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Unwelcome (Product) Diversions

Product diversion costs manufacturers millions, but often isn't technically illegal. CSOs say combating diversion involves equal parts investigation and corporate politicking.

And when you've got a huge customer like that, you've got to make a value judgment: "OK, maybe there are distribution clauses in there, but given the volume that they're selling, is that something that we're going to enforce, or are we going handle it differently?"

Brenton: One of our major distributors had been purchasing secondary product. And remember, they're a business, and it's a business decision. But what happened was, someone in that tertiary or secondary market had gotten ahold of counterfeit product. The counterfeit product then became mixed in with the diverted product, and they had no way of knowing that. And so we went back to three of our major distributors saying, "We know you're the victim the same as we are. However, let's make our partnership stronger."

We were able to go back and say, "OK, let's look at the choices—buying from us or buying from secondary dealers. It creates a lot of problems." Now, has that stopped all of the secondary dealers? No. But has it solidified our relationship with our major distributors? Yes, it has.

CSO: So you've mentioned due diligence on international distributions partners, and contractual efforts. What other types of antidiversion controls have you put in place?

Brenton: We have an extensive training program where we go out and explain this issue to our sales folks in the field. Also, I have a great liaison with all stages of law enforcement—the FDA, U.S. Customs, Immigration and Customs Enforcement.

We're now finally taking great steps in reducing the numbers of products that go out, and doing it by identification on the boxes and on the vials, and using tracking devices. It's still a business decision, but the traceability of the product is much better now than it was five years ago. We've actually reduced our classes of trade domestically. Your brand identification is very, very important. And what we've done is we've reduced the numbers of products that go out that are, in essence, the same product but for different arenas.

For instance, mail order for hospitals and caregiver facilities—that product should be sold at a reduced cost simply because we're dealing with people who need that product, and sometimes they are, in essence, strapped for money. And we've taken that into consideration. So [the product] is not identified for over-the-counter sale; the product looks the same, but it's in different colored boxes, and it will say "Exclusively for mail order. Not for sale in retail outlet." If somebody gets that across the counter, then there's a direct line that they can call.