Cost-Benefit Analysis Supplemental - Small Business Lens under the Cabinet Directive on Regulatory Management

Regulations Amending the Food and Drug Regulations - Good Manufacturing Practices for Active Ingredients

Background

The Proposal to amend the Food and Drug Regulations to include Good Manufacturing Practices (GMP) for active ingredients received "blue stamp" in December 2011 and was in queue for Treasury Board approval before the Small Business Lens and other regulatory reform initiatives took place in 2012.

The objective of this Supplemental is to compare the new requirements, including the use of the Regulatory Cost Calculator and implications of the One-for-One provisions; and to reconcile the differences, if any, with the information provided by the Cost-Benefit Analysis (CBA) already developed for the Proposal.

Interim Small Business Lens Instructions

The Small Business Lens Instructions (Interim) from Treasury Board Secretariat (TBS) consists of two sections and five parts.

Section A (Small Business Regulatory Design Checklist) comprises of 3 parts - Communication and Transparency, Simplification and Streamlining, and Implementation, Compliance and Service Standards. Section B (Regulatory Flexibility Analysis & Reverse Onus Checklist) comprises the Regulatory Flexibility Analysis and the Reverse Onus.

The Small Business Lens applies to regulatory proposals that impact small business and have nation-wide cost impacts over $1 million annually.

The Instructions provide a definition of regulatory costs as direct administrative and compliance costs.

The response to the Checklists for the Proposal is provided in Appendix A. 

Considerations

Distribution Analysis

The Regulatory Cost Calculator (RCC) is an Excel-based tool developed by TBS to standardize the calculations of administrative and compliance costs of business under the One-for-One (administrative burden) and Small Business Lens (administrative and compliance burden) regulatory reform rules.

The Department is expected to establish the industry profile pertinent to regulatory proposals using the Calculator, which sources its data from Statistics Canada. In this case, micro- and small business represents 89.3% of enterprises in pharmaceutical and medicine manufacturing, 94.9% in pharmaceuticals and pharmacy supplies wholesalers-distributors and 99.1% in testing laboratoriesFootnote 1. The tool does not provide further details or breakdown for the sectors.

Table 1: Micro- and small-business breakdown in pertinent industry sectors
NAICSTable 1 footnote 1 Industry Sector Micro Small All enterprise MS/All
325410 Pharmaceutical and Medicine Manufacturing 214 145 402 89.3%
414510 Pharmaceuticals and Pharmacy Supplies Wholesaler-Distributors 539 180 758 94.9%
541380 Testing Laboratories 2,634 464 3125 99.1%

Table 1 footnotes

Table 1 footnote 1

North America Industry Classification Code

Return to table 1 footnote 1 referrer

However, active ingredients, specifically active pharmaceutical ingredients (APIs), affected by this Proposal represent only a subset of pharmaceutical products.  

The Health Products and Food Branch Inspectorate of Health Canada will be responsible for compliance and enforcement activities in respect of APIs. It estimates that there are about 262 to 533 establishments in Canada engaging in key activities in the supply chain of active ingredients for pharmaceutical drugs.

Among these establishments, the Inspectorate anticipates about 40 API manufacturers, 30-40 API packagers/labellers, 10 API testers, and 250 to 300 API importers would be affected by the proposed regulations.

Health Canada does not have any internal data on the industry profile relative to the breakdown of corporate size (i.e., small business vs. medium and large enterprises). Rather, it focuses on the location (foreign or domestic) and the function (fabrication, packaging/labelling, testing) as well as the type of product (sterile versus non-sterile) that would be subject to inspection.

It should be noted that a Canadian or foreign company could have one or more domestic or foreign sites with single or multiple functions for either or both sterile and non-sterile products, and that a company may deal with both APIs and dosage-form drugs (which are already subject to GMP requirements). Health Canada estimates that there are about 864 sites to be under the purview of the regulatory proposal.

