By Anna Yukhananov
WASHINGTON, March 21 (Reuters) - U.S. lawmakers are investigating three pharmacies in Maryland and North Carolina accused of passing critical drugs in short supply directly to wholesalers, who are likely to profit from the scarcity of life-saving medicines, rather than to the patients that need them.
Elijah Cummings, the top Democrat on the influential House Committee on Oversight and Government Reform, began a probe in October to discover why certain companies were peddling cancer drugs at more than a hundred times their normal cost, while hospitals and patients were scrambling to receive any.
The Food and Drug Administration has said the number of drugs in short supply, which include cancer, anesthesiology and nutrition medications, had risen to 220 in 2011 from 56 in 2006, the year a clear trend started emerging.
Many of the drugs are generic, sterile injectable medications, such as cytarabine, a key treatment for leukemia, or fluorouracil, for colon and other cancers.
According to details of the investigation made public on Wednesday, some wholesalers opened up their own phony pharmacies simply to get their hands on drugs in short supply and re-sell them to patients at possibly higher prices. In some cases, the pharmacy and wholesaler were headed by the same person, or by a husband and wife pair.
State officials say pharmacies may be able to get access to scarce drugs when smaller wholesalers can't, on the assumption the drugs will go directly to patients who need them.
The findings illuminate gaps in the patchwork of state legislation that governs this sometimes shady network of pharmaceutical distribution known as the "gray market." And state officials are sometimes a step behind new scams -- hobbled by tight budgets, slow bureaucracies and inefficient communication with fellow regulators in other jurisdictions.
President Barack Obama made drug shortages a national priority in October, and also directed regulators to report cases of price gouging in the "gray market" to the Federal Trade Commission.
"It appears that some of these individuals essentially established 'fake pharmacies' ... What remains unclear is exactly how much they profited from this activity," Cummings said in a statement.
Cummings is investigating the gray market suppliers along with Senator John Rockefeller, chairman of the Senate Committee on Commerce, Science, and Transportation, and Senator Tom Harkin, chairman of the Senate Committee on Health, Education, Labor, and Pensions.
BACK CORNER PHARMACY
In one situation described by the lawmakers, Jessica Hoppe, the president of a drug wholesaler called International Pharmaceuticals Inc, applied to get a pharmacy license to sell drugs to long-term care facilities and infusion clinics.
But during a routine annual inspection, state regulators discovered Hoppe was operating the LTC Pharmacy from a "back corner" of her wholesaler office in Durham, North Carolina.
Instead of serving patients, she was funneling drugs like fluorouracil -- a treatment for colon and other cancers -- to her wholesale business within a day or two of purchasing them for the pharmacy, the documents show.
A pharmacist hired to run the pharmacy surrendered her license in September, and North Carolina officials declined to renew International Pharmaceuticals' wholesaler license at the end of 2011. Under state law, it is illegal for pharmacies to sell the bulk of their prescription drugs to wholesalers without a license, and for wholesalers to purchase drugs from unlicensed sellers.
But it is still unclear whether International Pharmaceuticals can still distribute drugs in 23 other states where it had a license. In a brief interview, a company representative said it was no longer operating, and that it surrendered its license voluntarily.
Dan Ragan, director of the Food and Drug Protection Division in North Carolina's Department of Agriculture, which oversees wholesaler licenses, said the information about International Pharmaceuticals was posted on the state's website.
"But there's not a great way to get the information out there," he said in an interview. "We should be able to notify our parties in other states that this is happening."
Most of the nation's drug supply passes from manufacturers like Hospira Inc and Teva Pharmaceuticals to three leading wholesalers -- AmerisourceBergen Corp, Cardinal Health Inc and McKesson Corp -- who distribute them to doctors, hospitals, clinics and pharmacies.
Smaller distributors have helped fill in the gaps in areas where larger companies may not operate, or may not always satisfy the entire demand.
But some of these more established companies have been joined by a bevy of new ones in recent years, as the problem of drug shortages has gotten worse.
"Any time there's a severe shortage of some critically needed good, invariably there are going to be folks who seek to exploit that," said Jay Campbell, executive director of the North Carolina Board of Pharmacy.
In tracing several scarce cancer drugs, Cummings' investigation found a convoluted supply chain, with drugs going from wholesalers to pharmacies and then back to wholesalers.
The lawmakers on Wednesday sent letters to three pharmacies and wholesalers in North Carolina, Maryland and New Jersey, asking them to reply by April 11 with detailed records about their operations and profit, and if any manufacturers had authorized them to sell the drugs.
They also sent letters to 19 other pharmacies that appeared to be selling drugs directly to wholesalers.
LOOPHOLES IN LAW
While the pharmacies in Maryland may not have been selling drugs to patients, the state's hands were also tied in terms of what they could do to stop it. Although the state tightened its wholesale laws in 2007, the pharmacy laws still leave some loopholes, officials said.
By law, many states allow pharmacies to sell up to five percent of their supply to other distributors, but only in rare or emergency circumstances.
But in practice it is hard to figure out when they're doing it, or how much of their supply is going elsewhere, said LaVerne Naesea, executive director of the Maryland Board of Pharmacy.
Maryland has no law that sets a timeline for how long a pharmacy can keep a license without operating, though its legislature recently passed a law that sets the limit at 60 days, which will take effect in July, Naesea said.
She said the number of pharmacies that were licensed but did not open for business seemed to increase alongside the growing number of shortages.
"My eyes get open every day (on innovative ways to bend the law)," Naesea said. "We just have to be more vigilant now that we know there's a new scam."