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Schering-Plough's Bitter Pill

by a $500 million judgment, drugmaker Schering-Plough is racing to comply with government regulations. Will technology slow it down?

Schering-Plough, a $9.8 billion drugmaker best known for its Claritin allergy pills, is a chronic violator of Food and Drug Administration rules on making medicines.

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The company just paid $250 million to cover half of a $500 million settlement with the FDA. But it still has a lot of work to do. While Schering-Plough tries to improve its use of technology, the company's initiatives may well be hampered by the regulatory thicket in which it's already stuck.

The pharmaceutical industry has always faced close government scrutiny. Schering-Plough, however, is a special case. Since 1998, the FDA has inspected four primary Schering-Plough factories in New Jersey and Puerto Rico 13 times, and found the same problems again and again. Among them: failure to reject drugs that didn't meet established specifications; missing data from laboratory tests; incomplete records related to various quality assurance routines; and workers performing tasks that aren't part of written procedures.

After at least 21 FDA "warning letters"—notices of what the agency says are serious violations—Schering-Plough still didn't move fast or well enough to correct defects at its plants. The FDA took legal action last year. A year's worth of negotiations resulted in a 25-page consent decree in May and the $500 million assessment—the biggest ever by the FDA.

The FDA oversees all aspects of the pharmaceutical industry, from research to manufacturing to marketing. Its "Current Good Manufacturing Practices (CGMP) are the commandments of drugmaking—non-negotiable rules that every company must follow. The FDA inspects pharmaceutical plants at least once every two years to make sure they comply with these practices. Infractions are written up in what's called a 483 Form—widely viewed as the equivalent of a traffic ticket—and given to the plant's operations manager to address. If the problems go on, correspondence escalates to a "warning letter." Legal action, such as in Schering-Plough's case, is the last step.

Schering-Plough's noncompliance "was an ongoing situation," an FDA spokeswoman says. "They weren't fixing their problems."

The consent decree stops Schering-Plough from making 73 human and veterinary products and mandates recalls of two older asthma medications that it had already stopped making last summer. The FDA didn't say the company's drugs were dangerous. The issue was that Schering-Plough had repeatedly breached so many regulations that nobody could say with certainty that the products from the four factories involved were made 100% right. A criminal investigation is also under way by the FDA and state of New Jersey into whether Schering-Plough used unapproved ingredients in some of its products.

The Long List of Tasks Schering-Plough Now Has to Perform Under the Consent Decree Will, in Part, Force Improvements in the Information Technology and Business Processes at the Company. by the End of Last Month, Schering-Plough Was to Have Taught All Supervisors and Managers What the Consent Decree Means. for the Next Three Years, All New Supervisors and Managers Must Be Given a Copy of the Decree and An Explanation of It Within 10 Days of Being Hired. the Company Must Also Hire Four Decree Administrators—One for Each Factory in Question—To Oversee Compliance With the Decree and to Report Findings Every Month to the Chief Executive. An Outside Expert Must Be Hired to Help Formulate a Plan and a Timetable for Correcting Problems at Each Facility.

Schering-Plough Must Also Reimburse the Fda $471,500 for Inspection Expenses Already Incurred and for What the Fda Will Spend to Make Sure the Company Complies With the Decree. the Billing Rate Is $65 to $78 Per Hour, Plus Mileage and Expenses.

"What the FDA is trying to drive home to pharmaceutical firms is the need to start looking at things systemically," says Terryn Barill, who runs a consulting firm that specializes in drug-company compliance issues. "And that's going to take technology," she adds.

Announcing the decree two months ago, the company insisted it has cooperated with the FDA throughout the audits and consent decree talks. A Schering-Plough spokesman refused to comment further and declined to make executives available for interviews with Baseline.

However, in other public statements, Schering-Plough has said that it will spend $60 million to clean up problems at its manufacturing facilities. According to a company executive close to the project, part of that sum will go toward a technology revamp at those locations.

Schering-Plough is rearranging its technology groups, the executive says. The head of information systems at the company's health care products division will now oversee key systems—servers and applications—at the pharmaceutical factories as well.

Schering-Plough Health Care Products, which makes Dr. Scholl's footpads, Coppertone sunscreen and other over-the-counter items, is known for clean manufacturing facilities. The hope is that at least some processes can be duplicated in the pharmaceuticals group. Also part of the impetus for combining technology supervision in the two divisions is that Schering-Plough is moving production of Claritin from the pharmaceuticals division to Health Care Products. That's because the patent on its blockbuster Claritin allergy medication will expire in December and Schering-Plough hopes to start selling it as an over-the-counter medication. (The FDA hasn't ruled yet on whether it will allow that.)

Claritin is still in wide use, though. Clarinex, the patented follow-on, has replaced just about 33% of Claritin prescriptions so far. So Health Care Products plans to upgrade server hardware to ensure that its distribution and supply chain systems can handle the high-volume manufacturing that goes with Claritin.

On top of dealing with oversight of technology in the pharmaceuticals manufacturing group, Health Care Products must also contend with a critical server migration. The division largely runs Tru64 AlphaServer hardware from Compaq. When Hewlett-Packard bought Compaq two months ago, the vendor said it planned to phase out the Tru64 operating system in favor of HP's Unix. Meanwhile, the hardware running at the pharmaceuticals unit is mainly IBM, with some older, proprietary HP 3000s and HP 9000s. Both Health Care Products and pharmaceuticals will likely migrate to servers running HP/UX starting this year. It will be "a handful" of servers expected to cost up to $300,000 in all, the executive says. But a plan and budget haven't been finalized yet.

