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'Gray Market' Companies Take Advantage Of Drug Shortages

Michael Tomsic

This week we're examining what one pharmacist calls the new normal for hospitals. In the Carolinas and across the country, hospitals are barely maintaining supplies of a wide variety of drugs - some basic, many life-saving. 

WFAE's Michael Tomsic has reported on the dangersand causesof the drug shortages. In the final story of our series Critical Supply, he takes us into what's called the "gray market" to show how some companies are profiting off the problem.

Joannah Branch is getting sick of the emails and phone calls.

Credit Michael Tomsic
Joannah Branch and Darrell Estes at Northern Hospital in Mount Airy check the latest emails they've received from secondary wholesalers.

She's in charge of buying drugs for Northern Hospital in Mount Airy, and she hears constantly from companies that say they have drugs she can't find anywhere else.

 "I mean, it's like talking to a used car salesman," Branch said. "It's like whatever they can do to push it to get you to buy it."

The calls come from area codes in Georgia, Florida, Maryland and other states. And she says they can get ugly.   

"They'll say: 'Oh, we got a little bit of this one in. It's going really quick, do you want me to put your name on it? It's going to be gone and you're not going to get any,'" she said. "Yeah, they do that a lot."

Buying Drugs, Raising Prices And 'Inciting Panic'

Credit Congressional report on the
How hospitals usually get their drugs.

The companies are called secondary wholesalers, and they operate outside of the normal drug supply. Usually manufacturers sell drugs to a primary wholesaler, which then sells directly to the hospitals.

But with drug shortages, some secondary wholesalers have found an opportunity. The pharmacy director for Carolinas HealthCare System, Kevin Isaacs, explains.

"An enterprising attorney general could probably prove that there are people out there buying these drugs up in anticipation of a shortage, then calling buyers at facilities inciting panic," Isaacs said.

The companies are also charging outrageous prices. It's what a Congressional report from last summer calls the "gray market." Maryland Congressman Elijah Cummings has emerged as a leader on the issue.

"There's absolutely no way that we can allow a situation to go on where the beginning of the day a vial of life-saving drugs costs $7 and by the end of that day it costs $700," Cummings said. "That just makes no sense whatsoever."

The 'Gray Market'

Here's how it often happens:

A small, independent pharmacy sets up shop. It gets a license with a state board of pharmacy and then signs a contract with a primary wholesaler. John Gray is the CEO of the association representing primary wholesalers.

"The idea is that when the customer signs on, they're buying product that they're going to dispense directly" to patients - not to another wholesaler, Gray said.

But some small pharmacies break their contracts and sell to secondary, or gray market, wholesalers. Congressman Cummings said that's where things get crazy.

Credit Congressional report on the
How the "gray market" interrupts the standard drug supply chain.

"We've seen where a drug may be sold in the gray market five or six times in the course of a day," he said.

One wholesaler sells it to a second, then a third, and so on – sometimes without the drugs actually changing hands. Cummings said they're paper transactions used to jack up the price.

"The price can go up easily 20, 30, 40 times in a day!" he said. 

Selling Drugs Within An Office

One of the drug wholesalers that called hospitals in the Carolinas was International Pharmaceuticals. 

Credit Michael Tomsic
International Pharmaceuticals' sticker is still on the front door of its old office building.

It was located in a small, brick office building in Durham. A few years ago, a North Carolina regulator checked it out and noticed something odd. International Pharmaceuticals, the wholesaler, had a pharmacy set up in the back of the office.

"In setting up their retail pharmacy in the back of this building, they were purchasing products from legitimate wholesalers and then transferring the product to their wholesaler distributor here as a separate business," said Dan Ragan, the director of the Food and Drug Protection Division of the N.C. Dept. of Agriculture.

(In North Carolina, Ragan's division oversees drug wholesalers, while the state board of pharmacy oversees pharmacies.)

The pharmacy was called LTC Pharmacy. To recap, it was buying drugs in short supply and selling them to a wholesaler a few feet away. And those two companies had the exact same owner. The pharmacy had to shut down and the wholesaler's license wasn't renewed.

Insufficient Laws

Ragan said the only thing illegal about what they did was this: the pharmacy acted like a wholesaler without having a wholesaler's license. 

"When these laws were created back in the 1980s, they were probably focusing more on the integrity of the product," Ragan said.

Shortages and the gray market weren't really problems back then. So even though it's illegal in North Carolina to jack up the price of water during a hurricane, you can charge as much as you want for a cancer drug during a shortage – as long as you have a wholesaler's license.

That's how it plays out in state law. In federal law, "it's very difficult to determine exactly where the line is drawn with regard to legality," said Congressman Elijah Cummings.

He said that federal law does not sufficiently address the gray market, but that he's hoping to change that this year. 

Tracking The Problem

California's legislature has already passed an electronic tracking system to make it easier to see how many times drugs change hands. Virginia Herold is the executive officer of the California Board of Pharmacy.

"We're thinking prosecution will be a lot easier and bad behavior will stop because it's more likely to be detected," Herold said.

But here's the catch: California passed the law almost 10 years ago, and the tracking system still isn't up and running. Herold said it's an incredibly complicated task requiring new systems and technology for the manufacturers and the rest of the supply chain.

Plus, wholesalers sell drugs across state lines. Jay Campbell is the executive director of the North Carolina Board of Pharmacy.

"The only way that any sort of tracking is ever going to work is it's going to have to be done at the federal level," Campbell said.

And there's another problem with the gray market that's tough to track - if the people applying for a wholesale license in one state got busted in another.

For example, the former sales manager of International Pharmaceuticals in Durham is now the owner of KY Meds, a company with active wholesale licenses in Kentucky, Ohio and Pennsylvania.