No IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

No. 06-51583 IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT MEDICAL CENTER PHARMACY; APPLIED PHARMACY; COLLEGE PHARMACY; MED SHOP TOTAL CARE PHARMACY; PET HEALTH PHARMACY INCORPORATED; PLUM CREEK PHARMACEUTICALS INCORPORATED; PREMIER PHARMACY; UNIVERSITY COMPOUNDING PHARMACY; VETERINARY PHARMACIES OF AMERICA; WOMEN'S INTERNATIONAL PHARMACY INCORPORATED, Plaintiffs-Appellees, v. ALBERTO R. GONZALES, U.S. Attorney General, United States Department of Justice, in His Official Capacity; MICHAEL O. LEAVITT, Secretary, Department of Health and Human Services, in His Official Capacity; ANDREW C. VON ESCHENBACH, Commissioner of the United States Food and Drug Administration, in His Official Capacity, Defendants-Appellants. ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF TEXAS BRIEF FOR THE APPELLANTS PETER D. KEISLER Assistant Attorney General JOHNNY KEANE SUTTON SHELDON T. BRADSHAW United States Attorney Associate General Counsel ERIC M. BLUMBERG DOUGLAS N. LETTER Deputy Chief Counsel for Litigation (202) 514-3602 SCOTT DANZIS CHRISTINE N. KOHL JENNIFER CARUSO (202) 514-4027 Attorneys Attorneys, Appellate Staff Food and Drug Division Civil Division, Room 7511 Office of General Counsel Department of Justice U.S. Dep't of Health & Human Services 950 Pennsylvania Avenue NW Rockville, MD 20857 Washington, DC 20530-0001

REQUEST FOR ORAL ARGUMENT This appeal involves an important public health issue whether all human and animal drugs compounded by a pharmacy are implicitly exempt, as a matter of law, from the "new drug" and "new animal drug" definitions of the Federal Food, Drug, and Cosmetic Act ("FDCA"), or whether they are embraced within those definitions and thus subject to the jurisdiction and enforcement discretion of the Food and Drug Administration ("FDA") over new drugs. In determining that Congress implicitly exempted all compounded drugs from the FDCA's definitions, the district court has misinterpreted and effectively rewritten several critical provisions of the statute. As a result, FDA's authority to protect public health through enforcement of key statutory provisions regulating new human and animal drugs has been called into question. The district court's decision also conflicts with the long established understanding of this Court, as well as other circuits and the Supreme Court, that compounded drugs are subject to FDA's authority. Appellants therefore request oral argument because they believe it will assist the Court in understanding and resolving this important public health issue.

TABLE OF CONTENTS Page REQUEST FOR ORAL ARGUMENT STATEMENT OF JURISDICTION...1 STATEMENT OF THE ISSUE...2 STATEMENT OF THE CASE...3 A. Nature Of The Case And Course Of Proceedings Below...3 B. Statutory And Regulatory Background....................... 5 1. The Federal Food, Drug, And Cosmetic Act...5 2. The Animal Medicinal Drug Use Clarification Act...7 3. The Food And Drug Administration Modernization Act...8 4. FDA's Policy On Compounding........................ 9 C. The Facts Of This Case...14 SUMMARY OF ARGUMENT...19 ARGUMENT...22 I. Standard Of Review...22 i

II. A Compounded Drug Is A "New Drug" Or "New Animal Drug" As Defined By The FDCA And Is Therefore Subject To The Act's New Drug Requirements...23 A. The Plain Language And Structure Of The FDCA Compel The Conclusion That Compounded Drugs Are "New Drugs" And "New Animal Drugs"...24 B. Drugs For Animals Compounded From Bulk Ingredients Are Not Exempt From Regulation Under The FDCA...39 C. The District Court Erred In Concluding That Public Policy Supports Exempting Compounded Drugs From The FDCA.................. 44 CONCLUSION...48 CERTIFICATE OF SERVICE CERTIFICATE OF COMPLIANCE STATUTORY and REGULATORY ADDENDUM ii

TABLE OF AUTHORITIES Cases: Alaska Airlines v. Brock, 480 U.S. 678 (1987)...29 Barnhart v. Walton, 535 U.S. 212 (2002)...22 Califano v. Sanders, 430 U.S. 99 (1977)...2 Central Hudson Gas & Elec. Corp. v. Public Serv. Comm'n, 447 U.S. 557 (1980)...29 Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984)...16, 22, 23, 37, 38, 39 Department of Hous. & Urban Dev. v. Rucker, 535 U.S. 125 (2002)...25 In re Establishment Inspection of: Wedgewood Vill. Pharmacy, Inc., 270 F. Supp. 2d 525 (D.N.J. 2003), aff'd sub nom. Wedgewood Vill. Pharmacy, Inc. v. United States, 421 F.3d 263 (3d Cir. 2005)...47 Heaven v. Gonzales, 473 F.3d 167 (5th Cir. 2006)....................... 30 Lorillard Tobacco Co. v. Reilly, 533 U.S. 525 (2001)...29 Medical Ctr. Pharmacy v. Gonzales, 451 F. Supp. 2d 854 (W.D. Tex. 2006)...16 In re Mirant Corp., 378 F.3d 511 (5th Cir. 2004)....................... 26 Professionals & Patients for Customized Care v. Shalala, 56 F.3d 592 (5th Cir. 1995)................. 3, 4, 10, 12, 18, 20, 36, 46 Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667 (1950).............. 2 iii

