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U.S. Department of Health and Human Services

Regulatory Information

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Executive Summary

Prescription Drug Marketing Act Report to Congress, June 2001: Back to Table of Contents

Contents

Introduction

On May 16, 2000, in its report accompanying the Food and Drug Administration (FDA or Agency) appropriations bill for 2001,1 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) of 1987 on the secondary wholesale pharmaceutical industry.2 The Committee directed the FDA to provide a report to the Committee by January 15, 2001, summarizing the comments and issues raised and FDA's plans to address those concerns.3 This report is intended to fulfill the Committee’s request.

The report briefly summarizes the history of the PDMA; discusses concerns that have been raised by industry, industry associations, and Congress; and outlines possible ways to address those concerns.

Background4 

The PDMA, which was signed by the President on April 22, 1988, was enacted to ensure that prescription drug products purchased by consumers would be safe and effective and to avoid an unacceptable risk that counterfeit, adulterated, misbranded, subpotent, or expired drugs were being sold to the American public. Congress decided that legislation was necessary because there were insufficient safeguards in the prescription 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.

The PDMA, as amended,5 requires State licensing of wholesale distributors of prescription drugs; requires unauthorized wholesale distributors to provide purchasers a statement (also called a pedigree) identifying each prior sale of the drug; and with certain exceptions, prohibits the sale of, or offer to sell, prescription drugs that have been purchased by a hospital or other health care entity or that have been donated or supplied at a reduced price to a charitable organization.6

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 and discussion in section II.C).

On March 14, 1994, the Agency published a proposed rule that would, when finalized, implement many of the provisions of the PDMA including the pedigree requirement. The proposed rule called for the submission of comments by May 30, 1994; the comment period was subsequently extended to August 15, 1994. The Agency received very few comments reflecting concern about the pedigree and related requirements: one comment objected to the requirement that the pedigree show all previous sales; two comments objected to the definition of the term on-going relationship, which is key in determining whether one is an authorized or unauthorized distributor.

The Agency also received several comments on the proposed regulation's potential effects on certain blood centers that function both as health care entities and as distributors of blood derivative products. The comments noted that, under the proposed regulation, these blood centers would not be permitted to continue operating in both capacities. Among other suggestions, the comments urged the exclusion of blood derivative products from the scope of the rule. Comments also objected to the statement in the proposed definition of health care entity that "[a] person cannot simultaneously be a 'health care entity' and a retail pharmacy or wholesale distributor."

On December 3, 1999, the Agency published final regulations in 21 CFR part 203 implementing the provisions of the PDMA as amended. In the preamble to the final rule, the Agency responded in detail to the comments submitted on the proposed rule.

After publication of the final rule, the Agency began to receive comments on the provisions concerning the pedigree requirement and the definition of health care entity. Comments came in the form of letters and petitions and other communications from industry, industry trade associations, and members of Congress objecting to certain provisions in the regulation. In addition, FDA received a petition for stay of action requesting that the relevant provisions in 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.

On March 29, 2000, the Agency met with representatives from the wholesale industry to discuss their concerns. The Agency also received several letters on the implications of the final regulations for blood centers that distribute blood derivative products and provide certain blood-related health care services.

Based on the concerns expressed by industry, industry associations, and Congress about implementing certain provisions of the regulation by the December 4, 2000, effective date, the Agency published a notice in the May 3, 2000, Federal Register delaying the effective date for §§ 203.3(u) and 203.50 until October 1, 2001. In addition, the notice delayed the applicability of § 203.3(q) to wholesale distribution of blood derivatives by health care entities until October 1, 2001.7

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. To that end, the Agency also decided to schedule a public hearing8 for the fall of 2000 to solicit information from interested persons and help develop a factual basis that the Agency could use to determine whether it is in the public interest to take steps to modify or change the requirements in the final regulations.

On May 16, 2000, the House Committee on Appropriations stated in its report (accompanying FDA’s 2001 appropriations bill) that it supported FDA's decision to delay the effective date for implementing those sections of the regulations and to reopen the administrative record to receive additional comments. In addition, the Committee asked that the Agency thoroughly review the potential impact of the proposed regulations on the secondary wholesale pharmaceutical industry. The Committee directed the Agency to provide a report to the Committee by January 15, 2001, summarizing the comments and issues raised and Agency plans to address the concerns.

Summary of Comments to the Docket and Hearing Testimony

A detailed discussion of the hearing testimony and comments is included in the body of the report. In addition to presentations at the public hearing, FDA received more than 60 written comments 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 were submitted by industry groups and associations, secondary wholesale distributors (i.e., distributors who would be considered unauthorized under the final rule for some or all of the products they sell), public interest groups, and individual physicians.

Comments Opposing the Final Rule

The vast majority of comments received as well as the presentations made at the public hearing opposed the specific provisions of the regulations discussed above and were consistent with the letters and petitions and other communications the Agency had received from industry, industry trade associations, and members of Congress.

Secondary Wholesalers

The general perception among secondary wholesalers, 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 by the requirements in the final regulations. Secondary distributors assert that a significant portion of their business would be eliminated by implementation of the final regulations because (1) they cannot obtain authorized distributor of record status from manufacturers for many of the drugs they sell and (2) primary wholesalers are not willing to provide pedigrees for drugs they sell to secondary wholesalers. The secondary wholesalers indicated that, when they do not qualify as authorized distributors under the status quo, they supply pedigrees, back to the last authorized distributor.9

Primary Wholesalers

There are five primary wholesale distributors, who buy most of their prescription drugs directly from manufacturers.10 Primary wholesale distributors usually have on-going relationships with manufacturers and, therefore, are considered authorized distributors within the meaning of the PDMA. Although none of the primary wholesaler distributors initially 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 association11 and in responses to questions the Agency submitted to them after the public hearing.

The statements submitted to the docket by the primary distributors are generally consistent with those submitted by the secondary distributors, indicating that they generally are not providing pedigrees. In addition, several primary distributors stated that their warehouse operations are not currently set up in a way that facilitates providing pedigrees, and it would be expensive for them to do so. Therefore, as a practical matter, the large distributors do not appear to be willing to voluntarily provide pedigrees. 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.12

Individuals Who Purchase from Secondary Distributors

Comments and hearing testimony from some individuals who purchase drugs from secondary distributors, such as retail grocery stores, pharmacies, and physicians, indicated that it would be more difficult and expensive to obtain prescription drugs if secondary distributors could not continue distributing them. Pharmacists frequently use more than one distributor to meet their supply needs, and secondary wholesale distributors are used extensively by pharmacies--particularly, to obtain unusual products or to purchase products when a pharmacy is in a remote area not served by one of the larger distributors. Although pharmacies 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.13

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.14

Public Health Concerns 

Some testimony and comments argued that the final rule would not significantly help to enhance the public health. The commenters 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. Commenters indicated at the hearing that recalls are done by broadcast messages rather than direct notification of particular purchasers of specific lots of drug. The presenters did not believe that a pedigree accompanying the drug would provide significant additional assurance of drug quality.15

Criminal Activity

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.16

Secondary Wholesaler Recommendation

Most of the comments and testimony supported maintaining the status quo--that is, the way the wholesale industry has been operating during the 12 years since the PDMA was passed. Apparently, the industry has been operating under its interpretation of the guidance letter issued by the Agency in 1988. However, industry has interpreted the guidance letter very broadly.

Industry has interpreted the guidance letter as defining the term authorized distributor as a distributor who conducts at least two transactions with the manufacturer within any two-year period. In fact, the guidance letter says that to qualify as an authorized distributor, a distributor must have an on-going relationship with a manufacturer, that is, show evidence of two sales in a two-year period and have "evidence of a written franchise, license, or other distribution agreement." In addition, the guidance letter stated that a pedigree should show all sales of a drug starting with "the manufacturer or authorized distributor of record" (see Attachment E and discussion in section II.C). Secondary wholesalers have interpreted this to mean that the pedigree need only go back to the most recent authorized distributor who handled the drug .

The Blood Centers

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 other health care providers. Comments asserted that the final rule would hinder blood centers' ability to provide blood derivative products and medical services associated with those products to hospitals, hemophilia treatment centers, and other providers.

