Drug manufacturers faceincreased enforcement ofForeign Corrupt Practices Act

Anumber of investigations of U.S. drug companies areunderway in Europe and the Middle East concerning

violation of the Foreign Corrupt Practices Act (FCPA), whichprohibits any U.S. individual (including U.S. companies andtheir branches or affiliates) from offering or giving anythingof value to foreign government officials. “This is not just atheoretical risk,” warns Joseph Tompkins, a partner withSidley Austin Brown & Wood in Washington, DC. “There arereal investigations taking place right now. There are realcases that have been brought, and there are real people whowill pay a price.”. w Cont. on page 5

Scrutiny of pharma sales and marketing practicesmounts worldwide European regulatory trends pose serious challenge to U.S. companies, says expert

The pharmaceutical industry, already under siege by state and federal prosecutors for its sales andmarketing practices in the United States, is now coming under significantly increased scrutiny

worldwide. In some respects, the trend in Europe mirrors the trend in the U.S. where increased enforcementin recent years has come from a variety of state and federal agencies rather than the traditional agency,namely the Food and Drug Administration. Similar to the situation in the U.S., it is not the underlyingstatutes that have changed, it is their interpretation and enforcement. “The basic European Union-levellegislative framework governing pharmaceutical marketing practices and manufacturers’ relationships with

physicians and other healthcare professionals has changedlittle for 13 years,” says Linda Horton, a 30-year veteran ofthe FDA. “The rules were recodified in EU’s 2001Community code on medicinal products for human use andwere tightened, slightly, in the April 2004 pharmaceuticalreview legislation.” Nevertheless, Horton, now a partnerwith Hogan & Hartson in Brussels, Belgium, reports “asignificant increase” in the level and intensity ofenforcement activity involving various pharmaceuticalmarketing practices in “a wide range” of Europeancountries. w Cont. on page 2

VOL. IV, ISSUE 3/MARCH 2, 2005

Exclusive

State AGs cite “exploding”pharma caseloadProsecutors from five states at ACI’s drugpricing conference in New York yesterdaysaid actions against pharma companiescontinue to rise dramatically. AssistantAttorney General Patrick O’Connell saysTexas probably has “in excess of 100 openfiles,” including many qui tam suits. AnotherAssistant AG reported roughly one newcase filed against pharma each week.

That does not mean federal prosecutorsplan to melt into the background. AssistantU.S. Attorney Virginia Gibson says the $2.1billion recovered from pharma to date “isgoing to pale by comparison once theMedicare drug benefit goes into effect.”Quality of care issues and antikickback lawswill be “the two prisms” prosecutors will useto examine transactions under the newbenefit, she says.

The next regular issue of Rx ComplianceReport will cover the event in detail.

SPECIAL REPORT

Rx COMPLIANCE REPORT 2MARCH 2, 2005

Horton says this has been accompanied by morestringent industry codes and a large number ofgovernmental investigations. “Notably, enforcementis not being initiated only—or even principally—bytraditional drug regulatory authorities,” she reports.“Rather, from the north to the south of Europe, thechallenges are being brought by prosecutors, taxpolice, competition authorities, and anti-corruptionofficials.” Targeted activities include pharmaceuticalcompanies’ sales representatives’ practices, thesponsorship of social activities in connection withmedical congresses, and various company financialarrangements with medical experts.

Horton also reports that industry code bodiessuch as the European Federation of PharmaceuticalIndustry Associations have recently tightened theirrules, while national-level associations are handlingincreasing numbers of trade complaints.

Establishing global corporate practicesAccording to Horton, U.S. compliance andenforcement activities involving marketing practiceshave had a spillover effect on many companies’international operations. She says many globalmedical product companies are seeking to establishglobal corporate compliance policies for severalreasons:

■ First, drug companies have to decide whatstandards will govern operations of internationalaffiliates when they put in place complianceprograms to satisfy U.S. Attorneys and theInspector General of the U.S. Department ofHealth and Human Services.

