Life Science Compliance Update

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April 27, 2016

Novartis Korea in Kickback Investigation – Medical Journal Rebates

In a recent securities filing, Novartis alluded to future issues for the Swiss company. In their Interim Financial Report, Novartis stated, "In Q1 2016, the Seoul Western District Prosecutor initiated a criminal investigation into allegations that Novartis Korea utilized medical journals to provide inappropriate economic benefits to healthcare professionals."

This admission follows a February raid of Novartis' Korean offices. On Monday, February 22, 2016, the Seoul Western District Prosecutor's Office raided Novartis' Korean offices, taking documents and accounting books. According to The Korea Herald, at issue are allegations that Novartis Korea "handed out money and other kickbacks, known in the industry as "rebates," to local doctors."

According to an official involved in the case, the prosecution is looking to find out how the rebates were offered, though "it is too early to confirm any charges against the company, as the investigation is still ongoing."

In an emailed statement to the Wall Street Journal, Novartis stated,

Novartis is cooperating with the investigation being conducted by the Seoul Western District Prosecutor's office. Novartis is committed to the highest standards of ethical business conduct and regulatory compliance in all aspects of its work and takes any allegation of misconduct extremely seriously.

According to an anonymous industry insider, the government and the Korea Pharmaceutical Manufacturers Association have been under increasing pressure to crackdown on the rebate program through harsher punishments and insider reports. It is possible that "foreign drug makers may be stepping up their marketing activities in Korea in a bid to remain competitive amid the introduction of generics, though such moves should stay within legal boundaries."

Part of the allegation includes Novartis giving a rebate on subscriptions to medical journals purchased by Korean physicians.

Novartis' Recent FCPA Violation

This new legal trouble comes after Novartis paid the Securities Exchange Commission $25 million in March 2016 to settle charges that it violated the Foreign Corrupt Practices Act when two China-based subsidiaries bribed doctors and others to prescribe its drugs. Novartis subsidiaries allegedly gave money and gifts to doctors and other healthcare professionals as bribes, leading to several millions of dollars in sales to China state health institutions. In the March 2016 settlement, the SEC stated that Novartis "failed to devise and maintain a sufficient system of internal accounting controls and lacked an effective anti-corruption compliance program to detect and prevent the schemes."

What Does This Mean

While this probe is still in its early stages, it is likely to be closely watched for signs that global drug makers continue to have problems in their practices in various foreign markets. As we have written many times on this website and in our sister publication, Life Science Compliance Update, global pharmaceutical companies often find themselves balancing laws, regulations, and local customs, in each market they operate in. Such an operational status makes compliance extraordinarily difficult, making the need for a thriving compliance department in each regional office exceedingly important.

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