Proposed FDA Rules Could Be Game Changers for the Pharmaceutical Supply Chain

New federal regulations have been proposed that will affect licensure of wholesale drug distributors and third-party logistics providers (3PLs). The Drug Supply Chain Security Act became law in 2013. The U.S. Food and Drug Administration (FDA) published proposed rules on Feb. 4, 2022, that would preempt state and local licensure requirements for many companies in the drug supply chain. Members of the public may submit written comments regarding the proposal. The deadline to provide comments is June 6, 2022.

The FDA recognizes that "[a] breach at any point in the supply chain carries potential for dangerous, and even deadly, outcomes for American consumers." In the preamble to the proposed rules, the FDA stated that "[t]heft and diversion of prescription drugs continue to be major issues contributing to drug shortages and creating significant financial losses, the effects of which cascade through the supply chain to consumers." The rules are designed to "secure and strengthen the supply chain." All 3PLs and wholesale distributors will be held to national standards relating to handling, storage and transportation of prescription drugs, instead of the current "patchwork" of differing standards among the states. States with their own licensure programs will continue to issue permits. If a state lacks a licensing program that complies with the federal rules, the "FDA will be the licensing authority."

The proposed rules, if finalized in their current form, could have a substantial effect on retail pharmacies selling into the wholesale market. The proposal addresses the FDA's policy to allow pharmacies to sell drugs to licensed practitioners for office use without those transactions being considered wholesale distribution. Any sales to a wholesale distributor, or sales above 5 percent for office use by healthcare providers, would require the pharmacy to obtain a wholesale distributor permit, as would any sales to other pharmacies except as required to fulfill a specific patient need.

The proposed rules would impose other regulatory requirements in a number of areas, including:

• defining 3PL activities
• describing events that would constitute a change of ownership
• defining a "designated representative," which raises questions about whether specific state requirements for designated representatives would continue, such as Florida's requirement that such individuals pass a written, state-required exam
• carving out a corporate office or headquarters from the definition of "facility" if the location does not store or handle drugs and only provides oversight, support or business administrative functions. Clarification may be needed to make it clear whether sales locations, such as call centers, require a permit. The regulatory preamble indicates that entities that do not take physical possession of drugs (such as a broker) may still be engaged in activities that meet the definition of a wholesale distributor or manufacturer
• requiring entities in the supply chain to authenticate products suspected to be illegitimate, and to do business only with licensed, authorized trading partners
• imposing an obligation on 3PLs and wholesale distributors to report any changes in information submitted on the licensure application to be reported within 30 calendar days of the change
• requiring all 3PLs with existing state licenses to obtain new licenses in accordance with the federal standards
• imposing good storage practices requirements
• imposing certain background screening and other requirements for personnel
• mandating written policies and procedures on numerous topics regarding operating the 3PL or pharmaceutical wholesaler's business
• providing for only 10 days after a permit is denied to request a hearing
• requiring surety bonds
• requiring a satisfactory inspection prior to licensure and routinely thereafter at least once every three years
• requiring certain annual reporting to the FDA

The FDA has determined that the "Federal requirements will establish both a 'floor' and a 'ceiling'" for wholesale distributors and 3PLs. In other words, states cannot impose requirements that differ from the federal standards. This could mean substantial regulatory changes for companies that operate in states, such as Florida, that impose more stringent requirements. Such state requirements will be preempted only once the rules are finalized and become effective. Because the final rules could have a dramatic impact on the way wholesalers and 3PLs do business, companies should consider submitting comments regarding how the regulations may affect their operations. All members of the pharmaceutical supply chain should be aware that changes are on the horizon.