A lucrative secondary market: Ex-employee, Cardinal both profited in buying discounted medicine

Oct 12, 2008 (The Columbus Dispatch - McClatchy-Tribune Information Services via COMTEX) -- CAH | Quote | Chart | News | PowerRating -- Robert Neil Spence is a name you probably haven't heard and Cardinal Health officials would rather not discuss.

He's a former Cardinal employee who pocketed more than $350,000 in kickbacks from a felon to purchase prescription drugs for the company.

While the Dublin pharmaceutical supplier has been dogged this year by federal authorities for the lack of regulatory compliance while selling drugs to rogue Internet pharmacies, Spence represents another practice under scrutiny: the purchase of discounted drugs on a secondary market from unscrupulous middlemen who often tamper with the goods.

This summer, Spence pleaded guilty in Nashville, Tenn., to federal charges related to the kickbacks that he received from Michael Allyn Carlow. One prosecutor described Carlow as the "worst of the worst" traders in the field.

Spence's case exposes a threat to the nation's drug supply, and court documents in his case illustrate the lengths to which Cardinal Health went to earn profits.

Typically, large distributors such as Cardinal Health purchase medicine from drug manufacturers and then sell it to pharmacies, hospitals and other entities that provide the drugs to patients. But a second market has emerged in which distributors trade with one another, buy manufacturer overruns or obtain drugs from pharmacies that might have ordered too much.

Industry sources say that this secondary market, although lucrative for buyers, is dangerous because it's unregulated and an easy place for unscrupulous operators to dump fake medicine. Drug counterfeiting, which has long been recognized as a problem in Asia, has spread more recently to the United States.

Tom Kubic, executive director of the Pharmaceutical Security Institute in Vienna, Va., said his organization tracks counterfeit and stolen medicines, as well as drugs that are illegally diverted from their intended purchaser. He said the value of seized drugs, commonly traded on a secondary market, varies but can reach hundreds of millions of dollars annually.

"Frankly, I've seen wild guesses that are not particularly helpful," he said. "Real numbers, effectively speaking, are extremely difficult to get to."

Cardinal stopped trading in this market in December 2005. Until then, it was a gold mine because the company could purchase drugs on the cheap and sell them at a huge profit.

Cardinal "must understand the need to not kill the goose who is laying the golden eggs," one Cardinal employee wrote in a 2001 internal e-mail, referring to alternative-source vendors. The e-mail surfaced in a New York attorney general's investigation into the secondary drug market.

Cardinal executives recently refused to answer most questions about Spence, the former vice president of Cardinal's plasma division in the company's office in Nashville, Tenn. Spence's job was to procure blood-derivative products. They include blood-clotting factors used by hemophiliacs, and immune globulin, a solution that includes antibodies designed to fight hepatitis, rabies and other diseases.

Blood derivatives can be incredibly expensive. A small vial of clotting factor VIII, which keeps hemophiliacs from bleeding internally, can sell for $1,000.

Spence actively traded in the secondary market, and Carlow was one of his best suppliers.

During Spence's sentencing hearing June 11 at U.S. District Court in Nashville, Special Agent Michael McElroy of the Internal Revenue Service said that from December 1998 to December 2001, Carlow paid Spence $353,136 in "secret commissions and kickbacks based on (Spence's) purchases on behalf of Cardinal of blood-derivative products from Mr. Carlow."

One rainy day in early April 2001, a soggy UPS envelope that Carlow had stuffed with $5,000 in cash and sent to Spence broke open. After the UPS courier returned the cash to his office, UPS issued a $5,000 check to Spence, which he cashed later that month.

An anonymous tip about the damaged envelope opened the floodgates for the IRS, which uncovered multiple payoffs and eventually busted Spence for mail fraud and filing a false tax return.

The case dragged on until early this year, when Spence pleaded guilty. His attorney, Peter Strianse, said at the plea hearing in February that Cardinal "made a very large profit on the product that it purchased from Mr. Carlow in this black market, and then in turn, sold."

As part of the plea deal, Spence agreed to a jail term of 12 to 18 months.

But shortly before sentencing, his family and friends submitted dozens of pages of testimony begging Judge Aleta A. Trauger to go light on Spence. They said he needed the money because he was hooked on painkillers first prescribed for an old football injury. That was news to U.S. Attorney Darryl Stewart, who said the issue of Spence's addiction hadn't come up until just before the sentencing.

The pleading worked. Trauger sentenced Spence in July to four years of probation and ordered him to pay $75,000 in back taxes to the IRS.

The judge also ordered Spence to pay $50,000 in restitution to Cardinal Health for depriving the company of legitimate income.

"Any time you have 50,000 employees, there's a chance that one person might do something that is not aligned with a company's policy or interests," Cardinal Health spokesman Jim Mazzola said. Cardinal officials would not comment further on Spence.

However, since Spence's case was brought to light in the 2005 book Dangerous Doses, Cardinal was investigated by former New York Attorney General Eliot Spitzer for trading on the secondary market. In late 2006, Cardinal agreed to pay $11 million to settle the charges brought by Spitzer.

Cardinal allegedly was profiting from the past deals, though. The New York attorney general's investigation discovered that a Cardinal executive wrote in an internal e-mail that "We need the margin from these high-risk vendors."

Spence's former boss, David Canniff, expressed shock when federal investigators confronted him with evidence of the payoffs from Carlow to Spence. Even more shocking, however, can be what happens to some people who take diverted drugs.

In Dangerous Doses, Katherine Eban charted the death of a cancer patient who had depended on expensive doses of Procrit, a drug that boosts red blood cells. But the Procrit was tainted: Someone had switched labels of the drug with those of a much weaker version of the drug.

The woman eventually died. Her family sued several companies in the drug-supply chain. One was Cardinal Health, which insisted in court that although it previously had supplied the woman's pharmacy with Procrit, it was not responsible for supplying the counterfeit drug.

Authorities eventually traced the contamination of the drug to Carlow, the trader who paid Spence under the table.

Carlow was sentenced to five years in federal prison in March 2007 for selling $42 million worth of counterfeit Lipitor, a cholesterol-lowering drug. He's currently in Broward County prison in Florida awaiting trial on more than a dozen charges there that include racketeering and grand theft.

mpramik@dispatch.com

The unregulated secondary market poses a risk to consumers because an easy place for unscrupulous operators to dump fake medicine.

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