DRUG DEVELOPMENT AND MANUFACTURING: UNCOVERING THE HIDDEN RISKS

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1 DRUG DEVELOPMENT AND MANUFACTURING: UNCOVERING THE HIDDEN RISKS Third party risk affects pharmaceutical, healthcare and life sciences companies. Fact. How you choose to deal with this risk is what sets you apart from your competitors. MIKE CHACE-ORTIZ, CENG Generics Product Strategy, Thomson Reuters Life Science NICOLA WYLIE, ACIM Risk Management Solutions, Thomson Reuters The views and opinions expressed in this paper are those of the author and do not necessarily reflect the official policy or position of Thomson Reuters.

2 CONTENTS INTRODUCTION...3 THE REGULATORY LANDSACPE... 3 SOME STATISTICS... 4 COMPLEX SUPPLY CHAINS... 4 QUESTIONS YOU SHOULD BE ASKING... 5 THE SOLUTION LANDSCAPE... 6 CONCLUSION DRUG DEVELOPMENT AND MANUFACTURING: UNCOVERING THE HIDDEN RISKS SEPTEMBER 2015

3 INTRODUCTION Taking a new drug to market - from the very first stages of research through to its eventual launch - is a complex, costly and time-consuming process. There are myriad risks that must be given due consideration, but these are not limited to concerns around the efficacy of the drug or even its eventual market penetration. Lengthy and complicated supply chains carry risks at every turn. Knowing exactly who you are doing business with is vital in today s global marketplace. As multinational pharmaceutical companies spread their wings into new territories and outsource aspects of their businesses, they run the risk of inadvertently partnering with organizations that do not stick to the letter of the law. The increasingly virtual operating models of pharmaceutical companies big or small, innovator or generic has led to very high levels of outsourcing across the board. And the penalties for non-compliance are significant including indirect liability, reputational fallout from association, and regulatory action that can have substantial financial consequences. The risks that third parties bring to the table may or may not be intentional, but they exist. The complex supply chain web that progresses during the drug development lifecycle is difficult to police and there are many different stakeholders to consider, including the regulator and shareholders. THE REGULATORY LANDSACPE Global regulations, including the US Foreign Corrupt Practices Act (FCPA), the Anti-Kickback Statute and the Federal Food, Drug and Cosmetic Act in the US; the UK Bribery Act and the UK Modern Day Slavery Act and many others serve to highlight the increased importance of establishing an effective third party compliance program. In many cases, regulators are also forcing regulatory compliance further down the supply chain, as seen in active pharmaceutical ingredient (API) manufacturing. Only a few years ago, regulators were chiefly concerned with whether or not the API was manufactured according to the appropriate regulatory standard. Now, however, regulators require assurances that the raw materials and intermediate chemicals are able to be traced to their manufacturer and manufactured to appropriate standards. Similarly, on their journey to the eventual patient; bar-coding and serialization requirements for finished drug packages prevent tampering and allow drugs to be traced. These stricter requirements are having a significant knock-on effect on pharmaceutical companies who must implement additional controls relating to third party suppliers. According to the European Generics Association (EGA), these additional controls could cost in the region of 10m per annum for a manufacturer with a modest market share. 3 DRUG DEVELOPMENT AND MANUFACTURING: UNCOVERING THE HIDDEN RISKS SEPTEMBER 2015

