Non-binding Guidance: The Regulatory Landscape for Drug Compounding—10 Years After the NECC Outbreak

December 5, 2022
12:32 minutes

This episode of Ropes & Gray’s podcast series Non-binding Guidance examines the regulatory landscape for drug compounding and how it has evolved over the last 10 years since a 2012 nationwide fungal meningitis outbreak caused by contaminated drugs from the New England Compounding Center (NECC) rocked the industry and led to a legislative overhaul. Listen to FDA regulatory partner Josh Oyster and associate Becca Williams as they discuss the continuing ramifications of the outbreak, the challenges faced by FDA and drug compounders, the opportunities presented to investors in the life sciences industry, and key areas of regulatory development to watch.


Josh Oyster: Hi—I'm Josh Oyster, a partner in the life sciences regulatory and compliance practice group at Ropes & Gray. And welcome to Non-binding Guidance, a podcast series from Ropes & Gray, focused on current trends in FDA regulatory law, as well as other important developments affecting the life sciences industry. I'm here today with my colleague, Becca Williams. Today's podcast will focus on the regulatory enforcement landscape for drug compounders, starting first, with a refresher on the significant changes that have occurred over the last ten years since a nationwide fungal meningitis outbreak rocked the compounding industry, and then, we'll highlight some key areas of future regulatory development. Becca, let's get into this: Can you help take us back to 2012 and set the scene with what the state of play was for FDA regulation of drug compounding back then?

Becca Williams: If we look back ten years ago, FDA exercised relatively limited oversight over drug compounders, and largely deferred to state boards of pharmacy to oversee compounding activities and establish appropriate standards. However, in 2012, contaminated injectable drugs that were compounded at the New England Compounding Center (NECC) in Massachusetts led to a nationwide fungal meningitis outbreak with roughly 800 patients with a reported illness and more than 100 deaths.

Josh Oyster: And then, in the wake of the NECC disaster, FDA, in early 2013, began a spree of inspections of sterile compounding pharmacies nationwide, especially those pharmacies that operated on a mailer-type basis across many states. FDA routinely observed insanitary conditions and other problematic practices during these inspections, and these observations led to many recalls by compounding pharmacies and the issuance of dozens of warning letters by FDA.

Becca Williams: At this point, Congress and FDA have realized that additional regulation of drug compounders is necessary. So, ultimately, in November 2013, Congress passed the DQSA, the Drug Quality and Security Act. The DQSA created a new regulatory scheme for drug compounders and separated compounders into two categories: the first, traditional compounders that would be regulated under the existing Section 503A; and second, a newly established category of outsourcing facilities that would be regulated under Section 503B. Josh, can you walk us through some of the differences between these types of compounders?

Josh Oyster: Sure. The traditional compounders under Section 503A are generally intended to be smaller-scale operations, where the compounding is directly performed by a licensed pharmacy or physician and done only on a patient-specific basis. In contrast, the outsourcing facilities under the newly established Section 503B can produce compounded drugs in large batches for office use, meaning on a non-patient specific basis. Because outsourcing facilities are permitted to compound in large batches, the framework is such that they are subject to additional requirements, including facility registration with FDA, compliance with current good manufacturing practices (or CGMPs), and also reporting to FDA of certain product information in adverse events. Additionally, Section 503B limits the use of bulk drug substances in compounding by outsourcing facilities much more so than under 503A.

Coming out of the NECC disaster and the passage of the DQSA, we saw a lot of changes in those first few years. Taking into consideration the dramatic increase in inspections and the increased statutory authority, the compounding industry critically identified that these huge changes in the regulatory landscape presented a significant opportunity. Those compounders that could adapt the most quickly and the most effectively to the new regulatory expectations will be best positioned to succeed and would be able to out-compete those compounders that failed to keep up, and many investors in the life sciences industry took notice of this opportunity, as well. After NECC, we saw in our practice a huge uptick in interest from private equity stakeholders looking to invest in and grow compounders.

Becca Williams: Really where we saw a lot of the investment and the interest increase is in compounders who are interested in, and able to, register and operate as an outsourcing facility under 503B. Although under the system 503B outsourcing facilities were subject to heightened requirements, including CGMP, there was a real benefit from being able to comply with these requirements. Notably, these compounders would be able to manufacture large batches of drugs for office stock and really create a larger scale operation than what's contemplated by traditional pharmacy compounding.

Josh Oyster: And regardless of whether we're talking about 503A or 503B, what was clear very quickly is that the quality of the drugs being compounded was paramount. FDA had made that abundantly clear through its pronouncements that assuring the sterility of compounded drugs that were supposed to be sterile was essential. FDA's expectations for exactly how to assure sterility in some cases went beyond those state law requirements to which compounders had been historically accustomed. And in other cases, FDA's application of traditional CGMP requirements for drug manufacturers to compounding by outsourcing facilities posed practical challenges. Ultimately, not all compounders have been able to rise to the opportunity, and some have been subject to significant government enforcement. For example, in the last 10 years, the Department of Justice and FDA have successfully obtained 15 consent decrees of permanent injunction against various compounding facilities, some of which were the largest players in the 503B industry immediately after passage of the DQSA. So, several of the facilities that would have described themselves as “leaders in the industry” in the first few years, they're no longer around—they're gone. It's something for industry to take note and be mindful of as the regulatory landscape continues to evolve, for sure.