Southwestern Bell Tel., L.P. v. Public Util. Comm'n, 467 F.3d 418 (5th Cir. 2006)...22 TRW Inc. v. Andrews, 534 U.S. 19 (2001)...26, 30 Texas Coal. of Cities for Util. Issues v. FCC, 324 F.3d 802 (5th Cir. 2003)...23, 39 Thompson v. Western States Med. Ctr., 535 U.S. 357 (2002)...3, 9, 11, 12, 16, 17, 28, 34, 35-36 United States v. 9/1 Kg. Containers, 854 F.2d 173 (7th Cir. 1988), cert. denied, 489 U.S. 1010 (1989)................ 37, 41, 42, 44 United States v. Algon Chem. Inc., 879 F.2d 1154 (3d Cir. 1989)...26, 33, 36, 41, 42, 44 United States v. Atropine Sulfate 1.0 mg., 843 F.2d 860 (5th Cir. 1988)...6 United States v. Baxter Healthcare Corp., 901 F.2d 1401 (7th Cir. 1990)...37 United States v. Johnson, 529 U.S. 53 (2000)...26 United States v. Rutherford, 442 U.S. 544 (1979)................. 26, 44, 45 Wedgewood Vill. Pharmacy, Inc. v. United States, 421 F.3d 263 (3d Cir. 2005)...7, 33 Weinberger v. Bentex Pharms., Inc., 412 U.S. 645 (1973).............. 23, 39 Weinberger v. Hynson, Westcott & Dunning, Inc., 412 U.S. 609 (1973)...6 iv

Western States Med. Ctr. v. Shalala, 238 F.3d 1090 (9th Cir. 2001), aff'd on other grounds, Thompson v. Western States Med. Ctr., 535 U.S. 357 (2002)...9, 16, 28, 29 Young v. Community Nutrition Inst., 476 U.S. 974 (1986)............. 23, 38 Statutes: Administrative Procedure Act: 5 U.S.C. 553(b)...18 5 U.S.C. 704...1 5 U.S.C. 706...1 Animal Medicinal Drug Use Clarification Act, Pub. L. No. 103-396, 108 Stat. 4153 (1994)................ 7, 26, 32, 40 Declaratory Judgment Act: 28 U.S.C. 2201...2 Federal Food, Drug, and Cosmetic Act: 21 U.S.C. 321...16, 27 21 U.S.C. 321(p)...3, A-1 21 U.S.C. 321(p)(1)... 5, 17, 24, 25, 28, 31, A-1 21 U.S.C. 321(v)...3, A-2 21 U.S.C. 321(v)(1)... 5, 17, 24, 25, 28, 31, A-2 21 U.S.C. 331 et seq....14 21 U.S.C. 331(a)-(c)...6 21 U.S.C. 331(d)...5 21 U.S.C. 331(k)...6 21 U.S.C. 351...6, 33, 40 21 U.S.C. 351(a)(2)(B)...8, 27, 30, A-3 21 U.S.C. 351(a)(5)...7, 39, A-3 21 U.S.C. 352...6, 33, 41 v

21 U.S.C. 352(f)...41, A-4 21 U.S.C. 352(f)(1)... 8, 20, 27, 30, 41, 42, A-4 21 U.S.C. 352(o)...43, A-5 21 U.S.C. 353a... 8, 9, 12, 16, 27, 28, 29, 30, 31, 40, A-6 21 U.S.C. 353a(a)...9, 27, 30, A-6 21 U.S.C. 353a(a)(1)...8, A-6 21 U.S.C. 353a(a)(2)(A)...8, A-6 21 U.S.C. 353a(b)...27, A-7 21 U.S.C. 353a(b)(1)...8, A-7 21 U.S.C. 353a(b)(3)(A)...8, A-8 21 U.S.C. 353a(b)(3)(B)...8, A-8 21 U.S.C. 353a(c)...8, 28, 29, A-9 21 U.S.C. 355...8, 27, 31, 33 21 U.S.C. 355(a)... 5, 6, 13, 28, A-11 21 U.S.C. 355(b)...6 21 U.S.C. 355(i)...25 21 U.S.C. 360...41, A-12 21 U.S.C. 360(g)(1)...33, 43, A-14 21 U.S.C. 360(g)(2)...43, A-14 21 U.S.C. 360b... 32, 33, 40, A-16 21 U.S.C. 360b(a)(1)...5, 7, 31, A-16 21 U.S.C. 360b(a)(1)(A)...39, A-16 21 U.S.C. 360b(a)(4)(A)...7, 26, 32, A-18 21 U.S.C. 360b(a)(5)(A)...7, 26, 32, A-19 21 U.S.C. 360b(b)(1)...5, 6, 31, A-20 21 U.S.C. 360b(i)...25 21 U.S.C. 374(a)...31, A-21 21 U.S.C. 374(a)(1)...6, 17, 32, A-21 21 U.S.C. 374(a)(2)(A)... 7, 18, 32, 33-34, A-22 Food and Drug Administration Modernization Act of 1997, Pub. L. No. 105-115, 111 Stat. 2296........................... 8, 27 28 U.S.C. 1291...2 28 U.S.C. 1331...2 vi

Regulations: 21 C.F.R. 201.122... 20, 41, 42, A-24 21 C.F.R. pt. 530...7 21 C.F.R. 530.13(a)...40, A-25 Rules: Fed. R. App. P. 4(a)(1)(B)...2 Fed. R. App. P. 4(a)(4)(A)(iv)...2 Fed. R. Civ. P. 59...2 Miscellaneous: Report: Limited FDA Survey of Compounded Drug Products, http://www.fda.gov/cder/pharmcomp/survey.htm...10 vii

IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT No. 06-51583 MEDICAL CENTER PHARMACY; APPLIED PHARMACY; COLLEGE PHARMACY; MED SHOP TOTAL CARE PHARMACY; PET HEALTH PHARMACY INCORPORATED; PLUM CREEK PHARMACEUTICALS INCORPORATED; PREMIER PHARMACY; UNIVERSITY COMPOUNDING PHARMACY; VETERINARY PHARMACIES OF AMERICA; WOMEN'S INTERNATIONAL PHARMACY INCORPORATED, v. Plaintiffs-Appellees, ALBERTO R. GONZALES, U.S. Attorney General, United States Department of Justice, in His Official Capacity; MICHAEL O. LEAVITT, Secretary, Department of Health and Human Services, in His Official Capacity; ANDREW C. VON ESCHENBACH, Commissioner of the United States Food and Drug Administration, in His Official Capacity, Defendants-Appellants. ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF TEXAS BRIEF FOR THE APPELLANTS STATEMENT OF JURISDICTION Plaintiffs Medical Center Pharmacy, et al., asserted jurisdiction in the district court under the Administrative Procedure Act ("APA"), 5 U.S.C. 704, 706, and the

