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. Last Updated: 07/27/2016

Pharmaceutical Piracy a Tough Pill to Swallow

The number of counterfeit pharmaceuticals seized by authorities has risen tenfold in the past year. Yet despite the threat to public health and to legitimate industry, the government has made little ground cracking down on the culprits.

Pharmaceutical manufacturers and federal authorities say the increasing numbers of counterfeit drugs on the market are squeezing legitimate industry and seriously endangering public health.

The Health Ministry reported 56 separate drugs and medicines counterfeited in 2000 — a 1,000 percent increase year on year.

The majority of the counterfeits are widely used high-volume drugs like antibiotics, which turn an enormous profit when copied in bulk. These are also far easier to introduce to the market undetected than low-volume revolutionary treatments used in only a handful of institutions.

As much as 3.6 percent of all drugs in Russia are false, estimated Deputy Health Minister Anton Katlinsky at a news conference held last month by the Association of International Pharmaceutical Manufacturers with the support of the Health Ministry. Other experts generally put the figure at 5 percent.

Legitimate industry's lost sales to such knockoffs may total well over $100 million in Russia alone. The loss is considerable considering that the Research Marketing and Business Consulting Co. estimates the value of the Russian pharmaceutical market at between $2.8 billion and $2.9 billion, compared with estimated totals of more than $100 billion in the United States and $11 billion in Britain.

'Question of Life and Death'

Concerned by the phenomenal growth of the problem, AIPM has urged the government to form a special commission to take action. "We are trying to make sure this is at the top of the agenda," said Robert Rozen, executive director of AIPM. "We're talking about severe bodily harm or death. It's a question of life and death."

'Good legislation doesn't mean things will change, enforcement is weak.'
— Alexander Shemelekh of CIPR

Boris Schpigel, an industry leader and chairman of the subcommittee for national security in the area of health, agreed. Schpigel said his own mother fell prey to the counterfeiters and was admitted to the hospital for shock last year after using fake insulin.

"We are talking about an issue of national security," he said at the news conference. Schpigel runs Biotech, a distribution company, and Pharmask, an association of Russian pharmaceutical distributors.

In a recent example, Aventis Pharma, the largest supplier of pharmaceuticals to Russia with 5 percent of the total market, recalled the antibiotic Claforan after counterfeits of the product containing dangerous levels of methanol were discovered in pharmacies in August last year. Used to treat dangerous post-operative infections such as pneumonia and septicemia, Claforan is commonly used in Russia and has been on the market for more than 10 years.

"[Claforan] is the only suitable medicine in some cases," said Dr. Kirill Litovchenko, product group manger at Aventis Pharma. "If it doesn't work, the patient can simply die."

In 1999, Croatian company Pliva was forced to recall more than 70,000 units of another antibiotic, Sumamed, repackage them to differentiate them from knockoffs and launch an extensive information campaign to distributors and pharmacies after finding counterfeits that contained no active ingredients.

Part of the problem is that some copies have become so good. Counterfeiters are well-financed and equipped with the latest technology and many buy packaging from the same producer as the legitimate manufacturers. This makes it almost impossible to identify many fakes without chemical analysis, an expensive and time consuming process performed by the ministry's department for control over quality and effectiveness and safety of medicines.

Some distributors are also to blame for the flood of fake drugs and can dupe even industry professionals in pharmacies and hospitals. Unlike the United States, where fewer than 10 large companies dominate the distribution game, there are thousands of small-scale distributors operating in Russia, making supervision and control almost impossible.

AIPM agreed at the news conference to work closely with PharmRos, the leading association of pharmaceutical distributors in Russia, to develop new prevention strategies.

Despite AIPM taking the lead, it is Russian manufacturers who are bearing the brunt of the problem. According to the Health Ministry, 60 percent of the fakes discovered last year were copies of local producers. However, Litovchenko said as much as 80 percent of counterfeits originate inside Russia, some from fully licensed producers of registered drugs, which are themselves making a profit on the side.

Deputy Minister Katlinsky accused ZAO Bryntsalov A, one of Russia's largest domestic drugs producers owned by Duma Deputy Vladimir Bryntsalov, of counterfeiting a number of foreign pharmaceuticals, including Claforan. The deputy minister told reporters last month that "direct evidence" would soon be passed to investigators.

Since November 1998, Bryntsalov has been involved in an ongoing legal dispute with Danish insulin manufacturer Novo Nordisk, a former supply partner, which accuses the Russian company of making their branded insulin with low-quality raw materials from another supplier. In a separate case in January last year, the Moscow arbitration court ruled against Bryntsalov and found that he had sold the government animal insulin instead of the agreed human gene-engineered insulin, which is more expensive.

