The act
Outstanding issues

Recent regulatory developments and forthcoming action


On November 27 2013 the president signed the Drug Quality and Security Act(1) into law. This legislation is designed to clarify the Food and Drug Administration's (FDA) oversight authority over drug compounding and modernise the federal drug tracking and tracing system.

The House of Representatives passed the bill on September 28 2013. The Senate passed the bill on November 18 2013, after an uncommonly strong bicameral, bipartisan effort. This came just over a year after a deadly meningitis outbreak was traced to the New England Compounding Centre and on the same day that another compounding recall was announced.

The act

Title I – compounding
Title I of the act aims to clarify the FDA's authority over drug compounding by resolving uncertainty regarding the applicability of federal law and introducing the concept of an 'outsourcing facility'. To this end, the compounding title:

  • amends Section 503A of the Federal Food, Drug, and Cosmetic Act to eliminate the advertising restrictions held to be unconstitutional in 2001 by the US Supreme Court and establishes this new Section 503A as the law of the land;
  • requires the FDA to coordinate and engage with states to ensure the safety of compounded drugs; and
  • distinguishes traditional compounders that mix tailored doses of medication in response to specific prescriptions from 'outsourcing facilities' that make larger volumes of compounded sterile drugs.

Under the act, compounders that wish to continue traditional compounding practices will remain primarily regulated by state boards of pharmacy, while compounders engaged in large-scale compounding operations will be permitted – but not required – to opt into the newly created 'outsourcing facilities' category. Companies that do choose to be designated as "outsourcing facilities" will be subject to federal registration, good manufacturing practice (GMP), fee and reporting requirements.

Title II – track and trace system
Title II of the act aims to reduce drug shortages, theft, counterfeiting and diversion by modernising the federal law and replacing the existing patchwork of state track and trace laws with a uniform national framework for tracing drugs throughout the supply chain. More specifically, Title II:

  • establishes a unit-level interoperable drug tracing system, to be phased in over the course of 10 years, that will require companies to provide information about each drug to the next party in the supply chain;
  • explicitly pre-empts state track and trace laws, including Florida's current law and a California pedigree law that was scheduled to go into effect in 2015, to ensure application of a single, uniform national standard;
  • formally recognises third-party logistics providers as part of the drug supply chain;
  • creates minimum and maximum licensure standards for wholesale distributors and third-party logistics providers, but preserves state authority for licensure issuance and fee collection; and
  • requires the FDA to keep and make available to the public a database that enables consumers and members of the drug supply chain to identify appropriately licensed wholesalers.

Outstanding issues

While a broad range of stakeholders have endorsed the act, and it has been hailed on Capitol Hill as a major bipartisan accomplishment, many experts and advocates have concerns about the final legislation.

Pharmacy compounding
Voluntary registration
Some industry experts are concerned that the bill's voluntary registration system relies too heavily on market forces and will allow large compounders engaged in non-traditional compounding practices to avoid federal regulation by deciding not to register as an outsourcing facility. Others warn that the bill lacks clarity, provides insufficient oversight authority to the FDA and will lead to litigation. Some opponents go further, arguing that this bifurcated system, with drug manufacturers operating under different sets of quality rules, may create an environment that is less safe for patients than the existing one.

These concerns may prove to have merit. Drawing the line between traditional compounders and outsourcing facilities was difficult for legislators. Ultimately, the drafters agreed on a voluntary registration system and left proposed metrics and more specific definitions out of the final compromise bill. The resulting ambiguities – particularly those that relate to FDA jurisdiction and the distinction between traditional compounding pharmacies and outsourcing facilities – may well be tested in court. Only time will tell how this new regulatory structure will affect patient safety.

