Distributed Ledger Technologies (DLT) has expanded from its original focus on cryptocurrencies to encompass a range of applications. Distributed ledger IT systems can provide solutions to some of the challenges faced by the pharmaceutical industry and its supply chains.
DLT is an asset database shared by multiple users without the need for a central database. The distributed nature of these systems provides several advantages. All the users on the network will have access to their own identical copy of the ledger and any changes to the ledger are reflected in all copies. Security and accuracy of the transactions recorded in the ledger are maintained cryptographically via ‘keys’ and signatures that control use of the shared ledger. Entries can be updated by one, some or all of the users depending on the rules of the network.
A blockchain is a type of distributed database that maintains a continuously-growing list of records aggregated into files (blocks). New blocks are added to a chain of existing blocks. Each block is time-stamped and linked to the previous block. By design blockchains are inherently resistant to modification. Blockchains are typically, but not always, found in DLT.
How is it being used?
Blockchain is not just for financial services. DLT has been adopted by a range of industries. In 2017, the Estonian eHealth Authority signed an agreement to secure the health records of over a million Estonians using Guardtime’s proprietary blockchain technology.
The Hyperledger Project (HLP) is an open source project created to advance cross-industry blockchain technologies. Led by the Linux Foundation, HLP aims to create open source distributed ledger framework and code, upon which users can build and run industry-specific applications. Using HLP code, Maersk and IBM applied a blockchain solution to help manage and track the millions of shipping containers that make up 90 percent of goods being traded globally. The project aims to cut down on maritime fraud as well as significantly reduce processing costs.
Who owns it?
Thanks to Bitcoin’s creator, Satoshi Nakamoto, the core technology is now in the public domain. However, a number of companies are building patent portfolios that cover improvements to the technology. Bank of America, IBM, Hewlett Packard, Mastercard as well as Chinese tech company Bubi have all filed patent applications. Where a number of companies obtain the right to exclude competitors from a potentially lucrative market, the litigation risk becomes significant for new entrants.
Companies in the pharma industry looking to make use of DLT need to consider how best to exploit the technology to avoid infringement allegations. They may wish to develop their own proprietary technology; co-develop the technology with a third party; or license a suitable platform. Another option is to join a patent pool that protects its members from patent litigation.
Some technologies will be open source. For example, HLP members agree that all new code contributions shall be made under the terms of the Apache Licence, Version 2.0. Under this licence, members grant users a worldwide, royalty-free, licence to IP rights in new code contributions.
Whether developing DLT solutions alone or with a partner, obtaining valuable patents will be difficult. Certain technological areas are excluded from patentability. In Europe and the US there are exclusions for computer programs. If the only contribution lies in excluded subject matter (i.e. the computer program), then it is not patentable. Some other technical contribution is needed. The upside is that a number of competitors’ granted patents in this area will be vulnerable to attack on the same grounds. A novel combination of existing technologies can also be patentable. This is noteworthy in the DLT space which has brought about the development of crossovers in traditionally non-overlapping industries most notably between finance and technology.
Few patents have been granted so far. When the dust eventually settles, the patent landscape will likely resemble that in the telecom space i.e. large numbers of patents that cannot be easily assessed in freedom to operate exercises.
What are the benefits?
The pharma supply chain faces a number of challenges. The global nature of the pharma industry and number of stakeholders involved means it’s crucial that the supply chain is well coordinated. It’s vital accurate information is available across the entire chain at every point. Greater collaboration also helps with another challenge: pharma products often need to be maintained at a constant temperature.
Applying blockchain technology to the supply chain means the transfer of the products through the chain would be registered on a ledger as transactions. The ledger could provide details such as the parties involved, date, location, quality and state of the product as well as any other information relevant to managing the supply chain such as temperature at each transfer point. As the ledger is available to all stakeholders they all have access to this information. As no one entity controls the ledger this makes it resistant to tampering.
Traceability is also key. Counterfeits are a major concern that can be difficult to police due to the number of stakeholders in the supply chain. If the provenance of all consignments can be easily verified then counterfeit drugs can be stopped from entering the marketplace. Such a system also means drug recalls are more efficient and cheaper to carry out. London based start-up Blockverify offers a blockchain-based solution to track pharma products through the supply chain. Companies are able to tag their products and monitor the supply chain using the Blockverify platform.
A recent pilot project highlights another advantage: access to financing. In partnership with Chinese supply chain management firm Hejia, IBM has launched a blockchain-based platform aimed at the Chinese pharmaceutical retail sector. Based on HLP code it is designed to help participants track products through the supply chain. The first users were Hejia, a pharmaceutical retailer, a hospital and a bank. In China, SME pharma retailers can wait several months after having delivered medicines to recover the payments they are owed. Without sound credit records and collateral these retailers often find it difficult to get loans. DLT provides security and transparency not possible using the traditional, paper-intensive process. Transparent record-keeping and rapid authentication enables retailers to obtain faster access to financing from participating financial institutions.
DLT allows the use of ‘smart contracts’. The terms of a ‘smart contract’ are recorded in computer code and automatically executed by a computing system, such as a suitable distributed ledger system. Automation of contact terms has obvious advantages e.g. facilitating collection of royalties due under an IP licence. Smart contracts could also help with the management and control of IP rights. A company seeking to commercialise their proprietary product or process through licensing may also transfer valuable know-how. A distributed ledger creates a record of transfer that can reduce unauthorised use of such information.
Smart contracts raise a number of issues. Most notably, what happens when things don’t go the way you expect? Progress is being made in this regard. Tech start-up Clause has launched the Accord Project. The Accord Project is an open source software initiative established in co-operation with law firms and others including Hyperledger and the International Association for Commercial and Contract Management (IACCM) to create tools and standards coverings the future of legal contracting.
Mark Marfe is a senior associate at Hogan Lovells International LLP
