Recent allegations that Novartis bribed doctors in Greece serve as a reminder that the pharmaceutical industry has a high risk of bribery and corruption. We look at the reasons behind the risk, and how companies can enhance compliance risk mitigation.
New markets for pharma increase bribery and corruption risk
In December 2016, Greek authorities launched a bribery probe into Swiss pharmaceutical company Novartis. In the midst of the on-going investigation, Greece's justice minister claimed that Novartis may have bribed "thousands" of doctors and civil servants to promote its products. And this isn't the first time; Novartis has been the subject of five bribery and corruption enquiries the past two years.
- In 2015, Novartis paid $390 million to settle charges that it bribed pharmacies in the U.S. to recommend certain prescriptions to patients.
- In March 2016, Novartis paid $25 million to settle claims by the U.S. Securities and Exchange Commission that it bribed health professionals in China to increase sales.
- In August 2016, Novartis came under scrutiny by Turkish authorities after an anonymous whistle-blower alleged that bribes were paid to win $85 million in business from government hospitals. To date those allegations remain unsubstantiated.
- Also in August 2016, South Korea handed down indictments to six former or current Novartis employees over "rebates" offered to doctors to boost drug sales. The probe continued until April 2017 when, as the FCPA blog reported, South Korea fined Novartis $48.3 million over the kickbacks and suspended insurance coverage for several of the company's drugs.
Moreover, Novartis is just one of many Big Pharma companies to have faced bribery and corruption allegations in recent years. In 2012, Pfizer paid $60 million to settle charges in the U.S. that its overseas subsidiaries had bribed healthcare officials in order to gain regulatory approval for the company's drugs and boost sales in 12 countries. In 2015, Bristol-Myers Squibb agreed to pay more than $14 million to settle charges of bribing state-owned hospitals in China in exchange for prescription sales. And 2016 saw the largest U.S. Foreign Corrupt Practices Act (FCPA) fine ever for a pharmaceutical company—and the fourth largest settlement across all industries—when Teva Pharmaceutical entered a deferred prosecution agreement for $519 million with the U.S. DOJ and SEC for FCPA offenses in Ukraine, Mexico and Russia.
3 reasons why compliance risk in pharma is high
No industry is immune to bribery and corruption risk, but the pharmaceutical industry is particularly exposed for several reasons.
- Emerging markets: Risk and reward often go hand-in-hand—and such is the case for companies entering new or expanding markets. These countries may have less stringent laws regarding corruption or even a culture in which bribery is an inherent part of 'getting things done.' Yet, pharmaceutical companies cannot support growth and profitability by avoiding markets like China, which has a population of more than 1.3 billion and is now the world's second-largest pharmaceuticals market. In fact, five out of seven 2016 FCPA settlements with pharmaceutical or medical device companies arose from violations in China or Russia.
- Broad definition of foreign officials: Pharmaceutical companies have regular, direct contact with doctors, pharmacists and hospital administrators. While this may not sound risky, in many foreign countries healthcare facilities are state-owned and run. As a result, many healthcare providers are classified as foreign officials under the FCPA definition, which means that unauthorised payments made to them are considered to be bribery.
- Reward-based marketing: Because doctors and healthcare administrators may be viewed as foreign officials, companies' marketing efforts can expose them to greater risk. What a company regards as marketing is sometimes considered by a regulator to be bribery when it involves meals, gifts, cash or entertainment.
What should companies do?
There are signs that companies are increasingly recognising the importance of improving their compliance procedures in high-risk regions of the world. Following the settlement of bribery allegations in China, Bristol-Myers Squibb announced that it had changed its policies in the country. Glaxo Smith Kline has also tried to reduce the potential for bribery in China by cutting the link between sales and pay for its representatives, stopping paying speaking fees to doctors, and investigating its employees' expenses more carefully. Recently, Novartis chief compliance and ethics officer Shannon Klinger said in an interview that the company plans to "shift from policing to coaching, with a compliance unit focused on helping local units make the right decisions."
But policy changes alone cannot fully mitigate compliance risk. When a company deems a third party to have a low risk of bribery and corruption, a basic due diligence search may suffice. Even then, however, relying on a traditional internet search engine may fall short. In addition to finding it difficult to verify open source data, other critical information may be hidden by paywalls or obscured due to legislation like the European Union's 'right to be forgotten' law. When a company has operations or relies on third parties in other countries, the need for enhanced due diligence—including checking against sanctions, PEPs and other watch lists—climbs. Pharmaceutical firms competing to enter new markets must recognise that effective third-party due diligence is a strategic driver for sustainable business growth. The alternative, as we've seen with Novartis and other pharmaceutical companies, is serious compliance failings that lead to reputational damage and costly enforcement actions—certainly bitter pills to swallow when it comes to the bottom line.
Learn how organisations in the pharmaceutical sector can mitigate the risks of corruption more effectively, in our ebook, "Something Missing? Pharmaceutical & Life Sciences Third-Party Due Diligence."