The pill pipeline
H.D. Smith under fire for opioid sales
H.D. Smith is a titan in the drug industry.
Founded in 1954 on the outskirts of downtown Springfield, the drug wholesaler has grown to become the nation’s fourth largest distributor of prescription drugs, with annual sales surpassing a reported $4 billion in 2015. After years of swallowing competitors to build a nationwide distribution network, owners of the family-run firm cashed out in January, when the company sold for $815 million.
“The company is a business, however, one that deals ultimately in altruism,” reads a history of the company published in 2004, when H.D. Smith celebrated a half-century in business. “The pharmaceuticals and supplies distributed by H.D. Smith are used by people in need, whether ill, uncomfortable or with a desire that must be fulfilled.”
With 360 employees based here and hundreds more working in offices and distribution centers elsewhere, the company is one of Springfield’s largest private employers. But now the company is in crosshairs, accused of distributing potentially deadly opioids to pharmacies in Appalachia and other places with high addiction rates and plenty of red flags signaling that the drugs were being abused and sold on the black market.
Smith, along with other drug wholesalers, are defendants in scores of lawsuits filed by state and local governments across the country that blame the companies for selling addictive drugs like so much candy. The company has already settled one, agreeing last year to pay $3.5 million to the state of West Virginia
while admitting no wrongdoing. An investigation is underway by the U.S. House Energy and Commerce Committee, with politicians hinting at the possibility of criminal charges.
“We get the facts, and then we make decisions, whether it goes to the Department of Justice or results in legislative change,” U.S. Rep. Greg Walden, R-Oregon, the committee’s chairman, told the Charleston Gazette-Mail in February, shortly after the committee sent a letter to H.D. Smith, asking for information on the sale of millions of doses of painkillers to tiny pharmacies in West Virginia.
“You have to run faster”
This, likely, is not where founder Henry Dale Smith, Sr., expected or wanted his company to end up when he founded H.D. Smith Wholesale Drug Co. in 1954, choosing a modest brick building at 435 North Fourth St. in Springfield as the first headquarters. He was fresh from South Carolina, where his brother Jim ran J.M. Smith Corp., a separate wholesale drug company that’s still in business.
The move to Springfield was equal parts plan and dream. The Smith family is firmly rooted in pharmaceuticals, and James Smith, Sr., who founded J.M. Smith Corp. in 1944, had talked about becoming a national drug wholesaler, something that never had been done. He set his sights on Springfield after visiting relatives in the capital city, but died unexpectedly in 1951 before he could make the move. Instead, Henry, like his late father a licensed pharmacist, moved from the South to Springfield to conquer the drug wholesaling world. He largely succeeded.
The Smith family chose Springfield for the city’s central location and comfortable distance from competing wholesalers in Peoria, Chicago and St. Louis. Early on, sales doubled every five years, according to the 2004 company history, thanks to such innovations as partnering with the Springfield Register newspaper, whose delivery trucks dropped drugs from H.D. Smith at pharmacies throughout central Illinois.
By 1977, the company had outgrown its building and so moved to a new warehouse and offices at 4650 Industrial Drive. The building remains a distribution center, but corporate headquarters moved to a larger building on Fiat Avenue in 2003. The move came amid a buying spree that saw H.D. Smith acquire wholesalers throughout the nation so that the company ultimately became the fourth-largest drug wholesaler in the United States. It is, top executives have said, a matter of swallowing competitors or getting swallowed yourself.
“One of the problems we’ve battled ever since I started in 1980 has been the declining margins in our business,” J. Christopher Smith, president and chief executive officer, said in the company’s self-published history. “Each year, if you do the same amount of buying that you did the year before, you lose ground because your margin shrinks. So you have to run faster and faster just to stay even. If you want to grow, you have to run even faster. It’s the only experience I’ve ever known in our business: How do you do more with less?”
