US Anti-Corruption Regulation Risks

December 1, 2010
Pharmaceutical Executive, Pharmaceutical Executive-12-01-2010, Volume 0, Issue 0

Stepped-up enforcement of the Foreign Corrupt Practices Act requires enhanced global coordination of compliance

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.

Anjali Chaturvedi

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.

Brian K. French

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.

Effective Compliance Actions

Most companies have responded to the threat with an internal program designed to prevent, identify, and address possible FCPA violations. In doing so, manufacturers should conduct a thorough review of the particular risk areas relating to each country in which they operate and develop clear policies and procedures tailored to the specific dynamics of each market. This country-specific focus should not only be reflected in a company's written policies and procedures, but should also guide how the organization implements, monitors, and audits compliance on the ground.

Through its compliance program, a company should seek to address the unique pressure points within each market that may create specific FCPA vulnerabilities. For example, to conduct clinical testing in certain countries, sponsors must first obtain a number of approvals from a complex web of regulatory bodies, sometimes at both a national and local level. Where this process results in long delays in completing clinical trials or obtaining product approvals, the risk of improper payments may be greater than in countries where the drug approval process is relatively fast.

An effective compliance program must also address the risks posed by third-party intermediaries. Drug companies may retain a variety of third parties in connection with their overseas operations, including contract research organizations, sales agents, distributors, and customs clearance agents. Since companies may be liable for corrupt payments made by their agents, it is important for them to establish and follow through on due diligence procedures before retaining a third party to perform services in another country. In addition, because an intermediary may also be considered a "foreign official" under the FCPA (such as a principal investigator employed by a state-owned medical institution), companies should adopt written criteria for retaining foreign intermediaries similar to the criteria for hiring consultants in the United States under the PhRMA Code on Interactions with Healthcare Professionals. For example, companies should permit the hiring of third-party intermediaries only where a legitimate need for the intermediary's services has been identified in advance, the criteria for selecting the intermediary are directly related to the identified purpose, and a written contract is entered into specifying the nature of the services to be provided and the basis for payment of those services.

Finally, a number of countries are taking steps to reduce public corruption and commercial bribery within their own borders. It is important that drug companies closely monitor legal and regulatory developments in the countries where they operate to ensure that their compliance policies and procedures account for any additional requirements or prohibitions imposed by the local governments. The UK, which is building an anticorruption regulatory regime that in many areas complements and reinforces the FCPA, is another example. Compliance now has to be orchestrated on a multiple-country front; it should not be seen exclusively as an outgrowth of aggressive US application of extraterritorial reach.

By adopting robust compliance programs, drug companies may greatly reduce the FCPA risks that surround their efforts to capitalize on the significant growth potential that emerging markets now offer.

Anjali Chaturvedi is a partner at Nixon Peabody and a member of the Government Investigations & White Collar Defense practice. She can be reached at achaturvedi@nixonpeabody.com

Brian K. French is a partner in Nixon Peabody's Government Investigations & White Collar Defense practice and is also a member of the firm's Life Sciences initiative. He can be reached at bfrench@nixonpeabody.com

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