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Managing Global Supply Chains to Avoid Importing Risk
by Sara E. Dyson, Esq., AVP, Loss Control for the Medmarc Insurance Group

Medical device and pharmaceutical companies are increasingly relying upon suppliers based in foreign countries to provide key component parts and ingredients.  However, oversight of foreign suppliers by the Food and Drug Administration is limited, making it critical that U.S.-based companies monitor and control their foreign supply chains.  This article examines the extent to which the FDA is policing foreign suppliers and describes steps that U.S. companies can take to protect themselves from liability that originates abroad.

Sara E. DysonThe global economy has caused supply chains to lengthen and grow in complexity.  Often, the manufacturer or distributor of a finished product is located in the United States, while the companies that provided its component parts or ingredients or assembled the product are located abroad.  Maintaining control over a global supply chain can be difficult, particularly when the product is a medical device or pharmaceutical.

The regulatory requirements imposed on the makers of medical products and the type and degree of risk these products pose to their end users further complicate the challenge of doing business on a global scale.  While the Food and Drug Administration (FDA) is the designated official guardian of the public health when it comes to overseeing the development, production, and delivery of medical products in the United States, its power and resources are limited abroad.  It is critical, therefore, for the manufacturers of medical devices and pharmaceuticals to manage the risks that arise from their global supply chains.

FDA Oversight of Foreign Companies

The volume of imports regulated by the FDA has doubled since 2003.1  To address some of the challenges presented by the rapid globalization of the industry, the FDA launched the "Beyond Our Borders" initiative to increase collaboration with the FDA's foreign counterparts and enhance technical cooperation with foreign regulators.  The initiative has been described by the FDA as the "first step" toward a larger overhaul of the global import safety system.2 For now, though, the FDA wields limited power abroad.

The FDA Inspects Few Foreign Medical Device Companies

By law, the FDA is required to inspect domestic manufacturers of Class II and Class III medical devices every two years. There is no comparable requirement for the inspection of foreign manufacturers of medical devices. As a result, the FDA inspects the foreign manufacturers of Class II devices every 27 years and Class III devices every six years.3 The U.S. Government Accountability Office (GAO) estimates that only six percent of registered foreign manufacturers are inspected in a given year. Between 2002 and 2007, the FDA conducted an average of 247 foreign inspections each year compared to 1,494 domestic inspections.

Number of Foreign Medical Device Manufacturers Inspected by the FDA
2002 - 2007

Country Total inspections Total registered Class II or Class III manufacturers 
Germany 231 460
United Kingdom 166 277
Canada 108 282
Japan 97 210
Ireland 90 62
France 83 154
Switzerland 71 108
China 64 568
Mexico 60 122
Italy 55 170
All other 456 1871
TOTAL 1481 4284

Data provided by the GAO in "FDA Faces Challenges in Conducting Inspections of Foreign Manufacturing Establishments," testimony of Marcia Crosse, Director of Health Care, Government Accountability Office, presented before the Subcommittee on Health, Committee on Energy and Commerce, House of Representatives, on May 14, 2008.

The FDA Inspects Few Foreign Drug Companies

Similarly, the FDA has a low inspection rate for foreign drug companies.  The GAO reported that, in a given year, the FDA inspects seven percent of the foreign manufacturers of finished drugs and suppliers of bulk drug substances.4  At this rate, it would take the FDA more than 13 years to inspect each foreign manufacturer or supplier, assuming that no new companies required inspection.  Most foreign inspections (88 percent) are performed as part of the review associated with processing an application to market a new drug, rather than for the purpose of ensuring the quality of drugs already being marketed.

Analysts estimate that as much as 20 percent of finished generic and over-the-counter drugs, and more than 40 percent of the active ingredients for these drugs made domestically, come from India and China.  Analysts further predict that as much as 80 percent of key, drug ingredients will come from these two countries within 15 years.5  The GAO estimates that there are 1,124 companies in India China involved in the manufacturer of drugs for the U.S. market.  The GAO determined that the number of inspections performed there totaled only 288 for the years 2002 through 2007.

Number of Foreign Companies Involved in the Manufacture of Drugs for the U.S. Market Inspected by the FDA
2002 - 2007

Country Total inspections Total registered Class II or Class III manufacturers 
India 200 410
Germany 140 199
Italy 131 150
Canada 123 288
United Kingdom 102 169
France 94 162
China 88 714
Japan 87 196
Switzerland 75 83
Ireland 55 61
All other 350 817
TOTAL 1445 3249

Data provided by the GAO in “Preliminary Findings Suggest Weaknesses in FDA’s Program for Inspecting Foreign Drug Manufacturers,” testimony of Marcia Crosse, Director of Health Care, Government Accountability Office, presented before the Subcommittee on Oversight and Investigations, Committee on Energy and Commerce, House of Representatives, on November 1, 2007.

