July 3, 2012

Shadowy online businesses that sell knockoff prescription drugs through spam and other dodgy advertising practices have begun relying more heavily on the U.S. Postal Service to deliver prescription drugs to buyers in the United States direct from warehouses or mules within the U.S. The shift comes as rogue online pill shops are seeking ways to lower shipping costs, a major loss leader for most of these operations.

An ad for Rx-Parners pill shop that ships from the US.

Traditionally, a majority of the counterfeit pills advertised and sold to Americans online have shipped from India. But the process of getting the pills from India to customers in the United States is so expensive and fraught with complications that it has proved to be a big cost center for the largest rogue pharmaceutical operations, according to a study I wrote about last month.

“One of the surprising things we found was that shipping dominates program costs,” said Stefan Savage, one of the lead authors on the study, and a professor in the systems and networking group at the University of California San Diego.

The researchers discovered that most rogue pharmacy operations spend between 11 to 12 percent of their annual revenue on shipping costs. Part of the reason for the high cost is that pill shipments from India and elsewhere outside of the United States frequently get delayed or confiscated by U.S. Customs officials. This forces the rogue pharmacies to either refund the customer’s money, or to eat the costs of re-shipping the pills.

Increasingly, however, some of the largest spam affiliate programs are delivering some of their most popular drugs — including erectile dysfunction pills and everything from Accutane to Cipro and Diflucan and Plavix — direct to U.S. buyers from shipping locations within the United States.

“This is why you see pharmacy outfits like RX-Partners, Mailien and Stimulcash picking the most popular drugs and warehousing them in the United States so they can do USPS shipping through mules,” Savage said.

All of the above-mentioned pharmacy affiliate programs are thought to be connected to Leo Kuvayev, the convicted spammer who is now serving a 20 year prison sentence in Moscow for multiple child sex abuse convictions.

In the members-only affiliate forum for RX-Partners, many affiliates have been discussing fastmedsabroad.com, the site that is spearheading its “US2US” efforts to reduce shipping costs for a formulary of nearly two-dozen of the most commonly ordered drugs.

“The main feature of this project is that all products ship straight from U.S., not from India as usual, and to U.S. addresses only,” wrote ‘Mark,’ a self-described member of the RX-Partners team.

According to the RX-Partners organizers, the image on the homepage of fastmedsabroad.com is a remake of a USPS brochure about fast delivery service. The RX-Partners administrators said they chose to copy it because they believed Americans would recognize the image and associate legitimacy with the pharmacy.

“The picture of the guy on home page is a remake on USPS brochure about Fast Delivery service (I’ve been there, have one and can ensure – that is a real delivery man) which is straightly related with a domain name and US2US main project’s features, overnight delivery up to your house, straight to every customer abroad  all the US — here is a clue: The level of its conversion in comparison to promptpillstore.com [another main RX-Partners domain] proves that the pictures [have] been recognized by US citizens. It’s been popular enough all the time, showing the level of trustworthy even higher than some other templates.”

The UCSD researchers recently conducted test buys of some pills available through RX-Partners’ US2US sites, and received a package via the U.S. Postal Service within a few days. This shipping cost about $50. The return address was a steakhouse in West Palm Beach, Fla., and it was postmarked from Miami.

I noticed a curious pattern that suggests some locus of the program’s US2US operation is centered around the coastal New Jersey area. Fastmedsabroad.com includes a shipping calculator that buyers can use to get an estimate of the date and time of package delivery. I placed a number of items in my shopping cart at the site, proceeded to checkout, and took my time entering dozens of different ZIP codes in the shipping speed calculator. If I had wanted the drugs shipped to anywhere around the Philadelphia, New York or New Jersey area, the site guaranteed delivery in less than two days. The further I got from those ZIP codes — to the north, south or west — my shipping time increased. Strangely enough, the calculator estimated the same delivery time to West Palm Beach as it did Denver, Colo.

19 thoughts on “Who Says Email Is Eating at Postal Revenues?

  1. nonegiven

    Why wouldn’t we assume that they have confederates here to do the manufacturing? Also, wouldn’t shipping counterfeit drugs through the mail be mail fraud?

    1. BrianKrebs Post author

      I’m not sure about the answer to your first question (Suresh has one in the comment above you, though). And yes, shipping counterfeit drugs through the mail is almost certainly fraud (it’s also illegal to order them through the mail).

    2. Suresh Ramasubramanian

      Manufacturing drugs in the USA? You set up a plant to make knockoff versions of copyrighted drugs and you’d be facing lawsuits for hundreds of millions of dollars.

      So you source drugs from countries with more liberal patent regimes that allow generic versions of various medication [and the indian pharma industry isn’t only supplying pill spammers, the bill and melinda gates foundation and bill clinton foundation both source cheap AIDS drugs from Indian manufacturers, for their campaigns in africa. So africans get AIDS medication for a fraction of the cost they’d incur buying it from a US or European manufacturer

  2. Liam Skye

    “The shift comes as rogue online pill shops are seeking ways to lower shipping costs, a major loss leader for most of these operations.”

    The term “loss leader” is used out of context in this sentence. A loss leader is a marketing term for a product sold at a loss in order to expose the customer to opportunities to purchase other products at prices that bring profits. Hence, you lead with the loss and follow with the winners. When the loss leader is presented as a good product but is actually junk that nobody would buy, the underlying intent being to sell the customer other than the advertised product, it is known as “bait and switch.”

    The misuse of this term did not detract in any way from the value of the article, which focused on the overall cheap pharmaceuticals market and was well researched and informative, but it could give a marketing guy a rash. Anybody know where I can get some cheap cortisone cream?

