Pharma compliance issues

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I have been always confused as to why pharma companies run into compliance issues as they grow larger. A good book on this is the bottle of lies which describe Indian and Chinese pharma compliance issues in a lot of detail.

So far here are my key takeaways:

  • As the product basket grows larger, the complexity of operations increase leading to more potential problems
  • Indian pharma employs a lot of contract workers who do not share the same incentive structure as a regular employee
  • Different range of products have different aseptic requirements. Thus as a company grows in the value chain towards higher margin products (like injectables), aseptic practices become more important

To understand this, lets see the major forms in which a medicine can be delivered:

  • Oral solids
  • Injectables
  • Inhalers
  • Solutions
  • Powders
  • Topicals

Oral solids are the lowest in value chain (in terms of aseptic requirement), injectables require completely sterile practices (because they are directly injected in blood), inhalers are technologically more complex, etc. The level of sterilisation is much more important for an injectable facility when compared to an oral dosage facility. Additionally, India is not known for its hygienic practices. The broader question I am trying to answer is whether compliance is a cultural thing (hence company specific) or if it has more to do with the kind of products that are being supplied from a given facility.

To this quest, I am planning to have a long form conversation with Amit Ranjan (https://www.linkedin.com/in/amit-rajan-695a48/) who is a pharma consultant and works in compliance. It will be really useful if I can get inputs from the community to ask relevant questions that may improve our understanding on pharma compliance issues. Ideally, I would like to know if by looking at the pipeline of a company, can we estimate the level of compliance risk (like issue of a warning letter)?

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Hi harsh,

Thanks for starting this thread. Past and future compliance record is definitely a very interesting and important dimension along which we should analyse potential pharma investments. Ill follow this thread closely to learn from others experiences. My 2 cents based on whatever I have read and understood is that one has to understand company specifics as well. On the one hand, some companies seem to make compliance a culture and on the other extreme companies seem to treat it as a hurdle to be crossed. Of course, the vast majority falls somewhere in the middle and have to be evaluated based on publicly available information in AR, concalls, investor presentations, management interviews etc. I’ll add my thoughts on 4 companies and their compliance track records to demonstrate my points:

  1. On the one hand are companies like alembic and neuland with clear USFDA track record. Some of this definitely has to do with the processes created and the seriousness with which they treat compliance. Both companies indulge in mock USFDA inspections and jage strong QA departments focus a lot on ensuring quality of the deliverables. Neuland is into sterile APIs and alembic into injectibles (since 2012 at least). Still they continue to provide good USFDA compliance.
  2. Companies like Caplin use past USFDA approved facilities to fast track orders into other countries which might have a faster procedure for facilities for approving USFDA. They do this while not supplying to US which ensures easier compliance.

In short, in my opinion it might be useful to take a company specific approach in order to understand why certain companies have a much better record than the others.

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He explains the USFDA inspection policies.

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IMHO there is no correlation one can get by the pipeline the company is having in terms of drug fillings and compliance issues. It totally depends on how the stringent practices being followed by that company to adhere to the norms. If the company is not supplying to US/Europe but rest of the world may not have best practices in place and they may still be able to generate a good revenue streams because of the sales they are doing in those countries.

As an investor I think we should not put more emphasis on this as no one except the employees will not be able to divulge much details on this subject.

Also, it may happen the company who is following best practices also get into compliance issues. It is a culture that company has to develop inside the organization to follow the norms of US FDA/EU GMP.

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Hi guys,

It will be more useful if you can suggest me questions which can improve our understanding of compliance requirements. This will lead to a more informed conversation with Amit where I can actually ask questions which are useful and will improve our own knowledge.

Cheers!
Harsh

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Some Q that comes to mind

  1. How to assess quality/QA impact - remember reading somewhere Alembic claims higher QA personnel ratio? Does saving QA cost increase risk?

  2. How does probability of compliance risk behave wrt past history patterns? Can we say alembic with clean records got checklist and execution right?

  3. Consultant hiring with ex US or EU FDA background folks seem to be a logical case for industry, does this actually happen given impact is material of warnings? Which are top players in this type of consulting? Why isn’t this a silver bullet yet?

