Cardinal latest wholesaler to curb secondary dealing

James Frederick

DUBLIN, OHIO -- Ridding itself of a profitable but problematic business interest, Cardinal Health will shut down its Cardinal Health Pharmaceutical Trading operation, which buys and sells discounted and overstocked pharmaceuticals in the secondary distribution market.

The move--announced in a letter to employees and suppliers May 6--follows recent legal action from New York State Attorney General Elliot Spitzer, who last month subpoenaed Cardinal and its two largest wholesale competitors as part of a high-profile investigation of drug sourcing, counterfeiting and the pharmaceutical supply chain. However, company officials say the decision to close me drug trading operation stems not from Spitzer's investigation, but from long-term trends in the wholesale drug industry.

"The pharmaceutical distribution industry ... has undergone dramatic changes over the past couple of years," noted Pharmaceutical Trading vice president and general manager Stephen Henck in his letter. "These changes have compelled Cardinal Health to rethink the way it does business in pharmaceutical distribution, including with regard to what role Cardinal Health Pharmaceutical Trading will play in our business going forward.

"The transition to a fee-for-service model has had an impact on our ability in Pharmaceutical Trading to deliver significant benefits to the business. For this reason, we are making changes to our pharmaceutical trading model, including closing our external sales function for the pharmaceutical trading business and reorganizing the balance of this business."

Cardinal spokesman Jim Mazzola called the move "a business decision, based on changes in our policies, as well as changes in our agreements with manufacturers.

"At this point," he told Drug Store News, "it just made sense to discontinue those operations."

Mazzola said about 20 Cardinal employees based in Groveport, Ohio, would be laid off when the company closes its secondary trading unit at the end of June in line with the end of its fiscal year. He characterized the impact on sales as minimal. "This is a very small business that had been declining for several years due to changes in our policies, as well as changes in our agreements with pharmaceutical manufacturers," he said. "So it's less than half of 1 percent of the revenue of our whole pharmaceutical distribution business and is down over 40 percent year-over-year."

Company officials point out that Cardinal will continue to purchase drugs from-authorized secondary-market suppliers, including other distributors. Such purchases--which also can come from overstocked PBMs, hospitals and mail order pharmacies offering excess supplies at a discount--have long served as sources of quick-fill inventory. Wholesalers also have relied on such discounted pharmaceuticals as a way to save on drug purchases, shore up their own profit margins and keep overall prices to their retail pharmacy customers at competitive rates.

The wholesale drug industry's other two giant players, McKesson Corp. and AmerisourceBergen, stated that they already have reduced their secondary-market pharmaceutical purchases dramatically. Like Cardinal, however, they have no plans to shut them down entirely in the near future.

McKesson has not eliminated its secondary- or multiple-source drug trading division, said company spokesman James Larkin, but it has scaled back its former dependence on the secondary market as a profit margin or sales tool.

"We already purchase more than 99.5 percent of our branded pharmaceuticals directly from manufacturers," said Larkin, including "all specialty, biotech and ... oncology drugs. We've really dramatically, reduced our dependence on our [secondary-source] trading, company over the last 18 months."

In addition, he said: "We don't sell to the secondary market at all. And we deal with a very small group of alternative-source vendors, and they are all very tightly screened by us."

At this point, he said, McKesson deals with "less than a dozen alternative-source vendors, and we've got long-term relationships with all of them."

Larry Kurtz, McKesson's vice president of investor relations, added that the company does "not regard this business as strategic.

"The profit rate can be higher than the normal distribution profit margin, but ... the volumes are so small, they really don't move the profit needle," he told Drug Store News.

AmerisourceBergen also has scaled back sharply on its secondary-market drug purchases to "one-half of 1 percent of all its billions of dollars in pharmaceuticals every year," said spokesman Mike Kilatric. In addition, he said: "Three ears ago, we put stricter restrictions in place on how you could sell to us as a distributor. So we have requirements that are tougher than any state does to register as a wholesaler."

Bottom line, said Kilpatric: "Since 2002, we've had no incidence of counterfeit drugs in the AmerisourceBergen distribution system, despite the fact that there have been several cases that have come up during that time. We've [boosted] our security systems because we feel very strongly that protecting the supply channel is an important part of what we do."

Following Spitzer's subpoena, Kilpatric said Amerisource-Bergen is cooperating with the New York governor's office and providing them materials."

Moves by Spitzer and other regulators to shed light on the secondary market for drugs are part of a broader effort among states and regulatory agencies to tighten the pharmaceutical supply chain and crack down on illegitimate or counterfeit drugs. In fact, Florida, Indiana and other states are adding or considering new laws that require pharmaceutical wholesalers and retailers to document--either by paper or an electronic trail--the pedigree of every prescription drug distributed and sold in the state.

At this point, Spitzer's investigation of secondary-market drug supplies seems to be confined to the Big Three wholesalers. Henry "Dale" Smith Jr., president and chief executive officer of HD Smith Wholesale Drug Co. in Springfield, Ill., told Drug Store News that despite the company having customers in New York state, "We have not received a subpoena to my knowledge. I think [Spitzer's] focus is on the larger companies.

"As the secondary market goes, there are certainly legitimate reasons for products to be sold other than from the manufacturer--overstocks, specials that people get from time to time, promotional allowances," said Smith.

HD Smith, like its larger counterparts, does take advantage of those opportunities, but doesn't operate a formal trading division. "We do have sales people who sell to chains," Smith explained. "A company like ours is not going to be a full-line provider to some of the large chains, but there are certain items that we will price to them more aggressively than our larger competition.

"Part of the reason for that is the pricing in the wholesale business is not even, and the same margin is not applied to all items," he added. "There are certain items within contracts that the larger wholesalers have with the chains where frankly they're making more margin than they need to be to offset losses in other areas."

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