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Generic Manufacturing: GDUFA & CMOs



Generic facility fees cause sticker shock



By Gil Y. Roth, Contract Pharma



Published March 6, 2013
Related Searches: Supplement API contract pharma Contract Manufacturing
In July 2012, the U.S. Congress enacted the Food and Drug Safety and Innovation Act (FDASIA), which contained the Generic Drug User Fee Amendments (GDUFA). GDUFA has noble goals in its first five-year term: improving safety, access and supply chain transparency for generic drugs in the U.S. Key targets include cutting down the huge backlog in Abbreviated New Drug Applications (ANDAs) by 90%, reducing the current turnaround time for a new ANDA from an average of 32 months to approximately 10 months, as well as inspecting all facilities that supply generic APIs and Final Dosage Forms (FDF).

We covered the genesis of GDUFA in our January/ February 2012 issue (bit.ly/Vm6SFS). At that time, there was uncertainty among CMOs as to whether they were going to be subject to the Facility Fees that comprise a large portion of GDUFA’s annual budget. Now that sites have received their bills (with instructions to pay up by March 4), CMOs have been hit by a wave of sticker shock. Domestic FDF and primary packaging facilities that handle even a single generic product must pay $175,389 in GDUFA’s first year, while non-U.S. FDF and primary packaging sites must pay $190,389. Failure of a facility to pay means “[n]o new generic drug submission referencing the facility will be received until the fee is paid,” according to the FDA.

To find out how the fee structure was developed, and how the CMO portion of the industry plans to respond to it, we spoke to FDA, the Generic Pharmaceutical Association (GPhA), and a variety of CMOs and API manufacturers.

The Fee
The math behind the GDUFA Facility Fee is (relatively) simple. Final Dosage Form facilities will pay for 56% of GDUFA’s annual budget, and API Manufacturing facilities will account for 14% of the budget. Another 24% will come from filings of ANDAs and Prior Approval Supplements (PAS), and the remaining 6% from holders of Drug Master Files (DMFs).

GDUFA’s 2013 budget is $299 million, but includes a one-time $50 million “backlog fee” issued to holders of ANDAs that were pending prior to October 1, 2012. That means FDF facilities owe a collective $139,440,000 for the first year of GDUFA, with API suppliers kicking in another $34,860,000. This translates to Facility Fees of $26,458 for U.S. API sites and $41,458 for foreign ones. (The $15,000 spread between U.S. and foreign facilities is meant to help offset the costs of inspecting facilities overseas, although the FDA noted that fees are not earmarked based on their source; that is, Facility Fees will not go solely toward inspections, and ANDA/PAS fees will not go exclusively toward reviewers.)

The backlog fee expires after 2013, so FDF manufacturers will have to cover an additional $28 million in 2014 and beyond. This will translate to an increase of approximately $30,000 for each FDF Facility Fee. The fees will also be indexed to inflation, and so may rise further.

The List
To calculate the fee per facility, the FDA requested that generic drugmakers, CMOs, API manufacturers, analytical laboratories, packagers (as mentioned, the FDA determined that primary packaging is tantamount to FDF manufacturing, so those sites were charged the same Facility Fee), and other associated service providers self-identify their facilities. In addition to bookkeeping, compiling the list also enabled the agency to develop a clearer picture of the size of the generic supply chain. (See Making a List, Checking It Twice sidebar below)

One look at the agency’s Self-Identified Facilities List spreadsheet — hosted on its GDUFA site, 1.usa.gov/ V4TRPT — reveals a significant number of pure-play CMOs alongside the facilities of dedicated generic drugmakers such as Teva, Mylan and Actavis, so we contacted more than 70 CMOs to get their perspective on GDUFA fees. Many either failed to respond or had no comment, and virtually none of the CMOs would speak for attribution, but the overall tone was that they felt blindsided by the Facility Fee.
One CMO remarked, “We have a single generic client that we do a short run of product for. Why are we charged the same as a Teva facility that pumps out a billion tablets?”

Another commented, “At least a flat tax is based on a percentage, either of revenue or profit. This is a flat fee, which makes it a regressive tax on smaller businesses, both CMOs and small generics companies.”

Said a third, “In practice, this is very much anti-small business. The big players are going to defray the costs across massive numbers of units, but for smaller players it’s a huge fee. If small business is the crux of your economy, this is going to hurt your economy.”

