On May 16, 2000, in its report accompanying the Food and Drug Administration (FDA or Agency) appropriations bill for 20011, the House Committee on Appropriations stated that the FDA should thoroughly review the potential impact of certain provisions of the Prescription Drug Marketing Act (PDMA) on the secondary wholesale pharmaceutical industry. The Committee directed FDA to provide a report to the Committee by January 15, 2001, summarizing the comments and issues raised by the public and proposing FDA plans to address those concerns.2 This report is intended to fulfill the Committee’s request.
Since the issuance of final regulations implementing the PDMA in December 1999, representatives primarily of the secondary wholesale distribution industry have expressed concerns about the effects those regulations may have on the industry. Although not the only concern, a primary concern has been that, as a result of factors discussed in detail below, as many as 4,000 unauthorized, secondary wholesale pharmaceutical distributors could be adversely affected as a result of certain requirements in the regulations.3
Members of the blood community also have expressed concerns that implementing the final regulations as written may disrupt effective distribution and create shortages of blood derivatives and add to health care costs.
The evolution of the PDMA spans almost two decades. The following paragraphs provide a brief background of the legislation and a discussion of the two key areas of concern: (1) the secondary wholesale distribution of human pharmaceuticals and (2) restrictions on the distribution of prescription blood derivative products by blood establishments that offer limited health care services.
A. Congressional Findings Prompting Passage of the PDMA
The congressional findings, which were made part of the text of the legislation, explain that the PDMA was intended (1) to ensure that drug products purchased by consumers would be safe and effective and (2) to avoid an unacceptable risk that counterfeit, adulterated, misbranded, subpotent, or expired drugs were being sold to American consumers.4 Congress found, among other things, that legislation was necessary because there were insufficient safeguards in the drug distribution system to prevent the introduction and retail sale of substandard, ineffective, or counterfeit drugs, and that a wholesale drug diversion submarket had developed that prevented effective control over, or even routine knowledge of, the true sources of drugs.5
Congress found that large amounts of drugs had been re-imported into the United States as American goods returned (AGRs), causing a health and safety risk to American consumers because the drugs may have become subpotent or adulterated during foreign handling and shipping.6 Congress also found that a ready market for prescription drug re-imports had been the catalyst for a continuing series of frauds against American manufacturers and had provided the cover for the importation of foreign counterfeit drugs7.
The congressional findings also stated that the then-existing system of providing drug samples to physicians through manufacturers’ representatives had been abused for decades and had resulted in the sale to consumers of misbranded, expired, and adulterated pharmaceuticals.8
According to congressional findings, the bulk resale of below-wholesale-priced prescription drugs by health care entities for ultimate sale at retail helped to fuel the diversion market and was an unfair form of competition to wholesalers and retailers who had to pay otherwise prevailing market prices.9
B. The Effects of the PDMA on the Federal Food, Drug, and Cosmetic Act
As a result of its findings, Congress passed the Prescription Drug Marketing Act of 1987 (Pub. L. 100-293), which the President signed into law on April 22, 1988. Most PDMA provisions became effective on July 22, 1988. On August 26, 1992, the Prescription Drug Amendments (P. L. 102-353, 106 Stat. 941) were passed, which amended several parts of the PDMA.
The PDMA, as amended by the Prescription Drug Amendments, modified sections 301, 303, 503, and 801 of the Federal Food, Drug, and Cosmetic Act (the Act) (21 U.S.C. 331, 333, 353, and 381) to:
C. 1988 Agency Guidance Letter
On August 1, 1988, the Agency issued a letter that provided guidance on the PDMA for industry pending the issuance of implementing regulations (see Attachment E). The letter provides detailed guidance on the Agency's interpretation of the PDMA, including clarifying definitions and explanations of specific sections.
For example, in section VII, Wholesale Distribution, under part B, Requirements for Unauthorized Distributors, the letter explains that the PDMA (section 503(e)(1)(A) of the Act) requires that a person who is engaged in the wholesale distribution of prescription drugs and who is not an authorized distributor of record of such drugs shall provide to each wholesale distributor of such drugs a statement identifying each sale of the drug (including the date of sale) before the sale to such wholesale distributor.
The letter also states that the phrase authorized distributors of record is defined in the Act10 as "those distributors with whom a manufacturer has established an on-going relationship to distribute such manufacturer's products."
Under part C, Guidance Information, the letter explains that on-going relationship may be interpreted to mean a continuing business relationship in which it is intended that the wholesale distributor engage in wholesale distribution of a manufacturer's prescription drug product or products. Evidence of such intent would include, but not be limited to
Part C also explains that the statement identifying prior sales (pedigree) should include "all necessary identifying information regarding all sales in the chain of distribution of the product, starting with the manufacturer or authorized distributor of record [emphasis added]."
The wholesale distribution industry has been operating under its interpretation of the guidance letter for the past 12 years and considers this to be the status quo. Although the guidance letter clearly contemplates some sort of a written agreement as well as some actual sales to demonstrate an on-going relationship that would qualify a distributor to be an authorized distributor exempt from the pedigree requirement, the secondary wholesale industry, as indicated in its comments, has apparently not been obtaining such written agreements. Instead, many distributors consider themselves to be authorized distributors exempt from the pedigree requirement based on sales alone.11 As a result, much of the industry has interpreted the requirement to provide a pedigree as applying to only a relatively small number of secondary distributors.
Industry's interpretation of the phrase each prior sale also is inconsistent with the PDMA (section 503(e)(1)(A) of the Act) and the regulation (§ 203.50). In 1988, when PDMA was enacted, the general understanding of the prescription drug distribution system was that most prescription drugs pass in a linear manner from a manufacturer to a retail outlet through a primary, or authorized, distributor of record (an identifiable group of distributors who could be characterized by their on-going relationships with manufacturers). The 1988 guidance letter states that the necessary identifying information regarding all sales in the chain of distribution may start with the manufacturer or authorized distributor of record. It was the Agency's understanding at the time that the authorized distributor of record would be the distributor to whom the manufacturer first sold the drugs, not just any authorized distributor who happened to purchase the drugs somewhere along the distribution chain.
