As one of the most highly regulated and logistically intensive industries in the world, the U.S. pharmaceutical industry would seem relatively protected from counterfeit drugs slithering into its supply chain.
And yet, the U.S. Food and Drug Administration (www.fda.gov) has launched more than 55 counterfeit investigations during the last five years that involve millions of dollars worth of products sporting such popular brand names as Epogen, Lipitor, Neupogen, Nutropin AQ, Procrit, Serostim and even Viagra. Counterfeit drugs are diluted, mislabeled or completely faked, as in saline or sugar water. The FDA notes that the average number of drug counterfeiting incidents reported to the federal agency has increased to about 20 per year since 2000 from about five per year in the 1990s.
Despite this apparently growing trend that has attracted plenty of coverage in the mainstream consumer media and trade press alike, no one is willing to concede or even admit on the record that the drug industry's logistics process and security measures are flawed or inadequate. If anything, they say, counterfeit drugs merely exposed and exploited some operational weaknesses and that these soft spots are anomalies. In fact, industry experts contend that to put counterfeiting into perspective you need to compare the number of counterfeiting incidents (estimated to reach $2 billion a year in losses) with the volume of product that moves through the distribution system (nearly $200 billion a year).
“Given the magnitude of products that we distribute — hundreds of millions of lines of product go through the system every day — the vast majority of products in the system are very safe,” says Greg Yonko, senior vice president of purchasing for the pharmaceutical division at McKesson Corp.
However, Yonko doesn't discount the potential impact a counterfeit drug could have on the healthcare industry, recognizing that “even one instance that poses a health hazard is serious.”
McKesson received its own wake-up call in 2000 when the company discovered it had purchased for distribution fake Serostim, a drug that treats patients suffering from AIDS. McKesson had been aware of counterfeiting, particularly with birth control pills and HIV drugs, but this was the first time the company had seen a high-priced injectible enter the marketplace as a counterfeit product, according to Yonko.
“At that point we immediately took very stringent steps to tighten up all of our purchasing processes, especially involving those types of products,” he says. High-priced injectibles joined a burgeoning product safety list already consisting of specialty, HIV and oncology products.
What steps did McKesson take? As of 2001, the company buys drugs on its product safety list directly from pharmaceutical manufacturers. Specifically, injectibles such as Serostim, Epogen and Procrit, along with more than 200 additional SKUs, come from 15 of the top 20 drug manufacturers. McKesson purchases less than 1% of the total number of branded products it distributes from what commonly is referred to as the secondary market. In fact, McKesson maintains active business relationships with 10 key alternative source vendors (ASVs), Yonko notes.
McKesson initiated a comprehensive review process to qualify ASVs, too. The “rigorous due diligence” includes obtaining a Dun & Bradstreet report on the prospective ASV and its owners, determining whether it satisfies licensing and insurance requirements, and conducting background and security checks as well as a site visit overseen by McKesson's Loss Prevention department to examine purchasing practices and detailed product checks in stock.
Once products arrive at McKesson warehouses, they go through an extensive check-in and quality control process to verify packaging, dating and bar codes. If any product fails any part of this process, it is prevented from entering the company's distribution network.
Those products that pass muster then are kept under tight watch, satisfying FDA and state laws and regulations. In fact, McKesson adopted and implemented Florida's drug pedigree laws, which the industry considers among the toughest.
“We haven't had an incident in our business for three years and we do $60 billion a year in sales and distribution,” Yonko says. “You're talking about billions of dollars of transactions, and only a very small percentage has wound up being counterfeit. There are far more incidents of counterfeit money than there are of drugs.”
Even though the secondary market remains a legitimate and necessary source for product, much of the counterfeit pharmaceutical trafficking has originated from unscrupulous smaller companies that are part of the secondary supplier community. These organizations can range from small corporations to guys selling out of the trunks of cars. McKesson and the FDA traced the fake Serostim transactions to secondary suppliers, according to Yonko.
“Most of the counterfeits over the last two years have come in through small distributors,” says Thomas McGinnis, R.Ph., Pharm.D., director of pharmacy affairs at the FDA, and chairman of the agency's Anti-Counterfeiting Task Force. “These are state-licensed entities that are supposed to be inspected by the pharmacy board. But a lot of them are very small businesses that are approached by somebody with product to sell. They don't have a business relationship with them. They've probably never done business with them before. And yet they buy the product without making a phone call to the manufacturer or to the FDA to ask if this guy who has a great deal is legitimate. Some of our investigators call that ‘willful blindness.'”
McGinnis, like Yonko, urges suppliers to use common sense and do their homework upfront to determine if a potential business partner offering that “great deal” is legitimate and “not a shell corporation or fly-by-night type of operation trying to move counterfeit product and then duck out of sight.” Both support the recommended guidelines for pharmaceutical distribution system integrity released by the Healthcare Distribution Management Association (HDMA) (www.healthcaredistribution.org) last fall (See sidebar below).
“Clearly, on one extreme you could say that if we bought everything from the manufacturers we wouldn't have this problem,” Yonko says. “That's a true statement. However, the secondary market, to a certain degree, does fill some holes when it comes to balancing of inventories, and there are price arbitrage opportunities [with those companies].”
So long as primary and secondary distributors practice due diligence there's nothing wrong in dealing with secondary market companies, Yonko notes. “We won't do business with anybody that's not what we consider a legitimate operation.”.
