On February 4, 2022—more than six years after the deadline imposed by statute—the U.S. Food and Drug Administration (“FDA”) issued a proposed rule titled “National Standards for the Licensure of Wholesale Drug Distributors and Third-Party Logistics Providers” (“Proposed Rule”),¹ required by the Drug Supply Chain Security Act (“DSCSA”). The DSCSA is an anti-counterfeiting federal drug law enacted in 2013 that provides for the tracking and tracing of prescription drug products, and includes requirements for the investigation, quarantine, and disposition of suspect and illegitimate prescription drug products. The DSCSA also required the FDA to develop national licensure standards for wholesale drug distributors (“Wholesalers”).

The Proposed Rule is a result of the FDA’s efforts to establish national uniform licensure standards for Wholesalers. If finalized, the Proposed Rule would completely preempt and replace the current patchwork of Wholesaler licensing standards across the 50 states. The significant details of the Proposed Rule are outlined below. Comments on the Proposed Rule are due on June 6, 2022.

Scope of the Proposed Rule

Historically, states have been responsible for licensure of Wholesalers. As with any state-based licensure scheme, regulatory variations exist across the states. Under the Proposed Rule, an entity that engages in “wholesale distribution,” as defined under the Food, Drug, and Cosmetic Act (“FDCA”), as amended by the DSCSA, must be licensed in accordance with the licensure standards outlined in the Proposed Rule, unless the entity falls under an exemption. States may choose to either continue to issue Wholesaler licenses through their own state agencies or transfer such responsibility to the FDA.² However, as further explained below, states that choose to continue to issue such licenses will be required to follow any FDA finalized standards from the Proposed Rule.  

The scope of the Proposed Rule is broad. The requirements of the Proposed Rule, if finalized, would apply to stakeholders beyond traditional Wholesalers—such as pharmacies, drug manufacturers, and other prescription drug product trading partners that maintain multiple types of trading partner license types. For example, pharmacies that maintain pharmacy distribution centers may also be licensed as Wholesalers and would be subject to the Proposed Rule.³

Despite the breadth of the Proposed Rule, there are important carve-outs for certain stakeholders. The Proposed Rule proposes to codify the FDA’s existing informal recognition of the 5 percent “minimal quantities” rule, which provides that pharmacies may sell up to 5 percent of their annual total dollar volume of prescription sales to licensed practitioners for in-office use, and such pharmacies will not be considered to be Wholesalers based on those sales.⁴ Section 503(e)(4) of the FDCA excludes, from the concept of wholesale distribution, “minimal quantities” of drugs sold by a pharmacy to a licensed practitioner for in-office use, but never defines “minimal quantities.” Previously, in a 1999 final rule regarding the Prescription Drug Marketing Act of 1987, the FDA recognized the 5 percent limit, but did so in the preamble and did not codify the limit in a regulation.⁵ The FDA does not state why it chose the Proposed Rule as the vehicle for codifying the 5 percent limit, but, within the preamble, the FDA notes that it recognizes the 5 percent limit as the industry standard.⁶

Even though the FDA is codifying the 5 percent limit, the agency firmly states that a pharmacy selling drugs to entities that are not licensed practitioners will be considered a Wholesaler regardless of whether the sales fall below the 5 percent “minimal quantities” threshold. The FDA notes that the National Association of Boards of Pharmacy has endorsed expanding the scope of the carve-out to apply to sales from pharmacy to pharmacy, as long as the sales are for dispensing and not for resale purposes. However, the FDA maintains that such sales are already addressed by the DSCSA “specific patient need” exemption for Wholesaler licensure, which allows pharmacies to “transfer … a product from one pharmacy to another to fill a prescription for an identified patient” without registering as a Wholesaler. Similarly, the FDA says that even though some states have expanded the exemption to include sales from pharmacies to other entities outside of licensed practitioners for office use, the statutory language of Section 503(e)(4)(E) of the FDCA prohibits the FDA from adopting the same expansion. The FDA seeks comments on the codification of the 5 percent limit.⁷

