Thought Leader: Paul Chang, IBM

In 2003, Paul Chang noticed a series of Washington Post articles about counterfeit drugs entering the convoluted US pharmaceutical supply chain. As he began to think about how RFID could reveal illicit points of entry for counterfeit medications, he learned more about the industry's complicated pricing schemes, distinct distribution channels, and poorly monitored chargeback procedures.What he realized: RFID could drive business value even as it combatted counterfeiting. Chang began talking to FDA about RFID, and has been actively discussing anti-counterfeiting initiatives with the agency ever since.

Paul Chang

Pharm Exec: You've spent a lot of time talking to FDA. What problems will RFID solve for the agency that, say, barcodes won't?

Paul Chang: The primary concern of FDA is to promote unique serialization, which means that every bottle of medication should have a unique ID number to identify it. The problem with barcode is that it's too easy to counterfeit. Counterfeiters can already mimic the bottle, the pills, the cap, the filling system, and the label. So for them to counterfeit a barcode would be fairly easy, right? They merely scan and print, and they can counterfeit. And then if the data carrier for that unique ID is counterfeited, the system reading the barcodes won't know the difference.

And RFID can't be counterfeited?

RFID has some inherent features that make it very, very challenging to counterfeit. The memory chip itself has a unique number that the manufacturer burns in at the silicon foundry. Let's assume Philips processes a wafer and creates 10,000 chips. For each chip, they burn in a unique number, like ABCD. Later, the drug manufacturer writes an electronic product code (EPC), another unique number on that chip. Let's say that number is 1234. So the chip's number reads "ABCD1234."

When a counterfeiter buys RFID tags, they can write the EPC, 1234, on a chip. But what they cannot do is replicate the foundry number, ABCD. So by matching those two numbers, you've created a unique number in the supply chain. The manufacturer has a record of the EPC number and its matching serial number for every bottle of medication, so when someone in the supply chain reads the RFID tag, it would ping back to the manufacturer's database. They would realize, "Hey, 1234 should have been written on the ABCD chip, but this one says EFGH."

This sounds like a very expensive system.

It depends on what you mean by expensive. Actually, RFID is expensive to apply but cheap to read, and barcode is cheap to apply but expensive to read. The RFID tags have inherent costs. Let's say it's 20 cents a tag. Barcode is pretty much free—one or two cents. But barcode forces all of the supply-chain partners to have line-of-sight readers and read bottles one at a time, which is expensive.

The big-three wholesalers are moving about 2.5 million bottles a day through the supply chain. That would be a significant burden if they had to read every bottle with line of sight. With RFID, they can take cases of bottles and just run them through a tunnel. They get over 99-percent accurate reads from all of the individual bottles in a matter of seconds. So barcode, while it costs only two cents to apply, could cost many dollars downstream because people have to manually read the tags. RFID might cost 20 cents now, but there's virtually no cost downstream to read the events.

The FDA's anti-counterfeiting program is the main driver now, but are there other supply-chain benefits for pharma?

There's a whole list of potential benefits for the manufacturers, wholesalers, and retail chains. For example, product recall: Right now the industry uses what is basically a broadcast recall. If there is a problem with one lot, everyone essentially takes everything off the shelf and sends it back, because there is no lot management. The manufacturer might have a lot-management system, but generally the wholesalers and distributors do not. So let's say a manufacturer wants to recall lot number 123 of a drug. By the time the wholesaler gets that message, they don't know who has lot number 123. They send a letter to anyone who's ever bought the drug and say, "We're recalling lot number 123." Now, if the people who receive the letter take the time to look for lot 123, that's great. But generally, what happens is they just clean the whole shelf and send everything back. So instead of being a targeted recall, it becomes a broadcast recall.

With RFID, the manufacturer could potentially see all of the EPC numbers associated with lot 123. They would know which retailers and hospitals got those bottles. Instead of broadcasting it, they could call each specific customer and say, "Hey, we know you have five of these bottles. We want them back."

Other advantages?

Other benefits would include inventory management and chargeback resolution. Right now the manufacturers have very limited visibility. Once a bottle leaves their door and gets into wholesaler hands, it's in kind of a black hole. So manufacturers tend to carry excess inventory.

Chargeback resolution is a problem in pharma because of the many different pricing structures. A wholesaler might pay $97 for a hundred-dollar bottle of a drug so they can sell it to a retail pharmacy for $100. But they might also have to sell it to a clinic for $50. In that case, the wholesaler is losing $47 on the transaction and the manufacturer has to make up the difference. That's called a chargeback.

How is that done now?

