By Lawrence E. Chiappetta, Principal, Chiappetta Consulting Group
Gray market is defined as “the redirection of authentic product to unauthorized distribution channels” and is legal in the U.S. and E.U. The gray market exists because it is profitable for medical supply distributors (typically 20 percent to 40 percent more in additional profit) vs. acquiring the same product directly from the manufacturer. Virtually all distributors in the U.S. and many health care facilities purchase product from the gray market.
How gray market product is acquired
There are three primary methods that gray market product is acquired: product theft, diversion or counterfeit.
- Product theft. Product is initially “acquired” by one of these methods, sold to a diverter (a.k.a. Alternative Supply Vendor), then sold to an authorized medical supply distributor or directly to a medical facility. Hospital staff and warehouse personnel, including clinicians, have been prosecuted along with manufacturer and distributor sales representatives for theft.
- Diversion. An example of product diversion is when a product is earmarked for sale outside the U.S. (OUS), diverted back to the U.S., or it never makes it out of port.
- Counterfeit. The gray market is the avenue of choice by counterfeiters as the easiest way to get their products into the healthcare marketplace. In fact, since 2005, every case of counterfeit product prosecuted by the F.B.I. has entered the supply chain system through the gray market. Some samples of counterfeit product include; implantable devices, blood glucose test strips, contact lenses and numerous pharmaceutical products.
Why should you care?
There are two primary reasons why you should care — maintaining a safe and secure supply chain, and the manufacturers’ sales and profit loss. A distributor’s profit gain is a manufacturer’s profit loss. Distributors claim manufacturers created gray market due to various customer price points in the U.S. and around the world. Maybe that’s the reason, maybe not. That’s a discussion for another time.
I contend the greater risk of gray market is the challenge it creates for maintaining a safe and secure supply chain. As mentioned above, gray market is the highway of choice used by “bad guys” for getting their counterfeit goods into the supply chain. Authentic medical devices and certainly most pharma products, if not stored in proper environmental conditions and shipped and handled properly, can become tainted or lose their efficacy. How can product efficacy/safety be guaranteed if the handling and transport of product is outside the traditional manufacturer to authorized distributor model?
Who’s at risk?
Most importantly, the patient is at risk. Providing quality care is challenging enough without the additional risk created by the gray market. You are at risk! How much is your reputation as a manufacturer worth and the reputation of the distributor and healthcare provider? The lost profit due to gray market could be small potatoes compared to what could occur to your brand or company name due to a counterfeit or tainted gray market product.
“Patient Safety and a Safe-Secure Supply Chain is Everyone’s Responsibility.”
Larry Chiappetta, Principal
The Chiappetta Consulting Group LLC
250 Preservation Circle
Pawleys Island S.C. 29585
Office: 843-235-8080
Cell: 412-897-1119
LarryChiappetta@yahoo.com