US Anti-Corruption Regulation Risks

Dec 01, 2010

Anjali Chaturvedi
During the past year, two trends in the pharmaceutical industry have garnered widespread attention. First, companies are expanding their presence in China, India, Brazil, and other emerging markets to capitalize on the significant growth opportunities offered by these countries. Second, the Department of Justice (DoJ) has made enforcement of the Foreign Corrupt Practices Act (FCPA) in the pharmaceutical industry a top priority and is currently investigating a number of drug companies regarding possible violations. As pharmaceutical manufacturers continue to expand their operations in emerging markets, their exposure to FCPA liability will increase. It is imperative that manufacturers recognize the key FCPA risk areas and adopt effective compliance policies and procedures to avoid violations.

Brian K. French
Many factors are contributing to the trend toward investment in emerging markets, the most important of which are the problems the industry faces in the mature countries of North America and Europe. These include market saturation, lost patent protection, generic competition, depleted product pipelines, and enhanced third-party payer leverage. Earlier this year, IMS Health identified 17 rapidly expanding "pharmerging markets," which present strong growth opportunities for drug companies. According to IMS, the average growth rates of these pharmerging markets will be at least triple those of the developed markets over the next four to five years. Throughout 2010, a number of major drug firms announced deals for expanding their overseas operations by acquiring or partnering with local branded generics companies, commercializing products in new markets through license and supply agreements, collaborating with foreign medical centers on new research and development opportunities, and hiring significant numbers of new sales representatives. All signs indicate that the pace of these emerging market deals will continue to accelerate. In the rush to gain early mover advantages, however, companies must not lose sight of the potential risks that accompany their overseas investments, not the least of which include the FCPA.

Pharma's Unique Exposure

On Nov. 12, 2009, Lanny A. Breuer, Assistant Attorney General (AAG) for DoJ's Criminal Division, delivered the keynote address at the 10th Annual Pharmaceutical Regulatory and Compliance Congress and Best Practices Forum and warned those in attendance that the government would be "intensely focused on rooting out foreign bribery" in the pharmaceutical industry in the months and years ahead. Within just a few months of AAG Breuer's remarks, a number of drug companies announced that they had received subpoenas and letter requests from the DoJ and Securities and Exchange Commission (SEC) regarding possible FCPA violations.

Pharmaceutical companies are particularly vulnerable to FCPA liability, in large part because of their extensive contacts with individuals who may be deemed "foreign officials." The FCPA prohibits US companies and citizens from paying or giving gifts of any value to a "foreign official" in order to obtain or retain business or to secure an improper business advantage. DoJ has broadly interpreted the phrase "foreign official" to include not only health ministers, customs officers, and other obvious government actors, but also physicians, pharmacists, and researchers employed by state-owned or state-controlled hospitals or other enterprises. This expansive interpretation has significant implications for drug companies, especially those operating in emerging markets where government is often heavily involved in the delivery of healthcare. As AAG Breuer observed in his November 2009 address, "It is entirely possible, under certain circumstances and in certain countries, that nearly every aspect of the approval, manufacture, import, export, pricing, sale, and marketing of a drug product in a foreign country will involve a 'foreign official' within the meaning of the FCPA."

For all the benefits that may flow to drug manufacturers through deeper engagement in emerging markets, these investments are not without risks. Each new deal that a drug company makes in an emerging market brings the organization into contact with a variety of government agencies and officials, increasing the company's exposure to FCPA liability. To compound these risks, many of the pharmerging markets that IMS identified have poor track records when it comes to bribery and corruption.

For example, Transparency International (TI) compiles an annual report ranking countries based on their perceived levels of public sector corruption. A number of the pharmerging markets fared poorly in TI's 2010 Corruption Perceptions Index (CPI). Of the 178 countries included in this year's CPI, the pharmerging market countries receiving the poorest scores included Venezuela (164), Russia (154), Pakistan (143), Ukraine (134), and Vietnam (116). Poland received the most favorable rating (41), while India, China, and Brazil received scores of 87, 78, and 69, respectively. Although a number of these countries have made genuine efforts to crack down on bribery and corruption within their borders, real risks remain.

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