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Smart contracts as a tool for increasing efficiency in the pharmaceutical supply chain

The pharmaceutical industry is one of the key sectors of the economy. It is estimated that in 2022, its global value exceeded 1.3 trillion dollars. In Poland, the pharmaceutical market is worth approximately 37 billion zloty.

The efficient operation of supply chains is a crucial element in the pharmaceutical sector. These chains encompass various components: from sourcing raw materials, through production, storage, distribution, to the delivery of medicines to pharmacies and hospitals. A failure at any stage can have serious consequences for patients.

Discover how blockchain technology can improve supply chains in the pharmaceutical industry.

What are smart contracts and how do they work?

Imagine blockchain as a virtual ledger or accounting book, in which the details of all transactions between entities - such as a company or a customer - are recorded. Importantly, it is impossible to change or delete records in this ledger without the knowledge and consent of both parties. Any change is immediately detected, making the records transparent and indisputable.

This means that there is no possibility to reverse a transaction or change its content or parameters. Once recorded, the information remains unchangeable and accessible to all authorized persons.

Meanwhile, smart contracts are scripts operating on blockchain technology that automatically execute the terms of a contract encoded in them.

Imagine you are the owner of a fruit store and want to add apples to your offer. The customer, on the other hand, wants to be sure that the apples are fresh, organic, and come from natural farms. What would this whole process look like if smart contracts were used?

  1. When the orchardist harvests the apples, information about the date and place of harvest is recorded in the blockchain. This way, you and your customers know where the fruits come from and when they were picked.
  2. The transporter, who takes the apples to the store, scans a code and information about the transport appears in the blockchain. Every stage of the journey is recorded, so you know how long the transport took and what conditions prevailed during it.
  3. When the apples arrive at the store, the seller scans them again, adding information about the receipt of goods to the blockchain. This provides a complete history of the apples - from picking to reaching the store shelf.

Smart contracts automatically execute specified actions when predetermined conditions are met. For example, if apples do not reach the store within a specified time, the blockchain will execute a refund to the store.

Compared to traditional contracts, smart contracts are characterized by:

  • Speed - transactions are executed automatically, without delays associated with the process of accepting terms or human verification of data;
  • Security - thanks to cryptographic confirmation of transactions in the blockchain, third-party interference becomes virtually impossible;
  • Transparency - each party has insight into the contract code and can verify its operation;
  • Lower costs - the transaction does not require any intermediaries, thereby saving on commissions and additional fees.

Smart contracts can have a wide range of applications in the pharmaceutical industry: from orders and logistics to automatic payments upon the fulfilment of contract conditions.

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Challenges in pharmaceutical supply chains

Pharmaceutical supply chains are highly complex. Their success is crucial for people's health and lives, hence they must be safe and reliable. However, the sector faces numerous problems.

One of the main threats is the counterfeiting of drugs. According to estimates by the World Health Organization, up to a million people die each year from taking counterfeit drugs. The lack of transparency and the inability to fully verify the origin of medications facilitate this type of criminal activity.

Another issue is quality management and compliance with legal standards. With complicated supply chains involving multiple entities, there is a risk associated with the interruption of continuity in appropriate storage conditions.

Logistical challenges are also significant, such as global shortages of key substances or supply disruptions related to transportation problems.

Cybersecurity is another concern - hacker attacks or breaches of confidentiality can disrupt the operation of IT systems that support the supply chain.

All this demonstrates how complex the pharmaceutical supply chains are and the challenges they face. Modern technologies, such as smart contracts, can help in addressing these challenges.

Application of smart contracts in the pharmaceutical industry

Smart contracts have numerous applications that can bring tangible benefits to pharmaceutical companies.

Firstly, they streamline processes and increase operational efficiency. For example, executing orders for raw materials or packaging through contracts can completely eliminate paperwork. Payments are triggered automatically upon the delivery of goods. The distribution of drugs to wholesalers or pharmacies can also be carried out without involving administrative departments.

Contracts also make it easier to monitor the circulation of products in the supply chain. Data about transport and storage conditions recorded in the blockchain allow for checking the history of each batch of drugs: from the production stage to delivery to the patient. This enables quick responses to any irregularities.

Smart contracts also facilitate compliance with regulations, for example, by automatically blocking the distribution of drug batches that have not passed quality tests. As a result, processes are transparent, making it easier to obtain certification.

