Health industry's bitter pill

By GREG ANSLEY

At 10.30am on Monday, Ross Brown, Jim Selim, Colin Henson and Ken Baxter sat down in the Moorebank, Sydney, boardroom of Pan Pharmaceuticals for a meeting that would break like thunder across Australia. Facing them across the table were John McEwen, principal medical adviser for the Therapeutic Goods Administration (TGA), Rita Maclachlan, director of the authority's office of devices, blood and tissues, and two other senior officials.

Three hours later, near the end of a catastrophic meeting for Pan and one which "flabbergasted" its four directors, the delegation of regulators handed over a formal notice putting one of Australia's largest pharmaceutical companies out of business for six months, possibly forever.

Alarmed by reports of hallucinations, delirium and other reactions, described by federal parliamentary secretary for health Trish Worth as potentially life-threatening, the TGA had uncovered a scandal of fabrication and manipulation of test results and appalling quality control.

Across the continent, chemists, supermarkets and health stores began stripping their shelves of a list of vitamins, herbal treatments and other remedies and preparations that by early Friday reached almost 1400 products.

Concern raced across the Tasman - where retailers in New Zealand's less-regulated complementary medicine industry account for almost 12 per cent of Pan's annual sales of A$110 million ($123 million) - and to other markets in Asia, America and Europe.

From vitamins and health products, the crisis extended into agriculture and the animal health products made by Pan for veterinary chemical companies. Fearing possible consequences for farmers and their livestock, the Australian Pesticides and Veterinary Medicines Authority also imposed a six-month ban preventing Pan from making veterinary chemicals.

"Although the TGA's investigations focused only on the human medicines side of the manufacturing operations, the extend of the quality-control problems identified was so great that they undermined any confidence in Pan's veterinary product manufacture," said the authority's quality assurance and compliance manager, Peter Raphael.

For Australia's A$2.5 million ($2.8 million) complementary medicine market, Pan's sins have been disastrous, rocking regulatory, investor and consumer confidence in the booming industry in alternative medicines and therapies.

As the industry called for calm and reason, New South Wales Premier Bob Carr, one of the nation's best-liked and respected politicians, demanded tough new studies of alternative medicine and the "exploitation of gullible people".

"Some of them may work, but there's not much scientific basis for popping pills that change the colour of your urine but do no demonstrable good," Carr said.

The federal Government has already promised a crackdown, with a further strengthening of laws controlling the manufacture of complementary medicines, including jail terms for pharmaceutical fraud, harsher penalties for breaches of safety, and tighter labelling requirements.

Collateral damage from the scandal has been immense. The Complementary Healthcare Council fears that 500 small, mostly family-run, health food stores could be forced out of business despite likely compensation from Pan and the tsunami of litigation already mounting against the company.

Mayne Group, a major pharmaceuticals company and private hospital operator which contracted Pan to make about one-third of its product line, estimates that the impact of the scandal will whip up to A$20 million ($22.4 million) from its balance sheet.

Other drug companies are desperately scrambling for the high ground, fearing that the fallout from Pan will hit their sales as well.

The list issuing disclaimers and assurances that no product has come off Pan production lines ranges from such major players as GlaxoSmithKline, Roche Products, Herron, and Merck Sharp and Dohme to Tahitian Noni, Ferrosan and Novogen.

Their concern is well placed. Pan is a major player in over-the-counter and alternative pharmaceuticals, with about 85 per cent of its production dedicated to complementary medicines, ranging from vitamins and dietary supplements to cough syrups.Its range of over-the-counter medicines includes paracetamol and codeine-based pain relievers and cold and flu preparations, none of which is involved in the TGA action.

The company makes drugs for a wide range of leading brands - causing serious problems when they came to be recalled - and is one of only two manufacturers of soft gelatine capsules in Australia, and the only producer of tongue-soluble effervescent tablets.

Outside Australia, Pan's woes have the potential to damage its own future as well as the wider credibility of the Australian industry, generally well-regarded because of tight regulation and high quality standards.

Pan is a major player in the export market. It sends about 40 per cent of its product overseas: 11.8 per cent to Asia, 11.7 per cent to New Zealand, almost 10 per cent to Europe and the rest to the United States, the Middle East and Africa. In Hong Kong, Australia is the largest supplier for a US$700 million ($1.2 billion) import market that is largely built around re-export throughout Asia.

In Vietnam, Pan is at present building a US$6 million ($10.6 million) factory to service that country's soaring demand for alternative medicines and a growing market in Malaysia, and to free up capacity at its Moorebank plant.

Pan won the Australasian rights for the US-developed SAM-e natural alternative to the anti-depressant Prozac, and last year won exclusive rights for a Canadian cholesterol-stripping formula, Reducol, for Australia, and key markets in Asia, Africa, the Middle East and Africa.

With control of more than 4500 formulations, a market capitalisation of about A$250 million ($280 million) and - until this week - a glowing balance sheet that was projected to produce revenue of A$119 million ($133 million) and net profits of A$18 million ($20 million), the scandal at Pan has shaken the entire industry.

The crisis had its beginnings in January, when the TGA heard disturbing reports that Travacalm, a travel sickness pill that had been used without problems for decades, was suddenly causing hallucination, blurred vision, and loss of balance.

