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Pharmaceutical Law
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Reproduced with permission from Pharmaceutical Law & Industry Report, 12 PLIR 41, 10/17/2014. Copyright 姝2014 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com Manufacturing Trouble: Is cGMP the Next Enforcement Frontier? BY EMILY R. SCHULMAN, MICHAEL J. BAYER AND departments are, by now, quite familiar. But many com-panies view cGMP issues through a regulatory prism, treating them simply as technical, operational concernsthat pose relatively little risk of civil liability, let alone federal criminal enforcement. Given DOJ's increasedfocus on cGMP violations as a potential basis for crimi- Current Good Manufacturing Practices (‘‘cGMP'') nalandcivilliability,companiesshouldrethinkthatap- may mark the next frontier in health care fraud proach and refocus their attention and legal resources enforcement. While pharmaceutical and medical on cGMP before serious problems arise.
device manufacturers have faced scrutiny from the De-partment of Justice (‘‘DOJ'') for decades,1 those en- Many pharmaceutical and medical device manufac- forcement activities have largely focused on off-label turers relegate cGMP issues to their quality groups, of- marketing and enforcement of the Anti-Kickback Stat- ten with little or no oversight by, or involvement from, ute, areas in which most in-house legal and compliance their in-house legal departments. Two related develop-ments call this approach into question. First, the Foodand Drug Administration (‘‘FDA'') recently has ramped 1 In fiscal year 2013, the federal government recovered ap- up its own enforcement efforts with respect to cGMP proximately $4.3 billion dollars in criminal fines and civil deficiencies. In fiscal year 2013 alone, the FDA issued settlements related to health care fraud, a substantial portion over 5,000 Form 483 observations and approximately of which came from pharmaceutical and medical device com- 700 non-tobacco Warning Letters, a substantial fraction of which related to cGMP issues. Second, DOJ is flex-ing its health care enforcement muscle by increasinglyeyeing cGMP violations as potential criminal and/or Emily Schulman is a partner in WilmerHale's civil violations that fall within its domain. In some re- Boston office and a member of the firm's spects, the uptick in regulatory activity paves the way Litigation/Controversy and Securities Depart- for DOJ's expanded enforcement efforts because the ments. She may be reached at (617) 526-6077 FDA's increased documentation of cGMP deficiencies provides DOJ a roadmap for investigating and building Michael Bayer is a counsel in WilmerHale's cases against pharmaceutical and medical device manu- Boston office and a member of the firm's facturers for alleged cGMP violations.
Litigation/Controversy and Securities Depart- DOJ has made no secret of its intention to aggres- ments. He may be reached at (617) 526-6303 sively step up enforcement of cGMP. In January 2013, Deputy Assistant Attorney General for Consumer Pro- Joshua Sharp is an associate in WilmerHale's tection Maame Ewusi-Mensah Frimpong warned that Boston office and a member of the firm's manufacturers who disregard cGMP do so ‘‘at their Litigation/Controversy Department. He may peril'' and that the government would ‘‘be taking an es- be reached at (617) 526-6098 or pecially hard look whenever patients are placed at an unacceptably high risk of harm by . . violations of cur-rent good manufacturing practices.'' In August 2013, COPYRIGHT 姝 2014 BY THE BUREAU OF NATIONAL AFFAIRS, INC.