Authorized distributors are exempt from the pedigree requirement and in most cases will not provide a pedigree to a distributor to whom they sell prescription drugs. In the years since issuance of the 1988 guidance letter, unauthorized distributors have interpreted the Agency's guidance letter to mean that the pedigree need only go back to the most recent authorized distributor who handled the drug.12 This interpretation is what pharmaceutical distributors consider the status quo. As a result, under the status quo, whenever a prescription drug is sold to an authorized distributor of record, the transaction history prior to that sale is no longer maintained.
D. Today's Pharmaceutical Wholesale Distribution System
A report prepared for the FDA's Office of Policy, Planning, and Legislation (ERG rept., 2001) provides a profile of the prescription drug wholesaling industry (see Attachment H). Excerpts from that report have been included here to provide a brief overview of the U. S. prescription drug distribution industry.13
The prescription drug wholesale industry in the United States is highly concentrated. Ninety (90) percent of the sales of prescription drugs are made by five major full-line companies, referred to as the big five.14 These companies each generate from $7.6 to $21.5 billion per year in revenue. They control the movement of most of the medical products from the manufacturers to the dispensers. The big five distribute a full line of drug products nationwide. The big five purchase the large majority of their drugs directly from the drug manufacturers, making them primary distributors. Because the big five have formal, written distribution contracts with the drug manufacturers, they would be considered authorized distributors as the term is defined under either the 1988 guidance letter or the final rule.
Their traditional mode of operation is to purchase prescription drugs in large quantities from manufacturers, take ownership of the drugs in their own warehouses, and resell them directly to the retail chains or hospitals in desired allotments. Increasingly, however, the big five use other methods of distribution. For example, they may arrange for a manufacturer to ship the products directly to the customer, but with the order and payment submitted through the wholesaler.
Although the big five are very large business entities, price and competitive conditions dictate that they operate on narrow profit margins. In general, the wholesale markup is modest. According to data generated in a recent U. S. Court case, for every dollar of prescription drugs sold in 1997, 76 cents went to the manufacturer, 20 cents went to the dispenser, and 4 cents went to the wholesale distributor.15 The NWDA reported that the after-tax net profit, expressed as a percent of sales, was only 0.62 percent for 1998.16
Secondary wholesalers, who generally purchase their products from other wholesalers, come in a variety of types and sizes. Regional wholesalers, probably the largest of the secondary industry, are at least an order of magnitude smaller than the big five. These companies generate revenues of approximately $500 million to $900 million per year.17 It is estimated that there are approximately 70 regional prescription drug wholesalers.18 Numerous additional, and generally smaller, wholesalers also distribute pharmaceutical products. Many viable drug wholesalers are quite small. Some small companies generate over $10 million in annual revenues with fewer than 10 staff dedicated to drug distribution. Smaller wholesalers generally are willing to deal in smaller volumes than regional wholesalers and serve the individual independent pharmacies and physicians' offices.
Secondary wholesalers seldom offer a full line of pharmaceutical products and often specialize in purchasing and selling selected discounted drug products. Although the big five also purchase and sell discounted products, secondary wholesalers are distinguished by their willingness to risk substantial capital in buying and trading discounted drugs. Their activities are built around the rapid turnover of discounted drugs in a fashion similar to that of discounters in other industries.
For example, occasionally, pharmaceutical manufacturers offer drug products for a limited time at a discounted price. This often occurs when they strive to meet a quarterly sales goal or wish to sell off inventory in advance of a price increase. Cash customers can often receive additional discounts. In response to such a sale, a secondary wholesaler might purchase quantities of the sale products. The secondary wholesaler would in turn offer the discounted products to other wholesalers, including the big five, undercutting the regular prices being offered by the manufacturer. These companies do very little advertising or sales promotion work other than publishing and advertising their sale prices. Additionally, these wholesalers (as do the big five when appropriate) often engage in trading of pharmaceutical products to take advantage of price differentials.
Like the majority of regional and smaller wholesalers, most secondary wholesalers do not have written distribution agreements with drug manufacturers whose products they purchase and resell. Some of the reasons why drug manufacturers decline to enter into written distribution agreements with the secondary wholesalers include (1) the inability of these wholesalers to carry the full line of manufacturers' products and maintain a required line of credit and (2) manufacturers' unwillingness to open new accounts . Furthermore, secondary wholesalers are usually irregular customers and do not represent an avenue for routine distribution of the manufacturers' products.19
It is estimated, based on available data, that there are more than 6,500 wholesalers. Of these, 83 percent are small (fewer than 20 employees), 11 percent are medium-sized (with 20 to 99 employees), and 6 percent are large (with more than 100 employees).20
E. Concerns of Secondary Wholesale Distributors
On March 14, 1994, the Agency issued a proposed rule implementing the PDMA as amended. The proposed rule called for the submission of comments by May 30, 1994, and the comment period was subsequently extended to August 15, 1994. The Agency published final regulations in 21 CFR part 203 implementing the provisions of the PDMA, as amended, on December 3, 1999.
The provision in the final regulations that has attracted the most attention from industry is § 203.50, which requires that, before the completion of any wholesale distribution by a wholesale distributor of a prescription drug for which the seller is not an authorized distributor of record to another wholesale distributor or retail pharmacy, the seller must provide to the purchaser a statement (or pedigree) identifying each prior sale, purchase, or trade of the drug. The identifying statement must include the proprietary and established name of the drug, its dosage, the container size, the number of containers, lot or control numbers of the drug being distributed, the business name and address of all parties to each prior transaction involving the drug, starting with the manufacturer, and the date of each previous transaction.21
Section 203.3(b) of the regulation defines authorized distributor of record as a distributor with whom a manufacturer has established an on-going relationship to distribute the manufacturer's products. This definition, too, mirrors the statutory definition of authorized distributor.22 Congress left it up to FDA to define what constitutes an on-going relationship.