Nevertheless, the distribution among small business could be as follows if the pattern identified by Statistics Canada in the overall pharmaceutical sector holds true for APIs:

Table 2: Distribution among small businesses in the API sector
Stakeholders Total Number of  Enterprises Small firm percentage No. of Small Firms
API Manufacturers 40 89.3% 36
API Packagers/labellers 30-40 94.9% 28 - 38
API Importers 250-300 94.9% 237 - 285
API Testers 10 99.1% 10

Risk-based Regulatory Flexibility Analysis

The Small Business Lens requires that at least one alternative lower-cost option for small business, which is not at the expense of greater health, security, safety or environmental risks for Canadians, be assessed, in addition to the initial (higher cost) option considered by the sponsoring department or agency.

Although the Proposal to extend GMP requirements to cover APIs was developed by Health Canada prior to the introduction of the Small Business Lens, the Department was mindful with its design to ensure as little administrative and compliance burden would be placed on its stakeholders as possible, regardless of their size.

For this reason, the Proposal tries to be principle-based rather than prescriptive, as the traceability requirement demonstrates. In addition, wholesalers and distributors which only engage in the lower-risk activities of storing and transporting already packaged and labelled APIs will be subject to the applicable GMP requirements but will not need to apply for an Establishment License.    

In any case, the Regulatory Flexibility Analysis requirement under the Small Business Lens would not be applicable, assuming the data from the North American Industry Classification System (NAICS) is correct about the makeup of the pharmaceutical industry in Canada, and assuming it is also a proxy for APIs.  As the entire sector (approximately 90% or more) would fall into the small business category, there is no lower cost option to be contemplated.

Administrative and Compliance Costs

In accordance with the latest version of the Small Business Lens Instructions available to the DepartmentFootnote 2, compliance costs are defined as upfront capital costs as well as ongoing maintenance and training costs that businesses face when complying with a regulation. They include signage/notifications (when in material form, such as a road sign), training staff, purchasing new equipment or software, maintaining equipment/software, renting additional space, etc.

Administrative costs are time and resources required to demonstrate compliance with government regulatory requirements in terms of (1) planning, collecting, processing and reporting of information and (2) completing forms and retaining data required by governments. They include filling out license applications, various forms, finding and compiling data for audits, learning about requirements, etc. These costs may also be known as the "administrative burden".

Based on discussions with the central agency, it is understood that there is a distinction between administrative costs related to regulations, and "business-as-usual" administrative costs, which would occur regardless of whether a regulation is in place or not. The "business-as-usual" administrative costs are to be excluded from the calculations.

The Cost-Benefit Analysis for the Proposal attributes only those training costs to be incurred after the regulations come into force as compliance costs, and only those expenditures relating to the annual filing for Establishment License renewal as incremental administrative costs.

The reasons are as follows:

First, the Department has encouraged GMP compliance on a voluntary basis since its issuance of Good Manufacturing Practice Guidance for Active Pharmaceutical Ingredients (ICH Q7) in 2002. Incidentally, the ICH Q7 requirements were developed jointly by industry and regulators.

Economic theories suggest that industry would comply voluntarily only if the business benefits outweigh the business costs.  A stakeholder's reasons for incurring the costs voluntarily should not change simply because the same rules become mandatory.   The costs of such voluntary compliance should therefore not be attributed to the introduction of the regulatory requirement.

Second, APIs are an "input" into tablets, capsules or solutions to be packaged for consumers and patients. They are currently regulated in Canada indirectly by requiring the manufacturers of drugs in dosage form to test the APIs. Other jurisdictions, however, already require these essential components to be GMP-compliant.

As a result, some dosage-form manufacturers institute physical audits of their Canadian suppliers to ascertain the obligations have been met, and some ask for supplier attestations of GMP compliance. In either case, some customers of APIs have already required the standards and procedures in the Proposal to be met by their suppliers.

Third, Canada would be one of the last industrialized countries to implement GMP for APIs. The United States and Europe, which constitute at least 60% of the market for APIsFootnote 3, already have an equivalent regulatory requirement. Other developed countries such as Australia, Singapore and Japan also have a similar legal framework in place. Last but not least, the Pre-Qualification program of APIs for the World Trade Organization (WTO) is based on the same model as well.

Thus, there are few, if any developed countries in the world that would allow APIs without meeting the GMP requirements, including the need for record keeping and inspections by competent regulatory authorities of either the country of origin where the APIs are produced, or the country into which the APIs are imported.

