[Senate Hearing 112-729]
[From the U.S. Government Publishing Office]



                                                        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




                  U.S. GOVERNMENT PRINTING OFFICE
79-524                    WASHINGTON : 2013
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing Office, 
http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202ï¿½09512ï¿½091800, or 866ï¿½09512ï¿½091800 (toll-free). E-mail, [email protected].  


       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

            JOHN D. ROCKEFELLER IV, West Virginia, Chairman
DANIEL K. INOUYE, Hawaii             KAY BAILEY HUTCHISON, Texas, 
JOHN F. KERRY, Massachusetts             Ranking
BARBARA BOXER, California            OLYMPIA J. SNOWE, Maine
BILL NELSON, Florida                 JIM DeMINT, South Carolina
MARIA CANTWELL, Washington           JOHN THUNE, South Dakota
FRANK R. LAUTENBERG, New Jersey      ROGER F. WICKER, Mississippi
MARK PRYOR, Arkansas                 JOHNNY ISAKSON, Georgia
CLAIRE McCASKILL, Missouri           ROY BLUNT, Missouri
AMY KLOBUCHAR, Minnesota             JOHN BOOZMAN, Arkansas
TOM UDALL, New Mexico                PATRICK J. TOOMEY, Pennsylvania
MARK WARNER, Virginia                MARCO RUBIO, Florida
MARK BEGICH, Alaska                  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


                            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


  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.
    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.
    [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 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.

        ``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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
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 
complications 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\
---------------------------------------------------------------------------
    \3\ David E. Golan, et al., Principles of Pharmacology, 3rd 
Edition, 30-31 (2012).
    \4\ Id.
---------------------------------------------------------------------------
    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:
---------------------------------------------------------------------------
    \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).

        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\
---------------------------------------------------------------------------
    \7\ Id. at 3.

    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 Health-System Pharmacists 
recently commented that the shortages have ``the potential to affect 
almost every patient that comes into a hospital.'' \9\
---------------------------------------------------------------------------
    \8\ See, 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).
    \9\ Waning Cancer Drug Supplies a Growing Concern at St. Jude 
Children's Research Hospital, The Commercial Appeal (Mar. 25, 2012).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
    \10\ American Hospital Association, AHA Survey on Drug Shortages 
(July 12, 2011).
    \11\ See, 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.'').
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \12\ Kaakeh, supra note 2, at 1818.
---------------------------------------------------------------------------
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 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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \18\ Group 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.
    \19\ See 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?new_window=1).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
    \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.
    \21\ Premiere 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'').
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \22\ Id.
---------------------------------------------------------------------------
    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 of the shortage cancer drug cytarabine 
for $995 per vial.\23\ The hospital's normal average purchase price for 
the drug was $15.76 per vial. Mr. Richerson told the San Antonio 
Express-News:
---------------------------------------------------------------------------
    \23\ Drug Shortages, Skyrocketing Prices Anger Pharmacists, San 
Antonio Express-News (May 3, 2011).

        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\
---------------------------------------------------------------------------
    \24\ Id.

    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\
---------------------------------------------------------------------------
    \25\ Institute for Safe Medication Practices, supra note 20.
    \26\ Id.
---------------------------------------------------------------------------
    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):
---------------------------------------------------------------------------
    \27\ See, 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.'').
    \28\ San 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'').

        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\
---------------------------------------------------------------------------
    \29\ John VanEeckhout, Financial Implications of the Drug Shortage 
Crisis, Children's Hospitals Today (Winter 2012).

    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:
---------------------------------------------------------------------------
    \30\ Transcript 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).

        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\
---------------------------------------------------------------------------
    \31\ Id. at 69 (statement of Erin R. Fox, Pharm.D, Manager, Drug 
Information Service University of Utah Hospitals & Clinics).

