DEA Announces “Groundbreaking” Guidance that is Inconsistent with the Settlement they are Announcing – Time at Last for Rulemaking?

July 20, 2017By John A. Gilbert

On July 11, 2017, the Department of Justice and the Drug Enforcement Administration (“DEA”) announced that Mallinckrodt LLC, a pharmaceutical manufacturer, agreed to pay $35 million to settle allegations related to the adequacy of its efforts to detect and inform DEA of suspicious orders of controlled substances.  Although DEA has reached similar settlements with distributors and pharmacy chains (see, e.g., here), this is the first settlement of its kind with an opioid manufacturer.  DOJ’s press release states that the settlement reflects manufacturers’ obligation to monitor orders not only from their own customers, but also between distributors and pharmacies and clinics downstream in the distribution chain.  However, this statement appears  inconsistent with the language in the settlement document, marks a stark shift in the prevailing understanding of manufacturers’ suspicious order monitoring obligations and raises serious questions about the legal basis and workability of such a requirement.

For years, DEA has been criticized for failure to provide guidance on the suspicious order monitoring regulation, 21 C.F.R. § 1301.74(b).  The language in that section has remained unchanged since its enactment in 1971 and while DEA issued informal guidance letters to certain industry groups in 2006, 2007 and 2012,  DEA’s interpretation of that regulation has evolved significantly beyond that guidance.  More important, a fundamental deficiency in the regulation is that it fails to recognize the differences between manufacturers and distributors, including the level of data available to each concerning sales between distributors and pharmacies.  Thus, the lack of a clear regulation has continued to hinder industry’s ability to meet DEA’s expectations.

Unfortunately for industry, in the last several years, DEA has set forth its evolving view of the regulation primarily in presentations at conferences, through Memoranda of Agreement (“MOAs”) related to enforcement actions and in the Southwood and, more recently, the Masters decisions. (see, e.g., here and here).  While this approach has allowed DEA to avoid the notice and comment rulemaking requirement under the Administrative Procedure Act (“APA”), it has also left industry with little clarity about their obligations around the reporting of suspicious orders. A critical element of notice and comment rulemaking is for an agency to solicit important industry input on the impact of potential rulemaking, with the ultimate goal being effective and clear regulations.  Such clarity would result in a more secure supply chain for controlled substances, which would better serve the public interest as the U.S. continues to struggle with the issue of opioid diversion and abuse.

The press release concerning the Mallinckrodt settlement, which purported to set out “groundbreaking” new rules, is another example of DEA establishing a new standard while avoiding notice and comment rulemaking.

The problem revolves around DEA’s discussion of chargebacks (which are a common pharmaceutical pricing feature), for the first time, and a critical discrepancy between the language set forth in the government’s press release and the obligation outlined in the MOA with Mallinckrodt.  (In general, a chargeback is a payment made by a manufacturer to a distributor to make the distributor whole when it sells the manufacturer’s product at a price below a specified rate. After a distributor sells a manufacturer’s product to the pharmacy, for example, it requests a chargeback from the manufacturer and to support that request for payment, the distributor identifies the product, volume and the pharmacy to which it sold the product.) In its press release, the government stated that, “[t]he groundbreaking nature of the settlement involves requiring a manufacturer to utilize chargeback and similar data to monitor and report to DEA suspicious sales of its oxycodone at the next level in the supply chain, typically sales from distributors to independent and small chain pharmacy and pain clinic customers.” (emphasis added). This appears to set forth DEA’s position that manufacturers must review chargebacks and report the underlying sales from the distributor to downstream pharmacies as suspicious orders.

However, we have reviewed Mallinckrodt’s MOA and it does not require reporting downstream transactions as suspicious orders.  Rather, the MOA provides that Mallinckrodt review chargeback data and alert DEA of pharmacies (not orders) that may be concerning.   The clear focus of the language is a reporting of pharmacies as a condition of the MOA, not the reporting of chargebacks as suspicious orders under 21 CFR 1301.74(b). Note, as of this writing, the MOA has not been posted to the government’s websites.

As an initial matter, it is not clear that DEA can create such a new requirement by announcing it in a press release. First, nothing in the language of 21 C.F.R. § 1301.74(b) suggests that a manufacturer must review orders between two downstream third parties and report them as suspicious. Second, we could find no prior public statement from DEA that a manufacturer must report such third party transactions as suspicious under 21 C.F.R. § 1301.74(b). Finally, if this really is “groundbreaking” – to use the government’s own word – surely such a change should warrant notice and comment rulemaking.

Moreover, there is no indication manufacturers’ attempts to monitor downstream transactions would be productive. It appears instead that manufacturers will be expected to second guess distributors’ decisions to fill orders from pharmacies (well after those sales have been completed), even though the manufacturers have far less information than the distributors have about those pharmacies. Distributors often have longstanding relationships with their pharmacy customers and sophisticated monitoring programs to evaluate pharmacy orders.  In contrast, a manufacturer can only see – after the fact – the manufacturer’s products a distributor sells to a pharmacy and for which the distributor submits a chargeback request. With such limited visibility, a simple and perfectly legitimate switch by a pharmacy from one manufacturer’s product to another’s, for example, could look like a suspicious “increase” in the distributor’s sales to that pharmacy.

DEA’s position raises many additional practical questions. If the manufacturer and distributor disagree about which orders are suspicious, will DEA hold manufacturers’ reports of suspicious orders against the distributor, even if the distributor is better positioned to assess those orders?  How many orders that appear “suspicious” to a manufacturer can be filled by a distributor before the manufacturer must stop selling to that distributor?  And how should a manufacturer structure a program designed to monitor distributor sales to tens of thousands of pharmacies with which the manufacturer has no contact?

Manufacturers will likely be struggling with these issues for years to come. That ongoing confusion and its negative impact on the security of the supply chain emphasizes, once again, the need for DEA to make clear the obligations of manufacturers through notice and comment rulemaking on this critical issue, especially as the country continues to struggle with the problem of opioid diversion and abuse.