1. 1 The Legal Implications And Costs Of Counterfeit Products To A Pharmaceutical Manufacturer Presented By: Alan Minsk Partner and Chair, Food and Drug Practice Team Richard E. Gardner, III Associate Arnall Golden Gregory LLP Atlanta, Georgia alan.minsk@agg.com 404.873.8690 (phone) 404.873.8691 (fax) rich.gardner@agg.com 404.873.8148 (phone) 404.873.8149 (fax) Presented to: IQPC Arlington, VA December 7, 2004

2. 2 Prevalence Of Counterfeiting The World Health Organization estimates that drug counterfeiting affects 5-8% of all drugs, representing $9.6-$15.4 billion to the U.S. pharmaceutical market alone FDA estimates that approximately 10% of the drugs in worldwide distribution are counterfeit However, FDA states that most of the counterfeit drugs are being sold in developing countries

3. 3 Prevalence Of Counterfeiting (cont’d) Most common counterfeited drugs are those with the largest sales (and those drugs with high profit margins and drugs that are easier to counterfeit) FDA states that, in recent years, counterfeiting has moved to finished pharmaceuticals as opposed to the counterfeiting of bulk drug ingredients Internet sales are growing concern

4. 4 Prevalence Of Counterfeiting (cont’d) Manufacturers doing business outside the United States (particularly developing countries) must be aware that the sale of counterfeit drugs in those countries could lead to legal action being taken against the company in the developing country with legal systems different from those found here Sale of counterfeit drugs outside the U.S. can also expose the company to liability in the United States where the company is based here

5. 5 Risks That Counterfeiting Presents Risks that counterfeit products present to the drug manufacturers/distributors 1. Good Will/Reputation 2. Economic 3. Legal

6. 6 Risks That Counterfeiting Presents (cont’d) Once a counterfeit drug enters the market and consumers unknowingly purchase the counterfeit product, the customers’ perception of the product will likely be harmed  i.e., the product is not as safe or effective as advertised

7. 7 Risks That Counterfeiting Presents (cont’d) Doctors who formerly prescribed the drug will likely hear from patients about the drug’s quality (or lack thereof) and not prescribe the drug as frequently or at all Distributors may also be influenced by the drug’s negative reputation and may not be willing to purchase the drug for fear that its sales will decrease in the near future

8. 8 Risks That Counterfeiting Presents (cont’d) Counterfeit products will decrease the legitimate manufacturers’ sales through direct competition Counterfeit products may force the legitimate manufacturer to lower the price for its drugs

9. 9 Risks That Counterfeiting Presents (cont’d) If a counterfeit product damages the legitimate drug’s reputation, demand for the legitimate drug will decrease In addition to sales, other costs of counterfeiting include potential legal costs, (e.g., liability, regulatory) cost of workers’ time resolving the counterfeit issues and responding to governmental and consumer inquiries

10. 10 Risks That Counterfeiting Presents (cont’d) Two major potential effects of counterfeit products  Increase the likelihood of government enforcement  Increase the likelihood of a common law tort suit filed against the manufacturer or distributor The occurrence of a tort suit may bring increased FDA scrutiny (and vice versa)

11. 11 Risks That Counterfeiting Presents (cont’d) Even if the suit relates to a counterfeit product, any press regarding the suit may damage the reputation of the legitimate drug, and will cost the legitimate manufacturer or distributor time and money

12. 12 Tort Suit Basics Common causes of action may be based on (in very general terms): 1. Negligence – a plaintiff would seek to establish that a company breached its duty to ensure that counterfeit products did not reach the end consumer 2. Breach of Warranty – a plaintiff would seek to establish that a product it bought was not fit for its intended purpose (based on its labeling)

13. 13 Tort Suit Basics (cont’d) 3. Strict Liability – under this legal theory, the manufacturer’s care is not relevant; a plaintiff must only prove that the product contained a manufacturer defect when sold 4. The violation of the Federal Food, Drug, and Cosmetic Act (the FDC Act) or a FDA regulation may be used to demonstrate that a company was negligent (negligent per se theory), although one may not bring a private cause of action under the FDC Act

14. 14 Tort Suit Basics (cont’d) A company may have at least two basic problems in defending itself if a consumer buys a counterfeit drug and alleges harm 1. Company would have to prove that the product purchased by the consumer was a counterfeit (could be difficult and expensive process unless the company and the downstream distributors have strong control over the tracking of the drugs)

15. 15 Tort Suit Basics (cont’d) 2. Company would also have to show that it did not know, or had no reason to know, that counterfeit drugs products were being sold or, if it did know, it was doing everything it could to stop the further sale of counterfeit products

16. 16 Tort Suit Basics (cont’d) Tort suits will often be filed in state courts If a counterfeit product’s distribution was widespread, a company may face suits in several states, each with its own sets of rules and laws  Some laws may be more favorable to consumers; some may be more favorable to the company  In any case, the more jurisdictions, the more difficult it will be to coordinate the cases and keep costs manageable  Diverts money from other projects

