By Susie L. Hoeller, J.D.President

American Center for International Policy Studies

(www.amcips.org and amcipsreports.net)

March 21, 2008

Nineteen deaths and nearly 800 life-threatening allergic reactions may be linked to contaminated heparin sold by Baxter International Inc. (“Baxter”) of Deerfield, Illinois. Heparin is used as a blood thinner in cardiac surgery and kidney dialysis. On March 20, 2008,

The New York Times

reported: “Federal drug regulators, in announcing Wednesday that the mystery contaminant in heparin was an inexpensive, unapproved ingredient altered to mimic the real thing, moved closer to concluding that Americans might be the latest victims of lethal Chinese drug counterfeiting.” Last year, a Chinese supplier added the industrial chemical melamine to wheat gluten to fraudulently boost the protein count. The wheat gluten was an ingredient in pet food and it killed and sickened thousands of American dogs and cats. Earlier, diethylene glycol was added to cold medicine to mimic glycerin. The adulterated cold medicine exported from China killed 120 people in Panama. We have seen millions of lead tainted toys and pieces of children’s jewelry, contaminated toothpaste and seafood, defective tires, and many other unsafe products arriving from China. There have also been anecdotal reports, not been widely circulated in the media, of counterfeited ISO-9000 quality assurance certificates being presented to American and European buyers of imported Chinese electronic components.

Both the Food and Drug Administration (FDA) and the Consumer Product Safety Commission (CPSC) have not been properly funded or led to pro-actively protect Americans from the surge in unsafe imported products. Legislation to make the federal regulatory system more effective is pending in Congress but has not yet been enacted. There are several aspects to this latest recall, heparin sourced from China, which bear serious examination and reflection upon by advocates and practitioners of corporate social responsibility.

Quality Assurance and Traceability

News reports over the past few weeks have suggested that Baxter failed to implement proper quality assurance and traceability processes within its essentially unregulated Chinese supply chain. The 2

photographs published in

The New York Times, The Wall Street Journal, and other newspapers, showing the primitive, unsanitary workshops where Chinese workers “process” pig intestines; the source of crude heparin, are unsavory, to say the least.1 The supply chain starts with the unregulated small workshops in China. Consolidators take the crude heparin from the workshops and in the Baxter case, crude heparin was sold to Changzhou SPL, a Chinese joint venture with Wisconsin based Scientific Protein, which then exported the heparin to Baxter. The joint venture factory was never inspected by the FDA.2 Although, it is questionable whether or not a onetime FDA inspection, would have even determined that heparin had been counterfeited. Inspection is an important quality control tool; but if one is dealing with a primitive raw material supply chain, in a country where counterfeiting and business dishonesty is rampant, inspection of a single factory, may not reveal contamination of the raw material. As reported by The New York Times on March 20, 2008, a spokeswoman for Baxter said that the company’s investigation has revealed that the supplies were contaminated before they arrived at the Changzhou plant but that Baxter investigators had been denied access to the consolidators and workshops. There have also been questions raised about the adequacy of the joint venture plant’s record keeping. Baxter did visit the Changzhou plant late last summer at the same time the plant was producing the defective heparin. Obviously, the single visit by Baxter did not uncover this contaminant. It certainly appears that Baxter simply purchased heparin from a factory in China without first determining if it met American quality and safety standards. Some of the counterfeit material (animal cartilage) contained in the heparin has now been found to constitute as much as 50% of the heparin, according to The Chicago Tribune. Total Cost of Ownership (TCO) 1

In describing the Baxter supply chain, I have to rely on media reports, since my request for information posed to Baxter itself, was not answered, at the time of this writing. 2 The FDA admitted that the joint venture factory never was inspected because its name was confused with a different company that had been inspected

Procurement officials at quality-driven companies are trained to understand and execute TCO in all of their sourcing decisions, large and small. Business Dictionary.com defines TCO as an “estimate of all direct and indirect costs associated with an asset or acquisition over its entire life cycle.”

What this means is that procurement managers do not purchase a raw material, a service or a piece of capital equipment based upon the “price” of the item alone. Purchasing decisions which only look at the lowest “price” tag are foolhardy without an analysis of TCO factors. Depending on the product or service, these can include supplier reputation; intellectual property rights; financing terms; 3

product durability; warranty terms; maintenance costs; quality and safety metrics; transportation costs; environmental concerns; avoiding potential lawsuits and loss of business reputation and customers.

Actually, one does not have to go to business school or take sophisticated courses in supply chain and quality management to understand this simple principle. Many smart shoppers already understand and follow TCO in their personal buying decisions. For example, if a consumer buys a shirt for $10.00 which shrinks tears or fades after the first or second washing and has to be replaced; it is more expensive than buying a $19.00 shirt which does not shrink, tear or fade even after numerous washings.

