Tips for Avoiding Internal and External Supplier Problems

For Medical Device and Pharmaceutical Companies

The signing of the historic healthcare reform legislation will have a significant impact on both the medical device and pharmaceutical industries. A significant increase in the number of individuals carrying health insurance will translate into a greater demand for medical devices and pharmaceuticals. While this will improve profitability for many companies, it will present challenges to manufacturing and quality managers tasked with finding ways to quickly increase production.

There are a number of well recognized risks involved with outsourcing.

Many companies will likely turn to outsourcing manufacturing operations in order to initially meet this growing demand. There are, however, a number of well recognized risks involved with outsourcing. One of the more important of these risks is the increased attention and enforcement by the U.S. Food and Drug Administration ("FDA") over supplier controls.

Enforcement of supplier controls has been steadily increasing. The number of medical device Warning Letters with purchasing control violations increased by 31 percent from 2006 to 2007, and by 40 percent from 2007 to 2008.¹ In addition, FDA's resident expert on the medical device Quality System Regulation, Kim Trautman, stated that a greater number of recalls and other device failures have been tied to problems with suppliers.²

The pharmaceutical industry has also dealt with an increase in enforcement concerning supplier controls. The heparin contamination revealed a number of shortcomings in the supply chain for active pharmaceutical ingredients ("APIs").³ Connected to the heparin contamination problem, the FDA issued Warning Letters to suppliers of APIs which revealed significant problems. In one Warning Letter, the FDA cited a firm for misrepresenting the source of the API described in its Drug Master File ("DMF").⁴ Despite statements in the DMF, the FDA found "that the facility was not manufacturing, and did not appear to have ever manufactured [the API] for the U.S. market," but that manufacturing was instead conducted at other facilities that were not identified in the DMF. The FDA suggested that the company's violations could have a significant impact on its customers, when the FDA noted it may recommend withholding approval of any applications listing the company as a drug manufacturer. Further, the FDA stated that the company's drug product shipments would be subject to refusal of admission.

Medical Device Requirements

The Quality System Regulation at 21 C.F.R. Part 820 sets out the requirements for purchasing controls applicable to manufacturers of medical devices. In particular, 21 C.F.R. 820.50 provides that "[e]ach manufacturer shall . . . ensure that all purchased or otherwise received product and services conform to specified requirements." This is accomplished in two ways. First is to conduct an evaluation process that imposes varying levels of control on suppliers. Second is to ensure that purchasing data specifies requirements and includes an agreement that the suppliers will notify the manufacturer of changes in the product or service.

The language in 21 C.F.R. 820.50 regarding product "otherwise received" expands the application of device purchasing controls to include facilities that may be part of the manufacturer's organization. In determining whether the products received from another facility are subject to purchasing controls, the test is whether the facility "is independent from the manufacturer's quality management system."⁵ Specifically, independence is established where the facility is "operated under a separate quality management system."

Determining what constitutes a "separate quality management system" requires looking beyond the existence of corporate-level quality policies and procedures. As suggested in the guidance on purchasing controls issued by the Global Harmonization Task Force ("GHTF"), facilities that are not part of the manufacturer's internal audit scope should be considered to be under a separate quality management system and treated as an internal supplier. Other potential indicators of a separate quality management system include different management with executive responsibility and management representatives; separate management review meetings; or differing quality policies and/or corrective and preventive action procedures.⁶

Pharmaceutical Requirements

Pharmaceutical current good manufacturing practice ("cGMP") regulations and guidance with respect to supplier controls are not as expansive as medical device regulations and guidance. In particular, the cGMP regulations at 21 C.F.R. Parts 210 and 211 pre-date the quality system approach (although they are considered to be consistent with such an approach). The FDA has formally introduced quality system controls to pharmaceutical manufacturing through its recognition of guidance developed by the International Conference on Harmonisation of Technical Requirements for Registration of Pharmaceuticals for Human Use ("ICH").

The ICH has developed several guidance documents on quality system controls for pharmaceutical manufacturing, although two documents in particular stand out. The ICH guidance titled "Pharmaceutical Quality System Q10" "applies to the systems supporting the development and manufacture of pharmaceutical drug substances . . . and drug products . . . throughout the product lifecycle."⁷ The more specific guidance titled "Good Manufacturing Practice Guide for Active Pharmaceutical Ingredients Q7" "applies to the manufacture of APIs for use in human drug (medicinal) products."⁸

The Q10 guidance discusses purchasing controls in the context of "Management of Outsourced Activities and Purchased Materials." The reliance on the phrase "purchased materials" in the Q10 guidance suggests that internal suppliers are not to be submitted to a control process similar to that for external suppliers. That said, the Q7 guidance is not written to be as limiting, suggesting that "[m]anufacturers of intermediates and/or APIs should have a system for evaluating the suppliers of critical materials."⁹

Purchasing Controls in Practice

Regardless of the impact on regulatory compliance, effective purchasing controls are important to maintain manufacturing quality. As noted by the FDA, changes in raw material and subassembly specifications are a common cause of product recalls. Further, greater reliance on Just-in-Time Inventory and other reduced inventory schemes by manufacturers increases the need to have reliable purchaser controls to prevent costly production delays.

