The Real Story Behind Outsourcing Facilities:

Are They Still Worth It and Were They Ever?

PART I History and Background:

The New England Compounding Center (NECC) preparation and shipment of contaminated injectable products across state lines in 2012 created a firestorm of publicity and enforcement actions. More than 750 patients in twenty states developed a fungal infection, fungal meningitis, and more than 60 people died. Others became sick and suffered long term harm as reported by Kurt Eichenwald in a Newsweek article of April 2015. In an abundance of caution, FDA quickly recommended that healthcare providers not use any product from NECC. The FDA commissioner gave testimony before Congress in November 2012 where they outlined their response and presented FDA’s legal authority over compounded drugs. In December 2014 fourteen arrests were made. The owner of the pharmacy was indicted by a federal grand jury and is currently on trial. He faces racketeering charges and twenty-five counts of second decree murder. In May 2015, a federal bankruptcy judge approved a $200 million fund to provide compensation to victims. A recent article from the Wicked Local Framingham written by Walter F. Roche Jr., identifies some of the practices that have come to light at the trial. This event triggered legislative changes, development of more than two dozen guidance documents, and changes in inspection practices for a niche area of drug preparation within the United States.

NECC sold purportedly sterile products across state lines:

  • Without receiving individual prescriptions as is required for a compounding pharmacy
  • Used expired raw materials
  • Manufactured in a facility that did not meet standards for cleanliness and repair

This incident, and others that were similar but involved fewer patients, led to changes in legislation and oversight of these firms. In the past three years, compounding pharmacies, and their larger ‘cousins’ the outsourcing facilities, have been subject to a disproportionate number of enforcement actions by FDA, including warning letters and drug recalls, when compared to conventional pharmaceutical drug companies. As such, they continue to provide a higher risk[i] source of drug products than those provided by conventional pharmaceutical companies[ii].


Let’s take a step back and see how we arrived at the point where a firm that was regulated by the state of Massachusetts as a pharmacy could function as a small parenteral drug manufacturer that sold product across state lines. Compounded drugs serve an important medical need for patients who cannot use an FDA approved drug product. Patients might be allergic to an excipient, need a modified dosage strength or cannot swallow a solid oral dosage form and need the drug to be supplied as an oral solution. Compounding pharmacies, however, cannot, by law, prepare dosage forms that are equivalent to existing FDA approved drug products. Pharmacies that compound these preparations are primarily governed by state law[iii] [iv], are generally limited to distributing product within the state, and must receive a prescription for that individual patient. They are governed under the FD&C Act but are not required to comply with the drug GMPs in 21 CFR 211. Rather the U.S. Pharmacopeia Chapter 797 details the standards governing the compounding of sterile drugs.

Compounded drugs are not determined to be safe and effective by FDA, nor are they FDA approved. NECC effectively became a ‘conventional’ parenteral drug manufacturer when they manufactured what appeared to be a sterile dosage form equivalent to an FDA approved product in the absence of patient specific prescriptions and sold that product across state lines. They failed to abide by the existing rules for compounding pharmacies. Their apparently egregious overstep of the compounding pharmacy type of operations resulted in catastrophic consequences for many of the patients who received these drugs. This is not the first time they have been subject to FDA enforcement actions. They received a warning letter in December 2006 for violations of the FD&C Act including misbranding.


NECC was not alone here, and this was not the first time compounded products created public health issues. Another highly publicized series of events, this time in 2011, included the repackaging of Avastin® from original 100mg vials into 1 mL single use syringes. The compounded product was prepared for intravitreal injections, an off-label use of the drug. FDA issued a health care alert regarding this practice after serious eye infections were reported in the Miami, FL area. The practice continued into 2013 when Clinical Specialties issued a voluntary recall of their re-packaged unit does syringes of Avastin® based on reports of eye infections.

