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FCPA Blog Daily News

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Tuesday
Aug132013

Second subpoena in SciClone China probe

SciClone Pharmaceuticals Inc. said Friday that an investigation launched three years ago into possible FCPA violations in China is ongoing and the SEC has issued a new subpoena focused on ‘sales and marketing expenses’ by its NovaMed unit there.

SciClone received its second subpoena from the SEC in late 2012, according to Friday's disclosure.

The subpoena is ‘primarily related’ to sales and marketing expenses at SciClone's China subsidiary, NovaMed Pharmaceuticals (Shanghai) Co. Ltd.

SciClone completed its acquisition of China-based NovaMed Pharmaceuticals, Inc. in April 2011.

More than six months earlier, SciClone had received the SEC's first subpoena.

It related ‘to a range of matters including interactions with regulators and government-owned entities in China, activities relating to sales in China and documents relating to certain company financial and other disclosures,’ SciClone said then.

Also in August 2010, SciClone learned about a DOJ investigation of ‘Foreign Corrupt Practices Act issues in the pharmaceutical industry generally, and [that the DOJ] had received information about [SciClone's] practices suggesting possible violations.’

After an internal investigation, SciClone self-reported its findings to the feds in May 2011. That investigation, SciClone said, found a ‘lack of controls to ensure that third-party gifts, travel and entertainment expenses, and sponsorships of certain conferences and symposia complied with the law.’

The company describes itself as ‘a U.S.-based, China-focused specialty pharmaceutical company with a product portfolio of therapies for oncology, infectious diseases and cardiovascular, urological, respiratory, and central nervous system disorders.’

In May 2011, the president of SciClone International, Ltd., a Hong Kong-based sales unit, resigned from the company. SciClone's statement then didn't specify the reasons behind Hans Schmid's resignation.

But SciClone's statement said ‘U.S. management did not have adequate and appropriate information about the Company's activities in China.’

SciClone also ‘failed to adequately implement existing controls and policies including its policy that employees comply with all applicable laws,’ the statement said.

Last year, SciClone said it found ‘internal control issues primarily within the NovaMed organization.’ It wrote down part of the value of the NovaMed acquisition and significantly increased disclosed inventory levels of its hepatitis B product, Zadaxin.

SciClone's legal and accounting costs for the first half of this year doubled to $16 million, mainly due to the FCPA investigation and costs for enhanced compliance.

SciClone trades on Nasdaq under the symbol SCLN.

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Here's the FCPA disclosure from SciClone Pharmaceuticals Inc.'s Form 10-Q filed with the SEC on August 9, 2013:

The US Securities and Exchange Commission (“SEC”) and the US Department of Justice (“DOJ”) are each conducting formal investigations of SciClone regarding a range of matters, including the possibility of violations of the Foreign Corrupt Practices Act (“FCPA”). We will continue to cooperate fully with the SEC and DOJ in the conduct of their investigations. In response to these matters, our Board of Directors appointed a Special Committee of independent directors (the “Special Committee”) to oversee our response to the government inquiry. The Special Committee substantially concluded its original investigation, and on May 4 and 5, 2011 reported its findings and recommendations to the Board of Directors. The Special Committee has also reported findings to the SEC and DOJ. The SEC’s and DOJ’s formal investigations are continuing and the Company is continuing to cooperate with those investigations, including undertaking a review or investigation of additional matters, primarily related to our NovaMed Pharmaceuticals (Shanghai) Co. Ltd. (“NovaMed”) operations and certain sales and marketing expenses.

In our Form 10-Q for the period ended September 30, 2012, filed with the SEC on November 9, 2012, we disclosed, among other things, a non-cash impairment loss to fully write down the value of intangible assets recorded as part of the NovaMed acquisition; a remeasurement of the valuation of the contingent consideration expense recorded as part of the NovaMed acquisition; a significant increase in ZADAXIN channel inventory levels; and internal control issues primarily within the NovaMed organization that was concluded to represent a material weakness in internal control over financial reporting. Following our disclosure of these items, we received a subpoena from the SEC requesting documents related to these and various other matters regarding the NovaMed acquisition and our operations in China. After review of the subpoena, and in order to respond to inquiries from the DOJ and SEC and to determine if any wrong-doing occurred, our Audit Committee determined to undertake an additional independent investigation as to additional matters including, but not limited to, matters related to our acquisition of NovaMed and FCPA matters, including certain sales and marketing expenses.

We are unable to predict what consequences any investigation by any regulatory agency or the Special Committee or the Audit Committee may have on us. Our cooperation with these investigations has resulted in substantial legal and accounting expenses, has diverted management’s attention from other business concerns and could harm our business. The ongoing investigations and any other regulatory investigations that might be initiated in the future will result in similar substantial expenses, management diversion and harm to our business. If we fail to comply with regulations or to carry out controls on our Chinese or other foreign operations in a manner that satisfies all applicable laws, our business would be harmed. Any civil or criminal action commenced against us by a regulatory agency could result in administrative orders against us, the imposition of significant penalties and/or fines against us and/or the imposition of civil or criminal sanctions against certain of our officers, directors and/or employees. The investigations, results of the investigations, or remedial actions we have taken or may take as a result of such investigations may adversely affect our business in China. If we are subject to adverse findings resulting from the SEC and DOJ investigations, or from our own independent investigation, we could be required to pay damages or penalties or have other remedies imposed upon us. In addition, we will incur additional expenses related to remedial measures we are undertaking, and could incur fines or other penalties. The period of time necessary to resolve the investigations by the DOJ and the SEC is uncertain, and these matters are requiring significant management and financial resources which could otherwise be devoted to the operation of our business. We cannot predict what the outcome of those investigations will be, or the timing of any resolution.

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Richard L. Cassin is the Publisher and Editor of the FCPA Blog. He can be contacted here.