FDA Fails to Protect Domestic Drug SupplyAugust 2005
By William Faloon
If you take the information on the FDA’s website at face value, you would be convinced that the FDA has guaranteed the safety of our drug supply—as long as you do not import any prescription drugs from outside the United States.
According to the FDA’s website, medications not approved for sale in the US may not have been manufactured under this nation’s rigid quality assurance procedures that ensure a safe, effective product. These imported drugs may not have been evaluated for safety and effectiveness in the US, and thus might be addictive or even contain dangerous substances. Moreover, according to the FDA’s website, some imported medications—even those bearing the name of a US- approved product—may be counterfeit versions that are unsafe or even completely ineffective. The FDA suggests that you need not worry about these dangers if you buy drugs from domestic pharmacies.1
Joe McCallion, a consumer safety officer in the FDA’s Office of Regulatory Affairs, sums it up this way: “If you buy drugs that come from outside the US, the FDA doesn’t know what you’re getting, which means safety can’t be assured.”1
On the other hand, the FDA website notes that drugs sold in the US must be made in accordance with good manufacturing practices, and all products must have proper labeling that conforms to FDA requirements. As part of the FDA’s “high” standards, drugs can be manufactured only at plants registered with the agency, and manufacturers are subject to ongoing FDA inspections. Along with these legal requirements, US pharmacists and wholesalers must be licensed or authorized in the states where they operate.1 These safeguards in the process of getting drugs onto US pharmacy shelves ensure that the products you buy are safe and effective.
It is a great argument, designed to assure us that the FDA has things well under control. If only it were true.
The Real Story
In fact, the drugs you buy pass through a network of wholesalers operating under lax state supervision and virtually no FDA supervision. You probably assume the drug manufacturers ship their products directly to pharmacies, maintaining strict control all along the way. Not so. Big pharmaceutical companies use middlemen that buy, sell, sort, repackage, and distribute 98% of the nation’s medicine. These middlemen, numbering about 6,500 in all, range from publicly traded giants with pristine warehouses to small, obscure, backroom operators. While the three largest companies control 90% of this market, below them are some 15 regional wholesalers, and below them are scores of smaller secondary wholesalers.
All of these middlemen, regardless of size, aim to buy medicine as cheaply as possible and resell it for a profit, a system of arbitrage made possible by widely varying drug prices. Drug companies offer an array of targeted discounts that result in their selling the exact same drug for any number of prices.
These varying prices often spark frenetic trading among the wholesalers. The “Big Three” distributors have trading divisions that scout the secondary wholesale market for discounted medicine, and they have been known to boast how much they saved by purchasing heavily discounted medicine from obscure wholesalers. The secondary wholesalers contend that this aggressive trading helps reduce drug prices for mom-and-pop pharmacies and local hospitals that lack the buying power of the big chains.
However, the bargains also drive a parallel and illegal process called diversion, in which some middlemen resort to fraud or misrepresentation to obtain discounted medicine. Corrupt wholesalers often solicit “closed-door” pharmacies (those that supposedly buy only for themselves) and others that qualify for discounts to buy more medicine than they need and sell the rest out the back door for kickbacks. In 2000, the National Association of Boards of Pharmacy estimated that up to four-fifths of the closed-door pharmacies that received discounted medicine illegally resold at least a portion of it to outside buyers.
