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‘Natural’ claims on RTE food packaging

March 2007 Packaging World magazine

USDA has a beef with some ready-to-eat deli packages. Companies are being forced to ditch “natural” copy on packaging.



Ready-to-eat deli meat marketers are clearing room in their garbage cans for packaging and labeling they will have to toss out if the U.S. Department of Agriculture (USDA) moves forward with its intention to change its rules for use of the term “natural” on labels of meat and poultry.

The USDA’s Food Safety and Inspection Service (FSIS) sent out letters in December to numerous companies such as Farmland Foods giving them a couple of months to prove that the sodium lactate they add to products labeled “natural” is used only for flavoring, not as a preservative.

Jesse Waller, manager of labeling at Farmland Foods, a division of Smithfield Foods, acknowledges that the sodium lactate in the company’s eight ham products does indeed function as a preservative. “All types of things will be precipitated with regards to packaging as a result of this,” he states. “We have no choice, our packaging will be rescinded.”

Randy Huffman, vice president, scientific affairs, American Meat Institute Foundation, does not know exactly how many other companies are in Farmland’s boat. “But it is definitely more than one or two,” he adds. The growth in use of sodium lactate in deli meats to control Listeria has been quite significant in recent years. The FSIS encourages its use as an anti-microbial. Companies can continue to use it for that purpose, but they will not be able to put a “natural” label on their package.

The FSIS’s impending cancellation of some “natural” labels reverses a policy the agency announced in August 2005 when it said companies could use sodium lactate in products labeled “natural.”

Hormel Foods forced the reversal by submitting a petition to the USDA in the fall of 2006 arguing the FSIS had erred in allowing sodium lactate because it is a refined chemical synthesized using a separate chemical manufacturing process that therefore corrupts an otherwise natural product.

The original 1980 FSIS policy memo on use of the term “natural” says that an ingredient that has been “more than minimally processed” cannot be included in a product with a “natural” label on it. But as sodium lactate became popular over the past few years, the FSIS started approving its use in natural products on an ad-hoc basis. It translated those ad-hoc decisions into formal policy in August 2005, and is now reversing it under pressure from Hormel.

Hormel’s alternative

Hormel has competitive reasons for pressing the FSIS to withdraw approval of sodium lactate. The company uses an anti-microbial process called high-pressure pasteurization (HPP) to increase shelf life of its natural products. HPP, a post-packaging pasteurization step, uses approximately 87,000 pounds-per-square-inch of water pressure to denature pathogens such as Listeria monocytogenes.

It is the technology behind the “all natural, no preservatives” claim on Hormel’s new Natural Choice line of luncheon meats that were rolled out last May. Perdue Farms also uses HPP in some of its Short Cuts line of ready-to-eat sliced turkey and chicken breast strips.

The FSIS’s response to the Hormel petition is just the first step in an upcoming rulemaking which will plumb numerous other issues related to a “natural” claim. This rulemaking could have even wider packaging implications, according to Bob Hibbert, a Washington attorney for flavor manufacturers and a former top FSIS official.

Hibbert says that the carbon dioxide added to meats when companies use modified atmosphere packaging (MAP) could be ruled an unnatural chemical ingredient, on a par with sodium lactate.

Effects on processors

The immediate concern, though, is to companies that use sodium lactate, and indicate that fact on their labels and packaging. All meat and poultry retail labels need to be pre-approved by the FSIS, which has threatened to cancel all past approvals for all labels for “natural” products that include sodium lactate.

Robert Post, the current director of the FSIS labeling and consumer protection staff, declined to be interviewed about this issue.

Farmland’s Waller explains that his company has eight active product codes devoted to all-natural classic ham products that use pressure-sensitive labels and are vacuum-packed. All are formulated with sodium lactate.

The products are only a small part of the company’s 3,000 active codes, but an increasingly important part, as Farmland and its rivals bid for the expanding demand for those products, especially from the giant “club” stores. “We will have to get rid of all our current labels and packaging for those eight codes if the FSIS goes ahead with this,” says Waller.

Other new techniques

Explaining the agency’s change of heart on sodium lactate, the FSIS’s Post, at a meeting in Washington, DC, on December 12, 2006, cited a growing number of requests by manufacturers to permit the “natural” claim on products that are made via processing techniques that were not available in 1980 when the
original FSIS policy allowing only minimal processing was written.

“For example, techniques have evolved such as high-pressure processing, packaging methods such as modified-atmosphere packaging and multiple-function ingredients such as sodium citrate and sodium nitrate that are regulated as flavoring agents and have anti-microbial effects,” he explained.

Now that Hormel has opened up this can of worms, the company itself is likely to come under scrutiny. Deb O’Donnell, director of research and development for Kayem Foods, wonders whether Hormel’s HPP process violates the “more than minimally processed” policy. This is a question asked by a number of other attendees at the FSIS December meeting.

Kayem markets an Al Fresco line of all-natural chicken-based sausages, and has for eight years. The product does not contain sodium lactate, nor does the company use HPP. O’Donnell says the company has extended the shelf life of its vacuum-packed line of Al Fresco sausages from 18 days initially to 35 days today without adding chemicals, but by altering cooking temperatures, handling procedures and by tweaking its packaging line, which it declined to identify.

“But now we have a lot of pressure on us to have more shelf life as we grow across the country,” she concedes. “A product can get lost in a warehouse for a week. Customers want shelf life that is endless


Business demands still more SEC give

March 5, 2007 Financial Week

Lobbies Congress to ease SarbOx burden on small companies’ internal controls

By Stephen Barlas

Business groups and individual companies have viciously attacked the SEC’s reform proposals for Section 404 of Sarbanes-Oxley, with some actively pushing for Congress to ease the regulatory burden.

And Congress is ready to act.

Rep. Greg Meeks (D-N.Y.), teaming up with fellow House Financial Services Committee member Rep. Tom Feeney (R-Fla.), is preparing legislation to make changes to Section 404. In an interview, Mr. Feeney said the bill will be introduced this week.

“Even chairman Frank admits something needs to be done,” Mr. Feeney emphasized. “The question is whether the SEC and PCAOB are prepared to completely resolve the problem, or whether corrective legislation is necessary. I prefer a comprehensive legislative fix.”

Chairman Frank is Rep. Barney Frank (D-Mass.), head of the House Financial Services Committee.

One business group, the Biotechnology Industry Organization, backs the efforts of Messrs. Meeks and Feeney.

“We have been supportive of the intents and goals of congressmen Meeks and Feeney,” said Alan Eisenberg, an executive vice president at BIO, “and look forward to working with them as they get their legislation introduced.”

BIO has been a leading trade association pleading with the SEC to change the Section 404 requirements. Public companies with market capitalizations below $75 million currently enjoy a reprieve, which has been extended a number of times, from filing 404 reports and having the auditor attestations done.

In addition to businesses, consumer groups weighed in loudly against the reform proposals, which could push the Democrat-controlled Congress even further toward stepping in and changing SarbOx. After all, Democrats consider themselves consumer-friendly.

“The guidance is so vague as to be unenforceable,” said Barbara Roper, director of investor protection at the Consumer Federation of America, in her comment letter to the SEC. “As a result, and particularly if the SEC brings that mind-set to its enforcement, managers are likely to be able to claim compliance with the guidelines, and the safe harbor that it provides, for even the shoddiest of internal control assessments.”

A preponderance of the public comments from the business community griped that proposed SarbOx changes—from both the Securities and Exchange Commission and the Public Company Accounting Oversight Board—don’t really clarify the vagueness of the official guidance for small and large companies and come up short on whittling away at Section 404 costs.

