The Online Drug Trail >>
From the outside, it looked like any other white-walled, terra cotta-roofed bungalow in sun-bleached Belize, perhaps someone's quaint tropical hideaway. Inside, however, the house's peripatetic occupants didn't act like they were on vacation. Workers in sneakers, shorts, and rubber gloves produced mountains of allegedly counterfeit prescription pills. Hundreds of pounds of raw ingredients came from China via a broker in New Jersey. The drugmakers whipped up their products in a dented mixing machine and blender. Finished tablets—imitations of Viagra, the cholesterol medication Lipitor, and Ambien, a sleep aid—were stored in gray garbage bins before being shipped out in plastic sandwich bags. The pills allegedly were hawked via spam e-mail and sold, without prescriptions, from such Web sites as www.planetpharmacy.bz.
According to the U.S. government, the brains behind the Belize operation belonged to Jared R. Wheat, a 34-year-old Atlanta-area businessman with a colorful history of marketing drugs and dietary supplements. This alleged enterprise typifies a burgeoning online black market in phony prescription drugs. One way in which the organization isn't typical, though, is that the government took action against Wheat. In September federal agents arrested him in Atlanta on charges including importation of controlled substances, disseminating adulterated drugs, and running a "continuing criminal enterprise." He has pleaded not guilty to all 45 counts against him and is jailed in Atlanta, awaiting trial next year.
His lawyers say he has been wrongly associated with the prolific little house in Belize and the dubious Web sites that marketed its output. In a written statement, the lawyers add that their client "has substantial defenses in this case, however, rather than airing them in your publication and therefore giving the government the benefit of that information, we intend to produce that information to a jury at trial and to the court in the form of legal challenges."
The pharmaceutical industry and U.S. law enforcers say they are increasingly worried about online pill pirates, but they are rarely successful in shutting them down. Recently security officials at AstraZeneca (AZN ) put fake and genuine versions of its $4.6 billion-a-year heartburn medicine Nexium on the desk of CEO David Brennan. They looked exactly the same, he says. "This is a very serious problem that is accelerating," Brennan adds. "It's hugely profitable for the people who do it." Jon L. Praed, an attorney at Internet Law Group in Arlington, Va., which tracks illegal pharmacy sites for drug companies, estimates that Internet counterfeits generate billions of dollars in revenue a year, a figure consistent with those offered by other experts.
Several factors drive demand for cheap drugs on the Internet: Drug prices in the U.S. exceed those in other developed countries by 18% to 67%, and more than 46 million Americans lack health insurance. A growing number of employers are pushing employees to order lower-cost generic drugs from pharmacy Web sites. This has spawned legitimate online sellers, such as Walgreens.com (WAG ), CVS.com (CVS ), and medco.com. But shady operators are far more pervasive—and more convenient for people who want to avoid the hassle or embarrassment of obtaining a doctor's prescription. Based on a study of 185 sites, Columbia University's National Center on Addiction & Substance Abuse reports that only 11% of Internet pharmacies require customers to provide a prescription. All the rest, an astounding 89%, appear to operate illegally. Conservative estimates of the number of dubious sites reach into the tens of thousands, according to Internet Crimes Group Inc., a corporate consulting firm.
Rogue drug distributors find customers mainly via spam. Internet security experts concur that nearly 25% of all e-mail, or some 15 billion messages a day, is spam advertising drugs, mostly counterfeits. Even if recipients click on only a tiny fraction of these offers and buy something after a minuscule percentage of their clicks, that would still translate into tens of thousands of online drug purchases a day. James Christian, who heads global security for Novartis (NVS ), estimates the number of Americans buying drugs online is "in the millions."
NO ACTIVE INGREDIENTS
The profusion of fakes puts consumers at risk. Some online drug shipments seized by U.S. authorities have turned out to be near-replicas of brand-name products. But others lack enough active ingredients to do any good, or are too potent. Either way, they endanger users.
Foreign substances sometimes end up in the pills. Phony Viagra made in Thailand has contained vodka; bogus Tamiflu recovered in San Francisco was manufactured with Vitamin C and lactose. Online purchases BusinessWeek made in connection with this article yielded imitations of Lipitor and the anti-anxiety medication Xanax that laboratory tests showed had no active ingredients whatsoever.
