Gray Markets for Pharmaceuticals Term Paper

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Pharmaceutical Gray Market on Operations and Strategies

The safety, security and prices of pharmaceuticals in the United States represent a fundamental national security interest. When essential drugs are unavailable or priced too high, the public's health is threatened and this is what is happening because of the pharmaceutical gray market. This paper reviews the relevant literature to determine how the pharmaceutical "gray market" affects the operations of pharmaceutical companies operating in the U.S. pharmaceutical market as well as strategies used by pharmaceutical companies to combat this issue. A summary of the research and important findings concerning these issues are provided in the conclusion.

Review and Discussion

Generally speaking, pharmaceuticals are enormously expensive to develop and bring to market (Kelly, 1999). According to Kelly, "The development of prescription pharmaceuticals requires costly and time-consuming research. After a product has been developed, it must undergo the rigorous approval process of the Food and Drug Administration (FDA)" (p. 10). The process typically requires more than a year-and-a-half to complete because the pharmaceuticals are subjected to rigorous testing to ensure they are safe and efficacious for their intended purposes (Kelly, 1999). Moreover, competition in the pharmaceutical industry is fierce and profitability elusive (Bender, 2004). Not surprisingly, the pharmaceutical industry is highly concerned about potential counterfeit and adulterated drugs, as well as their potential for misuse and abuse (Kelly, 1999). According to Chi (2009), "The World Health Organization declares fake medicines are a global problem. In the U.S., 5%-7% of pharmaceuticals bought and sold are believed to be counterfeit. Some drugs that have fallen prey to this practice include Prozac, Zantac, Viagra, and others" (p. 66).

Recent increases in the proliferation of pharmaceutical for non-medical purposes in the United States have generated growing concern about the sources of these drugs (Valdez & Sifaneck, 2008). In fact, for the past 30 years or so, there has been increasing concern in the international business community regarding so-called "gray marketing" or what it is also termed "parallel importation" of pharmaceutical (Chen, 2002). According to Chen, "The gray marketing or parallel importation arises where a marketer imports branded products from abroad and then diverts and sells them through unauthorized channels" (2002, p. 196).

It is important to note, though, that in contrast to black markets for counterfeit or stolen merchandise, gray markets are not regarded as being strictly illegal (Chen, 2002), but the pharmaceuticals may or may not be authentic (Chi, 2009; Foxman & Muehling, 2009). Nevertheless, gray markets typically involve authentic goods in terms of their manufacturing source; however, it is the distribution of these goods that is violative of the law (Chen, 2002). According to Chen, "The parallel importers arbitrage products in one country at a relatively low price, and then sell them to another country where the authorized distributor's price for the product is high" (2002, p. 197). An example of gray marketeering would be European Union pharmaceutical marketers that are restricted by regulated prices, creating a niche for gray marketers (Chen, 2002). In this regard, Chen advises that, "Estimates for the size of the gray market there range from two to ten percent of the total market for prescription medicines and are expected to grow in the future" (2002, p. 197). As a result, there is growing concern about whether the importation of gray market goods that have genuine trademarks should be regarded as trademark infringement (Chen, 2002).

Pharmaceuticals can also be diverted from their intended markets when pharmaceutical manufacturers allow institutional customers, including long-term care facilities and closed-door pharmacies, to purchase discounted drugs (Ukens, 2009). According to Ukens, "Closed-door pharmacies, which do not serve walk-in customers, then turn around and sell the products for a significant profit to entities not entitled to the discounts, such as community pharmacies" (2009, p. 23). The problem of diverted drugs to close-door pharmacies is much larger than many observers might believe. In this regard, Ukens emphasizes that, "It's estimated that between 50% and 80% of closed-door pharmacies participate in such diversion schemes. Some closed-door pharmacies are not really pharmacies at all but are established solely to purchase and resell discounted pharmaceuticals" (2009, p. 23). The gray market for pharmaceuticals is also fueled by "American goods shipped to charities overseas (although sometimes they never left the docks) and the resale of free prescription samples and medicines originally sold at sharply reduced rates to hospitals, nursing homes, and clinics" (Conlan, 2009, p. 33). There are other gray market sources as well.

