U.S. PRESCRIPTION DRUG SYSTEM UNDER ATTACK

Multibillion-Dollar Shadow Market Is Growing Stronger

First Of Five Articles

For half a century Americans could boast of the world's safest, most
tightly regulated system for distributing prescription drugs. But now
that system is undercut by a growing illegal trade in pharmaceuticals,
fed by criminal profiteers, unscrupulous wholesalers, rogue Internet
sites and foreign pharmacies.

In the past few years, middlemen have siphoned off growing numbers of
popular and lifesaving drugs and diverted them into a
multibillion-dollar shadow market. Crooks have introduced counterfeit
pharmaceuticals into the mainstream drug chain. Fast-moving operators
have hawked millions of doses of narcotics over the Internet.

The result too often is pharmaceutical roulette for millions of
unsuspecting Americans. Cancer patients receive watered-down drugs.
Teenagers overdose on narcotics ordered online. AIDS clinics get fake
HIV medicines.

Normally, drugs follow a simple route. Manufacturers sell them to one
of the Big Three national wholesalers -- Cardinal Health Inc.,
McKesson Corp. and AmerisourceBergen -- which sell to drugstores,
hospitals or doctors offices. Regulators and industry officials have
long considered this straightforward chain to be the gold standard.

The shadow market exploits gaps in state and federal regulations to
corrupt this system, creating a wide-open drug bazaar that endangers
public health. A yearlong investigation by The Washington Post has
found:

. Networks of middlemen, felons and other opportunists operating out
of storefronts and garages fraudulently obtain deeply discounted
medicines intended for nursing homes and hospices. The diverters have
stored drugs in U-Hauls and car trunks in blazing heat, stuffed them
in plastic sandwich bags and traded them in a daisy chain of
transactions with no purpose except to enrich the traders. Those drugs
are ultimately sold to unwitting patients. The diverters pave the
way for counterfeiters who use pill-punching machines and special inks
to produce near-perfect copies of the most popular and expensive
drugs. Some fakes have passed undetected through wholesalers to the
shelves of retail pharmacies.

. Pharmaceutical peddlers take advantage of lax regulations to move
millions of prescription drugs into the United States from Canada,
Mexico and elsewhere. Overwhelmed customs workers inspect less than 1
percent of an estimated 2 million packages containing medicine shipped
into the country each year. Virtually all of those shipments are
illegal, yet the Food and Drug Administration fails to enforce its own
import regulations, saying it lacks the resources to intercept the
illegal packages.

. Rogue medical merchants set up Internet pharmacies that serve as
pipelines for narcotics, selling to drug abusers and others who never
see doctors in person or undergo tests. The sellers move tens of
millions of doses of hydrocodone, Xanax, Valium, Ritalin, OxyContin
and other controlled substances. Scores of customers have become
addicted, overdosed or died.

The shadow market, which includes both legal and illegal operators,
has grown rapidly yet received little public attention.

Isolated problems nationwide have attracted the interest of some state
and federal prosecutors and resulted in lawsuits. But the increasing
recalls of tainted medicines, overdoses on Internet-bought drugs and
cross-border pharmaceutical trade are part of a larger pattern. Taken
together, the worst elements of the shadow market constitute a new
form of organized crime that now threatens public health.

In St. Charles, Mo., Maxine Blount, a 61-year-old woman with advanced
breast cancer, received a diluted drug distributed to her local
drugstore. "It makes you angry," she said in an interview last year.
"It shakes your faith. It saps strength you need to live." She died of
her cancer a month after the interview.

In La Mesa, Calif., Ryan T. Haight, 18, died in his bedroom of an
overdose after taking narcotics obtained on the Internet.

In Sacramento, James Lewis, 47, shopped the world for painkillers that
flowed unimpeded from pharmacies in South Africa, Thailand and Spain.
His wife discovered him dead of an overdose on the living room couch.

These victims are emblematic of the dangers that occur when
profiteering and cowboy criminality invade the nation's drug
distribution system.

