Life Science Compliance Update

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.

March 24, 2016

Novartis Settles China Foreign Corrupt Practices Complaint

Novartis AG has settled civil charges against the company, for $25 million to the United States Securities and Exchange Commission, for allegedly bribing healthcare professionals in China to boost sales there. According to the SEC, the alleged violations took place from 2009 to 2013. As expected, Novartis settled the charges without admitting or denying them.

The $25 million settlement breaks down into a $2 million penalty and $21.5 million in disgorgement and $1.5 million in interest.

The SEC claims that Novartis' China-based units violated the Securities Exchange Act of 1934 by attempting to mask their bribes by recording them on the corporate books as legitimate travel, entertainment, conference, lecture fees, marketing events, educational seminars, and medical studies expenses. For example, in 2011, sales representatives' allegedly submitting fake receipts totaling $8,100 for employee expense reimbursement requests; that $8,100 was allegedly actually used to entertain and provide various gifts.

Other instances cited by the SEC include efforts by Novartis to hire Chinese travel companies to arrange trips, meals, and accommodations, for healthcare professionals attending educational events. The problem with that was that, according to the SEC, the events tended to be more recreational than they were educational, including an excursion to Niagara Falls.

Settlement Requirements

The settlement was outlined in a cease-and-desist order, which can be found here. Novartis, a Switzerland-based company, is subject to the Securities Exchange Act of 1934 because Novartis issued and maintains a class of publicly traded securities. The order includes a requirement where Novartis will have to report to SEC staff, at least every nine months during a two-year term, the status of its remediation and implementation of compliance measures. During that two-year period, if Novartis discovers credible evidence that has not already been reported to SEC staff related to questionable or corrupt payments, Novartis is to promptly report such conduct.

Novartis is also required to certify, in writing, compliance with the aforementioned reporting requirement. The certification shall be written evidence of compliance in the form of a narrative, and be supported by exhibits sufficient to demonstrate compliance. SEC staff may make reasonable requests for further evidence of compliance and Novartis shall provide such requested evidence. No later than sixty days after completion, the certification and supporting materials shall be submitted to the Deputy Unit Chief, FCPA Unit, with a copy to the Office of the Chief Counsel of the Enforcement Division.

SEC and Novartis Statements

According to Novartis, however, the allegations involved in the settlement predated the compliance measures for the most part. Eric Althoff, Novartis spokesman, stated, "we believe these measures, which we review and update on an ongoing basis, address the issues raised by the SEC and reflect a broader initiative by Novartis to align and enhance our compliance standards globally."

The SEC backs up the claim by Novartis, by stating that "Novartis promptly took remedial steps to improve its internal controls at Novartis China," mentioning that Novartis terminated or disciplined employees, suspended vendor relationships and overhauled its anti-corruption policies. Further, the SEC noted that Novartis cooperated with its investigation and also conducted its own "expansive review" into the matter. Other companies including GSK are also facing FCPA complaints for Chinese activities. Novartis shows compliance departments that conducting your own expansive reviews are important especially working in emerging markets.

March 02, 2016

Olympus Settlement and Corporate Integrity Agreement – FCPA and Anti Kickback for $646 Million

The United States Department of Justice has announced a settlement with medical device maker Olympus, to the tune of $646 million ($623.2 million to resolve anti-kickback violations and $22.8 million to resolve criminal charges related to the Foreign Corrupt Practices Act). The settlement comes after two separate investigations by the federal government into Olympus and allegations that Olympus entered into a kickback scheme with physicians and hospitals and violated the United States Foreign Corrupt Practices Act.

Anti-Kickback Violations

Olympus Corporation of the Americas (OCA) was charged in a criminal complaint filed on Tuesday, March 1, 2016, with conspiracy to violate the Anti-Kickback Statute (AKS), which prohibits payments to induce purchases paid for by federal healthcare programs. OCA has opted to enter into a three-year deferred prosecution agreement (DPA) that will allow OCA to avoid conviction, provided it complies with the reform and compliance requirements outlined in the agreement.

