Step Carefully into Foreign Affairs

Pharmaceutical companies have turned to Asia, Africa, Latin America, and Eastern Europe for their top-line revenue growth and cost-effective clinical trials. The appeal of these emerging markets is well-known: rising healthcare expenditures by an expanding middle class, the large pool of treatment-naïve patients from which to recruit clinical-trial subjects, and the relatively low cost of conducting trials in those countries.

As sales and research expand in these regions, so do the risks that the biotechnology company, pharmaceutical company, or contract service provider operating in them will face potentially compromising ethical business situations. In many countries, limited institutional and logistical capacity often leads to opportunities for government officials and business executives to demand bribes or engage in other corrupt practices to expedite a transaction like securing permission to conduct a clinical trial or getting clinical trial materials through customs.

The degree of corruption risk can be estimated based on the Corruption Perceptions Index maintained by Transparency International, a Berlin, Germany-based nonprofit organization dedicated to fighting corruption worldwide. The index ranks countries based on the perceptions of businesspeople and country analysts. In the 2008 edition, China ranked 72nd, Brazil 80th, and India 85th out of 180 countries (by comparison, the United States ranked 18th and the United Kingdom ranked 16th, with the country ranked #1 being the least corrupt).

Most Western countries have strict laws prohibiting companies headquartered in them from participating in improper business practices in other countries. In the United States, the applicable law is the Foreign Corrupt Practices Act (FCPA), which prohibits a US company from "directly or indirectly paying or giving a gift of any value to a foreign official in order to obtain or retain business, or secure any improper business advantage." The US and the 29 other member countries of the Organization for Economic Cooperation and Development (OECD) have signed a convention that makes bribery illegal and allows investigators to access bank account and tax records in member countries.

My colleague at PharmSource, Laurie Pachter, recently wrote a series of articles about the FCPA focusing on government efforts to enforce the FCPA's anticorruption provisions The articles, based on interviews with leading experts in FCPA compliance, discuss the need for compliance efforts, what those compliance efforts should consist of, and the high costs for industry of failing to comply.

When working in emerging markets, the potential for violating the FCPA and laws of other countries is considerable. Whether a biotechnology or pharmaceutical company is selling products or conducting clinical trials abroad, the risk exposure is substantial. Consider these examples:

1. Much of the healthcare delivery system, especially hospitals and clinics, is government-owned and operated in emerging markets. Drug sales representatives seeking to place their products in the institutional pharmacy may be expected to provide inducements to procurement and pharmacy staff to make a sale.

2. Conducting a clinical trial abroad usually requires permissions from multiple government agencies and officials, including approval of the protocol by the relevant health or drug regulatory agency, permission to import clinical trial materials, and waiver or reimbursement of value-added taxes on clinical trial materials.

3. Executives of institutions recruiting patients for clinical trials may take advantage of their position to demand special compensation for allowing access to patients.

FCPA experts advise companies that assessing the risks posed by the number and nature of the interactions their employees have with government and business officials is the first step to establishing an effective compliance program. Key components of any compliance program include a clear corporate ethics policy, regular staff training, documentation of interactions with foreign officials, and regular audits of compliance activities. In many cases, extensive due diligence on the senior government officials with whom the company has regular contacts may be necessary, so that the biopharmaceutical or pharmaceutical company or contract research organization (CRO) fully understands who they are dealing with. Often, other relationships beyond that of the supplier-customer have to be clarified as well. For instance, what if the local CRO office head is married or related to the director of a hospital or a government official?

Compliance with the FCPA and similar laws in other countries is expensive. It may require the appointment of a compliance officer to oversee the various compliance efforts and of outside auditors to affirm compliance, and compliance efforts are expensive. An even bigger cost could be the loss of business to less scrupulous or local companies that would result from effective compliance efforts.

On the other hand, the costs of failing to comply can be high as well. In her articles, Pachter cites a situation where a company was faced with millions of dollars in investigation and remediation costs for mishandling a $70,000 payment. Heavy fines are also a possibility: the US government has collected more than $4 billion in fines for FCPA violations to date. In this time of great pressure to cut costs, companies must be careful not to cut out muscle while trimming the fat in their compliance efforts.

The risks of violating FCPA and similar laws should loom especially large for CROs and contract manufacturing organizations (CMOs) looking to expand their presence in emerging markets in response to the globalization of their clients' research and marketing strategies. A plan for creating a significant foreign presence must go beyond simply opening or acquiring offices and sites in target countries. Such a plan must include a carefully thought-out and properly funded ethics compliance program. The high cost of establishing and maintaining a program may create a significant barrier to small CROs and CMOs trying to expand their global footprint.

Biotechnology and pharmaceutical companies need to be thinking about this issue as well. Even if a company is unaware of ethical violations committed by one of its CRO partners, the violations committed by a CRO acting on its behalf could come back to haunt it. At a minimum, it could jeopardize or invalidate trial results if the CRO conducting the trial were to be prosecuted for FCPA ethics violations. The CRO's actions could tarnish the pharmaceutical company's reputation, making it difficult to do business in that country again.

Jim Miller is president of PharmSource Information Services, Inc., and publisher of Bio/Pharmaceutical Outsourcing Report, tel. 703.383.4903, fax 703.383.4905, [email protected], www.pharmsource.com