Several Factors Contribute to Low Inspection Rates

The low rate of FDA inspections abroad has been attributed to several factors, including budgetary constraints, language barriers, and hazards and logistical struggles associated with foreign travel.  Further, the GAO determined that the FDA relies on inconsistent or unreliable data about foreign companies that can be traced to limitations in the FDA's information technology infrastructure, making it difficult for the FDA to keep track of manufacturers and suppliers located abroad.  For example, the GAO found that one of the agency's databases estimates that there are 3,000 foreign companies that export pharmaceuticals to the United States, whereas another FDA database puts that number at 6,800.  Additionally, it can be challenging for the FDA to exercise authority abroad.  In some countries, the FDA must first obtain approval from the relevant governmental authority before it may enter a company's facility to perform an inspection.  This requirement makes unannounced visits of foreign companies impossible, whereas the FDA may conduct inspections of domestic companies without notice.  When a foreign company denies the FDA access to its facility, the FDA must rely on U.S. import controls as a backstop to letting the product into the country uninspected.6

The FDA is Ramping Up Efforts Abroad

Following several, well-publicized incidents involving contaminated medical and consumer products that originated with foreign manufacturers and suppliers, the FDA has faced increasing pressure from Congress and the public to ramp up its efforts abroad.  In November 2008, as part of the Beyond Our Borders initiative, the FDA deployed staff to China to work directly with importers and foreign regulatory agencies and to conduct inspections.  It is expected that the agency will spread more than 60 regulators across China, India, Europe, and Latin America by the end of 2009. Ultimately, the FDA is expected to spend $30 million setting up foreign offices.

Products Liability Exposures from Abroad

Despite the efforts of the FDA to increase its presence abroad, as well as other federal initiatives to ensure the safety of imported products (see the sidebar on page 3 for detail), the U.S.-based companies that import goods are likely in the best position to prevent problems from cropping up in their supply chains.  Yet, many companies fail to do so.  A recent study found that financial executives at top companies believe that supply chain risks pose the greatest threat to revenue; yet, close to half of the survey respondents said risks associated with globalization and outsourcing are a low priority for their companies.7  Ultimately, domestic companies may be held liable for any products liability claims that arise from goods being provided by foreign suppliers.

Liability Can be Imputed to Domestic Companies

When a product causes injury, all members of the product's supply chain are subject to being named in the lawsuit brought by the plaintiff.  As a practical matter, the U.S. based distributor or manufacturer of the finished product the company that puts its logo on the product's packaging is most likely to be the first party named in the suit, since it is the party most readily identifiable by the plaintiff.  The plaintiff may also bring component part or ingredient suppliers into the suit, assuming that they can be identified.  However, the legal complications involved in suing a foreign company in a U.S. court may allow a foreign member of the supply chain to escape being sued, altogether.  Since it can be difficult for a plaintiff to serve a foreign company with processor provide the foreign company with the required legal notice that it is being suedonly the domestic companies associated with the product may be brought into the suit, though liability may have originated with a foreign member of the supply chain.  In some states, if the product's manufacturer is not subject to service of process, imputed liability statutes provide that a product's distributor can be sued for a product's defect, though the distributor has no direct responsibility for the defect since the distributor played no role in the design, manufacture, or labeling of the product.8

Managing Potential Products Liability Exposures

Since the fate of a domestic company can be tied to the actions (or inactions) of its foreign business partners, it becomes imperative for the domestic company to maintain proper control over its supply chain. In particular, FDA officials have noted that domestic companies need to better manage their supply chains by strengthening their supplier qualification practices and conducting frequent audits of their suppliers.9

Step-Up Efforts to Investigate Foreign Suppliers

During the supplier qualification process, many companies fail to perform basic investigations of their potential suppliers to verify their performance records.  A domestic company should begin by reviewing information available from the FDA, if any, and the foreign regulatory body with direct authority over the supplier. Information, such as certifications and references, which can come from the supplier directly, also may provide valuable information.  Conducting an on-site inspection of the supplier's facility, though possibly costly, is extremely important to assess the supplier's quality management system.  Suppliers must comport with Good Manufacturing Practices (GMPs), and onsite inspections can help domestic companies determine whether suppliers have the proper infrastructure in place to do so.

Expand Use of Audit Procedures

There is no FDA requirement that a domestic company audit its foreign suppliers.  However, in the wake of the recent high-profile, drug contamination case involving heparin, the FDA is considering how supply chains should be audited.  For now, from a products liability standpoint, it is necessary for domestic companies to ensure that potential liabilities are not created during the manufacturing process.  Domestic companies must verify that suppliers continue to meet quality and design specifications by conducting on-going audits.  To do so, a domestic company should implement a risk-based audit program, meaning the extent of the risk associated with the product determines the audit procedures used to keep tabs on its quality and production.  If the potential risk for a product is low, then supplierconducted surveys (self-audits) may be appropriate.  For higher risk products, domestic companies will often use independent, third-parties to assess the product.  In some instances, a domestic company may choose to locate personnel in the foreign supplier's facility to oversee any critical operations.

