Prescription Drug Wholesalers: Don’t Overlook Non-Resident State License Requirements

August 21, 2020By Larry K. Houck

Owners and management of the Kilgoban Drug Company, a fictional prescription drug wholesaler in the fictional U.S. state of Moosissippi, are preparing to begin operations.  They have applied for and obtained all of the licenses required to operate their business, including a wholesaler license issued by the Moosissippi state board of pharmacy.  Owners and management believe that they are ready to begin purchasing drugs from manufacturers and selling them to pharmacies, hospitals, clinics and medical practices within Moosissippi and across the country.  But their belief would be incorrect if they have overlooked obtaining every license required by all of the states where their products may “end up.”  In fact, many wholesalers are unaware that they may need to obtain licenses even in those states where they are not physically located, or where they do not necessarily intend to send their products.

All states, and the District of Columbia, require wholesalers to obtain a license to ship or sell prescription drugs into or within their borders, and prohibit wholesalers from conducting those activities until they have obtained the required licenses.  The most niggling though consequential challenge confronting drug wholesalers is determining whether they hold all of the required state licenses to conduct their business activities.  To make that determination, wholesalers must identify, then obtain every license required by all jurisdictions where they conduct business.  While many states share similarities as to which activities require licensing, unfortunately they are far from uniform.  States are consistently inconsistent as to what triggers licensing requirements.

Failure to obtain and maintain required licenses can result in substantial civil financial penalties and administrative sanctions, including denial, suspension or revocation of a license and the prohibition of conducting activities within the state.

Initially, most states required and continue to require, drug wholesalers physically located within their borders to obtain in-state or “resident licenses.”  Later, most states also began requiring wholesalers to obtain “non-resident licenses” if they physically ship or move products into their state from another state.  Those are easy triggers for wholesalers to determine if they need non-resident licenses.  But states have gone even further, and drug wholesalers not located within their borders who do not physically ship products into the state may still have to obtain a non-resident license if they trigger one of the myriad licensing triggers.

Whether a wholesaler must obtain a non-resident license in certain states and not others depends upon how each state defines “wholesale” and “wholesaler” in combination with a number of different facts within the distribution scenario.  So, even if a wholesaler does not ship drugs directly into other states, owners and management must ask themselves whether their company…

•           Name appears on the products’ label?
•           Invoices customers in the state?
•           Employs sales representatives in the state?
•           Owns or holds title to products sold into the state?
•           Owns or holds the New Drug Application or the Abbreviated New Drug Application?
•           Conducts marketing activities or has customer accounts in the state?
•           Directs movement of products into the state?
•           Provides samples to entities in the state?

If the answer to any if these questions is “yes,” the wholesaler will have to obtain non-resident licenses in certain states.  The difficulty is determining exactly which states.  Deciphering unclear state statutes, regulations and licensing authorities’ (usually boards of pharmacy, but also possibly the state’s Department of Health or Occupational/Professions Division) websites to determine whether a license is required, can be a frustrating exercise.  Speaking or communicating directly with licensing authority personnel can cut through the foggy morass, but personnel within the same agency sometimes interpret definitions and requirements differently from their colleagues.

Once wholesalers have identified which state licenses they need, submitting applications and all required licensing components prior to beginning operations or after a change of ownership is a resource- and time-consuming endeavor.  Some applications are short and easy to complete, while others require detailed information about the company, ownership, officers (including fingerprints), products, operations and even customers.  As part of their application, a number of states require criminal background checks, including fingerprinting, of directors and employees, officers and owners.  States then may take up to ten weeks or longer to process applications, complete background checks and issue licenses.

We note that it is not only prescription drug wholesalers who must navigate through this difficult terrain.  Prescription and non-prescription drug manufacturers, non-prescription drug wholesalers, prescription and non-prescription medical device manufacturers and distributors, virtual manufacturers, third-party logistics providers and outsourcing facilities are subject to some of the same licensing requirements.

In addition, if controlled substances are among the prescription drugs that wholesalers distribute,  a number of states require joint or separate controlled substance registrations issued by the same agency or by a state controlled substance authority.  Wholesalers will also have to obtain a DEA distributor registration.

Diamonds may be forever, but state licenses are not.  Once obtained, state licenses must be renewed periodically, usually annually.  Ownership changes, mergers, acquisitions and corporate restructurings can require licensees to submit applications to obtain new licenses or, at the very least, to notify state regulatory authorities of the changes.  Changes of the corporate name, corporate officers and even federal tax identification number can trigger states requiring a wholesaler to obtain a new license.  A number of states allow operations to continue under the old license until a new license is issued, but some states require a new license be issued before operations can continue.  Notwithstanding any of the issues raised above, industry is awaiting FDA’s promulgation of regulations for wholesalers pursuant to Title II of the Drug Quality and Security Act (the Drug Supply Chain Security Act (“DSCSA”)) (FDCA Section 583), which will dictate on a uniform basis licensing standards for wholesale distributors distributing finished pharmaceutical human drug products throughout the United States.  Congress charged FDA with promulgating those regulations within two years after the DSCSA’s promulgation back in November 2013, yet to date those regulations have not been published or otherwise released.

The owners and management of Kilgoban, must obtain licenses in Moosissippi, the state where the facility is located.  However, they cannot overlook whether they need to also obtain non-resident licenses in other states before beginning operations or obtain new licenses if undergoing corporate changes.