, Education, Labor and Pensions; and Representative Cummings. We met repeatedly and worked cooperatively with the staff of these 

three committees, providing them with proprietary and confidential materials regarding these Paclitaxel transactions and Superior’s standard business practices. 

The greatest area of interest to the committees was the difference in the price Superior had paid to acquire the Paclitaxel and the price it charged when it subsequently sold the drug to its customers. In response to this inquiry, Superior provided data to the committees on its pricing structure and practices. Pursuant to this 

data, Superior showed that its average gross margin on all of its sales of Paclitaxel 

was less than 40 percent overall. The committees also expressed particular interest 

in the higher-priced sales of Paclitaxel. The data provided to the committees specifically showed that, for the Paclitaxel sales in the higher $500.00 range, the average 

gross sales margin in this price range was less than 25 percent. This data shows, 

importantly, that market supply and demand will tolerate only so high of drug 

prices, and that Superior actually makes less profit as a drug shortage worsens and 

market prices trend upward. In other words, because Superior’s primary inventory 

component of sterile injectable medications has been the class of drugs most affected 

by the current shortages, these medications have been subject to greater price escalation caused by market supply and demand, resulting in lower operating revenues 

for Superior than during normal market conditions where few drug shortages exist. 

I do not believe that these gross margins are excessive, unreasonable, unconscionable, or amount to ‘‘price gouging.’’ This is particularly true given that these gross 

margins do not account for the substantial overhead costs of running a small business, paying employees, providing them with benefits like health insurance and retirement accounts, or even keeping the lights on in the office. As alluded to above, 

Superior’s overhead costs are higher operating in this low-volume, high-cost ‘‘hardto-find’’ marketplace, wherein Superior often provides a very low volume of necessary medication—sometimes only one or two vials—to a needy facility (as a practical matter, the high market prices of these ‘‘hard-to-find’’ drugs means that most 

customers purchase only the minimum amount of medication for their immediate 

patient needs). Since many sterile injectable medications are produced in glass vials, 

and sometimes must be kept refrigerated, there are also additional labor and packaging and shipping costs associated with the delivery of these particular drugs to 

customers. In general, Superior and other small specialty distributors must internalize substantial overhead costs in the form of labor expenses, pedigree authentication and compliance, packing materials, dry ice and other refrigerated packing materials and methods, as well as the high costs of maintaining a common carrier acVerDate Nov 24 2008 13:17 Feb 28, 2013 Jkt 075679 PO 00000 Frm 00106 Fmt 6601 Sfmt 6621 S:\GPO\DOCS\79524.TXT JACKIE
103 

1 Under these licenses, Superior is accountable to the rules of numerous administrative agencies and bodies, including but not limited to the various state boards of pharmacy, the U.S. Drug 

Enforcement Administration, the U.S. Food and Drug Administration, the Federal Aviation Administration, the U.S. Department of Transportation, and others. The costs of complying with 

these multiple, and sometimes conflicting, laws and rules are extraordinary, including substantial employee training and monitoring expenses. 2Price Discrimination is defined as ‘‘the practice of charging different prices for the identical 

product to distinct buyers.’’ See Ernst R. Berndt & Joseph P. Newhouse, Pricing and Reimbursement in U.S. Pharmaceutical Markets at 29 (Harvard Research Working Paper Series, September 2010). 

count (such as UPS or FedEx) to deliver numerous smaller shipments of critical 

medications across the U.S. 

In fact, as shown to the investigating committees, Superior’s costs are up substantially while annual revenues have decreased by several million dollars. If given a 

choice, Superior would strongly prefer not to have to operate in this difficult secondary market, and would gladly return to the normal market conditions that provide more stability and sustainability to its core business model. But Superior still 

prides itself on supplying its regular customers with all of the medications that 

their patients need, even if it makes for difficult operating conditions. 

When looking at the gross margins on Paclitaxel, several key points must be considered. First, Paclitaxel represents a specialty drug with a need to immediately get 

it to customers, yet comply with the costly and time-consuming burdens of verifying/ 

creating paper pedigrees, hand packaging glass vials (including, if applicable, additional refrigerated packing), delivering product safely and on time, and then 

invoicing the customer and subsequently collecting payment. Second, operating a 

small business in the pharmaceutical industry includes significant fixed overhead 

and operating costs, such as the following: licensing, insurance, bonds, compliance, 

pedigree, shipping, payroll, rent, utilities, and taxes, among other things To illustrate, Superior currently maintains 112 different licenses for its distribution operations, and each of these licenses must be annually renewed at substantial expense 

to Superior and other similarly situated small businesses, yet the costs of maintaining this licensure is roughly the same as expended by the largest wholesalers in this 

country.1 Superior is just not big enough to recognize the ‘‘economies of scale’’ that 

its larger competitors enjoy, resulting in proportionally higher total operating costs 

for Superior and other small, specialty distributors. 

Shipping is one of the particular areas where we find ourselves unable to compete. 

For example, as shown to the investigating committees, the annual cost to maintain 

Superior’s UPS shipping account ranks second only to employee payroll as its largest annual operating expense. In contrast, the major wholesalers utilize their own 

internal carriers to deliver product to their customers. They have the luxury of placing their products in plastic totes with little to no packing material as these totes 

are not being handled through processing centers by common carriers. Each package 

that Superior ships to a customer must be meticulously packed, often times requiring each unit to be wrapped in bubble wrap, surrounded by paper or Styrofoam material, possibly packed in a manner to maintain adequate refrigeration conditions 

during shipment, and then placed inside a cardboard box, addressed and shipped. 

This sort of packaging ‘‘overkill’’ is costly but necessary to ensure that shipments 

of valuable medications reach the intended patient in time and intact. 

Furthermore, even when Superior purchases products under a direct manufacturer or ADR contract, we pay significantly higher prices than larger wholesalers 

and other volume-based organizations like GPOs. To illustrate, there have been 

many instances in Superior’s existence where, under normal market conditions, we 

have been able to acquire needed product cheaper on the open market from other 

wholesalers (even taking into account their additional markup) than we could pursuant to our direct accounts with drug manufacturers or ADR wholesalers. Available 

evidence suggests that while volume-based discounting is a standard practice in 

nearly every U.S. industry, drug manufacturers engage in more pronounced forms 

of price differentiation based on customer type, or ‘‘price discrimination,’’ 2 than in 

other industries. For example, the Minority staff of the House Committee on Government Reform in 1999 found that price differentials are far higher for drugs than 

they are for other consumer goods. According to their findings, the average price differential of the specific drugs evaluated was 134 percent, whereas the price differential for consumer goods in other industries was only 22 percent. Minority Staff, Special Investigations Division, Committee on Government Reform, U.S. House of Representatives at ii (November 9, 1999). Superior and other specialty distributors, and 

the small customers who critically depend upon them, can attest firsthand to the 

104 

anti-competitive effects of the pronounced price differentials in the pharmaceutical 

industry. 

Response to Release of Exhibits by the Senate Commerce Committee 

The Senate Commerce Committee released five exhibits to the public on July 25, 

2012. Exhibit III summarized a specific pedigree involving Paclitaxel and Superior’s 

involvement in the distribution of this drug. This exhibit listed Heartland Regional 

Medical Center in St. Joseph, Missouri as the end user of Paclitaxel in this transaction. As a response to this release of information by the Senate Commerce Committee, I am attaching for inclusion in the hearing record as Exhibit #2 a customer 

testimonial from Heartland. Heartland is one of Superior’s preferred hospital customers and we have enjoyed working closely with Heartland for many years to assist it in locating hard-to find drugs that it cannot acquire from its primary wholesaler. Attached to my written testimony is a customer testimonial that Heartland 

provided to Superior attesting to the excellent customer service, fair pricing, and 

overall professionalism of Superior as a specialty wholesaler. Heartland closes its 

testimonial with the following statement that really sums up the important service 

that we provide during times of shortage: 

‘‘Superior offers fair pricing that is often better than other similar companies 

in this business, and they deliver fast and overnight if necessary. Superior Medical recently obtained a very important chemotherapy drug (paclitaxel) that 

Heartland could not obtain through any other sources. We would not have received the paclitaxel if not for Superior. Superior is able to help us find several 

different drugs that have been in very short supply recently. We will continue 

to use Superior Medicals services in the future.’’ 

This customer testimonial shows the close working relationship that many specialty distributors like Superior have with the individual hospital pharmacy buyers. 

