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How the pharmaceutical industry can turn to blockchain on a dime

Posted: 25 October 2018 7:06 pm
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The counterfeit pharmaceutical crisis is decades in the making and coming to a critical juncture.

Blockchain might be a solution in search of problems, but it's definitely finding them.

These days, substandard or fake pharmaceuticals are estimated to kill up to a million people per year, and the fake drug market has expanded to about $200 billion per year.

It's an extremely sizable portion of the $1.3 trillion global pharmaceutical market, and unless something is done, it's only going to get worse.



From bad to worse

"It's quite a sizable problem," says UK-based FarmaTrust CEO Raja Sharif.

Sharif, originally a lawyer by trade, was a relatively early blockchain user. He was initially drawn to blockchain – Ethereum in particular – by smart contracts and how they would disrupt the legal sector and ended up swimming through the depths of the subject in search of problems to solve.

"I was quite interested in how this would work, I even invested in the DAO project which was ultimately a failure of course," he said. "But it did give me some experience."

He found a problem worth solving around the same time.

"There was a personal situation where a relative of mine was actually affected by fake cancer drugs," he explained. "A few months later that's when I thought this seems to be a solution which would work quite well to eliminate counterfeit drugs."

So started a journey into the terrifyingly wide world of counterfeit pharmaceuticals, starting with the realisation that nowhere is safe.

"This issue is not just limited to Asia and Africa," Sharif points out. "Actually there have been significant arrests both here in the UK and places like Canada and the US, which you can see on a daily basis on a Twitter feed for FarmaTrust, for an example of how global in nature this issue is."

Shipments of fake drugs are regularly picked up in every country in the world, and they've even infiltrated legitimate supply chains to end up on legitimate pharmaceutical shelves by the millions. And beyond the pointy end of the issue of drugs that are dangerous to ingest, you have long-term consequences like substandard antibiotics contributing to the rise of drug-resistant superbugs.

Substandard and counterfeit pharmaceuticals are a problem that affects everyone. Nowhere in the world is safe, and no amount of money can perfectly inoculate one against it.

And it's much worse beyond Western markets. The WHO now estimates that 70% of pharmaceuticals sold in developing countries are fake.

Behind the problem

A good first place to start finding a solution, as Sharif aims to, is by exploring the factors which are causing the problem.

The Internet

The relatively recent expansion of the Internet and social media has created buzzing marketplaces for "legitimate" pharmaceuticals – most of which aren't.

Counterfeit drugs can take many forms, Sharif explains, so whether a certain pill is actually useful, just ineffective or outright deadly is largely a crapshoot. Some might be once-real drugs watered down with ineffective dust, others might be concocted from engine oil or random scraps, some might be expired drugs that were slated for destruction but pulled away and sold under the table instead, and anything else.

"The European Association for Access to Safe Medicine estimates that 60% of drugs sold online are actually counterfeit," Sharif says." It's so easy to set up a website and then start shopping medicines around the world."

The online drug market is huge and has very little oversight. To use an example notable mostly for its recency rather than its uniqueness, last month Interpol seized about 10 million doses of illegal medicines, and in the process shut down about 5,000 websites, social media pages, ecommerce listings and other online ads that were selling them.

It's business as usual. The websites, ads and listings might get scrubbed from the Internet, but they'll always pop up again. In case you were wondering, the seized merchandise in that event was mostly being sold as anabolic steroids, sedatives, analgesics and erectile dysfunction drugs.

The economics and risk/reward ratio

The other reason fake drugs are making their way all around the world, in economies of all kinds, is because the economics of selling fake drugs are just plain solid, and it presents a solid risk/reward structure for drug counterfeiters, especially relative to the creation and selling of illicit recreational drugs.

"The profit margins are huge," Sharif explains. "It costs around 10% to make these counterfeit drugs. A Viagra pill can cost 10 cents to make, but you can sell it for 8 to 15 dollars on the black market.

"Similarly an ecstasy pill can also be made around the same profit margins... The profit margins on legal pharmaceutical drugs are actually quite a bit higher, and if you're caught with a packet of legal pharmaceutical drugs the penalties are often much lower."

Getting in front of the problem

How do you conquer the fake drugs problem? Even in the other "war on drugs", drugs are winning, and the counterfeit pharmaceutical business is like... well... drugs on steroids.

The key difference is that there's a legal, highly regulated market for legitimate pharmaceuticals, unlike other drugs. So if you can track and control the legitimate supply chain, you can say anything which falls outside of it is illegal, while still hopefully satisfying existing demand to the extent that people will refrain from taking the risk of purchasing outside legal and verified avenues.