Marie K. Lee, counsel and director of finance and tax policy at the American Electronics Association, said the proposals will not be effective “in their current form in significantly reducing the excessive compliance burdens our member companies, and in particular smaller companies, face.”

The association’s office in Washington, D.C., was the venue for a visit by incoming House Speaker Nancy Pelosi (D-Calif.) a few days after the November elections. During that visit, Ms. Pelosi emphasized the Democrats’ determination to fix problems with Section 404 now that they were in power on Capitol Hill.

Asked whether Ms. Pelosi plans to make good on that promise in the wake of the negative comments flooding the SEC and PCAOB, a spokesman replied: “We’re reviewing comments, as is the Financial Services Committee, and we’ve seen a mix of reaction. We want to thoroughly review these comments before we decide possible next steps.”

Last April, an SEC advisory committee recommended the commission develop “scaled” or proportional regulation for companies deemed small-cap or micro-cap, to offer some relief to smaller companies. Instead, the SEC attempted to move ahead and inject its Section 404 guidance with scalability, an effort which, at least in the view of many small business groups, failed miserably.

Thomas M. Sullivan chief counsel of advocacy at the Small Business Administration, said that based on comments from small business executives at an SBA roundtable in January, the SBA believes “the Section 404 requirements will still impose large and disproportionate costs on small public companies.”

The SEC’s attempt to sharpen its definition of “material weakness” fell flat too, particularly in light of the PCAOB definition, which seems miles apart from the SEC’s.

David Chavern, chief operating officer of the U.S. Chamber of Commerce, prefaced his comments, as did many others, by saying both the SEC and PCAOB proposals represent a legitimate and significant attempt to address the widespread concerns of the business community and the difficulties that public companies have faced.

But then he lowered the boom, calling the definition of “material weakness,” which is central to Section 404 analysis, “unnecessarily vague.” He added that the PCAOB has reworded its standard for material weakness from “more than a remote likelihood” in Auditing Standard 2 to “reasonable possibility” in Auditing Standard 5.

Other commentators cited the disconnect between the Interpretative Guidance and AS2.

“We believe that the proposed standards, although improved from the existing PCAOB Audit Standard No. 2, are still more detailed and prescriptive than the proposed guidance,” explained Arnold C. Hanish, executive director and chief accounting officer at Eli Lilly, in his comment letter.

“These differences,” he continued, “will result in external audits that are more conservative than management assessments, which will cause companies to incur unnecessary costs to remain aligned with their external auditors.”

Mr. Chavern of the U.S. Chamber added that because the SEC guidance is “vague as to the specific procedures that companies should follow to establish and evaluate their internal controls,” the proposed safe harbor—companies would be safe from enforcement if they follow the guidance—“does little to reduce the uncertainty that has been inherent in the compliance process to date.”

At least one chief financial officer admitted that the SEC and PCAOB proposals will result in costs that will in fact be lower than what they would have been minus the proposed changes. Question is, would it be a big enough savings?

“We think the implementation of the [guidance] may result in a reduction in issuer compliance costs on a rough order of magnitude of 10% savings in the initial year of adoption and a potential savings of 15% to 20% in subsequent years,” stated Michael E. Keane, vice president and CFO of Computer Sciences Corp.

“Since compliance costs under 404 have been widely reported to approximate $1 million per $1 billion of revenue,” he said, “we estimate this potential savings at 0.02% of public company revenues.”







Barney`s New Pulpit

March 2007 Financial Executive Magazine

By Stephen Barlas



Rep. Barney Frank, the new chairman of the House Financial Services Committee, has a reputation as one of Congress’ wittiest members. Observers say his rhetoric may be harsher than his strategy, but his approach to issues like executive compensation and Sarbanes-Oxley reform may not be welcomed by business executives.



Rep. Barney Frank (D-Mass.), the new chairman of the House Financial Services Committee, is the Robin Williams of Capitol Hill. He piles witty quips on top of one another like some counterman at a kosher deli heaping sliced meat on rye. At the same time, though, Frank is a serious politician, in many ways the heart and mind of the liberal wing of the Democratic Party. So, his one-liners are often fortified with substantial intellectual protein. Sometimes, though, there is also a lot of ham between the bread.

When the Securities and Exchange Commission (SEC) quietly put out a news release a few days before Christmas last year announcing a change in its reporting rules for executive pay, Frank went into shtick mode. “I didn’t even know they had a chimney at the SEC, and then all of sudden this came slipping down it,” he complained.

The SEC’s change to the pay reporting rules was done to align corporate disclosure requirements with disclosure requirements as laid out in FASB standard FAS 123(R). Soon after delivering his jibe, Frank spoke to SEC Chairman Christopher Cox, who allayed his concerns.

The Massachusetts Democrat, who is widely respected by both Democrats and Republicans as probably the smartest, quickest member of the House, immediately quieted down. But within days, he was off again, lampooning Republican economic theology positing that tax cuts result in a “rising tide that lifts all boats.”

Frank, who represents the very liberal Fourth District in Massachusetts, just west of Boston, has always championed affordable housing above all else. At the National Press Club that day, he joked, “If you think about that analogy, the rising tide is a very good idea if you have a boat. But if you are too poor to afford a boat and you are standing tiptoe in the water, the rising tide goes up your nose.”

Twenty-six years after taking a seat in the House, Frank is still a wise guy, in both senses of that word. His hair is gray these days, and his face is a touch jowly. But age has not cooled his passion. While the contemporary glasses which occasionally slide down his nose may make him look a touch professorial, his rhetorical style is anything but academic.

The openly gay Democrat is a dominating, combative verbal presence, his fingers twining and unfolding in front of him as he talks, hands slapping the table in front of him, karate-style, for emphasis. With the Democrats taking control of Congress, the 66-year-old Harvard-trained lawyer — who worked for former Boston Mayor Kevin White before coming to Washington, where he started as a Capitol Hill staffer — has real power. But as the 110th Congress gets underway, he faces the challenge of morphing from Robin Williams into Ted Williams, the laconic Red Sox great who always let his actions speak louder than his words.

Frank’s performance over the next two years could have a big impact on corporate financial executives, even though corporate issues with SEC ramifications are not at the top of Frank’s agenda. But they may rise quickly. Already, the Senate Finance Committee has begun to address the issue of executive compensation, one of Frank’s big issues. He will not want to be left behind.

Frank, who was unavailable for an interview, now has the power, as committee chairman, to pass his pet bill from 2006, the Protection Against Executive Compensation Abuse Act, which would give shareholders a say on executive pay. Whether he has the legislative skill to ferry such legislation through the House is another question. Business groups have been highly critical of the bill, and some even refused to appear at a hearing Frank held last May. Other issues that could quickly appear on the Financial Services Committee’s agenda include changes to Section 404 of the Sarbanes-Oxley Act, stock options accounting, hedge funds and terrorism insurance.

These kinds of issues hold a lower priority for Frank than some of the others over which his committee has jurisdiction: housing, banking and insurance. Rick Lazio, a former Republican congressman from New York who served with Frank on the committee when it was called Banking, Housing and Urban Development, explains that most Democrats who joined that committee did so because of their desire to have a positive impact on inner-city housing.

Lazio is now executive vice president for public policy at JP Morgan Chase & Co. When he left Congress at the end of 2001, he was chairman of the housing subcommittee. Frank was the top Democrat there. Lazio says he and Frank worked on a bipartisan basis to move bills out of committee on such things as home ownership and housing assistance for seniors and the disabled.

