Conflicting State Compounding Regulations Create Barriers for FDA-Registered Outsourcing Facilities

Since the passage of the Drug Quality and Security Act (DQSA) in 2013, the FDA has periodically released guidance that addresses compounding activities by outsourcing facilities registered under Section 503B of the Federal Food, Drug, and Cosmetic Act (FDCA).

Although the federal government has taken steps to comprehensively regulate outsourcing facilities, many states have been slow to reform their pharmacy laws to align with the DQSA’s new legal scheme. As a result, many state laws present substantial obstacles for outsourcing facilities—particularly those operating across state lines—thereby threatening to undermine FDA and Congressional designs to foster the development of outsourcing facilities to better ensure an adequate supply of safely compounded drug products.

Pharmacy innovators were initially encouraged by the federal government’s plans to treat 503B outsourcing facilities as distinct from pharmacies that are engaged in traditional compounding, which are primarily regulated under state law. In return for meeting certain conditions under federal law, including current good manufacturing practice requirements and FDA inspections, outsourcing facilities are able to sell unlimited quantities of sterile and nonsterile compounded products nationwide without patient-specific prescriptions.

With their ability to provide bulk quantities of compounded drug products to hospitals, clinics, and providers for subsequent patient administration, outsourcing facilities may be able to capitalize upon a new market niche. Meanwhile, traditional retail pharmacies are still permitted to compound, but only in limited quantities and for patient-specific prescriptions.

Close upon the heels of the DQSA, former FDA Commissioner Margaret A. Hamburg, MD, issued letters to state officials urging them to consider how they can encourage out-of-state pharmacies that ship compounded sterile drugs into their states to register with the FDA as 503B outsourcing facilities.

However, in the past couple of years, many states have failed to reshape their compounding regulations to align with the FDA’s distinction between outsourcing facilities and traditional pharmacy compounding activities. Two reports issued by the Pew Charitable Trusts reveal that state laws differ considerably in their treatment of outsourcing facilities, sterile drug compounding, and the practice of compounding without prescriptions.¹

The majority of states still permit traditional pharmacies to compound without a prescription, but only under certain circumstances. Meanwhile, only a minority of states have pending policy changes on compounding without a patient-specific prescription or have established specific licensure or registration categories for outsourcing facilities. Thus, the reports demonstrate how the current state landscape is antithetical to the FDA’s intent to limit the practice of compounding in the absence of patient-specific prescriptions to registered outsourcing facilities.

Despite the inertia and confusion in many state legislatures, some states have taken important steps toward reform. For example, until recently, out-of-state outsourcing facilities dispensing into California obtained both a California nonresident pharmacy license and a sterile pharmacy license.²

They were also barred from shipping compounded drugs into the state in response to nonpatient specific prescriptions, apart from 72-hour supplies permitted for office use compounding. (See, eg, Cal. Bus. & Prof. Code § 4127.2; Cal. Code Regs. tit. 16, §§ 1735.2 & 1751.) To remedy this legal conflict, legislation was recently passed to introduce separate California state licenses for 503B outsourcing facilities that authorizes these entities to compound drugs for nonpatient-specific distribution (S.B. 1193 [2016]).

Similarly, in late 2015, Virginia passed a law to permit state registration of outsourcing facilities to authorize them to engage in sterile compounding and ship into or within the state without patient-specific prescriptions. (See 18 Va. Code §§ 54.1-3434.05 & 54.1-3434.5.) Finally, earlier this year, Ohio implemented comprehensive regulations governing the licensing and operation of outsourcing facilities that permits them to provide nonpatient-specific compounded drugs (See Ohio Admin. Code § 4720-16.).

The intent of Congress in the DQSA was to bring clarity to the world of drug compounding, which has long operated in a legal gray area. To this end, legislators sought to draw a legible boundary distinguishing between the scope of authorities assigned to outsourcing facilities and traditional pharmacies to better ensure patient safety and access to needed supplies of compounded products. Although the FDA has diligently worked to issue supporting guidance, states have lagged in developing corresponding legal reforms.

The resultant legal uncertainty has prompted many stakeholders to assume a wait-and-see approach in considering how, and when, to invest in this fledgling business sector. Companies that have taken the plunge by registering as outsourcing facilities are well-advised to retain legal counsel to navigate the regulatory maze while keeping an eye on emerging state reforms, some of which appear to be aimed at better aligning with federal law.

Unless, or until, a significant number of states reach a consensus with respect to the regulation of outsourcing facilities and nonpatient-specific compounding, the FDA’s vision of a robust outsourcing facility sector will remain delayed—to the potential detriment of patients and providers.

About the AuthorJohn “Jack” S. Linehan is a health care attorney in the Health Care and Life Sciences practice group of Epstein Becker Green and his practice focuses on pharmacy law, drug distribution and reimbursement, and related compliance and litigation matters. Linehan counsels pharmacies, drug manufacturers and distributors, insurers, and investors on regulatory issues, the federal and state fraud and abuse laws, and due diligence reviews. In addition, he represents clients in criminal and civil enforcement actions involving the False Claims Act, the Anti-Kickback Statute, and the Food, Drug, and Cosmetic Act.