A consent decree is a legal agreement that is reached between a company and FDA. It is usually reached as a result of a company's continual nonconformance with its quality management systems. Continual nonconformance is defined as actions that lead to repeated Form 483 citations to a company regarding deficiencies in current good manufacturing practices (CGMPs) observed during several FDA audits and inspections. A company's unsatisfactory response or a lack of response to warning letters issued by FDA can also be considered to be continual nonconformance. A warning letter is written communication from FDA informing a company that FDA considers one or more products, practices, or processes to be in violation of the Food, Drug, and Cosmetic Act. If a company does not want to enter into litigation with FDA, it may choose to enter into a consent decree. Consent decrees include remedies to correct nonconformance and establish systems to prevent nonconformance from ocurring again.
FDA uses the mechanism of the consent decree to change the overall corporate culture so that the company complies and maintains compliance with regulatory requirements. It is also intended to pull the company out of its long-running CGMP problems and bring it up to current standards. Through the consent decree, the company commits to performing necessary corrective actions in a timely manner. The decree also involves the use of an independent third party to ensure corrective actions are taken. The consent decree may be viewed as the equivalent of a court order under which the manufacturing and distribution of the products can resume with conditions closely monitored by FDA. It is the same as a voluntary agreement, except that it is signed by the company's top official, a United States attorney, and the court. It is filed with the court and submitted to FDA. The consent decree ensures that the company is meeting CGMP guidelines, allows the company to remain in business, and ensures that consumers continue to receive necessary medications of sufficient quality.
Before a consent decree is issued, FDA must show evidence that the agency has made an effort to work with the company to resolve noncompliant situations. First, FDA and the company review the warning letters, 483 citations, and communications. Thus, receiving a consent decree should not be a surprise to the company. After a consent decree is issued, the company may be required to stop production of nonessential or multisource products. The company also may be forced to assign responsibility to a third party for quality assurance functions such as product testing and release, certification of investigation, approval of validation protocols and reports, and annual audits. In addition to paying an upfront fine, the company may be forced to pay additional fines and to delay new product introductions if corrective actions are not completed according to the agreed timeline.
Since 1999, FDA has been permitted to levy fines on corporations. These fines are not considered punitive measures; rather, they are considered a deterrent to bypassing the rules and a way to encourage companies to build better quality into manufacturing systems, reducing the risk that quality will have to be added later, which, in the long run, can be more costly. As noted by Alan Mink of the consulting firm Arnall, Golden and Gregory, "Compliance should not be a cost-benefit exercise" (1).
The number of consent decrees issued per year has remained fairly consistent during the past decade. However, companies have found it difficult to extricate themselves from the agreements. As a result, the number of companies under consent decrees at any given time has increased. Generally, it takes many years for a company to demonstrate that it is in full compliance. Only one company that has received a decree in the past 10 years has met all requirements and had the decree lifted.
Taking into account the fines that can now be levied and the payments to the third party consultants involved, the costs associated with a consent decree can become very high and have a significant effect on profitability. It is estimated that the total cost to Warner-Lambert from 1993 to 2002 of its 1993 consent decree in terms of product terminations, delays in approvals, and bringing facilities and systems into compliance was nearly $1 billion. In the case of Warner Lambert, the fine was only $10 million, a small percentage of the total cost. This was not true for Schering-Plough, whose initial fine was $500 million. Abbott Laboratories, in turn, has spent almost $1 billion as a result of its consent decree issued in 1999, including a fine of approximately $100 million.
The money spent on fines is money that could have been used for the research and discovery of new drugs. A study conducted by the Pharmaceutical Research and Manufacturers Association stated that "between 1980 and 1999, resources dedicated to production/quality control declined by about 20%, while those for R&D and marketing doubled" (1). This difference in the amounts spent on marketing and quality indicates that companies have not been placing the correct emphasis on quality processes and compliance. In spite of the fact that several quality initiatives such as "Quality Circles," "Total Quality Management," and "Statistical Process Control" were being implemented in parallel at many companies, management focus was on profitability and cutting costs to meet Wall Street expectations. By not spending on manufacturing improvements and quality systems, these companies have created environments that are not compliant with FDA guidelines.