TGA tests showed variations of up to 700 per cent in the content of ingredients in the pills, a finding confirmed later during an audit of the company's manufacturing process after Travacalm was recalled from the market.

Since then, alarming examples of side-effects have emerged.

* In Queensland, 10-year-old Shae Frawley was raced to hospital after she began hallucinating after taking two Travacalms and ran disoriented into a pole. "I thought there were spiders, elephants and monkeys in front of me," she said. "They looked so real and I was pretty scared, because I hate spiders."

* A 10-year-old boy who tried to jump overboard on a fishing trip.

* Stockbroker Mark Tooher, who told Melbourne's Herald Sun of nightmarish visions of spiders that still recur as flashbacks, months after he took Travacalm.

* A 10-year-old girl rushed to Melbourne's Royal Children's Hospital suffering hallucinations and delirium, whose parents have engaged law company Maurice Blackburn Cashman to sue Pan.

* 62-year-old psychologist Denis Shackell, who could not stand properly or dress himself after taking the drug.

In all, faulty batches led to 19 people being admitted to hospital and produced 68 other potentially life-threatening reactions.

But the TGA did not stop at Travacalm. The body is Australia's pharmaceutical watchdog, responsible for the safety of drugs listed on the national register of therapeutic goods which includes - unlike New Zealand - vitamins, dietary supplements and herbal remedies.

In late February, and again last month, TGA inspectors returned to the Moorebank plant for surprise inspections. What they found confirmed their worst fears - failures that included the "systematic and deliberate manipulation of quality-test data".

Reviewed by an expert advisory group led by Dr Richard Whiting, chairman of the TGA's medicines evaluation committee, the audits revealed quality and safety breaches so serious that immediate shutdown was considered the only option.

The audit found, among other scams, the status of 270 raw materials was changed from "quarantine" to "pass" in the company's computer, with untested substances being used in dozens of batches of pills.

The company also massaged assay results of energy and vitamin products and a cough and cold formula, fabricated other assay results for vitamins for export that were later found to be either over- or under-strength, and for more than two years either switched beef cartilage for shark, or shark cartilage for beef in a range of products.

Nor was this - or even Travacalm - the first time Pan had crossed the line.

The company's founder is Jim Selim, a heavily accented Egyptian who Anglicised his name from Gamal Sami Selim when he arrived in Australia as a struggling pharmacist in 1967. On Thursday, Selim resigned as managing director and CEO of Pan but keeps his majority shareholding and a non-executive seat on the board.

He began modestly with a pharmacy and a line in Vitamin C tablets, building up the company through drive, innovation and talent until floating Pan in 2000 with a Stock Exchange listing at A$1 a share. The A$55 million ($61.7 million) float funded Pan's ambitious expansion drive.

Selim, with 90 million shares and 52.5 per cent of the company, is now worth an estimated A$210 million ($235 million), with a A$6 million ($6.7 million) waterfront mansion on Sydney's Woolwich peninsula.

But the path to the status, wealth and influence of a Business Review Weekly listing at the nation's 106th richest person had taken some sharp and devious turns.

In December 1976, two years after founding Pan Laboratories - the predecessor to his present company - Selim was suspended from practising as a pharmacist for three months after tests showed he had failed to include paracetamol in some batches of the painkiller.

In 1992, Pan was again in trouble when the company stopped importing evening primrose oil from a Canadian supplier accredited with the TGA and began using unaccredited oil from Thailand, without declaring the change.

Despite warning from the TGA, Pan continued to import the Thai oil, leading to charges under the Therapeutic Goods Act and a then-record fine of A$280,000 ($314,000) in 1996, threatening the future of the company.

A year later the decision was overturned on appeal. In its latest crisis, Pan faces suspension, huge loss of income and credibility and the certainty of a wave of litigation. It also faces allegations that it tried to impede TGA investigators by shredding documents, blocking access to computers and refusing to answer phone calls.

The company denies the claims, has promised full co-operation, and blames a "rogue analyst" - since sacked - for falsifying Travacalm test data.

Director Ken Baxter, long-time multiple company director and hard-nosed troubleshooter for the NSW and Victorian Governments who is now helping the World Bank to overhaul the Papua New Guinea bureaucracy, said charges had also been laid against a former Pan executive, and that a number of other staff were under investigation.

Only two of the four-member board are pharmacists with technical knowledge of the industry: Selim and chairman Ross Brown, a 40-year veteran of the senior levels of the industry with a string of elevated positions.

The fourth director, Colin Henson, is a professional manager whose recent positions have included chief financial officer of Burns Philp.

Pan's board is under further investigation by the Australian Securities and Investment Commission for a delay in reporting its suspension to the Stock Exchange, apparently allowing some traders to profit.

The board rebuts the allegation, saying it had no idea when it met on Monday of the bomb the TGA was about to drop, and that while the regulator was ready with its finger on the trigger, Pan had to absorb the news and seek advice before acting.

But even as Pan's world crumbles, the company is fighting to lift its suspension and hanging tough, refusing to even say sorry to the millions of consumers, traders and clients now caught in the maelstrom.

"At this stage I don't think an apology is necessary," Baxter said. "What we are saying is we recognise that there are deficiencies."