Insights & Reports > Kroll Global Fraud Report

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Guillaume Corpart, Manuela D’Andrea & Enrique Orellana

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Amid Mexico’s recent influenza pandemic, the real danger that fake medication could imperil the health of the population was acknowledged. The country’s health ministry warned the public of the risks of buying medications, such as Tamiflu and Relenza, online. Armed guards protected warehouses storing medications. Pharmacies and hospitals maintained strict vigilance and were asked to keep faultless inventory records to avoid theft.

These measures helped with a crisis, but the same underlying threats besiege the industry every day. Kroll recently conducted an in-depth investigation into the growing problems afflicting this sector in Mexico. Here are some of the key findings.

The country’s pharmaceutical industry faces substantial fraud risks. The $15.5 billion market is plagued by widespread and difficult-to-tackle problems – counterfeit goods, theft, and irregular sales practices chief among them. Overall, illicit activity amounts to about $1.9 billion per year, or 12 percent of the formal market. Counterfeiting affects all companies and represents 81 percent of the illicit market. Theft – including stealing from pharmacies and warehouses, cargo theft, and pilferage – constitutes an additional 12 percent, while the illegal sale of drug samples accounts for 5 percent.

Counterfeit drugs

Sales of counterfeit drugs in Mexico were estimated to exceed $1.5 billion in value in 2008, or 10 percent of the formal market. They are the product of a complex and lucrative shadow industry with a global reach. Well coordinated rings, often working closely with organized crime, slip fake medication into Mexico’s legitimate drug supply. Such shadow players replicate operations parallel to the legitimate industry, including importing, manufacturing, packaging, and distributing their false merchandise. Counterfeiting usually takes place in small laboratories, often located in residential buildings, supported by an entire network of suppliers and intermediaries. Legitimate business activities can be used as a front, while in other cases fictitious corporations or ghost companies provide cover.

Two types of counterfeiting practices are rampant in Mexico:

• Partial or total product substitution: Counterfeit medication often includes the original active ingredient but in a smaller dosage than indicated on the packaging, thus creating a sub-potent drug. Even when the active ingredient is present, the medication may still be laced with potentially hazardous material. In one case, counterfeit pills for erectile dysfunction were found to have traces of LSD, a semi-synthetic psychedelic drug.
• Repackaging of expired drugs: Criminal rings also acquire expired medicine in order to repackage it and then reinsert it into the distribution channel. The absence of a formal waste management system for expired drugs makes this “recycling” easier.

The growing presence of illicit, online pharmacies is further increasing the proliferation of counterfeit medication. In 2004, the United States Drug Enforcement Agency found over 200 online pharmacies operating along the United States-Mexico border. It is calculated that these businesses sent over 11 million pills to American buyers between 2003 and 2008. Furthermore, over two percent of Mexico’s 110 million inhabitants are said to have purchased medication online. In order to address the risks inherent in such purchases, Mexico’s Federal Commission for Protection Against Health Risks banned all online pharmacies, including legitimate ones.

Theft

Drug theft, estimated to have cost companies $235 million in Mexico in 2008, remains the leading risk in the minds of executives especially as, beyond the direct losses, it provides the counterfeit market with raw material and packaging. The problem comes in three primary forms: cargo theft, break-ins, and pilferage.

Pharmaceutical cargo is an attractive target for organized crime. The latter can exploit vulnerabilities throughout the distribution network. High value, quick marketability, ease of rechanneling, and relatively small penalties if caught make this kind of theft good business for criminals. Insurance companies estimate that every month one percent of all cargo trucks on Mexican roads are attacked, and Kroll puts the loss to the pharmaceutical industry in 2008 from this activity at $80 million.

Gangs often have accomplices within distribution and transport companies who help identify targeted drugs, as well as provide shipping information and truck itineraries. Kroll has found that, in over 80 percent of thefts, a company employee is directly involved. Jalisco, Mexico State, Guanajuato, Mexico Distrito Federal, and Michoacán see 65 percent of all these crimes, largely because these same states serve as distribution and command centers for organized crime.

While cargo theft can affect all players, break-ins mainly target warehouses and retail drug stores. According to the National Association of Pharmacies, every pharmacy in Mexico experiences theft on average twice a year. Countrywide, this results in over forty thousand break-ins annually, and estimated losses of $62 million.

Pilferage, on the other hand, usually takes place further down the distribution network and is particularly rampant within government institutions. Although there are no official figures, Kroll estimates that losses in Mexico are approximately $93 million per year.

In seeking drugs, whatever the means, organized crime commonly focuses on medication of which the sale is restricted in the open market – such as psychotropic drugs – or on products with high market demand – such as lifestyle medicines. On the black market, these drugs are less expensive and easier to obtain, with no prescription required.

Sale of medical samples

The commercialization of medical samples hurts companies in two ways: first as an unprofitable use of resources in producing them, and second as a missed sales opportunity. It is calculated that the practice represents a lost marketopportunity of $90 million per year.

With drug sample production taking up between one and eight percent of pharmaceutical manufacturing capacity, some 20 million units are produced each year. Sales reps and doctors then sell the samples to “specialized collectors.” These, in turn, channel the products onto the black market, reaching clients mainly through street markets, irregular pharmacies, and online sales.

Looking forward

Pharmaceutical companies operating in Mexico are realizing that the risks outlined here erode their market position and long term competitiveness. It is no longer possible to dismiss the problem as simply a cost which companies have to endure. The long term profitability of manufacturers and distributors requires the implementation of preventive measures and anti-counterfeiting technologies, such as monitoring systems and authentication methods.

Technology, however, is not enough. Pharmaceutical companies are now acknowledging that good distribution channel management – that prevents the infiltration of counterfeit medication and stops the detour of products into illegitimate channels – is just as important.

Above all, most companies agree that they cannot tackle these problems alone. Whether partnering with law enforcement authorities to avert cargo theft, or with other companies to lobby the government on anti-counterfeiting laws, leading industry players are becoming more proactive in understanding and mitigating the substantial fraud risks which they face.

View the Healthcare, Pharmaceuticals and Biotechnology Industry Report Card