On June 27, 2023 the FDA published Prohibition on Wholesaling Under Section 503B of the Federal Food, Drug, and Cosmetic Act; Draft Guidance for Industry. In this draft guidance, FDA provides examples of activities prohibited by the wholesaling provision and also activities not prohibited by the wholesaling provision.

Congress created “outsourcing facilities” in Section 503B of the Drug Quality and Security Act of 2013. The law was designed to protect the safety of compounded medications after deadly contamination at the New England Compounding Center. Previously, large compounders like NECC were not subject to federal regulation. But for more than a decade, 503B outsourcing facilities have been required by law to register with the Food and Drug Administration, undergo periodic risk-based inspections, and meet the same robust manufacturing safety and quality standards as traditional prescription drug manufacturers.

Outsourcing facilities work to tailor prescription drugs to patients’ unique medical needs in a variety of ways – for example, producing a drug without an allergen that it might typically contain or making it in a different dosage or form. When a drug is listed on FDA’s drug shortage list, 503B outsourcing facilities are statutorily permitted to compound from bulk drug substances, also known as active pharmaceutical ingredients or APIs.  As such, outsourcing facilities are a tool to address drug shortages.

Section 503B prohibits outsourcing facilities from wholesaling their products as one mechanism to preserve the integrity of the drug approval process:

One of the conditions that must be met for a drug compounded by an outsourcing facility to qualify for the exemptions in section 503B of the FD&C Act is that the drug “will not be sold or transferred by an entity other than the outsourcing facility that compounded such drug.”However, this provision “does not prohibit administration of a drug in a health care setting or dispensing a drug pursuant to a prescription executed in accordance with section 503(b)(1).” 

Until today, the FDA has never clarified its interpretation of the second clause in the prohibition on wholesaling: “does not prohibit administration of a drug in a health care setting or dispensing a drug pursuant to a prescription executed in accordance with section 503(b)(1).” 

As is expected, FDA confirms that an outsourcing facility may not distributes a drug it compounded to a wholesale distributor, manufacturer, repacker, or relabeler that sells or otherwise transfers the compounded drug.  Additionally, the FDA explains that an outsourcing facility runs afoul of the prohibition on wholesaling when a third party (e.g., a marketing firm or operator of a website that is not a pharmacy) sells a drug compounded by an outsourcing facility, even though the third party does not take physical possession of the drug, by providing services (e.g., training, billing, advertising) to physicians that prescribe the drug and bundling the cost of those services with the cost for obtaining the drug.  

Outsourcing facilities may however engage in several activities that are not prohibited by the wholesaling prohibition. For example, according to FDA’s guidance, the following activities are not subject to the wholesale prohibition:

1. move a drug it compounded to another location (e.g., a warehouse) that is part of the same outsourcing facility (i.e., at the same address or geographic location) for subsequent distribution
2. distribute a drug it compounded (without obtaining a patient- specific prescription) to a health care professional, hospital, or health system who administers it in a health care setting (e.g., in a hospital or the physician’s office).
3. distribute a drug it compounded (without obtaining a patient- specific prescription) to a health care professional, hospital, or health system who dispenses that drug to patients pursuant to prescriptions
4. distribute a drug it compounded to a state-licensed pharmacy, federal facility, or licensed physician, which subsequently dispenses the drug pursuant to a prescription. distributes a drug it compounded to an entity that provides healthcare services (e.g., a hospital or health system, health clinic, or physician’s office) for administration in that health care setting based on pricing agreements the outsourcing facility negotiated with a third party (e.g., group purchasing organization (GPO)) acting on behalf of the healthcare services entity.

FDA’s guidance has been anticipated by industry for years. This guidance will clarify to state regulators the Federally permissible activities. Recently, the Nevada Governor signed SB 161 into law adopting the principles laid out in FDA’s guidance.

Outsourcing facilities, hospitals, health systems, prescribers and state-licensed pharmacies should take note of the opportunities presented in this guidance as the supply chain for quality compounded drugs and mitigation efforts for drug shortages is shaped by this consequential policy. FDA will accept stakeholder comment for 60 days.

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