Life Science Compliance Update

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August 30, 2016

Novartis Execs Indicted in South Korea

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Six executives from the South Korean unit of Novartis have been indicted by prosecutors for paying rebates to doctors in return for prescribing the company’s drugs to patients. The prosecutorial sweep also included twenty-eight other individuals, including fifteen doctors and six medical publishers.

Included in the count of six was Novartis Korea chief Moon Hak-sun for an allegedly illegal sales effort that saw the doctors at general hospitals receive 2.59 billion won (roughly $2.3 million) in payments in either cash or through arrangements with the medical publications via conference appearances and fees for articles. The prosecution claims that such activities were conducted from January 2011 through early 2016.

The South Korean health regulators and prosecutors have been working together for the past few years in a joint effort to prevent foreign and domestic firms alike from paying rebates on drug sales since passing a drug anti-rebate law in 2013.

This particular case started was launched by the Seoul Western District Prosecutors’ Office and was acknowledged by a local Novartis unit, issuing a statement saying it does not “tolerate misconduct and we are already implementing a remediation plan in Korea based on the findings from our own investigation.” Novartis notes that internal investigations have uncovered some unfair trade practices, but that such activities were not conducted with the knowledge of executives. Paul Barrett, an official from Novartis International, stated that the company “could provide no other details on the case before the trial proceedings.”

Novartis did not identify any of the other five executives charged and did not provide any contact information for Moon or his attorney. None of the other twenty-eight individuals have been arrested.

The case initially came to light in February 2016 with announcements that investigators were examining whether the company and its executives systematically encouraged the practices, a suggestion Novartis rejects.

Other Asia Trouble for Novartis

These indictments follow other troubles Novartis has faced in Asia this year. In March, the company agreed to pay $25 million to settle a Securities and Exchange Commission (SEC) investigation into bribery allegations in China that included travel and other inducements to boost prescriptions of its drugs in the country. Novartis improperly recorded the payments as travel and entertainment, conferences, lecture fees, marketing events, educational seminars, and medical studies.

The SEC Order specifically referenced, “[I]n 2011, two sales representatives submitted fake receipts for approximately $8,100 as part of their employee expense reimbursement requests, which were approved by a regional sales manager. The

proceeds were used to entertain and provide gifts to [health care professionals].”

The $25 million payout amounted to disgorgement in the amount of $21.5 million, $1.5 million in prejudgment interest, and a $2 million penalty.

The SEC settled the case through an internal administrative order and did not go to court.

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