How To Reach C&ENACS Membership Number


November 10, 2003
Volume 81, Number 45
CENEAR 81 45 pp. 36-43
ISSN 0009-2347

Sophisticated technologies and old-fashioned fraud pose risks to the prescription drug supply in the U.S.


Just a few years ago, Americans could boast with confidence that they had the safest prescription drug supply in the world. Now, they cannot be so sanguine.

SHADY BUSINESS To the naked eye, counterfeit products can appear identical to authentic medications.
Over the past few years, the number of counterfeit drug cases being investigated by the Food & Drug Administration has quadrupled from an average of five per year in the 1990s to about 20 per year in 2001 and 2002. In the U.S., a vast shadow market of secondary wholesalers has evolved that purchases drugs with few questions asked, providing a ready outlet for criminals who want to introduce counterfeit or adulterated drugs into the supply chain.

This problem manifests itself in a number of ways. Some pharmacies that supply nursing homes and hospices knowingly and fraudulently order at discounted prices far more drugs than they can use, then sell the excess to shady wholesalers at a profit. Entrepreneurs may import drugs and active pharmaceutical ingredients from foreign countries such as Mexico, where, according to FDA, up to 40% of the Mexican-made pharmaceutical supply is counterfeit, and sell the products over the Internet to anyone with a credit card.

Many manufacturers put tamper-resistant seals and holograms on their cartons and packages as a form of security. But repackagers must of necessity destroy the seals when they break the drug shipments into smaller units. This allows unscrupulous operators to put counterfeit medications in the bottles and vials. In addition, some pharmacies that compound drugs for patients with special needs create formulations that are seriously subpotent--that is, they contain less of the active ingredient than indicated on the label.

Tragically, some of the drugs that have been particular targets of counterfeiters are expensive products designed for the sickest patients. Recently, for example, counterfeit Procrit, an antianemia drug, placed at risk patients severely ill with cancer and AIDS, and counterfeit Epogen caused grave medical complications for organ transplant recipients and patients with end-stage kidney disease.

To the naked eye, counterfeit products often appear to be perfect copies of the authentic medications. Many are produced by criminals with sophisticated equipment capable of duplicating the authentic packaging.

In intellectual property law, counterfeit drugs are defined as medications that differ in some respect from what is stated on the label. They include drugs that contain smaller amounts of active pharmaceutical ingredient than claimed, the wrong active ingredients, or no active ingredients at all. Even if medications contain the stated amount of active ingredient but were made in India or elsewhere--even in someone's garage--rather than by the pharmaceutical company noted on the label, they are considered counterfeit. Fake drugs also include expired products that have been relabeled with new expiration dates. Adulterated drugs are those that have lost some or all of their effectiveness from improper storage or handling or are contaminated with bacteria or other microorganisms.

LAST SUMMER, FDA became seriously alarmed that counterfeit drugs were becoming much more prevalent in the U.S. when it observed a fourfold increase in the number of counterfeit cases being investigated. One case was especially worrisome: It involved 200,000 bottles of fake Lipitor, a widely prescribed medicine for lowering cholesterol. Also, earlier this year, a Florida grand jury reported that rampant corruption in the wholesale drug market in that state allows counterfeit drugs to enter the system. "Although counterfeiting was once a rare event, we are increasingly seeing large supplies of counterfeit versions of finished drugs being manufactured and distributed by well-funded and elaborately organized criminal networks," said FDA Commissioner Mark B. McClellan in a recent speech.

In July, McClellan organized a task force on counterfeit drugs that produced a preliminary report on the issue in less than two months. On Oct. 15, FDA convened a standing-room-only public meeting to hear comments on the report. It plans to revise the report based on the feedback it receives and to release a final version in January. The report will offer advice on what can be done to stem the rising tide of counterfeit and adulterated drugs.

Of all the avenues for entrance of counterfeit and adulterated medications into the $155 billion U.S. prescription drug market, those provided by shady wholesalers may pose the greatest threat.

In the U.S., there are three large drug wholesalers--AmerisourceBergen, Cardinal Health, and McKesson--and an estimated 7,000 smaller, secondary wholesalers. All wholesalers are regulated by the states. The three large wholesalers handle 90% of the drugs in this country. They buy most of them directly from manufacturers and sell to retail pharmacies, hospitals, nursing homes, and hospices. They purchase drugs for resale to retail pharmacies at one price, and drugs for resale to hospitals, nursing homes, and hospices at discounted prices--on average 40% lower. However, the major wholesalers purchase some of their stock--perhaps 1 to 3%--from the vast network of secondary wholesalers, who do not buy their pharmaceuticals from the manufacturers.

