The Politics of Cost-Cutting: Pfizer Downplays Outsourcing in Letter to Congress

Investors urging Pfizer to make more aggressive moves in cost-cutting take note: Pfizer says it has not yet realized any savings at all from manufacturing outsourcing.

The company recently told Congress that “we have realized little, if any savings to date” from outsourcing of production. In a letter to Sen. Sherrod Brown (D-Ohio) Pfizer Vice President-Quality Gerald Migliaccio explained, “Pfizer has been very cautious in sourcing from emerging markets that provide lower cost.”

Investors have been complaining that the firm is not serious about cutting costs as its blockbuster revenue base erodes, and the fact Pfizer has off-loaded 17 percent of its production operations without saving a dime may be seen as confirmation of that critique.

Of course, there is more to the story. In this case, context is everything. Brown's interest in outsourcing is driven by the heparin contamination debacle, and he (along with plenty of his colleagues in Congress) is quite eager to make that into an anti-globalization argument. So this would not be a good time for Pfizer to brag about efficiency.

The correspondence followed Migliaccio’s appearance at a Senate hearing where he touted the rigorous auditing Pfizer conducts of its contractors (Subscribers to "The Pink Sheet" can read Pfizer’s argument about the limited utility of inspections).

Brown had asked Pfizer about the risks of outsourcing, and the company emphasized that when conducted well, there aren’t any safety issues. But the exchange, as well as the grilling Baxter has faced over heparin, should serve as notice to firms that any savings they hope to achieve by moving operations oversees needs to be balanced against the increased spending they will likely take on in order to demonstrate that those activities remain in regulatory compliance.

And this is also a case where timing is everything. Pfizer notes in the letter to Brown that it only now received its first approval of a facility to supply raw material to the US from China--and that it has not yet used that facility as a source for finished products. But it will--and, we suspect, it will do so at a meaningfully lower cost to Pfizer.

Still, although Pfizer’s policies may reflect the full oversight costs of outsourcing, they may not be bowing to the financial realities of the company’s current circumstances, where all eyes are focused on the looming Lipitor patent expiration.

We are not adherents to numerology, but we do think it’s worth noting that Pfizer has also made another 17 percent change to its operations that may not save it any money. The company announced last week that it would stop providing grants to for-profit companies as part of changes to its policies for continuing medical education. ("The Pink Sheet" delineates how the move reduces the firm’s flexibility but improves its relations with academics.)

The 17 percent of Pfizer’s CME funds that are now spent with for-profit firms will likely go elsewhere (did we mention the improved relations with academics?), so don't expect that change to improve the bottom line.

Speaking of the number 17, Lipitor was approved on Dec. 17, 1996, and accounts for about 34 percent of Pfizer’s U.S. pharmaceutical revenue. When it goes generic in three years, Pfizer will need a lot more than the two 17-percent solutions it’s already implemented.

– M. Nielsen Hobbs

Globalization and its Discontents: Finger-Pointing Over Heparin

The US Food & Drug Administration's investigation into adverse reactions associated with Baxter's now-recalled heparin products is a major public health priority and a growing political liability for the agency.

It may also become another strain on relations between the US and China.

FDA is now confident that the reactions were indeed caused by a contaminant introduced into the raw material used by Baxter and its suppliers to produce heparin, a contaminant that FDA suspects was introduced deliberately somewhere early in the supply chain in China. The agency convened the latest in a serious of media conference calls April 22 to outline its findings so far. (Click here to read coverage of the conference call in PharmAsia News.)

Chinese regulators disagree, and called their own press conference at the Chinese embassy in Washington to make their position clear. They believe the problem is more likely the result of impurities introduced in the final production processes in the US, and plan to inspect Baxter's facilities themselves. (Here is The Washington Post's coverage of the press conference.)

Baxter, understandably, agrees with FDA's interpretation of events thus far. Assuming FDA is correct, Baxter's own liability for the adverse events will be less obvious: the company itself is presumably a victim of whomever is responsible for introducing the contaminant. (Though, as we have noted previously, the US Food Drug & Cosmetic Act is a strict liability statute that at least in theory allows for the punishment of Baxter simple because it ultimately introduced a tainted a drug.)

