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5
Weaknesses in the Drug Distribution Chain
The modern pharmaceutical supply chain is complex. Medicines are made from
ingredients sourced from different countries. Final formulations are then exported. Packaging,
repackaging, and sale can happen in many other countries. Drugs change hands many times
between the manufacturer and patient; every transaction is an opportunity for falsified or
substandard products to infiltrate the market. Changes to the drug distribution system could
improve drug quality around the world.
This chapter gives an overview of the drug distribution chain, explaining differences
between the system in developed and developing countries. The drug wholesale system is a
weak point where the licit and illicit supply chains mix. Better controls on the wholesale market
could improve the security of the distribution chain. Drug tracking systems could also improve
security by preventing products that leave the legitimate supply chain from returning to it. These
solutions can improve drug safety as long as the supply chain does not disintegrate at the point
closest to the patient. Disorganized drug markets, both real and on the internet, undermine
regulatory checks on medicines distribution.
AN OVERVIEW OF DRUG DISTRIBUTION IN DEVELOPED AND DEVELOPING
COUNTRIES
Key Findings and Conclusions
A few national firms control most of the primary wholesale market in rich countries. In
developing countries hundreds, sometimes thousands, of firms control tiny shares of
the same.
Drug distribution chains in developing countries are often fragmented and complicated.
The final leg of the drug distribution chain is exceptionally expensive and inefficient in
developing countries.
Figure 5-1 describes the drug distribution chain in developed countries, where most
patients get medicine from a doctor’s office, or a licensed pharmacy or dispensary (Yadav and
Smith, 2012). For example, in the United States about three-quarters of all pharmaceuticals are
bought in retail pharmacies, about half of which are national chains or food stores with an
internal pharmacy (Yadav and Smith, 2012). These vendors handle a wide variety of products
sold in an even wider variety of packaging. Retailers in developed countries would find it
logistically impossible to buy their stock, in its many different packages, directly from
manufacturers (Yadav et al., 2012). Therefore, most vendors buy their inventory from pre-
wholesalers and wholesalers.
The drug distribution system in low- and middle-income countries has the same basic
steps as that described in Figure 5-1, but with more intermediaries between the manufacturer
and patient (Yadav and Smith, 2012). Instead of having one coordinated distribution chain that
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COUNTERTING THE PROBLEM OF FALSIFIED AND SUBSTANDARD DRUGS
reaches the whole country, there are many small chains and many small companies at every step
(Yadav and Smith, 2012). Figure 5-2 describes the drug flow for public, private, and
nongovernmental organizations, and their separate, but sometimes overlapping, intermediaries.
A comparison of Figures 5-1 and 5-2, and Table 5-1 illustrate some important
differences in drug distribution in developing and developed countries. For example, a few large
firms generally control the national wholesale market in developed countries. Cardinal Health,
McKesson, and AmerisourceBergen distribute 90 percent of drugs sold in the United States;
four or five major firms distribute to 90 percent of the market in western Europe and Japan
(Yadav and Smith, 2012). In developing countries, hundreds, even thousands, of companies
control tiny shares of the drug wholesale market (Yadav and Smith, 2012).
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WEAKNESSES IN THE DRUG DISTRIBUTION CHAIN
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COUNTERTING THE PROBLEM OF FALSIFIED AND SUBSTANDARD DRUGS
TABLE 5-1 Differences in Overall Structure of the Pharmaceutical Market in Developed and
Developing Countries
Factor Developed Countries Developing countries
Mostly payments are made out of
pocket. Social health insurance
systems are expanding in many
Strong presence of public or private emerging markets. Private
Payer or insurance companies and limited out of insurance plans are also growing in
Reimbursement pocket expenditure some emerging market countries.
Weak fragmented regulatory
structures, ill-defined laws in some
Strong, well-defined laws and overall good instances, and poor ability to
Regulatory Structure ability to enforce regulations enforce regulations.