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Smart contracts in practice - case studies from the pharmaceutical industry

Chronicled - combating counterfeit drugs

Chronicled is a blockchain-based platform that collaborates with pharmaceutical companies to combat the threat of counterfeit drugs.

The platform assigns unique digital identities to individual products and records their journey in the blockchain. This allows consumers to independently verify the authenticity of medications. It ensures that patients receive original and safe products.

Chronicled's solution has led to a significant reduction in the number of counterfeit drugs entering the market, improving patient safety and the reputation of the pharmaceutical brand.

IBM – smart supply chain management

In collaboration with global pharmaceutical companies, IBM's blockchain platform provides visibility and transparency throughout the entire drug supply chain. Real-time tracking ensures compliance with quality standards, reduces the risk associated with non-conforming products, and accelerates product recalls when necessary. This initiative significantly increases patient safety and regulatory compliance.

IBM's solution has streamlined supply chain, operations, reducing the time and effort required for regulatory compliance checks and ensuring that patients receive authentic and uncounterfeited drugs.

Modum - drug temperature monitoring

Modum utilizes blockchain and IoT technology to ensure the integrity of temperature-sensitive drugs during transportation. By tracking temperature data at each stage of transport and storing it on the blockchain, Modum verifies the effectiveness of drugs and guarantees that they will be stored under specified conditions.

Modum's temperature monitoring prevents harmful drugs from reaching patients and reduces the financial losses companies face due to improper drug storage conditions.

Benefits of smart contracts

Here are some examples of how pharmaceutical companies can practically benefit from the application of smart contracts.

Increased transparency and security

It's beneficial to use a smart contract to monitor the transport conditions of temperature-sensitive drugs. Data from sensors go into the blockchain, making the entire delivery process transparent, and allowing you to quickly react to any irregularities.

Process optimization

A company can use a smart contract to automatically trigger payments to suppliers of pharmaceutical raw materials upon delivery of the ordered batch of goods. This relieves your accounting department, allowing them to focus on more urgent matters.

Compliance with Regulations

Another advantageous solution is the integration of the ERP system with a smart contract that blocks the shipment of batches of drugs to wholesalers if they have not passed quality tests. This eliminates the risk of human error.

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Challenges in implementing smart contracts

Smart contracts and blockchain are promising yet still new technologies. Therefore, their implementation comes with a series of challenges.

One barrier is technological and operational issues. Blockchain requires significant computational power, and smart contracts require advanced programming skills. Not everything can be automated, so a thorough analysis is needed to determine which processes will benefit the most.

Data security and privacy aspects are also important. While blockchain provides a high level of protection, it's still a relatively new technology. Therefore, potential risks and threats must be carefully analyzed.

Integration with existing systems, such as ERP, MES, or WMS, is crucial. Interoperability and data migration can be challenging, so such solutions should be introduced gradually.

The future of smart contracts in the pharmaceutical industry

Smart contracts in the pharmaceutical industry are likely to experience dynamic development and increasingly wider adoption of this technology.

Currently, smart contracts encounter some obstacles. However, many experts agree that in the future, their integration with IoT systems will be key to enabling the identification and monitoring of products in the supply chain.

Legislative changes will also have a significant impact, for example, transparency requirements for the origin of Active Pharmaceutical Ingredients (APIs), which will accelerate the introduction of blockchain-based solutions.

In the future, contracts will find applications in areas such as the automation of clinical trials, monitoring of the cold chain, and decentralized exchange of patients' medical data. Continued progress in this area seems inevitable.

Smart contracts - an innovative solution for pharmacy

Smart contracts have great potential to revolutionize the functioning of the pharmaceutical industry. The key benefits include increased transparency, security, and speed of transactions, as well as cost savings due to the automation of many processes.

At the same time, technological issues related to integration with existing systems and ensuring interoperability remain a challenge. Concerns about data security are also significant.

Although the benefits of automation are known, such solutions are still not being implemented on a global scale. Nevertheless, the importance of smart contracts for pharmacy will continue to grow. They already enable the streamlining of key areas such as logistics, distribution, and supply chain management. They also bring concrete business benefits in the form of cost savings and greater control over processes. Therefore, it can be expected that soon many countries will follow this trend.

With technological advancements and the standardization of blockchain solutions, the range of applications for smart contracts will expand: from drug monitoring, through the automation of clinical trials, to patient data exchange. This, in turn, will translate into greater transparency and efficiency in the pharmaceutical sector.

Learn more about the automation of business processes in the pharmaceutical sector from our next article.

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