Jeffrey Steger, Assistant Director for DOJ's Consumer that the violator intended—or even knew about—the Protection Brach, noted that DOJ is working more violation. Second-time offenders, and those who act closely with FDA, and that the government has been re- with ‘‘the intent to defraud or mislead,'' are subject to ceiving an increased number of cGMP referrals from in- felony criminal liability. Separately, manufacturers can dustry whistleblowers. And at the Pharmaceutical Com- also be subject to criminal liability for making materi- pliance Congress in January of this year, Carmen Ortiz, ally false or fraudulent statements to the government, the United States Attorney for the District of Massachu- including statements made in connection with New setts, reportedly noted that investigating the manufac- Drug Application submissions, required periodic fil- ture of adulterated drugs was a top priority for her of- ings, and even to FDA inspectors during routine inspec- fice. Consistent with this trend, the FDA's Pharmaceuti- cal Fraud Program (‘‘PFP'') opened 23 new criminal The direct financial consequences of a FDCA convic- investigations in FY 2013, including seven that involve tion or plea can be devastating. Significantly, the stat- allegedly ‘‘flagrant manufacturing practices.'' The PFP ute provides the same range of potential penalties for also recently announced that another ongoing investi- selling a drug or device manufactured with a minor gation of a ‘‘large drug manufacturer for serious and cGMP deviation as for selling one that wholly fails to pervasive manufacturing violations'' has begun to meet its FDA-approved specification. Any criminal con- ‘‘show promise'' of judicial action, including possible viction or plea—even a misdemeanor—is punishable by a criminal fine of $500,000 per violation, or twice the As the government's enforcement priorities evolve, pecuniary gain or loss associated with the criminal con- manufacturers must ask themselves if they are ready duct, whichever is greater. The government can also en- for increased scrutiny of their manufacturing opera- force compliance by seeking a lengthy term of proba- tions and cGMP compliance programs. Fortunately, tion or requiring that a company enter into a Corporate there are a number of steps that companies can take Integrity Agreement as a condition of settlement. These now to enhance their manufacturing practices and im- nonmonetary remedies can require companies to re- prove their cGMP compliance programs in ways that vamp their compliance programs, hire independent will help reduce the risk of DOJ action. After a brief monitors, and impose onerous self-reporting obliga- overview of the legal framework for DOJ enforcement tions. They can also include expedited procedures for of cGMP regulations, we review recent developments in imposing additional penalties in the event new viola- the cGMP enforcement landscape and offer some tions are discovered. Depending on the nature of the common-sense strategies that can help manufactures conviction, the government can also seek, in certain cir- prepare for increased cGMP scrutiny in the years cumstances, to debar or exclude an offender from par- ticipation in federal healthcare programs—the effectivedeath knell for most pharmaceutical and medical device II. Legal Framework A. The Federal Food, Drug & Cosmetic Act B. The False Claims Act The Federal Food Drug & Cosmetic Act (‘‘FDCA''), The government may also choose to litigate cGMP prohibits, among other things, the ‘‘introduction or de- violations under the federal False Claims Act (‘‘FCA'').
livery for introduction into interstate commerce'' of any The FCA imposes civil liability on those who ‘‘know- drug or medical device that is adulterated or mis- ingly present[] or cause to be presented'' to the govern- branded. A drug or medical device is ‘‘adulterated,'' if, ment ‘‘false or fraudulent claim[s] for payment.'' In the among other things, it is manufactured in a manner that cGMP context, the government has alleged that claims does not conform with cGMP regulations promulgated submitted to federal healthcare programs for reim- by the Department of Health and Human Services.
bursement of adulterated products not manufactured in cGMP regulations require companies to have systems conformance with cGMP are false, and that pharmaceu- in place to assure the proper design, monitoring, and tical manufacturers knowingly cause the submission of control of their manufacturing processes and facilities.
those false claims when they ship adulterated products The regulations are designed to be flexible—as they in interstate commerce. Violators are subject to a pen- must be—in order to cover a wide variety of manufac- alty of $5,500 to $11,000 for each false claim they pres- turing environments and evolving technical standards.
ent or cause to be presented, plus up to treble damages.
But, this flexibility necessarily leads to ambiguity, and A unique qui tam provision that allows individuals to determining exactly what cGMP requires in any given bring FCA actions in the name of the United States and context can be a difficult task. As former FDA chief collect fifteen to thirty percent of the government's re- counsel Peter Barton Hutt has stated, ‘‘it is very diffi- covery creates a powerful incentive for employees and cult, if not impossible, to determine the requirements of other company insiders to become whistleblowers GMP compliance simply by looking at the statute and when they learn of potential compliance issues.
