http://www.nytimes.com/2002/03/26/business/26BUYE.html
March 26, 2002
MEDICINE'S MIDDLEMEN
When a Buyer for Hospitals Has a Stake in Drugs It Buys
By MARY WILLIAMS WALSH
 his
article was reported by Walt Bogdanich, Barry Meier and Mary Williams
Walsh and was written by Ms. Walsh.
Dr. Tom Ferguson was puzzled when a patient on an IV drip of the
antibiotic gentamicin suddenly experienced a sharp fall in blood
pressure and a racing pulse. Then it happened to a second patient.
When a third patient began to shake uncontrollably just 10 minutes
after beginning her gentamicin IV, Dr. Ferguson, an infectious disease
specialist in Texas, knew what to do: stop giving the medicine, and find
out who made it. In this case, the antibiotic came from American
Pharmaceutical Partners.
After other doctors reported that the company's gentamicin had made
some patients sick, American Pharmaceutical pulled the drug from the
market in 1999.
It would not be the last of American Pharmaceutical's troubles. Yet
the company has grown rapidly into one of the nation's leading suppliers
of injectable generic drugs. One reason: it has what so many
medical-supply companies covet — a national contract with Premier Inc.,
one of the hospital industry's biggest buying groups, serving more than
1,500 hospitals.
Premier officials say they select products for their quality and low
prices. But Premier also had a financial interest in seeing the drug
company succeed.
Premier helped to set up American Pharmaceutical in 1996, then
steered hospital business to it. For this help and an initial $100
investment, Premier received American Pharmaceutical stock that was
worth $46 million when the company went public last year. Premier says
it also receives a percentage of the money that hospitals spend buying
American Pharmaceutical's drugs.
If American Pharmaceutical has helped Premier, it has also been good
for two former Premier executives. William J. Nydam, once an executive
vice president of Premier, received stock options as an American
Pharmaceutical director. He has since left Premier, but his options were
worth $1.2 million at the stock's initial offering price.
Palmer Ford, who worked for Premier's venture capital unit, received
an undisclosed number of American Pharmaceutical options for consulting
work after he had left the buying group, Premier said.
In its brief history as a drug maker, the company has recalled or
withdrawn 20 drugs and the government has warned it three times to fix
serious quality control problems. A Food and Drug Administration
official said the company "had probably more problems than the average
firm but it sounds like they worked them out."
Federal authorities are also investigating whether American
Pharmaceutical and its parent company, American BioScience, in which
Premier also has a stake, conspired with a major drug maker to keep a
cheaper generic cancer drug off the market — a charge the companies
deny.
That Premier could help turn a company with virtually no assets six
years ago into one that raised $144 million in its initial public
offering in December underscores the buying group's enormous market
power. It also illustrates the potential conflicts of interest that
exist in the world of medical-supply commerce, where billions of dollars
worth of goods and services change hands each year with little public
oversight.
Hospital buying groups are middlemen, negotiating contracts with
suppliers of products and services. But unlike most other purchasing
agents, these groups are not financed by the hospitals that buy
products, but by the companies that sell them, raising questions about
whose interests the buying groups serve. The two biggest groups, Premier
and Novation, account for $34 billion in annual sales, covering about
half of the nation's nonprofit hospitals.
Premier or its investment fund has also held financial interests in
more than 20 medical supply and service companies, about 10 of which,
like American Pharmaceutical, had at one time or another contracts or
business ties with Premier.
Premier denies that its financial holdings affect who gets contracts.
In the case of American Pharmaceutical, Premier's goal was "to encourage
the success of a new company providing a new channel of generic drugs,"
said James K. Gardner, a lawyer representing Premier, in a letter to The
New York Times. Premier says it is happy with the company's performance.
Mr. Gardner added that Premier's relationship to American
Pharmaceutical was not the norm. "It would be totally inaccurate and
misleading to portray this relationship as representative of Premier's
business practices as a whole," he said.
But Senator Herb Kohl, a Wisconsin Democrat and chairman of the
antitrust subcommittee, called Premier's ties to American Pharmaceutical
— which he first learned about from The Times — "scandalous."
"They're not to enrich themselves in any way," Senator Kohl said.
"They should have no conflict of interest. None at all."
The senator's subcommittee plans a hearing next month to examine the
financial links between hospital buying groups and suppliers. Those
links, and the potential conflicts of interest that they raise, were the
subject of a recent inquiry by The Times.
"These buying groups were created to keep health care costs down,"
said Larry R. Holden, president of the Medical Device Manufacturers
Association, a Washington-based trade group of mostly small businesses.
