The costs of counterfeiting: an exemplary study of the pharmaceutical industry
Fakes – whether fake news or fake goods – are currently a popular subject of debate and a cause of irritation. However, in most cases the problems are discussed with no real knowledge of their actual extent. In order to take concrete steps to overcome the issues that counterfeiting presents, it is first necessary to understand the full scope of the phenomenon.
As such, this chapter discusses the findings of a recent study examining the effects of counterfeiting as they relate to the pharmaceutical industry in the European Union.
Effects of counterfeiting
According to a 2013 study carried out by the European Patent Office (EPO) and the EU Intellectual Property Office (EUIPO), approximately 39% of all economic activity and 26% of all employment in the European Union is directly generated by IP-intensive industries, with a further 9% of jobs arising from the purchase of goods and services in other industries by IP-intensive industries.
Given the importance of IP rights, the EUIPO has developed a step-by-step approach to evaluate the negative impact of counterfeiting and its consequences for legitimate businesses, governments and consumers – and ultimately society as a whole. Several IP-intensive industries whose products are known or thought to be subject to counterfeiting have been subject to previous EUIPO studies.
In September 2016 the EUIPO published the results of its ninth sectoral study, covering the production of pharmaceutical preparations.
Economic cost of infringement in pharmaceutical industry
The 2013 EPO/EUIPO study recognised that the use of trademarks and patents is prevalent in the pharmaceutical industry. Nevertheless, World Health Organisation analysis shows that both generic and innovator medicines – from cancer treatment products to inexpensive pain treatments – are frequently falsified. These fakes can be toxic and pose a serious risk to health, as they may include the wrong ingredients, no active ingredients, insufficient quantities of ingredients or fake packaging.
The new EUIPO report shows that fake pharmaceuticals also have a serious impact on the economy, jobs and public finances. The study aimed to estimate the scale of the two major economic impacts of counterfeiting: the direct and indirect costs to industry and the wider costs to government and society.
According to the study, in 2013 EU production of pharmaceuticals amounted to €180 billion, with wholesale margins of €104 billion, for a total of €284 billion at wholesale prices. EU exports to third countries amounted to €100 billion and imports from third countries to €46 billion, resulting in a positive trade balance of €54 billion and leaving nearly €230 billion (at wholesale prices) – or €450 per capita – for consumption of medicines in the internal market. In the same year, around 1.1 million people were employed in the pharmaceutical industry across the European Union, with approximately 500,000 employed in manufacturing and 600,000 in wholesale trade.
The report reveals that the biggest producer of pharmaceuticals in the European Union is Germany (€41 billion), followed by Ireland (€26 billion), France (€25 billion) and Italy (€20 billion). These countries are also the major exporters, with a trade balance of €25 billion for Germany and €14 billion for Ireland. The EU pharmaceutical industry consists of more than 40,000 enterprises, of which 3,000 are manufacturers; the rest are wholesalers. The average size of firms differs significantly between the two groups, with manufacturers at 150 workers per firm and wholesalers at 15, respectively.
Direct costs to industry
According to the EUIPO study, the costs to industry consist mainly of lost sales due to counterfeiting. Quantifying the lost revenues is therefore a necessary first step, because it both constitutes a major economic consequence in itself and drives other consequences (eg, the loss of public revenues). Lost sales also result in loss of employment, which is apparent from European statistical data on employment for the sectors in question.
The EUIPO estimates that the pharmaceutical industry loses approximately €10.2 billion of revenue annually due to counterfeiting in the EU marketplace, corresponding to 4.4% of the sector’s total sales. The biggest sales losses due to counterfeiting were observed in Italy (€1.59 billion) and Spain (€1.17 billion), both of which were above the EU average (5% and 5.9% of total sales, respectively). Germany and France presented relative lost sales below the EU average at 3% (around €1 billion each). Lost sales in the United Kingdom were also below the EU average, amounting to €605 million (3.3%).
There was no statistical evidence of sales in Finland and Sweden being affected by counterfeiting. However, this does not mean that their pharmaceutical industries were not affected, since they will have lost sales in other EU member states due to the presence of counterfeit medicines in those markets.
These lost sales translate into 37,700 jobs directly lost across the EU pharmaceutical sector, as legitimate manufacturers and distributors employ fewer people than they would have done in the absence of counterfeiting.
Germany is the biggest producer of medicines and lost the highest number of jobs in the sector due to counterfeiting – nearly 7,000. Italy, France and Spain also suffered significant job losses, with between 3,000 and 4,000 jobs lost in each country. To estimate lost employment at country level, the losses are attributed to the member states in which genuine medicines are manufactured, regardless of where in the European Union the lost sales occur. This is why lost employment is higher in Germany than in Italy, even though lost sales were €1.6 billion in Italy and €1.1 billion in Germany.
Indirect effects of counterfeiting
In addition to the direct loss of sales in the pharmaceutical sector, the study revealed further impacts on other EU industries. These indirect effects result from the fact that different industries buy goods and services from each other for use in their production processes. If one industry’s sales are reduced because of counterfeiting, that industry will also buy fewer goods and services from suppliers, causing corresponding sales and employment losses in those other industries.
When the knock-on effects on other industries and on government revenues are combined with both the direct (€10.2 billion) and indirect (€7.1 billion) effects considered, it becomes apparent that counterfeiting in the pharmaceutical sector causes approximately €17.3 billion of lost sales to the EU economy, leading to additional employment losses of 53,200 jobs (about 91,000 jobs in total).
