Analysis: U.S. foreign bribery penalties for drugmakers may lack bite
NEW YORK (Reuters) - Global drugmakers are paying tens of millions of dollars to settle U.S. allegations that they bribed their way across emerging markets, but harsher penalties may be needed to deter the practice in untapped regions where billions are at stake.
Federal authorities have cast a wide net to weed out suspected gift-giving and kickbacks to foreign doctors and government officials to gain a foothold in burgeoning new markets in Asia, Eastern Europe and Latin America.
At least eight of the world's top 10 drugmakers, including Bristol-Myers Squibb Co, Pfizer Inc and Johnson &, have disclosed U.S. probes under the 1977 Foreign Corrupt Practices Act (FCPA).
Pfizer agreed to pay $60 million this year to settle FCPA charges and J&J reached a $70 million settlement last year. Pfizer is on track to record $10 billion in sales from emerging markets this year, while J&J said Brazil, Russia, India and China accounted for just under 10 percent of the $65 billion in sales it reported last year.
With so much at stake outside of established markets in the United States and Europe, some experts say fines like these are hardly a deterrent.
"The $60 million fine for Pfizer to a lay person sounds like quite a bit of money, but in perspective it took less than two days of Lipitor sales during its peak. It's really just chump change for them," said Michael Leibfried, a senior analyst with market research consulting firm GlobalData. The cholesterol pill at its height was a $13 billion a year cash cow for Pfizer.
Kara Brockmeyer, chief of FCPA investigations within the Securities and Exchange Commission's enforcement division, said the SEC and Department of Justice make a considerable effort to ensure penalties are appropriate and a deterrent. And there has yet to be a repeat FCPA prosecution.
The SEC relies on legal provisions that call for disgorgement of profits based on ill-gotten gains plus penalties. Companies that report violations and cooperate with authorities are often rewarded with penalty reductions.
"I would hate to think the companies view enforcement actions as the cost of doing business," Brockmeyer told Reuters. "If we find that out, it will certainly increase the size of the penalty," she said.
The law firm Shearman & Sterling, which puts out a semi-annual report tracking FCPA enforcement, found that penalties across all industries have averaged less than $20 million.
In 2009 Danish insulin maker Novo Nordisk paid $9 million for FCPA violations, while medical device maker Smith & Nephew this year agreed to $22 million in fines and profit disgorgement. The largest FCPA penalty on record was $800 million paid in 2008 by Germany-based Siemens.
The industry's FCPA payments pale in comparison to billion-dollar settlements over allegations drugmakers promoted medications for unapproved uses in the United States. These penalties often involve how much federal Medicare and Medicaid programs spent on the so-called off-label prescriptions.
"I'm not terribly surprised that dollar settlements (for FCPA violations) are strikingly lower because the government isn't directly being harmed," said Boston University law professor Kevin Outterson.
PLAYING THE RIGHT WAY
Pfizer's settlement covered infractions dating back to 2004, including some attributed to drugmaker Wyeth, which it bought in 2009. The company lightened its penalty by voluntarily providing information about kickbacks and bribes in Bulgaria, Croatia, Kazakhstan, Russia, China, the Czech Republic, Italy, Serbia, Indonesia, Pakistan and Saudi Arabia.
"Pfizer subsidiaries in several countries had bribery so entwined in their sales culture that they offered points and bonus programs to improperly reward foreign officials who proved to be their best customers," Brockmeyer said in a statement at the time the settlement was announced.
Pfizer executives say their emerging market operations will not repeat those practices. It has introduced an anti-corruption audit program, closer monitoring of relationships with non-U.S. healthcare providers and government officials, a mandatory global training program for appropriate employees and enhanced due diligence to make sure buyout targets follow the rules.
J&J said it has enacted similar anti-corruption initiatives.
"We're not out there to play the game that's been played before," said Adele Gulfo, head of Latin America for Pfizer's emerging markets unit. "We're either going to win by playing the right way or we're going to find another place to go."
Asked if there is still an expectation of payoffs for business in some Latin American circles, Gulfo said: "I'm sure it exists. I'd be naive to say it doesn't exist."
Latin American business practices were cited in August as the reason No. 1 generic drugmaker Teva Pharmaceutical Industries was targeted for an FCPA investigation.
J&J also voluntarily reported violations by foreign subsidiaries going back to 2007. Its settlement covered allegations of bribes and kickbacks to win business in Greece, Iraq, Poland and Romania.
DOJ spokeswoman Rebekah Carmichael said the penalties have already had a ripple effect in the industry, forcing companies to "make real, lasting changes to their operations that have altered the way they engage with foreign countries."
BEYOND THE PENALTIES
The U.S. government sees vast potential for abuse in the drug industry's business model, said Andy Spalding, assistant law professor at the University of Richmond and a senior editor for The FCPA Blog, which closely follows such cases.
"So much of their research and development, their marketing, their pricing and distribution and sales are occurring in foreign countries," Spalding said. "And often they are occurring through a big chain of subsidiaries and other operations that make compliance challenging."
Legal experts noted that any company subject to an FCPA probe is already spending a great deal to investigate the charges internally, and that the final cost can run into hundreds of millions of dollars.
"Overall expense vastly dwarfs the penalty," said Philip Urofsky, head of Shearman & Sterling's FCPA practice who previously worked on FCPA cases for the DOJ.
Drugmakers can have a tough time tracking kickbacks to local officials. Such payments, while widespread, are typically smaller than in other industries.
"In pharma there are thousands of daily interactions with government officials. There are always going to be people that step over the line," Urofsky said.
Since FCPA investigations typically take years to come to a head, Outterson said the jury is still out on whether the current strategy is working.
"Whether they're taking aggressive enough action to end it is a question we'll know in five more years ... when we see the cases refer to 2012."