Another one of the many types of businesses that will need to make changes to their operations in California once the pharmaceutical ePedigree law goes into effect is the third party logistics provider (3PL) business. There are a number of important differences between wholesale distributors and 3PLs, and because there seem to be confusion over the wording of the California law and recent comments made by California Board of Pharmacy officials regarding 3PLs (at least I’m confused), companies should be careful about their implementations. I do not have the answers and this is not legal advice, so please check with the Board and your lawyer to confirm anything you read here, but I will tell you my current thinking on the subject.
WHAT IS A 3PL?
A 3PL is a business that offers distribution services to pharmaceutical manufacturers. I know that sounds a lot like what most people think a wholesale distributor does—especially considering that wholesale distributors now charge a “fee for service” to manufacturers—but, like I said, there are important differences.
Unless products are “made-to-order” or made “just-in-time” (both rare in the pharmaceutical industry today) the pharma manufacturer must store excess production in a buffer between the manufacturing process—which usually produces in bursts—and their customers—which usually have a smoother and more continuous demand curve. The excess product buffer needed to prevent frequent out-of-stock and back-order situations on the customer demand side is normally implemented by a distribution center (DC) that is owned by the manufacturer. Manufacturing production is stored in the DC after a burst of production, and customer orders are fulfilled from the inventory of the DC, thus smoothing out the flow of goods.
The usual customers that a manufacturer’s DC would ship drugs to are wholesale distributors and the larger chain pharmacies. In some cases they might also ship to governmental agencies, hospitals, clinics and other smaller entities.
But some pharma manufacturers do not want to be distracted by operational cost centers that are not directly related to their core competency: developing and (perhaps) manufacturing drugs. In these companies a drug distribution center and its operation are the kind of the services that might be outsourced to a third-party under contract. Some manufacturers might handle the distribution of their drugs that are easy to distribute but choose to outsource the distribution of drugs that have certain complexities, like cold-chain and/or controlled substances, and other companies might outsource all of their distribution operations.
The 3PL business is designed to fill this need. These companies will take over the task of receiving finished goods from the manufacturer, store them in a warehouse and fulfill customer orders on behalf of the manufacturer—all under a contract that has a pre-negotiated price associated with it. Usually these relationships do not require the 3PL to purchase the product from the manufacturer. In fact, this is the primary defining characteristic of a 3PL according to California law.
Wholesale distributors, on the other hand, always buy the products that they distribute (some of the larger companies in the U.S. pharma wholesale distribution business also have separate business units that are 3PLs, but don’t let that confuse you—those two business units are kept separate). In most cases, wholesale distributors buy drugs directly from the manufacturer. They never buy drugs directly from a 3PL, but if the manufacturer they buy from makes use of a 3PL to distribute their products, the manufacturer will instruct the 3PL to ship their product to the wholesale distributor to fulfill the order. The wholesale distributor will then pay the manufacturer’s invoice for the product. So even though a 3PL was involved in the transaction to facilitate warehousing, order fulfillment and shipping, the product ownership changed only once: from the manufacturer to the wholesale distributor.
This is an important distinction, because the California pedigree law requires all changes of ownership to be reflected on a pedigree. So for drugs that are sold by a manufacturer to a wholesale distributor, this transaction must appear on the pedigree that the manufacturer must create (after the law goes into effect for manufacturers in 2015-2016). And (after mid-2016) the wholesale distributor must update this same pedigree to reflect their receipt of that product.
WHAT DOES THE CALIFORNIA LAW SAY ABOUT 3PLs?
Because the 3PL generally never “owns” the product, they do not need to update the pedigree. In fact, the law appears to explicitly exempt 3PLs from needing to update pedigrees for drugs that they never own (my interpretation…see below). Section 4045 of the California Business and Professions Code says:
“4045. Third-Party Logistics Provider or Reverse Third-Party Logistics Provider
‘Third-party logistics provider’ or ‘reverse third-party logistic provider’ means an entity licensed as a wholesaler that contracts with a dangerous drug manufacturer to provide or coordinate warehousing, distribution, or other similar services on behalf of a manufacturer, but for which there is no change of ownership in the dangerous drugs. For purposes of Sections 4034, 4163, 4163.1, 4163.2, 4163.3, 4163.4, and 4163.5, a third-party logistics provider shall not be responsible for generating or updating pedigree documentation, but shall maintain copies of the pedigree. To be exempt from documentation for pedigrees, a reverse third-party logistic provider may only accept decommissioned drugs from pharmacies or wholesalers.”
