How Pharmaceutical Supply Chain Benefits from Smart Contracts in 2020

Smart contracts help significantly reduce loses and cost of transportation for pharma companies, and some companies have already begun implementing them.

An illustration showing a ship, a truck, and a forklift in a line to a pharmacy building

We have already covered how blockchain helps prevent supply chain fraud, so in this article we focus on pharma supply chain in particular.

A report by the Health Research Funding organization found that in developing countries anywhere from 10 to 30% of all pharmaceuticals for sale are fake. Latin America, Africa and Asia are particularly hard hit by this illicit pharmaceutical trade.

Worldwide the counterfeit drug market has an estimated annual value in excess of $200 billion. If that illicit trade were a country it would have about the same GDP as Ecuador and Puerto Rico combined. A pharmaceutical supply chain which allows so much fraudulent activity cannot be deemed a fully secure one.

In developed countries the drug supply chain has its own set of problems. From inefficient and outdated business and financial practices to unverifiable cold chain tracking, an update is overdue. In both cases blockchain technology, specifically smart contract platforms, offer a solution to the pharma distribution problems plaguing supply chains the world over.

How Smart Contracts and Blockchain Tracking Can Combat Counterfeit Medicine

In an attempt to curb the flow of counterfeit drugs, the United States has instituted a tough new set of laws that will make it easier to track drugs through pharmaceutical supply chains. The Drug Supply Chain Security Act of 2013 mandates that by 2023, any drug sold within the United States must be able to be traced from the pharmacy all the way back to the plant where it was manufactured.

Companies are already demonstrating how smart contracts and immutable blockchain protocols can be used to track the pharma supply chain to meet these requirements. In fact the mood towards DLT (distributed ledger technology) is quite favorable when it comes to tackling counterfeit medicine. A Pistoia Alliance report noted that two-thirds of all pharmaceutical and life science leaders believe that blockchain will have the greatest effect in reducing the fraudulent medical trade.

Here’s how that works in practice:

  • When a company manufacturers a drug, it can assign it a National Drug Code (NDC) which can be used to track that drug through the supply chain. The NDC is immutably recorded to the blockchain where it cannot be altered or removed.
  • Throughout the supply chain shipping companies, storage depots and wholesalers can record the location of that drug in order to verify its provenance. In this way the drug can be tracked from the factory to the pharmacy.
  • When a patient picks up a drug from the pharmacy the sale can be recorded on the blockchain and the entire pharmaceuticals distribution is complete. A full record exists and in some cases a patient may even be able to view that record themselves, if they’d like to verify that the drug is authentic.

That’s how pharmaceutical supplies can be tracked through the supply chain using blockchain. The question we have to ask now is: what role do smart contracts play?

Smart Contract Automation

A smart contract can automate many aspects of the drug supply chain, especially for ordering. For instance, smart contracts can custody funds. Looking to the future it’s unclear what digital currency will become dominant. The winner could be Ethereum, Bitcoin, a Facebook like stablecoin or even a Central Bank Digital Currency (CBDC).

However, what’s clear is that in the next decade some form of digital currency is going to become the world’s preferred payment method. Whatever that currency is, smart contracts will be able to hold it.

This will lead to some new supply chain best practices:

  • Funds will be escrowed beforehand and released upon receipt. Currently manufacturers may have to wait a month or two to be paid after they’ve delivered a product. With blockchain a retailer will put the money into a smart contract up front and as soon as the shipping company lets the smart contract know that they’ve picked up the order the smart contract will automatically release the funds.
  • The same goes for the shipping company. As soon as pharmaceuticals wholesalers indicate that they’ve received the shipment the smart contract will release the shipping company’s payment. These instant payments will be hugely beneficial to companies, especially those operating on thin margins. Also, international remittance will be exponentially faster and cheaper, marking a big improvement over the current, outdated financial system.
  • Smart contract payments will also reduce administrative costs and improve efficiency. A McKinsey study found that supply chain expenses contribute 7 to 8% to the final cost of a pharmaceutical product. In that supply chain administrative expenses can be significant as admin staff must be employed to handle invoices and send payments. Smart contracts will automate much of this work which will lead to lower supply chain costs in the pharmaceutical industry, and almost every other industry as well.
  • Finally, smart contracts can be programmed to automatically reorder pharmaceuticals when supplies run low. We mentioned the National Drug Code code which is unique to each drug. Hospitals and pharmacies can use that code to digitize their entire inventories so that they always know what their stock levels are. Before a doctor or nurse administers a drug they can scan it so that the inventory program knows it’s being used. Once a limit is reached the smart contract can automatically order more pharmaceutical supplies. Again, what’s so unique about a smart contract is its ability to custody funds. So not only can the smart contract order more, it can also automatically make payments to the manufacturer or wholesaler, depending on the situation. That means lower costs for the hospital which can now employ fewer administrative personnel.

How Smart Contracts Can Improve Cold Chain Supply Chain

Certain pharmaceutical products must be refrigerated throughout the supply chain, from the factory to the pharmacy. This is known as cold chain. In the past refrigeration has been “ensured” by a driver manually checking a temperature gauge throughout the shipping process. Blockchain, combined with IoT, promises a better solution. Internet connected sensors can be placed inside of shipping containers or trucks transporting pharmaceuticals. These sensors can record the temperature on a regular basis (every 15 minutes for example) and send those temperature readings to a smart contract which can record them on the blockchain. If a temperature reading exceeds a certain threshold the smart contract can do several things. It can send out an alert to the shipping company to take action to get the temperature back down. If a high temperature is maintained long enough so that a batch of pharmaceuticals is ruined, the smart contract can withhold payment to the shipping company for that shipment.

Smart Contracts: Permissioned vs. Permissionless Chains

When any large company is considering what type of blockchain to work with their first thought might be a private, permissioned smart contract platform. A permissioned platform has the advantage of being private and fast, two obvious attractions. However, the problem with private smart contract platforms is that many of them aren’t much better than a database. If one company or a handful of companies can change data or contracts on the platform it defeats the point of using an immutable, tamper-proof technology. While public smart contract platforms have a lot of problems at the moment, these are quickly being fixed.

EY is famous for their considerable investment in an Ethereum protocol known as Nightfall which promises to bring private transactions to Ethereum. Also, with the upcoming release of Ethereum 2.0 the world’s largest smart contract platform will be able to handle several orders of magnitude more traffic. The biggest benefit of using a public smart contract platform: data and contracts are provably immutable. So long as the platform is running as it should individuals and companies can be assured that their data cannot be changed. That’s incredibly important especially for the drug supply chain where one of the largest reasons for using a smart contract platform is provenance drug tracking.

Smart Contracts to Revolutionize Pharma Supply Chains

Blockchain smart contract platforms are going to revolutionize the pharma supply chain. Manufacturer to pharmacy supply chain tracking is going to put a huge dent in the counterfeit medical trade. RFID chips and blockchain transaction fees are cheap meaning that these solutions will be affordable in the developing world where they’re needed the most.

For the developed world, supply chain inefficiencies can waste as much as 25 percent of a company's operating costs. Smart contracts are going to dramatically reduce the number of people needed to handle the administrative side of the drug supply chain. With their ability to custody, send and receive digital currencies, smart contracts will automate a lot of work that’s being done now by hand.

Further, digital currencies are designed to be sent anywhere in the world in just a few seconds. That marks a tremendous improvement over the existing financial system where remitting money between two countries can take as much as a week. Manufacturers and shipping companies will be paid faster while hospitals and patients will pay less for their medical supplies.

Smart contracts in the pharmaceutical supply chain are a win-win for everyone and we can expect their integration to begin in the next couple of years.

We help our clients to deliver high-quality distributed apps and web-apps with blockchain. If you have any questions about how blockchain might benefit your project, feel free to reach out, we offer a free consultation on the topic.