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Contract Manufacturing & Recalls

A typical manufacturing company relies on more than 35 different contract manufacturers, which adds significant business risk to everyone. And it presents a double whammy if a recall occurs.

Pharmaceutical companies face increased competition to meet consumer demand, and get their products to market quickly and efficiently.

As a result, they are turning more and more to contract manufacturing organizations (CMOs) to cut costs. In fact, a recent industry estimate found that a typical U.S. manufacturing company relies on more than 35 different CMOs worldwide. This vast production and supply chain adds significant business risk to everyone. And it presents a double whammy if a recall occurs.

Recalls today nearly always present significant financial and reputational risk to companies whose name is on a product that is potentially defective, contaminated or otherwise unsafe. Increasingly, suppliers and trading partners find themselves under the spotlight as well.

A string of recent recalls by one company, for example, triggered a U.S. Congressman to call for a full investigation of the recalling organization, along with its business partners and contract manufacturers.

Increasing Liability

The current regulatory landscape, particularly in the U.S., is such that recall liability is spreading widely to retailers, CMOs and distributors. This means not only scrutiny from Congress, but also the potential for regulatory fines or criminal charges, as well as devastating impacts to customer satisfaction and long-term brand loyalty.

While the above certainly demonstrates the worst-case scenario, what is sometimes overlooked is the financial liability of just executing an effective recall event. This can be even more significant than other recall-related costs if not negotiated by the CMO beforehand. Recalls are often addressed within quality agreements and, in fact, have been known to delay business negotiations. One manufacturer acknowledged during a recent AdvaMed event that it puts full product recall responsibility on its CMOs, leaving it up to them to negotiate other terms.

As pharmaceutical companies realize the increased recall burden they face from legal, regulatory and brand-protection pressures, CMOs can count on quality agreement product recall terms to be increasingly difficult to negotiate. But there are other ways to mitigate recall risks, including financial burden, before a recall happens.

Mitigating Recall Risks

The best time to think about recalls is before they start. Considering the recall risks your company faces, developing procedures to mitigate those risks and planning for a recall will ensure you are as prepared as possible for the day a recall strikes. Otherwise, as your customers face heat from lawmakers, regulators and consumer advocates, you will likely have little time to think before the spotlight is on you.

I have spoken with several CMOs whose customers now require them to take steps to mitigate recall risks for both parties, including investing in recall insurance and developing effective recall plans — two very important precautionary steps contract manufacturers should already be taking. Additionally, the very nature of this business requirement points to a third important element in effective recall management for CMOs and their customers — a transparent working relationship. Let’s examine these elements.

Recall Insurance

The financial impact of any recall, from notification to destruction or disposal, can be devastating for all companies involved, not only because of revenue lost from unsellable products and the cost of recall management, but also from the potential financial impact of litigation and fines. While recall insurance will not cover all these risks, companies, including CMOs, can invest in specialized coverage to help defray the cost of recall execution.

Many standard liability policies include a recall coverage endorsement, but they often fall short in terms of reimbursing the insured for the costs associated with recall management and the strategic guidance necessary from recall experts. But specialized recall insurance policies can cover both recall preparation support, and the logistics and crisis communications expenses associated with a product recall.

This investment is critical, especially for CMOs that may not be as familiar with recalls and, in fact, may have never managed one in its entirety. By finding and signing up for the right plan, you can have recall experts on the phone in a matter of minutes to help navigate the recall process. These consultants can also help you prepare for recalls before they happen.

Recall Plan

One of the best tools for minimizing the risks associated with managing the recall process is a well-tested plan, carried out by a trained recall response team. While the company whose name appears on the recalled products faces the greatest reputational risk, these companies are now looking to share the recall burden. They often turn to CMOs to manage the recall process, communicate with business partners and regulators, and even respond to inquiries from stakeholders and the media. With this in mind, it is critical for manufacturers to have the procedures and resources in place to quickly and effectively take action to protect a customer’s brand.

A recall plan should provide the information your team needs to manage a recall. That includes your corporate organizational structure, responsibilities of the recall management team, details about recall fact gathering, recall classification information, instructions for regulatory agency notification, recall communication guidelines and guidance on recall termination.

A sound plan that has been tested helps ensure recall effectiveness and compliance when working with regulators. Most importantly, a recall plan that is shared with your business partners helps to reassure them, as well as the general public, of your ability and commitment to protect consumers.

If your company doesn’t have a plan, or if you lack complete confidence in the one you have, by all means, get help in crafting or refining it.

Transparent Working Relationship

Healthy business relationships are built on transparency — a notion that is essential during each stage of the recall process. Identifying roles and responsibilities for each member of the business relationship before a recall strikes will ensure that the event is managed efficiently and both brands are protected.

In this case, transparency starts first and foremost within the quality agreements agreed upon by a firm and its CMOs. But once those terms and conditions are in place, the transparency must continue by sharing recall plans, investing in recall insurance and managing any recalls that arise. This transparency will only become more critical as the FDA scrutiny of companies and CMOs expands.

Future Regulation

In recent years, the FDA has cracked down on the pharmaceutical industry and CMOs that serve drug makers. In its 2011 “Pathway to Global Supply Chain Oversight” report, the agency stated its plans to address this changing landscape and anticipate worldwide trends in coming years. In fact, the FDA proposed legislation that would give pharmaceutical companies more liability for the actions of CMOs. While the proposal has not yet been accepted as regulation, the FDA’s scrutiny has certainly increased in this area.

The stakes are high when it comes to effective recall management, particularly when recalls prompt investigations into an entire supply chain in order to identify a product’s source or origin. Fortunately, much of what is needed during a product recall can be prepared in advance, saving the limited time and staff resources available during the crisis.

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