4 Pharmaceutical companies must also be aware that outsourcing to or manufacturing in regions where a weak rule of law prevails does not absolve them from complying with legislation in force in the US: the regulator will hold the pharmaceutical company liable if they partner with non-compliant third parties. On top of this, regulations are constantly changing, meaning that companies must actively take steps to stay ahead of the regulatory curve. Regulators are also increasingly strict in their enforcement of the law. A recent example (2015) of a hefty fine imposed by the SEC on Mead Johnson amounted in the region of $12 million for violating the FCPA when its Chinese subsidiary made improper payments to health care professionals to recommend the company s product to new and expectant mothers. Pharmaceutical, healthcare and life sciences companies would be well advised to put measures in place now to meet anticipated regulatory developments, because the tide of regulations will only grow as governments, regulators, shareholders and consumers increasingly demand transparency and accountability. SOME STATISTICS A study published in mid-2015 by the Center for the Study of Drug Development at the Tufts University School of Medicine (Tufts CSDD) found that the pharmaceutical industry faces a challenging operating environment, marked by increasing costs, inefficient and lengthy cycle times, and increased risk, uncertainty and complexity. The study found that success rates had dropped only 11.3% of drugs that enter clinical testing are approved in the United States, down from 16.4% a decade ago. Furthermore, the average clinical phase duration is 6.8 years and has increased 15% during the past decade. These statistics highlight some important points and illustrate that the industry is clearly facing difficult times: it is taking longer for new drugs to be approved and success rates are significantly down. A further report from the European Medicines Agency (EMA) indicates that there is increased globalization of clinical trials. With increased globalization comes increased risk and much of this risk will be hiding in the complex international network of suppliers that are part of the drug approval lifecycle. Furthermore, Thomson Reuters Center for Medicines Research (CMR) has recently published figures suggesting that Phase III clinical trials the largest and most expensive trials are moving strongly towards Southeast Asia and Western Pacific regions for recruitment. There are also lesser moves towards Eastern Europe. Add to this the fact that regulatory scrutiny is increasing and the scenario is complete: pharmaceutical, healthcare and life sciences companies are facing a business landscape where costs and drug lead times are increasing, success rates are declining and third party risks (both reputational and financial) are on the rise. COMPLEX SUPPLY CHAINS The process of bringing a new drug to market is convoluted and begins with an unregulated first stage: the discovery of and research into a new drug. This step naturally involves certain processes, such as sourcing laboratory chemicals, equipment and tissue samples. This stage ends when the new drug is patented. Then follows the highly regulated phase in which the following steps are undertaken: Preclinical testing to assess the drug s safety and potential toxicity. This step necessitates 4 DRUG DEVELOPMENT AND MANUFACTURING: UNCOVERING THE HIDDEN RISKS SEPTEMBER 2015

5 further sourcing of laboratory chemicals, equipment and tissue samples. Moreover, much of this work is outsourced completely to contract laboratories. Clinical development to further test the drug s safety and efficacy in humans. This includes sourcing clinical research organizations, patients and clinical investigators. It further involves the manufacture and/or sourcing of clinical drug supplies and the distribution of clinical supplies as well as the manufacture and/or sourcing of active ingredients. Each of these steps adds links to the supply chain. Regulatory review and obtaining global regulatory approval. Companies often outsource the compilation and preparation of their dossier (new drug application) to outside companies or the Contact Research Organizations (CROs) that are also running their large-scale clinical trials. Market development, including the official launch of the new drug and the building of its market share. Steps necessary include the manufacture and/or sourcing of the finished drug; the manufacture and/or sourcing of the active ingredient/s and the distribution of the product. Generics. Once patents have expired, cheaper copies of the drug are usually made and this stage involves the same processes in terms of manufacturing/sourcing and distribution as the stage above again adding more links to the supply chain. It is apparent that the resultant supply chain will be complex, since it includes a number of external parties involved in all of these steps. Pharmaceutical companies must select appropriate external suppliers, perform due diligence on each and every third party and manage ongoing supplier performance. This can be a highly time- and resource-intensive process. At every stage of the supply chain and with every new partner or supplier that is added, third party risk increases. Any one of these third parties could knowingly or otherwise be in contravention of regulatory requirements relating to, for example, child labor; various forms of workforce discrimination; quality assurance standards; or environment, health and safety (EHS) issues, to mention but a few examples. The drug development lifecycle is also lengthy in many cases it can take 10 to 12 years for a new drug to move from initial research to market launch. During this time, there could be significant changes to, for example, regulations or geo-political environments, adding further risk into the equation. Legislation is constantly evolving, meaning that pharmaceutical companies cannot simply complete their initial third party due diligence and then rest on their laurels. Continual monitoring to take cognizance of regulatory updates is crucial. QUESTIONS YOU SHOULD BE ASKING What kinds of questions should pharmaceutical, healthcare and life sciences companies be asking as part of their due diligence on new partners or partner selection? A comprehensive list of the questions that should be asked of every third party would be too lengthy to include here, but should cover, inter alia, the following broad categories: the ownership and structure of the facility; general policies; regulatory and quality controls; labor; EHS issues; chemical synthesis; packaging and sources; and the ability to meet GxP (Good x Practice, where x could be L = laboratory, C = clinical or M = manufacturing.) The following is a list of just 10 pertinent examples of questions that companies could and should be asking. There are hundreds more: 1. What is the legal ownership structure of your facility? 5 DRUG DEVELOPMENT AND MANUFACTURING: UNCOVERING THE HIDDEN RISKS SEPTEMBER 2015

