by Roger Bate, Ginger Zhe Jin, and Aparna Mathur

Perhaps 10% of the world’s pharmaceuticals do not work properly, although in some developing countries the situation is far worse. In this paper, Bate, Jin, and Mathur are the first to consider socio-economic factors when they distinguish between substandard and falsified drugs, demonstrating how they differ with respect to cost, health consequence, and possible policy-making solutions. Fortunately, understanding price and other signals can help consumers differentiate between varying types of drug quality. In this interview, the authors explain the price gap between falsified and substandard drugs and their research implications for both managers and consumers.

1. How does your research differentiate between substandard and falsified drugs?

Falsified products by definition are being passed off as the original product. Unlike a falsified watch or handbag, where the buyer is often complicit in the trade (for instance, no one thinks a $20 Rolex is real), people buying falsified medicines are unaware of their nature. As a result it makes sense for counterfeiters to sell their fakes at roughly the same price as the legitimate version – to sell lower would provide a signal that it is not what it claims to be. Whereas there are often cheaper versions of medicine on the market and hence those selling substandards are to some degree demonstrating their products are cheaper and perhaps of lower quality – they in effect are segmenting the market based on quality. As a result it is to be expected that substandard medicines are cheaper than the generics on the market, while falsified products are the same as the generics on the market.

2. How do local drug registrations, the World Health Organization (WHO) and Stringent Regulatory Authorities (SRA) differ when inspecting drugs for lower-income countries? How do these differing levels of inspection affect the falsified and substandard drug industry?

Most pharmaceutical regulators (including SRAs) rely heavily on the laboratory reports provided by the companies requesting registration of a particular product. In this sense an SRA can just as easily be fooled by fraudulent activity (e.g. faking of test results by a legal manufacturer) as an emerging market regulator. However, SRAs do far more extensive site visits to monitor production standards and hence find more flaws this way than either WHO or local regulators. WHO inspections are generally considered to be competent and similar to SRA inspections, but are less frequent – once approval is given by WHO, unacceptable production techniques are less likely to be discovered due to lack of follow up. Local regulators generally have less competence and budgets to undertake oversight. As a result SRA approved products are likely to be the best, closely followed by WHO approved products. And this is what we found. When it comes to preventing falsified products, pharmaceutical regulators play an important part, but most of the job is done by customs, police and other local and international agencies, and here emerging markets are also less well served.

3. Your research shows that substandard drugs are consistently priced lower than falsified drugs. What economic considerations would explain this result? 

Falsified products by definition are being passed off as the original product. Unlike a falsified watch or handbag, where the buyer is often complicit in the trade (for instance, no one thinks a $20 Rolex is real), people buying falsified medicines are unaware of their nature. As a result it makes sense for counterfeiters to sell their fakes at roughly the same price as the legitimate version – to sell lower would provide a signal that it is not what it claims to be. Whereas there are often cheaper versions of medicine on the market and hence those selling substandards are to some degree demonstrating their products are cheaper and perhaps of lower quality – they in effect are segmenting the market based on quality. As a result it is to be expected that substandard medicines are cheaper than the generics on the market, while falsified products are the same as the generics on the market.

4. What are the implications of your research for consumers? 

Consumers should always look at what they buy in case the pills are crumbling or the packaging looks fake. But our main finding suggests that those buying at the cheaper end of the market are more likely to risk buying a substandard product and those buying at a normal price still face a risk of buying a falsified product.

5. What are the managerial implications of your research?

Regulators should conduct market surveillance at the cheaper end of the market since this is where substandards are more likely to be found, and they should work with other agencies to spot falsified products on the market. Manufacturers of high-quality products should also work with regulators to fight against falsified and substandard drugs, as they mimic good products and will harm the reputation of legitimate manufacturers.