Consent decrees: who, when, and why
No company is immune to the risk of receiving a consent decree. Some of the largest and most respected companies have entered ito these agreements with FDA. In most cases, consent decrees have been reached because companies did not have adequate quality systems in place or did not follow the systems that already existed. A consent decree is a last resort option for FDA and is only taken flail other attempts to bring a company into compliance fail. Table I shows a chronological list of the pharmaceutical companies that have received a consent decree in the past 10 years. A description of each decree as well as products affected is discussed below.
Abbott Laboratories. A consent decree was reached in November 1999 for operations nonconformance with quality system regulations after 256 observations were made by an independent consultant. Abbott Laboratories (Abbott) was prohibited from manufacturing or distributing certain in vitro diagnostic products produced at its facility in Lake County, Illinois, and was fined $100 million. Products deemed medically necessary were still distributed from the Lake County facility.
Elan Corporation. In May 2001, Elan Corporation (Elan) signed a consent decree as a result of repeated nonconformance with FDA 483 observations. Elan received two warning letters in the two years before the agreement. In addition, FDA conducted several inspections that revealed a pattern of significant violations at the company's facility in Gainesville, Georgia. The company had replaced its management team and implemented several corrective actions, but this was not enough to prevent a consent decree. The nonconformance included failure to conduct adequate laboratory tests for product release, failure to finish validation activities before release of product, and inadequate maintenance of laboratory equipment and records. The consent decree did not result in any penalties, fines, or product recalls, however. The company hired outside consultants to inspect the facility at least once per year. Under the decree, if FDA finds any nonconformance, the agency may shut down the manufacturing operation until corrective action has been implemented and approved by FDA. Elan's decree can be dissolved in 2006 if compliance has been reached.
Eli Lilly and Company. A consent decree was issued in August 1995. A voluntary agreement had been signed with FDA in 1989 to correct GMP problems in the company's facility in Carolina, Puerto Rico. These problems were resolved, but some postapproval problems with the company's product Lorabid resulted in the 1995 consent decree.
Schering-Plough Corporation. In May 2002 FDA entered into a consent decree with Schering-Plough Corporation (Schering-Plough). This consent decree was a result of problems found with 90% of the company's 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. This decree affects 125 prescription and nonprescription drugs, including Proventil (for asthma), Chlor-Trimeton (a decongestant), theophylline (a generic for asthma), and Afrin (a decongestant). Production was suspended for 73 of the 125 drugs named in the decree, including those listed above. For the drugs that were suspended, alternative products are available on the market.
Warner-Lambert Company. The consent decree entered in August 1993 between FDA and Warner-Lambert was a result of various inspections at the company's plants in Vega Baja and Fajardo, Puerto Rico, which were followed by product recalls and meetings between Warner-Lambert and FDA officials. The decree involved all products made in the two plants. Certain medically necessary drugs were still manufactured and sold under the approval of FDA because a replacement for these drugs was not available on the market. These drugs included Celontin (an anti-convulsant), Chloramphenicol (an anti-bacterial drug), Choledyl (a bronchodilator), Dilantin (an antiseizure medication), Humantin (an anti-parasitic), Ketalar (for osteoarthritis), Loestrin 1/20 (an oral contraceptive), Lopid (for triglycerides/cholesterol), Milontin (an anti-convuslant), Nardil (an anti-depressant), Nipent (an oncology drug), Nitrostat (for angina), and Zarontin (an antiseizure medication).
Under the consent decree, Warner Lambert agreed to the following conditions, which have become typical requirements of consent decrees:
* an independent expert must certify the laboratory of each facility
* all laboratory personnel must be retrained
* outside consultants must certify that manufacturing processes are in compliance with GMPs
* the company must submit expert certification or compliance plans for correcting deficiencies (2).
