BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                            



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                                    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:
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          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  

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               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.

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          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  

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            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  

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          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  

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          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  

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          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

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          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



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          MW:e  8/18/14   Senate Floor Analyses 

                           SUPPORT/OPPOSITION:  SEE ABOVE

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