Quality should be built into manufacturing systems instead of being imposed as a corrective action.
In the last decade, a large number of pharmaceutical companies have entered into consent decrees with FDA. Consent decrees are issued for various reasons, and they can have a major impact on the company as well as the consumer. However, consent decrees generally have a negative connotation in the industry and to investors. While they may be punitive, they also can be viewed as a win-win situation. Companies under consent decrees have accepted the challenge of complying with FDA's requirements. This article addresses the impact a consent decree has on the company, consumers, investors, and the industry.
A consent decree is a legal agreement that is reached between a company and the government (in this case, FDA). It is a negotiated agreement detailing the voluntary actions pledged by the affected company to remedy nonconformances, including systems improvements, and to avoid FDA litigation. FDA uses consent decrees to change the overall corporate culture in compliance matters by pulling the company out of a pattern of long-standing cGMP problems and raising it to current standards. A consent decree commits the company to performing corrective actions in a timely manner, as verified by a third party.
Consent decrees are usually imposed as a result of continual non-conformance in a company's quality management systems. Continual nonconformance is defined as repeated Form 483 observations transmitted to a company over the course of several audits and inspections. A repeated "Unsatisfactory" or "No Response" from a company to FDA warning letters also may be reasons for FDA action. A warning letter informs the company that FDA considers one or more products, practices, or processes to be in violation of the Food, Drug and Cosmetic Act.
FDA adopts the consent decree approach after the company has received repeated FDA 483s or warning letters concerning GMP observations and deficiencies, and these repeated offenses have not been corrected. Although the company and FDA have communicated and discussed the deficiencies, there may not be a clear definition of how the company has made progress to remedy chronic violations, or a clearly defined plan to get back on track. The consent decree ensures that the company will meet the required GMP guidelines. It allows the company to remain in business and ensures that the consumers continue to receive medications of reasonable quality.
Figure 1. Pharmaceutical Companies that Received a Consent Decree Within the Last Ten Years.
A consent decree may be viewed as the equivalent to a court order under which the manufacturing and distribution of products can resume, with conditions closely monitored by FDA. It is a voluntary agreement that is signed by the firm's top official, the US Attorney, and the US District Court. It is filed with the Court and submitted to FDA.
Before a consent decree is issued, FDA must show evidence that both parties have made clear efforts to resolve noncompliant situations. The company and FDA review the warning letters, 483s, and other communications. Thus, a consent decree should not be a surprise to the company.
Once the consent decree is issued, the company may be required to cancel or stop production of nonessential and multisource products. The company may be forced to assign testing and release functions and certain QA responsibilities (such as certification of investigation, approval of validation protocols and reports, and annual audits) to a third party. This third party plays a major role in the consent-decree and post-consent-decree periods. In addition to paying a fine, the company may be forced to delay new product introductions and pay additional fines for not completing the corrective actions on an agreed upon timeline.
Since 1999, FDA has been permitted to levy continuous fines on corporations, even dipping into profits. Corporate executives do not always consider these fines punitive measures. Rather, they are perceived as a deterrent to bypassing the rules and part of the normal cost of doing business. But the reality is different. The number of consent decrees, issued per year, has remained fairly constant over the last decade. Most companies, however, have not been able to extricate themselves from the agreements. Therefore, the number of companies that are under consent decree, at a given time, has increased. Generally, a consent decree is considered a permanent agreement, and it takes several years for a company to demonstrate they are in full compliance. Only one company (Vintage) in the last ten years has met all the requirements of a decree. The others still abide by their agreements.
No company wants to reach the point where a consent decree is necessary. Adding the fines and the required payments to outside consultants, the costs can be astronomical and have a major impact on profitability. We estimate that the total cost since 1993 of the Warner-Lambert (W-L, now part of Pfizer) consent decree (in terms of termination of products, delays in approvals, and bringing facilities and systems into compliance) approaches $1 billion. In the case of W-L, the fine was only $10 million, a small proportion of the total cost. This will not be true for Schering-Plough, whose initial fine was $500 million. Abbott has almost reached the $1-billion mark since its agreement-and its initial fine of about $100 million-in 1999. This money could have been used for research and new drug discovery.
