April 2011, Volume 7, Issue 4
Published by AEGIS Communications
Taking the Bait:
Buying "gray market" products can cost you—and your patients.
By Allison M. DiMatteo, BA, MPS
In the gray world of the global market economy, the law of unintended consequences reigns. The very systems designed to facilitate distribution of beneficial dental materials and equipment can also be used to divert these products and undermine their value, as individuals and companies jostle for any means to increase their revenue. Legitimate products from a reputable manufacturer that are intended for export may be diverted from their original point of sale overseas, imported back or rerouted to the United States, and ultimately sold through channels not authorized by the manufacturer.
This shadow distribution channel is known as the gray market, and it creates unexpected risks for patients, dentists, distributors, and manufacturers.
"Fundamentally, gray market occurs when either dealers or end users purchase product from sources other than authorized dealers, whether internationally or within the United States," explains Brian Melonakos, president and CEO of Shofu America, who adds that most manufacturers publish the names of their authorized dealers. "It typically comes from an unauthorized dealer, but it may often come from an authorized dealer that has, unfortunately, purchased a product from an unauthorized source, rather than directly from the manufacturer."
The gray market travels many complex routes. According to Gary Price, chief executive officer of the Dental Trade Alliance, gray market might also include product sold by an authorized channel partner to a third party not specifically authorized by the manufacturer. In some cases it may be product manufactured in another country for use in that country, but imported to the United States for sale in this market. The distributors of unauthorized products can be traditional distributors or web-based sellers.
"Simply put, product that finds its way to the doctor through a supply chain outside of the manufacturer’s authorized channels of distribution falls under the description of gray market," explains Leo Pranitis, vice president of global marketing and innovation for Kerr Corporation.
For some, purchasing gray market materials may at first seem like a relatively innocuous game of bargain-hunting. If the product is essentially the same, by a well-known manufacturer, and if the activity is not illegal per se, what is the harm? After all, this is the age of the search engine and discount websites, which allow individuals to purchase virtually anything from anywhere—for less. However, there is an unacceptable risk that these dental products—intended for patient care—have been handled or labeled inappropriately, jeopardizing treatment.
"You know if you’re getting a product that cheap, there’s something wrong," observes Gerard Kugel, DMD, MS, PhD, associate dean for research at Tufts University School of Dental Medicine. "If I’m buying impression material or composite and suddenly I’m getting it from some no-name distributor for half the price, it either ‘fell off the truck’ or is being sold to me from a gray market."
Causes of Gray Market Conditions
The circumstances that enable—and perhaps even encourage—the gray market arise from manufacturers’ attempts to introduce their products or establish their brands in emerging markets that are unable to afford the prices of those products, especially in dentistry or medicine. Therefore, manufacturers develop a lower cost structure for the products, says Paul Jackson, vice president of marketing for Benco Dental. This allows them to become established in those markets for at least some period of time until the fees they’re able to charge at least approximate those in the United States or another first-world nation.
"What happens is those distributors that the manufacturers discount find that it is easier to sell back into the first-world nation, and this problem occurs in the European as well as the US markets," Jackson observes. "Anytime you discount a product to a third-world nation or even a second-world nation, you’re going to have pricing disparities. Depending on how different that is, it will be quite lucrative for the distributor in that country to sell it back in the United States."
Therefore, the gray market continues to be driven by the multitude of pricing structures that exist throughout the global market. Because international pricing is dependent on individual markets and economies, there may be major differences in prices in different regions around the world. "However, the differences in prices are so corrupting, and it’s corrupting for everybody," Jackson emphasizes.
If a manufacturer does nothing to differentiate its product—in terms of packaging design, contents, languages, or name—then distributors from one region of the world can purchase that product and sell it to a dealer in one of the higher price markets, Pranitis explains. "The result is product being shipped around the world through various channels, some of which are unauthorized in the eyes of the manufacturer."
The Economic Consequences
The impact on manufacturers and dealers manifests itself in lost profits, because they’re now experiencing a lower acquisition price than they would otherwise have for the company as a whole, explains Melonakos. However, that’s assuming that it’s actually legitimate product being purchased, albeit from an unauthorized source, and not counterfeit product.
"If they’re buying counterfeit product, and there are no guarantees that it’s not counterfeit if it’s purchased on the gray market, then there are many potential risks to patients, as well as completely lost sales and profits to the manufacturers," Melonakos adds. "In this case, the product isn’t coming from any of the manufacturer’s sources."
If the gray market product is an actual manufacturer’s product (but one coming from a developing country where it is sold at a lower price), overall profits to the manufacturer are lost. Additionally, more competition is created for authorized dealers, especially those that are "playing by the rules," because a dealer that is buying on the gray market can potentially sell at a lower price and unfairly undercut other businesses.
"The gray market tries to buy below the wholesale or for the least amount possible, and many times it involves purchase of products that are either similar to or from foreign countries," says John O. Burgess, DDS, MS, assistant dean for clinical research at the University of Alabama in Birmingham. "To circumvent the high price in the United States, brokers or dealers take those products and ship them to the United States; sometimes these materials that are supposed to be delivered to a country in Asia, for example, barely touch down in Asia, but are turned right around and sent back to the United States."
Dental practitioners may also find that the unexpected consequences of purchasing gray market materials outweigh the initial savings, especially when a suspect product undermines patient care. The costs of re-treating, negative patient word-of-mouth, and even liability, can be substantial. Additionally, there is no warranty on gray market products; therefore dentists cannot return defective material.
"Manufacturers typically will not guarantee products purchased through an unauthorized dealer," says Krisa M. Drost, business development manager for 3M ESPE. "This means the practitioner then assumes full liability if the product fails or a patient is harmed in any way."
The Impact on Patient Care
Problems affecting gray market materials include long shipping times and uncontrolled temperatures, subjecting the materials to excessive stress and strain, Burgess notes. As a result, particularly in the case of adhesives and impression materials, they don’t perform as well. That’s one reason why companies have different manufacturing plants in various countries to help control the material itself, to keep it from expiring, and limit its exposure to extreme hot or cold temperatures.
"When materials are shipped a long way, go past the expiration date, or are exposed to temperature extremes, it cannot perform the way it should," Burgess explains. "Even though it may be from a reputable manufacturer, that material may perform sub-optimally."
"In addition to unknown storage and handling conditions, we have obtained repackaged products with missing or falsified product origin, shelf life and/or lot number information. These alterations can raise the risk to the patients and dentist, as products past their shelf life may be sold with a fake label or products may have been compromised in the repackaging process," Drost says. "Gray market products from a different geographic region might not comply with local language or warning requirements and may no longer comply with local regulatory requirements."
Zirconia is made and manufactured by many companies, and some brands of zirconia are very good. Others may not include certain additives that help stabilize and prevent roughening of the zirconia over time. "Some of these products marketed from different places as generic products can have real adverse effects over time," Burgess emphasizes. "A classic example is what occurs in the pharmaceutical industry, where advertisements claim people can save 10% or 15% on their prescriptions; and while they think they’re reputable pharmaceuticals, they really may not even have the active ingredient in them."
What’s more, some materials used in other countries are not accepted in the United States nor approved by the American Dental Association. Using unaccepted materials would fall below the standard of care. "Again, the practitioner should be aware of the fact that they want to buy from authorized distributors, and they should check the labels on their products. If a product was meant to be shipped and sold overseas, there is a reason for that," Kugel says.
"Dentists have to buy legitimate products because, at the end of the day, they’re putting them in a patient’s mouth," says Bruce Seidberg, DDS, MScD, JD, a practicing endodontist in Liverpool, New York. "If there is any question about the quality, whether it’s going to set, or whether it’s going to fully polymerize, you’re going to pay the price in replacing those restorations. I don’t know if dentists want to take that chance."