■ Second, the precise source of a governmentalenforcement action, or the country in which anissue might arise, can be difficult to predict. “Thecase may come from a prosecutor’s office orgovernment body with which the company has hadlittle or no prior involvement,” Horton explains.“Or it may be a competitor’s complaint in one ormore trade groups.”

■ As a result, Horton says, companies need to havesolid, defensible compliance programs so that

when an enforcement action or trade complaintoccurs, the company has already put in place arobust compliance program including internalcontrols over marketing practices. “In somejurisidictions, diligent efforts to comply can resultin dismissal of a case or mitigate a penalty,” sheadds.

■ Third, she says, a company cannot easily put inplace global strategies for the core business ofdeveloping and selling medicines (i.e., globalStandard Operating Procedures governingoperations) when local marketing practices arebeing determined solely at the local level.

■ Fourth, efforts among chief executive officers toboost company image, emphasize the company’srole in new product development, and maintain ahigh level of corporate integrity can beundermined as effectively by employees’ improperactivities abroad as in the U.S. CEOs find itdifficult to understand, and even more difficult toexplain, why a rule applies to dealings with doctorsin one country but not in others, says Horton.“Word spreads fast in this information age if acompany is in trouble abroad,” she warns. Suchbad news lowers stock value and may stimulatelawsuits or investigations by prosecutors andpoliticians elsewhere, warns Horton, noting theplethora of qui tam cases in the U.S.

■ Fifth, in many countries, prescribers andpurchasers of medicines are foreign governmentofficials. The U.S. Foreign Corrupt Practices Acthas long required companies to have rules onforeign affiliates’ activities aimed at generatingforeign governments’ purchases, she notes (seerelated story, p. 1).

■ Sixth, meanwhile, foreign governments are tryingto manage spending on social security programs,including outlays for medicines. “Companies’marketing practices are a prime target for actionsunder criminal codes and anti-corruption,regulatory, or competition laws,” says Horton.

■ Seventh, U.S. officials interpret general U.S.statutes like Sarbanes Oxley (SOX) and thesecurities laws to include certain activities abroad.“Lax controls on drug sales representatives’ traveland expenses might be viewed as a SOX issue,”says Horton, “and the Securities and Exchange

w Cont. from page 1

Scrutiny of pharma sales andmarketing practices mountsworldwide

Rx COMPLIANCE REPORT 3MARCH 2, 2005

Commission believes that companies must disclosematerial information about certain enforcementactions by foreign governments.”

■ Finally, drug companies are trying to bettermanage the big spending associated with current

practices as the ABPI, and no code enforcementbody has handled as many adjudications as has thePMCPA.

Many rulings go against the company whosemarketing practices were under attack. Still, furthertightening is on the horizon in the UK.The ABPI ispreparing to revise its Code of Practice rulesregarding controlson the promotion ofprescriptionmedicines. Also,member companieshave stepped uptraining andcomplianceactivities,voluntarilyrefraining fromcertain marketing programs for products undersafety reviews and posting clinical trial data.

The PMCPA caseload is on the rise, andcounterpart bodies in other countries are likewiseseeing an increase in trade complaints. An exampleof a successful challenge involved a competitor’soffering of an ophthalmic lamp (valued at £175) oran educational grant (£250) to any clinician whostarted 20 patients on a ophthalmic drug product.This was seen as an inducement to prescribe thedrug.

Concerning government action to enforcemarketing rules, the MHRA possesses strongauthority but has not, in the past, brought manycases, preferring to rely on the ABPI and itsPMCPA. The last known case by the MHRA’spredecessor, the Medicines Control Agency (MCA),was in 1988. Some observers believe that this maychange given recent criticism against the backdrop ofcurrent concerns about drug safety and officialsecrecy.

marketing practices, says Horton. “In the news lastweek were reports that several large companiescontemplate possible reductions in large salesforces,” she notes.