Declaratory Judgment Act, 28 U.S.C. 2201. See Amended Complaint, Record on Appeal ("ROA") 1506-07. Neither of those statutes confers subject matter jurisdiction on a federal court. See Califano v. Sanders, 430 U.S. 99, 107 (1977) (APA does not confer subject matter jurisdiction); Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667, 671-72 (1950) (Declaratory Judgment Act provides discretionary procedural remedy, but does not confer jurisdiction). Nonetheless, the district court had jurisdiction over the questions of federal law raised in the complaint pursuant to 28 U.S.C. 1331. The district court entered judgment on August 30, 2006. Record Excerpts ("RE") 3677. Appellants Attorney General Alberto R. Gonzales, et al. ("the government"), filed a timely motion for reconsideration pursuant to Fed. R. Civ. P. 59. ROA 3678. The district court denied that motion and entered final judgment on October 3, 2006, resolving all claims. RE 3721. The government filed a timely notice of appeal on December 1, 2006. RE 3722. See Fed. R. App. P. 4(a)(1)(B), (4)(A)(iv). This Court has jurisdiction under 28 U.S.C. 1291. STATEMENT OF THE ISSUE There is an enormous public interest in not having drugs sold to the public unless they have first been approved by the Food and Drug Administration ("FDA" or "the agency") as safe and effective. This case involves whether Congress intends 2

that "compounded" drugs which are prepared by pharmacies sometimes in large quantities not linked to any particular prescriptions are exempt from this critical public protection requirement before they can be sold. Thus, the question presented here is: Whether a compounded drug is a "new drug" or a "new animal drug," as defined by the Federal Food, Drug, and Cosmetic Act ("FDCA" or "the Act"), 21 U.S.C. 321(p), (v), and is therefore subject to the Act's new drug requirements and FDA's enforcement authority. STATEMENT OF THE CASE A. Nature Of The Case And Course Of Proceedings Below Traditionally, drug compounding is "the process whereby a pharmacist combines ingredients pursuant to a physician's prescription to create a medication for an individual patient." Professionals & Patients for Customized Care v. Shalala, 56 F.3d 592, 593 (5th Cir. 1995). This practice is commonly used "to prepare medications that are not commercially available, such as diluted doses for children and altered forms of medication for easier consumption." Ibid. See also Thompson v. Western States Med. Ctr., 535 U.S. 357, 360-61 (2002) ("Western States"). However, many compounding pharmacies purchase large quantities of bulk drug substances, combine them into specific drug products before receiving valid 3

prescriptions, and then market those drug products to practitioners and patients "to circumvent [the] new drug, adulteration, and misbranding provisions of the [FDCA]." Professionals & Patients, 56 F.3d at 593. Compounded drugs that have not been subjected to the rigorous safety and effectiveness review required before a drug is approved for marketing have the real potential for causing serious harm to the public. Because of such public health concerns, FDA has long interpreted the expansive language of the FDCA's "new drug" and "new animal drug" definitions to encompass drugs compounded by pharmacies, physicians, and veterinarians. Plaintiffs Medical Center Pharmacy and nine other pharmacies that specialize in compounding human and animal prescription drugs (collectively, "the Pharmacies") brought this action to challenge FDA's authority to regulate drugs produced by compounding. On cross-motions for summary judgment, the district court granted the Pharmacies' request for declaratory (but not injunctive) relief, ruling that Congress intends for all compounded drugs to be "implicitly exempt" from the FDCA's "new drug" and "new animal drug" definitions. RE 3656. Consequently, FDA's authority to enforce key provisions of the FDCA has been called into question. 4

B. Statutory And Regulatory Background 1 1. The Federal Food, Drug, And Cosmetic Act Under the FDCA's comprehensive scheme for the regulation of drug manufacturing, labeling, and marketing, it is unlawful to distribute any "new drug" intended for human use without FDA approval. 21 U.S.C. 331(d), 355(a). The Act defines "new drug" in sweeping language as "[a]ny drug (except a new animal drug * * *)" that "is not generally recognized * * * as safe and effective for use under the conditions prescribed, recommended, or suggested in the labeling thereof." Id. 321(p)(1) (emphasis added). New animal drugs also require FDA approval, id. 360b(a)(1), (b)(1), and "new animal drug" is similarly defined as "any drug intended for use for animals other than man" that "is not generally recognized * * * as safe and effective for use under the conditions prescribed, recommended, or suggested in the labeling thereof," id. 321(v)(1) (emphasis added). As discussed infra pp. 9-13, FDA has consistently interpreted the FDCA's broad "new drug" and "new animal drug" definitions to embrace compounded drugs. To obtain FDA approval to market a "new drug" for human use or a "new animal drug," the sponsor must show that the drug is both safe and effective for its 1 The statutes and regulations most pertinent to this appeal are set forth in the Addendum to this brief. Unless otherwise indicated, they are from the current versions of the U.S. Code and Code of Federal Regulations. 5

intended uses. 21 U.S.C. 355(a), (b), 360b(b)(1). A drug is generally recognized as safe and effective for its intended use when there is expert consensus in that regard, founded upon substantial evidence. See Weinberger v. Hynson, Westcott & Dunning, Inc., 412 U.S. 609, 630, 632 (1973); United States v. Atropine Sulfate 1.0 mg., 843 F.2d 860, 862 (5th Cir. 1988). The FDCA imposes standards for manufacturing (known as "current good manufacturing practice") to ensure that drugs are safe and effective and, thus, not "adulterated." 21 U.S.C. 351. It also requires the labeling of drugs to provide consumers, physicians, pharmacists, and veterinarians with adequate information about drug contents, uses, and effects; drugs that are not properly labeled are "misbranded." Id. 352. The production, sale, and distribution of adulterated or misbranded drugs in the United States are prohibited. Id. 331(a) - (c), (k). To facilitate enforcement of the approval, adulteration, misbranding, and other FDCA provisions, Congress has authorized FDA to enter "any * * * establishment" where drugs are "manufactured, processed, packed, or held" and to inspect such establishment and "all pertinent equipment, finished and unfinished materials, containers, and labeling therein." Id. 374(a)(1). Under the so-called "records inspection" authority in the third sentence of section 374(a)(1), FDA may also inspect "all things" in such an establishment, including "records" relating to prescription 6

