Interview: Grey market darkening

In a typical grey market scenario, a dealer redirects low-priced products meant for sale in a developing-nation market and resells them to bargain hunters in the U.S. or Canada. Product pricing differentials occur across borders because of variations in exchange rates, regulatory compliance costs, distribution logistics, degree of after-the-sale support and subsidized pricing being provided in developing nations as a long-term growth strategy.

Beyond the potential loss of dollars and reputation faced by manufacturers, the bulk of risk in a grey-market transaction is borne by dental-practices, which are unable to pursue product-dissatisfaction recourse because such purchases typically can’t be traced back through the shipping, storage and manufacturing process.

The Dental Industry Association of Canada has long been involved in efforts to make dental practices aware of risks associated with buying products that may not be warrantied, traceable or even authentic — or are otherwise out of compliance with medical-device licensing regulations for any number of other reasons. Now the association is ready to put more focus on the distributors.

DIAC Executive Director Bernie Teitelbaum said education and awareness efforts will continue; but he identified lack of policing, meaningful penalties and enforcement as the biggest reasons for the “grey market” continuing to thrive unchecked.

To better understand and address the challenges, the biggest manufacturers and distributors in Canada in recent years have been meeting with government and dental association officials to discuss how to address the issue.

One of these “Grey Market Summits” was recently held in Toronto, immediately prior to the Ontario Dental Association Spring Meeting. Dental Tribune Canada spoke with Teitelbaum prior to the summit.

How do grey market products threaten the industry and dental practices?
Grey market products have been diverted from the manufacturer’s normal distribution channels. That’s the dictionary definition of “grey market.” To the extent that they have been diverted from developing-world markets, and may have passed through several hands: 1) The products may no longer satisfy Health Canada’s medical-device-licensing regulations; 2) the manufacturer can no longer attest to the shipping, storage and handling conditions; and 3) the efficacy of the products could be compromised.

Because the dental professional is responsible for everything that goes into the patient’s mouth, he or she may face remakes and recalls from faulty product and disciplinary procedures for using faulty products. The manufacturers don’t just lose a few dollars of price. They may actually lose a lifelong customer.

You have been involved with this issue for several years. Are you seeing progress?
It turns out that progress can be a two-edged sword. Manufacturers are making it increasingly difficult for grey marketers by changing the packaging and branding for export sales, putting tracking codes onto the product and watching exchange rates more closely.

The Dental Industry Association of Canada (DIAC) is complementing these efforts with articles, seminars and literature to create awareness among dental practices of product that is not compliant with medical device regulations and is actively engaged with professional associations to promote discussion and awareness.

The result is that grey marketers are scratching out lot numbers and tracking codes, selling product outside its packaging, making their own packaging, and to an increasing degree, they are starting to counterfeit the product itself.

Health Canada’s position is that product and distributor licenses are listed on its website, so there is enough information out there for dental practices to protect themselves. Unfortunately, that is not the case, because there is nothing on Health Canada’s website to help dental practices recognize non-compliant product and Health Canada’s inspection regime for unlicensed distributors and licensed distributors selling non-compliant product is laughable. In Health Canada’s own words, their “mandate is to monitor and inspect the compliant.”

What advice do you have for dental practices that want to avoid ordering these products?
It is likely a violation of the Competition Act to tell dental professionals where they have to buy their product. Clearly, the safest route is to always order through an authorized dealer because you always have recourse back to the manufacturer. However, if a bargain is to be had, the dental practice should go through a rigorous control process that includes: making sure that the dealer/distributor has an establishment license; checking the packaging for familiarity; making sure that the lot numbers on the package and contents match; and checking for scratched-out lot numbers, expiry dates, tracking codes and other defacements.

If there is any problem with the product when it is received, the dental practice should return it. If when the product is used, it appears that the efficacy is compromised, the dental practice is on its own. Manufacturers do not warranty product sold outside their normal distribution channel.