Why did companies put themselves in danger? The Pharmaceutical Research and Manufacturers Association (PhRMA) reported, "Between 1980 and 1999, resources dedicated to production/quality control declined by about 20%, while those for R&D and marketing doubled."1
The report revealed that even while the budgets were smaller, production received more money for better facilities, automation, larger batch sizes, and outsourcing. The inescapable conclusion is that companies were not putting the correct emphasis on quality processes and compliance and were just trying to sell their products. Despite the fact that several quality initiatives such as Quality Circles, Total Quality Management (TQM), and Statistical Process Control (SPC) were implemented in parallel, management's focus was on profitability and cutting costs to meet Wall Street expectations.
By not spending on manufacturing improvements and quality systems, these companies created environments that are not compliant with FDA guidelines. In the long run, this impacts sales and the company image in a very negative way. They forgot that by building better quality into the manufacturing systems, there is less chance that quality must be added later, which, in the long run, can save significant dollars. Alan Minsk, a lawyer with Arnall, Golden & Gregory, said it best, "Compliance should not be a cost-benefit exercise."2
No company is immune to a consent decree. Some of the most respected companies, as well as some of the largest, have such agreements with FDA. In most cases, consent decrees resulted from inadequate quality systems or not following those in place. A consent decree is an option of last resort for FDA and is only used if all other attempts to bring a company into compliance fail.
A consent decree was reached in November 1999, relating to nonconformances to the Quality System Regulations after an independent consultant made 256 audit observations. Abbott was fined $100 million and prohibited from manufacturing or distributing certain
diagnostic products at its Lake County, IL plant. Those products deemed medically necessary continued to be distributed from the Lake County facility.
In May 2001, Elan signed a consent decree as a result of repeated non-conformance observations. Elan received two warning letters in the six years preceding the agreement. Additionally, several FDA inspections revealed a pattern of significant violations in its Gainesville, GA facility. The company replaced its management team and implemented several corrective actions, but this was not enough to prevent a consent decree.
Nonconformances included failure to conduct adequate laboratory tests and final validation activities necessary for product release, and inadequate maintenance of laboratory equipment and records. There were no product recalls, penalties, or fines for Elan. The company hired outside consultants to inspect the facility at least once a year. If FDA finds any non-conformances, they can shut down the manufacturing operation until FDA-approved corrective action is implemented. Elan will be eligible for getting out of the decree in 2006.
A voluntary agreement was signed with FDA in 1989 to correct GMP problems in its Carolina, PR facility. These issues were resolved, yet post-approval issues related to its product Lorabid resulted in a consent decree in 1995. Eli Lilly is still struggling with corporate culture issues that have prevented it from satisfying the agreement criteria. However, several groups within the company have been re-aligned to prevent conflict of interest. For example, the Global Quality and Technical Support Group has been split into two units, Manufacturing, Science, and Technology and Corporate GMP Compliance.
In May 2002, Schering-Plough entered into a consent decree as a result of problems found with 90% of its products since 1998. Four manufacturing facilities (Union, NJ; Kenilworth, NJ; Manati, PR; and Las Piedras, PR) were involved and problems associated with manufacturing, quality assurance, equipment, laboratories, packaging, and labeling were cited. The decree impacted 125 different prescription and non-prescription drugs, including Proventil (asthma), Chlor-Trimeton (decongestant), Theophylline (generic for asthma) and Afrin (decongestant). Production was suspended for 73 of the 125 drugs named in the decree, including those listed above. Alternative products are available on the market for the drugs that were suspended. Proventil and Theo-Dur have not been marketed actively since June 2001. Annual sales for these two drugs totaled $44 million in the 1990s.