  4. How do we assess manual vs Automation of compliance possibilities- former being difficult and later being tech.? Data recording is more tech vs vessels cleaning…

  5. Does some top mgmt see compliance as a differentiators or as overhead? Quality as passion?

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Time and again he has rated Neulands’ compliance to be top notch. would be good to know what do they do differently or what are the simple things they do that gets them on the right side of the authorities as against some of the larger ones.

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Old article but provides some insight.

https://www.pharmamanufacturing.com/articles/2016/no-compromise-apis/

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  1. Prosfora provides Compliance services (QMS) to Clients and has aided 50 Pharma sites (API+FDF) ensure regulatory compliance (source). Why does this business model work? Why can Pharma companies not conduct QMS services in-house?
    Sahil’s Notes: We could also optionally add leading questions like is this due to Economies of scale, but imo those tend to steer the conversation towards the speaker’s biases, away from the speaker’s experiences.
  2. You’ve worked with Wokhardt, Alkem, Kopran, and now Prosfora (for the clients) in the Regulatory compliance kind of role. Across all these companies, what are a set of generalizable processes and learnings that you can share, about what companies can do to stay on the right side of regulatory compliance?
  3. Does luck or randomness play any role in regulatory compliance? Is there subjectivity in FDA (and similar) guidelines which can result in non-compliance or is this completely a function of the investments made by the company (money, personnel, headspace) for compliance?

Will try to think about more questions. @harsh.beria93 do you already have a date in mind when you’re talking to Amit? In that case I’ll work backwards from that date. How long would the interaction be? I ask this so that I can understand roughly how many questions you’re looking for.

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Since this thread is about Pharma compliance issues in general, I wanted to share this table i recently compiled for USFDA warning letters received by Indian companies:

Name of Company 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 Total
Aarti Drugs 0 0 0 0 0 0 0 1 0 0 1
Ajanta Pharma 0 0 0 0 0 0 0 0 0 0 0
Alembic Pharma 0 0 0 0 0 0 0 0 0 0 0
Alkem Labs 0 0 0 0 0 0 0 0 0 0 0
Aurobindo Pharma 1 1 0 0 0 0 0 0 0 0 2
Biocon 0 0 0 0 0 0 0 0 0 0 0
Cadila Healthcare 0 1 0 0 0 2 1 0 0 0 4
Cipla 0 0 0 0 0 0 0 0 0 0 0
Divi’s Laboratories 0 0 0 1 0 0 0 0 0 0 1
Dr Reddy’s 0 0 0 0 0 1 0 0 0 0 1
Glenmark Pharma 0 1 0 0 0 0 0 0 0 0 1
Granules 0 0 0 0 0 0 0 0 0 0 0
Indoco Remedies 0 1 0 1 0 0 0 0 0 0 2
Ipca Labs 0 0 0 0 1 0 0 0 0 0 1
Jubilant Lifesciences 0 1 0 0 0 0 0 0 0 0 1
Lupin 0 1 0 1 0 0 0 0 0 0 2
Natco Pharma 0 0 0 0 0 0 0 0 0 0 0
Neuland 0 0 0 0 0 0 0 0 0 0 0
Shilpa Medicare 1 0 0 0 0 0 0 0 0 0 1
Solara 0 0 0 0 0 0 0 0 0 0 0
Strides Pharma 0 1 0 0 0 0 0 0 0 0 1
Sun Pharma 0 0 0 0 0 1 1 0 0 0 2
Suven Pharma 0 0 0 0 0 0 0 0 0 0 0
Torrent Pharma 0 1 0 0 0 0 0 0 0 0 1
Wockhardt 0 0 0 0 1 1 0 2 0 0 4
zzTotal 2 7 0 3 1 4 2 1 0 0 19

Some Observations and Notes:

  1. It is sorted by the alphabetical order.
  2. USFDA appears to be much more active in some years compared to others
  3. Certain companies seem to have much worse record of compliance than others.
  4. Shilpa’s letter is not yet updated on USFDA website and hence is added as per exchange filings.
  5. Most companies got at least 1 letter in last 10 years.
  6. Set of companies include all those that I could recognize from USFDA website + my PF pharma stocks.
  7. Cadila and Wockhardt appear to have worst record.