It is estimated that only about 15% of APIs for the Canadian market are produced domestically while the rest are imported. Being a small marketFootnote 4, our manufacturers are unlikely to rely solely on sales within Canada to survive, nor would any foreign manufacturers.

Table 3: International comparison of GMP for API requirements
Jurisdiction Regulatory Authority Good Manufacturing Practices requirement for active ingredients?
United States Food and Drug Administration (FDA) Yes - based on ICH Q7
European Union Various, including United Kingdom's Medicines and Healthcare Products Regulatory Agency (MHRA) Yes - based on ICH Q7
Australia Therapeutic Good Administration (TGA) Yes - based on ICH Q7
Japan Pharmaceuticals and Medical Devices Agency (PMDA) Yes - based on ICH Q7
Singapore Health Sciences Authority Yes - based on ICH Q7
China State Food and Drug Administration (SFDA) Yes - domestically developed; not sufficient to meet ICH Q7 requirements
India Central Drugs Standard Control Organization (CDSCO) Yes - domestically developed; not sufficient to meet ICH Q7 requirements
Canada Health Canada No

In other words, anyone intending to enter and remain in the API business would probably need to have a GMP compliance program regardless of whether Canada requires it or not.

Hence, the Proposal should not add any significant compliance costs, in the form of upfront capital cost or incremental on-going maintenance and training cost, as Canada aligns its domestic GMP requirements for APIs with international standardsFootnote 5.

Furthermore, other than the annual filing of establishment license applications, there should be no incremental global administrative costsFootnote 6 for business to comply with GMP for API requirements as Canada establishes regulatory equivalence with our international counterparts and mutual recognition agreements reduce duplication in regulatory efforts. In fact, it might actually decrease the administrative cost.

While the primary reason for the Proposal to the Department is health related, the residual effect would also include economic impact for both Health Canada and a majority of Canadian business who are good corporate citizens and accept the higher cost to play by the rules. If the costs of such companies are counted retroactively as compliance cost, it could actually put non-conforming firms at a perverse regulatory advantage.

Net Present Value

Depending on how the compliance and administrative costs under the Small Business Lens are interpreted, the end result of economic assessment (net present value of benefits and costs) for the regulatory impact could change.

The Cost-Benefit Analysis assumes 150Footnote 7 of the approximately 400 firmsFootnote 8 affected by the Proposal would require training, as most should have already acquired theirs over the last 10 years to satisfy their clients (manufacturers of dosage-form drugs) and the competent regulatory authorities in other countries.

However, if the rule for compliance cost were interpreted to include all training costs incurred prior to the regulatory requirement becoming mandatoryFootnote 9, the initial training cost could be elevated to about $2.7MFootnote 10 to cover the approximately 400 firms affected by the Proposal instead of just under $1MFootnote 11 that was based on 150 companies with the future needs.

Because the Regulatory Cost Calculator (RCC) is new, its potential and capability has yet been fully understood and tested. For this reason, the Department calculates the lower and upper limits rather than replicating the formulation in the Cost-Benefit Analysis with the Excel tool for determining the compliance (training) cost. It results from $616,995 with the assumption that 100% of the stakeholders have some quality management system in place and all choose the cheapest form of training to $1.3MFootnote 12 if no one has quality management system and everyone decides to take the more expensive route for training. The estimated $1M one-time training cost in the Cost-Benefits Analysis would be in the middle of the RCC range.

It is assumed that all 864 sites of the estimated 400 firms are subject to some form of inspection at least once during a three year cycle, the regulatory proposal would only add Health Canada as a regulator with the appropriate authority to carry out active pharmaceutical ingredient inspection but should not change the frequency of inspection to Canadian companies due to the business environment and the likelihood of a mutual recognition agreement with our international counterparts under the new regime, as explained in the Administrative and Compliance Costs section above.. Hence, incremental cost for inspection is estimated to be nil in the Cost-Benefits Analysis under the regulatory proposal.

Nevertheless, if administrative cost for regulatory proposal were interpreted to exclude the impact on business of inspections carried out by other stakeholders and regulators and the effect of reciprocal arrangement, it could add as much as $55,000Footnote 13 on top of the annual on-going Establishment Licensing submissions costFootnote 14, for a total administrative cost of slightly over $100,000Footnote 15...