I think switching gears a bit though from the immediate industry reaction to the DQSA and the enforcement landscape, let's talk a little bit about the hurdles that FDA's faced in implementing the law. Becca, what sort of challenges have there been on the 503B side that you've observed?

Becca Williams: I think one of the really interesting things about the DQSA is it established a really high-level framework for drug compounding, but it left much of the responsibility of implementing the key requirements through regulations and guidance. So, as we mentioned, 503B facilities are subject to CGMP requirements, but FDA has repeatedly delayed promulgation of specific CGMP regulations for outsourcing facilities. Currently, outsourcing facilities are required to comply with FDA CGMP requirements for traditional drug manufacturers, however, such compliance can be difficult for compounding activities. FDA has issued several editions of draft guidance describing how it will apply the CGMP requirements for drug manufacturers to outsourcing facilities, but this non-binding guidance doesn't necessarily provide outsourcing facilities with the clarity and certainty they need.

Josh Oyster: And one of the other things on Section 503B that we mentioned briefly earlier is that outsourcing facilities are only permitted to compound drugs using bulk substances under very limited circumstances. The statute requires that FDA establish a 503B bulks list through notice and comment rulemaking. However, the Agency's been very slow to render final decisions on what bulk substances will be included on this list.

Becca Williams: To date, FDA has made a final decision for only 14 bulk drug substances—four have been included on the list, and the remaining 10 have not been included. Instead of finalizing this list, FDA has relied on the use of an interim bulks list, and has established a policy of enforcement discretion for substances that were nominated with adequate support and are currently under evaluation. FDA's delay in finalizing the bulks list has led some drug manufacturers concerned about the compounding of copies of their approved drugs to pursue litigation against compounders, but also against FDA itself. This is likely going to be an area of continued development and something that will be interesting to watch. Josh, we've highlighted some of the key difficulties for 503B outsourcing facilities. What can we say about the 503A side?

Josh Oyster: Thanks, Becca. The one I like to talk about a lot is the 503A Memorandum of Understanding provision, which always generates a lot of interest and intrigue from industry because the compounding industry has long been concerned that a restrictive interpretation of this provision could by and large prevent a 503A pharmacy from shipping compounded drugs interstate. This provision, which was originally enacted as part of 503A in 1997, basically says that a compounder can't ship more than 5% of their total prescriptions interstate unless their state board of pharmacy has signed a Memorandum of Understanding (or MOU) with FDA addressing certain things. To make a long story short, FDA's never enforced this 5% cap because FDA's never been able to get the MOU right. Most recently, in October 2020, FDA made a final MOU available for state review and signature, but a group of pharmacies promptly sued FDA to stop the MOU. And in September 2021, the court remanded the MOU to FDA because FDA hadn't addressed certain procedural requirements. And then more recently, this year, FDA announced that it intended to undertake future notice and comment rulemaking as an alternative method to implement the MOU provision. While I expect such rulemaking to be included on FDA's agenda for years to come, I don't expect FDA to actually move a new MOU forward, given all the prior pushback. If an MOU can't be implemented in 25 years, it's highly unlikely that it's ever going to happen.

Becca Williams: Another area where I've seen a lot of pushback from industry is on FDA’s regulation of animal drug compounding. So, historically, FDA’s taken the position that compounding animal drugs from bulk drug substances is not permitted by the FDCA. Earlier this year, FDA issued a final guidance on animal drug compounding from bulk that set up a system that was really similar to the framework for 503A and 503B compounding. In particular, the guidance establishes a policy of enforcement discretion for compounding animal drugs from bulk drug substances, where it generally permits compounding for patient-specific prescriptions, but only permits compounding from bulk for office stock when the substance appears on FDA's list of bulk drug substances for compounding animal drugs. The standard for inclusion on the list is relatively high and requires, among other things, that there is no animal or human drug that could be used on or off label to treat the condition, and treatment with a compounded drug is necessary to avoid animal suffering or death. FDA received significant pushback from industry on the draft version of this guidance, and it is going to be an interesting area to watch to see how FDA applies the guidance going forward and also how industry reacts.

Josh Oyster: Yes, I think that's very true. We've certainly seen in our practice an uptick in investor interest in animal drug compounders over the past couple of years, despite the fact that the regulatory landscape is still very much in flux. And there's also potential that we'll see Congress step in with new legislation akin to 503A and 503B, but more specific to animal drug compounding.

Unfortunately, I think that's all the time we have for today. Thank you, Becca, for joining in this conversation. These are certainly important areas to watch as drug compounding continues to be a focus of FDA and state regulatory scrutiny. We want to thank all of our listeners for tuning in. For more information about our practice, please visit our FDA regulatory and life sciences practice pages at You can listen to Non-binding Guidance and other RopesTalk podcasts and our podcast newsroom on our website or you can subscribe wherever you listen to podcasts, including on Apple and Spotify. Thanks again for listening.

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