Policing The Market

NEVADA GETS TOUGH, WITH MIXED RESULTS

RENO, Nev. -- In 2001, Nevada adopted the tightest controls in the country
for pharmaceutical wholesalers in an attempt to combat a growing illegal
trade among tiny wholesalers that diverted and resold millions of dollars'
worth of steeply discounted drugs. Over more than a decade, wholesalers had
set up shop in Las Vegas, occupying an entire block in one industrial
neighborhood.

The new measures required owners to employ an authorized representative
with 6,000 hours of experience, and strictly limited resales to other
wholesalers to 10 percent.

The regulators' efforts worked. Over the next two years, the number of
wholesalers plummeted from 50 to eight, as distributor after distributor
declined to renew its license with the Nevada State Board of Pharmacy.

But Nevada's efforts offer an object lesson in the difficulty in policing
the growing shadow market in pharmaceuticals. When the Nevada regulators
took action, some wholesalers simply moved operations across the state line
into California. Recently, several wholesalers sued Louis Ling, the board's
general counsel, and Keith Macdonald, its executive secretary, alleging
that the officials impeded their business.

Nationwide, attempts at changing the pharmaceutical distribution system
have been hit-and-miss. A federal law requiring more complete sales records
on medications sold among wholesalers has been on hold since 1988. The
regulations to implement that law, the Prescription Drug Marketing Act,
have been delayed four times by the Food and Drug Administration.

A strong federal law or model legislation drafted by a government-industry
task force and adopted by the states could standardize controls over
distribution of pharmaceuticals, said Marvin Shepherd, a researcher in
pharmacoeconomics at the University of Texas. So, too, would tougher rules
on pedigree papers, the documents that are supposed to track sales of a
medication as it passes among wholesalers. Those records would give
regulators clout to pursue violators, he said.

If that paperwork went to retail buyers, they could be more certain about
the products they were getting, Shepherd said.

In California, the pharmacy board is examining a number of proposals to
tighten licensing and regulation of its 400 pharmaceutical wholesalers,
said Patricia Harris, the board's executive officer. For years, the board
has struggled to keep up with small, rogue wholesalers that buy steeply
discounted drugs intended for nursing homes and divert them into the shadow
market.

"The problem is they have no records," Harris said. "There is no way of
tracking, no documentation. When we walk in, drugs are missing, and we have
no way of knowing where they've gone."

One of the California board's proposals is modeled after Nevada's changes.
It would limit the number of times wholesalers can sell to other
wholesalers before the drug is sold to a retail chain. Another would allow
the board to levy as much as $5,000 in fines each time a wholesaler
violated a law, providing "economic teeth," Harris said.

Two years ago, the board adopted similar economic sanctions for Internet
pharmacies, with fines of as much as $25,000 per incident for dispensing
dangerous drugs online. In May 2002, the board issued citations against a
Los Angeles Web site and two pharmacists that included $88.7 million in
potential fines. As part of a settlement with the board, the online
pharmacy recently agreed to pay a $1 million fine.

When Florida announced in 2001 that it would begin enforcing a
pedigree-paper law, and then said it would go further and require that
buyers verify the accuracy of the paperwork, "that hit a nerve more than
anything I've seen in the 17 or 18 years I've been doing this," said Gregg
Jones, a Florida pharmacy investigator.

After several delayed implementations, Florida this year passed tougher
criminal penalties, elevating the falsification of pedigrees to a felony.
But other tougher suggestions recommended by a special Health Department
committee were put on hold.

The Health Department had suggested requiring pedigrees for all drugs. The
industry objected to the full pedigree. The industry also opposed having it
apply to an estimated 30,000 drugs. Industry lobbyists said the rules would
drive wholesalers out of Florida and cost the state jobs and revenue.

Florida's legislation, which took effect this past July, toughened
background checks for wholesalers. But full pedigrees were required for
only 30 drugs.