Counterfeit drugs – a growing threat in life science

The growing threat of counterfeit drugs is a live issue for the World Health Organisation and to companies up and down the supply chain on a global basis, with an estimated 27 billion euros revenue lost annually in Europe alone (Pharma Times, December 2018).  If you unwittingly find your business in the supply chain for counterfeit drugs, can you call on your insurance?   

If you think fake designer handbags are a problem, this pales into insignificance against the issue of counterfeit drugs. Fraud in medicine is a global problem, with long supply chains offering criminals ample opportunities to sneak in counterfeit drugs, posing a serious risk to public health.  The WHO estimates that one-third of all medicines sold worldwide are illegitimate.  E-commerce has provided a gateway for “fake” drugs to masquerade under well-known and trusted brands, with online trade booming.  Trading in counterfeit drugs is a more lucrative industry than narcotics – and the punishment for being caught out is not nearly as severe.

Drugs are being traded under established brand names, despite measures to counter this with holographic authentication technologies.  But more significant than the breach of intellectual property and the lost revenues involved are the lives that are being put at risk.  And the innocent companies who find themselves unwittingly caught up in the chain.  These drugs could just be a placebo, with no API (active pharmaceutical ingredient) – or a bad mix, or contain substances including plastic.  They could be manufactured anywhere.

Who is at risk?

In Pharma, everything is traceable, with serialisation allowing a full audit trail.  Wherever you are in the supply chain, you’re exposed – from large Pharma distribution to selling aspirin in a corner shop.   If you inadvertently supply counterfeit drugs or someone ingests them after they get into the human food chain, there’s a real threat.

Particular risk areas:

  • Parallel importers – importing drugs that are past their exclusive patent period and are now “generic“ medicine.
  • Suppliers to named patients – supplying drugs for alternative applications than their original purpose (eg: phthalidamide), as prescribed by doctors to a named patient. Does the drug have a license in that region/country?

Case study:  

Our client imported nicotine patches from Poland – which turned out to be fake and therefore ineffectual.  On testing, it was proved they did not meet the correct specification.  Fortunately, these never reached the consumer marketplace, and the client had recourse to their supplier via the contract.  A “near miss” in terms of financial impact and testing insurance wordings.

Risk management

Pharma manufacturers are using anti-counterfeiting techniques like serialisation and holographic imaging to secure against counterfeit, and other packaging authentication technologies are being developed. But these advanced authentication and verification technologies can only work if the consumer is educated to look for them.

With risk management opportunities limited, and reliant on mass education, it’s important to work through your business model to identify areas of risk exposure to counterfeit drugs; to undertake due diligence on your supply chain; and to develop strong internal quality control procedures, including drugs testing.

We also recommend you have your insurance broker review your service contracts – to see where these could be limiting your recourse and burdening you with liability.  Look beyond the commercials of the deal to the detail lying in the deeper clauses.

Can insurance help?

The coverage position on claims resulting from counterfeit drugs is not clear cut; policy wordings and approaches vary across carriers and claims would be considered on a case by case basis.  Hence the importance of robust risk management.

In terms of the “bodily injury” element of your product liability insurance, most policies exclude unapproved products –  including counterfeit drugs. However, if they were provided inadvertently and you can make a firm case that you were not complicit, then you may have a case for a claim; again, it would depend on the context.  Third party financial loss (being sued for breach of contract, delays etc) arising from counterfeit drugs can potentially be significant and can typically be covered by having appropriate professional indemnity protection.

Depending on the nature of your business, you should be able to include counterfeit drugs within product recall insurance to provide financial protection against the costs of a counterfeit-triggered recall.

Connecting with the right insurance advice in Pharma is critical to the financial robustness of your business. Partners& works with specialist insurers who offer risk control services specifically for the life science industry, helping clients to identify and control their exposures.  Our team of life science specialists will take time to understand your business, analyse the risk in your activities and your contracts, and advise on how best to manage and mitigate, designing a programme of specialist insurance that flexes with your changes.