The Wholesaling Prohibition (Potentially) Demystified? FDA’s Take on Supply Chains for Section 503B Outsourcing Facilities

July 5, 2023By Kalie E. Richardson & Karla L. Palmer

Last week FDA published a long-awaited Draft Guidance for outsourcing facilities addressing the Prohibition on Wholesaling Under Section 503B of the Federal Food, Drug, and Cosmetic Act (Draft Guidance).  As a reminder, in Title I of the 2013 Drug Quality and Security Act (DQSA) (the Compounding Quality Act), Congress created the “outsourcing facility” FDA registration category, and set forth statutory parameters for their operation in new section 503B of the FDCA.  Under section 503B, drugs compounded by an FDA-registered outsourcing facility under the supervision of a licensed pharmacist can qualify for exemptions from FDA approval, labeling with adequate directions for use, and certain drug supply chain security requirements, subject to specific conditions.  See 21 U.S.C. § 353b(a).  On an annual basis, outsourcing facilities must register with FDA, pay the facility establishment fee, and submit biannual drug reporting to the Agency, among other requirements.  Outsourcing facilities are not exempt from FDA’s cGMP for drug manufacturers (as lightly tweaked via cGMP Guidance for outsourcing facilities) or adverse event reporting requirements, and are subject to regular inspection by FDA.

This Draft Guidance pertains to the prohibition on wholesaling or transfers—a two sentence provision in section 503B that states that a drug compounded by an outsourcing facility “will not be sold or transferred by an entity other than the outsourcing facility that compounded such drug. This paragraph does not prohibit administration of a drug in a health care setting or dispensing a drug pursuant to a prescription.”  21 U.S.C. § 353b(a)(8).

As explained in the Draft Guidance, the prohibition on wholesaling “preserves important distinctions between outsourcing facilities, which are intended to compound drugs for patients whose medical needs cannot be met by approved drugs, from conventional manufacturers, which generally engage in mass manufacturing of FDA-approved drug products.”  Section II at 2.  While section 503B expressly does not require a patient-specific prescription, FDA clarifies that Congress evidently did contemplate a “connection” (our words…) between an outsourcing facility and the prescriber; the more attenuated that relationship, the more an outsourcing facility starts to resemble a conventional drug manufacturer.  Essentially—in contrast with a conventionally manufactured drug that may be sold and resold several times before it reaches a patient (and is subject to Drug Supply Chain Security Act requirements)—FDA believes the supply chain for a drug compounded by a 503B outsourcing facility should be less attenuated and easily traceable.

FDA clarifies that the “sold or transferred” statutory language makes it clear that the prohibition applies to the physical movement of the product, regardless of whether or not money has changed hands.  Many of the examples provided in the Draft Guidance concerning the application of the wholesaling prohibition seem somewhat consistent with industry’s understanding in the nearly 10 years since the enactment of the DQSA.  For example, FDA does not intend to apply the prohibition to transfers of product that do not affect the integrity of the drug approval process or supply chain, which product movement is typically conducted for public health reasons, such as a transfer as part of a recall or return, or to a laboratory for testing.  Additionally, sales by an outsourcing facility to a wholesale distributor, repackager, or relabeler that, in turn, sells or transfers the drug are clearly prohibited because the drug is being sold by an entity other than the outsourcing facility that compounded it (i.e., the wholesale distributor, repackager, relabeler).

Concerning what FDA finds “Not Prohibited” under the Draft Guidance, we applaud FDA for what we consider its most significant clarification in the Draft Guidance.  Specifically, the Agency recognizes that that an outsourcing facility may distribute a drug it compounded to a “state licensed pharmacy, federal facility, or licensed physician, which subsequently dispenses the drug pursuant to a prescription.”  Draft Guidance III.B.2(e) at 9.  Outsourcing facilities may also distribute a compounded drug to a hospital or health system,  clinic, or physician’s office where it is used as “office stock” to dispense to patients pursuant to prescriptions. Draft Guidance III.B.2(d) at 9.