Ongoing relationship is defined in § 203.3(u) of FDA’s regulations to mean an association that exists when a manufacturer and a distributor enter into a written agreement under which the distributor is authorized to distribute the manufacturer's products for a period of time or for a number of shipments. If the distributor is not authorized to distribute a manufacturer's entire product line, the agreement must identify the specific drug products that the distributor is authorized to distribute.
The provisions in the final rule related to wholesale distribution of prescription drugs by unauthorized distributors (i.e., §§ 203.3(u) and 203.50) were adopted from the provisions in the proposed rule published in the Federal Register of March 14, 1994 (59 FR 11842) and are essentially the same as the proposed provisions, except the definition of on-going relationship in the proposed rule was revised to eliminate certain requirements.23
When FDA published its final rule, the Agency responded to comments submitted on the proposed rule, explaining that the PDMA required the provision of a statement of all sales going back to the manufacturer.24 The Agency also said that a written agreement is necessary to facilitate compliance with the Act by providing a formalized way of establishing on-going relationships between manufacturers and authorized distributors.
As discussed in the preamble to the final rule (64 FR 67720 at 67747), manufacturers and authorized distributors of record are not required to provide an identifying statement when selling a drug, although the Agency encouraged them to do so voluntarily to permit unauthorized distributors to continue to be able to purchase products from them.25
Subsequent to publication of the final rule, the Agency began to receive letters and petitions and had other communications with industry, industry trade associations, and members of Congress objecting to the provisions in §§ 203.3(u) and 203.50.
On March 29, 2000, the Agency met with representatives from the wholesale industry and industry associations. The industry representatives discussed their concerns with both (1) the requirement in § 203.3(u) that there be a written authorization agreement between a manufacturer and distributor for the distributor to be considered an authorized distributor of record under § 203.3(b), and (2) the requirement in § 203.50 that unauthorized distributors provide a pedigree showing all prior sales going back to the manufacturer.
The industry representatives asserted that manufacturers are unwilling to enter into written authorization agreements with the majority of smaller wholesalers.26 As a result, wholesalers cannot become authorized distributors of record for the drugs they sell. The industry representatives also said that smaller wholesalers cannot obtain the required pedigree showing all prior sales of the drugs they purchase for sale, because a large portion of these drugs are purchased from authorized distributors who are not required to provide pedigrees and who are unwilling to voluntarily provide them.27 The industry representatives asserted that authorized distributors will not voluntarily provide pedigrees when they sell drugs to unauthorized distributors because it would require them to change their warehouse and business procedures, which would entail additional effort and expense.28
The industry representatives said that implementation of the final rule could prevent as many as 4,000 smaller, unauthorized distributors from distributing many drugs to their customers and could put them out of business, at least with respect to their prescription drug wholesale business. They also asserted that because many of their customers are small retail outlets not served by larger distributors, implementation of the final rule may leave certain markets for prescription drugs, and ultimately consumers of prescription drugs, underserved.
In addition to the meeting discussed above and other informal communications that FDA has had with industry, industry associations, and Congress, FDA received a petition for stay of action requesting that the relevant provisions of the final rule be stayed until October 1, 2001. That petition was supported by several letters submitted to the docket from entities that would be considered unauthorized distributors under the final rule.
The Agency also received a petition for reconsideration from the Small Business Administration (SBA) requesting that FDA reconsider the final rule and suspend its effective date based on the projected severe economic impact it would have on over 4,000 small businesses. The petitions argued that the requirement for a written agreement in § 203.3(u) is unreasonable because manufacturers are unwilling to enter into such agreements with the majority of smaller distributors. The petitions also asserted that authorized wholesalers are not now able and could not provide, at a reasonable cost, a pedigree to their unauthorized distributor customers that meets the requirements of § 203.50 of the final rule. The SBA petition asserted that, if the effective date of the final rule is not stayed, drug products now in the inventory of wholesalers will have to be cleared, and new orders will have to cease or be severely limited to comply with the final rule's original December 4, 2000, effective date, with corresponding disruptions in the distribution of drugs possible by summer of 2000.29
Section 503(c)(3)(A) of the Act states that no person may sell, purchase, or trade, or offer to sell, purchase, or trade, any prescription drug that was purchased by a public or private hospital or other health care entity. Section 503(c)(3)(B) of the Act states several exceptions to § 503(c)(3)(A), none of which are relevant to this discussion. Section 503(c)(3) also states that "[f]or purposes of this paragraph, the term entity does not include a wholesale distributor of drugs or a retail pharmacy licensed under State law."
Section 203.22 of the PDMA final rule provides, with certain exceptions, that no person may sell, purchase, or trade, or offer to sell, purchase, or trade any prescription drug that was purchased by a public or private hospital or other health care entity or donated or supplied at a reduced price to a charitable institution. In § 203.3(q) of the PDMA final rule, health care entity is defined as any person that provides diagnostic, medical, surgical, or dental treatment, or chronic or rehabilitative care, but does not include any retail pharmacy or wholesale distributor. Under the final rule, a person could not simultaneously be a health care entity and a retail pharmacy or wholesale distributor.
Thus, under the PDMA final rule, blood centers functioning as health care entities could not engage in wholesale distribution of prescription drugs, except for blood and blood components intended for transfusion, which are exempt from the PDMA regulations under § 203.1 of the final rule. Blood and blood components include whole blood, red blood cells, platelets, and cryoprecipitated antihemophilic factor, which are prepared by blood banks that collect blood from donors and separate out the components using physical or mechanical means. In contrast, blood derivative products are derived from human blood, plasma, or serum through a chemical fractionation manufacturing process; blood derivative products fall within the scope of the PDMA final rule. Examples of blood derivative products include albumin, antihemophilic factor, immune globulin, and alpha-1 anti-tripsin. As discussed in the preamble to the final rule, blood derivative products are not blood or blood components intended for transfusion and, therefore, could not be distributed by health care entities, including certain blood centers, after the final rule goes into effect.
