Hot Issue (#01-02 January-February 2012)

Pharmaceutical Dishonesty

by Inna N. Moskalenko

One of the most dynamic sectors of the national economy suffers from a predominance of counterfeit goods.

The pharmaceuticals business is one of the most profitable segments of the Ukrainian market. Our country is a cherished and rewarding market for foreign manufacturers of medical products, and at the same time it can boast of its own well developed chemical and pharmaceutical industries.

In other words, this market is very busy, and it is witnessing tight competition. In addition, the pharmaceuticals sector did not experience significant losses even in the wake of the global economic crisis and continues to grow rapidly.

This trend is only natural. Medical and pharmaceutical products are mostly essential goods, and people do not stop buying medicines even in the most difficult times of crisis. The demand for medical goods is also heated by the media, which widely report global pandemics of various diseases, which regularly emerge almost every year in the XXI century.

Perhaps it is the high profitability of this market segment, coupled by harsh competition and, frankly speaking, rather weak regulatory policies that have led to the situation when market competition does not always look civilized. And counterfeit goods are one of the major problems on the market.

Origins of the problem

The problem of counterfeit drugs exists worldwide, but it became large scale in countries with a favorable climate. Unfortunately, Ukraine falls into this category completely. The factors that trigger the flooding of the market with counterfeited medications include the following:

1) underdeveloped legislation in this area, 2) unsystematic and slack state policy that allows pharmacists to resort to unfair competition without fear of incurring liability, 3) corruption of regulatory and law-enforcement agencies, customs authorities, as well as licensing and certification agencies Ukraine is known as the country where you always can settle things with everybody, and 4) a low level of the populations awareness, where people become easy prey of scams and are unable to effectively defend their rights.

Low-quality products can be divided into two categories: falsified products that are manufactured without violation of intellectual property rights (i.e. by patent holders or upon their consent), but in violation of the law; and counterfeit products that are manufactured without permission of patent holders (developing companies), i.e. violating intellectual property rights.

Falsified unusable medications get to pharmacies in several ways, including:

smuggling of drugs from abroad;

production of counterfeit medications at underground enterprises in Ukraine imitating legally produced ones;

repackaging of expired medicines and their subsequent sale.

Apart from the above-mentioned methods, which have a distinctive shade of crime, there are several other ways for the poor quality and ineffective medical products to find their way to consumers. The more subtle ways include:

legal production and sale of medicines that are manufactured under brand names that are virtually indistinguishable from the well-known brands, that is, in violation of intellectual property rights. Thus, consumers are misled about the true manufacturers of such medications and they mistakenly attribute the belief that the purchased medication (usually at a cheaper price) has the properties of a widely known original product;

legal production of medications that, however, are not efficient enough, as permits and documentation confirming their quality are gained with violations of the law through corruption;

violations by manufacturers of medicines, including a deliberate substitution of recipes, replacement of expensive components with cheaper ones, violation of timing and sequence of technological processes, lower level of purification, and use of poor-quality packaging materials;

unfair advertising, where advertisers assign non-existent or exaggerated features to medicines;

cooperation of pharmacists with physicians, who in exchange for informal rewards prescribe to their patients medications traded by their sponsors, regardless of the actual efficiency in comparison with alternative medicines.

The shield of legislation

In fact, Ukrainian legislation provides mechanisms to deal with all the above violations and abuses. Intellectual property rights to medications or manufacturing processes are confirmed by patents that are issued, recognized, and protected in Ukraine according to the

On Protection of Rights to Inventions and Utility Models Act of Ukraine the provisions of which correspond to the norms of the European Patent Convention of 2000. Registered trademarks (brands) are also under the protection of the law, and namely the On Protection of Rights to Marks of Goods and Services Act of Ukraine. Commercial (business) names of manufacturers (importers, wholesalers) of pharmaceutical products are protected in accordance with the Civil Code of Ukraine.

Use of any objects of intellectual property rights without permission of their owners is unfair competition and entails civil, administrative, and criminal responsibility.

Ukraine has a positive practice of judicial cases involving intellectual property rights when courts ruled in favor of aggrieved persons and obliged offenders not only to terminate violations but also to compensate damage, stop selling products made in violation of the rights of patent holders (owners of trademarks), and destroy the produced goods.

However, a manufacturer of pharmaceuticals can only resort to this method of protection if the offender of its rights is a legal entity in the market. But when it comes to underground production, manufacturers are powerless, as this is the area of law-enforcement agencies responsibility. And, unfortunately, their activity in this area is far from efficient.

The Criminal Code of Ukraine envisages harsh penalties for smuggling (up to 12 years imprisonment in accordance with Article 201 of the Criminal Code). The Act also distinguishes crimes of illegal use of trademarks, trade names, qualified designations of origin (fines ranging between UAH 3,400 and

UAH 51,000, correctional labor or imprisonment for up to six years depending on the severity and other aggravating circumstances according to Article 229 of the Criminal Code). The Act also prosecutes for deliberate release of dangerous products (not complying with regulations) if the total value of such products exceeds

UAH 235,250. According to Article 227 of the Criminal Code it entails a fine of up to UAH 3,400 or correctional works.

However, the severity of the Criminal Code does not prevent multiple offenders, and the reason is obvious enough. The probability of avoiding liability is much higher than that of being caught.

In order to fight the spread of counterfeit products, it is not enough that law-enforcement agencies make attempts to identify clandestine production sites and smugglers. The main thing is to take control of the ultimate link between the latter and pharmacies, since counterfeit products cannot be sold without their participation.

In this area, the law also provides a set of measures, including various instruments of criminal liability (Part 1, Article 202 of the Criminal Code envisages fines, correctional work or imprisonment if the economic gains of a business involving licensing violations exceed UAH 470,500) or cancellation of the licenses of pharmacies. But in practice the application of these measures is very limited.

To sum up, one can admit that the major problem (which is often the case in Ukraine) is not legislation but its enforcement. Criminal penalties can be efficient only if they are imminent, and civil laws can work if properly implemented by executive and judicial bodies.

Strategy to take

The fight against counterfeit products is a difficult endeavor. And settling this issue is rooted in the severe state control over manufacturers of medicines and aggravation of responsibility for the latter. As a result, it will be dangerous and unprofitable to manufacture counterfeit products. But this settlement is inextricably linked to the problem of corruption, which unfortunately is not showing the slightest sign of disappearing.

As to the distribution of counterfeit products, the problem is equally painful for both the state and pharmaceutical companies losing their profits and reputation. Therefore, one may expect consolidation of joint efforts to achieve mutually beneficial goals.

The spread of counterfeit medical products creates a significant obstacle for the markets development, hinders international cooperation, and promotes development of the shadow sector and other adverse consequences.

The package of measures aimed at combating counterfeiting in the pharmaceutical sector should include the following:

changes in national legislation, which would explicitly regulate businesses engaged in production and sale of medicines (in particular, transparent mechanisms of ongoing monitoring), and would provide various forms of liability for violations: criminal, administrative, economic and legal (denial of licenses), civil law (damages to consumers and manufacturers whose rights are violated by selling counterfeit goods);

efficiency improvement of the relevant law enforcement and regulatory agencies by combating corruption in their departments, strengthening of internal vertical controls, professional development of employees, improvement of their interaction with other government bodies, foreign agencies, with law-abiding businesses and consumers;

broad awareness and information campaign for the public to encourages people to be careful about quality of purchased products and to address relevant agencies when they come across counterfeit products.

The Ukrainian Journal of Business Law

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