I. Introduction and II. Background
A. Congressional Findings Prompting Passage of The PDMA
B. The Effects of The PDMA On The Federal Food, Drug, and Cosmetic Act
C. 1988 Agency Guidance Letter
D. Today's Pharmaceutical Wholesale Distribution System
E. Concerns of Secondary Wholesale Distributors
F. Concerns of Blood Centers
G. Decision to Delay the Effective Date; Hold a Public Hearing
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.
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
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:
- Ban the sale, purchase, or trade of, or the offer to sell, purchase, or trade, drug samples and drug coupons.
- Restrict re-importation of prescription drugs to the manufacturer of the drug product or for emergency medical care.
- Establish requirements for drug sample distribution and the storage and handling of drug samples.
- Require a wholesale distributor of prescription drugs to be State licensed, and require FDA to establish minimum requirements for State licensing.
- Establish requirements for wholesale distribution of prescription drugs by unauthorized distributors.
- Prohibit, with certain exceptions, the sale, purchase, or trade of (or the offer to sell, purchase, or trade) prescription drugs that were purchased by hospitals or other health care entities, or donated or supplied at a reduced price to charities.
- Establish criminal and civil penalties for PDMA violations.
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
- the existence of a written franchise, license, or other distribution agreement between the manufacturer and wholesale distributor; and
- the existence of on-going sales by the manufacturer to the distributor, either directly or through a jointly agreed upon intermediary. The Agency would consider two transactions in any 24-month period to be evidence of a continuing relationship.
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.
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
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.
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.
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.
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).