Impact on public finances
The EUIPO study noted that those engaged in the manufacture of counterfeit goods likely do not pay tax on the resulting revenues, as their activities are illegal. Therefore, an additional impact of counterfeiting is lost tax revenue – specifically income taxes, social security contributions and corporate taxes.
The study revealed that lost income tax – based on the share of wages corresponding to lost employment in total wages, and considering the direct and indirect effects on employment – amounted to €683 million. Lost corporate tax, based on the share of direct and indirect costs to industry, amounted to €206 million. Lost social security contributions linked to direct and indirect employment losses were estimated at €802 million.
Therefore, the total annual government revenue lost as a result of counterfeit pharmaceuticals across the 28 EU member states is estimated at €1.7 billion.
Possible measures to protect intellectual assets
What can be learned from this study? The Swedish and Finnish markets – with their control mechanisms and distribution structures – may provide important lessons, as their revenue losses were close to zero.
Moreover, it is well known that counterfeiting is increasingly attractive to organised crime. Production costs are low and the return on revenue for fakes is potentially higher than that for products traditionally marketed by organised crime (eg, illegal drugs). The risk of serving 10 years to life for smuggling drugs is thus far less appealing than the prospect of a fine or commuted sentence for counterfeiting. In other sectors (eg, clothing, food and kitchenware), fines can be so minimal as to be considered an acceptable risk of doing business by those wishing to deal in counterfeits.
The question is whether policymakers should re-examine the penalties for such criminal activities. Fake oncological drugs containing little or no active ingredients, impurities or even toxic substances are as harmful to life and health as illegal drugs. Fake aircraft parts, flammable protective clothing and food can also cause serious harm to human life. Should the illegal production of these goods be treated any differently from the illegal drug trade? There seems no logical reason to do so.
In the meantime, what can rights holders do to protect themselves?
First, it is necessary to maintain a balanced portfolio, making use of various kinds of right – from trademarks and designs to patents. In the interest of enforceability, it is advisable to register these rights.
It is also vital to watch the markets. This can be done effectively by monitoring online activities, as the Internet is the single most important gateway for the marketing, sale and distribution of counterfeits. Monitoring can be undertaken with the assistance of specialised firms which scour the Web and filter the results in order to provide the rights holder with relevant findings. These results may be further filtered by legal advisers in order to save time for the rights holder. Such legal advisers can also counsel the rights holder on how best to proceed in particular cases.
Watching the markets and the Internet is also the responsibility of the rights holder’s employees, sellers and repairers, among others. They should all be made aware of the problem and be trained in recognising counterfeit offers and products. There should be an established chain of communication allowing such information to be easily disclosed to the rights holder. Investment in training and increasing awareness among these parties usually pays off.
Where possible, safety features – on either the packaging or the goods themselves – should be used and regularly updated. Moreover, closed or at least closely supervised chains of development, production, wholesale and retail should be maintained where possible and legally permissible. This could prevent surplus production by contract manufacturers or purchases of cheap originals by wholesalers and retailers for resale to consumers. For this reason, monitoring the different parts of the supply chain – including by way of test purchases and onsite inspections – is an additional method to defend IP rights.
Infringements should be penalised where legally and commercially feasible. Such penalties should always include the possibility of legal action. This can take the form of both civil and criminal actions based on IP rights infringement. In order for this to act as a deterrent, successful actions should be publicised. However, it is important to avoid creating the impression that big corporates are unfairly attacking individuals or small companies that do not have the financial and legal resources to defend themselves. This demands a careful approach to the publication of successful actions.
Cooperation with Customs on every possible level is another economical and powerful method of protecting IP rights. Partners of rights holders in defending their interests include national customs organisations, the World Customs Organisation and regional organisations such as the European Observatory on Infringements of Intellectual Property Rights and national customs organisations.
The latter’s Enforcement Database (EDB), for example, contains information on products that are protected by IP rights (eg, registered trademarks and designs). Police and customs officials of the 28 EU member states can access this information, as well as rights holders’ contact information, through the EDB, allowing them to more easily identify counterfeits and take action. Rights holders and their representatives can also use the EDB to:
- generate and submit customs applications for action;
- obtain information about suspicious consignments detected by the authorities; and
- alert the authorities to possible counterfeits.
Rights holders may avail of a wide range of measures before the customs offices, the courts and criminal prosecution authorities. Based on EU Regulation 608/2013 (in force since January 1 2014), rights holders can take action against infringing goods entering or leaving the EU customs territory. Such actions can be based on registered EU trademarks, registered Community designs, patents, utility models, copyright, geographical indications, supplementary protection certificates, trade names and plant variety rights, as well as on national trademarks and designs.
In addition, applications for customs measures pursuant to EU or national laws should not be forgotten. The customs authorities will detain or suspend the release of goods that they suspect to infringe IP rights, and will accordingly inform the rights holder and the declarant or holder of the goods. If the rights holder confirms the infringement, the relevant goods will be destroyed on its request, unless the other party explicitly opposes the destruction within 10 working days.
Under the EU regulation, customs authorities can also take action at international trade fairs throughout Europe, which is another highly efficient tool available to rights holders. Customs officers in cities which are major exhibition centres are well prepared for these measures.
In view of the results of the EUIPO study, and the predicted increase in counterfeiting as a result of the rapid advance of three-dimensional printing technology, taking action to combat counterfeiting should be of the highest priority not only to rights holders, but also to society in general and policymakers in particular. Rights holders should make the best possible use of the tools available to them. However, it is up to society to realise the potentially harmful and far-reaching effects of counterfeiting, and up to policymakers to establish a framework in which the tools available to protect intellectual assets are more finely honed and varied, and include more effective penalties and preventive measures.
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