updated 4/8/2005 2:33:02 PM ET 2005-04-08T18:33:02

New York Attorney General Eliot Spitzer has issued subpoenas to at least two of the nation’s three largest drug distributors in what appears to be a probe into the way the companies buy drugs from each other.

AmerisourceBergen Corp., Chesterbrook, Pa., in a filing late Thursday with the Securities and Exchange Commission said one of its subsidiaries had received a subpoena from Spitzer’s office the previous day.

The document requests information on the manner and degree to which AmerisourceBergen buys drugs from other wholesalers, in what is often referred to as the “alternate source market,” the company said.

“AmerisourceBergen, which purchases less than 0.5 percent of the pharmaceuticals it distributes from sources other than the manufacturer, was advised by the (attorney general’s office) that similar subpoenas have been issued to other industry participants,” the company said.

AmerisourceBergen said it was not advised of any allegations of misconduct.

Cardinal Health Inc. of Dublin, Ohio, said in an SEC filing Friday that one of its subsidiaries had received a similar subpoena from Spitzer’s office.

San Francisco-based McKesson Corp., the other of the big three wholesalers, hadn’t disclosed the receipt of any such subpoena, and a spokesman wasn’t immediately available for comment.

Brad Maione, a spokesman for Spitzer, said the office doesn’t comment on the subpoenas it issues.

Probe target uncertain
Merrill Lynch & Co. said in a note that it isn’t clear whether the wholesalers are even the target of the probe and that they could be sources of information related to drug prices.

While Spitzer’s aim is unknown, the attorney general could be focusing on counterfeit drugs, a growing area of concern in recent years, Merrill said.

“The secondary market offers a potential way for such drugs to enter the channel. Along the same lines, some states have focused on implementing drug ‘pedigree’ tracking requirements, which seek to reduce counterfeits in the system,” Merrill said.

AmerisourceBergen said it has been working closely with many manufacturers to minimize the need for purchases from alternate sources.

“AmerisourceBergen purchases from alternate sources to maintain high service levels to customers when products are in short supply and in some cases to improve its margin,” the company said in its filing.

One reason AmerisourceBergen’s margins have declined over the past year has been the deterioration in its secondary market sales, according to Merrill.

Merrill expects to seek or receive investment-banking compensation from Amerisource within the next three months and owns at least 1 percent of its shares.

Pembroke Consulting President Adam Fein said the big three wholesalers are not the primary customers of secondary products. He said that hospitals and pharmacies contribute to that market by purchasing from unauthorized channels or reselling their unused drugs to wholesalers other than the big three.

Under earnings pressure
The big three drug wholesalers have come under earnings pressure as manufacturers have limited the inventory available to them.

Previously, the distributors made profits by buying up drug inventory and holding it until prices rose, and then selling it to their customers. That model started to change after Bristol-Myers Squibb Co. was accused of channel stuffing — giving wholesalers incentives to buy extra inventory to inflate the drug maker’s results. Bristol-Myers settled the related SEC accounting-fraud charges last year.

The wholesalers are negotiating new fee-for-service contracts with pharmaceutical manufacturers in hopes of making their earnings more predictable and stable, and less contingent on drug price increases.

© 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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