Key Takeaways:
- Healthcare Product Diversion is a multi-billion-dollar problem for MedTech, Pharmaceutical, HealthTech and Consumer Healthcare manufacturers, especially Small-Medium Businesses (SMBs)
- Manufacturers are most at risk, but distributors and consumers feel the pain too.
- Practical solutions exist—from serialization and contract clauses to better training and audits.
Why Product Diversion is a problem for Healthcare Supply Chains?
Product diversion might sound like a minor logistics glitch, but it’s a growing form of supply chain fraud with serious consequences for manufacturers. It undermines pricing strategies, exposes patients to risk, and silently drains profit from businesses—especially in pharmaceuticals, medtech, and consumer healthcare.
Let’s ground this in reality:
- Price Gouging in Grey Markets: A 2012 U.S. Senate investigation revealed that during drug shortages, grey market distributors were marking up prices by up to 650%, creating an exploitative shadow supply chain that directly impacted patient care and manufacturer pricing strategies.
- IP and Brand Risk for SMBs: According to a 2013 analysis by Michigan State University’s A-CAPP Center, illicit diversion and counterfeiting in healthcare products pose major threats to brand trust, supply chain security, and IP protection—risks that are especially acute for small and mid-sized companies lacking robust controls and visibility.
- Healthcare Product Diversion via Unauthorised Resellers: Unauthorised resellers obtain genuine products through bulk or discounted sales and redirect them into unapproved markets. This undermines pricing and contracts, risks product quality due to improper handling, and threatens supply chain integrity. Such diversion impacts compliance, profitability, and consumer safety.
While precise global loss figures are difficult to pin down due to the covert nature of diversion, the financial and reputational impact is consistently described by regulators, manufacturers, and law enforcement as both significant and growing.
How does Product Diversion happen in healthcare supply chains?
Healthcare Product Diversion schemes don’t follow a single playbook. Instead, they are creative, persistent, and often involve trusted insiders or third parties exploiting weak points in the supply chain.
| Method | How It Happens | Example |
|---|---|---|
| Bulk purchasing | Authorised buyers order large volumes, then resell to unauthorized parties | Salon-exclusive beauty products showing up in discount e-commerce sites |
| Overproduction / shadow batches | Contract manufacturers produce more than authorised, sell off the surplus | Unapproved medical device units reappearing in Southeast Asian markets |
| Theft and leakage | Products stolen from warehouses or in transit | Fentanyl stolen from hospital stocks and sold on the black market |
| Geographic arbitrage | Products meant for one country sold in another to exploit pricing differences | EU-only medical device diverted to U.S. via grey market reseller |
| Expired or defective goods | Meant for destruction, but reintroduced into the supply chain | Expired drugs found in unregulated online pharmacies |
| Collusion and kickbacks | Sales reps or healthcare providers over-order and resell excess inventory | Institutional drugs diverted to retail pharmacies for profit |
Understanding these methods is essential if you want to design effective prevention strategies. They often exploit gaps in oversight, compliance, and contractual clarity.
Real-World Case Studies – Pharmaceuticals, Medtech, and Consumer Healthcare
Product diversion isn’t a hypothetical risk for the global healthcare sector —it’s already happening:
- Pharmaceuticals: A 2013 U.S. Senate report detailed how opioids intended for healthcare providers were routinely diverted and sold illicitly, playing a direct role in the national opioid crisis1.
- Medical Devices: EU regulators have flagged instances where temperature-sensitive devices were diverted to regions without the infrastructure to store them safely, leading to degraded product quality and recall risks.
- Consumer Healthcare: Brands like Redken and Olaplex have openly addressed diversion issues. Products intended for exclusive sale in salons have appeared on Amazon and eBay, undermining pricing integrity, partner relationships, and consumer trust.
These examples highlight the diverse nature of diversion threats and show that no segment of the healthcare supply chain is immune.
All manufacturers – big and small – are vulnerable to Product Diversion
Manufacturers sit at the top of the risk pyramid.
- They suffer the most from product diversion, followed by authorised distributors and, finally, healthcare providers and consumers who must deal with the consequences.
Manufacturers lose direct revenue from diverted sales.
- They also face brand damage when mishandled products tarnish reputation, and serious regulatory risk when expired or non-compliant items are resold.
- Consumers don’t blame the grey market vendor—they blame the brand.
Small-to-medium-sized manufacturers are even more exposed.
- Often, they don’t have dedicated legal or compliance teams, formal diversion programs, or tools like serialisation in place.
- Their supply chains are lean and reliant on third-party relationships—relationships built on trust rather than tight oversight.
Unfortunately, this creates the perfect opportunity for diverters to exploit weak links.
So what? The Business Impact
For manufacturers, the business implications of diversion go well beyond lost sales:
- At a strategic level, diversion undermines pricing control, exclusivity agreements, and go-to-market models.
- From a financial perspective, every diverted unit is a unit sold outside authorized channels—often at a discount or under different conditions. That distorts revenue forecasts, inflates warranty claims, and creates return headaches.
- Operationally, diverted goods often re-enter your returns and recalls process, costing time and money.
- From a compliance angle, unauthorized sales might breach your distribution contracts, prompt regulatory investigations, or expose your business to liability if patients are harmed.
If you’re trying to secure IP rights in a new market or negotiating an investment, diversion-related quality or compliance issues can tank your credibility quickly.
Control gaps enable Product Diversion
Understanding what makes your business vulnerable is the first step to fixing it.
| Vulnerability | Description |
|---|---|
| Complex global supply chains | Multiple players and jurisdictions reduce visibility |
| Weak contractual oversight | Contracts without anti-diversion clauses or penalties |
| Limited serialization and tracking tech | No way to trace individual units across the supply chain |
| Insider threats and poor awareness | Employees or partners exploiting gaps in oversight |
| Market price differentials | High variation in pricing between regions fuels geographic diversion |
When multiple vulnerabilities stack up, diverters can exploit your entire supply chain, from production to post-sale support. Fortunately, each of these can be addressed with proportionate controls.
Mitigation Strategies for Product Diversion in Healthcare Manufacturing
Now for the good news. You don’t need to spend millions to protect your supply chain from diversion. Here are six effective, scalable steps:
1. Use Serialization and Digital Tracking
Track-and-trace technology, including QR codes and unique identifiers, allows unit-level visibility. It can deter resale and help identify leak points quickly. Newer tools are cost-effective and accessible to SMBs.
2. Update Contracts
Review your contracts with manufacturers, distributors, and resellers. Include anti-diversion clauses, audit rights, and explicit consequences for unauthorised sales. Legal clarity closes loopholes.
3. Audit and Monitor the Supply Chain
Use a risk-based auditing framework. Start with high-risk partners or geographies. Look for unusual purchasing volumes, inconsistent delivery data, or unauthorised resale complaints.
4. Train Your Staff
Awareness is critical. Your internal teams—from sales to shipping—need to know how diversion happens, why it matters, and what signs to watch for. A single employee spotting something suspicious can save you a lot of pain.
5. Use Incentives and Whistleblower Programs
Encourage internal reporting by rewarding ethical behaviour. Employees and partners are more likely to speak up when they feel safe and supported.
6. Leverage External Expertise
If you don’t have in-house expertise, work with professionals who understand the complexities of IP protection, supply chain risk, and regulatory compliance. Tailored assessments can identify hidden weak points.
Call to Action: Stop Assuming Product Diversion Is Someone Else’s Problem
If you’re a manufacturer in pharmaceuticals, medtech, or consumer healthcare, it’s time to act.
You don’t need perfection—you just need proportionate protection. Start with serialisation. Tighten your contracts. Educate your teams. The earlier you build diversion awareness into your commercialisation strategy, the better positioned you’ll be to protect your research, technology, and trade secrets.
Let’s connect if you need help building a scalable product diversion program. It doesn’t have to be big to be effective. And the sooner you act, the fewer losses you’ll have to explain.
Further Reading:
- Association of Certified Fraud Examiners. “Proactive Shields: Preventive Strategies for India’s Pharma Industry”
- Corsearch. Brand Protection in Pharmaceuticals: Combining Online Enforcement & Investigations.
- Curwell, Paul. (2023). “Taxonomy for Product Diversion”
- Curwell, Paul. (2021). “Emerging Supply Chain Integrity Practices.” June 2021. Brand Protection Program, Michigan State University.
- Fierce Pharma (2019). “Diverted and Counterfeit Drugs: How the Gray Market Is Threatening Your Brand”
- Legislative Analysis (2025). “Healthcare Diversion” April 2025.
- SDC Exec. “The Battle for Traceability in Healthcare Supply Chains”
- Therapeutic Goods Administration (2020). “UDI Consultation Paper 2: Exploring Options for the Introduction of an Australian Unique Device Identification System“
- Trent, C. (2013). “Assessing the Risks of Counterfeiting and Illicit Diversion of Health Care Products“. Anti-Counterfeiting and Product Protection Program, MSU.
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