As an undercover agent with the Drug Enforcement Administration and the Food and Drug Administration, Aaron Graham saw firsthand how counterfeit drugs can slip into the pharmaceutical supply chain. Graham, now VP and chief security officer for Purdue Pharma, once posed as the manager of an "institutional pharmacy" selling drugs at a discount to secondary wholesalers who were then supposed to sell them to nursing homes. Soon after he began, his phone started ringing. Dozens of smaller pharmaceutical wholesale companies were calling, desperate to buy his drugs. These secondary or "gray market" wholesalers scour the country and the world for low-price drugs they can sell back to major wholesalers for a profit. In addition to trawling for institutional pharmacies, some secondary wholesalers have been known to purchase counterfeit drugs from criminal organizations in places such as China, Thailand or Colombia.Graham, who was part of a two-year FDA sting operation known as "operation gray pill," helped expose a system in which large and small wholesalers were taking advantage of multitiered pricing in the industry. Prescription drugs are sold at discounts to subsidized groups such as nursing homes and also exported at lower prices. Graham and his colleagues found that these lower-priced drugs are sometimes smuggled back into the country and sold to large wholesalers for a profit. These multiple steps, in which a drug can bounce back and forth from distributor to distributor, create a supply chain that is complex, convoluted and, at times, vulnerable. The more frequently a drug changes hands, the greater the chance that counterfeit or diverted drugs can enter the legitimate supply chain.Such a porous supply chain poses hazards to patients\u2014thousands of people worldwide die every year from ingesting fake drugs\u2014and it costs the pharmaceutical industry an estimated $46 billion a year in lost profits. The World Health Organization (WHO) in a recent study said that counterfeit drugs represent more than 10 percent of global sales. And in 2004, the FDA reported that the number of its investigations of counterfeit drugs rose by 150 percent from the previous year as a growing number of criminal groups take advantage of high profits and penalties that are less severe than those for selling illegal narcotics such as heroin or cocaine."Prescription drugs pass through so many hands before they reach the pharmacy, there is no way to know where they all come from," says Graham, who came to Purdue in 2002. "Laws on the books today are not effective in keeping counterfeit drugs out of the supply chain."To fix the problem, pharmaceutical companies are under increasing pressure to plug holes in their supply chain, particularly in the distribution network that runs from manufacturer to customer. For instance, several states are now mandating that companies confirm the authenticity of their product by creating a "pedigree" that vouches for a medication\u2019s origin and who else has handled it. The FDA has recommended that pharmaceutical companies start using radio frequency identification technology (RFID) as a means of better tracking drugs. As a result, most pharmaceutical companies are experimenting with RFID, or at least using bar codes or other technologies such as Web portals that can help track and authenticate the drugs. Purdue, along with several pharmaceutical giants, including Pfizer and GlaxoSmithKline, has started tagging some of its most popular drugs with RFID chips as part of a pilot program designed to track drugs from the manufacturer to the consumer. None of the technologies or techniques now being tested is trouble free, and most demand a hefty investment in infrastructure and IT. Tagging drug bottles with RFID and collecting data on drug sales also raises privacy and security issues that have yet to be resolved. But those drug manufacturers not yet on the bandwagon can\u2019t wait for questions of standards or privacy regulations to be decided. With the help of their CIOs, who will design the IT infrastructure to support the new processes, they need to start pilot projects now to get ready for further mandates or risk getting left in the dust as the industry gears up to fight a dangerous global scourge. "Drug companies need to be seen doing everything they can to secure their supply chains," says Daniel W. Engels, director of the health-care research initiative at MIT. Now You See It, Now You Don\u2019t The pharmaceutical industry operates one of the world\u2019s most complex and opaque supply chains. The industry is heavily regulated, but the rules vary from country to country, as do the prices, generating a web of legitimate, quasi-legitimate and illegitimate trade. Although there are three main drug wholesalers in the United States\u2014Cardinal Health, McKesson and AmerisourceBergen, which collectively control 90 percent of the prescription drug business\u2014hundreds of