BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | AB 2605| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- THIRD READING Bill No: AB 2605 Author: Bonilla (D) Amended: 8/6/14 in Senate Vote: 21 SENATE BUSINESS, PROF. & ECON. DEV. COMM. : 8-0, 6/23/14 AYES: Lieu, Wyland, Berryhill, Corbett, Galgiani, Hernandez, Hill, Torres NO VOTE RECORDED: Block SENATE APPROPRIATIONS COMMITTEE : 7-0, 8/4/14 AYES: De León, Walters, Gaines, Hill, Lara, Padilla, Steinberg ASSEMBLY FLOOR : 74-1, 5/27/14 - See last page for vote SUBJECT : Pharmacy: third-party logistics providers SOURCE : Board of Pharmacy DIGEST : This bill requires third-party logistic providers (3PL) who provide storage, handling, or distribution services related to pharmaceuticals, to be licensed by the Board of Pharmacy (BOP). ANALYSIS : A recent federal law made a variety of changes to the drug distribution system. One of the new provisions of federal law preempts states from requiring 3PLs to be licensed as wholesalers. Existing state law: CONTINUED AB 2605 Page 2 1.Establishes the practice of pharmacy and provides for the licensing and regulation of pharmacies and pharmacists by BOP. 2.Defines "wholesaler" to mean a person who acts as a wholesale merchant, broker, jobber, customs broker, reverse distributor, agent, or a nonresident wholesaler who sells for resale, or negotiates for distribution, or takes possession of, any dangerous drug or device. 3.Defines "third-party logistic provider" or "reverse third-party logistics provider" to mean 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. 4.Requires wholesalers and nonresident wholesalers to have a designated representative in charge, maintain a surety bond, and adhere to certain distribution, administrative, and storage requirements, as specified. 5.Requires, beginning April 1, 2014, a CURES fee of $6 be assessed annually on specified licensees to pay the reasonable costs associated with operating and maintaining CURES for the purpose of regulating those licensees. This bill requires 3PLs who perform specified activities related to pharmaceuticals to be licensed by BOP. Specifically this bill: 1.Expands the list of entities assessed an annual $6 fee to support the CURES system to include 3PLs and nonresident 3PLs. 2.Defines the following terms: A. "Designated representative-3PL" as an individual to whom a license has been granted pursuant to Section 4053.1 of the Business and Professions Code. B. "Responsible manager" as a designated representative-3PL selected by a 3PL and approved by BOP as responsible for ensuring compliance of the licensed place of business with state and federal laws with respect to dangerous drugs and CONTINUED AB 2605 Page 3 dangerous devices received by, stored in, or shipped from the licensed place of business of the 3PL. C. "Reverse third-party logistics provider" as an entity that processes or manages the disposition of an outdated or non-saleable dangerous drug or dangerous device on behalf of a manufacturer, wholesaler or dispenser of the dangerous drug or dangerous device but does not take ownership of the dangerous drug or dangerous device nor have the responsibility to direct its sale or disposition. Specifies that provisions under Pharmacy Law that apply to a 3PL shall also apply to a reverse 3PL. 1.Repeals and recasts the definition of "third-party logistics provider" to mean an entity that provides or coordinates warehousing or other logistics services of a product in interstate commerce, on behalf of a manufacturer, wholesaler or dispenser of a product but does not take ownership of the products, nor have responsibility to direct the sale or disposition of the product. 2.Provides that a separate license is required for each place of business owned or operated by a wholesaler or 3PL and that each place of business may only be issued a single license by BOP. Permits a wholesaler and 3PL under common ownership to be licensed at the same place of business, as specified. 3.Provides that a separate license is required for each place of business owned or operated by a nonresident wholesaler and a nonresident 3PL and that each place of business may only be issued a single license by BOP. Permits a nonresident wholesaler and nonresident 3PL under common ownership to be licensed at the same place of business, as specified. 4.Requires the designated representative-in-charge to maintain an active license as a designated representative with BOP at all time during which he/she is designated as the designated representative-in-charge. 