The shadow market takes advantage of technology, global trade, vast
disparities in pharmaceutical prices, the explosive growth of enticing
new miracle drugs and the self-medicating habits of an aging baby-boom
population. It extends from small, backroom operations to buck-raking
Internet pharmacies to the warehouses of the nation's largest drug
distributors.

Diverters reap millions illegally by buying drugs at a discount to
sell to secondary wholesalers, which then sell them to other
distributors, including the Big Three wholesalers that supply most
major hospitals and chain stores. The Big Three risk buying from these
secondary sources because they can get drugs more cheaply than if they
bought them directly from manufacturers. In some cases, the drugs have
turned out to be diverted, diluted or counterfeited.

William K. Hubbard, senior associate FDA commissioner, stressed that
the U.S. drug distribution system is the safest in the world. "People
can have a high degree of confidence," he said in an interview.

Yet he acknowledged that in recent months the FDA has been overwhelmed
by illegal imports from Canada and offshore pharmacies. The agency
also had to apologize to Congress in June for releasing a quarantined
shipment of fake Viagra to consumers. And the FDA is now scrambling to
keep up with a rise in drug counterfeiting.

Phony medicines have surfaced in pharmacies from Florida to Hawaii,
including tens of thousands of doses discovered in warehouses of the
Big Three wholesalers.

Last summer, nearly 200,000 tablets of Lipitor, the world's
best-selling cholesterol-lowering medication, was found to be
counterfeit and recalled by a small Missouri wholesaler. Some of the
pills had already reached Rite Aid and CVS pharmacies.

"This is hurting people," said Thomas E. Getz, a federal prosecutor in
Cleveland who has pursued pharmaceutical fraud. "It's one thing to ask
people to choose between name brand or generic," he said. It's another
to "choose a bottle that came from a manufacturer or one that's been
sitting in a hot semi for three weeks."

In the past year, a Texas wholesaler bought cancer drugs that had been
spirited out in backpacks and, at least once, in a fast-food bag, from
Methodist Hospital and the University of Texas M.D. Anderson Cancer
Center in Houston. A drugstore in Scotch Plains, N.J., sold insulin
and brand-name drugs stolen from Beth Israel Deaconess Medical Center
in Boston. Pharmacies and wholesalers from Miami to Los Angeles sold
medicines that Medicaid fraud rings bought on the streets.

The growth of the shadow market comes as Americans are spending more
money than ever on prescription drugs. Between 1994 and 2001, the
number of prescriptions swelled to 3.1 billion -- a nearly 50 percent
increase. In nearly the same period, sales soared from $61 billion to
$155 billion.

There were several reasons for this. Americans took advantage of new
When some states crack down, the problem shifts elsewhere.

In the late 1990s, Nevada tightened its licensing requirements and
limited the amount of product a wholesaler could sell to another
wholesaler. Nevada's number of licensed wholesalers plummeted from
about 50 in 2002 to eight this year.

But they merely moved across the state line, said Judi Nurse,
supervising inspector for the California Board of Pharmacy. "We have
more of them now than ever," she said. "I'm scrambling just to try to
keep up."

The Big Three Drug Wholesalers

Three Fortune 500 companies -- Cardinal Health Inc. of Dublin, Ohio;
McKesson Corp. of San Francisco; and AmerisourceBergen of
Chesterbrook, Pa. -- dominate the drug wholesaling industry, with
combined annual revenue of $146 billion. They are known in the
business as the Big Three.

The wholesale drug industry is characterized by high volumes and a
razor-thin profit margin of about 1 percent of revenue. If the large
wholesalers can purchase drugs for less than the manufacturer's price,
the spread goes straight to their bottom line.

The firms said they sometimes buy from smaller companies when reserves
are tight, a sudden need arises or special promotions produce better
prices. All three firms said they limit purchases from smaller
wholesalers: McKesson, 1 percent; AmerisourceBergen, 2 percent; and
Cardinal, 3 percent.

