May 10 (Bloomberg) -- The day after U.S. drug agents showed up at Cardinal Health Inc.’s distribution center in central Florida, probing oxycodone sales, the company’s compliance chief sent a handwritten note to “Michele” -- Michele Leonhart the head of the Drug Enforcement Administration.
As the Justice Department’s second-in-command before joining Cardinal in 2008, Craig Morford had overseen the DEA while Leonhart was acting administrator. He was hired to manage compliance after the company’s previous run-in with the DEA in 2007, one of his specialties being “interactions with government agencies,” according to Cardinal’s website.
Morford attached his note to a three-page memo touting Cardinal’s efforts to keep prescription narcotics from reaching addicts and criminals. It suggested a meeting with Leonhart to address the drug-diversion problem “in a non-adversarial way,” according to documents filed in federal court.
The bid failed.
In February, the DEA suspended Cardinal’s license to ship controlled substances from the Lakeland, Florida, facility, which supplies 2,500 pharmacies. The agency alleged the company hadn’t made sure the drugs went only to legitimate patients and ordered Cardinal to explain why the suspension shouldn’t be made permanent.
Cardinal will get to make its case at a hearing later this month, set to be scheduled today by a DEA administrative law judge. The judge will send a recommendation on the license to Leonhart, whose decision can be appealed to federal court.
The behind-the-scenes conflict between Cardinal and the DEA came to light in February after the company asked a federal judge in Washington for an emergency ruling to overturn the suspension. Internal reports by the company and agency, sworn statements, e-mails and customer data provide an inside view of what caused the showdown.
Cardinal Chairman George Barrett, responding to the suspension, said the company was being held accountable for “parts of the supply chain that we do not control.”
“We do not write prescriptions,” he told analysts in a Feb. 3 conference call. “We do not dispense controlled medicines, nor do we license pharmacies.” In court papers, the company argued it only supplied DEA-registered outlets.
In the DEA’s view, Cardinal, the second-largest U.S. drug distributor with revenue of $102.6 billion in 2011, was helping fuel a national surge in abuse of addictive painkillers. It was also a recidivist. Cardinal settled similar allegations in 2008 for $34 million, then the largest fine under the Controlled Substances Act.
Months of Proceedings
Now Cardinal may face months of administrative proceedings and appeals as it seeks to restore drug distribution from Florida. It also risks lost market share, federal fines and state probes, and the possibility that the case will make it harder to win U.S. contracts.
A 10-month suspension of three Cardinal facilities, including Lakeland, in 2007 cost the company about $833 million in lost sales, according to a court filing by the company.
From the DEA’s first facility suspension on Nov. 28, 2007, to Oct. 29, 2008, when company reported first-quarter earnings after settling with the agency, Cardinal shares fell 40 percent to $25.21 from $42.26. Cardinal rose 10 cents to $42.33 at 3:30 p.m. in New York.
To avoid such risks, Dublin, Ohio-based Cardinal spent more than $16 million modifying its suspicious-activity monitoring program, according to Morford, who told Leonhart 14 employees are “exclusively dedicated” to it.
Yet less than a year after pledging improvement, the company failed to act on a “glaring” pattern of oxycodone orders that should have triggered a crackdown on several customer pharmacies in Florida, DEA special agent Gary Boggs said.
“The only thing I can think of is that they chose not to for purposes of profit,” Boggs said in an interview.
Last year, Cardinal shipped enough of the semi-synthetic opiate painkiller oxycodone to two CVS Caremark Corp. pharmacies in Sanford, Florida, to supply a population eight times the city’s size, according to the government. The DEA alleged in court filings that Cardinal didn’t question the orders or heed warnings to conduct on-site audits.
“These were not just high numbers,” Boggs said in an interview. “These numbers were off the chart.”
Barrett, Cardinal’s chairman, called the suspension “overly aggressive” and “counter-productive” in his Feb. 3 call. The same day, the company made its failed effort in court to lift the suspension.
‘Tools and Systems’
“We have been investing, and will continue to invest in people, tools and systems designed to detect and prevent diversion of controlled drugs,” Debbie Mitchell, a spokeswoman for Cardinal, said, declining to comment on the DEA case.
A phone call to Morford was directed to Mitchell, who said he couldn’t be interviewed.
“There’s a lot of debate as to whether the DEA should be prosecuting Cardinal to the extent it is since the company doesn’t directly interact with patients or physicians,” said Adam Fein, a consultant for drug manufacturers and the founder of Pembroke Consulting Inc., a Philadelphia-based management advisory and business research firm.