According to the executive director of one state board of pharmacy, who asks to remain anonymous, some pharmacies that supply drugs to nursing homes and hospices--called closed-door pharmacies--routinely buy far more drugs at greatly discounted prices than they can possibly use. They then resell the excess to a secondary wholesaler, usually with a 5% markup. This is called drug diversion, because the products are presumably purchased for closed-door pharmacies but do not end up there.

The secondary wholesaler then markets the drugs to another wholesaler, also usually with a 5% profit. This process continues until the drugs are eventually purchased by a retail pharmacy or bought back by one of the primary wholesalers. If a secondary wholesaler resells large volumes of drugs at a 5% profit each year, he or she can make a very healthy income.

This commerce is facilitated by the 1988 Prescription Drug Marketing Act (PDMA). Under the act, hospital pharmacies receive huge fines if they resell excess stock. But the closed-door pharmacies that supply nursing homes and hospices are not fined for selling excess stock to wholesalers. Before passage of PDMA, some hospitals were engaged in the same type of fraud that a number of nursing home pharmacies are now involved in.

What is happening at some closed-door pharmacies is obvious when the invoices are examined, the state pharmacy board spokesman says. For example, he found that huge amounts of high-blood-pressure medicine in four different strengths were being sold to a single closed-door pharmacy every day of the week. There is just no way a single pharmacy can use that much medicine in a week, he says. Experienced wholesalers could easily recognize that something crooked was going on, but they preferred to remain "consciously ignorant" of the fact that drugs were being diverted, he says.

Even catching the criminals is not doing much to solve the problem. Some criminals have been convicted of drug diversion multiple times but repeat the offense as soon as they get out of jail. Martin P. Rubin, a big player in the fraudulent drug wholesale industry, is an example. According to the Department of Justice and other sources, he has been convicted three times for illegal drug diversion. Each time, he promises the judge he will never buy drugs under false pretenses again and is sent to jail for two years. Each time he is released from jail, he sets himself up in a new drug wholesale business.

These problems of drug diversion exist all over the country, the pharmacy board spokesman says. Most states have not seriously investigated the problem because drug diversion is a sub-rosa industry that is difficult to detect and track, he says.

Only two states--Florida and Nevada--have undertaken detailed investigations of the practices of their prescription drug wholesalers. They both found widespread corruption that enables counterfeiters to enter the market and that allows drugs to become adulterated.

In its investigation, conducted in 2000, the Nevada pharmacy board found that people were getting into the drug wholesale business who never even appeared at the address where the business was presumably located. Some wholesalers had no records indicating that drugs had ever been sent to or received from their place of business. The business address was merely a location where mail could be sent.

The board also found that the real owner of a drug wholesale business was often different from the name on the application. In some instances, a wholesale operation was terminated, and the landlord later found drums of medications abandoned in a shed or apartment.

SOME EXPENSIVE DRUGS for cancer patients must be refrigerated to prevent the active ingredients from breaking down. A number of Nevada wholesalers were effectively adulterating cancer drugs by storing them at high temperatures in rented trucks or in crude sheds. Some drugs were purchased from doctors' offices or Indian reservations and resold.

At the time of the pharmacy board investigation, Nevada had lax laws governing drug wholesalers. The application to become a wholesaler was simple, asking only for the owner's name, the location of the business, and whether the fee was paid. Over the years, Nevada's inspectors had always assumed that drug wholesalers were running their businesses properly and therefore performed few inspections.

In 2001, after the investigation was complete, the Nevada legislature enacted a much stricter law governing drug wholesalers. The wholesaler's application is now quite detailed. It asks how long the applicants have dealt with drugs, who their relatives are, and a variety of other financial and personal data to ascertain who will actually be running the business and how it will operate. Inspectors now visit the wholesalers to see if they are dealing with drugs properly.

Under the new law, Nevada also requires "pedigree papers"--documents tracing sales of all drugs back to the manufacturer. These must be provided to prospective buyers before transactions take place. Resales to other wholesalers are now limited to 10% of the drug volume. After Nevada made its rules more stringent, no one has applied to become a licensed secondary wholesaler there, and the number of wholesalers in the state has plummeted. Rather than renew their licenses, many wholesalers have moved to other states.

A Florida grand jury conducted a similar investigation in 2002 and found widespread fraud and corruption among drug wholesalers licensed in the state. It discovered that an alarming percentage of the drugs in Florida's wholesale market had been illegally acquired--stolen from shipments or clinics or illegally imported from overseas. It found that wholesalers had purchased millions of dollars' worth of counterfeit drugs.

These findings prompted Florida to change its laws. It now requires pedigree papers on the 31 drugs that it considers most likely to be counterfeited--out of about 14,000 on the market. Falsification of pedigree papers is now a felony in Florida.