Recently, however, the United States Court of Ap- cGMP regulations are primarily enforced by FDA peals for the Fourth Circuit rejected a relator's legal through an administrative regime of inspections, Form theory that cGMP violations can form the basis of an 483 observations, Warning Letters, civil injunctions, FCA action. In United States ex rel. Rostholder v. Om- consent decrees, and civil fines. But the very same nicare, Inc., 745 F.3d 694 (4th Cir. 2014), cert denied, cGMP violations that can lead to FDA enforcement ac- No. 13-1411 (Oct. 6, 2014), a former pharmacist and op- tion can also carry criminal liability under the FDCA.
erations manager for an Omnicare subsidiary alleged Even seemingly minor or ‘‘technical'' deviations from that the company violated cGMP by packaging both cGMP can potentially be prosecuted as criminal misde- penicillin and non-penicillin products in the same build- meanors. Misdemeanor liability in this context is strict, ing, with inadequate separation and controls to prevent meaning that the government does not need to prove cross-contamination. The relator alleged that drugs COPYRIGHT 姝 2014 BY THE BUREAU OF NATIONAL AFFAIRS, INC.
manufactured in facilities with cGMP violations were ated products stemming from cGMP violations involv- adulterated under the FDCA, and that claims submitted ing the manufacture of Paxil CR and Avandamet and to Medicare and Medicaid for reimbursement of such violations of the False Claims Act.2 Specifically, the adulterated drugs were therefore false. While the gov- government claimed that the Paxil CR manufacturing ernment declined to intervene in the case, it filed a process allowed certain two-layer tablets to split, result- statement of interest, in which it argued that certain ing in the distribution of some Paxil CR tablets that types of cGMP violations, particularly those that render lacked any active ingredient, and some that lacked any a drug useless or give rise to discrepancies in the com- controlled release mechanism. The government simi- position of the drug, are material to the government's larly alleged that certain tablets of Avandamet did not reimbursement decision and can therefore serve as the contain the FDA-approved mix of active ingredients.
basis of a false claim.
Then, in May 2013, generic manufacturer Ranbaxy The Fourth Circuit acknowledged that the relator's Laboratories, Ltd. pleaded guilty and agreed to pay alleged cGMP violations rendered the drugs adulter- $150 million in criminal penalties, plus $350 in civil ated, but found that such violations were not, by them- damages and penalties, to resolve charges of misbrand- selves, sufficient to trigger FCA liability. According to ing, distributing adulterated products, making false the court, an FDA-approved drug is reimbursable under statements, and violations of the FCA relating to signifi- the Medicare and Medicaid statutes, and ‘‘the submis- cant cGMP violations at several of its Indian facilities.
sion of a reimbursement request for [an FDA-approved] The alleged cGMP violations included, among other drug cannot constitute a ‘false' claim under the FCA on things, Ranbaxy's submission of false stability study the sole basis that the drug has been adulterated as a data to FDA, ‘‘nonexistent'' cGMP training, and numer- result of having been processed in violation of FDA ous deficiencies in Ranbaxy's internal investigations, safety regulations.'' Rostholder at 701-02. The court recordkeeping, stability assessment program and cross- also expressed general discomfort with the idea of us- contamination prevention controls.
ing the FCA to enforce cGMP violations, stating: And as recently as October 2, 2014, DOJ filed a com- Were we to accept relator's theory of liability based merely plaint for permanent injunction in the District of New on a regulatory violation, we would sanction use of the FCA Jersey against a medical device manufacturer, Pharma- as a sweeping mechanism to promote regulatory compli- ceutical Innovations, Inc. (‘‘PII''), and its owner, Gilbert ance, rather than a set of statutes aimed at protecting the Buchalter for, among other things, violations of cGMP.
financial resources of the government from the conse- DOJ alleged that, despite multiple meetings with the quences of fraudulent conduct. When an agency has broad FDA, the issuance of multiple Form 483 observations, powers to enforce its own regulations, as the FDA does in and a Warning Letter, PII failed to comply with cGMP this case, allowing FCA liability based on regulatory non- regulations regarding process validation, production compliance could ‘‘short circuit the very remedial processesthe Government has established to address non-compliance and process controls, corrective and preventative ac- with those regulations.'' tions, and purchasing controls. In addition to the cGMPfailures, DOJ also alleged that PII failed to properly Rostholder at 702 (quoting U.S. ex rel. Wilkins v. alert the FDA when it became aware that sixteen surgi- United Health Grp., Inc., 659 F.3d 295, 310 (3d Cir.
cal patients at a Michigan hospital developed infections traced to a PII ultrasound transmission gel.