“Many people, including me, believe they are overstepping their bounds in going after Cardinal in this manner,” he said in an interview.
About 5 million Americans use painkillers such as oxycodone, hydrocodone and oxymorphone for non-medical purposes, according to the government’s 2010 National Survey on Drug Use and Health.
A baby is born every hour in the U.S. addicted to prescription painkillers, according to a study published April 30 in the Journal of the American Medical Association.
In Florida, identified by the DEA as the “epicenter” of illegal use of painkillers, more than 4,000 people died in 2010 from overdoses associated with oxycodone, methadone, hydrocodone, morphine and benzodiazepines, according to data from the Florida Medical Examiner’s Office cited in court documents. The same year, Florida’s surgeon general reported that 98 of the 100 doctors dispensing the most oxycodone in the U.S. were located in the state.
A prescription of 180 pills of 30 milligrams of oxycodone without health insurance retails for about $260. On the street, each pill fetches as much as $30, according to the DEA. Pills bought in Florida are illegally sold along the East Coast and in the Midwest, the DEA reports.
The DEA has established “red flags” to look for drug diversion. Suspicious activities include groups of customers appearing at pharmacies miles from home, and presenting prescriptions from the same doctors for the same drugs to treat the same conditions. And they pay in cash.
“The majority of people have lower lumbar pain,” Susan Langston, the DEA’s acting diversion program manager in Miami, said during an April 25 suspension hearing involving Cardinal customer CVS.
Last year, the top 25 drug wholesalers in Florida distributed more than 572 million oxycodone pills to retail pharmacies in the state. Cardinal accounted for more than 146 million, or about 25 percent of the total, according to the agency.
“We’re very pleased the DEA suspended their license,” said Florida Attorney General Pam Bondi, a Republican who has advocated for tougher laws against prescription drug abuse and set up a state task force investigating at-birth addiction.
“Certainly in any case where someone’s license is pulled by the DEA, we’d also be looking at them carefully,” Bondi said in an interview.
Cardinal’s Lakeland center -- one of its 25 within the U.S. approved to handle controlled substances -- distributes drugs in Florida, Georgia and South Carolina. After a federal judge upheld the immediate suspension on Feb. 29, Cardinal switched distribution for those states to a facility in Jackson, Mississippi.
Jon Giacomin, president of Cardinal’s U.S. distribution, predicted in a Feb. 13 court filing that the current suspension “would have an even greater impact” on the company than the one in 2007 because the earlier case also disrupted Florida distribution of competitors McKesson Corp. and AmerisourceBergen Corp., he said.
“Not being able to distribute controlled substances from one location can have a detrimental effect on the whole corporation,” said John Mudri, a former DEA official who now runs a prescription drug consulting business. “How far that extends will be DEA’s call.”
Ohio Food Distributor
Cardinal was founded in 1971 as a food distributor in Columbus, Ohio. It branched into pharmaceuticals in 1979 and became publicly traded four years later. By 1994, Cardinal’s annual revenue was about $6 billion, according to the company’s website.
Since then, the company, with more than 30,000 employees worldwide, has expanded into surgical products and pharmacy franchising. In November 2010, Cardinal bought China’s largest pharmaceutical importer, Zuellig Pharma China.
In 2007, Cardinal settled a Securities and Exchange Commission lawsuit for $35 million over its revenue reporting from 2001 to 2004. Three former executives, including its chief financial officer, Richard Miller, also reached settlements with the SEC, which accused them of lying about company finances. The company and the executives settled without admitting or denying the allegations.
Cardinal fired Miller, restated results and lost almost half its market value after federal regulators intensified the accounting probe in 2004. The company agreed in July 2007 to pay $70 million to settle four shareholder lawsuits over issues that included stock-option grants and its takeover of Syncor International Corp.
Last year, Cardinal agreed to pay $8 million to settle a false claims lawsuit with the Justice Department without admitting liability. The whistle-blower suit was brought by a pharmacy owner and a pharmacy consultant who claimed Cardinal paid the owner $440,000 to buy drugs covered by Medicare and Medicaid.
After the 2007 diversion case, settled before an administrative hearing was held, Cardinal pledged to make monthly reports on drug sales to the DEA and to hire an expert to run a program designed to detect suspicious orders.