    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, 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\
---------------------------------------------------------------------------
    \32\ Jaimy Lee, Providers Fuel Gray Market: Some Sell While Others 
Buy During Drug Shortage, Modern Healthcare (Sept. 5, 2011).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \33\ Short of Drugs, Hospitals Wary of `Gray Market,' St. 
Petersburg Times (Nov. 7, 2011).
---------------------------------------------------------------------------
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 ``primary'' 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.
---------------------------------------------------------------------------
    \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. Sec. 353(e)(3)(A).
    \36\ Pew 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).
    \37\ Healthcare Distribution Management Association, HDMA Fact 
Sheet on PDMA (online at http://www.healthcaredistribution.org/
press_room/pdma_facts.asp).
    \38\ Id.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
    \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. Sec. 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 
Sec. 104.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \41\ Letter 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).
---------------------------------------------------------------------------
    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 products for their ``own use'' and its secondary 
wholesaler customers to agree to sell purchased products only to final 
dispensers.\44\
---------------------------------------------------------------------------
    \42\ Primary Wholesale Distributor, Policy Statement on Secondary 
Market Sales.
    \43\ Primary Wholesale Distributor, Wholesaler Safe Product 
Practices.
    \44\ E-mail from Primary Wholesale Distributor to Senate Committee 
on Commerce, Science, and Transportation Staff (July 19, 2012).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \45\ Food 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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \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:gray-
market&catid=146:democratic-agenda&Itemid=107).

------------------------------------------------------------------------
                                                         Distributor
                 Manufacturers        Treatment           Receiving
                                                     Information Request
------------------------------------------------------------------------
Cytarabine     APP, Bedford,      Leukemia in        Allied Medical
                Hospira            children and       Supply, Inc.,
                                   adults             Miami, FL
------------------------------------------------------------------------
Fluorouracil   APP, Mylan, Teva   Colon, stomach,    PRN
                                   breast, and        Pharmaceuticals,
                                   pancreatic         Rockville, MD
                                   cancer
------------------------------------------------------------------------
Leucovorin     APP, Bedford,      Advanced colon     Premium Health
                Teva               cancer             Services Inc.,
                                                      Columbia, MD
------------------------------------------------------------------------
Magnesium      American Regent,   Seizures during    Reliance Wholesale,
 Sulfate        APP, Hospira      pregnancy           Inc., Miami, FL
------------------------------------------------------------------------
Paclitaxel     APP, Bedford,      Breast and         Superior Medical
                Hospira, Sagent,   ovarian cancer     Supply, Inc.,
                Sandoz, Teva,                         Superior, CO
                Pfizer (started
                in 2012)
------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------
    \48\ Senate Committee on Commerce, Science, and Transportation, 
Senate Chairmen Join Cummings' Investigation of ``Gray Market'' Drug 
Companies (Dec. 15, 2011).
    \49\ Senator Rockefeller issued a Senate Commerce Committee 
subpoena to one company, Superior Medical Supply, that refused to 
respond voluntarily to an information request.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \50\ See 21 U.S.C. Sec. 353(e)(1)(A). Drug manufacturers and 
authorized distributors of record are exempt from the Federal pedigree 
requirement.
---------------------------------------------------------------------------
    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.

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.
---------------------------------------------------------------------------
    \51\ See section II.B.4. of this report for further discussion of 
Priority Healthcare.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \52\ Gray 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.
---------------------------------------------------------------------------
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 Mississippi 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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \55\ Staff 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.''

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:

   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.
---------------------------------------------------------------------------
    \56\ The 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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \57\ As noted in section II.B.4. below, a husband-wife team owned 
both Tri-Med America and Priority Healthcare.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
    \58\ Letter 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).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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 Sec. 24:6B-14.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \63\ Letter from Prince Dennis, Owner, B&C Health Services, to 
House Committee on Oversight and Government Reform, Minority Staff 
(Mar. 27, 2012).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
    \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.
    \65\ Three 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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \66\ E-mail from broker to pharmacy owner (June 13, 2011).
    \67\ E-mail from broker to pharmacy owner (Aug. 19, 2011).
---------------------------------------------------------------------------
    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 behalf.\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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \74\ Fax 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).
---------------------------------------------------------------------------
    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 mark-ups.'' \78\ The 
Board determined that the pharmacies violated the California Business 
and Professional Code by acting as ``purchasing agents'' for Priority 
Pharmaceuticals.\79\
---------------------------------------------------------------------------
    \76\ Local Pharmacy Faces a Barrage of Charges, The Bakersfield 
Californian (Mar. 22, 2012).
    \77\ Id.
    \78\ Id.
    \79\ See, 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).
---------------------------------------------------------------------------
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

   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.
---------------------------------------------------------------------------
    \80\ E-mail from broker to pharmacy owner (Jan. 20, 2012).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \81\ Letter 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).
    \82\ Letter 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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
    \88\ This transaction is also discussed in section II.A.1.
    \89\ State of New Jersey Department of Health and Senior Services, 
Wholesale Drug Project Revocations (online at http://nj.gov/health/
foodanddrugsafety/rev_sus.shtml) (accessed June 7, 2012).
    \90\ Maryland 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).
    \91\ Maryland Board of Pharmacy, Establishment Detail (online at 
https://license.mdbop.org/verification/veri/
establishmentDetail.asp?PermitNo=PW0275) (accessed June 10, 2012).