Several other CMOs in the same position — one or two generic clients alongside a larger roster of innovator clients — wondered why no sliding scale or exemptions were implemented, as they are for PDUFA.

In the public meeting on GDUFA implementation held on Sept. 21, 2012 at FDA White Oak Campus in Silver Spring, MD, Donal Parks at CDER’s Office of Management remarked, “You will not find small business waivers, you will not find orphan drug exclusions, things like that, in GDUFA.” The idea is “to have as few exemptions as possible, so that the overall fees could be kept as low as possible,” said Mr. Parks.

In spirit (if not in magnitude) GDUFA was patterned after the Prescription Drug User Fee Act (PDUFA), first enacted in 1992. However, under PDUFA, the Establishment Fee for sites that manufacture drugs (whether in-house or outsource) is charged to the holder of the NDA or BLA. In an outsourcing relationship, this means that the sponsor must factor that fee into its negotiations with a CMO.

Under GDUFA, the Facility Fee is charged directly to the owner of the site. For a CMO, it means either swallowing the cost or telling generic clients that the new fee has to be levied into the existing contract. Given the razor-thin margins that many generics afford, the fee has the potential to wipe out the operating margins for a contractor.

The Deal
CMOs gave us conflicting messages about how they planned to deal with the new fees. Some told us that they had language in existing contracts that would enable them to re-open negotiations to help pass along a portion of their Facility Fees to their generic clients. Others said that they had no such provisions, and that they could only work in changes related to cost of materials, not to new regulatory issues. In particular, the smaller CMOs, especially the ones with very small generic client bases, were the most concerned that the fees would make it unfeasible to continue working in the generic space. One told us that it would have to take out a small business loan to cover the fee.

A larger CMO with no internal generics told us, “I have no mechanism to tell our major client, ‘You’re one of [x] number of generics I make at my site, so I need you to pay your portion.’ They have no obligation to pay that.” That CMO admitted his firm would likely swallow the costs of the Facility Fee this year, but would factor it into any new contracts with generic partners in hopes of defraying the overall cost. He added, “It’ll be great if this results in ANDAs getting approved more quickly, but the amount of business that CMOs will gain from that isn’t likely to pay off for years.” The result, he contended, is that costs for generics will increase, at least for smaller-run, specialty products. “We’ll see CMOs exit generics, and those short runs will have to be handled by larger companies that aren’t interested in them and will charge a heavier premium.”

One CMO told us that the fee won’t be the end of the world, noting, “Even if it’s not in the contract, there’s a way to negotiate with a generic customer. You have to go to table and say, ‘Look, this wasn’t contemplated when we went into this business. I’ve got 10 ANDAs in my plant, and this is $175,000, so I need $17.5k per ANDA.’ I think it can be reasonably negotiated, because when you get down to it, ‘Screw you’ is really a bad way to do business. A client who tells you that is telling you that they don’t want to do business with you. What you really want is to have is a business relationship where you can say, ‘I have a problem,’ and your client can say, ‘Let’s see how I can help you.’

“That said,” he admitted, “for smaller CMOs, this is a body blow.”

A small CMO commented, “Our contracts discuss inflation costs by referencing the consumer price index (CPI). For existing contracts, it may be difficult to immediately raise prices. But our generic clients recognize that this cost can’t be solely absorbed by the CMO partners and are open to discuss these new regulatory costs. You can be sure that each new project will bear the cost of the filing fee.”

Another not-so-small CMO told us, “We plan to pass the costs along to our customers that are impacted by the fees.  Those customers have been informed and we have had no issues. The inspection fees have forced us to rethink having generic companies as customers, but if we can come to an agreement on passing the fees through, there is no reason not to continue. However, if we have to assume the fees ourselves, it is a difficult financial position to be in.”

Not all CMOs are in the same boat. We spoke to some that have an internal line of generic products in addition to their contract manufacturing work. Most companies in that position told us that they’re likely to pay the fee themselves without trying to re-open existing contracts with generic clients. Said one, “We look at it this way; we’d have to pay the Facility Fee anyway for our own line. We’re not happy about it, but if it improves approval times, then we could still benefit.”

The Margin
One CMO that’s considering entering the generic manufacturing market told us, “We’re negotiating to make a product for a generic client that we currently do analytical work for, but the Facility Fee might make it uneconomical for us to proceed. It could wipe out our profit margin.”