These buyers are responsible for maintaining adequate pharmaceuticals to meet the 

needs of critical patients on a day-to-day basis. As a result, these buyers often have 

a unique perspective on the real value that specialty distributors can bring to the 

table in terms of industry knowledge, drug supply trends, inventory management, 

and meeting the immediate needs of the underlying patients. These hospital pharmacy buyers often have a markedly different perspective on the value of secondary 

distributors to the hospital sector, particularly during times of drug shortages, than 

do the hospital administrators or compliance officers who are not involved with the 

secondary distribution industry on a regular basis and, thus, often do not truly understand the unique value that specialty distributors like Superior can bring to the 

table for hospital purchasing departments. 

Recommendations by Superior to Address Drug Shortages 

Superior would like to offer a couple recommendations to address drug shortages. 

1. Encourage the use of smaller distributors by the major wholesalers to help 

alleviate national and regional shortages, as well and to increase the availability of drugs to more remote or less populous regions of the U.S. Also increase the supply channels between the primary and secondary distribution 

industry so that our customers—and their patients—can readily obtain the 

critical drugs they need at more reasonable price points. 

2. Pass new laws and/or administrative policies to lessen the anticompetitive effects of differential pricing in the pharmaceutical industry, and to level the 

playing field for the hundreds of small distributors like Superior and the 

small medical facilities that depend upon them for their critical drug supplies. 

3. Implement a nationalized electronic pedigree system and openly support any 

effort to make this happen. As the current pedigree law was crafted to exempt 90–95 percent of the pharmaceutical wholesale transactions that occur 

daily, the unilateral burden of pedigree on the secondary distribution industry undercuts our ability to compete with larger wholesalers and offer better 

pricing to the customers who depend upon us. Because of the pedigree burden, specialty distributors like Superior must process mountains of paperwork each day, raising the cost of product that each pedigree-compliant company transacts in by adding hundreds of man-hours each week. Perhaps 

more importantly, absent a national pedigree system that applies to all 

stakeholders in the supply chain from top to bottom, this country cannot realize the Prescription Drug Marketing Act’s original promise of a true closed 

system of drug distribution that can better ensure drug integrity and resulting patient safety. 

105 

4. Simplify the license structure for small business pharmaceutical suppliers. 

Superior maintains over 100 licenses between two distribution centers at a 

cost no different than what a $100 million company is required to pay. Also 

simplify the bonds required by the various state boards of pharmacy and 

other administrative agencies in order to be licensed in this industry. Superior would propose a uniform national bond requirement, with tiered-pricing 

according to the scale of each licensee. In this way, tiered licensing and bonding overhead costs would level the playing field for small distributors and the 

customers and their patients who depend upon us. 

Conclusion 

Thank you for the opportunity to provide written comments for this important 

hearing. 

I understand the objective of the Committee is to better understanding the function of the secondary or specialty wholesalers and Superior does function in this capacity when necessary. However, Superior is genuinely more interested in operating 

in a market without shortages. 

We believe that Superior helps represent an indispensable part of the pharmaceutical supply chain. Our job is to get the drugs to those medical and surgery facilities that desperately need them for their patients. Thanks again for this opportunity. 

Enclosure of Exhibits 


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107 

RESPONSE TO WRITTEN QUESTION SUBMITTED BY HON. ROGER F. WICKER TO

VIRGINIA HEROLD

Question. Can you give us your opinion on what measures could be taken to tighten the supply chain or to prevent these types of ‘‘questionable’’ transactions from 

taking place? 

Answer. Actually, we see two questions in Senator Wicker’s comment. We strongly 

believe that the questionable transactions involved in the gray market of prescription drugs in short supply that were highlighted by the Committee result from opportunists, and not health care providers, who see an opportunity to make a profit 

from a supply and demand inequity involving prescription medication. As such, the 

consequences of engaging in such activity should involve substantial fines or other 

financial sanctions that cannot be readily discharged. Additional, deterrent sanctions are needed when the transactions are committed by unlicensed entities selling 

and buying prescription drugs. 

In 2004, California enacted changes to pharmacy law to stem one source of drug 

diversion—to prohibit a pharmacy from acting like a wholesaler, except in limited 


725MEDS2.eps
108 

circumstances. As a deterrent, the board was granted the extraordinary ability to 

issue fines at $5,000 per invoice, which correlates a higher fine which repeated involvement in performing prohibited acquisitions or sales. In our experience: pharmacies should be prohibited from engaging in wholesale transactions except in limited circumstances, and correspondingly wholesalers should be barred from buying 

from pharmacies except in rare circumstances (the latter provision we do not have 

in law currently). 

The answer to the second question—how to tighten the supply chain against questionable transactions—we believe requires greater transparency in the supply chain, 

and specifically, the tracking of all sales transactions from the manufacturer to the 

purchaser (wholesaler, pharmacy) in a tamperproof manner. A purchaser needs to 

be able to review everyone who has owned the product before the sale. Because the 

supply chain is more of a network than a true chain, this is virtually impossible 

now to know where a drug has been before purchase. 

If a purchaser has the information needed to track (in a tamperproof manner) the 

product back to the manufacturer, this will aid detection against the sudden, unauthorized entry into the supply chain of a product at a specific point. This is because 

such insertions would be traceable to a particular owner who did the insertion, and 

thus serve as a deterrent to unauthorized insertions of any product into the supply 

chain, making the pharmaceutical supply chain more secure. Such entries are not 

now readily detected. 

In California, such a system is in place via the e-pedigree law, which will take 

effect on a staggered basis from 2015 through July 2017. The law will require electronic tracking of every owner of pharmaceutical product from the manufacturer to 

the dispenser. 

RESPONSE TO WRITTEN QUESTIONS SUBMITTED BY HON. JOHN BOOZMAN TO

VIRGINIA HEROLD

Question 1. Mr. Coster testified that, depending on state requirements, pharmacies may be allowed to open with a temporary license before regulators conduct 

an on-site inspection. When dealing with potentially lifesaving drugs that must be 

handled and stored properly, how does a state board determine whether a pharmacy 

can open without an on-site inspection? How long can a pharmacy operate without 

being inspected? If this practice was changed, would it prevent fake pharmacies 

from operating? 

Answer. We had to change our practices in performing pre-opening inspection relatively recently, Since 2010 California now does pre-opening inspections of new nonchain store pharmacies before a pharmacy license is issued. This is a resumption 

of a requirement that was in effect until approximately 1996 for all pharmacies. 

From approximately 1996 to 2010, California discontinued pre-opening inspections 

of all new pharmacies before a license was issued. During these years, the board 

viewed pre-opening inspections as providing little value where staff resources could 

be better deployed after the pharmacy was operating. Specifically, the inspection of 

a pharmacy before it operates, before it has been issued a license, and before it has 

been authorized to purchase drugs resulted in the board making visits to sites in 

pre-1995 inspections where there was little to inspect. Essential functions and operations could not be reviewed because the sites had not been operating, staff were 

not present and there were no records to review. Instead, the board opted to inspect 

the pharmacy after the first 120 days of operation, and where the board could cancel 

the license if there was no pharmacy present (pursuant to California law). 

However in 2010, the board reinstituted pre-opening inspections of non-chain 

store pharmacies due to a flurry of fake pharmacies that once licensed, began to defraud MediCal or divert drugs. The resumption of these inspections has permitted 

the detection of truly fake pharmacies. The board will continue to conduct these prelicensure inspections. 

To additionally ensure the safety of the public, we also try to inspect pharmacies 

sometime after 120 days of operation to review their functioning. 

Question 2. Does California have any compliance cost estimates for independent 

pharmacies for the new electronic tracking system? 

Answer. No. The few pilots underway between manufacturers and wholesalers do 

not currently involve many pharmacies, perhaps because e-pedigree implementation 

for pharmacies will not occur for another five years (July 2017). We expect to see 

more involvement of community pharmacies in the future once the current pilots involving the manufacturer/wholesaler interface mature. 

However, one area in which the board is cognizant of decreased costs is in the 

area of e-pedigree readers for the serialized product. In discussions with the supply 

109 

chain in 2008 and earlier, the supply chain was projecting readers would be required in a pharmacy in at least three different forms (RFID high frequency, RFID 

ultra-high frequency and 2-D bar code). Some of the readers then in use were bulky 

and expensive. 