The consent decree entered into by W-L in August 1993 resulted from a number of inspections in its plants in Vega Baja and Fajardo, PR, product recalls, and negotiations with FDA officials. It involved all products made in both plants. Certain medically necessary drugs continued to be manufactured and sold with FDA approval. Replacements for the following drugs were not available: Celontin (anti-convulsant), Chloramphenicol (antibacterial), Choledyl (bronchodilator), Dilantin (anti-seizure), Humantin (anti-parasitic), Ketalar (osteoarthritis), Loestrin 1/20 (oral contraceptive), Lopid (triglycerides/cholesterol), Milontin (anticonvuslant), Nardil (antidepressant), Nipent (anticancer), Nitrostat (angina), and Zarontin (antiseizure).
Under the consent decree, W-L agreed to the following conditions, which have become typical for other pharmaceutical companies under consent decrees3
In May of 2002, Watson agreed to a consent decree due to several issues. FDA performed inspections in 1998 and 1999 at its Corona, CA facility and issued a warning letter each time. Inspections after the 1999 warning letter resulted in three additional Form 483 observations. Watson also initiated two product recalls for non-conformances in the 18 months prior to the agreement.
In October of 2000, Wyeth agreed to a consent decree involving its sites in Marietta, PA and Pearl River, NY. Inspections in 1995, 1996, and 1998 found several GMP deviations and resulted in warning letters. A meeting between FDA and Wyeth addressed the issues and the agreement followed.
As a result of the consent decree, the company:
Alpha Therapeutics entered into a consent decree in February 1998 for its Los Angeles, CA facility.
Barr entered into a consent decree in November 1994 for its facilities in Northvale, NJ and Pomona, NY.
Biocraft entered into a consent decree in July 1994 for all its NJ facilities.
Centeon entered into a consent decree in January 1997 for its Bradley, IL facility.
Halsey entered into a consent decree in June 1993 for its Brooklyn, NY facilities.
KV entered into a consent decree in June 1993 for its St. Louis, MO facilities.
Pennex entered into a consent decree in July 1993 for its St. Louis, MO facilities.
Steris entered into a consent decree in October 1998 for its Phoenix, AR facility.
Vintage entered into a consent decree in November 1998 for its facilities in Charlotte, NC and Huntsville, AL.
The American Red Cross entered into a consent decree in April 2003 related to blood banking.
In 1999, FDA received authority from Congress to garnish the profits of companies that continually have nonconformances in quality systems. According to Lester Crawford, the deputy commissioner of FDA, "Manufacturers who choose to wait until FDA investigators find violations, rather than policing themselves, will find that they have made a poor and costly decision."
It is informative to review the history of companies receiving consent decrees to see how agreements affected their futures. Five of the sixteen companies in the pharmaceutical industry that received a consent decree either were sold or acquired: Steris, Centeon, Biocraft, W-T, and Pennex. While not all changes can be directly attributed to the consent decrees, the timing of the events suggests there is a connection.
Data available for other major companies provide insight into how consent decrees impact profitability and other business activities.
Abbott, according to its 1999 Annual Report, had a one-time charge of $168 million against its operations
including a $100-million fine to FDA, $44 million for contractual obligations, and $24 million in inventory. In addition, the consent decree had a $250-million impact on 2000 sales. Losses were expected to exceed $1 billion through 2003.
Additionally, Abbott's potential $7.3-billion acquisition of Alza failed as an indirect result of the decree.
In June 2002, Abbott said it would write off charges of $0.06/share in the second quarter and $0.07 to $0.09/share for the year ($140 million) as a result of the consent decree and payments to the government.8,9 This is 16% of the US revenue generated by those drugs that are deemed medically necessary and are being manufactured while under the decree. This charge also covers expenses for ongoing quality work, eroded market share, and cancellation of any new product launches from the Lake County facility. Abbott paid another $112 million in fines to FDA for a failed follow-up inspection.
Abbott has submitted fourteen process validation studies. These validation documents averaged 6,000 pages each and accounted for 60,000 man-hours per process. At approximately $150 per hour for expert consultants, this cost Abbott about $126 million.10 It also completed over 250 product-specific validations that totaled over 2.6 million man-hours ($350 million). Finally, over 1,500 employees were retrained.7
Table 1: The impact of consent decree on Schering's sales.13
As a result of its consent decree, approval of two new drugs was delayed. This occurred when GMP issues were found during pre-approval inspections in the fall of 2001, six years after the agreement was reached.
