Magazine Article | March 1, 2013

Exploiting The Not-So-Best Practices Of The Pharma Supply Chain

Source: Life Science Leader

By Ron Guido, VP of global brand protection and supply chain integrity, Johnson & Johnson

Lessons learned from someone who exploits the “not-so-best” practices of the pharmaceuticals supply chain

I want to thank the honest and hard-working members of the global pharmaceuticals supply chain for being naive, uninformed, or apathetic to the lucrative and growing business opportunities I enjoy at their expense. To the IP owners of those products affected, I am equally indebted for creating “trust” in those brand names among the user community, thereby establishing a healthy base of business for me to exploit. You see, I am actually honoring you by copying your products.

You may not know me, but I certainly know you very well. In fact, it is easy to become acquainted with you by simply observing your predictable routines and trusting behaviors. I am amused by your preoccupation with service levels, fill rates, global sourcing networks, and speed of delivery. Ah yes, I enjoy the way you process countless transactions and inventory transfers without that verification part — my fortune is built upon your trust-sans-verification habits.

Nevertheless, I do feel obligated to share some of my practices with you, because I get the feeling you think that counterfeiters cannot be stopped or even deterred away from dangerous medicines to other more benign product categories. And you pathetically believe that you, the legitimate trade masters of the pharmaceutical industry, are simply victims of my success rather than accomplices. As you will learn, all you have to do to render me powerless is to get your collective acts together, share control of the supply chain with each other, and add visibility to information you feel you must hide from each other.

What I am offering you is a chance to see how you unknowingly contribute to a not-so-secure pharmaceuticals supply chain … from the vantage point of a business opportunist. So let’s get started with my confessions.

Confession #1: My Market Space is the Facility of Global Commerce
The global market for prescription medicines is rapidly approaching $1 trillion according to recent IMS data. The key is cross-border trade facilitated by a growing percentage of production taking place in a country in which those goods are not consumed. This is the case with pharmaceuticals.

Stimulated by free trade agreements and geopolitical will for a single global economy, Asia, in particular, has become the “factory” for the world. The growth and capitalization of emerging markets, combined with a relative lack of respect for and protection of IP in some countries, has created a cornucopia of opportunity for those of us who understand international trade. And if the situation wasn’t easy enough to exploit, there is a perpetual shortage of regulatory and enforcement resources around the world. In the unlikely event that my goods are confiscated in transit, the risk of prosecution is much lower than the reward. In fact, I can’t think of any form of commerce that has a more attractive risk/reward profile than sending branded drugs across borders. If such illicit endeavors still appear risky, the safe haven of e-commerce is always available to me. With the lack of international regulations and oversight policing Internet sales, taking Internet orders and sending the goods through parcel services is perhaps the easiest and least risky trade route available to those of us in this profession.

Confession #2: My Targets Are Multinational Brands In High Demand
Why spend time and money falsifying obscure brands with limited demand when you can exploit reputable, highly recognizable brands which are registered for trade virtually everywhere? My experience tells me that price is a plus, but not as important as volume, particularly considering my low cost of goods. Areas of prime interest in counterfeit trade include branded apparel, media products, software, electronics, and healthcare products. All are money-makers for the same reason — high-volume, popular brands attract less scrutiny than specialty items and are easier to move throughout their respective supply chains.

Confession #3: As a Rule, Never Be Seen With The Goods
My success in remaining undetected as a counterfeiter is largely attributable to ensuring that my manufacturing site not be visible to the legitimate supply chain. Once I manufacture my goods, I want to cross a border as soon as possible. In so doing, I am able to utilize gray-market diverters to “dilute” fake products among genuine goods. In addition, I always ship my goods across borders in multiple small quantities rather than bulk so that, in the unlikely event that they are intercepted by the authorities, my investment is not totally lost. For added protection, I use my friends and family for import/export operations, regularly “transplanting” trusted colleagues to port cities to serve as trading brokers.

Confession #4: My Technology Investments Are Largely In Packaging
I spend at least 80% of my operating budget on packaging. I always begin by purchasing genuine products to use as a template and utilize the latest Web-based printing tools to replicate packaging. Even better, I try to secure discarded genuine packaging to encase my fakes. I am not admitting to the art of “dumpster-diving” as a means of procuring spent packaging, but I do know colleagues who enjoy the fruits of such practices. Whenever possible, I source containers, caps, inks, and labels from the same suppliers used by my targeted brands, unless of course the legitimate rights holders are prudent enough to track inventories of such supplies into and out of their providers.

I’m most amused by the term “anticounterfeiting technologies.” Do you really believe that just because you bury some secret foo-foo dust deep into your printing inks, I will be deterred? If no one can find such authentication markings because the required high-tech scanners are located halfway around the world, or if no one even knows what to look for, I thank you for investing in such a false sense of security. Remember, my objective is to fool the inspectors, not the users of the product or the company’s security ink brigade.

More broadly, when it comes to technology, I have been fortunate to be in practice at a time when excess capacity exists across the pharmaceuticals industry. Plant closings offer me a plethora of equipment, from printing plates to dies to pill-making equipment. Online auction sites routinely offer the equipment I need to reproduce anything, usually at a fraction of the original cost. Oddly, the legitimate drug manufacturing industry is ostensibly handing me the know-how, supplies, and hardware I need to become a so-called third-party manufacturer of their most cherished brands. Regardless of how I choose to make a fake, I always check for mistakes using sound quality control practices. Most arrests begin with someone identifying subtle packaging flaws.

