Are Your Drugs Exempt From The California Pedigree Law?

Exempt signImportant Notice To Readers of This Essay On November 27, 2013, President Barack Obama signed the Drug Quality and Security Act of 2013 into law. That act has many provisions, but one is to pre-empt all existing and future state serialization and pedigree laws like those that previously existed in California and Florida. Some or all of the information contained in this essay is about some aspect of one or more of those state laws and so that information is now obsolete. It is left here only for historical purposes for those wishing to understand those old laws and the industry’s response to them.Not all prescription drugs will need to comply with the California pedigree law on January 1, 2015 or 2016.  In fact, there are a number of important exemptions that cover entire classes of certain drugs and certain types of transactions for all drugs.  The volume of drug packages that could escape being serialized and pedigreed by those effective dates is not huge, but if you are a manufacturer or wholesaler, you should familiarize yourself with the list of exemptions.  If you are lucky enough to make or handle any of the exempt drugs or transactions you might as well take advantage of your exemption.

The list of exemptions are covered in the California Business and Professions Code under section 4034 (g)(1) through (9) (see pages 20-21 of the “2013 Lawbook For Pharmacy”).  Section 4034(g) simply states, “The following transactions are exempt from the pedigree requirement created by this section:.

(1)    “An intracompany sale or transfer of a dangerous drug. For purposes of this section, “intracompany sale or transfer” means any transaction for any valid business purpose between a division, subsidiary, parent, or affiliated or related company under the common ownership and control of the same corporate or legal entity.

This exemption is very important to chain pharmacies who are “…under common ownership and control…”.  Under this exemption, drugs that are shipped to the chain pharmacy-owned distribution centers are apparently exempt from maintaining a pedigree from that point forward in their distribution to the actual pharmacies owned by the chain.

What is not totally clear to me is what this means for drugs that arrive at a chain pharmacy’s distribution center that is outside of California’s borders, and then are distributed to the company’s pharmacies within the state through an intracompany sale or transfer.  Some might interpret the law to exempt these drugs from any part of the pedigree law, which might mean that they would not even need to have unique identifiers (serial numbers) attached to them and would not even need a pedigree from the manufacturer or wholesaler to the chain pharmacy’s DC.

The logic would go something like this:  California law does not cover transactions that occur outside of the state and since the intracompany transactions that do occur inside the state appear to be exempt from the pedigree law, then these drugs are, presumably, entirely exempt from the pedigree law.  If true, his would provide an extra financial benefit to the chain pharmacy who imports generic drugs in this way (no need to serialize and pedigree means lower costs).  Check with your legal team before assuming my logic is correct.  Remember, I’m not a lawyer and this isn’t legal advice.

[UPDATE:  See Dany Lauener’s comment and my response below for a more practical view of this logic.  Once the drug arrives in California it must have a pedigree that reflects all of the transactions that occurred outside of the state.  Those are not exempt.]

Here’s an intriguing question that is very timely.  Considering last week’s announcement that Walgreens (NYSE: WAG) and AmerisourceBergen (NYSE: ABC) are planning to start an equity relationship (see Adam Fein’s excellent explanation and analysis of the pending deal here), how much ABC equity would Walgreens need to own before they could stop dealing with pedigrees on drugs “transferred” between them?  That is, when do these transactions become “intracompany transfers”?  

As I understand it, their initial announcement says that Walgreens may now buy up to a 7% share of ABC on the open market.  That’s probably not enough to invoke this exemption and the current deal caps the equity share at a total of 23% by March 2017 (which just happens to be 4 months before Walgreens will need to meet the California pedigree regulations).  

But Dr. Fein speculates that Walgreens will swallow ABC completely sometime in the next 10 years.  So, what if Walgreens’ share of ABC someday gets to 51% in the interim?  In that case, wouldn’t ABC just be a “division, subsidiary…or affiliated or related company under the common ownership and control of the same corporate or legal entity”?  Cha-ching…exemption!

