Alexion Pharmaceuticals expands overseas, runs smack into the FCPA
Sometimes you can feel a little bad for these companies that get hit with FCPA enforcement actions. I mean, here’s Alexion Pharmaceuticals, trying to develop drugs to treat ultra-rare diseases, which by itself must be a tough slog. The patients in these situations must be enormously appreciative that any company has even been able to envision a profitable treatment. That’s where Alexion was as it got started in 2007, selling a drug called Soliris to treat paroxysmal nocturnal hemoglobinuria and atypical hemolytic uremic syndrome. Together these blood diseases affect fewer than 1,000 people in the United States each year. For the business model to work, a worldwide search for those patients was inevitable. Alexion’s search brought the company to Russia and Turkey.
All of the allegations below come from the SEC’s administrative order against Alexion from Sunday (a Sunday!). They’re just allegations, and might not even be true.
Turkey
It probably wasn’t Alexion’s plan to starting breaking anti-corruption laws in its efforts to sell Soliris. But in Turkey, sales ran through the country’s named patient sales program, with each patient’s application to begin Soliris therapy requiring review and approval by government health care providers. At first, naturally, these approvals were hard to come by. But then a senior Turkish official helpfully explained that if Alexion’s Turkish subsidiary started paying government officials, their prospects might improve.
Alexion Turkey warmed to the task. It hired a consultant to make those payments, and then asked a third-party vendor to pay the consultant. Large expenses for the consultant were often described only vaguely (e.g., “other expense”). Even with that obfuscation, the first names of government officials receiving Alexion’s payments found their way onto expense reports or on attached notes. Doh! Then there’s this glorious detail: “An Alexion Turkey manager directed that the description of the Consultant’s claimed expenses should be written in pencil . . . [to] allow the description of the expenses to be easily changed or concealed.” Oh, dear.
All told, over $1.3 million ran through the consultant. The Turkish sub also paid money directly to health care providers with responsibility for approving or denying patient prescriptions.
Russia
Meanwhile, Alexion’s Russian subsidiary made over $1 million in payments to Russian health care providers, including funds paid to influence them to take favorable positions in connection with regional budget allocations, to increase the number of approved Soliris prescriptions, and to influence Soliris’s regulatory treatment. To take one example, Alexion Russia paid one government doctor $100,000 and patients requiring Soliris treatment were allocated 52% of the regional Ministry of Health budget in that doctor’s region in 2013.
Brazil and Columbia
Also, employees at Alexion’s Brazilian and Colombian subsidiaries directed third parties to create inaccurate financial records concerning payments to third parties, including patient advocacy organizations (“PAOs”). To take one example, in 2014 an Alexion Colombia senior manager paid a PAO and directed it to submit an invoice that falsely described that the funds would be used for “legal support” services. This inaccurate invoice allowed Alexion Colombia to approve the payment locally instead of obtaining approval for the payment through the global grant process, as required by Alexion’s policies.
The Upshot
The SEC ordered Alexion Pharmaceuticals to (1) cease and desist from committing or causing any violations of the FCPA’s books-and-records and internal controls provisions, Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act; and (2) pay disgorgement of $14,210,194, prejudgment interest of $3,766,337, and a civil penalty of $3.5 million.
What to do
This matter does offer some lessons for companies operating or starting to operate overseas.
On Ramps. If you’re just starting a global sales operation, as Alexion was after it was founded in 2007, watch out for the risks inherent in that. Many countries’ governments are far more involved in their economies than the federal government is here, which means those countries have many more government officials who can receive bribes. A doctor probably won’t be a government official in the United States, but very well could be in Russia.
Risky Jurisdictions. Beware of risky jurisdictions, especially when those jurisdictions’ markets include government-based barriers to entry. Here, Alexion was essentially forced into all corners of the globe in its search for Soliris patients. It’s no wonder they didn’t sail through Turkey’s named patient sales program at first, but obstacles like that should put a company’s spidey senses on high alert.
Vague Expenses. Don’t take “Other Expenses” as an acceptable category of expenses paid to a third-party consultant. Ask what they are and make the consultant describe them sufficiently. The description isn’t sufficient until you know what it means. Also, when you see “legal support”, be sure you understand what the legal support is for. If a category is both vague and can be approved in a distant location, you should dig a little more.