In May 2002, the company reached an agreement with FDA and agreed to pay $500 million in fines. As a result of this agreement, Schering-Plough lowered its 2002 earnings-per-share (EPS) growth estimate from the low double digits to the single digits.
Production was suspended for 73 of the 125 drugs impacted by the decree. The company must now determine which drugs they will discontinue and which they will continue to manufacture after the suspension is lifted. All potential sales of these drugs are in jeopardy. Claritin, alone, accounts for $250 million in lost profits for 2002. The company also decided to suspend the production of certain animal health products at its PR site. Sales from these products were worth $44 million in 2001.
If the agreed-upon actions are not met in the timeline developed, the company will incur the following additional costs:
FDA approval of Clarinex was delayed by one year due to ongoing nonconformances. Schering worked with FDA to limit the number of facilities producing the drug (to reduce plant-to-plant variation). Clarinex has now been approved, but potential sales from the expected time of approval to the actual time of approval were lost. Annual sales from Claritin were approximately $2 billion. The delay in the approval of Clarinex allowed Claritin to go off patent without a prescription replacement in place. Also, the patent for Clarinex was not extended by a year. If Clarinex is similar to Claritin in sales, this means over $1 billion in lost sales. The 2002 combined global sales for Claritin and Clarinex were close to $3 billion. In 2001, Claritin sales alone were $2.47 billion. The loss in sales can be directly correlated to the delay caused by the consent decree. It is also believed that Clarinex sales will not grow at the same rate that Claritin sales decrease because Schering does not have advertising money to spare. See Table 1 for additional sales breakdown (total US and international).
Not only did W-L have to abide by the rules stated above, key personnel were subject to criminal investigation. In November 1995, the company pleaded guilty to charges of intent to defraud and mislead the government. They were fined $10 million, and a company official also was prosecuted (and acquitted).
It employed over 30 consultants from an expert company for 20 months at three PR sites. At about $150 per hour, the cost totaled around $15 million for this single consulting company, and W-L had similar consultants at other sites.
Watson added more than 30 employees to its QA department as a result of the decree. Additionally, it hired an outside consulting firm to conduct ongoing independent audits of the facility. Twenty-six of the company's 170 products are manufactured at the Corona facility. Since no products were suspended, there was minimal impact to the company's revenue.
Under the consent decree, the company paid a one-time fee of $30 million to the government, with an additional $15,000 per day for each day out of compliance past the deadline (capped at $5 million). In January 2001, Wyeth discontinued its vaccine for DtaP (Acel-Immune). Sales for this drug were $71 million in 2000. Discontinuation was a direct result of the consent decree and an evaluation of the company's product portfolio. In 2001, Wyeth paid over $267 million in fines as a result of the decree (the fine, product discontinuation, and other). It also closed two manufacturing facilities.
Fortunately, none of the past decade's consent decrees pertained to products that were deemed unsafe for human use. All drugs that were released were safe. Certain drugs at manufacturers' locations and new drugs not yet in circulation were recalled. Customers who were using these drugs had to adjust to alternatives. According to David Feigal, M.D., director of the Center for Devices and Radiological Health, "A firm's failure to comply with their quality systems does not mean that the product will fail to perform as intended. It does, however, mean that users have less assurance of successful performance than they would have had if these products were manufactured properly."
Consent decrees can put a strain on pharmacy and hospital inventories. They impact the HMO formularies and limit the drugs available to physicians. Drugs that are deemed critical are not removed from the market, which can cause some extra work for the formularies and hospitals, but it does not result in a lack of drugs for patients. Since most drugs involved in consent decrees are not suspended, there is little impact on product cost.