Craig Schmidt fell victim to questionable Internet medicine in April, 2004. The Chicago plastics salesman, then 30, was feeling the stress and back pain of long workweeks often spent on the road. Checking his e-mail one day, he noticed ads for Xanax and the painkiller Ultram. He placed $400 in orders without ever speaking to a doctor. When the pills arrived, he took one tablet of each drug and headed for an errand at the hardware store. The next thing he remembers is waking up three weeks later in the hospital. It turned out that each Xanax tablet contained 2 mg of the drug, or quadruple the usual starting dosage. The combination apparently caused him to black out and wreck his car. He had a heart attack, fell into a coma, and suffered brain damage. After an extraordinary recovery, he still takes medication to prevent severe leg spasms. "Don't do what I did," he says. "It's like playing Russian roulette."
Fearful that too many cases like Schmidt's could lead to a public-relations disaster, legitimate manufacturers are struggling to stop suspect Internet pharmacies. Last year, Pfizer (PFE ) filed suit in federal court in New York alleging that two online pharmacies were selling knockoffs of its products, including Viagra. One case fizzled when Pfizer couldn't figure out who ran the site. In the other, company investigators obtained dozens of e-mails sent by Ashok Agarwal of Mumbai, who allegedly sold counterfeit drugs on the Internet. In one message, Agarwal warned shippers in the U.S. to exercise caution, saying: "Our products are not U.S. FDA approved and will not carry any doctor's prescription." Served with legal papers in India, Agarwal has refused to appear in an American court. In March, 2006, Pfizer won a default judgment ordering him not to market anything that resembles Viagra or claim that his products are linked to Pfizer. But there is little the company can do to enforce the judgment. Agarwal, says Pfizer's vice-president for global security, John Theriault, "is beyond the reach of U.S. law. He's home free." Efforts to reach Agarwal for comment were unsuccessful.
The operation in Belize got Pfizer's attention in 2002, when the company filed a complaint with the U.S. International Trade Commission seeking to block Web sites selling knockoff Viagra. Among the sites were at least two that prosecutors say are affiliated with Wheat, but at the time no one connected them to the Atlanta pill entrepreneur. Wheat and his group, meanwhile, were building a lucrative drug empire online and off. According to a Sept. 14, 2006, Drug Enforcement Administration affidavit, from 2000 through this year more than $100 million was deposited in four bank accounts for companies controlled by Wheat. His attorneys have offered records in court showing that in 2005 he personally raked in $3.9 million—all honest money, the lawyers say, though the government begs to differ.
Smart and gregarious, Wheat grew up in comfort in Birmingham, Ala. His father, Robert, was a bank executive; his mother, Carol, worked as a teacher and librarian. In letters filed in federal court in Atlanta, relatives describe a close-knit family in which young Jared thrived. He was an A student and a member of the National Honor Society and Math Honor Society. His mother notes that he still calls his sisters by their childhood nicknames, "Ginge" and "Shrimpy."
By age 18, however, Wheat had taken a wrong turn. He pleaded guilty in 1991 to selling MDMA, or ecstasy, an illegal euphoria-inducing drug popular at clubs and raves. That put him behind bars for two years. Wheat's supervised release was revoked, and he returned to prison in Alabama for two more years in 1995 after being arrested with 30 pounds of marijuana and $17,000 in cash. Interspersed with his criminal pursuits and periods of incarceration were two years of business classes at the University of Alabama at Birmingham.
Wheat incorporated a company in 1998 called Hi-Tech Pharmaceuticals Inc. It was based in a two-story strip mall north of Atlanta on Jimmy Carter Boulevard, just off Interstate 85. During this period, according to the DEA, he began working with David A. Brady, now 40, from whom he appears to have learned new marketing techniques.
Brady, according to a 1998 Federal Trade Commission filing, marketed erectile-dysfunction products with flyers that included endorsements from fictitious physicians, such as a Dr. Alan Bradshaw of a fabricated Carnegie Research Institute. Brady also set up front companies with names like the Institute of Sexual Research and plagiarized a research report from The New England Journal of Medicine to give his products a patina of scientific legitimacy, the FTC said. The agency obtained a permanent injunction in 1999 barring Brady from falsely marketing impotence products. Brady, who didn't concede liability in the FTC matter, has been charged with 41 criminal counts in the Atlanta case. He has pleaded not guilty; his attorney declined to comment.
