New FDA proposed rule will eventually preempt state drug wholesaler/3PL licensure laws

Requirements for wholesale drug distributors and 3PLs currently vary significantly across State lines. One of the goals of the Drug Supply Chain Security Act (DSCSA), is to create a uniform national standard and build an electronic, interoperable system to identify and trace certain prescription drugs as they are distributed in the United States. Once final and effective, the proposed rule will hold every U.S. wholesale distributor and 3PL to the same licensure and related standards, and only those licensed according to the national standards would be able to engage in transactions related to the sale and distribution of certain prescription drugs.

Preemption

The DSCSA includes a provision that preempts States from establishing or continuing requirements for 3PL or wholesale distributor licensure that are inconsistent with the national standards and requirements. However, the proposed rule indicates that State requirements that differ from the Federal Food, Drug, and Cosmetic Act (FDCA) with respect to licensure will not be preempted until the regulation is finalized and takes effect because the “standards and requirements” that will preempt State law will be established by regulation. For example, under FDCA Sec. 503(e)(4)(H), the distribution of a drug by its manufacturer is expressly excluded from the definition of “wholesale distribution.” Based on FDA’s interpretation of the preemption provision in the proposed rule, it appears that State laws that require manufacturers to register as wholesale distributors would not be preempted until the implementing regulation, including this same exclusion,[1] comes into effect. Note that this example may prompt comments as to whether certain statutory provisions under DSCSA should be interpreted as “standards and requirements” that qualify for preemption even before the regulations come into effect. Based on the different effective dates, the proposed rule will preempt State licensure requirements for wholesale drug distributors two years after it becomes final, and for 3PLs, one year after finalization.

In addition, the proposed rule alters FDA’s prior interpretation of the scope of the DSCSA preemption provision. In FDA’s 2014 Draft Guidance on the preemption of State wholesale drug distributor and 3PL licensing standards and requirements, FDA interpreted the preemption provision for wholesale distributors and 3PLs as a “floor” that prohibited State licensing standards and requirements that “fall below the minimum standards established by Federal law.” In the proposed rule, FDA modified its prior interpretation and determined, instead, that the Federal requirements establish both a “floor” and a “ceiling.” As a result, when the final rule comes into effect, State licensing standards and requirements must be the same as those in the regulation, and cannot be more stringent, as FDA had stated in its 2014 draft guidance. Accordingly, on the same day that FDA issued the proposed rule, the agency also finalized the guidance document, “Drug Product Tracing: The Effect of Section 585 of the FD&C Act Questions and Answers,” and stripped out all language from the draft guidance relating to the agency’s interpretation of the preemption provision for wholesale distributors and 3PLs.

Summary of proposed requirements

The proposed rule specifically requires the following of wholesale distributors and 3PLs:

• Licensure rules. Wholesale distributors and 3PLs must keep their license information current and report any changes, including those that may significantly affect operations such as changes in location or ownership, to the licensing authority.
  • 3PLs must renew their license every three years, and wholesale distributors every two years, with renewal applications submitted no more than 90 days prior to the license's date of expiration to ensure that licenses are renewed based on current information.
  • FDA would add licensure to a public database and make information about wholesale distributors and 3PLs available on the agency’s website. 
  • The proposed rule would require wholesale distributors to obtain a surety bond to be licensed and engage in wholesale distribution.
• Good storage practices. Wholesale distributors and 3PLs must comply with FDA standards for “good storage practices,” including that illegitimate products and other products unfit for distribution are kept in a clearly defined and designated area, separate from saleable products, until dispositioned so the illegitimate or otherwise unfit product is not inadvertently combined with saleable products.
• Personnel requirements. The proposed rule says wholesale distributors and 3PLs must design their facilities in such a manner that only personnel who possess appropriate and verifiable experience and training will have access to areas in which products are held.
  • FDA says a best practice would be for a 3PL or distributor to screen personnel who work in areas of its facility where prescription drug products are held for records of Federal or State criminal convictions relating to the possession, control, or distribution of prescription drugs. In addition, 3PLs and wholesale distributors, as a best practice, would require that employees state that they are not engaged in and will not engage in the illegal use of controlled substances while serving in their capacity within the 3PL or distributor, according to the proposed rule.
  • Wholesale Distributors and 3PLs must maintain and make available to the licensing authority certain information about their facilities' managers and designated representatives. To this end, FDA is establishing specific employee qualifications with respect to facility managers or designated representatives that are necessary to effect good storage practice. FDA is also proposing to require that a facility manager or designated representative of the facility manager serve in either capacity for only one facility at any one time.
  • For wholesale distributors, the proposed rule would mandate key personnel to have the appropriate education, background, training, and experience necessary to carry out their assigned functions within the operation.
• Written policies and procedures. All distributors and 3PLs would be expected to establish, maintain, and follow the written policies and procedures to address a product's receipt, security, storage, inventory, shipment, and distribution, to the extent that the requirements of those sections are relevant to the scope of their specific activities.
  • All written policies and procedures will be made available to the licensing authority upon request, and the licensing authority will be permitted to have access to and copy records to ensure that the facility is following its written policies and procedures.
  • FDA is also proposing to require that distributors and 3PLs establish written policies and procedures for handling not only expired product, but also products that are unfit for distribution, as well as suspect and illegitimate products; any drug unfit for distribution must be segregated and returned or destroyed to prevent its distribution to the patient, the proposed rule says.
  • FDA says it views it as a best practice to establish written policies and procedures to ensure that it only engages in distribution or 3PL activities on behalf of authorized trading partners with respect to a product.
• Recordkeeping and list of trading partners. FDA is proposing to require that all records be securely stored for at least three years, with procedures in place to restrict access and protect record integrity, and that any alterations made to records be signed and dated while preserving the original information contained in the record.
• Reporting to FDA. The DSCSA requires wholesale distributors and 3PLs to report to FDA for each facility: (1) The State for which the facility is licensed; (2) the facility's license number; (3) the facility's name and address; and (4) all trade names under which the facility conducts business. In the proposed rule, FDA requires that wholesale distributors and 3PLs use an electronic system provided by FDA for reporting, with annual reports due by March 31^st.
  • FDA is also proposing to require the date each State license expires, and include a unique facility identifier (UFI) that corresponds with the facility name and facility address.
  • FDA would also require wholesale distributors and 3PLs to report “significant disciplinary actions” to FDA, including a DEA registration number or State controlled substance license number.
  • The agency is proposing to require reporting to FDA within 30 calendar days of ceasing warehousing or other logistics services that it is going out of business or voluntarily withdrawing a license from a State.
  • In addition to these requirements for both wholesale distributors and 3PLs, under the proposed rule, wholesale distributors must submit the contact information of the facility manager or designated representative, including that individual's name, telephone number, and email address, with its annual reporting requirements.
• Inspections. FDA is proposing to require that a physical inspection of a facility be conducted prior to issuance of the initial license and routinely once every 3 years thereafter.
  • In addition, FDA is proposing that a wholesale distributor be required to provide offsite records within 2 business days of a request for such records by a State or Federal official, or sooner if necessitated by the duration of the inspection.

