Creating an Epidemic — Part 2: How Drugs Get Around

Part One of this series is here.

Like this, but 50,000 acres of it. Source: FreeImages.Com/Ali Taylor

In Tasmania, there is a field of poppies.

Actually, there’s more than one. In Tasmania, poppies are a $100 million a year business. Much of the raw opium used to make the prescription narcotics sold in the United States comes from here. Tasmania has the right combination of climate and, being a remote island, security for opium poppy cultivation.

The harvested opium travels from distant Tasmania to secure manufacturing plants all over the world, where it’s made into a variety of products: morphine, codeine, fentanyl, vicodin, demerol, methadone, oxycodone and oxycodone’s extended release variant, OxyContin.

From those factories, these drugs change hands repeatedly as they move from manufacturer to its end user, ideally the holder of a legitimate prescription. In this installment, I’d like to quickly cover some of the basics of how we get our pills, focusing on how narcotics physically move around the world and get from their manufacturers to patients; and then end with describing how this trade is regulated.

Bear with me — it’s going to make later installments make much more sense.

I doubt any drug manufacturer has smokestacks like this, but I think this picture is cool. Sansão

FIRST STOP: Manufacturers

In the U.S., you can divide prescription pharmaceuticals into two groups: brand and generic, a distinction most Americans with tight-fisted health insurance plans know very well.

Brand drugs are known by their trade name and are marketed by one company that owns the FDA approval for the drug. This approval, called a New Drug Application or NDA, is extremely expensive. The FDA application fee ALONE is over two million dollars, and that doesn’t include all of the research and clinical tests necessary to support the application.

It’s not all bad news though: in return for developing a new drug, brand manufacturers get exclusivity and patent protection giving them a monopoly in the drug until the patent/exclusivity expires. Money, honey.

Generics can be manufactured and sold after the patent/exclusivity on the brand drug expires. Companies apply for FDA approval to manufacture a generic drug using the creatively-named Abbreviated New Drug Application, or ANDA. This application is a lot cheaper: $76,030 versus $2.3 million. To win approval drug companies need to prove that it’s the same as the brand. Provided that each company gets their own ANDA, there’s no limit on how many different companies can make a particular drug.

Brand drug manufacturers include every drug company you’ve ever heard of: Pfizer, Eli Lilly, Novartis, Roche. If they have a TV commercial, they’re a brand company. These huge companies have billions of dollars in annual revenue, but spend large amounts of that money on research and promotion.

Generic companies are very different. Although some generic companies are very large, they can also be very small, with dozens or hundreds of employees rather than thousands. Generic companies don’t need to do much research or promotion, as they don’t develop new drugs or market to the public.

Both brand and generic companies typically sell everything they make to our next stop: the distributors.

SECOND STOP: Distributors

There are hundreds prescription drug manufacturers licensed to sell their wares in the United States. There are approximately seventy thousand pharmacies in the U.S., as well as hundreds of thousands of other locations, such as hospitals and clinics, dentist and veterinarian offices, jails and prisons, and emergency services that are licensed to purchase prescription drugs. Pharmacies, especially owner-operated ones, cannot realistically manage accounts with hundreds of different drug manufacturers; nor can those manufacturers easily manage thousands of small customer accounts. Enter distributors.

Drug distributors are essential in getting drugs from their manufacturers to the pharmacies who dispense them. The vast majority of prescription drugs in the U.S. are handled by one of three gigantic corporations. Known in the industry as the Big Three, these companies are some of the largest businesses in America. They are McKesson [Current Fortune 500 rank: 11], AmerisourceBergen [16th], and Cardinal Health [26th]. In other words, the smallest of the big three drug distributors is larger than Boeing. These are the largest companies in America that most Americans have never heard of, yet every American who has ever had a prescription filled has most likely benefited from their work.

The remaining 10% of drug distribution still represents billions of dollars in annual revenue, and consists of a collection of smaller companies that service mainly regional or specialty markets. Some of these distributors specialize in certain types of medicine, such as cancer drugs or vaccines, but many function as discounters, buying manufacturer’s excess inventory at cut-rate prices, then selling it as cheaply as they can.

