Gray Clouds Imperil Drug Firms

Kevin Fagan had never heard of AmerisourceBergen (ABC Quote - Cramer on ABC - Stock Picks) -- let alone seen the company's escalating stock chart -- when he said his teenage son received counterfeit medicine supplied by the giant drug distributor.

Fagan's introduction to the mysterious world of drug middlemen would come two months later. Fagan first had to watch his son suffer through agonizing spasms after taking medicine bought at a local CVS (CVS Quote - Cramer on CVS - Stock Picks) pharmacy that was supposed to help him recover from a life-saving liver transplant. He felt stunned when he finally learned that his son's medication, obtained by AmerisourceBergen after passing through the shady gray market, was a low-dose fake at best.

Three years later, Fagan is still waiting for AmerisourceBergen to explain how the company wound up with what he calls tainted drugs -- and to offer some reassurance that it won't happen again.

"It's just mind-boggling," he says. "It seems like their established way of doing business. ... And, incredibly, the only person who has had to pay a price is my son."

If so, that situation could change. Fagan has sued AmerisourceBergen in a ground-breaking case that seeks damages from a big wholesaler for supplying counterfeit drugs to the public. Amerisource denies it acted improperly and says it will defend itself vigorously. But New York Attorney General Eliot Spitzer this spring subpoenaed the so-called Big Three wholesalers -- AmerisourceBergen, Cardinal Health (CAH Quote - Cramer on CAH - Stock Picks) and McKesson (MCK Quote - Cramer on MCK - Stock Picks) -- about their involvement in the gray market. In addition, Fagan's son has become the poster child for a new bill in Congress designed to crack down on counterfeiters and those who do business with them.

To be fair, the Big Three buy the vast majority of their drugs directly from manufacturers and purchase only a tiny fraction from secondary suppliers dealing in the loosely policed gray market. Moreover, all three claim they now buy even fewer drugs on the secondary market than they once did.

AmerisourceBergen, for example, says that it purchases "less than one-half of 1%" of its drugs -- and no high-risk medications -- from sellers other than manufacturers. In addition, the company says that it has strict guidelines in place for the authorized distributors it does use and, by now, has gone a full three years without counterfeit drugs entering its system.