After publication of the final rule, the Agency received several letters on the implications of the final regulations for blood centers that distribute blood derivative products and provide certain health care services. The blood industry asserts that the regulations, in particular, the definition of health care entity and the inclusion of blood derivative products within the scope of this rule, will severely inhibit the blood industry's ability to provide health care and may disrupt the distribution of blood derivative products to the public.
G. Decision to Delay the Effective Date; Hold a Public Hearing
Based on the concerns expressed by industry, industry associations, and Congress about implementing §§ 203.3(u) and 203.50 by the December 4, 2000, effective date, the Agency published a notice in the May 3, 2000, Federal Register (65 FR 25639) delaying the effective date for those provisions until October 1, 2001. In addition, the notice delayed the applicability of § 203.3(q) to wholesale distribution of blood derivative products by health care entities until October 1, 2001. The Federal Register notice also reopened the administrative record and gave interested persons until July 3, 2000, to submit written comments. As stated in the notice, the purpose of delaying the effective date for these provisions was to give the Agency time to obtain more information about the possible consequences of implementing them and to further evaluate the issues involved. In addition, the Agency decided to hold a public hearing 30 to solicit information from, and the views of, interested persons, including professional groups and associations, the regulated industry, health care professionals, and consumers. The Agency believed such a hearing would help develop a factual basis that the Agency could use to determine whether it is in the public health interest to take steps to modify or change the requirements in the final rule.
On May 16, 2000, the House Committee on Appropriations stated in its report accompanying the Agriculture, Rural Development, Food and Drug Administration, and Related Agencies Appropriations Bill, 2001 (report 106-619) that it supported the "recent FDA action to delay the effective date for implementing certain requirements of the Prescription Drug Marketing Act until October 1, 2001, and to reopen the administrative record in order to receive additional comments." In addition, the Committee stated it "believes the Agency should thoroughly review the potential impact of the proposed provisions on the secondary wholesale pharmaceutical industry." The Committee directed the Agency to provide a report to the Committee by January 15, 2001,31 summarizing the comments and issues raised and proposing Agency plans to address the concerns.
The public hearing was held on October 27, 2000 (see Attachments A and B). The Agency left the docket open to receive additional comments after the hearing until November 20, 2000. Although none of the primary wholesaler distributors submitted individual comments to the docket or attended the October public hearing, their views were presented in statements submitted to the docket by their trade association32 and in responses to questions the Agency submitted to them after the public hearing (see Attachment F). The questions and received responses have been placed in the docket.
At the October 27, 2000, public hearing, various associations, industry groups, and individuals made presentations to an FDA panel (see Attachments A and B). The presenters that addressed prescription drug wholesale distribution issues included the American Pharmaceutical Association, the Pharmaceutical Distributors Association, Purity Wholesaler, Inc., the Food Marketing Institute, the American Veterinary Distributors Association, the Pharmaceutical Research and Manufacturers of America (PhRMA), Public Citizen Health Research Group (Public Citizen), R&S Sales, a wholesale distributor based in Kentucky, and a representative of the National Wholesale Druggists' Association. The presenters that addressed blood derivative issues included the American National Red Cross, America's Blood Centers, and the Blood Centers of America, Inc.
In addition to testimony at the public hearing, FDA received more than 60 written comments and other submissions in response to the May 3, 2000, and September 19, 2000, Federal Register notices pertaining to wholesale distribution (i.e., the definition of on-going relationship and the pedigree requirement) and blood derivative distribution issues (e.g., the definition of health care entity and the inclusion of blood derivative products). Comments on the wholesale distribution requirements were received from industry groups and associations, wholesale distributors that would be considered unauthorized distributors under the final rule for some or all of the products they sell, and individual physicians. The vast majority of comments received opposed the Agency's definition of on-going relationship and/or the pedigree requirement in the final rule.
The general perception, as expressed in the comments and the presentations made at the public hearing, is that a significant number of prescription drug wholesale distributors would be adversely affected economically, and might be put out of business, by the requirements in the final rule, because the requirements would prohibit them from distributing some or all of the drugs they currently are distributing.33
According to the information provided, there are five large, full-line wholesale distributors, who carry most, if not all types, of pharmaceutical products; purchase the majority, but not all, of their drugs from manufacturers; distribute nationwide to a variety of customers; and handle perhaps 90 percent or more of the $100 billion pharmaceutical product distribution in the United States.34 Although it was not stated explicitly in the testimony or comments, the Agency assumes that these large distributors would be authorized distributors of record under the final rule for most, or all, of the drugs they sell. The remaining 6 to 10 percent of drugs distributed in the United States that are not distributed by the five large distributors are distributed by 4,000 secondary distributors. These secondary distributors in many cases serve smaller areas than the big five distributors and, in some cases, distribute only a limited line of pharmaceuticals.
A. Comments From Those Opposed to the Pedigree/Wholesale Distribution Regulations
Although secondary distributors apparently purchase some of their inventory directly from manufacturers, much of their inventory is purchased from other wholesale distributors. The secondary wholesale distributors said they have tried and, for the most part, have been unable to obtain written agreements from manufacturers so they can be considered authorized distributors of record for manufacturers' products. For example, one distributor stated at the hearing that out of 59 manufacturers with whom it does business and contacted to obtain a written authorization agreement, 51 did not respond at all, 1 denied the request, and 7 provided the written agreement.35
In addition, the secondary distributors state that when they purchase drugs from other distributors, it is difficult to obtain pedigrees for them. This is due to the fact that the majority of drugs are distributed through one of the five large distributors, who most likely are authorized distributors of record and, therefore, are not required to provide pedigrees for the drugs they sell.
