Hyderabad: A warning from the US Food and Drug Administration (FDA) citing violations at three plants owned by Dr Reddy’s Laboratories Ltd, the country’s second largest drug maker, has once again trained the spotlight on quality and compliance practices in the Indian pharmaceutical industry.

The warning is the latest in a string of FDA actions against Indian pharmaceutical firms. Ranbaxy Laboratories Ltd (acquired by Sun Pharmaceutical Industries Ltd), Sun Pharma, Cadila Pharmaceuticals Ltd, Ipca Laboratories Ltd, Wockhardt Ltd and Aurobindo Pharma Ltd have faced action from the US regulator in recent years.

In this context, David Keeling, who leads the global quality, compliance and remediation practice at US-based management consulting firm McKinsey and Co. Inc., says the cost of non-compliance and remediation is 3-5% of sales, in addition to revenue lost on account of product removals from shelves. The remediation time itself is anywhere between five and seven years. “Given what we see today, the choice of being reactive and addressing things after is a bad choice. Organisations need to build quality proactively and from start," he says. Edited excerpts from an interview:

What’s your take on increased US FDA oversight? There is a perception of a disparity in the way Indian companies are treated.

If you look at the last few years, I think India and Indian companies should be proud of the success they have had in becoming part of the global supply chain of drugs. Along with that growth, you expect as they become a bigger part of the global supply chain, that regulatory bodies are going to ensure that they are up to the standard, just as the rest of the industry outside India is, and so to some extent it’s entirely be expected that the regulators will visit more often and will be concerned about quality. I do not see a disparity in the way in which they treat Indian companies.

David KeelingChicago, US-based David Keeling brings over 20 years of experience to his role as leader of McKinsey & Co.’s global pharmaceutical operations practice. He helps pharma and medical product makers implement operational changes that spur innovation and open new market opportunities by improving quality, service and safety. Keeling has an MBA degree from Kellogg School of Management, Northwestern University.

What’s the cost of non-compliance?

There are two costs of non-compliance: the impact on revenue performance and the impact on costs. The revenue impact is varied, depending on enforcement action. But what we do see in cases of warning letters and consent decrees—among the stronger enforcement actions by US FDA—are cost increases of about 3-5%. That’s a heavy burden. It’s the cost of ensuring compliance while you are in the remediation phase.

In addition, the leadership of an organisation is forced to spend more time on fixing things than addressing customer needs. They get drawn into this. It’s not just the real cost, there is a managerial cost. Given what we see today, the choice of being reactive and addressing things after is a bad choice. Organisations need to build quality proactively and from the start.

Why is the impact larger, even though your data indicates that the average number of import alerts remained constant?

The impact of quality issues is larger and faster. Information flow is larger and faster. Once you have information flow at a faster pace through the Internet, then the impact just grows. Be it the automotive industry, the food industry or the pharmaceutical industry, what you see are larger impacts than ever before. And you won’t have time to react. So you better driving quality from the start.

Why is remediation taking so long?

Remediation takes a long time because the reasons aren’t simple. It’s not about how you laid out the plant, or about the design of products. It’s about management systems and the toughest piece is about the culture. You have to solve that at the end of the day to build quality. You have to deal with people issues—that takes time. Some of the clients I served had to deal with remediation for 5-7 years. These are US organisations, not Indian organisations. These are long journeys. I think it’s important that people understand that there is no quick fix. If you have a quality problem you need to go underneath it and fix all the elements of the system. Very few have solved it quickly.

What are the areas where India companies need to catch up?

The definition of good manufacturing practices has changed over time. What was the standard for producing steriles has evolved over time and the industry has gotten smarter and better. Everybody needs to stay up to date on good quality standards. The second thing what has changed is the people element and culture. Organisations are beginning to understand that it’s not just about investing in how the equipment is laid out and performance management and metrics, but it is about actually investing in people and getting the quality culture right, with leadership playing a big role in ensuring quality.

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