Big Pharma's Battle Against Counterfeit Drug Criminals

• The global fraud industry is worth $431 billion, with counterfeiting lifesaving medications being a profitable criminal enterprise, according to the World Health Organization.
• HIV drugs manufactured by Gilead Sciences and Johnson & Johnson were targeted by a counterfeiting operation, prompting the companies to file lawsuits against pharmacies, wholesale pharmaceutical distributors, and others. The legal proceedings are ongoing.
• Law enforcement officials are investigating reports that criminals are also targeting other lifesaving drugs.

In Las Vegas, Lazaro Hernandez was a flamboyant, jet-setting poker player who appeared in televised tournaments with stacks of colorful chips. However, the casually dressed gambler caught on security cameras with wads of cash at the casino cage was concealing a secret life.

Federal investigators claim that Hernandez oversaw a $230 million scheme to counterfeit prescription medications, including HIV drugs, by altering pill bottles and selling them back to pharmacies at a significant discount.

Court records reveal that Hernandez changed bottles of Biktarvy, Descovy, and other pharmaceuticals for HIV patients, sometimes replacing the pills with Seroquel, an antipsychotic drug.

Authorities claim that Hernandez, who resides in south Florida, used the proceeds from his counterfeiting operation to gamble, frequently taking private jets to Las Vegas and participating in multiple poker tournaments.

The drug counterfeiting scheme was part of what the World Health Organization estimates is up to $431 billion in drugs counterfeited worldwide annually. In the U.S., there were 2,121 incidents of counterfeiting in 2022, up 17% from the prior year, according to the Pharmaceutical Security Institute, which tracks industry trends.

Prescription drug diversion and counterfeiting are major concerns for , prompting it to prioritize finding and combating these issues more broadly.

In July 2021, the company filed a lawsuit against 161 defendants, including pharmacies and wholesale pharmaceutical distributors, accusing them of participating in a scheme to alter the company's medications Biktarvy and Descovy. In April 2022, the company filed a similar lawsuit against 27 defendants over its HIV medication Symtuza. Industry experts and law enforcement officials have reported that other lifesaving drugs, including cancer medications, have been counterfeited over the past several years. The suits are pending.

Lori Mayall, Gilead's head of anti-counterfeiting and product security, stated that these criminals are targeting the most susceptible individuals.

What makes a counterfeit medicine?

At Gilead's headquarters in Foster City, California, Mayall clarified that a counterfeit medication can be identified by various factors such as altered packaging, incorrect tablets, cap or label, and even the accompanying leaflet with crucial medication information.

The process of drug diversion involves a patient obtaining a prescription for a high-priced medication, which is paid for by Medicare, Medicaid, or insurance. The patient then sells the medication to an aggregator for a small fraction of its list price in cash. The aggregator removes the patient information and alters the bottle before selling it to the wholesale distributor, who then resells it back to the pharmacy.

Gilead states that although Biktarvy's package list price is $3,795, most patients' copays are typically less or they can obtain significant discounts through the company's patient assistance programs.

In August 2020, an independent pharmacy reported to Gilead that a patient had received a sealed bottle of Biktarvy with Excedrin pills inside, according to the lawsuit.

The company received numerous complaints from patients and pharmacies over several months that other sealed bottles of Biktarvy contained Seroquel, an antipsychotic, instead of the intended medication. Mayall stated that counterfeiters had obtained authentic empty bottles, filled them with the wrong pills, and packaged them with a fake seal. In one instance, a patient became temporarily unable to walk or talk after taking the Seroquel, but later recovered.

Mayall stated that the bottles we've observed are being reused, cleaned, and repackaged to resemble authentic Gilead products.

Despite the requirement under the federal Drug Supply Chain Security Act for every sale of a prescription medication to be tracked to the manufacturer, criminals such as Hernandez have found ways to bypass the process by altering labels, prescription paperwork, and counterfeiting supply chain documentation, according to law enforcement officials interviewed by CNBC.

Typically, the crime begins on the street, where patients are approached outside a homeless shelter or clinic, Mayall stated. They are enticed to sell their month's supply of Biktarvy for several hundred dollars or less.

Mayall explained that the practice of buying medicine from pharmacies and then reselling it to patients is the opposite of drug dealing on the streets. These individuals go to specific locations where they know patients receive medication from pharmacies, often through government insurance or free drug programs. They then pay the patients for their medicine and the bottles that come with it.

Gilead’s war room

At Gilead headquarters, there is a locked room labeled "war room" containing tens of thousands of pills and bottles that were seized as counterfeits, according to Mayall. Some of the fake pills can be easily identified due to errors in the paperwork.

Gilead medicines are manufactured at the company and sold to a licensed distributor, who then sells them to a pharmacy. However, Mayall stated that the counterfeit medications in the war room, which were linked to the Hernandez case, were repackaged to resemble Gilead products.

Four licensed distributors, namely Safe Chain Solutions, Scripts Wholesale, ProPharma Distribution, and ProVen, are included in the Gilead lawsuit.

Only Safe Chain Solutions responded to CNBC's request for comment among the four.

Gilead accused Safe Chain Solutions of selling or purchasing counterfeit pills, but Safe Chain Solutions denied these claims in the lawsuit.

Safe Chain is a family-owned, full-service wholesale pharmaceutical company that offers a comprehensive selection of pharmaceuticals and healthcare products to retail pharmacies and other healthcare facilities across the country. As independent wholesalers, companies like Safe Chain play a critical role in providing independent pharmacies, surgical centers, and other retailers with prescription drugs at competitive prices and in the volumes they need.

