Novartis Takes Another Spin on the FCPA Wheel
It probably is hard to obey the law all the time if you’re a multinational conglomerate. You have tens of thousands of employees out there doing godknowswhat and it’s probably hard to keep track. It sounds like it’s hard for the Swiss pharmaceutical company Novartis AG.
We saw them in 2016 consenting to an SEC cease-and-desist order for allegedly violating the FCPA’s accounting provisions in China. That one cost $25 million to resolve. On Thursday, Novartis made headlines again, this time getting hit by both the Justice Department and the SEC for allegedly violating the FCPA’s anti-bribery provisions and accounting provisions. Here’s what happened according to the SEC’s and DOJ’s charging documents, which might not be accurate:
Novartis merged with Alcon Inc., an eye care company, in 2011, and then spun Alcon off last year. The allegations at issue in the government’s documents happened in Greece, South Korea, and Vietnam.
Greece
Novartis’s Greek issues ran in two big categories. First, from 2012 through 2015, Novartis’s Greek subsidiary (“Novartis Hellas”) – sometimes through an ophthalmology franchise known as Ophtha – paid health care providers to increase sales of Lucentis, a drug used to treat macular degeneration and other eye disorders.
Some Ophtha employees ranked physicians by their prescription preferences and volumes and gave “investments” based on their likelihood to prescribe Novartis products. The resulting prescriptions were internally described as a return on investment (“ROI”), and sales and marketing staff were encouraged to plan their activities to maximize ROI. In Ophtha strategy planning documents, sales staff remarked that doctors were reminded of their investment and obligation to prescribe. If a doctor wasn’t meeting at targeted ROI, investment activities were reduced or eliminated.
Ophtha also used international congress sponsorships to induce physicians to write Lucentis prescriptions. Novartis Hellas targeted Greek physicians that it designated as Key Opinion Leaders (“KOLs”) and paid their costs to attend the congresses, many of which exceeded $5,000 per person. Ophtha personnel made pretty clear in internal documents what these conferences were for. Minutes of one meeting said the doctors “must understand that their participation in [specific congresses in the United States and Europe] will be cancelled if sales performance is not improved significantly.” In his 2013 Action Plan, the Ophtha KOL manager wrote that he would convey to one ophthalmology KOL, “to get you must write. No presents any more.” Some sales reps even demanded that KOLs agree not just to prescribe Lucentis but also to “NON USE of [a competitor’s product and] TOTAL COOPERATION.”
Second, from 2009 to 2012, Novartis Hellas conducted Phase IV and epidemiological studies that were mostly designed to promote sales of Novartis products in Greece. That sentence may not even make sense, so let’s go over it again. Phase IV clinical trials are supposed to be used to assess the safety and efficacy of a studied prescription drug with a publication announcing the results to inform medical decisions. In these trials, though, doctors were selected to participate (and get paid) not to assess the studied drugs but to increase prescription sales. That is, some physicians who participated in the trials believed that they were obtaining payments in return for their prescriptions of Novartis products and not for their role in the trials.
Here’s how Novartis Hellas employees put it on captured audio recordings:
“You all know this very well, I just repeat, that the doctor believes that he/she participates in a study and gets paid for what he prescribes in reality and not for what he/she write in the study . . . .”
“To be honest, the studies were conducted in a similar way in the past as well; they were conducted as marketing projects. That’s within quotation marks. Between us.”
Novartis Hellas’s Finance Department lacked visibility into clinical study budgets and due to a lack of internal accounting controls could not properly reconciled the budget and actual spend. In some instances, because of deficiencies in Novartis Hellas’s internal accounting and supplier management controls, it used “dummy vendors” to try to track which physicians were paid for which studies and to monitor payments relative to the approved budget. What a mess.
Vietnam
To comply with Vietnamese laws, Alcon Vietnam conducted all sales and marketing activities of Alcon surgical equipment and consumables (e.g., intraocular lenses (“IOLs”)) through a separate Vietnamese distributor. Alcon Vietnam’s management and financial reporting were overseen by the regional management team of Alcon Singapore, another Novartis subsidiary. From 2007 to 2014, Alcon Vietnam and the distributor made payments to doctors to increase the sale of Alcon’s IOLs. From 2008 to 2011, the distributor implemented a “consultancy program” to pay bribes to doctors – approved by Alcon Vietnam managers – so they would recommend the benefits of Alcon products to patients.
Some communications made clear that the purpose of the payments was to “encourage[] doctors to introduce and use Alcon’s IOLs and . . . speed up IOLs sales.” Much of this activity obviously preceded Novartis’s 2011 merger with Alcon. After the merger, the government says Novartis failed to take sufficient steps to ensure the payments stopped. Instead, the program was revised and given different names (e.g., “patient education”), and the payments continued. The SEC’s order includes these two sentences: “A former Alcon Singapore executive who was aware of the improper payments signed and transmitted two false Sarbanes-Oxley sub-certification letters to Alcon’s [CEO and CFO] in which the executive did not identify the improper reimbursements to the Distributor Company.” We’ll come back to this.