smaller, secondary wholesalers also buy and sell excess inventory from the large wholesalers. A prescription drug commonly moves from manufacturer to several distributors and even "repackagers" before it lands at a pharmacy. Many of these small wholesalers are legitimate businesses that can help the supply chain run smoothly by efficiently finding buyers for prescription drugs. But they also add an extra layer that reduces visibility and creates opportunities for counterfeit drugs (including products with the wrong active ingredient or fake packaging) to enter the distribution network. Each year, thousands of people around the world die from taking counterfeit medication, much of which has been produced in squalid conditions. And developed countries are not immune. In 2003, 18 million tablets of the cholesterol-lowering drug Lipitor, the world\u2019s best-selling prescription drug in 2004, were recalled by Pfizer in the United States after fake pills were found in pharmacies. In 2004, fake Cialis, an erectile dysfunction drug, was found in the United Kingdom supply chain; and this year 120,000 packets of Lipitor were recalled in the United Kingdom after 73 counterfeit packets were found. To prevent such abuses, federal and state law enforcement are devoting more resources to investigating criminal networks and enforcing anticounterfeit laws. At the same time, the states of Florida and California have taken the lead in passing legislation that will push the industry to come up with a way to authenticate their products. Florida\u2019s law, effective in July of this year, requires drug wholesalers to provide a paper "pedigree," or record of where drugs originated from. California\u2019s law, set to take effect in January 2007, will require an electronic pedigree or serial number for all prescription drugs sold in the state. Initially, drug wholesalers will be responsible for creating the pedigree, whether it is paper or electronic, although manufacturers will need to comply in the future as well. Some are skeptical that the industry will be able to meet these mandates, given the current state of technology adoption. "We move so many products that it is a challenge to do what Florida is requiring," says Ron Bone, senior vice president for distribution support at McKesson. Bone, however, says his company already won\u2019t buy drugs without a pedigree when purchasing them from an "alternate source" or secondary wholesaler. Different Ways to Track and Trace Drug companies are working on an array of techniques to prevent counterfeit and mispriced drugs from slipping into the supply chain. Many are experimenting with holograms, color-shifting inks and watermarks that can help them authenticate the package and actual pills. Genzyme, which does the bulk of its business making specialty drugs to treat genetic diseases, is looking at using inks or dyes and is already using tamper-resistant packaging tape on some of its products. Genzyme is beginning to see some counterfeiting and price manipulation of its drugs to treat kidney disease and arthritis, says Jim Shuman, Genzyme\u2019s VP for materials management. For instance, wholesalers will sometimes buy drugs in one country where the government has negotiated a certain rate from pharmaceutical companies and then export the drugs to another country, where they can sell them at a higher price. "We now have products showing up in countries where they have never been sold," Shuman adds.To better track its drugs around the world, Genzyme is testing a Web-based system, working with United Parcel Service (UPS) in Europe, to follow products distributed from its facilities in the United Kingdom and Ireland. Those at Genzyme who order the drug can visit the website to track a product delivery and follow the process using a traffic light system. If they see a green code, they know the delivery is on schedule, while yellow indicates a delay and red signals a problem. Shuman says that Genzyme is considering expanding the Web-based system with UPS to include more geographic areas. Other pharmaceutical companies are working to create electronic pedigrees for their drugs through track and trace technologies such as bar coding or RFID. Bar-coding technology, which has matured over the past 20 years, is cheaper to implement than RFID, but it can be more expensive to maintain because it requires someone to read the package at each stage of the supply chain. Passive RFID tags, on the other hand, can be read automatically as unopened boxes pass by electronic readers in a warehouse. Paul Chang, associate partner at IBM Business Consulting Services, says that companies will be able to comply with the new state pedigree legislation using bar codes as well as RFID to authenticate their products. He predicts that these two technologies will coexist for years to come.Pfizer and Purdue are ahead of the pack with RFID tagging pilots, if only because these companies produce Viagra