By Ron Guido, president, Lifecare Services, LLC
It has been described as the “Crime of the 21st Century.” The growing problems of counterfeiting and intellectual property piracy threaten businesses and consumers in nearly every industry sector and within every country. Fake products deprive legitimate businesses of revenue and undermine consumer confidence in their brand names. Consumers are also adversely affected because they are deceived into buying fake products that don’t meet the brand owner’s standards and can pose health and safety hazards.
In short, counterfeiting is a big problem for society, as well as for legitimate companies that collectively forfeit hundreds of millions of dollars in sales annually. Reliable statistics on this illicit business don’t exist, but the International Chamber of Commerce’s Counterfeiting Intelligence Bureau estimates that fakes account for 5 to 7 percent of international trade, or about $650 billion annually. While some observers dispute this estimate, it’s hard to argue with U.S. Customs and Border Protection, which reported seizures with MSRP of more than $1.2 billion in counterfeit and pirated goods in fiscal 2012. More alarming is the observation that the value of last year’s seizures has grown 450% from five years ago. A few years ago, the World Health Organization issued a gross estimate as to the annual market value of fake prescription medicines in the range of $70 billion to $100 billion, or 8 to 10 percent of all prescribed drug sales.
These fakes come in many forms, from no active ingredient to harmful components to “underpowered” doses that lead to drug-resistant diseases. Whatever form the counterfeiter chooses can be lethal. By definition, medicines are “prescribed” to treat disease, so the absence of clinically proven therapy is tantamount to being life-threatening. In reality, there are no benign counterfeits in the life sciences.
So this problem — some say “epidemic” — elicits two questions for leaders in life sciences businesses.
- What factors are contributing to the growth and global spread of brand violations?
- What can organizations do to protect themselves?
Among the many factors which have spawned the growth of illicit commerce (notably counterfeits, trademark infringements, product adulteration, and graymarket diversion), the most enabling are the globalization of the economy and international trade agreements making counterfeit goods easy to hide from underresourced enforcement agents through free trade zones — including the Internet — and the supportive lack of IP rights protection in many countries.
Many aspects of the counterfeiting problem seem to be beyond the control of legitimate businesses. But one important area over which businesses can exert a large measure of control is the security of their own supply chains. There is virtually no way to prevent a counterfeiter from making fake medicines, but we can build more secure supply networks. Lax security creates opportunities for counterfeit and stolen goods to make their way into the growing network of legitimate production, wholesale, and retail channels. Unfortunately, many businesses do not fully appreciate the bottom-line cost of supply chain insecurity and the adverse impact it has on top-line brand value.
So that brings us to the second question. How can your organization establish a culture and supporting infrastructure to help identify fake goods entering the legitimate supply chain? The short answer is that companies with anticounterfeiting strategies that are based upon a solid understanding of the mechanisms of counterfeit trade, that are strongly supported by senior management, and that include well-defined monitoring and response processes that foster strong collaborations with external stakeholders are best-positioned to maximize the market value of their goods and services. In doing so, they also preserve, perhaps enhance, brand and company equity.
In establishing such a culture across your company, it is important to begin with a humbling awareness which is counterintuitive to business leaders who pride themselves in knowing their products, customers, competitors, and markets incredibly well. Unfortunately when it comes to counterfeits, even the best “brand protectors” in the industry will be quick to say, “We don’t know what we don’t know.” For this reason, it is imperative for ethical and reputable companies to focus on risk assessment, preventive business practices, and immediate response to known incidents with appropriate root-cause analyses. This also implies having well-documented procedures and proper attention to organizational expertise to manage incident reporting, legal and enforcement efforts, and system-wide communications.
In the pharmaceuticals supply industry, it is easy to understand why we suffer from lack of knowledge of the problem. This lack of business intelligence is attributable to four common supply chain realities:
- The majority of trade occurs “downstream” from companymanaged operations where the transparency and control of our goods is limited to information obtained from trading partners and customers.
