Special Report: A prescription for corruption

BELGRADE Tue Feb 28, 2012 4:43pm EST

1 of 6. An exterior view of the Institute for Oncology and Radiology in Belgrade, January 15, 2012. Picture taken January 15, 2012.

Credit: Reuters/Ivan Milutinovic

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BELGRADE (Reuters) - According to a signal from the electronic tag around his ankle, Nenad Borojevic last left his apartment building at 6.25 p.m. on January 10. It was the festive season in Serbia; the capital was enjoying the lull between Orthodox Christmas and New Year.

Police said Borojevic, a doctor, headed to Kosutnjak park, a popular wooded area in Belgrade dotted with restaurants and criss-crossed by jogging paths.

Borojevic had been one of Serbia's most eminent doctors, a director of the Institute for Oncology and Radiology. Now he was due in court in five days to face charges brought by the public prosecutor that he had taken bribes from international drug companies as incentives to use their products. The electronic tag was a condition of his 500,000 euro ($660,000) bail.

The next day, around noon, a passer-by found Borojevic hanging from a tree on a nylon rope five millimeters thick. Police found a suicide note in the mailbox of his wife, from whom he was separated. It had been sent from a local post office. "I couldn't take it anymore," it said.

Borojevic's story, some of which emerges here for the first time, is a particularly gruesome example of what even people in the global drugs business concede is a growing problem: bribery and corruption in emerging markets. The 51-year-old cancer specialist was one of a group of 10 Serbia-based doctors and drug company officials charged in 2010 with taking, or offering, more than 500,000 euros in bribes to persuade the medics to use specific products. The doctors are alleged to have personally gained from the choice of medicines used; the drug company representatives with illegally offering the incentives.

In recent years, Big Pharma has forked out billions of dollars to settle scandals involving improper promotion of medicines in the United States. Now bribes paid to foreign doctors and other state employees are shaping up as the next major legal liability threat for the industry. A Reuters examination of U.S. Securities and Exchange Commission (SEC) filings by the world's top 10 drug companies has found that eight of them recently warned of potential costs related to charges of corruption in overseas markets.

One factor driving the trend is a search for new business. Companies whose profit margins have been squeezed in the developed world are increasingly turning to thinly regulated emerging markets for growth. At the same time, U.S. and European governments are toughening up on bribes paid by companies overseas. The U.S. Foreign Corrupt Practices Act and Britain's new Bribery Act, which came into force last July, are both targeting drugs companies for special scrutiny, providing new impetus for the industry to clean up its act.

"There's clearly a legal risk from violating laws with the current drive into emerging markets, so mis-selling cases in these markets could become a significant legal threat for the industry," said Chris Stirling, European sector leader for pharmaceuticals at KPMG in London. "The business practices in these countries are very different from the sort you find in Western Europe and the United States."

Borojevic's suicide - police have ruled out foul play - means certain aspects of his case, which is being investigated at a national level, may never be known. The trial of the other men and women in the group is continuing. All the defendants have pleaded not guilty, though one of the six drug company representatives involved agreed a plea bargain and another turned witness for the prosecution.

Emerging markets to drive pharma growth: link.reuters.com/ryw76s

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OPERATION CRAB

The probe of Borojevic, which police called Operation Crab, started with a tip-off in March 2007, according to a police source involved in the investigation.

At a later point, police received information from a former mistress of one of the accused, the investigator said, declining to name her. "After they broke up, she came to us and recited everything - names, places, contacts, how they operated, how much everyone received and from whom, when and where," said the investigator. "She even gave us some concrete evidence which helped us a great deal."

Some of Serbia's tabloid media said the informant was a former Serbian model, Katarina Rebraca, who herself, in a separate case, had in April 2010 faced charges of embezzling funds at a breast cancer charity she ran. Borojevic, the doctor, had been called as a witness for the prosecution against her, although he died before testifying.

Rebraca declined to comment. Her lawyer, Dragan Mrakovic, said: "It is not in the best interest of my client to give any information whatsoever" about the Borojevic case. "This has nothing to do with my client's case, nor does my client have anything to do with the pharmaceutical corruption case."

