It is important that financial investors safeguard investments from bribery and corruption risks.

How financial investors can effectively protect investments against healthcare compliance risks

The healthcare market continues to be an attractive area for financial investors, with a total value of healthcare buyouts at more than $16bn in 2013. At the same time, the global healthcare sector is facing a significant shake-up in relation to compliance and anti-bribery requirements, exposing both the portfolio company as well as financial investors and their management to very significant risks that can have a detrimental effect on the value and marketability of the investment – investigation costs, unlimited fines, possible debarment, confiscation of revenue and reputational damage.

Making compliance risks a top priority in any healthcare due diligence, and implementing proper compliance systems at portfolio level post-close, is key to avoiding liability. When considering healthcare deals, financial investors should take a particularly close look at the following arrangements in order to identify potential ‘red flags’ at an early stage in the due diligence process:

  • consulting arrangements;
  • agreements with distributors and intermediaries;
  • sponsoring of training and hospitality;
  • clinical studies; and
  • provision of products/equipment free of charge.

In 2013 alone, twelve companies paid over $730 million to resolve FCPA cases.

U.S. Securities and Exchange Comission

Investigators are targeting healthcare companies all across the globe

Criminal investigators all across the globe target pharmaceutical and medical device companies, as well as healthcare service providers, for alleged bribery of healthcare professionals. US authorities have taken an aggressive approach to anti-bribery and corruption enforcement under the US Foreign Corrupt Practices Act 1977 (FCPA) and have investigated and prosecuted companies even with very little connection to the US.

The rest of the world is rapidly catching up with the US in cracking down on bribery. This is particularly true of emerging markets. The recent wave of bribery investigations against international healthcare companies in China and elsewhere shows that the risk profile for businesses operating in these countries has significantly increased. This increased local scrutiny is mirrored by current US enforcement trends: three out of four pending FCPA investigations relate to emerging markets.

Placing anti-bribery compliance at the forefront of both pre-acquisition due diligence and post- closing compliance integration is critical to avoiding liability.

Tougher healthcare anti-bribery legislation

The current wave of global enforcement action against healthcare businesses is supported by increasingly tightened anti-bribery legislation, providing a new dimension of corporate liability. For example:

  • The UK Bribery Act has a wide territorial scope and introduced a new corporate offence  of failing to prevent bribery. Under the Act, a healthcare company may face a criminal conviction and an unlimited fine where it fails to prevent misconduct by its employees or business partners anywhere in the world. The only defence available to the company is proving that it had adequate procedures in place designed to prevent bribery being committed by those performing services on its behalf.
  • Germany is extending the application of its healthcare anti-bribery legislation by making the bribing of doctors in private practice a criminal offence. This paradigm shift will make all major players in the German healthcare sector subject to German anti- corruption laws.
  • New transparency obligations are expected to fuel a new round of investigations by prosecutors around the world. To cite just one example, the US Physician Payment Sunshine Act requires manufacturers of drugs, devices and biological and medical supplies covered by US healthcare programs to collect, track and report on financial relationships with covered physicians and teaching hospitals. Similar transparency requirements have recently been enacted in other countries, and will be mandatory for the pharmaceutical industry in Europe from 2015 onwards.​

Liability risks of portfolio company, financial investors and their managers

Bribery investigations against a healthcare portfolio company can have a detrimental effect on the value and marketability of the investment – investigation costs, management time, unlimited fines, possible debarment, confiscation of revenue and reputational damage. In addition, with regulators’ increased focus on the financial sector, financial investors increasingly get in the frontline sight of enforcement authorities, with potential exposure at all phases of an investment.

For example, US regulators have argued that the failure to conduct robust pre-investment due diligence on a target, and to effectively stop misconduct from continuing, may create liability of the investor for corrupt activities of the acquired company – even if the corrupt activities occurred before the acquisition or were unknown to the acquiring company. In other words, unwary investors may ‘purchase’ FCPA liability by failing to conduct appropriate due diligence of their intended transaction target.

And after the investment, fund managers actively involved in the management and decision making of the portfolio company may face potential exposure for ongoing misconduct at the portfolio level.

Five arrangements to pay attention to when conducting healthcare M&A due diligence and compliance integration

When considering healthcare deals, financial investors should take a particularly close look at the following arrangements in order to identify potential ‘red flags’ at an early stage in the due diligence process:

 1.  Consulting arrangements

Consulting, speaker and advisory arrangements with healthcare professionals are particularly sensitive from a compliance perspective. Key issues to watch out for include:

  • full and clear written contractual arrangements and associated accounting records;
  • employers’ consents;
  • fair market value remuneration;
  • appropriate frequency of engagement and total compensation levels;
  • evidence of services actually being provided; and
  • the absence of any signs of improper influence over purchasing or prescription decisions.

2.   Agreements with distributors and intermediaries

A healthcare company can potentially be held liable for acts of bribery of its business partners if it fails to show in its defence that it has implemented adequate controls to prevent bribery. Key issues to watch out for include:

  •  adequate procedures to select and effectively monitor intermediaries; and
  •  appropriate counterparty clauses in agreements with business partners.

3.   Sponsoring of training and hospitality

Inviting healthcare professionals to lavish meals and luxurious hospitality, even for training and conferences, has triggered many investigations in recent years. Key issues to watch out for include:

  • that the event has a scientific, medical education or other legitimate business purpose;
  • that the location, any hospitality to be provided and any associated transportation or other arrangements made are reasonable and proportionate;
  • employers’ consents; and
  • the absence of any signs of improper influence over purchasing or prescription decisions. 

4.   Clinical studies

Payments to individual healthcare professionals in relation to clinical trials and studies are subject to increased scrutiny by investigators. This is particularly true for post- marketing observational studies. Key issues to watch out for include:

  • the scientific justification for the study; and
  •  the fair market remuneration of the investigator.

5.   Provision of products/equipment free of charge

The free provision of high value products or equipment (eg surgery machines or diagnostic devices) faces increased scrutiny due to stricter laws and enforcement. Key issues to watch out for include:

  • bundling agreements; and 
  • the provision of equipment for testing purposes.