A consent decree can create doubt in the minds of investors and result in a stock price decrease. This decline may be short or long term, depending on the company's response to the problems. The magnitude of fines and product recalls may also impact the stock price. In no case researched did a stock price increase when an agreement was announced. Here are some of the investor reactions to those announcements. Stock charts are readily available elsewhere, so we will focus on some illustrative examples.
Abbott's 1999 earnings declined by $0.10/share as a result of the consent decree. Abbott's stock had reached a high of approximately $50 in the summer prior to the announcement of the consent decree. While the stock dropped slightly at the announcement, strong product sales continued to push the stock upward to a high of $58. From Dec. 17, 1999 to Jan. 25, 2000, the stock dropped 5.7% with double the normal trading volume. But it wasn't until the June 2002 earnings announcement that the stock took a significant drop. In June 2002, Abbott announced its 2nd quarter decrease in earnings and forecasted a $0.07 EPS decrease for the year (from $2.13 to $2.06). The stock price on June 12, 2001 dropped 16% (from $45.67 to $38.30) at a trading volume of three times the normal. As of November 14, 2002, there was a partial rebound to $43.96. On May 19, 2004, it was $40.83.
Schering-Plough announced a decrease in its expected EPS for 2002 as a result of a consent decree. Standard and Poor's recommended avoiding Schering stock with the expectation of low EPS and high risk of regulatory and criminal actions. Schering's stock reached an all-time high in the 1999 to 2001 timeframe. As issues with FDA began to surface and the chance of government action became more real, the price of the stock steadily declined.
The agreement reached with FDA in May of 2002 caused an even bigger drop in the price from $27.09 on May 14 to $22.90 on June 6, while trading ran three to five times the normal volume. The company has not recovered from these declines. When lower EPS were announced in the autumn of 2002, there was another drop. In two weeks of October 2002, stock fell 18.8% to $17.32, while volume was running five to eight times the normal rate. On May 19, 2004, the stock listed at $16.35.
Watson's stock price dropped by 10% ($30 to $27) upon announcement of the agreement on March 28, 2002. Trading volume jumped to five times the normal rate. The stock slipped again in July, hitting a low of $18.77 on July 26, 2002. The price continues to recover. On May 19, 2004, the stock listed at $36.48.
Wyeth stock was at a high ($70.00) in March 1999. The announcement of a consent decree in October 2000 did not have a perceivable impact on the stock price or trading volume. The fine wasn't very high, relative to those levied on Schering-Plough and Abbott. Additionally, no products were recalled from the market and no product manufacturing was suspended. It wasn't until the recent controversy with hormone replacement therapies that the stock took a significant drop. It is still low at $37.70 on May 19, 2004.
A consent decree is a burden to both the company and FDA. Not only does the company incur costs, pay fines, and lose profits, FDA must support the agreement with resources and extra effort. This prevents them from performing their expected functions, such as NDA approvals and quality audits.
The warning letters and consent decrees that have been issued in the last decade offer a good starting point for review of policies and FDA guidelines. An evaluation may offer insight to areas that may need to be revamped. A review of FDA guidelines, in relation to changing technologies and the marketplace, offers the companies and FDA a chance to broaden their views; it can benefit everyone involved. Washington, DC-based attorney Mark Brown of King & Spalding told The Silver Sheet that he "believes that the new warning letter policy will result in fewer warning letters but more consent decrees for volatile firms."15
In September of 2002, The Pink Sheet discussed a risk-based inspection model FDA is evaluating for future compliance evaluations. This model is based on three criteria: 1) patient exposure to the product, 2) inherent risks of formulations, and 3) the GMP compliance record of the manufacturer.16 The model would help FDA place priorities on inspections and allow for best use of resources. There is ongoing discussion about this proposed model. It is clear there will be increased emphasis on firms that have been non-conforming in the past. (Note: See the QSIT system discussed on page 44.)
Quality should be built into manufacturing systems instead of being imposed as a corrective action. Drug companies must be aware of competitive pricing and cannot raise drug prices to offset FDA fines and consultant costs. They must reduce spending for marketing and sales, issue stock, or reduce dividends to the shareholders. If there is no large fine involved and no suspension of manufacturing, most consumers never hear of a decree or its impact on the company.