Watson Pharmaceuticals, Inc. In May of 2002, Watson Pharmaceuticals, Inc. (Watson) agreed to a consent decree with FDA. FDA had performed inspections in 1998 and 1999 of Watson's facility in Corona, California, and had issued a warning letter each time. Inspections after the 1999 warning letter resulted in three additional 483 citations. Watson also issued two product recalls for nonconformance in the 18 months before the agreement was reached.
Wyeth. In October of 2000, Wyeth reached an agreement with FDA to enter into a consent decree involving the company's sites in Marietta, Pennsylvania, and Pearl River, New York. The agreement followed several warning letters to various plants that resulted from inspections in 1995, 1996, and 1998 in which several GMP deviations were found. As a result of the consent decree, the company
* paid an initial free of $30 million
* is undergoing a comprehensive CGMP inspection by outside expert consultants
* has hired expert consultants to review the company's quality assurance and quality control programs and its management systems
* must pay FDA 18.5% of all sales of its FluShield vaccine, because the vaccine is needed but is manufactured at the noncompliant location. This 18.5% is essentially the profits from sales.
Other Companies. During the same period, nine other companies entered into consent decrees with FDA (see Table II).
Effect on companies
FDA has been increasingly concerned with the manufacturing practices in the pharmaceutical industry. FDA is becoming more forceful in pressuring companies into making what the agency considers necessary improvements. In 1999, FDA received author@ from Congress to pursue the profits of companies that continually demonstrate nonconformance in their quality systems. According to Lester Crawford, deputy commissioner of FDA,
It is interesting to review the history of companies that have received consent decrees to see how the decrees affected the companies' future. Five of the sixteen companies that received consent decrees between 1993 and 2002 subsequently were either sold or acquired. Although the mergers and acquisitions may not be directly attributable to the consent decree, the timing of the events leads one to wonder if a connection exists. Below is a general list of the recent history of these companies.
* Steris: consent decree in October 1998; purchased by Schein, Inc. (later acquired by Watson).
* Centeon: consent decree in January 1997; now part of Aventis
* Biocraft: consent decree in July 1994; merged with TEVA.
* Warner-Lambert: consent decree in August 1993; acquired by Pfizer.
* Pennex: consent decree in July 1993; now operated by Morton Grove.
Data available for major companies provide insight into how the consent decree affected profitability and other business activities.
Abbott. Abbott, according to its 1999 annual report, had a onetime charge of $168 million against its operations that year. This included a $100-million fee to FDA, $44 million for contractual obligations, and $24 million in inventory. The following year, sales declined by $250 million. All of these charges were a direct result of the consent decree. The losses were expected to continue, and the total loss was expected to exceed $1 billion by the end of 2003. Indirectly, Abbott's potential $7.3 billion acquisition of Alza failed, in part because of the decree. In June 2002, Abbott stated that it would take charges of $0.06 per share in the second quarter and $0.07-$0.09 per share for the year (which equates to $140 million) as a continued result of the consent decree and payments to the government (4). This equates to 16% of the revenue generated in the United States by the drugs deemed medically necessary that are still being manufactured while under the decree. This charge also covers expenses for ongoing quality work, eroded market share, and cancellation of new product launches. Abbott paid another $112 million in fines to FDA for a failed follow-up inspection. Abbott has submitted 14 process validations studies. These validation documents averaged 6000 pages each and accounted for 60,000 personnel hours per process. At a cost of approximately $150 per hour for expert consultants, this equates to a cost of about $126 million (5). The company also carried out more than 250 product-specific validations that totaled more than 2.6 million personnel hours (at a cost of approximately $350 million). Finally, more than 1500 employees were retrained (1).
