An Illustration of How the Media’s Report on “Price Gouging” by Small Drug

Distributors is Misleading and Untruthful, in Most Situations

As Presented by Pat Earl, Principal and CEO of Secure Pharma Distributor Network

RISING DRUG SHORTAGES IN U.S. Source: U.S. Food and Drug Administration

Year No. of Reported Shortages

2005 61

2006 56

2007 90

2008 110

2009 157

2010 178

2011 200 and growing

Reasons for Rising Drug Shortages in U.S. Source: U.S. Food and Drug Administration

Rank Why Drug is Short Supply % of Reasons

1 Quality Problems 54%

2 Delays Related to Capacity 21%

3 Company Discontinuing Production

11%

4 Raw Material Supply 5%

5 Increased Demand Due to Another Shortage

4%

6 Loss of Manufacturing Site 3%

7 Shortage of Packaging Components

2%

Pharmacist Michael O'Neal, manager of procurement at VUMC, holds the drug propofol, which has been in

short supply. / Samuel M. Simpkins / The Tennessean

Growing Drug Shortage Leaves Patients in the Lurch… as reported in The Tennessean on October 6, 2011

• According to a pharmacist who is manager of procurement at Vanderbilt University Medical Center “…I don’t know if this is a market adjustment because the whole generic drug industry has become so commodified that you can buy a bottle propofol that can be used in surgery much cheaper than you can buy a bottle of water.”

Propofol is the generic version of Diprivan, the anesthetic drug used in Hospital Operation Rooms

Price: When No-Adverse Market Supply Issue:

 On Major GPO Contracts

Manufacturer A Published Wholesale Acquisition Cost (WAC) $5.60

GPO Contract Price $0.48

Discount off Published Wholesale Acquisition Cost (WAC) $5.12

Percent Discount Savings 91.43%

Actual Pricing that a Small Distributor Pays for Propofol when Purchasing for Normal Supply

Price Between Two Distributor Trading Partners, i.e. an ADR to Distributor

No GPO Contract 

The WAC Price to Authorized Distributors $5.60

ADR Invoice Price to Small Distributor $6.60

Cost Plus Invoice Price to Distributor $1.00

Percent Markup on ADR to Distributor 17.86%

Selling Price that a Small Distributor Offers to Hospital at15% Markup on its Purchase Price

Price If Market Supply Channel is Disrupted:Market Price 

Small Distributor Acquisition Price from ADR $6.60

Sell Price to Hospital - Non GPO Eligible $7.60

Cost Plus Mark-up on Sale to Hospital $1.00

Percent Markup on Small Distributor Price 15.15%

These Illustrations Show a 15%-18% Markup to Cover the Costs of Picking, Packing and Shipping Transactions for Propofol… NO GOUGING HERE!

Cost Impact on hospital pricing as reported to GPO:

 On vs. Off Contract

GPO negotiated contract price on APP product $0.48

Non-GPO authorized distributor sale at WAC+ $7.60

Additional Cost to Purchase Off-Contract Alternative $7.12

Cost Impact for hospital reporting to GPO 1483.33%

Drugs in the “Market”

• Manufacturers bid low prices in exchange for sole source GPO awards

• One supplier then corners the market for multiple years of contracts

• Artificial price controls drive competition to discontinue that product

• Limited distribution conspires to drive drugs into commodity exchanges

• Artificially low pricing leads to unnecessary shortages

Growing Drug Shortage Leaves Patients in the Lurch… as reported in The Tennessean on October 6, 2011

• Many of the drugs are old-line treatments with low profit margins for their makers

• The general public reads the headlines about the drug shortage crisis, and they assume we are talking about these blockbuster drugs that are so…expensive .

• In reality, we are talking about generics that are $2 each that are proven to work, that patients are now not able to obtain

Drug Shortages are a direct result of GPO favoritism and their loss-leader pricing strategies…No other manufacturer will produce a drug at a loss!

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…

Perceived “gouging” alluded to is A DIRECT cause of GPO and their chosen partners’ policies that create ”artificial price controls” for their favored member customers.

Small distributors are “restricted” by the manufacturers and the GPO’s from selling these contract items at the exclusive, artificially-set contract pricing between GPO and selected partners.

Hence small distributors must pay the ACTUAL price

Pat Earl, Principal and CEO of Secure Pharma Distributor Network

From my viewpoint as an industry veteran… “I believe that it is rather disingenuous for Premier Purchasing Partners, the other large national GPO’s and their partner manufacturers, in general, to point their fingers at the small drug distributors, who must pay a significantly higher price for their products. The market share for the smaller distributors is comparatively speaking…relatively insignificant.”