"If you were to have surgery and the physician used a suture or implant device that wasn’t made by a legitimate manufacturer or had expired, you’d be appalled if they used that on you," Kugel says.
Price emphasizes that, ultimately, everyone in a legitimate channel for product distribution wants the best possible product for the patient. One difficulty with the gray market arises from not being able to ensure the integrity of the product because the pedigree chain is broken, which also complicates finding the goods should a recall be necessary.
"If product cannot be properly traced back to the original lot codes and expiration dates, which is a very common problem with gray market product because often those codes are scratched out or covered up in some way to hinder our ability to track it to the unauthorized source, then it makes it nearly impossible to locate users should there be a legitimate reason to recall or withdraw a product," Pranitis cautions. "Additionally, if we need to contact a doctor regarding a change, we cannot do that properly if product has changed hands several times or been altered illegally."
The Consequences of Broken Trust
The fact that manufacturers have established wide price discrepancies globally—selling products up to 50% less in certain markets—makes it even more attractive for people to engage in gray market activity.
As a result, much of the burden for curtailing opportunities for gray market activity begins to fall back on the manufacturer, Melonakos says. "Some dealers are relatively open in saying that they do in fact engage in gray market purchasing, and they don’t necessarily cover it up."
Unfortunately, there are no serious legal consequences for engaging in gray market sales. However, the manufacturer/dealer relationship is significantly damaged. "It’s typically not illegal, but it certainly violates any manufacturer/dealer agreements that might be in existence, because typically a manufacturer agrees to restrict the sales of their products only to authorized dealers, and the dealer agrees to only purchase product from the authorized manufacturer," Melonakos elaborates. "It also violates a basic trust between a dealer and a manufacturer because manufacturers, particularly larger ones, also typically invest marketing dollars with distributors and have other terms of support. It’s a mutually supporting relationship, and if that dealer then purchases a sizable amount of product from another source, that’s certainly harmful to the manufacturer."
Consider a scenario in which a large, well-known dental distributor could buy quantities of product on the gray market and also through proper channels. The gray-market product, which might represent only 10% of its total for one product, could blend into its entire inventory throughout its many warehouses, making it difficult for manufacturers inspecting for gray market products to realize what was happening.
"When you have thousands of boxes of product going out, it’s difficult to see which are gray, especially if they’re under 10% and all over different warehouses," explains Jackson. "Now, however, major manufacturers are gathering transactional data from all authorized distributors indicating the amount of product purchased and the amount sold. If there is a discrepancy, the dealers are called into question."
With fewer reputable distributors willing to buy gray market, that leaves countless products available for unauthorized dealers to purchase at prices lower than those offered through proper channels. As a result, they’re often selling product at or below the price that authorized dealers can even buy it from the manufacturer.
"There are two ethical sides to this. First, it is up to the manufacturers to control where product goes and how it gets there. It is not up to distributors to regulate where it’s purchased," Jackson says. "The part that’s technically unethical is that we all sign distribution agreements that say we can only buy the product from the manufacturer. So, those two facts are in direct opposition."
The Fine Gray Ethical and Legal Lines
Although selling or buying product that has been diverted from its original channel is not illegal, there is a possibility that the product quality has been seriously diminished. Ultimately, practitioners are responsible for what they use on their patients.
"Selling or buying products coming from an uncontrolled supply chain can violate Food and Drug Administration (FDA) rules, violate import laws, infringe the manufacturer’s intellectual property rights, and most importantly, expose the dealer and the dentist to significant liability in case compromised or counterfeit goods lead to a health problem for the patient," Drost cautions.
According to Seidberg, the buyer should beware and, when looking at restorative materials or anything to be used in a patient, dentists really should question where they’ve been made and if they’ve been sitting around in the wrong container or improperly stored for a long time. As far as equipment is concerned, dentists should be aware of where it’s made and any warranties. "If it’s a gray market piece of equipment and something goes wrong, you’re not going to have the warranty or the redress that you would normally have," he explains.