The company’s generosity grew with its fortunes. Quietly, the H.D. Smith Foundation became one of Springfield’s biggest charitable enterprises. The foundation in 2016 gave more than $1.6 million to a dizzying array of recipients that included food banks, Henson Robinson Zoo, Memorial Medical Center Foundation, the Southern Poverty Law Center, the International Campaign for Tibet, the Toledo Opera in Ohio and UNICEF. Churches and religious organizations received nearly one-third of the charity’s donations in 2016, the most recent year for which financial records are available. Money went to Mormons, Catholics, Baptists and Lutherans in several states, with Westminster Presbyterian Church in Springfield – where company founder Henry David Smith, Sr. was a deacon before he died in 2015 – getting $241,200, the second-largest single contribution behind a $556,000 gift to Bennington College in Vermont.
No shortage of blame
Even as H.D. Smith was acquiring other wholesalers and opening divisions in Kentucky, New England, Florida and elsewhere, drugs sold by the company were causing problems.
There is no shortage of blame for the current opioid crisis. Doctors either crooked or clueless have written prescriptions to addicts. Drug manufacturers suckered physicians with marketing campaigns that overplayed benefits of painkillers while soft-pedaling the danger of addiction. Pharmacies working hand-in-hand with pill mills dispensed prescriptions at breakneck speed. And the government, critics say, enabled it all with weak enforcement of regulations and laws favoring the drug industry, which lavished campaign contributions on elected officials.
After years of near-unchecked production, the Drug Enforcement Administration, which sets annual ceilings on manufacturing of prescription drugs, rolled back the 2017 quota by 25 percent. This year, the DEA dropped the quota by another 20 percent at the urging of elected officials including Sen. Dick Durbin, who last summer was one of 16 senators, all Democrats, who sent a letter to the DEA noting that the agency had dramatically increased quotas for addictive painkillers during the past two decades. According to Durbin’s office, production of oxycodone increased from 3.5 tons to 150 tons between 1993 and 2015. During that same time period, the DEA approved a 25-fold increase in production quotas for fentanyl.
Profits can be immense – sales of OxyContin last year totaled a reported $1.8 billion, which was down 50 percent from five years ago. The family that owns Purdue Pharma, the privately held company that invented and sells the drug, was deemed the 16th richest in the United States by Forbes magazine in 2015, with most of an estimated $14 billion fortune based on the exploding popularity of a painkiller blamed for the death and addiction of tens of thousands of Americans. In 2007, the company pleaded guilty to criminal charges for misleading the government, physicians and patients about the dangers of OxyContin. The company was fined $600 million. In addition, three company executives entered guilty pleas as individuals and were hit with an additional $34.5 million in fines. Faced with scores of pending lawsuits, Purdue in February announced that it would end marketing campaigns of OxyContin to doctors.
As part of the supply chain, drug distributors also have fallen under scrutiny, and so H.D. Smith and other wholesalers have been hit with lawsuits and government inquiries, including the letter sent by the House Energy and Commerce Committee in January.
Citing data from the Drug Enforcement Administration, the committee wrote that H.D. Smith in 2008 sold more than 1.1 million hydrocodone doses to Family Discount Pharmacy in Mount Gay-Shamrock, a West Virgina town that is home to 1,800 people – it works out to more than 3,000 pills per day. That same year, H.D. Smith sold more than 1.3 million doses of hydrocodone and oxycodone to Sav-Rite Pharmacy in Kermit, West Virginia, a town of 406. According to the congressional letter of inquiry, that’s five times the amount that such a rural pharmacy would be expected to need. The company between 2007 and 2008 also sold nearly 5 million hydrocodone pills to two small pharmacies in Williamson, West Virginia, where slightly more than 3,000 people live, the committee wrote. The committee based part of its concerns on stories in the Gazette-Mail, which has reported that H.D. Smith distributed more than 18 million doses of oxycodone and hydrocodone in West Virginia between 2007 and 2012.
“Data provided to the committee by the Drug Enforcement Administration raises…questions regarding H.D. Smith’s efforts to monitor for, and mitigate, controlled substance diversion in West Virginia,” representatives from both parties wrote in the eight-page letter.
Speaking on background, a staff member for the committee wrote in an email that the committee has received a partial response from H.D. Smith and is working to get more answers. Christopher Smith and his brother, Dale, who together ran the company until its recent sale, declined an interview request sent via H.D Smith spokeswoman Sarah Kinkade. “H.D. Smith operates with stringent protection of our nation’s healthcare supply chain, responding to the inquiry from Congress as necessary,” Kinkade wrote in an email.