17. 17 Increased FDA Scrutiny Stemming from the sale of counterfeit drugs 1. The sale of counterfeit drugs may lead to the legitimate company reporting an increased number of adverse drug experiences 2. Increased reporting of adverse drug experiences may lead to FDA taking an increased interest in the company and an inspection (and may also lead tort lawyers to begin investigating and suing company)

18. 18 Basics Of The FDA Law To Stop Counterfeiting The FDC Act defines a counterfeit drug as: A drug which, or the container or labeling of which, without authorization, bears the trademark, trade name, or other identifying mark, imprint, or device or any likeness thereof, of a drug manufacturer, processor, packer, or distributor, other than the person or persons who in fact manufactured such drug and thereby falsely purports or is represented to be the product… – 21 U.S.C. § 321(g)(2)

19. 19 FDA Law A company may only sell new drug products that FDA has approved or determined to be safe and effective Shipping an unapproved new drug, such as a counterfeit drug, is a violation of the FDC Act Shipping a drug without a doctor’s prescription when one is required also violates the law

20. 20 FDA Law (cont’d) Shipping a drug with a label or labeling that is false or misleading, such as a counterfeit drug, is a violation of the FDC Act  Misbranding (e.g., lack of adequate directions for use, inadequate warnings, inaccurate contact information) Shipping a drug that is adulterated is also a violation of the FDC Act  Adulteration (e.g., not complying with current Good Manufacturing Practices or potency and strength not of approved quality)

21. 21 FDA Law (cont’d) Instances of counterfeiting are more likely to result in criminal investigations (as opposed to other alleged violations of the FDC Act) because, by nature, counterfeiting will involve the “knowing” or “intentional” violation of law

22. 22 FDA Law (cont’d) A criminal investigation and sanctions are much more likely to send a message to potential counterfeiters than any form of private legal action  Another reason to get FDA and other government officials involved if you see a potential problem of counterfeiting involving your product

23. 23 FDA’s Recent Initiative FDA’s recent initiatives to combat drug counterfeiting will be discussed in detail by other speakers  Overview – FDA formed a working group and has released a report containing recommendations and plans to combat the counterfeit drug market  FDA plans to work and educate other federal and state enforcement agencies and officials, as well as consumers FDA has also made it clear that it will take more aggressive action against companies importing drugs from foreign countries

24. 24 FDA’s Recent Initiative (cont’d) In a “Questions and Answers” paper issued with the interim report, FDA stated: Importation of drugs from foreign countries creates a portal of entry for counterfeit drugs to enter the U.S. distribution system. Counterfeiters could take advantage of this entryway by substituting counterfeit drugs for authentic drugs and sell them to U.S. wholesalers or other unsuspecting entities. Importation also provides an avenue for adulterated, unapproved, and outdated drugs into the U.S. distribution system.

25. 25 More To Do FDA acknowledges that “[n]one of the security, enforcement, education compliance, inspection, regulatory, or other actions being considered can guarantee that counterfeiting will not occur in the US” In addition, the agency has made no final decisions on any specific anti-counterfeiting measures

26. 26 And Don’t Forget About... Drug Enforcement Administration – if the products are controlled substances Department of Justice/U.S. Attorneys State enforcement U.S. Customs & Border Protection Plaintiffs’ lawyers

27. 27 Where Problems Can Arise Lack of internal quality control Lack of internal security measures Use of third parties in the manufacture and distribution process

28. 28 Where Problems Can Arise (cont’d) Failure to monitor adequately product’s distribution channels and possible diversion or counterfeiting trends In many states, becoming an authorized distributor of pharmaceuticals or other healthcare products is as simple as filling out a form and paying a small fee at the county clerk’s office It has been reported that some drugs may change hands among small secondary distributors six to ten times before reaching the hands of the dispensing pharmacist

29. 29 Case Example On December 5, 2003, the U.S. Department of Justice announced that a Florida man was charged with selling to a licensed wholesaler bottles containing a counterfeit version of the prescription drug Lipitor, manufactured by Pfizer The wholesaler then sold the drugs to another distributor, who in turn sold the drugs to yet another distributor who then sold the drug in wholesale and retail markets

30. 30 Case Example (cont’d) A forensic analysis of the tablets revealed that some of the tablets were not manufactured or distributed by Pfizer The criminal complaint alleged that the bottles contained a mixture of counterfeit Lipitor and illegally diverted Lipitor

31. 31 Case Example (cont’d) Pfizer has said its products may now be bought only from Pfizer or from authorized wholesalers Products may be sold only to pharmacies, hospitals, physicians or other distributors in the United States who are properly licensed by the states in which they operate, or to other Pfizer-authorized wholesalers

