Eliminating Pharmaceutical Gray Markets

Eliminating Pharmaceutical Gray Markets

Shortages affect less than 1 percent of the approximately 40,000 pharmaceuticals in the U.S. marketplace, and the vast majority (88 percent in 2013) of shortages involve generic, rather than patented, drugs. Yet when a shortage involves a life-sustaining or significantly life-enhancing drug and there is no substitute, statistics do not convey the full impact of this situation.

So when these drugs are not available through traditional channels, gray markets emerge. Gray markets involve the trading of drugs that have been stockpiled by wholesale distributors. While legal, this activity is unofficial, unauthorized, and unintended by the original manufacturer. It's also profitable, because shortages facilitate price-gouging. And as these drugs are processed by wholesaler distributors and pharmacies, which can involve the drugs changing hands four or five times, they may be repackaged, relabeled, stored under improper conditions, or replaced by counterfeits.

An FDA plan released in October 2013 acknowledges opportunities for all stakeholders — including manufacturers, researchers, professional organizations, and patients — to address drug shortages. But in particular, the Pharmaceutical Research and Manufacturers of America (PhRMA) has an opportunity to lead a market-based strategy to minimize the impact of gray-market activities.

PhRMA’s formal position on gray markets is as follows:

The practice of price gouging by secondary wholesalers, which largely comprise the "gray market," is unacceptable and presents serious concerns for patient safety, as it cannot be assured that the products have been handled in a way that maintains their integrity.

As a leading pharmaceutical industry association, PhRMA has an opportunity to encourage a self-regulatory approach. PhRMA could promote an industry-wide policy in which drug manufacturers insist on anti-gray-market provisions in their contracts with wholesale distributors. Contracts could, for example, require distributors to buy only from manufacturers and to sell only to pharmacies and hospitals. These are called "Authorized Distributor of Record" agreements.

Pharmacies and hospitals, meanwhile, should buy drugs only when the drugs have the proper "pedigree." Federal and state laws usually require wholesale distributors to provide their customers a record of the distribution route a drug has traveled since it left the manufacturer. Pharmacies and hospitals should make sure to obtain these records and inspect them carefully.

The first public reaction to a persistent industry problem is to look for government solutions. But in this case, if PhRMA takes the lead, a self-regulatory approach may work best.

Thomas A. Hemphill is a professor of strategy, innovation, and public policy in the University of Michigan-Flint School of Management and a senior fellow with the National Center for Policy Analysis.

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