■ Linda Horton, Partner, Hogan & Hartson, Brussels, Belgium,LRHorton@hhlaw.com, Tel: [+[32 2] 505 0931/202-637-5795

Pharmaceutical marketing practices: Europeanauthorities tighten controlsBy Linda Horton

Turning to national activities, and starting innorthern Europe, the pharmaceutical industry

in the UK has been through a tough year. As if theissues with antidepressant drug study data, fluvaccine, and COX-2 inhibitors were not enough, theUK Parliament’s Select Health Committee held amuch-publicized inquiry into the influence of thepharmaceutical industry on prescribing practice,patient groups, and regulators.

The inquiry closed earlier this month and acommittee report will issue later this year. Theevidence sessions held by the Health Committeesince last July provided a forum for strident criticismof pharmaceutical companies. Singled out forparticular criticism were the spending on marketingrather than R & D; what is viewed as selectivepublication of clinical trial data, particularlysuppression of negative results; drug companyrepresentatives’ “ghost-writing” of articles publishedwith an expert shown as author; and companysponsorship of physicians to attend lavishconferences in exotic locations. Even a seeminglybenign activity--support of disease awarenesscampaigns and sponsorship of patient organizations--came under attack, characterized by some Membersof Parliament as “disease mongering.” The UKMedicines and Healthcare products RegulatoryAgency (MHRA) was accused of excessive closenessto industry, a pro-approval bias, and undue secrecy.

Although it is too soon to tell what legislative orother recommendations might emerge from theHealth Committee’s report, already the industry istackling the issues raised. At the parliamentaryinquiry, the Association of the British PharmaceuticalIndustry (ABPI) defended the role of itsPrescription Medicines Code of Practice Authority(PMCPA) in enforcing a code that elaborates on therequirements of EU and UK law. Certainly, of all thedrug industry trade associations around the world,none has issued as much guidance on marketing

Enforcement is onthe rise in Sweden,with severalprosecutionsannounced earlierthis month.

Rx COMPLIANCE REPORT 4MARCH 2, 2005

Sweden imposes restrictionsEnforcement is on the rise in Sweden, with severalprosecutions announced earlier this month. Newagreements have been reached between the SwedishAssociation of the Pharmaceutical Industry and theorganizations representing local goverenments,doctors, and the national drug purchasing authorityon forms of cooperation between pharmaceuticalcompanies and public-sector medical professionals.

Drug companies’ ability to offer lavish marketingevents and conferences to professionals has beenseverely limited. Restrictions include a cap on thelevel of reimbursment of travel expenses and costsfor accommodation and food (50%); a requirementfor invitations to scientific conferences to be sent tohospital management only, who then decide whichhealthcare professionals may attend; a ban onoffering social activities (e.g. golf, theatre) inconnection with conferences; and a ban onsponsorship of events organized by healthcareprofessionals themselves, such as hospital staff-parties.

Italian trade group initiates certificationTwo developments in Italy are cases brought by taxauthorities and new industry code requirements. LastMay the Italian police force responsible forinvestigating economic crimes completed a two-yearinvestigation into the drug industry’s marketingpractices. More recently, a number of cases havebeen in the news. In November 2004, a small U.S.company and its CEO became the subjects of acriminal investigation in Milan. The company isalleged to have paid a physician and hospitaladministrator in exchange for hospital contracts. In asecond case, the Public Prosecutor for Verona isconducting an investigation involving 4,000 doctorsand 300 officials of a global company. The allegationis that the company’s sales representatives sought toinfluence doctors’ prescribing preferences by offersof cash, cameras, computer equipment and holidays.In a third case in Florence, a major company ischarged with illegal payments to doctors.

After these and other cases, the pharmaceuticaltrade association Farmindustria decided to requireeach member company to hire a 3rd-party body toaudit and, each year, to certify the company’scompliance with laws and the industry code onmarketing practices. Drug companies are scramblingto meet the April 2005 deadline for the firstcertification.

