The wholesale pharmaceutical distribution industry operates under stringent regulations imposed by both federal and state governments. These regulations aim to protect public safety by mitigating risks associated with counterfeit drugs, outdated or expired drugs, and fraudulent activities through serialization. For small to medium-sized pharmaceutical distribution companies, maintaining compliance with all standards and regulations can be particularly challenging and costly. This article explores the economics of staying compliant in this highly regulated environment and provides scenarios for dispensers of complying or not complying with the Drug Supply Chain Security Act (DSCSA).
How Retail Pharmacies Manage the 5% Rule in Regards to DSCSA Compliance
Some retail pharmacies in certain states distribute a portion of their inventory to secondary locations or other pharmacies in their area. In some states, the 5% rule requires dispensers (pharmacies) meeting this threshold (distributing 5% or more) to obtain a distribution license and thus comply with the DSCSA – this can present sticker shock to those unaware of the costs and process associated as the DSCSA presents certain procedures and file formats that they are unfamiliar with. To get a better understanding of the inbound and outbound workflow that you must comply with: watch this video:
Case Study: Exploring DSCSA Compliance Scenarios for Dispensers
Scenario Analysis
Note: This scenario analysis is not intended to be used as legal advice. Please visit the FDA’s website for more information: Pharmacists: Utilize DSCSA Requirements to Protect Your Patients | FDA
Let's consider ABC Pharmacy which uses 4 different tools to manage their business
- Introductory Accounting Software
- Retail Point-Of-Sale
- Customer Relationship Management Software
- Spreadsheets to manage Inventory
At this moment, they have already experienced slight data errors due to the disconnected systems, but because the business and inventory volume are small, it is relatively simple to manage these inconsistencies.
Since ABC Pharmacy distributes 10% of its inventory to smaller pharmacies in neighboring towns, they already have a distribution license and must now comply with the DSCSA.
ABC Pharmacy can choose either of the following three options:
- Scenario 1: Keep the same multiple systems layout and comply by integrating Serialization capabilities as a standalone solution.
- Scenario 2: Switch to a Mid-Tier ERP and increase the distribution capabilities (in this case, they will have unlimited capacity for growing their business processes, especially distribution.)
- Scenario 3: Discontinue the distribution business or (in the best-case scenario) reduce it to 4% or less of their total inventory.
Integrating DSCSA Solution to Current Tech Stack (Scenario 1)
If ABC Pharmacy decides to maintain its 10% distribution levels (In a state that enforces the 5% rule) and keep its current technology stack, they will have to find a third party to help them with DSCSA Compliance as a standalone solution.
It may sound like a simple Google search, but the DSCSA is unprecedented, and the majority of the supply chain was not ready for the initial deadline hence the introduction of the Stabilization period. Depending on the current solutions in place, ABC Pharmacy should speak with their vendors to see if any of them offer DSCSA integration. Considering their current tech stack, this is likely not an option (due to the agreed file format of EPCIS) resulting in the implementation of a standalone solution that can receive, parse, store, and send EPCIS files upstream and downstream.
The costs will include:
- Serialization set-up (One-Time Cost)
- Serialization fees (Ongoing Costs)
Now, ABC Pharmacy has added yet another solution to the tech stack, presenting numerous challenges including efficiency loss with human error and duplicated data entry, integration challenges, increased training and support from multiple vendors differing in quality and accessibility, lack of comprehensive reporting, etc. ABC Pharmacy is not thinking of long-term growth.
Grow the Business with Comprehensive ERP (Scenario 2)
The cost of complying with the DSCSA may vary depending on the technological readiness of your business. If your current business management solution provides additional add-ons for DSCSA compliance, it can be a matter of added service and fee, while if your current business solution is introductory, you may need to implement a mid-tier software solution to have the infrastructure in place.
In this scenario, we assume that ABC Pharmacy currently uses an introductory software solution and has decided to upgrade it to a mid-tier Enterprise Resource Planning (ERP) solution. Calculating the cost of implementing an ERP solution with working integrations for DSCSA requires a detailed analysis of your business, the number of users, and the number of inbound and outbound transactions (Who you buy from and sell to). Their investment will include:
- ERP Implementation Costs (One-time Cost)
- ERP Software and Per User Costs (Ongoing Costs)
- Serialization Set-up (One-Time Cost)
- Serialization fees (Ongoing Costs)
ERP implementation costs are very specific to the software vendor, the business and its specific requirements, and require a thorough calculation. To learn more about the determinates of cost, check out this blog: So how much does Inventory Management Software cost? (bluelinkerp.com)
The best part about this option is the automation. An ERP solution is designed to help your business grow and will take care of the DSCSA complexities for you so that you can focus on your business and customers.
For a more accurate understanding of the costs of ERP software implementation, please check our Pricing Guide. You can also book a meeting with our specialists to analyze your situation, and the benefits associated with DSCSA compliance.
Minimize Distribution (Scenario 3)
With option 3, ABC Pharmacy has decided to reduce its distribution to 4% of its inventory which will result in overstock costs until they reduce purchase levels to suit their new business needs. According to the FDA, a dispenser who receives inventory from a registered pharmaceutical trading partner is not excluded from the DSCSA as a trading partner themselves meaning they still have certain requirements to follow. Dispensers must ensure the trading partner provides full a transaction Report (T3), a product identifier for eligible products (some prescription drugs are excluded, grandfathered, or exempt – check with the manufacturer or repackager if the product identifier is missing) and the dispenser must keep a record of this information in paper or electronic format for at least 6 years.