drugs, unless the establishment is a pharmacy that is in compliance with local pharmacy laws and satisfies other criteria. Id. 374(a)(2)(A). See Wedgewood Vill. Pharmacy, Inc. v. United States, 421 F.3d 263, 268-73 (3d Cir. 2005) (FDA has general authority to inspect pharmacies and was authorized to inspect plaintiff pharmacy's records, based on information indicating that it was engaged in unlawful large-scale drug manufacturing). 2. The Animal Medicinal Drug Use Clarification Act In 1994, Congress amended the FDCA by enacting the Animal Medicinal Drug Use Clarification Act ("AMDUCA"), Pub. L. No. 103-396, 108 Stat. 4153 (1994). Under the AMDUCA amendments, a new animal drug does not require approval under 21 U.S.C. 360b(a)(1) when its use is pursuant to the order of a licensed veterinarian within the context of a veterinarian-client-patient relationship, and it is (i) a new animal drug that is already approved for a different ("extralabel") use, or (ii) a new animal drug that is already approved for human use. 21 U.S.C. 360b(a)(4)(A), (5)(A). Thus, these exemptions only allow for extralabel use involving approved drugs. Any extralabel use of a drug to treat animals that does not meet one of these two exemptions results in a drug that is "unsafe," id. 360b(a)(1), and "adulterated," id. 351(a)(5). FDA has issued regulations implementing AMDUCA. See 21 C.F.R. pt. 530. 7

3. The Food And Drug Administration Modernization Act Congress also amended the FDCA through the Food and Drug Administration Modernization Act of 1997 ("FDAMA"), Pub. L. No. 105-115, 111 Stat. 2296. Section 127(a) of FDAMA, codified at 21 U.S.C. 353a, added a provision to the FDCA specifically addressed to the practice of "Pharmacy compounding" of human drugs. Under section 353a, compounded drugs are explicitly exempt from three and only three specified requirements of the FDCA: (i) "current good manufacturing practice," 21 U.S.C. 351(a)(2)(B); (ii) "adequate directions for use" in labeling, id. 352(f)(1); and (iii) approval for human use, id. 355. Those exemptions would apply, however, only if certain statutorily prescribed criteria were satisfied. For example, a licensed pharmacist or physician would have to compound the drug pursuant to a prescription for an "individual patient" or only "in limited quantities" in advance of a valid prescription. Id. 353a(a)(1), (2)(A). The pharmacist or physician would have to use bulk drug substances or other ingredients that comply with various standards set forth in the United States Pharmacopoeia or established by FDA, and he could not compound "regularly or in inordinate amounts * * * any drug products that are essentially copies of a commercially available drug product." Id. 353a(b)(1). In addition, a drug product could not be compounded if it "presents demonstrable difficulties for compounding 8

that reasonably demonstrate an adverse effect on the safety or effectiveness of that drug product." Id. 353a(b)(3)(A). Finally, compounded drugs would be subject to quantitative limitations. Id. 353a(b)(3)(B). Section 353a also contains restrictions on the advertising and promotion of compounded drugs. See id. 353a(a) (the word "unsolicited"), (c) (prohibiting advertising for particular drugs or classes of drugs). In Western States, however, the Supreme Court invalidated those restrictions on First Amendment grounds. 535 U.S. at 368-77. Although the Supreme Court did not address the severability of the advertising and promotion restrictions from the nonadvertising restrictions in section 353a, see id. at 360, the Ninth Circuit had previously ruled in that case that the advertising restrictions could not be severed, and, thus, all of section 353a is invalid, see Western States Med. Ctr. v. Shalala, 238 F.3d 1090, 1096-98 (9th Cir. 2001), aff'd on other grounds, Thompson v. Western States Med. Ctr., 535 U.S. 357 (2002). 4. FDA's Policy On Compounding As noted above, FDA has long interpreted the expansive language of the FDCA's "new drug" and "new animal drug" definitions to encompass drugs compounded by pharmacies, physicians, and veterinarians. That is because, like any drug, compounded drugs present concerns about their safety and effectiveness; the processes used to ensure their quality, purity, and potency; and the adequacy of their 9

labeling and directions for use. If compounded drugs do not conform to FDA standards, the consequences for the public health can be serious and potentially deadly. Indeed, an FDA survey of compounded drugs ordered over the internet in 2001 identified potentially serious problems with their quality. FDA found that 34 percent of 29 product samples failed one or more standard quality tests. That high percentage compares to a less than 2 percent failure rate for commercially produced drugs. The principal area in which those compounded drugs failed was potency i.e., they contained less of the active ingredient(s) than indicated on the product's label. See Report: Limited FDA Survey of Compounded Drug Products, http://www.fda.gov/cder/pharmcomp/survey.htm. Consuming a drug at subtherapeutic levels can obviously lead to serious health consequences for a patient. FDA has therefore established a policy for addressing the public health issues associated with compounded drugs. To that end, the agency has issued guidance documents that explain its enforcement policy toward pharmacists and veterinarians engaged in compounding drugs for human and animal use. In its first Compliance Policy Guide ("CPG") for human drugs which this Court upheld in Professionals & Patients, 56 F.3d at 593-602 FDA recognized that, traditionally, pharmacists have extemporaneously compounded reasonable quantities 10

of drugs upon receipt of a valid prescription in response to a specific patient's medical need, or in very limited quantities based on documented records of valid prescriptions generated in an established physician-patient-pharmacy relationship. CPG 7132.16 (March 1992), RE 2051. Because such drug compounding can serve important public health purposes by meeting the needs of patients for whom FDA-approved, commercially available drugs are inadequate, FDA has historically declined to take enforcement action in those circumstances, as a matter of discretion. See Western States, 535 U.S. at 362-63. However, while some pharmacies are exempt from some FDCA requirements, CPG 7132.16 emphasized that pharmacies "are not the subject of any general exemption from the new drug, adulteration, or misbranding provisions of the Act." RE 2051. Moreover, "an increasing number of establishments with retail pharmacy licenses are engaged in manufacturing, distributing, and promoting unapproved new drugs for human use in a manner that is clearly outside the bounds of traditional pharmacy practice and that constitute violations of the Act." RE 2052. CPG 7132.16 described the activities of such pharmacies as consistent with those of manufacturers, insofar as they promote specific drug products directly to licensed practitioners and patients and use large quantities of bulk drug substances to manufacture unapproved drug products in advance of receiving valid prescriptions for such drugs. RE 2052. 11