Another said, “Potentially, we could get out of the generic CMO business. We’ll have to look at our strategy, if it hurts our margins significantly.”

Still another added, “It might get worse as CMOs drop out of the program due to marginal profits. There are many winners with this program but it will cut out the smaller players, especially the smaller international suppliers.”

We asked the agency about the possibility of CMOs and smaller generic companies leaving the business if the Facility Fees become too onerous on their low-margin businesses. “FDA is not expecting a large number of fee-paying entities to leave the market, though at the margin that is possible,” the CDER trade press desk told us. “GDUFA was designed to keep individual fee amounts as low as possible to supplement appropriated funding to ensure that consumers continue to receive the significant benefits offered by generic drugs. This program was not expected to add significantly to the cost of generic drugs. Moreover, with the adoption of user fees and the associated savings in development time, the overall expense of bringing a product to market may decline and result in reduced costs.”

One CMO told us, “If I pay this fee, it’s because I’m expecting to get revenues from pending products. I’ve budgeted generics that our clients filed nearly three years ago, but have yet to be approved. If this speeds up that process, and we can recognize that revenue soon, I’m fine with the fee.”

Backlog woes were a constant refrain among CMOs. Many have been waiting for approvals to begin manufacturing, and now find themselves facing higher costs without the guarantee of that new business. One CMO commented, “With today’s backlog, no client is going to produce an At Risk generic; they’re going to wait for approval. It’s very difficult to forecast and explain to your management that you don’t know when the client’s going to get cleared by FDA. If this can get a few projects approved 12 months earlier than we’re used to, it may pay itself back.”

However, in several meetings, the FDA “expressed concern about meeting specific performance metrics in the first two years of the program,” because it would be focused on hiring and training staff and “building necessary systems.”

The Negotiations
The fee structure for GDUFA was the result of negotiations between FDA and several industry groups. GPhA was the key trade association in negotiations with FDA, with representatives at all 16 sessions with FDA from February to August 2011. In its publicly available minutes from those meetings, the FDA noted that it was at the May 26, 2011 meeting where the FDF/API split for facility fees was settled at 80/20 (56% and 14%, respectively, of the total GDUFA budget). The June 30 meeting focused on funding for GDUFA, where FDA noted, “Congress will have the final role in determining the precise fee structure after the negotiated plan is presented to Congress for inclusion in user fee legislation,” but no change was made from the 80/20 proposal reiterated by GPhA, the European Fine Chemicals Group (EFCG) and SOCMA’s Bulk Pharma-ceutical Task Force (BPTF).

We asked GPhA about the process of negotiating GDUFA and whether that group saw any “unintended consequences” arising from the imposition of Facility Fees on companies that do not actively sell generics.

We were told, “In negotiating with the FDA for GDUFA draft language, the goal was to reduce the ANDA backlog and to improve the time spent by the FDA Office of Generic Drugs in the ANDA approval processes. [. . .] The intended consequence was to reduce the backlog and improve the ANDA approval time. These fees were/are an accepted ‘trade’ for accelerating the FDA processes.”

Why was GDUFA negotiated with Facility Fees going directly to facility owners rather than ANDA filers? Neither FDA nor GPhA answered that question when we put it to them. Is this an instance of the adage, “If you’re not at the table, then you’re on the menu?” It’s possible that the negotiating parties simply forgot about or were oblivious to the presence of “pure-play” CMOs that help manufacture generic drugs, especially those in short runs. It’s also possible that GPhA’s negotiators saw that millions of dollars of the annual GDUFA FDF contribution could be passed along to a subset of companies that had no voice at the bargaining table.

The GPhA negotiators, as cited in the FDA’s meeting minutes at the GDUFA website, included representatives from major generic companies such as Watson, Teva, Mylan, Perrigo and Sagent. One representative from Ben Venue Labs (BVL) attended several sessions, but it’s likely that she represented the company’s generic business, Bedford Laboratories. In addition, those meetings took place at the time when BVL was reaching its decision to exit the CMO business.

In the March 18, 2011 meeting minutes, the agency noted, “FDA encouraged industry to let their colleagues, whether in a trade association or not, know that the FDA public docket remains open and that FDA welcomes input from industry and non-industry stakeholders alike.” None of the CMOs we spoke to said that they knew anything about these negotiations.

