The sale of counterfeit Viagra at two California pharmacies last month represents just a small piece of the $30 billion problem that's plaguing the drug industry--and driving it to adopt item-level use of radio-frequency identification technology. A group of pharmaceutical manufacturers revealed last week they're working with distributors and retailers on an experiment to attach RFID tags to individual bottles of drugs, the first time item-level tracking has been tested since Wal-Mart Stores Inc. last year canceled a project with The Gillette Co. to place tags on individual packages of razor blades.

The manufacturers, including Abbott Laboratories, Johnson & Johnson, Pfizer, and Procter & Gamble, began shipping bottles of pills with RFID labels on July 12. The bottles are being tracked as they move from manufacturers' plants to their distribution centers, then to distributors' facilities, retailers' distribution centers, and, finally, to CVS and Rite-Aid retail pharmacies. McKesson Corp. and Cardinal Health are the participating distributors.

The pharmaceutical industry estimates that between 2% and 7% of all drugs sold globally are counterfeit. Earlier this year the Food and Drug Administration issued a report recommending that drugmakers use RFID on bottles of the most commonly counterfeited drugs starting in 2006 and on bottles of most drugs by 2007. But the pharmaceutical industry isn't only losing tens of billions of dollars in sales worldwide each year to counterfeiting. It's also estimated that inventory worth $40 billion is lost or stolen somewhere along the pharmaceutical supply chain every year.

The experiment, dubbed Project Jumpstart, will continue until September when the results will be evaluated and published through industry trade groups such as the Pharmaceutical Research and Manufacturers of America, the Healthcare Distribution Management Association, and the National Association of Chain Drug Stores.

At a pharmaceutical supply-chain conference in Washington, D.C., last week, Jumpstart participants cited legislation to thwart the growing problem of drug counterfeiting as a major impetus for the effort. A number of states are considering legislation requiring that "paper pedigree" documentation accompany drug shipments to ensure their authenticity. Florida already has a law requiring paper pedigrees for 31 frequently counterfeited drugs, including Lipitor and Zocor, and will require such documentation for all prescription drugs starting July 1, 2006. The U.S. Senate is considering similar measures as part of the drug-importation debate.

But drugmakers and distributors say item-level paper pedigrees are unwieldy. "Paper pedigrees aren't going to be workable in our environment," says Ron Bone, senior VP of distribution support at McKesson Pharmaceutical. RFID "is a way to make pedigree [requirements] workable and make the supply chain secure."

Jumpstart participants began discussing how to implement RFID at the item level last year. The effort uses track-and-trace technology provided by RFID chip maker Matrics Inc. and supply-chain-software vendor Manhattan Associates Inc. Accenture is playing a leading role in the project, and the FDA also is involved.

For the test, five drug manufacturers are each applying RFID tags to bottles of two types of pills for a total of 10 products, whose names weren't disclosed. Manufacturers chose to use larger bottles used by pharmacists to fill customer prescriptions, so the RFID tags wouldn't block information printed on the labels. Just finding the right glue for affixing the RFID tags took two months of study.

Long-term, improved inventory management will be a benefit of item-level RFID tagging, pharmaceutical executives say. It will help avoid product stock-outs and make it easier to trace drugs that have been recalled. "There are huge wins," says Pat Rizzotto, global consumer initiative VP at Johnson & Johnson, "even if all you do is make sure products are available."