More than 30 years ago, U.S. law mandated state licensure of prescription drug wholesale distributors, resulting in a patchwork of varying state requirements and practical burdens for multi-state businesses. In 2013, Congress passed the Drug Supply Chain Security Act (DSCSA), which was intended to strengthen the integrity of the pharmaceutical distribution supply chain and to “replac[e] the current patchwork of multiple State laws with a uniform national standard, [thereby] improving safety, eliminating duplicative regulations, and creating certainty for all members of the pharmaceutical supply chain.”
Now, the Food and Drug Administration has proposed regulations outlining uniform national standards for the licensure of prescription wholesale drug distributors (WDDs) and third-party logistics providers (3PLs) in the U.S. When the regulations are finalized, they will preempt states from establishing different requirements — in other words, states will be prohibited from establishing or maintaining requirements for licensure of WDDs and 3PLs that are not the same as the federal standards articulated in the regulations.
Interested persons can comment on FDA’s proposed rule through Monday, June 6, 2022. It is important that WDDs and 3PLs, as well as their trading partners and service providers, take this opportunity to reflect on their experience and business needs and inform FDA to help create a workable licensure system going forward.
Background on the DSCSA
The DSCSA requires that manufacturers, repackagers, wholesale distributors and dispensers meet applicable requirements to be considered “authorized trading partners,” and that business be conducted only with other authorized trading partners. It also imposes serialization and enhanced supply chain security mechanisms, establishing the ability of distributors, purchasers and regulators to follow a product’s path through the supply chain and to react nimbly to the discovery of suspect or illegitimate products.
In addition, DSCSA updated relevant definitions — e.g., updating the scope of “distribution,” distinguishing “manufacturers” from “wholesale distributors,” and creating a new regulatory category for 3PLs (“an entity that provides or coordinates warehousing, or other logistics services of a product in interstate commerce on behalf of a manufacturer, wholesale distributor, or dispenser of a product, but does not take ownership of the product, nor has responsibility to direct the sale or disposition of the product”).
Most salient for current purposes, the DSCSA directed FDA to establish, by regulation, uniform national standards for the licensure of prescription WDDs and 3PLs. When finalized, FDA’s regulations will create nationally uniform conditions, preventing states from imposing additional or different requirements for licensure of WDDs and 3PLs.
Proposed standards for licensure
The proposed regulations are detailed and address several broad topics, including facility requirements; security; inventory; equipment maintenance; personnel and management qualifications; recordkeeping and document maintenance, including annual reports to FDA; and requirements for written policies and procedures. The rule also proposes specific standards for:
- Licensure applications and license renewal.
- Pre-licensure and periodic inspection.
- Denial, revocation and suspension of licenses.
- Establishment of national standards for the storage and handling of prescription drugs.
The proposed rule would create “good storage practices” for WDDs and 3PLs to abide by, including, for example, segregating illegitimate products and other products unfit for distribution in designated areas to avoid inadvertent commingling with saleable products. Also, under the auspices of Good Storage Practices, the rule would set forth practices for personnel screening in facilities where drugs are held, and specific employee qualifications.
Written policies and recordkeeping would be required, addressing the receipt, security, storage, inventory, shipment, and distribution, handling expired and suspect or illegitimate products, and products that are otherwise unfit for distribution. Procedures must also be in place with regard to records, which must be stored under secure conditions for a minimum of three years.
The list of licensure criteria is long; suffice it to say, in order to be licensed by a state or by FDA, a WDD or 3PL must meet the articulated standards, keep relevant information up to date and report any changes promptly. And, because the DSCSA requires all trading partners to do business only with other authorized trading partners, this will impact potentially all trading partners, not just WDDs and 3PLs.
Reliance on third-party organizations
Perhaps recognizing that FDA and the states may need help assessing the long list of criteria for licensure, FDA’s proposed regulation created a substantial role for third-party organizations. These organizations will apply to become “Approved Organizations” based on criteria set out in the regulation (e.g., recordkeeping requirements and employment criteria). The entity ultimately issuing the license (FDA or a state) could then rely on recommendations made by an Approved Organization.