    1. Stefan Savage

      I suspect Brian’s use of the term comes from the observation that a number of online pharmacies heavily market free shipping as a bonus for orders above a certain value. It is in these cases where shipping amounts to an actual loss, with the goal of enticing customers to purchase additional product. What I found interesting in general is that shipping costs dominate drug costs — although perhaps this should not be surprising since they must individually drop ship orders from India absent local re-shippers.

      However, I suspect the big advantage with US2US shipping is not cost (it is undoubtedly cheaper, but someone needs to compensate the mule for their risk and I’m not sure if that works out as a win in the end) but speed. We are a nation of impulse buyers and waiting 7-10 days to get an order of drugs is likely to rule out a segment of the market.

  3. Yaya

    If it were me doing this (and it’s not), I’d be moving stuff across the border from Mexico through traditional entry-points (Miami, Tijuana, Texas). Agents in those areas are overwhelmed policing street drugs, they don’t have the bandwidth to worry about things like Accutane. “Pharma-tourism” is rampant.

    It also doesn’t hurt that lots of people in those parts are, shall we say, experienced in moving stuff. Mules would be easy to find when the penalty is almost always just loss of the drugs without prosecution. Our messed-up drug prosecution laws surely make this kind of smuggling pretty attractive to people who’d otherwise be facing stiff penalties for trafficing in pot, heroin or cocaine.

  4. JimV

    “This forces the rogue pharmacies to either refund the customer’s money, or to eat the costs of re-shipping the pills.”

    I’m guessing the scammers end up doing neither in the vast majority of instances, and simply write off that particular mark as a prospect for future sales while keeping the funds they previously obtained.

    1. Stefan Savage

      In fact, I don’t think this is the case. There are two problems with non-delivery. First, the customer may then initiate a chargeback. For example, with Visa you typically have a 120 day period during which you can contact your issuer and request a chargeback. The bank has to eat the chargeback fee and hence passes it onto the program (well, really they just pay themselves since most of these programs accounts have 10% holdback for 90-180 days). High chargeback rates leads to fines and increased scrutiny. Brett Stone-Goss et al have a nice paper looking at these issues in the FakeAV industry (see: “The Underground Economy of Fake Antivirus Software”). The second problem with non-delivery is that then you don’t get reorders. Since ~30% of revenue comes from reorders, alienating customers is self-defeating.

      All of that said, I think non-delivery is not one of the big problems for these guys. When using good drop shippers, I’d be surprised if customs interception of individually packaged goods is much more than 1%. I think the potential cost benefits of USPS shipping is that international shipping is expensive on a per-piece basis.

      Finally, as I mentioned earlier, its not clear what the cost structure is for paying the re-shippers in the US. Its clearly cheaper from a raw shipping standpoint, but the re-shipper needs to be compensated for risk and that may minimize the cost advantage. I suspect a bigger advantage is that it helps attract customers who don’t want to wait and as a market differentiator vs other programs (both for customers and for affiliates who believe that they may get better conversions for their traffic as a result).

      1. john

        Purpose of US2US is not related to delivery cost. US2US targets customers who needs fast (overnight or 2-3 days) delivery and ready to pay extra for it. Delivery from India takes too much time even via EMS.

      2. Suresh Ramasubramanian

        One other thing you have to see is that large scale international movement of money and material – on a scale calculated to run a pharma operation – is best done in bulk with the load split closer to the distribution point .. within the states.

        The other thing is – new jersey has a sizeable indian and chinese diaspora with a regular track record of moving large quanties of material to the states, and large ports that have a significant # of traffic with India (where the drugs manufactured are genuine and high quality, sildenafil citrate is sildenafil citrate even if pfizer doesn’t make it and call it viagra).

        Far less of that in texas / new mexico etc, and the local cocaine etc gangs there aren’t likely to appreciate new criminals butting in on their territory.

        1. AlphaCentauri

          True, in addition, the New Jersey/Pennsylvania/Delaware is a nexus for pharmaceutical companies. A large, accurately-labeled shipment from a pharmaceutical company in India might not stand out as unusual.

  5. Stefan Savage

    Minor correction: I may have miscommunicated with Brian vis-a-vis costs. I would not claim that shipping dominates overall program costs. It does not. But it does dominate fulfillment costs (i.e., its more than the cost of the products themselves or customer service). The dominant overall cost is always advertiser commissions.

  6. Erewhon3

    I don’t see any answer to the question: “Who Says Email Is Eating at Postal Revenues?”

    1. SeymourB

      I believe drug spam emails that result in product being delivered via USPS is what Brian was getting at.

      Instead of USPS losing business due to email, for whatever fraction of targets who fall for the spam, email actually increases USPS shipments.

  7. Stanley Jermanowski

    If drugs were not so overpriced in the USA this problem would not exist.

    1. cherry

      Not necessarily. Sure, it would remove a segment of that market if US drugs were cheaper, but even in countries with a robust government-supported pharmaceuticals scheme, not all drugs are covered. Especially Viagra. I live in Australia, and I don’t want my taxes wasted on peoples’ sex lives, but I understand the need to fund solving peoples’ other problems, like mood disorders and heart problems.

      Another popular one is Oxycontin. In Australia, there was a huge expose on the misuse and addiction to this heavily prescribed drug, and an increasing reluctance of doctors to prescribe it, especially to addicts. One way for addicts to get around this is to buy it from those rogue pharma websites.

      Ritalin may also be used by people who may not medically need the drug, but who take it because they are addicted to it. Doctors don’t hand out prescriptions for that either so again, rogue pharma websites.

      You are correct in saying that drug companies expect too much money. I agree. I think drug companies are greedy and need to be taken down a few pegs. At least the FDA kicked GlaxoSmithKline in the shins this week for misbehaviour.

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