Settlement could lead to new obligations and restrictions on pharma distribution

While Eliot Spitzer, the aggressive attorney general of New York State, is busy ascending to his newly won position as state governor, his office has negotiated a settlement with Cardinal Health over wholesaling trading practices that occurred during the 2001-05 period. As part of the settlement—without “admitting or denying the findings,” as Cardinal’s statement reads—the company will pay $11 million to the state and a local nonprofit healthcare research organization, and has agreed to adhere to “Wholesaler Safe Product Practices” that the state office has written.

When the state Office of Attorney General (OAG) opened the investigation in April 2005, McKesson and AmerisourceBergen reported that they were also targeted. The OAG settlement notes that these investigations are “continuing.”

Among the findings, OAG asserts that the past practices of “unfettered secondary-market trading . . . contribute[ed] to . . . providing opportunities for counterfeiters and price-diverters to introduce counterfeit, adulterated, mishandled, mislabeled, unreliable or price-diverted prescription pharmaceuticals into the mainstream distribution network.” Further, Cardinal had “repeatedly sold pharmaceuticals to customers that it knew or should have known were diverting pharmaceuticals,” and that it “purchased from sources despite indications that the vendors may have been unsuitable.” Under a state Executive Law, which prohibits businesses from “engaging in repeated fraudulent or illegal acts . . . misrepresentation . . . or unconscionable contractural provisions,” OAG asserts that this conduct is “actionable.”

This legal line of reasoning seems to set a much higher standard of practice than federal rules under the Prescription Drug Marketing Act (PDMA), and the pedigree rules that are now being adopted. OAG notes that Cardinal has subsequently revised its trading practices, including stopping the purchase of product in the secondary market, and has set up a screening process that has already launched 65 internal investigations of its trading partners, and has closed over 30 accounts “for suspected diversion.”

The other notable part of the settlement is Cardinal’s agreeing to comply with a “Wholesaler Safe Product Practices” guideline that OAG has written. Among other things, the guideline requires Cardinal to:

• Purchase only from the manufacturer directly, or from an authorized distributor (AD) of that manufacturer that has “adopted these Wholesaler Safe Product Practices”
• Sell product only to a “final dispenser” defined as pharmacies, hospitals and other authorized prescribers. “An entity is not a Final Dispenser if its business includes the sale of prescription pharmaceuticals to wholesalers,” reads the guideline. However, Cardinal can sell to wholesalers who themselves have adopted the guidelines, and have had their operations certified for compliance annually.
• Institute compliance measures that will, among other things, prevent the purchase or sale of product “that will be sold more than three times in the supply chain from the manufacturer to the Final Dispenser.”
• Institute compliance with PDMA, and the HDMA Recommended Guidelines for Pharmaceutical Distribution Integrity (issued in November 2003), with the addition of the annual vendor inspections.

This settlement can only apply to transactions within New York State—and only to Cardinal itself and its trading partners. But it clearly throws additional restrictions on that could add cost and complexity to on pharmaceutical distribution in the state, and acts as something of an end-run around state legislative efforts (currently at “proposed” status) for pedigree and pharmaceutical distribution rules. It will be interesting to see whether McKesson and AmerisourceBergen agree to the same terms.