Financial Metrics For Anti-counterfeiting Programs
By Ron Guido, president, Lifecare Services, LLC
Many companies struggle with the need to justify investments in anticounterfeiting programs. Others deem it an important part of their business rationale to help safeguard key brands; yet they question how to devise such metrics. I feel strongly that a credible scorecard can be produced, even for the ostensibly intangible results associated with combatting illicit trade.
By measuring the financial effects of brand-protection programs and their secondary impacts on operational efficiencies and effectiveness, your company will generate the management information needed to:
- monitor the integrity of your supply chain over time in financial terms
- quantify breaches in the supply chain that may endanger patients/ customers
- measure the potential impact of future supply chain breaches (lost revenue or increased costs)
- objectively inform management of benefits derived from investments in supply chain security (ROI).
Along with ongoing monitoring programs, combined with analysis of your own commercial data, a brand-protection financial scorecard is a valuable tool in your continuing efforts to fulfill your company’s promise to your patients to deliver safe medicines. In doing so, you enhance the reputation and the profitability of your businesses around the globe.
A sustainable process can be created to capture the financial benefits of brandprotection programs and counterfeiting countermeasures across all functional areas, regions, and product lines of your company. Such information can be captured and reported by brand, channel of trade, or type of violation. With the accent on both “recovery” from past/current insults and “prevention” or “loss avoidance,” this process divides reported results into two categories: recovery and avoidance.
The concept of revenue recovery, as the phrase implies, is to recognize that you, the IP rights holder and brand owner, have created a finite amount of market demand for your product. That brand would therefore generate an expected level of sales against the pent-up demand. Yet some of that revenue has been “hijacked” by counterfeiters purporting their fakes to be genuine. Therefore, if you determine that your brand-protection programs have had a direct effect on retarding the sales of counterfeited products in a targeted market or channel, then you have earned the value of that recovery. In other words, if you did nothing to thwart counterfeit trade of your brands, your sales would be booked by those operating outside the legitimate supply chain, tantamount to losing market share to a clandestine competitor. On the other hand, recovering sales lost to illicit traders provides the basis for assigning financial value to the ways and means of anticounterfeiting processes and technologies.
Recovery also can take the form of nonrevenue-related reclamation of value. If, for instance, your company pursued civil damages against convicted counterfeiters, your monetary award can be included in the recovery bucket. (Note: Some organizations opt to record recovery dollars net of the costs, e.g. legal fees.) Some examples of activities that generate brand-protection recovery results are shown in sidebar 1.
Unlike recovery, which recognizes insults to brand integrity after the fact, brand protection measures of avoidance are derived from estimates of the likelihood of a brand violation if no preventive actions are taken. Given the dearth of available information about counterfeit and gray market transactions, avoidance measures must be associated with rates of illicit trade titrated from known aggregate data or from market surveys (sampling) conducted to size the problem. For example, if your branded drug is in the lifestyle category (e.g. erectile dysfunction), your financial scorecard may assume that your drug will experience a similar rate of counterfeiting to the published data of Viagra, tempered by market share, price differences, and adoption rates. Alternately, you may elect to precede your anticounterfeiting implementation efforts with a statistically relevant survey of the affected market and, using authentication methods, determine the prevalence of fakes in the market. Following the implementation of supply chain best practices and/or application of anticounterfeiting technologies, a similarly powered field survey will provide an estimate of the financial benefit associated with your risk-mitigating efforts. But there is a catch to this predictive analysis of counterfeit drugs. If your product is found to be counterfeited in a certain market postimplementation, then it is prudent to reset the savings to zero for an agreedupon period of time (e.g. one year) in the specific market or region where the fake was discovered. In effect, your financial scorecard should be debited for ineffective brand-protection activities.
Beyond avoidance of market losses, the brand-protection financials should include operational gains resulting from safeguards that generate collateral (secondary) benefits to the organization. This category of value emanates from the concept that the legitimate supply chain is being violated, in part, due to the limited visibility and control of the manufacturer via downstream supply chain transactions. Beyond wholesalers, the pharmaceutical supply chain (which is more of a network than a linear chain) lacks real-time tracking of doses, i.e. electronic pedigree. Typically, when supply integrity practices are applied to routine supply chain functions, there is a fundamental increase in awareness of transactions and more control over inventory. The resulting operational effectiveness and efficiency gains can be allocated, in part, to investments in brand protection. Some examples of activities which generate brand-protection avoidance results are shown in sidebar 2.
Reporting/ Validation Process
The governance of the financial scorecard results should be managed by the finance/accounting department with buy-in from marketing and supply chain management. Results will be accumulated within the brand-protection team on an ongoing basis, tabulated monthly, and reported by finance/accounting quarterly to minimize reversals of entries due to premature or overzealous recording of information.
To secure credibility in the use of these metrics over time, it is important to use conservative approaches for reporting results. Keep in mind that the value of “scorecarding” your brand-protection performance results lies in a) tracking macro measures of return on investment, b) showing trends in performance over time and, most importantly c) rallying the organization to become more accountable for supply integrity.
In summary, encouraged by globalization of commerce, broader manufacturing footprints in high-risk markets, and the profitability of popular brands in a sluggish economy, counterfeiters are experiencing unprecedented success in falsifying prescription medicines. It is incumbent upon brand owners to incorporate brand-protection practices into their commercial strategies. It is equally important for supply chain executives to seek additional operational gains from increased transparency and control of downstream transactions. Together, these goals can be realized by selective investments in brand-protection programs and technologies.
The immeasurable value of increasing patient safety notwithstanding, life science leaders should adopt objective metrics to gauge the effectiveness of investments in anticounterfeiting activities. These metrics will galvanize your organization around the value of brand-protection safeguards and help fulfill the trust mark of your brands. Your patients will thank you.
Brand Protection Financial Recovery Activities
- Determine market value of products seized in transit or from unauthorized channels — includes recovery of counterfeit, diverted, and stolen goods.
- File civil suit against convicted counterfeiters and claim litigation awards (legal recovery).
- Take down rogue Internet sites and estimate value of sales redirected to legitimate channels (short-term benefit).
- Conduct IP protection interventions through law enforcement agents and customs agents — capture market value of seized goods.
Brand-Protection Financial Avoidance Activities
- New products introduced include anticounterfeiting technologies. Calculate the revenue loss avoided by using estimates of predicted levels of fake goods present in the market. Make assumptions based upon the general product category (e.g. lifestyle or oncology drugs), market risk (channels and countries of sale), and unit price.
- Implement and adopt supply chain best practices. A market value is assigned to implementation of each practice with appropriate lag times for old inventory flow-through.
- Reduce insurance premiums via installation of facility or cargo security upgrades.
Realize operational efficiency gains by improving the transparency and control of finished goods. These include documented improvements in:
- supply/demand balancing
- expiry date management
- returns processing/integrity
- recalls and market retrieval effectiveness
- new-product tracking
- in-transit and storage theft avoidance
- chargebacks/rebates: reduced labor and reconciliation time