The letter came one year after H.D. Smith agreed to pay $3.5 million to settle a lawsuit brought by the West Virginia attorney general’s office, which accused the company and other wholesalers of pumping millions of doses of painkillers into a state with one of the highest addiction and overdose rates in the nation. The company admitted no wrongdoing, nor did any of the other 11 distributors that last year settled lawsuits brought by the West Virginia attorney general, which ended litigation in exchange for more than $40 million in settlements. H.D. Smith agreed to the third-highest amount. Even before the settlement was reached, the company’s insurer sued in federal court in Springfield, arguing that it should not have to pay to defend the lawsuit. U.S. District Court Judge Richard Mills ruled in favor of the insurer in 2016, but was overturned on appeal.
Lawsuits keep coming against H.D. Smith and other wholesalers as counties, cities and states demand that distributors help pay for a public health crisis the companies helped create. Lawsuits against H.D. Smith have been concentrated in West Virginia, but the state of Delaware sued in January, alleging that the company and eight other wholesalers, manufacturers and pharmacy companies sold far more addictive painkillers than could possibly be needed for legitimate medical purposes.
One of the biggest settlements came last year as McKesson Corp., a publicly traded wholesaler, agreed to pay $150 million to settle federal claims that the company hadn’t reported suspicious orders for painkillers to the Drug Enforcement Administration. It was the second settlement for the company since 2008, when McKesson agreed to pay a $13.25 million penalty and promised to develop a better system to flag and report suspicious orders to the DEA. The government says the company didn’t keep its promise, filling 1.8 million orders from 2008 to 2013 in Colorado alone and reporting just 16 as suspicious. The company last year realized $4 billion in profit from revenue of nearly $200 billion.
“The distributors are important,” Frank Younker, a retired DEA supervisor, told ProPublica last year. “They’re like the quarterback. They distribute the ball.”
“We were trying to shut off the flow”
While the nationwide opioid epidemic crescendoed, regulators were lax, according to critics, including a former head of the DEA’s drug diversion division tasked with keeping prescription medication off the black market.
The former director was reportedly forced into retirement three years ago after telling a congressional staffer that a proposed change in law aimed at altering enforcement procedures against drug wholesalers amounted to protecting criminals. Congress amended the statute in 2016 so that the DEA effectively lost the power to immediately suspend licenses of drug wholesalers, pharmacies and manufacturers deemed by the agency to have posed a danger to public health by selling opioids irresponsibly, according to reports last fall by the Washington Post and “60 Minutes,” which documented reductions in enforcement actions that corresponded with massive political contributions from the drug industry, including wholesalers. U.S. Rep. Tom Marino, R-Pennsylvania, who sponsored the legislation that reined in the DEA, withdrew his name from consideration as the nation’s drug czar days after the media reports.
Wholesalers have said that the law needed to be changed because the DEA had too much latitude to define what constituted a public health threat and so suspend licenses and otherwise initiate enforcement proceedings. The companies say that legitimate patients were at risk of losing access to opioids due to DEA enforcement actions. Even before the law changed, enforcement actions dropped as DEA lawyers, starting in 2013, began demanding a higher standard of proof before field investigators could take action against wholesalers, according to a 2016 Washington Post report. “We could not get these cases through headquarters,” Younker, the retired DEA supervisor, told the newspaper. “We were trying to shut off the flow, and we just couldn’t do it.”
The paper found that the government had levied more than $286 million in fines against 13 opioid wholesalers between 2007 and 2015. H.D. Smith wasn’t on the list. Indeed, the company came off as diligent in the Post report, which documented the demise of Gulf Coast Pharmacy in Florida, whose proprietors were convicted of federal drug charges in 2014.
