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Recently Enacted Congressional Legislation Will Impact Healthcare Supply Chain

|Includes: iShares U.S. Pharmaceuticals ETF (IHE), XPH

President Obama signed the Drug Quality & Security Act (H.R. 3204) into law on November 27, 2013. The law was created as a response to the meningitis outbreak from contaminated steroid pain injections that was traced to the New England Compounding Center in Framingham, MA. While many have focused on the law's compounding elements, the bill also sets forth pedigree provisions that the healthcare supply chain have discussed for years. Below are a few highlights of the bill:

Compounding Summary: The bill allows the FDA to use a national standard while regulating facilities making adulterated, misbranded or unapproved products as well as allows the FDA to establish a list of drugs that may not be compounded for safety reasons. Compounders that mix sterile drugs without a prescription and ship across state lines can choose whether to register as an "outsourcing facility." The pharmacies that register would then be regulated by the FDA instead of a state board of pharmacy.

The Secretary would be required to coordinate communication between the FDA and the state boards of pharmacy about any concerns against a compounding pharmacy. Additionally, the Government Accountability Office shall issue a follow-up report to Congress 3 years after enactment on the regulation of compounding pharmacies.

Drug Pedigree Summary: This section sets forth drug tracing requirements for downstream pharmaceutical supply chain members including manufacturers, repackagers, distributors, and dispensers. Each time there is a change in ownership of a product, a document outlining the product's chain of custody must accompany the product. Once the product is serialized, manufacturers, wholesalers and repackagers must be able to respond to requests to verify the product at the unit level if there is suspect product at issue, while also being able to verify the product at unit level for saleable returns. Additionally, the legislation sets a 10 year timeframe for when supply chain entities must be compliant with the law. It also preempts state and local requirements related to drug pedigree and licensure of distributors and 3rd party logistics providers.

Drug pedigree has been a contentious issue throughout the healthcare supply chain for over 25 years, with commitment to technological advances being the main holdup. It is still surprising to many industry insiders that regardless of Congress' divisive environment; such an important issue was addressed. It is even more surprising that it took a catalyst such as the unfortunate event in Framingham, MA to make this bill a reality.

This information is useful if you are an investor seeking exposure to the healthcare industry via exchange traded funds such as the iShares Dow Jones US Pharmaceuticals Index Fund (NYSEARCA:IHE) or the SPDR S&P Pharmaceuticals ETF (NYSEARCA:XPH).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.