Although practitioners can always seek redress through the legal system, Seidberg says the channels are not always clearly open. If it’s gray market material from overseas, it’s very doubtful they will be able to be made whole.
If the use of gray market products leads to a lawsuit involving a patient, two issues arise. One involves treatment results, dentist competency, and whether the treatment was performed within the standard of care. That’s the main area of negligence in malpractice, Seidberg explains.
The second issue is material related. If a patient brings a lawsuit because of a material that was used, the channels of the legal system are open, but the material results will be very difficult to prove.
"It’s a matter of were the materials used properly? Did the dentist follow all the instructions? Were the ingredients of the materials proper?" Seidberg says. "The patient would have a very difficult time proving the defect material-wise. It all comes down to the standard of care and the way the dentist did his or her treatment."
The FDA Position
In the United States, the dental industry is regulated by the FDA to ensure dental products meet applicable standards and that their safety and efficacy has been confirmed. The FDA inspects manufacturer facilities for ongoing compliance and clears products (classified as medical devices or drugs) before they can be marketed and sold in the United States, explains Drost. Gray-market products may not have such FDA clearance and often don’t meet all FDA standards.
"We adhere to the strict guidelines of all the governing bodies that regulate our product globally, and we are subject to the routine audits as well as required documentation for a dental medical device manufacturer," Pranitis says. "We treat those requirements with the utmost importance. When a doctor buys from anywhere other than an authorized dealer, they are taking a chance that our product has been altered or compromised in some way."
According to Price, as long as the product is legal and has not been altered or tampered with (ie, changing a serial number), the FDA does not involve itself in gray-market issues. However, if the dates or packaging have been changed, it is no longer a "gray" market product but an illegal product, he clarifies. Additionally, "knock off" products may be substituted in packaging that appears original, which is also illegal. The FDA and others will be interested in these products.
"I think the FDA is trying to get more active in this, especially since now there are counterfeit products," Jackson says. "It’s one thing to bring these products ‘out of the country’ and bring them back in when they have the same FDA numbers, but as soon as you make a counterfeit, that becomes a huge problem."
How Can the Gray Market Be Combated?
"The gray market problem has been around for a number of years, and many manufacturers have taken aggressive steps to try to control or curb it," observes Burgess. "For example, manufacturers are now marking products that are marketed into foreign countries as a different kind of product, so the name and packaging are different."
"Manufacturers have contractual relationships with distributors which provide conditions for selling their products," Price says. "The FDA will be announcing new stringent rules for labeling in 2011 that will impact all medical devices. These new Unique Device Identification bar codes will make it easier to track and trace devices going forward and identify anomalies in the distribution channel."
The issue is quite complex, Pranitis admits. However, he says Kerr continues to explore several options that include packaging, distribution methods, pricing, and channel partnership. "Of course, dentists should insist that their dealers send them product that has come directly from the manufacturer, and if all the dealers complied, then we might see the problem diminish significantly," he emphasizes.
3M ESPE also is firmly committed to the quality and safety of every product it designs, manufactures, and sells, says Drost. Specific to gray market, 3M ESPE invests in regionally appropriate packaging, labeling, and product registration, and also conducts audits with its authorized distributors and makes purchases of its own products from a range of sources to understand what is happening in the market overall.
"Working closely with our authorized distributors, we also try to help educate dentists about the risks of purchasing from unauthorized distributors," Drost says. "Purchasing through an authorized dealer is the only way to assure products have been moved as intended through a controlled supply chain. 3M ESPE’s list of authorized dealers is very easy to find on our 3MESPE.com website. We strongly encourage every dentist to ask, ‘Where did the product come from?’ of all their suppliers to help assure themselves they are getting authentic products through a controlled supply chain."
