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Bloomberg Government: Small Vendor Protests Delay $32 Billion U.S. Drug Contract


Small Vendor Protests Delay $32 Billion U.S. Drug Contract
By Kathleen Miller

DMS Pharmaceutical Group Inc. says it’s had enough.

After the Department of Veterans Affairs excluded small businesses from its largest contract for the third time, the 25-employee Park Ridge, Illinois, drug wholesaler filed a protest. PBA Health, a small Kansas City, Missouri, drug wholesaler, also has protested being shut out of the drug distribution deal, now valued at about $32 billion.

“It’s like it’s set up for failure,” Jean Hawkins, a DMS vice president, said in an interview. “We do similar work for the Department of Defense. It’s not like we’re some small business who doesn’t know what they’re doing.”

The companies say their cases show how hard it is for small businesses to crack the federal government market, especially for large contracts, and why the government has missed its small-business contracting goal every year in the past decade. The three largest U.S. drug distributors by revenue -- McKesson Corp., Cardinal Health Inc. and AmerisourceBergen Corp. -- are all vying for the business.

“When you eliminate a role for small businesses, you create these behemoths that are too big to fail,” said Nick Smock, the chief executive officer of PBA Health, which has about 100 employees. “Small businesses should have the first shot at bidding on these kind of contracts because we’re really the job creators in this country.”

Award Delayed

DMS and PBA Health have complained to the U.S. Government Accountability Office, which arbitrates contract disputes. The GAO must issue a decision by April 9 on the DMS protest, and by June 4 on the PBA Health case, according to the agency’s website. Josh Taylor, a VA spokesman, declined to comment on the protests.

The new contract is expected to have about the same value as the current one held by McKesson, or about $4 billion a year for as many as eight years, according to the VA. The award will be delayed until the protests are resolved, Jo Schuda, a VA spokeswoman, said in a March 26 e-mail. Eric Shinseki, the VA secretary, had hoped to award the new drug contract by the end of last month, according to a December letter he sent to a U.S. lawmaker.

PBA Health, DMS and three other small pharmaceutical wholesalers have asked Representative Sam Graves, a Missouri Republican who chairs the U.S. House Small Business Committee, to intervene to help small businesses win a portion of the work.

Letter to Lawmaker

“The Veterans Affairs has a $4 billion budget for pharmaceutical goods, which gives it ample opportunity to award small business set-aside contracts if it chooses,” the companies said in a January letter to Graves. “Instead, the VA continues to follow the same process every time by awarding the entire contract to one dominant pharmaceutical wholesaler, even though there are competitive and capable bids from small businesses.”

Graves and the committee have been “engaged in an aggressive contracting reform initiative to help small business” over the last few months, said DJ Jordan, a spokesman for the House Small Business Committee. The committee is looking into the VA contracting issue raised by the letter, Jordan said in an e-mail today.

“We agree that small business contracting is a great value for the taxpayer and a way to boost job creation,” he said.

One Warehouse

Kris Fortner, a McKesson spokesman, declined to comment in an e-mail yesterday.

The companies say they are in a Catch-22 situation: The agency rejected them in part for not meeting conditions they might satisfy if they won a big enough piece of the contract.

DMS’s Hawkins said VA officials determined her company isn’t eligible to assist with the drug supply work because it only has one warehouse and lacks an online inventory management system. DMS planned to add warehouses and the required technology if it had received a spot on the contract, she said.

“We weren’t going to do these things without the guarantee of business,” Hawkins said.

The VA faulted PBA Health for having only one warehouse and for the pricing it offered, said Don Raby, PBA Health’s chief financial officer. Yet the company provides next-day delivery to about 45 states, and it would provide better pricing if it were allowed to serve the entire contract, rather than just the roughly 10 percent of work that was set aside for small business, Raby said.

Missed Targets

“Give us the whole $4.5 billion contract, and our pricing is going to be a lot different,” he said in an interview.

The government has a target of awarding 23 percent of eligible prime, or direct, contracts to small businesses. It awarded 21.8 percent of $422.4 billion in such awards to small companies in the fiscal year that ended Sept. 30, according to federal data posted online.

The U.S. has missed its small business contracting goal every year in the past decade, led by annual shortfalls at the Pentagon, which represents more than two-thirds of all prime contract revenue. The VA was one of the top performers. It awarded 34 percent, or about $6 billion of $17.6 billion in eligible awards, to small businesses last year, bolstered by spending with companies owned by disabled veterans.

McKesson, the largest U.S. drug distributor by revenue, has been the VA’s primary medicine supplier for veterans’ hospitals and the department’s mail-order pharmacy since 2004. The San Francisco-based company has received as much as $27 billion in awards under the current contract, according to data compiled by Bloomberg Government. The contract expires in May. McKesson’s total revenue last year was $112.1 billion.

“A spot on a contract like that could have really moved the needle for a company like us,” PBA’s Raby said. “That would be a boon for our business, our hiring, our local economy. Something like that doesn’t really move the needle much for McKesson, I’d imagine.”

A GAO decision favoring the small businesses won’t guarantee they receive any work. Federal agencies aren’t required to comply with GAO decisions, although it’s rare for a department to ignore its guidance.