Radio tags not yet tuning out fake drugs
Pfizer, Glaxo only public drugmakers to use technology in multi-billion dollar battle against counterfeiters.
By Aaron Smith, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Imagine this: a worldwide network of radio-tagged pharmaceuticals, weeding out the multi-billion dollar counterfeit drug market with a universal security system.

You can keep on imagining, because we're not there yet.

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The FDA, some U.S. politicians and some drug companies have been pushing for a worldwide radio frequency identification (RFID) system to address the rapidly-expanding counterfeit drug industry. But a universal system won't become a reality unless it wins more mainstream support.

So far, only three drug companies - Pfizer (up $0.23 to $27.52, Charts), GlaxoSmithKline (down $0.04 to $54.33, Charts) and Purdue Pharma - have launched pilot RFID programs to protect products most susceptible to counterfeit and theft.

Kevin Starke, analyst for Weeden & Co., said newcomers are reluctant to invest in RFID because it's hard to tell whether it's cost-effective in protecting the products.

"The question is: is the security element worth the cost?" said Starke. "If the answer to that question were clear, you would already see RFID tagging rolling out much faster than it is."

Meanwhile, the counterfeit industry becomes more rampant. One in every 10 pharmaceutical drugs is a counterfeit, according to the World Health Organization, meaning that it is an illegal knock-off, with or without the active ingredients found in legitimate drugs.

In developing countries, one in four drugs are believed to be counterfeit, and in the worst-case nations half the drugs are fake.

Sad results

Some of the counterfeits are placebos masquerading as life-saving drugs, with dire consequences. As an example, 2,500 people died in Niger during a meningitis epidemic in 1995 after they were inoculated with a fake vaccine that they thought was real.

The problem isn't going away. The WHO projects that the illegal market will nearly double in size by 2010, to $75 billion.

To try and protect lives, money and their reputations, Pfizer, GlaxoSmithKline and Purdue Pharma have tagged shipments, pallets and bottles of drugs with RFID. The tagged products are tracked electronically.

Pfizer, the world's biggest drug company, has spent $5 million to RFID-tag Viagra, the treatment for sexual dysfunction in men that totaled $1.6 billion in 2005 sales. Purdue Pharma, the privately held maker of OxyContin, has RFID-tagged the painkiller, a narcotic that can cause physical dependency. Viagra and OxyContin are often abused for non-prescribed uses.

(A recent Google search on the words "buy cheap Viagra" resulted in more than 18 million hits. A similar search for OxyContin turned up 1.7 million hits, though Purdue said its product is not a target for counterfeiting.)

To prevent theft and illegal fakes, the British drugmaker GlaxoSmithKline (down $0.04 to $54.33, Charts) has RFID-tagged its HIV treatment Trizivir. HIV drugs are often sold at reduced prices to poverty-stricken populations in sub-Saharan Africa where the killer virus is most prevalent, which makes the drugs ripe subjects for theft and illegal reimportation to Europe at an inflated price.

The drug companies have enlisted the players in RFID to implement the technology for them, including IBM (up $0.39 to $84.58, Charts), Symbol Technologies (down $0.03 to $15.06, Charts), Alien Technology and Tagsys. Some of these companies manufacture the tags, while others, such as IBM, create and maintain the networks that keep them running.

The drugmakers launched their RFID pilots early in the year and their programs are now fully implemented. But the participants say it's too early to tell whether the programs have taken a bite out of the counterfeit market.

"We're in the process now of evaluating the first year of the program," said Pfizer spokesman Bryant Haskins. "It's too early to tell what effect it might have on counterfeiting."

"I know one of the concerns is that the technology is not prevalent throughout the drug system," said GlaxoSmithKline spokeswoman Mary Anne Rhyne. "As this becomes more pervasive, it will be easier to notice the impact."

Needed: a universal program

The RFID program is complex, requiring full implementation from the manufacturer to the distributor to the pharmacy. And in order to be truly effective it must become universal, like the Internet, according to those in the industry.

"The entire system is not in place yet to really make a dent in counterfeit medicine," said Rhyne of GlaxoSmithKline. "You'll need a mass of systems around the world. That's when everything will fit together. You've got bits and pieces right now and those seem to be working, but it needs to be bigger and it needs to tie together."

This is why Eli Lilly & Co. (up $0.57 to $57.63, Charts) is sitting on the sidelines, for now, even though a search for "buy cheap Cialis," the company's sexual dysfunction drug, brings up nearly one million hits on Google.

Lilly spokeswoman called the RFID technology "promising," but said, "We don't feel we can adequately rely on it to secure the drug market. Our position is that it's an interesting emerging technology and we will continue to assess it."

Despite the difficulties in implementing RFID to the drug industry, the new system is "too convoluted and difficult" for counterfeiters to slip through, said Sara Shah, analyst for ABI Research.

Shah said RFID serves as an effective "layer" to be combined with other forms of security: "I think it will have a significant impact on the industry and will be a step ahead of some of the other methods, but not the end-all, be-all."

The Food and Drug Administration is encouraging the use of RFID technology in the nation's drug supply. In March 2006, Reps. Gil Gutknecht, R-Minn., and Dan Burton, R-Ind., introduced a bill to mandate an RFID system for the drug industry. But support for these measures is slow to catch on.

IBM is betting that the rock-solid security offered by RFID technology will be incentive enough to bring the drug industry into the fold.

"I'm not sure that the pilots have been running long enough where there's concrete data, [but] they're going to have huge difficulty counterfeiting RFID products today," said Paul Chang of IBM, which sets up the software for the RFID system. "At the end of 2006, you're going to have many, many companies doing RFID pilots."

U.S. Customs relaxes enforcement on bringing drugs from Canada

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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.