        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.
---------------------------------------------------------------------------
    \92\ See 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 IX--Photos of Columbia Med Services



        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\
---------------------------------------------------------------------------
    \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).

        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\
---------------------------------------------------------------------------
    \96\ Letter 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).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \97\ Several pharmacies outside of this local area also sold drugs 
into this network through Avenel Pharmacy.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \98\ See 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.
---------------------------------------------------------------------------
    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 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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
    \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/
1103_dis.pdf).
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \104\ The 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).
    \105\ Defendant's Plea Agreement, United States v. Stephen F. 
Corba, Jr., Case No. 1:11-cr-00523-JEI-1 (D.N.J. May 13, 2010).
---------------------------------------------------------------------------
    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 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\
---------------------------------------------------------------------------
    \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).
    \108\ Kentucky 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).
---------------------------------------------------------------------------
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.
                                 ______
                                 
                                 
                                 
                                 
                                 
                                 ______
                                 
                                 
                                 
                                 
                                 
                                 ______
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 ______
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 ______
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 ______
                                 
                                 
                                 
                                 
                                 
                                 ______
                                 

    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 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 address 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. 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.
    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 
situation 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:]

       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.

  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.

    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 ranking 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 medications 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 practice 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.
    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.
    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 
manufacturers 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 
transaction. 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. 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.
    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/
GrayMarketFigure2%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/
GrayMarketFigure3%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/
GrayMarketFigure4%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/
GrayMarketFigure5%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 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 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 International 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/
GrayMarketFigure6%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.
    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 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 
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 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.

   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 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, 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.
    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 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.
    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 short-supply 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 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 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 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 month-in 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.
                                 ______
                                 
                                 
                                 
                                 ______
                                 
                                 
                                 
                                 
                                 
                                 ______
                                 
                                 
                                 
                                 
                                 
                                 ______
                                 
                                 
                                 
                                 
                                 
                                 ______
                                 
                                 
                                 
                                 
                                 
                                 ______
                                 
                                 
                                 
                                 
                                 
                                 ______
                                 
                                 
                                 
                                 
                                 
                                 ______
                                 
                                 
                                 
                                 
                                 
                                 ______
                                 
                                 
                                 
                                 
                                 
                                 ______
                                 
                                 
                                 
                                 
                                 
                                 ______
                                 
                                 
                                 
                                 
                                 
                                 ______
                                 
                                 
                                 
                                 
                                 
                                 ______
                                 
                                 
                                 
                                 
                                 
                                 ______
                                 
                                 
                                 
                                 
                                 
                                 ______
                                 
                                 
                                 
                                 
                                 
                                 ______
                                 
                                 
                                 
                                 ______
                                 

    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.

               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?
    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 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.
    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.
    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 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 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?
    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 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 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.
    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.]

                            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.
---------------------------------------------------------------------------
    \1\ Pew Health Group. ``After Heparin: Protecting Consumers from 
the Risks of Substandard and Counterfeit Drugs.'' (2011) http://
www.prescriptionproject.org/after_heparin_report.
---------------------------------------------------------------------------
    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 third-party 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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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 Diversion and Trafficking 
of Prescription Drugs. July 17, 2012. http://www.justice.gov/usao/nys/
pressreleases/july12/prescriptiondrugs.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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    In another case, thieves stole $75 million worth of pharmaceuticals 
from an Eli Lilly warehouse in Connecticut. It was a sophisticated 
operation, the largest dollar-value 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.
---------------------------------------------------------------------------
    \8\ Forsaith, 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.
---------------------------------------------------------------------------
    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 AIDS-related wasting, 
was found in at least seven states and passed through multiple 
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.
---------------------------------------------------------------------------
    \10\ Serono, 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.
    \11\ Otto, Alex. Counterfeit Serostim Found Nationwide. Pharmacy 
Today. American Pharmacists Association. March 1, 2001. http://
www.medscape.com/viewarticle/406804. Accessed October 13, 2010.
    \12\ Dutchess 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.
    \13\ Williamson, 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.
---------------------------------------------------------------------------
    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.