Today, we are aware that readers in cell phones are possible, which greatly reduces this cost component to pharmacies, as well as the size of the reader. Moreover, manufacturers are principally using 2-D bar codes to serialize their products, 

and RFID high frequency is disappearing for this purpose. We expect continual evolution in the technology in this area in the future. 

RESPONSE TO WRITTEN QUESTION SUBMITTED BY HON. ROGER F. WICKER TO

DR. DAVID MAYHAUS

Question. Can you give us your opinion on what measures could be taken to tighten the supply chain or to prevent these types of ‘‘questionable’’ transactions from 

taking place? 

Answer. 

a. I might recommend a look at the main business market of secondary distributors. Specifically, if their role is to provide pharmaceuticals to community pharmacies, then why do they need to purchase intravenous drugs and 

chemotherapeutic agent used exclusively in hospitals? There should be some 

kind of accountability from the manufacturer or primary wholesaler where 

the initial transaction took place to verify the legitimacy of the purchase of 

hospital used pharmaceuticals. Cincinnati Children’s would not use the secondary wholesalers if the product was available through our primary. Some 

of our pedigrees have indicated that the initial distributer listed was a primary wholesaler. I was not aware that primary wholesalers sold drugs to 

secondary wholesalers. If there is a process to determine if the secondary 

wholesaler had a legitimate market for intravenous drugs used exclusively 

in hospitals, it may deter this type of transaction. 

b. Limiting the number of wholesalers that can handle a pharmaceutical might 

be something to consider. As described in other’s testimony, as the number 

of wholesalers involved with the drug increased, so did the price. Setting a 

limit of 2–3 distributors permitted on a pedigree may significantly curtail 

this activity. 

RESPONSE TO WRITTEN QUESTION SUBMITTED BY HON. JOHN BOOZMAN TO

DR. DAVID MAYHAUS

Question. How often do you turn down business offers from secondary distributors 

because you identify inaccurate, incomplete, or unsettling information in your procurement process? 

Answer. The buyers at Cincinnati Children’s decline the offers of approximately 

90 percent of the calls they receive. The reasons are either they are not licensed 

as a wholesaler in Ohio, too high of price, or the secondary wholesaler wants a purchase order given to them without confirmation of the needed drug in supply. The 

issuance of a purchase order prior to providing firm confirmation the secondary 

wholesaler has the actual drug in supply is not normal pharmacy business practice 

of Cincinnati Children’s. 

RESPONSE TO WRITTEN QUESTIONS SUBMITTED BY HON. ROGER F. WICKER TO

DR. JOHN COSTER

Question 1. Can you give us your opinion on what measures could be taken to 

tighten the supply chain or to prevent these types of ‘‘questionable’’ transactions 

from taking place? 

Answer. There are a number of actions or measures that could be taken to tighten 

the supply chain. These could include making sure that all pharmacies must have 

an actual on-site inspection prior to being allowed to open. This would ensure that 

the pharmacy is, in fact, an operational and legitimate pharmacy and not a ‘‘shell’’ 

pharmacy. In addition, NCPA has gone on record in support of Federal standards 

for wholesaler licensure. 

A number of years ago, there was a flurry of publicity around the fact that in 

many states, the licensure requirements necessary in order to operate as a drug 

wholesaler were not terribly consistent or robust. In response, many states took the 

necessary steps to tighten up or increase these requirements in order to provide a 

110 

greater degree of assurance that only legitimate entities were operating in this area. 

That being said, there are still some states in which the wholesaler licensure requirements are more rigorous than others. Uniform, Federal requirements for 

wholesaler licensure would create a consistently high standard for these entities 

across the country. 

NCPA has also publicly stated its support for a lot-level form of tracking for prescription drugs that could be used in the event of a recall or to investigate suspect 

product. Such a system would make it much easier for each participant in the supply chain to keep track of exactly who products are purchased from and subsequently sold to. In addition, NCPA feels that there should be a greater emphasis 

on the importance of all participants in the supply chain to perform their due diligence with respect to their business partners. 

Question 2. Is there a valid reason why a pharmacy may sell a small amount of 

his or her inventory to either another pharmacy or perhaps even to a wholesaler, 

and do the states address this issue in a consistent manner? In light of the types 

of activities we have heard about, should these practices be allowed to continue? 

Answer. Many state pharmacy practice acts recognize the value of allowing pharmacies to sell small amount of his or her inventory to another pharmacy in order 

to alleviate temporary shortages. In addition, some states also permit appropriate 

licensed pharmacy sales to wholesalers as well to alleviate temporary shortages. In 

addition, a pharmacy may sell a product which is close to the expiry date to a 

wholesaler who has a client with an immediate need, to ensure that the product will 

not go to waste and can actually be used for patient benefit. This is also critical 

for small pharmacy owners due to the significant amount of capital that is tied up 

in inventory stock. 

States do not address these issues in a uniform fashion. There are some states 

that specifically allow these types of sales or exempt these transactions from the 

state definition of wholesale distribution. There are other states that allow these 

types of sales but only in instances of the existence of an actual patient need or as 

long as a pharmacy does not sell over a certain percentage of their inventory. NCPA 

feels that greater clarity or consistency from state to state in how these types of 

transactions are allowed would certainly be helpful. No pharmacy, whether fake or 

legitimate, should be in the business of acting as a conduit to facilitate the activities 

of a gray market or placing specific orders with a primary wholesaler for the sole 

purpose of immediately selling to a secondary wholesaler. 

NCPA does feel that pharmacies do need to have the option to engage in these 

types of sales in certain circumstances in order to address temporary shortages in 

the workplace and to respond to patient needs. We feel that any remedial action 

taken to prohibit the types of activities highlighted in the hearing should be narrowly tailored. We urge Congress to not take any overly broad actions that might 

limit the ability of pharmacists to take care of their patients or manage their inventories. 

Question 3. Is there a valid role for secondary distributors in the market? If so, 

could you elaborate on ways in which your members utilize these entities? 

Answer. Yes, NCPA feels that there is a valid role for secondary distributors in 

the market. Most community pharmacies rely on a primary wholesaler to meet the 

majority of their ongoing prescription drug needs. However, community pharmacies 

typically need to have at least one or more backup or secondary wholesalers that 

they can call upon in the event that there is a shortage. ‘‘Primary wholesaler’’ generally describes entities that purchase the vast majority of their product directly 

from drug manufacturers. This market is highly concentrated—the ‘‘big three’’ 

wholesalers generate approximately 85 percent of all revenues from pharmaceutical 

wholesaling in the United States. ‘‘Secondary’’ wholesaler generally describes distributors that do not purchase the majority of their products directly from a pharmaceutical manufacturer. Most manufacturers typically limit the number of entities 

that they will sell to directly and most do not sell directly to smaller companies that 

are not interested in purchasing extremely large, bulk amounts. Secondary wholesalers play an important role in the industry by serving as a ‘‘back-up’’ source of 

supply to pharmacies who may use a primary wholesaler for their usual and expected day-to-day needs and also provide necessary competition for the primary 

wholesalers which helps keep costs down. These entities also frequently specialize 

or focus on a subset of the market, such as a geographical region or specific product 

categories such as differing types of specialty drugs such as oncology or HIV. 

111 

RESPONSE TO WRITTEN QUESTIONS SUBMITTED BY HON. JOHN BOOZMAN TO

DR. JOHN COSTER

Question 1. Do you think that a national pedigree or track and trace system would 

prevent nefarious activities by wholesalers or fake or real pharmacies with respect 

to the buying and selling of shortaged drugs? 

Answer. It is important to recognize that no system, whether a national pedigree 

or track and trace system would solve all problems or ‘‘loopholes’’ that may exist 

in the pharmaceutical supply chain. NCPA favors a multi-pronged approach to bolstering the integrity of the supply chain including uniform, Federal licensure standards for wholesalers, cracking down on illegal Internet pharmacies as well as a lotlevel form of tracking for prescription drugs that could be used in the event of a 

recall or to investigate suspect product. In addition, there needs to be a greater emphasis on each sector of the supply chain to thoroughly ‘‘vet’’ their trading partners—their suppliers and their customers. 

Question 2. What track-and-trace system do small pharmacies support and why? 

How will such a system improve the supply chain? 

Answer. NCPA supports a lot-level form of tracking for prescription drugs that 

could be used in the event of a recall or to investigate suspect product. This system, 

known as RxTEC, is the result of a year-long effort by a multi-stakeholder 

workgroup that sought to create a system that would recognize both tangible safety 

improvements and appropriate industry burden. 