Right now the wholesaler basically provides information and the burden really lies with the manufacturers to make sure they are reimbursed accordingly. "Hey, I sold X bottles of this and Y bottles of that to a clinic for this price." The manufacturers really don't have a good way to validate that, so after a discussion with the wholesaler they probably just pay it.

With unique serialized numbers, you would be able to verify that products intended for clinics actually went to clinics. And you would know how many bottles they actually purchased.

What about diversion?

Once again, it has to do with different pricing schemes. The manufacturer would sell the hundred-dollar bottle for $100 in the US, but in the UK it might sell it for $30. This allows overseas distributors to order excess inventory and send whatever they don't use back to the US supply chain at say, $60. So instead of paying $97 for the product, a US wholesaler can pay this overseas distributor $60. Both parties stand to make a whole lot of margin on that sale. Now there are all sorts of loopholes for people to make money unethically.

So the wholesaler that gets it for $60 isn't talking. But they have to sell it to somebody else. And the pharmacy that buys it is going to run it through a reader, and alert the manufacturer.

Absolutely. So wholesalers, especially large wholesalers, will participate in authenticating these products along the supply chain. But some of the smaller wholesalers—or let's say the less ethical wholesalers—might not. But the end user, whether it's a retailer or a hospital, could send a signal back to the manufacturer. And they will say, "Whoa! How did this bottle make it back to the US?"

Any other benefits?

Returns processing. About two percent of pharmaceuticals are returned, generally. And people often don't know the price that they actually paid for the returned product. Let's say a pharmacy gets product directly from manufacturers and also from several wholesalers. They might have no idea who they need to send it back to.

The same with expirations. Once the RFID system provides some downstream visibility, everyone in the supply chain can do a better job of tracking the expiration dates of individual bottles. Let's say there's a bottle of medicine that's going to expire and a pharmacy wants to send it back. Well, did they buy it directly from the manufacturer? Or did they buy it from a wholesaler? If they send it all back to the manufacturer or all to the wholesaler, people would have to process returns on products that they never sold in the first place. RFID tags would end the confusion.

At the moment, distributors don't just make money selling the product downstream at a profit, they also sell data about their customers upstream to the manufacturer. Wouldn't RFID cut off this income stream if a manufacturer required wholesalers to open up their RFID records?

I don't think so. Wholesalers and retailers are customers of the manufacturers. So I think the business arrangement is more complicated than just asking them to open up the data stream for manufacturers. What I like to say is that RFID infrastructure will allow full visibility if the business arrangement calls for it. But my sense is that everyone may hold on to some piece of the data themselves and share other pieces of data. Just because the infrastructure is capable of doing it, I don't think that means that everyone's going to sign on and share all the data all the time.

But pharma tends to have a lot of patented products that retailers can't live without. Does the retailer have an argument against giving up the data?

I believe so. While I agree with you that manufacturers have a certain amount of leverage in the pharmaceutical industry, I think the retailer still has the human interface with the consumers. So I don't think the manufacturer can just mandate data sharing.

IBM's primary interest is to promote standards-based infrastructure and data sharing so that members in the supply chain are capable of sharing data. With RFID, they can actually have a good business discussion about how to do that.

At this early stage, I think people are going to keep their existing business relationships intact but just get more granular data in real time and see how that changes the manufacturer's forecasting and planning, or inventory management. Or maybe manufacturers really will need the wholesalers and retailers to charge them less for data.

But every time the RFID reader reads a tag, that information registers on the mother database, right?

Not necessarily.

No, why not?

It doesn't always have to be registered on the mother database. Generally speaking, the data within an enterprise are held by that enterprise. When the wholesaler chooses to share with the manufacturer, that data stream has to be turned on by the wholesaler. Then the manufacturer is allowed to query into a wholesaler's database and see the transactions.

It looks like RFID might be good for business. But FDA is still the driver. Are there signs that FDA is committed to this technology?

I think the fact that the FDA commissioned an internal study to test RFID impact on biologic product is one indication. The FDA wouldn't be putting in all of that effort if they didn't think RFID was going to be a key technology enabler in potentially reducing counterfeit drugs. They're using their own scientists, spending their time to develop the protocol, and they're selecting some commercially available products. They're testing it, and they're going to provide the results to the industry. Which means the FDA to some degree is putting their neck on the line. It looks like a lot of work if they weren't going to really push for adoption of RFID technology.

Paul Chang is associate partner at IBM Business Consulting Services, where he leads the initiative in radio-frequency-identification (RFID) technology for life-sciences industries. He began thinking about possible applications for RFID in pharma's supply chain in 2003, when he worked for Mead Westvaco Intelligent Systems. Before joining IBM, he worked briefly for Texas Instruments. IBM calls him an "informal advisor" to FDA.