The Proposed Rule also maintains a broad interpretation of the scope of Wholesaler functions. Specifically, the preamble of the Proposed Rule provides that Wholesalers include not only those who distribute prescription drugs in finished dosage forms but also those who distribute bulk drug substances. The FDA believes that bulk drug substances require the same safeguards against diversion and theft as finished drug products. Presently, not all states regulate distributors of bulk drug substances as Wholesalers. This scope expansion at the federal level and the preemptive effect of a final rule will require licensure of all distributors of bulk drug substances. Such distributors will need to ensure that they are licensed in all states in which they do business and retain the Wholesaler licensure function, even if presently the distributors may only be required to be licensed in some states.⁸

Preemption

The most significant aspect of the Proposed Rule is the FDA’s clarification that the national standards completely preempt state standards. For the past eight years, industry stakeholders harbored concerns regarding the FDA’s ultimate decision as to the scope of preemption of the Proposed Rule’s standards, as a 2014 FDA draft guidance document⁹ had previously suggested that the national standards would merely serve as a preemptive floor to state standards. The Proposed Rule is clear that the FDA national standards completely preempt state licensing standards, aligning with the view of industry stakeholders.¹⁰

Even though there is complete preemption of state standards, in the preamble, the FDA provides that the scope of preemption will not extend to the traditional police powers of the states. For example, states are still free to regulate the enforcement of, and penalties concerning, Wholesaler employees who engage in criminal activity related to prescription drugs, as long as the regulations are not related to Wholesaler licensure.¹¹

Moreover, the Proposed Rule would allow for states to continue to license Wholesalers, as long as the state licensure standards are the same as outlined in the Proposed Rule. Whether some or all of the states continue to license Wholesalers remains to be seen and likely involves a cost-benefit analysis by each state. New state laws and/or regulations will need to be developed to comply with the new federal regulations, and states may need to assess whether the revenue resulting from state licensure outweighs the costs of oversight and implementation of new rules.

Application, Licensure, and Inspection

The general application and licensure process proposed by the FDA in the Proposed Rule is not unique. Nonetheless, stakeholders may take issue with its clarity or with provisions that may be viewed as burdensome. For example, the FDA is proposing that the lookback period for disclosure of licensure violations or significant disciplinary actions be seven years, which some stakeholders may view as too extensive.¹²

For the most part, the licensure process outlined in the Proposed Rule applies only to licenses obtained from the FDA and is merely a recommendation for the states that issue their own licenses. However, whether the FDA or a state is issuing the license, the Proposed Rule would require that an inspection of the facility be performed after the filing of the application and before the state or the FDA issues the license. If the state is issuing the license, then the state or a third-party approved by the state would conduct the inspection. For non-resident licenses issued by a state, the same applies or the non-resident state may rely on the inspection by the licensee’s home state. If the FDA is issuing the license, the applicant may indicate a preference for a specific third-party FDA-approved “approved organization”¹³ to conduct the inspection, or if none exists, then the FDA will conduct the inspection. Regardless, in the latter situation, the FDA, not the approved organization, determines whether the applicant meets all of the applicable licensing requirements.¹⁴

The inspection described within the Proposed Rule is an in-depth process, requiring a review of records, as well as a physical inspection of the facility. Wholesalers will also be required to make offsite records available for inspection within two business days of a request to inspect such records. Finally, the Proposed Rule would mandate routine inspections every three years. However, license renewal would only be required every two years. Some aspects of these inspection requirements may generate comments from stakeholders.¹⁵

Change of Ownership

In defining key terms, the FDA has provided a definition of “change of entity ownership,” which addresses Wholesaler ownership changes involving partnerships, unincorporated sole proprietorships, corporations, and limited liability companies. Regarding the latter two entities, the FDA is proposing that certain changes in equity or stock ownership not constitute a “change of entity ownership.” For those frequently involved in stock acquisitions involving an entity with many Wholesaler licenses, this is a positive development for two reasons. First, there will now be a common national standard for what is, and what is not, a change of ownership for Wholesaler licensure purposes, instead of differing standards in different states. Second, by carving out some equity transfers as not triggering a change of ownership, the change-of-ownership burden on the parties to such stock transactions is lessened.¹⁶

