The Counterfeiter

The story of how one of pharma’s biggest enemies was nabbed in Houston, Texas

Stone / Getty Images

On May 25, 2007, Kevin Xu logged into his Gmail account and found a startling message from a man who could have been his biggest client.


rom an office suite on the 28th floor of the Plaza Royale in Beijing, the baby-faced businessman had gone from selling shark cartilage and penicillin to Chinese hospitals and clinics to cashing in on the high-profit margins of the European and—he hoped—US pharmaceutical markets. Xu kept a list of 29 brand-name drugs he could deliver at cut-rate prices, from the baldness remedy Propecia to lifesavers like the antileukemia drug Gleevec. If it wasn’t on the list, Xu boasted that he could find a way to get it.

Now, he thought he finally had an entrée to the US market. His contact, going under the...

Then, the email arrived. It was probably the first significant stumbling block in what was so far Xu’s flawless career. “One of my customers called,” Ed wrote in a message to, “and said there is a recall of Zyprexa in Europe with the same lot number. I am trying to find out more on the Internet. Have you heard anything? We will cancel the Zyprexa order until we find out the problem lot number.”

That day, the United Kingdom’s drug agency had pulled the drug from pharmacy shelves after a tip from a wholesaler. Analysis revealed that the pills contained just 75% of the active ingredient. The agency later recalled two other drugs: the Sanofi-Aventis anticlotting medication, Plavix, and the AstraZeneca prostate cancer medication Casodex. Xu had given Ed both medicines, which would turn out to be subpotent and contain high levels of impurities. They were counterfeits.

If Xu was worried about the law, he didn’t show it. He told Ed he’d look into the problem, and the duo agreed to steer clear of Zyprexa for the time being. “Don’t sell to EU market now for Zyprexa,” Xu wrote. The 36-year-old businessman had already made millions of dollars cheating the pharmaceutical business—selling, for instance, fake Tamiflu during the avian flu scare—and, like many crooks, he would have made a lot more if he hadn’t been so cocky. Two months after that email, Kevin and Jennifer climbed aboard a plane to the United States to finalize the deal in person.

“I have taken care of your hotel accommodations and will pick you up at the airport,” Ed wrote on July 12th, “My business partner has been very busy on our venture when I was out of the country and has made some very large deals starting in August, especially for [Pfizer’s Alzheimer drug] Aricept. I think you will be pleased with the result.”

But Xu would not be pleased with the accommodations Ed had in mind. Ed was an undercover agent named Robert Sherman with the United States Immigration and Customs Enforcement unit; on that very same day of his July email, Sherman stood before a judge in downtown Houston and signed the criminal complaint that would lead to Xu’s arrest.

Drugs can pass through a dozen or more hands on the way to the pharmacy and a consumer’s medicine cabinet. The patchiness of the drug distribution network and the absence of a proper paper trail, as investigative journalist Katherine Eban revealed in her 2005 book Dangerous Doses, has allowed unscrupulous middlemen to launder counterfeit medications within the legitimate supply chain that leads to a local pharmacy. Foreign-produced drugs are also illegally “diverted” into the domestic supply chain.

In the last 10 years, counterfeit pharmaceuticals have become big business. According to the World Health Organization, counterfeit drugs are any medication that is deliberately and fraudulently mislabeled with respect to its true identity or source. For instance, counterfeits may have packaging that matches a brand-name drug but were produced under appalling sanitary conditions, and may contain no active ingredient or a completely different ingredient. By some estimates, 15–25% of malaria drugs in sub-Saharan Africa are counterfeit or substandard. The best counterfeits may be made in the very same developing-world factories that produce legitimate drugs by day (but get taken over by counterfeiters at night), while the worst may come from no more than a dingy back room in Egypt.

The best counterfeits may be made in the very same developing-world factories that produce legitimate drugs by day (but get taken over by counterfeiters at night), while the worst may come from no more than a dingy back room in Egypt.

The Washington-based Pharmaceutical Security Institute, a nonprofit organization supported by 27 drugmakers, reports that the number of incidents of counterfeiting, theft, and diversion from foreign to domestic supply chains has risen by a factor of ten in the last 5 years. In 2002, they recorded 196 incidents. In 2008, that number rose to 1834, with 917 arrests around the world resulting in the seizure of more than 11 million tablets. The rise has been partly fueled by the increased sophistication of foreign manufacturing capabilities, but much of it comes from simply catching more criminals in the act, a result of better international coordination among drug companies and law enforcement, along with an increased recognition by state and federal regulators of the scale of the problem.