Confession #5: My Favorite Supply Chain Category Is Reverse Logistics
People in my line of work know that famous brands have liberal returns policies. Perhaps the easiest way to make money in counterfeit trade is to sell the fakes to the company whose brands you are falsifying! I know this seems absurd, but consider this: Returned prescription medicines aren’t generally restocked and resold. There is no need to worry about such fakes reaching the patient. Furthermore, the administrative tasks involved are usually too overwhelming to include any significant authentication, particularly when returned drugs are quarantined for destruction anyway. Typically, my returned goods are sent back to the company through enterprising returns processors or aggregators, providing a natural fence between me and the IP rights holders.

Lastly, I want to point out a major deficiency in the way returned goods are processed by legitimate supply chain managers. Destruction of damaged, expired, or obsolete pharmaceuticals is typically orchestrated through a third-party contractor which picks up the inventory and brings it to a remote site for destruction, burial, or incineration. Yet many of your company’s practices simply require the driver to sign for the load or, more securely, photograph the act of destruction. I have found it relatively easy to repurchase such inventory from your third-party contractors for a fraction of the market value and reintroduce those products into the reverse logistics network. I often wonder if such drugs are ever returned for a second trip to the dump.

Confession #6: I Am Inspired By The Lack Of Pharma Supply Chain Visibility
I am almost embarrassed to share my observations about how the lack of visibility to transactions in the downstream supply network allows me to become wealthy. First, as long as those within pharmaceutical supply operations continue to call it a “chain,” instead of recognizing it as the “network” it really has become, transparency of transactions will remain an aspiration but never a reality. The history of pharmaceutical trade explains the lack of visibility. Manufacturers are motivated to rapidly sell and distribute their remarkable innovations in medical science to all dispensing outlets utilizing all reasonable means to do so. Consequently, the “chain of custody” or pedigree of a given inventory unit is lost among a sea of transactions with little coordination of events across trading entities. Authentic products visit wholesalers, secondary distributors, repackagers, and third-party logistics parties across many boundaries and regulatory jurisdictions before arriving at the patient’s side. Separately, financial records are generated and processed by some of the same entities as well as by importers, exporters, retailers, clinics, and brokers along the way. In short, records of trade are asynchronous to money and inventory flows, leaving a myriad of opportunities to insert falsified product into such a web of unregulated trade. Each legitimate player in the network contributes to the problem by acting independently of others. IP rights holders quickly “sell out” their brands to intermediaries in order to register revenue, but this creates attractive gray zones outside their purview. Intermediaries are reluctant to share trade data for fear of being disintermediated from the network. External manufacturing sites require separate flow lanes for legitimate trade while opening the door for shadow operations to arise. Suppliers of legitimate components and services openly seek new customers to leverage available capacity. Trivial checks by government agents create a false sense of security. Trusting retailers and consumers don’t worry about integrity of supply. Lastly, Internet purchasing is attractive to consumers, yet the most difficult to regulate. With so many opportunities to insert fake goods into what is perhaps the most complex of all global supply networks, the only logical way to illuminate the supply chain is to implement and enforce a realtime track-and-trace system.

Confession #7: Laissez Faire Provides a Supportive Business Environment for Counterfeiters
Controls, regulations, audits, certifications, and intellectual property rights all impede free commerce, and therefore, they will usually be denied or minimalized in favor of allowing business success to drive economic growth. There is a natural bias of local authorities to favor their own economic development over international trade rules. Inbound customs inspections, for example, are more rigorous than scrutiny of exported goods.

Some governments actually endorse local production of unauthorized generics in the interest of jobs creation. An argument can be made for the value of knockoffs in stimulating local economies and generating new tax revenue. In most industries, while genuine brands establish demand for a product category, “generics” will usually suffice. Consumers tend to be trusting and/or apathetic about the dangers of fake goods. Although this is not necessarily the case for pharmaceuticals, given a choice, the public tends to favor economic stimuli over concerns for supply integrity.

So there you have it — my true confessions! I do feel bad about all of you honest people trying to figure out how to safeguard the supply chain. Maybe I can take a pill for that.

10 Best Practices To Counter The Counterfeiter

Since I like making money at my job as a drug counterfeiter, I’m hoping you don’t follow these guidelines, which demonstrate some of the countermeasures currently in place or under development to help pharmaceuticals manufacturers prevent counterfeits from entering the legitimate supply chain.

  1. Establish a companywide business culture of trust with verification.
  2. Respond aggressively to all reported incidents.
  3. Rewrite agreements with intermediaries to assure your branded products are only purchased from your authorized sources.
  4. Enlist the support of government agencies in authenticating your brands as they cross borders.
  5. Utilize authentication technologies interoperably with track-and-trace systems to identify where and when counterfeits enter the supply chain.
  6. Apply stringent reverse logistics procedures to assure that returned goods are genuine and destruction is witnessed and documented.
  7. Market monitoring and supply/demand analytics can identify potential brand attacks.
  8. Ensure suppliers and contract manufacturers are not supporting shadow operations.
  9. Protect your facilities and cargo from pilferage, theft, and other security breaches.
  10. Prevent your excess and retired equipment from being acquired by counterfeiters.