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

AuthorThomas A. Hemphill
Date01 December 2016
Published date01 December 2016
“U.S. Pharmaceutical Gray
Markets: Why Do They
Persist—and What to Do
about Them?”
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
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
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.”
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
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’”).
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

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