Melissa Davis

Return to Article

AmerisourceBergen Dims Gray Market for Drugs

Melissa Davis

AmerisourceBergen has taken a step toward ensuring that counterfeit drugs never wind up in its system again.

The company announced last week that beginning in October, it will buy all of the drugs it supplies in the U.S. directly from the manufacturers. The company previously purchased a small fraction of those drugs from other sources with exposure to the shady so-called gray market.

Still, some industry critics spotted a possible loophole in the company's new policy.

"They're saying we can still buy cheap drugs from Joe Blow wholesaler in Florida when we're exporting the medication to foreign markets," said Katherine Eban, author of Dangerous Doses: How Counterfeiters Are Contaminating America's Drug Supply. "Then somehow -- it happens every day -- those drugs never reach the foreign market and, through various schemes, the medications get resold for top dollar in the U.S. instead."

But AmerisourceBergen argues that no such loophole exists. The company says that it will, in fact, purchase all of its drugs directly from the manufacturer -- regardless of where those drugs are headed -- with one exception. If the manufacturer requires it to do so, it will buy the drugs from exclusive distributors instead.

"These would tend to be rather small manufacturers that basically outsource the distribution of their products to usually one or maybe two distributors," explains spokeswoman Barbara Brungess.

Even before last week's announcement, AmerisourceBergen insisted that it purchases "less than one-half of 1%" of its drugs -- and no high-risk medications -- from sellers other than manufacturers. By changing its policy, the company said it is simply taking another step to ensure customer safety and "strengthen the integrity" of the nation's entire pharmaceutical supply chain.

AmerisourceBergen laid out its new plans a full three years after the company allegedly supplied counterfeit drugs to Tim Fagan, a young liver transplant patient who was lucky to survive the ordeal. The Fagans went on to sue the company in a case that, for the first time ever, could hold a drug distributor liable for selling counterfeit drugs. Meanwhile, New York Congressman Steve Israel has introduced "Tim Fagan's Law" in an attempt to crack down on drug counterfeiters and those who wind up with their supplies.

Eric Turkewitz, the attorney representing Fagan, believes that AmerisourceBergen had plenty of reasons to change its ways long ago.

"Why have they been buying mystery medicine all these years?" he asked. "It should have been obvious that what they were doing was exceedingly dangerous."

Shares of AmerisourceBergen slipped 32 cents to $76.82 Tuesday.

First Step

A big AmerisourceBergen competitor, Cardinal Health (CAH - Cramer's Take - Stockpickr), publicly distanced itself from the secondary market first.

Back in May, just days before Israel introduced his new legislation, Cardinal announced plans to officially close its secondary trading division. However, Eban saw a loophole there as well.

"What that means is that they've closed one of their back doors -- the back door that's marked 'back door,'" Eban told TheStreet.com this summer. "But there are other, unmarked back doors that are still open."

Still, the nation's other giant drug distributor has yet to announce any policy changes at all. Contacted Friday by TheStreet.com, McKesson (MCK - Cramer's Take - Stockpickr) said it plans to stick by its practice of buying more than 99.8% of its drugs directly from manufacturers and relying on authorized distributors for the rest.

However, Eban believes that McKesson will now face intense pressure to change its practices as well. Israel hinted at the same.

"Either the industry will police itself -- and, so far, two of the three large wholesalers have decided to do that -- or Congress will pass legislation that protects Americans from counterfeit drugs," Israel told TheStreet.com on Friday. But "I think the more the big wholesalers realize how much of a mess the secondary market is, the more they want to clean it up by getting out."

No Pain

They expect no financial pain, either.

Both Cardinal and AmerisourceBergen have indicated that their policy changes should not materially affect their results going forward. In fact, AmerisourceBergen barely even caught Wall Street's attention with its news.

Baird analyst Eric Coldwell did publish a brief note on the development last week. He suggested that market forces, rather than government pressure, caused AmerisourceBergen to act. He also said the move could have been somewhat overdue.

Meanwhile, Merrill Lynch analyst Thomas Gallucci simply mentioned the change in the equivalent of a footnote tacked on to a discussion of looming Medicare reforms. He expressed caution about AmerisourceBergen because of its institutional pharmacy business -- which faces major reimbursement changes -- instead of any backlash from leaving the secondary drug market behind.

"ABC has already limited its secondary market activity," explained Gallucci, who has a neutral rating on the stock. "As a result, the financial impact is not material at this point."

Eban sees some hope.

"Now you have two out of three major wholesalers making, if nothing else, a gesture in the right direction," she said. "At face value, the noises being made are the right ones."