In light of the integrity and clinical issues raised by the New England Compounding Centers far-reaching recalls in late 2012, the FDA has urged officials from all 50 states to close regulatory loopholes involving the safety of compounding drugs for humans and to issue new regulations to head off future public health disasters. FDA held discussions mid-December about the regulatory landscape of compounding drugs with more than 50 groups, including pharmacies, consumers, hospitals, clinics and medical professionals.

As described by our colleagues Melissa Gilmore and Payal Keshvani, FDA has crafted a plan that would leave states responsible for overseeing traditional compounding pharmacies but allow the Agency to impose new federal standards for large-scale compounders; those standards would then be enforced by the Agency alone or in partnership with states. Critics of FDA’s plan warn that states are faced with tight budgets and do not have adequate funding to accomplish comprehensive oversight. In addition, some critics claim FDA’s plan would actually jeopardize drug safety by allowing large-scale compounders to operate under less strict safeguards than those now applied to drug manufacturing.

Private equity firms have actively invested in various types of compounding pharmacies for many years. In addition to compounding pharmacies for veterinary services, those pharmacies serving human patients have been a source of investor interest, but of course investors are weary of the risks stemming from the NECC investigations and what the new regulations might mean for the industry.

Examples of PE investment in compounding pharmacies include the following: 

  • In December, Sequoia Sciences, based in St. Louis, Mo., secured $1.5 million of funding from Prolog Ventures and Holton Capital Group, according to a Techli report. Prolog Ventures, based in St. Louis, is a venture capital firm specializing in life sciences, while Holton Capital Group, based in St. Louis, is a PE firm that invests in St. Louis businesses.
  • Also in December, Galera Therapeutics, Inc., announced an $11 million series A venture capital financing. The round was co-led by Chevy Chase, Md.-based New Enterprise Associates (NEA), a venture capital firm that focuses on life sciences and other industries, and Novartis Venture Fund (NVF), which has a U.S. office in Cambridge, Mass., and invests in life science companies.
  • In November, Center for Innovative Technology GAP Funds announced a $100,000 investment in Charlottesville, Va.-based Lewis and Clark Pharmaceuticals. CIT GAP Funds is a family of seed- and early-stage investment funds placing near-equity and equity investments in Virginia-based life science and other companies.
  • In October, Neurovance, Inc., based in Cambridge, Mass., announced it closed a $7 million series A1 round led by existing investor NVF.
  • In September, Shopko Stores Operating Co., LLC., acquired Waupaca Woods Pharmacy, Inc., based in Waupaca, Wis. Shopko Stores is owned by Sun Capital, a Boca Raton, Fla.-based PE firm that invests in healthcare and other industries.
  • In July, Mersana Therapeutics, Inc., based in Cambridge, Mass., announced it closed a $27 million series A-1 financing led by new investor NEA.
  • In April, InterWest Partners, Sutter Hill Ventures and Astellas Venture Management announced an investment of $14 Million in Telsar Pharma, Inc., a virtual company operated by the executive team of Bridgewater, N.J-based Drais Pharmaceuticals. InterWest Partners, based in Menlo Park, Calif., provides venture capital to early-stage life sciences and information technology companies. Sutter Hill Ventures, based in Palo Alto, Calif., is a PE firm focused on venture capital investments in technology-based start-up companies. Astellas Venture Management is the corporate venture capital arm of Northbrook, Ill.-based Astellas Pharma, a R&D-driven global pharmaceutical company.

Given the typical more modest size of most compounding pharmacies, many are still family or locally owned, such as Swedesboro, N.J.-based Wedgewood Pharmacy, which focuses on urology, ophthalmology and retina, obsterics/gynecology, addiction, dentistry, endocrinology and dermatology and is owned by the Malmberg family. Such compounding pharmacies may be ripe targets for PE investors, particularly as add-ons to existing compounding pharmacies platforms, if PE investors can get comfortable with the risk and increased government regulation.

As our colleagues Ms. Gilmore and Mary C. DeBartolo note, events over the past few weeks indicate that increased regulation of compounding pharmacies and the debate over the government’s role in regulating and inspecting compound pharmacies continues. Ranking GOP members of the House of Representatives Committee on Energy and Commerce recently sent a letter to FDA requesting internal documentation of the agency’s actions and decision-making regarding New England Compounding Center from 2006 until 2008, and the Massachusetts Department of Health reported that unannounced inspections of compounding pharmacies has led to 11 facilities ordered to halt operations in part or completely and another 21 pharmacies cited for deficiencies. The ongoing federal and state scrutiny of compounding pharmacies should factor in to any PE companies weighing whether to invest in this industry.