One project will be to integrate and streamline the 70 separate supply chain and manufacturing applications the corporation runs. Health Care Products uses two warehouse management packages: DigitaLogistix from RedPrairie in Waukesha, Wis., and PC/AIM from Ann Arbor Computer in Ann Arbor, Mich. For supply chain, the division uses SAP software.

Pharmaceuticals, meanwhile, runs virtually no packaged software. It's all custom-coded. But SAP will soon be installed, the company executive says, adding, "I call it catching up, but 'modernization' is a nicer word for it."

Schering-Plough Is Like Most Drugmakers. It Has Spent the Last Several Years Investing Heavily in Technology for Upfront Research and Development and Clinical Trials, Ignoring Production of the Drugs. That Happens for Two Big Reasons. One Is That Pharmaceutical R&d Is One of the Most Complex and Competitive Arenas in 21st Century Business. Along With Brilliant Scientists, a Company Needs Technology to Get Any Edge at All.

The other reason is that the FDA makes it painful to bring new technology to factories, says Janit Buccella, a consultant at Omnival in Newton, N.J. Omnival guides drug and biotechnology companies through the process of validating their equipment against government regulations.

The FDA must sign off on every aspect of drug production. A company must submit a thick package of documents detailing the minutia of how it plans to manufacture a product—down to how the software inside a tablet press, for example, interacts with quality control data stored in a proprietary application running on a different computer. Once a company wins approval, it is reluctant to change the setup one bit. If it did, Buccella says, it would have to prove to the FDA that the change wouldn't affect the outcome—the drug.

"It's a lot easier to develop and install and test new technologies in R&D [because] you're still playing with your process and product," she says. "The rigors of having to validate become much more strenuous as you get closer to production."

Plus, validation is the responsibility of the user company, not the supplier selling the software, notes Denise McDade, a quality assurance manager at Genentech, a $2.1 billion biotechnology company in South San Francisco. Vendors do ensure that their products comply in principle with FDA regulations. But because all customer implementations are different—the pharmaceutical industry is full of quirks in how people work and how products are made—vendors can't validate their software across the board, says McDade, who focuses on validation. "It's a growing area of concern for pharmaceutical companies," she says. "In my world, you spend a lot of time and money."

Thus, drug companies tend to be conservative with technology in the manufacturing process. They don't dabble. Not when a simple upgrade from version 3.0 to 3.1 of a given application would set off a revalidation routine that might cost more than the value of upgrading and could slow production.

At Schering-Plough factories, new document-management software and other upgrades have interrupted production of some drugs, the company says. Extra managers, consultants and scientists also have been hired to help with revalidation.

Drug Companies' Reluctance to Change Technol- Ogy in Their Plants Is Diminishing. Drug Manufacturing Now Is Where the Auto Industry Was 15 or 20 Years Ago, When Carmakers Started to Use Massive Doses of Technology in Their Factories to Improve Car Quality and Compete With Japanese Imports, Says Barill, the Compliance Consultant.

Ford, Chrysler and GM wanted to reduce defects, raise quality, create an audit trail and cut costs. "What they did in their manufacturing plants is [build] a system that depends more on technology and less on people," Barill says, adding that she sees pharmaceutical plants starting to do the same.

The pharmaceutical industry will step up spending on information technology during the next few years, says Anne Lu, an analyst at International Data Corp. Drug companies are expected to spend $5.5 billion on information technology this year, a 4% rise over last year. But in 2005, Lu predicts, they will spend a whopping 11% more than they do in 2004.

The movement to mirror car companies will start in smaller pharmaceutical firms that make generic versions of medications once protected by patents. Those companies generally have a smaller product line with, consequently, fewer validation worries, Barill says. They can move faster.

Even so, the glimmer is there at Schering-Plough. More efficient manufacturing processes save money. At the same time, the FDA has recently put out new, more stringent rules for some electronic aspects of manufacturing. It wants, for example, more complete quality control records and audit trails tracking who accessed which data when.

"Now everybody's saying, if we can trim costs, let's do it. If we can plan the production cycle better, let's do it," says the insider at Schering-Plough. When it comes time to seek funding for SAP software for the pharmaceuticals division, "we'll justify it by saying the FDA has these demands," the executive says. "It's becoming a cost of doing business."

Schering-Plough Base Case

Headquarters: 2000 Galloping Hill Rd., Kenilworth, NJ 07033

Phone: (908) 298-4000

Business: Pharmaceutical and health care products

Chief Information Officer: Donald Lemma

Financials in 2001: $9.8 billion in sales, $2.9 billion operating income, $1.9 billion net income

Challenge: To fix chronic manufacturing problems that led to a $500 million fine by the Food and Drug Administration

Baseline Goals:

  • Increase return on equity, from 3% in 2001. It had been 43% in 2000.
  • Submit plans for fixing manufacturing problems by Sept. 17 to Food and Drug Administration
  • Stop receiving FDA warning letters by 2005, down from 34 from 1997 through 2001
Source:  Schering-Plough's Bitter Pill
By Kim S. Nash
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