1.1 Regulatory Framework for the Distribution of Prescription Drugs
Federal regulations define distributor requirements for reporting on the source of their drug purchases to their customers. States impose basic licensing requirements on drug distributors.
At the Federal level, the Prescription Drug Marketing Act (PDMA) of 1988, as modified by the Prescription Drug Amendments of 1992, establishes requirements for the distribution of prescription drugs. Section 503 [e]  [A] of the Act requires each person, who is engaged in the wholesale distribution of a prescription drug and who is not the manufacturer or an authorized distributor of record for the drug, to provide the person receiving the drug a statement identifying each prior sale, purchase, or trade of the drug, including the date of the transaction and the names and addresses of all parties to the transaction before each wholesale distribution. Further Section 503 [e]  [A] of the Act defines the term "authorized distributors of record" as those distributors with whom a manufacturer has established an "ongoing relationship" to distribute the manufacturer's products. In a 1988 Guidance, FDA indicated that:
"Ongoing relationship" as used in the definition of "authorized distributors of record," 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 ongoing 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 (FDA, 1988).
On December 3, 1999, the Agency published final regulations in 21 CFR Part 203 implementing these and other provisions of the PDMA as amended by the Prescription Drug Amendments of 1992 (64 FR 67720). Section 203.50 of these final regulations requires that, before the completion of any wholesale distribution transaction where the seller is not an authorized distributor of record, the seller must provide the purchaser with a statement identifying each prior sale, purchase, or trade of the drug. The identifying statement, also known as the drug product's pedigree, 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. The Agency further refined its definition of "ongoing relationship" in Section 203.3 [u] of the final regulation 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."
Based on concerns expressed by the industry and the Small Business Administration (SBA), FDA decided to delay the effective date for the above and other sections of the final rule (21 CFR Part 203) until October 1, 2001. At present, the prescription drug wholesale industry operates on the basis of its interpretation of the 1988 FDA Guidance regarding drug product pedigrees. Specifically, the wholesale distribution industry has interpreted the last sentence of the "ongoing relationship" definition (see p. 1-2) as indicating that it is sufficient for a wholesaler to have had two transactions within a 24-month period in order to be considered authorized. Figure 1-1 compares the distribution chain and the associated drug pedigrees under current industry practice and the final rule.
All drug wholesalers must be licensed under state licensing systems, which must in turn meet the FDA guidelines under State Licensing of Wholesale Prescription Drug Distributors (21 CFR Part 205). The regulations set forth minimum requirements for prescription drug storage (21 CFR Part 205.50 [a] and [c]) and security (21 CFR Part 205.50 [b]), as well as for the treatment of returned, damaged, and outdated prescription drugs (21 CFR Part 205.50 [e]). Further, under 21 CFR Part 205.50 [f], wholesale drug distributors must establish and maintain inventories and records of all transactions regarding the receipt and distribution of prescription drugs and make these available for inspection and copying by authorized federal, state, or local law enforcement officials.
In most states, wholesale distributor licenses are issued by the State Boards of Pharmacy and require periodic renewal. The majority of states (approximately 80 percent) also require out-of-state wholesalers that distribute drugs within their borders to be licensed as well. Table 1-1 presents the available data on wholesale distributor licensure requirements, license renewal schedules, and the number of in-state and out-of-state licenses issued, by state.