In the period between 2008-2010, pharmaceutical and healthcare products provider Johnson & Johnson, and in particular, its McNeil Consumer Products operating unit, faced a building crisis involving multiple branded OTC healthcare remedies such as Tylenol, because of quality and process issues focused on a specific production facility in Fort Washington Pennsylvania. After numerous product recalls, that plant was subsequently shutdown for remedial actions and has yet to re-open.
This week, McNeil announced an agreement with the U.S. Attorney’s Office for the Eastern District of Pennsylvania and the U.S. Department of Justice to resolve the previously disclosed government investigation relating to the manufacturing of certain over-the-counter products at its Fort Washington facility. The company agreed to pay a $20 million criminal fine and forfeit $5 million. Under this agreement, McNeil reportedly pleaded guilty to a misdemeanor violation and accepted responsibility for the inadequate filing of required documentation during the manufacturing process. In its announcement, McNeil states in-part:
“McNeil has been implementing enhanced quality and oversight standards across its entire business to ensure we are best able to meet our commitment to consumers, patients and doctors who rely on our products.”
In a July 2013 Supply Chain Matters commentary, we highlighted all of the efforts that were underway to transform all of Johnson & Johnson’s supply chain processes. Senior executive changes were part of that transformation effort along with a declaration of five strategic priorities:
- Deliver on FDA consent decree milestones
- Ensure reliable supply of OTC products to retailers and consumers
- Achieve brand leadership
- Rebuild customer trust including top retail customers
- Execute a return to market plan for core U.S. brands and SKU’
J&J subsequently centralized its supply chain efforts under a singular leadership model, along with a singular quality and compliance model. In the systems area, a four year program was outlined to consolidate an overall systems landscape that was described as 60 different ERP systems supporting 275 operating companies
The McNeil statement indicates: “this plea agreement fully and finally resolves the federal government’s investigation, and closes a chapter on actions that led the company to review and significantly improve its procedures.”
In its reporting, The Wall Street Journal cited the U.S. Justice Department as indicating that McNeil continues working to bring the Fort Washington facility into regulatory compliance and plans to re-open the facility once it gains approval from the U.S. Food and Drug Administration. McNeill’s other production facilities are reportedly running under a 2011 permanent injunction and Consent Decree. McNeil indicates that a third party cGMP expert has now submitted written certification to the FDA after determining all sites are conforming with applicable laws and regulations.
Seven years and a considerable financial sum later, J&J continues in its organizational wide efforts to address consistency in good manufacturing practices.
No doubt, this has been an expensive lesson for Johnson & Johnson, as well as a rather important learning for the remainder of the industry regarding the critical importance of consistent product quality and supply chain wide standards in avoiding negative business outcomes.
Supply Chain Matters has opined on more than one occasion that the wheels of justice seems too often crank very slow even though today’s clock speed of business moves at lightning speed. For pharmaceutical supply chains, the mitigation of such thefts remains a rather important component in supply chain risk management and mitigation.
One of the largest warehouse thefts in U.S. history occurred in March 2010 and involved the theft of an estimated $80 million worth of pharmaceuticals from an Eli Lilly warehouse in Enfield Connecticut. In May of 2012, federal authorities arrested two people in connection with the Eli Lilly incident. According to reports at that time, the arrests were described as a takedown of a major prolific cargo theft ring. Two Cuban born brothers were indicted on federal conspiracy and theft charges and ten additional persons were also charged in federal court.
Since that time, the U.S. Attorney for the District of Connecticut accused five individuals in the conspiracy and participation in the theft that occurred in the Enfield Connecticut warehouse. All five have since pleaded guilty. According to evidence and statements collected, the thieves climbed through the roof, slid down ropes and disabled the alarm system and then loaded the 40 pallets of stolen goods into an awaiting tractor trailer utilizing existing fork lifts. The stolen goods were then transported to a public storage facility in the Miami Florida area for black-market distribution.
According to a report published by The Wall Street Journal, the stolen pharmaceuticals included Lily’s antipsychotic drug Zyprexa, antidepressants Cymbalta and Prozac, the cancer treating drug Gemzar, among other drugs. The thieves were obviously seeking high-value goods. These drugs were destined for retail distributors along the U.S. east coast.