Since its inception in 2011, Safe Chain has shipped over 100,000 orders with approximately 2 million units, all from licensed suppliers. The company has never knowingly sold inauthentic drugs or drugs with falsified pedigree documentation, whether manufactured by Gilead or otherwise. It has never altered or fabricated drug transaction histories. Safe Chain and its owners were, at most, victims of this conspiracy.

Gilead learned about several incidents involving HIV drugs directly from Safe Chain, which communicated extensively with Gilead to investigate concerns. Safe Chain provided documentation about hundreds of bottles it sold and transaction history received from its suppliers. Additionally, Safe Chain invited Gilead to inspect its facilities to assure Gilead of its commitment to patient safety and collaboration in investigating these serious issues. These actions suggest that Safe Chain was not intentionally counterfeiting the drugs.

Gilead medications will no longer be sold by ProPharma Distribution after settling the lawsuit for $3.3 million, court records indicate. The terms of the settlement are confidential, as stated by Gilead's attorneys.

In November 2020, Johnson & Johnson discovered that fake versions of its HIV medication Symtuza were being sold to three pharmacies in the U.S. The company subsequently informed the Food and Drug Administration about the issue.

Dr. Dave Anderson, a company vice president, stated that counterfeiting of life-saving medications is a criminal act that endangers patient lives. To address this issue, the company has implemented anti-counterfeiting measures and taken legal action. Furthermore, the company wants to inform all stakeholders about the situation and offer guidance on how to identify HIV medicines.

Criminal schemes

Geoffrey Potter, a partner at the New York City-based law firm Patterson Belknap Webb & Tyler, acts as legal counsel for both Gilead and Johnson & Johnson.

There is no effective method to measure the amount of counterfeit medication in the system, but when we discover these schemes, they are typically extensive.

In the Hernandez case, Potter stated that it was difficult to determine whether a pill bottle was authentic or counterfeit solely based on its appearance.

"Few people check their medication before taking it, so they wouldn't know," he stated.

Hernandez, like drug traffickers, employs advanced techniques to create counterfeit currency, which is unsurprising given that many of them have been found guilty of narcotics offenses, Potter stated.

The alarming extent of drug diversion fraud in the U.S. Department of Health and Human Services’ Office of Inspector General, or HHS-OIG, was stated by Stephen Mahmood, assistant special agent in charge.

Mahmood expressed disappointment and discouragement that fraudulent schemes affect the entire United States and its territories, although he was not surprised, as fraud is constantly evolving.

A pharmacy may or may not be aware that it is receiving a counterfeit drug, according to what he said.

Some pharmacies are complicit in fraudulent wholesalers, while others are unaware and may unknowingly purchase drugs from them due to competition and the desire to make money.

In a 2014 case handled by HHS-OIG in Miami, agents used an informant wearing a hidden camera to film a woman, her husband, and her adult son in a South Florida apartment altering medication bottles. The video, obtained by CNBC, shows how they used lighter fluid to remove the patient information affixed to the bottle.

Obviously, no one would sell a drug with someone else's name on it, and they're cleaning it to make it look new again," Mahmood stated, referring to the video as a "drug diversion in progress.

In 2015, three individuals were found guilty of offenses related to the illegal distribution of prescription medications and were incarcerated. Despite serving their time, their lawyers declined to provide a comment when contacted.

Julio, a convicted felon who spoke to CNBC on the condition of anonymity, revealed that he spent about 10 years in South Florida altering medication bottles as his way of life.

"I operated a pill business and had dealers on the road. Pharmacies bought pills from me at a wholesale price," he stated.

He said patients desperate for cash willingly forgo their essential medication.

He stated that the medications would be bought by a wholesaler, who would then sell them back to pharmacies after he had cleaned and packaged them.

He revealed that when he receives the bottles from the supplier, they are labeled with the individual's name. He uses a special liquid to clean them and restore their appearance to make them look new again, ensuring they can be resold.

Eventually, he was caught and went to prison.

The FDA advised CNBC that no one was available to discuss counterfeit drugs, but sent a statement: "The FDA advises the public to acquire prescription drugs only from state-licensed U.S. pharmacies or physicians located within the United States, where the FDA and state authorities can guarantee the quality of drug manufacturing, packaging, distribution, and labeling. Non-FDA approved drugs may contain incorrect ingredients, have insufficient or excessive amounts, lack active ingredients, contain harmful substances, or be shipped and stored outside of approved conditions."

Earlier this year, Lazaro Hernandez's high-flying days came to an abrupt end when he pleaded guilty to conspiracy charges related to distributing adulterated and misbranded drugs and money laundering in connection with a $230 million fraud ring. In June, he was sentenced to 15 years in prison.

In court, one of Hernandez's lawyers argued that his "gambling addiction" was the main reason for his involvement in the criminal conspiracy, and that he frequently used the money from selling diverted drugs to fund his gambling activities at casinos.

An attorney representing Hernandez stated in an email that they had no comment regarding the case.

None of the distributors in the Gilead case have been criminally charged.

In June, Steven Diamanstein, the owner of Scripts Wholesale in New York City, was indicted for purchasing over $150 million worth of illegally diverted prescription HIV medication and reselling it to pharmacies, according to the indictment and a Justice Department news release. He pleaded not guilty, and his attorney declined to comment.

Law enforcement officials informed CNBC that there are other investigations into counterfeit schemes, but criminals continue to profit from altering pill bottles and drugs.

Mayall stated that locks must be placed on all doors and windows to prevent criminals from entering. Currently, it is too simple for previously dispensed bottles to re-enter the supply chain.