Companies should take all necessary actions to prevent a decree. This includes being proactive in establishing quality systems, maintaining and upgrading manufacturing facilities to meet GMP guidelines, and spending the money up-front to design quality into the manufacturing process. Once a company enters into a consent decree it is difficult to extricate itself. As mentioned above, only one of the sixteen companies so far has had its consent decree lifted by the court.
From a financial standpoint, both the investor and the company are impacted negatively by the agreement. Loss of sales, as well as loss of investor trust, can reduce company profits significantly. The higher the visibility and fines levied, the larger the financial hit. If manufacturing processes are suspended, this loss is even greater, since revenues are affected. Without profits and investor backing, the company begins to lose available cash for marketing, sales, and R&D, and it must reduce spending. This results in shrunken profit, and it is difficult to prevent a downward spiral. The company must be very proactive in making corrections and spending efficiently to prevent this from happening. Maintaining a positive investor relationship is key to not bottoming out in the market.
The philosophy of management, going forward, should be that quality systems and process compliance are critical to the company's advancement. Do not cut corners when creating these systems. You can have the most advanced marketing, sales, and R&D in the industry, but without a sound quality system and firm compliance guidelines, they will not prevent FDA from shutting your doors.
Consent decrees are expensive to the company and can certainly have a short-term negative impact on investors. In the long-term, however, they may be considered a win-win situation. The company is allowed to remain in business, as long as corrective actions are taken to bring the company into compliance. This is good news for the company.
Through the mechanism of constent decrees, FDA confirms that the company and industry take the safety and efficacy of drugs seriously. It provides an independent route to evaluate the effectiveness of the GMP guidelines. The consumer continues to receive medically necessary drugs with no risk to their safety, which is good news to patients and doctors. By working together, the industry and FDA can ensure that consumers' and doctors' needs are met, that the drugs being produced are the safest and best available, and that the companies can continue to develop new and exciting technologies and medical advancements for the coming years.
This work was originally done as an independent research paper at Fairleigh Dickinson University, Teaneck NJ MBA Program, December 2002.
1. FDC reports,
The Gold Sheet
, 2002 June; 36 (6).
2. Minsk A, FDC reports, The Gold Sheet, 2002 June; 36 (6).
3. FDA web site. Available at URL: www.fda.gov/bbs/topics/NEWS/NEW00430.html.
4. Wyeth web site. Wyeth-Ayerst Labs Enters into Consent Decree with FDA, 2000 Oct 2; Available at URL:www.wyeth.com/news.
5. Drug maker to pay $500 million for quality-control problems, Detroit New s; 2002 May 18.
6. Abbott Laboratories. Annual Report. Abbott Park IL, 1999.
7. Abbott Labs Endures, The Motley Fool, 2000 Oct 10. Available at URL: www.fool.com.
8. Abbott Adjusts Earnings Guidance. Available at URL: http://www.inpharm.com/External/InpH/1,,1-4-0-0-inp_intelligence_news-0-7742,00.html, 2002 June 13.
9. Abbott Laboratories Cuts Earnings Forecast. NY Times 2002 June 12; late edition, Sect. C: 4 (col. 1).
10. Comment from an independent consultant for the pharmaceutical industry who wishes to remain anonymous.
11. Schering-Plough Press Release. Kenilworth NJ. 2002 May 17; Available at URL: http://www.schering-plough.com/schering_plough/news/release.jsp?releaseID=297804.
12. Still Sell Schering-Plough. Business Week Online 2002 May 17. Available at URL: www.businessweek.com.
13. Burd M., Pharm-Chem Project, Fairleigh Dickinson U. Teaneck NJ. 2002 Dec.
14. FDA web site. Dear Colleague letter: Abbott Labs Consent Decree, Available at URL: www.fda.gov/cdrh/ocd/abbottletter.html.
15. FDC reports, The Silver Sheet. 2002 July; 6 (7).
16. FDC reports, The Pink Sheet. 2000, Sept 2; 64 (035): 22.