When one of the largest and most regulated industries in the world becomes infested with dissolute ne’er-do-wells passing off fake pharmaceuticals and medical devices as authentic, the natural and obvious reaction by that industry is to debug itself quick and thoroughly.

That’s why within the last few months at least a half-dozen suppliers and several prominent trade organizations in the healthcare industry, capped by the U.S. Food and Drug Administration, are cracking down on a small but growing and potentially deadly threat of counterfeit products entering the domestic supply chain with the goal of protecting their products and the patients that use them.

Last month, the FDA unveiled its long-awaited final investigational report that included specific recommendations for strict anti-counterfeiting measures, including stronger regulatory oversight and enforcement, stiffer penalties for counterfeiters.

Prior to that, trade groups such as the Healthcare Distribution Management Association (HDMA), the National Association of Chain Drug Stores (NACDS) and the Health Industry Group Purchasing Association (HIGPA) issued their own guidelines designed to ensure supply chain integrity and safety that mirrored the central tenets of the FDA’s initial report released last fall. By and large, they all reiterated some common themes: Stricter internal purchasing practices, tighter controls over product through better tracking, improved scrutiny of business partners and the adoption and implementation of rather expensive information technologies, which many see as a long-term goal that also will generate efficiencies.

Robert Betz, Ph.D., HIGPA’s executive director, called this recent rash of product counterfeiting a "terrible problem with many different tentacles." But he applauded the FDA’s significant actions. "I’m pleased to see the FDA step up to this," he said. While most efforts so far have focused on pharmaceuticals, which have dominated reports of counterfeiting, sources told Healthcare Purchasing News that many of the current counterfeit prevention guidelines also can be applied to medical devices.

Precluding FDA guidelines, a number of healthcare suppliers launched their own counterfeiting offensives that almost immediately changed the way the industry moves product around.

Johnson & Johnson unleashed the most sweeping changes, forcing its selected distributors to sign a contract that prevents them from buying the company’s drugs and medical devices from any source other than J & J. Last fall the company learned that counterfeit versions of a synthetic mesh implant typically used in hernia-repair surgeries and manufactured by its Ethicon Inc. unit began showing up in customer facilities.

But J & J’s policy went further: It also gives company investigators the right to perform random audits and distributor warehouse inspections in order to spot and stop unauthorized purchases. Distributors failing to comply won’t receive shipments. J & J also sent letters to hospitals and other healthcare facilities urging them to buy company products only from authorized sources. Officials from J & J did not return repeated calls for comment at press time.

Pfizer followed suit within a week, notifying its distributors that they must purchase the company’s drugs directly from the manufacturer or from a list of authorized distributors and sell them only to pharmacies, hospitals, physicians or other properly licensed and approved reseller. Pfizer also noted that it wouldn’t do business with non-compliant companies.

Eli Lilly & Co. enacted similar restrictions and effectively terminated distribution agreements with five drug wholesalers that hadn’t been towing the line. The company even uncovered some counterfeit drugs among the lots of those wholesalers.

Three years ago, McKesson Corp. instituted its own restrictive policy after discovering in 2000 that it had purchased counterfeit Serostim, a drug that treats patients suffering from AIDS wasting. McKesson wasn’t caught completely off-guard, however, because the company previously knew that fake birth control pills and HIV drugs had made it into the supply chain. But this was the first time the company had seen a counterfeit high-priced injectible drug. "At that point we immediately took very stringent steps to tighten up all of our purchasing processes, especially involving those types of products," said Greg Yonko, McKesson’s senior vice president of purchasing for the pharmaceutical division. The company added high-priced injectibles to a growing product safety list already comprising specialty, HIV and oncology products.