Implementation of this type of system would make it much easier for each participant in the supply chain to keep track of exactly who products are purchased from 

and subsequently sold to. NCPA does not at this time support the electronic tracking and tracing of prescription drugs at the unit level due to the costs of the hardware and software to small businesses that would be required to set up and maintain such a system as well as the significant time and labor costs associated with 

its implementation. 

HEALTHCARE DISTRIBUTION MANAGEMENT ASSOCIATION

Arlington, VA, August 31, 2012 

Hon. JOHN D. ROCKEFELLER, 

Committee on Commerce, Science, and Transportation, 

Washington, DC. 

Dear Chairman Rockefeller: 

Thank you for the opportunity to testify before the Senate Committee on Commerce, Science and Transportation on July 25, 2012 at the hearing entitled ‘‘ShortSupply Prescription Drugs Shining a Light on the Gray Market.’’ I have attached 

my response to the Questions for the Record forwarded to us by your staff. 

As a result of the Commerce committee hearing and release of the ‘‘Shining Light 

on the Gray Market’’ report, we understand that responsible pharmacies are more 

acutely aware of the potential impact of drug shortages on patient health and may 

be ending their practices of reselling product, to the extent they had previously done 

so. While this is a very positive development, we are encouraging our members to 

remain vigilant for any change in tactics from gray market suppliers. These gray 

market entities may pursue other avenues to obtain drugs in short supply, such as 

through veterinary and dental providers. 

In fact, the Federal Trade Commission is convening a workshop to examine certain veterinary drug prescribing and distribution practices, including instances in 

which ‘‘veterinarians purchase pet medications from manufacturers or authorized 

distributors and then resell some portion of their purchase to secondary suppliers 

for a profit.’’ 77 Fed. Reg. 40,355, 40,356 (July 9, 2012). 

Thank you for your leadership and we look forward to continuing to work with 

you and your staff on the important issue of drug shortages. 

Sincerely, 

JOHN M. GRAY, 

President & CEO. 

112 

1 21 C.F.R. § 1301.74(b). 

RESPONSE TO WRITTEN QUESTION SUBMITTED BY HON. ROGER F. WICKER TO

JOHN M. GRAY

Question. Can you give us your opinion on what measures could be taken to tighten the supply chain or to prevent these types of ‘‘questionable’’ transactions from 

taking place? 

Answer. HDMA and its members are strong advocates for increased wholesaler 

licensure standards and a uniform Federal pedigree system to enhance the safety 

and security of the pharmaceutical supply chain. In addition to fundamentally addressing counterfeit and diverted medicines, Federal pedigree may be a useful tool 

in discouraging gray market activities associated with drug products in short supply. 

Further, HDMA supports a prohibition on wholesalers’ purchasing prescription 

drugs from pharmacies. When HDMA members sell any drugs (regardless of their 

shortage status) to pharmacies or providers, it is with the intention that the product 

will be dispensed or administered to a patient in the usual course of pharmacy or 

medical practice. 

RESPONSE TO WRITTEN QUESTION SUBMITTED BY HON. JOHN BOOZMAN TO

JOHN M. GRAY

Question. According to Dr. Coster’s testimony, the NCPA encourages pharmacists 

to conduct due diligence on potential wholesalers before engaging in business transactions. Has HDMA developed industry guidelines to assist primary distributors in 

vetting their customers? 

Answer. In 2008, HDMA published the Industry Compliance Guidelines: Reporting 

Suspicious Order and Preventing Diversion of Controlled Substances (ICGs) (http:// 

www.healthearedistribution.oregovlaffairs/pdflcontrolled/20081113lieg.pdf). 

These guidelines emphasize ‘‘Know Your Customer’’—that is, obtaining and reviewing thorough background information about a distributor’s prospective customers prior to doing business with them. The ICGs support due diligence efforts 

to provide assurance that pharmacy customers are appropriately licensed by state 

and Federal authorities and that these entities intend to dispense drug products for 

legally acceptable purposes. 

The ICGs were specifically developed to help evaluate customer orders for controlled substances and report those that are ‘‘suspicious’’ to the Drug Enforcement 

Administration (DEA) as required under Federal law’.1 These guidelines are also intended to aid distributors in evaluating and incorporating DEA interpretations of 

distributors’ responsibilities for responding to ever-evolving changes in the diversion 

and illicit use of these much needed medications. 

As important as it is for distributors to take responsibility to prevent diversion 

of controlled substances, it is equally important for all members of the supply chain 

(including manufacturers, dispensers, and prescribers) to take steps to help prevent 

drug abuse as well as preventing the diversion of product into the gray market. 

RESPONSE TO WRITTEN QUESTIONS SUBMITTED BY HON. ROGER F. WICKER TO

PATRICIA EARL

Question 1. Can you give us your opinion on what measures could be taken to 

tighten the supply chain or to prevent these types of ‘‘questionable’’ transactions 

from taking place? 

Answer. Who is NCPD: Founded in 2006, the National Coalition of Pharmaceutical Distributors (NCPD) has represented and promoted the interests and priorities of small and independent pharmaceutical distributors before legislatures, regulatory organizations, industry partners and the community at large by advocating 

sound and responsible public policy. In this manner, NCPD is committed to preserve 

the well-being of its members; to ensure distribution system efficiency; and to 

strengthen the pharmaceutical supply chain to the greatest degree possible. Our 

members are regulated by the FDA, the DEA and every State Board of Pharmacy 

in which we operate. Our companies produce pedigrees, engage in current good 

manufacturing practices and provide heightened product quality assurance. NCPD 

members operate inside ordinary, lawful channels of distribution referred to as the 

authorized distribution networks. 

Question 2. How did the ‘‘gray market’’ root causes emerge? 

113 

Answer. Industry changes have placed medication in short supply. The FDA 

website provides frequently asked questions and answers. One noted question is 

this: What has caused drugs to be in short supply?’’ The FDA answered the question 

as follows: 

‘‘The major reason for these shortages has been quality/manufacturing issues. 

However there have been other reasons such as production delays at the manufacturer and delays companies have experienced receiving raw materials and 

components from suppliers. Discontinuations are another factor contributing to 

shortages. FDA can’t require a firm to keep making a drug it wants to discontinue. Sometimes these older drugs are discontinued by companies in favor 

of newer, more profitable drugs. With fewer firms making older sterile injectable 

drugs, there are a limited number of production lines that can make these drugs. 

The raw material suppliers the firms use are also limited in the amount they 

can make due to capacity issues at their facilities. This small number of manufacturers and limited production capacity for older sterile injectables, combined 

with the long lead times and complexity of the manufacturing process for 

injectable drugs, results in these drugs being vulnerable to shortage. When one 

company has a problem or discontinues, it is difficult for the remaining firms 

to increase production quickly and a shortage occurs.’’ 

The Staff Report prepared for Chairman John D. Rockefeller, IV, Chairman Tom 

Harkin and Representative Elijah E Cummings entitled ‘‘An Examination of Why 

Hospitals Are Forced to Pay Exorbitant Prices for Prescription Drugs Facing Critical 

Shortages’’ confirmed those root causes from the Committee’s extensive examination 

of the authorized distribution networks. 

Question 3. So what are the repercussions of drug shortages and what measures 

are needed to prevent these ‘‘questionable’’ gray market transactions? 

Answer. Following shortages, supply and demand allowed for prices to increase. 

The healthcare market is not immune to the basic principles of supply and demand. 

Supply represents how much the market can offer. The quantity supplied refers to 

the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship. Price, therefore, is a reflection of supply and demand. When there is a short supply of drugs, as has been 

noted by the FDA, there is an opportunity for ‘‘bad actors’’ to take advantage of the 

system. NCPD members do not engage in pricing gouging behavior even though 

market conditions are ripe for it because they know it is inherently bad business 

to gouge customers that you want to come back and buy from you next week. Our 

members know you can’t stay in business long unless your prices are fair and competitive and that is how NCPD members have done business with their long-standing relationships. Further, a typical hospital pharmacy purchaser has multiple backup small distributors from which to choose. As such, a secondary distributor will 

typically seek to offer the best price available to ensure that its hospital customer 

will continue to utilize its services in the future. 