Secondary distributors assert that because they cannot obtain authorized distributor of record status for many of the drugs they sell or obtain a pedigree for drugs purchased from sources other than a manufacturer, a significant portion of their business would be eliminated by implementation of the final rule.
They testified that they have been operating under the 1988 guidance letter and believe that the Agency should maintain the status quo (see discussion of the 1988 guidance letter and the status quo in section II.C).
2. Primary or Authorized Distributors
The five primary wholesale distributors most likely have on-going relationships with manufacturers and, therefore, would be considered authorized distributors within the meaning of the PDMA. None of the primary wholesaler distributors submitted individual comments to the docket or attended the October public hearing; however, their views were presented in statements submitted to the docket by the NWDA.
The NWDA stated that the typical authorized distributor center carries approximately 14,000 different prescription drug products and that each of these 14,000 products includes an average of three different manufacturer lot numbers at any given time. The NWDA stated further that a distribution center processes an average of 14,600 order lines per day. Thus, the burdens and resulting costs associated with requiring records of distribution of individual products by lot number, source, date, or other particulars required under the pedigree requirement would be extremely high.36 The NWDA estimated that tracking distribution of drug products by lot number would cost approximately $1 million per year per distribution center, which, for NWDA member distribution centers alone, would total $200 million per year. The NWDA stated that it would "vigorously oppose" any effort to impose additional requirements on authorized distributors.37
Because no individual comments were received from the primary distributors and they did not attend the Agency's public hearing, the Agency solicited comments from the primary distributors on five specific questions (see Attachment F). The comments submitted by the primary distributors are generally consistent with those submitted by the secondary distributors. Like the secondary wholesalers, primary wholesalers cite the low profit margin associated with their business as a reason why they purchase drugs from secondary wholesalers, and they say they cannot afford the costs associated with passing on the pedigree.
3. Individuals Who Purchase From Secondary Distributors
In addition to the potential economic harm to secondary distributors that implementation of the final rule could have, comments and hearing testimony from some individuals who purchase drugs from secondary distributors, such as retail grocery stores, pharmacies, and physicians, indicated it would be more difficult and expensive to obtain prescription drugs if secondary distributors could not continue distributing to them.38 For example, the representative for the American Pharmaceutical Association, a group that represents pharmacists, stated that pharmacists frequently use more than one distributor to meet their supply needs and that secondary wholesale distributors are used extensively by pharmacies, particularly to obtain unusual products or to purchase drugs when a pharmacy is in a remote area not served by one of the larger distributors.39 The representative said that although pharmacies do purchase directly from manufacturers and authorized distributors, secondary distributors are often used as backups to ensure access to a full range of products when they are needed.
4. Competition in the Marketplace
It was argued that implementation of the wholesale distribution requirements in the final rule would generally decrease competition in the marketplace and result in higher prescription drug prices for retailers and, ultimately, consumers.40 As the secondary distributors explained to the Agency, the secondary wholesale market operates on an arbitrage system whereby secondary distributors, by purchasing and selling drugs at discounts offered by manufacturers and other distributors, help to keep drug prices lower overall for consumers than they would otherwise be without the presence of secondary distributors.41 Under this system, secondary distributors apparently purchase from and sell drugs to large distributors (i.e., authorized distributors of record). For example, a secondary distributor might purchase a large volume of a discounted drug from a manufacturer prior to the end of the manufacturer's sales quarter and sell it at a later date to a large distributor below the cost the distributor could otherwise obtain it from the manufacturer, from whom it would normally buy. The authorized distributor could then sell the same drug to another secondary distributor or retail outlet.
Some testimony and comments argued that the final rule would not significantly help to enhance the public health. The comments and testimony stated that existing requirements for State licensing of wholesale distributors in 21 CFR part 205 of the Agency's regulations provide adequate record keeping for the purposes of conducting recalls and ensuring that diverters of prescription drugs can be readily identified by the Agency.42 With respect to recalls, several presenters at the hearing stated that recalls are generally broadly broadcast by manufacturers, not only to distributors, but also to retail pharmacies and health care professionals.43
Several presenters also stated that, even where no pedigree exists for a drug, sales records required to be maintained under 21 CFR part 205 could be used to trace the distribution history of a drug for recall purposes.44
In response to the Agency's posthearing questions, which were sent through the NWDA to the major primary distributors, the primary distributors supported maintaining the pedigree requirement as implemented under the status quo (industry's interpretation of the Agency's 1988 guidance letter, see discussion in section II.C) because it helps authorized distributors make better purchasing decisions, helps provide a safe and efficient drug distribution system, and helps the primary distributors document where a product originated.
When asked whether the pedigree requirement helps deter criminal activity, several presenters stated that sales records without a pedigree are sufficient to identify individuals in the distribution chain of a drug who may be responsible for counterfeiting or other diversion activities.45 Several presenters, including representatives of pharmacies, noted that established relationships exist between retailers and distributors of prescription drugs and that it is these relationships that provide the primary assurance of drug quality when a drug is purchased.46 The speakers did not believe that a pedigree accompanying the drug would provide significant additional assurance of drug quality.
Most of the comments and testimony supported maintaining the status quo --that is, the way the wholesale industry has been operating in the 12 years since PDMA was passed. However, the status quo (industry's interpretation of the Agency's 1988 guidance letter, see discussion in section II.C) is inconsistent with the PDMA and the regulations. Industry's interpretation allows a broader definition of who is considered an authorized distributor than is contained in either the 1988 guidance letter or the final regulations and assumes that a pedigree need only show prior sales since the drug was last handled by an authorized distributor.