Where a “change of entity ownership” does occur, a new application must be submitted within 30 days prior to the “change of entity ownership,” and a new inspection of the facility will be required. However, operations may continue under the original license for 30 calendar days after the change or until the new license is issued, whichever occurs earlier. Other changes not considered a “change of entity ownership” would require only the submission of new information within 30 days after such a change is effective.¹⁷

Personnel Requirements

The Proposed Rule provides detailed requirements that must be met by Wholesalers’ “key personnel,” which expansively includes any individual authorized to enter areas where prescription drugs are held and who are likely to handle such drugs. The Wholesaler must maintain a list of officers, directors, facility managers, designated representatives, and other “key personnel,” including a description of each person’s duties and a summary of each person’s qualifications. The Wholesaler must also maintain policies and procedures that ensure that the qualifications of “key personnel” are met, maintained, and documented, and that identify the facility personnel responsible for certain enumerated important functions. “Key personnel” must have the education, background, training, and experience necessary to perform that person’s assigned functions, and licensure may be denied where “key personnel” have engaged in any wrongdoing enumerated in the Proposed Rule.¹⁸ Some of these requirements may generate stakeholder criticism as they could be seen as burdensome, especially given the broad definition of the term “key personnel.”

In addition to “key personnel,” facility managers and/or their designated representatives are subject to additional requirements, including that each facility manager and/or designated representative may only serve in that role for one facility at a time. Moreover, before employment, such individuals must submit fingerprints for conducting local and national criminal background checks.¹⁹

Prescription Drug Storage and Handling

The Proposed Rule provides for an exhaustive list of Wholesaler drug storage and handling requirements, as well as associated policies and procedures to be developed and maintained by Wholesalers. It is anticipated that some or many stakeholders may object to the requirements as being overly burdensome and/or vague. For example, the Proposed Rule requires that equipment be installed, maintained, and repaired by “qualified individuals,” yet the latter term is never defined.²⁰

Additionally, the FDA makes clear that where a facility is licensed as two types of trading partners, such as a pharmacy and Wholesaler, the facility must have separate systems and processes in place for the separate dispensing and wholesale distribution functions applicable to each trading partner type.²¹ This requirement is not explained in detail, and it is likely that some stakeholders with dual functions will push back on this requirement as requiring duplication and being unduly burdensome.

Regarding recordkeeping requirements, the proposed requirements are fairly consistent with standards imposed under existing state laws. However, under the Proposed Rule, any alterations to records must be signed and dated by the person making the alteration, original information must be preserved, and there must be documentation for the reason for the alteration.²² The FDA may receive comments that this provision is unduly burdensome to stakeholders, and the requirement to preserve original information could be difficult to operationalize, as well. The FDA is proposing to require that applicable records be retained for three years, except for records of suspect and illegitimate product investigations, destroyed products, nonsaleable returned products, and recalled drugs, which must be kept for six years. Presumably, the start date for the record retention period would be the creation of the record or receipt of the record, but the FDA does not clarify.²³ Accordingly, stakeholders may want to seek clarity on this issue in submitted comments.

Reporting Requirements

Wholesaler reporting requirements are included in the DSCSA statute. The Proposed Rule provides for reporting requirements following initial receipt of a license, annual reporting, reporting of facility closures, and reporting of voluntary withdrawal of a state license, along with corresponding timelines for such reporting. As required by statute, the Wholesaler must annually submit specifically enumerated reports in accordance with requirements in the Proposed Rule, including any significant disciplinary actions by a state or federal agency against the Wholesaler. Significant disciplinary actions also must be reported to the FDA within 30 days of any final action taken by a state or federal licensing authority against the Wholesaler. A “significant disciplinary action” is any action that limits or prevents the Wholesaler from distributing or facilitating the distribution of prescription drugs. The FDA also suggests that where the disciplinary action involves the Drug Enforcement Administration (“DEA”) or a state-controlled substance license, information regarding the DEA registration and/or state-controlled substance license should be reported if the disciplinary action limits the Wholesaler’s ability to distribute controlled substances.²⁴

