Criminals are infiltrating the nation’s pharmaceutical supply chain with knockoffs and diverting legitimate drugs to the black market. Although this is nothing new, the problem has worsened in recent years. Drug counterfeiters have become more sophisticated, and in the battle to protect public health, the wrong side is winning.

FDA criminal investigations of drug counterfeiting have increased six fold since 2000, and the U.S. pharmaceutical industry loses approximately $2 billion to counterfeiting every year, according to Ross Enterprise Inc., a subsidiary of CDC Software.

New York-based Center for Medicine in the Public Interest estimates sales of counterfeit drugs to reach $75 billion worldwide in 2010, an increase of more than 90% from 2005. As much as

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10% of the current global medicine supply is counterfeit, according to the World Health Organization.

The long-term prognosis from the healthcare community is dire, and laws designed to put a tight lid on counterfeiting are getting tougher. The idea is to guard public safety, reduce crime and protect profits of legitimate pharmaceutical businesses.

Though the regulations are well intended and necessary, problems inevitably arise when the ‘who’ and ‘what’ are spelled out, while the ‘how’ is missing. That’s happening right now for companies that move pharmaceuticals in California.

State of the Industry
One of the most daunting regulatory challenges for any business involved in manufacturing or distributing pharmaceuticals is the requirement to track and trace individual drugs through pedigrees.

Drug pedigrees are not new, and they are not restricted to California. In 1988, the FDA enacted the Prescription Drug Marketing Act (PDMA), a key provision of which was the requirement for pedigrees— statements of origin that identify all prior sales of a specific drug and all transaction dates as well as the parties involved in each transaction. Under the PDMA, it’s the wholesaler’s responsibility to generate and maintain each drug pedigree and produce it, on demand, to an inspector or purchaser.

In recent years, though, regulations have become tougher, with state legislatures adding complexity to the national requirement. “More than 35 states have their own pedigree laws or are currently working on them,” says Brian Daleiden, director of product marketing at SupplyScape, a software supplier to pharmaceutical companies.

“Florida, California, Texas and Indiana are just a few examples,” adds David Crawford, project manager at supply chain consulting firm Tompkins Associates. “More states are expected to follow.”

California is taking the most aggressive approach by far with its new electronic pedigree regulation, set to take effect Jan. 1, 2009. The state will be the first in the nation to require electronic pedigrees initiated by manufacturers and verified and updated by every link in the pharmaceutical supply chain—from point of origin (manufacturer) to wholesale distributor to final dispenser (pharmacy). Because of fears of forgery, paper pedigrees will no longer be allowed in the Golden State.

Further complicating matters, the new regulation will require item-level serialization for visibility all the way down to a drug’s smallest saleable unit. This is an industry first.

Layers upon layers of inventory complexity will be added to California’s pharmaceutical supply chain. “Changes are expected to be substantive for all wholesalers, resellers and redistributors of pharmaceuticals,” says Crawford.

Specifically, three main requirements of the new regulation—itemlevel serialization, more detailed data collection and electronic information management—will test the limits of pharmaceutical handling.

Needles in Haystacks
Most drugs today are not serialized at the item, case or pallet level, according to SupplyScape, and the software firm estimates it will take a minimum of five to 10 years for all drugs to be serialized at the item level.

Serialization introduces much more complexity into the process of managing inventory. Manufacturers must assign a unique number or identification code to each packaging unit. A typical serialization system includes a code to identify manufacturer, product type and specific item unit, SupplyScape explains in a recent white paper addressing the new requirements.

Although California puts the burden of creating the pedigree on the manufacturer, the new regulation isn’t just a manufacturer issue. It will undoubtedly have a domino effect throughout the industry.

Material handling processes—from picking to packing to shipping—will have to be reconfigured. Specifically, most experts agree that more process steps will be required. Crawford estimates the California regulation will result in a 10% overall increase in labor throughout the industry.