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Nevada Law Aims to Halt Drug Diversion by Wholesalers

Donna Young

In an attempt to halt the diversion of prescription drugs, Nevada has adopted a new law that limits retail drug wholesalers to selling no more than 10% of their prescription drug purchases to other wholesalers.

Louis Ling, attorney for the Nevada State Board of Pharmacy, said the new law would help "weed out" fraudulent drug wholesale businesses.

"Closed-door" pharmacies. Some secondary wholesalers, known as "closed-door pharmacies," buy drugs through intermediary purchasing groups at greatly reduced prices under the auspices that the drugs are intended for nursing homes, Ling said. But, these so-called closed-door pharmacies re-sell the drugs to other wholesalers at a profit, he said.

"In most closed-door operations, the drugs never actually leave the delivery truck," Ling said. "When the truck pulls up, someone is there to slap the labels on to send the shipment to the next wholesaler. These drugs go all over the country, and we never know for sure if they have been properly stored or handled. With the secondary wholesaler system, there is no way to assure the public that the drugs were treated well."

Ling said many "bogus" drug wholesalers operate by using a "straw man" owner so that the identity of the company’s true ownership is hidden from state investigators and licensing boards.

"The person who has put their name on the license usually just shows up to work for a few hours and then takes a paycheck, while the real owner, who is making the deals from his fax machine at home, is hidden away in his gated compound," Ling said. "I’ve seen people put their daughters, sons, and anyone out there so we don’t know who is behind the money.

"Very often it’s because the actual owner of the business is a convicted felon or the person has been in the business before and had their license revoked or has had other problems that they don’t want us to know about. One company’s front person was a city manager from Montana who didn’t know the first thing about retail pharmaceuticals. And we even had a machinist who tried to get a license as a drug wholesaler once."

The new law. Ling said that, as part of Nevada’s new law, people seeking to obtain or renew a license must pass a written exam and prove that they have at least 6000 hours of experience working in the drug wholesaling industry.

The exam, which will include questions about the federal Prescription Drug Marketing Act (PDMA), must be taken in person at the state board of pharmacy’s Reno office, Ling said.

"This way, we can make sure that anyone who is handling the drug supply in our state knows what he or she is doing," he said.

Path of a drug product. Ling said closed-door operations are easy to spot because they generally list on their license applications only nursing homes as clients. But, he adds, a "loophole" in PDMA makes it possible for secondary wholesalers to run such operations and "impossible to trace" the sales history of drugs.

Secondary wholesalers generally buy prescription drug products from other wholesalers.

Ling said he presented to the state board of pharmacy in October an illustration that charts the sales path of a drug product sold by a manufacturerr. The chart shows that the drug could change hands among several wholesalers before reaching a pharmacy where it is sold to the public.

"The federal government allows for this to happen, and it makes it hard for us to know just how well traveled that drug could be," Ling said.

PDMA—the federal law designed to help stop counterfeit, adulterated, misbranded, and expired drugs from entering the marketplace—took effect in 1988. But a provision that requires secondary wholesalers to maintain and pass on a pedigree—a complete history that identifies each prior sale, purchase, and trade of a prescription drug—does not officially become effective until April. Secondary wholesalers have been operating under an FDA guidance letter since 1988.

Primary wholesalers—McKesson Corp., Bergen Brunswig Drug Co., Cardinal Health Inc., AmeriSource Corp., and Bindley Western Drug Co. (a wholly-owned subsidiary of Cardinal Health)—are not required to keep the pedigree.

According to FDA, many drugs move through the supply chain without pedigrees or with incomplete ones.

Problems with the federal approach. Ling said that the federal pedigree requirement is a good idea but "only works if people are honest. In the hands of crooks, it is used as a way to defraud people."

And, he added, because primary wholesalers do not have to provide the pedigree to secondary wholesalers, a drug product’s "first sale can never be traced."

Ling said "this gap in the system" allows counterfeit drugs to enter the market.