- Ownership of goods typically transfers to the intermediary (distributor) or directly to the end customer early in the supply chain. Unless there is a contractual or legal obligation for trading partners to share such detail with the manufacturers, visibility to further transfers is limited to syndicated sources of data.
- With few exceptions, there is no industrywide network of tracking or tracing products through the supply chain (socalled pedigree, or chain, of custody systems) to record the time, value, and place of product transfers.
- The quality of the counterfeiters’ work has become so sophisticated that the product and/or its packaging is often indistinguishable from the genuine product and can pass through to consumption or administration by a practitioner without detection.
As a result of these conditions, all industry stakeholders must develop and implement monitoring systems to look for and uncover fakes anywhere in the supply chain. But this is no easy task, since the pathways of the counterfeiter are varied, inconsistent, and largely underground.
Due to the inability of business leaders to accurately estimate how counterfeit goods are affecting revenue from traditional internal data systems, we must take a top-down approach from the World Health Organization statistics in order to build a credible “Case For Action” within our scope of operations. There are at least two ways of addressing this need for quantifying the unknown: (1) it is not unreasonable to assume that your highvolume, high-profit brands are being “violated” at a 2 percent to 3 percent rate when combining all illicit trade categories or (2) treat the aggregation of all counterfeiters as being equivalent to a second-tier competitor, taking away some of the natural demand that exists for your products. The latter approach works particularly well among marketers who enjoy staging campaigns to win market share.
There are other qualitative factors that can refine your internal estimate of counterfeits when comparing your company to the industry average (until more reliable business intelligence is obtained):
- Does your company’s drug portfolio include any of the highly counterfeited product categories (e.g., lifestyle drugs, antimalarials, or statins)?
- What is your relative market share and price point in specific high-risk categories?
- Do you have effective safeguards currently in place?
- What is your relative penetration and operational presence in emerging markets compared to that in more regulated markets?
- Do you have product security contracts and auditing procedures with your key distributors?
- Can you apply your incident history to determine the degree and scope of your brands which are being targeted by counterfeiters?
The key message though is, regardless of how you sculpt the known data into an assessment of the business opportunity, ANY counterfeit trade of your brands or any sale of a genuine but diverted product that has been mishandled, stored improperly, or allowed to expire places a patient at risk. For this reason, you must maintain a culture of governance that reinforces a “NO TOLERANCE” policy on illicit trade worldwide.
5 Key Essentials to a Strong Company Culture of Intolerance to Brand Violations
Preaching a company commitment to anticounterfeiting policies and practices will not stop counterfeit drug trade, but it’s a start. In fact, I have prepared five basic ingredients to a strong company culture to reinforce your “no tolerance” message with strategies, actions, processes, metrics, and assessments, all aimed at brand protection and patient safety and all starting with the commitment of the company’s C-suite leaders:
- senior management commitment and accountability
- cross-functional governance and policy stewardship
- brand protection functional expertise
- widely adopted set of supply chain best practices
- measurement systems and data analytics.
Management Commitment. As in most companywide culture initiatives, it is vital to have the CEO or president address the company’s commitment to thwart the effects of counterfeiters and to demonstrate such commitment through regular and open communications on the topic. Anticounterfeiting measures may not immediately have a positive business case, and for many associates, it is difficult to see the benefits of the effort at all. Support from top management is crucial to signal that the problem must be addressed proactively and that associates who are empowered to implement anticounterfeiting measures are contributing to the wealth of the company. Without explicit executive acknowledgement of a strong case for action, typically rooted in consumer safety, brand equity, and business value, brand protection commitments inside the supply chain will become fragmented, ineffective, inconsistent, and financially challenged and will eventually lead to unmitigated risks.
