On November 27, President Barack Obama signed the Drug Quality and Security Act (H.R. 3204), a law that makes significant changes that will have a widespread effect on all members of the US prescription drug supply chain – from manufacturers and wholesale distributors to retail pharmacies and large-scale drug compounding operations. The law consists of two distinct parts. First, it requires a 10-year phase-in of a national interoperable electronic track-and-trace system for prescription drugs, a system that ultimately will allow unit level traceability of drugs from the manufacturer to the dispenser. Second, the law creates a new category of drug facilities that can register with and be regulated by the Food and Drug Administration (FDA) when they engage in the compounding of sterile drug products without first obtaining individual prescriptions.
Both parts of the Drug Quality and Security Act (the Act) respond to perceived deficiencies with the existing regulatory system for human pharmaceuticals; the track-and-trace provisions in particular have been the subject of many years of debate and compromise among affected stakeholders and members of Congress. The national track-and-trace system is intended to strengthen the security of the pharmaceutical supply chain by preventing drug diversion, counterfeiting, and other adulteration. The system should enhance patient safety by, among other things, making it much more difficult for counterfeit medications to enter the US drug supply. The law establishes a new federal system and preempts existing and impending state electronic and paper pedigree requirements. Preemption was a critical feature for supply chain members who raised serious concerns about how they would operate within a patchwork of different state laws on the issue.   
In a similar vein, following the highly publicized 2012 outbreak of fungal meningitis due to contaminated injectable drug products that were shipped to multiple states by the Massachusetts-based New England Compounding Center (as well as a large number of compounded drug recalls since that time as a result of both states and FDA increasing their inspections of compounding pharmacies), many believed that overlapping federal and state jurisdictions had allowed certain facilities to fall between the cracks.
Pharmacies engaged in “traditional” compounding – in which individual prescriptions are used to make a tailored drug product for a patient, such as a version that omits an allergen or a preservative ingredient – are regulated under state law. However, facilities throughout the country had been compounding drugs in large quantities for distribution across state lines, without receiving practitioner orders in advance of compounding or individual prescriptions for identifiable patients. In essence, historically, those facilities were not viewed as “pharmacies” by the states and were not being adequately overseen at the local level – and they also were not registered with FDA as “drug establishments” engaged drug manufacturing, so they were not being inspected by FDA for compliance with Federal good manufacturing practice regulations. The Act creates a new category of “outsourcing facilities” that will be permitted to compound and distribute large volumes of sterile drugs (meaning parenteral, ophthalmic, or oral inhalation drugs) without first obtaining individual prescriptions.
We outline below some of the more significant aspects of the two parts of the Drug Quality and Security Act. 
Drug Supply Chain Security

The provisions of the Act that create a national, interoperable electronic track-and-trace system for prescription drugs establish a stepwise implementation schedule. First, beginning on January 1, 2015, manufacturers must provide (and distributors must receive and pass along to their customers) for each prescription drug product documentation that includes the transaction information, transaction history, and transaction statement for the product.[1] Next, four years after the date of enactment, manufacturers would have to provide the transaction information / history / statement in electronic format only, and they also would be required to affix an electronic product identifier to each package of a particular drug product (also called unit level serialization). The product identifier for a package must be a 2D barcode that consists of the product’s standardized numerical identifier (which follows a defined format established by FDA), its lot number, and its expiration date.
After manufacturers have serialized their products, six years after the date of enactment, wholesale distributors will be prohibited from receiving or selling any products that are not serialized as mandated by the law. Dispensers (i.e., retail pharmacies, hospital pharmacies) would be required to receive and sell only serialized product seven years after the date of enactment. Finally, 10 years after enactment, the requirement to provide transaction information/history/statements will sunset, and drug products’ unit level serialization will be used by all members of the supply chain to trace the product back to the manufacturer using an interoperable electronic system. FDA will issue guidance on unit level product tracing and standards for interoperable data exchange in order to make this system possible.   
In addition to the track-and-trace requirements described above, the provisions in this title of the Act also require all members of the pharmaceutical supply chain to be properly registered or licensed, either by State agencies or the FDA, as appropriate. It also raises Federal licensure standards for wholesale distributors, establishes minimum licensure standards for third-party logistics providers (3PLs), and requires wholesale distributors and 3PLs to report annually to FDA regarding their licensure status.
Drug Compounding

The drug compounding title of the Act defined an “outsourcing facility” as a facility is one geographic location that elects to register with FDA, compounds sterile drug products, and complies with the new statutory provisions governing outsourcing facilities. An outsourcing facility is not required to be licensed as a pharmacy, and it may or may not obtain prescriptions for identifiable individual patients. The law subjects such facilities to FDA regulation and requires them to comply with good manufacturing practice regulations (just as conventional drug manufacturing facilities). However, registered outsourcing facilities would be exempt from the provisions of the Federal Food, Drug, and Cosmetic Act that require (i) approval of a new drug application before a product can be distributed, and (ii) adequate directions for use in the product’s labeling. Outsourcing facilities also would be exempt from the new track-and-trace requirements enacted under the companion title of the Drug Quality and Security Act.
Registering with FDA as an outsourcing facility is voluntary, so facilities that do not register will continue to be regulated as pharmacies at the State level, but registering as an outsourcing facility would allow the site to rely on compliance with Federal law and its inspection history with FDA when shipping sterile compounded products interstate. Otherwise, depending on their specific activities, compounding pharmacies may be required to comply with multiple state laws, hold multiple state licenses, and potentially be inspected by multiple state boards of pharmacy. Registration requires an annual fee of $15,000 to help fund FDA’s risk-based inspections of outsourcing facilities and requires a licensed pharmacist to directly supervise the operations. Each outsourcing facility must report adverse events to FDA and also submit biannually to the agency a list of products that it compounds. In addition to its new inspection mandate, FDA must establish a public database of registered outsourcing facilities on its website.   
The Act also places restrictions on the types of drugs that can be compounded – either by state-licensed compounding pharmacies or FDA-registered outsourcing facilities. Consistent with the agency’s long-standing policy, drugs that are essentially copies of commercially available drugs, drugs that have been withdrawn from the market for safety or effectiveness reasons, and drugs identified by FDA though rulemaking as presenting “demonstrable difficulties to compound” may not be compounded.
The intricacies of both parts of the Act make clear that major stakeholders in the pharmaceutical industry, as well as regulators at the FDA and in states, have considerable work ahead of them to realize the shared goal of enhancing the safety and quality of the US drug supply. Arent Fox will continue to monitor these efforts and keep our clients and friends informed of any new developments