Congress is presently considering various legislative proposals intended to enhance the Federal government’s ability to track and trace prescription drugs beginning with the manufacturer and continuing with every subsequent transaction until 

the product is ultimately provided to the patient or consumer NCPD supports Federal pedigree legislation that includes unit level track and trace mandates. Since 

2006, its members are the only companies required to authenticate drugs and pass 

pedigrees. We support the serialization of drugs for national track and trace system 

both level and with 2D bar codes. Many of our members serialize drugs today for 

tracking and billing purposes where distribution in small unit of use packs. We support stringent Federal licensure standards and penalties for those who fail to comply with laws and standards. This concept—commonly referred to as ‘‘pedigree’’— 

is considered critical to ensuring that misbranded, adulterated or counterfeit prescription products do not enter the pharmaceutical supply chain. NCPD has actively 

supported congressional efforts to reform Federal pedigree laws with more stringent 

and effective requirements for supply chain participants. 

NCPD does not support the ‘‘shell pharmacies’’ or illegal wholesalers that divert 

drugs that would have gone directly from manufacturer to independent distributors 

and been available for normal distribution supply chain safety net. Plugging those 

holes with more stringent Federal licensure standards and penalties for failure to 

comply should be the most important measure to prevent these questionable transactions. 

Rather than focusing on how the ‘‘bad apples’’ received the ‘‘leaked’’ product, a 

better solution for all normal trading partners in the ordinary, lawful channel of distribution would be to get product to the registered, licensed, compliant, traditional 

114 

safety-net secondary distributors that have historically been able to redistribute 

short supply product without extraordinary measures of multiple distributors touching the products. Historically, secondary distributors have stepped in to fill the gap 

that the normal trading partners cannot because of their inability to handle the exceptions created by the current fragile supply chain. The solution to keeping the 

supply chain safe is to have all the ‘‘ordinary, lawful channels of distribution’’ have 

equal access to their fair share of the available inventory based on their customer’s 

historical needs and not allow, such unlawful, fake pharmacies and their unlawful 

business partners sneak into the supply chain and siphon off the legitimate inventory to gain illegal and unlawful profits at the expense of everyone else. 

RESPONSE TO WRITTEN QUESTION SUBMITTED BY HON. JOHN BOOZMAN TO

PATRICIA EARL

Question. There are a number of price markups of critical, lifesaving drugs that 

have been uncovered during the course of this investigation. What would account 

for these significant markups? I understand that small distributors have to pay 

higher prices than those negotiated under GPO contracts, but will you explain how 

your members price their drugs? Putting shipping costs aside, can you explain why 

secondary wholesalers may charge more than $100 to pass along product to another 

entity in the distribution chain? 

Answer. Analyzing prices of the drugs that were examined in the Staff Report, 

the first questions we have to ask is ‘‘Is the comparison apple to apples?’’ On page 

10 of the report, it was stated that five prescription drugs were the focus of the examination. Those five drugs were all compared using the manufacturer—GPO— 

wholesaler ‘‘normal contract pricing’’ to establish the baseline for the mark-ups to 

the hospitals. As you have requested, we will do our response based on the industry 

standard, Wholesale Acquisition Cost, which is what a distributor will pay for the 

drug in the ‘‘authorized distribution network.’’ It appears in the report, that these 

examinations make the assumption that all stakeholders track their purchases 

using the unique identifier, NDC number that is the manufacturer identification 

code for only one manufacturer’s chemical entity for that drug. That NDC tracking 

process must be used to trace a drug transaction from the manufacturer to the normal trading partner and to the GPO hospital in order to process the GPO contract, 

file chargebacks and pay administration fees. Only the contract transactions must 

follow that specific NDC track for that one product and since many of our members 

are restricted from the GPO agreements, they are free to interchange competing 

manufacturer products under one Generic Sequence Number (GCN). The manufacturer wholesaler acquisition prices are published in three national data warehouses, 

First Data Bank (FDB), RedBook and MediSpan. These database files are used to 

set the WAC by NCPD members and many times are used in lieu of a company’s 

actual acquisition price for single items. 

As defined in FDB, the GCN Sequence number is a unique number representing 

a generic formulation. It is specific to the generic ingredients, route of administration, dosage form and strength. According to FDB, the GCN Sequence Number is 

the same across manufacturers and/or package sizes and therefore can be used to 

interchange equivalent products. As a consequence of our distributor members not 

being restrained in their inventory management systems to tracking by specific 

NDC numbers, they may set up a shelf-keeping-unit (SKU) system by GCN code in 

order to run all equivalent GCN products under one unique item number for the 

purpose of financial accounting and inventory valuation. They may create an SKU 

number that is proprietary to their company, i.e., Paclitaxel 300mg and track that 

item by their SKU number. That SKU record will establish their base cost for purchasing and selling price algorithms based on the average costing or FIFO or LIFO 

cost of the drug. In these situations, they may have multiple manufacturers that 

make that same drug and sell in different package sizes and they all sell at a different manufacturer wholesaler acquisition price. Since our members do not have 

to follow the GPO process of selling only one specific manufacturer’s NDC number 

at a pre-negotiated contract price, they can use the most recent published market 

price established for that item. Here is an example of that pricing comparison is the 

Paclitaxel 300mg 50ml Vial and its GCN equivalent of 5ml Vials that is listed in 

the First Data Bank and the Redbook data repositories. 

115 

As you can see, there are multiple manufacturer-specific generically equivalent 

products that have published Wholesale Acquisition Costs (WAC). If we look at four 

of these products to see the variance in the WAC for the purpose of establishing 

a market in-bound cost for a distributor to use as the competitive threshold to price 

the product when it is acquired from another trading partner, we will see that manufacturers have created wide variances in how they set their company’s WAC and 

that there are wide spreads in the dollars and the percentage difference by manufacturer. 

Drug Name: PACLITAXEL 300 MG/50 ML VIAL 

NDC MFG Pkg 

Desc Pkg Size WAC Unit WAC Pkg 

Mark-Up 

$ over 

Lowest 

WAC 

Mark-Up 

% over 

Lowest 

MFG WAC 

61703–0342–50 Hospira Vial 50 $1.45 $72.53 N/A N/A 

63323–0763–50 APP Vial 50 $2.59 $129.30 $56.77 78.27% 

55390–0314–50 Bedford Vial 50 $7.00 $350.00 $277.47 382.56% 

66758–0043–03 Sandoz Vial 50 $9.05 $452.55 $380.02 523.95% 

Drug Name: PACLITAXEL 300 MG/5 ML VIAL 

NDC MFG Pkg 

Desc 

Pkg 

Size 

WAC 

Unit 

WAC 

Pkg 

Mark-Up 

$ over 

Lowest 

WAC 

Mark-Up 

% over 

Lowest 

MFG WAC 

61703–0342–09 Hospira Vial 5 $1.61 $8.03 N/A N/A 

63323–0763–05 APP Vial 5 $2.58 $12.93 $4.90 61.02% 

55390–0314–05 Bedford Vial 5 $7.00 $35.00 $26.97 335.87% 

66758–0043–01 Sandoz Vial 5 $9.05 $45.26 $37.23 463.64% 

When our members purchase a Paclitaxel 300mg 50ml Vial or a 5ml Vial, they 

put in the market price of the product based on what the First Data Bank, Redbook 

or MediSpan has published as the WAC and if they have purchased two of the four 

above and the SANDOZ product was one of those two, their base cost for that product would be $452.00 not the $129.30 that APP had priced their lowest contract negotiated product. Therefore, when a hospital was quoted their price on the Paclitaxel 

300mg 50ml Vial as a non-primary customer of our member, they would be priced 

on the highest WAC, unless they have a pre-negotiated supply agreement with our 

member for sell price based on actual cost. 

This is a common practice in the ‘‘secondary distributor’’ industry because a hospital has committed to buy 100 percent of their contract items from the primary distributor –referred to in the report as ‘‘normal trading partners.’’ Since a secondary 

distributor does not know what products, if any, or how much dollar volume that 

a hospital will purchase from them, they normally sell at a cost plus based on their 

market intelligence and that is based on the higher of published WAC or their ComVerDate Nov 24 2008 13:17 Feb 28, 2013 Jkt 075679 PO 00000 Frm 00119 Fmt 6601 Sfmt 6621 S:\GPO\DOCS\79524.TXT JACKIE

725EARLQ1.eps
116 

mercial Price File established by their inventory and pricing guidelines. Our members receive letters from their customers like this one on a consistent basis: 

‘‘This is to say THANK YOU for all the vital service you have provided to our 

company. You play a critical role in my daily routine as I rely on your e-mails 

that contain drugs that I currently need and you are quick to act on it. You are 

a life saver as I have never been without in spite of the current drug shortages. 

