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To be honest, my heart sinks when I’m asked my opinion about the explosion of compounding pharmacies related to GLP-1 weight loss drugs (commonly known by brand names like Ozempic or Wegovy). It’s a complicated answer, and my opinions are rarely popular with my pharmacy peers. I decided to spell it out after a team member described her experience at a local weight loss clinic.
Walk-In Weight Loss Clinic: Patient Experience
“You pay up front, and they check your weight and blood pressure. If your blood pressure is good, they offer you a prescription for phentermine. Then you see a nurse practitioner, who asks if you’ve been on this medication before and if you have any questions. You pick up your injections and phentermine, and you’re out in less than 10 minutes. It’s $300 for four weekly injections and $25 for a month’s supply of the phentermine.”
The Backstory
I’ve been a pharmacist in Memphis, Tennessee, since 2005. I was the Director of Pharmacy for a rehabilitation hospital in 2012, when 15 Tennesseans died due to poor compounding practices. They died from devastating fungal infections of the brain and spinal cord after receiving spinal injections of contaminated steroids, which had been produced in batches by the New England Compounding Center in Massachusetts and shipped to more than 20 states.
Nearly 800 patients developed fungal infections and more than 100 died before the meningitis outbreak was contained. After an investigation, the FDA decided that while the operation should have been caught by the Massachusetts Board of Pharmacy, further regulation was necessary. In the aftermath of the tragedy, regulators turned up the heat on sterile compounding pharmacies by increasing the inspection, testing and reporting requirements. Most of the compounding pharmacy owners I know personally stopped sterile compounding altogether due to the increased time and expense. Ultimately, we lost both patients and pharmacies.
Regulation and 503B
The legislative result of the NECC meningitis outbreak was the Drug, Quality and Security Act (DQSA) of 2013, which gave the FDA authority over certain aspects of compounding.
DQSA separated compounding pharmacies into two categories:
- 503A pharmacies (your local compounding pharmacies) only dispense to patients within a single state. They are regulated by each state’s board of pharmacy.
- 503B outsourcing facilities specialize in compounding drugs in large quantities for mass distribution. They are regulated by the FDA, much like traditional drug manufacturers.
- 503B facilities may dispense directly to patients, but they primarily distribute to prescribers, clinics, pharmacies, hospitals and health care facilities.
When the FDA categorizes a medication as being in critically short supply, DQSA allows 503B facilities to reproduce commercially identical dosage forms to meet the need. The system works. When there is a nationwide shortage of something like intravenous normal saline, like in the wake of Hurricane Helene, 503B facilities not only ramp up mass production, they circumvent the time-intensive traditional supply chain by distributing directly to health care facilities. When the shortage ends, compounding facilities are no longer allowed to reproduce those commercially identical dosage forms.
The 503B Loophole
Absent a declared critical shortage, 503B pharmacies are not permitted to produce identical dosage forms. But they are permitted to produce non-identical dosage forms. And an effectively innocuous change (like the concentration or an inactive ingredient) may constitute a new dosage form.
“In health care in particular, regulation can be a catalyst to category creation which would not be possible under the status quo.” – Julie Yoo, General Partner at A16Z
Noticed an explosion of testosterone clinics?
In addition to creating an alternative supply chain for medications during times of crisis, DQSA inadvertently enabled the modern-day testosterone clinic.
In this model, patients visit the clinic in-person every 7-10 days. At each visit, the prescriber monitors their blood levels, draws up the appropriate dose and administers an injection on-site. These clinics often order concentrated injectable testosterone in multi-dose vials (which is not commercially available) from 503B facilities at a fraction of the price of commercially available products. The prescribers can bill an amount that is less than the market price for the testosterone, but much more than their 503B acquisition price. This price disparity largely funds the model.
The Fallout (and What’s Coming)
- There’s been an explosion of weight loss clinics, while compounding pharmacies are closing at an alarming rate. GLP-1 weight loss drugs fall into the same business model as testosterone clinics, but with amplified economics that distort the risk/reward consideration.
- Under DQSA, medications are shipped directly to any prescriber who may administer them in a clinic or dispense them to patients. Essentially, every clinic is its own pharmacy.
- I could not find publicly available statistics regarding the number of 503A pharmacies across the country, or more specifically, the fraction of those pharmacies that continue to provide sterile compounding. However, more than 1,000 community pharmacies have closed so far in 2024. The remaining 503A pharmacies compete with volume pricing provided by 503Bs, further amplifying the downward financial pressure. Still, despite the pricing advantage, the number of 503B facilities is also decreasing. As of May 2023, the number had decreased to 73 (down from 81 just six months earlier).
- The bubble is about to move, not burst. My team member’s prescription is $1100 for a month’s supply at a retail pharmacy. She paid $300 for the compounded version, and the 503B acquisition price for the clinic was less than $30. If the drug market forces consumers to purchase a product at 35 times its cost, there will be alternatives willing to sell the same product for “just” 10 times the cost.
- On Oct. 2, 2024, the FDA issued a clarification of its policies for compounders as national GLP-1 supply began to stabilize, emphasizing that compounded drugs “may not be identical or nearly identical to an FDA-approved drug.” A day later, the FDA removed one of the most compounded GLP-1s, Tirzepatide, from the short supply list. And on Oct. 7, 2024, the Outsourcing Facilities Association filed a lawsuit against the FDA for declaring an end to the shortage. Now the race is on. All the facilities and clinics with patients actively using Tirzepatide can find a non-identical dosage form that will keep prices low and margins high, or they can move their patients to a different drug that is still in short supply.
- This may be the new norm. We should expect to see the same song and dance play out for semaglutide, dulaglutide, liraglutide, and the next new biologic, and the next. The intricate dance between regulation, market dynamics and patient care has never been more important for pharmacy.
What Now?
The drug supply chain is evolving under the compounding pressures of blockbuster drug releases and catastrophic climate events. The recent FDA clarifications and ensuing legal battles underscore a fundamental tension: the need to balance patient safety with market innovation.
The DQSA, a response to a tragic failure in compounding practices, created a more resilient supply chain during crises, but it also enabled a new business model that operates on thin ethical margins. As compounding pharmacies close at an alarming rate and the number of 503B facilities dwindles, we are increasingly left with a health care ecosystem in which the clinic replaces the pharmacy.
What Does This Mean?
If you oversee a self-funded plan, now is the time to start considering compounding pharmacies in your purchasing strategy. With the rising demand for high-cost drugs and ongoing instability in the pharmaceutical supply chain, 503B facilities present a viable alternative for securing critical medications, often at a fraction of the retail price. These outsourcing facilities can ensure continuous supply during shortages and provide cost-effective options for expensive treatments like GLP-1 drugs.
However, there are risks to weigh against these potential benefits. Unlike traditional drug manufacturers, 503B pharmacies can create non-identical versions of FDA-approved drugs, which can vary slightly in concentration or composition. While this flexibility can increase access and lower costs, it introduces variability that could impact efficacy and patient safety. Although oversight is stringent, it’s not as comprehensive as it is for FDA-approved drugs. Therefore, any strategy involving 503B facilities must prioritize rigorous quality checks and transparency with patients regarding the potential differences in compounded medications.
Balancing these benefits and risks requires a careful approach – but for plan sponsors, the inclusion of 503B compounding pharmacies may offer a valuable option in today’s evolving health care landscape.