5.Provides that the responsible manager is responsible for ensuring the compliance of the licensed place of business with state and federal laws and with the 3PL's customer specifications, except where the customer's specifications conflict with state or federal laws. CONTINUED AB 2605 Page 4 6.Authorizes BOP to issue a license to a qualified individual as a designated representative-3PL to provide sufficient and qualified supervision of a 3PL's place of business. Provides that the designated representative-3PL protect the public health and safety in the handling, storage, warehousing, distribution and shipment of dangerous drugs and dangerous devices in the 3PL's place of business. 7.Requires the designated representative-3PL applicant to meet the same requirements as those set forth for a designated representative under existing law. Prohibits a 3PL from operating without at least one designated representative-3PL present at each of its licensed places of business. 8.Provides that a designated representative-3PL may take charge of, and act as, the responsible manager of a 3PL upon application by the 3PL and with BOP approval. Requires BOP notification within 30 days in writing if a responsible manager is no longer operating in that capacity. 9.Provides that if a manufacturer, wholesaler, 3PL or pharmacy has reasonable cause to believe that a dangerous drug or dangerous device that has been sold or distributed in California that is in or has been in its possession is counterfeit or the subject of a fraudulent transaction, the manufacturer, wholesaler, 3PL or pharmacy shall notify BOP within 72 hours. 10.Requires a 3PL to keep records of the manufacture and of sale, acquisition, receipt, shipment, or disposition of dangerous drugs, and current inventory, as specified. 11.Requires a 3PL that is not government owned and operated to post a surety bond of $90,000. 12.Establishes fees for a 3PL and nonresident 3PL license, as specified. 13.Requires BOP, at such time as federal regulations are promulgated to implement Section 584 of the federal Food, Drug, and Cosmetic Act (FD&C Act), to immediately identify any standard, requirement, or regulation in California law governing interstate commerce that is in conflict with federal CONTINUED AB 2605 Page 5 regulations and act to remove the conflict in the manner permitted by law. 14.Provides that a 3PL using the services of a carrier, as specified, shall have in place and comply with written policies and procedures that provide for (a) verification that the 3PL, or the owner of the dangerous drugs/devices stored at the 3PL, has imposed obligations on the carrier that provide for the security and integrity of any dangerous drugs/devices delivered to the transferee at its premises, and (b) confirmation, prior to shipping a dangerous drug/device, that the intended recipient is legally authorized to receive the dangerous drug/device. 15.Makes other clarifying, conforming and technical changes. Background Drug supply regulation . The FD&C Act was passed by Congress to ensure public confidence in our drug distribution system and to require that drugs are both safe and effective. The FD&C Act requires the FDA to regulate drug manufacturers and to approve drugs for sale but also requires state governments to regulate the drug distribution system by licensing and regulating drug wholesalers. In the simplest situation, a manufacturer sells drugs directly to one of the major wholesalers who then sell the drugs to a hospital or pharmacy. However, this simple distribution pattern is not the only distribution route taken through the supply chain. Typically, there is more than one wholesaler who receives the drugs before they reach the pharmacy. These transactions include transfers between separate facilities owned by major wholesalers and transfers between the major wholesalers and the large drug store chains that have their own wholesale facilities in the company distribution system. Common carriers may transport the drugs between licensed entities and in some cases will store, select and then ship products to pharmacies at the direction of manufacturers. The distribution system is further complicated by the practice of "repackaging." Unlike European countries and Canada, most drugs in the United States are not packaged in a "unit of use" size by the drug manufacturers. Instead, many drugs are sold by the manufacturers