IV. Agency Conclusions
A. 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?
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:
- Who qualifies as an authorized distributor?
- Should authorized distributors be exempt from maintaining and passing on a pedigree?
- What is the meaning of the phrase each prior sale?
- 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.
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.
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.
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.
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.
- 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.