Last week, a U.S. federal judge sentenced the first of these criminals, a Cuban citizen living in Florida, to a six year and three month prison sentence in regards to his role in the pharmaceutical theft. Prosecutors were seeking a seven to nine year sentence, citing the seriousness of the crime. However, defense attorneys argued leniency by the defendant’s guilty plea and subsequent actions.
Thus, roughly six years after this high visibility theft, the wheels of justice have begun to close the loop.
Meanwhile, pharmaceutical companies have since garnered a more astute understanding of the increasing occurrences of cargo and retail thefts and the risks that these incidents pose to legitimate pharmaceutical supply chains as well as public health. While the wheels of justice indeed move slow, deterrence, supply chain risk identification and mitigation remain important ongoing initiatives.
During this period of earnings announcements for the December-ending quarter, a new and significant headwind, the effects of the U.S. dollar, has appeared for industry supply chains with operations anchored in the United States. That was significantly delivered to Wall Street by yesterday’s earnings announcement from Procter and Gamble, which currently has nearly two-thirds of its revenues coming from outside of the U.S. Procter and Gamble was not alone, even the likes of Apple encountered the same headwinds.
P&G reported a 31 percent drop in profit as the stronger U.S. dollar diluted the effects of a modest 2 percent organic sales growth. Net income dropped nearly a billion dollars from the year earlier quarter. According to business media reporting, foreign exchange pressures reduced net sales by 5 percentage points. Once more, P&G indicated that these currency effects will continue to be a drag within 2015, potentially cutting net earnings by 12 percent or in excess of another billion dollars.
The implications are obvious including a continued selloff of underperforming brands and businesses. One published financial commentary report by The Wall Street Journal implied the continuance of “ruthless cost cutting” and a continued slim-down of brands. P&G has further undertaken ongoing efforts to source more production among emerging global regions, and those efforts are likely to accelerate in momentum.
The strong headwinds of currency were not just restricted to consumer product goods. Today’s WSJ reports that it is now evident that:
“The currency effects are hitting a wide swath of corporate America- from consumer products giant Procter and Gamble Co. to technology stalwart Microsoft Corp. to pharmaceutical company Pfizer Inc.. Those companies and others have expanded aggressively overseas in search of growth and now are finding that those sales are shrinking in value or not keeping-up with dollar-based costs.”
Further cited was a quote from the CEO of Caterpillar indicating: “The rising dollar will not be good for U.S. manufacturing or the U.S. economy.” The obvious fears for investors and economists alike is that the U.S. dollar’s explosive gains will backfire for U.S. based companies by reducing the price attractiveness of goods offered in foreign countries as well as reducing the value of foreign-based revenues.
The implications to U.S. centered industry supply chains are the needs for yet further shifting of strategies and resources. The existing momentum for U.S. manufacturing may well moderate with these latest developments. Initiatives directed at supporting increased top-line revenue growth now have the added challenges for more flexible, global-wide sourcing of production and distribution needs. Operations, procurement and product management teams that believed that they could get a breather from draconian and distracting cost-cutting directives will once again face the realities of having to cut deeply into domestic focused capabilities and resources.
We often cite the accelerated clock speed of business as a crucial indicator for agility and resiliency for industry supply chain strategy. Here is yet another example where perceptions of a booming U.S. economy quickly change to the overall business and supply chain implications of the subsequent currency effects.
As we enter 2015, all signs point to an enhanced looking glass across pharmaceutical and drug industry supply chains. The most prominent issues fueling industry supply chain scrutiny right now are media-driven headlines focused on price inflation related to the increasing cost of generic drugs. However, other issues related to electronic tracking and tracing of drug items will also come to light.
In the latter part of 2014, business and social media headlines buzzed with stories related to the exploding costs of generic drugs, which were supposed to be the more cost-affordable alternative to branded, proprietary drugs. Governmental driven health initiates such as the Affordable Health Care Act were legislated to control the spiraling cost of drugs and healthcare.
Price inflation among generic drugs was not a new phenomenon in 2014. This author reviewed a BloombergBusinessWeek article published in December 2013 that had already outlined the problem with certain drug prices skyrocketing overnight even then. That article cited one industry observer as indicating that prices for more than a dozen generics had sourced ten-fold in 2013, and included generic drugs for treating breast cancer, heart and other diseases. A likely culprit reported by Bloomberg was a frenzy of merger and acquisition activities that led to three companies controlling 44 percent of global generics revenues. That was in 2013, and the trend continued throughout 2014.