According to United States Attorney Paul J. Fishman, "for years, Olympus Corporation of the Americas and Olympus Latin America dropped the compliance ball and failed to have in place policies and practices that would have prevented the substantial kickbacks and bribes they paid. It is appropriate that they be punished for that. At the same time, the deferred prosecution agreement takes into account the companies' cooperation and commitment to fully functional corporate compliance."

The breakdown of the anti-kickback settlement is as follows: $312.4 million in a criminal penalty and an additional $310.8 million to settle civil claims under the federal False Claims Act, as well as various state False Claims Act. The settlement total amounts to the largest amount paid in United States history for violations involving the Anti-Kickback Statute by a medical device company.

United States Foreign Corrupt Practices Act Violations

Olympus Latin America (OLA), a subsidiary of OCA, will pay a $22.8 million criminal penalty for violations of the FCPA under a separate DPA. According to court documents, from 2006 through August 2011, OLA implemented a plan to increase medical equipment sales in Central and South America by providing payments to healthcare practitioners at government-owned healthcare facilities. These payments were in a variety of forms, including cash, money transfers, personal grants, personal travel, and free or heavily discounted equipment.

Who Was the Whistleblower?

The lawsuit was filed by John Slowik, the former chief compliance officer of Olympus. Slowik was employed by Olympus for nearly two decades, and filed his lawsuit in 2010, alleging widespread corruption, stemming in part from Olympus' 2008 acquisition of Gyrus. Slowik is expected to receive $44,102,573 million from the federal fines and $7 million from the state share of the civil settlement amount.

Slowik alleged that Olympus has a culture of going to great lengths to keep customers happy, including allowing sales representatives to spend extravagantly on meals and outings to entertain physicians. Slowik claimed that during his tenure as compliance officer, he was instructed not to enforce Olympus' $100 limit on meals to entertain doctors, who were sometimes given all-expense paid luxury vacations to exotic locations.

As a compliance officer, Slowik participated in meetings of Olympus' grant committee, which was actually composed entirely of sales, marketing, and customer relations personnel, who based the grant approval process entirely on the amount of sales that would be generated by the customer receiving the grant.

Next Steps for Compliance

Olympus did not create the position of compliance officer until 2009, and did not actually hire an experienced compliance professional until August 2010, according to the Department of Justice. Therefore, the criminal complaint against Olympus alleges that the improper payments happened while Olympus lacked training and compliance programs.

The DPA requires OCA to adopt several new compliance measures, in an attempt to remedy its problems, including:

  • Enhance its compliance training and maintain an effective compliance program;
  • Maintain a confidential hotline and website for OCA employees and customers to report wrongdoing;
  • An annual certification by CEO and Board of Directors, certifying that the program is effective; and
  • Adopt an executive financial recoupment program that requires executives who engage in misconduct or fail to promote compliance to forfeit up to three years performance pay.

In addition to the aforementioned resolutions, Olympus executed a corporate integrity agreement (CIA), which details the compliance program that OCA must maintain, including:

  • Compliance responsibilities for OCA management and the Board of Directors;
  • A healthcare compliance code of conduct;
  • Training and education (with specified standards);
  • Requirements for consulting arrangements, grants and charitable contributions, management of field assets, and review of travel expenses;
  • Risk assessment and mitigation process; and
  • Review procedures for testing the compliance program.

It is important for compliance officers at small pharma and device companies to ensure that marketing has no functions that should be handled by medical affairs such as research grants, or the educational aspect of the company. Marketing must be separated from other departments, as their motivations are different.

Links to Documents

Press Release

Olympus Corporation of the Americas Criminal Complaint

Olympus Corporation of the Americas Deferred Prosecution Agreement

Olympus Latin America Criminal Complaint

Olympus Latin America Deferred Prosecution Agreement

Olympus Corporation of the Americas Second Amended Civil Complaint

Settlement Agreement

Corporate Integrity Agreement


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