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Thursday
Apr202017

Elizabeth David-Barrett: Pharmas and the repeated failure of anti-bribery compliance

Pharmaceuticals companies continue to fall foul of the FCPA and other anti-bribery laws, with a number of 2016 cases suggesting a vulnerability around marketing practices especially in the Asia-Pacific region. Why does a sector that is way ahead of the compliance game in so many ways keep getting caught out by anti-bribery laws?

Our recently published research suggests that compliance teams are prescribing the medicine, but sales teams are uncooperative patients, reluctant to swallow a bitter pill -- and worried about side effects such as a loss in bonuses and commission payments.

There are good structural and historical reasons why sales teams in pharma find anti-bribery policies unpalatable. If you sell chocolate or cars, you can reach right out and appeal directly to your users. If you sell medicines, though, you have only indirect access to customers.

Pharma companies often rely on physicians to prescribe their drugs, as well as on insurance companies or public healthcare providers to buy or approve them. Before that, they need regulators to approve the use of drugs for certain ailments.

Traditionally, pharma companies coped with this difficulty by developing relationships with physicians, insurance companies and regulators. These relationships were often built and maintained partly through the provision of gifts and hospitality -- red flags, these days, for FCPA violations.

The gifts and hospitality culture in pharma is much more than free pens and notepads. Physicians are invited to training events to learn about how to administer drugs, but the training takes place in a high-class resort with plenty of free time for golf and relaxation. Key opinion leaders receive generous fees in return for promoting new medicines, or even research grants in return for putting their name to positive journal articles (sometimes ghost-written by the pharma companies themselves).

Over many years, watchdogs have pointed out that these practices, at best, create major conflicts of interest. Some academics have gone so far as to call them institutional corruption -- undermining the very purpose of the pharma industry.

But it wasn’t until FCPA enforcement got serious over the last decade or so that pharma companies started to call a halt to such practices. The Sunshine Act in the United States has made physician payments entirely transparent. And in most western markets, the lavish hospitality of old has been strictly trimmed. As one pharmaceuticals executive ruefully told us, gone are the days of elaborate high-end dinners: “it’s all salad these days.”

The rub though, for pharma companies, is that most of their growth markets are emerging markets. These tend to be less-developed countries, which score high on indices of corruption risk, and where local norms are much more in line with the old-fashioned practices. In many Asian markets, especially China and south-east Asia, gift-giving and hospitality are key to the business culture. Should companies fit in with local expectations or stick to the rules but risk losing business to others?

Our research uncovers two tensions facing pharma companies as they seek to expand into key growth markets. At the macro level, there is a tension between local norms (such as gift-giving) on the one hand and near-global laws against bribery on the other. At the level of the organization, the tension is between a sales team that wants -- perhaps needs -- to use hospitality to cultivate relationships, and a compliance team that must tightly constrain any such behavior so as to avoid violating anti-bribery laws.

This second tension is acute, and it is here where pharma companies repeatedly stumble. Take GSK’s travails in China. The company had a gold-standard compliance program according to some experts. Yet that did not stop the team in China from systematically making payments to local distributors in order to secure sales. In September 2016, GSK agreed to pay $20 million to the SEC to resolve charges that it provided things of value to Chinese government officials in order to improperly influence them and increase sales (having already paid $490 million to the Chinese authorities previously). As the table shows, a number of other pharma companies seem to suffer from a similar ailment.

Table 1: Selected FCPA-related SEC settlements with pharma companies in 2016

Date

Company

Size of Settlement to SEC (US$)

Allegations

Feb 2016

SciClone Pharmaceuticals

12 million

Subsidiaries allegedly provided gifts, travel and lavish hospitality to Chinese health care professionals.

 

March 2016

Novartis AG

25 million

Chinese subsidiaries allegedly provided gifts and payments to health care professionals and engaged in ‘pay-to-prescribe schemes’ to induce sales to Chinese health institutions

August 2016

AstraZeneca

5.5 million

Chinese subsidiary had made improper payments to employees of Chinese state-owned enterprises in the hope that they would purchase or prescribe its pharmaceutical products

______

It is time for pharma companies to think through what is going wrong. We recommend three courses of action.

First, ensure that the incentives of the sales team are aligned with anti-bribery concerns. If sales teams only care about meeting targets, they will be tempted to bend the rules. This might require deep changes in the business model, to reduce reliance on local agents or develop ways to build loyal and trusting relationships without bribes.

Second, the Board must show that it is serious about reforming practices; this can boost the credibility and authority of both compliance professionals and sales agents seeking to change.

Third, companies should work with competitors to change norms at the industry level. As more pharma companies realize the fix that they are in, greater willingness to fundamentally change practices is emerging. Collective action initiatives against corruption have helped trigger change in some unlikely sectors such as extractives and shipping; pharma companies also need to rise to the challenge.

____

Elizabeth David-Barrett, pictured above, is a Senior Lecturer in Politics at the University of Sussex and Deputy Director of the Sussex Centre for the Study of Corruption, teaching on Sussex’s full-time MA in Corruption and Governance. Her research focuses on favoritism in public procurement, private-sector collective action against bribery, transparency and open data.

Reader Comments (5)

This is a terrific contribution to what is still an under-researched area: the impact of compliance programs on firm behavior. Please don't stop with pharma.
April 20, 2017 | Unregistered CommenterRichard Messick
Elizabeth: great article! Do you have information about Latin America regarding this issue? Thanks!
April 20, 2017 | Unregistered CommenterMarco Iván Escoto
Hi Elizabeth- from the perspective of trust, your article makes some great points and also leads to a few questions/comments...

1. What about a "zero tolerance" policy on giving or receiving gifts or bribes? Other companies/industries have successfully adopted these, so why not big pharma?

2. Perhaps this is a case of the familiar argument of "everybody does it so why shouldn't we?"

3. And saving the best for last, if the fines paid are a mere fraction of the "cost of doing business" and nobody is going to jail, where is the incentive to stop? It's certainly not a compliance function or responsibility to enforce, but rather a decision that sits squarely on the shoulders of the Board and CEO. Who is willing to hold their breath waiting for the first company to lead that charge?
April 22, 2017 | Unregistered CommenterBarbara Brooks Kimmel
Are high incentives for selling products to ill people needed for their health ethically correct? Who in the end pay these large sums of money? 1 Tim. 6:10: "For the love of money is the root of all evil”.
April 24, 2017 | Unregistered CommenterPeter van der Krift
Excellent and timely article, thank you. Not only is the corruption relating to money flow important but also the inappropriate prescription of medicines also potentially linked.

I suspect the solution will be a combination of increased enforcement, legislative tightening and cultural peer pressure over many years.
April 24, 2017 | Unregistered CommenterDavid Hitchen
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