Lacking any deep personal interest in corporate financial reporting issues, Frank has tended to take positions there, and elsewhere, for that matter, aligned with liberal and labor interest groups. The AFL-CIO rated Frank as voting “right” on 93 percent of “their” votes in 2005, a slight drop from his 95 percent lifetime rating; this lifetime rating is two percentage points higher than Sen. Edward Kennedy’s.

Frank certainly won points with the AFL-CIO in 2002, when the Sarbanes-Oxley bill came to the House floor for a vote. Rep. Dennis Kucinich (D-Ohio), one of the Democrat’s most outspoken liberals, proposed an alternative bill that would have substituted a federal regulatory agency for what became the Public Company Accounting Oversight Board (PCAOB). It also included provisions holding CEOs accountable for their financial statements and subjecting them to criminal penalties for knowingly lying.

The bill required those who make false or misleading statements to surrender their stock bonuses, and it also barred guilty officers and directors from serving at other public companies. Only 39 House members voted for the Kucinich alternative, called the Investor, Shareholder, and Employee Protection Act of 2002. Frank was one of them.

More Willing to Listen

It is only fair to note, however, that Frank’s rise to the top spot on the committee has, over the past four years, resulted in a greater willingness to listen to business groups, and for a number of reasons. “I have seen Barney over the years evolve to be very competent pragmatic leader,” says Lazio. “He is very quick to point out what he would view as hypocrisy, and has this acerbic wit. But over the last few years, as the top Democrat on the committee, Barney developed an effective partnership with Mike Oxley, the former Republican chairman. He knows how to get things done.

“He’s been successful in effectively organizing Democrats on the committee,” Lazio adds. “And, he has become for many in financial services, someone who understands the substance, accepts the basic requirements of a market system and with whom you can have an intelligent discussion about reasonable solutions.”

That pragmatic streak was on display in March 2006 when Frank, doing somewhat of an about-face, advocated at committee hearings that the SEC and PCAOB be allowed to ease the Sarbanes-Oxley rules they had written. At hearings at which officials from FASB, the AICPA and former FEI President Colleen Cunningham testified, Frank stated: “I hope they will be willing to make some appropriate adjustments — not exemptions, but adjustments — in how this applies, particularly in part, based on size. And I hope we would tell them that if there were any things that they thought made sense, that they thought they might like statutory authority to do, they should ask us.”

Barney Frank reasonable? Well, he is certainly trying to sound that way. Witness his speeches and television interviews in the wake of the 2006 congressional elections, as he began to lay out his concept for a “grand design” between business and labor in the legislative arena, offering business concessions on such issues as free trade in exchange for its concessions to the labor unions on such things as health care.

“He is trying to reassure the markets that he is not a wild-eyed liberal. That is what is important about his comments, setting aside the particulars,” says a public policy director for a major business lobby who confessed he is not sure what Frank has in mind.

But as Frank attempts to become a little less of a liberal lightening rod, there are questions about whether he can become more of a legislative lightning bolt. His record as a legislator is spotty. Despite considerable public outrage over executive pay, Frank was unable to get a single House Republican to support his executive pay bill last year, a fact he bemoaned in November.

The bill would allow shareholders to review and approve a company’s comprehensive executive compensation plan. One of its more controversial proposals allows for a company to recapture incentive compensation paid in past years to an executive if the company is forced to issue a financial restatement. Frank noted that if just three Republican members of the Financial Services Committee agreed, there would be enough support to force committee consideration of the bill. Not a single Republican member of the committee has come forward to do so.

Republicans steered clear of Frank on pretty much everything. In the 2005-06 Congress, Frank introduced 32 bills and resolutions, according to Thomas, the online congressional research service. None of them was passed by any committee, which may not be surprising, particularly given Republican control of the House. Besides the bill on executive pay, the only other legislation Frank introduced that was relevant to financial executives had to do with extending the Terrorism Risk Insurance Act (TRIA).

Financial Services Committee Chairman Rep. Mike Oxley, who has now retired, included very little of Frank’s bill in the measure the House eventually passed. In December 2005, Congress adopted a very different Senate bill that extended the TRIA program for two years, meaning Frank will have another shot in this session at influencing the terrorism insurance program. Late in January this year, Frank announced that he expects the House to vote to extend the program by April, and that he favors making it permanent.

It’s worth noting that Frank, through his wit, intellect and passion, can on occasion get things done. In 2006, he managed to convince Chairman Oxley and many of the other GOP stalwarts on Financial Services to allocate some of the profits earned by housing juggernauts Freddie Mac and Fannie Mae to public interest groups who advocate for public housing.

Some of the more conservative Republicans on the committee heatedly opposed Frank’s amendment to the Federal Housing Finance Reform Act, which passed the House but never got through the Senate. Still, Frank’s amendment passed the committee by a vote of 16-6.

Rep. Tom Feeney (R-Fla.) was one of the recalcitrants. He was amazed at Frank’s chutzpah. Feeney and his band of conservatives looked at Frank’s gambit as a thinly disguised effort to funnel money to groups such as ACORN (Association of Community Organizations for Reform Now), a nonprofit housing group with an active political arm, which is seen as an appendage to the Democratic Party.

But Frank convinced Oxley to sign on to ostensible “firewall” language in the housing bill that disallowed any spending of what was expected to be a $500 million honey pot for political uses. “Could you imagine if I had proposed an amendment to give $500 million to the National Rifle Association and said they could not use it to educate school kids on guns?” Feeney asks. “What do you think Barney Frank would have said?”

But Feeney was as amazed as he was appalled. “He hoodwinked everyone on the committee,” he says. “And while I was the loser, I admire a successful manipulator.”

As committee chairman, Frank could become an intimidator, too. The chairman’s sharp wit can draw blood, making some colleagues hesitant to challenge him. “While he knows how to make a point, you might be a little bit hesitant to engage him in debate,” states former Rep. John LaFalce, who worked with Frank for many years on the Financial Services Committee and retired at the end of 2004 as the panel’s top Democrat. “His wit can be a double-edged sword. But, it far more often works in his favor than not.”

What will definitely work in his favor is his influence with the House Democratic leadership. House Speaker Rep. Nancy Pelosi (D-Calif.) greatly enhanced his public stature when she shot down Rep. John Dingell (D-Mich.), the incoming chairman of the Energy & Commerce Committee; Dingell had floated a trial balloon right after the November election advertising his intention to take back jurisdiction for the SEC from Frank’s Financial Services Committee.

SEC jurisdiction had been in Energy & Commerce for many years prior to 2002, when Republicans made a switch as a sop to Rep. Oxley. But Dingell’s suggestion obviously fell on deaf ears, despite the fact that Frank had supported Rep. Steny Hoyer (D-Md.) for majority leader over Rep. John Murtha (D-Pa.), Pelosi’s chosen candidate. But Frank paid no price for that challenge to Pelosi, which, in his normal fashion, he made loud and clear.

Maintaining his prominent place in the House Democratic firmament, however, mitigates, to some extent, Frank’s ability as a legislator to channel organized labor legends like Samuel Gompers. That’s because the congressman receives hundreds of thousands of dollars each two-year election cycle from corporate political action committees (PACs). This was true despite the fact that he has either nominal or, as was the case in 2006, no one challenging him for his congressional seat.

During the 2005-06 cycle, JP Morgan Chase & Co. was Frank’s biggest contributor, chipping in with $13,500. Ernst & Young was at number three with $10,000. Right behind Ernst was the Securities Industry Association, UBS AG and the Bond Market Association. Labor unions gave him money, too, but considerably less.

