H.B. 371 signed by Gov. Bush (UPDATED)

H.B. 371, the controversial bill that modifies Florida's pedigree law, was signed by Governor Bush today. Despite all of the hyperbole, H.B. 371 actually brings Florida closer to the requirements of the PDMA, which takes effect on December 1. (See my previous post for more on the FDA’s PDMA decision.)

The altered pedigree requirements of HB 371 may not make good local news sound bites, but they make good supply chain sense. Manufacturers will need to take greater responsibility for monitoring and protecting their products. This will be a boon for channel commerce vendors, but unpleasant news for pedigree and RFID companies.

What Really Happened in Florida

Basically, products moving through a one-step channel (Manufacturer-Wholesaler-Customer) are subject to different pedigree requirements, while products moving through a two-or-more step channel (Manufacturer-Wholesaler-Wholesaler-Customer) will require a standard pedigree with lot number, transaction dates, etc.

Narrowing the scope of full pedigree makes it more likely that we can catch the bad guys. A fundamental rule of economics is that life is full of tradeoffs. While theoretically desirable to track every product all the time, the time and attention devoted to the effort would take focus away from the real problems in the secondary market. (If you slept through your college Econ 101 course, I recommend Gregory Mankiw’s Principles of Economics featuring his classic “Ten Principles of Economics.”

Frequent flyers in an airport security line have probably thought about tradeoffs. I personally fly almost 150,000 miles per year. I buy tickets with a corporate credit card. I’m happy to put my luggage through the x-ray machine and walk through metal detector. But think about it: every minute that TSA spends making me take my shoes off or pulling me aside for special screening is a minute that will not be spent searching more likely suspects.

Why doesn’t the TSA let me submit to additional “licensing” each year so that I can avoid the indignity of the shoe removal? In a nutshell, that’s what H.B. 371 does for the drug supply chain. Wholesalers in the one-step channel now submit to more stringent licensing and certification requirements, but are presumed innocent for the purposes of pedigree. In other words, they still have to walk through the metal detector but no longer have to remove their shoes.

Winners and Losers

The extra costs and burdens of a two-or-more step channel provide an incentive for more direct purchases from manufacturers. If other states adopt the Florida HB 371 approach (or just accept the PDMA standard), then more volume will be flowing through the one-step channel. So, either:

• The large wholesalers (MCK, CAH, ABC) will pick up volume from (secondary) physician distributors such as PSS and Henry Schein, which have small volumes of Rx product in their mix, or
• Manufacturers will compensate wholesalers for fulfillment to secondary distributors --another area of possible margin expansion for wholesalers.

OTOH, the effect could be negative if manufacturers begin selling directly to more distributors. This may happen in some situations, but most pharma manufacturers do not want to handle too many more customers. [ADDENDUM: PSS World Medical just announced their intention to buy more products directly.]

As a result of the legislative changes, manufacturers will also have a greater responsibility to monitor this one-step wholesaler channel. The big winners from this approach will be channel commerce software vendors such as Edge Dynamics, which can turn wholesaler data about order flow, inventory levels, and customer shipments into actionable product security monitoring. (Fee-for-service agreements compensate wholesalers for providing data to drug makers in the form of EDI transaction documents.)

And as I understand the technology, enterprise systems such as Edge can then provide a tool for meeting the FDA’s goal of “secure business practices” in a way that data aggregation and reporting systems can not. Manufacturers with enterprise-level software can perform real-time analyses of the channel data to evaluate the suitability of wholesaler orders, balance inventory levels in the channel, prevent leakages into the secondary market, and limit unauthorized distribution. I presume that all transactions can be archived and available for auditing or use by law enforcement personnel.

On the other hand, pedigree and RFID vendors should start lowering their forecasts. The greatest demand for pedigree technology will be from smaller wholesalers and retail pharmacies with a wholesale license. These companies are least able to pay for technology, suggesting that pedigree technology vendors will have to create very inexpensive, easy-to-deploy solutions. Full enterprise pedigree systems will not take off but remain a niche market.

I also view this news as a blow to the RFID software and hardware vendors who have piled into the market. The FDA’s decision to lift the PDMA stay was widely (mis)interpreted as a mandate for RFID, which is was not. But RFID is not the same as pedigree. It is simply a means to an end, like all technologies.

Despite all of this reasoning, I fully expect hyperventilating opinion pieces to start spewing forth from the Florida media. I’ll post the more ludicrous ones as they appear.