Fake pharmaceuticals are an international problem, however, and fakes found on the Russian market are not all manufactured domestically. China, India, Eastern Europe and Turkey are all commonly identified origins of counterfeit drugs imported to Russia.

'Conveyor Belt' Judiciary

The problem of counterfeit pharmaceuticals is a rapidly growing phenomenon around the world. Market players say Russia has so far failed to respond to the problem. Procedural and legislative weaknesses in the legal system and corruption by law enforcement agencies and customs officials are partly to blame.

The most pressing need, many experts say, is for the federal government to demonstrate the political will to ensure enforcement of the law. They say it needs to establish an agency with overall responsibility to coordinate a coherent response to the problem and mobilize the various state bodies to action. At the same time, manufacturers and intellectual property rights owners also need to become more active to support and work with authorities.

According to Eugene Arievich, a partner at the law firm Baker & McKenzie, legislation is, on the whole, adequate to combat fake drugs and is not the main problem in Russia. Baker & McKenzie represents most of the leading international pharmaceutical manufacturers present in Russia and was instrumental in establishing AIPM.

However, the law is not perfect. Though the Health Ministry can issue warning letters and temporarily suspend a producer's license if it has evidence of specific wrongdoing, it has no special powers to authorize raids on suspected factories or warehouses to secure that evidence.

Also, when a defendant in a criminal case is investigated and found guilty, counterfeit pharmaceuticals cannot be destroyed by the authorities. Supposedly removed from circulation, the seized drugs sometimes turn up later on the open market again.

All too often applications to the courts for search warrants or to revoke production licenses get bogged down. The judicial system is stretched to the limit, underpaid and understaffed. Arievich describes the way cases are dealt with as "a conveyer belt at an assembly plant," each lucky to receive an hour of the judge's time, despite the fact that millions of dollars and people's lives can be at stake.

It is often manufacturers who bring cases through civil courts, which are ill-suited to the task. Here the burden of proof lies with the plaintiff and the system moves too slowly to catch the criminals at work. The court and authorities cannot help in collecting evidence and "as soon as you make an application then the defendant is tipped off and will move his products out of the factory," Arievich said.

The Criminal Code should dominate in this area, Arievich said, because "it is more immediate, there is an element of suddenness and it provides for seizure of the counterfeit and prison sentences." Unfortunately, he said, criminal cases are rarely brought by authorities.

Another problem for enforcement agencies is that the penalties are not severe. In civil cases, "the fines are not large because it's next to impossible to prove the scope of the damage," Arievich said. "The meager fines are not a deterrent to well-seasoned criminals." He said he doubted the fines ever exceed $5,000.

Criminal cases also lack bite. "I have never heard of anyone being imprisoned for breaking intellectual property laws," Arievich said.

The judiciary is making an effort to address counterfeiting. A special group of judges, experienced in intellectual property law, was recently established in the Moscow arbitration courts and there have been successes with litigation. Last year, both Pfizer and Glaxo Wellcome, before it became Glaxo Smithkline, won cases in Russia against Dr. Reddy's, an Indian generic drug manufacturer, for patent infringements.

Need to Coordinate

Without a firm lead from the government, cash-strapped and overworked enforcement agencies are slow to get involved. Deputy Minister Katlinsky said drug counterfeiters are simply not a priority for the agencies that could control the problem. "They don't even see it as a second priority to address this issue," he said.

Others agree. "Good legislation doesn't mean things will change, enforcement is still a weak point," said Alexander Shemelekh, vice president of the coalition for intellectual property rights. "The government thinks other issues are more urgent."

The coalition brings together manufacturers, patent agencies and relevant government authorities from all over the Commonwealth of Independent States and Central Asia to discuss issues of intellectual property protection and support policy making.

Manufacturers like Aventis Pharma, which last month submitted a file to a number of government agencies against Bryntsalov, are frustrated with the lack of initiative by the authorities. Litovchenko of Aventis Pharma, said: "We still do not have any active support from them."

Pliva said it was shocked by the government's lack of response to its complaint. Although the Health Ministry did issue warning orders to pharmacies and medical professionals after the company alerted them about counterfeits of Sumamed, little was done by enforcement agencies to find those responsible.

"It is very strange," complains a clearly angered spokesman at Pliva's representative office in Moscow. "The authorities knew about this for more than two years but nobody did anything about it."

