Merger and acquisition activity is occurring at high levels across the pharmaceutical industry, and analysts expect the shopping
spree to continue, with deals increasingly taking on an international flavor. Globalization opens the door to tremendous opportunities,
but it also comes with additional risks. A notable one is the increased scrutiny of international activities by US Department
of Justice (DOJ) and the Securities and Exchange Commission. It is important that pharmaceutical companies and their representatives
have a solid grasp of the dangers and pitfalls in this area and that they take steps to avoid them.
IMAGE: TIM LAMAN, GETTY IMAGES
DOJ officials have been clear about their intentions to closely scrutinize overseas business dealings of US pharmaceutical
companies with an eye toward violations of the Foreign Corrupt Practices Act (FCPA). Speaking at the annual Pharmaceutical
Regulatory and Compliance Congress last November 2009, US Assistant Attorney General Lanny Breuer pulled no punches, promising
that DOJ "will be vigilant in holding companies and individuals who break the law accountable," and that application of FCPA
to the pharmaceutical industry is going to be "a focus for the Criminal Division in the months and years ahead."
FCPA includes an antibribery provision enforced by DOJ and recordkeeping provisions enforced by the SEC. The antibribery provision
outlaws the offer, payment, authorization, or promise by a US-based company or issuer of "anything of value" to "foreign officials"
in an effort to secure business. Such payments made to foreign officials through subsidiaries, intermediaries, or third-party
agents are as illegal as direct payments if made knowingly or with conscious disregard for the law. US issuers, including
foreign companies on US exchanges, are required to maintain a sufficient set of FCPA-related internal controls pursuant to
relevant federal securities laws under the SEC-enforced provisions. Violations include purposely recording payments to foreign
officials improperly, mislabeling bribes as "commissions," or other expenses, omissions of payment entries, and similar actions.
FCPA was enacted in 1977 but was used sparingly for a long time. During its first 20 years of existence, it was used to prosecute
just 17 companies. Over the last five years, however, DOJ has prosecuted 57 companies for FCPA violations—more than the total
number of prosecutions brought between 1977 and 2005—and during the past two years, it has launched approximately 260 related
investigations. Historically, healthcare and pharmaceutical companies have accounted for about 11% of FCPA enforcement activity,
but it's no mystery why DOJ is focusing its scrutiny in those industries. Nearly one third of pharmaceutical companies' total
sales are now generated outside US borders, where health systems are regulated, operated, and financed by government entities
to a significantly greater degree than in the United States. As a result, companies doing business overseas are likely to
interact with foreign officials on a fairly frequent and consistent basis.
The bottom line for the pharmaceutical industry is increased exposure to risks of FCPA-related infraction. Many clinical trials
and research now take place abroad, often in a decentralized manner involving third parties. These actions raise significant
monitoring and compliance problems for pharmaceutical firms, including the expansive definition of "foreign official." Companies
may be working for government healthcare programs or institutions or for state-owned organizations which, in turn, may be
considered "foreign officials" for purposes of the FCPA. For example, because Chinese regulators are involved in most business
enterprises, most hospitals and employees of hospitals—including doctors and technicians—are considered "foreign government
DOJ is working with the Health Care Fraud Unit, FBI, US Attorneys' Offices, and IRS's Criminal Investigation Division to examine
all international business transactions of pharmaceutical companies, and its efforts extend to investigation and prosecution
of senior executives. "[For] enforcement efforts to have a real deterrent effect, culpable individuals must be prosecuted
and go to jail," Breuer insisted.
Violations by pharmaceutical and healthcare companies that are currently under investigation include bribing doctors to purchase
drugs, paying company sales agents commissions that are passed along to doctors, paying researchers to influence the reliability
or integrity of data in clinical trials, and paying regulators to win drug approvals.