A Prescription to Kill

China’s population: 1.3 billion.

Estimated 2005 revenues of the Chinese pharmaceutical market: $9.8 billion, double 2001’s total, and growing annually at almost 20 percent.

Annual number of deaths in China related to fake medications: 300,000.

Annual number of such deaths outside China due to fake Chinese-manufactured drugs: Unknown.


The Problem

These statistics point to a disturbing picture of opportunity and threat related to China’s pharmaceutical market, which is estimated to reach $24 billion well before the next decade, making it the fifth largest in the world. By 2050 the country should be the world’s largest drug market, driven largely by a population with 24 percent of its members over age 65.

Chinese and multinational drug-manufacturers alike are enjoying the benefits of this growth, with double-digit increases in annual revenues. But there is a dark side: China is already the world’s largest producer of counterfeit drugs, with such products—including ingredients benign as baking soda or harmful as rat poison—accounting for 63 percent of the country’s pharmaceutical market. Thus China is the backbone of the $40 billion global counterfeit drug market, which accounts for an estimated 15 percent of all drugs sold worldwide.

Counterfeit drug-making is a problem escalating on multiple fronts: from developing countries like Africa to the most developed, including the United States, where an estimated 5 to7 percent of drugs sold have been tampered with; from an early focus on lifestyle drugs such as Viagra to the inclusion of lifesaving medications for cancer, heart disease, and other conditions; with increasing involvement of organized crime and terrorist groups.

Beyond the obvious threats of counterfeit drugs to the global population’s health, such products are affecting pharmaceutical firms’ levels of brand equity and profits, with consequences of fake drug use ranging from generally undetected placebo effects to reputation-damaging patient injuries and fatalities. To address these threats, pharmaceutical firms and the FDA have begun taking more active steps.

But they face major challenges: Chinese scientists and manufacturers easily replicate and mass-produce branded drugs; unscrupulous entrepreneurs quickly build new pharma manufacturing plants and duplicate every detail of product packaging; China’s version of intellectual property protection is still ambiguous and often hard to enforce; the Internet provides easy sale of fake drugs to customers and wholesalers even in countries with more stringent regulation and oversight, like the United States.

This paper is a synopsis of research conducted as part of Kellogg’s Global Initiatives in Management program into the Chinese counterfeit drug making. Understanding how to address this industry involves gaining deeper insights into the multiple interrelated factors that have helped to create, perpetuate, and occasionally mitigate this problem.


The Chinese Government’s Role

Despite the creation of the Chinese Patent Office in 1980, until 1998 Chinese pharma companies could legitimately copy foreign firm’s products. As a prerequisite to and after joining the World Trade Organization, China bolstered existing patent laws, such that the country now conforms to most international standards (e.g., twenty-year patent protection). But enforcing these is still a major challenge, with multinational pharma companies having two options: making civil claims or taking criminal action. According to many, including Jack Chang, GE Asia’s Senior IP Counsel, civil claims (e.g., trademark infringement), though costly, are the easier route. Though such cases are on the rise, with 268 filed in 2005, with a significant proportion of victories (80 percent in 2006), the Chinese courts remain challenging to navigate, as demonstrated when GlaxoSmithKline dropped its defense of Avandia against fakes in 2004. Many provincial officials and police are unwilling to pursue cases against counterfeiters because their operations provide local employment.

Government-related contributions to the problem extend much higher than the provincial level. In 2005 Zheng Xiaoyu, the chief of the State Food and Drug Administration (SFDA), was dismissed after medicines his agency had approved killed dozens of citizens. He received a death sentence in July 2007 for taking bribes in exchange for drug approval. According to a senior pharmaceutical executive, the SFDA was selling manufacturing licenses and GMP (good manufacturing practices) certificates for cash.

The Chinese government has taken recent actions to address the problem of fake drugs, including training more than 6,000 drug inspectors, auditing manufacturing facilities, and developing portable drug-testing kits and mobile laboratory vehicles. Despite some success, including a recent sting that resulted in the conviction of a Chinese chemist responsible for seven counterfeit-drug-related deaths, poor coordination and questionable commitment have remained stumbling blocks.


The Impact of U.S. Regulations

The number of pharmaceuticals entering the United States has increased ten-fold since 2002. Several factors have compounded the problem of policing fake drugs: the FDA shares jurisdiction over the issue with several other agencies including the DEA and state-based ones; wholesalers have lobbied to relax restrictions on resale of pharmaceuticals; ongoing manpower shortages (e.g., Florida has nine inspectors to monitor almost 2000 wholesalers and retailers).