In addition, Frank raked in heavy contributions from business people in his district and outside it. John J. Brennan, chairman of the Vanguard Group, tossed him $1,000, as did Aryeh Bourkoff, managing director of UBS Securities. In total, Frank raised $1.56 million in 2005-06, $721,000 from PACs, $818,000 from individuals. He was a half-million dollars in front of the next-closest House colleague in the Massachusetts delegation.

One might wonder why Frank needs to solicit, or even accept, business PAC contributions when his seat is as safe as Tom Brady’s job as quarterback of the New England Patriots. If he is not spending that money on campaign advertising and consultants, what is he doing with all that money? Well, he is using it to support Democrats running for House seats.

In 2006, Frank contributed $326,000 to the Democratic Congressional Campaign Committee, which was run by Nancy Pelosi. Frank contributed more to the DCCC than any other House committee chairman, and almost as much as Rep. Steny Hoyer, the House majority leader. Frank even out-donated Pelosi.

With Democrats in power, and his hands on the traffic light controls for the first time in his career, Frank can ill afford to jeopardize either his leverage with the leadership or the flood of campaign contributions from business groups which, in part, allow him to make a big splash with House Democrats. And besides the contributions, Frank also needs from business some legislative cooperation if he is to make good on his “grand design” agenda. So, he cannot be seen to be in labor’s vest, much less their pocket.

With that, business groups are waiting to see whether the new Financial Services Committee chairman will continue to show maturation in the form of compromise on issues such executive compensation.

Says J.P. Morgan Chase’s Lazio: “It’s impossible not to see why Barney would be concerned about executive compensation. But the challenge for him is to develop a compelling legislative response — one that doesn’t damage competitiveness and still creates incentives for restraint that would be applauded by shareholder advocates. To be comfortable, public companies will want the Frank bill to acknowledge the limited information which shareholders have on which to base their views on compensation, as well as to have it apply only to key management positions, not non-management employees who may be highly compensated.”

Frank also may have to take a position on a Sarbanes-Oxley reform bill. Two members of the committee, Rep. Gregory Meeks (D-N.Y) and Florida’s Rep. Feeney, plan to introduce a revised version of their COMPETE Act, which would make significant changes to Sarbanes-Oxley Section 404. That section has occasioned a much-debated SEC rule, as well as Auditing Standard 2, which deals with attestation on the corporate controls report, from the PCAOB.

Both the SEC and PCAOB proposed changes to their rules last December, and the agencies have been mulling over comments from the business community on whether those changes go far enough. The Meeks-Feeney bill goes beyond those December changes. If high-tech groups decide to push the bill, as they did when its first iteration was introduced in 2006, Speaker Pelosi, whose “Innovation Agenda” includes support for a Sarbanes-Oxley fix, may push Frank in a direction he has said he does not want to go.

No one herds Barney Frank, of course, not even Nancy Pelosi. He doesn’t necessarily listen to his staff, either. David Eppstein, director of state affairs for the National Association of Professional Insurance Agents, says during his years as a Republican staffer on the Financial Services Committee, the Democratic staff could never commit to a deal on behalf of Frank.

Even labor groups cannot always count on his allegiance. “We are looking forward to working with Chairman Frank, even though we know we won’t agree with everything he says, and he won’t agree with everything we say,” says Damon Silvers, assistant general counsel for the AFL-CIO.

Told that some people might be surprised to hear him say that, given Frank’s stratospheric AFL-CIO rating, Silvers laughs. “Chairman Frank doesn’t agree with anything anybody says,” he answers. “He is an independent thinker.”

Indeed, in an era in which politicians are criticized for being overly beholden to PACs, Frank has sometimes not just bitten the hand that feeds him, he has chewed on it. It is a neat trick, but those corporate PAC contributions, in truth, reflect the desire of business interests to at least keep Frank’s door open.

It is a considerably weightier door now, though. In this new Congress, business groups hope that once Frank makes a decision on an issue, and slams the door closed, they won’t still have their fingers on the jamb.

Controlling Drug Prices

Human Resource Executive magazine online

January 22, 2007


Congress is offering several variations on ways for Medicare to lower drug prices -- a process that may reverberate in the corporate sector.

By Stephen Barlas

An attempt by House Democrats aimed at forcing drug manufacturers to lower prices charged to Medicare could well have an impact on corporate health-insurance spending as well.

Though the bill, which passed the House on Jan. 12, requires the federal government to negotiate directly with drug companies, odds are it will not pass Congress. Nevertheless, it may pave the way for a federal role that perhaps could include a new requirement for drug price "transparency."

Any downward pressure on Medicare drug prices would reverberate in the corporate sector, says Cara Jareb, director of retiree medical consulting for Watson Wyatt Worldwide, which is headquartered in Bethesda, Md.

She cites statistics from the Center for Medicare and Medicaid Services, the agency which administers Medicare, showing that of the 38 million Medicare participants in Part D, 6.9 million are corporate retirees in corporate plans for whom each company gets a subsidy from Medicare.

Another 16.4 million Part D participants actually get their drug benefits from one of the Medicare plans, but those individuals also get payments from their former employers to underwrite their Part D participation.

If drug companies are forced to cut their prices to Medicare, they are likely to raise them to private payers, a phenomenon called "cost shifting."

Steve Wojcik, vice president of public policy at the Washington-based National Business Group on Health, which represents Fortune 500 companies, says, "There is a legitimate concern that cost shifting could occur."

Senate leaders from both parties have all but declared the House bill dead on arrival, and even if it somehow passed the Senate, President Bush has threatened to veto it. J.D. Piro, a principal at Lincolnshire, Ill.-based Hewitt Associates, says the House does not have the votes to override a veto.

That bill aside, however, lowering Medicare drug costs remains a potent political issue.

Jareb points to a recent Kaiser Permanente survey which showed 85 percent of people questioned said Medicare can get lower prices from drug companies than it currently obtains.

Given that political pressure, the Senate may opt to pass a more limited approach, such as the one taken by Sens. Ron Wyden, D.-Ore., and Olympia Snowe, R.-Maine. Their bill requires the secretary of Health and Human Services to negotiate prices when there is one brand-name drug in a therapeutic category or when a drug was created with substantial taxpayer funding for its research and development.

Another approach was suggested by Gerard Anderson, professor of health policy and management at Johns Hopkins University, who testified at hearings in the Senate Finance Committee on Jan. 11.

He wants drug-price transparency. "Unfortunately we do not know the prices that the Part D plans are paying for individual drugs," said Anderson, noting that the Center for Medicare and Medicaid Services "collects the data on prices, price concessions, rebates, and discounts but is prohibited from sharing this data or even analyzing it internally."

The Bush administration has pushed price transparency in tandem with its advocacy for health savings accounts, which give an individual tax advantages in conjunction with high-deductible health plans.

So the White House might find it politically difficult to oppose transparency in Medicare drug pricing.

"That is certainly a possibility if the Bush administration felt it had to compromise," says Piro.

But Mark Merritt, president of the industry trade group, Pharmaceutical Care Management Association, says if the prices PBMs pay drug companies for individual drugs become public, "it would be like playing poker with our cards face up."

Congress opens the SarbOx box

Financial Week

House legislation could go beyond federal regulators’ proposed relief

By Stephen Barlas

Not content waiting for the Securities and Exchange Commission to revise Sarbanes-Oxley, some Congressmen are taking things into their own hands by preparing to rewrite the law—opening opportunities for change and even lobbyist mischief.

Two House members are readying a version of a Sarbanes-Oxley reform bill as business groups consider whether proposed changes to Section 404 of that law, announced in December, go far enough.