According to Melonakos, detecting gray market sales is among the ways manufacturers are trying to combat the problem. Like many manufacturers, Shofu receives monthly data based on zip code information from dealers detailing its sales to the end user. In any given month, there can be wide variation between company sales to dealers and dealer sales to end-users. "However, if over a longer period—such as a year—there is a significant difference between dealer purchases and end user purchases, especially for mature, well-established products, then it’s pretty likely they’re buying some of their purchases from an alternative source," Melonakos says. "If we see a dealer over the course of a year who has sold significantly more product to end-users than they could have possibly bought from us, then at a minimum we know that dealer is getting it from an alternative source. We don’t necessarily know what source, but we can be pretty confident they’re not getting it all from us."
Other ways to combat the gray market include placing so-called nonremovable stickers stating "For Sale in USA, Canada" or something to that effect. Although this too can be circumvented, Melonakos has found that even that basic step can reduce some of the gray market. Another option is different packaging in developing countries, which some manufacturers have implemented.
Kugel has observed major dental product manufacturers making it harder to copy their packaging, either by using three-dimensional images, sensor bars, or other tracking mechanisms. All of this, however, increases the cost of the products ultimately for the end user—the dentist."The more gray label that’s sold in the United States and the more the legitimate distributors and manufacturers have to fight it, the more dentists have to eat the cost," he notes.
"The most significant thing companies can do is sell for the same price worldwide," Melonakos says. "Companies have talked about it, but I don’t know of a single major manufacturer that sells for the same basic price in, for example, Asia or Latin America as in Europe and North America."
Alternatively, Jackson suggests removing the FDA numbers from those products shipped to foreign markets. Doing so would make it technically illegal for those projects to then be used in the United States because they wouldn’t bear FDA approval. However, even this suggestion may not solve the problem entirely, because some countries honor the FDA approval process for products sold in their country.
"Major companies are making efforts to minimize the gray market and educate the dental community about it," Seidberg says. "The best thing a dentist really can do is deal with the major companies that have the reputation of being good in the profession."
The negative consequences of gray market activity can be difficult to quantify, but they are substantial, permeating the industry at all levels. Besides the extra costs in packaging, labeling, and tracking products, the effort by the dental community required to sort out products and verify their origin has an impact on the economics and safety of oral healthcare.
Burgess believes that manufacturers are trying to do the very best that they can to put out a quality product. If dentists remain loyal to reputable materials and manufacturers, at the end of the day, they can be sure that the restoration and restorative process that they’re using will perform optimally. "If you’re buying products from an unreputable individual, you’re never sure how those materials will perform or how they will affect the longevity of the restorations that you’re placing," he cautions.
Therefore, Seidberg encourages dentists to educate themselves on the material being used on their patients and where it’s coming from. If they deal with a reliable local dental dealer with a good reputation that has been around for years, the materials likely are going to be good. If they shop some of the catalogs, the Internet, or lesser-known dealers, they don’t really know where the materials are being stored, how long they’ve been stored, or if they’ve outlived their shelf life, he warns.
"If it’s too good to be true, then it’s too good to be true. If the pricing is that cheap, there’s a reason for it," Kugel emphasizes. "We’re all looking for a good deal, but the bottom line is that you have to do what’s best for your patient, and buying gray market is not going to be best for your patient."
The Inside Look From:
Issue after issue, the feature presentations in Inside Dentistry deliver coverage of the relevant and thought-provoking topics specifically affecting day-to-day practice within the dental profession. The publishers and staff could not bring the underlying concerns and trends surrounding these timely issues to the forefront without the insights shared by our knowledgeable and well-respected interviewees. For their collective generosity of time and perspectives, we extend our sincere gratitude.
John O. Burgess, DDS, MS
Assistant Dean for Clinical Research
University of Alabama at Birmingham
Krisa M. Drost
Business Development Manager
3M ESPE Dental Products
Vice President of Marketing
Gerard Kugel, DMD, MS, PhD
Associate Dean for Research
Tufts University School of Dental Medicine
President and CEO
Vice President, Global Marketing & Innovation
Chief Executive Officer
Dental Trade Alliance
Bruce Seidberg, DDS, MScD, JD
Private Practice, Endodontics
Liverpool, New York