Now it seems the problem has started again, this time with another drug produced by Pliva, Nootropil. "We wrote letters three months ago asking authorities to investigate the new counterfeits," said the spokesman. "We even offered to provide them with cars to drive around in and still there has been no response."

The authorities are not completely inactive. The Anti-Monopoly Ministry can order factories to cease production and levy fines under unfair competition legislation if it believes they are counterfeiting. Last year, the ministry found in favor of Novo Nordisk, which alleged trademark infringement against Bryntsalov, and ordered the company to cease production and sales of the drug.

However, "the relief available under the competition law is very limited," said Marat Mouradov, an associate at Baker & McKenzie. "I don't think the law is structured to deal with counterfeiting, it's not a real deterrent." Orders by the ministry are also of little help in closing down secret pharmaceutical factories run by organized crime.

IP Protection

The difficulties of fighting counterfeit pharmaceuticals partly stem from a more general failure of authorities to grasp the need for and importance of protection for intellectual property rights, a concept that only appeared in Russia a decade ago. By contrast, Western legal systems have been developing and refining these concepts for hundreds of years.

"To tell you frankly, for a long time this problem was not even in the state's field of vision," said Ivan Bliznets, professor of law and deputy general director of Rospatent, the federal patents and trademarks agency. "One of the main aims of the agency at the moment is to try to convince authorities that in fact counterfeiting is a form of property theft," he said.

Even a package of new IP laws presented to the Duma in February, which should be passed sometime during the summer, will fail to radically improve the situation according to Arievich at Baker & McKenzie. They will "not significantly enhance the enforcement process and do not contain destruction as something that should be provided for," he said.

As Russian companies increasingly develop popular brand names, however, the domestic drive for IP protection is likely to grow. Igor Lisinenko, the founder of Maisky Chai, for example, which has fallen victim to widespread counterfeiting since 1998, is also a Duma deputy and an active campaigner for better legislation to combat counterfeits.

The government has strong financial reasons to take IP protection seriously. A recent survey of 12 consumer goods manufacturers in the Brand Protection Group, an industry association campaigning to protect trademarks, by Deloitte & Touche estimated losses on just 22 items to be worth $473 million. Lost tax revenues to the government were $174 million. The survey describes the estimates as "conservative" reflecting "the lower limit" of possible tax losses. Scaled up to include all goods that are commonly copied, the survey suggests that lost government revenues may top $1 billion.

Manufacturers' Role

Not everyone accepts that the government is solely to blame for the lack of progress. Peter Necarsulmer, president of the Coalition for Intellectual Property Rights, of which AIPM is a member, agrees that political will and poor coordination between authorities are major issues.

But he also said manufacturers must shoulder more responsibility and actively support the government officials in dealing with the problem.

Companies with little faith in the system are failing to work with it, he said. A recent survey by CIPR of the top 50 foreign companies in Russia showed that only 30 percent had registered any new patents or trademarks during the previous year.

Russia has only 10 years of experience in this area of law, he said. However, successful cases brought by Pfizer and Glaxo Smithkline last year against trademark infringement are evidence, he said, that the law can be made to work.

"Pharmaceutical companies are scared about their bottom line and loss of consumer confidence if they publicize the issue," Necarsulmer said. "But industry and companies need to come out of the closet on this — I feel strongly about that."

Pharmaceutical companies counter that with fake packaging so difficult to distinguish from the genuine products, it is doctors and manufacturers who are best placed to take decisions about prescribing and recalling drugs. They also say they fear patients will make ill-informed decisions and stop taking necessary drugs if they go public on every case of counterfeits.

CIPR also urges companies to take more active approaches to educate the public about the problems of counterfeiting to take advantage of the chance to register their trademarks at Rospatent and directly with customs officials to help them spot counterfeits before they enter the country.

Manufacturers have in fact taken steps to communicate directly with the public. Last summer, the Brand Protection Group undertook a publicity campaign and launched a telephone hotline to help consumers identify counterfeits and fight for their rights. At one point, the hotline was receiving 40 calls a day.

While coordinated reaction to the counterfeit drug problem fails to materialize, AIPM warns that the safety of the fakes could plummet in two years with serious public health consequences. Delay will threaten not only public health. Financial losses to the government budget will grow and even threaten plans to join the World Trade Organization.

The call for a dedicated commission, supported by the Health Ministry, is only a first step in addressing the issue. Government and manufacturers need to cooperate more closely.

"We need to unite our efforts," said Rozen of the AIPM. "We believe that only through joint action will we succeed in combating this problem. Unless we act now, it will get worse and spread to other countries."