Reporting requirements and public database
DSCSA includes a number of reporting requirements for WDDs and 3PLs, which each must report for each facility: (1) the state by which the facility is licensed; (2) license number; (3) name and address of the facility; (4) contact information of the facility manager or designated representative; (5) trade names under which the facility conducts business; (6) date of expiry of each state license; (7) unique facility identifier (UFI); and (8) any significant disciplinary actions. Reporting must be done annually. In addition, FDA is proposing to require WDDs and 3PLs to report within 30 calendar days of ceasing relevant activities, going out of business or voluntarily withdrawing a license.
FDA will maintain information on licensure on a public database on the agency’s website.
Preemption of state standards
DSCSA includes an express preemption provision under which states are precluded from establishing or continuing requirements for WDDs or 3PLs that are “inconsistent with, less stringent than, directly related to, or covered by” applicable national standards. In earlier guidance, FDA interpreted this preemption provision as a “floor” that prohibited state licensing standards and requirements that “fall below the minimum standards established by federal law,” but left open room for state requirements that exceeded the minimums established under DSCSA.
Now, in its proposed rule, FDA has changed course, taking the position that federal requirements establish both a “floor” and a “ceiling” — and that state licensing standards must therefore be the same as those in the regulation. In other words, once the rule is final and effective, more stringent state licensing standards will preempted, as will less stringent ones. For example, since DSCSA excludes manufacturer activities from the definition of “wholesale distribution,” states ostensibly will be preempted from requiring manufacturers to register as WDDs once the regulations are final and effective. (It is not clear, however, whether states might maintain parallel regimes for categories such as manufacturers, so clear FDA guidance could at least be helpful toward consistency.)
Reach of the proposed rule
While technically the scope of the licensure requirements is applicable to WDDs and 3PLs, some aspects of the proposed rule are directly relevant to pharmacies, manufacturers and other trading partners. For example, the proposed rule would codify the “minimal quantities” rule — i.e., the principle that pharmacies may — without a wholesale distributor license — resell up to 5% of the total volume of their annual prescription drug sales to business actors (rather than dispensing to patients). However, FDA clarifies that the 5% quantity may be only for licensed practitioner office use: “FDA understands that some States and other entities have expanded the applicability of this exclusion from the definition of wholesale distribution to allow for distribution from pharmacies to other entities outside of licensed practitioners for office use, but … this practice is not allowed under current Federal law.”
Pharmacies that maintain pharmacy distribution centers may be licensed as WDDs under the proposed rule. Moreover, if a facility is licensed as more than one type of trading partner, it must have separate systems in place. For example, under the proposed rule, a facility licensed as both a pharmacy and a WDD would have to have dual, separate systems in place for dispensing, on the one hand, and wholesale distribution activities on the other hand.
In addition, while DSCSA did not address licensure for manufacturers or licensure for medical device firms, some states have included both manufacturing and medical devices along with drugs under their licensing laws. Thus, in practice, a final FDA rule may have broader reach. It remains to be seen whether the patchwork of state laws will continue to burden trading partners of manufacturers (both drug and medical device firms), or whether the preemptive effect of the national standards for licensing will lessen states’ ability to do so.
Given the ability to comment now in a way that will potentially affect the standards and associated commentary when the rule is finalized, stakeholders — including dispensers, manufacturers and all trading partners — should communicate to FDA considerations or questions that have been encountered over years of experience. Theoretically, the agency can at least provide commentary to clarify issues and help minimize state-to-state variability.
Better late than never?
FDA’s proposed rule published more than six years after the DSCSA deadline to promulgate such a rule setting forth national licensing standards. More time will pass before the new regulations can be adopted: Following administrative law, the agency must consider and respond to all the substantive comments it receives, and ultimately develop a final rule. This takes time. Even then, FDA has proposed a multiyear phase-in period — in part because of the in-depth implementation that will need to occur on a state-by-state basis (e.g., revision of state legislation and regulations; adoption of new policies).