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For instance, according to Chi (2009), "There are also storefront operators or shell companies that buy drugs at institutional prices, then sell them to retailers and quickly go out of business to escape being caught" (p. 66).

At first blush, this diversion of pharmaceuticals would appear to be a straightforward business matter, but there is a very real social problem associated with these practices. As Ukens points out, "Deep discounts, up to 99%, create a gray market-for drugs. Such diversion has been found to be an extensive enterprise affecting the safety, quality, cost, and availability of those products to consumers, thereby endangering the public health and welfare" (2009, p. 23). The diversion of pharmaceutical in this fashion adversely affects the costs and availability of pharmaceuticals in particular. For instance, Ukens reports that, "The most graphic recent example of the gray market at work was [the recent] influenza vaccine shortage. Hospitals and clinics couldn't get supplies through the normal distribution channels, but gray market distributors were able to obtain the vaccine and proceeded to push the price through the roof" (2009, p. 23). The conventional manner in which pharmacies and healthcare organizations typically receive their pharmaceuticals through primary wholesalers is depicted in Figure 1 below.

Figure 1. Conventional pharmaceutical distribution chain

Source: Tomsic, 2013

By contrast, some secondary wholesalers have taken advantage of drug shortages in various parts of the country to stockpile essential medicines and then sell them at inflated prices as depicted in Figure 2 below.

Figure 2. How the "gray market" interrupts the standard drug supply chain

Source: Tomsic, 2013

Although pharmacies are under contract to sell to various healthcare organizations, some pharmacies take advantage of drug shortages to exploit the system. For instance, according to Tomsic, "Some small pharmacies break their contracts and sell to secondary, or gray market. We've seen where a drug may be sold in the gray market five or six times in the course of a day" (2013, para. 3). Likewise, Cherici, McGinnis & Russell (2011) report that, "When critical medications are not available through hospitals' usual channels of distribution, unscrupulous gray market distributors [are] quick to jump in with supplies of these drugs that they are more than willing to sell to healthcare providers at exorbitant costs" (para. 3). The price for the pharmaceutical increases as it is handled by each of these secondary distributors, sometimes inflating the price as much as ten times the original amount (Tomsic, 2013). As can be seen in the process illustrated in Figure 2 above, pharmaceuticals may go through several intermediaries before ever reaching their final destination. In this regard, Tomsic reports that, "One wholesaler sells it to a second, then a third, and so on -- sometimes without the drugs actually changing hands. They're paper transactions used to jack up the price. The price can go up easily 20, 30, 40 times in a day!" (p.

The gray market also includes so-called "drug tourists"; these tourists are U.S. citizens that travel abroad, generally to Mexico but also to South America and even the Netherlands, to purchase legal pharmaceuticals for recreational purposes (Valdez & Sifaneck, 2008). In this regard, Conlan (2009) reports that, "Millions of people are buying what are advertised as bargain-rate prescription drugs from offshore Web sites. Countless others are visiting Mexico, where prescriptions are not required for most medicines and are easily obtained for controlled substances, including OxyContin" (p. 32). The "Mexican connection" is especially troublesome for policymakers because of their different laws and lower costs for pharmaceuticals. For example, according to Valdez and Sifaneck, "Drug tourism along the U.S.-Mexican border is driven by the inexpensive costs of these substances, legal access to drugs whose distribution is loosely controlled in Mexico, and the close physical proximity of Mexico to the United States" (2008, p. 880).

The purchase of pharmaceuticals is legal in Mexico when foreigners have a prescription from a Mexican physician or dentist and American citizens are allowed to bring a 3-month supply of an unlimited number of prescriptions back with them to the United States (Valdez & Sifaneck, 2008). Indeed, hundreds of thousands of American citizens live in close geographic proximity to Mexican border cities, making access to pharmaceuticals that much easier (Valdez & Sifaneck, 2008). In this regard, Valdez and Sifaneck report that, "The drugs are particularly accessible to prescription drug.....

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