Korea
Between 2011 and 2016, Novartis Korea employees used three different schemes to make corrupt payments to physicians to increase sales of Novartis products, and improperly recorded them in Novartis’ consolidated books and records. First, some Novartis Korea employees paid doctors via third-party medical journals that forwarded the payments for participating in roundtable meetings organized by the medical journal. As these events were conducted through a vendor, they were not subjected to compliance review as otherwise required by Novartis’s policies. In 2017 the Korean Ministry of Health and Welfare and the Korean Ministry of Food and Drug Safety imposed civil administrative fines of around $50 million on Novartis Korea and suspended sales and reimbursements of certain Novartis products for 3-6 months. In 2020, South Korean criminal proceedings found Novartis Korea and one of its former sales staff guilty of the same conduct, and Novartis Korea was fined about $35,000.
Second, Novartis Korea re-ran the Greek play and sponsored physicians’ attendance at international medical conferences to induce them to increase prescriptions of Novartis products. In connection with some congresses, Novartis Korea employees took into account the prescription sales activities when targeting some doctors for sponsorships in an effort to encourage them to increase their prescriptions. the Korea Fair Trade Commission charged Novartis Korea with unfair trade practices and fined it approximately $446,000 for this in 2017.
Third, Novartis Korea employees in the neuroscience business unit devised a local non-interventional clinical study with 17 pre-selected doctors to improve relationships with those doctors. This one is more vague, but the SEC’s order says Novartis Korea recorded the funding to complete the study as advertising expenses and failed to have the study reviewed and approved by medical affairs as required by internal procedures.
Alcon Asia
This aspect was complex, but much more of an accounting issue than a bribery one. After the 2011 merger, Novartis ran Alcon as a separate reporting segment through which it sold vision care equipment, intraocular lenses and other consumables. From 2013 to 2015, Novartis’s Alcon Asia business, in China and elsewhere, placed Alcon surgical equipment at hospitals or clinics for no or little money down in exchange for contractual assurances that they would either pay for the equipment directly or finance it over several years through payments associated with the purchase of Alcon’s lenses and consumables. Alcon called these deals “equipment financing arrangements” (i.e., EFAs).
The SEC’s order says Novartis lacked sufficient internal accounting controls needed in light of the degree of accounting, contractual, and financial complexity presented by the EFAs. Particularly in markets like China, where the customer base of Alcon’s local subsidiary was dominated by public hospitals and state physicians, EFAs presented issues of validity, profitability, and misaligned incentives. A significant portion of Alcon’s surgical sales in China were derived from EFAs with state HCPs. The short version of this long and boring part of the story is that “despite knowing that customers’ “compliance rates” with respect to EFA contractual purchase obligations were sometimes very low, Alcon China continued entering into certain EFAs that lacked adequate profitability safeguards.”
The Upshot
As part of the SEC’s order charging it with violating the FCPA’s books and records and internal controls provisions, Novartis AG agreed to disgorge $92.3 million plus prejudgment interest of $20.5 million. Meanwhile, Novartis Hellas paid a criminal penalty of $225 million and entered into a three-year deferred prosecution agreement with the DOJ. Former Novartis subsidiary Alcon Pte Ltd. paid a separate criminal penalty of $8.9 million and also entered into a deferred prosecution agreement.
Three Things
The clinical trials. It’s hard to know what to make of these, but we have a couple questions. First, how fake were they? Were they completely fake? Were they real trials that just imported physicians for the purpose of paying them to increase prescriptions? Also, where were the contract research organizations, which usually administer these trials for large pharma companies like Novartis? The documents don’t mention one, but it’s a notable omission.
The false sub-certification letters. Oh, boy. The sub-certification letters within Alcon Vietnam aren’t required by Sarbanes-Oxley Section 302, and the order doesn’t get into knowing falsity, so it’s hard to tell how dire the situation was here. But CEOs and CFOs sure would like to be able to rely on accurate sub-certifications when making their own Section 302 certifications that are required, so this is not a great situation.
M&A due diligence. It really matters. The government seems to go out of its way to note that not only didn’t Novartis catch Alcon’s Vietnam issues before the merger, it sort of papered them over after the fact with euphemisms like “patient education”. With a price tag of almost $350 million for this series of enforcement actions, it would have been worth it to do the extra work on the front end to unearth the problems and make Alcon account for them in the acquisition price. But it’s easy to say that in retrospect.