Governance and Policy Stewardship. Because counterfeit trade can engulf virtually every function in the organization, cross-functional oversight and governance of policies, positions, and practices are vital to the effectiveness and sustainability of the company’s brand protection efforts. Typically, pharmaceuticals organizations will set policies and procedures pertaining to IP protection through close collaboration among the law department, including trademark and patent attorneys, quality & compliance officers, government affairs, the security department, and business unit heads. This internal governing body, composed of proven leaders, can guide and inform senior executives on strategic brand protection issues, political and regulatory direction, and important events. This standing committee (council) will create and maintain internal policies and mandates pertaining to the broad issues of protecting the supply chain. It is also important for the company to have a consistent “voice” to external partners and the public, relative to its practices. Such a council is invaluable in communicating such positions throughout internal and external communications networks.
Brand Protection Expertise. As a business discipline, brand protection is a nascent function for most organizations. It is important to design, fund, and manage brand protection activities as an operational unit for the purpose of providing subject-matter expertise for the long term. The core mission of the brand protection group is to assess risk, develop and advise on the implementation of counter measures, and develop the tools needed to protect the company and its customers from false versions of its brands. This group can report organizationally to the commercial units or to supply chain leaders or to the law department. Given the need to implement anticounterfeiting practices and technologies inside the supply chain, it may be best for this group to reside there or at least have liberal access to production operations. Lastly, depending upon the markets served, the brand protection organization might have regionally deployed experts “on the ground” in addition to enterprise- based specialists to support new product launches or legislated anticounterfeiting programs.
Supply Chain Best Practices. Leading organizations in this space refuse to adopt a “victim mentality” when counterfeits surface in the marketplace. Instead they study the causal factors of each incident using available information and assess what, if anything, can be changed inside the company or through affiliated suppliers and commercial partners to prevent the counterfeits getting into the legitimate channels of trade. Such best practices become evolutionary as each incident is a new learning, and every violation can be linked to a pattern of behavior. Best practices then become prescriptive anticounterfeiting guidance documents for widespread implementation across the enterprise. In some cases the recommendation for increased control and security are best implemented as standard operating procedures with appropriate training, validation, and version control. The categories of prime importance for best practice development include distributor compliance, reporting and escalating incidents, market monitoring, employee education (e.g. call center personnel), appropriate use of deterrent or authentication technologies, and managing reverse logistics. These practices should be reviewed periodically by the cross-functional governance committee and the brand protection experts for completeness and feasibility of deployment.
Measurement and Data Analytics. The old management adage, “you achieve what you measure,” also applies to brand protection. Despite the fact that information about specific counterfeit activity is sketchy at best, it behooves an organization to track incidents and place a value (lost or recovered revenue) for each violation and for each protective measure. Internal rules can apply to the metrics so that credibility is not challenged if the cause and effect are not clearly stated. In addition to the wins and losses amassed over time, as a measure of brand protection effectiveness, it is important to learn from the aggregation of the data. It is not unreasonable to catalog forensic information obtained from a cluster of fake goods, to help profile the counterfeiters’ actions or perhaps some elements of their supply network. For example, the clandestine nature of drugs sold via the Internet can make triaging incidents a difficult task. However, by looking for patterns of packaging, pricing, graphics, etc., it is possible to determine if one or many cells of illicit producers are involved. Lastly, as mentioned earlier, many aspects of brand protection are counterintuitive to common business logic. Measuring incidents is at the top of the list. In the early phases of establishing a culture to proactively combat counterfeits, an organization will see the number of reported incidents rise simply because the company’s search antennae are more active. Here it is important for senior leaders NOT to react negatively to rising reports of illicit trade. You may be observing the tip of the iceberg, whereas before the focus on metrics, your company was merely reporting the “tip of the tip” of the iceberg. Take heart; eventually your new 5-Step Plan will drive incidents down and revenue recovery up.
In summary, a successful organizational commitment to brand protection and supply-chain integrity is no different from any other pursuit of business excellence. It begins with visibility to the case for action from the top of the organization down through the ranks with shared accountability for a “no tolerance” culture. That culture becomes sustainable when the organization understands individual roles and responsibilities needed to help mitigate the risks of counterfeits invading the legitimate supply network and proactively embraces the policies, practices, and technologies needed to deploy a comprehensive and sustainable brand protection program. Your patients will applaud your efforts.