Pfizer, for instance, has long had workers in the field of product security, integrity, and quality control, but it was only in 1998 that they officially launched their Global Security Division, which handles counterfeits, drug thefts, and other legal issues. “That was the year we launched Viagra,” says Rubie Mages, a former New York City assistant district attorney now with the company, “That was the first time we became aware of counterfeiting on any large scale.” Today, the little blue pill is still the most widely counterfeited drug in the world.

In 2006, 58-year-old Marcia Bergeron, a US citizen living in Canada, developed flulike symptoms after taking a version of the sleeping pill Zolpidem, which she bought online. It was manufactured in Southeast Asia and sold over the Internet via Eastern Europe. She continued taking the pills for several months, complaining to friends that her hair was falling out, and that she was wracked by nausea, aching joints, diarrhea, and blurry vision. After a friend found her dead on December 28, 2006, authorities ruled that the cause of death was cardiac arrhythmia caused by metal toxicity. The counterfeit Zolpidem contained dangerous levels of aluminum, uranium, and other heavy metals.

Although state and federal agents around the country have launched numerous investigations into counterfeit medicines, few groups have made as large of an impact as the team down in Houston, Texas. With the help of evidence marshalled by Sherman and his coworkers, assistant US Attorney Sam Louis has led an international crackdown on counterfeits. In 2006, James George of Texas-based Lifeway Pharmacy was locked up for 2 years after purchasing 1,000 counterfeit Cialis tablets and 4,500 Viagra tablets. In 2007, Mohammad Gawasmmah and Fayez Aledous of the Houston-based store, “RU Sophisticated,” pled guilty to dealing in counterfeit drugs and were locked up for 20 months. In 2009, Richard Fletcher, Dallas owner of an Internet site selling the drugs, was also convicted and faces up to 10 years in prison.

As part of Pfizer's investigation and expert testimony, Amy Callanan took photos of Kevin Xu's fake 10-mg Aricept tablets (left) alongside authentic tablets (right). In addition to containing a substandard formulation, the fake tablets were slightly wider than normal, darker yellow in color, and had a dull film coat.

But none of these criminals compared to Kevin Xu. While many counterfeit pharmaceutical traffickers sell small volumes of fake Viagra on the Internet, the number one concern of law enforcement is to protect that legitimate supply chain of lifesaving medications going to major pharmacies online and off. It’s that legitimate supply chain that Xu sought to crack. “Mr. Xu,” attorney Sam Louis would later tell the court, “is probably to this date the most significant counterfeiter or individual who is involved in pharmaceutical counterfeiting that has been the subject of any investigation by Immigration and Customs Enforcement and [Food and Drug Administration].”

In 1971, Lu “Kevin” Xu was born in Nanjing, the sprawling port city on the delta of the Yangtze River. Xu reputedly got his start working for China’s largest manufacturers, Sinochem, before joining a branch of a conglomerate called Everlasting Business & Industry Corporation, Ltd. around 2002. EBIC consisted of a handful of businesses that manufactured and exported projects ranging from steel pipes for drilling and mining operations to knock-off Louis Vuitton handbags and tennis shoes. According to Edward Mallet, a defense lawyer who first handled the case, purses and clothing were Jennifer Xu’s specialty.

Xu took charge of a division that dealt in botanical extracts and raw pharmaceutical ingredients and would later be named Orient Pacific International, Ltd. In early 2003, he was offering a 12-page list of generic antibiotics, cancer drugs, and biologics on the company’s website,, along with standard medical supplies like bandages, forceps, and scissors. “We are [sic] leading Chemical and Pharmaceutical company,” Xu wrote on one website, “and we import and export over 3,000 kinds of Chemicals and Pharmaceuticals each year.”

Xu had connections to the biggest names in China’s industries. According to the testimony of Stephen McCane, former vice president of T2 Laboratories in Jacksonville, Florida, Xu was also helping the company sell a gasoline additive on the Chinese market. It took him just 3 days to score a meeting with the vice president of Petro China, a company larger than Exxon. “Kevin is a person who never went to sleep without sending you a memorandum of that business day,” McCane said. Xu was efficient and responsive. “He was a hard-working businessman.”