Disc: I have significant holdings in Alembic, and small holdings in Neuland, Suven.

Edit:
22/Oct/20 Update: Updated Warning Letter for Aurobindo Pharma.

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In order to better understand the compliance record, we should look at OAIs and VAIs received as well. Here is the USFDA document which describes these terms.
Here is the USFDA website which contains all the raw data.

I consider VAI to be less serious since they are for voluntary addressing by the company. OAI being Official Actions are more serious. These observations, if not addressed appropriately then result in warning letters, which we analyzed in previous post. We need to understand that number of observations (VAI or OAI) received is kind of proportional to the size of the business since a larger business has more plants and hence higher probability of getting multiple observations. Hence, I plot the revenue for FY2019-20 below to compare these companies in size. The graphs are in alphabetical order (except neuland which comes first because i navigated to Neuland first):

Screenshot 2020-10-13 at 8.28.08 PM
Screenshot 2020-10-13 at 8.28.08 PM2718Ă—1182 324 KB

First, the VAIs:

Name of Company 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 Total
Aarti Drugs 0 0 0 0 0 0 0 1 0 1 2
Ajanta Pharma 0 2 0 1 0 1 0 0 1 0 5
Alembic Pharma 1 0 2 0 1 1 0 3 1 1 10
Alkem Labs 1 1 1 1 2 2 1 2 0 1 12
Aurobindo Pharma 3 3 6 2 7 2 2 0 3 3 31
Biocon 2 1 2 1 1 2 2 0 0 0 11
Cadila Healthcare 0 2 2 1 2 5 0 2 2 1 17
Cipla 1 5 2 3 3 3 1 2 1 5 26
Divi’s Laboratories 0 0 0 1 0 0 1 0 1 0 3
Dr Reddy’s 0 1 0 1 0 0 0 0 0 0 2
Glenmark Pharma 0 2 2 1 0 4 0 1 0 2 12
Granules 1 1 1 0 0 1 0 1 1 0 6
Indoco Remedies 0 0 2 0 0 3 0 0 2 1 8
Ipca Labs 0 0 0 2 0 0 0 1 1 1 5
Jubilant Lifesciences 0 0 0 1 1 1 0 1 1 0 5
Lupin 1 1 2 0 4 3 0 0 1 1 13
Natco Pharma 0 2 0 2 1 2 2 0 0 1 10
Neuland 1 1 0 1 0 0 1 0 0 0 4
Shilpa Medicare 0 3 0 1 1 2 0 0 0 0 7
Solara 0 0 1 0 1 2 1 0 2 1 8
Strides Pharma 1 1 0 1 1 0 1 0 0 0 5
Sun Pharma 3 3 2 1 1 3 0 0 5 1 19
Suven Pharma 0 1 1 0 1 0 0 1 0 0 4
Torrent Pharma 0 1 0 0 2 3 1 2 0 1 10
Wockhardt 0 0 0 0 0 0 0 1 4 0 5
Total 15 31 26 21 29 40 13 18 26 21 240

Now, the OAIs:

Name of Company 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 Total
Aarti Drugs 0 0 0 1 0 0 1 0 3 0 5
Ajanta Pharma 0 0 0 0 0 0 0 0 0 0 0
Alembic Pharma 0 0 0 0 0 0 0 0 0 0 0
Alkem Labs 0 0 0 0 0 0 0 0 0 0 0
Aurobindo Pharma 1 4 0 0 0 0 0 0 0 0 5
Biocon 0 0 0 0 0 0 0 0 0 0 0
Cadila Healthcare 0 1 0 0 1 0 2 0 0 1 5
Cipla 0 2 0 0 0 0 1 0 0 0 3
Divi’s Laboratories 0 0 0 0 1 0 0 0 0 0 1
Dr Reddy’s 0 0 0 0 0 0 0 0 0 0 0
Glenmark Pharma 0 0 0 0 3 0 0 0 0 0 3
Granules 0 0 0 0 0 0 0 0 0 0 0
Indoco Remedies 0 0 1 0 1 0 0 1 0 0 3
Ipca Labs 0 0 0 0 0 0 4 0 0 0 4
Jubilant Lifesciences 0 1 1 0 0 0 0 0 0 0 2
Lupin 0 3 1 1 0 1 0 0 0 0 6
Natco Pharma 0 0 0 0 0 0 0 0 0 0 0
Neuland 0 0 0 0 0 0 0 0 0 0 0
Shilpa Medicare 0 0 0 0 0 0 0 1 0 0 1
Solara 1 0 0 0 0 0 0 0 0 0 1
Strides Pharma 0 1 0 0 0 0 0 0 0 0 1
Sun Pharma 0 1 0 0 1 0 1 1 2 0 6
Suven Pharma 0 0 0 0 0 0 0 0 0 0 0
Torrent Pharma 0 2 0 0 0 0 0 0 0 0 2
Wockhardt 0 0 0 0 1 4 0 3 0 0 8
Total 2 15 3 2 8 5 9 6 5 1 55

A few observations:

  1. Aurobindo has a disproportionately high number of VAIs, but on OAIs, it does much better, specially compared to its size.
  2. Wockhardt seems to be a consistent under-performer on compliance, specially given their size (highest OAIs). I find this specially interesting since Amit Rajan used to work at Wockhardt. Harsh, should we ask Amit about this? It’s difficult for him to know since he only used to work from 2002-2005, but might still have some insights.
  3. It is interesting to see how OAIs translate into Warning letters. All companies that got at least 1 OAI ended up with a warning letter. Many of them were able to reduce the conversion ratio, but a few stand out in terms of inability to stop conversion of OAI into warning letter: Cadila and Indoco stand out (along with Wockhardt). Harsh, can we ask a question around, what differentiates companies that are able to address concerns raised in OAI and stop its conversion into a warning letter, from those that are unable to stop this?

Would like to thank @harsh.beria93 who showed me the OAI/VAI website and indicated that this deep dive could have been done.

Lastly, I understand that someone might want to compute other interesting metrics like Revenue per unit of VAI, revenue per unit of OAI etc (which might indicate scalability of the specific company).
The google doc from which I am working is here:

Please feel free to make a copy and slice and dice it any way. :slight_smile:

PS: I have included subsidiaries data into the holding company instead of creating separate rows.

Edit: Thanks for @lingalarahul7 for pointing out some typos in totals columns for OAIs. Corrected this.
22/Oct/20 Update: Updated OAI for Aurobindo Pharma which is not on USFDA website.

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This is absolutely fantastic work @sahil_vi … I knew Aurobindo had previous issues but dint know the numbers. This new warning letter isn’t surprising then and explains why market has given it a low PE multiple. This could be the norm from now on… clean companies like alembic/granules etc could get higher ratings and the likes of auro(and unfortunately shilpa recently) could need to work a lot harder for their re ratings. More than anything keeping an eye on compliance on our pharma bets looks more important than anything else. I hope market doesn’t get too wary about pharma in general due to these 2 warning letters though.

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Sahil (@sahil_vi ) and I had a wonderful long form interaction (~1.5hrs) with Amit Rajan (profile) where we talked about an array of topics including APIs, formulations, complex generics, injectables, compliance culture, etc. Amit was kind enough to share his key learnings over the last 2 decades of work in compliance within the Indian pharma industry. I have highlighted the major takeaways below, you can watch the whole interview on youtube.

Do what you document and document what you do – should be written at the front desk of every pharma company and they will not face a compliance issue

Compliance is independent of a company’s scale of operations, and largely depends on the markets that the company is serving. Compliance requirements are higher in 5 regulated markets (North America [US, Canada], Japan, European Union including UK, Australia & South Africa). Regulatory compliance is a promise made to the country’s regulator and continued commitment to provide the given drug as was promised originally.

