Nichols Diagnostics Stops Product Sales

Are “Black Belts” getting a “black eye” from significant manufacturing problems?

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CEO SUMMARY: It’s an odd story. One of the nation’s most respected names in diagnostics quietly ceases delivering products—and no one in the laboratory industry pays much attention. Last month, Nichols Institute Diagnostics, acknowledging production problems it has not yet resolved, announced to its laboratory customers throughout the United States that deliveries of its diagnostic kits would cease.

QUIETLY AND WITH LIMITED PUBLIC DISCLOSURE, a prominent diagnostic kit manufacturer ceased selling products to laboratories in the United States.

Nichols Institute Diagnostics, Inc., based in San Clemente, California, issued “Customer Bulletin CR-05-20” on June 16, 2005 to client laboratories. Titled “Product Inventory Hold,” the first paragraph made a succinct statement, declaring “This is to advise you of a new quality initiative at Nichols Institute Diagnostics (NID) and an accompanying hold on all products at NID.” (Our italics.)

With this sentence, Nichols Institute Diagnostics told its laboratory customers in the United States not to expect further deliveries of test kits and other products. It was an unexpected withdrawal from the market.

Nichols Institute Diagnostics is a division of Quest Diagnostics Incorporated. It manufactures an instrument called the “Nichols Advantage® Specialty System” and sells a menu of assays that can be run on that instrument.

Although Quest Diagnostics does not specifically disclose the financials of NID, the company has told analysts that annual revenues for this division represent no more than 1% of the company’s revenues. That would place NID’s yearly revenues at a maximum of about $50 million.

Because the company is no longer shipping product, laboratory customers throughout the United States are scrambling to set up and validate comparable assays from alternative vendors. The situation is exacerbated by NID’s lack of candor about its problems. Some laboratory customers of NID are troubled that NID is silent on the subject of whether or not, and when, it will resume shipment of new products.

Will NID Continue?

Some laboratory customers speculate that Nichols Institute Diagnostics may be preparing to exit the business. There has been speculation in recent years that Quest Diagnostics has considered selling Nichols Institute Diagnostics, primarily because the diagnostic assay manufacturing business is a distraction from the company’s core business strategies.

There is evidence that significant and deep problems plague NID. On March 2, 2005, the Food & Drug Administration (FDA) published a recall for the NID 25-Hydroxy Vitamin D Assay. NID had previously recalled this test by a customer bulletin on June 30, 2004. The FDA next published two recalls on May 18, 2005. They were for NID’s IRMA Intact PTH Assay and the Bio-Intact PTH (1-84) Assay. NID had previously issued recall letters for these assays in March 2005.

Additional Product Recalls

On June 15, 2005, the FDA published two additional recalls for the Nichols Sample hGH Diluent Set and the TSH–Third Generation Assay. Both assays had been recalled by NID on May 2 and April 28, 2005, respectively.

NID issued Customer Bulletin CR- 05-20 one day following the last published FDA recall notices. That is strong evidence that Nichols Institute Diagnostics is responding to FDA concerns about its failure to manufacture products which meet specifications. By voluntarily pulling its products from the market, it is likely that NID was fore-stalling more forceful action by the FDA on these quality deficiencies.

All of this occurred under the radar screen of most lab industry watchers. And this story has a rather peculiar aspect. The fact that a business unit of one of the lab industry’s most respected brands—Nichols Institute—has pulled test kits from the marketplace because of quality problems has yet to catch the attention of the laboratory industry.

In the short term, the obvious impact of NID’s withdrawal from the market is that its laboratory customers are now under time pressure to locate alternate sources of comparable assays and avoid disruptions in lab testing services to their client-physicians. Historically, disruption by a vendor like NID in the supply of its products usually alienates a large number of its laboratory customers.

Released From Contracts

That alienation of the customer base makes it difficult for an IVD vendor to re-enter the marketplace at a future date and re-establish relationships with its former customers. One sign that Nichols Institute Diagnostics recognizes it faces an uncertain future is the fact that it has released lab clients from contracts covering instruments and assay kits.

There is an additional dimension to the story of product quality problems at Nichols Institute Diagnostics which raises several interesting questions. Nichols Institute Diagnostics is owned by Quest Diagnostics Incorporated. Quality failings and management inadequacies at NID are directly at odds with the quality message that executives at Quest Diagnostics deliver to the public and Wall Street alike.

First, if quality management systems and philosophy are firmly rooted within Quest Diagnostics and its constituent business units, how could production failures within Nichols Institute Diagnostics compound to the point where it was forced to cease selling its products? After all, the major goal of Six Sigma and similar quality management systems is to give a company the tools and knowledge it needs to continuously improve the quality of its products and services. This does not seem to have happened within Nichols Institute Diagnostics.

Second, after production and quality problems were uncovered at Nichols Institute Diagnostics, at least as recorded by the recalls issued by NID and FDA, why has this company offered so little communication to the laboratory marketplace about the situation? This contradicts the spirit of quality management, which emphasizes that meeting customer expectations is what defines quality.

Lost Corporate Asset

Three, does this episode reflect negatively on the management culture within Quest Diagnostics, which has, to this point, allowed its NID business unit— and its estimated $30 to $50 million in revenues—to literally drop out of the market? In absolute terms, that’s a sizeable corporate asset to “vanish,” notwithstanding Quest Diagnostics’ $5 billion in annual revenues.

Four, isn’t this a major tarnish on the long-respected reputation of Quest Nichols Institute? This is not likely to be mentioned publicly. However, many lab directors and pathologists know how NID was spawned from Nichols Institute in 1984 and how NI founder Albert Nichols, M.D. infused a remarkable emphasis for quality into his company from its earliest days. (In fact, even today many ex-Nichols employees still remember the acronym Dr. Nichols constantly stressed: Q R I S P, where the Q came first and stood for Quality.)

Despite the fact that this story has remained under the lab industry’s radar screen to date, THE DARK REPORT believes it is significant in at least two ways. First, it is another example of how in vitro diagnostic manufacturers are struggling to maintain consistency in the quality of their reagents and test kits. Nichols Institute Diagnostics is not the only company that has grappled to deliver products to lab customers which fully meet their own published specifications.

Second, it has been almost six years since Quest Diagnostics Incorporated announced to the world that it would use Six Sigma and other effective tools to raise the quality of its services and products. The experience at Nichols Institute Diagnostics—and its withdrawal from the market due to product quality problems—is a reminder that any company’s journey into quality management systems requires intense effort and unrelenting attention.

NID’s Problems Seemed To Start With Vitamin D

IT MAY BE THAT THE UNRAVELING of Nichols Institute Diagnostics (NID) was its 25-Hydroxy Vitamin D assay. The story began in early 2004.

Several technical laboratory directors have told The Dark Report that NID acknowledged that the assay was under-measuring the D-2 fraction of vitamin D. Nichols Institute Diagnostics issued a Customer Bulletin on June 30, 2004 notifying customers of this fact. These lab directors note that, in September 2004, NID staff informed them that NID would establish a time line on a fix for this assay. However, in the months since that statement, NID has issued no additional statements on a fix.

The first FDA recall notice involving an NID product was published on March 2, 2005 and involved the 25-Hydroxy Vitamin D assay. This was followed by a cascade of recall notices in subsequent months involving many of NID’s remaining assays.

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