News Update: August 2007

I’m going to take a break from blogging until after Labor Day. In the meantime, here are a few stories that you may have missed this month. Don't worry -- I’ll be back in September!

1) Pharmacy fights back
The Average Manufacturer Price (AMP) war has now moved to Congress, where multiple bills benefiting retail pharmacy have been introduced. Here are the major bills and their key provisions, which I’ll discuss further in upcoming posts:

• S.1951: Fair Medicaid Drug Payment Act of 2007 – This bill changes the AMP formula and redefines retail class of trade, among other things.


• S.1954: Pharmacy Access Improvement Act of 2007 – Many items are stuffed into this bill, including prompt payment requirements for drug plans and limits on Part D co-branding.


• H.R. 3140: Saving Our Community Pharmacies Act of 2007 – This bill would replace AMP with a survey-based metric called “Retail Acquisition Cost.”

BTW, you will not be surprised to find that emails from pharmacists about Heretical Questions about the AMP War have been generally negative. Oh well. I still maintain that an ounce of data is worth a pound of opinions.

2) Drug Imports: Coming Soon?
In early August, I speculated that drug importation may be inevitable within the next few years. The lawyers over at Hyman, Phelps & McNamara provide a useful legal analysis of HR 3161, the Agriculture bill that included controversial drug importation language. Check out House Passes FDA Appropriations Bill With Drug Importation Provision, which concludes that “…the House and Senate are headed for a showdown over the issue as a part of FDA appropriations legislation.”

3) Cracking the Top 100
Drug Channels is now #69 on the Healthcare 100 list of top blogs on health and medicine. (There are actually 390 blogs on the list, so it's a good page to bookmark.) Thanks for helping to make Drug Channels such a success!

I also want to give a special shout-out to Al Godley of Edge Dynamics, who was named to the PharmaVOICE 100 list of industry influencers. Congratulations on this well-deserved recognition, Al!

4) Phun Phact about Philly
Your friendly neighborhood pharmacy supply chain blogger is proud to live in the second "bloggiest" city in the US. Who knew?

Diversion from Canada via China

Bloomberg has a great story today in which Johnson & Johnson talks publicly about how they disrupted a counterfeit diabetes test supplier. See China Counterfeit Diabetes Tests Tracked by J&J. Unfortunately, the story once again shows the dangerous connection between diversion and counterfeiting.

The article makes for a gripping read. Following customer complaints, detectives followed the bogus products to 700 pharmacies where the products were sold, then to eight U.S. wholesalers, and then to two importers, one in the U.S. and another in Canada.

Here’s the rub: the defendant wholesalers apparently believed the counterfeit strips were lower-priced gray market products diverted from normal distribution channels.

So, we (re)learn the lesson that diversion is the primary way for counterfeit products to enter legitimate channels. That’s why allowing importation will open up new gateways for counterfeits. I just wish that Senator’s Dorgan and Snowe would try to understand the dangers!

Unfortunately, there’s still a fatal flaw in J&J’s distribution channel. One LifeScan executive is quoted as saying: “We recommend customers obtain their diabetes testing supplies from reputable sources to reduce their risk of receiving counterfeit product in the future.”

Sounds sensible, but a “recommendation” is much too weak. Why doesn’t LifeScan require all pharmacy customers to purchase only from authorized distributors and then require authorized distributors to only buy directly from the manufacturer? That's the situation for prescription drugs, where Inventory Management Agreements (IMAs) and Fee-for-Service agreements have limited product leakage into the grey market and closed a significant entry point for counterfeiters.

And I pointed out yesterday, there is still no way for the ultimate consumer/patient of these diabetic tests to know whether their pharmacy or its wholesaler got the product from a legitimate source. Very few people are willing to discuss this truly scary part of product security.

Hat tip to Pharmalot for highlighting this story.

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P.S. Given the quality problems of Chinese goods, many people seem eager to throw out overseas sourcing for political reasons. Not me. I am simply arguing against diversion, not against Chinese sourcing. See The Risks of Chinese Sourcing on my Distribution Trends blog for more details.

Lessons from Nigeria

Did you ever pick up a prescription and wonder if your pharmacy received a valid pedigree, imported drugs from outside the country, or dispensed an outright counterfeit to you? You and I have no way to know if our pharmacy is behaving ethically, even in a world of self-authenticating e-pedigree.

