FDA Releases Proposed Rules on National Licensure Standards for Wholesale Drug Distributors and Third-Party Logistics Providers (3PLs)

Introduction

Enacted in 2013 as part of the Drug Quality and Security Act (DQSA), the Drug Supply Chain Security Act (DSCSA) created the first federal law to mandate enhanced requirements for domestic prescription drug distribution, including track and trace requirements and drug product serialization. Among the many new requirements set forth in the DSCSA, Congress required FDA to update and create national standards for the licensure of wholesale drug distributors (WDDs) and third-party logistics providers (3PLs). The DSCSA also amended the Prescription Drug Marketing Act (PDMA) of 1987 regarding certain WDD requirements.

Although these standards were required to be issued by November 2015, last week, after conducting a “comprehensive review of existing State standards” for WDDs and 3PL licensure, on February 3, 2022, FDA proposed the long awaited regulations (Proposed Rule) “to ensure that the supply chain remains secure and that those prescription drugs subject to the DSCSA that are moving through the supply chain are properly stored, handled, and transported.”¹ When final, these rules will “provide greater assurance that [U.S.] supply chain participants are sufficiently vetted and qualified to distribute products” and “help diminish opportunities for dangerous and criminal conduct affecting the supply of prescription drugs in the United States.”²

This Advisory first highlights certain provisions of interest to manufacturers. Second, we summarize the proposed national standards for WDD and 3PL licensure. Third, we outline FDA’s proposal to establish approved organizations (AOs) that can review license applications, inspect, and oversee WDDs and 3PLs. Finally, we conclude with FDA’s federalism or preemption analysis. Comments are due to FDA by June 6, 2022 (Docket No. FDA-2020-N-1663). Notably, in connection with the proposed rule, FDA also:

• Withdrew a July 2011 proposed rule that would have amended certain PDMA regulations, effective February 4, 2022;³
• Proposed a new rule to amend PDMA regulations to reflect required DSCSA changes, which would become effective 30 calendar days after publication;⁴ and
• Issued a final guidance to clarify FDA’s interpretation of the DSCSA’s preemption provisions regarding its track and trace provisions.⁵

FDA has proposed that the national licensure standards for both 3PLs and WDDs will be effective two (2) years after the date the final rule is published. While the DSCSA provides that the 3PL rules should go into effect one year after the final rule, FDA “does not intend to enforce” such requirements until two years after the final rule to provide States the opportunity to establish or modify existing 3PL licensure programs. Likewise, FDA noted that it would not enforce the requirements that authorized trading partners use “authorized” 3PLs until two years after the final rule is published.

Key Considerations for Biopharmaceutical Manufacturers

While the Proposed Rule focuses on requirements for WDDs and 3PLs, several aspects of the proposal, if finalized, may be of particular interest to biopharmaceutical manufacturers:

• If finalized, FDA’s revised interpretation of the DSCSA’s preemption clause would likely allow drug manufacturers to forgo state and non-resident or out-of-state wholesaler licenses because the DSCSA amended the PDMA to exclude from the definition of “wholesale distribution” the “distribution of a drug by the manufacturer of such drug.” If finalized and unchallenged in court, States would either be required to enact the same exemption or would no longer be able to rely on broad definitions of “wholesalers,” “manufacturers” or “labelers” to require drug manufacturers to obtain such licenses.
• FDA proposed clarifying that the DSCSA’s definition of “product” “excludes active pharmaceutical ingredients intended for incorporation into a finished drug product but have yet to undergo substantial further manufacturing to become the finished dosage form for administration.”⁶
• FDA proposed, in preamble language only, that entities that distribute bulk drug substances “must have the same safeguards and provisions as the distribution of finished drug products,” including to “prevent diversion and theft.”⁷
• FDA proposed to exempt from the definition of wholesale distribution “the sale or transfer of a drug for investigational or research purposes to an investigator, as defined in 21 CFR 312.3 (or any successor regulation), under an investigational new drug application (IND) submitted to FDA.” FDA reasoned that distribution of drugs under an IND are “outside the scope of wholesale distribution because the drug is used for in vitro, clinical, or other research purposes under an IND.”⁸ FDA would codify this position in its proposed definition of “Other Than a Consumer or Patient,” which would not include a “clinical investigator.”⁹
• FDA proposed that WDDs must provide notice within 24 hours to manufacturers or other authorized trading partners where the WDD obtained product if the WDD identifies any “deviations from storage requirements.” This could require manufacturers to update or review current SOPs and practices to reflect such notifications, particularly as they could raise other DSCSA (e.g., suspect or illegitimate) or FDA (e.g., recall, field alert) obligations.
• The DSCSA exempts from the definition of “wholesale distribution” the “distribution of minimal quantities of drug by a licensed retail pharmacy to a licensed practitioner for office use.” FDA proposed to define “minimal quantities” to mean the “total annual dollar volume of prescription drugs sold by a retail pharmacy to licensed practitioners for office use does not exceed 5 percent of the total dollar volume of that retail pharmacy’s annual prescription drug sales.”¹⁰ FDA recognized this limit to strike the balance of practitioners who may not purchase enough drugs to go through a WDD or may not otherwise easily obtain drugs for office use versus the risks of pharmacies engaging in unlicensed wholesale distribution. FDA noted that the NABP passed a resolution in 2013 supporting the 5 percent rule. FDA clarified that while some states have allowed retail pharmacies to distribute to other entities, the FDA exemption would only apply to licensed practitioners for office use.
• FDA proposed to clarify that the exemption from wholesale distribution “for emergency medical reasons” includes not only a public health emergency declaration pursuant to section 319 of the Public Health Service Act, but also: (1) “the distribution of a drug to a first responder or other authorized individual administering prescription drugs to acutely ill or injured persons in an emergency situation and outside a healthcare facility; and (2) a long-term care facility receiving an emergency kit containing drugs for use in emergency situations to treat acutely ill or injured persons during hours of the day when necessary drugs cannot be obtained from a dispenser.”¹¹
• FDA proposed to clarify that the entity which needs a wholesaler or 3PL license is the “facility,”¹² that is “one general, permanent, physical location used to store or handle prescription drugs,” and does “not include a site, such as a corporate office or headquarters, where the sole activity conducted at the site is one of oversight, support, or business administrative function.”¹³

