McKesson Lawsuit Puts Drug Distributors Back Into Harsh Public Spotlight
A lawsuit alleges McKesson has violated the False Claims Act.

With a lawsuit charging McKesson Inc. (MCK) with pooling and reselling cancer medication, drug distributors have been thrust back into a spotlight of controversy.

The legal action, brought in New York federal court by Florida physicians group Omni Healthcare Inc., alleges the company violated the False Claims Act by collecting cancer medication left over from single-dose vials, repacking it under nonsterile conditions and selling to medical providers at a discount. The nonsterile conditions could have led to infections in cancer patients.

The cancer drugs included Procrit, Aloxi and other medications. The collected drugs were placed in syringes and resold, the lawsuit alleges.

The suit in the U.S. District Court for the Eastern District of New York also includes allegations that the medication was included in transactions involving federal reimbursement, which could bring the government into the action.

Omni, which alleges the repackaging took place between 2007 and 2010, brought the lawsuit on a qui tam or whistleblower basis on behalf of itself, the U.S., 31 states, the District of Columbia, Chicago and New York City against McKesson and subsidiaries including US Oncology Inc.

If the suit moved forward and the allegations were proved true, the expense for McKesson could be considerable. Each violation of the False Claims Act carries a $10,000 fine plus a penalty of three times the amount of damages to the government.

In a similar case for AmerisourceBergen Corp. (ABC) , the company decided to settle the charges and was fined $990 million but did not admit guilt.

Omni said it became aware of McKesson's alleged collection of overfill medication when one of its employees witnessed the repackaging of drugs in Texas. Supposedly, McKesson went as far as relabeling the syringes and placing phony expiration and product codes on the syringes, according to court records.

"Patient safety, compliance with the law and maintaining the trust of our customers are top priorities for us," McKesson said in a statement. "While we have not yet formally received the complaint, we reject the allegations as they've been reported and plan to vigorously defend the company in court if this case moves forward."

Earlier this year, San Francisco-based McKesson settled federal charges that it failed to follow up on suspicious drug orders in violation of the Controlled Substances Act. The company paid a $150 million fine in January and came out swinging against both TV news program "60 Minutes" as well as The Washington Post, which broke the story. McKesson said it was the victim of inaccurate reporting by the media outlets, which alleged the Drug Enforcement Agency felt there was enough evidence to charge the company criminally but the Department of Justice was talked out of it by lawyers for the company.

McKesson isn't alone in the harsh glare of the spotlight, Cardinal Health Inc. (CAH) and AmerisourceBergen have challenges as well. Both those companies are named in a massive lawsuit in Cleveland over the opioid crisis brought by hundreds of plaintiffs including states, counties, Native American tribes and cities from across the country. The lawsuit, which joined hundreds of other actions, includes opioid drugmakers such as Purdue Pharma LP, Janssen Pharmaceuticals Inc. and Allergan plc (AGN) as well as McKesson.

The controversies haven't devastated the share prices of the drug distributors, though. Cardinal Health's shares were trading at $63.43 on Monday, April 9, about $9 above its 52-week low, but $19 below the high for the last year. Amerisource was trading at $87.42, $15 off its low but $19 away from its high share price. McKesson hit $141.58 on Monday, nearly $8 over its 52-week low but $37 off its high share price.

Allergan is a holding in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer and the AAP team buy or sell AGN? Learn more now.

More from Stocks

Tech Stocks Have You Baffled? Educate Yourself in Some Portfolio Diversification

Tech Stocks Have You Baffled? Educate Yourself in Some Portfolio Diversification

Alphabet Shares Rise on Earnings, Revenue Beat But Some Concerns Remain

Alphabet Shares Rise on Earnings, Revenue Beat But Some Concerns Remain

Semiconductor Stocks Get Smashed Again as Earnings Weakness Continues
Dow and Nasdaq Finish Lower as 10-Year Treasury Yield Hovers Near 3%

Dow and Nasdaq Finish Lower as 10-Year Treasury Yield Hovers Near 3%

Video: Jim Cramer on Trade Tariffs, Rising Rates, Kimberly Clark and Hasbro

Video: Jim Cramer on Trade Tariffs, Rising Rates, Kimberly Clark and Hasbro