Well, just be glad you don’t live in Nigeria. Dora Akunyili, the head of Nigeria’s National Agency for Food, Drug Administration and Control (NAFDAC), estimated that 41% (!) of drugs in her country were fake or sub-standard in 2001. Today, the national average is down to a still-troubling 15%. (See Officials boost fight against counterfeit drugs for more background.)

In response, Pfizer (PFE) has just launched an intriguing pharmacy-level anti-counterfeiting initiative in Nigeria. As described in Pfizer Launches Friendly Pharmacy Initiative, the program provides disease awareness materials, training, and testing materials to pharmacists. But most interesting to me is the fact that the Pfizer-Friendly designation will signal the availability of genuine Pfizer products.

Pfizer’s Marketing Director made the connection to counterfeits directly, saying: “We want to have strong allies who will say no to clones, no to parallel imports, no to fakes or counterfeits. We want to create strong and effective disease awareness amongst our colleagues in Pharmacy practice and the patients down the streets in a language they understand.”

Naturally, any potential problems with counterfeit drugs in the U.S. pale in comparison with the Nigerian situation. Yet the Nigerian program makes me wonder:

How could drug makers partner with dispensing pharmacies in the U.S. to help consumers identify and validate legitimate pharmacies that practice “safe sourcing?”

What do you think? Which elements, if any, of the Nigerian program can be adapted to the U.S.?

Investment Buying: Not Dead Yet

Many inventory management agreements and fee-for-service agreements between manufacturers and wholesalers will be renegotiated over the next 24 months. So it’s interesting to note that investment buying remains an important source of drug wholesaler profits. (Click here for a little musical accompaniment to today's post.)

Peter Loftus from Dow Jones wrote a must-read article Wholesalers' Speculative Buying Still Unsettles Drug Sales to follow-up on the Pfizer (PFE) and Wyeth (WYE) inventory issues described in Harry Potter and the Wholesaler Inventory.

Here’s a key quote from the article:

Cardinal Health still practices what it calls "investment buying" with certain manufacturers, said spokeswoman Tara Schumacher. The company doesn't comment on specific customers or products. Also, it has "hybrid" relationships with some drug makers, engaging in speculative buying for some products and fee-for-service on others. "From the beginning, we knew we wouldn't have a 100% shift," Schumacher said. "That was never the intent. We wanted to ensure we were negotiating fair prices for each customer. We're comfortable with the economics of some of the contracts not being fee-based."

Translation: Investment buying is still around, just less prevalent and less visible. In some cases, investment buying appears to have shifted away from wholesalers to other points in the pharmacy supply chain.

I must give credit to Cardinal Health (CAH) for discussing this “open secret.” The adoption of inventory management and fee-for-service agreements has dramatically reduced (but not eliminated) drug wholesalers’ dependence on investment buying and price inflation. I estimate that inventory profits (investment buying + passive gains) are now less than one-third of wholesaler gross margins from large branded manufacturers.

If you don’t believe Cardinal, check out AmerisourceBergen’s (ABC) July 26 earnings announcement, in which they noted that “…operating income benefited from an above market sales increase in our proprietary generic drug program which offset in part the impact of fewer drug price increases in the June quarter.” (emphasis added)

The Wall Street Journal's Health Blog is more pejorative about these activities, writing Drug Wholesalers Back at Betting Window. That’s not really fair. Investment buying is nothing more than a means by which manufacturers can compensate wholesalers for the legitimate costs of distributing drugs. Unfortunately, there can be excesses in this system (summarized in the third paragraph of my 2005 article).

At least two senior wholesaler executives hate when I write about this topic. But facts don't cease to exist because they are ignored.

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P.S. Check out the new Health Wonk Review, edited by Julie Ferguson at Workers' Comp Insider.

John Edwards and ... Pedigree?

It's official! E-pedigree has now become a campaign issue as we enter the final 15 (!) months before the 2008 Presidential election.