Eli Lilly. As a result of a consent decree, the approval of two new drugs was delayed. This occurred when GMP noncompliance was found during the preapproval inspections in the fall of 2001, six years after the agreement was reached.
Schering-Plough. 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 earning per share (EPS) growth estimate from the low double digits to the single digits (6). Production was suspended for 73 of the 125 drugs affected by this decree. All future sales of these drugs are jeopardized by the decree, and the company must now determine which drugs will be discontinued and which products the company will continue to manufacture after the suspension is lifted. Claritin alone was worth $250 million in lost profits to the company for 2002. The company decided to suspend the production of certain animal health products at the Puerto Rico site. Sales from these products were worth $44 million in 2001. In addition, FDA approval of Clarinex was delayed by a year as a result of the ongoing nonconformance. Schering worked with FDA to limit the number of facilities producing Clarinex (to reduce the risk of plant-to-plant variations), and the drug was subsequently approved, but potential sales from the expected time of approval to the actual time of approval were lost. For comparison, sales of Claritin were approximately $2 billion in the first year. 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. This means that effective patent protection for the drug (the number of years the drug is sold while under patent) was decreased by one year. If Clarinex is similar to Claritin in sales, this will mean more than $1 billion in lost sales. Worldwide sales of Claritin and Clarinex combined for 2002 were less than $3 billion. By comparison, 2001 sales for Claritin 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 the sales of Clarinex will not grow at the same rate that Claritin decreases. Overall, sales of key products declined 10% in the year following the decree (see Table III).
In addition, if the actions agreed to in the consent decree are not met according to the timeline established, the company will incur the following additional costs
* a $15,000 daily payment for each deadline missed, not to exceed $50 million per calendar year and not to exceed $175 million through 2005
* a royalty payment of 24.6% for each product not revalidated within the timeline
* payments to FDA to cover the cost of all inspections required during the course of the agreement, including $500,000 for the inspections already carried out.
Warner-Lambert. Not only did Warner-Lambert have to abide by the rules stated in the above section, there was a criminal investigation of key personnel. In November 1995 the company pleaded guilty to charges of intent to defraud and mislead the government. The company was fined $10 million and a company official was prosecuted and later acquitted. A leading consulting company served as an expert consultant to Warner Lambert at three of the company's Puerto Rico plants. Warner Lambert employed more than 30 consultants for 20 months at the three sites. At about $150 per hour, this equates to approximately $15 million for this consulting company alone. Warner Lambert also hired consultants for other sites.
Watson. Watson added more than 30 employees to its quality assurance department as a result of its consent decree. In addition, the company has hired an outside consulting firm to conduct regular independent audits of the affected facility in Corona, Puerto Rico. Twenty-six of the company's 170 products are manufactured at the affected site, but because no product suspensions occurred as a result of the decree, the impact on the company's revenue was minimal.
Wyeth. Under the consent decree, the company paid a onetime fee of $30 million to the government, with an additional $15,000-per-day fine for each day out of compliance past the deadline (capped at $5 million). In January of 2001, Wyeth discontinued its vaccine for DtaP (Acel-Imune), which had sales of $71 million in 2000. The product's discontinuation was a direct result of the consent decree and an evaluation of the company's product portfolio. For 2001, Wyeth paid more than $267 million in charges as a result of the decree (a fine plus product discontinuation and other costs). The company also closed two manufacturing facilities.
Effect on consumers
Fortunately, none of the consent decrees discussed here pertained to products that were deemed unsafe for human use. All drugs that had been sold previously were safe for use, and certain drugs not yet in circulation were recalled. Customers who were using these drugs had to try to adjust to alternatives, but were not faced with serious risk. According to David Feigal, MD, 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" (7).
Consent decrees can put a strain on the inventory systems at pharmacies and hospitals. The decrees affect the formularies of health maintenance organizations and limit the drugs that physicians have available for dispensing. Of course, drugs that are deemed critical are not removed from the market; drugs are only suspended if there is an "alternative available. This causes some extra work for formularies and hospitals, but it does not result in drug unavailability for patients. Because most drugs involved in consent decrees are not suspended, there is little impact on the cost of the product.
