- Falsified drugs aim to mimic a legitimate, registered product and hence dupe customers in both price and quality
- Significant price discounts of substandard drugs tend to concentrate in low-literacy or low-income countries
- A different amount of active ingredients lead to different health outcomes, prices, and potential remedies
Concerns about US drug quality are increasing. With 80 percent of the ingredients and 40 percent of the final products coming from overseas (notably India and China), the U.S. Food and Drug Administration (FDA) faces a daunting task to ensure drug quality throughout the global supply chain. It has issued multiple warnings to myriad firms ranging from data manipulation to sanitation issues. Concerns about drug quality even drove FDA commissioner Dr. Margaret Hamburg to a high profile visit to India in February.
Historically, much attention to drugs has focused on patent battles and counterfeits in developing countries as they infringe the intellectual property (IP) rights. The most widely used definition of counterfeits by the World Health Organization emphasizes IP infringement and the intent to deceive, rather than the drug’s chemical content.
In a paper forthcoming in the Journal of Economics & Management Strategy, we focus on a drug’s active ingredients rather than its intent to deceive. In particular, we classify drug samples with zero correct active ingredient as “falsified”, those with some but less than 80% of correct active ingredient as “substandard”, and the rest as “passing”. Because we can only afford to test active ingredients, passing products could still have imperfect quality due to impurities or insolubility.
While our classification is crude, it is useful to distinguish falsified and substandard drugs this way because different amount of active ingredients lead to different health outcomes, prices, and potential remedies. With no correct active ingredients, falsified drugs constitute no treatment at all and may even be directly harmful. Substandard drugs with some correct active ingredient may provide partial benefits to patients. However, for drugs prone to resistance (such as antibiotics), consuming some correct active ingredient could be even worse than consuming no active ingredient for patients themselves and the population as a whole, since the strain of the disease they are infected with may become totally resistant to even good quality versions of the substandard drug being taken (Bate et al. 2013). Most nations make the sale of falsified products illegal, but with the rise of resistant superbugs, limiting substandard products is as important, yet rarely prioritized. Moreover, combating the spread of falsified and substandard drugs requires different strategies. In many cases, substandard drugs arise from poor production practices by legitimate manufacturers and therefore can be addressed by greater regulatory monitoring, enforcing or increasing standards of manufacturing, and better education of manufacturing staff (Caudron et al. 2008). In contrast, zero-active-ingredient drugs are often produced by criminals who have little knowledge in drug manufacturing and engage in a “hit and run” strategy. Combatting them often entail police effort and legal prosecution (Newton et al. 2005). It is economically more feasible to differentiate poor quality medicines by ingredient than prove “intent to deceive”, and such differentiation can assist national regulators and global actors like WHO to target their efforts more effectively.
To study this issue, we acquired 1437 samples of Ciprofloxacin from 18 low-to-middle-income countries, analyzed their quality following the Global Pharma Health Fund e.V. Minilab® protocol, and linked the test results to local regulations, demographics, and distribution channels. Overall, 9.88% of samples failed the tests and 41.5% of the failures were falsified.
Our results suggest that falsified and substandard drugs differ in two observable attributes: first, falsified drugs are more likely to mimic officially registered products than substandard drugs. Second, after controlling for purchase city, product registration, distribution channel, and manufacturer information as shown on the package, substandard drugs are on average 10 percent cheaper than passing generics in the same city. In comparison, falsified and passing drugs have almost identical prices after including the same controls.
One likely explanation is that falsified drugs aim to mimic a legitimate, registered product and hence dupe customers in both price and quality. Because locally registered products enjoy a significant price premium and registered products are less likely to be examined by inspectors, it is not surprising that falsified drugs prefer to target locally registered products. In comparison, substandard drugs appear to differentiate from rather than mimic good-quality drugs. They are priced significantly lower than average passing generics, and are less likely to be locally registered. Such a differentiation strategy is attractive in a market with substantial demand for low-price drugs and where most patients are ignorant as to what lower quality means in terms of their health, which explains why significant price discounts of substandard drugs tend to concentrate in low-literacy or low-income countries. The fact that falsified drugs tend to target local registration blurs the signal value of local registration. This suggests that educating consumers about drug registration status must be accompanied by strong post-market surveillance on registered products.
Arguably, price, brand, and distribution channels are more salient to consumers than a drug’s registration status. Pharmacists pay significant attention to procurement systems, and many middle class consumers in emerging markets appear to be aware of this, becoming reliant on the overall look of a pharmacy or pharmacy chain as a trusted source of medicines (Bate 2012). This common wisdom is confirmed in our data, with the rate of falsification lower in chain purchases (31.25%) than in non-chain purchases (42.86%), possibly indicating that chain procurement systems are more knowledgeable about cues of falsification. However, chains are not as good at removing substandard products from their supply, which perhaps they intentionally buy to service lower end customers.
Our findings highlight a delicate tradeoff between drug quality and drug cost. Banning low priced substandard products has to be addressed carefully, since these products may be the only ones the poorest can afford and raising the minimum quality standard might be welfare reducing, especially for those who are more sensitive to price and prefer substandard products due to affordability (Leland 1979). On the other hand, maintaining minimum standards is important because very poor quality drugs do not help the patient, may increase resistance at the population level, and vastly increase healthcare costs. A more overt understanding of the dynamics of this dilemma is needed before policy makers commit to extra drug regulations in and out of the US.