32. 32 Case Example (cont’d) Pfizer said its new initiatives will help prevent distributors from purchasing its products on the secondary market, which has been a primary avenue for counterfeits to enter the U.S. distribution system The company said it will also periodically audit purchases and sales of Pfizer medicines by its wholesalers and will require that they put in place a comprehensive plan to ensure the safety of the nation’s drug supply It is estimated that 200,000 tablets were counter- feited and mislabeled, resulting in a $55 million recall

33. 33 Another Example Serono’s Serostim for the treatment of AIDS wasting Serono was apparently not aware of the counterfeiting In this case, the victim sought damages from Serono, alleging the company was negligent in taking sufficient action to protect its product from the threat of counterfeiting Although the plaintiff purportedly won only a small award, the precedent if not a good one for manufacturers in terms of liability

34. 34 Legal Options Against Counterfeiters Possible Private Actions Assuming that company X has reason to believe that company Y is participating in the sale of counterfeit drugs and FDA (or other federal/state agencies have not taken action), a company may: 1. Seek to stop the offending action by asking a court to issue an order restraining company Y from taking the offending action (an analogy would be the enforcement of a trademark or patent)

35. 35 Legal Options Against Counterfeiters (cont’d) 2. One difficulty will be that a company must have sufficient evidence to convince a judge to issue the order  Usually must show a likelihood to succeed on the merits of the suit and that irreparable harm will occur if the court does not stop the action

36. 36 Legal Options Against Counterfeiters (cont’d) 3. If the counterfeiting is being assisted by any person under contract with company X, the company should be able to seek relief from a court under its contract (depending on how the contract is drafted, an action based on the contract may form an easier basis to convince a court to intervene)

37. 37 Recommendations To Minimize Risks Have a good working relationship with FDA  Government has wide and powerful abilities to demand documents, perform inspections, seize product, and conduct interviews

38. 38 Recommendations To Minimize Risks (cont’d) Demonstrate the company’s ability to control and identify its products through the marketplace Consider implementing FDA’s proposed technologies to either authenticate or track and trace approved drugs (e.g., unit-of-use packaging at the time of manufacture, tamper-evident packaging, electronic database of drugs to verify the authenticity of the drug), although it may not be cheap

39. 39 Recommendations To Minimize Risks (cont’d)  Authentication technologies assure that a drug is indeed the approved new drug and not a counterfeit  Track and trace technologies follow a drug from its manufacture to the consumer

40. 40 Recommendations To Minimize Risks (cont’d) Review current standard operating procedures (SOPs) to ensure that the SOPs are addressing possible counterfeiting Ensure that you have written procedures for the possible triggering events for an investigation of counterfeiting Ensure that once a triggering event occurs, you investigate and document the event to a conclusion

41. 41 Recommendations To Minimize Risks (cont’d) Consider following the National Association of Boards of Pharmacy Model Rules Consider Drug Enforcement Administration requirements (e.g., security, storage)

42. 42 Recommendations To Minimize Risks (cont’d) Work to ensure that contracts executed in the distribution of your drug requires all downstream handlers of the drug to account for all the product Ensure that all contracts contain indemnification language holding your company harmless for counterfeiting that occurs after the product has left your facility

43. 43 Recommendations To Minimize Risks (cont’d) Keep detailed documentation on the tracing of your products through the marketplace, in case you ever get into the situation where you must prove that a drug was a counterfeit

44. 44 Recommendations To Minimize Risks (cont’d) Coordinate the control of your expiration dating system – and the destruction of drugs past these dates – with your anti- counterfeiting SOPs Perform routine (and sometimes unannounced) audits of some distributors  This right should be explicit in your contracts with distributors

45. 45 Where Are We Headed? It is too early to predict which specific initiatives of enforcement FDA will pursue to fight the distribution of counterfeit drugs However, the agency clearly considers the issue to be a high priority because of the public health implications

46. 46 Where Are We Headed? (cont’d) Drug companies should also take the threat of counterfeiting seriously due to the potential risks that could result Collaboration between FDA and the drug industry is essential in implementing successful controls

47. 47 Where Are We Headed? (cont’d) In January 2004, a U.S. Congressional Committee asked five drugmakers to provide information on their efforts to fight counterfeiting and diversion of prescription drugs The letter said: We are interested in any ongoing efforts or plans by your company to prevent counterfeiting and diversion of your drugs, and to prevent any involvement of your products with illicit Internet sites and foreign pharmacies.

48. 48 For More Information For more information about FDA’s initiatives, please review the information on FDA’s Website at http://www.fda.gov/oc/initiatives/counterfeit/ http://www.fda.gov/oc/initiatives/counterfeit/ We wrote an article about FDA’s initiatives. If you would like a courtesy, i.e. free, copy, please give me your card or email us at rich.gardner@agg.com, or alan.minsk@agg.com. Now, how many lawyers will give you something for free?! rich.gardner@agg.com alan.minsk@agg.com