Case Simulation Counterfeit Drugs in Africa

Bad Intentions – Good Policies: Who wins?

Case exercise and role play on drug counterfeiting in an LDC context

Acronyms used:

GDP Gross Domestic Product USD US Dollars ITN Insecticide Treated Bed Nets CMS Central Medical Store MOH Ministry of Health ACT Artemisinin Combination Therapy

Country Description

Buwani is a Central African country, approximately the size of Texas, with a population of 18 million people, about 65% belong to the Mfana tribe, the rest are Posis and Aluna people. Buwani was a British colony and got its full independence in 1959. The Mfana majority ruled in a despotic fashion for about 35 years, suppressing the minorities and exploiting the natural resources (silver, gold, bauxite) for their own benefit. Frequent uprisings in the minority territories led to episodes of civil war, typically followed by some type of agreement that lasted for a while until it was broken again by either side, starting the next cycle of violence. Although the civil war was regionally contained and did not claim as many lives as in some other African countries, development was held back and the country was in pretty bad shape, when in 1994 finally a democratic government took over and settled the long lasting animosities by involving the minorities in the decision making and giving them a limited regional autonomy and a stake in the natural resources income from their provinces. In the last four years, Buwani had an average growth rate of 4%, the economic situation has improved somewhat and the per capita GDP reached 385 USD.

There are three major cities in Buwani, the capital Ngorone with about 1.2 million people, Kuwabashi in the mining area with about half a million people and Seronego, the capital of the Posi province, with 400,000 people. About 35% of the population lives either in the cities or closer than 50 km to one of the big cities, the rest is spread out over the country.

There are 7 provinces in Buwani. The Western Posi province is the largest and traditionally the most populated. The land is relatively fertile and the Posi have a distinct culture and a better than average standard of living due to their agricultural income. The Aluna people are subsistence or nomadic farmers or migrant workers, spread over three Eastern provinces which are relatively thinly populated by a mix of Mfana (predominantly urban population around the silver and gold mines) and Aluna in the countryside. The Aluna are the poorest among the peoples of Buwani. All other provinces are traditionally Mfana land, in the central highlands and along the Kaluni river in the South.

Main sources of income:  Natural resources: limited gold, silver, bauxite  Farming exports: palm oil, coffee, cocoa, cotton  Remittances from nurses and other exported professionals

1 Distribution of wealth  18% of the population are wealthy or urban middle class, 42% are living on less than one dollar per day

Main diseases Malaria – has been declared #1 health priority, programs to distribute ITNs going on since 1997, coverage 25%  HIV/AIDS (7% of the adult population is HIV positive)  Tuberculosis cases increasing mainly among HIV infected persons

Healthcare system There is a number of public (government owned) hospitals and clinics, but they reach only about 15-20% of the population. The majority of people gets healthcare in the private sector or from traditional healers, including chemical sellers, in a cash-and-carry system. About 30% of people in the Posi province are members of community based insurance funds that pay for primary care services and for some basic essential medicines.

Pharmaceutical supplies The government runs a CMS that procures medicines and sells them to a network of PMS (provincial medical stores). The planning cycle is yearly, stock outs of drugs with a high turnover are frequent. Some regional stores (in the wealthier regions) have independent supply contracts with private wholesalers. There are reports of corruption in the CMS.

Many government-owned hospitals and clinics that rely on the official distribution network are under-utilized. One reason is that patients have made the repeated experience that the necessary drugs are not available. Despite the time and effort taken and the costs of a consultation, they had to go home without medicine, or had to buy it from a pharmacy outside the hospital.

Outside the public sector, pharmaceuticals are sold in pharmacies and in the streets by chemical sellers. They offer a portfolio of cosmetics, nutritional additives and various medicines (traditional and modern). Prescription drugs can be obtained without prescription. Supply in the private sector is reliable; there are several private importers and wholesalers. Outside the cities, drugs are sold by street vendors, some of them traveling rural areas. About 50-60% of the population has no access to a regular pharmacy.

Pharmaceutical regulation The Food and Drug Law specifies which medicines can be registered. Importers and manufacturers need to be registered as well, but illegal imports from neighboring countries, in particular from Kanango, are possible, either by bribing customs officials or by using jungle tracks that are not sufficiently supervised.

The MOH is in charge of registering products, setting prices and defining the national essential drug list. However, there is currently no capacity to enforce the pricing decisions, meaning that pharmaceuticals are pretty much sold at market prices.