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 track-and-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.
---------------------------------------------------------------------------
    \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/
Pharma_Report_Final.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/ip_white_paper
.pdf. Accessed April 22, 2011.
---------------------------------------------------------------------------
    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.
    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 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 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 so-called ``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 
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 ``hard-to-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 
account (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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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 anti-competitive effects of the pronounced 
price differentials in the pharmaceutical industry.
---------------------------------------------------------------------------
    \2\ Price 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).
---------------------------------------------------------------------------
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.

    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

    
    
    
    
                                 ______
                                 
   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 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 non-chain 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 pre-licensure 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 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 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.
                                 ______
                                 
    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 
lot-level 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 ``Short-Supply 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.
                                 ______
                                 
   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.oregov_affairs/
pdf_controlled/20081113_ieg.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.
---------------------------------------------------------------------------
    \1\ 21 C.F.R. Sec. 1301.74(b).
---------------------------------------------------------------------------
    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?
    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 back-up 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 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.



    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
----------------------------------------------------------------------------------------------------------------
                                                                                                      Mark-Up  %
                                                    Pkg     Pkg                          Mark-Up  $      over
            NDC                      MFG           Desc    Size   WAC  Unit   WAC  Pkg      over     Lowest  MFG
                                                                                        Lowest  WAC      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
----------------------------------------------------------------------------------------------------------------
                                                                                                      Mark-Up  %
                                                    Pkg     Pkg                          Mark-Up  $      over
            NDC                      MFG           Desc    Size   WAC  Unit   WAC  Pkg      over     Lowest  MFG
                                                                                        Lowest  WAC      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 Commercial 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.

             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                                 $39 B                                  13%
 and Food Stores
----------------------------------------------------------------------------------------------------------------
Total Generic and Brand Prescription
 Drugs Sold through Traditional
 Wholesalers to Following Providers:
----------------------------------------------------------------------------------------------------------------
Chain Warehouses purchased from                                      $51 B                                  21%
 Wholesalers
----------------------------------------------------------------------------------------------------------------
Chain Pharmacies                                                     $59 B                                  24%
----------------------------------------------------------------------------------------------------------------
Hospitals, HMO's, Clinics and Nursing                                $61 B                                  25%
 Homes
----------------------------------------------------------------------------------------------------------------
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 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
----------------------------------------------------------------------------------------------------------------
                                                              NCPA  Industry              NCPD  Small
    Proforma Categories      HDMA industry  Avg.--   Avg. %     Avg.--Small    Avg. %    Distributors    Avg. %
                                Wholesalers \1\                Pharmacy \2\                  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           $87,108,317       3.33%        $886,498    24.00%      $1,875,000    25.00%
 All Discounts
----------------------------------------------------------------------------------------------------------------
Gross Margin % After All                   3.33%                      23.97%                    25.00%
 Discounts
----------------------------------------------------------------------------------------------------------------
                                                    Expenses
----------------------------------------------------------------------------------------------------------------
Payroll Expense                      $15,845,003      18.19%        $110,812    12.50%        $215,625    11.50%
----------------------------------------------------------------------------------------------------------------
Payroll Taxes, Workers                $3,188,164       3.66%         $17,730     2.00%         $37,500     2.00%
 Comp, Empl. Benefits
----------------------------------------------------------------------------------------------------------------
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                    $0       0.00%          $4,432     0.50%         $12,188     0.65%
 Containers, Packing,
 Labels
----------------------------------------------------------------------------------------------------------------
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                          $0       0.00%              $0     0.00%         $15,000     0.80%
 Compliance
----------------------------------------------------------------------------------------------------------------
Other Operating Expense                       $0       0.00%         $23,935     2.70%         $28,125     1.50%
----------------------------------------------------------------------------------------------------------------
Total Operating Expense              $31,247,820       1.19%        $776,737    21.00%      $1,668,000    22.24%
 (includes some lines not
 broken out separately
 above)
----------------------------------------------------------------------------------------------------------------
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. 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 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-in-time 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, 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 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.

                                  
