Drug Diversion: Still a Industry

ILL THRIVING ILLEGAl INDUSTRY ver since the November 1984 discovery that nearly 2 million counterfeit Ovulen-21 birth control tabE lets had somehow reached this country from Panama and had been distributed nationwide, concern about prescription drug diversion and counterfeiting has steadily mounted. The great speed and ease with which these counterfeit tablets were channeled through the U.S. distribution system prompted a congressional staff

American Pharmacy Vol. NS26, No.1, January 1986/31

investigation and then a series of hearings, where further evidence came to light from the alarming testimony of FBI undercover agents and convicted diversion criminals. In his opening statement at the most recent drug diversion hearing (October 31, 1985), Rep. Gerry Sikorski "CD-MN) described this widespread criminal practice as "a $1 billion a year illegal business-a" scam inyolving'some crooked hospitals and clinics, 31

Pharmaceutical research snccesses are

~ and the financial risk is great. On the average, only one of every 50,000 compounds screened ever reaches the market. This may be the reason that of some 10,000 pharmaceutical companies in the world, only 400 have research capabilities.

The Upjohn commitment ... to research, to innovation, to Quality control ... is exemp-lified by. MOTRIN Tablets (ibuQrofen). MOTRIN Tablets pioneered a whole new class of pharmaceuticals ... opened a billion -dollar market. Your support of MOTRIN Tablets contributes to our ability to continue the search for the drugs of the future.

Motrin...the ibuprofen that supports the future of pharmacy Motrin builds traffic and sales. MOTRIN is a trusted name, more familiar to the consumer than almost any other prescription product. Many pharmacists report that Customers feel more confident with a quality product. And the quality image that MOTRIN provides can transfer to your pharmacy, building traffic and sales.

Motrin is backed by Upjohn service. Service is an Upjohn tradition. Far-ranging, it includes: o Legal support for.a11 Upjohn products, protecting the pharmacist as described in the Upjohn product catalog. o Medical and product information on a 24-hour basis. o Professional·management programs for pharmacists. o Support for pharmacy schools and organizations. We invite you to be the judge of the services offered by Upjohn Representatives. They, too, have a tradition to maintain: to provide current information on Upjohn products and to be personally helpful to you in every way possible.

For a better future ... and for the customers satisfaction Dispense

Tablets

MOTRIN is still the most widely prescribed drug of its class, with 130 million prescriptions to date ... 130 million customers ... 130 million opportunities ---for you to provide professional services and other health care needs.

© 1986 The Upjohn Company

J·5889

A Century of Caring 1886-1986

doctors and pharmacists, sales representatives and corporate executives. It is built on greed and deceit," he continued, "fostered by lax government regulation and hidden by an 'I don't want to get involved' industry morality." The congressional staff report on diversion is titled "Prescription Drug Diversion and the American Consumer: What You Think You See May Not Be What You Get." It represents the findings from several months of investigation during 1985 and includes a November 1984 survey of all the larger brand-name pharmaceutical manufacturers on the extent of drug counterfeiting and mislabeling. According to Stephen F. Sims, the document's author, the report uncovers a vast array of loopholes in the U.S. distribution system that subsequently allow "the introduction of substandard, ineffective, or counterfeit pharmaceuticals." FBI Investigation

FBI evidence indicates that the drug diversion market is nationwide; that its products are often outdated, adulterated, misbranded, or outright counterfeits; and that, in many instances, manufacturers' sales representatives have ignored apparent fraudulent activity. Hal Helterhoff, chief of the FBI's White-Collar Crimes Section, testified that in one FBI investigation, code-named "Pharmoney," an undercover agent worked with a registered pharmacist from the Georgia Drugs and Narcotics Agency and began building a reputation as an affiliate of a small hospital pharmacy management firm. The decision was made to "plant" the agent after the owner of this firm complained to the FBI several months earlier, in August 1983, that he had been repeatedly approached by individuals who asked him to order surplus pharmaceuticals for the seven hospital pharmacies he operated. "In a relatively short period of time," Helterhoff said, "the undercover operative became known as a trader in pharmaceuticals. Once established, the operation began receiving unsolicited telephone calls from previously un-