But the issue is a double-edged sword for the biopharmaceutical industry. If indeed the contaminant turns out to be a case of economic fraud initiated by an unscrupulous business in China, that may help Baxter, but it will also fuel the misgivings of many US consumers and politicians about the globalization of trade--and especially concerns about the perceived dangers of outsourcing to China.

The Democratic Presidential campaign is increasingly sounding some protectionist themes, and the political anxiety about the rise of China as an economic rival to the US is palpable. Then there is the sensitivity of the Chinese government to its global reputation, including outrage at the protests surrounding the Olympic torch relay.

We ink-stained wretches at the IN VIVO Blog don't fancy ourselves experts on international relations, nor do we have a crystal ball to say what if any difference the heparin issue will make in the great game of global diplomacy.

But we do know this: global pharmaceutical corporations--and investors seeking opportunities in emerging markets--have to factor in the political dynamics of globalization into their planning. If protectionists on either side win out, plenty of players in the biopharma sectors will be among the losers.

Dingell vs. Von Eschenbach = Fireworks

Apparently, House Energy & Commerce chairman John Dingell is unhappy with the Food & Drug Administration.

The Michigan Democrat took issue with FDA commissioner Andrew von Eschenbach's broad plan to overhaul the agency's overseas drug inspection structure to avoid another heparin situation during an E&C Oversight and Investigations Subcommittee hearing. Von Eschenbach was trying to explain that it's not just the number and frequency of inspections by inspectors, but how the inspections are carried out that matter.

Dingell was having none of what he called the commissioner's "toe dancing." Dingell, during his allotted time for question-and-answer, asked von Eschenbach to answer "yes" or "no" to a series of questions. The commissioner started off obliging Dingell but then began getting off track with longer, more verbose answers.

Dingell: I'm going to be honest with you, I'm establishing that you don't have the resources and you can't do your job.

The Energy & Commerce chairman asked if the $11 million for 2008 and $13 million for 2009 allocated for inspections was enough for FDA to inspect the thousands of currently uninspected facilities abroad which import food and drugs into the US every year.

Dingell: Does FDA need more resources to conduct inspections.

Von Eschenbach: Yes, sir. I've asked for more resources.

Dingell then pointed out that the Government Accountability Office estimated it would cost $16 million to inspect only Chinese exporters. So clearly, the $11 million and $13 million were not adequate, right?

Von Eschenbach paused and then answered: I'm telling you that we are putting [the resources] to appropriate use and I have requested additional resources to do more but I'm trying to make the point that in addition to doing more, we have to do it differently.

That set off Dingell, and recalled the Michigan Democrat's days when he skewered witnesses without mercy.

Dingell: You know, I've been in this business a long time, and I've had food and drug commissioners constantly tell me, 'Ooooh, we're going to have a new means of doing this, and we're going to be leaner and meaner.' Turns out that they're leaner and poorer and weaker and less capable of doing their jobs. And all of these promises that I get from commissioners...turn out to be nothing more or less than hooey.

Von Eschenbach: Mr. Chairman, if you allow me to...

Dingell: I didn't fall off the cabbage wagon yesterday. I've been talking to food and drug commissioners for 40 years. And you're not the first fella I've had to skin for not doing his job and coming up here and defending an indefensible situation. I want to maintain my respect for you but I can't maintain my respect for you if you keep toe dancing around the hard facts that curse you with the inability to do your job because you don't have resources.

Then Dingell asked von Eschenbach repeatedly exactly how much money FDA needs to inspect all of the outside facilities up to a US standard.

Dingell: I'm rather tired of all this toe dancing. You cannot do your job, you are not doing your job, how much money do you need to do it?

Von Eschenbach responded that he would have to submit a business plan to appropriately address the question but added that a rough estimate would be the number of total facilities multiplied by $45,000 (the GAO estimate per inspection).

