NEW YORK (CNNMoney.com) - Big Brother is watching your Viagra. And your OxyContin. And, within five years, maybe the rest of your medicine cabinet, too.

Pfizer (up $0.09 to $24.92, Research), producer of Viagra, and Purdue Pharma, the privately-held producer of OxyContin, have launched pilot programs tagging these drugs with Radio Frequency Identification, or RFID, technology. Other drug companies are expected to make the switch as well.

"All Viagra that we're producing right now is being tagged with RFID tags," said Pfizer spokeswoman Peggy Staver. "By the end of the first quarter [2006,] I expect all the untagged inventory will have worked its way through the system."

With RFID, drugs in the U.S. can be traced from the manufacturer to the supplier and even to the customer, with the intent of weeding out counterfeits and tracking stolen shipments. Also, RFID can help the government and drug makers locate caches of vaccines and anti-virals during pandemics, and recall faulty drugs.

Viagra, a treatment for erectile dysfunction, and OxyContin, a painkiller, were selected for the pilot programs because they are prime targets for substance abuse, counterfeiting and theft, according to the companies.

"It was an easy decision for us," said Staver of Pfizer. "I think its safe to say [Viagra] has been our most counterfeited item."

Microchips are installed in drug-bearing pallets so shipments can be traced across the country. In some cases, even the individual bottles are tagged. Bottle-tagging is more expensive, but it means that individual patients, or the thieves who stole their bottles, can be tracked.

"You know precisely where the unit is at all times and you exclude other products from entering that market unless they can prove their pedigree," said Aaron Graham, vice president of corporate security for Purdue Pharma, who referred to OxyContin as "a high-flyer outside of legitimate commerce."

Graham, a former undercover agent who investigated drug smuggling for the Drug Enforcement Administration and counterfeit pharmaceuticals for the FDA, said RFID replaces paper-based identification, which is easy to forge.

"I used to do it undercover for many years for the government, so I can tell you how simple it is," said Graham.

And this is just the beginning. IBM (down $0.15 to $80.76, Research), a big player in RFID technology, is converting another drug maker – which the tech giant would not identify - over to RFID and will unveil the program sometime in the next few months. Larry Blue, vice president and general manager of the RFID division for Symbol Technologies (down $0.05 to $12.30, Research), which produces the tags for OxyContin, said his company has been working with six or seven other drug makers for potential roll-over to RFID. Blue did not name the companies.

Also, the Food and Drug Administration is holding an open forum on Feb. 8 with drug makers and members of the public as a fact-gathering effort to try and convert the entire drug industry over to RFID.

But the process isn't exactly cheap. Pfizer has spent $5 million to convert Viagra over to RFID, which seems like a bargain compared to the drug's $1.6 billion total sales in 2005. But this is just for a pilot program, Pfizer points out.

"If you would try to implement RFID on every product everywhere you sold it, it could be very expensive," said Bryant Haskins of Pfizer.

Despite the cost, the Pharmaceutical Research and Manufacturers of America, the drug industry's trade group, supports the RFID program. "Our bottom line is patient safety, and efforts that make it safer for American patients is something we support," said Alan Goldhammer, associate vice president for regulatory affairs for PhRMA.

So what are the other motives for the drug makers in switching to RFID?

Big Pharma sees RFID as an investment, not an expense, in trying to capture billions of dollars in sales of counterfeit drugs, which can be bought easily and illegally online.

"In pharmaceuticals, the counterfeit program is described as a $30 billion issue," said Kevin Starke, an analyst for Weeden & Co. who covers RFID companies. "So the cost-benefit analysis in tagging shipments of Viagra is a lot more beneficial than tagging cans of Campbell's Soup."

Besides, RFID "doesn't like" metal cans and liquid (like soup,) which interferes with radio signals, added Starke. Of course, this could create a problem with metal-packaged drugs that come in a liquid form, he said.

There's no shortage of companies involved in the RFID business. Some of the larger players include IBM and Intel Corp. (up $0.33 to $21.54, Research), which focus on the connection between transmitters and receivers, and Symbol Technologies and privately-held Alien Technology, which produce the hardware.

There's nothing new about RFID, reportedly used in espionage since the 1940s, and it's already made its way into the retail industry to scrutinize the spending habits of consumers or manage inventory, depending on who you ask. In 2005, retail giant Wal-Mart started mandating RFID-tagging for its top 100 vendors. But drug makers have been a little slower in adopting the technology, which appears to be the impetus for the February fact-gathering meeting by the FDA, which has been trying since 2004 to motivate the industry for an RFID switch-over.

"The FDA meeting is really to have the industry discuss the potential hurdles for RFID," said Paul Chang, associate partner with IBM business consulting services. "The FDA is really interested in helping the industry overcome the hurdles, but I think they're a bit dissatisfied with the rate of adoption at the moment."

Chang said it could take three to five years for the drug industry to fully adopt RFID.

To read about RFID in the retail industry, click here.