How Blockchain Could Save Big Pharma Billions

Biotech - Shutterstock photo
Credit: Shutterstock photo

By Gal Hochberg, CEO and Co-Founder of Clear

The U.S. pharmaceutical industry is facing a reckoning. Although most pharmaceutical companies have been spared the brunt of the hit suffered by many companies in the wake of Covid-19, back-office inefficiencies have been lurking under the surface for years. Studies have shown that revenue leakage has swallowed up to 4% of industry revenue annually. Put in monetary terms, this amounts to almost $15 billion USD lost, not due to incompetence or reduction of market share, but due to inefficiencies and fraud.

How did the U.S. pharma industry end up in such a state? Well, to be fair it wasn’t necessarily big pharma’s fault. The U.S. pharmaceutical market has some inherent complexities that were bound to make settlement and reconciliation a nightmare sooner rather than later.

For starters, each manufacturer deals with thousands of generic drugs, as well as dozens of more sensitive and complex specialty drugs. Settlement is carried out per-item, meaning the vast amounts of data involved in general operational procedures is extremely difficult to process without error. The number of stakeholders involved in these operations also adds a significant lag to processes; distributing pharmaceutical products can involve the participation of pharmacies, wholesalers, and GPOs (Group Purchasing Organizations).

Pharmacies can either purchase drugs directly from the supplier or, more commonly, through a wholesaler and/or through a GPO. This creates a situation where the wholesaler, GPO, and pharmacy all see different prices and supply times and terms — all governed by separate contracts. The archaic logistical framework governing the processing of these differing prices and contracts adds further complexity to the mix.

The involvement of these parties in the production and sale of a single batch of pills can create an abundance of chargebacks and rebates. To simplify, chargebacks are requests for a pharma manufacturer to repay other players down the supply chain (typically wholesalers). This usually happens when drugs are being sold by the wholesaler at a lower price than the price paid to the manufacturer upon purchase, or when transactions fall through.

Rebates are agreements that provide discounts for the purchase of a high volume of a given product. Resolving chargeback or rebate-related queries is labor-intensive, complicated, and most importantly, costly.

The bottom line is that individual manufacturers are losing hundreds of millions of dollars each year due to inefficient processes. It does not have to be this way.

There is immense value in the capability of blockchain technology to reduce the instances of these inefficiencies. Blockchain technology could save the pharmaceutical industry billions of dollars per year while speeding up the process of the distribution of essential medicines from lab to home or hospital. Smart contracts can identify discrepancies relating to chargebacks or rebates early on, vastly reducing the instance of time wastage or money spent investigating such instances. These contracts can also provide a root cause analysis to prevent disputes from ever occurring.

Blockchain technology also heightens the level of trust between all stakeholders, as it is fully transparent and immutable, meaning that the contracts cannot be altered by any party after the fact. Pharmaceutical companies often deal with highly sensitive information which could be protected by blockchain technology and not shared to unwanted parties. The end-to-end process of transaction clearing and settlement can largely be automated through blockchain technology which, critically, can drastically reduce revenue leakage that will allow financial teams to focus on much-needed results.

Most importantly, blockchain technology allows for the creation of an ecosystem between all stakeholders where they can freely interact, communicate, and operate seamlessly.

Throughout the Covid-19 pandemic, the U.S. pharmaceutical industry has been heavily relied upon to continue its processes in as fast and efficient a manner as possible, in a bid to ensure continuity of service in these altered circumstances. The pharmaceutical industry should take this once in a century crisis as an opportunity to enhance its processes by adopting the technology of the future that will ensure its financial and operational successes for years to come.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.