CroatiaTransitional economies present special challenges tocompanies. In November 2004, a majorpharmaceutical company announced an internalprobe of its sales operations in Croatia, a countrythat will launch accession negotiations with the EUin a few years.

Pan-European initiatives As noted earlier, the EFPIA (European Federationof Pharmaceutical Industries and Associations) hasrevised its Code of Conduct. The new Code banschoice of exotic venues for industry-sponsoredconferences for healthcare professionals, tightensrules to ensure the predominance of scientificaspects of meetings, and draws a distinction betweenmarketing practices and scientific informaitonactivities of pharmaceutical companies. EFPIAcomprises 29 national pharmaceutical industryassociations and 43 leading pharmaceuticalcompanies involved in the research, developmentand manufacturing in Europe of medicinal productsfor human use.

Two other governmental EU-level developmentsrelating to marketing practices should be mentioned.One, the Draft Penalties Regulation, would allow theEuropean Commission to penalize companies thatviolate rules related to European Medicines Agency(EMEA) product authorizations.

Also, the EU will launch, in October 2005, a newinstitution called the European Healthcare Fraudand Corruption Office (EHFCO). It will help EUMember States to coordinate enforcement activitiesrather than act as an enforcement body in its ownright. The groundwork for the EHFCO has been putin place by bodies responsible for counteringhealthcare fraud and corruption in their country orregion.

Among the practices which the EHFCO wishesto combat is the grant of material incentives bypharmaceutical companies to doctors practicing inpublic healthcare and to hospital staff responsible forprocurement if they purchase from a particularsupplier seeking to encourage purchase orprescribing of certain drugs.

In sum, the regulatory landscape in Europe isvery challenging at present. ■

■ Linda Horton, Partner, Hogan & Hartson,lrhorton@hhlaw.com

Rx COMPLIANCE REPORT 5MARCH 2, 2005

Tompkins says drug manufacturers should pay closeattention to at least two trends. First is the continuedvigorous enforcement of the FCPA by the Securitiesand Exchange Commission (SEC) and the U.S.Department of Justice (DOJ). He says both agencieshave increased the size of their staff in this area overthe last five years and he expects that trend tocontinue.

The second trend he points to flows from theOrganization for Economic Cooperation andDevelopment (OECD) Anti-bribery Convention,which he says “globalizes” the U.S. anti-bribery law.Over thirty countries are now party to thatagreement. Now, he says, foreign governments maytarget U.S. companies under new FCPA-type laws.To the extent that companies have internationaloperations or affiliates, subsidiaries or even salesrepresentatives or agents outside the U.S., the FCPAmust be on their list of things to be concerned about,says Tompkins.

A “surge” in investigationsIn the pharmaceutical arena, there appears to be asurge in investigations taking place, reportsTompkins. One of the reasons for this, he explains, isthat in many places such as Europe, South America,and the Far East, many of the hospitals and healthcare facilities are owned by the government and thedoctors and other health care workers areconsidered government employees. As a result, someof the ongoing investigations, as well as some of thecases already settled, involve pharmaceuticalcompanies giving something of value to a doctor orhospital for patient referrals or to get their drugs onthe list of approved drugs for governmentreimbursement.

That restriction is very broadly defined in theFPCA, says Tompkins. “It does not only cover agovernment official,” he says. “It also coverscandidates for political office and parties.” The lawwas recently amended to cover employees andofficers from international organizations such as theWorld Bank, he adds.

Uneven enforcement citedAccording to Tompkins, the FCPA has beenunevenly enforced since it was enacted by Congressin 1977. After being largely dormant during the1980s, he says, enforcement of the FCPA has beenmuch more vigorous during the past decade. TheCriminal Division of the U.S. Department of Justicenow has a specialized unit of attorneys that overseeenforcement of the FCPA and the EnforcementDivision of the SEC also has a group of attorneysand auditorsengaged in FCPAinvestigations andcompliance.

