State Reaches Agreement With Cardinal On Drug Trading Issues

Attorney General Spitzer today announced an agreement with Cardinal Health Inc. (Cardinal) to improve the safety and security of practices in the trading of prescription pharmaceuticals among wholesalers.

An investigation by the Attorney General's Office into the trading of pharmaceuticals on the "secondary market" determined that certain trading practices by wholesalers had the potential to compromise the security and safety of the national drug distribution system.

Cardinal -- based in Dublin, Ohio and ranked 19th on the Fortune 500 list of America's largest corporations -- is one of the three primary distributors of prescription drugs in the nation. Cardinal has cooperated with the Attorney General's Office throughout the investigation and unilaterally adopted certain reforms prior to and in the course of the Attorney General's investigation.

In today's settlement, Cardinal has agreed to adopt a set of Wholesaler Safe Product Practices that establish a new standard for the safe trading of pharmaceuticals and point the way forward for an industry that is vital to the health of Americans.

The investigation, which began in 2005 and is continuing with regard to other wholesalers, concerns trading practices in the secondary market for prescription pharmaceuticals. That is the market in which wholesalers trade drugs among themselves, after the drugs are sold by the manufacturer but before they are purchased by a pharmacy, hospital, or other end user. The wholesalers who sell drugs to other wholesalers are called alternate source vendors.

Secondary market trading is not illegal on its face, but can create opportunities for the introduction of unreliable drugs, including counterfeits, into the marketplace. In recent years, there has been an increase in the number of cases of counterfeit drugs in the American supply chain. Secondary market trading also can create an opportunity for companies to divert drugs from their intended distribution channels. Diversion into the secondary market, often to take improper advantage of manufacturer discounts, can begin a series of trades from wholesaler to wholesaler that makes it difficult to trace the origin of a drug and impossible to ascertain its authenticity.

The investigation determined that Cardinal purchased drugs from certain alternate source vendors, despite risks associated with buying from those vendors, to take advantage of higher available profit margins. Cardinal also sold pharmaceuticals to certain customers even in the face of evidence that those customers may have been illegally diverting the drugs outside their intended channels of distribution.

Under the terms of today's settlement, Cardinal will adopt an innovative set of Wholesaler Safe Product Practices, and has agreed that it will not sell pharmaceuticals to another wholesaler unless that wholesaler also adopts that same set of practices. The Wholesaler Safe Product Practices are designed to ensure that a drug may not pass through the hands of more than two wholesalers after the manufacturer sells it and before it is bought by a pharmacy or other end user.
In addition to adopting the Wholesaler Safe Product Practices, Cardinal has agreed that in the regular course of its business it will:

  • Buy pharmaceuticals directly from manufacturers and not on the secondary market from alternate source vendors;
  • Sell pharmaceuticals only to wholesalers who have certified their compliance with the Wholesaler Safe Product Practices, and have agreed to allow audits of those certifications;
  • Adopt "know your customer" provisions and monitor for customer diversion; and
    Hire an external auditor to conduct periodic reviews of its compliance with the settlement.

Cardinal will also pay $7 million to Health Research Inc., a New York not-for-profit corporation affiliated with the New York State Department of Health and the Roswell Park Cancer Institute, and an additional $3 million to the state of New York.

Today's agreement with Cardinal is the first settlement in the continuing investigation by the Attorney General's Office into improper secondary market trading of pharmaceuticals.

The investigation was conducted by Assistant Deputy Attorney General Steve Krantz of the Medicaid Fraud Control Unit and Assistant Attorney General John Powell of the Health Care Bureau under the supervision of Assistant Attorney General Joseph Baker and Deputy Attorneys General William Comiskey and Peter Pope.

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