In 2005, the avian flu H5N1 hit Asia and demand for Tamiflu soared. Later that year, Roche, the drug’s maker, bowed to international pressure to allow drugmakers in China and Vietnam to produce their own Tamiflu. It didn’t take long before unauthorized batches of Tamiflu started trickling back into the European and US markets via the Internet. But it wasn’t until May 2006 that regulators caught drugs in the legitimate supply chain. The Swiss regulatory agency, Swissmedic, issued a warning about counterfeit Tamiflu, and Roche soon responded by posting guidelines to help consumers spot the real deal. But no one knew where the bogus products were coming from.

In August 2006, a Turkish undercover agent named only “Sandra” in court documents, who was working for Eli Lilly & Co., had bought samples of a drug directly from Xu that matched some of the fake Tamiflu. She had other drugs shipped to her from Xu including Cialis, Aricept, Zyprexa, and Plavix, which she passed on to law enforcement agents and pharmaceutical companies for testing. At company labs, technicians took digital photographs of the pills and precisely measured their dimensions with handheld calipers. Pfizer chemist Amy Callanan noticed that Xu’s Aricept was slightly wider than the real thing, darker yellow in color, and lacked the authentic pill’s glossy coat. Callanan scraped off the surface coat of the pill and analyzed it separately from the core using infrared spectroscopy. The active ingredient, donepezil hydrochloride, was present but mixed with cellulose rather than lactose. Eli Lilly, Pfizer, and the other companies began working with Robert Sherman’s office in Houston. (Eli Lilly declined to respond to questions regarding the Kevin Xu case or their counterfeit-fighting strategies, citing “ongoing investigations.”)

At the time, Sherman was busy closing in on a crooked Filipino distributor named Randy Gonzales after two of his buyers were busted and cooperated with the Feds through a plea bargain agreement. A 10-year veteran of the Houston Police Department who had also spent 15 years with the Customs service, Sherman was a natural fit for cracking down on counterfeit medicines. “Bobby is terrific,” says Doug Mason, a Houston-based collaborator with the Food and Drug Administration’s Office of Criminal Investigations. “He’s probably the best undercover [agent] I’ve ever seen work.” (Sherman was not permitted to comment for this article.)

With the help of Sandra, Sherman immediately went to work winning Xu’s confidence and ordering his own drugs in December for testing at the FDA’s Forensic Chemistry Center in Cincinnati and, again, at drug company labs. Ideally, Sherman would have set up the meeting in China, but Chinese authorities had failed to respond to requests for cooperation through the US embassy attaché. So in early March 2007, as Sherman and his team were heading to Bangkok to nab Gonzales with the help of the Royal Thai Police, they figured they would kill two birds with one stone before heading home to the United States. According to court records, Sherman and Sandra set up a meeting with Xu and his wife in Bangkok as another special agent stood by with a video camera.

At the start of the meeting, Sherman’s cell phone buzzed and he took a call purporting to discuss the importation of a shipping container. Then, Sandra admonished Xu, telling him she was “not happy” about the fact that his shipments to Tri State had been several weeks late. It was a ploy, of course, and it allowed Sherman to confirm that Xu was the actual source of those shipments. As the discussion shifted to future business plans, Xu let it be known that he would have no problem delivering up to 10,000 boxes, which Sherman calls “a significant order.”

Workers destroy fake and outdated drugs January 18, 2007 in Beijing, China. Thousands of pounds of fake and outdated drugs were destroyed in the operation.
Photo by China Photos / Getty Images

Xu explained to Sherman that the way to get the drugs through US customs was send the package through South Africa and Brazil, which would arouse less suspicion from officers than a shipment directly from China. Then, he should also pack them in cardboard barrels sealed in aluminum packs that customs could not open without permission. Those packs would be declared as powdered chemicals. And what if customs intercepted the shipment and started asking questions? Xu told Sherman just to repeat this mantra: “I don’t know, I don’t know.” By the close of the meeting, Xu and Sherman had ironed out the details ensuring, for instance, that Xu would be able to precisely match the coloring of the pills Sherman wanted. Sherman returned to Texas and Xu to China.

Just as Sherman and his colleagues were pondering how to nab Xu, the investigation took on a new urgency. The UK recalled tainted batches of those three medications—Zyprexa, Casodex, and Plavix—and after consulting with Sherman’s office they linked the recalls to Xu. Some Plavix pills contained just 10% of the active ingredient. All told, some 40 distributors had handled Xu’s products, and 70,000 packages were recalled, although at least 30,000 made it into the hands of patients. The pills had made it into the country’s supply chain from France via a process called parallel importation, which allows distributors to purchase drugs from other countries in the European Union, and then repackage and relabel them. It’s a loophole that drugmakers and patient advocates despise, but that distributors champion as a way to give customers lower prices. Patrick Ford of Pfizer Global Security calls it “an invitation to counterfeit.”