One small CMO told us, “I think the sad part is that the FDA chose only to engage the GPhA and didn’t let anyone else know what the magnitude of the fees might be. I tried to get answers from FDA and was told that the idea for having a single fee was that FDA couldn’t handle the logistics of different pricing for different parties. That’s an amazingly poor answer. FDA has all the data available on who has what products; they could’ve handled some routine accounting issues.”

An industry lawyer told us, “I wouldn’t be shocked if the big guys helped write the laws to squeeze the smaller generic companies and dump fees on pure-play manufacturers. I find it suspicious that GDUFA is modeled after PDUFA but doesn’t include any waivers and charges sites directly. That’s not an accident.”

One single-site CMO remarked, “Of course, GDUFA is intended to have a positive impact for the industry, which has voiced the need for such a program. Our main concern is that the unintended consequences could lead to further industry consolidation. We question whether this is good for the consumer and what impact could it have on manufacturing in the U.S. We hope to see foreign establishments held to the same standards as U.S. firms. Given that the FDA has not had the resources to properly audit foreign establishments in the past, GDUFA could help change this paradigm.”

GDUFA has five years to run, at which point Congress can vote to reauthorize it, scuttle it, revamp it . . . or expand the categories of Facility Fees that help pay its budget. If there’s an upside to this experience for contract manufacturers, it’s that they know they have to be more diligent about regulations that could affect their business. They should keep their Representatives’ and Senators’ phone numbers handy. 

API Dynamics
The API industry possesses a much different dynamic than FDF, with a far greater issues related to competitors from low-cost regions. That may be why the only companies that did choose to go on the record for this article were impacted by GDUFA on the API side.

Through a spokesman, Aesica Pharmaceuticals, which identified two of its sites as API manufacturers for the FDA’s list, told us, “The increased number of inspections will eliminate inferior and fraudulent manufacturers and increase quality standards. Nevertheless the fee is somehow unjust, as it weighs equally on high as well as low quality manufacturers and will ultimately have an impact on drug prices. Probably more effort should be done in developing a global approach with agencies in the manufacturers’ countries working to the same international parameters and accepting responsibility of non-compliance, rather than duplicating effort by introducing additional inspections.”

AMRI self-identified its Rensselaer, NY facility for API Manufacturing. Junan Guo, Ph.D., AMRI’s vice president, Pharmaceutical and Quality Services, remarked, “The facility fee is relatively small in comparison to the overall site business. In addition, GDUFA provides more timely approval for ANDAs, and reduces the competition from the smaller operations, especially small, international operations.”

Dr. Guo added, “AMRI will consider the required facility fee before introducing generic API or drug product into other AMRI sites globally.”

Making a List, Checking It Twice
The FDA admitted that it needed a better understanding of the world of generic drugmakers and service providers. The Self-Identified Facilities List should help rectify that, but only if companies actually self-identify. In December 2012, at the end of the reporting period for self-identifying, the number of facilities on the list was “below estimates of the universe of generic drug facilities.” Based on facilities listed in ANDAs between October 1 and December 2, 2012, it appeared that one in eight facilities failed to self-identify. A two-week grace period helped improve the numbers, but they still fell short of the agency’s initial estimates.

CDER’s trade press desk told us, “Actually, the facility estimates that were used in the negotiation were not terribly far off — but as we told industry clearly during the negotiation, prior to GDUFA FDA lacked a single comprehensive accurate database of all facilities involved in the manufacture of generic drugs, so we utilized the best information we had at the time. To the extent there were overestimations in any category, those would have been due to insufficiencies in the information that was available, and the fact that for years, firms have been very lax about removing facilities from FDA’s registration database when they are no longer manufacturing drugs. It should also be noted that industry trade groups were unable to provide any more accurate estimates of the number of facilities than the ones that both sides used in the negotiation.”

It’s a chronic problem for the industry. Some of the people we spoke to for this article contended that there are companies on the FDA’s facilties list that they are certain no longer exist.

One analytical laboratory told us that it was twice on the receiving end of FDA audits because it was named on ANDAs. The problem was, the lab had never done any work for either of the generic companies that had listed it. In one instance, the lab discovered that the company filing the ANDA wasn’t registered in the U.S., and that the address on the filing was for a residence belonging to a consultant who was filing the ANDA for a company in the far east.



Gil Roth has been the editor of Contract Pharma since its debut in 1999. He can be reached at groth@rodmanmedia.com.


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