34

known individuals who expressed a strong desire to engage in the sale, trade, or exchange of diverted pharmaceuticals." Generally, the diverters were physicians, past or present employees of pharmaceutical manufacturers, hospitals, or clinics, Helterhoff said. "They included large national drug wholesalers, manufacturer's sales representatives, individuals who set up storage facilities solely for the diversion, and even a former industry executive who found diversion more lucrative than his previous employment." But, as Sims points out in the subcommittee's staff report, diverted pharmaceuticals can also be purchased on the account of one company, although actually destined for another company, without the knowledge or collusion of the manufacturer's sales representative. Furthermore, "nonprofit hospitals buy at below average wholesale price under a special exemption to Federal antitrust laws," the report states. "These nonprofit institutions that buy in excess of their legitimate needs and then resell the excess are a significant and growing source of diverted merchandise. Salesmen's samples are sold rather than given to [physicians], or the [physicians] themselves sell the samples rather than giving them to their patients. . .. In some cases, pharmaceuticals are simply stolen." Drug Theft

During approximately 18 months of investigation, operation Pharmoney uncovered, among other things, the theft of more than a quarter of a million dollars worth of pharmaceuticals from a manufacturer's loading dock, which led to charges against two sales representatives and a warehouse employee, Helterhoff testified. The FBI gathered enough evidence to execute 13 searches in six states. As of October 9, 1985, 46 individuals and three corporations have entered into various plea agreements; approximately 30 defendants have pled guilty. An estimated $600,000 in "diverted and adulterated pharmaceu-

ticals" were purchased and seized as part of this investigation, including "hundreds of thousands of tablets and capsules packaged in containers varying from plastic sandwich bags to used bread wrappers," Helterhoff said. Most packages lacked any identifying data and "commonly sat in attics, mini-warehouses, storage sheds, and on loading docks for extended periods of time with no sanitary or environmental controls." Wholesale Submarket

But what is most significant, Helterhoff said, is the ease with which these pharmaceuticals were able to flow into the wholesale (diversionary) submarket. Their vendors offered significantly lower than market prices and asked for no documentation whatsoever. Cash was used exclusively in all transactions. Buyer Beware

A major problem in purchasing drugs from diverters is that a retailer can easily-and unknowingly-buy counterfeit merchandise. Although subcommittee staff avoided any specific inquiry into the initial source of last year's counterfeit Ovulen-21 because of a pending criminal investigation, they were nevertheless able to unravel some pieces of the story. Counterfeit drugs move swiftly through the diversion market. As Rep. John D. Dingell (D-M!), Chairman of the House Subcommittee on Oversight and Investigations, pointed out at the October 31 diversion hearing, "some of these pills were still being distributed as recently as last month." Infiltration of counterfeit Ovulen apparently began when 3,351 units of 21-tablet packages were acquired by American Medic Sales, Inc., of North Miami, FL, from an unknown source at an unknown price-although the bogus tablets were probably imported from Panama and sold at a fraction of their normal price. American Medic Sales, Inc., then sold the counterfeits to Marchar Laboratories of Walnut, CA, on June 20, 1984, at $3.00 per package, plus half the profits from the future resale by Marchar.

