30 May 2006
Melbourne, 30 May 2006: Companies operating in the pharmaceuticals and medical devices sectors will need to be extra vigilant in maintaining good business and risk management practices following changes to the regulatory regime under which they operate, according to a leading corporate lawyer.
Clayton Utz partner Ms Robyn Baker says amendments to the Therapeutic Goods Act 1989 which come into effect this week present a serious corporate governance challenge for companies in affected sectors and warns them to ensure they properly understand the Act's requirements or potentially risk severe consequences.
A former adviser to government in the area of health, Ms Baker says one of the major changes to the regime is that company directors and managers are now exposed to personal liability where they fail to ensure the company's employees, agents and contractors are across the Act's requirements.
Companies will also need to take extra care to ensure the accuracy of statements and information provided to the Therapeutic Goods Administration, the regulatory authority that oversees compliance with the Act, or risk attracting heavy penalties. Companies also risk possible reputational damage given the TGA's broader powers to release information to the public on breaches of the Act.
Ms Baker says the personal liability provisions raise a particular concern for those involved in the day-to-day management of companies operating in these sectors. "In failing to take steps to adequately educate their own employees and ensure that their agents and contractors understand what the company's obligations are under the Act, management may find themselves on the wrong end of the law," says Ms Baker.
The new provisions imposing personal liability are sections 54B and 54C of the Act. Under those sections, any-one involved in the management of the business may be found personally liable if they knew the company would breach the Act and were in a position to influence its conduct but failed to take 'reasonable steps' to prevent the breach.
Possible breaches include a failure to comply with manufacturing standards and failing to inform the Therapeutic Goods Administration of issues with the quality, safety or efficacy of a pharmaceutical good or device.
Certain breaches (such as non-compliance with standards) carry a maximum criminal penalty for individuals of $440,000 and up to 5 years imprisonment and a civil penalty of $550,000.
In determining what are 'reasonable steps', the court will be asked to consider what action the director or manager took to ensure the company's employees, agents and contractors had a 'reasonable knowledge and understanding' of the Act's requirements.
"Directors and managers who take a 'head in the sand' approach to compliance with the Act now stand to suffer enormous personal consequences. This is a very significant measure which places them at the front line of the increasingly demanding obligations of corporate governance in Australia," Ms Baker says.
"The new laws also stand to drastically impact the way in which companies in the pharmaceuticals and medical devices sectors do business. It may no longer be enough for the company to have a blanket provision in its underlying contracts (such as contract manufacturing agreements) that require a third party to comply with the Act and relevant standards. The company - be it a pharmaceuticals manufacturer or sponsor - should now ensure it has hard evidence that those acting on behalf of their business understand the Act's requirements."
Ms Baker describes the new regime as a 'carrot and stick' approach aimed at encouraging companies to examine their own internal practices to ensure compliance with the Act rather than waiting for a breach to happen.
"Affected companies would be well advised, if they haven't already, to take all necessary steps to ensure they have the appropriate systems and documentation in place not only to ensure they avoid breaching the Act but also to protect their management from personal liability," Ms Baker adds.
The proposed changes were prompted by the Pan Pharmaceuticals recall, which raised concerns that the existing regulatory regime was inadequate. Ms Baker says that while the amendments significantly strengthen the regime by expanding the power of the Therapeutic Goods Administration to enforce the Act's provisions, they are a double-edged sword for companies and their management.
"The full impact of the changes will not be clear however until the Act has been in operation for a while," Ms Baker says.
Other changes under the Act include a tiered regime of criminal offences with new maximum penalties of up to $440,000 and 5 years imprisonment, civil penalties of up to $550,000 for individuals and $5.5 million for companies applicable to certain existing offences, infringement notices as an alternative to prosecution and provision for enforceable undertakings.