Licensure Denial, Suspension, Reinstatement, Revocation, and Voluntary Termination

Along with setting forth the process of obtaining a license and outlining corresponding licensure standards, the Proposed Rule establishes the process for, and enumerates eight substantive reasons for, denying a license application, as well as two additional reasons for denying a renewal application. The licensure suspension and revocation procedures illustrate new tools available to the FDA to enforce the dictates of the DSCSA. The process generally includes an applicant’s right to notice of the intent to deny the license, the opportunity for the applicant to show that licensure requirements were met, the opportunity for reconsideration of a denial, and an opportunity to request a hearing. A similar process exists concerning action to suspend a Wholesaler’s license. However, there is also a process for immediate suspension before notice and an opportunity for a hearing when Wholesaler noncompliance poses an imminent threat to public safety, such as distributing illegitimate products and refusing to take corrective action to prevent such distribution. A hearing may still be requested, but the suspension is immediate.²⁵

An upheld suspension will generally result in the licensing authority moving to revoke the Wholesaler’s license, with the licensee having the opportunity to request a hearing. However, suspended licenses may also be reinstated upon a showing of compliance and any inspection that may be required by the licensing authority. The option for immediate licensure suspension is particularly powerful given the potential breadth of the term “imminent threat to public safety.” With it, the FDA is sending a message that Wholesalers who fail to comply with track and trace requirements and/or requirements for the handling of suspect and illegitimate products could face serious licensure consequences.²⁶

Effective Date

The Proposed Rule represents the very beginning of the movement towards national Wholesaler licensure requirements. Comments on the Proposed Rule are due on June 6, 2022, and substantial time may pass before the FDA issues the final rule. Even once finalized, per the dictates of the Proposed Rule, the final licensure standards will not be enforced for an additional two years after the final rule is published. Accordingly, it is unlikely that the national Wholesaler licensure standards will be enforced until at least 2025. Until that time, existing state-based Wholesaler licensure standards will remain in place.²⁷

ENDNOTES

[1] National Standards for the Licensure of Wholesale Drug Distributors and Third-Party Logistics Providers, 87 Fed. Reg. 6708 (February 4, 2022), available at https://www.govinfo.gov/content/pkg/FR-2022-02-04/pdf/2022-01929.pdf. The scope of this Insight solely focuses on the national Wholesaler licensure standards.

[2] 87 Fed. Reg. at 6710-6712.

[3] Id. at 6713.

[4] Id. at 6711.

[5] 64 Fed. Reg. 67720.

[6] 87 Fed. Reg. at 6714.

[7] Id. at 6714-15; 21 U.S.C.A. § 360eee(19).

[8] Id. at 6713. The scope of the Proposed Rule does not include those who distribute intermediates used in the synthesis of such bulk drug substances.

[9] FDA, Guidance for Industry: ‘‘Draft Guidance for Industry on The Effect of Section 585 of the FD&C Act on Drug Product Tracing and Wholesale Drug Distributor and Third-Party Logistics Provider Licensing Standards and Requirements: Questions and Answers’’ (October 2014), available at https://www.fda.gov/media/89954/download.

[10] 87 Fed. Reg. at 6709.

[11] Id.

[12] 87 Fed. Reg. at 6723-24.

[13] The Proposed Rule contains detailed regulations governing the FDA’s use of “approved organizations,” the required qualifications for “approved organizations,” and the process and procedure for an organization to become an “approved organization.”

[14] 87 Fed. Reg. at 6724-25, 6727-28.

[15] Id. at 6727-28.

[16] Id. at 6738.

[17] Id. at 6750.

[18] Id. at 6714, 6725.

[19] Id. at 6725-26.

[20] Id. at 6726-27.

[21] Id. at 6726.

[22] Id. at 6727.

[23] Id. at 6727, 6752-53.

[24] Id. at 6728-29.

[25] Id. at 6729-30.

[26] Id.

[27] Id. at 6708.