All 50 states and the District of Columbia

It s The Law License to Ship: What You Don t Know About State Wholesale Distribution Licensing Laws Can Cost You By Sarina D. Rivera, Esq., Maggie P. Smith and David Baron All 50 states and the District of Columbia impose some form of licensure and registration requirement on companies seeking to manufacture drug products within and/ or distribute them into their territory. What may be less well known is that a company s business model (manufacturer, distributor, third-party logistics provider) and the types of products it manufactures or distributes (prescription, controlled, device, OTC) often impact the number and type of licenses it must obtain. For example, one might assume that a company that does not physically manufacture or distribute drug products does not need to obtain a license. The truth is, however, that a majority of states require so-called virtual pharmaceutical companies to obtain a manufacturer/distributor license even if they do not actually manufacture or distribute any product. When confronted with this reality, companies are faced with the task of determining which states require them to obtain a license and then preparing and submitting the application. Between obtaining the correct application and preparing the submission, this endeavor usually ends up requiring far more time than may have been anticipated. This article details the process by which pharmaceutical companies obtain licensure and divulges some of the secrets for getting an application successfully processed. Rationales for Licensure Perhaps the most fundamental rationale supporting licensure requirements for pharmaceutical wholesalers and manufacturers at the state level is protection against the counterfeit drug trade. Since the early part of this decade, FDA has seen a large spike in the distribution of counterfeit drugs. 1 The agency has attributed this spike to factors such as the economic incentives provided by an increasing volume of high cost drugs, the development of technologies that make it easier to counterfeit drugs, and the ability to sell drugs directly to consumers without face-to-face contact through purchases over the Internet. 2 Additionally, the complexity of the pharmaceutical distribution system contributes to the ease with which counterfeit drugs slip into the supply chain. In response, FDA established a counterfeit drug task force and introduced various preventative measures against drug counterfeiting. The agency has also expressed the need to strengthen state requirements governing the licensure and oversight of pharmaceutical distributors. 3 It is a basic tenet of product liability law that anyone in the chain of distribution can potentially be held liable for a defective product. As such, it logically follows that everyone in the chain of distribution must be accounted for. Although FDA is charged with the registration of many types of pharmaceutical entities, individual states have borne the primary responsibility for ensuring that those doing business within their borders are appropriately licensed. State licensure requirements add a critical layer of registration to aid in the oversight of the pharmaceutical trade. 4 Consider the complexity of the pharmaceutical chain of distribution and how easily a counterfeit drug can slip into the supply chain. According to a January 2006 article published by Chief Information Officer Magazine, an undercover agent with the DEA and FDA discovered that discounted drugs were being purchased by smaller, secondary wholesalers and then sold to larger wholesalers for a significant profit. Often, these discounted drugs are smuggled back into the US after being exported from foreign countries. More disturbingly, the agent explained, Some secondary wholesalers have been known to purchase counterfeit drugs from criminal organizations in places such as China, Thailand or Colombia. 5 Who Must Obtain a License? To distribute trade products and samples throughout the US, a company must obtain a 42 October 2008

license through the applicable state licensing agency. Pharmaceutical businesses required to obtain licenses include manufacturers, wholesale distributors, third-party logistics providers, brokers and virtual manufacturers. Many factors must be considered when determining whether the company is required to obtain a drug distribution license in a given state. Among them are: whether the entity physically handles product; whether the entity s name appears on the label; whether the entity owns the product; and, most importantly, whether the entity plans on distributing into the state in question. Currently, four states do not require out-of-state distributors/manufacturers to obtain licensure: Alaska, Hawaii, Massachusetts and Utah. A company that utilizes a contracted third party to both manufacture and distribute its product is referred to as a virtual manufacturer. Roughly half of the states do not require virtual manufacturers to obtain licensure. A virtual manufacturer that uses a third party to distribute its products should obtain up-to-date copies of its third-party distributor s licenses. If a company physically distributes its own drug products or those of another firm, it will likely have to apply for wholesale distributor licenses in all 50 states and the District of Columbia. Generally speaking, wholesale distribution license applications are lengthier than manufacturer license applications and require additional layers of personal information and back-up documentation. The rationale for this distinction is rooted in concern over the counterfeit drug trade. State licensing agencies want to ensure that the wholesalers shipping product into their territories hold legitimate licenses. Most states issue one license to cover the distribution practices of manufacturers and wholesale distributors. Some states, however, such as Minnesota, Oregon and Florida, issue separate applications, and therefore licenses, for distributors and manufacturers. The company business model will determine which application must be completed. In addition, three states Florida, Kansas and Washington have separate applications for the distribution of samples. Distribution licenses are facility-specific. Therefore, if a company operates multiple facilities that physically ship product, multiple licenses are required. A company seeking licensure for multiple locations must consider a number of factors when determining which facility or facilities to license, including the address listed on the product label(s) and the addresses listed on the bill of lading or invoice. Wholesale distributors and manufacturers are the pharmaceutical businesses required to obtain licensure to market and distribute prescription drugs. Third-party logistics providers (3PLs) distribute and warehouse prescription drugs at the direction of another entity. 3PLs are contracted companies that do not take title to the product they manage. Licensure throughout the US and the District of Columbia must be obtained to properly distribute prescription drugs on behalf of another entity. Depending upon the state, licensure must also be obtained if an entity seeks to distribute or market prescription devices and over-thecounter (OTC) products. Roughly 30% of all states require a license for the distribution of OTC products. A company that markets or distributes a controlled substance must also complete licens- 44 October 2008

