Brace Yourself: DEA’s Final Rule on Quotas Squeezes Inventory Levels and Signals Further Supply Restrictions
On August 31, 2023, DEA published a final rule (“Final Rule”) regarding its management of controlled substance and List 1 Chemical (“L1 Chemical”) quotas for DEA-registered manufacturers. The Final Rule largely tracks DEA’s October 23, 2019 notice of proposed rulemaking, but contains numerous changes to DEA’s historical handling and management of quotas, the most notable of which are:
- New definitions for the types of quotas issued by DEA;
- New defined quota subcategories, one of which is specific to repackaging;
- The adoption of quota subcategories, which formalizes historical practices within DEA;
- The establishment of a quota certification verification process;
- Decreases to permissible inventory allowances;
- New inventory threshold limits that will justify the suspension of quotas;
- New inventory threshold limits that DEA will consider when reviewing quota increase requests; and,
- New annual deadlines by which DEA will announce quotas.
Changes under the Final Rule will go into effect on November 29, 2023.
The Final Rule adds a host of new definitions to DEA’s regulations, which are important to understand for the quota process. Under 21 CFR 1303.03, DEA’s regulations will define three types of quotas for Schedule I & II controlled substances as follows:
- Aggregate production quota (“APQ”), which establish the total quantity of each basic class of schedules I and II controlled substances that may be produced by all manufacturers in a calendar year.
- Individual manufacturing quotas, which establish the maximum quantity of each basic class of schedules I and II controlled substances that a registered manufacturer may manufacture during a calendar year. This type of quota is only issued to DEA-registered bulk manufacturers.
- Procurement quotas, which establish the maximum quantity of each basic class of schedules I and II controlled substances that a registered manufacturer may procure during a calendar year for the purpose of manufacturing into dosage-forms or other substances.
Separately, under 21 CFR 1315.06, the regulations will define four types of quotas for L1 Chemicals as follows:
- Assessment of annual needs, which establishes the total quantity of ephedrine, pseudoephedrine, and phenylpropanolamine necessary to be manufactured and imported by all manufacturers and importers in a calendar year.
- Individual manufacturing quotas, which establish the maximum quantity of ephedrine, pseudoephedrine, and phenylpropanolamine that a registered manufacturer may manufacture during a calendar year. This type of quota is only issued to DEA-registered bulk manufacturers.
- Procurement quotas, which establish the maximum quantity of ephedrine, pseudoephedrine, and phenylpropanolamine that a registered manufacturer may procure during a calendar year for the purpose of manufacturing into dosage-forms or other substances.
- Import quotas, which establish the maximum quantity of ephedrine, pseudoephedrine, and phenylpropanolamine that a registered importer may import during the calendar year for distribution to their DEA-registered customers.
In addition to defining the types of quotas, the Final Rule also creates (under 21 CFR 1303.04) five subcategories of quotas, which DEA has historically used internally for its management of quotas. These subcategories include:
- Quota for commercial sale. This is a quota for the amount of bulk active pharmaceutical ingredients (“API”) initially acquired by a registrant for the manufacture of approved schedule I or II controlled substance drug products by the Food and Drug Administration (“FDA”), and bulk API acquired by outsourcing facilities, manufacturers, etc. This quota category is used to capture bulk API moving from a bulk manufacturer to other registered manufacturers for their commercial manufacturing efforts. This type of quota may only be used to support commercial manufacturing efforts and may not be used to support other manufacturing efforts.
- Quota for transfer. This is a quota for the amount of material moved upstream from one registrant to another and does not include material captured under procurement quota for commercial sale. Examples include: (1) Bulk API being transferred back to the original registrant after milling; (2) Transfer of in-process material or finished dosage-forms for additional manufacturing efforts (coating, beading, encapsulation, and so forth) back to the preceding registrant; and (3) Return of material after the specified manufacturing activity has been completed or return of rejected material to the upstream manufacturer for destruction or additional processing.
- Quota for product development. This is a quota for the amount of material needed for product development and validation of manufacturing efforts. This quota is limited to that activity only and only for the development efforts noted in the application; it shall not be used or substituted for commercial production or the development of a different product. This quota is issued with the understanding that this material is not intended for commercial use, with the exception of post-FDA approved validation batches. Validation batches shall be noted specifically in an application and shall be considered product development material that will be taken into account for net disposal once a product is FDA-approved for commercial sale. No inventory will be granted for these efforts, nor will replacement quota be considered for destroyed material issued under this quota subcategory. (d) Quota for replacement. This is a type of individual manufacturing quota or procurement quota that is granted to a registrant after the registrant disposes of material that was initially intended for commercial sale, but for some reason was unable to be marketed. This quota is separate and shall not count against a registrant’s other issued quota. Replacement quota will be granted on a case-by-case basis. The merits of the request will be determined by the specifics of the registrant’s justification and situation. DEA will review the submitted DEA Form 41 or DEA Form 222 documenting the destruction of the controlled substance and evaluate the justification for the destruction to determine if replacement quota is warranted and whether or not the destroyed material is required to meet the legitimate demand of the market. Replacement quota is intended to replace material from the current quota year and not a means to replace disposed samples, analytical samples, product development material, or inventory acquired under previous quota years.