Poor regulatory structure creates a
strong market for branded generics
Patented, Generic vs. The market for prescription drugs consists (brand is used as a signal of quality
Branded Generic of patented drugs and generics. by the patient).
Retail drug shops often dispense
medicines and also act as the first
Prescription Prescription drugs can only be dispensed point of healthcare contact for many
adherence with a formal prescription patients.
Buyer (insurance companies or national
health system) monopoly creates good Balance of power is tilted towards
balance of power between the manufacturer the manufacturer and the
and the patients. In the United States, distribution channel. The large
pharmacy benefit managers and drug fraction of patients purchase using
Balance of power in formularies are commonly used as a means out of pocket funds and have little
the system to ensure further balance of power. bargaining power.
SOURCE: Adapted from (Yadav and Smith, 2012).
Excessive fragmentation is an important difference between developed and developing
country drug distribution systems. In developed countries, comparatively few large firms
control the market and regulatory authorities require some chain of custody documentation. In
low- and middle-income countries, the system is vastly more complicated. Sometimes multiple
parallel distribution systems of varying efficiency run in the same country. Box 5-1 describes
the confusing drug distribution systems often found in humanitarian emergencies.
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WEAKNESSES IN THE DRUG DISTRIBUTION CHAIN
BOX 5-1
Drug Distribution in Humanitarian Emergencies
A donated batch of Ringer’s Lactate Infusions made its way to humanitarian aid workers
in Darfur through a UN agency and other suppliers. Despite its many stops along the way, only
at one of the final destinations did a volunteer doctor notice fungal spores contaminating the
product (Caudron et al., 2008). The infusions had been distributed so widely and haphazardly
that, despite a product recall, only 15 percent were ever collected (Caudron et al., 2008). Such
problems are not uncommon during emergencies, when quality control throughout long supply
chains becomes difficult.
Despite the good intentions of aid agencies, nongovernmental organizations (NGOs),
individual and corporate donors, the chaos inherent in humanitarian emergencies often leads to
a proliferation of fake, substandard, and otherwise poorly regulated medical products. The
dangers of poorly regulated drugs lead some bodies, such as the European Commission’s
Directorate-General for Humanitarian Aid, stipulate that quality assurance guidelines not be
relaxed during emergencies, even though quality assurance steps can slow down response
(Pomatto and Schuftan, 2006).
After the tsunami in Sri Lanka, only 50 percent of the drugs donated had expiration
dates on them, of that half 5 percent had already expired or would expire within days; 62
percent of the medication labels were not in English, the language of the Sri Lankan health
system (Mahmood et al., 2011). Such inappropriate drug donations cause serious problems
because disposing of such drugs, especially in large quantities, is a lengthy and expensive
project (Pomatto and Schuftan, 2006). After the 2000 floods in Venezuela, 70 percent of the
drugs donated for humanitarian assistance needed to be destroyed, requiring the government
to pay $16,000 to cover the extra personnel needed to sort the donations (Hechmann and
Dune-Birouste, 2007).
During emergencies, little about patients, their diagnoses, or medical history is collected
at most health facilities. Drug quality signals can be difficult to spot when infrastructure is
disrupted: patients are seen quickly and only minimal information is recorded. NGOs often
arrive with few or no pharmacists on staff, and although local health workers may be aware of
substandard and falsified drugs, visiting doctors often are not (Villacorta-Linaza, 2009).
The World Health Organization published its “Guidelines for Drug Donations” in 1996
after particularly problematic donations during the Bosnian War (Berckmans et al., 1997;
Hechmann and Dune-Birouste). At times the guidelines are followed closely; for example
humanitarian emergencies in East Timor and Gujarat State saw few inappropriate donations
(van Dijk et al., 2011).