Morford joined the company in May 2008 as chief compliance officer. His previous job was running the Justice Department’s day-to-day operations as acting deputy attorney general, appointed by President George W. Bush.
At a health-care conference in 2008, Cardinal’s then-chairman, R. Kerry Clark, told analysts that the company’s regulatory compliance “has not been where we want it to be and it has cost the company quite a lot of money.” Morford, who moved up to chief legal officer the next year, would help Cardinal become “best-in-class” in fulfilling its compliance obligations, Clark said.
Morford’s compensation last year was $1.2 million, including about $471,000 in salary, according to company filings.
In 2010, the DEA told Cardinal it should take a closer look at its Florida customers because of the state’s growing diversion of prescription drugs, according to a court filing by Michael Mone, Cardinal’s anti-diversion official. After Cardinal reviewed 53 of its largest independent pharmacy customers that November, it terminated five and reported them to the DEA and the Florida Board of Pharmacy, he said.
Yet when the DEA analyzed which Florida pharmacies bought the greatest volumes of oxycodone, two of the biggest buyers were in Sanford and supplied by Cardinal.
“I considered it to be highly suspect that two of 14 pharmacies in a city of only 53,570 residents could alone be dispensing 7.2 million dosage units of oxycodone over an approximately three year period,” Leonhart said in court papers.
Cardinal shipped two CVS pharmacies in Sanford enough of the drug to serve a city of 400,000, Clifford Reeves, a Justice Department lawyer, said at a court hearing in Washington on Feb. 29.
The company filled orders 44 times for its top four customers that exceeded its own limits on monthly volumes without adequately documenting the reason, as required by regulations, the DEA said.
On Oct. 28, DEA agents visited one of the CVS stores. The chief pharmacist told investigators that customers often requested certain brands of oxycodone using street names such as Ms or blues, according to a court declaration by DEA investigator Ruth Carter. About every third car in the pharmacy’s drive-through had prescriptions for oxycodone or hydrocodone, she said.
Cardinal wasn’t obligated to audit CVS because the company -- unlike independent pharmacies -- has its own compliance programs, according to Mone’s court declaration.
Carolyn Castel, a CVS spokeswoman, said the company works with the DEA to prevent drug abuse and had “dramatically reduced the amount of oxycodone” sold at the two pharmacies before their suspension. In court papers, CVS said the stores had stopping filling prescriptions from 22 physicians.
Gulf Coast Medical Pharmacy, a top independent customer in Fort Myers, Florida, surrendered its license in a DEA probe, and its owner and manager were indicted in January for conspiracy to possess oxycodone with intent to distribute. Federal prosecutors seized $1.9 million from six bank accounts in connection with the case. Both are scheduled for trial in July after pleading not guilty.
Gulf Coast Sales
From 1998 through Sept. 30, Cardinal sold Gulf Coast about 3.4 million oxycodone pills and made five visits to the pharmacy. In April 2009, Cardinal inspector Vincent Moellering reported that he heard the owner only accepted cash and sold drugs by the pill.
During an October 2010 visit, Moellering and another investigator said they saw groups come into the pharmacy with prescriptions. At the time, Gulf Coast’s owner was seeking to increase orders from Cardinal after dispensing about 463,000 oxycodone pills in two months. Moellering concluded the pharmacy presented a high risk of diversion, according to his internal report.
“I have requested permission to contact DEA,” he wrote.
Cardinal never contacted the DEA about Gulf Coast, according to Carter’s declaration. Instead, the company “substantially increased” monthly shipments of oxycodone to 207,200 pills from 141,000, Carter said.
Cardinal told the appeals court in a May 2 filing that it stopped shipping oxycodone to the two independent pharmacies before the DEA moved against them. Both pharmacies later forfeited their DEA licenses to handle the drugs.
Cardinal says Leonhart’s suspension order doesn’t claim that the company “knew its customers allegedly were engaged in diversion or that Cardinal Health acted with indifference to the risk of diversion” or that any of Cardinal’s employees were involved in diversion.
“To justify immediate suspension, DEA must do more than assert that there is some unspecified flaw in Cardinal Health’s ability to police diversion by the DEA-registered pharmacies to which it sells controlled substances,” Randolph Moss, a lawyer for Cardinal, said in a court filing.
The cases are Cardinal Health v. U.S. Department of Justice, 12-05061, and Holiday CVS LLC v. Holder, 12-05072, U.S. Court of Appeals, District of Columbia Circuit (Washington).
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