The issue of how to account for Canadian regulatory costs for business and commodities operating globally as well as other concerns relating to the implications of the One-for-One rule will be the subject of further analysis.

One-for-One Rule Implications

The additional regulatory burden on Canadian business as result of the regulatory proposal to amend the Food and Drug Regulations - Good Manufacturing Practice for Active Ingredients is estimated to be slightly under $1M in compliance cost for some of the companies in need of one-time training and the administrative time for filing Establishment Licensing submissions is quantified be $58,500 annually.

The total regulatory burden, on present value basis with a discount rate of 7%Footnote 16 over 10 years would be about $1.4MFootnote 17.

The annual average regulatory cost, with the one-time training cost amortized over a 10 year period on a straight line basis is estimated to be about $155,000Footnote 18.

Conclusion

The Small Business Lens is unlikely to be applicable to the regulatory proposal to amend the Food and Drug Regulations - Good Manufacturing Practices for Active Ingredients, given the average annual regulatory costs are substantially below the $1M threshold.

Appendix A: Small Business Lens

1. Name of sponsoring regulatory organization:

  • Health Canada

2. Title of regulatory proposal (should match Regulatory Impact Analysis Statement (RIAS) title):

  • Regulations Amending the Food and Drug Regulations - Good Manufacturing Practices for Active Ingredients

3. Is the checklist submitted with a RIAS for Canada Gazette Part I or Part II?

Note: checklists should be submitted to TBS-RAS along with the RIAS for Canada Gazette, Part I, when seeking TBS-RAS approval. If the small business lens is applicable to a proposal that is exempted from prepublication in Canada Gazette, the checklist can be submitted along with the RIAS for Canada Gazette, Part II.

4. Date final copy received by TBS-RAS (D/M/YYYY): 12/12/2011

  • If the answer to any of the questions is "No", please attach a reasonable explanation.
A. Small Business Regulatory Design Checklist
I Communication and Transparency YES NO N/A
1. Are the proposed regulations or requirements easily understandable in everyday language?    
2. Is there a clear connection between the requirements and the substantive purpose (or intent) of the proposed regulation?    
3. Will compliance promotion activities guide small businesses on how to comply sufficiently in advance of regulations coming into force? (Includes information sessions, sample assessments, toolkits, websites, etc.)    
4. If new forms are introduced, are they consistent in appearance and format with other relevant government forms?    
II Simplification and Streamlining YES NO N/A
1. Will streamlined processes be put in place (e.g. through BizPal, CBSA single window) to collect information from small businesses where possible

Explanatory note from Health Canada: We are currently looking into expanding Health Canada's BizPal linkages to include the proposed regulation.  However, it should be noted that BizPal does not collect information from small businesses.  Rather, it helps businesses to determine which federal, provincial and municipal permits and licences they may require and provides any relevant Internet links.
   
2. Have opportunities to align with other obligations imposed on business by federal, provincial, municipal or international / multinational regulatory bodies been assessed?    
3. Has the impact of the proposed regulation on international or interprovincial trade been assessed?    
4. If the data or information - other than personal information (1) - required to comply with the proposed regulation is already collected by another department or jurisdiction, if possible will this information be obtained from them instead of requesting the same information from small businesses or other stakeholders?

Note (1): The collection, retention, use, disclosure and disposal of personal information are all subject to the requirements of the Privacy Act. Any questions with respect to compliance with the Privacy Act should be referred to the department or agency's ATIP office or legal services unit.

Explanatory note from Health Canada: No other department or jurisdiction collects the data or information required under the proposed regulation.
   
5. Will forms be pre-populated with information / data already available to the department to reduce the time and cost necessary to complete them (e.g. when a business completes an online application for a license, upon entering an identifier or a name the system pre-populates with the applicant's personal particulars such contact info, date application opened, etc. when that information is already available to the department)

Explanatory note from Health Canada: Health Canada does not currently collect the data or information required under the proposed regulation.  All initial application forms will therefore be blank.  All subsequent renewal forms, however, will be pre-populated.
6. Will electronic reporting and data collection be used, including electronic validation and confirmation of receipt of reports where appropriate?