and Oxycontin respectively\u2014two drugs that have been more vulnerable to theft and counterfeit because of their popularity. These companies are trying out RFID because paper pedigrees are expensive to produce and can be forged and lost. "RFID is interesting because it\u2019s not just a bar code replacement," says MIT\u2019s Engels. "You can put sensors on it or log the product\u2019s temperature history and create a database on the products." Knowing the temperature is important because some drugs need a certain amount of refrigeration in order to remain active. (For more on the use of RFIDs in health care, read "Admitting RFID Into the Hospital" on Page 52.)The Oxycontin StoryEven before the FDA came out with its statement in favor of RFID, supply chain executives at Purdue Pharma were working to meet a 2004 mandate from Wal-Mart that all shipments of "Class 2" narcotics, including the highly addictive Oxycontin, be labeled with RFID tags. While Purdue executives were wrestling with the new technology, they saw that it could also help them in the battle against counterfeit drugs in the supply chain.Mike Celantano, Purdue\u2019s associate director of supply chain systems and RFID, says that when his group first started to investigate RFID tagging, the technology was immature and there were few examples to follow. "Wal-Mart specified the frequency and the type of tags it wanted, and it was up to us to find a solution," Celantano says. Purdue figured out a way to tag the product as it moved along a high-speed production line before it ended up in cases that each contain 48 bottles of Oxycontin. Purdue met Wal-Mart\u2019s mandate and at the same time was able to gain experience with data collection and RFID\u2019s track-and-trace capabilities. Celantano used SAP\u2019s Aii middleware software to collect the information from the RFID labels. Starting earlier this year, Purdue began testing an electronic drug pedigree using RFID tags to match each bottle of Oxycontin with a corresponding record that shows the drug\u2019s movement through the distribution chain. The idea, says Celantano, was to look at ways to pass along data from the manufacturer to the distributor and eventually to a hospital or pharmacy.Before shipping a case of Oxycontin to its distributor, H.D. Smith, Purdue scans the shipment and records data that includes a unique electronic product code as well as a batch or lot number and expiration date. So, when H.D. Smith receives a shipment of Oxycontin from Purdue, the distributor can authenticate it, certify the pedigree and make sure its serial number\u2014the electronic product code number\u2014for each bottle of medication matches the corresponding number on the bottle\u2019s RFID tag. Celantano says the pilot shows that it\u2019s possible to create an electronic pedigree using RFID. In the future, he says, the process could extend beyond the distributor down to the retailer. "The potential is tremendous from both an efficiency and a safety standpoint because you\u2019re introducing that ability to manage the product supply chain at a level of granularity that has never been seen before," Celantano says. When you can track and manage each case of pills, he says, it will be easier to match document cases as they flow through the supply chain. And distributors will no longer be able to disguise where the product comes from.The Problem with RFIDCelantano acknowledges that anyone trying out RFID in the pharmaceutical industry is facing some serious challenges. "RFID is one way to tighten the supply chain, but it\u2019s not a panacea," he says. First of all, compared with the consumer packaged-goods industry, which is using RFID to tag cases and pallets, pharmaceutical companies need to label each bottle to create a system that will allow for authentication. There are also questions about how radio frequency will affect biological products. According to McKesson\u2019s Bone, the industry still needs to be reassured that their liquid and biological medications won\u2019t be affected by RFID tags, although tests have shown that solid medications aren\u2019t damaged by the radio waves. The cost of building the infrastructure needed for RFID and the lack of agreed-upon industry standards are also holding back mass RFID adoption. But Graham and Celantano say they are encouraged by the results of their initial trials. "At this point, no one knows the durability of the tags," Graham says. But he says that once the tags have been applied to the bottles, the tags are tested and if found defective removed before issued to the packaging line. As a result, the failure rate is low; only seven out of 200,000 RFID tags have failed inside the plant. (Purdue pays Symbol Technologies between 30 cents and 35 cents a tag and each tag is applied to a bottle containing 100 tablets.) Graham says they could scale up at any time if more in the industry decided to invest in RFID infrastructure and