As CPG 7132.16 further explained, such activities present "a very real potential for causing harm to the public health" because drug products are manufactured and distributed without (i) FDA approval, (ii) adequate record-keeping for tracing and recalling harmful products, (iii) adequate labeling, and (iv) manufacturing controls to assure the safety, purity, potency, quality, and identity of the drug product. RE 2052. Thus, under CPG 7132.16, pharmacies that exceeded the scope of traditional compounding were subject to FDA's exercise of its enforcement discretion. RE 2054. In that regard, CPG 7132.16 identified a number of factors that FDA took into account when determining whether to initiate enforcement action in order to address what this Court has described as "an old problem unregulated drug manufacturing." Professionals & Patients, 56 F.3d at 602. See RE 2055. When Congress amended the FDCA in 1997 by adding the provision specifically addressed to pharmacy compounding, 21 U.S.C. 353a, it based that provision largely on CPG 7132.16. See Western States, 535 U.S. at 364. After the Supreme Court invalidated the advertising provisions of section 353a in Western States, FDA issued revised compliance policy guidance on compounding human drugs. See CPG Sec. 460.200, "Pharmacy Compounding" (May 2002), RE 2057-64. It also subsequently issued a new CPG for compounding animal drugs. See CPG Sec. 608.400, "Compounding of Drugs for Use in Animals" (July 2003), RE 2065-71. 12

Like CPG 7132.16, FDA's revised compliance guidance sets forth a nonexhaustive list of factors that the agency considers in determining whether to commence enforcement action, when the scope and nature of a pharmacy's or veterinarian's activities raise the kind of concerns ordinarily associated with a drug manufacturer. For example, compounding drugs in anticipation of receiving prescriptions (except in very limited amounts), using drug substances without first obtaining the supplier's written assurance that each lot of the substance was made in an FDA-registered facility, using commercial-scale equipment for compounding, compounding for third parties who resell to individual patients, and compounding drugs that are essentially copies of commercially available drugs are among the factors that FDA considers. See CPG 460.200, RE 2060-61; see also CPG 608.400, RE 2068-69. FDA's enforcement guidance also explains that the agency generally defers to state authorities regarding less significant compounding violations of the FDCA, and that it conducts coordinated investigations with the states. See RE 2054, 2060, 2068. For example, in April 2004, FDA sent a notice to State Boards of Pharmacy ("SBP Notice"), requesting their assistance and participation in the inspection of 20 pharmacies. Based on complaints and promotional materials that had been submitted 13

to the agency in recent years, FDA was concerned that those pharmacies were engaged in illegal veterinary compounding activities. See RE 2072-74. C. The Facts Of This Case 1. Plaintiffs Medical Center Pharmacy and nine other pharmacies specialize in compounding prescription drugs for humans and non-food animals (i.e., animals not consumed as food). Amended Complaint, ROA 1507. In their view, all compounded drugs "are not and cannot be 'new drugs' within the meaning of the New Drug Definitions" in the FDCA. ROA 1511. The Pharmacies seek to continue compounding drugs without obtaining FDA approval and without fear of FDA inspections and enforcement action, including the threat of criminal penalties under 21 U.S.C. 331 et seq. ROA 1531-32. The Pharmacies thus filed this suit in federal district court, challenging FDA's regulatory authority over all compounded drugs. In their amended complaint, they allege, inter alia, that they have been subject to unauthorized FDA inspections in which FDA agents have informed them that they have compounded drugs in violation of the FDCA (ROA 1511-12, 1601-04); that FDA has misinterpreted AMDUCA (ROA 1516); and that FDA "is currently enforcing the application of the New Drug Definitions to pharmacy compounded drugs" and "enforcing the CPG as though it were enforceable and binding" (ROA 1523). The Pharmacies assert that, as a 14

consequence of FDA's determination that compounded drugs are "new drugs" and "new animal drugs" under the Act, they face disruption and loss of business, as well as the inability to expand their businesses. ROA 1532. The Pharmacies therefore requested the following declaratory judgments that would permit them to continue engaging in compounding activities with impunity: (i) drugs compounded by licensed pharmacists are not "new drugs" or "new animal drugs" under the FDCA, and, therefore, compounded drugs are not subject to the Act's new drug requirements or FDA enforcement action respecting new drugs; (ii) FDA's policy guidance on "Compounding of Drugs for Use in Animals," CPG 608.400, and the agency's April 2004 request to state pharmacy boards for their assistance in inspecting 20 pharmacies (none of which is a plaintiff here) are not enforceable; and (iii) compounding drugs from bulk ingredients for non-food animal use is lawful. ROA 1535-38. The Pharmacies also sought other related declaratory and injunctive relief. ROA 1540-41. 2. The government moved to dismiss the Pharmacies' original complaint for failure to state a claim. ROA 502. The district court denied that motion in a brief order. ROA 1059. 15

