One of the complexities of the modern pharmaceutical supply chain occurs when a pharmaceutical dispensing organization “outsources” the management of their on-premises inventory to their supplier, or “vendor”. This is known as Vendor Managed Inventory, or VMI. There are several good reasons this might be done, including eliminating the need to deal with issues that have more to do with supply chain execution mechanics and fluctuating supply and demand than they do with the core competency of dispensing drugs.
When VMI is used in the pharma supply chain the supplier is typically a wholesaler whose core competency is in dealing with those exact issues. That’s just what they do. The wholesaler benefits from the VMI relationship because they become the exclusive supplier to the VMI customer. VMI can be a “win-win” proposition as long as costs are kept in-check.
But what will happen to VMI relationships in California after the California pedigree law goes into effect?
I don’t recall much being said by the California Board of Pharmacy about these business relationships so we just have to follow the logic of the law to figure it out on our own. The main thing to look for when applying this law is any change of ownership of a drug. Those are the times when a seller must provide a pedigree to the buyer.
In a VMI situation, the drugs sitting in inventory at the dispensing organization’s location are usually owned by the supplier. The change of ownership to the dispenser usually occurs only at the moment when a drug is administered or dispensed to a patient. The “sale” from VMI supplier to dispenser occurs on paper (or electronically anyway) as the drug is being “resold” (dispensed) to the patient. In this way the dispenser never actually carries any inventory of the VMI product. This is true even though a casual observer—or a Board of Pharmacy inspector—would see lots of inventory sitting on the dispenser’s shelves. The dispenser has custody of the drugs, but does not own them.
3PLs, A SIMILAR SITUATION?
The Board of Pharmacy has also made it clear that anyone in the supply chain within California who is in custody of drugs which they do not own must be able to show a pedigree for them. We see this in their position on third party logistics providers (3PLs) which do not own drugs but are warehousing them and fulfilling orders on behalf of a manufacturer. In that instance, the Board expects to be able to see a pedigree for any drugs sitting in the 3PL’s warehouse, even though the first change of ownership has not yet occurred. Presumably these pedigrees would clearly show that the manufacturer still owns the drugs.
Of course, this apparently applies to 3PL warehouses that are located within the state boundaries after January 1, 2015 and especially after January 1, 2016 (the manufacturer’s effective dates)—the key phrase here being “within the state boundaries”. I assume that the California Board of Pharmacy does not have the authority to require pedigrees be available on the premises of 3PL warehouses located outside the state, even for drugs that are later shipped into the state as long as, at that time, their pedigrees accurately reflect the changes of ownership in the supply chain, but check with your lawyer before you assume that. (That’s a topic that might justify its own essay.)
APPLY THE 3PL EXAMPLE TO VMI
Applying the same logic to the case of a dispensing organization that makes use of VMI within the state of California, the VMI supplier would need to provide the dispenser with pedigrees for all drugs in their custody showing the full supply chain ownership history up to the supplier’s acquisition of the drugs. That way if the dispenser is visited by a Board of Pharmacy inspector they will be able to show pedigrees that accurately reflect the prior history, including the current ownership situation.
At the moment of dispense the dispenser would become the owner (momentarily) so pedigree updates would likely be required to show that change. Presumably as a result, the supplier would have to provide the dispenser with an updated pedigree showing a “shipping” transaction, and then the dispenser would have to update that pedigree with a “receiving” transaction. That way the history reflected on the pedigree which the wholesaler retains, and that on the one the dispenser retains, will accurately reflect the reality that has occurred from their different perspectives. Again, these are my assumptions, check with the Board and/or a lawyer.
A Board representative has talked recently about requiring dispensers to also “decommission” any manufacturer-serialized supply chain packages that become empty as the result of a dispense, which would be an added complication if it sticks (see “Should Pharmacies Decommission EPCs Upon Dispense?”).
Of course, any dispensing organization that has decided to shed all of the pharma supply chain hassles by compensating someone to manage their inventory for them probably won’t want to deal with ePedigrees either. In that case they may rely heavily on the VMI supplier to take as much of that work off their hands as possible, leaving only the need to certify the pedigrees at the time of dispense, assuming the Board would allow that arrangement.
There is a fair amount of speculation in how VMI could be handled in California under the pedigree law, as this essay shows. Companies who want to continue using that business process may want to confirm many of these assumptions with the Board of Pharmacy.
Can you think of any other business processes in use today where a company has custody of a drug in California but does not own it (other than a courier/delivery company)? Do you think these same assumptions would apply to it, or would different assumptions make more sense? Leave a comment below.