The dispenser or ABC Pharmacy in this example, also must properly handle suspect or illegitimate product by putting the product in question in quarantine and reporting it to the FDA within 24 hours using Form FDA 3911. Documentation for this process must also be stored for at least 6 years. See Guidance on Verification: Wholesale Distributor Verification Requirement for Saleable Returned Drug Product and Dispenser Verification Requirements When Investigating a Suspect or Illegitimate Product—Compliance Policies | FDA
Cost Considerations of DSCSA Compliance
One of the main concerns for small distributors and retail pharmacies engaged in the distribution process regarding DSCSA compliance is the cost of compliance. To be able to calculate the potential costs and benefits of compliance, we need a breakdown of possible expenditures and gains.
Initial Setup Costs
- Software Implementation: If you use introductory accounting and business solutions, you will have two options for DSCSA compliance. If your current software vendor supports integration with serialization components, you can adhere to the DSCSA and continue the manual processes with limited room for growth. However, if you want to scale and streamline your distribution business and comply with DSCSA, you can invest in a sophisticated ERP solution with pharma capabilities. The upfront and ongoing costs of implementing ERP solutions are higher than those of the first option, however, by streamlining your business processes, ERP software can boost your efficiency and provide unlimited growth opportunities. Keep in mind that the implementation cost of an ERP solution can vary depending on your business requirements and the vendor’s pricing policies.
- Training and Onboarding: Ensuring staff understand new systems and compliance requirements.
Ongoing Costs
- Maintenance and Updates: In any case, you will pay an ongoing fee for keeping the solution you have chosen up and running and making sure your systems receive all necessary updates. This can also vary significantly depending on the type of software infrastructure you choose and the software vendor.
- Accreditation Fees: Costs for optional accreditations, such as The National Association of Boards of Pharmacies (NABP).
Cost Savings
- Efficiency Gains: Automating compliance processes by implementing an ERP solution reduces manual labor and errors, improving the efficiency of the business.
- Risk Mitigation: Proactively managing compliance reduces the risk of fines and legal issues.
How Long Does It Take to Setup Compliance Infrastructure?
Another big concern of small distributors regarding DSCSA compliance is the time required for processes that enable DSCSA compliance. Generally, two major processes take up most of the time in this transaction:
- Licensing Process: In the United States, approval times for a wholesale drug distributor license vary by state, ranging from weeks to months. In Alaska, the process is relatively simple, and a license can be issued within two to three weeks. In contrast, California's process is more complex, requiring basic licensing information and approvals from both the Food and Drug Administration (FDA) and the DEA. For states that mandate certification by the NABP or a similar organization, the application process can be extended by several weeks or months. Additionally, if you plan to expand into another state, you will need to complete the licensure process there as well, which can further extend the processing time.
- Software Setup Process: Check to see if your current Software Provider already integrates with the necessary third parties to ensure DSCSA compliance. If they do not already have an integration set up, it will take time to create the custom or to look for a system that offers this as a comprehensive solution. Blue Link Pharmaceutical ERP, for example, already has an integration with 2 third-party service providers for DSCSA compliance. Remember, Non-compliance is not an option! You can save money where possible by talking to your vendor first.
Penalties for Operating Without a License
Operating a wholesale drug distribution business without a valid license, or with an expired license, can lead to warnings, fines, and potentially criminal prosecution at both state and federal levels. This is particularly critical when controlled substances are involved, as the regulatory scrutiny and penalties are substantially more stringent.
The Role of Compliance in Public Safety
The DSCSA introduces a fully interoperable environment with the EPCIS file format as the standard. To dive deeper into EPCIS file management, download our DSCSA Compliance Guide for Distributors (bluelinkerp.com)
These regulations are designed to enhance:
- Interoperable Tracing: Facilitate electronic tracing of prescription drugs at the package level, enabling identification and tracking of products as they move through the distribution chain, and detection of counterfeit, stolen, contaminated, or harmful drugs.
- Consumer Protection: Protect patients by preventing exposure to compromised pharmaceuticals and ensuring the removal of unsafe products from the drug supply chain.
- National Licensure Standards: Establish uniform licensure standards for wholesale distributors and third-party logistics providers (3PLs).
The Cost of Non-Compliance: Business Growth Opportunities
Pharmaceutical distribution has significant potential for scaling up and creating profit opportunities which can be the case for a pharmacy considering their industry know-how, their network, and the opportunity of other small distributors reducing their distribution levels to below 5%. While compliance involves initial and ongoing costs, the potential revenue, long-term benefits, and growth opportunities may outweigh these expenses, making compliance a financially sound decision for pharmacies with significant distribution activities.
Pharmaceutical distribution companies must navigate a complex regulatory landscape with significant financial implications for compliance. Leveraging advanced ERP solutions with enough pharma capabilities like Blue Link’s CSOS and SOM can streamline operations, ensure compliance, and mitigate risks. Automating reporting and monitoring processes allows companies to focus on growth and efficiency while maintaining adherence to legal standards.