Is this primarily an enforcement problem with grey market dealers or an education and awareness challenge that needs to be addressed with those handling ordering for dental practices?
We are currently engaged in an extensive education and awareness campaign, but the real problem is enforcement. Non-compliant dental product is almost exclusively imported into Canada. All Health Canada has to do is amend its establishment licensing requirements to include a proximate connection to the manufacturer as a condition for a license, and then issue a directive to the Canada Border Services Agency to stop product that is shipped to or from a company that does not have a proximate connection to the manufacturer. Presently Health Canada does not deem a proximate connection to the manufacturer as a serious requirement, even though a lack of proximate connection makes their other requirements — product complaint and recall procedures — totally and completely useless. Grey market dealers will never hear about a recall, and they have nobody to send a product complaint to.

Are you aware of a dealer being shut down or fined for selling grey market products?
No, and the penalty is only $500. A license costs $7,000 per annum plus the consequent costs of regulatory and quality control. This penalty is not going to stop anybody. You can get caught 14 times a year and at worst break even.

Are there additional packaging strategies that can be used to address the challenge?
We are constantly on the lookout for additional packaging strategies and awareness efforts. Unfortunately, where there is money to be made and the enforcement of regulations is lax or absent, you can expect more creative — and probably dangerous ways — for distributors of non-compliant product to operate.

Are you seeing much counterfeit packaging and counterfeiting of the product?
It started with counterfeit packaging and poly-bagging, when manufacturers started their packaging changes, and some of the counterfeit packaging has been very sophisticated. All you need is a good quality ink jet printer. Some sellers have just gone straight to counterfeiting the product, and yes, we have not only seen it; some of it has even fooled the manufacturers. There was one case where a counterfeiter secured some real product, lifted the lot number and expiry date, and then produced a counterfeit product with a matching package. When the reports and samples came in to the manufacturer that the product didn’t work, that manufacturer was preparing to stop its own manufacturing line — until somebody decided to test the product.

Is it possible to use packaging strategies that inhibit counterfeiting similar to currency printing, or is that just too costly?
Some manufacturers are going as far as producing holograms for their packaging, but with so many products, we cannot reasonable expect that dental practices will know what to look for. Education and awareness is a one-by-one proposition. There are more than 18,000 practicing dentists in Canada, plus all the dental assistants, receptionists and office managers involved in the ordering. It is an enormous task.

Is this a bigger problem in Canada compared with the U.S. and elsewhere?
Canada, and particularly Ontario, are the centres for grey market product in North America because of giant holes in the regulations and their enforcement. Counterfeiting is more prevalent abroad because of market sizes; but that product is also making its way into Canada with all the other non-compliant product.

What’s the primary intent behind the “Grey Market Summit” being held prior to the ODA Spring Scientific Session? What would you like to see come out of the meeting?

It’s really a “Non-Compliant Product Summit,” but that name doesn’t have much pizzazz. We expect to share newer and more sophisticated packaging and transportation mechanisms to prevent product from being diverted from developing-world markets, and to make internal and external packaging more tamper proof. We also hope to come up with more effective education and awareness programs for dental practices. Both CDA and ODA officials are invited, as well as the compliance and enforcement inspectorate for Health Canada.

Bernie Teitelbaum has more than 35 years of experience in the dental industry in a variety of executive and management functions ranging from finance and operations to sales and marketing. For the past 13 years he has served as executive director of the Dental Industry Association of Canada (DIAC), responsible for moving the association’s programs forward from conception to completion. He is also the association’s spokesperson and watchdog on market ethics. After participating in a panel discussion on the grey market at the 2008 Toronto Association of Dentistry Winter Clinic, he has conducted grey market clinics at the 2009 Pacific Dental Conference, the 2010 Journées dentaires internationales du Québec and the 2011 Ontario Dental Association Annual Spring Meeting. He has written several articles on the grey market in industry publications. Before DIAC, Teitelbaum was director of sales and marketing for the Dentsply division of Dentsply Canada. He received the Toronto Academy of Dentistry Industry Service Award in 2010.