Although the significance of the Rostholder decision In contrast to the GSK, Ranbaxy and PII cases, in remains to be seen, it seems unlikely to deter the gov- which product adulteration allegations raised safety ernment from pursuing FCA actions premised upon and efficacy questions, the DOJ has declined cases cGMP violations, particularly where those violations where the alleged cGMP violations at issue presented materially affect the strength, quality, or purity of a less serious risks to product safety or quality.
drug. It is also unclear what impact the decision willhave in other circuits that, unlike the Fourth Circuit,recognize the more lenient ‘‘implied certification'' IV. Recent Developments in cGMP theory of liability. On October 6, 2014, the Supreme Court denied certiorari in the Rostholder matter, leav- While much of the recent attention in the cGMP en- ing this issue unresolved for now.
forcement sphere has focused on the GSK, Ranbaxy,and Rostholder cases, a number of other recent events III. DOJ's Approach to cGMP Enforcement Is provide valuable insights into the government's view of the importance of cGMP compliance. In one recent The approach DOJ appears to be taking with respect case, FDA announced that it was withholding approval to the prosecution of cGMP cases is in many ways con- of a new drug until its manufacturer corrected previ- sistent with that which it has used to prosecute other ously identified cGMP deficiencies at the proposed forms of healthcare fraud. Among other things, DOJ ap- manufacturing facility. Those deficiencies, which FDA pears to be focused not on technical cGMP violations, had detailed in a Warning Letter, included the failure to but on cases that involve real quality issues, actual investigate critical deviations and to reject products that product adulteration, and/or a risk of patient harm. This did not meet specification. Significantly, FDA did not focus is particularly evident in two of the most heavily request any additional studies concerning, and has not covered cGMP cases in years, as well as a recent com- expressed any significant concerns about the new plaint filed in the District of New Jersey.
drug's safety or efficacy. Thus, FDA's decision, while First, in October 2010, SB Pharmco Puerto Rico Inc.
(‘‘SB Pharmco''), a subsidiary of GlaxoSmithKline 2 In the related qui tam action, GSK agreed to pay $600 mil- (‘‘GSK''), pleaded guilty and agreed to pay $750 million lion to settle FCA and related state law claims involving allega- in criminal fines, forfeitures and civil damages to re- tions that it sold drugs whose strength, purity, and quality dif- solve charges of misbranding and distributing adulter- fered materially from their FDA-approved specifications.
PHARMACEUTICAL LAW & INDUSTRY REPORT not unprecedented, reflects the seriousness of the gov- B. Understand Your Products and How They ernment's commitment and its willingness to put cGMP compliance above other financial and public health in-terests.
Robust and effective cGMP compliance also requires a deep scientific and technical understanding of every The government has also recently signaled an intent product the company manufactures, and every process to hold distributors accountable for overseeing manu- used to manufacture each product. It requires a funda- facturing operations performed by third party contrac- mental understanding of which process parameters are tors. In the spring of 2013, FDA sent Warning Letters to key to successful manufacturing and which variables five dietary supplement distributors citing their failure drive process failures. Achieving this depth of under- to implement and maintain an adequate quality release stating can be challenging for companies that manufac- program for supplements manufactured for them by ture legacy products, particularly where robust devel- opment data are not readily available. But even where States v. Park, 421 U.S. 658 (1975), FDA admonished such data are limited, companies must be vigilant about each company that, ‘‘[a]lthough your firm may contract identifying, investigating, and correcting manufactur- out certain dietary supplement manufacturing opera- ing deviations and monitoring manufacturing trends to tions, it cannot, by the same token, contract out its ulti- help detect process problems before they affect product mate responsibility to ensure that the dietary supple- quality. Companies must also effectively monitor, track, ment it places into commerce (or causes to be placed and investigate any customer complaints that involve into commerce) is not adulterated for failure to comply product quality.
with dietary supplement CGMP requirements.'' Thus,the government asserted, the distributors are ‘‘respon- C. Take a Holistic Approach sible for ensuring that the product is not adulterated forfailure to comply with dietary supplement CGMP re- Companies must take a holistic approach to cGMP quirements, regardless of who actually performs the di- compliance. Modern pharmaceutical and medical de- etary supplement CGMP operations.'' Although the vice companies often operate through a multinational government had not yet pursued this expansive theory network of corporate entities, divisions, and business of liability in a criminal cGMP case, these Warning Let- units, each with its own corporate structure, operating ters demonstrate the risks that companies who lack budget, and management authority. But the govern- their own manufacturing operations can face as govern- ment often takes a more monolithic view of these orga- ment scrutiny of cGMP increases.