The FTC has separately claimed that Wheat incorporated his own network of dubious scientific entities, including the National Urological Group Inc., to market herbal weight-loss and impotence pills. The network used a licensed doctor to endorse misleading claims associated with the products, such as enabling users to lose 30 pounds in just 60 days, the FTC said. In November, 2004, the agency sued Wheat and Hi-Tech in federal court in Atlanta over these practices. Wheat has denied wrongdoing and alleged procedural violations by the FTC. The case is pending. Hi-Tech's sales, meanwhile, soared from $1 million in 2001 to $12.7 million in 2004, court records show.
The government claims that Brady had marketed some drugs via Web sites, and Wheat allegedly followed suit in 2001. Using the Internet, they could more easily sell their wares from anywhere, although it is illegal to import prescription drugs into the U.S. without FDA approval. Wheat registered a separate company called Hi-Tech Pharmaceuticals Ltd. and another corporation in Belize, according to documents reviewed by BusinessWeek. Prosecutors say the firms operated from the white-walled house near the Central American country's Caribbean beaches. A woman named Michele Young worked as the day-to-day operations manager, processing orders, sorting pills, and purchasing the rights to Web site domain names, according to the criminal indictment and other court documents. Wheat's lawyers say, however, that he and his companies had nothing to do with any illegal activity there.
Unlike many Web pharmacies, which subcontract pill production to manufacturers in India or China, the Belize operation made pills itself, using the lightly regulated market in active pharmaceutical ingredients, or APIs, prosecutors say. The organization allegedly obtained some of its ingredients from China by way of a Montvale (N.J.) broker called New Chemic Inc. From 2002 through 2004, New Chemic shipped APIs worth more than $580,000 to Belize to make versions of Ambien, Lipitor, Celebrex, and other drugs, according to the DEA affidavit. Gregory J. Rummo, New Chemic's CEO, confirms in an interview that his company sold APIs to Wheat. Rummo says that Wheat claimed "he was not selling into the U.S." When Rummo grew uneasy about this issue in 2004, he adds, he ended sales to Wheat. Nirmal Jhunjhunwala, president of another Wheat supplier, RIA International of Whippany, N.J., says that he always obeyed the law and that he had no obligation to vet his onetime customer: "We ship you the product, and what you do with it is your problem, not ours."
Spam for one of the Web sites the indictment links to Wheat, www.canadiangenerics.com, caught the eye of Gary B. two years ago. (He requested that his last name not be used.) The 50-year-old salesman from a small town in northern Georgia clicked on a link offering "generic Viagra" at a 50% discount. The site pledged that its product was safe because it was imported directly from the government-subsidized health system in Canada. He bought 120 tablets for $191.95. "I didn't have to talk to my doctor, and I didn't have to talk to my health insurer," he says. He admits he was worried when the round blue pills arrived in the mail. They were wedged loosely between two pieces of ordinary paper crudely glued together. But he was eager to surprise his wife, so he went ahead and swallowed several tablets one night when their two teenagers were out of the house. The only effect was his promptly becoming nauseated—and very scared. "I discarded the rest after that," he says. "I didn't know what the hell I was taking."
In the house in Belize, workers made pills under primitive conditions that prosecutors allege were unsanitary. Investigators found what they say is a recipe for 20,000 Viagra tablets written in Wheat's scribbled handwriting. Stephen D. Smith, a company vice-president, was photographed by colleagues mixing pill ingredients in a large bowl while dressed in Bermuda shorts and a gray sleeveless Old Navy T-shirt, according to court testimony. In the photo, Smith is wearing yellow rubber gloves and a gas mask. Charged in the Atlanta criminal case, he has pled not guilty to 41 counts. His attorney, Brett Bloomston, confirmed it is Smith in the photo but declined further comment. Photos of the inside of the house taken later by the DEA show the gray plastic garbage bins labeled "Lipitor" and "Viagra" that were used to store thousands of pills. Blister packs of white, yellow, orange, pink, green, blue, and black pills were taped next to a product list. Fine white dust covered everything.