in large bulk containers and then are repackaged by additional companies into smaller containers for CONTINUED AB 2605 Page 6 resale to the pharmacy. And the distribution system is complicated yet again by the existence of a "secondary" wholesale market. "Secondary" wholesalers are smaller companies (often regional down to small family owned companies) that focus their business on selling drugs to other wholesalers and serving smaller niche clients that are not routinely served by the major wholesalers (individual practitioners, small clinics, rural locations, etc.). Drugs routinely move between both primary and secondary wholesalers and from pharmacies to secondary wholesalers as well. These intermediate steps pose the greatest opportunities for compromising the integrity of the drug distribution system. The primary threat to system integrity is the introduction of counterfeit products. Counterfeit drugs are most likely to be introduced into a distribution system that involves multiple wholesalers because drugs are largely untraceable unless they are only handled by a major wholesaler who purchases directly from the manufacturer. Without being able to trace a drug back, there is no assurance to the consumer that the drug has been stored and handled appropriately to preserve its potency and safety. In response to a growing threat to the pharmaceutical supply chain from counterfeit, misbranded, adulterated or diverted drugs, California enacted SB 1307 (Figueroa, Chapter 857, Statutes of 2004) which made comprehensive changes to the drug distribution system to protect the integrity of the pharmaceutical supply chain. That legislation enacted the nation's strongest pharmaceutical consumer protection measure and included provisions pertaining to the licensure and qualifications of wholesalers, restrictions on furnishing and the requirement, beginning January 1, 2007, of an electronic pedigree (e-pedigree) to accompany and validate drug distributions for the purpose of tracking each prescription drug at the saleable unit level through the distribution system. Subsequent BOP sponsored legislation, SB1476 (Figueroa, Chapter 658, Statutes of 2006) delayed the implementation date for the e-pedigree component to January 1, 2009, and granted BOP the authority to extend the deadline an additional two years to allow the industry additional time to implement technologies necessary for e-pedigrees. In 2008, BOP sponsored SB 1307 (Ridley-Thomas, Chapter 713, Statutes of 2008), which amended the law to resolve implementation issues, specifically CONTINUED AB 2605 Page 7 staggering and extending the implementation dates for e-pedigree compliance, establishing grandfathering of existing stock in the supply chain, allowing BOP to establish criteria for inference, and preempting California's requirements in the event federal legislation is enacted in this area. Per SB 1307, California's e-pedigree requirements for prescription drugs would have taken effect on a staggered basis from January 1, 2015 through July 1, 2017: 50% of a manufacturer's products by 2015 would have had to have an e-pedigree; the remaining 50% of the manufacturer's products would have had to have an e-pedigree by 2016; wholesalers and re-packagers would have had to accept and forward products with the e-pedigree by July 1, 2016, and pharmacy and pharmacy warehouses would have had to accept and pass e-pedigrees by July 1, 2017. In 2013, Congress passed and President Obama signed H.R. 3034, the DQSA. Among other provisions, the bill created a national set of standards to track pharmaceuticals through the distribution chain, aimed at curbing illegal importation and patient harm caused by counterfeit drugs and devices. The new law requires the FDA to implement an electronic system to trace pharmaceuticals throughout the supply chain at the unit level and, as a result, preempts California's e-pedigree law established in 2005. DQSA also defines a 3PL as "an entity that provides or coordinates warehousing, or other logistics services of a product in interstate commerce on behalf of a manufacturer, wholesale distributor, or disperser of a product, but does not take ownership of the product, nor have responsibility to direct the sale or disposition of the product." Major companies, such as UPS, DHL, and others provide these services. The duties of a 3PL can vary from contract to contract, but the comment element is that a 3PL never holds title to the product it is contracted