I wrote an RxTrace essay about the impact of the California pedigree law on 3PLs back in 2013 (see “3PL Operation Under California ePedigree“). This is an update of that essay to address the impacts of the new DSCSA on 3PLs since the California pedigree law is now obsolete.
There are a number of important differences between wholesale distributors and 3PLs as defined in the DSCSA.
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 known as “batches” or “lots”—and their customers—which usually have a smoother and more continuous demand curve. The 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. Product 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 the DSCSA.
Wholesale distributors, on the other hand, always buy (take ownership of) the products that they distribute. (Be aware that some of the larger pharma wholesale distributors in the U.S. 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 (take ownership of) 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 their 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.
In many cases, the manufacturer’s invoice is actually generated and transmitted to the wholesale distributor by the 3PL, and payment may even be made to the 3PL on behalf of the manufacturer. Even these are simply financial services rendered to the manufacturer for a fee by the 3PL.
This is an important distinction, because the DSCSA requires all changes of ownership to be documented with the passing of Transaction Information (TI), Transaction History (TH) and a Transaction Statement (TS) from the seller to the buyer. So for drugs that are sold by a manufacturer to a wholesale distributor, this transaction must result in the generation and passing of TI, TH and TS by the manufacturer and its receipt by the wholesale distributor (the law is currently in effect for manufacturers, repackagers and wholesale distributors but will be effective for dispensers on July 1, 2015).
WHAT DOES THE DSCSA SAY ABOUT 3PLs?
Not much really. Because the 3PL generally never “owns” the product, they are not obligated by the DSCSA to generate, transmit or receive the transaction documents. However, 3PLs are included in the definition of “Trading Partners”.
Beginning sometime next year, depending on when the FDA publishes regulations regarding the standards for Federal and State licensing of third-party logistics providers, 3PLs must apply for and receive a license from either a third-party accreditation program approved by the FDA, or the FDA themselves. Until that time, the DSCSA created a blanket license for all existing 3PLs who currently held state licenses and who reported to the FDA by November 27, 2014 (and must continue to do so annually).
Until we see those new 3PL regulations from the FDA we will not know exactly what to expect. They are due by November 27, 2015. However, Congress provided the FDA with specific requirements for working with the states on licensing and fees. If you work for a 3PL, I suggest you familiarize yourself with those specifics in the DSCSA because the FDA’s regulations will need to align with them.
The reference to “third party accreditation program” sounds suspiciously like the existing Verified-Accredited Wholesale Distributor (VAWD) program offered by the National Association of Boards of Pharmacy (NABP) and which some states required for wholesale distributor licensure. I would not be surprised if the NABP announces in the coming months a new or related program that would be recognized by the FDA to fulfill the new Federal 3PL and wholesale distributor licensure requirements. I’m betting there are negotiations going on right now between the NABP and the FDA for just this sort of thing. If so, they will need to announce it as part of the FDA’s mandated deadline this November. We’ll see.
CAN A 3PL OFFER TI/TH/TS SERVICES?
The interpretation of the DSCSA 3PL regulation is pretty straightforward. I can’t find any other provision in the law that would seem to block 3PLs from offering TI, TH and TS document retention, generation and transmission services as part of their overall contractual service offering. 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 the DSCSA transaction documentation on their behalf.
Of course, a 3PL cannot absorb the legal responsibility that the manufacturer, repackager or wholesale distributor has to generate, provide, store and retrieve the DSCSA transaction documentation, 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 DSCSA transaction documentation 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 TI, TH and TS 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 regulators and/or the FDA and the 3PL would be liable to the manufacturer.
If you work for a 3PL, or for a manufacturer who makes use of a 3PL, I suggest that you review the 3PL provisions of the DSCSA and work with your contract partner to update your contracts to clarify the obligations and penalties under these new circumstances.