In a subsequent decision on cross-motions for summary judgment, the district 2 court ruled in favor of the Pharmacies on most issues. RE 3651-76. In its principal ruling, the court rejected FDA's interpretation of the FDCA under Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842-43 (1984), holding that "compound [sic] drugs are implicitly exempt from the new drug definitions contained in 321." RE 3655 n.1, 3656 (emphasis added). The court reached that conclusion on the basis of five factors. First, addressing an issue that the parties did not raise or brief, the district court concluded that the advertising restrictions in 21 U.S.C. 353a the provision specifically addressed to pharmacy compounding and added to the FDCA in 1997 by 3 FDAMA are severable from the remainder of that section. RE 3661-63. As a consequence of that determination, the court found that the nonadvertising portions of section 353a survive and constitute a congressional declaration that "compounding is an approved and legal practice." RE 3663. In the district court's view, because 2 The district court's opinion is published at Medical Ctr. Pharmacy v. Gonzales, 451 F. Supp. 2d 854 (W.D. Tex. 2006). 3 As discussed supra, the Supreme Court struck down the advertising restrictions in section 353a on First Amendment grounds, but did not address whether those restrictions are severable from other provisions regulating compounding. See Western States, 535 U.S. at 368-77. However, earlier in the same case, the Ninth Circuit ruled that the individual parts of section 353a are not severable from each other, and, thus, the entire provision is invalid. Western States, 238 F.3d at 1096-98. 16

compounding is thus "legal," "any drugs created by the compounding process are authorized under 353a and are therefore implicitly exempt from the new drug approval process and the definitions found in 21 U.S.C. 321(p)(1) and (v)(1)." RE 3663 (emphasis added). Second, the district court concluded that "Western States demonstrates that compounding is a process that has been approved by the Supreme Court, albeit in dicta." RE 3664. Third, the court found that the distinction drawn by FDA in CPG 460.200 between "compounding for an individual patient pursuant to a prescription * * * and compounding that rises to the level of manufacturing * * * supports the exemption of compounded drugs from the new drug definitions, if the drugs are created for an individual patient on the basis of a prescription from a licensed practitioner." RE 3665. Fourth, according to the district court, the "freedom from inspections of all materials for pharmacies that compound in the regular course of business demonstrates Congress' intent to carve out a niche for compounded drugs." RE 3666. And fifth, "public policy supports exempting compounded drugs from the new drug definitions." RE 3666. The district court also addressed compounding drugs for non-food animals using legal bulk ingredients and held that such activities are free of FDA oversight and regulation. In the court's view, such compounded drugs are not subject to the 17

FDCA's provisions regarding unsafe, adulterated, and misbranded new animal drugs. RE 3670-72. With respect to CPG 608.400, "Compounding of Drugs for Use in Animals," the district court rejected the Pharmacies' argument, ruling that this guidance document is not a substantive rule, and that it is therefore exempt from the APA's notice-and-comment requirements, 5 U.S.C. 553(b). RE 3673-74 (citing, inter alia, Professionals & Patients, 56 F.3d at 595-602). However, the court also held that, to the extent that CPG 608.400 and the 2004 SBP Notice (which requested the assistance and participation of State Boards of Pharmacy in inspecting other pharmacies engaged in compounding animal drugs) are inconsistent with the court's other rulings, they are unenforceable. RE 3674. 4 Finally, the court declined to grant the Pharmacies' request for injunctive relief because "that would amount to pre-enforcement review of FDA actions." RE 3675. The court's ruling, however, is "without prejudice," and it invited plaintiffs to renew their request for an injunction if FDA "continue[s] to violate the Act." RE 3675. 4 The district court also ruled that, on the basis of the evidence before it, FDA could not inspect the records of the ten plaintiff pharmacies "unless it demonstrates that they are no longer meeting the requirements set forth in [section 374(a)(2)(A)]." RE 3669 & n.3. That ruling is not here at issue. 18

SUMMARY OF ARGUMENT As noted earlier, this case involves an important public health issue. The Pharmacies claim an exemption for all compounded drugs from the FDCA's "new drug" and "new animal drug" definitions, despite significant concerns about whether compounded drugs are safe and effective given the way in which they are produced. The Pharmacies' position simply cannot be squared with the FDCA or Congress's clear intent. The FDCA's definitions of "new drug" and "new animal drug" are sweeping and embrace "any drug" unless explicitly exempted by Congress. How and where a drug is produced are irrelevant for purposes of determining whether FDA has jurisdiction over a new drug. Thus, all drugs for human or animal use that are compounded by pharmacies are "new drugs" and "new animal drugs" subject to FDA's regulation and enforcement discretion. The district court's conclusion that compounded drugs are "implicitly exempt" from the FDCA's new drug definitions is plainly at odds with the statutory text, the Act's overall structure, and the deference owed to FDA in interpreting the Act to protect public health. Indeed, other FDCA provisions, as well as various amendments to the statute, reflect Congress's unequivocal understanding and intent that compounded drugs are covered by the Act. For example, the FDAMA provision enacted in 1997 (and later invalidated on unrelated constitutional grounds) that 19

expressly exempts compounded drugs from three specified FDCA requirements in certain limited circumstances would not have been necessary and would make no sense if compounded drugs were already "implicitly exempt" under the FDCA. The district court's ruling also conflicts with this Court's decision in Professionals & Patients for Customized Care v. Shalala, 56 F.3d 592 (5th Cir. 1995), as well as decisions of the Supreme Court and several other courts of appeals. Those decisions are premised on, and accept without hesitation, FDA's longstanding interpretation of the Act that compounded drugs fall within the FDCA's "new drug" and "new animal drug" definitions and are therefore subject to the agency's regulatory authority and enforcement discretion. The district court erred further in holding that drugs for animals compounded from legal bulk ingredients are exempt from FDCA regulation. That ruling is based not only on the court's erroneous conclusion that compounded animal drugs are not "new animal drugs" under the Act, but also on a misunderstanding and misapplication of other FDCA provisions and FDA regulations. For example, the district court found that 21 C.F.R. 201.122 exempts animal drugs compounded with bulk ingredients from the Act's "adequate directions for use" labeling requirement in 21 U.S.C. 352(f)(1). Although that regulation exempts a drug in bulk packaging from that labeling requirement in specified circumstances, it does not provide a general 20

exemption from labeling or any other requirement for a new animal drug created with bulk ingredients. Finally, the district court exceeded the permissible bounds of statutory interpretation when it purported to find support in "public policy" for its decision exempting compounded drugs from the Act's new drug definitions and FDA oversight. The Supreme Court made clear almost 30 years ago in a case involving the same "new drug" definition that courts may not rewrite legislation in accordance with their own conception of what public policy should be. In any event, FDA's well established enforcement policy on compounded drugs reflects an appropriately balanced approach that is fully consistent with congressional intent, as well as sensitive to the public's need for individually tailored drugs in limited circumstances. The district court's holding is thus contrary to Congress's express intent that compounded drugs are covered by the FDCA and subject to FDA's jurisdiction. Even if the Act were ambiguous in this regard as the district court evidently concluded the court erred in failing to defer to FDA's reasonable interpretation of the statute that Congress has entrusted it to enforce. The district court's decision should therefore be reversed. 21