Comments Favoring the Final Rule

The comments and testimony supporting the final rule as written came from pharmaceutical manufacturers and one 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. They indicated that without a legally required document ensuring traceability back to the manufacturer, the public has no guarantee that the pharmaceutical products being sold are not counterfeit or that they were stored under appropriate conditions throughout their shipment chain.

One presenter at the hearing said that Congress should have required 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 presenter argued that logistical problems in tracking the pedigree of drugs is not a legitimate reason for not requiring all distributors to maintain a pedigree.17

Agency Conclusions

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.

Key Issues

Most concerns about the final rule focus on four key issues:

  1. Who qualifies as an authorized distributor?
  2. Should authorized distributors be exempt from maintaining and passing on a pedigree?
  3. What is the meaning of the phrase each prior sale?
  4. Should blood centers that provide some health care services be permitted to distribute blood derivative products?

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 this 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 the 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 1988 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 National Wholesale Druggists' Association (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 may do so 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.

Summary of Conclusions

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.

  • By changing its regulations, the Agency could broaden the definition of authorized distributor --although this change could result in even fewer wholesalers than before maintaining and passing on pedigrees for prescription drugs.
  • The Agency is considering whether it should amend the regulation to permit those blood centers that provide certain limited health care services to distribute blood derivative products.
  • 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 further delayed the effective 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.

FOOTNOTES

 1Agriculture, Rural Development, Food and Drug Administration, and Related Agencies Appropriations Bill, 2001 (H. Report 106-619), enacted into law in P.L. 106-387, 114 Stat. 1549.

 2For purposes of this report, secondary wholesale distributor (or secondary wholesaler) refers to a distributor of prescription drugs who buys prescription drugs primarily from other wholesale distributors, rather than directly from manufacturers. A primary wholesale distributor (or primary wholesaler) is a distributor of prescription drugs who buys prescription drugs primarily from manufacturers. Primary wholesale distributors usually have on-going relationships with manufacturers because of purchasing patterns and, therefore, in most cases are authorized distributors within the meaning of the PDMA. It should be noted, however, that primary, or authorized, distributors sometimes purchase prescription drugs from secondary wholesale distributors, and secondary wholesale distributors sometimes purchase drugs directly from a manufacturer.

 3The Agency was granted an extension on the report due date.

 4Attachment C contains a summary list of events related to the PDMA.

 5The PDMA was modified by the Prescription Drug Amendments of 1992 (P. L. 102-353, 106 Stat. 941) on August 26, 1992.

 6The state licensing provisions of the PDMA (part 205 (21 CFR 205)) were implemented by a final FDA rule, which published in the Federal Register of September 14, 1990 (55 FR 38012).

 7The Agency further delayed the effectiveness date for §§ 203.3(u), 203.50, and 203.3(q) until April 1, 2002.

 8The FDA holds public hearings according to the requirements in 21 CFR part 15, Public Hearing Before the Commissioner. In accordance with those requirements, the public hearing was announced in the Federal Register of September 19, 2000 (65 FR 56480) (see Attachment D).

 9Transcript of the FDA Part 15 Hearing, Prescription Drug Marketing Act, Friday, October 27, 2000, p. 56.

 10The five largest wholesale distributors include McKesson HBOC, Inc.; Bergen Brunswig Drug Company; Cardinal Health, Inc.; AmeriSource Corporation, and Bindley Western Drug Company. These companies generate revenues of between $7.6 to 21.5 billion per year each (see Attachment G, ERG rept. pp. 1-20 and table 1-3).

 11The National Wholesale Druggists' Association (NWDA) represents the health care product distribution industry, including specialty and secondary source distributors.

 12Data show that for every dollar of prescription drugs sold in 1997, 76 cents went to the manufacturer, 20 cents to the dispenser (e.g., the pharmacy), and only 4 cents to the wholesale distributor. After-tax net profit expressed as a percentage of sales was only 0.62 percent for 1998 (ERG rept. 2001).

 13Ibid., 19, 23, 98.

 14Ibid., 20, 40, 67, 70, 99.

 15Transcript 20, 24, 60, and 105.

 16Ibid., 41 and 42, 211 to 213.

 17Transcript 130, 133.

Prescription Drug Marketing Act Report to Congress, June 2001: Back to Table of Contents

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