B. Comments From Those In Favor of the Pedigree/Wholesale Distribution Regulations
The comments and testimony that supported the final rule as written came from manufacturers and a public interest group. They stated that the requirements in the regulations are consistent with Congress' objectives in enacting the PDMA and would be helpful in supporting those objectives. The representative from PhRMA stated at the hearing that without a legally required document ensuring traceability back to the manufacturer, one has no guarantee that the pharmaceutical products being sold are not counterfeit or that they were stored under appropriate conditions throughout their shipment chain. The representative also stated that using a small number of sales, rather than a written authorization agreement, to confer authorized distributor of record status on a distributor does not meet the definition of an on-going relationship under the statute and argued that the final rule should be implemented as published.
The representative from Public Citizen stated that Congress erred in not requiring a universal pedigree, because the pedigree as conceived would provide the opportunity for unscrupulous distributors to launder counterfeit or substandard drugs through authorized distributors. The representative argued that logistical problems in tracking the pedigree of drugs is not a legitimate reason for not requiring all distributors to maintain a pedigree. He recommended that the Act be amended to also apply the pedigree requirement to authorized distributors.
C. Comments From Blood Centers
The Agency received comments on blood-related issues from Congress, various national, regional, and local blood centers, blood center associations, and individuals. Presenters that addressed issues related to blood derivative product distribution at the October 27, 2000, hearing included the American National Red Cross (Red Cross), America's Blood Centers, and Blood Centers of America.
According to the testimony, more than 15 percent of all U.S. blood derivative products are distributed by community and Red Cross blood centers, with the Red Cross alone accounting for 10 percent. In the case of the Red Cross, the products distributed are prepared by contract manufacturers for Red Cross from plasma collected by Red Cross and distributed under the Red Cross label.
In addition to their role collecting blood and plasma and distributing blood derivative products, blood centers also provide certain health care services to the hospitals and health care entities they serve. These services include therapeutic phlebotomy, plasma exchange, and stem cell and cord blood collection and processing. In addition, blood centers work directly with physicians at hospitals and health care entities to provide medical expertise on the appropriate use of blood derivative products they are involved in distributing. It was argued that continued provision of these services is important to the public health, because it provides patients access to a higher level of medical expertise than would be possible to obtain or practical to maintain at individual community hospitals. It was argued that the value of the specialized medical expertise that exists in blood centers is critical to community health care and does not exist in the majority of local hospitals.
America's Blood Centers stated that the provision of medical expertise by blood centers is subsidized by the small margins that blood centers earn on sales of blood derivative products. Comments and testimony stated that there is no evidence that the current system of blood derivative product distribution results in any distribution of counterfeit, expired, adulterated, misbranded, or otherwise unsuitable blood derivative products to consumers. Finally, it was argued that manufacturers of blood derivative products are not granting centers special pricing that would not be available to other distributors and that blood centers are not unfairly competing with other distributors of these products.
According to the comments and testimony, implementation of the final rule as published would be detrimental to the public health because it would disrupt distribution of blood derivative products and interfere with longstanding relationships between blood centers and health care entities. The final rule would hinder centers' ability to provide blood derivative products and medical services associated with those products to hospitals, hemophilia treatment centers, and other providers.
The Red Cross stated that 85 percent of their anti-hemophilic factor is supplied directly to health care entities. They stated that implementation of the final rule would deny hemophilia patients access to this product because many treatment centers are smaller entities that are not supported by large distributors. Additionally, the Red Cross stated that 15 percent of their IVIG (intravenous immunoglobulin) products and 10 percent of their albumin product are provided directly to health care providers and account for 26,000 to 69,000 infusions annually.
It was argued that distribution of blood derivative products to hospitals and health care entities by blood centers is cost efficient because it relieves these entities of the burden of carrying inventory of specialized products that may only be needed on an infrequent basis. Also, it was stated that small or medium-size hospitals may have trouble negotiating with larger distributors and, even if needed blood derivative products could be obtained from larger distributors, they would be more expensive.
It also was argued that blood centers, as neutral, not for profit entities, are able to distribute products in short supply equitably throughout the communities they serve, avoiding problems with hoarding of products and price gouging during times of shortages. The recent shortages of immunoglobulin and alpha-1 antitrypsin were cited as examples.
After carefully reviewing all of the comments, the Agency believes that by revising its regulations, it would be able to address some, but not all, of the concerns raised by both the secondary wholesale industry and the blood industry. Four issues seem to be the focus of most concerns.
Most concerns about the final rule focus on four key issues:
By changing its regulations, the Agency would be able to address issues 1 and 4. It would take statutory changes, however, to address concerns raised regarding issues 2 and 3.
1. Who qualifies as an authorized distributor?
Current § 203.3(u) of the final regulations requires a written agreement between a manufacturer and each of its authorized distributors. The Agency agrees that this requirement is restrictive and places control of who can be an authorized distributor in the hands of manufacturers. It could prohibit many secondary distributors, including those who make regular purchases from manufacturers, from qualifying as authorized distributors of record. This could have anticompetitive consequences without the corresponding benefit of protecting the public health.
The Agency believes that changing the regulations to broaden the definition of on-going relationship could enable more wholesale distributors to qualify as authorized distributors. FDA believes that an on-going relationship could be demonstrated by evidence of two sales within the previous 24-month period. With such a change, a distributor who is able to provide such evidence would be considered an authorized distributor. If the definition in the regulation were revised, a greater number of wholesale distributors would be able to qualify as authorized distributors and would not have to maintain or pass on a pedigree as required under the PDMA and FDA’s implementing regulations. One possible consequence of this change would be that it could reduce the extent to which pedigrees currently are maintained and passed on during the distribution of prescription drugs.
Despite such a change, some wholesale distributors would still not qualify as authorized distributors. For these wholesale distributors, the pedigree requirement would remain problematic because under the regulations, they would have to obtain a pedigree showing each prior sale and pass it on when reselling prescription drugs. As discussed in the next section, they still might not be able to obtain a pedigree, unless the PDMA were changed.
