The drug wars

Keith Macdonald is the quintessential Nevada regulator a believer that markets will police themselves, a believer that regulators should get out of the way of businesspeople.

And yet Macdonald, the executive secretary of the Nevada State Board of Pharmacy, will stand with his board before a crowd of regulators in a couple of weeks and accept their applause for cracking down hard on a little- known corner of the pharmaceuticals industry.

In fact,Nevada's regulation of the so-called "secondary-source wholesalers" these days is among the tightest of any state in the union, and Macdonald the champion of laissez faire capitalism wishes that more states would follow Nevada's lead.

The state's crackdown is likely to be in the national spotlight in coming weeks as a muchpublicized new book takes a close look at the pharmaceutical business.

It's been a long journey philosophically as well as chronologically for Macdonald and Louis Ling, the Board of Pharmacy's general counsel.

About a decade ago,Macdonald began hearing rumblings of potential problems among secondary-source wholesalers.

Most pharmaceuticals at least 90 percent move from major manufacturers and a handful of major distributors directly to pharmacies, hospitals or doctors' offices.

Some drugs, however, are sold at steep discounts to so-called "closed-door pharmacies" a pharmacy such as one located at a hospital that provides drugs only for the hospital's own patients.

But some of the drugs sold to closed-door pharmacies and physicians' offices instead have been diverted into a secondary-source wholesale market,where they sometimes are traded between wholesalers as much as six or seven times before they were sold to retailers for distribution to consumers.

Because drug makers sometimes sell drugs to closed-door pharmacies for as much as 90 percent discounts, the potential profits are huge.

The secondary-source wholesalers have contended that their business reduces costs for consumers.

"By aggressively discounting drugs, they reduce drug prices at neighborhood pharmacies," said Steven Gibson, an attorney for the Association of Nevada Pharmaceutical Wholesalers, during a hearing before the State Senate in 2003.

What alarmed Macdonald as the 1990s drew to a close, he recalled last week,was a growing number of reports that some of the secondary wholesalers were mishandling drugs as they moved from one set of hands to another.

Nevada investigators found, for instance, that drugs that lost their efficacy unless they were refrigerated had been stored in a storage unit without air conditioning in Las Vegas.

In some instances, investigators discovered that licensed wholesalers and closeddoor pharmacies existed only as paper-shuffling operations in storefronts, never handling the drug vials at all as they speculated on price moves.

When investigators arrived at the addresses listed by licensed wholesalers, they'd be told that the company was just wrapping up its business, and paperwork no longer was available.

And the regulators' alarm grew, Ling recalled, when they began to see counterfeit drugs not generics, but outright fakes that often don't work flowing through some secondary wholesalers.

Counterfeits some of them more valuable, ounce for ounce, than gold pose an obvious threat to the public health.

But just as worrisome, Ling said, is the possibility that bioterrorists could use counterfeit pharmaceuticals as a weapon.

"When the counterfeits started showing up, suddenly people started paying attention," Ling said.

And while Nevada wasn't alone in seeing the growth of the secondary-source wholesalers, it had its share.

The reasons, Macdonald said, are the same as those that attract any business to the state a business- friendly regulatory climate and easy access to California markets.

For some secondary wholesalers who were making big money and spending it on flashy lifestyles, the ability to blend into the background in Nevada was another plus.

At first,Macdonald and the Board of Pharmacy believed the marketplace would solve the problem as reputable retailers wouldn't deal with wholesalers who jeopardized patients' health.

But the market didn't work,Macdonald said last week, and the nationwide dealings of the secondarysource wholesalers demanded action by regulators.

The state began its crackdown in 2001 with legislative passage of what Ling called a "get real" law.

"You had to have a real person in a real office who really knew something about drugs with real drugs on the premises," he summarized.

Licensing requirements were tightened as Macdonald began following the lead of the state's Gaming Control Board and its tight scrutiny of applicants.

Almost immediately, the number of small wholesalers working in the state dropped from more than 40 to about eight.

Another law said that pharmaceutical retailers can't sell to wholesalers, and wholesalers can't buy from retailers a step to stop the flow of drugs out of closed-door pharmacies into the secondary-source markets.

And in a move that was legally challenged, the state ruled that 90 percent of the sales by pharmaceutical wholesalers must be to end users, leaving only 10 percent for trading between wholesalers.

A couple of years later, the state dropped that requirement and instead gave the Board of Pharmacy permission to review any transactions that it views as potentially fishy.

A small group of wholesalers, none of them the giants that dominate the business, have challenged the Board of Pharmacy repeatedly, and legal actions have targeted Macdonald and Ling personally as well as professionally.

(A representative of the Association of Nevada Pharmaceutical Wholesalers didn't return calls last week seeking the wholesalers' viewpoint for this article.) The Nevada crackdown has been followed closely in other states, and the Board of Pharmacy this month will receive an award from the National Association of Boards of Pharmacy for its steps to protect public health.

More attention is likely to come this month with the publication of "Dangerous Doses: How Counterfeiters Are Contaminating America's Drug Supply," a heavily promoted book by Katherine Eban.A portion of that book focuses on Nevada.

None of the process,Macdonald said, has been easy not the hours of rule-making, the days of court hearings, the weeks devoted to public hearings on the four wholesalers who ultimately were barred from doing business in the state.

"It's taken a huge toll on this board," he said."I'm extremely happy that they have been recognized for their accomplishments."