nizations, and can be unsympathetic to claims of corpo-rate separateness. For example, the government oftenexpects companies to assess whether cGMP issues V. Mitigating the Risks identified at one site are present at others, and if so, to As the government sharpens its focus on cGMP, an remedy those issues even where they fall under the pur- increasing number of companies will find their manu- view of a legally separate entity.
facturing, quality, and compliance programs underscrutiny from a variety of government agencies, includ- D. Prioritize Responses to FDA Observations ing FDA and DOJ. Companies would be well served to and Whistleblower Complaints take a hard look at their manufacturing, quality and Companies must also take seriously any issues iden- cGMP compliance programs now, before they come un- tified by government inspectors or their own employ- der the microscope of a government investigation, to ees. Rarely does DOJ surprise a company by investigat- ensure that they are prepared. Fortunately, companies ing an issue that is completely new or foreign to key can take a variety of steps to enhance their manufactur- members of its manufacturing, quality or compliance ing practices, quality systems and compliance programs groups. Indeed, most of DOJ's recent cGMP investiga- in order to help reduce the risk of an investigation and tions have focused on problems that were the subject of bring any investigations that do arise to a swift, and repeated Form 483 observations, FDA Warning Letters hopefully favorable, conclusion.
and/or employee complaints. Internal whistleblowercomplaints are also important. Such complaints played A. Prioritize and Incentivize cGMP a key role in the Ranbaxy case, as the company's fail-ure to promptly and thoroughly investigate and respond to whistleblower complaints provided impetus for DOJ Any successful compliance program begins with the ‘‘tone at the top,'' and cGMP compliance is no different.
To help reduce the risk that problems identified by Senior management must make cGMP compliance a FDA inspectors and employee whistleblowers will re- priority and continually reinforce its importance. While sult in a DOJ investigation, companies should: proper messaging is important, prioritizing and rein-forcing cGMP means more than just ‘‘talking the talk.'' s Foster an open an collaborative corporate culture, It also means ensuring that the company has an inde- in which management respects and encourages pendent quality assurance function, backed by ad- employee feedback, and in which employees feel equate funding and resources, and staffed with dedi- comfortable reporting issues to their managers cated employees who have received proper cGMP train- without fear of retaliation; ing. It means ensuring that every employee who s Maintain clear, transparent dialogue with FDA, touches the manufacturing process and supply chain both during inspections and in response to any re- understands that cGMP compliance is a key part of his sulting Form 483 observations; or her job. And it means creating appropriate mecha-nisms and incentives to encourage all employees to de- s Prioritize the remediation of issues identified dur- tect, report, and correct cGMP issues when they arise.
ing FDA inspections and devote adequate re- COPYRIGHT 姝 2014 BY THE BUREAU OF NATIONAL AFFAIRS, INC.
sources to remediation so that such issues are cor- E. Integrate Legal Into Key Aspects of rected in a timely fashion; cGMP Compliance Program s Make internal cGMP compliance and investigation Finally, in light of the current enforcement environ- policies transparent to employees; ment and the potential risks involved, now is the timefor companies to integrate in-house counsel into their s Ensure that employees have anonymous channels cGMP compliance programs, much as they have done for reporting cGMP issues that they do not feel in the sales and marketing spheres over the past de- comfortable reporting to their managers; cade. Among other things, counsel can bring consider-able expertise to bear in identifying and assessing en- s Investigate reports of cGMP violations thoroughly, forcement risks associated with cGMP issues, and by credibly and objectively; reviewing and commenting on FDA communications tohelp avoid unintentional admissions or misstatements.
s Where necessary, hire outside consultants with Members of the legal department can also oversee, ad- appropriate technical expertise and/or knowledge- vise on, or even conduct internal investigations of able attorneys to lead or assist in investigating whistleblower complaints and help guide other cGMP- cGMP problems; and related investigations. And, in-house attorneys candraw upon their networks of experienced outside coun- s Drive investigations to completion, and implement sel to obtain more particularized advice, to conduct recommended remedial actions, including disci- larger investigations, and to defend the company in the plinary actions, where necessary and appropriate.
event a DOJ investigation does arise.
PHARMACEUTICAL LAW & INDUSTRY REPORT

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