Thought Leader: Paul Chang, IBM - Pharmaceutical Executive


Thought Leader: Paul Chang, IBM
RFID technology promises to help FDA stem the tide of phony medicines. But that's just the beginning. It's also a great supply-chain management tool.

Pharmaceutical Executive

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.


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