Thursday, August 16, 2007

Diversion from Canada via China

Bloomberg has a great story today in which Johnson & Johnson talks publicly about how they disrupted a counterfeit diabetes test supplier. See China Counterfeit Diabetes Tests Tracked by J&J. Unfortunately, the story once again shows the dangerous connection between diversion and counterfeiting.

The article makes for a gripping read. Following customer complaints, detectives followed the bogus products to 700 pharmacies where the products were sold, then to eight U.S. wholesalers, and then to two importers, one in the U.S. and another in Canada.

Here’s the rub: the defendant wholesalers apparently believed the counterfeit strips were lower-priced gray market products diverted from normal distribution channels.

So, we (re)learn the lesson that diversion is the primary way for counterfeit products to enter legitimate channels. That’s why allowing importation will open up new gateways for counterfeits. I just wish that Senator’s Dorgan and Snowe would try to understand the dangers!

Unfortunately, there’s still a fatal flaw in J&J’s distribution channel. One LifeScan executive is quoted as saying: “We recommend customers obtain their diabetes testing supplies from reputable sources to reduce their risk of receiving counterfeit product in the future.”

Sounds sensible, but a “recommendation” is much too weak. Why doesn’t LifeScan require all pharmacy customers to purchase only from authorized distributors and then require authorized distributors to only buy directly from the manufacturer? That's the situation for prescription drugs, where Inventory Management Agreements (IMAs) and Fee-for-Service agreements have limited product leakage into the grey market and closed a significant entry point for counterfeiters.

And I pointed out yesterday, there is still no way for the ultimate consumer/patient of these diabetic tests to know whether their pharmacy or its wholesaler got the product from a legitimate source. Very few people are willing to discuss this truly scary part of product security.

Hat tip to Pharmalot for highlighting this story.

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P.S. Given the quality problems of Chinese goods, many people seem eager to throw out overseas sourcing for political reasons. Not me. I am simply arguing against diversion, not against Chinese sourcing. See The Risks of Chinese Sourcing on my Distribution Trends blog for more details.

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