Rare Disease and Specialty Product Manufacturers: Distribution Model Considerations

Distribution of rare disease and specialty products in the United States has become increasingly complex for manufacturers due to the patchwork of state licensure requirements and new state-based restrictions on distribution networks. These state laws have become increasingly thorny in recent years and can pose hurdles for the unwary without careful planning and monitoring of the legislative environment. In addition, rare disease and specialty product manufacturers must consider federal healthcare laws, like the Anti-Kickback Statute, and compliance with government price reporting requirements when structuring arrangements with third-party logistics businesses (3PLs) and distributors. This article provides an overview of the key business and compliance factors that rare disease and specialty product manufacturers must navigate when developing a distribution network.

State Licensure Requirements

All 50 states and the District of Columbia maintain licensure requirements for distributors of prescription drugs. Each state has different requirements, exceptions, and application processes for entities that distribute prescription drugs in its boundaries. There is limited overlap among these jurisdictions’ requirements.

Several states have also incorporated the concept of virtual distribution into their licensure framework. This means that entities that may not have a physical presence in the state but are nonetheless conducting some type of distribution activity, potentially including just title transfer to other entities in the supply chain, must still be licensed in the state. For example, Connecticut law defines “virtual wholesaler” to mean “a person who facilitates or brokers the transfer of drugs, devices or cosmetics without taking physical possession of the drugs, devices or cosmetics.”¹ Virtual wholesalers in Connecticut are required to obtain licensure as a wholesaler.

For rare disease and specialty product manufacturers, including those that may be located outside the U.S., obtaining state licensure means navigating a complex patchwork of state requirements that could apply even when the manufacturer does not have physical possession of the product but retains title and engages in certain activities within a state. This process is often expensive and time consuming. Manufacturers may consider working with a partner that is already licensed or carefully selecting the states in which their title transfers will occur.

Distribution Models May Offer Solutions to State Licensure Requirements

There are several distribution models available to manufacturers — including 3PL options, full-line wholesale distribution, and specialty distribution.

Historically, 3PLs have offered logistics support for product shipment and delivery either directly to a specialty pharmacy or site of care (as is common for rare disease and specialty product manufacturers) or to wholesale distributors that arrange for ultimate distribution to the customer. Under the traditional 3PL model, the manufacturer retains ownership of the product until it is transferred to the distributor or customer. Newer models are emerging. For example:

• Rare disease and specialty product companies may rely instead on a “flash title model” where a 3PL takes title of the product after the product is manufactured to manage compliance with state licensure laws but does not handle storage or distribution.
• Rare disease and specialty product companies are also increasingly looking to another model offered by 3PLs known by names such as the “3PL title model” under which manufacturers pass ownership (i.e., title) and possession to a 3PL to handle warehousing, distribution, and other regulatory and administrative services. The title model allows manufacturers to leverage the 3PL’s state licenses instead of obtaining their own. This allows manufacturers, particularly small manufacturers, to accelerate product launch in the U.S. while taking time to consider strategy and options for state licensure.

Regardless of the model chosen, state licensure is an important gating consideration to ensure smooth and compliant distribution.

State Restrictions on Distribution Continue to Evolve and Disrupt Supply Chains

In addition to complex state licensure requirements, states have begun enacting restrictions on distribution networks in an effort to protect independent community pharmacies. For example, on April 16, 2025, Arkansas Gov. Sarah Huckabee Sanders, signed into law HB 1531 — An Act to Prohibit Pharmaceutical Manufacturers From Restricting or Limiting Prescription Medications to a Limited Distribution Network of Out-of-State Pharmacies (the Act) — which limits pharmaceutical manufacturers’ ability to use limited distribution networks (LDNs) in Arkansas.

The Act is scheduled to take effect on September 1, 2026, and restricts any pharmaceutical manufacturer “that expects for their prescription medications to be eligible, considered for payment, and covered in a state government and public plan sponsor for health benefit plans” from establishing limited distribution networks within the state of Arkansas unless certain Arkansas-based providers and pharmacies are allowed to participate in those distribution networks.²

Specifically, the Act states that affected manufacturers “[s]hall not restrict or limit prescription medications” of a new product to a “limited distribution network” more than three months after launch without having “similar access” and “allowing for upon request or application by [a] pharmacy,” at least

(i) “[a] local network of public institution academic medical center access”

(ii) “[g]eographic diversity of access within the state”

(iii) “[d]iverse access for local for-profit and nonprofit pharmacies in good standing” with the Arkansas Board of Pharmacy (the Board or BOP) and “that have experience or accreditation in managing expensive specialty or limited distribution medications”

(iv) access for a pharmacy that meets “medication specific ... Food and Drug Administration guidance or requirements”

Under the Act, pharmaceutical manufacturers that intend to maintain “restricted networks” for six months or longer must present a request to the BOP that “explain[s] how the restriction will support and not hinder the mission of the [B]oard to promote, preserve, and protect the public health, safety, and welfare of citizens” of Arkansas. Even if the Board grants a manufacturer’s request for continued use of a “limited network,” manufacturers must still allow Arkansas pharmacies to apply to be part of the network. Even rare disease and specialty product manufacturers, which often rely on restricted and specialized networks given the complex distribution and handling requirements often associated with their specialty products, are not granted an automatic exemption and must go through the steps to request an exemption from Arkansas BOP.

The Act imposes significant penalties on manufacturers that are noncompliant with the Act. Specifically, the Act states that a “state government and public plan sponsor for a health benefit plan shall not pay for prescription drugs” from noncompliant manufacturers and also subjects such manufacturers to a fine of $10,000 per day of noncompliance.

The Act is one of the latest efforts by Arkansas to regulate access to pharmaceutical medications. In 2021, Arkansas passed a separate law that prohibits drug manufacturers from denying or prohibiting in Arkansas “340B drug pricing for an Arkansas-based community pharmacy that receives drugs purchased under a 340B drug pricing contract pharmacy arrangement with” a covered entity or prohibiting “a pharmacy from contracting” with a covered entity.

Arkansas passed a separate law that same year that prohibits a pharmacy or pharmacist that is “owned or controlled by, or is under ownership or control” of an “insurance company, pharmacy benefits manager, pharmaceutical manufacturer, pharmaceutical wholesaler, or pharmacy benefits manager affiliate” from “requir[ing] that a patient receive his or her prescription through home delivery services.”³ The statute defines “home delivery services” to mean “providing medications from a pharmacy licensed in” Arkansas through any means “other than the patient picking up the medication at a physical pharmacy location.”⁴ The statute grants the Arkansas BOP authority to promulgate regulations that set standards for pharmacies providing home delivery services; however, neither this statute nor any Arkansas BOP regulations define what “controlled by” or “require” means for purposes of this statute.

In June, the Louisiana Senate adopted Senate Resolution 209, directing the Louisiana Department of Health to analyze the potential impacts of prohibiting pharmacy benefit manager ownership of pharmacies within the state. The findings of this study are to be reported to the legislature by March 1, 2026.

Other states may follow suit with new regulatory and legal frameworks intended to disrupt existing supply chains. Rare disease and specialty manufacturers should ensure they remain apace of the changing landscape in distribution network and home delivery state laws.

Other Federal Healthcare Considerations

Arrangements between rare disease and specialty product manufacturers and 3PLs or distributors may implicate federal healthcare laws and regulatory requirements in addition to the state laws discussed above. Rare disease and specialty product manufacturers should consider how to structure and document such arrangements for compliance with both the federal Anti-Kickback Statute and government price reporting requirements, including with respect to determining fair market value for any fees paid under these arrangements.