ing applications for its business operations. Currently, more than a dozen states, including Maryland and North Carolina, require manufacturers and distributors to complete separate applications for the manufacture and distribution of controlled substances. The Mechanics of Licensure The actual process of obtaining state licenses consists of three steps: gathering blank applications; completing applications, supplementing them with additional required documents and submitting them; and following up with the boards regarding the status of pending applications. Gathering blank applications for many states is easy. Many applications can be found on the state board of pharmacy s website under a clearly marked heading. Applications are often organized by business model type (e.g., manufacturer, wholesaler or prescription drug sample distributor), which makes it simple to determine which application to download. There are, however, several states that do not provide this information in a user-friendly fashion. Some board of pharmacy websites can be difficult to navigate, and applications are often found under obscure and improperly labeled links. Further, a handful of state websites do not have drug manufacturer or wholesaler applications available for download, although other pharmacy applications may be readily available. For a wholesale or manufacturer license in Nebraska, Idaho and Ohio, for example, it is necessary to call and request an application. The second step, completing the applications, is the most daunting. This procedure is complicated not only by the number of applications to be completed, but also by the breadth of information required. Each state license application is unique, not only in its format, but also in the information it demands and the additional requirements that fall outside the scope of the actual paper application. While some states (e.g., Indiana, Alabama and New Hampshire) require only a simple one-page application, others require an application of up to 15 pages. New Jersey and California s applications are among the longest. Where some states (e.g., New York and Georgia) may require only proof of resident state of licensure as an attachment, others require articles of incorporation, a copy of the facility s lease agreement, a certificate of insurance, a FEIN certificate, a surety bond or even a diagram of a facility s floor plan. The vast majority of applications request personal information about company officers, but the detail varies greatly from state to state. Some states, such as Alabama, merely require the name and title of corporate officers, while other states, such as California, require much more. Specifically, California requires that every officer submit a Personal Background Affidavit that asks a host of personal questions and must include a set of completed fingerprint cards for a criminal background check. The New Jersey application also requires information regarding the previous employment of all officers as well as a copy of their resumes and other personal information, including Social Security numbers, dates of birth and home addresses. Another issue complicating the licensure process involves a company s licensure in its resident state. The length of time it takes for a company to obtain all of its state licenses often hinges on how quickly it is able to acquire its resident state license. Almost every state requires some sort of verification of an applicant s licensure status in its resident state, whether this is a copy of the license or a board of pharmacyissued verification form that must be completed Regulatory Focus 45

by the resident state s licensing agency. Although some state boards will accept applications without verification of the resident license, and hold the applications as pending until such verification is received, a handful of states will return any incomplete application to the applicant. It is therefore integral to the mechanics of licensure that a company obtain its resident state license as early as possible in the licensing process. This is especially applicable to companies located in New Jersey, Florida and California, which are among the most rigorous in their demands. The final step of the licensing process is following up with the boards to determine the status of pending applications. As with the other processes, some state boards require minimal, if any, follow-up before a license is issued. Certain states, e.g., New Hampshire and North Dakota, tend to evaluate applications and update their databases quickly, thus requiring no follow-up. Other states, however, employ lengthier evaluation periods. The state boards of New Jersey and California, for example, receive a large number of applications, resulting in a longer review stage and requiring more consistent follow-up. Applications in these states require more frequent revisions due to the scrutiny of their review. This is especially true for companies with unique or complicated business models that do not fall within the scope of the standard manufacturer or wholesale distributor. Once a license is obtained, a company must ensure that it remains in good standing. Certain changes that occur within a licensed company (e.g., changes involving the corporate officers, name of company, ownership and location) may require notification of each state-licensing agency. Most licensing agencies require notification within 15 to 30 days of a change. The Maine Department of Professional and Financial Regulation, however, requires notification within 10 days. Consequences of Non-Compliance with State Licensing Laws Pharmaceutical companies may be aware of the penalties for misbranding, shipping adulterated products and violating pedigree requirements. Less well known, however, is that penalties for unlicensed practice at the state level can be just as harsh for both the shipping entity and the recipient. Wholesalers or manufacturers shipping pharmaceutical products without a license may be subject to both civil and criminal penalties in their home state as well as the state to which a product is distributed. For example, in Pennsylvania, an unlicensed wholesaler is liable for a civil penalty of up to $500 for each day of unlicensed practice. 6 The criminal penalty for this practice in both Pennsylvania and California is a fine of up to $2,000 and/or imprisonment for up to six months for the first offense. 7 In Colorado, an unlicensed wholesaler is subject to a penalty of up to $50,000, while a company that knowingly engages in unlicensed practice is liable for up to $500,000. 8 An unlicensed wholesaler found shipping to New Jersey and Florida will be issued an order to cease and desist or obtain a license within a certain time frame. If the company does not comply in Florida, it is subject to a fine of up to $5,000 per day in addition to suits or other legal proceedings. 9 In New Jersey, such a company would be found guilty of a disorderly person s offense and would ultimately be subject to a fine of up to $20,000 for each violation. 10 Perhaps even more devastating from an operations perspective is the action that can be taken against a recipient of pharmaceutical products from an unlicensed entity in a given state. The South Carolina Board of Pharmacy initially denied a company s wholesale drug distributor 46 October 2008