Rep. Gregory Meeks, D-N.Y., and Rep. Tom Feeney, R-Fla., two mid-level members of the House Financial Services Committee, are making substantial changes to the Compete Act, a bill they introduced last year that included provisions to revise Sarbanes-Oxley.

Their bill will prove a test for the new Democratic House leadership, whose two kingpins made promises going into and following the 2006 congressional elections that they would pursue legislative changes to Sarbanes-Oxley.

Jameel Johnson, Mr. Meeks’ chief of staff, said he has been working with groups such as the Institute of Management Accountants, the Financial Services Roundtable and the Biotechnology Industry Organization on the bill’s provisions.

In 2006, BIO helped organize a coalition that sought significant changes to Sarbanes-Oxley. Many of those changes are absent from the interpretive guidance on Section 404 that the Securities Exchange Commission proposed in December and the Public Company Accounting Oversight Board’s proposed revisions to its auditing standard for 404.

The BIO coalition, which includes semiconductor, telecommunications and medical-device trade associations, wants smaller companies to be able to test their financial controls every second or third year, not annually as SarbOx now requires. The Meeks-Feeney bill will include such a provision that applies to companies of all sizes.

Mr. Johnson said the 2007 version of the bill would combine new provisions with some of those included in the bill when it was originally introduced on May 17, 2006. Sen. Jim DeMint, R-S.C., introduced the bill in the Senate at the same time in 2006.

He will reintroduce the bill in 2007, but details haven’t been worked out, according to a spokesman.

“Obviously, their efforts are well placed, and we want to encourage them to move forward,” said Alan Eisenberg, executive vice president of capital formation and business development at BIO.

Political pressure from high-tech companies led Rep. Rahm Emanuel, D-Ill., chair of the House Democratic caucus and ramrod of the Democratic Congressional Campaign Committee, to pledge at an off-the-record meeting of a major business group last September that the Democrats would “relegislate” SarbOx if they gained control of the House, according to someone who attended that meeting.

Then House Speaker Nancy Pelosi, D-Calif., made Mr. Emanuel’s promise public when she unveiled the Democrats’ “Innovation Agenda” at the National Press Club on Nov. 16. That agenda includes a proposal to require specifically tailored guidelines for small public companies to ensure Sarbanes-Oxley requirements are not overly burdensome.

Ms. Pelosi underscored that commitment the next day at a meeting with companies that are members of the American Electronics Association.

A Pelosi spokesman said she wants to see the public comments about the SEC and PCAOB proposals before deciding on a next step. A spokesman for Mr. Emanuel did not return phone calls or e-mails seeking comment.

Over a period of seven days beginning about a month after Ms. Pelosi put forth her party’s agenda, the SEC and PCAOB unveiled their packages of changes to SarbOx rules that were meant to dampen efforts by high-tech groups and the U.S. Chamber of Commerce to force the Democrats’ hands.

The PCAOB then proposed pulling Auditing Standard 2 and substituting a new AS5. PCAOB Chairman Mark Olson presumably echoed Ms. Pelosi by referring to his effort to “scale” audits to the “size and complexity of each company.”

But the Meeks-Feeney bill would go far beyond the SEC and PCAOB changes, which business groups have been busy analyzing.

Mr. Johnson said the 2007 bill would allow companies of all sizes to test their internal controls just once every two or three years after getting a good grade from auditors on their initial accounting review.

“Auditors who come in to test those companies’ financial controls as part of the attestation required by SOX should be able to rely on the analysis done by the federal regulators,” explained Mr. Johnson.

“The outside auditors should not have to test the controls again, as long as the company makes the federal or state review available to the outside auditor.”

This year’s bill may also include some provisions from the original bill, one of which exempted small businesses with a total capitalization under $700 million or product revenue under $125 million from complying with Section 404.

Another provision would allow small companies that hire internal consultants to do the management report and testing to talk with the company’s outside auditors before doing the testing so as to better focus their efforts. That provision will reappear in 2007, said Mr. Johnson. FW

Business Awaits Labor Dept. Rule on Default Pension Investments

December 2006 Financial Week

Some corporate pension fund fiduciaries will soon know how the Roman mythological god Janus felt. Treasurers and financial officers will be looking backward and forward simultaneously when the Department of Labor issues its final rule on default investments for automatic enrollment 401(k) plans. Mutual funds and investment firms will storm the front door offering investments. But trial lawyers may just as aggressively pursue fiduciaries through the back door.

Those changes, which corporate America hoped the DOL would publish by January 1, in time for the earliest company announcements on changes for 2007 plan years, implement a provision in the Pension Protection Act (PPA) of 2006, which President Bush signed last August. That law was the most significant change in pension law since the passage of the Employee Retirement Income Security Act (ERISA). The proposed rule issued late in September, the first of many expected to originate with the PPA, listed the types of investment vehicles companies could use as defaults for individual 401 (k)s in automatic enrollment plans.

However, many companies are worried that the final rule will expose them to past liability. That is because companies who now offer automatic enrollment heavily favor, as default investments, stable value and money market funds. Those plans could become legally problematic if the DOL excludes them as QDIAs, as it did in the proposed rule, injecting them with a whiff of imprudence.

Judy Schub, managing director of the Committee on Investment of Employee Benefits, says that she has heard considerable consternation from corporate officials about the potential rise of litigation based on past fiduciary decisions. That fear is heightened by the recent initiation of lawsuits by trial lawyers alleging some companies overcharged employees on fees for 401 (k) plans.

“There is a concern about potential lawsuits from employees alleging that a particular pension investment was imprudent,” agrees Jan. M. Jacobson, director, retirement policy, American Benefits Council, the main corporate pension lobby in Washington.

Lewis Freeman, president, Employers Council on Flexible Compensation, is one of many in the business community who want the DOL to bless capital preservation funds. “Such a vehicle may also be an appropriate default option for an employer with a very young population, or a high rate of turnover, where many of the plan's participants will terminate in short order and roll their account balances out of the plan,” he says.

But while support for inclusion of capital preservation products within the QDIA safe harbor is broad, only the life insurance industry wants the DOL to bless annuities. Ann B. Cammack, senior vice president, taxes & retirement security, American Council of Life Insurers, says, “The failure to include guaranteed insurance products, such as fixed annuity contracts, annuities with a fixed component, guaranteed investment contracts, stable value funds and other guaranteed products in the list of products eligible for QDIA status is an unacceptable shortcoming in the proposed regulation that must be addressed.”

But one financial industry executive, who did not want to be quoted, says that life insurance products are extraordinarily expensive. “I can’t imagine anyone would think they are an appropriate default investment,” she states.

Cammack responds, "Annuity products are a bargain when you consider what they offer, which is a guarantee of lifetime income. The fact is that you should not be building your retirement security on the cheap."

Not only are there disagreements about what kind of investments are appropriate for default 401(k) choices, but there is considerable unhappiness over the DOL’s preliminary decision to require a QDIA to either be managed by an investment manager or an investment company registered under the Investment Company Act of 1940. Schub says that requirement may greatly limit the ability of plan sponsors to offer independently-assembled “best in class” target-date or target-risk funds, which can be considerably cheaper than those offered by a mutual fund family.

The proposed rule also may limit the kinds of mutual funds which can be included in a QDIA. That is because it says a QDIA may not impose financial penalties or otherwise restrict the ability of a participant or beneficiary to transfer, in whole or in part, his or her investment alternative to any other investment alternative available under the plan. So would that exclude the many mutual funds who impose a redemption fee or a back-end sales load? That is the question Gail B. Mayland, vice president and associate general counsel, Charles Schwab & Co., Inc., is asking.