- Quota for packaging/repackaging and labeling/relabeling. This is the quota for the amount of material moved to a registrant to undergo packaging and labeling activities. This quota is limited to that activity only and only for the packaging/repackaging and labeling/ relabeling noted in the application; it may not be used or substituted for commercial production. The packaging/ repackaging and labeling/relabeling quota is intended for tracking of schedules I and II controlled substances as they undergo packaging/labeling activities; however, packaging/ repackaging and labeling/relabeling quotas shall not be counted against the aggregate production quotas.
The adoption of these quota subcategories is important because they create a new regulatory framework that may, over time, further encourage more appropriately tailored regulation of distinct manufacturing-related activities. While it was historically DEA’s practice to distinguish these subcategories for its internal purposes, the formal adoption of those subcategories may help lead to the development of a more refined and mature regulatory environment for manufacturers that only engage with substances in finished form.
Additionally, the Final Rule noted that manufactures are now going to be required to apply for quotas and abandon quotas electronically, through the UN Reporting and Quota Section’s “Quota Management System.” Notably, when addressing comments to this part of the Final Rule, DEA responded to a number of states’ Attorneys General who criticized DEA for not tailoring the quota process to “legitimate medical needs” and for failing to provide transparency in the quota setting process. DEA refused to meaningfully respond to the Attorneys General and, instead, it broadly stated that DEA sets quotas in a manner that ensures all “prescriptions that are authorized for legitimate medical purposes can be filled.” Thus, DEA is facing increased scrutiny from the public regarding the process by which it establishes APQs, which is pressure that may cause DEA to build in more reason and thought to its APQ setting in the future.
Second, the Final Rule addresses a historical gap in DEA’s regulations regarding the use of quota certifications. Under 21 CFR 1303.12(f) and 1315.32(h), only manufacturers are required to obtain and verify a certificate of quota when purchasing from another manufacturer. However, there is no such requirement for distributors or for manufacturers that purchase from a distributor that is simply shipping substances between two manufacturers. In response to this gap, DEA is expanding the quota certification verification requirement such that, in order for a manufacturer or a distributor to sell Schedule I, Schedule II or L1 Chemicals to a manufacturer, the seller must obtain from the purchasing manufacturer a “procurement quota certification” that conveys to the seller its authorized quota and “ensures that purchases do not exceed the procurement quota set by DEA.”
Third, the Final Rule implements a more restrictive framework for inventory allowances, which vary by quota type and substances:
- DEA is decreasing existing inventory allowances. Allowances for manufacturing quotas are decreased from 50% to 40% for Schedule II substances and L1 Chemicals. 21 CFR 1303.24(a); 21 CFR 1315.24(a). Allowances for procurement quotas are decreased from 50% to 35% for L1 chemicals that are not liquid injectable dosages. 21 CFR 1315.31(a). (50% allowance is retained for L1 chemicals in liquid injectable form).
- DEA is establishing a new inventory allowance for procurement quotas for all Schedule II dosage form-controlled substances. The allowance for Schedule II substances that are not liquid injectables will be 35%, and the allowance for liquid injectables will be 50%. 21 CFR 1303.16(a).
- DEA will now be suspending quotas when inventory exceeds the certain thresholds of estimated net disposals. It will suspend manufacturing quotas for Schedule II substances and L1 Chemicals when inventory exceeds 55% of estimated net disposals. 21 CFR 1303.24(b); 21 CFR 1315.24(b). It will suspend procurement quotas of Schedule II substances and L1 Chemicals that are not liquid injectables in dosage form when inventory exceeds 50% of net disposals. 21 CFR 1303.16(c); 21 CFR 1315.31(b). It will suspend procurement quotas of Schedule II substances and L1 Chemicals that are liquid injectables in dosage form when inventory exceeds 65% of net disposals. 21 CFR 1315.31(c); 21 CFR 1303.16(b).
- DEA will now be reviewing quota increase requests and require inventory levels to be at certain levels before granting such requests. Inventory must be less than 30% of the estimated net disposal for manufacturing quotas for Schedule II substances and L1 Chemicals. 21 CFR 1303.24(c); 21 CFR 1315.24(c). Inventory must be less than 25% of the estimated net disposal for procurement quotas for Schedule II substances that are not liquid injectables in dosage form. 21 CFR 1303.16(d). It must be less than 40% of the estimated net disposal for procurement quotas for Schedule II substances in liquid injectable dosage form. 21 CFR 1303.16(e). Regarding L1 Chemicals that are not liquid injectables, inventory must be less than 25% of the estimated net disposal for procurement quotas. 21 CFR 1315.31(d). L1 Chemicals in liquid injectable form will need inventories less than 40% of the estimated net disposal for procurement quotas. 21 CFR 1315.31(e).
Fourth, DEA has set new deadlines for when it must establish and announce quotas. APQs will be announced by September 1st, procurement and manufacturing quotas will be by December 1st and manufacturing quota adjustments by July 1st.
Fifth, DEA declined Congress’s invitation to migrate the quota process over to a dosage-based system. While the SUPPORT Act authorized DEA to measure quotas based on their dosage form, DEA declined to do so and, instead, it retained the quota process’s existing use of kilograms measurements. DEA noted that the SUPPORT Act left it within DEA’s discretion to decide whether to convert the quota system over to a dosage-based process.
Notably, as it addressed the SUPPORT Act, DEA specifically emphasized that the SUPPORT Act requires DEA to make “appropriate quota reductions,” but it “does not require quota increases.” Was this DEA’s way of laying the groundwork to help justify further decreased quotas DEA may already have in mind?
For more information on this recent DEA Final Rule or other matters of quota management of pharmaceuticals, please contact your Quarles attorney or: