Big Pharma takes on counterfeit drugs

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

And federal investigators say he was gambling with people’s lives. Hernandez, they say, oversaw a nationwide $230 million scheme to counterfeit prescription medications, particularly lifesaving HIV drugs, in which pill bottles were altered and sold back to pharmacies at a huge discount.

Hernandez’s operation altered bottles for Biktarvy, the No. 1 prescribed drug for HIV, as well as Descovy, another HIV medication, and other pharmaceuticals, according to court records. In some cases, the records show, the pills in the bottles were swapped for Seroquel, an antipsychotic drug.

Hernandez, based in south Florida, gambled with proceeds from the counterfeiting operation, taking private jets to Las Vegas and appearing in numerous poker tournaments, authorities say.

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.

It’s a huge concern for Gilead Sciences, which has made it a priority to find and fight prescription drug diversion and counterfeiting more broadly.

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

“These criminals are preying on the most vulnerable,” said Lori Mayall, Gilead’s head of anti-counterfeiting and product security.

In an interview at Gilead’s headquarters in Foster City, California, Mayall explained what constitutes a counterfeit: Altered packaging, a bottle with the wrong tablets, the wrong cap or label and even the leaflet attached which contains important information about the medication.

Here’s how drug diversion works: A patient fills a prescription for a medication that is worth several thousand dollars but is paid for by Medicare, Medicaid or insurance. The patient then sells it for a fraction of the list price in cash. The buyer, known as an aggregator, removes the patient information, alters the bottle and sells it to the wholesale distributor, who sells it back to the pharmacy.

Biktarvy has a package list price of $3,795, although most patients’ copays are typically far less or they may obtain significant discounts through the company’s patient assistance programs, according to Gilead.

In the Gilead counterfeiting operation, which authorities say was overseen by Hernandez, the company discovered it had a potential problem in August 2020. That’s when an independent pharmacy reported that a patient had received a sealed bottle of Biktarvy with Excedrin pills inside, according to the lawsuit.

The bottle and label appeared to be authentic. Over the next several months, the company received more complaints from patients and pharmacies that other sealed bottles of Biktarvy contained other medications, primarily Seroquel, the antipsychotic. Mayall said counterfeiters had obtained authentic empty bottles, filled them with the wrong pills and packaged them with a counterfeit seal. In one case, she said, a patient temporarily could not walk or talk after taking the Seroquel, but soon recovered.

“What we’ve seen is our bottles reused,” Mayall said. “They’re cleaned and repackaged to look like genuine Gilead products.”

Every sale of a prescription medication is supposed to be tracked to provide a chain of custody back to the manufacturer under the federal Drug Supply Chain Security Act. But that hasn’t stopped criminals such as Hernandez from circumventing the process by altering the labels and prescription paperwork and counterfeiting the supply chain documentation, according to law enforcement officials interviewed by CNBC.

Typically, the crime starts at the street level, where patients are approached outside a homeless shelter or clinic, Mayall said. They’re induced to sell their month’s supply of Biktarvy, for example, for several hundred dollars or less.

“It’s kind of the reverse of drug dealing on the streets,” Mayall said. “They go to these locations where they know there are patients who receive medicine that’s been dispensed from a pharmacy, and oftentimes these medications are given to the patients through government insurance or through other free drug programs, and they will pay the patients for their medicine and the bottles that come with the medicine.”

Behind a locked door marked “war room” at Gilead headquarters are tens of thousands of pills and bottles. All were confiscated as counterfeits, Mayall said as she took CNBC on a recent tour. Some of the fakes are obvious because the paperwork contains numerous misspellings.

Legitimate Gilead medicines are manufactured at the company and then sold to a licensed Gilead distributor, who then sells them to a pharmacy. The counterfeit medications in the war room, most of which were connected to the Hernandez case, were repackaged to look like Gilead products, Mayall said.

The Gilead lawsuit includes four licensed distributors: Safe Chain Solutions, Scripts Wholesale, ProPharma Distribution and ProVen.

Of the four, only Safe Chain Solutions, through its attorneys, responded to CNBC’s request for comment.

Safe Chain Solutions denied claims by Gilead in the suit that it sold or bought counterfeit pills.

“Safe Chain is a family-owned, full-service wholesale pharmaceutical company that provides a wide range of pharmaceuticals and other health care products to retail pharmacies and other healthcare facilities nationwide,” the statement said. “Independent wholesalers like Safe Chain play a vital role in supplying independent pharmacies, surgical centers, and other retailers with prescription drugs at prices and in volumes they could not obtain from larger wholesalers.”

The company said it “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.” It said it has shipped more than 100,000 orders with about 2 million units since its founding in 2011 and deals only with licensed suppliers.