The pharmaceutical department at the MOH has five inspectors, who spend most of their time at checking drugs at customs. They take samples from shipments for the public sector and send them to a contracted lab at the local university for quality testing. Once the test comes back with positive results, the imported batch is released and passed on to the CMS. Drugs imported for the private sector are not tested. Customs checks whether they

2 are on the list of registered drugs. If yes, they are being released on payment of 6% customs and handling charges.

The quality of the drugs officially imported for the public sector is usually good. Complaints and rejections are mainly due to storage and transport related alterations of the products. There are anecdotal reports about counterfeit drugs sold by street vendors, based mainly on hearsay. No official statistics on counterfeit drugs are available.

Pharmacies can only be opened by licensed pharmacists, but there is neither enforcement capacity nor political will to interfere with street sellers offering drugs, even if these drugs are officially on the prescription list or may have been imported without proper license and testing.

The maximum penalty for bringing into circulation drugs that are not approved is three years in prison, or a USD 50,000 fine. Violation of trademarks (independent of the type of product) can be punished with maximum five years in prison or USD 100,000 fine. There hasn’t been any case of imprisonment for either crime in the last two years. There were some cases in which forged luxury brand fashion items (clothing, handbags) were confiscated. These cases were interpreted as turf fights between traders; the sellers got away with minor fines and are still active in the same business.

3 Party One – The Counterfeiters

You are members of a “informal” organization that comes across an opportunity to develop a counterfeit drug business. Your task is to develop a “business plan” to maximize profit from this business.

Here is the story: Patrick Kafomo, 58 years old, called PK by his friends and business partners, lives on an estate outside the provincial capital Mulani in the Posi-province. He is a rich man, with cash reserves of more than five million USD and a personal net income of one million per year from his current trade. He made this fortune mainly as an arms dealer during the civil war, when both sides were in need of weapons while the UN and major arms exporting countries had blacklisted Buwani. He is half Posi, half Mfana and speaks both languages, which allowed him to be in business with both sides. During the 80s and 90s PK re-invested some of his profits in nightclubs and casinos. Later he also tried trading in imported textiles and luxury goods, mostly copies of well known brands that he got from Chinese business partners. He operates through a network of informal sellers and traders, goods against cash, with no paper trail. In a country that has a severe lack of employment opportunities it is easy to recruit people for such kinds of informal business activity. He manages his empire in a carrot-and-stick approach, using his private “security force” to ensure discipline among his dependents. He maintains good relations with government officials and the police, and uses his money to buy small favors and avoid deeper investigation into his business practices.

Recently he added a line of cosmetics (counterfeit brands from India) and healthcare products to his portfolio. The cosmetics have been a bit of a disappointment; women initially bought them but then came back to his sellers complaining about bad quality. The healthcare products however seem to do better. His wholesaler was out of stock after ten days already and he ordered a significantly larger batch from the manufacturer, Singharam Pharmaceuticals in Chennai, India.

Two weeks ago he received a fax from a Chinese company, Huang Xiao Healthcare, asking him for a meeting to discuss a significant business opportunity. He arranges for a meeting in Dubai International airport on a trip to India. The Huang Xiao representative shows him packages of the malaria medicine “Artesunate” and offers him to provide this product at a price that is 75% under the ex-factory price charged by the manufacturer Sinopharm (whose name is on the package). He also shows what he says is a pack of this medicine from the original maker Sinopharm, and PK cannot tell any difference. Even the hologram on the package looks exactly the same.

The Huang Xiao representative explains to PK that the government of Buwani is about to receive 15 million US Dollar from the World Bank and the Global Fund for purchasing malaria medicine and financing a campaign to switch from Chloroquin, which is cheap but increasingly ineffective, to the more expensive Artesunate in combination with Amodiaquine, another malaria drug. PK learns that the government is bound by the donors to buy the original medicine from Sinopharm. But as 80% of malaria treatment happens outside the public sector, PK understands that offering this new medicine to chemical sellers at a competitive price is an excellent business opportunity – he will even get free promotion through the donor-financed government campaign. The Huang Xiao person tells PK also that they already sell some of their drugs in Buwani, but are not happy with their current partners who proved unprofessional and unreliable, and unable to scale up operations to take advantage of the expected increase in demand for this type of malaria drug.

The meetings ends with PK signing an order for a first batch of 10,000 packs, which he intends to pass on to his wholesalers to test the market.