One important feature of the drug distribution business is that it is a high-volume, low profit margin business. In good years, their margins rarely exceed two percent. There are a variety of reasons for this, but one of the biggest is that the large brand drug manufacturers, with their patent-driven monopoly power over the drugs they market, are very good at getting paid for their drugs. Distributors don’t make much money from them. Generic drugs are much cheaper than the brand drugs, but the distributors make up for it by making several times the profit margin on them. This is where distributors make the vast majority of their profit.

This is important for two reasons. First, because the drug distribution business is such a low profit margin business, there’s very little extra money. Distributors thrive by conducting their operations leaner and cheaper than their competition. Second, distributors make virtually all of their profit on generic drug sales. Therefore, they want to sell these drugs very aggressively.

Drug distributors didn’t make a lot of money off OxyContin. They still don’t. When, after OxyContin was reformulated, demand for generic oxycodone went way up, the distributors, eyeing higher profit margins, were eager to fill the demand.

And fill it they did.

Life was so much simpler when this guy was poisoning kids.

THIRD STOP: Prescribers and Dispensers.

The final steps in getting a prescription are very familiar: your doctor writes you a prescription, and a pharmacy fills it. That’s it.

However, a lot of interesting things happen here nonetheless, and I’ll have a lot more to say about this later in the series. One of the reasons this gets interesting is how pharmacies and doctors are (or sometimes, not) regulated.


The pharmaceutical industry, as you might imagine, is very regulated. As it should be, given they’re selling things that people are supposed to put in their body and fix stuff, but I digress. I’ve already mentioned one of the regulators: the FDA. Although extremely important on the drug development side of things, however, FDA is not very important when it comes to regulating distribution, especially of narcotics. That falls to other agencies, most notably:

THE FEDS: The Drug Enforcement Administration (DEA)

The DEA regulates the movement of narcotics and their constituent raw materials from place to place within the U.S., from manufacturer to pharmacy. They do this by requiring everyone involved to register with them. This includes importers, exporters, raw material producers, manufacturers, distributors, pharmacies, and doctors. Anyone who handles a narcotic, or in the case of doctors, writes prescriptions for a narcotic, must be registered, and records of the movement of narcotics from registered entity to registered entity kept.

If a narcotic ever leaves this chain, it’s what DEA calls diversion. Diversion happens anytime someone gets a prescription narcotic that they shouldn’t have, whether they stole it from a drug distributor or filled a illicit prescription.

It’s important to note that this is not the sexy side of the DEA. Diversion control typically isn’t a priority, compared to, say, tracking down Mexican drug cartels. Most of the time, it’s a desk job. Enforcement is very dependent on analyzing periodic reports and records from registrants. Until recently, diversion control was a pretty sleepy corner of the agency.

On their way to a pharmacy near you. Or, more likely, not.


Every state and the District of Columbia licenses the pharmacists, pharmacies, doctors, and health care facilities in within their borders. Typically, this happens through a state’s Board of Pharmacy for the pharmacists and pharmacies, and the Board of Medicine for the doctors. Most Boards of Pharmacy also regulate wholesalers and manufacturers, but in several states that’s been split and someone else handles it.

There is wide variation between state laws. For example, some states run Prescription Drug Monitoring Programs to track when a narcotic prescription is filled. In those states, if you try and get similar prescriptions filled in the same month, the system flags the transaction. Also, the system helps state regulators identify doctors and pharmacies writing and filling lots of narcotic prescriptions. The end result of these systems is to reduce things like doctor shopping, where a patient will get multiple doctors to write them prescriptions for narcotics at the same time, allowing them to get way more pills than they need.

Some states have these monitoring systems. Most don’t.

Another state to state difference is whether or not doctors can fill the prescriptions they write. In most states they can’t, but in some, especially in the time period I will be talking about, could. This is of critical importance. For example, Florida allowed doctors to fill their own prescriptions. They also lacked a Prescription Drug Monitoring Program. This turned out to be an explosive combination, as I’ll get into later.

Prescription narcotics are supposed to follow a certain path. From Tasmania, through manufactures and distributors, to a licensed pharmacy where a licensed pharmacist fills a prescription written by a licensed doctor to a patient who has a legitimate medical need for the drug in the strength and quantity dispensed.

Most of the time it works this way, but for a critical period in the last decade or so, this system developed huge gaps which were exploited not only by addicts, street dealers, and corrupt doctors who wrote the prescriptions, but also the pharmacies that filled them and the distributors and manufacturers who supplied them. The next installments in this series will get into how.