Conclusion

Given the limited FDA oversight of foreign suppliers, domestic companies may be importing risk along with the key component parts and ingredients they purchase abroad.  Since domestic companies can be held liable for the products liability claims that originate with foreign suppliers, domestic companies must step up the due diligence they perform when selecting foreign suppliers and carefully monitor the products they receive from them.

Federal Action Signals Changes Are In Store for Imports

The federal government is taking action in response to growing concern over the safety of imported products. Proposed legislation and the creation of a new, oversight body could significantly impact U.S. policies on imported medical products.

FDA Globalization Act of 2008: This bill is being considered by the Committee on Energy and Commerce in the U.S. House of Representatives. If this bill is enacted, the FDA will be required to inspect foreign device and drug manufacturers every two years. This bill also imposes an annual registration fee on domestic and foreign drug and device manufacturers to defray the cost of inspections. The bill's other provisions would empower the FDA to:

  • Limit the import of drugs to U.S. ports with testing facilities, unless the importer can show that the drug meets certain standards;
  • Deem a drug "adulterated" or "misbranded" if the manufacturer cannot provide information about the origin, purity, and performance of a particular drug ingredient;
  • Require country of origin labeling; and
  • Exert greater control over drug recalls.
  •  

    Food and Drug Import Safety Act of 2007: This bill is also being considered by the Committee on Energy and Commerce.

    It would create a user fee on imported drug products to pay for additional personnel to perform inspections at the U.S. border and abroad and increase testing of imported products. Additionally, the bill grants the FDA authority to:

  • Issue mandatory recalls;
  • Require country of origin labeling;
  • Halt imports until a foreign manufacturer or supplier can demonstrate it has rectified an identified problem; and
  • Increase penalties for importers who violate the Federal Food, Drug, and Cosmetic Act.
  •  

    The Interagency Working Group on Import Safety:  This body was created by Executive Order on July 18, 2007.  Its mission is to review current import practices and recommend steps to ensure the safety of imported products.  Under the Group's leadership, the United States entered a Memorandum of Understanding (MOU) with both China and Vietnam regarding the safety of drugs and medical devices.

  • The U.S.-Chinese MOU improves the flow of critical regulatory information between the countries, develops international standards, and streamlines foreign inspections.
  • The U.S.-Vietnamese MOU improves cooperation between the countries with respect to sharing information, training, and establishing best practices in clinical trials.
  •  

     

    1 "FDA Beyond Our Borders," FDA Consumer Health Information, U.S. Food and Drug Administration, December 9, 2008.

    2 "Leavitt: Regulation-Building is Key Role of New FDA Foreign Outposts," FDA Week, vol. 14, issue 42.

    3 Data regarding foreign device manufacturers is cited from "FDA Faces Challenges in Conducting Inspections of Foreign Manufacturing Establishments," testimony of Marcia Crosse, Director of Health Care, Government Accountability Office, before the Subcommittee on Health, Committee on Energy and Commerce, House of Representatives, on May 14, 2008.

    4 Data regarding foreign drug manufacturers and drug ingredient suppliers is cited from "Preliminary Findings Suggest Weaknesses in FDA's Program for Inspecting Foreign Drug Manufacturers," testimony of Marcia Crosse, Director of Health Care, Government Accountability Office, before the Subcommittee on Oversight and Investigations, Committee on Energy and Commerce, House of Representatives, on November 1, 2007.

    5 Kaufman, Marc. "FDA Scrutiny Scant in India, China as Drugs Pour into U.S.," The Washington Post, June 17, 2007.

    6 See the Statement of Andrew C. von Eschenbach, Commissioner of Food and Drugs, Food and Drug Administration, Department of Health and Human Services, before the Committee on Energy and Commerce, Subcommittee on Oversight and Investigations, House of Representatives, November 1, 2007.

    7 The study, "Managing Business Risk in 2006 and Beyond," was commissioned by FM Global, a commercial property insurer, and conducted by Harris Interactive. The study included input from more than 600 financial executives, the majority of whom work for companies with at least $1B or more in annual revenue.

    8 For more information about imputed liability statutes, see "Tracking Foreign Manufacturers to Obviate Liability," by Eric Larson Zalud and Clare R. Taft, published in For the Defense, December 2008.

    9 "FDA Considering How Supply Chain Needs Auditing," The QMN Weekly Bulletin, FDAnews, July 25, 2008.