The FDA was able to discern a distinct pattern in the types of drugs being faked. “High-priced drugs in high demand with a couple of years left on their patent life so there wasn't going to be generic competition in the near future seem to be the common thread of drugs counterfeited during the last two-and-a-half years,” McGinnis observes.
Centralizing purchasing activities and operating under sound but tighter common sense business practices involving due diligence investigations of potential business partners is “probably the easiest, fastest and most effective way to mitigate the problem,” Yonko says. The costs have been minimal at best, and it only took McKesson a few days to identify the problem, create and adopt a solution and implement it as standard operating procedure, he says.
“Everything we've done is easily replicable,” Yonko adds. “We reviewed thousands of products that we thought could be counterfeited and turned our systems off so that none of that product could be purchased from anybody other than the manufacturer. We did that in a matter of days.”
However, even if all distributors overhauled their purchasing practices or stopped supporting the secondary market, counterfeit drugs still could find their way onto retail shelves and into consumer hands, according to Yonko, particularly if bargain-seeking retailers don't adopt similar safeguards.
“Everybody along the supply chain basically has to use due diligence and have similar processes in place to ensure that [counterfeit] product doesn't enter into the system through various sources,” he says. “It's not just a McKesson issue or an issue for one of the three top wholesalers. It filters down throughout the whole system.”
Executives from McKesson's two primary competitors declined to respond to Logistics Today's repeated requests for comment.
Another solution to the counterfeit drug problem commonly cited but intensely debated centers around paper pedigrees that accompany product lots. “Paper pedigrees come up as a suggestion, but quite frankly a pedigree only goes back to the last authorized distributor,” Yonko contends. “It's not a living document like a deed to your house. This is something that somebody could basically print out. There's no way to validate whether the information on it is correct.” Indeed, some of the more high profile counterfeit cases involve counterfeit pedigrees.
Digital imaging capabilities and souped up printers make it easier for anyone to duplicate or manipulate labeling and packaging. “These labels and packages look so good and so genuine,” McGinnis says. “I've been practicing pharmacy for 25 years and I can't tell the difference.”
The Internet provides an open marketplace to acquire drug-making paraphernalia, such as “tableting machines,” and then to sell finished product to unsuspecting retailers and consumers who don't want to pay full price or simply want larger discounts than they can get from manufacturers and authorized distributors.
As a result, the HDMA and the National Association of Chain Drug Stores (NACDS) (www.nacds.org) have been working with the FDA to develop operational and technological solutions, as well as to update state licensing requirements in lieu of more stringent federal regulations. In late October, the FDA's Anti-Counterfeiting Task Force, led by McGinnis, released for public comment an interim report on the issue with its recommendations to prevent counterfeiting.
The draft report recommends a multi-pronged approach that includes manufacturers shipping in smaller unit-of-use sizes to prevent repackaging by distributors, installing tamper-evident packaging on products, and implementing bar codes and radio frequency identification (RFID) chips on packages to track, trace and authenticate drugs. Among other creative recommendations are chemical tags, color-shifting inks, embedded threads and holograms. The final report is scheduled to be published later this month.
Both the FDA and the HDMA acknowledge that none of these recommendations alone is a magic bullet. But if every company actively supports a mutually agreed upon plan of attack, then that effort would go a long way toward preventing — if not eliminating — counterfeit drugs in the supply chain.
Although Yonko and McGinnis don't want to point fingers, they both agree that any technology-based preventive measures should begin with the manufacturers and be supported by the distributors and retailers.
“If the manufacturers don't put bar codes on every product, it's very difficult for us to implement something system-wide that can be used,” Yonko says. “[Manufacturers] have been slow to embrace that technology. But all of the participants within the supply chain will have to embrace the technology at some level. If manufacturers and distributors could work together to implement RFID, then that would pretty much guarantee products going into the retail channel are safe and effective.”
McKesson currently participates in Jumpstart, a coalition of wholesalers and retailers exploring and testing RFID chips affixed on packages.
For McGinnis, the lynchpin to stop drug counterfeiting is the Electronic Product Code, a chip about a third of the size of a grain of rice and carries a unique ID number. “That's going to be the cornerstone of any type of track-and-trace technology,” he says. “That's the 21st century solution to this problem, and it's got to start with the manufacturer.”
Affixing an electronic chip to packaging will help manufacturers be more financially accountable with their inventory, in addition to ensuring product safety, according to McGinnis. By 2005, retail giant Wal-Mart Stores Inc. is requiring its top 100 suppliers to put chips on cases and pallets at their warehouses or those cases won't be received, he says.
“If companies don't comply, they won't be able to sell to [Wal-Mart],” McGinnis says. “That's like the kiss of death for some of these guys, so they will drive this faster than the FDA could.” The HDMA is requiring the same thing by the end of 2005. By 2007, chips should be attached at the product level, he adds.
“We think this chip will be the 21st century pedigree, but that most likely won't happen until 2005 at the earliest, and 2007 at the latest,” McGinnis says. Until then, the pharmaceutical industry must apply some common sense to basic business practices. LT
Note: For more information on the FDA's efforts regarding counterfeit drugs, go to www.fda.gov/oc/initiatives/counterfeit .
The Healthcare Distribution Management Association (HDMA) (www.healthcaredistribution.org) has issued the following guidelines for drug distribution integrity that are designed to protect the safety and efficiency of the pharmaceutical supply chain and prevent counterfeiting.
Due diligence standards
Background check standards
Physical site inspection standards
Ongoing compliance review standards