The informant led police to a rented apartment in Medakovic, a neighborhood of communist-era apartment blocks and family homes in Belgrade. Here a group of doctors and drugs company sales representatives would allegedly meet and hold "raunchy, loud parties with Belgrade babes, three or four times a week," said the police investigator. It was not possible to confirm who had rented the apartment.

In June 2010 police arrested Borojevic: the charges against him and four colleagues included running a criminal conspiracy in cancer drugs from 2007 to 2009. The indictment said that the alleged scheme, whereby drug company representatives gave inducements to the doctors to use their companies' products, had increased sales of a number of generic chemotherapy medicines as well as branded cancer medicines including Roche Holding AG's Avastin and Erbitux, made by Merck KGaA of Germany.

For Borojevic, the alleged gains were significant, especially in a country whose GDP per capita the IMF puts at just $6,500 a year. In total, he was accused of receiving a total of 11.2 million dinars ($138,000) in kickbacks from drug companies.

Officials at drugs companies AstraZeneca Plc, Sanofi SA and Actavis confirmed they were served in July and August 2011 with criminal indictments related to allegedly improper payments to physicians including Borojevic at his state-run institute, and said they had filed certain procedural objections. Icelandic pharmaceutical company Actavis gave the most expansive statement: "The allegations include bribery of state officials in order to obtain preferential status when it comes to the sale of oncology products in Serbia," said the company, which moved its headquarters to Zug, Switzerland in 2011.

All declined further comment on the proceedings. Also charged with alleged bribery in the case were representatives of Roche, Merck KGaA and PharmaSwiss - a unit of Canada's Valeant Pharmaceuticals International Inc - all of whom declined to comment.

REPS TAKE THE RAP

In one instance, the police allege, Borojevic and his colleague Zoran Bekic, head of the Institute for Oncology and Radiology's pediatric oncology ward, received 95,000 euros from Goran Orlic, a representative for Actavis. Orlic allegedly paid the men for inside information about its business plans.

The Actavis representative received immunity from prosecution in exchange for his testimony ahead of the trial, the court said in a statement. Actavis said Orlic left the company in 2009. Neither Bekic, the pediatrician, or his lawyer would comment. Orlic could not be reached.

Another of those charged was Merck KGaA's representative, Jasmina Gutovic. She reached a plea bargain with prosecutors and admitted giving bribes, according to the judge who heard her case. While Gutovic was convicted, the court will not say what punishment she received while the rest of the case is being heard. Merck KGaA confirmed she left the company in June 2011 and she could not be reached for comment.

The indictment against Borojevic also states that he and colleagues did a deal with unnamed drug company sales staff to develop "new therapeutic applications" using their companies' drugs, as a way of further boosting sales of the products. In the months before his death, Borojevic was portrayed in Serbian media as a poisoner of children, based on suggestions in the media that he had overprescribed.

Borojevic was released on bail in November 2011. He repeatedly denied all the charges against him, saying he was the victim of a media witch hunt. "Nothing is true from the indictment," he said in a statement in May 2011.

His lawyer, Strahinja Kastratovic, said that the day before Borojevic killed himself, he had learned the apartment he had bought with his estranged wife would be seized by the court. "He said, 'I can't take this anymore, I don't know how to fight this or against whom I'm supposed to be fighting,'" said Kastratovic. He declined to elaborate.

TEMPTATIONS INCREASE

Corruption is rife in Serbia, which is ranked 86th out of 183 countries in Berlin-based Transparency International's corruption perceptions index. The drugs business is particularly exposed to corruption, Transparency International says: pharmaceuticals create vast opportunities for graft across both rich and poor countries. Its 2011 Bribe Payers' Index ranks pharmaceuticals and healthcare 13th out of 19 industries on probity - a lower ranking than defense firms, though above mining and construction.

"There are a number of classic red flags for bribery that indicate the pharma sector is particularly vulnerable," says Robert Barrington, TI's director of external affairs. These include a tradition of gifts and hospitality, a lack of transparency over pricing and the need for regulatory approval in everything.

In many parts of the world lavish gifts such as all-expenses-paid trips to resorts and golf days remain common, even though the industry has reined in such hospitality in the United States.

Temptations may increase as companies move into the developing world. IMS Health, which analyses pharmaceutical industry trends, says 17 key emerging markets will account for around 63 percent of worldwide growth in prescription drug sales between 2010 and 2015.