National Standards for Wholesale Drug Distributors (21 CFR 205 Part C)

Licensure Application, General Requirements, and Key Personnel

Largely consistent with current practices, 21 CFR Part 205 would require that any individual or entity engaged in “wholesale distribution” obtain: (1) a license by the State from which the drug is distributed; or (2) a license by FDA or an AO (discussed below) if the State has not established a licensure requirement consistent with the Proposed Rule (when final); and (3) a license in the State into which the drug is distributed, “if such license is required by that State.”¹⁴ Licenses would be issued or renewed for two (2) year periods, expiring after the date the license was issued.¹⁵ FDA proposed that: (1) any change in WDD location will require an inspection of the new facility prior to the WDD beginning operations at the new facility;¹⁶ and (2) any “change of ownership”¹⁷ or change in the person engaged in wholesale distribution will require a new license prior to beginning operations.¹⁸ FDA also proposed prohibiting certain individuals or entities from being licensed as a WDD.¹⁹

FDA further proposed that “key personnel” of the WDD must have the education, background, training and experience necessary to perform his or her assigned functions. FDA proposes to define “key personnel” as essentially any individual with authority or responsibility to enter areas where prescription drugs are held or to handle prescription drugs.²⁰ WDDs, as proposed, must also have a facility manager or “designated representative” (DR)²¹ with certain qualifications proposed by FDA.²²

Largely consistent with current PDMA and State WDD licensure requirements, WDDs would be required to establish and implement written policies and procedures in a number of areas, including: (1) ensuring qualifications of key personnel; (2) implementing and maintaining all  facility and personnel requirements; (3) ensuring that the facility complies with all licensure and reporting requirements; and (4) ensuring key personnel receive initial and regular training to ensure competence relevant to their job functions.²³

Wholesaler Storage, Handling, and Security Requirements

The Proposed Rule would establish specific storage and handling requirements for WDDs to adopt and implement, including through policies and procedures, at any facility owned, rented, or leased for wholesale drug distribution. Importantly, FDA proposed that when an entity is licensed as a WDD with the same name and address as another authorized trading partner (e.g., 3PL), the WDD “must maintain separate systems and processes for the distribution of drugs that are specific to the WDD.”²⁴ Facilities that engage in wholesale distribution must be “suitable for the storage and handling of prescription drugs,” including sufficient lighting, ventilation, sanitation, temperature and secure conditions for prescription drug storage to ensure drugs are stored in accordance with the drugs’ labeling.

FDA also proposed that WDDs have policies and procedures in place covering various topics, including but not limited to: (1) receipt, security, storage, handling, inventory, shipment, distribution and inspection of products; (2) theft, loss, diversions, stock irregularities, recalled products, and products “unfit for distribution,”²⁵ including immediate reporting to the manufacturer of the drug and FDA of any confirmed losses or theft; (3) receipt of products, as well as incoming and outgoing shipments; (4) facility assessments, including temperature mapping to ensure proper storage in accordance with product labeling; and (5) proper equipment and processes to ensure equipment is adequately installed and maintained. The Proposed Rule would also incorporate certain DSCSA requirements for WDDs and 3PLs (e.g., only doing business with authorized trading partners, passing/receiving tack and trace information, suspect and illegitimate product policies, procedures, recordkeeping and notifications, etc.).

