Busting the Myths of Pharma RFID

Words like “counterfeiting” and “out of stock” are anathema to any industry, but for pharmaceuticals the implications are particularly serious. Radio frequency identification, or RFID, has the potential to nearly eradicate such issues. The idea of tagging and tracking the whereabouts of drugs has some intrigued, some alarmed—and most somewhat confused. What’s the real story?

Pharmaceutical companies are gearing up to take advantage of RFID (radio frequency identification) technology, which involves tagging cases, pallets or individual products with small electronic antennae. Each tag, which runs about US$0.30 for pharmaceutical products, effectively acts as a passport that tracks items at various checkpoints as they make their way through the supply chain, from manufacturer to end consumer. Questions of cost, implementation and maintenance may seem daunting, but the potential benefits—from pedigree to patient safety—offer more than enough incentive to face these issues head on.

Leading players including Pfizer, Glaxo-SmithKline and Purdue Pharma are beginning to tag their highest profile products and have plans to track the rest. The incentives for pharma companies to adopt RFID are compelling enough that they will likely overtake their consumer peers, even without hard deadlines. According to Meta Group, the pharma industry will outstrip the consumer packaged goods industry in RFID usage within the next 18 months. In Europe alone, RFID revenue is expected to jump from US$32.5 million in 2004 to US$408.5 million by 2007.

But as with any project this size—particularly one moving at light speed—there’s as much information as there are myths. Let’s start at the top:

Myth #1: RFID Belongs to the IT Department

Figure 1: RFID costs and benifits for large manufacturer and didtributor

True, RFID is a technology. And of the estimated US$1.8 billion the top 20 U.S. drug stores spent on IT last year, a significant portion went into RFID technology. But to treat it as anything other than a strategic business tool risks squandering its real potential. With RFID, the pharmaceutical industry can improve the integrity of its supply chain. And that could translate into big benefits, including reduced counterfeiting and improved patient safety, brand protection and operational efficiency (see sidebar: Tracking the Potential of RFID). Our analysis shows that a solid business case exists for RFID implementation for both manufacturers and distributors (see figure 1).

Despite the overarching benefits, many organizations assign their IT people to RFID initiatives. They concentrate on tactical and physical issues rather than a broader strategy. For example, focusing on whether or not the radio frequency will be absorbed by water should come long after executives have a broader strategy in hand.

Conversely, it’s also important to resist the temptation to jump in too quickly and learn as you go. For example, we talked with one executive who received an internal budget request for US$2 million to put RFID tags on boxes. Yet when he asked for specifics, he discovered that there was no business case or roadmap for implementation. He put the brakes on the initiative until the strategic homework was completed.

Ideally, pharma companies will focus on the business benefits they want to achieve and then determine how best to attain them. One way is to assign executives from all business units to the issue, including executives from operations (such as warehouse, distribution, manufacturing, store operations, supplier management and quality control) in addition to IT.

Myth #2: My Company’s Strategy and Execution Will Determine My Success

Figure 2: RFID implementation hurdles

Many companies are focusing on the efforts within their own four walls, but collaboration with trading partners drives the greatest savings when it comes to RFID.

Many of the biggest RFID hurdles must be resolved at the industry rather than the company level (see figure 2). For example, the industry must build consensus around technology and data standards. Common standards help companies clear RFID hurdles faster and assuage their reluctance to make necessary investments for fear of betting on the wrong horse. Getting buy-in will take time, but technology companies are working fast to fill in the gaps. SAP and Intel recently announced a joint initiative aimed at simplifying and standardizing RFID technology; Microsoft is also getting into the game with plans to launch its RFID Services Platform in 2006.

Pharma companies might learn a few lessons from the consumer products industry, where companies continue to struggle to achieve benefits as they react to retail RFID mandates. In the consumer goods industry, only select products going to select warehouses are being tagged. But achieving the full benefits of RFID depends on tagging across multiple dimensions: product hierarchies (such as pallets, cases and units), business units, and most important, across trading partners. Also, because the rules of the road on sharing RFID data on select products have not been clearly defined or accepted, manufacturers cannot see end-to-end demand for their products.

Can pharma avoid the consumer industry’s RFID pitfalls? Yes. But it will require resolving some difficult issues around information sharing. How much and how frequently should a company share data with its supply chain partners? Do agreements with certain customers prohibit distributors from sharing shipment information with their manufacturing partners? To answer these questions and others, pharma companies must work with their supply chain partners and industry associations; doing so will be critical to achieving the full benefits of RFID technology.

Myth #3: I Can Just Watch Wal-Mart and Learn

True, Wal-Mart wrote the first chapter of this story. The retail giant has worked extensively with its top suppliers to determine issues such as where to put tags and how to configure cases on a pallet. Tesco, Carrefour and Marks & Spencer have adopted similar RFID strategies. The decisions these retailers and their partners have made reflect their specific strategies, desired benefits and challenges.

But the storyline for pharmaceutical companies is fundamentally different. For one thing, pharmaceutical products have a higher average value than consumer products. The result is that tag costs will run about 7 percent of the average consumer goods product, but less than 1 percent of an average pharmaceutical product. 1 Then again, logistics costs as a percentage of revenue are also lower in the pharmaceutical industry, meaning there is less opportunity to improve supply chain efficiency.

