IBM Improves Its Pedigree

On Thursday, IBM (NYSE: IBM  ) announced the launch of its ePedigree system to use radio frequency identification (RFID) technology to track medications from the time they are manufactured and through the supply chain system until they reach the customer.

The news is noteworthy for IBM investors because the system could represent a lucrative new source of revenue for Big Blue. According to RNCOS, a research and consulting firm, it has been estimated that the pharmaceutical industry lost $30 billion due to counterfeit drugs in 2005.

In the following years, it is unlikely that that figure has gotten any smaller. In spite of the pharmaceutical industry's efforts to stem counterfeits through the use of holograms and watermarks, counterfeiters have met the challenge and have been able to produce forgeries of those defenses as well. ePedigree, because it allows manufacturers to monitor their product continuously, will offer a more formidable barrier for counterfeiters to overcome.

Big Blue has indicated that it intends to invest over $250 million in RFID technology over the coming years, and the ePedigree system could offer a very fast payback on this investment. I say this because companies such as Pfizer (NYSE: PFE  ) , which produces Viagra, a drug that is widely counterfeited, have already been using RFID technology in a wide-scale pilot project since 2005.

Preventing the illegal reproduction of popular drugs may, however, represent just the tip of the iceberg. Several states, including California, are planning the implementation of mandates requiring that pharmaceutical companies begin verifying the pedigree of all drugs in order to better track expiration dates as well as have the necessary information to locate drugs in the event of a recall.

As these regulations are rolled out, demand for IBM's ePedigree system could soar. To this end, in response to California's impending 2009 mandate, Cardinal Health (NYSE: CAH  ) -- an $81 billion global provider of pharmaceutical products -- has announced that later this fall it intends to outfit its Sacramento distribution facility with RFID.

By no means does IBM have this field all to itself. Hewlett-Packard (NYSE: HPQ  ) , Motorola (NYSE: MOT  ) , and Lockheed Martin (NYSE: LMT  ) are also making big investments in RFID technology, but few companies will be able to match Big Blue's ability to integrate RFID tags, computer systems, and software into a single easy-to-use comprehensive system. To my mind, ePedigree offers yet another reason to be bullish on IBM.

Interested in reading more about IBM? Check out these articles:

Pfizer is anInside Value recommendation.

Fool contributor Jack Uldrich owns stock in IBM. The Fool has a strict disclosure policy.


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