Compounding pharmacies also prepare drugs for animals, and some of these have resulted in deaths. In 2009, Francks Compounding Lab in Florida compounded a super-potent version of a vitamin and mineral supplement that resulted in the deaths of twenty-one polo ponies. The firm was also the subject of a warning letter from the FDA on July 2012 that identified manufacturing of drugs under ‘insanitary conditions.’ This warning letter also identifies that ‘FDA laboratory analysis identified the presence of Fusarium incarnatum-equiseti species complex, as well as other microorganisms, in samples of your compounded drug product BBG Injection collected during the inspection.’ Recipients of the drug developed fungal endophthalmitis.


Two sections of the FD&C Act address compounding pharmacies, Sections 503A and 503B. Section 503A was enacted in 1997 and identified three conditions that must be met to be considered exempt from some requirements in the FD&C Act including exemption from:

  • Pre-market approval
  • Requirement for adequate labeling directions for use
  • CGMP requirements

Even though CGMP requirements may not apply, these entities are governed by the FD&C Act’s requirement that prohibits manufacturing under insanitary conditions. In addition, this type of firm must employ a licensed pharmacist to manufacture these products in either a state licensed or federal facility. Distribution of product must be supported by a valid patient specific prescription, and the types of bulk drug substances that can be used are limited. Further, Section 503A prohibited advertising of compounded drugs. Legal challenges were made against these advertising restrictions, and, eventually, it became unclear as to the FDA’s authority over these entities.

In November 2013, approximately a year after the spinal meningitis outbreak associated with the product produced by NECC, Congress passed the Compounding Quality Act amendment to the FD&C Act. This amendment made a change to the requirements of section 503A and added section 503B. The prohibition against advertising was removed from section 503A, and, thus, the doubts about the FDA’s authority over these firms were removed. Section 503A retained the requirements identified in the 1997 legislation.

Section 503B of the FD&C Act created a new category of compounding facilities known as ‘outsourcing facilities.’ This essentially legitimized the “significant growth in the number of entities compounding drugs, and in particular, entities that were supplying large quantities of compounded drugs to hospitals and other customers nationwide.” In contrast to the 503A facilities, those who choose to enjoy the privileges of an outsourcing facility must:

  • Register with the FDA
  • Be subject to routine, risk based inspections by the FDA
  • Meet GMP requirements as specified in 21CFR 211 and others
  • Report adverse events to the FDA

Outsourcing facilities that meet the requirements of 503B are exempt from the following requirements of the FD&A Act:

  • Pre-market approval
  • Requirement for adequate labeling directions for use
  • Drug supply chain security requirements

The FDA provides a Questions and Answers page on their website to assist firms who are considering whether to register as outsourcing facilities.

Outsourcing facilities are a heterogenous group of firms. Some are small, and some are large. Some manufacture to individual patient prescriptions and some don’t. They vary in the number of products they manufacture and the type. Some focus on sterile drugs and others manufacture only non-sterile dosage forms. The FDA website identifies sixty entities that have registered as outsourcing facilities effective February 1, 2017. These range from small entities to PharMEDium Services which operates four facilities in the US, and was acquired by AmerisourceBergen in November 2015 for just under $2.6 billion.

The FDA urges hospitals and clinics who purchase compounded drugs to make their purchases from outsourcing facilities given the additional oversight provided by the agency. Remember, though, that the FDA does not deem these products safe and effective, and they are not required to comply with supply chain security requirements. Thus, they may be more vulnerable to problems associated with counterfeit medicines or medicines provided though suspect distribution chains. We will see in the next section the extent of the ‘additional oversight’ that the FDA is providing these facilities. This additional monitoring includes specific guidance and, more importantly, inspections and enforcement actions including warning letters and recalls.

Read part 2 of this post here: What is the future of Outsourcing Facilities?

[i] Testimony before the Committee on Health, Education, Labor and Pensions, US Senate, May 9, 2013. Allan Coukell Senior Director of Drugs and Medical Devices, The Pew Charitable Trusts

[ii] FDA’s Human Drug Compounding Progress Report Three Years After Enactment of the Drug Quality and Security Act. January 2017 published by FDA.

[iii] Pew Charitable Trusts, National Assessment of State Oversight of sterile Drug Compounding, February 2016

[iv] Pew Charitable Trusts, Best Practices for State Oversight of Drug Compounding, February 23, 2016