¶ … Pharmaceutical Gray Market on Operations and Strategies
The safety, security and prices of pharmaceuticals in the United States represent a fundamental national security interest. When essential drugs are unavailable or priced too high, the public's health is threatened and this is what is happening because of the pharmaceutical gray market. This paper reviews the relevant literature to determine how the pharmaceutical "gray market" affects the operations of pharmaceutical companies operating in the U.S. pharmaceutical market as well as strategies used by pharmaceutical companies to combat this issue. A summary of the research and important findings concerning these issues are provided in the conclusion.
Review and Discussion
Generally speaking, pharmaceuticals are enormously expensive to develop and bring to market (Kelly, 1999). According to Kelly, "The development of prescription pharmaceuticals requires costly and time-consuming research. After a product has been developed, it must undergo the rigorous approval process of the Food and Drug Administration (FDA)" (p. 10). The process typically requires more than a year-and-a-half to complete because the pharmaceuticals are subjected to rigorous testing to ensure they are safe and efficacious for their intended purposes (Kelly, 1999). Moreover, competition in the pharmaceutical industry is fierce and profitability elusive (Bender, 2004). Not surprisingly, the pharmaceutical industry is highly concerned about potential counterfeit and adulterated drugs, as well as their potential for misuse and abuse (Kelly, 1999). According to Chi (2009), "The World Health Organization declares fake medicines are a global problem. In the U.S., 5%-7% of pharmaceuticals bought and sold are believed to be counterfeit. Some drugs that have fallen prey to this practice include Prozac, Zantac, Viagra, and others" (p. 66).
Recent increases in the proliferation of pharmaceutical for non-medical purposes in the United States have generated growing concern about the sources of these drugs (Valdez & Sifaneck, 2008). In fact, for the past 30 years or so, there has been increasing concern in the international business community regarding so-called "gray marketing" or what it is also termed "parallel importation" of pharmaceutical (Chen, 2002). According to Chen, "The gray marketing or parallel importation arises where a marketer imports branded products from abroad and then diverts and sells them through unauthorized channels" (2002, p. 196).
It is important to note, though, that in contrast to black markets for counterfeit or stolen merchandise, gray markets are not regarded as being strictly illegal (Chen, 2002), but the pharmaceuticals may or may not be authentic (Chi, 2009; Foxman & Muehling, 2009). Nevertheless, gray markets typically involve authentic goods in terms of their manufacturing source; however, it is the distribution of these goods that is violative of the law (Chen, 2002). According to Chen, "The parallel importers arbitrage products in one country at a relatively low price, and then sell them to another country where the authorized distributor's price for the product is high" (2002, p. 197). An example of gray marketeering would be European Union pharmaceutical marketers that are restricted by regulated prices, creating a niche for gray marketers (Chen, 2002). In this regard, Chen advises that, "Estimates for the size of the gray market there range from two to ten percent of the total market for prescription medicines and are expected to grow in the future" (2002, p. 197). As a result, there is growing concern about whether the importation of gray market goods that have genuine trademarks should be regarded as trademark infringement (Chen, 2002).
Pharmaceuticals can also be diverted from their intended markets when pharmaceutical manufacturers allow institutional customers, including long-term care facilities and closed-door pharmacies, to purchase discounted drugs (Ukens, 2009). According to Ukens, "Closed-door pharmacies, which do not serve walk-in customers, then turn around and sell the products for a significant profit to entities not entitled to the discounts, such as community pharmacies" (2009, p. 23). The problem of diverted drugs to close-door pharmacies is much larger than many observers might believe. In this regard, Ukens emphasizes that, "It's estimated that between 50% and 80% of closed-door pharmacies participate in such diversion schemes. Some closed-door pharmacies are not really pharmacies at all but are established solely to purchase and resell discounted pharmaceuticals" (2009, p. 23). The gray market for pharmaceuticals is also fueled by "American goods shipped to charities overseas (although sometimes they never left the docks) and the resale of free prescription samples and medicines originally sold at sharply reduced rates to hospitals, nursing homes, and clinics" (Conlan, 2009, p. 33). There are other gray market sources as well. For instance, according to Chi (2009), "There are...
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