In Organization for Economic Cooperation and Development countries, private
companies ship and transport almost all pharmaceuticals, but in developing countries, despite
their vastly smaller tax base, the government does (Yadav, 2010). In sub-Saharan Africa, a
government owned and operated central medical store manages the distribution of drugs,
transporting goods around the country in a government-owned fleet. Donors and developing
country governments favor this system, wherein the central store manager can neither hire
people with business experience, nor fire incompetent workers (Yadav, 2010). Inefficient
supply chain management directly drives up costs and causes drug stock-outs in low- and
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COUNTERTING THE PROBLEM OF FALSIFIED AND SUBSTANDARD DRUGS
middle-income countries (Yadav, 2010). As Chapter 4 explained, this drug scarcity in turn
creates a vacuum for poor quality products to fill.
Of course, donor demands alone do not drive the costs of supply chain management in
developing countries. It is expensive to transport products over rough terrain with poor roads. In
India, for example, nearly 70 percent of the population lives in rural areas, where the health
posts may be few and lacking in staff, electricity, and supplies (Langer and Kelkar, 2008). The
costs of drug distribution in India are two to three times greater than in the United States or the
European Union, despite vastly lower labor costs (Langer and Kelkar, 2008). Supply chain
managers are always concerned with the last mile problem: the disproportionately expensive
and inefficient final leg on the distribution chain. In developing countries, the last mile is
exceptionally long, extending to sparsely populated villages far from a paved road and farther
from a supply center (USAID, 2011).
Managing the drug distribution system in developing countries means containing the
costs of the last mile, moving medicines to patients quickly, and keeping records of all
transactions between the manufacturer and the consumer. The first step on this chain is the drug
wholesale market. Around the world, drug wholesale is a common point of vulnerability to
falsified and substandard medicines.
THE WHOLESALE SYSTEM
There are two kinds of drugs wholesalers: primary wholesalers who have written
distribution contracts with manufacturers and buy directly from them, and secondary
wholesalers who buy from other intermediaries. In some countries, including the United States,
there are also large regional wholesalers (Fein, 2012; White and Bothma, 2009). Regional
wholesalers may be primary or secondary wholesalers (Fein, 2011). They often serve
independent pharmacies or hospitals and may have strong distribution networks (Levy, 2006).
As Figure 5-1 suggests, the distinction between the primary and secondary wholesalers
is not always clear. Primary wholesalers may, for example, buy products from secondary
wholesalers as well as manufacturers (Ziance, 2008). The back and forth sales are common
among drug wholesalers, who buy and sell medicines to accommodate market demand. That is,
when they see a medicine is scarce in one region, they can buy the same medicine from other
wholesalers that may be flush with it. The markets are constantly fluctuating; products change
hands many times.
Sometimes secondary wholesalers fill a void; they supply to rural pharmacies or markets
that national or regional wholesalers do not reach. But, they choose stock based on demand
forecasts, price, margin, and their customers’ willingness to pay (Yadav, 2009). The costs of the
transactions required when dealing with many suppliers and their generally poorer bargaining
power give the secondary wholesalers weak incentives to stock a wide variety of products or
brands (Yadav, 2009).
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WEAKNESSES IN THE DRUG DISTRIBUTION CHAIN
Key Findings and Conclusions
The U.S. drug wholesale market is made up of a combination of primary and secondary
wholesalers. There are three major national wholesalers, a few regional wholesalers, and
thousands of secondary wholesalers.
Secondary wholesalers are the weakest point in the U.S. pharmaceutical distribution
chain.
Wholesalers buy and sell drugs in response to market demand, repeatedly repackaging
products. In wholesale repackaging illegitimate products can gain authentic packaging,
and clean, authentic packaging is removed and not always destroyed.
In the United States, state pharmacy boards or other state agencies license wholesalers.
Their licensing requirements vary widely. Unscrupulous wholesalers seek out states with
the most lenient requirements and move from state to state when caught in violations.
There is no national database on drug wholesalers.
Raising the minimum standards for drugs wholesale in the United States could build
momentum for increased control of the drug wholesale market in low- and middle-income
countries.