You have fair prices and I have referred your company to many of my colleagues 

so they too can receive the vital service you provide. Thank you again for the 

great service and I will continue to look forward to doing business with you as 

always!’’ RN, CNOR Surgery Center Customer 

There are additional factors that determine the selling price mark-ups and they 

include higher costs of acquisition of these life-saving, critical short supply drugs. 

Some of our members have long-standing relationships with hospitals and clinics 

(like the one above) to be the last resort in finding a drug that is critical to saving 

a patient’s life. In these extreme situations, our members use extraordinary measures to find those drugs by contacting other trusted suppliers that have assisted 

them in the past. These extreme situations can cost hundreds of dollars in operational, administrative and labor costs. Many times either experienced sales reps or 

customer service management will spend hours in tracking down and locating the 

available product. They negotiate the rapid response to expedite the drug to the hospital or clinic. They incur special handling costs, packaging and labeling materials 

for hazardous (oncology), breakables (injectables and liquids) and sensitive transporting (OMD guidelines) of the product to a viable shipper. There are incremental 

costs for all these activities that must go into the cost of processing the drug. 

Lastly, our members are required by PDMA and state statutes to provide a readable pedigree document in these situations that may involve tracking transactions 

from the manufacturer to the dispensing customer. Pedigree documentation not only 

involves labor costs but also our members are required to pay a fee to the ‘‘normal 

trading partners’’ in order to get access to that pedigree. The cost to get pedigree 

documentation from the primary wholesalers is a fixed fee of $5,000 per month or 

$60,000 per year and that is for one pedigree or for many per month. Internal labor 

costs for pedigree administration carries an average cost of $60,000 or more to authenticate and pass pedigree on these items. Many of our members have invested 

in software systems that have a license fee that has to be paid for the service. If 

our members passed on the actual cost of that pedigree service on these transactions, it could easily add at least $100 per item just for the authentication documents. Because this is an arduous, labor intensive process, in many instances, our 

members lose money on these emergency, hard-to-find situations in order to keep 

a good customer and to save a patient’s life. 

As benchmark tools for our industry, we have prepared some financial analysis 

to show the economic impact of the small distributions and how it relates to the normal trading partners. Prescription drugs move though a very complex distribution 

model that has many players. These multiple providers each play an important role 

in getting the right drugs, to the right patient, at the right time. However, because 

of the sheer volume of over $307 Billion, according to the Center for Healthcare 

Supply Chain Research, 2011–2012 HDMA Factbook, each traditional distributor 

placed more than 385,000 orders for healthcare products in 2012 from an average 

of 1,100 manufacturers delivering drugs daily to over 200,000 providers across the 

U.S. While this provider network is vast, distributors were able to consistently provide services levels exceeding 95 percent while operating efficiently and keeping the 

cost of distributor low. These large, national distributors are able to offer economies 

of scale by aggregating volumes and inventory for both manufacturers and providers. This systems works for drug distribution in a fast and efficient manner at 

least 95 percent of the time, but for the balance of that 5 percent, a back-up, secondary distributor is called on to provide the same level of service that these primary companies provide. 

117 

Table 1.—Flow of U.S. Prescription Sales ($B) and Contribution by Channel (%) in 2010. 

Total U.S. Pharmaceutical Market Contribution by Channel ($) Contribution by Channel (%) 

Manufacturers $307 B 100% 

Traditional and Specialty 

Distributors $268 B 87% 

Direct to Chains, Mass 

Merchandisers and Food Stores $39 B 13% 

Total Generic and Brand 

Prescription Drugs Sold through 

Traditional Wholesalers to 

Following Providers: 

Chain Warehouses purchased 

from Wholesalers $51 B 21% 

Chain Pharmacies $59 B 24% 

Hospitals, HMO’s, Clinics and 

Nursing Homes $61 B 25% 

Independent Community 

Pharmacies $38 B 16% 

Mail Order Pharmacies $33 B 13% 

Others (Distributors) $2 B 1% 

1. Total value of goods flowing through traditional distributors, as per IMS National Sales Perspectives. 2011–12 HDMA Factbook

(Tables 1 and 3 and 109.) 

2. Sources: Center for Healthcare Supply Chain Research, 2012–12 HDMA Factbook, IMS Health, Inc., Booz & Company Analysis, 

The Role of Distributors in the U.S. Healthcare Industry 

NCPD members, small and independent distributors, have estimated that this 

market segment does less than one percent of the total goods flowing through this 

supply chain or approximately $2 Billion annually. It is often hard to understand 

where secondary distributors fit into the flow of prescription drugs in this supply 

chain and the role that NCPD members play every day in distributing prescription 

drugs to their small healthcare customers and as a second-line supplier to the largest providers listed in Table 1. Much activity has driven these secondary relationships that have been the realities for the pharmaceutical supply chain during this 

period of increasing short-supply of critical drugs. One of the practical circumstances that have fed the expansion of these relationships in the secondary distribution industry is the fact that this industry of small suppliers primarily serves 

as a safety-net or back-up supplier to all hospitals, both large and small in the U.S. 

Add to that, the fact that this industry is the primary supplier of all drugs to smaller medical facilities, doctor’s offices and pharmacies. Despite their crucial role in 

getting life-saving drugs to critically ill patients, they are also on an individual 

basis, one of the smallest customers of the ‘‘traditional’’ wholesalers that do billions 

of dollars of sales to these large hospitals and are required to pay the highest acquisition cost offered in the U.S. supply chain. As a practical matter, every sector of 

the healthcare industry depends critically upon secondary distributors due to the 

fact that they act as the safety-net in times of national shortages to secure and distribute scarce drugs in short supply. 

Many manufacturers, hospitals, health care centers and pharmacies in rural locations and those too small to meet the minimums of large distributors rely on secondary distributors to fill critical needs for life-saving medicine. What’s more, every 

sector of the health care industry depends critically upon secondary distributors because they act as the safety-net in times of national shortages to secure and distribute scarce drugs in short supply. While they are crucial in getting life-saving 

drugs to critically ill patients, small distributors are on an individual basis, one of 

the smallest customers of ‘‘traditional’’ wholesalers. These same wholesalers do billions of dollars of sales to large hospitals, but will not supply smaller clinics and 

facilities. In addition, small distributors are required to pay the highest acquisition 

cost offered in the U.S. supply chain, putting them at a competitive disadvantage. 

In spite of their proven value, small, secondary distributors have come under fire 

recently because few people really understand them or have taken the time to see 

where they fit in the supply chain. The arguments have ranged from accusations 

of price gouging to shifting product between multiple companies as a means to increase profits to working with fake pharmacies. These allegations are not grounded 

118 

in reality. What’s more, these characterizations fail to reflect one basic fact of this 

market: There are thousands of small distributors that work with hospitals across 

the Nation. To remain competitive, they must comply with all laws, follow pedigree 

and handling requirements to the letter and still offer an economical price point 

that allows for only a modest profit margin. If they do anything else, they run the 

risk of permanently losing a customer. That’s because hospitals comparison shop. 

If they don’t like a price offered by one company, they will call another. This is a 

reality that every small distributor out there is well aware of. And they know that 

if they were to engage in the types of activities you accuse them of, they would not 

be in business very long. As you learn more about this industry you will see that 

the activities you are trying to paint as nefarious actually have legitimate and reasonable explanations: 

So-Called ‘‘Price Gouging’’ Or Mark-Ups 

Drug prices are established on an intricate system that is far more complex than 

most free markets. Manufacturers set a number of price points for a product, including the Wholesale Acquisition Cost—or WAC—which is the lowest price at which 

a wholesaler or distributor can buy the product. As with many markets, hospitals 

and physicians can negotiate the price they are willing to pay for a drug. The more 

product a hospital or doctor expects to use, the more power they have in securing 

to negotiate a lower price. Neither large nor small distributors have the ability to 

influence drug price negotiations. To secure the best prices for patients, most hospitals belong to one of the major group purchasing organizations—GPO’s, which leverage the strength of the collective buying power of their members when negotiating contracts with manufacturers. GPOs require hospitals to adhere to specific 

rules, such as select a primary wholesaler—and if their primary does not have a 

drug, they are prohibited from using another primary. Instead, they must contact 

their second-line—or ‘‘secondary—distributor to supply their needs. Secondary distributors are able to work with all of the primary wholesalers, plus their network 

of small distributors to locate and secure drugs, even those that are in short-supply. 