"It is almost guaranteed that every multinational pharmaceutical company is going to end up with these issues and is going to have to go through a painful experience," says one in-house lawyer at a major U.S. drugmaker. "Frankly, the odds are stacked against companies."

'NOT ETHICAL, BUT UNIVERSAL'

The Serbian charges and claims of corruption extend beyond Borojevic and his colleagues. In his defense, Borojevic always insisted that he could not approve drug purchases alone, but passed on recommendations to the state-run Department of Health Insurance. That itself is the target of other, unrelated corruption charges brought by the public prosecutor against its former head, Svetlana Vukajlovic, who has been in pre-trial detention since September 2011.

An example from another Balkan country, Greece, underlines how ingrained such practices can be. Earlier this month, London-based Smith & Nephew Plc, Europe's biggest maker of artificial knees and hips, agreed to pay $22 million to settle SEC allegations that it bribed doctors in Greece to use its products. Among documents the SEC released as part of the dossier was a note jotted down in 1999 by an unnamed in-house lawyer for the company.

"Pay surgeon to use prod(uct)," it read. "Not legal or ethic; but universal."

In that case, the company's Greek distributor sent an email to the firm's U.S.-based head of international sales seeking to maintain access to one of the slush funds used to pay doctors to buy S&N products: "I absolutely need this fund to promote my sales with surgeons, at a time when competition offers substantially higher rates," he wrote. The fund's "only reason for being is the need for cash incentives, a real pain in the neck but an unavoidable fact of Greek life."

S&N CEO Olivier Bohuon, who took office in 2011, long after the alleged bribery occurred, said the company had moved on but the episode showed the need to remain vigilant.

Over the past year eight of the world's top 10 drugmakers - Pfizer Inc, Novartis AG, Merck & Co Inc, Sanofi, AstraZeneca, GlaxoSmithKline Plc, Johnson & Johnson and Eli Lilly & Co - have all warned that they may face liabilities related to charges of corruption in numerous overseas markets.

Investigations into potential wrongdoing by pharmaceutical firms cover activities in countries including Argentina, Brazil, Canada, China, Germany, Italy, Poland, Russia and Saudi Arabia, according to company filings. They also involve possible improper conduct of clinical trials, which are increasingly being run in lower-cost Asian or East European countries.

(For a report, see link.reuters.com/kyp76s).

'JUST SAY NO'

One reason such cases are surfacing now is the renewed vigor with which U.S. officials have enforced its foreign corruption law since November 2009. That's when U.S. assistant attorney-general Lanny Breuer told a pharmaceutical conference: "We will be intensely focused on rooting out foreign bribery in your industry."

The 1977 Foreign Corrupt Practices Act makes it illegal for U.S. companies and foreign firms whose stock is traded in the United States to bribe government officials in foreign countries. Officials at the U.S. SEC and Department of Justice (DOJ) declined to say if they planned to follow the Serbian probe with their own investigations.

Some drug firms have already started to come clean. In the first case of its kind, Johnson & Johnson settled for $78 million with U.S. and British authorities in April last year, after disclosing voluntarily to U.S. authorities back in 2007 that it had made payments to doctors in Poland, Romania and Greece who chose to use J&J medicines and surgical implants.

Pfizer, which in 2004 became the first pharmaceutical company to volunteer information about past wrongdoings to the DOJ and the SEC, is likely to be the next big firm to settle. The world's biggest drugmaker, it reached an agreement in principle with U.S. authorities towards the end of last year and is set to finalize a deal during the first half of 2012, according to people familiar with the discussions.

Under U.S. and British law, the onus is on a corporation to report improper behavior by either its own staff or outside contractors. In some cases, this has already meant radical change. AstraZeneca, for example, said last May it was ending all payments to doctors attending international scientific and medical congresses.

"I know that this is not easy," Chief Executive David Brennan told a conference at the time. "I know from my own experience as a sales representative, you will encounter people who will ask for gifts, or other inducements. And they will threaten to take their business elsewhere, if you don't acquiesce. But we have made it clear that our sales force have to say no."

(Aleksandar Vasovic reported from Belgrade, Ben Hirschler from London; Edited by Sara Ledwith and Simon Robinson)

(For PDF: link.reuters.com/xaz76s)

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