Explanatory note from Health Canada: IT system enabling electronic data collection currently being developed by Health Canada for use with the proposed regulation.
   
7. Will reporting, if required by the proposed regulation, be aligned with generally used business processes and / or international standards if possible?    
8. If additional forms (whether paper-based or electronic, including official documents and originals) are required, can they be incorporated into or streamlined with existing forms that must be completed for other governmental information requirements or that is part of usual business practices?

Explanatory note from Health Canada: IT system currently being developed by Health Canada for use with the proposed regulation will eventually be expanded to include existing forms for other governmental information requirements in 3 to 5 years.
   
III Implementation, Compliance and Service Standards YES NO N/A
1. Can compliance occur without specific compliance promotion activities for small business?
2. Has consideration been given to small businesses in remote areas and / or that do not have access to high speed (broad band) Internet?

Explanatory note from Health Canada: No affected regulatory parties in remote areas due to nature of regulated activity.
   
3. If regulatory authorizations (e.g., licenses, permits, certifications) are introduced, will service standards be developed that will address the timeliness of decision-making and clarify for business the information/process requirements, including for complaints about poor service?    
4. Is there a clearly identified contact point or help desk for small businesses and other stakeholders?    
A. Small Business Regulatory Design Checklist
I Communication and Transparency YES NO N/A
1. Are the proposed regulations or requirements easily understandable in everyday language?    
2. Is there a clear connection between the requirements and the substantive purpose (or intent) of the proposed regulation?    
3. Will compliance promotion activities guide small businesses on how to comply sufficiently in advance of regulations coming into force? (Includes information sessions, sample assessments, toolkits, websites, etc.)    
4. If new forms are introduced, are they consistent in appearance and format with other relevant government forms?    
II Simplification and Streamlining YES NO N/A
1. Will streamlined processes be put in place (e.g. through BizPal, CBSA single window) to collect information from small businesses where possible

Explanatory note from Health Canada: We are currently looking into expanding Health Canada's BizPal linkages to include the proposed regulation.  However, it should be noted that BizPal does not collect information from small businesses.  Rather, it helps businesses to determine which federal, provincial and municipal permits and licences they may require and provides any relevant Internet links.
   
2. Have opportunities to align with other obligations imposed on business by federal, provincial, municipal or international / multinational regulatory bodies been assessed?    
3. Has the impact of the proposed regulation on international or interprovincial trade been assessed?    
4. If the data or information - other than personal information (1) - required to comply with the proposed regulation is already collected by another department or jurisdiction, if possible will this information be obtained from them instead of requesting the same information from small businesses or other stakeholders?

Note (1): The collection, retention, use, disclosure and disposal of personal information are all subject to the requirements of the Privacy Act. Any questions with respect to compliance with the Privacy Act should be referred to the department or agency's ATIP office or legal services unit.

Explanatory note from Health Canada: No other department or jurisdiction collects the data or information required under the proposed regulation.
   
5. Will forms be pre-populated with information / data already available to the department to reduce the time and cost necessary to complete them (e.g. when a business completes an online application for a license, upon entering an identifier or a name the system pre-populates with the applicant's personal particulars such contact info, date application opened, etc. when that information is already available to the department)

Explanatory note from Health Canada: Health Canada does not currently collect the data or information required under the proposed regulation.  All initial application forms will therefore be blank.  All subsequent renewal forms, however, will be pre-populated.
6. Will electronic reporting and data collection be used, including electronic validation and confirmation of receipt of reports where appropriate?

Explanatory note from Health Canada: IT system enabling electronic data collection currently being developed by Health Canada for use with the proposed regulation.
   
7. Will reporting, if required by the proposed regulation, be aligned with generally used business processes and / or international standards if possible?    
8. If additional forms (whether paper-based or electronic, including official documents and originals) are required, can they be incorporated into or streamlined with existing forms that must be completed for other governmental information requirements or that is part of usual business practices?

Explanatory note from Health Canada: IT system currently being developed by Health Canada for use with the proposed regulation will eventually be expanded to include existing forms for other governmental information requirements in 3 to 5 years.
   