And so, as Sharif realised, the bulk of the solution would be found in tight supply chain management. This is one of those areas where blockchain really excels. The pharmaceutical supply chain is a little different to most though.

Crunch time

It's worth emphasising that this is a pivotal time in the history of counterfeit drugs. The problem has been kicked into overdrive, in a way the world has never seen before, over the last 10 or 15 years.

For consideration:

  • In 2003, the WHO estimated total earnings from substandard or pharmaceutical drugs were estimated to be some $32 billion. It's now in the hundreds of billions.
  • The rise of less-controlled manufacturing centres around the world, especially in India and China, has produced difficulties overseeing drug production and enforcing quality standards. From 2002 to 2010, drug imports to the United States more than doubled. By 2012, about 80% of active ingredients for drugs consumed in the USA were made overseas
  • Combined factors in the USA over the last couple of decades, such as over-prescription; heavy drug advertising; the lack of a national health insurance system; and a lot of aging, often financially struggling, people, is thought to have contributed to a large surge of counterfeit drugs.
  • Throughout it all, the rise of the Internet and the globalisation of markets have created an easy way for people to sell fake drugs with minimal risk.

These actions have had reactions in the form of relatively sudden regulatory changes. The usual lag for assembling and vetting new regulations and allowing reasonable lead-in periods for adoption mean they're in the middle of arriving right now.

In more dramatic terms, pharmaceutical and pharmaceutical-supply-chain-related industries are right now being hit with the pent-up force of rule changes years in the making, which were specifically created in response to a public health crisis of the kind the world has never seen before.

The regulatory foundation

"There are new rules in the USA and EU. They're called FMD (Falsified Medicine Directives) in the EU. In the US, they're called DSCSA (Drug Supply Chain Security Act). Essentially what pharmaceutical companies are obliged to do is ensure they know where their pharmaceutical drugs are at any given moment," Sharif explains.

It's an ongoing process, and it's easier said than done. Here's what the timeline of DSCSA looks like:

  • November 2013 - Signed into existence.
  • January 2015 - First major deadline, requiring lot numbers on packaging of all prescription drugs and supply chain partners to exchange detailed transaction documentation at each transfer of liability
  • November 2017 - Intended date for enforcement of serialisation on certain pharmaceuticals and more. Enforcement of certain serialisation requirements was delayed a year due to a lack of suitably qualified vendors and the sheer number of companies that weren't ready for it.
  • November 2018 - You are here. The industry will take another crack at those 2017 regulations.
  • November 2019 - Authentication and verification requirements for pharmaceutical wholesalers
  • November 2020 - Authentication and verification requirements for dispensers
  • November 2023 - Complete traceability of the entire pharmaceutical supply chain

These regulations go beyond the United States. Counterfeit pharmaceuticals are a global problem, and with many developing markets being in much worse shape, there's even more of an impetus to find a solution. But the same obstacles exist, and the entire world is finding the DSCSA time line a little aggressive. China, Egypt, India and many other countries have delayed adoption deadlines to varying degrees.

At this very moment, a trillion dollar global industry is shifting its bulk towards finding a way of thoroughly and effectively tracking goods end to end across an extraordinarily complex supply chain, and it's struggling.

The right place at the perfect time

FarmaTrust aims to be the end-to-end solution for all of it.

"As soon as legitimate drugs are manufactured and the unique label is attached, what we do is track them all the way from the manufacturer to point of consumption, so every other data point within that supply chain is captured. What this essentially does is seal the pharmaceutical supply chain from counterfeit drugs."

And using a public blockchain solution, Sharif says, "means records are immutable and corruptible, so you can't have that situation like in China."

The situation in China he's referring to is where manufacturers and even government health officials have allegedly been complicit in the falsification of medication data.

"Our solution is quite unique in the blockchain world in that it works in both emerging markets and developed markets such as the US. We have a contract with the Mongolian government, for example, where we've built a mobile app where labels can be scanned."

Significantly, FarmaTrust also entered into a strategic partnership with Systech in September 2018.

If you're not up on the industry, Systech has a 32-year history behind it, pioneered pharmaceutical serialisation and counts some of the world's largest pharmaceutical companies among its users.

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"Blockchain is quite a new concept, and the pharmaceutical industry is quite a conservative industry generally," Sharif points out. "Systech has been around 30 years, so they have some longevity in the pharmaceutical industry."

That longevity and trust is key to bringing something as potentially different as a public blockchain solution to established supply chains. And FarmaTrust is a perfect partner for Systech as well.