In the case of heparin, Americans outside of the pharmaceutical industry now know that it comes from pig intestines. In this country, we have over 100 million pigs that are slaughtered every year. Consequently, it is physically possible to produce heparin here (unlike medicines which are only derived from tropical plants). Since heparin has been used for over 70 years, one can assume that it was produced here before multi-national companies raced to China to take advantage of cheap labor and lack of regulation. Baxter made a sourcing decision to obtain heparin from China and it appears that the company did not impose proper quality controls on the sourcing and production processes. Now, Baxter is and will be faced with lawsuits; government investigations; the enormous costs of conducting the recall; negative publicity; thousands of management and staff hours in dealing with this crisis situation; and lost customers. Outside observers do not know how much money Baxter saved over the years in sourcing heparin from China and therefore do not know if the costs of this recall will be higher than the cost savings from US sourced heparin. Of course, damage to reputation cannot be measured precisely but it is real damage. Hopefully, the company’s board of directors will be asking these questions and re-evaluating the decision making ability of its management team – which is supposed to be manufacturing and selling life saving drugs not contaminated drugs.

Labeling Disclosures – Need for Legal Reform and Transparency

The recalled heparin bore the Baxter International label. Doctors and nurses hooking up intravenous (IV) lines to their patients would only see that the product came from Deerfield, Illinois, not from a foreign supply chain. This is because our federal laws for country of origin labeling are outdated in our era of globalization and do not achieve their original policy objective – which was to let Americans see the country or countries where a product comes from. Imported bulk raw materials and finished products have to bear a country of origin label; but raw materials and ingredients removed from a bulk 4

status and then assembled or combined here in the U.S. do not need to identify country of origin for the raw materials or ingredients. So whether a nurse is hooking a bottle of heparin to a patient’s IV line or a dad is buying cereal for his children; neither will know from the product label that the heparin itself came from Chinese pig intestines or the strawberries in the cereal came from Chinese fields. Product labeling laws need to be reformed to disclose more information about the ultimate supply chain. Progressive corporations do not have to wait for legal reform. There is nothing stopping them from being more transparent to their customers. If they have instituted proper supplier selection, quality assurance and traceability in their global supply chains, they should not be afraid of transparency; which ultimately builds customer trust.

Loss of Public Trust

Here are some things for all leaders in multi-national companies to think about- unwise decisions which trade cost savings for patient and consumer safety are damaging the confidence of the American public in so many ways. It is not just the bloggers who complain about all the products from China in words that are often very crude and which I will not use. This involves consumer behavior and loss of trust. We are in a recession and sales of many products are down. Most pundits say this is because people are watching their money due to mortgage foreclosures, higher gas prices, layoffs, etc. But it is more than that -

The New York Times reported today that many people will no longer vaccinate their children and that this is creating public health dangers. In the old days, people who did not vaccinate their children were motivated more by religious ideas but now the anti-vaccination backlash is growing because of safety fears. We see the growth of the local food movement and more people starting to grow their own gardens and fruit trees because they do not trust agri-business to provide safe and humanely raised food.What company leaders need to realize is that the free market’s foundation is customer trust. You cannot have recall after recall after recall in food, drugs, and consumer products of all sorts, and retain that trust; especially when so many of the unsafe and defective products and ingredients are coming from China or other developing countries. Support for free trade among Americans has plummeted, not just because of the loss of manufacturing jobs, but because people are being injured or killed by imports. The federal government talks but has done very little to improve the situation. Companies have talked, issued press releases about how they are going to improve safety, but every day national recalls keep coming. Many consumers are losing their trust in agri-business, the pharmaceutical 5

industry and other industries. It is much easier to lose customers than to obtain them in the first instance.

Corporate Social Responsibility has to Include Product Stewardship

Many multinational companies are failing to integrate their corporate social responsibility programs within core business processes and decisions in a holistic manner. Look at Baxter; they have a sustainability report posted on their website; but then their products kill and injure people in a highly publicized case of poorly considered and executed sourcing, that are all that people will remember about the company. Their sustainability efforts, as positive as they may be, will be outweighed by product safety failures.

Corporate social responsibility has to move well beyond just giving donations to charity or having one socially beneficial program, like mentoring youth in the community – CSR needs to be integrated into

every core business process, including product stewardship. Product stewardship is a 360° look at every aspect of the company’s products: quality and safety; ethical sourcing; animal welfare; environmental impact including energy use, carbon footprints and disposal; societal impact; and other relevant metrics. CSR without real product stewardship is not truly CSR.