Freakonomics Meets the Drug Supply Chain

Nov. 14, 2011

Counterfeiting, says Johnson & Johnson’s Ron Guido, is a form of flattery. “If you don’t have counterfeits in your business, chances are you don’t have a good brand,” said Guido, J&J’s VP for global brand protection, speaking at the ISPE annual meeting in Dallas last week. In other words, a successful product/brand (Gucci, let's say) is the apple of a counterfeiter's eye.

Counterfeiting, says Johnson & Johnson’s Ron Guido, is a form of flattery. “If you don’t have counterfeits in your business, chances are you don’t have a good brand,” said Guido, J&J’s VP for global brand protection, speaking at the ISPE annual meeting in Dallas last week. In other words, a successful product/brand (Gucci, let's say) is the apple of a counterfeiter's eye.

Guido wasn't being flippant. Rather, he was demonstrating how the growing field of Brand Protection, his specialty, looks at drug counterfeiting and diversion differently than the traditional “good guy vs. bad guy” crime-fighting paradigm. It looks at them through a business lens. Think of it as a kind of Freakonomics of pharma supply chain security.

In Freakonomics (the books, and now a website and blog by the same name), Steven Levitt and Stephen Dubner apply simple economic theories—supply and demand, risk-reward, the profit motive—to explore and explain what truly motivates professionals in all walks of life, from sumo wrestlers to prostitutes to drug dealers. “If morality represents how people would like the world to work,” they write, “then economics shows how it actually does work.”

There’s a lesson here for those interested in protecting the (legitimate) drug supply chain. Except on rare occasions—1982’s Tylenol tampering crisis, for example—counterfeiters and other supply chain criminals are motivated purely by profit, and as such have a keen sense of what consumers crave and need.

As much as we like to moralize about the horrors, and real dangers, of fake drugs, the fact of the matter is that the bad guys aren’t going away. A few may get caught, a few may get converted, but legions more will take their place.

Economically speaking, drug counterfeiting and diversion are an entrepreneur's dream. As Guido made clear, the barriers for entry into the market are relatively low and there is tremendous demand, fueled by the free trade of the Internet. “It’s growing much faster than your business is growing,” Guido told the audience in Dallas. No matter whose numbers or calculations you believe, the threat of counterfeiting is real, Guido emphasized, because the opportunity is plentiful. Even a 1% rate of counterfeit drugs in the U.S., for example, equates to 40 million prescriptions annually, Guido said. Most experts agree the percentage is much higher than that.

The bad guys are looking at risk-reward, Guido added. The reward to counterfeiters is tremendous—high-value and high-volume drugs mean high profit potential. And, though it’s not easy, drugs are easier to fake than, say, medical devices, Mercedes Benzes or hundred-dollar bills. For diverted products, cost markups can be exponential rather than incremental.

Meanwhile, the risk is relatively low. Regulators and government agencies are not well funded and cannot adequately police the pharmaceutical supply chain, Guido says. And laws aren’t tough enough. “Let’s see, do I want to rob a bank or hijack a [pharmaceutical delivery] truck?” Guido asked hypothetically. “The truck has one driver, who is usually unarmed, and there’s little penalty if I get caught. . . . That’s got to change.” Harsher penalties—even charging supply chain criminals with homicide in certain cases—are one solution. Escalate the risk and it tips the scales away from reward.

Brand Protection: No Experts Yet
Patient safety is paramount. But legitimate drug manufacturers also need to see the fake drug problem as one of economics. “Your companies spend a lot of time and money making your products,” Guido told the audience. “The bad guys are filling your demand and stealing your business.”

Effective brand protection is a solution. As a business discipline, it’s about five years old, Guido noted. As such, there are no experts. “It really is a core competency that we as pharmaceutical manufacturers must develop,” he said. “It’s in its infancy. When someone says they’re an expert in brand protection, that’s not true. There are no experts yet.”

An irony of the brand protection discipline: it devalues competition between legitimate drug manufacturers. “When it comes to patient safety, no company should profess having a competitive advantage,” says Guido. In other words, if you’re withholding secrets on drug product and supply chain security from competitors, you imperil the patients taking competitors’ medicines.

It’s a sentiment echoed by Brian Johnson, Pfizer’s senior director of supply chain security, in a recent webcast. Clearly, Pfizer and J&J are on the same page (and frequently on the same committees) in fighting the fight against counterfeiters and diverters. At ISPE, Guido went out of his way to praise Pfizer for paving the way for today’s understanding for brand protection—with the widespread counterfeiting of Viagra serving as a catalyst for the relatively new domain.

J&J, Pfizer, and all manufacturers have an uphill battle in brand protection. The media has helped to raise awareness of the problems of drug counterfeiting and elevate the profile of the brand protection discipline, Guido noted. But this awareness is not broad enough, and it doesn’t account for the myriad factors that have fueled global counterfeiting and diversion: free trade agreements; the growth of China as the “world’s factory”; counterfeiters who are well funded and technologically advanced; and of course the Internet—“the frontier that needs the most attention,” according to Guido.

Guido also acknowledged the role that Big Pharma has played in helping counterfeiting to proliferate, especially in emerging markets. “As manufacturers, we’ve set up our shops there and have given [emerging markets] the knowhow and SOPs,” he said. “Then we’re shocked that some of these manufacturers are making counterfeits with our tools?”

He added that plants are shut down by major drug companies almost every day, leaving a glut of equipment. “What are we doing with all that excess equipment? Who’s buying it?” The implied answer: counterfeiters.

Track-and-trace technologies are helping secure the supply chain, as are e-pedigree and serialization regulations. Manufacturers have to design new business models around track-and-trace systems and in turn enjoy collateral operational benefits. “The old way isn’t working,” Guido emphasized.

The new way involves making drug counterfeiting and diversion economically less attractive. Lowering drug prices is one way. Another way is raising the barriers for entry into the market. Comprehensive track-and-trace technologies are most effective in this regard—requiring counterfeiters and diverters to expend significant time and cost up front.

The bad guys aren’t going away. But by making the economics of drug counterfeiting and diversion less attractive, they’ll begin to look for places outside the drug industry to ply their trade.

--Paul Thomas

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