4 Party Two – The Government You are working in the pharmaceuticals department in the ministry of health, in charge of overseeing the malaria program. Your task is to develop a plan for improving the quality assurance system for drugs and protect your population against substandard and counterfeit drugs.

The BNMA (Buwani National Medical Association) has changed the recommendations for first line treatment to ACT instead of Chloroquine, based on the increasing resistance against this once effective and affordable medicine. World Bank and Global Fund provide funding for procurement of ACT treatments (the chosen combination is Artesunate and amodiaquine, based on price/effectiveness ratio) and for a campaign to educate physicians, pharmacists and the general public about the change in treatment recommendations. The MOH estimates that about 80% of malaria treatment happens in the private sector; therefore it is important to reach out to the population with information about adequate malaria treatment.

A problem is the price of the new drug combination. It costs about five times as much as the previous first line treatment and can only be procured in sufficient amounts with help from outside donors (who will provide 15 million USD to buy ITNs and ACTs and pay for the education campaign for providers and consumers). The drugs will be provided to the public sector in a packaging that contains both medicines - one pack for one course of treatment. The plan is to give the new drugs to the outlets at no charge. Today, patients pay 20 cents for a course of chloroquine treatment. It is likely that public pharmacies in hospitals and clinics will charge a similar fee for dispensing the new drugs, to cover their operating costs.

The private sector will not be allowed to buy this same pre-packed ACT combination from the CMS. The local company that does the packaging (with technical support from WHO to upgrade their procedures) is not allowed to sell the co-packaged drug to the private sector, in order to avoid a possible drug shortage in the public sector. These rules may change once the program is successfully implemented in the public sector, and supplies can be scaled up to meet the needs of the private sector as well.

Artesunate and amodiaquine are registered and available in private pharmacies as separate products, through private wholesale channels. The retail price of these products is in the range of USD 1.80 up to 4.20 for artesunate and USD 0.40 to 1.10 for amodiaquine, per treatment. The assumption is that the private sector has compounded margins of 50 up to more than 200% over ex-factory prices, depending on location and competitive situation. Only about 20% of the population can afford to buy the combination treatment at such prices, another 30% could afford to spend about one dollar per treatment.

As a condition for funding the new drugs, the donors are requesting an upgrading of the quality assurance system. Funding for the upgrading has to come out of the USD 15 million grant. One of the goals is to prevent and discourage the infiltration of counterfeit drugs into the market. With 1.5 million malaria cases and about 40,000 malaria related deaths each year, the appearance of fake and ineffective malaria could cost thousand of lives. A neighboring country (Kanango) is known as a source and transit country for fake drugs: Recent data from Kanango suggest that up to 40% of medicines sold in the informal sector are fake or of such bad quality that they must be considered ineffective. There are no data from Buwani, but everyone has heard stories of bad quality drugs.

5 Fact Sheet – Counterfeit Drugs Case Simulation

 Buwani: 7 provinces, 18 million people, per capita GDP USD 385, 4% growth  35% live in or close to big cities (Ngorone 1.2 million, Kuwabashi half a million and Seronego 400,000 people)  18% wealthy or urban middle class, 42% living on less than one dollar a day  1.5 million malaria cases per year with 40,000 deaths (healthcare priority #1)  ITN coverage 25%  15-20% people reached by the public health service, 80% of malaria treatments in the unregulated private sector  Five MOH inspectors busy at customs, no time for spot checks in the market  Penalty for selling unapproved drugs: maximum three years or USD 50,000 fine  Penalty for violating trademarks: maximum five years or USD 100,000 fine  World Bank and Global Fund funding for malaria program: USD 15 million  Procurement price for public sector ACT product: USD 0.95 per treatment  Ex-factory price for real Artesunate: USD 0.98 up to 1.22, depending on volume  Ex-factory price for fake Artesunate: USD 0.25 per “treatment”

6  Questions for the “Counterfeiters”

Do you think this is a good business opportunity? Estimate how much money your organization could make with this fake malaria drug.

Do you have the resources to develop the business?

What are the strengths and weaknesses of your organization that are relevant for the success of a counterfeit drug business?

What are the risks of diversifying into counterfeit drugs and how do you limit these?

7 Questions for the Government

In your view, how big is the risk of counterfeit drugs appearing on the market? Which part of the country and the population will most likely be exposed?

What are the key elements of your defense strategy?

What are the main obstacles you will be facing and how can they be addressed?

What are the resource requirements for a successful anti-counterfeiting program? How many years will it take to get the problem under control?