(2)    “Dangerous drugs received by the state or a local government entity from a department or agency of the federal government or an agent of the federal government specifically authorized to deliver dangerous drugs to the state or local government entity.”

Yeah, don’t expect the state of California and the federal government to deal with the California pedigree law.  That would be non-sense.  The drugs you handle need pedigrees because you might mistakenly buy illegitimate drugs, but there’s no way the federal government or their authorized agent could possibly ever mistakenly acquire illegitimate drugs.  Right?!

(3)    “The provision of samples of dangerous drugs by a manufacturer’s employee to an authorized prescriber, provided the samples are dispensed to a patient of the prescriber without charge.”

Free patient samples given or sold by a manufacturer directly to a prescriber equals no pedigree required.

(4)    “(A)   A sale, trade, or transfer of a radioactive drug, as defined in Section 1708.3 of Title 16 of the California Code of Regulations, between any two entities licensed by the Radiologic Health Branch of the State Department of Public Health, the federal Nuclear Regulatory Commission, or an Agreement state.

“(B)  The exemption in this paragraph shall remain in effect unless the board, no earlier than the date that is two years after the compliance date for manufacturers set forth in subdivision (k) of Section 4034 or Section 4163.5, determines after consultation with the Radiologic Health Branch of the State Department of Public Health that the risk of counterfeiting or diversion of a radioactive drug is sufficient to require a pedigree. Two years following the date of any such determination, this paragraph shall become inoperative.”

This exemption covers the radioactive portion of a radiopharmaceutical.  Drugs that are intended to be used as a compounding ingredient along with a radioactive ingredient are probably not exempt until they are actually blended at the pharmacy because they are not radioactive until then.  Check with your legal team if you manufacture or distribute these types of ingredients.

(5)    “The sale, trade, or transfer of a dangerous drug that is labeled by the manufacturer as ‘for veterinary use only’.”

Drugs that are intended for both human and veterinary use are apparently still covered by the pedigree law.

(6)    “The sale, trade, or transfer of compressed medical gas. For purposes of this section, ‘compressed medical gas’ means any substance in its gaseous or cryogenic liquid form that meets medical purity standards and has application in a medical or homecare environment, including, but not limited to, oxygen and nitrous oxide.”

This was a big win for the medical gas manufacturers and distributors when the legislature included this exemption in one of the later versions of the law.

(7)    “The sale, trade, or transfer of solutions. For purposes of this section, ‘solutions’ means any of the following:

“(A)  Those intravenous products that, by their formulation, are intended for the replenishment of fluids and electrolytes, such as sodium, chloride, and potassium, calories, such as dextrose and amino acids, or both.

“(B)  Those intravenous products used to maintain the equilibrium of water and minerals in the body, such as dialysis solutions.

“(C)  Products that are intended for irrigation or reconstitution, as well as sterile water, whether intended for those purposes or for injection.”

This exemption was originally won by makers of saline IV fluid.  As I recall, the argument was that no one would make much money if they tried to counterfeit saline fluid since it isn’t that expense anyway.  During that debate I remember thinking, “yeah, but isn’t tap water a lot cheaper than sterilized saline solution?”.

I wonder if the wording of item (C) would exempt things like prescription nasal flush and eye drops that can be used in part for “irrigation”.  All of those that I’m aware of are over-the-counter products which would not be covered by the law anyway, so why the special exemption?  Obviously I’m just not familiar with the products that fall into this category.

(8)    “Dangerous drugs that are placed in a sealed package with a medical device or medical supplies at the point of first shipment into commerce by the manufacturer and the package remains sealed until the drug and device are used, provided that the package is only used for surgical purposes.”

I’m not sure who the “manufacturer” is here.  I think it is unlikely that both components of many drug/device combinations are made by the same company.  Is the kit packer the “manufacturer” or does it have to be the manufacturer of the drug?  I assume so, but check with your legal team.  Also, I think they mean that the contents of the package are only used for surgical purposes!  But, again, check with your legal team.   😉

(9)    “A product that meets either of the following criteria:

“(A)  A product comprised of two or more regulated components, such as a drug/device, biologic/device, or drug/device/biologic, that are physically, chemically, or otherwise combined or mixed and produced as a single entity.