to manage. DQSA authorizes states to continue licensing programs for wholesale distributors and 3PLs, although it explicitly states that "No State shall regulate 3PLs as wholesale distributors." This bill creates a separate licensing system for 3PLs to be in conformance with DQSA. While DQSA does provide for a federal licensing system for 3PLs beginning in late 2015, until that time, 3PLs will be unregulated unless the FDA makes a specific finding that a 3PL does not utilize good handling and distribution practices. This bill will provide for ongoing CONTINUED AB 2605 Page 8 licensing of 3PLs according to California law to maintain the integrity of the drug supply system. Comments According to the author's office, California has regulated 3PLs as drug wholesalers for years, but recent federal legislation, the Drug Quality and Security Act (DQSA), preempts California law and requires that if California wants to license 3PLs, they must be licensed as a distinct entity. The author's office notes that DQSA permits states or the FDA to license 3PLs. However, regulations implementing a federal licensing program are not anticipated until late 2015, and will likely be completed later than that. The author's office notes that until then, 3PLs which are not state licensed are "deemed" federally licensed unless FDA finds that a specific 3PL provider is practicing unsafely. This means that there are no safety, storage, handling, or recordkeeping standards for 3PLs to adhere to until FDA develops regulations. According to the author's office, 3PLs are essentially unregulated until either California or FDA develops a licensing scheme. FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes Local: Yes According to the Senate Appropriations Committee: One-time costs of approximately $100,000 to revise existing regulations and make information technology upgrades to the system used for licensing (BOP Contingent Fund). No significant ongoing licensing or enforcement costs are anticipated, as 3PLs are already licensed under existing state law. This bill revises the licensing requirement to conform to federal law but does not substantially change the responsibilities of BOP. SUPPORT : (Verified 8/6/14) Board of Pharmacy (source) OPPOSITION : (Verified 8/8/14) International Warehouse Logistics Association CONTINUED AB 2605 Page 9 UPS ARGUMENTS IN SUPPORT : The Board of Pharmacy writes, "Until recently [3PLs] were required to be licensed as drug wholesalers by this board if they were handling prescription drugs and prescription devices intended for California patients or practitioners. (Those warehouses that do not handle prescription drugs or devices do not require such a license.) However, recently enacted federal law requires a separate licensure program for 3PLs, and specifically directs that they not be licensed as drug wholesalers. As such provisions in AB 2605 would establish requirements for these distributors of prescription drugs and devices that are appropriate to entities that distribute, store, select and ship medication. The federal Food and Drug Administration will develop general requirements for these businesses for those states that do not establish their own regulatory provisions; however, the FDA has 15 more months before they are required to develop the parameters." ARGUMENTS IN OPPOSITION : UPS writes that this bill does not acknowledge the unique role of 3PLs, imposes many requirements that are not applicable to 3PLs, and contains 3PL licensure provisions that are inconsistent with and pre-empted by the Federal Drug Supply Chain Security Act. ASSEMBLY FLOOR : 74-1, 5/27/14 AYES: Achadjian, Alejo, Allen, Ammiano, Bigelow, Bloom, Bocanegra, Bonilla, Bonta, Bradford, Brown, Buchanan, Ian Calderon, Campos, Chau, Chávez, Chesbro, Conway, Cooley, Dababneh, Dahle, Daly, Dickinson, Eggman, Fong, Frazier, Beth Gaines, Garcia, Gatto, Gomez, Gonzalez, Gordon, Gorell, Gray, Grove, Hagman, Hall, Harkey, Roger Hernández, Holden, Jones, Jones-Sawyer, Levine, Linder, Logue, Lowenthal, Maienschein, Mansoor, Medina, Melendez, Mullin, Muratsuchi, Nazarian, Nestande, Olsen, Pan, Perea, John A. Pérez, V. Manuel Pérez, Quirk, Rendon, Ridley-Thomas, Rodriguez, Salas, Skinner, Stone, Ting, Wagner, Waldron, Weber, Wieckowski, Williams, Yamada, Atkins NOES: Fox NO VOTE RECORDED: Donnelly, Patterson, Quirk-Silva, Wilk, Vacancy CONTINUED AB 2605 Page 10 MW:e 8/18/14 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END **** CONTINUED