Wholesalers may sell and resell medicines repeatedly among themselves before filling a
pharmacy order. Wholesalers often repackage products with every sale, or at least repackage
individual containers for final sale (Catizone, 2006; Laven, 2006). Through a process called
salting, legitimate and fake drugs are mixed at wholesale, and in the wholesale repackaging, the
fake products gain authentic labels (Donaldson, 2010a; Liang, 2006). Salting can be done
unknowingly, such as when primary wholesalers buy from other intermediaries, accidentally
launder fake products, package them in authentic labels, and send them to pharmacies (Spies
and VanDusen, 2003). In repackaging the manufacturer’s expensive fraud-protection packaging
can be removed, and batch numbers reprinted (Satchwell, 2004). Not only does this interfere
with tracking requirements, but it leaves the wholesaler repackagers with clean, unused
packaging that is not always destroyed (Satchwell, 2004).
Manufacturers usually have no distribution agreements with secondary wholesalers
(Ziance, 2008). The firms may trade in many kinds of products other than pharmaceuticals.
Their staff are not required to show skills in pharmaceutical warehousing and management,
often with disastrous consequences (Ziance, 2008). In 2001, for example, a falsified version of
Epogen, one of the most expensive drugs in the Medicare formulary, killed a 16-year-old boy in
New York (Gressit, 2007; Ziance, 2008). Eleven secondary wholesalers had traded the Epogen
that killed him (Engelberg et al., 2009; Gressit, 2007; Whoriskey, 2012). Though it is
impossible to recreate the drug’s exact path, it was briefly stored in a drinks cooler above a
Florida strip club (Brown, 2005).
Small secondary wholesalers act negligently in part because they do not have the
reputational risks major national or regional wholesalers do. There are thousands of secondary
wholesalers in the United States, all legally supplying to pharmacies, the product of lax
licensing requirements (Appleby, 2003). In a recommendation to the state legislature, a Florida
grand jury described some of the states’ drug wholesalers as, “uneducated, inexperienced, …
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COUNTERTING THE PROBLEM OF FALSIFIED AND SUBSTANDARD DRUGS
rank amateurs, many with criminal records” (Appleby, 2003). As the grand jury description
implies, many of these companies are looking to increase their profits at any costs.
These companies exploit problems in the regulated drug market, such as drug shortages.
Hospital pharmacists are under pressure to fill prescriptions even during drug shortages, forcing
them to buy from gray market vendors at up to 10 times the standard prices for some drugs,
including anesthetics and cancer drugs (ISMP, 2011; Newsmax, 2011). More than half of
surveyed hospitals in the United States buy cancer meds from gray market (Gatesman and
Smith, 2011). A similar proportion of U.S. hospital pharmacists and drug buyers report daily
inquiries from gray market pharmaceutical salesmen about their inventories (ISMP, 2011). One
survey respondent told the Institute for Safe Medication Practices, an NGO, “You are hesitant to
tell gray market vendors what you need because they will buy it all up if they find it, and then
harass you [to buy it] for months afterwards” (ISMP, 2011). Box 5-2 describes one such gray
market purchase.
Some changes to the drugs wholesale system could protect the American consumer. One
option would be requiring all organizations that sell wholesale medicines to hold National
Association of Boards of Pharmacy (NABP) accreditation. The NABP wholesale accreditation
process reviews wholesalers’ record keeping, licensing, and drug verification procedures
(NABP, 2012a). Accreditation also involves criminal background checks on the most senior
operations, buying, and inventory staff, their supervisors, and anyone owning greater than 10
percent interest in the company if it is not publically held (NABP, 2012a). Indiana, North
Dakota, and Wyoming require NABP accreditation for wholesalers; wholesalers in other states
may voluntarily seek out certification as evidence of their standards (Cherici et al., 2011).
Direct to pharmacy distribution is another alternative to the current wholesale systems.
In this system, manufacturers eliminate secondary wholesalers and use logistics companies to
ship directly to the vendor. It has been used, with varying success, in Europe and Australia
(Galve and Campos, 2011; Kanavos et al., 2011; Taylor, 2011). There is some concern,
however, that direct distribution drives up medicines costs (Exel, 2003; OFT, 2007). It also puts
impractical storage and warehousing demands on retailers (Exel, 2003). If direct to pharmacy
distribution replaces wholesalers with an equally porous network of transport and logistics
companies, then it is no improvement.