“Safe Chain also communicated extensively with Gilead to investigate concerns about HIV drugs. Indeed, Gilead itself learned about several of these incidents directly from Safe Chain. Safe Chain provided documentation about hundreds of bottles that it sold and further documentation showing what transaction history it had received from its own suppliers. Safe Chain even invited Gilead to inspect its facilities to assure Gilead of its commitment to patient safety and to work collaboratively in investigating these serious issues. These are not the actions of knowing and willful counterfeiters,” the statement said.

ProPharma Distribution settled the Gilead suit for $3.3 million and agreed to be permanently prohibited from selling Gilead medications, court records show. Details of the full settlement are confidential, according to Gilead attorneys.

Johnson & Johnson, in a statement to CNBC, said it learned in November 2020 that counterfeit versions of its HIV medication Symtuza were being distributed to three pharmacies in the U.S. The company said it then reported that to the Food and Drug Administration.

“Counterfeiting of life-saving medications is a criminal act that puts patient lives at risk,” Dr. Dave Anderson, a company vice president, said in the statement. “In addition to the anti-counterfeiting measures and legal action we have taken, we want to remind all stakeholders about the situation and provide specific guidance on how to identify HIV medicines.”

Geoffrey Potter, a partner with the New York City-based law firm Patterson Belknap Webb & Tyler, represents both Gilead and Johnson & Johnson.

“We don’t know how much counterfeit medication is in the system because there is no good way of measuring it. But when we do find these schemes, they are very large,” he said.

In the Hernandez case, which involved distributors throughout the country, Potter said, there was no easy way to determine whether a pill bottle was real or fake just by looking at it.

“Virtually nobody inspects their medication before taking it, so they wouldn’t be able to tell,” he said.

Potter said counterfeiters such as Hernandez use sophisticated methods similar to those favored by drug traffickers. That isn’t surprising, since a number of them have been convicted of narcotics-related crimes, he added.

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

“I’m saddened and disheartened that the schemes cross the entire United States and territories, but I’m not surprised. Fraud is always evolving,” Mahmood said.

Depending on the scheme, he said, a pharmacy may or may not know that it is getting a counterfeit drug.

“Some of the pharmacies are involved with the fraudulent wholesalers. They know exactly what they’re doing,” he said. “Some are unwitting, and they may get a fax from a wholesaler saying, ‘Hey, we have a discounted drug.’ And due to competition and trying to make money, they may buy the drug.”

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.

“Because obviously no one is going to sell a drug with someone else’s name on it. And they’re cleaning it to make it look new again,” said Mahmood, describing the video as a “drug diversion in progress.”

The three were convicted of charges related to the unlicensed distribution of prescription drugs in 2015 and served prison time. All have since been released, and their attorneys did not respond to a request for comment.

A convicted felon who spoke to CNBC on the condition his identity would not be disclosed and who asked to be referred to as “Julio” said altering medication bottles was his life for about 10 years in South Florida.

“I was in the pill business. I used to have dealers in the road. The pharmacies buying pills from me, wholesale price,” he said.

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

“They will bring it to me. I’ll pay them. I’ll pack it up. I’ll clean it, make it look nice. Then I had a wholesaler who will buy it from me,” he said. He said the wholesaler would then sell the medications back to pharmacies.

Describing how he cleaned the bottles, he said, “When I get them from the dealer, they come with the label over, with the person’s name. I have a thing that I put — it’s like a liquid that we put on it and we clean it, and we make it look brand new again. It’s got to be brand new so we can resell it.”

Eventually, he was caught and went to prison.  

The FDA told CNBC it had no one available to discuss counterfeit drugs, but sent a statement: “The FDA urges the public to obtain prescription drugs only from state-licensed U.S. pharmacies or physicians that are located in the United States, where the FDA and state authorities can assure the quality of drug manufacturing, packaging, distribution and labeling. Non-FDA approved drugs may contain the wrong ingredients, contain too little, too much, or no active ingredient at all, contain other harmful ingredients, or be shipped and/or stored outside of approved conditions.”

For Lazaro Hernandez, his high-flying days ended abruptly earlier this year. He pleaded guilty in April 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 documents, one of his attorneys said his “gambling addiction” was a “driving force behind his participation in the criminal conspiracy,” and said Hernandez regularly took cash from his sales of diverted drugs to casinos.

A different attorney for Hernandez said in an email that she had no comment on the case.

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

However, Steven Diamanstein, the owner of Scripts Wholesale, based in the Brooklyn borough of New York City, was indicted in June on charges of buying more than $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 had no comment.

Other investigations into more counterfeit schemes are pending, law enforcement officials told CNBC, adding that altering pill bottles and the drugs themselves is too lucrative for criminals to slow down.

“We need to put locks on all the doors and windows to keep the criminals out,” Mayall said. “Right now, it is way too easy for these bottles that have been previously dispensed to patients to make their way back into the supply chain.”