Go Undercover

Locking truck doors is one of many simple
solutions for protecting drug shipments.
Photo courtesy of Stiefel Laboratories.



By Angelo De Palma, Ph.D., Contributing Editor

Protecting an ever more complex pharmaceutical supply chain has become one of the industry’s greatest challenges. Drugs worth many times their weight in gold, coupled with huge price discrepancies between U.S. and foreign markets, have spawned illegal profiteering operations that threaten manufacturers and patients alike.

The assurance that consumers receive prescribed drugs, at the prescribed dose, at an appropriate price is a cornerstone of the U.S. health system. Counterfeiters, diverters, importers, and compounders skim anywhere from five to ten percent—nobody knows the exact number—off the top of this $200 billion enterprise. The World Health Organization estimates that five to eight percent of the world’s drug supply is counterfeit.

(Anti-)Diversionary Tactics Differential pricing from one country to another puts pharmaceuticals at high risk of diversion, or “gray marketing,” by which unscrupulous distributors or resellers purchase product intended for one geographic location and resell it into a higher-price region. “It’s a form of illegal arbitrage,” says Henry Kupperman, an attorney and senior managing director at Kroll, Inc. (New York, N.Y.), an investigative and security consulting firm. Internet ordering of single prescriptions makes diversion even more profitable than in years past, says Kroll, because diverters don’t need to find a wholesale buyer. “Diverters don’t have to ship product back to high-price countries at all before selling it.” Manufacturers have already taken precautions against early supply-chain diversion by exercising extreme caution in whom they sell to. Controls lose their effectiveness beyond the large distributor level, however, eventually disappearing as product trickles downward. Know who you’re selling to. Perform background checks on individuals and companies making overseas purchases: Do they have a history of selling diverted product? “Diverted product is usually the result of a distributor who has not been investigated,” Kupperman says. Deploy a product-level (vs. package-level) tracking system. A good tracking system begins with lot numbers, but should also include at least a serial number and/or barcode. There have been cases where manufacturers knew their product was being gray-marketed, but they couldn’t figure out the overseas source because gray marketers usually repackage. Institute a mechanism for both announced and unannounced distributor audits, especially for repeat purchasers of large shipments such as hospitals and government agencies. The larger the shipment, the greater the chance of diversion. Be on the lookout for disproportionately large sales, especially overseas. If it seems too good to be true, it probably is. Involve your distributors in manufacturing’s efforts to prevent diversion because regulators and law enforcement are more concerned with counterfeiting. “Gray marketers are very clever—in some ways more devious than counterfeiters,” Kupperman observes. He recalls a case where an overseas diverter convinced a distributor to sell very large quantities of product for distribution in Russia. This individual actually did import the shipment to Russia, but then had it shipped across Siberia to an eastern port—then exported it from there to the more lucrative U.S. West Coast market.

The counterfeiting problem may not be as serious in the U.S. as it is in other countries such as China, where 40 percent of drugs are believed to be fake, and by some estimates, to have caused 192,000 deaths in 2001. Nevertheless, drug manufacturers and FDA are working together to respond to a growing threat that is eroding the implicit trust between pharmaceutical and biopharmaceutical manufacturers, the government and the public. “Counterfeiting put FDA and pharma on the same side for the first time,” says Don McMillan, vice president of marketing at West Pharmaceutical Services (Lionville, Pa.). “It’s changing FDA’s relationship with industry.”

The pharmaceutical supply chain is relatively straightforward: manufacturing (including off-site production, packaging, and labeling) feeds distribution (usually more than one level and size), which, in turn, feeds dispensaries, which supply patients or physicians. The hefty dollar values and volumes of the drugs packaged and shipped create illegal profit opportunities at each point along the chain.

Major drug firms have taken steps to assure product integrity by selling only to reputable distributors, who by and large follow the same practice with their customers. Further down the value chain, where buyers and sellers multiply exponentially, these practices become more diluted. A Florida grand jury investigating irregularities in that state’s drug distribution channels concluded that the greatest potential for mischief exists with small distributors. Just five percent of our medicines pass through this channel, yet that still translates into a $10 billion market. By the time the drugs reach the level of the consumer, any fraud scenario is possible.