Cardinal Health's Customer Problems Deepen

Implications: Cardinal Health (CAH) recently stopped shipping controlled substances to certain customers so as to avoid a Drug Enforcement Agency (DEA) suspension of its license at a fourth facility.  It appears that Cardinal Health’s new role as supply chain enforcer is angering some of the customers who have been tagged as “diverters.”  I also suspect that their actions will hurt the company’s efforts to regain or build market share among independents.  

Analysis: Cardinal had its license to distribute controlled substances suspended by the DEA in Washington, Florida, and New Jersey. See Cardinal Still Has a Diversion Problem (council site) and Cardinal Health's Diversion Problem Gets Worse (council site).  Cardinal had been negotiating with the DEA over the Company’s Stafford, TX distribution center as I discuss in Cardinal Health: Fourth Facility Now At Risk. (Council Site).

But rather than a suspension, Cardinal Health discontinued all controlled substance and List 1 Chemical shipments from its Stafford distribution center only to a subset of customers.  The move was announced to retail independent customers on February 25. Read Cardinal's letter online here.  

The interesting twist -- and the likely reason that the facility's license was not suspended by the DEA -- is that Cardinal will be discontinuing shipments only to the retail independent pharmacies from Stafford. The “legitimate controlled substance needs” (their words) of these customers will be serviced from another Texas facility. Per Cardinal's letter: “We will continue to provide controlled and non-controlled products to acute care, regional chain and national chain customers out of our Stafford (Houston) distribution center.”  

As the Dow Jones article points out, two pharmacies have so far sued Cardinal over the way in which the company is identifying purported diverters.  This is an especially tricky situation for each of the big 3 wholesalers – AmerisourceBergen (ABC), Cardinal Health (CAH), and McKesson (MCK) – because each company serves 20,000 or more active customer accounts placing millions of total orders per year.  Most companies will (rationally) become very risk-averse about any questionable situations when faced with uncertainty.  

I also wonder what this move signals about supply chain security. Are retail independent pharmacies now considered to be the weak link in guarding our supply chain against counterfeits and diversion?