Compliance is also a function of the product being supplied to a regulatory market, where the aseptic requirements are much more stringent for injectable products compared to oral solids or inhalers.

Distance between company’s chairman and the head of quality of the company is inversely correlated with compliance (e.g.: Laurus labs CEO Dr. Satyanarayana Chava still talks first with the quality team which is shown in the inspection track record of Laurus; no OAI or warning letter in the last decade). The site quality professional should directly report to the company chairman. Compliance question during management Q&As: Who does the site QA head report to?

API specifics

  • Changing reagents or solvents without prior approval is not allowed. A company cannot simply upgrade/change the chemistry than what was originally promised (e.g.: in the DMF filing in the US), without seeking prior approval of the regulator. 90% of audit time gets wasted in this, with companies arguing that they have data backing up the usage of another process (e.g. the usage of recovered solvent). DMF is like a bond that a company signs with the FDA and a company cannot go back on their promise
  • Changing intermediate material sourcing, for e.g. by using an alternative Indian supplier or manufacturing in-house the API because a Chinese supplier couldn’t provide the material because of COVID related supply chain disruption, without informing the FDA is a compliance disaster. This is something to look out for in future inspections, especially in the current euphoria of Atmanirbhar Bharat.

Formulation specifics:

  • Example: During a pre-approval audit of a facility, a given set of machines are shown that are used to manufacture the drug, which the FDA accepts. However, when FDA revisits the plant after the facility is commercialized, they find that the company is using another machine, even from a different manufacturer without filing an amendment to their original ANDA. This leads to failed audits and is a common problem with companies who have just started doing business in US
  • File a CBE (change being effected) to supplement any change to a product including the underlying processes is the correct way to go about things (example)
  • Instead of computing OAI/VAI/WL per unit of revenue, it makes more sense to read the form 483 and differentiate between operational issues vs data integrity issues. Number of observations is not important but the quality of the observations are. Minor observations that are largely ignorable are things like poor trainee program, employee not following the SOPs, etc.
  • A company boasting no observations should be looked at with due care as in large facilities, something is always bound to go wrong. Companies like Natco, Lupin, and Neuland do not talk about how good or bad the audit went.
  • Certain therapy areas such as inhalation and female contraceptives are inherently more risky because the chance of getting sued if the product doesn’t work is very high.
  • In addition to the regulatory problem described above, respiratory generics is also more complex (and risky) because the company has to copy flow of the drug, its particle size distribution and the medical equipment that is used to dispense the drug. There are multiple things that can go wrong in this arrangement. This is different from an oral solid where the delivery method is relatively simpler. Keep an eye out for Lupin’s respiratory pipeline (given that they have announced their arrival with their first product approval of the product proair)

Biological molecules

  • Require very good aseptic practices as most of the products are directly injected in the blood. Injectables require much better hygiene conditions in manufacturing
  • Biosimilars are approved as an API and not a formulation product. There is no alternative scheme to de-risk the constituents of the molecule (such as finding another source to provide intermediary material). If anything goes wrong with the facility or with the process, the biosimilar molecule is at a risk as its constituents cannot be outsourced.
  • Compliance in these plant as a result is very important because any disruption can cause immense business loss because it is not possible to switch suppliers
  • Another important factor that plays a large role in the US market is the marketing muscle required to make doctors prescribe biosimilars. As a result, generic biosimilar business adoption requires Indian companies to partner with American counterparts that have better connect with doctors
  • Currently, biosimilar guidelines are being relaxed by FDA bringing them closer to generic guidelines. This might bridge the differential in capabilities between an innovation player (like Biocon) and masters of generics (such as Sun, Lupin, Aurobindo, etc.)
  • Companies like Intas and Cadila now have world class plants for manufacturing biological molecules. What is missing is the operators and their basic hygiene practices.