Because small distributors are not restricted by GPO contracts, they are able to use 

avenues that hospitals cannot, such as large distributors that compete with the hospital’s primary wholesalers. 

Small distributor companies measure key profitability by comparing income and 

expenses, which are significantly higher than the large traditional wholesalers because they do not have the depth, breadth and economies of scale that the larger 

companies can spread expenses across billions of dollars in pharmaceutical revenues. In fact, the small and independent distributors are very similar in size and 

scope to the small, independent, community pharmacies that are members of the 

National Community Pharmacy Association. We have used the data from the HDMA 

Factbook and the 2011 NCPA Digest to compare and contrast the revenues, gross 

profit margins, operating expenses and net operating incomes of these three industries. 

Table 2.—Industry vs. Small Distributor. Percentage of Revenues, Expenses, Gross Margins 

and Net Margins 

Proforma Categories HDMA industry 

Avg.—Wholesalers 1 Avg. % 

NCPA 

Industry 

Avg.—Small 

Pharmacy 2

Avg. % 

NCPD 

Small Distributors Avg. 

Avg. % 

Revenues 

Rx Sales Per Location $2,615,865,364 100.00% $3,698,748 100.00% $7,500,000 100.00% 

Cost of Goods Sold $2,528,757,047 96.67% $2,812,250 76.00% $5,625,000 75.00% 

Gross Margin $ Sales 

After All Discounts $87,108,317 3.33% $886,498 24.00% $1,875,000 25.00% 

Gross Margin % After 

All Discounts 3.33% 23.97% 25.00% 

Expenses 

Payroll Expense $15,845,003 18.19% $110,812 12.50% $215,625 11.50% 

Payroll Taxes, 

Workers Comp, Empl. 

Benefits $3,188,164 3.66% $17,730 2.00% $37,500 2.00% 

119 

Table 2.—Industry vs. Small Distributor. Percentage of Revenues, Expenses, Gross Margins 

and Net Margins—Continued 

Proforma Categories HDMA industry 

Avg.—Wholesalers 1 Avg. % 

NCPA 

Industry 

Avg.—Small 

Pharmacy 2

Avg. % 

NCPD 

Small Distributors Avg. 

Avg. % 

Total Payroll Expenses $19,033,167 21.85% $128,542 14.50% $253,125 13.50% 

Administrative 

Expense $409,409 0.47% $0 0.00% $0 0.00% 

Sales and Marketing 

Expense $226,482 0.26% $4,432 0.50% $8,438 0.45% 

Buying Expense $17,422 0.02% $0 0.00% $0 0.00% 

Insurance $0 0.00% $2,659 0.30% $9,375 0.50% 

Supplies, Storage and 

Ship Containers, 

Packing, Labels $0 0.00% $4,432 0.50% $12,188 0.65% 

Postage $0 0.00% $886 0.10% $3,563 0.19% 

Shipping and Delivery $261,325 0.30% $3,546 0.40% $12,188 0.65% 

Information and 

Technology $182,927 0.21% $3,546 0.40% $5,625 0.30% 

Rent $130,662 0.15% $10,638 1.20% $71,250 0.95% 

Utilities amd 

Telephone $0 0.00% $3,546 0.40% $9,375 0.50% 

Contract and 

Chargeback $17,422 0.02% $0 0.00% $0 0.00% 

Pedigree 

Authentication $0 0.00% $0 0.00% $42,188 2.25% 

Licensure, Bonds and 

Compliance $0 0.00% $0 0.00% $15,000 0.80% 

Other Operating 

Expense $0 0.00% $23,935 2.70% $28,125 1.50% 

Total Operating 

Expense (includes 

some lines not broken 

out separately above) $31,247,820 1.19% $776,737 21.00% $1,668,000 22.24% 

Net Operating 

Income 3 $55,860,497 2.13% $110,962 3.00% $207,000 2.76% 

1 Center for Healthcare Supply Chain Research 2011–2012 HDMA Factbook (Pg. 19–24, 51). 

2 National Community Pharmacy Association 2011 NCPA Digest Sponsored by Cardinal Health. 

3 Center for Healthcare Supply chain Research 2011–2012 HDMA Factbook (Table 20). 

Small distributors are very competitive with their pricing for products and services particularly geographically—close proximity to their distribution centers. For 

extreme situations where FedEx Air overnight deliver is provided, they face the possibility of the shipping, handling, packaging and related delivery costs to be more 

expensive than the actual drug itself. Many members have reported that the large 

distributors have discounts of 80 percent or more off delivery schedules. Patient 

safety is their first concern when requested to ship an emergency drug. Consistent 

temperature, humidity and quality control is vital for a critical, life-saving drug to 

be delivered to provide immediate benefits to a patient. They have experienced high 

quality warehouse advocates that provide excellent quality control when a hospital 

expects reliable, safe and secure drugs to be delivered just-in-time to save a patient. 

This manual processing from the receipt to the delivery of the emergency drug falls 

outside the normal cost of the division. 

Small distributors have been inaccurately portrayed when it comes to the price 

of products. As I noted before, secondary distributors pay the highest prices for 

drugs in the entire U.S. supply chain—sometimes as much as 91 percent more than 

one of the traditional wholesalers would ultimately pay for the same product. 

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What’s more, many people will look at a pedigree and compare the cost a distributor 

paid for a drug to the price he sold it for and assume the entire amount was pocketed as profit. That’s the furthest thing from the truth. The reality is that the pedigree does not show how much was spent on things like shipping, which can be much 

more expensive than the drug itself if the hospital needs it delivered overnight. 

Every small distributor knows that the hospitals they work with are going to comparison shop. If a hospital doesn’t like the price that one secondary distributor 

quotes to them, they will call another. Or, if they need it right away and can’t risk 

losing it, they will buy it, but will find another secondary distributor to work with 

moving forward. They are free to move their account elsewhere, so secondary distributors have to remain competitive and will often sacrifice their own profit margins to make sure they keep a customer. 

Question 1a. How does our pricing work and does it contributes to the ‘‘questionable’’ gray market activities? 

Answer. Pharmaceutical pricing is complex and difficult to understand; because 

of this the investigative reports and ‘‘gray market’’ reports have unfairly and incorrectly discounted the value of small pharmaceutical distributors that operate inside 

of authorized distribution networks. Let’s talk about the layers of this business and 

the service each layer provides. 

(1) Drug manufacturers discover patent, study, create, market and sell various 

drugs. Manufacturers build a service fee into their product price to recoup 

their cost. 

(2) Authorized Distributors of Record’s (ADRs) negotiate with drug manufacturers 

in order to buy large quantities of drugs at extremely low prices. ADRs buy 

from multiple manufacturers. When a hospital wants to buy certain drugs and 

does not want to be constrained by manufacturer product lines, they buy from 

ADRs. The best ADRs have strong negotiating power allowing them to offer 

low prices and multiple manufacturer product portfolios to customers. ADRs 

build a service fee into their price to account for their negotiation and marketing work. 

(3) Pharmaceutical Distributors such as our NCPD members buy bulk product 

from manufacturers and ADRs. Some of us just sell the product in its original 

container. Others re-package and/or re-label product in accordance with current good manufacturing procedures and are regulated by the FDA and DEA. 

When product is repackaged from bulk bottles and placed into individual 

count bottles, many FDA quality regulations are mandatory. These quality 

regulations are not applicable to pharmacies, such as those referred to in the 

report entitled ‘‘Shining Light on the Gray Market’’ prepared and presented 

July 25, 2012 at the Senate Committee on Commerce, Science, and Transportation. Also, our companies service locations with little to no buying power. 

Many rural area clinics and doctor’s offices, for example, are precluded from 

buying manufacturer direct or from an ADR because they do not purchase sufficient quantities of product. Our companies cater to these clients and ensure 

that they receive quality, safe products; we are an integral part of the supply 

chain. Pharmaceutical Distributors build a service fee into their price to account for their operational, administrative and labor costs for sourcing, purchasing, regulatory compliance to pedigree, storage, handling, special packaging, labeling, quality checking, marketing and distribution services. Higher 

costs are incurred for special situations that involve life-saving, critical, short 

supply drugs. 

(4) The service provided by each layer is necessary and an increased price is a 

necessary corollary arising from the layers; each layer must be compensated 

for their service. 