That wasn't good enough for Dingell. "You are carrying water for an administration that has not given you the resources that you need. This committee wants you to have the resources that you need to do the job you have to do to protect the American people." He then brought up the deaths and adverse events related to Baxter's contaminated heparin. And started shouting. "You presided over this because you do not have the resources to do the job that you need to do. How much money do you need to do the job that you are supposed to do?"

Von Eshenbach remained calm and answered again in a way that did not calm Dingell's tone: "Mr. Chairman, I would like to have the resources that would enable us to do a systemic overhaul of the entire process, not a figure that's related to a cost per inspection times the number of facilities."

Dingell repeated again and again, slamming his hand against the desk, the question of exactly how much money FDA needed for the overseas inspections. "You have one fine scandal going on, you have others going on with regards to fish and fish products and you simply are absolutely incapable of addressing your responsibility."

In the end, von Eschenbach gave him the round figure for drugs: 3,000 facilities times $45,000 per site, which is $135 million. However, the sites are inspected once every two years, so the number really is about $70 million. The Republican Senate staff would later say it would take about 500 FDA inspectors overseas.

Dingell ended his fire and brimstone delivery with this: "Commissioner I have no ill will towards you. I have ill will of the most gross sort towards the fact that you come up here and defend a situation that is indefensible and that you are not soliciting the resources that you need to do your job to protect the American people the way the law says you should. And that you are tolerating an administration which is allowing this kind of situation to [continue] because they are too damn tight."

Von Eschenbach, for his part, handled himself well in the face of such a storm from Dingell and remained calm-not an easy thing to do considering the circumstances. But maybe next time, he should just say: $70 million.

Hard Time for Biopharma CEOs

Yes, times are hard for many biopharma executives. But we're referring to hard time in the other sense, as in time behind bars in a federal penitentiary.

If history is any guide, top executives across the industry should prepare for a wave of high profile enforcement activity from the Food & Drug Administration and the Department of Justice--cases where a civil settlement and fines may no longer be enough to satisfy prosecutors. It sure looks like the government wants to start putting people in jail.

The RPM Report has just published an article highlighting recent, not-so-friendly reminders from top FDA officials that they have immense power to pursue criminal cases against corporate executives--starting with the CEO--even if those executives did not participate in, or even know about, criminal conduct that occured on their watch.

Two officials quoted in press releases this week underscore that point. Here is the first:

“It is unacceptable that Americans have died and been seriously injured by what appears to be deliberate tampering. Whether this contaminant was introduced intentionally or by accident, the full force of the law must be brought to bear to bring those responsible to justice.”

That is Senator Edward Kennedy responding to FDA's announcement that it has identified the contaminant that apparently caused severe adverse reactions to Baxter's heparin products in the US. FDA still does not know if the contamination was accidental or deliberate, but note Kennedy's response: Accidental or not, someone must be held accountable. He underscored that point in a separate letter to FDA Commissioner Andrew von Eschenbach, asking for a criminal investigation.

Here is the second quote:

"Pharmaceutical companies do not run themselves, and those who engage in criminal conduct will be held personally accountable."

That is FDA Special Agent Kim Rice, quoted in a Department of Justice press release announce the indictment of Scott Harkonen, the former CEO of Intermune Inc., on charges of wire fraud and violations of the FD&C Act. The indictment follows from an off-label promotion and False Claims Act investigation settled by Intermune in 2006.

Intermune settled the investigation by agreeing to strict new codes of conduct and paying a fine of $37 million. That is a relatively large sum for a small company, but also is the type of fine that upsets some members of Congress who believe pharmaceutical companies are not been punished aggressively enough. Harkonen, on the other hand, faces a theoretical maximum penalty of 20 years in prison.

The company points out that the indictment of Harkonen, who left Intermune in 2003, does not in any way affect the settlement or Intermune's current business prospects. And of course we have no idea whether any of the allegations against Harkonen are merited.

What we do know is this: if the tough talk from FDA and Congress is to be believed, Harkonen will not be the only pharmaceutical executive brought up on charges.