Also, pharmaceutical manufacturers will enjoy significant revenue gains from RFID adoption, while distributors will see supply chain efficiencies mostly from fewer unsalables and out of stocks. Consumer products companies, in contrast, primarily use RFID to increase supply chain efficiencies and reduce retailer stock-outs.

The bottom line? Each organization needs to work within the context of its own industry and environment.

Myth #4: Once I Get RFID Up and Running, I Can Do Great Things with the Data Easily

While the allure of gathering more information is easy to understand, companies in every industry that implement RFID will face significant challenges in determining and separating out which data will actually be valuable to the business. Since RFID has yet to hit full-scale implementation, it’s difficult to predict how companies will clean up in the wake of the impending data blizzard.

Again, much of the answer lies with the right combination of smart business decisions and smart technology. “The implementation of RFID technology within current business processes will increase the data volume significantly,” explains Abhi Talwalker, vice present and general manager for Intel’s Digital Enterprise Group, in a recent press release. “To drive down costs and increase flexibility, intelligent systems need to provide a solid foundation for smart, accurate decisions.”

Myth #5: Government Agencies and Regulators Will Take a Hands-Off Approach

The battle against counterfeit drugs has been steadily heating up in the past few years, with the number of cases increasing tenfold since 2000. Over a three-month period in 2003, U.S. officials examined more than 1,100 pharmaceutical packages that entered the country by mail. Of these, nearly 90 percent included unapproved drugs.

Now, consider that in 2003, the U.S. Food and Drug Administration (FDA) estimates that four million pharmaceutical shipments entered the United States by mail. Such numbers mean officials have the resources only to inspect a small percentage, leaving the vast majority unchecked. So it’s not surprising that the FDA views RFID as one of its best strategic weapons and is looking to the private sector to move quickly.

The FDA wants the industry to adopt RFID by 2007. To help companies meet this goal, it published a compliance policy guide in late 2004 that advises companies on conducting RFID feasibility studies and pilot programs. It also launched an internal group to monitor the industry’s adoption of RFID and to identify and quickly address emerging regulatory issues.

Although the U.S. government stopped short of introducing legislation to force pharma companies to adopt RFID, several state governments, including Florida and California, have passed laws requiring drugs to be tracked throughout the supply chain. The story is similar in Europe, where member countries have nine RFID initiatives that will be implemented in the next few years.

In interviewing executives from leading pharma companies, we found that most consider a regulatory mandate possible—even likely—and expect regulatory agencies to be among the key driving forces of implementation.

Focus on the Real Benefits

Neither the strategy nor the implementation will be easy, but RFID has a great deal to offer the pharmaceutical industry. It’s a promising business tool for solving some of the industry’s most pressing problems. If pharma companies treat it as such, focusing on strategic issues and including business and community partners in their plans, they’ll be well on their way toward realizing what RFID really has to offer.

Sidebar: Tracking the Potential of RFID

In these early days of RFID adoption, the risk of losing sight of the true benefits remains high. But a quick snapshot of the key areas RFID will affect is a bold reminder of how big the potential really is:

Counterfeiting. Anyone who gets spam in their email account shouldn’t be surprised by the soaring popularity of counterfeit drugs such as OxyContin (a narcotic that produces a heroine-like effect) and Viagra (no explanation required). The World Health Organization (WHO) estimates that about 6 percent of the world’s drugs are counterfeit. But for the global pharmaceuticals industry, the price tag for fake prescription drugs runs as high as US$30 billion each year.

Patient safety. The other, much more nefarious, side of counterfeiting, is the risk to patient safety. Fake drugs may look and feel like the real thing, but they are anything but. In fact, a report by WHO indicated that about 93 percent of cases it tracked didn’t have the correct amount of active ingredients. And millions of counterfeit drugs make their way into consumers’ medicine cabinets each year. RFID tagging improves security and facilitates validation at every step along the supply chain, significantly increasing patient safety. Indeed, many pharma executives cite patient safety as a critical reason to proceed with RFID tagging regardless of the economic benefit.

Brand protection. Brand protection is paramount for drug manufacturers, and for good reason. A single product-tampering incident can wreak long-term havoc on a company’s reputation. Past cases of product tampering show that it can take months, if not years, for a compromised product to recover market share, requiring significant investments in marketing and public relations to do so. Because RFID tracks the pedigree of each product, it significantly reduces the chances of tampering, thereby adding a valuable protective layer.

Operational efficiency. Expired or damaged products that are either returned or expire in warehouses are the bane of pharmaceutical distributors. With RFID, distributors obtain more visibility into their warehouses—and potentially into their customers’ inventory management practices. And with improved visibility into distributors’ warehouses, manufacturers can balance their inventory across their distributors—an area of untapped opportunities. RFID can significantly reduce the industry’s losses due to stock-outs and expirations, saving in the neighborhood of US$2 billion worldwide, which far exceeds the costs.

¹ Over-the-counter products will not be tagged at the item level until RFID technology matures.