(5) So why are the reports saying that pharmaceutical distributors are price gougers? Despite the fact that pharmaceutical distributors provide quality, necessary services, the media has skewed the world’s view of pharmaceutical distributors. For instance, Premier Healthcare Alliance report published in 2011 

incorrectly calculated the percent markup charged by small distributors overstating the high-end by 3,804 percentage points or 521 percent. ‘‘Many people 

mistakenly believe that distributors that deal in medicines have greater negotiating power than they really do. This isn’t like a car dealership, where people generally don’t have to pay MSRP because of dealer incentives and rebates. In health care, small distributors must pay what’s called a Wholesale 

Acquisition Cost that is many times greater than what the GPOs have negotiated. When you compare the cost a small distributor must pay for a medicine 

to the final price it charges a hospital, you find that the gross profit margin 

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is often in a very reasonable range. It is not the 1,400 percent markup you 

find when you compare to GPO numbers—a practice that is misleading and 

doesn’t represent the complexities of the health care market. GPOs have created a market that is anticompetitive and exclusionary, which actually leads 

to shortages and higher prices on alternative products in times of market disruptions. The fact that the numbers in the original report were so drastically 

miscalculated indicates that it is another unjustified attack on the business 

integrity of small distributors. It was disingenuous for Premier Purchasing 

Partners who created and understand the system better than anyone, to point 

their fingers at small distributors, which must pay significantly higher prices 

for the same products to serve health care providers. 

(6) Stories about a few ‘‘bad actors, fake pharmacies and fake distributors’’ have 

tainted the gray market debate. During 2005 and 2006, rogue companies in 

Florida took advantage of a flawed regulatory system and introduced counterfeits and unsafe practices into the U.S. pharmaceutical supply chain. NCPD 

was founded to represent the wellbeing and interests of reputable small distributors. We worked to help enact Federal legislations to revamp the Nation’s 

chain of custody laws for drugs. A new system was put in place to make sure 

that our supply chain was safe from the criminals that could open a storefront, buy drugs off the street and resell them without any regard for patient 

safety or regulations. In order to fix the system, we need to look at all the 

links in the system, the manufacturers who bid for contracts and cannot supply, the traditional wholesalers who have a fragile supply chain with just-intime inventory and no safety stock, and especially the group purchasing organizations that are protected by anti-kickback and safe harbor exemptions 

which create a smokescreen intended to prevent simple comparisons of GPO 

vs. non-GPO prices. As a knee jerk reaction to fix that 2005–2006 crisis and 

to make sure that we put some standards into place, we saw the manufacturers, the traditional wholesalers and the group purchasing organizations tighten their relationships. 

(7) The FDA instituted the pedigree requirements that any distributor that did 

not buy from the manufacturer direct would have to create a pedigree record 

and authenticate that chain of custody all the way back to the manufacturer. 

The manufacturers then exempted Authorized Distributors of Record from the 

pedigree statutes. Manufacturers subjectively terminated all secondary distributors’ direct accounts unless the distributor was a member of the legacy 

association, HDMA, representing large, traditional, full-line distributor and 

manufacturers. HDMA, at that time, decided to pare down their membership 

to only the top 20–30 distributors that could meet their stringent financial requirements. The group purchasing organizations pared down their list of authorized distributors to the ones with direct contracts with manufacturers. 

The traditional wholesaler’s, who had done business with the smaller distributors over the last 20 some years, were given fee for services and inventory 

management agreements from the manufacturers and from their GPO partners. All three of the large wholesalers then blocked sales to the secondary 

distributors because they would lose their rights to purchase hospitals products and to sell into the large GPO members hospitals. Small independent distributors were essentially denied access, restricted, blocked and tackled from 

every direction, and the only source of product suppliers that they could buy 

from were small manufacturers that could not play in the GPO contracts, 

small generic manufacturers that could not win the large GPO contracts, (note 

that many of those suppliers went out of business or picked up new products 

that did not compete with the GPO manufacturers) thus leaving no safety net 

suppliers for products in the supply chain. The secondary distributors were on 

an island and their only source of support and trading partners were each 

other. They have seen millions of dollars evaporate off their shelves and balance sheets. Secondary distributors, by comparison, are often family-owned 

businesses. The companies try to obtain their products from the manufacturer, 

where permitted, and use a traditional wholesaler that is an ADR and from 

other trusted, well-known distributors, just like them. Secondary distributors, 

so called because they fill a need when a hospital’s primary wholesaler cannot 

fill it, are a beneficial, integrated and official part of the authorized distribution network. They are required to pay much higher prices than traditional 

distributors, are excluded from GPO contracts, and restricted from filing for 

chargeback differentials with the manufacturer when a hospital has a GPO 

contract and buys off-contract with a secondary distributor. Their customers 

understand they will not get the GPO pricing, but know the service may help, 

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or even save a patient. They are the safety-net in the market, ensuring quality 

medications reach a patient in the safest, fastest and most cost-effective way 

possible. 

Question 2. You state in your written testimony that NCPD members report fake 

pharmacies they uncover. How often do you come across these fake or ‘‘shell’’ pharmacies? Is action taken to shut them down when reported? 

Answer. As we stated earlier in this response, NCPD represents and promotes the 

interests and priorities of small and independent pharmaceutical distributors before 

legislatures, regulatory organizations, industry partners and the community at large 

by advocating sound and responsible public policy. In this manner, NCPD is committed to preserve the well-being of its members; to ensure distribution system efficiency; and to strengthen the pharmaceutical supply chain to the greatest degree 

possible. 

NCPD was founded in 2006 as a voluntary, horizontal, member-directed association that succeeds in differentiating the participants by a common set of guiding 

principals for self-governance. New members are accepted after being vetted by a 

membership steering committee. The criteria for vetting a new member may include, but is not be limited to: 

• Do they meet all industry regulatory standards for licensing and business practices? 

• Do they adhere to provisions of Prescription Drug Marketing Act for handling, 

packaging, storage, and shipping of drugs? 

• Are they in full compliance with all governing federal, state and local laws? 

• Provides pedigree and authenticates its inventory according to state statutes. 

• Approved through VAWD certification, when applicable to business model. 

• Follows cGMP guidelines from FDA in packaging, mail order and covered facilities. 

• Employs mutual-nondisclosure agreements to meet anti-trust thresholds. 

• Does business only with other licensed distributors or that meet their stringent 

customer inspection and monitoring policies. 

• Have Standard Operating Procedures for diversion control and suspicious ordering reporting. 

• Have rigorous governance policies in place to ensure internal and external practices for fair treatment of customers and employees. 

• Legal aspects of the association will be carefully monitored by Board. When 

pricing and group purchasing are discussed, we abide by the provisions of Robinson-Patman Act and other anti-trust regulations pertaining to competitive activities. 

• Member companies are independent of other member companies in all other respects—and transactions are strictly confidential. 

• All member’s business information, volumes, pricing, and supplier information 

are kept confidential. 

• Members must approve release of any information. 

• NCPD recognizes that most aspects of the supplier/member relationship remain 

under the individual member’s full control. 

In addition to the criteria above that we may use to evaluate and approve new 

members, each of our members has their own due diligence process when they accept new customers. That process follows certain specific PDMA, DEA and State 

Board of Pharmacy licensing criteria whereby the customer: 

• If a Retail Pharmacy, Physician Office or Healthcare Clinic, it meets all DEA 

and state licensing and regulatory practices. 

• Requires a physical inspection of pharmacy sites. 

• If a Distributor, adheres to provisions of Prescription Drug Marketing Act for 

packaging, storage, and shipping and other applicable requirements. 

• Is in full compliance with all governing federal, state and local laws. 

• Provides pedigree and authenticates its inventory according to state statutes. 

• Approved through VAWD certification, when applicable to business model. 

• Follows cGMP guidelines from FDA in packaging, mail order and covered facilities. 

As we said above, NCPD is a voluntary, member-directed association and is not 

a regulatory enforcement agency. However, NCPD does provide our members with 

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the most recent Federal, State and local legislative and regulatory updates to keep 

them up-to-date on the best practices of the industry. We have Annual Meetings to 

educate members on current trends and regulatory practices. When we receive notices of a counterfeit, adulteration, fake pharmacy or any unlawful or illegal activity 

that affects our membership, we have an immediate notification process in place to 

make sure the information gets to the NCPD members and, if applicable to the regulatory agencies involved. 

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