H.D. Smith cut off shipments to a Gulf Coast pharmacy in 2010 after a company investigator, suspicious of orders for painkillers, visited the pharmacy and found customers standing in line, cash in hand. “They appeared impaired and lethargic with glassy eyes,” an appellate court wrote in a 2016 decision upholding the pharmacy’s owners’ convictions on drug and money laundering charges. By contrast, Cardinal Health, a competing wholesaler, continued shipping painkillers to Gulf Coast even after a company investigator visited the pharmacy and recommended that the DEA be contacted, the Post reported. An owner of the pharmacy told the Cardinal investigator that he could sell more opioids if the wholesaler would supply them, according to the newspaper, which reported that company never called the DEA.
“They’re in a tough spot”
In 2009, H.D. Smith alerted Purdue Pharma, the maker of OxyContin, that a California pharmacy was ordering large quantities of the drug. It isn’t clear whether H.D. Smith called the DEA, but the wholesaler stopped shipping painkillers to the pharmacy. Other wholesalers, however, continued shipments, and Purdue, which tracked prescriptions, didn’t tell distributors that the pharmacy was on the drug manufacturer’s radar screen. Purdue also didn’t contact the DEA, even though a Purdue investigator had recommended that the company alert the DEA when the pharmacy’s OxyContin orders increased by 1,400 percent. Ultimately, the pharmacy owner, who had been filling prescriptions written at a pill mill where the homeless were recruited as patients, was convicted of criminal charges.
A Purdue lawyer in 2016 told The Los Angeles Times that it had followed the law and that the company’s failure to contact the DEA or other authorities about the suspect California pharmacy was proper. “It would be irresponsible to direct every single anecdotal and often unconfirmed claim of potential misprescribing to these organizations,” the lawyer told the paper.
Pressure on drug wholesalers to curb suspicious sales is coming from shareholders of publicly traded distributors. Forty-four asset managers, including the Illinois treasurer’s office and the Diocese of Springfield, that collectively control more than $2 trillion last year, formed a coalition called Investors For Opioid Accountability that is targeting wholesalers, including AmerisourceBergen, which closed the $815 million deal to buy H.D. Smith in January.
“We don’t look at the manufacturers or distributors as villains in any way – they’re providing something that a lot of people have to have,” said Tom McCaney, associate director of corporate responsibility for the Sisters of St. Francis in Philadelphia, which owns stock in AmerisourceBergen. The Sisters of St. Francis recently forced the company to ask shareholders whether the corporation should prepare a report on what steps the board of directors has taken to address the opioid crisis and prevent painkillers from falling into the wrong hands and what responsibility the board bears for overseeing opioid risks. The company, which has annual revenue exceeding $150 billion, had fought to prevent such a vote at its March 1 annual meeting, but the Securities and Exchange Commission ruled in favor of the nuns.
McCaney said he’s been impressed during recent talks with AmerisourceBergen executives. The company, he said, has tightened auditing procedures to track opioids, but it can be difficult for distributors to know whether they are shipping excessive amounts of drugs because companies don’t know what other companies are sending to any given geographic area. “They have made a lot of strides,” McCaney said. “They were doing more than we were aware of. … They’re in a tough spot. They’re trying to provide medication and then we’re asking them to be perfect to make sure it doesn’t get to the wrong people.”
Donna Meyer, director of shareholder advocacy for Mercy Investment Services that manages assets for Sisters of Mercy in Houston, said that drug wholesalers are doing a better job with opioids than in the past.
“I would say I’m delighted with the progress we’ve made with both the manufacturers and the distributors,” said Meyer, whose organization owns stock in Cardinal Health, one of the largest drug wholesalers in the nation, and is talking with the corporation about opioid oversight. “We’re not where we want to be, but we’ve made progress. And I should say they have made progress, too. All of them have expressed a concern about the epidemic.”
The quantity of painkillers shipped to West Virginia in past years was “outrageous,” Meyer said.
“Frankly, the distributors have a more direct handle on where drugs go than the manufacturer,” she said. But solutions, she said, will require involvement of the entire prescription drug industry as well as government and shareholders of drug companies.
“Whether you’re looking at this as a social issue or a public health issue, the only way to solve these kinds of issues is collective impact,” Meyer said. “Everyone who has a part needs to play a role.”
Contact Bruce Rushton at email@example.com.