Don't Blame China...At Least, Not This Time

Here’s some news: Baxter is discontinuing an injectable hospital product because of problems with a third-party contractor it relied on to supply the active pharmaceutical ingredient.

Heparin? Who said anything about heparin?

We are talking about the neuromuscular blocking reversal agents Enlon (edrophonium) and Enlon-Plus (edrophonium/atrophine).

The Food & Drug Administration announced the discontinuation of the drug February 29. The agency keeps track of product discontinuations and shortages to help alert providers to the need to find alternative agents. At a time when cost-cutting and consolidation are industry wide imperatives, these notices have become routine.

Still, you will forgive us for perking up when we saw the announcement about Baxter’s product the day after the company formally recalled all remaining supplies of its heparin product in the US.

It turns out that not all supply chain issues involve Chinese raw material manufacturers.

In this case, the third party supplier is Akorn Inc., which produces edrophonium for Baxter in Decatur, Illinois. Akorn has had some compliance problems of its own, receiving a Warning Letter from FDA last year—and then a follow-up inspection raised more concerns.

Enlon fell into short supply soon thereafter, with the American Society of Health-System Pharmacists alerting members to the issue in December. And on February 18, Baxter sent a terse letter to the trade announcing the discontinuation of the product.

The company notes that there is no relationship between this issue and the heparin investigation.

We can think of at least three critical differences. First, this is purely a supply issue; there have been no unusual adverse events or other issues associated with the product on the marketplace. Second, Enlon is not a widely used product (though, unlike with heparin, Baxter is the sole source provider of the drug). And third, this is a case where the supply chain issue followed an FDA inspection—not, as with heparin, the embarrassing discovery that FDA failed to inspect the right supplier.

But it is a timely reminder that the complexity of the pharmaceutical supply chain is not entirely a function of globalization. After all, Decatur is only about 200 miles from Baxter’s headquarters in Deerfield.

Heparin Investigation: "Unsettling" Indeed

"We at FDA understand how unsettling this whole situation with heparin is."

That is how FDA Office of New Drugs Deputy Director Sandra Kweder wrapped up FDA's latest media teleconference discussing the agency's investigation into adverse event reports associated with Baxter's heparin multi-dose vials in the US.

Unsettling indeed. We have written previously about the ugly turn the investigation has taken, and things keep getting uglier.

Apart from the adverse reactions and potential shortage of a critical hospital product, the heparin story seemingly confirms everyone's worst fears about globalization (though no one knows for sure, the suspicion is that the adverse events result from problems with the raw material sourced from China), FDA (the agency got confused and didn't inspect the Chinese plant in question), and the overall safety of the drug supply (if we see any more pictures of pig intestines in China we are going to be sick.)

In case you missed the latest news, Baxter has now recalled all remaining supplies of the product, having received assurance that the only other supplier, APP, can meet demand in the US. And FDA has completed its inspection of the Chinese facility. The agency determined that it is no longer manufacturing API and--surprise surprise--that there are some "objectionable" issues with its Good Manufacturing Practices compliance.

FDA is not ready to issue a formal regulatory pronouncement about the Chinese facility. However, it did post the standard inspection report (an FD-483--inset above) on its website.

They say a picture is worth a thousand words. The inspection report probably won't do as much to shake public confidence in the drug supply as images of pig intestines at the start of the heparin production process, but for quality control professionals in industry, it takes just 642 words (allowing for redactions) to paint a devastating portrait of the facility.

Our favorite section:

"The inside surface of large, 'cleaned' [Redacted] tanks ...were very scratched, with unidentified material adhering to the insides and the inverted handles held liquid, which spilled to the bottom of the tank when it was uprighted. There was no written procedure showing that the tanks were dedicated to a particular process step. There was no data collected to verify marker and tape volume markings on the outside of the tanks and, the cleaning method was not validated. It was noted that equipment cleaning tags were made of paper and taped to the piece of equipment unprotected from liquids used in the processing room environments."

