Life sciences companies should prepare for renewed Foreign Corrupt Practices Act (FCPA) enforcement attention from U.S. authorities. This focus may be particularly acute for midmarket and emerging companies with nascent compliance programs. Likewise, the globalization of healthcare is increasing the enforcement risks for companies outside of the pharmaceutical and medical device manufacturing space, including clinical research organizations, hospitals and providers.
On February 19, Kara Brockmeyer, chief of the FCPA Unit of the U.S. Securities and Exchange Commission (SEC), announced that that the SEC would be “going back to the pharma industry after a break for a period of years.” Brockmeyer explained that the SEC was prioritizing investigations involving pharma companies because the industry had historically been problematic and was “having a difficult time addressing [FCPA] risks.” The U.S. Department of Justice (DOJ) has never backed off its interest in the life sciences industry.
We have identified 10 takeaways for life sciences companies to consider in light of increased FCPA enforcement activity. We also highlight five recent settlements and investigations that provide guidance for companies in proactively managing their risks.
Key Takeaways for Life Sciences Companies
- DOJ and SEC continue to exhibit a willingness to pursue prescription-level and doctor-level activities, particularly if they indicate broader control issues.
- China and Latin America remain focus areas for FCPA enforcement.
- SEC continues to aggressively use books and records/internal controls provisions to avoid burden-of-proof issues associated with bribery charges.
- DOJ and SEC are frequently seeking to enforce traditional Anti-Kickback Statute (AKS) issues extraterritorially via the FCPA (see Olympus), and as a result, we may see even more aggressive FCPA theories developed against the life sciences industry.
- DOJ and SEC are looking at all areas of life sciences companies, not just sales and marketing (e.g., recent investigations like Optimer Pharmaceuticals, Inc. focus on grants and clinical research).
- Continued globalization of healthcare is creating FCPA risk for providers, clinical research organizations, and benefit managers — not just manufacturers.
- Midmarket and emerging companies operating in foreign jurisdictions are particularly at risk if they have not invested sufficiently in compliance programs.
- With DOJ’s hiring of compliance counsel Hui Chen, a company’s fundamental compliance program deficiencies will become readily apparent.
- Proactive compliance efforts that emphasize risk assessments, auditing and monitoring are critical to mitigating FCPA risk.
- Consolidation and merger and acquisition activity in the industry are presenting challenges and making compliance due diligence and rapid integration activities critical for acquirers.
Recent Life Science Company Settlements and Investigations
Alere Inc. (Alere) disclosed on March 15 that it was under DOJ investigation for its sales practices and relationships with government officials and distributors in Africa and China. The company had disclosed in November that it was under investigation by the SEC for similar FCPA-related conduct. The investigation of Alere, a diagnostics service provider of point-of-care testing for infectious diseases, suggests that DOJ and SEC are expanding their FCPA focus on the life sciences industry beyond pharmaceutical and medical device companies.
On March 3, the SEC and Nordion (Canada) Inc. (Nordion) resolved charges of FCPA “books and records” violations with the company paying a $375,000 civil penalty. In addition, the SEC chargedMikhail Gourevitch, a former employee at Nordion, with FCPA bribery and “books and records” violations. Gourevitch agreed to pay $178,950 in disgorgement, interest and civil penalties to resolve the charges. The SEC order, which Nordion did not admit or deny, alleged:
- Nordion made improper payments to a third-party agent to obtain Russian government approval to distribute the company’s liver cancer treatment and mischaracterized these payments as legitimate business expenses.
- Nordion also failed to conduct meaningful due diligence on the third-party agent and maintain an effective system of internal controls to prevent improper payments.
On March 1, Olympus Latin America (Olympus) entered into a deferred prosecution agreement with DOJ and paid a criminal penalty of $22.8 million to resolve FCPA bribery charges. DOJ charged Olympus with making improper payments to healthcare providers to increase sales of its medical devices in Central and South America, including Brazil, Bolivia, Colombia, Argentina and Mexico. The alleged primary vehicle for delivering improper benefits was medical education “training centers” that provided salaries and other personal benefits to healthcare providers. This agreement was announced in conjunction with a separate agreement resolving charges against Olympus for AKS violations in the United States.
The SEC announced the resolution of a FCPA enforcement action against SciClone Pharmaceuticals (SciClone) on February 4. SciClone agreed to pay $12.8 million to settle “books and records” charges. The SEC order, which SciClone did not admit or deny, alleged:
- Representatives in China provided improper benefits to healthcare providers and state regulatory officials to increase prescriptions and obtain favorable treatment of regulatory applications and recorded these expenditures as legitimate expenses.
- SciClone failed to assess more broadly potential risks related to sales and marketing practices in China. The limited nature of SciClone’s investigation resulted in a failure to maintain a sufficient system of internal accounting controls to detect and prevent improper payments to foreign officials.
The SEC and Bristol-Myers Squibb (BMS) resolved charges of FCPA “books and records” violations on October 5 with BMS agreeing to pay $14 million in disgorged profits and civil penalties. The SEC order, which BMS neither admitted nor denied, contains the following allegations:
- Between 2009 and 2014, BMS China sales representatives provided health providers with cash, jewelry, meals, travel, entertainment and conference sponsorships in an effort to obtain and increase sales, and these expenses were recorded as legitimate expenses.
- BMS failed to respond, investigate and remediate red flags regarding sales personnel’s interactions with these Chinese healthcare providers that were identified in compliance assessments and internal audits.
- Compliance resources and attention dedicated to the company’s China operations were insufficient, noting that the compliance officer for the Asia-Pacific region was rarely present in China and there was a poor record of on-time completion of anticorruption training for sales representatives.