FDA Proposed Rule: Game Changer For Pharmaceutical Supply Chain

FDA seeks to reduce diversion of pharmaceutical products via sales by unlicensed distributers and tighten up the supply chain by vetting trading partners.

On February 4, 2022, the FDA published a long anticipated proposed rule1 which will essentially change the landscape for regulation of wholesaler drug distributers (WDD), third-party logistic providers (3PLs)2 as well as pharmacy to pharmacy and pharmacy to wholesaler product sales. The goal is to reduce diversion of pharmaceutical products via sales by unlicensed distributers and tighten up the supply chain by vetting trading partners.

Forum shopping by diverters for states with less stringent licensure and regulatory requirements will be prevented by a uniform regulatory framework. Key provisions of the proposal are found in Table 1.

Pursuant to the 2013 Drug Quality and Security Act3 mandate, the FDA has now developed national standards and a federal licensing system for WDD and 3PLs, which would eventually replace the state regulatory patchwork that currently exists.4 FDA is also proposing to replace the current 21 CFR, Part 205, which provides guidelines for state licensing of WDDs.

State licensure programs consistent with federal licensure standards would be permitted to remain, although it is assumed these would be eventually phased out by the individual states. For states that choose not to license, absent a state licensure program, the national program would apply.5

States with requirements that differ from those on the national level (e.g. for “designated representatives,” Florida’s exam, California’s self-assessment, or New Mexico’s training program)6 will be preempted. Federal licensure standards7 will decrease both the administrative and cost burdens for these entities that currently are subject to varied state licensure requirements, as well as “ship to” license requirements.8

WDDs and 3PLs would be required to report to the FDA (database already established), undergo routine inspections every 3 years or more often, write, and revise standard operating procedures required for equipment maintenance, personnel, transportation, and authorized trading partners,9,10 and conduct criminal background checks for all designated representatives and facility managers.

The FDA may evaluate certain approved organizations as appropriate and designate them to conduct licensing and inspections on its behalf.

For 3PLs, the proposed rule establishes many new requirements as listed in Table 2.

Implications for Pharmacy

For retail pharmacies, the proposed rule has several provisions. Stricter state requirements, such as Oklahoma’s rule that a wholesaler cannot be physically located in a pharmacy, would be preempted.

The proposed rule will codify the 5% rule, which currently states that sales of prescription drugs by a retail pharmacy to licensed practitioners for office use are considered to be minimal and not constitute wholesale distribution if the total dollar volume of these sales does not exceed 5% of the total dollar volume of that retail pharmacy's annual prescription sales.11

Sales above 5% for office use, or any sales to a wholesale distributor, require the pharmacy to become licensed and regulated as a wholesale distributor. This will eliminate diversion caused bypharmacies purchasing product from an unlicensed wholesaler or another pharmacy and selling their inventory to wholesalers.

Transfers or sales between pharmacies or from pharmacies to practitioners for a specific patient are already not considered wholesale use.12 Currently, some states allow for the 5% distribution by pharmacies to other entities, e.g., pharmacy-to-pharmacy or pharmacy-to-contract research organization, which are not for a specific patient. The FDA has indicated in the proposed rule that this is not permitted under the statutory language of the FDC Act13 and is seeking comments on it.

According to the National Association of Boards of Pharmacy (NABP)'s 2013 report entitled “Wholesale Drug Distribution: Protecting the Integrity of the Nation's Prescription Drug Supply,” drug diverters seek out gaps in the distribution chain, specifically seeking out states whose licensure framework is less stringent. This proposed rule, when finalized, and the preemption of inconsistent state provisions will remedy this forum shopping for diverters seeking to take advantage of the lack of uniform framework.

Additionally, NABP's 2013 report also contends that the so-called 5% rule is a policy that has been ripe for exploitation due to the policy being inconsistently legislated, interpreted, and enforced from state to state.

Interpretation of the 5% rule was not codified and NABP observed that “pharmacies acting as wholesalers have been found to take advantage of the parameters set by some states [regarding minimal quantities] when it comes to drug distribution. Rather than dispensing the drugs as mandated, these pharmacies retain them to resell to wholesalers at an amount exceeding the specified quantity of prescription medications as permitted in certain states (oftentimes 5% of annual sales). Some have gone as far as to sell their entire inventory into the gray market.”

This proposed rule, when finalized, codifies the principle that the 5% rule only applies to pharmacy sales for office use. Stakeholders are currently analyzing the proposed standards as they prepare to deal directly with the FDA rather than the states. The deadline to provide comments on the proposed rule is June 6, 2022.

About the Author

Martha M. Rumore, PharmD, RPh, MS, LLM, Esq is senior counsel at Frier Levitt, LLC where she advises clients in the area of Food, Drug Device Law and Intellectual Property. She also teaches Food, Drug Cosmetic Law at Maurice A. Deane School of Law at Hofstra University, New York.

Footnotes

  1. 87 FR 6449, February 4, 2022. https://www.fda.gov/drugs/drug-supply-chain-security-act-dscsa/fda-announces-proposed-rule-national-standards-licensure-wholesale-drug-distributors-and-third-party.
  2. 3PLs provide warehousing and logistics services without taking ownership of the products that they warehouse.
  3. P.L. 113-54.
  4. A “designated representative” is defined as a representative who is responsible for managing the daily operations of a WDD or 3PL facility.
  5. Currently, every state has a WDD licensing program and 31 states have 3PL licensing programs.
  6. The 1987 Prescription Drug Marketing Act mandated that WDDs obtain licenses from the states.
  7. Two year renewal for WDDs and 3 years for 3PLs.
  8. It is for this reason that WDDs often hold licenses in many if not all states.
  9. SOPs for authorized trading partners are a “best practice” but not required for 3PLs.
  10. Authorized trading partners are those who are licensed. The term as used by FDA does not refer to “authorized distributers” as exists under some manufacturer restricted distribution channels.
  11. 64 FR 67720, December 3, 1999.
  12. FD&C Act section 503(e)(4).
  13. Id.