One prediction: that will definitely not be the last word on the heparin investigation.

Heparin Investigation Takes an Ugly Turn for Baxter, Industry

There's nothing like a picture of pig intestines being sorted in China to dramatize the fears that outsourcing is jeopardizing the safety of the US drug supply.

The picture to the right is just one in a series posted on-line today by the Wall Street Journal, showing the first step in the production process for heparin, one of the mostly widely used hospital pharmaceutical products in the US. (You can see the rest of the pictures here if you have the stomach).

You can expect those photos of the heparin production process to show up again, any time someone wants to question the impact of manufacturing outsourcing in the pharmaceutical industry. Like maybe when House Agriculture Appropriations Subcommittee chair Rosa DeLauro holds a hearing on drug safety issues (and especially the Trasylol controversy) February 27.

The photos accompany a lengthy discussion of the investigation into an apparent increase in adverse reactions associated with Baxter's heparin product, which has been recalled in the US. The Chicago Tribune also weighs in with a story including some comments from Baxter CEO Robert Parkinson.

Now, bear in mind that no one knows for sure at this point that the Chinese facility has anything to do with the heparin adverse events. Not that that will make too big of a difference in how much damage the story will do to confidence in FDA, the industry and the drug supply.

First came the embarrassing admission by FDA that it never inspected the plant in China that serves as one raw material supplier for the product in question. That prompted a key overseer of FDA--Michigan Democrat Bart Stupak--to call for the resignation of Commissioner Andrew von Eschenbach.

But Baxter may face some tough questions of its own--at least based on comments made by top agency enforcement officials during a Food & Drug Law Institute conference February 19-20. According to the Tribune, Parkinson says Baxter wasn't even aware that the plant in question was part of its supply chain, since it was a subcontractor to the firm Baxter relied on for bulk API.

David Elder, director of the agency's Office of Enforcement, pointed out that FDA believes it is the responsibility of the finished dose product manufacturer to assure the quality of its products. He was responding specifically to a question about components of medical devices, not heparin. But he pointedly expanded to his answer to include finished dose pharmaceutical manufacturers being responsible for their suppliers.

Deputy Chief Counsel for Litigation Eric Blumberg also discussed the agency's ability to hold individual corporate executives criminally responsible for allowing adulterated products on the market. The authority--known as the Park doctrine after a Supreme Court ruling upholding the principle--allows FDA to file misdemeanor cases against executives even if there is no evidence of intent or even knowledge of GMP violoations.

The principle, Blumberg reminded FDLI, is that an executive has at least the opportunity to prevent a dangerous product from entering the market, while consumers cannot protect themselves from a contaminated drug once it is in distribution.

If Congress does look more broadly at supply-chain responsibility, things could get really interesting.

Both the Journal and the Tribune quote American Pharmaceutical Products Inc. CEO Patrick Soon-Shiong, asserting the advantages of his company's approach to supply chain management. APP is the big winner (if there is one) in the heparin recall, since its product is now the only one available.

Soon-Shiong has been in the news before. APP was the subject of a front page story in the New York Times in 2002 because of its relationship with the group purchasing organization Premier; that was during a time when Congress was looking into GPO practices following allegations by small device manufacturers that they were being shut out of the market.

Before that, Soon-Shiong played a part in the controversy surrounding generic launches of Bristol-Myers Squibb's paclitaxel (Taxol). APP asserted that a patent it held on a cremaphor free formulation of paclitaxel should block generics of the Bristol product. The issue briefly delayed generic launches and prompted a Federal Trade Commission inquiry. (Bristol ultimately settled a series of antitrust claims regarding its patent defense strategies for several brands; APP was never charged.)

One last thing: APP also has first-hand experience with the challenges of global supply chain management. The company acquired its injectable generic product line from Fujisawa USA in the 1990s. Shortly after the acquisition, APP had to recall injectable gentamicin due to endotoxin contamination. The culprit? A Chinese raw material supplier.

Soon-Shiong should make an interesting witness...