Effect on investors
Many of the companies that have entered into consent decrees in the past decade are publicly owned corporations. People who invest in pharmaceutical companies expect that the firms are operating safely and effectively and are meeting government requirements. A consent decree can decrease investor confidence in the company and result in a decline in the stock price. This decrease may be short term or long term, depending on the company's response to fix the problems. The severity of the fines and of the product recalls also affects the significance of the stock price change. The following examples describe the reactions of the investment community to the announcements.
Abbott. In 1999, Abbott's EPS declined $0.10 per share as a result of its consent decree. Before the consent decree was issued, Abbott's share price had reached a high of approximately $50. Although the share dropped slightly when the decree was announced, strong product sales continued to push the stock up to approximately $55 per share. However, in June of 2002, Abbott forecasted a $0.07 EPS decrease for the year (from $2.13 to $2.06), and the stock price dropped 16% on 12 June 2002 (from $45.67 to $38.30). Therefore, it was not until the earnings decrease announcement that the stock took a significant drop (see Figure 1). By 14 November 2002, the stock price had recovered somewhat, rising to $43.96.
[FIGURE 1 OMITTED]
Schering-Plough. Schering-Plough announced a decrease in its expected EPS for 2002 as a result of its consent decree. Standard and Poors recommended avoiding Schering-Plough stock because of the expectation of low EPS and high risk of regulatory and criminal actions. Schering's stock had reached an all-time high in the 1999-2001 timeframe. As issues with FDA began to surface and the chance of a government action became more real, the stock steadily declined. The agreement reached with FDA in May of 2002 caused an even bigger drop in the price. The company has not been able to recover from these declines (see Figure 2).
[FIGURE 2 OMITTED]
Watson. The stock price dropped 10% ($30 to $27) in 2002 following the announcement of Watson's consent decree. Since then, however, the price has been recovering gradually (see Figure 3).
[FIGURE 3 OMITTED]
Wyeth. Wyeth's stock price was at a high around March 1999. The announcement of a consent decree in October of 2000 did not have a perceivable effect to the stock price. The fine imposed the government was not very high in comparison with those paid by Schering-Plough and Abbott. In addition, no products were recalled from the market and no product manufacturing was suspended. It was not until the recent controversy regarding hormone replacement therapies that the stock took a significant drop (see Figure 4).
[FIGURE 4 OMITTED]
Consent decrees are a burden to both the company and FDA. Not only does the company incur costs, pay fines, and lose profits, but FDA must support the agreement with resources and extra effort. This may draw FDA resources away from other functions such as reviewing new drug applications and conducting quality audits.
The warning letters and consent decrees that have been issued in the past decade offer a good starting point for reviewing FDA policies and guidelines. An evaluation can be performed of the effectiveness of the current policies and indicate which areas may need to be revised. FDA's new approach to changing technology and the marketplace offers both companies and FDA a chance to broaden their views, to the benefit of everyone involved. Mark Brown, an attorney with King & Spalding (Washington, DC) 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" (8). In August 2002 FDA launched its initiative, "CGMPs for the Twenty-First Century: A Risk-Based Approach," which outlined the agency's new risk-based inspection model for future compliance evaluations. This model is based on three criteria: patient exposure to the product; the risk inherent in different formulations of a drug; and the GMP-compliance record of the manufacturer (9). The model would help FDA prioritize inspections and optimize the use of its resources. This proposed model makes it clear that higher priority will be given to inspecting companies that have been noncompliant in the past. This again points out the need for quality to be built into a manufacturing system instead of being imposed as a corrective action. Because of price competition, companies cannot simply raise the price of the drugs to offset FDA frees and consultant costs; they must get this money by reducing spending on marketing and sales or by issuing shares or reducing shareholder dividends. If no large fines are involved and manufacturing is not suspended, most consumers never hear of the decree or how it affects to the company.
