How blockchain could solve pharma's counterfeit drug problem

How blockchain could solve pharma’s counterfeit drug problem

The pharmaceutical drug industry historically has been siloed, heavily regulated, and resistant to change. But as it comes under enormous pressure to monitor supply chains for accuracy and safety, some startups are suggesting blockchain technology as a possible solution.

By creating an unalterable record of ownership and location, blockchain technology could ease regulatory compliance and address the pressing problem of counterfeit drugs. If it becomes widely adopted, the technology could be applied to other dimensions of the industry, perhaps speeding the development of new medications or simplifying the notoriously complex payment process.

Combating counterfeit drugs

Counterfeit drugs are a major problem worldwide, especially in developing nations, where the World Health Organization estimates that one in 10 medical products — including pills, vaccines, and diagnostic kits — is substandard or fake. As the drug distribution chain has increased in scope and complexity, the problem has worsened.

Counterfeit pharmaceuticals are now the world’s largest fraud market, according to Strategy&, PwC’s strategy consulting business. In addition to being dangerous for consumers, they cost U.S. pharmaceutical manufacturers more than $163 billion a year in lost sales.

To combat the problem, governments have passed stringent laws, such as the U.S. Drug Supply Chain Security Act. The law is being phased in, and by 2023 it will require pharma companies to track products with serial numbers from the raw materials stage to the pharmacy, and to do so in an interoperable, electronic way.

Manufacturers have worried for years about how they will comply. “Essentially, the FDA said, ‘You have to have an interoperable system by 2023. Good luck — figure it out!'” said Darryl Glover, chief clinical officer of pharma blockchain startup iSolve.

Blockchain technology could provide an answer. Drugs are placed in bottles labeled with serial numbers, then the bottles are grouped together and packaged. Packages have labels that are scanned at every point along its journey from factory to pharmacy. It is these labels that would connect to a blockchain system.

At each juncture, pickup and drop-off activity would be time-stamped and recorded into the blockchain ledger. Everyone along the chain could verify that the drugs they are receiving are arriving from the correct source, but no one could alter information in the chain, including their own.

Because the system is decentralized and provides real-time updates to all parties along the chain, it would be nearly impossible to hack, Glover said. iSolve is working with major drug companies to develop blockchain solutions for anti-counterfeiting measures, but nondisclosure agreements prevent Glover from naming the companies.

Blockchain technology could also help wholesalers manage drug returns. Three to five percent of all drugs are returned from pharmacies to wholesalers, said Susanne Somerville, who manages pharmacy solutions for blockchain startup Chronicled.

They are sent back due to mistakes in hospital orders or an oversupply of inventory. To resell them, each serial number must be verified with the manufacturer, a process so time-consuming that many returned to the manufacturer are destroyed. Blockchain technology could verify the serial numbers quickly and enable the drugs to go back on the market.

Recalls of defective drugs would also be simplified. Manufacturers could see via the blockchain all the pharmacies that received an affected drug. Pharmacies could see which patients received it and contact them directly. Both Chronicled and iSolve are working with pharma companies to use blockchain for recalls and returns.

Challenges for blockchain startups

Chronicled formed a working group last year to develop its blockchain technology for verifying drugs, and participants include pharma giants Pfizer, Abbvie, and Genentech. The company has learned that despite blockchain’s advantages, many pharma companies have been reluctant to use it because they don’t want competitors on the same network to see their transaction information, Somerville said.

To address drug companies’ concerns, Chronicled created a “zero knowledge proof” system, which allows companies to create their own strings of hashed letters and numbers representing product IDs and serial numbers.

Essentially an additional layer of encryption, hashes preserve an unalterable record of activity while hiding business secrets. Companies can share their hashes with regulatory agencies to verify compliance.

iSolve’s system also allows blockchain participants to see some types of information but not others. For example, a pharmacy wouldn’t see the price a wholesaler paid for a shipment of drugs, Glover said.

Another potential problem with blockchain technology is the transaction speed. One of the disadvantages of decentralized ledgers is that transaction speeds can slow dramatically as networks scale. Some cryptocurrency networks have warned banks that their systems may be too slow to be suitable.

The global pharma industry, worth more than $1 trillion dollars, is likely to pose similar problems. But by tweaking algorithms specifically tailored to the industry, it may be possible to lower transaction speed. Chronicled is working on scaling its system to handle 2,000 transactions a second, Somerville said.

Beyond the supply chain

Transforming the supply chain could be just the beginning of blockchain’s utility in the pharma industry.

The current payment system is complex, involving rebates and hidden information among participants, which include retail pharmacies, pharmacy benefit managers, distributors, and insurance companies. Using blockchain could provide transparency throughout this network, likely lowering costs by eliminating some of the intermediaries.

Leveraging this technology could also help pharma companies and universities manage intellectual property by providing a permanent, unalterable record in cases of dispute, Glover said. iSolve is developing a system to connect universities that are developing drugs with businesses interested in selling them, providing clear documentation of exactly what information was transmitted and when.

Time will tell whether blockchain technology can develop fast enough for pharma companies to meet looming regulatory deadlines. If it does, they are likely to become more comfortable with it and explore other applications.

“It’s like the internet when it first came out,” Somerville said. “We’re only beginning to imagine what could be possible.”

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