DSCSA: Special Privileges For The “Big-3” Wholesale Distributors, Part 1

iStock_000011736093SmallerAre you a pharmaceutical manufacturer who is acting as a wholesale distributor, as defined by the U.S. Drug Supply Chain Security Act (DSCSA), for some of your products?  This might occur if you are buying pre-packaged drugs from the New Drug Application (NDA)-holder or Abbreviated New Drug Application (ANDA)-holder and offering them for sale to U.S. wholesale distributors.  If you cannot justifiably fit into the DSCSA definitions of either a “co-licensed partner”, or an “exclusive distributor” for those drugs, you might as well remove them from your catalog because the “Big-3” wholesale distributors—AmerisourceBergen, Cardinal Health and McKesson—probably will not be willing to buy them anymore as of next January.

That’s because the DSCSA, which begins to take effect at that time, will most likely consider you as a wholesale distributor for those products, which makes your purchases from the actual manufacturer fall into the “direct purchase” category.  And that means the wholesale distributors you sell to will be considered by the DSCSA as the second wholesale distributor, which means the job of distributing your product will be much less efficient for them.  Unless your drug is the latest, cutting-edge, cure-all drug that cannot be acquired any other way, the “Big-3” wholesale distributors in the U.S. will probably not be willing to go through the extra trouble.  Let me explain.


Back in the mid-2000s the “Big-3” wholesalers announced that they were getting out of the secondary “grey” market for pharmaceuticals, and from then on, would only buy drugs directly from each manufacturer…when they could.  This was a huge move in the effort to secure the U.S. supply chain from the kind of criminal activity that had been growing by leaps and bounds prior to that time, as documented so well by Katherine Eban in her excellent 2005 book “Dangerous Doses” (see the RxTrace essay by the same name “Dangerous Doses”).  The moves by the “Big-3” away from the grey market was triggered by a well-executed investigation conducted by the office of the Attorney General of New York (then headed by Eliot Spitzer) and a resulting big settlement with Cardinal Health (see “Do We Even Need To Mandate Drug Pedigrees Anymore?”).

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This move eliminated a wide-open opportunity for criminals to slip illegitimate product back into the legitimate supply chain.  I contend it was the single most important reason our supply chain did not descend into total confusion over drug legitimacy in the subsequent years.  But to implement this promise, the big wholesale distributors had to buy all of their inventory directly from the “manufacturer” from then on.

The only problem is, that might not always be technically possible.  In a few cases, certain drugs are sold by the manufacturer only through an exclusive distributor under contract.  In a few other cases, a “manufacturer” buys pre-packaged drugs from the actual manufacturer under contract and offers them for sale in the U.S. market.  In both of these cases it is technically not possible for the “Big-3” wholesale distributors to buy directly from the actual manufacturer.  So in these cases, they only buy from the first company they are able to:  the first wholesale distributor, which may also be the actual manufacturer of other products (see “Working With CMOs Under California ePedigree”).


This situation wasn’t a problem, except when Florida, California, Congress and other states wanted to impose some form of track and trace, or pedigree, on all drugs in the supply chain in an attempt to secure the drug supply against the kind of illegitimate activity that the “Big-3” felt they had already addressed.  Of course, although the criminal activity was greatly reduced, it did not go away.  It just moved elsewhere.

The problem with imposing full track and trace on the “Big-3” is, the volume of drugs passing through the warehouses of these companies is so massive that stopping to capture, document and check the path of every single unique package of drugs as they pass through them would result in serious inefficiencies that would raise costs.  Wholesale distributors already operate on thin margins (see Adam Fein’s excellent essay “Profits in the 2014 Fortune 500: Manufacturers vs. Wholesalers, PBMs, and Pharmacies“), so any degradation in operational efficiency would produce a significant hit on profits.  The proportion of the cost of fully tracking and tracing all drugs against wholesale distributor profits would be much greater than that against the profits of drug manufacturers and chain pharmacies, assuming the wholesale distributors do not just pass the costs upstream or downstream.

According to the Healthcare Distribution Management Association (HDMA), in the United States, 91% of prescription drug sales are handled by “primary distributors”.  All but a few percentage points of that by the “Big-3”.  No serious person thinks these companies would intentionally engage in any activity that would result in elevating the risk of introducing counterfeit or other illegitimate product into the supply chain.  So how do you impose track and trace requirements on companies in the drug supply chain without unnecessarily killing the efficiencies of these important links in the drug supply?  Easy, you give them special privileges.

In Part 2 of this series I will explain what these “special privileges” are in the DSCSA, how the “Big-3” won them, and why they may lead to some drug SKUs being dropped.  Stay tuned.