Contract manufacturing

  • Contract manufacturing organizations (CMO) from India are the biggest threat to Indian generic pharma industry. This is because US innovators can simply source drugs from FDA approved Indian CMO players at a much cheaper price (hence removing the price arbitrage) and supply it to the US market. Biggest risk for CMO industry is FDA and EU GMP compliance
  • CMO players do not need to compromise on data integrity as it is not their ANDA filings and it’s in their best interest to be on the good side of compliance. Better compliance record attracts more business
  • Manufacturing of high value APIs whose IP is confidential might move to developed markets such as Switzerland (e.g. Dishman setting up their manufacturing plant to Switzerland)

Sterile manufacturing:

  • It’s risky for a company to manufacture both sterile (e.g.: injectables) and non-sterile (oral solids, patches, inhalers) products from the same site. A lot of recent warning letters have been issued at facilities which manufacture both sterile and non-sterile products. Sometimes when the inspection only fails for the sterile injectable unit, the whole facility comes under the warning letter. A recent example of this is Shilpa Medicare which has a very good oral solid plant (given their previous successful inspection in June 2019). However the March 2020 inspection was for oral + sterile; Because the sterile plant was not up to mark, the whole facility came under the warning letter. To tackle this, companies have started making injectables from dedicated facilities, separating sterile and non-sterile plants. This requires balance sheet strength.
  • Be careful of companies which have more than 40% of their current portfolio and future pipeline in injectables (especially the smaller ones), the Indian generic pharma industry currently doesn’t excel at manufacturing injectables.
  • Future of injectable manufacturing in India: Companies have to see that very sterile and hygienic conditions are met within the facility. Also, the workers have to be much more patient while working within the facility. If a worker is doing things quickly, it creates more bacteria in the process. Basic idea is to improve hygiene practices + not be in a hurry

Current trends:

  • Local inspection within the US is ongoing, especially for facilities that provide critical drugs.
  • Inspections in the COVID period is now taking beyond 1 month from the earlier ~2 weeks period (e.g. of Lupin’s Somerset facility where inspection started on September 17 and was still ongoing on October 12, link)
  • Virtual inspection guidelines are being finalized. However, virtual inspection is ongoing for companies with a good regulatory track record (e.g.: companies like Neuland can create a new block and file DMFs from that facility without having a pre-approval inspection because of their phenomenal inspection track record)

Filing costs:

  • ANDA filing cost on a molecule is ~$1mn (40-50% goes into testing bioequivalence; very high failure rate), for a respiratory it’s ~$10mn.
  • For biosimilars, the largest cost is in conducting clinical trials, with costs going up to $50-60mn for one biosimilar molecule (link). A number of large companies now buy out the biological molecule from a startup and pay for conducting the clinical trials. Another emerging trend is that a smaller company organizes the clinical trial, and the data for the same is later bought by a larger company, which files the drug to the FDA

Miscellaneous:

  • A number of companies only get US approval without supplying to the US as it gives them access to over 130 countries. By getting FDA compliant status, the company can also provide drugs to other markets such as Brazil, South Africa, etc.
  • It is prudent to keep an eye out for non-listed pharma companies which might have a smaller cost structure and disrupt business of larger pharma companies
  • Any Indian company that gets a new drug approval will need to partner with a US counterpart because at this stage, Indian generic players don’t have the required marketing muscle
  • Natco is one company with a very rich Para IV pipeline (high risk high reward). They have a superlative R&D team and are something to watch out for.

Value proposition of Prosfora: To enable tier-3 and tier-4 Indian pharma companies get into regulated markets by building a compliance structure in the organization.

Disclosure: I hold shares in a number of Indian pharma companies (detailed portfolio here)

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@harsh.beria93 and @sahil_vi this was an excellent interaction with Mr Amit Rajan. You asked some really insightful questions and Amit sir was at his best in answering them. After the warning letter episode of Shilpa Medicare, even i was wondering if there is any way of detecting such things early. Certainly lot more clarity after watching this conversation. Thanks once again.

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I completely agree with his view that CMO is biggest threat to generic pharma companies.
My question is regarding the moat of CMO business. Innovator company will see all FDA approved entities as one, so wont they try to squeeze the margin of CMO companies.
I think in future generic companies because of margin pressure put by CMOs, convert their facility to CMOs. Wont it lead to price erosion for CMO and generic companies.
At the end innovator companies will have the pricing power.

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