Recently, the United States Securities and Exchange Commission’s (“SEC”) Enforcement Director, Andrew Ceresney (“Ceresney”), spoke to pharmaceutical compliance personnel at the CBI’s Annual Pharmaceutical Compliance Congress and discussed three current areas of SEC focus most relevant to the pharmaceutical industry: the Foreign Corrupt Practices Act (“FCPA”), corporate disclosures relating to interactions with the Food and Drug Administration (“FDA”), and financial internal controls.
First, the FCPA remains a focus for the SEC. In recent years, the Enforcement Division created specialized enforcement units and devoted one of those units solely to FCPA cases. Ceresney stated his belief that the pharmaceutical industry remains a high risk industry for FCPA violations because of the multitude of contacts that pharmaceutical representatives regularly have with foreign doctors, hospitals and administrators. The three most common FCPA cases the SEC has brought are: (1) “pay to prescribe” cases; (2) cases where bribes were paid to get drugs placed upon approved lists; and (3) cases where bribes were disguised as charitable contributions. Ceresney recommended that companies create and administer robust FCPA compliance programs and stressed that for companies who find themselves in violation of the FCPA, self-reporting and cooperation will be the best path given the SEC’s inclination to use tools to reward cooperation, such as reduced charges and penalties and deferred prosecution agreements.
Second, in the disclosure area, Ceresney both (1) highlighted several recent SEC enforcement actions based upon disclosure failures relating to company communications with the FDA and (2) suggested disclosure of FDA communications as a way to avoid potential disclosure problems. The highlighted cases all relate to situations in which the companies and their executives distorted the true nature of their interactions with the FDA, according to the SEC. In one such case, the SEC charged a biopharmaceutical company and its officers with fraudulently misleading investors about the true nature of the FDA regulatory approval status for its drug. Statements were made that Phase II clinical trials would begin in the near future and that FDA approval would be secured within a year, even though the FDA had placed a full hold on the company’s application to begin Phase I clinical trials and clinical trials were prohibited from occurring. In another case, a medical technology company and its CEO and CFO settled fraud charges, paid penalties, and received officer and director bars resulting from statements in the company’s SEC filings that the company was planning to file with the FDA a premarket approval application to sell a medical device by specific deadlines. These statements were made with knowledge that the company had no basis for its deadline projections because, among other reasons, the company was unable to complete FDA-required clinical trials.
Ceresney stated “[t]he message from these cases is clear that you need to be completely accurate in recounting your dealings with the FDA. So much turns on those interactions and not being straight with investors will have significant consequences.” He suggested that actual disclosure of the correspondence between companies and the FDA could eliminate the issues and asked companies to consider this type of disclosure in appropriate circumstances.
Third, internal controls cases also have been brought in this area – even in the absence of fraud charges – which reflects the SEC’s view that sufficient internal controls over financial reporting are critical. Ceresney recommended that companies design their controls to match their businesses, update them as their businesses grow and change, and ensure that senior management is engaged in meaningful discussions about the applicable controls.
In summary, it is abundantly clear that all companies in the pharmaceutical arena need to carefully consider their interactions in foreign jurisdictions, statements they make about the development and regulatory status of their products, and their internal controls. While the primary regulatory body of companies in this area is the FDA, these companies must be mindful that another regulator, the SEC, has demonstrated both an interest and willingness to be involved as well.