Thankfully, no one appears to have been injured by the products. Elizabeth Bolton, spokesperson for the UK drug regulator, declined to answer questions, citing the open investigation, but Claire Blackburn of the Prostate Cancer Charity says they have not had any men come forward with problems caused by the bogus Casodex. “Due to the short time scale of the incident and the fact that the men affected received a weakened version of the drug, it is unlikely that we will have any men coming forward,” she says.

After the recall in the United Kingdom, Kevin Xu could have walked away with a cool $1.5 million in revenue from that year alone, but he wanted more. As Sherman and the ICE team were pondering a way to lure Xu to US soil for his arrest, they learned that he was coming anyway—to unload some of that hard-earned cash on a $26,000 diamond for his wife. “The price of diamond in USA is cheap,” he wrote Sherman, “but we don’t know exactly so we want to see in NYC, heard a big diamond market there.”

On July 22, Sherman and Xu drove up to the Tri State warehouse so he could meet his business partner, “Dr. Doug”—aka Doug Mason of the FDA. It was a simple “counterfeit” office connected to a warehouse, furnished solely with a coffee machine, computer, and a cheap desk set up for such meetings. Mason sported a business suit, but had laid a white lab coat in the room to complete his persona. “[Xu] was interested in making as much money as he could possibly make,” Mason says. “I told him I can push as much as you can give me, and his eyes lit up.” That year, Xu had already sold $232,568 worth of drugs to Americans over the Internet, according to ICE, but this was his chance for real distribution.

The trio discussed the intricacies of the business, as it would be the last chance Sherman had to milk Xu for all the information he had. Xu explained that he had the ability to change lot numbers printed on drugs, which meant he had access to state-of-the-art packaging facilities. Suddenly, a half dozen officers from Immigration and Customs Enforcement entered the room. “Police! Hands up, stand up. Put your hands up,” they shouted, handcuffing Xu and taking him to the federal detention center in downtown Houston. There, he was charged with conspiracy to traffic in counterfeit goods, three counts of trafficking in misbranded pharmaceuticals, and five counts of trafficking in counterfeit pharmaceuticals.

All told, some 40 distributors had handled Xu’s products, and 70,000 packages were recalled, although at least 30,000 made it into the hands of patients.

Xu’s attorney, Colin Amann, calls his client an “Internet geek” with no criminal history who knew how to find the best deals in one market and sell them in another. But Xu couldn’t necessarily vouch for the drugs’ authenticity. “China is very much a buyer beware culture,” Amann says. “They don’t have copyright laws like we have here.” Indeed, without the cooperation of the Chinese government, Sherman and his team were never able to identify Xu’s alleged factory in China, and Amann says that Xu had exaggerated his abilities by “puffing himself up” during his interactions with the agents.

In the end, Xu was convicted, and given the maximum sentence of 6 years in prison. In January, he was shipped out to Big Spring, Texas where he is waiting for an appeal and serving out his sentence. He was also ordered to pay $1.3 million restitution to Pfizer and Eli Lilly. As a testament to the difficulty of prosecuting these cases, Xu’s six-figure defense team got him acquitted on four counts of trafficking in counterfeit pharmaceuticals because the government failed to explicitly demonstrate that the drugmakers still held active patents. “You can call that a technicality,” Amann says, “but the government never called an Eli Lilly rep in to say ‘This is on file.’” Xu did not testify during the trial and failed to respond to questions mailed to him in prison.

After serving his sentence, Xu could still be extradited to the UK, where he could face additional charges. “He’s a pretty stoic fellow,” Amann says, “The entire time I’ve seen him shed a tear once or twice when he was talking about missing his wife, his son, and father in China.” Although the Orient Pacific website is defunct, its parent company, Everlasting Business and Industry Corporation, Ltd, still seems to be offering a variety of products online. In interviews, investigators have suggested that they are still following leads produced from the Xu case.

This time, Pharma and the Feds have managed to strike back against a major counterfeiter, but the war is far from over. In late October 2009, as officials geared up for the next round of H1N1 swine flu in the United States, FDA officials purchased Tamiflu online. One envelope arrived with a postmark from India with white tablets taped between two pieces of paper. The pills contained just talc and Tylenol.

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