National Standards for 3PLs (21 CFR 205 Part A)

The Proposed Rule incorporated the DSCSA’s requirements that: (1) States are precluded from regulating 3PLs as WDDs;²⁶ (2) all 3PL facilities are required to obtain a 3PL license for each facility of such 3PL; and (3) if an entity owns a facility in which it is engaging in “3PL activities”²⁷ and wholesale distribution out of the same facility, the entity will be required to hold a 3PL license and a separate WDD license for the distinct functions they perform.

Licensure Application, General Requirements, and Key Personnel

The Proposed Rule would create a national system for 3PLs to apply and seek licensure, including if the State from which a 3PL conducts 3PL activities has not established a licensure requirement in accordance with the Proposed Rule when final. As proposed, 3PLs would be required to submit a 3PL licensure application to FDA for review.²⁸ In practice, FDA proposed that AOs (discussed below) would review 3PL applications, with final decisions being made by FDA.²⁹ Licenses would be issued or renewed for three (3) year periods, expiring after the date the license was issued.³⁰ FDA proposed that changes in the location or ownership of a facility require a new 3PL license.³¹ 3PLs would have similar license application requirements and prohibitions as WDDs noted above (e.g., background checks, prohibited behaviors or convictions, etc.).³²

FDA proposed to require that a 3PL facility be designed such that only personnel with appropriate and verifiable experience and training have access to areas in which products are held. Similar to the proposed WDD rule, FDA proposed that 3PLs have a facility manager or DR of the facility manager to be accountable for all operations of a 3PL facility; 3PLs provide DRs with adequate authority and necessary resources to fulfill their obligations; and managers or DRs be present at and engaged in the daily operations of the facility to remain aware of any noncompliance issues.³³

3PL Storage, Handling, and Security Requirements

Similar to the proposed WDD rules, FDA proposed that 3PLs would need to comply with general requirements for their facilities (e.g., personnel qualifications, suitable size/construction; proper lighting, ventilation, temperature, and sanitation; cleaning and maintenance; free from infestations; cleaning program schedule and pest control program).³⁴ FDA also proposed that 3PLs have policies and procedures covering various topics, including but not limited to: (1) receipt, security, storage, handling, inventory, shipment, and distribution of products; (2) theft, loss, diversions, and products unfit for distribution; (3) receipt of products, as well as incoming and outgoing shipments; (4) facility assessments, including temperature mapping to ensure proper storage in accordance with product labeling; and (5) proper equipment and processes to ensure equipment is adequately installed and maintained.³⁵

Common Processes and Requirements for 3PLs and WDDs

Initial and Annual FDA Reporting (21 CFR § 205.15 (3PLs) and 205.29 (WDDs))

The DSCSA requires 3PLs and WDDs to register and report certain information to FDA on an annual basis, ³⁶ which FDA has already implemented.³⁷ FDA incorporated this requirement into the Proposed Rule. Specifically, 3PLs and WDDs are required to report to FDA for each facility: (1) the State by which the facility is licensed; (2) the facility’s license number; (3) the facility’s name, address, and contact information; and (4) all trade names under which the facility conducts business. A facility that operates as both a 3PL and a WDD must report to FDA separately as each.³⁸ WDDs already must also report any “significant disciplinary actions” ³⁹ taken against the entity, and FDA proposes to apply the same requirement to 3PLs .⁴⁰

In addition to the information required by the DSCSA, FDA proposed requiring 3PLs and WDDs to report to FDA: (1) the expiration date of each State license the entity holds; and (2) within 30 days that the entity is going out of business or voluntarily withdrawing a license from a State. FDA recommends as a best practice that 3PLs and WDDs report a unique facility identifier (UFI) for each physical address that the entity is reporting and to submit the contact information of a designated individual familiar with the facility’s daily operations who will interact with FDA on behalf of each facility.

Approved Organizations (21 CFR 205 Part B (3PLs) and Part D (WDDs))

The DSCSA granted FDA the authority to establish a third-party licensure or accreditation system to review 3PL and WDD licenses to entities in States that do not have adequate licensure programs, including once the Proposed Rule is finalized. Under the Proposed Rule, FDA would allow organizations meeting certain requirements (e.g., organizations that are not involved in drug distribution, no conflicts of interest or financial connections to FDA or regulated industry, etc.)⁴¹ to apply to the agency to become an Approved Organization (AO) to review 3PL and WDD license applications and conduct inspections.⁴² AOs would be required to report to FDA within 24 hours of discovering evidence or observations of potential violations at a 3PL or WDD facility that could pose an imminent threat to the public health, and to report to FDA “immediately” upon discovery such evidence or observations at such facility.