2. Should authorized distributors be exempt from maintaining and passing on a pedigree?
In 1987, when PDMA was enacted, the general understanding of the prescription drug distribution system was that most prescription drugs pass in a linear manner from a manufacturer to a retail outlet through a primary, or authorized, distributor of record (an identifiable group of distributors who could be characterized by their on-going relationships with manufacturers). Congress exempted authorized distributors from the pedigree requirements in the PDMA. As a result, most authorized distributors do not maintain or pass on pedigrees. This creates a substantial problem for unauthorized distributors wishing to purchase prescription drugs from an authorized distributor and resell them. Under the PDMA, without a pedigree, an unauthorized distributor cannot legally resell prescription drugs. The secondary wholesale distributor might be able to create an incomplete pedigree that indicates whom he or she purchased the drugs from, but that pedigree would not reflect each sale back to the manufacturer as required by the PDMA.
The wholesale prescription drug distribution system has changed considerably since 1987 when the PDMA was enacted. According to the testimony and other comments, today, between 5 and 10 percent of the $100 billion wholesale pharmaceutical market is handled by secondary wholesalers (see Attachment G, table 1-7). In many cases, a primary distributor purchases prescription drugs from a manufacturer and resells them to one or more secondary wholesalers, who subsequently resell them to other wholesalers. In some cases, manufacturers sell directly to secondary distributors. Some drugs may go through several transaction cycles involving multiple primary and secondary wholesalers before arriving at their retail destination.
Furthermore, the volume of drugs that authorized distributors purchase from secondary wholesalers is significant. The NWDA told the Agency that the big five distributors purchase 2 to 4 percent of their products from sources other than manufacturers. One of the big five reported that of the approximately $16 billion total inventory purchased in 2000, approximately $350 million came from nonmanufacturer vendors.
Authorized distributors are not required to maintain a pedigree or pass one along when they resell prescription drugs to another wholesaler or retail outlet. As a result, an unscrupulous wholesale distributor seeking to introduce a counterfeit or diverted drug into commerce need only launder the product by selling it to an unknowing authorized distributor who may or may not know the true origins of the drug and who is not required to maintain or pass on a pedigree when the drugs are resold.
The PDMA pedigree exemption for authorized distributors not only puts unauthorized distributors at a disadvantage, but also has the effect of wiping the slate clean each time prescription drugs pass through an authorized distributor. Today under the status quo, a large volume of prescription drugs move through the system without pedigrees, or with incomplete pedigrees, because they have passed through an authorized distributor at least once before reaching their retail destination.
FDA believes that maintaining and passing on a pedigree on prescription drugs provides a valuable tool--even if this is required of only those secondary distributors unable to attain authorized distributor status. The pedigree requirement is a deterrent to the introduction and retail sale of substandard, ineffective, and counterfeit drugs. Although a pedigree can be, and sometimes is, falsified to disguise the true source of prescription drugs, FDA believes that requiring a pedigree makes it more difficult for someone planning to introduce counterfeit or diverted drugs into commerce. Requiring a pedigree also facilitates the efforts of law enforcement personnel seeking to identify the source of a counterfeit or diverted drug shipment and take action against those responsible.
The Agency also believes that, given today's prescription drug distribution system, the PDMA provision that exempts authorized distributors from having to maintain and pass on a pedigree undermines the purpose of the pedigree by allowing for potential gaps in the distribution history. If the definition of authorized distributor were broadened, fewer wholesalers than before would be required to maintain and pass on pedigrees on prescription drugs.
FDA does not have the authority to require authorized distributors to maintain and pass on a pedigree. Such a requirement would necessitate a statutory change. Therefore, Congress may want to consider whether the benefits of requiring authorized distributors to maintain and pass on pedigrees to deter the introduction of counterfeit or diverted drugs outweigh the costs to the primary and secondary distributors of maintaining and passing along such pedigrees.
3. What is the meaning of the phrase each prior sale?
Section 503(e)(1)(A) of the Federal Food, Drug, and Cosmetic Act requires that the pedigree must identify "each prior sale, purchase, or trade."
The Agency's 1988 guidance letter stated that the pedigree could start with the "manufacturer or authorized distributor of record." It was the Agency's understanding at the time that the authorized distributor of record would be the distributor to whom the manufacturer first sold the drugs, not just any authorized distributor who happened to purchase the drugs somewhere along the distribution chain.
Authorized distributors are exempt from the pedigree requirement and in most cases will not provide a pedigree to a distributor to whom they sell prescription drugs. In the years since issuance of the 1988 guidance letter, unauthorized distributors have interpreted the Agency's guidance letter to mean that the pedigree need only go back to the most recent authorized distributor who handled the drug. This interpretation is what pharmaceutical distributors consider the status quo.
The language in the current regulation, which is based on the statute, clarifies that the pedigree must identify "each prior sale, purchase, or trade of such drug" (§ 203.50(a)) and include "all parties to each prior transaction...starting with the manufacturer" (§ 203.50(a)(6)). Consistent with Congress' intent in enacting the PDMA, this requirement ensures that a complete history of a prescription drug is created and passed along.
As stated in the comments to the docket and in testimony given at the public hearing, the regulation, although consistent with the statute, is inconsistent with the status quo as understood by wholesalers. As a result, under the status quo, whenever a prescription drug is sold to an authorized distributor of record, the transaction history prior to that sale is no longer maintained. Secondary wholesale distributors have asked the Agency to amend the regulations to be consistent with their interpretation of the status quo (i.e., the pedigree need only go back to the most recent authorized distributor who handled the drug).
