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OTC to DTC: Regulatory Considerations for Moving to Direct-to-Consumer Healthcare

Contributors: Sebastian Valencia

In today’s new age of the consumer, industries that may not have considered a direct-to-consumer (DTC) play before are now expected to do so, like direct-to-consumer healthcare. Given the low barriers to entry, low capital costs, low resource requirements, cost-effective shipping partners, pure DTC businesses have been able to scale in a relatively short period of time.

Deterrents to the DTC model include legislative factors such as extensive regulations in advertising, packaging, production, and customer demographics (age). Products in industries such as healthcare, firearms, alcohol, and tobacco find themselves in a precarious position as a result of these deterrents. Given the impossible task of customer acquisition and tall order of legal preparation, companies must still rely on pre-existing customer loyalty, legal, and financial resources and highly inelastic demand to sell directly to the consumer. There is some nuance based on the product and the target consumer.

Consumer healthcare, given the depth and width of their product portfolio, will find varying degrees of regulatory resistance depending on the product. OTC (over-the-counter) or nonprescription drugs do not require a prescription to purchase and are readily available in your local pharmacy. They can be legally sold online as long as they comply with the same regulations that were applied to pharmacy sales. Despite this, online sales only account for roughly 2% of OTC product sales.

The same legislation related to manufacturing and processing apply regardless of the sales channel. They are subject to additional regulation in subsequent areas of the supply chain by bodies such as the FDA (Food & Drug Administration), FTC (Federal Trade Commission), and USPS (United States Postal Service).

Packaging in Direct-to-Consumer Healthcare

OTC drugs sold directly are still subject to the same CPSC regulated Poison Prevention Packaging Act (PPPA) requirements. The FDA will also continue to regulate the requirements for bottles/containers under Title 12, Chapter 1 of the Code of Federal Regulations. While there are no additional regulations with regards to the physical packaging, companies will need to adapt before using DTC. They will have to ensure compliance to the previously stated regulation still applies to parcel shipping. The United States Postal Service is the only entity that ships FDA-approved non-prescription drugs. UPS and FedEx can be used for dietary supplements. In addition to the testing mandated in 16 CFR § 1700.20, the integrity of containers will need to be tested to make sure they will be intact for both unit shipping and parcel shipping.

For example, the pharmacy sale of nonsteroidal anti-inflammatory drugs (NSAID’s) and analgesics, are required by the FDA to carry a Black Box warning on the PPPA compliant containers. DTC sales will carry the same requirements as in pharmacy sales in addition to durability tests for shipping. The increase in touchpoints in a DTC model can cause additional vibrations that have been found to compromise the container closures. Impact resistance testing will be integral to assuring customers of medical products that have not been compromised.

Cost Considerations

Given that the shift to DTC is relatively recent, packaging optimization has been geared towards a more traditional retail model including palletization, strategies for picking, packing, shelf display, etc. Small parcel shipping has introduced a service called dimensional pricing. In this model, shipping cost is based on the relative space that a package occupies in relation to its weight. DTC companies can drastically change their shipping costs through the packaging for DTC products.

Operational Considerations

Assessing packaging for the optimal sizing and materials will require assessing the current manufacturing and operations capabilities. Would a change in packaging require adjustments to equipment? How will this affect the PLC in manufacturing facilities? This assessment will require looking at packaging within the broader context of your overall operations and logistics.

Advertising and Marketing Regulations for Direct-to-Consumer Healthcare

DTC today is almost exclusively driven by online sales which in turn, will require online advertising. The FTC regulates claims made by OTC companies as per the Dietary Supplements Health & Education Act (DSHEA). Per its Enforcement Policy Statement on Marketing Claims,

“The FTC’s authority over disease and other health-related claims comes from Sections 5 and 12 of the FTC Act. Section 5, which applies to both advertising and labeling, prohibits unfair or deceptive acts or practices in or affecting commerce, such as the deceptive advertising or labeling of OTC drugs.”

The FTC’s authority extends to all sales channels including online sales as well as social media platforms with regards to making disclosures or making claims.