But arguably the biggest problem is growing demand for grey-market drugs, from wholesalers and consumers alike. Americans spent $203 billion on prescription drugs in 2003. Because of this demand, until a recent increase in counterfeit-drug-related deaths, even the three major U.S. drug distributors had considered the reselling of fake drugs an “acceptable risk.” Even punishment has been an ineffective deterrent. Ironically, the punishment for selling genuine OxyContin (a felony) is greater than marketing a fake version of the same drug (a misdemeanor). And as this trade moves increasingly online, controlling it is even more challenging.


Drug-Counterfeiting: Just Like Any Other Business

CEOs, CFOs, and other senior managers. Marketing, manufacturing, distribution, and customer care. Complex supply chains. Counterfeit drug-makers run their businesses just like any other. They base headquarters in major financial centers and ports such as Hong Kong and manufacturing in North China, developing a wide network to source needed items (e.g., labels). WHO estimated 500 counterfeiters in China in 2001 and, with expected returns of up to $500,000 for every $1,000 invested (versus a return of only $5,000 for heroin peddling), that number has grown dramatically. Savvy businesspeople, counterfeiters segment their markets, targeting wealthy nations with branded fake drugs that have higher margins and less developed countries with counterfeit generics and over-the-counter products.

But what strengthens these business models is the set of powerful factors driving the market for counterfeit drugs across nations: limited access to healthcare facilities; escalating drug costs; privacy of purchasing lifestyle drugs online without disclosure to employer/insurer; naiveté about fake drugs; non-existent or poorly enforced laws against counterfeits.


Supply Chain Issues

Not surprisingly, a complex supply chain exists for counterfeit drugs. Central to the chain is the use of mega-ports such as Hamburg and Tokyo, which move too many containers daily for close inspection. Manufacturers then use sites in numerous nations as cargo exchange points, payment centers, web hosts, and supply centers.

To address this, the Pharmaceutical Researchers and Manufacturers of America (PhRMA) and the FDA have advocated a closed distribution system, where each link in the supply chain from manufacturer to consumer is monitored closely, with paper and/or electronic product authentication. But even these measures, along with highly intricate packaging, are susceptible to counterfeiting, as suggested by the Director of Global Protection for a major pharma company: “These counterfeiters have gone through painstaking measures to replicate our logos, inks, holograms, external packaging, and internal blister packs. It is often the case that we can’t tell the difference ourselves until the product ends up in one of our testing facilities.”

Similarly, the closed system would fail to address the rise in online purchases of counterfeits by consumers and resellers. Accordingly, U.S. Immigration and Customs Enforcement (ICE) has established C3, a Virginia-based cyber crimes center that has been used to investigate counterfeit pharmaceuticals, among other products and activities. In 2005 ICE collaborated with the Chinese government to break a ring of counterfeit drug-makers and distributors with participants in the United States and China, arresting multiple suspects and seizing thousands of fake Viagra and Cialis pills and labels, along with counterfeiting equipment.

More recently, the World Health Organization announced the creation of IMPACT, the International Medicinal Products Anti-Counterfeiting Taskforce, which will focus specifically on supply chain issues related to fake drugs.


Anti-Counterfeiting Strategies

Groups such as IMPACT will have to avail themselves of multiple anti-counterfeiting measures including: using new technologies such as digital watermarking and micro-tagging; promoting more secure business practices among manufacturers and distributors; employing a rapid response network, with pharma companies’ help, for the public; international cooperation. These tactics could be used to prevent counterfeit operations in the first place, and to diminish the profit margins of those already in existence. But there is no easy answer. Anti-counterfeiting technology is expensive, often requires major infrastructure modifications, and is not fail-safe. Transnational collaboration is always complicated. Resources for such efforts within and between countries are scarce.

At the same time, the specific steps to making progress on this issue are clear: recognizing counterfeit drug-making as a high-priority global problem; enacting/enforcing sanctions through legislatures and courts; controlling the pharmaceutical supply chain; support of international cooperation and taskforces such as IMPACT; establishment of more effective Internet monitoring measures; raising the public’s awareness. We are making progress on many of these, but have a long way to go.


A Call to Action

China’s tremendous market potential for legitimate pharmaceutical manufacturers is offset by the country’s major contribution to the counterfeit drug trade. Fake drugs have already killed millions, by some estimates, and damaged and diluted the reputations of numerous established brands. Despite the major challenges outlined here, it is imperative that active steps are taken to address this problem. By building a stronger public response network, bolstering consumer education and pharma industry reporting systems, promoting cooperation among all international stakeholders, and supporting international anti-counterfeiting agencies, we can diminish and hopefully eradicate drug counterfeiting.

A global problem as widespread and deadly as drug counterfeiting requires a global solution.