Because § 203.50 reflects the language of the statute, the FDA believes that it cannot revise the regulation to make it consistent with the status quo. Such a requirement would necessitate a statutory change. Congress may want to consider this issue in conjunction with the issue of granting authorized distributors an exemption from the pedigree requirement. Congress could require that the pedigree go back only as far as the last authorized distributor, rather than to the manufacturer. This would, however, as pointed out in the previous section, leave gaps in the pedigree and encourage the laundering of drugs through unknowing authorized distributors. Congress may wish to consider whether the benefits of requiring that a complete pedigree be maintained and passed along outweigh the costs to the primary and secondary distributors of maintaining and passing along such a pedigree.
4. Should blood centers that provide some health care services be permitted to distribute blood derivative products?
Based on the comments it has received, the Agency is reconsidering its previous position with respect to blood centers that provide certain health care services and distribute blood derivative products. The Agency is considering whether blood centers that provide some blood-related health care services should be able to continue to distribute blood derivative products.
The Agency is considering whether it should modify the regulation to allow blood centers that offer certain limited health care services and also function as wholesale distributors of blood derivative products to continue operating in both capacities.
After carefully reviewing all of the comments, the Agency believes that it would be able to address some, but not all, of the concerns raised by both the secondary wholesale industry and the blood industry.
The Agency believes, as discussed above, that concerns related to continuing to exempt authorized distributors from the pedigree requirement and to the exact meaning of the phrase each prior sale can be addressed only through statutory remedies.
The Agency has delayed the effectiveness date for §§ 203.3(u) and 203.50 and the applicability of § 203.3(q) to wholesale distribution of blood derivatives by health care entities until April 1, 2002.
1Agriculture, Rural Development, Food and Drug Administration, and Related Agencies Appropriations Bill, 2001 (report 106-619).
2The Agency was granted an extension.
3Transcript of the FDA Part 15 Hearing, Prescription Drug Marketing Act, October 27, 2000, p. 38.
4See section 2(8) of the PDMA.
5See sections 2(2) and 2(3) of the PDMA.
6The 106th Congress tried to address issues related to the reimportation of drug products when it enacted the Medicine Equity and Drug Safety Act of 2000 (P.L. 106-387, § 1(a), 114 Stat. 1549).
7See section 2(4) of the PDMA.
8See section 2(6) of the PDMA.
9See section 2(7) of the PDMA.
10Section 503(e)(4)(A) of the Act (21 U.S.C. 353(e)(4)(A).
14The five largest wholesale distributors include McKesson HBOC, Inc.; Bergen Brunswig Drug Company; Cardinal Health, Inc.; AmeriSource Corporation, and Bindley Western Drug Company.
15U.S. District Court for the District of Columbia, 1998, Civil Action No. 98-595: Federal Trade Commission v. Cardinal Health, Inc. and Bergen Brunswig Corp. and Civil Action No. 98-596: Federal Trade Commission v. Mc Kesson Corp. and Amerisource Health Corp.
16National Wholesale Druggists' Association (NWDA), 1999, 1999 NWDA Industry Profile and Healthcare Factbook, National Wholesale Druggists' Association, Reston, VA.
18This number is based on the membership roster of the NWDA.
21The requirement that the pedigree include the names and addresses of all parties to each prior transaction involving the drug and the requirement that it identify "each prior sale, purchase, or trade of such drug" are taken directly from the statute. Section 503(e)(1)(A) of the Act says that the statement [pedigree] must identify "each prior sale, purchase, or trade of such drug (including the date of the transaction and the names and addresses of all parties to the transaction)."
22Section 503(e)(4)(A) of the Act states: "the term 'authorized distributors of record' means those distributors with whom a manufacturer has established an ongoing relationship to distribute such manufacturer's products."
23The proposed rule defined on-going relationship to require a written agreement and the following additional two requirements, which were eliminated in the final rule: (1) That a sale be completed under the written agreement and (2) that the distributor be listed on the manufacturer's list of authorized distributors.
24The Agency received very few comments on the proposed requirements related to the provision of a pedigree. Only one comment objected to the requirement of a statement identifying all previous sales. Two comments objected to the definition of the term on-going relationship as it relates to the identification of authorized distributors.
25An unauthorized wholesale distributor who purchases a product from a manufacturer or authorized distributor of record without an identifying statement showing the prior sales of the drug could not provide an identifying statement to its purchasers and, therefore, could not conduct further wholesale transactions of the drug in compliance with § 203.50.
26According to the ERG rept. (pp. 1-19 and 1-20), there are several reasons for this. First, many wholesalers cannot carry the full line of a manufacturer's products and cannot maintain the required line of credit. In addition, many secondary wholesalers will only purchase products from a manufacturer under certain conditions. As a result, they do not represent "an avenue for routine distribution of a manufacturer's products."
27Testimony at the hearing indicated that there are five large full-line wholesalers that carry most if not all of the drugs distributed in the United States and distribute 90 percent or more of all drugs (Transcript 36).
28Apparently, few distributors track prescription drugs by lot number (10 percent, ERG rept. p 1-29).
29The Agency has decided to delay further the effectiveness date for §§ 203.3(u), 203.50, and 203.3(q) until April 1, 2002.
30The FDA holds public hearings according to the requirements in 21 CFR part 15, Public Hearing Before the Commissioner.
31The Agency further delayed the effectiveness date for §§ 203.3(u), 203.50, and 203.3(q) until April 1, 2002.
32The National Wholesale Druggists' Association (NWDA) represents the health care product distribution industry, including specialty and secondary source distributors.
33Transcript 19, 20, 38, 39, 69.
36Apparently, only 10 percent of distributors can track products by lot number (ERG rept., p. 1-29). In answers to questions posed by the Agency after the hearing, primary distributors said that the costs of implementing a system to maintain a pedigree would be significant.
37NWDA comment to September 19, 2000, Federal Register notice, comment # EC-2, November 20, 2000, pp. 5, 6.
43Ibid., 25, 60-61. See also ERG rept. pp. 1-28 and 1-29.
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