Mexico’s Shadow Pharma Market

An in-depth investigation reveals a host of problems afflicting Mexico’s pharmaceutical industry. Counterfeiting, theft and illegal sales of samples cost drug-makers nearly US$2 billion a year.

Guillaume Corpart, Manuel D’Andrea & Enrique Orellana , Mexico City

In the wake of Mexico’s influenza pandemic earlier this year, the threat that fake medications might imperil the health of the population came into sharp focus.  Mexico’s health ministry warned the public about the risks of buying online medications, such as Tamiflu and Relenza, and to be wary of so-called miracle drugs. Warehouses storing medications were fortified by armed guards.  Pharmacies and hospitals were under strict vigilance and asked to keep faultless inventory records to avoid pilferage. These measures were responses to a crisis, but the threats they sought to remedy besiege the industry on a daily basis.

Mexico’s pharmaceutical industry faces unique challenges. The US$15.5 billion market is plagued by counterfeit goods, theft on a massive scale and irregular sales practices. Illicit activity in Mexico’s pharmaceutical industry is estimated at $1.9 billion per year – 12 percent of the formal market.

Counterfeiting is the primary problem, accounting for 80 percent of the illicit market.  Theft -- including assaults on pharmacies and warehouses, cargo robbery, and pilferage inside health institutions -- represents an additional 12 percent, while the illegal sale of drug samples accounts for 5 percent.

Sales of counterfeit drugs in Mexico in 2008 are estimated at $1.5 billion.  Counterfeit medications are the product of a sophisticated and lucrative shadow industry, with global reach. Well organized counterfeiting rings slip fake medications into Mexico’s legitimate drug supply. The operations of the legitimate industry are replicated by shadow players who engage in importing, manufacturing, packaging and distributing of their false merchandise.

Counterfeiting usually takes place in small laboratories, often located within residential dwellings, supported by a network of suppliers and intermediaries.  Legitimate business activities can be used as a front, but fictitious corporations or ghost companies often provide cover.

Two types of counterfeiting practices are rampant in the Mexican market:

1. Partial or total product substitution: It is common practice for counterfeit medication to include the original active ingredient but in smaller dosage, thus creating a sub-potent drug. Although the active ingredient is present, the medications may be laced with potentially hazardous material.  In one case, counterfeit medication for erectile dysfunction was found to have traces of LSD, a psychedelic drug.
    
2. Counterfeiting of expired drugs: Organized crime rings acquire expired medicines in order to repackage and reinsert them into the distribution channels.  The absence of a formal waste management system for expired drugs encourages the “recycling” of drugs back into the formal distribution system.
    

Also fomenting the proliferation of counterfeit medication is the growing presence of illicit online pharmacies. In 2004, the U.S. Drug Enforcement Administration detected over 200 online pharmacies operating along the U.S.-Mexico border.  These businesses delivered an estimated 11 million pills to U.S. buyers from 2003 to 2008. Furthermore, over 2 percent of Mexico’s 110 million inhabitants have purchased online medications. In order to thwart the illicit trade, Mexico’s Federal Commission for Protection Against Health Risks (COFEPRIS) banned all online pharmacies, including legitimate firms.

Though not as big a problem as counterfeiting, drug thefts accounted for an estimated $235 million in financial losses in 2008 and is the top-of-mind threat for industry executives, as stolen goods feed directly into the counterfeit market as a source of raw material and packaging.  Theft falls into three main categories:  Cargo robbery, assaults and pilferage.

Pharmaceutical cargo is an attractive target for organized crime, which exploits vulnerabilities throughout the distribution network. The high value of the merchandise, combined with its quick marketability, the ease of rechanneling the product, and the relatively mild punishment for those who are caught stealing, make cargo theft a primary focus of illicit activity.  Insurance companies estimate that 1 percent of all cargo trucks on Mexican roads are assaulted each month.  Kroll estimates financial losses due to cargo theft at $80 million in 2008.

Gangs often operate by developing accomplices within distribution and transport companies, who help identify targeted medications or obtain shipping information and truck itineraries. According to Kroll analysis, in over 80 percent of theft incidents, a company employee is directly involved.

Drug warehouses and pharmacies are also under constant assault. According to the National Association of Pharmacies (ANAFARMEX), every pharmacy in Mexico is assaulted twice a year on average.  This translates to over 40,000 assaults per year countrywide and estimated losses of $62 million. Meanwhile, pilferage is rampant within government health institutions. Although there are no official figures, Kroll estimates financial losses due to pilferage at $93 million per year. 

Jalisco, Mexico State, Guanajuato, Mexico DF and Michoacán account for 65 percent of all assaults on distributors. The geographic concentration of cases can be explained by the fact that these same states serve as distribution and command centers for organzed crime.

Organized crime commonly focuses on medications whose sale is restricted in the open market, such as psychotropic drugs, as well as products with high market demand, such as Viagra and other lifestyle medicines. Sold in the black market, these drugs are less expensive and easier to obtain than in the formal market, where patrons have to face a doctor or pharmacist.

The commercialization of medical samples is another burden on the industry, representing a lost market opportunity of $90 million per year. Drug samples account for between 1 percent and 8 percent of production, depending on the manufacturer.  As a result, total production of drug samples is estimated at 20 million units.  Sales reps and doctors often sell the medical samples to “specialized collectors”.  These, in turn, channel the products to the black market, reaching clients mainly through street markets, irregular pharmacies and online sales.

Pharmaceutical companies operating in Mexico realize that this illicit activity erode their market position and long-term competitiveness. It is no longer possible to rationalize that these risks represent sunken costs that companies have to live with. The profitability of pharmaceutical manufacturers and distributors in the long run requires the implementation of preventive measures, anti-counterfeiting technologies in the form of monitoring systems, as well as product authentification methods.

Technology, however, is not enough, and pharmaceutical companies are now acknowledging that a well-crafted distribution channel management, one that prevents the infiltration of counterfeit medications and that avoids the diversion of products into illegitimate channels, is just as important.

Above all, most companies agree they cannot tackle the problems alone.  Whether partnering with law enforcement authorities to avert cargo theft or with other companies to lobby the government to strengthen, enact and enforce anti-counterfeiting laws, leading industry players are becoming more proactive in measuring and mitigating these risks.  

The authors:  Guillaume Corpart (gcorpart@kroll.com) is an Associate Managing Director, Manuela D’Andrea ( mandrea@kroll.com ) and Enrique Orellana ( eorellana@kroll.com ) are Market Intelligence Analysts.  All are based in Kroll’s Mexico office.