The National Association of Boards of Pharmacy met on Oct. 29 and 30 to develop model legislation for the states that would help eliminate corruption among drug wholesalers and minimize the chances that wholesalers would purchase from counterfeiters. It was planning to take some of the best provisions in the Florida and Nevada statutes and draft a practice law that all 50 states can use as a model, says Thomas McGinnis, director of pharmacy affairs at FDA.

Experts contacted by C&EN have a variety of opinions on how to eliminate corruption in the wholesale industry.

One part of the solution is to severely restrict the drug wholesale market, says Eric M. Turkewitz, a personal injury lawyer in New York City who advocates for patients who have been harmed by counterfeit drugs. Trying to keep counterfeit and adulterated drugs out of the current system with about 7,000 secondary wholesalers is like trying to keep burglars out of a house with 7,000 windows, he explains. A house with 10 windows can be protected, he says, but one with thousands of windows is impossible to secure. "The secondary market should be crippled," he says.

Another part of the solution is to mandate "strict liability for those who sell a counterfeit or adulterated drug regardless of whether they knew about it," Turkewitz says. Also, "there should be very large fines for anybody who sells a counterfeit drug regardless of fault," he says. "It is the wholesaler's job to see that they are buying drugs directly from the manufacturer where they know with 100% certainty that the drugs are safe. Otherwise, they should be caught holding the bag, no matter how many other criminals or wholesalers are involved."

Manufacturers could do something about the problem by selling drugs only to wholesalers who agree not to buy drugs on the secondary market, Turkewitz says. "Billions and billions of dollars are being spent on developing and marketing drugs, and then what happens to them? After drugs leave the door, they are being traded like orange juice futures in this unregulated open market," he says. "You need to close down all those avenues of access--the secondary wholesalers--so that counterfeit drugs cannot get in the supply chain," he explains.

Turkewitz believes that technological solutions would not help much. All systems can be counterfeited, he says. "But by instituting very strong financial disincentives for selling counterfeit drugs, you in effect force manufacturers and wholesalers to pick their own methods of security and safety," he observes.

IN CONTRAST, Lewis T. Kontnik, a consultant on counterfeit drugs, says a combination of legal changes and technological solutions is needed to secure the drug supply. Requiring pedigree papers for the small number of drugs most likely to be counterfeited would be helpful, but requiring them for all drugs would be onerous and impractical, he says. "If you had to have records for all 14,000 drugs on the market, the record keeping associated with that would be huge," he explains. With a pedigree system, there are prior-notice requirements. "You have to transmit the pedigree before you conduct the deal, and that would be difficult to accomplish for all drugs in a fast-moving, low-margin business," he says.

Kontnik, who was facilitator for the Product Surety Working Group at New Mexico State University, says, "FDA should take action in months to require pedigree papers on the 30 or so drugs most likely to be counterfeited."

Unlike Turkewitz, Kontnik is not certain that the government should mandate a shortening of the drug distribution chain. "Some people advocate allowing only one or two resales for certain classes of drugs. I don't know if that is right or implementable," he says.

Eventually, the government should decide on a long-term plan for fighting the counterfeit drug problem, Kontnik says. It could be a pedigree plan or an authentication plan--a system of markers on drug containers that are difficult to counterfeit. Then, after a plan is chosen, technologies can be used to support it, he says.

One example of an authentication technology is a system of electronic product coding developed at Massachusetts Institute of Technology. It involves radio-frequency chips applied to all medicine containers and computerized readers to track their movements. "It is a tremendous technology, but it is not fully developed," Kontnik says. It could be used to detect whether drugs have fallen into the hands of counterfeiters and to authenticate the products on pharmacy shelves.

Alan Goldhammer, associate vice president for regulatory affairs at the Pharmaceutical Research & Manufacturers of America (PhRMA), recognizes that corrupt secondary wholesalers are causing problems in the drug supply chain. Pedigree papers and stronger licensing requirements for wholesalers would help, as would more enforcement and stronger penalties for counterfeiting and drug diversion, he says. He notes that drug manufacturers have already taken a number of steps to protect their products, such as the use of tamper-resistant packaging. PhRMA is in the process of preparing a list of suggested changes in laws and regulations for FDA to consider.

"The system for drug delivery and drug distribution is really very safe and extraordinarily efficient in the U.S.," says Steven E. Bizar, a litigator at Buchanan Ingersoll in Philadelphia who represents AmerisourceBergen. "I see no evidence that the big wholesalers don't do the proper checking that they should do when purchasing drugs. Amerisource maintains meticulous records and inspects secondary sources," he says. The best way to fight counterfeiting, he says, is to give FDA more resources so it can do more inspections.

According to a Sept. 19 Wall Street Journal article, AmerisourceBergen is under investigation by FDA and the FBI for using a complicated scheme to earn rebates from pharmaceutical companies more than once on the same stock. Allegedly, Amerisource sold drugs at discounted prices to closed-door pharmacies and collected rebates from the manufacturers on the sale. The closed-door pharmacies had already set up business entities to sell the drugs to secondary wholesalers. Then, AmerisourceBergen bought the drugs back from the secondary wholesalers and resold them to closed-door pharmacies, once again collecting rebates from the manufacturer.