application when board investigators discovered that the applicant had been subject to disciplinary action in Illinois for purchasing product from a supplier not licensed in that state. The company was forced to appeal the denial of its application. 11 The board ultimately approved the distributor s application for a permit. The Florida Board of Pharmacy investigates facilities within the state to determine whether drug products housed in them are being obtained via licensed distributors. With states continually updating and adopting new licensing regulations, the trend is toward more-frequent disciplinary action. Conclusion Companies should consider their need for licenses well in advance of actually shipping product across state lines. On average, it can take six to eight months to complete applications and receive licenses from state agencies. Accordingly, knowing whether and how wholesale distribution laws will impact a company s business is key. It is also important to keep abreast of licensure renewals as well as changes to existing state wholesale distribution laws that may affect the status of a company s license. The process of obtaining a license to manufacture or distribute drugs can be time consuming and requires diligent follow-up with the various state boards. However, the importance of obtaining proper licenses to ensure the timely delivery of a company s products into a target market and avoid fines and other penalties cannot be overstated. co.us/pharmacy/statute.pdf). 9. Fla. Stat. 499.066 (1997) (www.leg.state.fl.us/statutes). 10. NJ Rev. Stat. 24:6B-11 (2008) (http://lis.njleg.state. nj.us). 11. For a copy of the order, see www. llronline.com/pol/ pharmacy/orders2007/h.%20d.%20smith%20 Wholesale%20Drug.pdf Authors Sarina D. Rivera is an Associate at Porzio, Bromberg, & Newman PC, a law firm with offices in Morristown, NJ and New York, NY. She is a member of the firm s pharmaceutical marketing and sales compliance and litigation department. Sarina Rivera is also a director of Quality Control of Porzio Pharmaceutical Services LLC, located in Morristown, NJ. She can be reached at sdrivera@pbnlaw.com. Maggie P. Smith is a regulatory analyst with Porzio Pharmaceutical Services LLC. She is a member of the company s licensing department and is responsible for the day-to-day management of licensing projects. She can be reached at mpsmith@pbnlaw.com. David Baron is currently attending his first year of law school at New York University. At the time of drafting of the article, he was a regulatory assistant with Porzio Pharmaceutical Services LLC and a member of the licensing department. References 1. Protecting Consumers From Counterfeit Drugs, FDA Consumer Magazine, May/June 2004, US Food and Drug Administration. www.fda.gov/fdac/ features/2004/304_drug.html (accessed 25 July 2008). 2. Counterfeit Drugs Questions and Answers, US Food and Drug Administration. www.fda.gov/oc/initiatives/ counterfeit/qa.html (accessed 10 March 2008). 3. Combating Counterfeit Drugs: A Report of the Food and Drug Administration, February 2004. www.fda.gov/oc/ initiatives/counterfeit/report02_04.html#regulatory, (accessed 10 March 2008). 4. Protecting Consumers From Counterfeit Drugs, FDA Consumer Magazine, May/June 2004, US Food and Drug Administration. www.fda.gov/fdac/ features/2004/304_drug.html (accessed 25 July 2008). 5. Patton S. Cracks in the Pharmaceutical Supply Chain, Chief Information Officer Magazine, 15 January 2006. www.cio.com/article/16565/cracks_in_the_ Pharmaceutical_Supply_Chain, (accessed 10 March 2008). 6. 63 PA Stat. Ann. 391.11 (www.health.state.pa.us/pdf/ ddc/wholesale.pdf). 7. Cal. Bus. & Prof. Code 4321 (2008) (www.leginfo. ca.gov). 8. Col. Rev. Stat. 12-22-806 (2007) (www.dora.state. Regulatory Focus 47