Because the act creates a voluntary registration system under which certain compounders will be regulated by the FDA and others by state authority, much will depend on whether large-scale compounders choose to register for federal oversight. It remains unclear how many compounders will see FDA oversight as good business practice and elect to be subject to risk-based inspections, adverse event reporting and annual user fee payments. While it is possible that federal regulation will become viewed as a mark of quality or condition of doing business for compounders, it is also possible that non-traditional compounders will decide against registering for FDA regulation. If the latter occurs, absent unprecedented coordination between the FDA and the state boards of pharmacy, the same type of confusion over controls that arguably led to the New England Compounding Centre disaster will likely remain under the new framework..

Other concerns
Moving forward, it will be important to monitor a number of other issues which, for the sake of advancing legislative negotiations between the House of Representatives, Senate and the administration, were also omitted from the final version of the bill. For example, questions remain about how the FDA will interpret the legislation's silence on office-use compounding and repackaged sterile drugs, as well as the regulation of biologics, nuclear pharmacies and animal drug compounding. Concerns about preserving access to compounded drugs recently prompted key lawmakers to engage FDA officials publicly about the agency's interpretation of congressional intent and whether, in light of omissions in the final bill, the FDA would continue to regulate these areas in the same manner it had pre-enactment. Top House of Representatives and Senate authors have vowed to work closely with the FDA and address any unintended consequences of the legislation.

Track and trace
As implementation moves forward, there will be no shortage of important supply chain questions to consider and address. Some experts believe that the act's drug supply chain provisions will be particularly difficult to implement. Requiring a distinct number to be assigned to each "package or homogeneous case" - the definition of which will also be determined by regulation - will have significant ongoing implications for manufacturers and upstream suppliers, which may be tasked with keeping records of or assigning these numbers. Moreover, developing standards to enable interoperable data exchange will be a challenge. As the lot-level and package/unit-level tracing systems are layered onto product identifier requirements, the level of technical and commercial complexity is likely to increase.

Experts also have many questions about legislative provisions and forthcoming regulations regarding issues of inference, the nature and scope of third-party logistics provider regulation, regulatory implications for common carriers, product return loopholes and other opportunities for bad actors to avoid or exploit the system.

Recent regulatory developments and forthcoming action

The FDA began implementation shortly after the act was signed into law. Since the law's enactment in late 2013, the FDA has taken the following steps to implement the law:

  • multiple draft guidances on outsourcing facility registration and reporting;
  • draft guidance describing the FDA's anticipated enforcement approach for compounders that do not register as outsourcing facilities;
  • notices soliciting nominations for members of the reconstituted Pharmacy Compounding Advisory Committee (the act requires the FDA to consult with this committee before issuing certain outsourcing facility regulations); and
  • notices requesting nominations for lists of bulk drug substances that may be used in compounding; lists of drugs that are difficult to compound.

On January 8 2014 the FDA also sent letters to states and purchasers, designed to promote outsourcing facility registration. In these letters the FDA encouraged hospitals and purchasers to consider adopting purchasing policies that would strongly favour registered outsourcing facilities. The FDA asked state officials to require outsourcing facility registration for out-of-state compounders that ship compounded drugs into the state. While this effort may improve regulatory clarity in some respects, it could also create other complications relating to state and federal law conflicts, purchasing policies and payer policies, to name a few.

In short, while a fair amount of uncertainty remains, the FDA has signalled its willingness to use the regulatory implementation process to address many of the outstanding issues highlighted in this update.

Interested parties should monitor and engage on the numerous guidances and regulations that will be developed over the course of the law's implementation. Stakeholders may be particularly interested in the FDA's development of a notification system designed to facilitate coordination with state boards of pharmacy and rules outlining drugs that are demonstrably difficult to compound. Forthcoming regulations on adverse event reporting, labeling requirements, tailored GMPs for large- scale compounders. suspect product identification, package-level tracing and interoperable electronic data exchange are also likely to require significant stakeholder attention.

For further information on this topic please contact Daron Watts, William A McConagha or Emily Newman at Sidley Austin LLP by telephone (+1 202 736 8000), fax (+1 202 736 8711) or email (, or The Sidley Austin website can be accessed at


(1) HR 3204