"They're a perfect partner for us because they don't have a blockchain solution," Sharif says. "So we installed ours into their backend, so Systech clients can plug directly into our blockchain solution and start using it seamlessly. If they want to use it, they can switch over within 24 hours as long as they have the Systech systems within already."

FarmaTrust has to use a properly decentralised blockchain though. The stakes are high, there's a ridiculous amount of money involved and there's an unfortunate pattern of corruption in many of the markets the solution will be deployed in.

Sharif is cognisant of this, and aware that partial centralisation won't do. This is exactly when you really need the immutability and decentralisation of blockchain to get all the way down to zero points of failure. This isn't an area where people might try to tamper with data – it's a space where people will be attempting to tamper with data to the fullest extent possible.

Looking forward, Sharif also notes the importance of immutable records for when AI and automation becomes more widely used, and an immutable tamper-proof record of the robots' behaviour is then needed.

"Significantly, as AI and automation becomes increasingly accepted within the industry, things can still go wrong. There are plenty of examples of how AI programs don't perform the way the programmers expected. And the blockchain becomes even more important within that situation because we don't want the records to be changed in any way."

But given the relatively primitive state of most public blockchain platforms so far, there's not yet a perfect solution.

Blockchain agnosticism

"We currently are using the Ethereum blockchain for transactions, but our policy is actually to be blockchain neutral," he says. "So we believe that in coming years, because of the number of platforms that are being built around there – a little bit like the Internet search engine issues of the late 90s and early 2000s – we believe that the blockchain solutions will evolve and better ones will come out."

The product itself is ready and working though, Sharif says, running main transactions on Ethereum and using side chains where needed. But where needed, it can be picked up and put on a different platform. Similarly, it's designed to be sensor agnostic, working with RFID tags, newer chips and so on as needed.

"Everyone knows about the issues around Ethereum when it comes to scalability and transaction speeds," Sharif observes. "I think that will ultimately define which blockchains will succeed. Do they have smart contract ability? What are their transaction speeds?

"So we maintain a blockchain solution agnostic approach. Over the coming years I think we'll see which blockchain platforms will become the most efficient in terms of transaction speeds. And indeed, what our customer feels is most appropriate for them.

"We have a contract with a German company," he notes. "We're going through a feasibility study with them. What we seem to have noticed from even six months ago, companies have really opened up to looking at the benefits of blockchain. We're quite lucky in that we already have a working system so we can show them how it works.

"And essentially we can even install it depending on how big their supply chain process is, within a month, frankly, because we have the APIs ready and we have the mobile phone apps ready."

With all the ducks lined up, Sharif sees a very quick time line for substantial uptake of FarmaTrust.

"I expect not even looking at it within a 2-year timeframe – I expect within the next 12 months we shall see significant uptake," he said.

The deluxe service

FarmaTrust can go well beyond supply chain tracking. Its customers won't just be companies looking to tick a regulatory box, but potentially anyone who can benefit from knowing more about pharmaceutical movements, improved pharmaceutical supply chain efficiencies and more.

"Our customers tend to be ministries of health, regulators, pharmaceutical companies themselves, law enforcement..." Sharif says. "What we do is we take the data we collect and we can do various visualisations for different customers.

"For example, in the USA $3 billion every year is wasted from drugs just sitting on shelves and becoming expired. What our system can do is put up a system of alerts before drugs expire to be moved to somewhere else where they're needed. We can also avoid returns frauds. The pharmaceutical industry generally has to accept drugs [back] that are not sold within the time limit. Criminal gangs essentially try to return drugs that were never sold in the first place. Sometimes this can be five years later."

And for the end user, there's a free app to check the provenance of the drugs in front of you, so you know exactly where they came from and how they came to be in front of you.

"We think in the next five years the pharmaceutical supply chain is going to fundamentally change," Sharif said.

At the same time, off the supply chain and in the labs, expiring patents, rising R&D costs and endless cost pressure is causing headaches for pharmaceutical companies too. If using a blockchain solution can save lives, lock illegal competitors out of the market, reduce wastage, enable easier regulatory compliance and generally be excellent for the bottom line, then that's where interest will go.

"People have looked at whether cryptocurrencies have been in a bubble, or not in a bubble. I think people have to remember that companies like Google came out of the dotcom bust," Sharif says. "Quality will always be quality, regardless of booms and busts.

"I think FarmaTrust is one of the companies that haven't come to early or too late. The stars were kind of aligned to help us get acceptance."

FarmaTrust aims to solve a problem decades in the making, and certainly seems to have found the right technology in the right place at the right time.


Disclosure: At the time of writing, the author holds ETH, IOTA, ICX, VET, XLM, BTC and ADA.

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