III Implementation, Compliance and Service Standards YES NO N/A
1. Can compliance occur without specific compliance promotion activities for small business?
2. Has consideration been given to small businesses in remote areas and / or that do not have access to high speed (broad band) Internet?

Explanatory note from Health Canada: No affected regulatory parties in remote areas due to nature of regulated activity.
   
3. If regulatory authorizations (e.g., licenses, permits, certifications) are introduced, will service standards be developed that will address the timeliness of decision-making and clarify for business the information/process requirements, including for complaints about poor service?    
4. Is there a clearly identified contact point or help desk for small businesses and other stakeholders?    
B. Regulatory Flexibility Analysis & Reverse Onus Checklist
IV Regulatory Flexibility Analysis YES NO N/A
1. Does the RIAS identify at least one (1) flexible option with lower compliance and administrative costs for small businesses in the Small Business Lens Section (Section 9)?

Examples of flexible options to minimize costs are:
  1. Performance-based standards;
  2. Partial or complete exemptions from compliance, especially for firms with good track records;
  3. Longer transition periods or temporary exemptions;
  4. Reduced compliance costs;
  5. Use of market incentives;
  6. Reduced fees;
  7. Simplified and less frequent reporting obligations and inspections;
  8. Licenses granted on a permanent basis or renewed less frequently.
   
2. Does the RIAS include, as part of the Regulatory Flexibility Analysis Statement (Section 9), quantified and monetized compliance and administrative costs for small businesses associated with the initial option assessed, as well as the flexible, lower-cost option?
  • Use the Regulatory Cost Calculator to quantify and monetize administrative and compliance costs and include the completed Calculator in your submission to TBS-RAS.
Explanatory note from Health Canada: The Triage Statement was signed off and the RIAS was developed prior to the introduction of the Small Business Lens requirements and therefore does not contain a Regulatory Flexibility Analysis Statement.  Small Business Lens requirements that are not addressed in the RIAS, such as this one, are addressed in the CBA supplemental document.

Note also that the Regulatory Flexibility Analysis requirement under the Small Business Lens would not be applicable, as the entire pharmaceutical sector in Canada (approximately 90% or more) appears to fall into the small business category, according to the data from the North American Industry Classification System (NAICS). There is therefore no lower cost option to be contemplated.    
   
3. Does the RIAS include, as part of the Regulatory Flexibility Analysis Statement (Section 9), a consideration of the risks associated with the flexible option? (Minimizing administrative or compliance costs for small business cannot be at the expense of greater health, security, safety or environmental risks for Canadians)

Explanatory note from Health Canada: The Triage Statement was signed off and the RIAS was developed prior to the introduction of the Small Business Lens requirements and therefore does not contain a Regulatory Flexibility Analysis Statement.  The RIAS does contain a consideration of the risks associated with a less onerous approach for businesses, large or small, carrying out particular lower-risk activities.  Further minimization for small business would not be appropriate as it would be at the expense of greater health risks for Canadians.
   
4. Was the regulatory flexibility analysis validated with a reasonable sample of small businesses prior to pre-publication in Canada Gazette, Part I?
  • Note that small businesses can be consulted via roundtable discussions, test panels of entrepreneurs, surveys - whether online, by phone or in person, through associations, etc.
Explanatory note from Health Canada: The Triage Statement was signed off and the proposed regulation was developed prior to the introduction of the Small Business Lens requirements.  The regulatory flexibility analysis set out in the CBA supplemental document will be validated  with a reasonable sample of small businesses concurrent with pre-publication of the proposed regulation in Canada Gazette, Part I.
   
5. Does the RIAS include a summary of feedback provided by small business during consultations on the regulatory flexibility analysis or flexible option?    
V Reverse Onus YES NO N/A
1. If the recommended option is not the lower cost option for small business (both in terms of administrative and compliance costs), is a reasonable justification provided in the RIAS?    

Signoffs

"Kim Dayman-Rutkus"
Department (Director Level)

"1/4/12"
Date

Departmental contact (Name/Phone/Email):

The regulatory organization should send one (1) signed copy (scanned pdf or paper copy) and one (1) final Word copy of the Small Business Lens to TBS-RAS for approval (analyst level).

Signed checklists and attached explanations, if any, are to be made available by the sponsoring department or agency to the public upon request.

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