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 systems 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

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.



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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, explain- ing differences between the systems 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 se- curity 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 sup- ply chain does not disintegrate at the point closest to the patient. Disorga- nized drug markets, both real and on the internet, undermine regulatory checks on medicines distribution. AN OVERVIEW OF DRUG DISTRIBUTION IN DEVELOPED AND 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 phar- macy or dispensary (Yadav and Smith, 2012). For example, in the United States about three-quarters of all pharmaceuticals are bought in retail 197

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198 COUNTERING THE PROBLEM OF FALSIFIED AND SUBSTANDARD DRUGS Key Findings and Conclusions •  few national firms control most of the primary wholesale market in A rich countries. In developing countries, hundreds, sometimes thou- sands, 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. 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 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 West- ern 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). Excessive fragmentation is an important difference between developed and developing countries’ 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 par- allel distribution systems of varying efficiency run in the same country.

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Supplier(s) Manufacturer Wholesaler distributor Pharmacy Patient (primary) or hospital Repackager Wholesaler distributor (secondary) FIGURE 5–1 The drug distribution system. SOURCE: FDA, 2011b. 199

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PRIVATE SECTOR PUBLIC SECTOR NGO SECTOR 200 NGO international International Manufacturers Procurement agents warehouse Manufacturer’s NGO national Central medical stores national subsidiary warehouse National Importers and wholesalers Regional Regional NGO regional Distributors medical stores warehouse Sub- Private District medical stores District wholesalers subscribers and district hospitals City or large town Pharmacies Health center Small town or rural community Second-tier pharmacies Community NGO clinics and chemical sellers health worker PATIENTS FIGURE 5–2 The private, public, and NGO drug distribution systems for essential medicines in developing countries. NOTE: NGO = nongovernmental organization. SOURCE: Yadav et al., 2011.

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WEAKNESSES IN THE DRUG DISTRIBUTION CHAIN 201 TABLE 5–1 Differences in Overall Structure of the Pharmaceutical Market in Developed and Developing Countries Factor Developed Countries Developing Countries Payer or Strong presence of public or Mostly payments are made reimbursement private insurance companies out of pocket. Social health and limited out-of-pocket insurance systems are expenditure. expanding in many emerging markets. Private insurance plans are also growing in some emerging market countries. Regulatory Strong, well-defined laws and Weak fragmented regulatory structure overall good ability to enforce structures, ill-defined laws regulations. in some instances, and poor ability to enforce regulations. Patented, generic The market for prescription drugs Poor regulatory structure vs. branded generic consists of patented drugs and creates a strong market for generics. branded generics (brand is used as a signal of quality by the patient). Prescription Prescription drugs can only Retail drug shops often adherence be dispensed with a formal dispense medicines and also prescription. act as the first point of health care contact for many patients. Balance of power Buyer (insurance companies or Balance of power is tilted in the system national health system) monopoly toward the manufacturer creates good balance of power and the distribution channel. between the manufacturer and The large fraction of patients the patients. In the United States, purchase with out-of-pocket pharmacy benefit managers and funds and have little bargaining drug formularies are commonly power. used as a means to ensure further balance of power. SOURCE: Adapted from Yadav and Smith, 2012. Box 5-1 describes the confusing drug distribution systems often found in humanitarian emergencies. In OECD 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 distri- bution 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

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202 COUNTERING THE PROBLEM OF FALSIFIED AND SUBSTANDARD DRUGS 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 per- cent 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 or- ganizations (NGOs), and 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, to stipulate that quality-assurance guidelines not be relaxed during emer- gencies, 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 humani- tarian 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 medi- cal 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, 2007). At times the guidelines are followed closely; for example, humani- tarian emergencies in East Timor and Gujarat State saw few inappropri- ate donations (van Dijk et al., 2011).

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WEAKNESSES IN THE DRUG DISTRIBUTION CHAIN 203 low- and 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 second- ary 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 phar- macies 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

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204 COUNTERING THE PROBLEM OF FALSIFIED AND SUBSTANDARD DRUGS 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. pharmaceuti- cal distribution chain. • Wholesalers buy and sell drugs in response to market demand, re- peatedly repackaging products. In wholesale repackaging, illegitimate products can gain authentic packaging, and clean, authentic packag- ing is removed and not always destroyed. •  the United States, state pharmacy boards or other state agencies In license wholesalers. Their licensing requirements vary widely. Unscru- pulous 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 drug wholesale in the United States could build momentum for increased control of the drug wholesale market in low- and middle-income countries. required when dealing with many suppliers and their generally poorer bar- gaining power give the secondary wholesalers weak incentives to stock a wide variety of products or brands (Yadav, 2009). 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, 2010; 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 prod- ucts other than pharmaceuticals. Their staff are not required to show skills

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WEAKNESSES IN THE DRUG DISTRIBUTION CHAIN 205 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 sec- ondary 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 that 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, . . . 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 cost. These companies exploit problems in the regulated drug market, such as drug shortages. Hospital pharmacists are under pressure to fill prescrip- tions 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 (Aleccia, 2011; ISMP, 2011). More than half of surveyed hospitals in the United States buy cancer medicines from the gray market (Gatesman and Smith, 2011). A similar proportion of U.S. hos- pital 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 af- terwards” (ISMP, 2011). Box 5-2 describes one such gray market purchase. Some changes to the drugs wholesale system could protect the Ameri- can 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

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206 COUNTERING THE PROBLEM OF FALSIFIED AND SUBSTANDARD DRUGS BOX 5-2 Falsified Avastin’s Circuitous Path to the United States A fake drug originally manufactured in Turkey took a winding path to the United States in late 2011 and early 2012, where it found its 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 com- pany 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, appar- ently unaware of the problem, purchased the Avastin from Turkey from a Syrian middleman in Egypt, and subsequently sold it to another distribu- tor 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 phar- macy that often uses overseas companies to source discount drugs. Ulti- mately, 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 fal- sified Avastin was a good deal for such practices (Weaver and Whalen, 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 wholesal- ers with an equally porous network of transport and logistics companies, then it is no improvement. More rigorous licensing and regulation of the wholesale market, es- pecially 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

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WEAKNESSES IN THE DRUG DISTRIBUTION CHAIN 207 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. Path of Fake Avastin The fake Avastin traveled through a series of overseas suppliers before reaching the Canada Drugs’ network. Companies controlled by Canada Drugs procured the counterfeit cancer medicine, marketed it to U.S. doctors, Copenhagen, Denmark and shipped it through a contractor in Tennessee, court records and business documents show. Doctors identified by the FDA as the network’s customers were warned that they may have bought the fake Avastin. Nottingham, UK Istanbul, Winnipeg, Manitoba Zug, Turkey Switzerland Belgrade, MT ? Corporate Headquarters Supplier Gainesboro, TN Marketing Not in Canada Drugs’ network In Canada Drugs’ network Number of medical practices warned by the FDA that they may have bought the fake Avastin 1–4 Total SOURCE: Weaver and Whalen, 2012. Barbados 5–10 10–25 76 reduce the number of transactions in the drug distribution chain, thereby improving security. Recommendation 5-1: State licensing boards should only license whole- salers and distributors that meet the National Association of Boards of Pharmacy accreditation standards. The U.S. Food and Drug Adminis- tration, 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 sys- tem account for much of the United States’ vulnerability to falsified and substandard drugs. Limiting the wholesale market to vetted firms would

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