The FCPAcontains two typesof provisions. One isan anti-briberyprovision prohibitingspecified partiesfrom offering ormaking a promise orpayment to a“foreign official” forthe purpose ofacquiring business,obtaining animproper advantage,or influencing anofficial act. Theother is accountingprovisions requiringcompanies that issuesecurities under U.S.federal securities laws to maintain certain records,accounts and accounting controls.

According to Tompkins, the original purpose ofthe FCPA was to prohibit “issuers” under U.S.securities laws, along with U.S. citizens, residentaliens, and businesses organized under U.S. law, frommaking payments to foreign public officials in orderto acquire or maintain foreign government business.

Since its enactment, however, the FCPA has beensubstantially revised twice, once in 1988 and once in1998. “The 1988 amendment was intended to clarifyand somewhat narrow the conduct subject tocriminal sanctions,” he says. “The 1998 amendment,in contrast, came into force on November 10, 1998, aspart of the Anti-Bribery Act which significantlybroadened application of the FCPA.”

w Cont. from page 1

Drug manufacturers faceincreased enforcement ofForeign Corrupt Practices Act

“This is not just atheoretical risk,”says defensecounsel JosephTompkins. “Thereare realinvestigations takingplace right now.There are real casesthat have beenbrought, and thereare real people whowill pay a price.”

Rx COMPLIANCE REPORT 6MARCH 2, 2005

OECD “globalizes” the FCPAA second critical trend Tompkins points to is the“globalization” of U.S. law by the OECD, which, in1998, agreed to enact legislation similar to the FCPA.He says there were many complaints from U.S.companies competing with companies from othercountries that were not bound by the same rules. Asa result, the U.S. pushed the OECD nations to enactsimilar legislation. Five countries outside the OECDhave since passed similar legislation.

The Convention was adopted and signed onDecember 17, 1997, by 33 countries, including theUnited States. All countries adopting the Conventioncommitted to enact and enforce anti-foreign briberylaws, imposing criminal penalties for corruptpayments comparable to those otherwise applicableto bribery within the respective country’sjurisdiction.

The OECD establishes standards in defining theoffense of bribery of foreign officials, which is similarto the FCPA, says Tompkins. It requires parties totake all necessary measures to establish bribery offoreign officials as a criminal offense and adopteffective criminal penalties for bribery of foreignofficials.

According to Tompkins, all ratifying countrieshave passed some form of implementing legislation.“The question is, what are these countries doing toenforce the law,” he says, “and I think the answer isthat it is kind of a mixed bag.” Some countries arenot enforcing it very much at all, he says, whileothers including Norway, Poland, and several otherEuropean countries, are consistently enforcing it.

Tompkins says the other significant part of theOECD agreement is that government agencies inthese countries have agreed to cooperate with U.S.government agencies to investigate FCPA mattersand trade information. “That has helped the SECand the Department of Justice get information fromother countries,” he says.

SEC v. Schering-PloughOne of the most significant developments in thisarea came last year when Schering-Plough settledallegations for $500,000. Notably, the company’semployees did not give anything of value to agovernment official. Rather, they gave a charitabledonation to a foundation that had nothing to do witha pharmaceutical company. However, they did so atthe request of a regional health official. The SECtook the position that qualified as an FCPA violationbecause they were allegedly trying to curry favor.

Specifically, a Polish branch office of Schering-Plough subsidiary, Schering-Plough Poland (SPP),paid approximately $74,000 to a Polish charitablefoundation between 1999 and 2002. The founder ofthe foundation was the director of one of sixteenregional health authorities in Poland. While thefoundation had nothing to do with health care, SPP’scontributions were solicited by the director of theregional health authority.