"If they have done some of the things that you say they've done, how in
that business model are we saving the health care consumer money?"
A Drug Maker's Rise: Untested Partner Is Transformed
On July 7, 1997, Premier announced briefly that it had struck a deal
with American Pharmaceutical Partners to sell drugs to Premier's
hospitals. The statement did not mention Premier's financial interest in
either American Pharmaceutical, based in Los Angeles, or its controlling
shareholder, American BioScience.
Nor did Premier say that its new supplier existed back then mostly on
paper. As a small drug broker, it made no drugs, owned no factories and
had few assets.
Moreover, American Pharmaceutical was named one of Premier's elite
"corporate partners" — companies that were able to sell their products
to Premier hospitals under favorable terms. That status was held then by
just seven global companies like Johnson & Johnson (news/quote)
and Merck (news/quote).
Both of those had revenues in the billions of dollars. American
Pharmaceutical had a mere $85,000 in net sales the previous year. |
|
In selecting such an untested company, Premier was putting its faith in the
drug company's chief executive, Dr. Patrick Soon-Shiong, a surgeon who had
little background in the generic drug trade.
Dr. Soon-Shiong had gained fame briefly in the mid-1990's with
miraculous-sounding results from an experimental treatment for Type 1 diabetes,
the most devastating form of that disease. Several national news organizations
reported that his star patient, 38-year-old Steven Craig, appeared to be much
better after receiving a transplant of insulin-producing pancreas cells.
Premier, mindful that hospitals might benefit from such a breakthrough, had
its venture capital unit invest about $4 million in the doctor's research
companies in 1996.
But some researchers and diabetics began questioning Dr. Soon-Shiong's
results — questions that continued as years went by.
Dr. Andrew J. Drexler, director of Mount Sinai's Diabetes Center in New York,
said, "He was never able to reproduce it."
Mr. Craig, after several years of praising his treatment, put the barrel of a
gun to his head in 1998 and pulled the trigger. His widow, Peggy Craig, said
that he was despondent over his poor health.
Dr. Soon-Shiong defended his research in a brief interview, saying Mr. Craig
"made a major contribution to mankind."
While the medical research continued, Premier and Dr. Soon-Shiong came up
with a quicker path to success — selling generic drugs to hospitals. Beginning
in 1996, American Pharmaceutical began to broker drugs for companies like
Fujisawa USA. Fujisawa hired American Pharmaceutical partly because it knew that
Premier, as a part owner, "could guarantee us or ensure we would get more
business with Premier," a Fujisawa USA executive vice president, Theron E.
Odlaug, said in court papers.
Another drug company, Sicor Inc., paid American Pharmaceutical as much as 10
percent of its net sales to Premier hospitals. That relationship ended in
litigation that was settled out of court.
American Pharmaceutical was only a "toll taker," Craig Lea, a Sicor vice
president, said. The company, in his view, was simply selling "access" to
Premier hospitals. "That is what it was," he said. "It was access. You got a
chance to get in the door."
By 1998, American Pharmaceutical had sufficient funds to buy two money-losing
plants owned by Fujisawa of Japan.
Quality Problems Arise: An Antibiotic Is Withdrawn
American Pharmaceutical thought it could turn those plants around. A memo
seeking to raise money for American Pharmaceutical cited, among other things,
its close ties to Premier as evidence that it might do better than Fujisawa had.
That proved prophetic. American Pharmaceutical, one Wall Street analyst
recently noted, took just six months to reverse what had been nine consecutive
years of operating losses reported by Fujisawa.
While Premier may have helped jump-start American Pharmaceutical — Premier
got more drug company stock based on sales — American quickly adopted a strategy
of selling to other buying groups, including the biggest, Novation. As it did
with Premier, American Pharmaceutical paid Novation fees that were a percentage
of hospitals' purchases of its drugs. Neither group would say how much it was
paid.
But if sales were good, American Pharmaceutical had to deal with
manufacturing problems, some inherited from Fujisawa. Just weeks before American
Pharmaceutical took over the Fujisawa plants in June 1998, federal regulators
began receiving reports of patients getting sick from the antibiotic gentamicin.
By the end of the year, the Centers for Disease Control and Prevention would
call the outbreak an epidemic traceable to one Fujisawa plant.
In November 1998, American Pharmaceutical voluntarily withdrew its gentamicin.