Given the lawsuits against Lockheed Martin, General Dynamics and some other companies on pension fund fees, companies are also nervous about what the DOL says about fees for automatic enrollment 401(k)s. The DOL proposed rule doesn’t address fees, except to rule out “financial penalties” when a participant transfers funds from one QDIA to another.

But the AARP, the lobby group for seniors, says that if QDIA fees are higher than for other comparable investments available on the market, then the plan fiduciaries must be able to justify choosing that investment for the QDIA. David Certner, legislative counsel and director of legislative policy for AARP, also wants DOL to publish fee disclosure guidance.

Health Insurers to Expand Offerings of Personal Health Records

December 2006 Digital Healthcare & Productivity.com

At a time when Nike's new Air Zoom Moire shoes send fitness data to a runner’s iPod Nano, the announcement on December 13 that health insurers were creating a portable, Web-based personal health record (PHR) was hardly revolutionary. In fact, speakers from the America’s Health Insurance Plans (AHIP) and Blue Cross and Blue Shield Association (BCBSA) at a press conference in Washington, D.C. used an infinite variety of rhetorical versions of the term “first step.”

The real significance of the announcement was as an impetus to the software industry to begin cranking up applications which could be used by consumers to maximize the value of these PHRs, and as a spur to convince physicians and hospitals to make a long-delayed start on ramping up office-based electronic health records systems which ultimately will be the prime beneficiary of these PHRs in a new era of real-time medicine.

The PHRs to be made available by AHIP and the Blues will cover 200 million individuals by the end of 2008. The data will be based primarily on claims received by the insurance company and consumer inputs on such things as immunization and family medical history. Scott Serota, CEO of the BCBSA, emphasized that the PHRs offered by individual companies will have tweaks beyond the core data elements, and will be “branded” for use as marketing tools. The PHRs depend for their portability on Health Level 7 and ANSI X12 protocols.

A plan member will be able to dictate what data is transferred from one health plan to another, or if that data should be provided to his or her physician. The data in the PHR will have all the privacy protections authorized by HIPAA and relevant state laws.

These PHRs are seen by the insurance industry as a way to help consumers improve their own health care, and as a way for the companies to cut costs associated with medical care that could otherwise be avoided. So a key component of these PHRs will be a constant sifting of medical claim, laboratory and pharmacy data against best practices and evidence-based guidelines, a process Aetna will do via what it calls its CareEngine. Aetna has actually offered that service, provided by a company called Active Health Management, to plan sponsors since 2002.

The challenge, of course, will be to get consumers to use these PHRs and, maybe more importantly, give physicians access to them, which is not technologically possible at the moment, given the low rates of electronic health record infrastructure adoption by the nation’s physicians and the absence of interoperability standards. As to the first challenge, AHIP and BCBSA have partnered with the National Health Council, which through its member groups has about 100 million members with various chronic illnesses. The NHC will be conducting pilot projects in an effort to educate its members on these PHRs, and stimulate their use.

The major benefit of the PHRs, however, is getting them into the hands of a patient’s physicians in real time, at the time of an examination, or when someone ends up in an emergency room. “But we are a ways away from creating an interoperable system,” acknowledged Bill Marino, CEO of Horizon Blue Cross Blue Shield of NJ.

OPENING THE DOOR TO FOLLOW ON PROTEINS

October 2006 issue of Biotechnology Healthcare

When the FDA approved the follow-on protein Omnitrope in May, it gave generic drug
makers the wedge they were hoping for. With pressure building in Washington, did
Omnitrope push the door open – or was it just an anomaly? BY STEPHEN BARLAS


When the U.S. Food and Drug Administration last May approved Sandoz’s Omnitrope — a follow-on protein to Pfizer’s Genotropin, the leading biotech human growth hormone
— hope sprung in the generic drug community that perhaps the agency had finally seen it their way, setting a precedent that would allow for the production and sale of follow-on proteins in the United States.
Omnitrope (somatropin) is the first follow-on protein from a generic pharmaceuticals company that the FDA has ever approved. Equally significant — and troubling
to the biotechnology indus-try — is the FDA’s near-withering 52-page reply to two biotech manufacturers and the Biotechnology Industry Organization, whose citizen
petitions had marshaled a phalanx of legal and regulatory arguments intended to persuade the
agency not to approve Omnitrope. Essentially, the three petitions said the FDA could not approve Omni-trope nor any other follow-on protein submitted via the 505(b)(2)
pathway, which otherwise permits a sponsor to rely on published studies or the agency’s finding of safety and effectiveness for an approved drug to support approval. The BIO
petition, for instance, cited significant differences between therapeutic protein products and chemical drugs, in terms of complexity and heterogeneity, and thus argued that the use of other companies’ data is no assurance of safety.
Perhaps more important than the approval of Omnitrope itself were the questions it raised. Was this a one-time shot, or did it create a defacto path for others to follow —even before a formal regulatory road map for follow-on biologics is developed and approved? Would
any future approvals be on a caseby-case basis? And how will Congress follow up?
Even though the FDA’s approval was epochal, the agency bent over backwards to refute that impression. In a Questions and Answers document posted on its Web site when it approved Omnitrope, the agency downplayed the precedent value of its approval by citing other
follow-on proteins it has approved under 505(b)(2): GlucaGen (glucagon recombinant for injection), Hylenex (hyaluronidase recombinant human), Hydase and Amphadase (hyaluronidase), and Fortical (calcitonin-salmon recombinant) nasal spray.
Tom Newton, PhD, pharmaceuticalmarket analyst for visiongain, a United Kingdom consulting company that recently published the exhaustive report Biogenerics 2006:
Challenges Ahead for an Emerging Market, says companies such as Novo Nordisk (GlucaGen), Halozyme (Hylenex) and PrimaPharm (Hydase) cannot really be thought of as “generic” manufacturers in the sense that Teva and Sandoz are. “In my opinion, that makes the application for Omnitrope significantly different from these examples,” he says. More importantly, he adds, all of the follow-on proteins alluded to by the FDA in its Q&A “appear to
be modifications of treatments already on the market, whereas Omnitrope is presented as a pure biogeneric.” Adds Newton, “This case has definitely raised the profile of biogenerics.
The authorities will come under increasing pressure to do something about it.”

WILL OTHERS FOLLOW?
Officials at top biotech companies concede that Omnitrope is likely to be succeeded by other
follow-on products, which is what has happened in Europe where follow-on proteins are referred to as “biosimilars.” David Beier, senior vice president for global government affairs at
Amgen, points to guidance documents published by the European Medicines Evaluation Agency
(EMEA). EMEA has developed both clinical and nonclinical guidances for recombinant products containing human insulin, somatropin(human growth hormone), granulocyte
colony stimulating factor (GCSF), and erythropoietin (EPO), and future guidance is expected on ainterferon and immunogenicity. Those publications, says Beier, led to the EMEA’s approval of Omnitrope and Valtropin, a recombinant human growth hormone, and its rejection
of a hepatitis C product. “Those European regulatory requirements in terms of safety, efficacy,
and pharmacokinetics are very, very similar to innovator products, but not identical,” Beier says. “In the main, although not in every detail, EMEA guidance has effectively
protected patient safety.”
Given the EMEA conditions for approval, and because in many cases newer innovative biotechnology medications are available that offer advantages over the older medicines that follow-on versions attempt to imitate, Beier feels that biologic follow-on products could
play a limited role in the marketplace by offering alternative products. But, he adds, the price advantage for biosimilars in Europe is substantially more modest than for the differential between brandname conventional drugs and generic copycat products. When they
first come on the market, European biosimilars offer a 10 to 20 percent price advantage over innovator drugs, according to Beier. Moreover, he says, there are fewer innovator
drugs coming off patent in the next five years than the generic industry “overestimates,” and biosimilars, which will have a less-robust safety profile, will offer no therapeutic advantage.
Ajaz Hussain, vice president and global head for biopharmaceutical development at Sandoz, agrees that the price differential in Europe for biosimilars will be smaller compared with traditional generic drugs. But, he argues, a follow-on product that costs that much less
than an innovator’s drug — whose annual cost to the patient may be in the $20,000 to $100,000 range —still amounts to an immense savings. Hussain declines to comment on how Sandoz will price Omnitrope in the United States.
Sandoz is already looking beyond Omnitrope, based on what Hussain describes as the FDA’s
precedent-setting decision, to other drugs the company could submit via the 505(b)(2) process. “We certainly plan to use it when we have a product that would fit the criteria,” he says, though he declines to be specific about possible candidates.