6 2. Does the facility have any ethics, labor, environment, health and safety management system accreditations, certifications, or awards? 3. What quality systems are in use at the facility? 4. Does your facility have tools or processes in place to prevent corruption? 5. Does the facility have written environmental policy, procedures, and practices? 6. Does your facility have practices to encourage employees to report concerns without fear of reprisal? 7. Does your facility work with animals as a part of your business? 8. Does your facility have a policy (or statement of commitment) regarding labor practices? 9. Does the facility prevent the use of child labor? 10. Does the facility ensure that there is no discrimination or harassment in the workplace? Whilst asking these and other relevant questions will not necessarily ensure that all third parties are complying with global regulations, they will go some way towards demonstrating to the regulator that steps were taken to conduct proper due diligence on third party suppliers and to uncover and address potential risks. The regulator is likely to look favorably on companies following this sort of procedure and being able to show auditable proof that adequate due diligence has been conducted. When the regulator comes calling, it s what you can prove that counts. THE SOLUTION LANDSCAPE Even in this highly regulated market in which pharmaceutical companies operate, there has been an increase to recent product recalls and reputational fallout as a result of third party irregularities within extensive supply chains. Unsurprisingly, there is growing public awareness of and intolerance towards unethical behavior. It has therefore never been more important for pharmaceutical companies to invest in a comprehensive third party risk program that scrutinizes every external supplier, partner or associate to discover and investigate hidden risk. Recent allegations against two organizations operating in India, for example, have experienced some wellpublicized manufacturing and clinical regulatory compliance issues. The reputational fallout on both the companies and their suppliers has been enormous. As the need for thorough and complete due diligence has grown, the solution landscape has also evolved. Technological advances have enabled the swift and efficient compilation of comprehensive enhanced due diligence (EDD) reports on potential business partners to uncover hidden risks. A holistic screening solution must, however, run far beyond just EDD. Comprehensive solutions offer third party on-boarding software platforms that can integrate with other products and services. This sort of offering, along with robust due diligence questionnaires and analytics, helps companies to assess and classify the risk found in supplier relationships. Trusted and holistic solutions also remove the need for costly, time-consuming procedures to be carried out in-house, in the process relieving 6 DRUG DEVELOPMENT AND MANUFACTURING: UNCOVERING THE HIDDEN RISKS SEPTEMBER 2015

7 the burden on existing in-house infrastructures, streamlining costs and providing auditable proof to the regulator that adequate due diligence and further screening have been carried out. When selecting a solution provider, it is important to choose an organization with the depth and breadth to provide the full spectrum of screening solutions as well as global intelligence. As a starting point, due diligence reports should screen against: The Food and Drug Administration (Food Importation) List The Food and Drug Administration Debarment List The Office of the Inspector General: Exclusions Database Reports should also ensure full compliance with legislation such as: The US Foreign Corrupt Practices Act (FCPA) The UK Bribery Act (UKBA) Anti-money Laundering (AML) The USA PATRIOT Act Countering the Financing of Terrorism (CFT) Often the root cause of a problem is not the innate complexity of the supply chain (which is often inescapable), but rather poor management and monitoring of the links within the chain. In order to prevent, detect and investigate supplier and third party risk, a robust third party risk framework should be implemented to detect risks; train and educate staff; and monitor, review and evaluate all third party risks on an ongoing basis. CONCLUSION Pharmaceutical companies are out of necessity reliant on numerous third parties as they develop, test and launch new drugs. These external suppliers, partners and associates fulfil pivotal roles throughout the drug life cycle. Amongst other benefits, they speed up lengthy lead times and reduce costs. There is, however, a caveat: third parties introduce significant additional risk. As a result of both increased regulation and public scrutiny, pharmaceutical companies are now held accountable not only for their own actions, but also for the actions of their many suppliers, vendors and partners. It is therefore imperative that they invest in robust risk management solutions that include thorough due diligence surrounding the selection and on-going monitoring of all third parties. As the regulatory landscape becomes ever-more demanding, these due diligence procedures will become more time- and resource-intensive. As the complexity of global supply chains also increases, companies would be well advised to take a proactive, rather than reactive approach to mitigating these additional risks. Selecting a service provider that has the gravitas to deliver a global third party risk solution, incorporating all aspects of best practice third party management, will ensure that costs are controlled and that risks are effectively mitigated. Moreover, solutions such as these provide auditable proof of adequate due diligence to the regulator. It would be prudent for pharmaceutical companies to put the right procedures in place now in order to stay a step ahead of the anticipated regulatory curve. Sources consulted: DRUG DEVELOPMENT AND MANUFACTURING: UNCOVERING THE HIDDEN RISKS SEPTEMBER 2015

8 RISK MANAGEMENT SOLUTIONS FROM THOMSON REUTERS Risk Management Solutions bring together trusted regulatory, customer and pricing data, intuitive software and expert insight and services an unrivaled combination in the industry that empowers professionals and enterprises to confidently anticipate and act on risks and make smarter decisions that accelerate business performance. For more information, visit risk.thomsonreuters.com 2015 Thomson Reuters GRC03403/12-15