The Clock is Ticking: Comments to Proposed Federal Rules For Wholesalers and 3PLs are Due June 6th and Here’s What We Think
On February 4, 2022, the FDA released its long-awaited proposed national standards for the licensure of third party logistics providers (3PLs) and wholesale drug distributors. The draft rules were years over-due and the delay increased the variation across wholesale and 3PL licensure that the federal Drug Supply Chain Security Act (DSCSA) intended to resolve. The proposed rules create more questions than answers and will likely require significant time and litigation before the rules are finalized.
The DSCSA directed the FDA to promulgate rules to establish national standards for the licensure of wholesale drug distributors and 3PLs as required by sections 583 and 584 of the Food, Drug and Cosmetic Act as amended by the DSCSA. The proposed rules and preamble cover a lot of ground, from proposed definitions and standards to the withdrawal of previous guidance saying licensing standards that were noncompliant with the DSCSA were preempted as of November 23, 2017. See page 6735, Section X.A. Here are some of the highlights we saw and questions we have about gaps or challenges in the proposed rules.
- The proposed rules only discuss prescription drug wholesalers and 3PLs, and rightly so since the DSCSA only governs the distribution of prescription drugs. A number of states, however, regulate the wholesale distribution of prescription devices. States will be forced to draft a separate section of the law that addresses wholesale distribution of prescription devices, creating yet another license classification that these providers will have to obtain and track.
- Many states allow pharmacies to sell “minimum quantities” of prescription drugs to practitioners and sometimes other health care facilities without the need for a wholesale permit. The proposed rule will limit these sales to practitioners for office only and capped at 5 percent of the total dollar volume of that retail pharmacy’s annual prescription sales. See § 205.3(h). This will prevent pharmacies from selling to each other (outside of intracompany transfers), something that some states permitted, and it isn’t clear if it would also prohibit sales from pharmacies to dispensers that will be used for dispensing rather than use or administration in the office.
- “Facility” is defined as a site at one general, permanent, physical location used to store or handle prescription drugs. Where does this leave virtual wholesalers, which states are increasingly licensing because they are the entities passing title to subsequent purchasers?
- “Change of entity ownership” appears limited to changes at the operating entity level. If this is correct, change of ownership (CHOWs) above the operating entity level won’t need to be submitted. Considering that some states require CHOW filings for changes at higher levels, this will simplify and standardize this process. This is great for the facilities but will likely be an area of concern for boards that traditionally dug deeper into ownership.
- The definition of “wholesale distribution” includes a number of common exceptions, such as intracompany transfers, transfers for emergency use, and distributions by a 3PL. It also includes the return of salable drug returns when conducted by a dispenser, which is an exception that is commonly missed in state exception lists.
- The DSCSA requires the FDA to establish standards for the licensure of wholesalers and 3PLs. The proposed rules go beyond the basic licensure requirements, though, even proposing standards for the hearing process for a denied license. The California Board of Pharmacy has already objected, arguing that rules in these categories go beyond “licensing” and should be omitted from the final rule.
- The DSCSA preempts state provisions that are “inconsistent with or “covered by” the federal requirements, which the FDA interprets to establish a “floor” and a “ceiling”. It will be interesting to see how this plays out, especially when the room contains furniture. What happens, for example, with California’s licensure requirement for designated representatives and the requirement that a designated representative be on-site at all times? This concept isn’t in the proposed rules, but certainly is a part of wholesale licensure. Will it be considered preempted? We predict this will be an area of future litigation.
- The rules create federal licensure processes for 3PLs and wholesalers if the state does not have a program “consistent with the standards set forth” in the rules. See §§ 205.6(a) and 205.23(a). Who decides when a state’s requirements are not consistent? The applicant, the state, or the FDA?
- CHOWs resulting in a “change in the entity” engaged in 3PL activities require a new application no later than 30 days prior to the CHOW. See § 205.7(c). Does this mean that a grandparent level CHOW does not trigger a new application?
- Oddly, the wholesale rules require a new license for “any change in the person engaged in wholesale distribution”, rather than the “entity”. See § 205.24(c) (italics added). We have no idea what this means or if this was a drafting error.
- If a new application is required under the CHOW, the facility can continue to operate under the original license for 30 calendar days after the CHOW occurs or the application is approved, whichever is sooner. This process takes far longer at the state level and this is often entirely out of the facility’s hands, so we hope this timeframe is removed and the facility can operate until the new owner is approved. This is particularly problematic if the home state is delayed in issuing the home state application since the nonresident permits often wait until the home state permit issues to issue the nonresident permit. Otherwise, facilities will find themselves unable to provide services in states that cannot process the new application in time.
- Inspections must be conducted before the initial license of a facility. See §§ 205.16(a) and 205.28(a). This is not possible in some states at this time due to understaffing and it isn’t clear if third party accreditation services can perform inspections promptly.
- 3PLs that outsource transportation to a third party are responsible for the common carrier’s compliance with polices that protect against breakage, contamination, adulteration, theft, and exposure to conditions that may compromise their quality and integrity. See § 205.12(c)(5)(ii). Oddly, this isn’t mirrored in the wholesale section.
- Any alterations to records must be signed and dated by the individual making the alteration. See §§ 205.13(a)(3) 205.27(b)(4). It should be clear that these can be digitally recorded and maintained.
- A wholesale permit can be denied if “key personnel” delayed or impeded an inspection, provided false information on an application for distributing prescription drugs, or were subject to a suspension or revocation of a license for the manufacture or distribution of prescription drugs. See § 205.25(c). Aside from the usual owners, officers and designated representative, the definition of “key personnel” includes “individuals authorized to enter areas where prescription drugs are held and are likely to handle” them as part of their duties. See § 205.3(g). This broad definition means wholesalers will have to greatly increase their hiring due diligence for almost all of the facility staff.
- The wholesaler must also maintain a list of key personnel with a description of their duties and summary of their qualifications. See § 205.25(d) and (e).
These are just some of the interesting areas to watch as these proposed rules evolve. As of today’s date, the comment section is fairly slim, perhaps as industry leaders work through these rules and wait to see what other comments are posted. You can click here for the federal register page for the rule proposal with a link to the public comments.
Boards of Pharmacy are also reviewing the proposal and preparing comments. The California Board of Pharmacy voted at their April board meeting to approve submission of a comment letter summarizing the board's major concerns with the proposed rule. We suspect the letter will be similar to a memo prepared for the April 2022 board meeting, found here. Per comments made at the California board meeting, other boards share the same concerns raised by the California Board of Pharmacy.
We will be watching board meetings and the rule comments page as this process continues and will keep you posted. If you are seeking further guidance or if you have any specific inquiries, please contact your local Quarles & Brady attorney, or: