On a brisk morning in March 2013, dozens of DEA agents descended upon a warehouse in Aurora, Colo.
This was not your typical drug bustâ€”the breaking up of a meth lab or some seedy way station in the illicit drug trade. The facility where the investigators had assembled that morning, brandishing an Administrative Inspection Warrant, was a distribution center operated by one of Americaâ€™s largest public companies, the giant drug wholesaler McKesson (MCK, +0.23%) , which ranks No. 5 on this yearâ€™s Fortune 500.
The incident is a case study in how companies in the pharmaceutical supply chain have come under fire for their alleged role in the country’s opioid crisis and of the questions that have been raised about the responsibility of middleman companies that distribute prescription painkillers.
The drugs that passed through McKessonâ€™s Aurora facility were all legal, FDA-approved medicines. McKesson, with its 28 drug distribution centers, provides the pipes of Americaâ€™s ever-running pharmaceutical supply chain, moving millions of drugs every day from their DEA-registered manufacturers to the DEA-registered pharmacies that dispense them. The company delivers a third of all medicines in North America.
What had brought federal investigators to the doors of its Colorado distribution center were questions about the company’s processes around a small and highly regulated subset of those pharmaceuticals known as controlled substances. The agents were particularly interested in the facilityâ€™s practices when it came to an even smaller subset of those scheduled drugs: the highly addictive pain medicines containing oxycodone and hydrocodone that have been at the center of the nationâ€™s opioid epidemic. (Based on QuintilesIMS data, Fortune estimates these drugs accounted for roughly $2.9 billion, or 1.5% of McKesson’s revenues in 2015.)
Over the previous decade, for a variety of reasons, these painkillers had been prescribed in greater and greater numbers. Since 1999, the amount of these medications sold in the U.S. nearly quadrupled according to the CDC; in 2014, there were enough prescription opioids dispensed in America to give every adult a bottle of their own pills. A number of these highly addictive painkillers get diverted, landing in the hands of patients who misuse them or lack a legitimate medical need; often, they wind up with people to whom they were never prescribed.
The DEA was on a mission to determine whether McKessonâ€™s Aurora facility was doing its part in preventing this â€œdiversion,â€ or the illegitimate, non-sanctioned use of these prescription drugs. Though wholesalers like McKesson have limited control over what happens to the drugs they drop off at the pharmacy door, they have a legal obligation to maintain an effective system that will help prevent diversion; they are required to detect and report â€œsuspicious ordersâ€â€”those of unusual size, frequency or deviating from a customerâ€™s normal patternsâ€”to the DEA. Those â€œsuspicious orders,â€ a term many in the industry consider to be vague and impractical, theoretically serve as investigative leads for the agency.
As Fortune reported in a June 15, 2017 magazine feature, â€œAs America’s Opioid Crisis Spirals, Giant Drug Distributor McKesson Is Feeling the Pain,â€ the $192 billion wholesaler earlier this year settled claims with the Department of Justice, that between 2008 and 2013, it had effectively turned a blind eye and failed to warn the DEA about the large number of suspicious orders of prescription opioids it shipped certain parts of the country. The companyâ€™s $150 million settlement agreement was the largest and most severe of its kind involving a drug wholesaler, or any member of the pharmaceutical supply chain over violations of the Controlled Substances Act. (Since 2008, the industry along with large pharmacy chains, have collectively paid more than $425 million in state and federal settlements related to the issue). In its recent settlement, McKesson acknowledged failing to identify and report â€œcertain orders placed by certain pharmacies which should have been detected by McKesson, in a manner fully consistent with the requirements” set forth for the company by the DEA. The company maintains that it settled with the government â€œin the interest of moving beyond disagreementsâ€ about whether McKesson was in compliance.
The magazine feature highlights the governmentâ€™s investigation of the companyâ€™s conduct at its Landover, Md., distribution center (which closed in 2012 for unrelated reasons). Here, weâ€™ll tell the story of another one of the federal investigations behind the $150 million settlementâ€”this one of the Colorado facilityâ€”that led the government to allege that McKesson had fallen down on the job.
What put McKessonâ€™s Aurora site on investigatorsâ€™ map was the fact that for several years, from June 2008 to May 2013, the facility had reported almost no suspicious orders. During that period, the distribution center flagged for the DEA just 16 of the more than 1.6 million controlled substances orders it processed, according to the DOJ. All 16 of those orders were reported in March 2012â€”they dated back to January 2012 and related to a single independent pharmacy in Fort Lupton, Colo. with which McKesson was no longer doing business.
The absence of other suspicious order reports made the government, well, suspicious. McKesson is the largest pharmaceutical distributor in America; it didnâ€™t make sense to the Feds that there wouldnâ€™t be many more out of a distribution center of Auroraâ€™s size. Plus, in 2008, the Aurora distribution center had been at the center of another settlementâ€”this one for $13.25 millionâ€”for the same issue: failing to report suspicious orders (McKesson did not admit wrongdoing). As a result of that administrative agreement, McKesson agreed to design and operate a new company-wide system to prevent diversion.