This alleged scheme involved two illegal practices: collecting more than one rebate on the same stock and purchasing diverted drugs. AmerisourceBergen denies the allegations.

It is very difficult to measure the extent of the harm caused by fake drugs. The reason, as Turkewitz points out, is that "drug counterfeiting is an almost perfect crime. The evidence is destroyed once the medicine is ingested and the packaging is thrown away. When the patient doesn't get any better, the physician and patient believe it is the underlying disease process that is causing the problem. The problems caused by counterfeit drugs are much larger than most people think," he says. In one such case, fake Procrit was injected into 25,000 people.

But not all counterfeit and adulterated medication in the U.S. comes through wholesalers. Compounded drugs are another source. Compounding is the combining, mixing, or altering of ingredients by a licensed pharmacist to create a customized drug; it often serves a legitimate function. In some cases, a dye or a preservative is removed from a drug to accommodate a patient's allergy; in others, a drug is converted to a different dosage form--from a pill to a liquid--for example, so an elderly patient can swallow it. Under FDA regulations, compounded drugs can only be made on receipt of a valid prescription.

Based on voluntary reporting and investigations by journalists, FDA has become aware of more than 200 adverse events involving 71 compounded products since 1990. For example, in 2001, there were three deaths and 13 hospitalizations following injection of a drug that was contaminated with bacteria. In addition, a limited survey of 29 compounded drugs from 12 pharmacies conducted by FDA in 2001 found that about 34% were subpotent--they had significantly less of the active ingredient than indicated on the label. Technically, such drugs are counterfeit.

Compounding is regulated by the states. Even though commercial drug manufacturers must report any problems or adverse events associated with their products, compounding pharmacies, except for those in North Carolina, do not have to report sicknesses or deaths related to their drugs.

On Oct. 23, the Senate Health, Education, Labor & Pensions Committee held a hearing on the risks posed by improperly compounded drugs. "Compounding seems to be a growing business," Steven Galson, acting director of FDA's Center for Drug Evaluation & Research, told the committee. An estimated 13 million to 30 million compounded products are sold each year, he said. The vast majority of compounding pharmacies are performing a legitimate function, but abuses are increasing, he warned.

Some of these abuses are large-scale manufacturing under the guise of compounding in facilities that have not been approved or inspected by FDA, Galson said. "Sometimes these pharmacies compound a product containing an active ingredient not approved by FDA," he said. Other pharmacies manufacture drugs that FDA has previously withdrawn from the market for safety reasons, he explained. "If compounding is done on a large scale, and is not done properly, it can expose large numbers of patients to health risks associated with unsafe or ineffective medications," he said.

There have been several instances in which medicines were compounded under nonsterile conditions, Galson said. For example, after taking methylprednisolone acetate from a compounding pharmacy in South Carolina, four patients developed a rare fungal infection and one died, he said. And because states are the primary regulator of compounding pharmacies, FDA has been denied access to some facilities where it suspects that drugs are being made under unsafe conditions, he said.

MANY STATES are strengthening their regulations governing compounding, said Janet Heinrich, director of health care and public health issues at the U.S. General Accounting Office. However, some states do not have the resources to inspect compounding facilities or to enforce their regulations. Missouri is the only state that does random testing of compounded drugs, she said.

"Accurate, complete, and unbiased information about the compounding industry in the U.S. is not available," Sarah L. Sellers, a master's degree candidate at Johns Hopkins University school of public health, told the hearing. The observed cases of death and sickness from compounded drugs are probably only the "tip of the iceberg," because compounding pharmacists are not required to report adverse events, she warned.

Many of the problems leading to counterfeit and adulterated drugs stem from areas where FDA has unclear or no jurisdiction. The states license wholesalers, yet many lack the resources to verify whether the wholesalers are handling drugs properly or engaging in fraudulent behavior. States also have jurisdiction over compounding pharmacies, yet most don't have the resources or expertise to properly inspect them either. If the federal government were granted jurisdiction in those areas, the drug supply might be more secure.

FDA's John M. Taylor III, associate commissioner for regulatory affairs, struck an optimistic note at the agency's Oct. 15 meeting. "No single magic bullet will solve the counterfeit drug problem," he said. "Rather, we need a multipronged strategy." Although counterfeiters are more sophisticated than they were in the past, "many new technologies are available to counter the threat," he said. When FDA's final report comes out in January, it will be recommending strategies to deal with the problem.


Sophisticated technologies and old-fashioned fraud pose risks to the prescription drug supply in the U.S.

Prescription Drug Corruption Rampant Among Florida Wholesalers


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