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Corruption in the pharmaceutical industry poses risks for governments and corporations

Governments and companies are failing to address pharmaceutical corruption risks

June 14th, 2016 - Posted by Sam Hemmant in Anti-Bribery And Corruption

Regulatory scrutiny and enforcement has increased rapidly in the pharmaceutical industry as more supply chain and business development risks have been exposed in overseas operations. A recent report compiled by the Pharmaceuticals & Healthcare Programme, a global initiative of Transparency International UK, aims to help policy makers identify and understand corruption risk in the pharmaceutical sector by identifying key policy and structural issues. 

One in 10 corruption investigations by authorities in the United States (US) in 2016 involve companies operating in pharmaceuticals – significantly more than in banking and financial services.  This is one of the findings revealed in a recent report published by Transparency International (TI) – 'Corruption in the pharmaceutical sector: Diagnosing the challenges' – that shows how few industries are as exposed to risk as pharmaceuticals.  A 2010 World Health Organisation (WHO) report estimated that as much as six per cent – more than $300 million – of annual global health expenditure is lost to corruption each year. 

Patient safety, clinical trial management, ethics, mergers and acquisitions, research and development (R&D) and pricing structures are just some of the areas where compliance failures can lead to significant reputational damage, financial loss and regulatory enforcement action.

The Pharmaceuticals & Healthcare Programme – a new global initiative from Transparency International UK – aims to help policy makers understand corruption vulnerabilities in the pharmaceutical sector. In a recent report the programme identifies key policy and structural issues within the pharmaceutical value chain that need to be addressed to reduce corrupt practices.

Marketing vulnerabilities

The TI report identifies marketing as one of the highest levels of risk. Marketing budgets are a significant part of pharmaceutical company expenditure – nine out of the ten largest pharmaceutical companies in the world spent more on marketing than on R&D in 2013.  US pharmaceutical companies spend an estimated $42 billion every year targeting doctors with promotional activities – roughly $61,000 per doctor.

Since the beginning of 2016, almost half of investigated corruption cases have related to sales and marketing. While the relationship between industry and health care professionals is central to research, medical education and side effect monitoring, the TI report suggests increased visibility into relationships between companies and doctors is needed if corrupt practices are to be detected and eradicated.

New international disclosures

In 2014 the Access to Medicine Index Report found that 18 of the 20 largest pharmaceutical companies have been found guilty of unethical marketing practices.  Analysis by Transparency International in February 2016 showed that one in ten companies under ongoing corruption investigations by US authorities were biotech and pharmaceutical companies. At least six of these cases related to sales and marketing practices.

The recent TI report highlights the need for stronger regulatory oversight mechanisms to reduce the risk of unethical marketing practices while increasing transparency and accountability. For the pharmaceutical industry this will involve making information on budgets, key performance indicators and medicine pricing publicly available.  Those making decisions will also to be held to account for their adherence to international codes of conduct.

The effect of relatively new legislation governing the relationships between companies and doctors has yet to be fully analysed and may also make an impact on the drive to end corrupt practices in this area.  The 2014 Physician Payment Sunshine Act in the US requires companies to disclose payments in an online database, and the European Federation of Pharmaceutical Industries and Associations (EFPIA) has implemented a similar code that comes into force in June 2016.

Strong anti-corruption leadership to increase accountability

Ensuring accountability through increased monitoring, enforcement and sanctions will only be possible if governments utilise technology and share information. Like any legislation the key to effective application is consistent enforcement.

The US Department of Justice (DOJ) outlined a new approach to seeking individual accountability in the 'Yates Memorandum' and its effect has already been seen on the pharmaceutical industry. Less than two months after the new regulator focus was released, Warner Chilcott (Allergan) President Carl Reichel was personally charged with bribery, and although he was later acquitted, the case serves as a reminder of the intent by regulators to pursue individual executives for failures to address financial crime in their organisations. The company also settled the $125 million fine for the kickback scheme to doctors.

While the case served as a reminder that the memorandum described a cross-industry approach, other cases show an industry slow to accept change.  In late 2015, after narrowly avoiding trial by agreeing to pay $390 million to settle claims the company paid kickbacks to specialty pharmacies, Novartis Chief Executive Joe Jimenez said to the Wall Street Journal: "We continue to maintain that specialty pharmacies must continue to play a role in ensuring patient adherence. How that is going to play out as to whether we change our behaviour or not remains to be seen."

Demonstrating best practice

TI's report suggests that an active and genuine commitment to ending corrupt activity in the pharmaceutical value chain is crucial if progress is to be made on an international scale.  Companies operating in the high risk industry that employ robust due diligence practices will be best placed to avoid the financial and reputational risk posed by bribery allegations if unforeseen failures occur. 

If companies and executives are singled out for unforeseen anti-bribery and corruption failures, demonstrable due diligence best practice can also offer a lifeline. The United Kingdom Bribery Act (UKBA) allows a deferred prosecution agreement (DPA) to be issued in situations where full disclosure and a comprehensive compliance practice can be demonstrated, and the US Foreign and Corrupt Practices Act (FCPA) offers leniency if "a genuine commitment" can be shown.

The LexisNexis whitepaper – Something missing? Pharmaceuticals & Life Sciences Third Party Due Diligence– provides a due diligence check list specifically designed for companies operating in the healthcare sector.  The whitepaper also offers recommendations for enhanced due diligence escalation polices that are central to a comprehensive compliance program and any mitigation defence employed if unforeseen failures occur. 

Download the whitepaper here for free to see how you can start implementing positive changes to your compliance program today.

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