Secondary activities with primary consequences

Although public awareness of healthcare product counterfeiting may be a recent phenomenon garnering intense media scrutiny the industry has been battling to maintain supply chain integrity for at least a decade. In fact, the FDA has initiated more than 55 counterfeit investigations during the last five years that involved millions of dollars worth of drugs with popular brand names like Epogen, Lipitor, Nutropin AQ, Procrit,, Serostim and Viagra. Some of these fake drugs, which are diluted, mislabeled or merely saline or sugar water, even made it to the warehouses of the top three drug wholesalers in the U.S. Furthermore, the federal agency noted that the average number of reported drug counterfeiting incidents has risen to about 20 per year since 2000 from about five per year during the previous decade.                                           

Don’t expect anyone to admit that the logistics process or security measures in the healthcare supply chain are flawed or inadequate. They will concede that counterfeit incidents exposed and exploited some operational weaknesses but those are anomalies that can be repaired. As if to assuage public fears, industry experts urge that counterfeiting must be viewed in perspective. The number of counterfeiting incidents is estimated to reach $2 billion a year in losses, while the volume of product that moves through the distribution system is 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 that are in the system are very safe," Yonko said. "It’s not even close to epidemic proportions." But Yonko recognized that "even one instance that poses a health hazard is serious."

Still, McKesson developed a comprehensive product integrity program in 2001 that has helped the company maintain a spotless, counterfeit-free record since implementation. In short, McKesson buys drugs on its product safety list directly from 15 of the top 20 pharmaceutical manufacturers. The company purchases less than 1% of the total number of branded products it distributes from 10 approved alternative source vendors (ASVs) in what commonly is referred to as the "secondary market."

Typically, providers and suppliers tap the secondary market to buy needed products quickly to fill spot inventory shortages or glean significant price breaks. Unfortunately, many of the counterfeit drugs reported to authorities were traced to these heretofore loosely regulated secondary supplier outlets. Companies comprising this market range from small legitimate and properly licensed firms with filled warehouses to guys selling out of the trunks of their cars. In fact, McKesson traced the fake drugs it received in 2000 to secondary suppliers.

"Most of the counterfeits over the last two years have come in through small distributors," said Thomas McGinnis, R.Ph., Pharm.D., director of pharmacy affairs at the FDA, and chairman of the federal 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.’"

Today, McKesson conducts a comprehensive review process to qualify its ASVs, rooted in simple but rigorous due diligence. That includes obtaining Dun & Bradstreet Reports on prospective ASVs and owners, checking licensing and insurance requirements, conducting background and security checks and making site visits to examine purchasing practices and detailed product checks in stock.

Products that come through McKesson’s supply chain are subjected to an extensive check-in and quality control process to verify packaging, dating and bar codes before entering its distribution network.

"We haven’t had an incident in our business for three years and we do $60 billion a year in sales and distribution," Yonko said. "You’re talking about billions of dollars of transactions and billions of transactions and a very small percentage has wound up being counterfeit. There are far more incidents of counterfeiting money than there are of drugs."

But wouldn’t it make more sense to eliminate the use of secondary suppliers, even if it unfairly targeted ethical and legitimate companies?

"Clearly, on one extreme you could say that if we bought everything from the manufacturers we wouldn’t have this problem," Yonko said. "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, he noted. "We won’t do business with anybody that’s not really what we consider a legitimate operation," he added.

Common sense over common cents

HIGPA’s Betz, along with McKesson’s Yonko and FDA’s McGinnis, all agree that common sense business practices must precede stricter regulations, stiffer penalties and costly IT equipment for track-and-trace purposes.

"Performing due diligence is simply the best course of action," Betz told HPN. "Buyers should establish the integrity of a source prior to a product need. Simply waiting around until the need arises is not the way to do it. At the end of the day the person who touches the patients or fills prescriptions has to ask questions. If you’re sitting in a hospital worrying about product shortages and you receive a blast fax from an unknown distributor offering the needed product at what you determine to be a good price, it’s a difficult not to look at the situation. Clinicians simply want to do what’s good for the patients and they’re facing tremendous pressure.