And all three said that since 2001 they have been buying cancer,
injectable and other drugs attractive to criminals only from
manufacturers. James Larkin, spokesman for McKesson, said the company
does "rigorous due diligence" on the small wholesalers.

But lawsuits and drug recalls show that deals with small wholesalers
have exposed the Big Three to counterfeit and diverted
medications.

Since 2000, the large wholesalers have had to recall thousands of
bottles of counterfeit product. On occasion, the giants have sued
small wholesalers, alleging that they were the source of the bad drugs.

In 2000, AmerisourceBergen bought 52 bottles of counterfeit Retrovir,
an HIV medication, from a small Ohio wholesaler, Florida health
inspectors said. The bottles were found during a routine inspection in
2001 at AmerisourceBergen's Orlando distribution center. By turning to
the smaller wholesaler rather than buying directly from the drug's
manufacturer, AmerisourceBergen saved about $8 per bottle on a product
that costs nearly $300 a bottle, sales records show.

The company paid a $50,000 fine in the Orlando case. In a letter to
Florida authorities, the company said that it "regrets that alleged
counterfeit Retrovir was received and distributed." The letter also
said that "due to the volume of product received daily," the company
"is not able to inspect each piece of product that is received."

In 1999, federal prosecutors in Las Vegas targeted Amerisource as part
of a broad investigation of illegal drug diversion in the Southwest.
Working with Fred Evans, a two-time felon, the FBI set up an
undercover business known as V.N. Chicago Inc. in Las Vegas. In seven
months, V.N. bought $31.2 million worth of deeply discounted drugs
meant for hospices and nursing homes from the Sacramento division of
Amerisource. V.N. quickly diverted the drugs to other smaller
wholesalers, earning nearly $1 million in profit.

The FBI in Las Vegas shut down its investigation in February 2000
without charging Amerisource or the other wholesalers. The case lay
dormant for two years until FDA and FBI agents in California took over
the file.

In July, the U.S. attorney in Sacramento charged Robert Strusz, a
sales manager at Amerisource's distribution center there, with mail
fraud. He pleaded guilty in August and is cooperating with
investigators.

Strusz had worked closely with Evans to arrange the sale of the
discounted drugs to V.N. Chicago. Strusz saw his bonus boosted by the
sales and he also received kickbacks, according to his plea agreement.
A spokesman for AmerisourceBergen said the diversion scheme stopped at
Strusz, who declined to comment.

The spokesman said the company became suspicious of Evans in January
2000 and stopped selling to him a month later.

'Golden Boy' Gets Caught

In the mid-1990s, David Dyck was known as the "golden boy" around
Bindley Western Industries Inc.'s drug distribution center in San
Dimas, Calif., federal investigators said. Personable and charming,
Dyck brought in millions in sales and played a large role in making
San Dimas one of the huge wholesaler's most profitable hubs.

Dyck's job included recruiting business from the hundreds of
closed-door pharmacies in the Southern California-Las Vegas corridor.
He took his job an extra, illegal step, introducing those pharmacies
to diverters.

Dyck was paid handsomely, court records show. He received
approximately $500,000, which he funneled through a shell company he
set up in his daughter's name, Santa Susanna Consultants Inc.

He was caught by a federal investigation. In 1999, he pleaded guilty
to mail fraud and began to cooperate. Nearly 18 months later, Bindley
pleaded guilty to conspiracy in federal court in Nevada and agreed to
pay a record $20 million fine.

The San Dimas case was not the first time Bindley's name surfaced in
drug diversion. In 1989, the company pleaded guilty to mail fraud
involving its Atlanta distribution center and paid a $500,000 fine.
Four Bindley managers, including a top executive at headquarters in
Indianapolis, also pleaded guilty.

Bindley did not respond to a request for an interview. However, in a
2000 news release, company officials said they were "shocked" to learn
of Dyck's crimes.

Dyck, who now works for another California health care company,
recently said in an interview, "Believe me, I didn't do anything
without the knowledge of superiors. Do you think Bindley paid $20
million because I did something wrong?"