More rigorous licensing and regulation of the wholesale market, especially the
secondary wholesalers, is another solution. The committee believes the secondary wholesale
market is the weakest link in the U.S. drug distribution system. Improvements to the secondary
wholesale system could reduce the number of transactions in the drug distribution chain,
thereby improving security.
Recommendation 5-1: State licensing boards should only license wholesalers
and distributors that meet the National Association of Boards of Pharmacy
accreditation standards. The U.S. Food and Drug Administration, in
collaboration with state licensing boards, should establish a public database
to share information on suspended and revoked wholesale licenses.
The committee finds that peculiarities of the American wholesale system account for
much of the United States’ vulnerability to falsified and substandard drugs. Limiting the
wholesale market to vetted firms would make the drug distribution chain less permeable to
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WEAKNESSES IN THE DRUG DISTRIBUTION CHAIN
criminals (Donaldson, 2010b). Similar weaknesses plague the wholesale system in developing
countries, and action in the American market might give regulators around the world an
example and encouragement to tighten controls on the chaotic wholesale and distribution
systems.
This recommendation should be implemented in phases over the next 2 years.
Collaboration between state licensing boards and the FDA should happen first. Next, the
regulators should design the database and publish the processes for collecting accurate, reliable,
and timely information about the suspension or revocation of wholesale licenses.
The United States Wholesale Market
In the United States, state governments control professional practice, including the
practice of pharmacy, which includes medicine distribution and wholesale. Some states have
enacted tighter regulations on the market, with unintended spillover effects (Laven, 2006). After
the state of Nevada increased oversight of drugs wholesale, for example, “some wholesalers
simply moved operations across the state line into California” (Flaherty and Gaul, 2003). When
unscrupulous business can seek out the softest regulatory systems to work in, they do. As the
previous section explains, the wholesale trade depends on buying and selling medicines in
response to shortages and gluts in different parts of the country. Therefore, the weaknesses in
one state licensing system can become vulnerabilities for the others. The committee recognizes
the authority of states to license wholesalers, but believes that public health will be best
protected if all businesses adhere to the strict standards laid out by the National Association of
Boards of Pharmacy accreditation process.
Every state has an interest in promoting high minimum standards for medicine sale and
manufacture. The recent fungal meningitis outbreak from an steroid injection compounded
under grossly unsterile conditions at New England Compounding Center in September 2012 is a
reminder of the risks of competing state standards (Grady et al., 2012; Tavernise and Pollack,
2012). The outbreak and associated infections, which as of January 2013, had killed 45 patients
and sickened 693 others in 19 states, was driven by the interstate sale of a compounded steroid
(CDC, 2013). Compounding pharmacies are not held to the same standards as big
pharmaceutical manufacturers; courts have questioned FDA’s authority over them (Grady et al.,
2012). As in the wholesale market, states regulate these businesses in isolation. Though the
Massachusetts Department of Health registered three complaints against New England
Compounding Center, there is no mandatory national system for sharing these complaints
(Grady et al., 2012).
Similarly, there is no way for state authorities to share information on criminal or
negligent wholesalers. As part of the stronger wholesale system, states should report violations
and revocations of wholesale licenses to a national, public database. This will impede
unscrupulous wholesalers from moving from state to state and starting over when caught in
violation of one state’s rules. The FDA should facilitate the sharing of this information among
states and with the public. The recent tragic meningitis outbreak has brought to light the
importance of sharing information on dangerous actors in the drug distribution chain. While the
states have the authority and staffing to license wholesalers, the nation’s interests are best
served by enabling communication among the states.