It blamed the adverse reactions on hospitals' giving patients too much of the
drug too quickly, a problem noted by the F.D.A. But the agency also found
"unusually high" levels of potentially dangerous endotoxins in some lots, and
inspectors said the drug company had failed to investigate thoroughly why
patients were getting sick. American Pharmaceutical said the drug's endotoxin
levels were within allowable limits.
American Pharmaceutical resumed selling gentamicin in June 1999, but after
nine more patients became ill, the company withdrew the product again, the F.D.A.
said. Another company also withdrew its gentamicin — it, too, had sickened
patients.
To learn why some gentamicin had elevated levels of endotoxins, the F.D.A.
visited a Chinese company that had supplied materials to Fujisawa, American
Pharmaceutical and the other company. The Chinese plant was found to be
seriously substandard.
American Pharmaceutical's gentamicin problems stopped after it switched
suppliers.
But the company's troubles with the F.D.A. did not end. During one F.D.A.
inspection in 1999, the agency discovered that American Pharmaceutical had
manufactured some Adenoscan — used to dilate blood vessels during heart tests —
in chipped and leaking glass vials.
The agency inspectors regarded the situation as so serious that they
considered taking legal action, but American Pharmaceutical recalled the product
instead.
There were other recalls. For one widely used obstetrical drug, oxytocin —
given to speed labor and to control postpartum bleeding — hospitals reported
that the American Pharmaceutical drug appeared subpotent, F.D.A. records show.
In some cases, the hospitals said, women endured long labors or heavy bleeding.
The company recalled one shipment in late 1999, but said the product was within
specifications.
Last October, the F.D.A. threatened for the third time to seek a court order
to shut an American Pharmaceutical plant if it failed to improve certain quality
controls.
Jack C. Silhavy, American Pharmaceutical's general counsel, said: "We, like
virtually every other manufacturer of pharmaceutical products in the United
States, from time to time voluntarily recall certain product lots." The company
has spent $35 million to upgrade its facilities and added more than 50 people to
work on quality control, he said. The F.D.A. recently gave the company a clean
bill of health.
A Separate Inquiry: Was Generic Drug Kept Off Market?
In 2000, another agency, the Federal Trade Commission, began its own inquiry
into American Pharmaceutical. The F.T.C. wanted to know whether the drug maker
and its parent colluded with Bristol-Myers Squibb (news/quote)
to keep inexpensive generic versions of Bristol's life-extending cancer drug,
Taxol, off the market.
Just as Bristol's exclusive right to market Taxol was about to expire in
2000, American BioScience filed what one rival, Ivax (news/quote),
called a "sham" lawsuit that temporarily blocked other companies from selling
generic versions of the drug. American BioScience said it was trying to protect
its own patent on a Taxol product that had not yet come to market.
Bristol, American BioScience and American Pharmaceutical all deny any
wrongdoing, and they are contesting legal claims against them. A lawsuit by the
Cobalt Corporation (news/quote),
a Milwaukee insurer, says it had to pay excessive claims for patients treated
with Taxol.
William Zaferos, Cobalt's spokesman, expressed surprise when told that
Premier held a financial interest in American BioScience and American
Pharmaceutical.
"If your philosophy is to hold down the price of health care," he said, "then
there would seem to be a tremendous amount of irony when you're putting your
money into a company that is bent on keeping prices high."
Cross-Pollination: Board Seats at a Supplier
Helping to oversee American Pharmaceutical and its parent company were two
Premier officials — Mr. Nydam, on American Pharmaceutical's board, and Mr. Ford,
on American BioScience's board. Mr. Nydam left Premier in November 1999, and Mr.
Ford left in January 2000. Neither man agreed to be interviewed for this
article.
Premier says its executives may sit on corporate boards and earn options, but
they are supposed to turn them over to Premier. But Premier officials say they
learned that Mr. Nydam and Mr. Ford had received American Pharmaceutical options
personally only after The Times began asking about them. Premier says it is
"inquiring further into the matter."
Premier, which retains a seat on American Pharmaceutical's board, would not
divulge the nature of Mr. Ford's consulting or the value of his options.
A recent biography of Mr. Ford released by his current employer cited his
role in Premier's "venture investments" in American Pharmaceutical and American
BioScience.
Premier, a private for-profit company, said its stock in American
Pharmaceutical would benefit its 890 owner hospitals. The 700 nonowner hospitals
that buy through Premier are not entitled to any disbursements.
Premier also acknowledged recently that two additional executives had
received options from two other companies in which Premier had a financial
interest. Premier said it had since reached a financial settlement with one of
those executives and was investigating the other; both have left Premier.
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