“(B)  Two or more separate products packaged together in a single package or as a unit and comprised of drug and device products or device and biological products.”

These multi-part clauses are fun to interpret.  They can open up ambiguity or at least some level of variable interpretation.  My personal interpretation of this exemption is that it can only possibly apply if your combo product includes at least one device.  However, because there is no punctuation in (B) to help determine the extent of the clauses affected by the compound coordinating conjunctions (the “or”s and the “and”s), some may wish to interpret it to mean that single packages that contain two separate drug products—like two HIV drugs packaged together into “a single entity” (a single carton) to form what is known as an “AIDS cocktail” drug (no device is involved)—are exempt from the pedigree law.

I’ve already said I’m not a lawyer, and I was not an English major either, so I don’t know how to agree on the extent of the clauses that are affected by the second “or” and the first “and” of (B), but that agreement will significantly determine the applicability of the exemption.

Hmmm.  Seems to me like that kind of product is exactly the kind that needs the protection of drug pedigrees.  Maybe we’ll need a judge to decide how that sentence should be interpreted.  Hopefully he or she will have been an English major in college.

That’s it.  Those are all of the exemptions.  If your prescription drug will be distributed in California after next year and it doesn’t fall into one or more of the exemptions above, you will need to comply with the pedigree law.

If your product falls into a grey area and your legal team thinks you can risk a liberal interpretation of one of these exemptions, don’t forget to check with your wholesaler too.  You might think you fit into an exemption, but if your wholesaler doesn’t agree, they will probably not be willing to transport your drug into California after July, 2016 because they would be subject to a fine if they were found to be holding a non-exempt drug without a serial number and/or without a valid pedigree.  Their interpretation might not be as liberal as yours.

Of course, you could also check with the California Board of Pharmacy, but from what I’ve seen, they don’t like giving definitive answers to questions about exactly what complies and exactly what doesn’t—especially when a grey area is involved.

Exemptions are great for those who clearly fit into them.  Everyone else, take care.


6 thoughts on “Are Your Drugs Exempt From The California Pedigree Law?”

  1. Facinating (as ever). These types of exemptions still need to be finalised in the EU, but it’s clear that pharmaceutical companies are going to have to perform a careful analysis of products, markets and applicable regulations to get this right.

    For larger organisations the simplest solution will surely be to tackle serialization and pedigree in one solution, serialise all applicable products (which will get easier as markets converge on formats) and make it easy to turn pedigree on/off as applicable.

    1. David,
      I think you are right. Global companies need to have a global strategy that is centrally developed and maintained within the corporation because I think we have only seen the beginning of these kinds of regulations around the world. And I agree that formats will converge. That’s really already happening but it will continue. So far only California requires an actual e-pedigree and I’m not sure if that will spread. It all depends on what happens in the U.S. Congress and the final regulations in response to the E.U. Delegated Acts.


  2. I was wondering if you do not mix “product exclusion” and “scan event exclusion” ?

    It would be just too easy that building a cross-state organisation with “subsidiary, parent, or affiliated, … ” would exempt a product beiing serialized.

    Avoiding inter-group-company sales and stock transfers tracability does not mean that the final retailer is not supposed to be pedigree-proof, requiring serialization anyhow.

    Part of state concerns should be that an organization ensure the origin/pedigree of the finished goods ??

    1. Dany,
      You make a very good point. Drugs residing on a chain pharmacy shelf are not exempt from the pedigree law, only the intracompany transfer transaction from it’s parent company’s DC to the pharmacy is exempt from appearing on the pedigree. Without a pedigree for drugs on a pharmacy shelf there is no way for the pharmacy to prove to an inspector where they came from and how they arrived there.


  3. Dirk,

    I guess it would be too straightforward for CA BOP to download the NDC directory from website and simply place a checkmark next to those NDC codes which REQUIRE serialization based on what they deem “dangerous” and non-exempt.

    Great blog post, Dirk !


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