Even though California licenses 3PLs as wholesalers (a.k.a., wholesale distributors), be careful, because their law defines the term “manufacturer” to include 3PLs (see section 4033, “Manufacturer”). Notice from the extract above that California defines a 3PL with respect to product ownership. The list of sections called out in this passage are all pedigree related. So 3PLs are not responsible for generating or updating the pedigrees, but they must “maintain copies” of the pedigrees. That is, they must be able to produce a copy of their client manufacturer’s pedigree for any drug that is currently in their custody and (probably) those that they have had in their custody in the past.
CAN A 3PL OFFER PEDIGREE SERVICES?
The interpretation of the California 3PL regulation relating to pedigrees, at first, appears to be pretty straightforward. I can’t find any other provision in the law that would seem to block 3PLs from offering pedigree retention, generation and transmission services as part of their overall contractual service offering (but have your lawyer look at it for you). It seems like this kind of service would be a very nice extension to their menu of services because any manufacturer wishing to outsource the distribution of their drugs would also very likely want to outsource the busywork part of maintaining ePedigrees on their behalf.
Of course, a 3PL cannot absorb the legal responsibility that the manufacturer has to provide and certify the information contained within their pedigrees, but there are seemingly lots of things the 3PL could do to make it very easy for the manufacturer to execute their legal obligations by handling all of the technical stuff. The manufacturer would still be liable for the accuracy of the pedigrees and as a result, they would certainly want to create an additional liability for accuracy on the 3PL through their contract. That is, the manufacturer’s contract with the 3PL should include provisions that would make the 3PL responsible for ensuring that the pedigrees accurately reflect the reality of the shipments they make. That way if an error is ever detected that results in a regulatory violation, the manufacturer would be liable to the State and the 3PL would be liable to the manufacturer.
The only problem with this concept is that the California Board of Pharmacy may not see it that way. Virginia Herold, the Executive Officer of the California Board of Pharmacy, has made comments multiple times recently claiming “…the law specifically bars…” 3PLs from updating pedigrees on behalf of their manufacturer clients (see page 40 of the transcript provided by TraceLink of their June 28 Webinar with Virginia Herold). The problem appears to be a subtle difference in semantic interpretation, which is where your lawyer comes in. When I read “…a third-party logistics provider shall not be responsible for generating or updating pedigree documentation”, not being a lawyer, I interpret it to mean that the law specifically does not require 3PLs to generate or update a pedigree. The alternate interpretation is that instead of protecting 3PLs from being required to update pedigrees, it “specifically bars” them from generating pedigrees on behalf of the manufacturer.
Perhaps the distinction is in the pedigree certifications (see “Draft Regulations On Certifications Within California ePedigrees”). It makes sense to me that a 3PL would not be allowed to certify a pedigree on behalf of a manufacturer. After all, it is the certification to the truth and accuracy of the pedigree that each seller is legally responsible for. To allow them to pass off that legal responsibility through a contract to a 3PL should not be allowed. But if the manufacturer is the one who applies their certification to a pedigree, would you not say that they, the manufacturer, “generated” or “updated” the pedigree, even if a service provider (the 3PL in this case) assisted them with the technical construction, the storage and the transmission of the data? I would, but I’m not sure the Board will so make sure you check with them before you proceed with any plans.
Last week I speculated that this might be an issue only if the 3PL were physically located within the State of California (see “Vendor Managed Inventory Under California ePedigree”). That speculation was based on my theory that the Board would not have jurisdiction over what happens in a facility outside their state. They would have retroactive jurisdiction over what happened to the product before it entered the State, but only after that product actually does cross the border into the State. But once the product enters the State, a pedigree that was previously technically generated by a 3PL in another state and which was properly certified by the manufacturer should accurately reflect the history ownership of the product (assuming it was otherwise properly constructed).
Even in this case, the 3PL custody of the product would be reflected on the pedigree in the “seller shipping address” data element. This would allow easy tracing backward to not only find out the ownership history, but the custody history as well.
If you work for a 3PL, or for a manufacturer who makes use of a 3PL, I suggest that you and your lawyer get clarification from the Board about how you are able to operate going forward under the California pedigree law. Making assumptions could be risky.