503B Loses Federal Preemption Argument, Appeals to Ninth Circuit

Fusion IV (doing business as Axia Pharmaceutical, hereinafter "Fusion"), a California producer of compounded drugs, is making waves in the pharmaceutical compounding world by claiming that the California Board of Pharmacy (the "Board") lacks the authority to regulate certain compounding facilities registered by the Food and Drug Administration (FDA). In essence, Fusion claims that because it is appropriately registered on the federal level as a Section 503B outsourcing facility, the Board has no authority to bar Fusion from operating as a 503B outsourcing facility in California. Despite setbacks at the administrative and trial court levels, Fusion has recently filed an appeal with the Ninth Circuit, the outcome of which remains to be seen.

Background

In early 2017, Fusion obtained a registration in California as a Section 503B outsourcing facility under the federal Drug Quality and Security Act (DQSA). The registration enabled it to produce and sell compounded drugs to prescribers and health care facilities without a patient-specific prescription as long as it met certain federal requirements.

Immediately afterwards, Fusion applied for a license with the Board pursuant to a state law which requires a state-level license for outsourcing facilities that compound sterile or nonsterile medication for non-patient-specific distribution within the state.

The Board denied Fusion's application, mainly due to discipline it enforced against Fusion's owner—a licensed pharmacist—for issues unrelated to Fusion's business. Fusion and its pharmacist owner appealed the decision late in 2017, but were eventually denied relief by an administrative law judge (ALJ) in late 2018. The Board adopted the ALJ's decision in early 2019, ordering Fusion to discontinue operations as an outsourcing facility in California.

Fusion subsequently brought a federal lawsuit challenging the Board's authority to require federally registered outsourcing facilities to be concurrently licensed by the Board on the state level. This lawsuit was dismissed without leave to amend on June 21, 2019. Fusion appealed this decision to the Ninth Circuit on July 9, 2019, and the appeal remains pending.

On July 25, 2019, however, the Board issued a formal cease and desist order against Fusion which stated that Fusion must, effective immediately: "cease and desist all activities as an outsourcing facility within California. [Fusion] shall not compound or furnish any sterile or non-sterile non-patient-specific medication for distribution into or within California."

Preemption Issue

Fusion's core argument in this matter is that the DQSA preempts California's licensing requirement. Accordingly, Fusion is requesting that the court strike down the state statute preventing Fusion from operating its outsourcing facility in the state.

As Fusion argued in its original complaint: "Here, the Board's objection to the operation of [Fusion] is in directly [sic] conflict of federal law[.]." "[Fusion] [is] regulated by under [sic] the [DQSA], and therefore it is allowed to engage in interstate commerce. The Board's refusal to grant license or permission is in violation of the federal laws."

Though it is unclear how the court will rule on this issue, Fusion likely faces an uphill battle due to the fairly extensive authority of the states to regulate the practice of pharmacy (which generally includes compounding and would likely include outsourcing facilities). However, Fusion does raise various interesting legal arguments which call into focus the complex interplay between the DQSA and the assortment of state laws governing compounding.

Special thanks to Ben Lockwood for his assistance with this article.

We will continue to monitor this case and will provide updates as they come. If you have any questions about this case and how it might affect your 503A or 503B operations, please contact your Quarles & Brady attorney or:

• Susan B. Trujillo: (602) 229-5318 / susan.trujillo@quarles.com
• Richard B. Davis: (602) 229-5318 / richard.davis@quarles.com