Last spring, Dutchess Business Services Inc., a Las Vegas-based secondary wholesaler, initiated a recall of counterfeit somatropin that had been purchased by the company, Ling said.

Bergin Brunswig and several secondary wholesalers had also bought the counterfeit drug, according to a June 2001 enforcement report from the FDA.

"Rather than rely on the pedigree that is not terribly useful at solving the problem, we need to put a stop to the secondary wholesaler market altogether. It’s a market that does not need to exist, and it is putting the public in danger," Ling said.

State investigations. In Nevada, Ling said, wholesalers are required to keep their records of drug sales on company premises at all times. But, he noted, state inspectors have found that some secondary wholesalers operate out of small offices with generally one employee where no records can be found on the premises.

In one such case, Nevada’s board of pharmacy took action in April 2001 against Dalfens Inc., a retail drug wholesaler based in Douglas County.

Dalfens’s owners, Gary and Kelly Dahlberg, received a license from the Nevada board of pharmacy in 1998 to operate a wholesale business to handle "legend pharmaceuticals, supplies or devices and over-the-counter health and beauty aids," according to pharmacy board documents.

During a May 2000 inspection of Dalfens, a Nevada inspector found no records on the company’s premises related to the purchase or sale of prescription drugs.

The inspector testified at an April 2001 board of pharmacy hearing that the Dalfens employee who was present during the inspection "did not know how to access the computer."

After the inspection, the board of pharmacy filed a subpoena seeking Dalfens’s prescription drug sales records.

An attorney for Dalfens responded with a letter stating that the company "does not sell drugs," according to hearing documents.

But the state obtained records from Merit Distributors, a Nevada-licensed wholesaler, showing that, from December 5, 1998, through May 25, 2000, there were 11 separate sales transactions of prescription drugs conducted between Merit and Dalfens. Merit had purchased and received drugs from Dalfens totaling over $1.8 million, according to the hearing documents.

In addition, the board of pharmacy obtained records from IPD Inc., a Nevada-licensed wholesaler, that showed the company had purchased and received over $33 million of prescription drugs from Dalfens.

The board of pharmacy fined Dalfens $1 million plus $6769 for investigation and prosecution fees.

Ling said Dalfens responded by seeking protection from the order through a district judge.

"They claimed that to turn over their records would be giving up a trade secret," Ling said.

At press time, the district judge had not yet ruled on the case.

Effects of drug diversion. Ling said the diversion of prescription drugs adds to the problems of drug product shortages and increased drug prices.

Ling said he presented evidence to the board of pharmacy last October that shows several Internet-based prescription wholesalers have sold the influenza vaccine for $99–$149 per 10-dose vial.

"That is two to three times the normal price of what the [Centers for Disease Control and Prevention] said it should be," he said.

Donna Soflin, pharmacy director for Tri-County Hospital in Lexington, Nebraska, and the chair of the state board of pharmacy, said she has had some concerns about the secondary wholesale market and its impact on drug shortages.

Soflin led a roundtable discussion on drug shortages at the ASHP Midyear Clinical Meeting in December 2001.

"It has always been my philosophy to avoid using [secondary wholesalers]," she said.

Soflin said she applauds Nevada’s new law and hopes that other states will initiate similar regulations.

Carmen Catizone, executive director for the National Association of Boards of Pharmacy (NABP), said that if Nevada’s law is successful, his organization will encourage other states to adopt it.

Catizone said NABP appointed a task force to examine diversion practices in the prescription drug market.

"It is difficult to curb," he said.

Ling said that, at a Nevada board of pharmacy hearing in October, several secondary wholesalers protested the state’s move to limit sales of prescription drugs from one wholesaler to another to no more than 10% of total sales.

"They tried to argue that their industry helps to reduce prices," Ling said. "There is no way that they are making things cheaper or that they make the system more efficient. We asked them what good, what benefit, they are to the prescription drug system. And the only conclusion is that the system makes them rich."