Among some people affiliated with Hi-Tech there seems to have been concern about getting caught. In an instant-message exchange in 2003, Sergio Oliveira, a company sales representative in Atlanta, warned Belize-based Michele Young to be careful what she said online. "michele, you have to assume that anyone here in the [U.S.] could be working with the govt or could begin doing so if they got in trouble down the road with planet products," Oliveira wrote, apparently referring to the Web site planetpharmacy.bz. Oliveira has pleaded not guilty to 41 criminal counts in federal court in Atlanta. His lawyer declined to comment. Young has been charged in the case but hasn't entered a plea. She is believed to still be in Belize. Neither she nor planetpharmacy.bz responded to requests for comment.
In 2004, the FDA and DEA were growing more concerned about pharmacy Web sites in general and about sites the government connected to Wheat in particular. The FDA purchased knockoffs from a site affiliated with Wheat, according to the DEA affidavit. Tests showed that fake Ambien the FDA bought contained as much as 170% of the prescribed amount of its active ingredient, zolpidem. Such a high level can dangerously depress the central nervous system, the FDA says.
In July, 2004, Belizean police and U.S. DEA agents raided the white-walled house. Authorities in Belize charged Wheat, three other individuals, and three companies with "drug trafficking, money laundering, and preparation for crime," according to the Belize Judicial District. That month, U.S. prosecutors say, Wheat fled to Mexico and Panama to avoid appearing in court. Records in federal court in Atlanta show that on Sept. 17, 2004, he transferred $1.7 million from a Belize bank account to a new one at Banco Continental de Panamá—an above-board transaction, according to Wheat's attorneys.
After the raid, Wheat sent a letter maintaining his innocence to his Belizean lawyer, Glenn D. Godfrey, a former attorney general of that country and former member of its Parliament. Wheat then appeared to offer the lawyer a share of the pillmaking business in return for Godfrey's using his sway with local politicians. "If you would like to buy more shares it is fine with me but I will give you 10% for free," Wheat wrote. "But I need your help with the Prime Minister or whomever to get rid of these charges so we can make some money." Wheat didn't show up in court in Belize, and in March, 2005, officials there issued a certificate of acquittal and withdrew all criminal charges against him. Neither Godfrey nor Belizean law enforcement officials responded to requests for comment.
BIG BOX CUSTOMERS
Despite the mounting legal peril, the Belize operation continued to pump out pills, according to U.S. prosecutors. In February, Wheat's associate, Smith, signed a purchase order for 5,000 kilograms of the appetite suppressant ephedrine and an additional 2,500 kilograms of the decongestant pseudoephedrine from an Indian manufacturer, according to court documents. The products were to be shipped to the house in Belize. But Indian customs officials, wary of such a large order, notified the DEA. The DEA, in turn, obtained a letter dated Apr. 21, 2006, signed "Jared Wheat," that urged his Indian supplier to get moving "or else we shall purchase from China, who already has our export permit verified," according to court documents.
As U.S. law enforcement closed in this summer, Wheat's neighbors in suburban Atlanta observed him frequently talking on a cell phone in front of his gray stucco house. They speculated that he might have been trying to avoid some kind of surveillance. Wheat told one neighbor that he once traveled to Belize because the U.S. government was out to get him. Early on the morning of Sept. 14, DEA agents made his nightmare come true. They raided his house, arrested him, and carted off his Maserati Quattroporte. In their written statement, Wheat's lawyers say: "It has not been Mr. Wheat's practice to hide from the United States government."
Even as he faces the possibility of more than 20 years in prison if convicted, Wheat's business continues to function. As of late November, Wal-Mart (WMT ), CVS, and Kroger (KR ) were all carrying Hi-Tech Pharmaceuticals' most popular product, the sexual stimulant Stamina-Rx. The blue-diamond pills—10 can be had for $14.99 at an Atlanta Kroger—are entirely legal. The big retail chains all say they believe Hi-Tech is complying with an earlier FDA consent decree that required a recall of some batches of Stamina-Rx because it allegedly contained the active ingredient in Eli Lilly & Co.'s (LLY ) impotence drug Cialis. Hi-Tech hasn't admitted liability or that Stamina-Rx has ever contained that ingredient. The FDA says it is "still looking into" Stamina-Rx.
Asked about the pending criminal case, CVS says it is monitoring the situation; Kroger and Wal-Mart declined to comment.
By Brian Grow, Ben Elgin, and Arlene Weintraub, with Keith Epstein in Washington and Susan Zegel in New York