technology. But if more distributors and retailers don\u2019t sign on, there will be very few distributors able to read the tags.Graham adds that electronic pedigree technologies like the one they are testing with H.D. Smith, Unisys and SupplyScape would "wipe out" a significant number of "gray market" wholesalers, thus tightening the supply chain. If manufacturers are able to track their drugs through the supply chain, then the smaller wholesalers will no longer be able to sell drugs they have purchased illegally.While Purdue and other large drug manufacturers are experimenting with RFID, other companies are waiting to see what standards will be developed and how feasible the technology is. (For more, read "A Question of Standards," at right.) "I believe that the pharmaceutical industry as a whole is waiting for proof that RFID can work," says Dennis Kim, senior manager of supply chain operations at Tap Pharmaceuticals. At Tap, Kim says supply chain and IT leaders are working to understand how the technology can be applied and are reviewing pilot opportunities so they will be ready if they need to be. "RFID is expensive and the technology is becoming more robust, but it\u2019s not quite there yet," Kim says. "Most people are saying they\u2019re not going to commercial deployment until they have to."Robert Cowie, CIO at biotech company Genzyme, says he believes RFID is a good idea for improving efficiency in the consumer product supply chain. However, he also does not think the technology is mature enough for his company to start using it. "The cost of the unit and its level of reliability doesn\u2019t make RFID economical for us right now," Cowie says. Forrester Research VP Laura Ramos agrees that most pharmaceutical companies should wait on RFID until the technology matures. Typical tag failure rates are not uncommon, and placing tags near certain metals and liquids can cause reader interference rates to climb higher, Ramos notes.For now, companies that are taking the lead with RFID are those that sell either high-profile or very expensive drugs. Whereas it may not be economically feasible to buy a 30-cent RFID tag for a bottle of Tylenol, it would be more appealing for a $50 or $100 prescription.The Big Brother IssuePrivacy concerns relating to RFID could also cloud the picture for the technology\u2019s easy adoption. Privacy groups such as the American Civil Liberties Union and Consumers Against Supermarket Privacy Invasion and Numbering, or CASPIAN, have raised concern over RFID use in the retail sector, fearing a loss of privacy if the technology is used to track what people buy and bring into their own homes. In the pharmaceutical industry so far, RFID tags are placed on the large bottles that pharmacies buy, but not on the bottles of pills that consumers take away from the pharmacies. Still, "privacy could be the killer issue that seriously limits the potential value of RFID in product tracking," says Forrester\u2019s Ramos.Examples from outside the United States underscore how collecting data from medication down to the vial could raise concerns from privacy advocates. In Italy, for example, a law requires that each vial of a prescription drug have a unique ID. The vials, marked with bar codes, are read at each stage of the supply chain until they reach the pharmacy or hospital. Italian law requires that the data captured go directly to a central government database. While such an intrusion of privacy by the government would probably not be permitted in the United States, pharmaceutical companies have already gained access to individual prescription information from some pharmacy chains, and RFID tags on individual medications could accelerate that trend. (Under pressure from a recent class-action lawsuit, CVS was forced to stop its practice of sharing patient prescription information with major pharmaceutical companies.)"Security and privacy will have to be addressed more fully than they have been, because when we create a network information system that spans the globe\u2014as the pharmaceutical supply chain does\u2014the data won\u2019t always be protected by VPNs or other secure networks," Engels says. Despite such issues, Purdue\u2019s Graham believes that tracking and tracing technology represents the best chance so far to solve the problems he helped expose back in 1995. "Operation gray pill" ultimately led to more than 100 convictions and $25 million in fines from drug wholesalers. An executive at the country\u2019s fourth-largest wholesaler at the time, Bindley Western, pled guilty to two federal felony and fraud charges after the sting operation revealed he had been directing people to buy from Graham and his colleagues so they could get a discount themselves. Ten years later, however, such fraudulent practices remain common. "The system hasn\u2019t changed, and the loopholes remain in place," Graham says. "That\u2019s why track-and-trace accountability is so important."