Prescription Drugs Resold, Repriced Through ‘Gray Market’

This year's shortage of flu vaccine has prompted federal investigators to open an inquiry into the drug industry's "gray market" -- a "dark" area between wholesalers and customers where medications are repeatedly resold by individuals and smaller companies, the New York Times reports. The FDA's Office of Criminal Investigation is currently examining how several small distributors were able to obtain, and consequently resell at elevated prices, thousands of vials of flu vaccine this year. Many of the small distributors offered the vaccine to hospitals and clinics at as much as five times the standard price, and investigators are questioning whether its passage through the gray market broke any laws. Many gray market pharmacies and wholesalers obtain their product by setting up a pharmacy that claims to be purchasing discounted drugs for nursing homes, hospitals or other institutions that typically buy the drugs at "deep discounts." However, instead of sending the medications to these facilities, gray market pharmacies instead resell the drug, for a profit, to a small wholesaler. The wholesaler, in turn, may resell the drug to another wholesaler, sometimes creating a string of transactions that cause the price of the drug to rise repeatedly. Besides possibly violating federal and state laws that restrict the reselling of pharmaceuticals, the repeated selling of drugs could harm their quality. The more times a drug is resold, the greater the risk it may become spoiled by "improper handling," and the greater the risk that it is counterfeit. In addition, recalled drugs that have passed through the gray market may be impossible to trace.

Taking Control of the Situation
The 1987 Prescription Drug Marketing Act aimed to eliminate the gray market, but experts say that it has had "little effect" on the "booming" industry. Government investigators and prosecutors speculate that the drugs passing through the underground market could be valued at more than $1 billion, or 1% of total pharmaceutical sales. Stephen Haynes, former special agent in charge of special operations at the Office of Criminal Investigation, said, "The law and regulations are just fraught with loopholes. Something needs to be done." However, gray market cases are "often very difficult to prosecute," the Times reports, and drug companies may even be aware of the operations of gray market pharmacies. Bruce Houdek, an attorney who represented a man accused of operating a gray market pharmacy, said that drug companies "cast a blind eye" on the issue. Pharmaceutical companies, however, deny that they are ignoring the problem, and some have even hired investigators to examine wholesalers that could by violating the law. Other drug companies have sent auditors to wholesalers and pharmacies, cutting off "suspicio[us]" ones. But the Times reports that drug companies may not necessarily be the source of the problem. Investigations have found that some large wholesalers, which receive the pharmaceuticals from the drug companies, are "doing substantial business" with gray market pharmacies (Petersen, New York Times, 12/14).