Mitigating regulatory risk at Indian Pharma

Earlier this month, Mumbai-based brokerage Ambit Capital published an Expert White Paper on pharmaceuticals in which it observed that the US Food & Drug Administration’s decision to conduct surprise inspections at Indian manufacturing sites (as opposed to inspections with prior notice) has “raised regulatory risks” at Indian companies.

The US FDA has been under pressure at home to increase its inspections and audits of overseas facilities which are nowhere near as frequent as audits of factories located in the US, even as US imports of pharmaceuticals have grown rapidly.

But do more inspections mean more Indian companies will go the Ranbaxy and Wockhardt way?

The paper attempts to tackle such tricky questions by asking a panel of three former CEOs and drug industry veterans, each armed with over three decades of experience in the Indian drug industry, to try and answer them.

The trio weigh in on a range of questions including one that investors would no doubt give an arm and a leg to get answered. How do you spot a company that’s headed for (regulatory) trouble? (Answer : there is no ready formula but there are some pointers that are by no means foolproof). The experts also make some interesting suggestions on how to mitigate risk. I have tried to summarise here some of the more interesting observations made by each which will be of value to readers of this blog.  This is, of course, not exhaustive.

Jagdish Dore

PAST : Former managing director, Sandoz India and former CEO, Matrix Laboratories (now Mylan Labs)

PRESENT : Leads pharma consultancy Sidvim Life Sciences

THE BIG PICTURE

Dore believes that the regulatory issues that have arisen among Indian companies should be seen in the right context. In the recent past, several global players such as Novartis, Johnson & Johnson and Hospira have been seriously impacted by FDA audits, he points out.  In other words, this does not seem to be an uniquely Indian problem.

INFORMATION GAPS

Dore points to the extreme difficulty of assessing whether a company is more than ordinarily exposed to regulatory issues.  Mostly, this stems from a lack of audited information in the public domain.  For instance, independent agencies that provide “technical” ratings such as those seen in the financial sector (Moody’s, Standard & Poor’s etc)  do not exist in the drug sector.  And while Indian companies’ quality issues have surfaced after US FDA audits, there is little information about those not audited by the FDA.

INSUFFICIENT AUDITING

Dore calls for greater ‘technical due diligence’ of companies.  This occurs either when a regulator or a third party such as a customer or potential acquirer inspects a plant. He observes that few Indian companies have undergone audits other than those conducted by regulators such as the FDA.  In the past, a US FDA approval was seen as a sufficient stamp of quality.  But quality issues have emerged in spite of FDA approval suggesting a greater need for third-party technical due diligence, he says.

IDENTIFYING RISKY BETS

Dore points to some “surrogate methods” to identify companies with high regulatory risk – such as the number of product recalls, consecutive warning letters and the time taken to resolve them, import alerts, and consent decrees – but warns that these are not always foolproof and may even be misleading.  For instance, recalls might be required because of genuine, one-off errors and it would be tough to reach any conclusion unless these are studied over a 5 to 10 year time frame. Here again, the availability of data is a major challenge.

CEO speak : “The past is no reflection of what a company would do in the future”

Ajit Dangi

PAST : Former president, Johnson & Johnson India

PRESENT : President and CEO, pharma and healthcare consultancy Danssen Consulting

PREVENTING FRAUD

Among other things, Dangi suggests that corporates have a strong Whistleblower Policy, and regularly train all levels of the workforce in ethics and compliance with evolving regulations. He advocates a QualitybyDesign structure where “quality is built into the product at every stage” with a thorough understanding of both the product and manufacturing process, the risks involved and ways to address those risks.

IDENTIFYING RISKY BETS

Dangi also suggests looking at product recalls, FDA notices and warnings, and the frequency of FDA inspections as pointers.  Importantly, he observes that the organisation should be structured to prevent quality compromises. For instance, he says, the head of quality  assurance and quality control cannot report to the head of manufacturing/technical operations but must report directly to the managing director of the company.  Similarly, the team approving a new drug should not be the same as the one doing post-marketing surveillance.

CEO speak : “While testing a finished product for quality is important, it cannot guarantee good product quality”

Kewal Handa

PAST : Former MD, Pfizer Limited

PRESENT : Promoter director of healthcare advisory firm Salus Lifecare

TWO STANDARDS

Handa observes that Indian factories exporting to western markets that have been approved by those countries’ regulators are “mostly compliant”. However, this cannot be said for facilities of companies that manufacture only for the Indian market and are therefore governed solely by the Indian regulatory framework.

HARMONISING REGULATORY OVERSIGHT

Handa highlights the importance of the Indian drugs regulator stepping up its own vigilance of Indian factories.  For instance, like the FDA, Indian drug inspectors should have an audit plan for all facilities, he says. Every facility should get audited once every three years.  Quality control should be strengthened by intensifying random testing of drug samples picked up from the market to ensure safety, efficacy as also bioequivalence, he adds.

FOLLOW-UP ACTION

Handa points out that the Drugs & Cosmetics Act that is used to govern pharmaceuticals in India does not make any provision for follow-through action by an Indian regulator if a factory fails an audit (or is issued a warning) by a foreign regulator like the FDA.  He believes it would be appropriate for Indian regulators to issue show-cause notices and independently audit the plant in such cases.

CEO speak : “Management attitude towards quality standards appears complacent”

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