Presidential candidate John Edwards just issued his Smarter Trade That Puts Workers First, which includes the following unexpected statement:

Big drug companies have lobbied and litigated to prevent enforcement of the drug safety law passed in 1988. As president, John Edwards will require the pharmaceutical industry to quickly implement non-forgeable electronic "track-and-trace pedigrees" to ensure that drugs stay safe at every step in the supply chain, from factory to store. He will also start enforcing laws requiring sellers to prove that their drugs came from an authorized distributor and close the loophole that allows big drug wholesalers to ignore pedigree requirements.

(Note to John’s speechwriter: For the record, it is actually smaller wholesalers, not "big drug companies," that have litigated to prevent enforcement of the PDMA. See It's Official: PDMA is Back On Hold for some background.)

Notably, Edwards implies that he wants Federal pre-emption over state pedigree laws to close loopholes for "big drug wholesalers." This is deeply ironic, given the lobbying activities now underway. Politics does indeed make strange bedfellows.

Drug imports are not here...yet

House OKs prescription drug imports, said the headline in a widely syndicated AP story on Friday. Pharmalot led with a similar headline.

These headlines are not really accurate. Nevertheless, drug importation fans continue to fight on, making me fear that this legislation is inevitable.

HR 3161, a massive agriculture bill, was passed on Friday by a vote of only 237-18. Math wizards will note that the total is far less than 435 district total because Republicans essentially boycotted the vote.

Here is the primary drug importation text buried inside the bill:

“SEC. 726. None of the funds appropriated or otherwise made available by this Act for the Food and Drug Administration may be used under section 801 of the Federal Food, Drug, and Cosmetic Act to prevent an individual not in the business of importing a prescription drug within the meaning of section 801(g) of such Act, wholesalers, or pharmacists from importing a prescription drug which complies with sections 501, 502, and 505.”

Obviously, this text is much less intrusive than the primary House importation bill (HR 380), the inaptly named Pharmaceutical Market Access and Drug Safety Act of 2007. H.R. 380, which now has 102 co-sponsors, includes detailed requirements about pedigree and track-and-trace systems. H.R. 380 and its Senate cousin S.242 impose many commercial restrictions on drug makers.

S.242 was undone by an amendment requiring the administration to certify the safety and effectiveness of imported drugs before they can be imported. In contrast, the House voted 283-146 to reject Rep. Jack Kingston's amendment to remove section 726 from the H.R. 3161 bill.

As Senator Vitter’s diversion obsession shows, the fans of importation draw inspiration from Spartan King Leonides: No retreat, no surrender. (Yes, I finally saw 300 this weekend.) So why do I still run into executives who claim not to be preparing for the eventual passage of an importation bill?

The ASP Future is Here

I've stated before that Average Manufacturer Price (AMP) will become a new benchmark for pharmacy reimbursement.

Both AMP skeptics and die-hard AWP fans should consider a must-read article called The Arrival of Average Sales Price from Biotechnology Healthcare. It describes how private health plans are now using Medicare’s average sales price (ASP) data to reimburse oncologists and other specialists for office-administered drugs.

I predict that CMS’ publication of AMP data will have a similar effect on retail pharmacy channels. List minus pricing models for pharmacy reimbursement based on AWP or WAC will not be sustainable once there is confidence in the published AMP data, which I predict will occur no later than mid-2008. Expect the retail pharmacy revolution to be in full swing by 2009.

ASP Adoption

The Arrival of Average Sales Price describes how many health plans have already adopted ASP models for oncology reimbursement. A survey of 102 plans found:

• List Minus: 52% of plans (68% of covered lives) used AWP

• Cost Plus: 36% of plans (30% of covered lives) used ASP

Half of the plans using ASP are paying at Medicare’s ASP+6% rate, while the rest paid at ASP markups ranging from 9% to 18%. The larger plans have been most successful at getting providers to accept because they can leverage their market share power.

Physicians are making predictable changes in their practices –collecting co-payments, looking for bigger rebates from manufacturers, getting out of the injection/infusion business, etc.

Ironically, Judge Saris chastised third-party payers for not adopting cost-plus reimbursement models once Medicare devised the ASP model for Part B. (See my Comments on the AWP Decision from June.)

Looks like she was right about the outcome, but wrong about the timing.

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FYI, CMS issued an updated AMP timeline. The regulation now takes effect on October 1, 2007.