Consent decrees are considered to be the last resort by FDA with respect to noncomplaint companies. 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 the GMP-guidelines and spending the money upfront to design quality into the process. Companies generally find it difficult to extricate themselves from consent decrees; therefore, companies should consider them almost permanent. Only one company out of the 16 companies reviewed in this study has had its consent decree lifted by the court. From a financial standpoint, both investors and companies are negatively affected by these agreements. 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 some manufacturing processes are suspended, the loss is even greater because direct revenues are affected. Without the profits and investor backing, the company loses available cash for marketing, sales, and R&D, and, as a result, must reduce spending. This results in profit losses. A downward spiral is difficult to prevent, and the company must be very proactive in making corrections and spending efficiently to prevent this from happening. Maintaining a positive investor relationship is a key to not bottoming out in the market.
Considering these effects of consent decrees, the philosophy of management should be that quality systems and process compliance are critical to the company's advancement. Corners must not be cut when creating these systems. A company may have the most advanced marketing and sales and R&D in the industry, but without a sound quality system and firm compliance guidelines, it cannot prevent FDA from shutting the company's doors. If a company builds quality into its design, it prevents problems down the road.
Consent decrees continue to have negative connotations in the industry. They are expensive to the company and can certainly have a short-term negative impact on investors. The good news for the companies involved is that the company is allowed to remain in business, as long as corrective actions are being implemented and the proper actions are being taken to ensure compliance. In the long term, consent decrees can actually be considered positive, because they can lead to improvements in manufacturing processes and quality control. Through consent decrees, FDA ensures that the industry takes drug safety and efficacy seriously and can evaluate the effectiveness of GMP guidelines, which reinforces the agency's effectiveness. Finally, the effect of consent decrees on consumers is minimal. Consumers continue to receive medically necessary drugs without any safety risk, which is good news to both 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 companies can continue to develop new technologies and medical advancements for the coming years.
(1.) Alan Minsk, "GMP Consent Decrees," The Gold Sheer 36 (6), June 2002.
(3.) "Drug Maker to Pay $500 Million for Quality-Control Problems," Detroit News, 18 May 2002.
(4.) "Abbott Laboratories Cuts Earnings Forecast," The New York Times, 12 June 2002.
(5.) Comment from an independent consultant for the pharmaceutical industry.
(6.) "Still Sell Schering-Plough," Business Week Online (www.businessweek.com), 17 May 2002.
(7.) Dear Colleague letter: Abbott Laboratories Consent Decree, http://www.fda.govcdrh/ocd/abbottletter.html.
(8.) The Silver Sheet, 6 (7), (July 2002).
(9.) FDA, "Pharmaceutical CGMPs for the Twenty-First Century: A Risk-Based Approach," FDA News, 21 August 2002.
The World High Technology Society has issued calls for sponsors, media partners, scientific advisers, presentations, and posters for the 2004 Third Annual International Life Spring Forum of Biosciences: Interface of Biotechnology and Information Technology to be held in Dalian, China on 13-15 May 2004. This program has been designed for world-leading scientists and international entrepreneurs and will cover topics such as "Functional genomics and proteomics advancement in oncovirology" and "Modern Techniques: 3D NMR in decoding the structures of macromolecules." For submission requirements and registration information, visit www.whts.org/lifespring/2004.htm.
Suggy S. Chrai * and Michele Burd
* To whom all correspondence should be addressed.
Suggy S. Chrai, PhD, is president of Chrai Associates, Inc., 16 Bodine Drive, Cranbury, NJ 08512, tel. 609.655.2573, fax 609.655.2573, email@example.com. Michele Burd is a contract account manager at Johnson & Johnson Consumer Products Company, Skillman, NJ.
COPYRIGHT 2004 Advanstar Communications, Inc.
COPYRIGHT 2004 Gale Group