American Pharmacy Vol. NS26, No.1, January 1986/34

About two days later, Marchar sold the entire lot to H & H Pharmaceuticals (d.b,a. Medicine Man Pharmacy) of Seattle, WA for $5.00 per package and, on June 28, H & H in turn sold the drugs to Harry's Pharmacy of Palos Heights, IL, for $6.50 per package. Here, approximately 1,275 packages were sold at the suggested retail price of $13.50 per package (the average wholesale price at the time was about $11.50 to $12.00). After widespread reports in November 1984 that the tablets were counterfeit, Harry's returned them to H & H-which was about to return them to Marchar when the FDA stepped in and seized the drugs. Why Diversion Persists Testifying at a September 19, 1985, hearing, one pharmacist with first-hand knowledge of drug diversion schemes shed some light on the reasons why this widespread, illegal industry continues to thrive. Stanley Kowitt, a 47year-old pharmacist convicted of criminal violations in 1983 after an extensive investigation in south Florida uncovered approximately $10 million worth of pharmaceuticals obtained from U.S. manufacturers through hospital diversion schemes and bogus charities, testified as follows: "There are two primary factors that are responsible for the diversion industry, and both are totally under the control of the manufacturer. The first is the tremendous price differential between ordering entities ... up to 80% in some cases. The second is the internal structure of the drug companies that places great emphasis on the sales of competitive items, which are the ones involved in diversion. Sales quotas must be met or salespeople may be fired. Bonuses, commissions, and promotions are based on sales in excess of quotas. Helping diverters was the only way a salesman or his manager could retaliate against a salesman that was dumping into his territory and hurting his sales." Eddie Ronald Burklow, who has worked in sales and marketing for Pfizer Laboratories and Lederle Laboratories, and is currently

Southeast Regional Sales Director for the generic manufacturer Barr Laboratories, recently pled guilty to criminal violations involving drug diversion in Atlanta. In his testimony at the September 19 hearing, Burklow called multi-tier pricing "the parent of diversion," and explained how he was drawn into the diversion marketplace while working for Lederle: "The idea to become involved in drug diversion evolved because we could buy [excess pharmaceutical supplies] at well below wholesale prices through Pharmacy Resources' approximately 55 member hospitals . . . and sell the products through wholesalers at a good profit. The hospital purchasing group increased the quantity of certain products ordered from the manufacturers, ostensibly for the use of about five member hospitals, thereby creating excess inventories.... We sold the products to licensed wholesalers, and ... in no way did we attempt to hide the business." Both Kowitt and Burklow insist that they made no false representations, that they never dealt in stolen or counterfeit pharmaceuticals, that they worked only with licensed wholesalers and did not attempt to hide their business, and that the merchandise they sold posed no health hazard to American consumers. "Although I, and most other pharmacists," Kowitt said, "are aware of the existence of individuals who are usually not licensed and who purchase physician samples from doctors and salesmen (usually for cash) and then adulterate and repackage these items for sales to retail stores (again usually for cash), this is nothing that I or most other diverterwholesalers are involved in." But Larry D. Thompson, United States Attorney for the Northern district of Georgia, testified at the October 31 hearing that even if the defendants were not directly involved in misrepresentations, they still purchased drugs that they knew were originally obtained under false pretenses. "While some individual defendants may not have been fully

American Pharmacy Vol. NS26, No. 1, January 1986/35

aware of the specifics of such treatment by others in the distribution system," Thompson testified, "they did have reason to know that the distribution of 'diverted' drugs is ... attractive to those wishing to dispose of stolen, foreign-made, counterfeit, or adulterated and misbranded drugs." In response to the request of Rep. Dingell's Subcommittee on Oversights and Investigations, the United States Customs Service and FDA have joined forces in an attempt to intercept counterfeit and other suspect drugs entering this country. Through ajoint program, the two agencies have agreed to hold all imports claiming to be "American Goods Returned" in Customs custody until (1) their ownership is traced to the original manufacturer and (2) prior storage, shipment, and packaging conditions are determined. APhA Support

APhA has applauded Rep. Dingell's subcommittee for its successful efforts in exposing counterfeit prescription drugs and illegal distribution schemes that continue to threaten the safety and health of American consumers. As APhA President John F. Schlegel noted several months ago: "We are gratified-and not at all surprised to find-that those portions of the [subcommittee's] staff report addressing domestic 'drug diversion' schemes confirm points we brought to the subcommittee staffs attention in June . ... Current industry-wide chaotic pricing conditions and concessions to purchasers heavily implicated in drug diversion schemes threaten to destroy the entire drug distribution system. If the public to whose service we are all dedicated loses confidence in that dedication, both the industry and the profession may suffer irreparable damage." ®

-Clare Hagerty

35