Pharma: The Bigger RFID Story

The implementation and the strategy are not easy but RFID can offer a lot to the pharmaceutical industry including solutions for some of its most difficult problems

Most of the press for RFID implementation and rollouts went to the consumer packaged goods industry (Thanks to the big daddy, Wal*Mart!) But the pharmaceutical industry worldwide is not very far behind in gearing up to take advantage of this technology. According to the Meta Group, the pharma industry will outstrip the consumer packaged goods (CPG) industry in RFID implementation by the end of 2006. In Europe alone the RFID revenues from the pharma industry will cross over $400 million by 2007 as compared to a measly $33 million in 2004.

According to another study by research firm Frost & Sullivan, RFID's application in the pharmaceutical and healthcare verticals globally will grow to about $2.3 billion in 2011, clocking a healthy CAGR of 30%. This includes money spent on hardware and software, professional services, integration, and applications. The report divides the market into three segments: medical equipment tracking, patient tracking, and pharmaceutical tracking. The latter, says the report, will constitute the biggest chunk of the overall market.

It’s Not Wait and Watch
Wal*Mart created a robust business case for RFID implementation and in effect wrote another chapter in technology adoption. And this is not the first instance that Wal*Mart has backed a technology successfully. Bar codes are just one case in point. It was in 1973 that the bar code standards were approved. And just about 15,000 suppliers were using bar codes on their products by 1984. And it was in 1984 that Wal*Mart issued a similar edict and within a short span of three years, 75,000 suppliers started to use bar codes. And therefore it is with this lineage in mind that a lot of pharma companies are waiting and watching. They are expecting to replicate the Wal*Mart success. But the CPG story is strikingly different from the pharma story.

Different Strokes
The average value of a pharmaceutical product is far higher than packed consumer goods. Thus the math becomes extremely simple. So the tag costs become as low as 1% in the pharma case on an average as opposed to 7-8% for consumer goods. Extending the calculation, it is not incorrect to say that the logistics spend as a percentage of revenue is also lower in the pharma industry. Therefore the opportunity to drive efficiencies and associated savings from improved logistics is lower and far and in between.

Another driver far more important to the pharma industry is the expiry date issue. RFID will help create a dual edged sword to fight this bane of the pharma industry. While on one side it will provide ease of manageability at the distributors’ warehouses and on the other it will provide a great deal of insight in to the inventory management practices of the distributors. This will help the industry manage stock outs of course, and also losses incurred due to expired products. The loss from both these factors to the industry globally is in the region of $2 billion.

The Biggest Bane
The World Health Organization estimates that about 6% of the world’s drugs are counterfeit. The loss incurred by the industry globally on this account annually? $30 billion! And an average email user everyday sees this in the inbox. All of us are inundated with spam peddling counterfeit formulations ranging from God knows what to Viagra. This problem, which every pharma executive today is fighting against, hurts two ways. It puts patient safety at risk and also can wreck havoc with the company’s reputation and brand image at large. And lost consumer confidence in the drug only leads to millions of dollars in marketing and PR spend and months, sometimes years, to regain the same.

RFID can here be a good friend of the industry. While it is true that putting a tag on the product will not guarantee that the consumers get the genuine product. More so since consumers cannot read the tag, there is no way they can find out the genuineness of the product. How then does RFID come to the rescue? The solution is simple. RFID will create a trail as the product leaves the point of manufacture and goes right up to the final consumer. It can help validation at any point in this trail at a very low cost with tagging at the pallet or the case level. This will vastly improve the bulk validation process that happens along this chain now. For this process in particular, RFID capability as a read-write solution versus a read only for bar code provides a huge advantage. In effect it means that the point where the counterfeit is injected into the distribution channel can be pointed out with a fair amount of ease. So RFID is not the solution but the enabler thereof.

It is prudent for the pharma CIO to build a contextual case for RFID deployment as the drivers are not the same as those that pushed Wal*Mart to back the technology. After all the pharma industry has its own standards for the bar code too, the pharmacode! And it was therefore not without reason that the US FDA wants the industry to adopt RFID by 2007. To help companies meet this deadline, it even published a compliance policy guide in late 2004.

Many a slip
There are many a slip betwixt the cup and the slip. These proverbial slips are more technical and business hurdles than economic. The marketplace for RFID technologies is still rather noisy and immature. While the hardware market is fast approaching stability, there are a host of issues with middleware that integrate RFID with legacy systems, which both mid-sized and large vendors are resolving. Also many ERP databases are not equipped to handle the granular data that each article tagging will generate. Many of the technical hurdles have to be addressed at the industry level also. For instance the industry must come to a consensus on electronic product code (EPC), the standard that RFID uses. Issues regarding sharing of information also have to be addressed. Its not before long that the pressures to implement RFID, both from regulators and customers, will mount and the industry must work together and with their suppliers to reap full benefits of the technology.

This is the second in my series on RFID in Dataquest.