ARGUMENT I. Standard Of Review This Court reviews a grant of summary judgment and questions of statutory interpretation de novo. Southwestern Bell Tel., L.P. v. Public Util. Comm'n, 467 F.3d 418, 421 (5th Cir. 2006). Where the interpretation of an agency's statute is involved, a court must first inquire "whether Congress has directly spoken to the precise question at issue"; if Congress's intent is clear, "that is the end of the matter," and "the court * * * must give effect to [such] unambiguously expressed intent." Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842-43 (1984). In other words, a court must initially decide "whether the statute unambiguously forbids the Agency's interpretation." Barnhart v. Walton, 535 U.S. 212, 218 (2002). However, if "Congress has not directly addressed the precise question at issue," the statutory provision is ambiguous. Chevron, 467 U.S. at 843. In that circumstance, a court may not "impose its own construction on the statute," but, rather, must determine if the agency's interpretation is based on "a permissible construction of the statute." Ibid. In doing so, the court should give "considerable weight * * * to an executive department's construction of a statutory scheme it is entrusted to administer" and "should not disturb" an agency's interpretive choice 22

among conflicting policies, "unless it appears from the statute or its legislative history that the [interpretation] is not one that Congress would have sanctioned." Id. at 844, 845. Thus, under the second step of the Chevron analysis, this Court will "reverse [an] agency's decision only if it [is] 'arbitrary, capricious, or manifestly contrary to the statute.'" Texas Coal. of Cities for Util. Issues v. FCC, 324 F.3d 802, 807 (5th Cir. 2003). The courts have long deferred to FDA's interpretation of the FDCA. See, e.g., Young v. Community Nutrition Inst., 476 U.S. 974, 981 (1986). Indeed, as the Supreme Court explained in Weinberger v. Bentex Pharms., Inc., 412 U.S. 645, 653-54 (1973), FDA is "peculiarly suited" to determining issues such as whether a drug is encompassed within the FDCA's definition of "new drug." II. A Compounded Drug Is A "New Drug" Or "New Animal Drug" As Defined By The FDCA And Is Therefore Subject To The Act's New Drug Requirements. As the courts and FDA recognize, drug compounding can serve an important public health purpose when it is confined within appropriate boundaries. However, compounding on a large-scale basis without satisfying quality standards, compounding with ingredients that are not components of FDA approved drugs, compounding drug products that are essentially copies of commercially available drugs but at nonapproved strengths, and other similar activities pose a threat to public 23

health and undermine the FDCA scheme, which requires FDA review of a drug's safety and effectiveness before the drug can be approved and marketed. The Pharmacies make a very broad claim here, asserting that all compounded drugs are outside the FDCA's "new drug" and "new animal drug" definitions. The district court erroneously accepted that argument based on a misreading of the statute and judicial precedent, as well as its own views on public health policy. In reaching its decision, the district court not only impermissibly substituted its preferences for those of Congress and FDA, it also overlooked the potentially serious threat to public health presented by compounded drugs that are not subject to the usual regulatory controls to ensure drug safety and effectiveness. A. The Plain Language And Structure Of The FDCA Compel The Conclusion That Compounded Drugs Are "New Drugs" And "New Animal Drugs." 1. As explained supra, the FDCA defines "new drug" and "new animal drug" in sweeping terms. A "new drug" is "[a]ny drug (except a new animal drug * * *)" that "is not generally recognized * * * as safe and effective for use under the conditions prescribed." 21 U.S.C. 321(p)(1) (emphasis added). Similarly, a "new animal drug" is "any drug intended for use for animals other than man" that "is not generally recognized * * * as safe and effective for use under the conditions prescribed." Id. 321(v)(1) (emphasis added). How and where drugs are produced 24

are irrelevant for purposes of these fundamental definitions. The Act's scope is not limited to drugs produced by pharmaceutical companies in a manufacturing process, nor does it exclude drugs produced in other ways, such as compounding by pharmacists. Indeed, Congress's use of the word "any" in both definitions signifies its intent that "new drug" and "new animal drug" are to have expansive meanings. See Department of Hous. & Urban Dev. v. Rucker, 535 U.S. 125, 131 (2002) ("[T]he word 'any' has an expansive meaning, that is, one or some indiscriminately of whatever kind") (internal quotation marks omitted). The district court effectively acknowledged as much: "Taken alone, the new drug definitions might seem to indicate that compound[ed] drugs fall within their provisions." RE 3655. The exemptions from the FDCA's definitions of "new drug" and "new animal drug" and from its premarketing approval requirement are few in number and explicit. For example, drugs qualifying under the Act's "grandfather" provisions are excluded from those definitions. See 21 U.S.C. 321(p)(1), (v)(1) ("if at any time prior to June 25, 1938, it was subject to the Food and Drugs Act of June 30, 1906, as amended, and if at such time its labeling contained the same representations concerning the conditions of its use"). Human and animal drugs intended solely for investigational use also do not require premarket approval, so long as they comply with statutory requirements. See id. 355(i), 360b(i). Thus, as the Third Circuit explained, "[t]he 25

basic regulatory scheme of the Act, applicable to both animal and human drugs, is the requirement that 'any new drug,' unless it is intended solely for investigative use or is exempt under one of the Act's grandfather provisions, must be approved by the FDA before it is marketed." United States v. Algon Chem. Inc., 879 F.2d 1154, 1155 (3d Cir. 1989). See also United States v. Rutherford, 442 U.S. 544, 551-52 (1979) (FDCA contains no exemption from drug approval requirement for drugs used to treat terminally ill patients). More recently, Congress has amended the FDCA to create a limited number of additional exemptions. As a result of the Animal Medicinal Drug Use Clarification Act, see supra p. 7, a new animal drug is exempt from the FDA approval requirement if its use is pursuant to an order of a licensed veterinarian in the context of a veterinarian-client-patient relationship, and either the drug is already approved for a different use, or it is approved for human use. 21 U.S.C. 360b(a)(4)(A), (5)(A). When Congress creates exceptions in a statute, the courts have no authority to create others. United States v. Johnson, 529 U.S. 53, 58 (2000). See also TRW Inc. v. Andrews, 534 U.S. 19, 28 (2001); In re Mirant Corp., 378 F.3d 511, 522 (5th Cir. 2004). "The proper inference * * * is that Congress considered the issue of exceptions and, in the end, limited the statute to the ones set forth." Johnson, 529 U.S. at 58. Indeed, with respect to the very FDCA "new drug" provision here at 26