The company implemented that system, its Controlled Substance Monitoring Program (CSMP), in 2008; in Aurora, it just didnâ€™t yield any suspicious orders until the handful that came in on the Fort Lupton pharmacy in March 2012.
By its own admission, McKessonâ€™s monitoring programâ€”which assigned customers monthly thresholds for controlled substances and involved three levels of reviewâ€”was geared more towards reporting suspicious customers than isolated suspicious orders; the company believed this was the more practical approach to identifying and preventing diversion. “We built a program to investigate customers and, if they were suspicious, terminate them and share examples of suspicious orders with the DEA,” says a company spokesman. Accordingly, McKesson tended to report suspicious orders to the DEA in batches; once it had concluded through an investigative process that the customer was suspicious, it would file a handful of the orders that, over time, had led the companyâ€™s compliance staff to determine that was the case. The order reports simultaneously filed in March 2012 about the Fort Lupton pharmacy reflect that approach.
The company also believed that approach passed muster with the DEA; McKesson briefed the agency on its program at its inception, and again during a compliance inspection in 2008. It was not informed of any issues with its monitoring program for a period of years. â€œWe had no reason to believe we were not meeting their expectations,â€ explained a spokesperson with McKesson. The DEA maintains it never formally endorses or approves such programs.
In any case, McKesson Auroraâ€™s reporting underwhelmed the government; in a four-year period, the facility had reported just a handful of orders about one suspicious customer. During that time, it had done business with others that one might have expected to raise alarms: Among those was Platte Valley Family Pharmacy, a Brighton, Colo., establishment managed by a burly, balding redhead named Jeffrey Clawson. Clawson had a history with McKesson; his previous and now-defunct business, Brighton Pharmacy, had been involved in the investigation that led to the companyâ€™s 2008 settlement.
His orders for Platte Valley Family Pharmacy raised red flags; between 2008 and 2011, the volume of oxycodone 30mg orders McKesson provided the outlet increased 1,469%. At the time, McKesson didnâ€™t report those orders or any others placed by the pharmacy to the DEA, according to Coloradoâ€™s January 2013 indictment of Clawson. He and 14 co-conspirators were charged for their participation in an oxycodone ring operated in Colorado and Oklahoma. The stateâ€™s indictment also made note of McKessonâ€™s roleâ€”for much of the scheme, the company had unwittingly supplied the narcotics. In 2014, Clawson was sentenced to 15 years in prison for his role.
When DEA agents showed up at the Aurora site in March 2013, McKesson turned over a substantial number of documents to agents, including Aurora’s monitoring program files that helped shed light on why the facility hadnâ€™t submitted more suspicious orders.
These documents became key to the governmentâ€™s investigation which alleged that between 2009-2013 the company “did not fully implement and adhere to” its own compliance program. At Aurora, the government alleged the distribution center preemptively raised thresholds for customersâ€™ controlled substances orders or set them at inappropriately high levels so that they would never trigger a review (or possibility of a suspicious order report); in other cases, it alleged the distribution center had ignored thresholds and supplied pharmacies volumes of controlled substances that exceeded their assigned amount without a proper review. Investigators believed the companyâ€™s reviews over whether to supply customers more controlled substances were not meaningful and were used as a sales tool; customers were granted threshold increases for reasons, like the 4th of July, or the closure of an area pharmacy years earlier, that the government considered less than compelling.
McKesson denies these allegations. The company objects particularly to the idea that sales were a motivating factor: â€œOnly McKessonâ€™s Regulatory personnel have the authority to raise a customerâ€™s threshold limit, and the compensation for these personnel has never been based on revenue or profitability targets for sales of controlled substances,â€ a McKesson spokesperson commented. â€œMedications that are commonly diverted and abused are purposefully excluded from McKessonâ€™s compensation metrics to eliminate any incentive to increase sales of those products.â€
The Aurora distribution center continued to operate normally in the midst of the federal investigation; during this period, it did not have its registration to distribute controlled substances suspended or revoked as the government has done with other distributors.
Indeed, after the DEAâ€™s March 2013 visit, McKesson swiftly sprang into compliance. Between June and November of that year, as a result of enhancements the company had made to its monitoring program, the Aurora distribution center reported 2,447 suspicious orders, many of which dated back months and years. The facility also terminated relationships with 20-some independent pharmacy customers for the same reason.
McKesson has has continued to invest significantly and enhance its efforts to guard against diversion in the years since. It has also joined the broader effort to address the countryâ€™s opioid epidemic.
As for the record settlement it recently finalized with the DOJ, the company speaks of it as a realized opportunity. Says a McKesson spokesperson, â€œWe chose to spend [two years] building a better partnership with the DEA where we would move forward with full understanding of our program and a process to share information on an ongoing basis to partner in the fight against diversion.â€