Anti-Corruption Risks and Drug and Device Companies
For years, the Justice Department and the Securities and Exchange Commission touted the FCPA “sweep” of the pharmaceutical and medical device industries. With good reason, DOJ and the SEC turned the drug and medical device industries into virtual enforcement punching bags as company after company reached settlements with the DOJ and/or SEC. Indeed, the drug and medical device industries replaced the earlier enforcement punching bag – the oil and gas industry that eventually reinvented their compliance programs to create world-class programs to avoid further FCPA enforcement actions.
The industry “sweep” really gained momentum with the Johnson and Johnson 2011 settlement for approximately $70 million, and the Pfizer settlement for a little over $60 million in 2012. For years, these two cases were the highest penalties imposed against drug and medical device companies.
Drug and medical device companies were targeted based on cooperation from other companies, common distributors and bribery practices, and voluntary disclosures.
Last year, Teva Pharmaceuticals broke all records for drug and device company FCPA enforcement actions when it settled with DOJ and the SEC for $519 million. Last year, 2016 was a big year for DOJ and SEC enforcement actions against drug and device companies, including settlements with GSK ($20 million); AstraZeneca ($5 million); Analogic ($15 million); Novartis ($25 million); Nordion ($375k); SciClone ($12.8 million); and Teva ($519 million).
Continuing in 2017, there have ben two significant FCPA actions against medical device companies – Orthofix ($6 million, repeat offender) and ZimmerBiomet ($30 million, repeat offender)
Drug and device companies face a number of significant FCPA risks. Even with redoubled compliance efforts, drug and device companies can easily fall into a series of missteps and investigation. In most foreign countries, the government owns and operates the healthcare system. Healthcare officials, physicians and staff are typically government employees and often fall within the FCPA definition of a “government official.” Given the nature of the interactions with foreign medical officials, drug and device companies have to exercise care when selling and marketing to medical officials and physicians.
In dealing with foreign healthcare officials and physicians, drug and medical device companies often face significant compensation/bribery demands from foreign officials and physicians who are often underpaid, particularly in comparison to their counterparts in the United States. Foreign officials and physicians view such compensation arrangements as part of their professional privilege, requesting conference sponsorships and other lavish benefits.
Drug and device companies also face significant risks by relying on extensive networks of distributors and sub-distributors to sell their products. These networks often stretch down to sub-sub-distributors who interact with individual hospitals in a geographic region.
The foreign pharmaceutical industry totals over $100 billion each year. China remains a high-risk market with significant upside. Chinese consumers continue to devote a significant portion of their income to drug and device products.
The so-called industry FCPA enforcement “sweep” may dwindle or even increase in the future. It is clear that corruption risks will continue and can increase as foreign governments assume greater control over the healthcare industry. As the trend of government-delivered healthcare continues to grow, so does the risk for drug and device companies seeking business with government health officials and physicians.