An area of clarification that we believe will be appreciated by industry concerns sales to a group purchasing organization (GPO).  Under the Draft Guidance, the distribution by an outsourcing facility of a drug it compounded to an entity that provides healthcare services (e.g., a hospital or health system, health clinic, or physician’s office) based on pricing agreements the outsourcing facility negotiated with a GPO acting on behalf of the healthcare services entity, is not prohibited wholesaling.  Because a GPO “does not own drugs, ship drugs, warehouse drugs, handle drugs, or hold drugs” and “does not purchase, or decide to purchase, drugs,” the GPO has not “sold” or “transferred” the drug compounded by the outsourcing facility.  Draft Guidance III.B.2(f) at 9-10.  The outsourcing facility transferred the drug to the healthcare services entity; the GPO is merely the “negotiator.”

One truly surprising inclusion in the “Activities Prohibited” section of the Draft Guidance, however,  addresses FDA’s interpretation of a non-traditional type of wholesaling or transfer (if one could even call it wholesaling or transferring in the first instance) where a third party actually does not take possession of the drug product.  More specifically, the prohibition includes when a “third party (e.g., a marketing firm or operator or 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 costs for obtaining the drug.”  Draft Guidance III.B.1.(e) at 7-8.  Here, FDA may be concerned that the outsourcing facility “does not recoup the cost of the compounded drug product directly from the prescribing physician,” rather than the physical movement of the product, which is still from the outsourcing facility to the provider.

FDA presents an arguably strained reading of the practice of wholesaling (whether via a marketer, third party website or otherwise).  The contemplated activities here would not in any event affect the “quality” of the compounded formulation.  And compounding “Quality” is indeed at the heart of the “Compounding Quality Act” under any interpretation.  This seems targeted, more or less, at the advertising and promotion by third parties of drugs compounded by outsourcing facilities that are made available to prescribers for dispensing to patients, rather than the “quality” of the compounded formulation itself.  This prohibition also seems wholly inconsistent with FDA’s statements concerning “essentially copies,” where the “price” of the compounded drug cannot be a consideration when compounding what may be essentially a copy of a commercially available drug product. But in this prohibition provision, it seems that charging a higher “price” for the drug—notwithstanding part of a bundled service—is exactly what FDA is trying to prevent.

There are two somewhat related examples for which further clarification may be needed:

  1. Intracompany transfers: The prohibition does not apply to “intracompany transfers during shipment” to the customer, “including when an outsourcing facility sends drugs it compounded to a warehouse it owns or leases that is not located in the outsourcing facility that compounded the drugs for shipment to the outsourcing facility’s customers.” Draft Guidance III.A.1 at 5.

For example, if an outsourcing facility located on in one state ships drugs to its warehouse several states away so that the product can then be shipped to customers in a different part of the country that is closer to the warehouse than the outsourcing facility, this would not be a prohibited transfer.  This is a much-needed clarification for industry.

However, Section III.B.2(a) suggests a more limited view of an “intracompany transfer,” which would apply only to the movement of a compounded drug to another location that is “part of the same outsourcing facility (i.e., at the same address or geographic location) for subsequent distribution.”  Under this narrower provision, the transfer of product from an outsourcing facility in one state to a warehouse in another, which then ships it to an end customer in another part of the country would seemingly be prohibited because the outsourcing facility and warehouse are not at the same address or geographic location.  But such a transfer is plainly permissible in the scenario FDA describes in Section III.A.1—so long as it is an intracompany transfer during shipment to a customer.

  1. Outsourcing facility-to-outsourcing facility transfers: The concept in this example is not dissimilar to an intracompany transfer. FDA’s Guidance example states that the transfer of drugs compounded by outsourcing facility A to outsourcing facility B for subsequent distribution is prohibited wholesaling.  However, the Draft Guidance specifies that A and B are “are owned by different entities and registered with FDA as separate outsourcing facilities.”  Section III.B.1(b).  But what if A and B are owned by the same entity, but are registered with FDA as separate outsourcing facilities because they’re in different geographic locations?  Is this a prohibited transfer, or is it a permissible intracompany transfer?  And, what if instead of only handling the “subsequent distribution” or shipment, outsourcing facility B is further compounding the product it receives from outsourcing facility A?  We believe that, because the outsourcing facilities are “owned” by the same entity, the transfer between facility A and facility B would be permissible under the Draft Guidance.

Our main takeaway from this Draft Guidance is that even this short supply chain can get surprisingly tangled.  Let us know if you have questions!