An effective purchasing control system employs the following elements:

• Planning
• Selection of potential suppliers(s)
• Supplier evaluation and acceptance
• Finalization of controls
• Delivery, measurement and monitoring
• Feedback and communication, including Corrective and Preventive Action process

As with most quality system controls, emphasis is placed on effective planning to avoid problems later in the process.

Manufacturers should look to avoid the trap of "penny wise, pound foolish" purchasing controls by considering important factors other than cost, such as quality, reliability and supply, when selecting a supplier. Manufacturers should seek to properly execute their purchasing control plan by conducting a thorough review of potential suppliers, including those who are the sole source of a product or service. The controls implemented by a manufacturer over a supplier should be consistent with the manufacturer's needs and the risk associated with the product or service. The desired outcomes of the purchasing control plan should also be reasonable and achievable.

Manufacturers should stick to their purchasing control plan. If a supplier does not meet stated requirements, corrective or preventive action(s) should be taken. Appropriate actions can include training for the supplier, redefining the responsibilities for CAPA activities, allocation of resources to the supplier, or change to another supplier, if the necessary improvements cannot be achieved. While the cost of identifying a new source for a product / service will likely be a factor in determining whether to change to another supplier, it should not outweigh business or quality needs.

Recommendations

The following recommendations are intended to assist both pharmaceutical and medical device manufacturers in minimizing supplier problems.

1. Do not wait for the FDA to audit your supplier for you.The FDA does not regularly inspect every supplier or contract manufacturer, and, in some cases, the FDA does not inspect certain types of suppliers or contract manufacturers at all. In addition, the consequences of a failing FDA inspection can have an immediate and lasting impact on the contractor's operations. If significant supplier issues are suspected, companies should consider using an FDA attorney experienced in conducting internal compliance investigations.
2. Apply uniform procedures to both internal and external suppliers.Despite the vagueness as to whether internal suppliers are required to be monitored through the purchasing control system, it is good practice to apply such controls to internal suppliers. Effective monitoring will ensure that materials from internal suppliers meet required specifications. Outside counsel can assist with assessing whether a sister facility is being operated under a separate quality management system, requiring monitoring through the purchasing control system.
3. Develop a supplier control system that makes sound business sense.If a supplier does not meet the specified requirements, the manufacturer should seriously consider taking some form of corrective or preventive action. Considering changing to another supplier should only be taken if the necessary improvements cannot be achieved. Other appropriate actions include training for the supplier, or allocating additional resources to the supplier.
4. Consider the business ramifications of inadequate supplier controls.Effectively monitoring suppliers can be time consuming and costly. Inadequate monitoring, however, can have a significant impact on manufacturing operations. Further, the cost of identifying a new supplier for a product or service will likely be a factor in determining whether to make a change to another supplier. This cost should not, however, outweigh business or quality needs.

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References:

1. Marc H. Miller, "Supplier control: growing regulatory concern for outsourcing" Medical Product Outsourcing (Jul. 1, 2009), available at http://www.highbeam.com/doc/1G1-205249821.html.
2. Id.
3. Gardiner Harris, "Heparin Contamination May Have Been Deliberate, FDA Says" New York Times (Apr. 30, 2009), available at http://www.nytimes.com/2008/04/30/health/policy/30heparin.html.
4. FDA, Warning Letter WL 320-09-01, issued to Shanghai No. 1 Biochemical & Pharmaceutical Co. Ltd. (Apr. 14, 2009), available at http://www.fda.gov/ICECI/EnforcementActions/WarningLetters/ucm136668.htm.
5. Global Harmonization Task Force, Guidance on the Control of Products and Services Obtained from Suppliers, GHTF/SG3/N17R9:2008 (Dec. 11, 2008), available at http://www.ghtf.org/documents/sg3/sg3final-N17.pdf.
6. Id.
7. International Conference on Harmonisation of Technical Requirements for Registration of Pharmaceuticals for Human Use, Pharmaceutical Quality System Q10 (Jun. 4, 2008), available at http://www.ich.org/LOB/media/MEDIA3917.pdf.
8. International Conference on Harmonisation of Technical Requirements for Registration of Pharmaceuticals for Human Use, Good Manufacturing Practice Guide for Active Pharmaceutical Ingredients Q7 (Nov. 10, 2000), available at http://www.ich.org/LOB/media/MEDIA3917.pdfhttp://www.ich.org/LOB/media/MEDIA3917.pdf.
9. Id.