issue, the Supreme Court in Rutherford cautioned that, "[w]hen construing a statute so explicit in scope, a court must act within certain well-defined constraints. * * * Exceptions to clearly delineated statutes will be implied only where essential to prevent 'absurd results' or consequences obviously at variance with the policy of the enactment as a whole." 442 U.S. at 551-52. The district court here violated those canons of construction when it found that "compound[ed] drugs are implicitly exempt from the new drug definitions contained in 321." RE 3656 (emphasis added). 2. In finding an "implicit[]" exemption for pharmacist-compounded drugs, the district court relied heavily on the provision specifically addressed to "Pharmacy compounding," 21 U.S.C. 353a, which was added to the FDCA in 1997 by the Food and Drug Administration Modernization Act. See RE 3656-63. As enacted, section 353a imposes numerous restrictions on pharmacy compounding in exchange for exemptions from three (and only three) requirements of the FDCA current good manufacturing practice, 21 U.S.C. 351(a)(2)(B) (adulteration); adequate directions for use, id. 352(f)(1) (misbranding); and approval of drugs for human use, id. 355. See id. 353a(a), (b); see also supra pp. 8-9. In the district court's view, section 353a "demonstrate[s] that Congress intended to declare that compounding is an approved and legal practice." RE 3663. Because the district court found that the statute thus "permit[s] pharmacies to compound," it reasoned that "any drugs created by the 27

compounding process are authorized under 353a and are therefore implicitly exempt from the new drug approval process and the definitions found in 21 U.S.C. 321(p)(1) and (v)(1)." RE 3663 (emphasis added). Before determining that section 353a reflects Congress's approval of compounding, the district court concluded that parts of that provision are severable, and, thus, despite the Supreme Court's invalidation of the advertising restrictions in subsections (a) and (c), see Thompson v. Western States Med. Ctr., 535 U.S. 357, 368-77 (2002), the nonadvertising provisions remain valid. RE 3661-63. The district court raised and decided this question sua sponte, without any briefing by the parties. As noted supra p. 9, the Supreme Court did not address severability in Western States, but the Ninth Circuit had previously concluded that section 353a could not be dissected and, consequently, is invalid in its entirety. Western States Med. Ctr. v. Shalala, 238 F.3d 1090, 1096-98 (9th Cir. 2001), aff'd on other grounds, Thompson v. Western States Med. Ctr., 535 U.S. 357 (2002). If the parties had raised and briefed this issue in the district court here, the government would have argued that the Ninth Circuit correctly concluded that the advertising restrictions in section 353a 28

cannot properly be removed from the statute while leaving the remaining portions intact, and, thus, all of section 353a is invalid. See CPG 460.200, RE 2059. 5 This Court, however, need not decide whether section 353a is severable and whether any portion of it remains valid, because enforcement of the nonadvertising restrictions in section 353a is not at issue in this case. More important, regardless of the validity vel non of those portions of section 353a, the provision's real value here is that, contrary to the district court's theory, it unequivocally demonstrates that Congress considers compounded drugs to be regulated under the FDCA. Quite simply, if compounded drugs are "implicitly exempt" from the FDCA's new drug definitions, as the district court concluded, there would have been no need, and it would have made no sense, for Congress to exempt compounded drugs from 5 As the Ninth Circuit noted, both houses of Congress linked restrictions on advertising to the limited exemption for human drug compounding found in section 353a. Western States, 238 F.3d at 1097. When enacted, the statute therefore provided that "[a] drug may be compounded under subsection (a) of this section only if the pharmacy, licensed pharmacist, or licensed physician does not advertise or promote the compounding of any particular drug, class of drug, or type of drug." 21 U.S.C. 353a(c) (emphasis added). That linkage is consistent with the Supreme Court's longstanding recognition of the direct correlation between advertising and the demand for a product. See Lorillard Tobacco Co. v. Reilly, 533 U.S. 525, 557 (2001) (citing, inter alia, Central Hudson Gas & Elec. Corp. v. Public Serv. Comm'n, 447 U.S. 557, 569 (1980)). Thus, in order for section 353a to "function in a manner consistent with the intent of Congress," Alaska Airlines v. Brock, 480 U.S. 678, 685 (1987), Congress expected the advertising and nonadvertising restrictions on compounding activities to work in tandem. 29

the FDCA's "new drug" approval requirement in 21 U.S.C. 355. Moreover, Congress's exemption of compounded drugs from two other FDCA requirements that apply to all drugs i.e., current good manufacturing practice (id. 351(a)(2)(B)) and adequate directions for use (id. 352(f)(1)) would also have been unnecessary and senseless if Congress did not understand and intend that compounded drugs are already subject to regulation under the statute. The district court's reasoning thus makes the enactment of section 353a a meaningless act and, assuming arguendo that the nonadvertising portions remain valid, renders that provision superfluous, contrary to fundamental principles of statutory construction. See TRW, 534 U.S. at 31 (cardinal principle of statutory construction is that no word should be treated as surplusage); Heaven v. Gonzales, 473 F.3d 167, 176 (5th Cir. 2006) (same). The district court's use of section 353a to support its conclusion that compounded drugs are implicitly exempt from the FDCA's new drug requirements is seriously flawed in other respects as well. If, as the court ruled, the nonadvertising restrictions in section 353a "remain[] in full effect," RE 3663, then pharmacies must comply with each and every such restriction in order to benefit from the limited exemption from the three FDCA requirements specified in section 353a(a). See supra pp. 8-9 (describing nonadvertising restrictions). Yet, the district court makes no mention of those statutorily prescribed restrictions in reaching its determination that 30