FDA: WHERE NEXT?
Omnitrope’s approval and the EMEA guidance documents would appear to point the FDA toward its next step: publication of guidance for approval of follow- on proteins submitted via
the 505(b)(2) pathway, which was developed before the emergence of complex biopharmaceuticals.
The U.S.agency has had some public workshops over the past two years, and has progressed on a guidance document in fits and starts, but it may be years before a guidance document is
drafted, vetted through public hearings, revised, and implemented. Established by the 1984 Drug Price Competition and Patent Term Restoration Act (commonly known as Hatch-Waxman), the 505(b)(2) pathway may be available for follow-on versions of drugs approved under section 505 of the Food, Drug, and Cosmetic Act, such as hGH and insulin, which are small-protein drugs containing few sugars —making them easier to duplicate.
Follow-on proteins in these categories are not exact copies, owing to the inexactitude of reproducing a drug via biotechnology — and, to be sure, Omnitrope itself is not rated as
therapeutically (AB) equivalent to any other human growth hormone and, therefore, is not substitutable for one. The 505(b)(2) pathway may be used, however, for a follow-on protein product that is sufficiently similar to an approved drug product to permit reliance, where scientifically justified, on certain existing information (including the FDA’s findings
of safety and effectiveness for an approved drug product) and may relieve the applicant from having to submit full-scale supporting data.
But GlucaGen, Hylenex, Hydase and Amphadase, and Fortical, all approved under 505(b)(2), are relatively simple molecules. The majority of biopharmaceuticals, infinitely more complex, are not approved as drugs under the Food, Drug, and Cosmetic Act, but licensed as biological products under section 351 of the Public Health ServiceAct — the “gold mine” route for
the generic drug industry. There is no approval pathway analogous to 505(b)(2) for products licensed under section 351.
That isn’t stopping generic drug makers such as Sicor, LG Chemicals, GeneMedix, Cangene, Rhein Biotech, Dr. Reddy’s Laboratories, Wockhardt, and Dragon Biotech from already supplying interferons, erythropoietin, and other biopharmaceutical products to Lithuania,
Mexico, China, Korea, India, Argentina, Egypt, Peru, and Brazil. These companies lick their chops at the prospect of getting FDA approval for those drugs, which are infinitely more complicated than human growth hormone and insulin.
Most observers, even those in the generic industry, agree that Congress would have to give the FDA new authority before it could approve generic versions of section 351 biopharmaceuticals. Amgen’s Beier notes that any new approval process for products regulated under section 351 must be constructed in a way that ensures patient safety and respects the intellectual property rights of the innovators. As Beier points out, a would-be sponsor of a followon biologic would be using a different cell line and different growth media to produce the
protein, and would likely use different fermentation methods, purification processes, and specifications. “Because of the inherent differences in these materials and processes, a generic sponsor cannot produce the same product as the pioneer,” he argues.
Genentech made a similar point in its April 2004 citizen petition, which asks the FDA to refrain from establishing standards for “similarity” of biotechnology-derived products under 505(b)(2). Alluding to safety concerns, the company maintained that “Current science
[does not] allow for reliance on analytical data and information generated from one biotechnologyderived product to support approval of a product manufactured through a different process.” Varied manufacturing processes, it pointed out, affect product purity
and can lead to immunogenicity. Genentech’s petition also gets to Beier’s point about respect for intellectual property rights, contending that any company that relies on another’s data to make safety and efficacy claims for a product that is not an exact copy of the innovator drug has, in essence, unfair access to the innovator’s trade secrets. The petition refers to a 505(b)(2) application from Dr. Reddy’s, an Indian company, for amlodipine maleate, based on the FDA’s approval of Pfizer’s amlodipine besylate (Norvasc), a calcium-channel blocker. The FDA stayed the effective date of the approval of Dr. Reddy’s product “because questions [were] raised
about the source of the data the [FDA] relied on in approving” the application, according to the petition. “We are similarly concerned about the protection of our confidential commercial information.”
Congress is notably slow-footed, so whether legislation pertaining to section 351 passes in the near future is unlikely. What is more likely over the next six months to a year is the submittal of additional 505(b)(2) applications by major generic drug companies.