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BOX 5-2
Falsified Avastin’s Circuitous Path to the United States
Fake drugs originally manufactured in Turkey took a winding path to the United States
in late 2011 and early 2012, where they found their way to several physicians’ offices. The
drug, Avastin, is manufactured by Roche Holding AG of Switzerland and is often used
alongside chemotherapy to treat certain lung, colon, and kidney cancers (Faucon and
Whalen, 2012). The fake batches contained salt, starch, and various chemicals, but no active
ingredients (Blair, 2012). In February and March 2012, the FDA warned approximately 20
practices that they may have received fake Avastin. Later that spring, they expanded the
number to 76 potentially affected practices in 22 U.S. states (Weaver and Whalen, 2012) .
The precise origins of the drugs are unknown, as the Turkish company listed on
relevant paperwork was not registered with the Turkish authorities, and a trip to its stated
address led investigators to a textiles warehouse (Faucon and Whalen, 2012). A Swiss drug
distributor, apparently unaware of the problem, purchased the Avastin from Turkey from a
Syrian middleman in Egypt, and subsequently sold it to another distributor in Copenhagen
(Faucon and Whalen, 2012). From there, the drugs traveled through several companies in
Britain and the United States under the parent company Canada Drugs, which operates an
online pharmacy that often uses overseas companies to source discount drugs. Ultimately,
two U.S. companies sold the drug directly to physicians (Weaver and Whalen, 2012) .
The high cost of such drugs, at times exacerbated by shortages, may tempt physicians
to seek out alternative suppliers to lower their own and their patients’ costs and assure a
steady supply. At a price several hundred dollars lower per vial than the standard, the
falsified Avastin was a good deal for such practices (Weaver and Whalen, 2012). The same
forces that lead patients to buy unreliable drugs can lead doctors to do the same, creating yet
another vulnerable link in the medicines supply chain.
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The Wholesale Market in Low- and Middle-Income Countries
As the previous section explains, the wholesale market is a common vulnerability in
medicines distribution around the world. On potential positive outcome of raising the standards
for US wholesalers is that it would build international momentum for a leaner, more organized
wholesale drug market. Other countries are already working towards more controlled drug
wholesale. For example, in 2004 the Chinese drug regulatory authority cut the number of drug
wholesalers in the country from 16,000 to 7,445 (Yadav et al., 2011). This is still many more
then in the United States, Europe, or Japan, but it is an admirable move in a more sustainable
direction.
Proponents of the current drug wholesale system maintain that a small number of
wholesalers cannot serve the drugs market of developing countries. They reason that a system of
three or four large primary wholesalers may work in Europe or North America, but in
developing countries a few companies could never guarantee fine-mesh distribution
(Foundation Strategy Group, 2005; McCabe, 2009). Medicine shops in Kenya, for example,
report buying from a range of pharmaceutical and general wholesalers both in and outside of the
shop’s district, as well as mobile vendors and manufacturers (Amin and Snow, 2005).
Others argue that raising the quality standards for drug distribution carries an inherent
trade-off of decreased access to medicine (OFT, 2007). Analysis of successful distribution
chains, such as the Coca-Cola distribution chain, suggests this is a false dichotomy, however
(Yadav et al., 2013). ColaLife, a nonprofit, has been using Coca-Cola’s fine mesh distribution
chain to bring oral rehydration and zinc supplements to remote areas since 2008 (ColaLife,
2012). Steps toward a more controlled and efficient wholesale market can protect patients in the
markets most hurt by bad quality drugs. A reduction in the number of licensed wholesalers and
use of more efficient distribution chains can help the wholesale market around the world.
DRUG DIVERSION
More stringent licensing requirements can improve the wholesale system, but drugs will
still need to move from factory to the vendor, passing through many hands before reaching the
patient. With every transaction on the chain, there is a risk of the drug supply being
compromised. Criminals take advantage of places where the distribution chain breaks down and
medicines depart from documented chain of custody. Drugs that leave the proper distribution
system are called diverted drugs; the markets that trade diverted drugs, or more generally,
markets that trade with little authorized oversight, are called gray markets.
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