The largest processor of prescriptions in the United States is Express Scripts Holdings. Last week, this provider published an advisory: The Reality Behind Generic Drug Inflation. The advisory indicates that: “… since 2008, the average price of brand drugs has almost doubled while the average price of generic drugs has been cut roughly in half.”
It further states: “Just four medications have accounted for the most significant generic price increases in 2014: digoxin for congestive hear failure, ursodiol for gallstones, hydrocortisone acetate for inflammation and clobetasol propionate for eczema and psoriasis. Digoxin had the largest 2014 price increase- 1127%- because for a while only, two manufacturers were producing this widely used medication.”
While all the above statements attempt to provide clarity, they are not going to appease the hundreds and thousands of patients who are enduring such price steep increases, beyond the capabilities of reimbursement from health plans. Once more, legislators are once again being compelled to get involved through a series of Congressional hearings. Again, all eyes will turn towards the supply and demand dynamics of lack thereof across individual drug supply chains.
Supply Chain Wide Track and Trace
The other important issue involves new supply-chain-wide track and trace capabilities that go into effect within the United States during 2015 as a result of the Drug Supply Chain Security Act. As of January 1, manufacturers, repackagers and wholesale distributors of pharmaceutical drugs must provide lot-level product tracing information, and by July 1, pharmacies themselves, both community and hospital focused, must be able to provide lot-level transactional tracing and history for 6 years. Also on January 1, pharmacies must have established processes and systems for verification and handling of any suspect fraudulent products. These are to include quarantine and investigative procedures of suspected fraudulent drugs with notification to the U.S. FDA and primary trading partner if a suspected fraudulent drug is found. A recent posting on PharmacyToday outlines these requirements and their potential impact for pharmacy operators. It notes that conformance to these new requirements has a strong dependence on electronic information transfer and that smaller, independent pharmacies may find themselves at a disadvantage because of the need to move current paper based transactions to electronic record keeping and portal access.
The largest wholesale distributors of pharmaceuticals will obviously play a very large role in helping to track and disseminate such information. Meanwhile, the National Community Pharmacists Association is calling for various supply chain industry partners to work together in coming up with cohesive electronic information gathering strategies.
For our part, throughout the coming weeks, Supply Chain Matters will provide added focus and commentary related to both the supply and demand dynamics affecting inflated pricing of generic drugs as well as implementation of the new track and trace requirements.
The looking glass up and down the pharmaceutical supply chain is indeed becoming an important headline and motivation for learning in the coming year.
The World Health Organization (WHO) has declared the ongoing outbreak of the deadly Ebola virus in West Africa to be a Public Health Emergency of International Concern (PHEIC) and humanitarian organizations such as Doctors Without Borders continue to work on the front lines to control the outbreak. The consequences of further international spread of the virus coupled with fears of wider-scale contagion have created a call for coordinated global public health actions to stop and reverse the outbreak.
Other concerns should be the short or longer impacts to industry and global supply chains if the current outbreak cannot be adequately controlled. Within close proximity to the current effected region within West Africa is the country of Cote d’Ivoire, which is a major supply source for cocoa. Countries within the West Africa coastal and interior regions also produce supplies of palm oil, iron ore and other commodity materials.
Beyond local sourcing are the broader implications to global transportation and logistics networks if the current outbreak spreads to other countries and spawns additional travel and cross-border restrictions. In short, industry supply chain and sales and operations planning teams definitely need to monitor the current Ebola outbreak and have some form of scenario and backup plans identified.
This posting serves to alert our Supply Chain Matters readers who subscribe to Accenture Academy training and webinars that this author will overview the current Ebola crisis from an industry and infrastructure supply chain perspective and provide expert perspective on the areas to watch along with considerations for building risk contingency scenarios. Accenture Academy is launching a new series termed Trend Talks, which are more compact and two-way interactive webinars that address and provide collective discussion on important, rapidly developing trends among industry supply chains.
I am pleased and looking forward to delivering this inaugural Trend Talk webinar addressing this timely and rather concerning global topic. The session is scheduled for Wednesday, December 10th at 10am Eastern time with participation available only to Accenture Academy members. Readers can utilize this Accenture Academy web link for login and registration.