NCPA - National Center for Policy Analysis

Eliminating Pharmaceutical Gray Markets

July 9, 2015

Shortages affect less than 1 percent of the approximately 40,000 pharmaceuticals in the U.S. marketplace, and the vast majority of shortages involve generic 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, according to Thomas Hemphill, senior fellow with the National Center for Policy Analysis.

When drugs are not available through traditional channels, gray markets emerge. Gray markets involve the trading of drugs stockpiled by wholesale distributors. While legal, this activity is unofficial and unauthorized by the original manufacturer. It's also facilitates price-gouging.

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.

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.

Source: Thomas A. Hemphill, "Eliminating Pharmaceutical Gray Markets," Real Clear Policy, July 7, 2015.


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