Inspections (21 CFR 205.16 (3PLs) and 205.28 (WDDs))

FDA proposed that WDD and 3PL facilities must undergo a physical inspection prior to their initial Federal or State license.⁴³ This inspection may be conducted by: (1) the State where the facility is located; (2) a third-party accreditation or inspection service approved by the State licensing the WDD; (3) an AO; or (4) where FDA is the licensing authority, FDA or an AO. FDA proposed routine inspections of WDDs and 3PLs to be once every three (3) years. WDDs and 3PLs must permit the relevant inspection authority access and entry to their premises to audit their procedures and written and electronic records.

Licensure Denial, Suspension, Reinstatement, and Revocation (21 CFR 205.9 (3PLs) and 205.30 (WDDs))

The proposed rule details nine (9) circumstances in which the licensing authority would be required to deny a request for licensure or renewal of an entity seeking WDD or 3PL licensure (e.g., inadequate or unsafe facilities, policies, procedures or personnel; improper storage practices; insufficient or false information or recordkeeping, etc.).⁴⁴ The Proposed Rule details the administrative and procedural process afforded to entities whose applications for licensure are denied, including a reconsideration⁴⁵ and appeals process.⁴⁶

FDA or States could also deny a license if a WDD, 3PL, or key personnel of either licensed entity: (1) delayed a Federal or State inspection or an inspector was unable to gain access to an establishment; (2) omitted material information or furnished false information in an application about drug distribution; or (3) have been subject to licensure suspension or revocation by any Federal, State, or local government for any current or previously held license to manufacture or distribute drugs. The licensing authority could revoke a license upon finding that an entity whose license had been suspended was unable or refused to comply with the licensing requirements.⁴⁷ A suspended license could be reinstated if the entity demonstrated to the licensing authority that the entity is in compliance with all necessary regulatory requirements.⁴⁸

Recordkeeping and Document Maintenance (21 CFR 205.13 (3PLs) and 205.27 (WDDs))

FDA proposed that all records related to WDD and 3PL licensure, requirements, policies, procedures, and distribution be retained for a minimum of three years, except for records of suspect and illegitimate products and destroyed, returned, and recalled products, which the DSCSA already mandates WDDs and 3PLs retain for six years.⁴⁹ FDA also proposed that such records be securely stored, with procedures in place to restrict access and protect record integrity, and that any changes made to records be signed and dated and the original information preserved.⁵⁰ FDA also proposed codifying the DSCSA’s requirement⁵¹ that 3PLs provide licensing authorities, upon request, a list of the 3PL’s trading partners.⁵²

Federalism and Preemption

In passing the DSCSA, Congress sought to establish a “uniform national policy” regarding product tracing and WDD and 3PL licensure requirements and distribution standards, and the DSCSA provides that upon enactment, no State or political subdivision of a State may establish or continue any track and trace requirements “which are inconsistent with, more stringent than, or in addition to” the DSCSA.⁵³ The DSCSA also provides that no State or political subdivision of a State may establish or continue any WDD or 3PL licensure requirements or standards that are “inconsistent with, less stringent than, directly related to, or covered by the standards and requirements” under Section 503(e) of the FDCA (21 U.S.C. § 353(e)).⁵⁴ In 2014, FDA issued a draft guidance titled, “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: Questions and Answers.” Under that draft guidance, FDA interpreted the DSCSA’s preemption provisions to allow States and localities to “impose requirements on 3PL and WDD licensure that were different from Federal requirements so long as those requirements did not fall below the minimum Federal standards.”⁵⁵

FDA “reconsidered its earlier proposed interpretation” and has now proposed that when final, the rule “will establish both a ‘floor’ and a ‘ceiling,’” and preempt any States or local governments from continuing or establishing “different” 3PL or WDD requirements.⁵⁶ In shifting its previous position, FDA pointed to Congress’ use of the terms “inconsistent with” or “covered by” to “suggest[] both a floor and a ceiling” and noted that the “fundamental purpose of the DSCSA provisions was to strengthen the security and integrity of the drug supply chain through uniform national requirements.” In connection with the Proposed Rule, FDA withdrew its prior 2014 draft guidance and reissued a final guidance that only addresses preemption of drug product tracing requirements under the DSCSA.⁵⁷

Finally, FDA proposed that the preemption provisions with respect to 3PL and WDD standards will become effective when the Proposed Rule is finalized; “until such time, current State and local licensing of WDDs and 3PLs may continue.”⁵⁸ FDA further clarified that “regulation of areas within the historical police powers of the States would be unaffected by this regulation, including prohibiting employees of WDDs and 3PLs from engaging in criminal activity related to prescription drugs, provided that the State requirements involved are not related to licensure of 3PLs or WDDs.”⁵⁹

*Sam Williams contributed to this Advisory. Mr. Williams is a graduate of the University of Michigan Law School and is employed at Arnold & Porter's Washington, DC office. He is not admitted to the practice of law.

© Arnold & Porter Kaye Scholer LLP 2022 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.