FIGHTING BACK
Of course, Pfizer is worried about Omnitrope. In its May 2004 citizen petition, Pfizer argued that the FDA could not legally approve Omnitrope via 505(b)(2) because the agency would have to access confidential Pfizer manufacturing and clinical data to do so. The Genentech and BIO petitions made a different point: The FDA could not issue guidance for generic drug companies on how to navigate the 505(b)(2) process, though they cited reasons similar to the ones Pfizer
used in its anti-Omnitrope petition.
When it approved Omnitrope, the FDA sent a 52-page explanation to each of the three petitioners, carefully knocking down every one of the industry’s objections like pins at the end of a bowling lane — and seemingly with enough force that those pins could fly across lanes.
Briefly, the agency said that the active ingredient in Omnitrope, somatropin, is highly similar to the
active ingredient somatropin in
Genotropin. Sandoz was able to
demonstrate that Omnitrope was
“sufficiently similar” to Genotropin
to warrant reliance on FDA’s finding
of safety and effectiveness for
that drug. Somatropin is the active
ingredient that has been part of
seven different recombinant hGHs
the agency has approved since somatrem
(Protropin) in 1985. Sandoz
also provided extensive independent
evidence of Omnitrope’s
safety and effectiveness for use in
pediatric patients with growth hormone
deficiency through three sequential,
multicenter, phase 3 pivotal
trials over a 15-month period,
along with other supportive data.
Moreover, the FDA said it did not
depend on any trade-secret information
submitted by Pfizer to approve
Omnitrope.
So the FDA seemed to be arguing
that small follow-on proteins, as
opposed to big molecules — at
least in a couple of therapeutic categories
— could be approved without
reliance on brand-name trade
data, and the FDA will continue to
do just that. The unstated message
was: stop complaining and live
with it.
Whether Pfizer accepts that message
is another matter. Paul Fitzhenry,
a spokesman for Pfizer, says
his company has not yet decided
whether to take the FDA to court
over its approval of Omnitrope.
The Genentech and BIO petitions
have even broader implications, because
they argued that the FDA does
not have the authority to either approve
follow-on proteins or guidance
for generic drug companies.
Walter Moore, vice president of government
affairs for Genentech, says
his company has made no decision
yet on whether to take the FDA to
court. But he adds, “We do not consider
the FDA letter a full response to
our citizen petition by any means.”
Does the FDA even need to issue
guidance at this point? Its answer
to the petitions may be guidance
enough for companies making follow-
on protein products that fit an
Omnitrope-type profile. An FDA
spokesperson, Karen Mahoney says
that, “The Agency will not comment
on the status of unpublished
draft guidance.”
WHAT WILL CONGRESS DO?
Some members of Congress believe
that FDA guidance on how
follow-on protein products can
clear through 505(b)(2) would be a
useful political exclamation point,
such as Republican Sen. Orrin
Hatch of Utah and California Democratic
Rep. Henry Waxman,
authors of the landmark 1984 law
that opened the door to expedited
FDA approval of abbreviated applications
from generic drug companies.
Earlier this year, Hatch and Waxman sent a letter to the FDA
asking it to publish guidance on
hGH and insulin, two categories
amenable to follow-on proteins.
On Sept. 29, Waxman, along with
New York Democratic Sen. Charles
Schumer, introduced the “Access to
Life-Saving Medicines Act,” which
would amend section 351 to approve
abbreviated applications for
biologics that are “comparable” to
previously approved products. The
bill defines comparable as demonstrating
no clinically meaningful
differences. Introduced a
week before Congress recessed
for elections, the bill got its
sponsors some publicity back
home but won’t see any action
before the the 109th Congress
officially closes next month.
A more likely congressional
response to the FDA’s consideration
of Omnitrope would
be legislation forcing the FDA
to make decisions promptly on
individual 505(b)(2) applications,
even when citizen petitions
are filed. Innovator biotech
companies have filed a couple dozen
citizen petitions in the past few years
in an effort to prevent FDA approval
of both follow-on proteins and conventional
generics.
At hearings the Senate Select
Committee on Aging on July 20,
Gary Buehler, director of the FDA’s
Office of Generic Drugs, said that
an agency evaluation of 42 petitions
answered between 2001 and 2005
showed that 33 had been denied in
full, 3 denied in part, and 6 granted.
“While the citizen petition process
is a valuable mechanism for the
agency to receive information from
the public, it is noteworthy that very
few of these petitions on generic
drug matters have presented datatherapeutically (AB) equivalent to
any other human growth hormone
and, therefore, is not substitutable
for one. The 505(b)(2) pathway may
be used, however, for a follow-on
protein product that is sufficiently
similar to an approved drug product
to permit reliance, where scientifically
justified, on certain existing information
(including the FDA’s findings
of safety and effectiveness for an
approved drug product) and may relieve
the applicant from having to
submit full-scale supporting data.
But GlucaGen, Hylenex, Hydase
and Amphadase, and Fortical, allapproved under 505(b)(2), are relatively
simple molecules. The majority
of biopharmaceuticals, infinitely
more complex, are not
approved as drugs under the Food,
Drug, and Cosmetic Act, but licensed
as biological products under
section 351 of the Public Health Service
Act — the “gold mine” route for
the generic drug industry. There is
no approval pathway analogous to
505(b)(2) for products licensed
under section 351.
That isn’t stopping generic drug
makers such as Sicor, LG Chemicals,
GeneMedix, Cangene, Rhein
Biotech, Dr. Reddy’s Laboratories,
Wockhardt, and Dragon Biotech
Pressure is likely to mount on
Congress and the FDA to address
the absence of section 351 followon
protein products because of the
cost of drugs like Epogen, Procrit
and Eprex — the three biggest selling
versions of epoetin alpha, a recombinant
form of erythropoietin,
which is a hormone that stimulates
the production of red blood cells.
Epoetin alpha brands and their derivatives
are the most successful
biotech drugs on the pharmaceutical
market. The first process
patent to expire for epoetin
alpha lapsed in 2001 in Europe
and 2004 in the U.S., according
to visiongain. Most epoetin
products are already off patent
— approximately 70 percent
of the total market has lost
patent protection.
Former Deputy FDA Commissioner
William Schultz,
now a Washington lawyer
who has represented the
Generic Pharmaceutical Association
and generic companies,
says a coalition of business and
health groups is pushing Congress
to give the FDA the authority it
needs to approve more follow-on
protein products. “Cost of biopharmaceuticals
is pushing this issue,”
says Schultz, “not just from generic
companies and consumers, but
from payers in the private sector
and the federal government.”
Congress may get its first chance
to amend section 351 in 2007 when
Congress must reauthorize the Prescription
Drug Users Fee Act. It will
be an event worth watching. BH
Stephen Barlas has covered the FDA and
drug issues since 1981 when he became
a full-time freelance Washington journalist
for business and trade publications.

Washington Letter: FMEA as a Packaging Tool

September 2006 issue of Pharmaceutical Manufacturing

By Stephen Barlas, Washington Correspondent

A July report on medication errors by the Institute of Medicine (IOM) underscored the utility of Failure Modes and Effects Analysis (FMEA) in managing risk. The FDA already endorses FMEA, describing it in a June Quality Risk Management guidance document as “powerful tool.” In fact, the FDA even uses FMEA itself, to help weed out confusing drug names once a new drug application (NDA) has been submitted.

But neither the FDA nor the drug industry use FMEA to assure the development of clear, consistent drug labeling and packaging. According to the IOM’s latest report, failure to use FMEA leads to such problems as:

  • cluttered labeling
  • small font
  • serif typeface
  • lack of background contrast
  • inadequate prominence of reminders and warnings
  • overemphasis on company logos and trade dress

— all of which “continue to have a direct effect on the readability and comprehensibility of product labels, and hence on rates of medication errors.”

The report suggests that the FDA require FMEA analysis for all pharmaceutical labeling and packaging design and assessment, and that drug manufacturers be required to submit those assessments as part of any new drug application (NDA). It also urges the FDA to publish two separate guidance documents, one on naming, the other on labeling and packaging, by the end of 2006, and to encourage industry to expand unit-of-use packaging to new therapeutic areas.

The Pharmaceutical Research and Manufacturers of America has taken no official position on whether FMEA should be required, according to PhRMA associate vice president Alan Goldhammer. In an unsigned response to the IOM report, the FDA alluded to guidance documents on naming, labeling and packaging that it is planning for later this year. So far, the FDA has not weighed in on the IOM report recommendations.

Progress Being Made on Medication Errors

The IOM report asserts that some progress has been made toward reducing medication errors since an earlier advisory committee issued a report on the topic six years ago. However, there is still plenty of room for improvement. “The frequency of medication errors and preventable adverse drug events is cause for serious concern,” said committee co-chair Linda R. Cronenwett, dean and professor, School of Nursing, University of North Carolina, Chapel Hill.

Sen. Charles Grassley (R-Iowa), chairman of the Senate Finance Committee and a key congressional Medicare decision maker, issued a statement after the report’s release highlighting the IOM recommendation that the FDA issue guidance on drug naming, labeling and packaging by the end of 2006.

With regard to the recommendation on wider implementation of unit-of-use packaging, drug companies have been moving in that direction. This is due, in large part, to an FDA requirement that kicked in last April, which states that all drugs going to hospital pharmacies must have a linear bar code containing, at a minimum, the drug’s National Drug Code (NDC) number.

The FDA rule does not require that hospital SKUs (stock keeping units) be packaged in a unit-of-use or unit-dose package. But Reynard Jackson, executive vice president, business development, packaging services at Cardinal Health, says that most of his company’s 200 pharmaceutical packaging clients are beginning to do just that. They’re complying, he says, with the “spirit” of the FDA rule, which is aimed at reducing medication errors. The FDA just approved two Pfizer hospital blister packs for Lipitor (atorvastatin calcium), for example.

“The question is,” asks Opal Johnson, marketing director at Pearson Medical Technologies, “how fast are they [drug manufacturers] moving on this? What are there — 80,000 drugs out there?” Pearson sells its intelliPack2 blister packaging and m:Print bar code labeling equipment to smaller hospitals.