“U.S. Pharmaceutical Gray Markets: Why Do They Persist—and What to Do about Them?”

• Author: Thomas A. Hemphill
• Date: 01 December 2016
• DOI: http://doi.org/10.1111/basr.12101
• Published date: 01 December 2016

“U.S. Pharmaceutical Gray

Markets: Why Do They

Persist—and What to Do

about Them?”

THOMAS A. HEMPHILL

ABSTRACT

This article illustrates how a traditional U.S. pharmaceu-

tical industry supply chain operates, beginning with

pharmaceutical compounds and ending at patient-dis-

pensing hospitals or pharmacies. Furthermore, to place

the problem of U.S. drug shortages in historical perspec-

tive, a review of the annual volume of such shortages over

the last decade is undertaken. Following this review of

recent drug shortages is an analysis of the market forces

and business decisions that drive the creation of a phar-

maceutical gray market, its attendant “price gouging” and

product integrity issues, and the alterations in the tradi-

tional pharmaceutical industry supply chain model. In

response to persistent drug shortages, the U.S. Food and

Drug Administration (FDA) has recently been empowered

by the executive and legislative branches of the U.S. gov-

ernment to actively address this issue. To reflect these

FDA challenges, a thorough review of these new agency

charges and responsibilities is undertaken. Lastly, an

Thomas A. Hemphill is a Professor of Strategy, Innovation and Public Policy, School of Ma nage-

ment, University of Michigan-Flint, 2118 Riverfront, 303 East Kearsley Street, Flint, Michigan,

48502-1950. E-mail: thomashe@umflint.edu

V

C2016 W. Michael Hoffman Center for Business Ethics at Bentley University. Published by

Wiley Periodicals, Inc., 350 Main Street, Malden, MA 02148, USA, and 9600 Garsington

Road, Oxford OX4 2DQ, UK.

Business and Society Review 121:4 529–547

bs_bs_banner

analysis of the results of recent FDA public policy actions

on mitigating drug shortages, as well as recommenda-

tions tor market-based solutions to the gray market prob-

lem that pharmaceuti cal manufacturers, hospitals and

pharmacies could institute as industry-wide standards of

business practice, are discussed in the conclusion.

Over the last decade, so-called “ethical” drug shortages

(hereafter “drug shortages”) have plagued the U.S.

health care system, causing serious access issues for

patients requiring lifesaving and life-enhancing pharmaceuticals.

The U.S. Food and Drug Administration (FDA) has historically

defined a “drug shortage” as “a situation in which the total sup-

ply of all clinically interchangeable versions of an FDA-regulated

drug is inadequate to meet the current or projected demand at

the patient level.”

1

When a preferred drug treatment is unavail-

able, physicians must use less effective alternative drug treat-

ments or those associated with an increased risk of adverse

outcomes. Placed in a pharmaceutical industry context, drug

shortages affect less than 1 percent of the approximately 40,000

ethical drugs on the market, with the vast majority of shortages

involving generic (off patent) pharmaceuticals (88 percent of all

prescriptions filled in 2013 were manufactured by generic

companies).

2

These drug shortages, however, have created a “gray market”

(also referred to as a “parallel market”) for such pharmaceuticals. A

gray market involves the trading of a product by wholesale distrib-

utors, in this case the hoarding of a drug in short-supply, that

while legal, is unofficial, unauthorized, or unintended by the origi-

nal manufacturer, and that health care providers are purchasing

at exorbitant prices (and sometimes of questionable product integ-

rity) to help fill their pharmaceutical demands.

An example of how a pharmaceutical gray market operates is

illustrated in a 2012 Congressional report (“Shining Light on the

‘Gray Market’”).

3

This report documents an incident in September

2011 involving the shipment of 25 vials of fluorouracil, a chemo-

therapy drug, which was sold by a Maryland pharmacy to another

distributor for $30.00 (its original purchase price from the manu-

facturer was $7.00), and which was re-sold to different distributors

five more times—with some not taking physical custody of the vials

530 BUSINESS AND SOCIETY REVIEW