Approval of third parties to conduct licensure reviews and inspections

FDA is also proposing to establish a process by which third-party organizations will be approved by FDA to review qualifications for licensure, or to conduct inspections for the purpose of licensure. These “approved organizations” (AOs) may be approved by either a State or FDA, but the agency recommends that states that choose to rely on AOs for licensure reviews have in place the same or similar processes for AOs to conduct licensure reviews and for decisions affecting the approval status of those organizations.

FDA is proposing that the AO's licensure review be completed within 90 days upon receiving notice from FDA to conduct the licensure review. Upon completion of the licensure review, the AO would then provide FDA with a licensure review report within 7 days; FDA would then make the final determination as to whether a facility may be issued a license.

To keep its approval status, FDA is proposing to require that an AO maintain certain records for a period of at least 5 years, and that these records be readily available to FDA upon request. The required length of maintenance of records would align with the length of the entity's licensure term, FDA says. FDA is also proposing to require that AOs report potential violations at facilities to FDA within 24 hours of discovery. Last, FDA is proposing to require that those employed by an AO abide by additional requirements that are intended to secure against conflicts of interest, promote professional business practices, and protect non-public information.

Under the proposed rule, FDA would allow AOs to hire outside contractors to conduct licensure reviews or licensure review-related activities; however, AOs who decide to use outside contractors must ensure that the contractors not only effectively carry out the licensure review or licensure review-related activities in a manner consistent with this proposed regulation to ensure public health, but the AO must also ensure that the contractors properly protect all non-public information. The proposal would prohibit contractors from subcontracting licensure review or licensure review-related activities, however.

Right to hearings

The regulation proposes that wholesale distributors and 3PLs could request a formal evidentiary public hearing for review of decisions affecting the denial, suspension, or revocation of 3PL or wholesale distributor licenses issued by FDA. The proposed rule contemplates that “most suspensions will happen only after notice and opportunity to request a hearing,” but adds that “FDA reserves the ability to suspend approval prior to a hearing if there is a reasonable probability that the organization's noncompliance will cause imminent and serious adverse health consequences or death to humans.” FDA proposes that a suspended approval can be reinstated if the issue is resolved within 1 year from the date of suspension.

Changes from the PDMA

Prior to the DSCSA's enactment, the last comprehensive legislative action related to prescription drug distribution was the Prescription Drug Marketing Act of 1987 (PDMA), which required wholesale distributors to obtain licenses from States in which they were operating. The PDMA provided neither a specific definition of 3PL-type entities nor specific oversight over them; as a result, some States chose to regulate and license 3PLs as wholesale distributors, with others choosing to license 3PLs as separate entities. The DSCSA now requires that all wholesale distributor and 3PL licenses meet the standards established by FDA, and that 3PLs not be licensed as wholesale distributors.

To this end, FDA issued two other notices concurrently with the proposed rule: one withdrawing a proposed rule from 2011 that was never finalized due to the enactment of the DSCSA, and another announcing the proposed rule titled “Certain Requirements Regarding Prescription Drug Marketing,” which would remove or revise outdated and conflicting regulatory requirements to align with changes or affected provisions of the FDCA following enactment of the DSCSA. FDA is accepting comments on this proposed rule through April 5, 2022.

Next steps

FDA said it intends to post a webinar which will provide an overview of the proposed rule’s key provisions to assist stakeholders in understanding the proposed rule and preparing comments. FDA is also accepting comments on the proposed rule through June 6, 2022. If you may wish to submit a comment, or have any questions on the proposed rule or on the Drug Supply Chain Security Act more broadly, please contact any of the authors of this alert or the Hogan Lovells attorney with whom you generally work.

Authored by David Horowitz and Meredith Manning