For example, Massachusetts-based company, NeuroMetrix (NURO) launched the online sale of Quell, a transcutaneous nerve stimulation medical device in 2015. Quell was falsely marketed as “clinically-proven” and “FDA-approved” for treating chronic pain. The FTC challenged their lack of scientific evidence and the authenticity of their “FDA-approved” claim. A Massachusetts court found NeuroMetrix guilty and ordered a $4 million settlement and for the defendant to stop marketing the drug with the stated false claims.

Webpage Requirements

In their Dot.Com Disclosures published in 2011, the FTC stated that, “the FTC Act’s prohibition on ‘unfair or deceptive acts or practices’ encompasses online advertising, marketing, and sales.” It also provides guidelines with regards to making disclosures on webpages such as:

  • Take account of the various devices and platforms consumers may use to view advertising and any corresponding disclosure. If an ad is viewable on a particular device or platform, any necessary disclosures should be sufficient to prevent the ad from being misleading when viewed on that device or platform.
  • When using a hyperlink to lead to a disclosure, make the link obvious and label the hyperlink appropriately to convey the importance, nature, and relevance of the information it leads to
  • Keep abreast of empirical research about where consumers do and do not look on a screen.
  • Recognize and respond to any technological limitations or unique characteristics of a communication method when making disclosures.
  • Display disclosures before consumers make a decision to buy — i.e., before they “add to shopping cart.”

Additional considerations include updating the web presence of a product to reflect any changes to the product. For example, if a company makes any packaging changes to their OTC containers, they will need to update the product on their DTC sales channel to reflect that change. Regulatory compliance such as PPPA standards will have to be re-stated on the website for the new packaging in accordance with the stated FTC Dot.Com Disclosures.

Shipping Ability

Companies will have to switch from unit/bulk shipping to parcel shipments in order to reach customers directly. The FDA does not regulate the fulfilment of OTC healthcare products. However, the sender will be responsible for abiding by standards set by the United States Postal Service. OTC drugs can be shipped by carriers such as USPS, UPS and FedEx as long as “the mailer [meets] all applicable federal, state, or local laws that may apply (such as the Poison Prevention Packaging Act of 1970 in 15 U.S.C. 1471(2) and the Consumer Product Safety Commission requirements.” Damage protection will be essential in the shift to parcel shipments. 58% of Americans say that receiving a damaged product will affect their relationship with an online business. Shipping practices will have to be assessed if any changes in packaging and materials is proposed.

Returns and Disposal

Companies will have to consider the possibility of returns. CVS allows the return of non-damaged and unopened nonprescription drugs from both pharmacy locations and through its website. Direct-to-consumer healthcare companies will have to ensure that they have the necessary logistical requirements to handle returns. Direct sales will require disclosures and instruction relating to returns, including on the DTC sales channel. While companies are not federally-mandated to have a return policy, each state has its own regulations relating to returns and refunds policies. Upon return, companies will have to carry out disposal in compliance with EPA requirements. Companies are not permitted to use community drug take-back programs or local drug boxes. Small operations can simply follow FDA guidelines to dispose of OTC drugs. For larger operations, a direct-to-consumer healthcare company will have to contract a pharmaceutical waste disposal company to ensure full compliance with both federal and state regulations.

Final Considerations for Moving to Direct-to-Consumer Healthcare

For the most part, direct-to-consumer healthcare products do not have too many added regulations. In fact, CVS has already made significant headway in shipping to customers via drones thanks to a partnership with UPS. There will be significantly more regulation when the conversation shifts to prescription medication and other controlled substances. OTC products on the other hand, carry significant opportunity.

So, if regulatory constraints are not a significant barrier, why is it that in an age of boom in digital sales, only 2% of OTC sales are made online? The regulatory constraints that do exist, need to be assessed in the context of a DTC supply chain. The supply chain needs to be contextualized when assessing optimization of packaging and materials. Not to mention, the investment in sales and marketing. While this presents a tall order, it is by no means impossible. DTC is here to stay and so are the opportunities that come with it. Time will be of the essence in driving a swift and effective response.

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Contributions by Eshan Lakarikkal.

Tags: Strategy & Compliance, Consumer Healthcare Trends, Direct-to-Consumer