In her new book, Dangerous Doses: How Counterfeiters Are Contaminating America’s Drug Supply, investigative medical reporter Katherine Eban details the results of a two-year exploration of America’s secret ring of drug counterfeiters, following the trail of medicine as it winds its way from a seemingly minor break-in to a sprawling national network of drug polluters. She follows the progress of a team of Florida criminal investigators as they uncover sickening examples of stolen medicine that is resold as the genuine article without any of the safeguards we assume exist for prescription drugs.2
While the FDA has an Office of Criminal Investigations, the agency does not aggressively pursue these matters. The wholesalers profiled in Dangerous Doses use this confusion to their advantage. They have state licenses, lawyers, accountants, and all the trappings of legitimacy. Their goal is to buy low, sell high, and make money. But they have little incentive to maintain drugs in pristine condition.2
Three years ago in Florida, it was laughably easy to become a pharmaceutical wholesaler. All you needed was a refrigerator, an air conditioner, an alarm to secure your products, $200 for a security bond, and $700 for a license. No experience or particular knowledge was required. You had to certify that you had no criminal record, but the state’s pharmaceutical bureau did not actually check for a criminal background. Through this loophole slipped all sorts of unsavory characters: former cocaine dealers looking for good money with less chance of jail time, real estate hucksters, and others. Once established, a pharmaceutical wholesaler had little reason to worry about FDA inspections. State authorities alone regulated your business. And each inspector had some 300 companies to look after.2
With this regulatory framework, Florida’s pharmaceutical wholesale companies proliferated like rabbits, far beyond any need for them. By 2002, Florida had licensed 1,399 wholesalers, one for every three pharmacies in the state. The vast majority of these companies were based out of state, though some actually were Florida operations. The wholesalers set up “corporate headquarters” by rerouting their calls and faxes to make it appear that they had offices everywhere.2
Not surprisingly, criminal elements were drawn to this regulatory vacuum like moths to a flame. The state investigation began when a two-bit burglar stole cancer medicine from an unlocked refrigerator at Jackson Memorial Hospital in Miami. Caught in the act, he cooperated with police in return for leniency, agreeing to carry a hidden microphone while he sold his stolen goods. The woman who bought the drug, a licensed wholesaler, threw it in the hot trunk of her car while she did errands, destroying the potency of this delicate medicine without any obvious indication of damage. According to the investigators, this adulteration happens frequently, with the end-user of the drug being the hapless victim. Arrested later that day, she also agreed to cooperate, and in time the state investigators worked their way to the kingpins of the trade, who were making millions from this illicit activity.2
One of these men was Michael Carlow, who pocketed $2.5 million in a single eight-month period. Duffel bags delivered to his house were filled with pill bottles, medicine vials, and bags of blood derivatives, all culled from different sources and some still bearing the labels of the patients to whom they had been dispensed.2
His conspirators maintained the flow of discounted inventory by buying anti-cancer and anti-AIDS drugs from patients treated at health clinics in Miami’s slums. Some of those infected with HIV/AIDS were crack addicts who preferred getting high to getting well. Carlow’s associates waited for them outside the clinics and swayed them to sell their Medicaid-supplied medicine (including growth hormone that retails for more than $1,000) for a few $20 bills.2
Carlow sold the medicine through his licensed wholesale businesses, using a variety of aliases to make them appear to be independently owned. The buyers of his goods would sometimes meet Carlow or an assistant at a gas station to exchange medicine for checks or cash. At Carlow’s office, the state investigators found nail polish remover, lighter fluid, and paint remover cluttering the worktables and desks. The employees apparently used these products to remove patient dispensing labels and any other evidence of a product’s origin. However, Carlow did not stop at selling to small, obscure companies. He developed a lucrative relationship with one of the Big Three distributors. In 2000, Carlow sold almost $2 million in contaminated or even counterfeit products to National Specialty Services, a Big Three division that at the time was the nation’s largest supplier of blood products, cancer drugs, and other specialty pharmaceuticals to hospitals.2
Carlow was not the only kingpin to be trapped in the state investigators’ dragnet. In January 2002, thieves stole 344 vials of specialty blood products from a refrigerator in the warehouse of BioMed Plus, one of the nation’s largest wholesale distributors of these drugs. These products, worth $335,000 wholesale, were destined for patients with compromised immune systems, hemophilia, and other rare disorders. Incredibly, the owner of BioMed Plus received a call a few days later from a wholesaler who offered to let him buy back a list of products identical to his list of stolen goods for a discounted price of $229,241. This medicine is rare and is almost never traded freely, so BioMed’s owner knew the goods were his. He cooperated with investigators to retrieve the stolen drugs, but had to destroy the medicine because he could not guarantee that it had been properly stored during the heist.2
The state investigators also discovered a filthy Miami warehouse filled with $15 million worth of counterfeit, diverted, and illegally re-imported medicine, as well as pill-making machines and 2 million tablets of counterfeit Lipitor®.
By the end of 2004, the state investigators had arrested 55 suspects—more than 30 of them on racketeering charges—and seized $33 million in bad medicine and almost $3 million in cash. Sixteen suspects agreed to cooperate, most pleading guilty to an array of charges. As a result of these state and local investigations, the Florida Legislature tightened its regulation of wholesalers, reducing their numbers by 50% (still one for every six pharmacies). Statewide Medicaid costs plunged for certain categories of drugs that had been overprescribed, billed to Medicaid, diverted to clinics, and prescribed again.2
Throughout the entire investigation, the FDA did nothing to help track down and bring these criminals to justice.