The case was settled in June 2004. In addition tothe $500,000 civil penalty for violating books andrecords provisions of FCPA, the settlement includeda cease and desist order and the company wasrequired to retain an Independent Consultant,approved by the SEC, to review and evaluateinternal controls and record-keeping. TheIndependent Consultant’s recommendations must beadopted by the company unless it can show them tobe unduly burdensome, impractical or costly, and thecompany can propose an adequate alternative. ■

I. Anti-bribery Penalties: Companies

Criminal penalties• Up to $2 million criminal fine per violation

Civil penalties• Up to $10K civil fine per violation

Collateral consequences• Harm to public relations and reputation• Inability to partake in U.S. government

procurement or receive export licenses• Unlawful FCPA payments are not tax

deductible as business expense, but are taxableitems

II. Anti-bribery Penalties: Individuals

Criminal penalties• Up to $100K criminal fine per violation• Up to 5 years’ imprisonment per violation

Civil penalties• Up to $10K civil fine per violation• SEC may seek additional fines up to $100K

based on expected profit

Collateral consequences• Fines are NOT reimbursable by the company

Source: Sidley Austin Brown & Wood

The Foreign Corrupt Practices Act:Enforcement and Penalties

Rx COMPLIANCE REPORT 7MARCH 2, 2005

Anti-bribery RulesElements of FCPA Violation■ A “covered” person■ Must offer or give something of “value”■ To a “foreign official”■ To “obtain or retain business”■ With “corrupt” intent

Who is a “Covered” Person?■ Any foreign office, and any officer, director,

employee, or agent, including foreign employeesand agents• Issuers of registered securities in the U.S.• All U.S. citizens, residents, companies, and

foreign branches of U.S. companies, andforeign branches of U.S. companies

• Officers, directors, employees, and agents• Foreign companies or persons who commit

acts in furtherance of corrupt payments whilein the U.S.

What is “Value”?■ Offers to confer or conferring ANY benefit to

recipient• Cash, reimbursements, extravagant hosted

travel, non-monetary gifts, etc. to officials• Scholarships, contributions in name of official,

etc.• Benefit to private person or entity at behest

of official■ Applies to conduct “in furtherance of” corrupt

payment, not just payment itself• Includes devising plan, processing check, etc.

■ Need not be fully consummated or successful tocreate liability

Who is a “Foreign Official”?■ Foreign officials at all levels very broadly

defined• Includes international organizations, political

candidates and parties, government owned orcontrolled commercial enterprises, heads ofgovernment entities, etc.

■ Private persons acting in official capacity• Includes ceremonial advisors, consultants, etc.

Is the Payment to “Obtain or RetainBusiness”?■ Payment made to obtain or retain business by:

• Influencing any official act or decision• Inducing official to do or omit to do acts in

violation of official duties• Securing any improper advantage• Inducing official to influence acts of

government■ Need not relate to specific business opportunity

• Business need not be with foreign government■ Bribes to reduce foreign duties/taxes can violate

FCPA, but government must prove “businessnexus”

Is There a “Corrupt” Intent?■ Benefit conferred or offered to induce foreign

official to abuse or misuse his/her position orauthority through action or inaction

■ Quid pro quo generally assumed• Gift/payment made with reasonable

expectations of some official favor in return• Quid pro quo need not be executed• Official need not be able to deliver “quo”

herself■ Government need not establish defendant knew

his/her conduct violated FCPA

Indirect Offers/Payments Prohibited■ Payments or offers/promises to pay any person

while knowing all or portion of value will begiven, directly or indirectly, to any foreign officialare prohibited

■ “Knowing” means:• Actual awareness• A firm belief as to the existence of such

circumstance or that such circumstance willoccur

• A high probability of the existence ofcircumstance unless the person “actuallybelieves that such circumstance does not exist”

• No “willful blindness” - i.e., conscious disregardor deliberate ignorance of knowncircumstances that should alert one to FCPAviolations is not permitted

The Foreign Corrupt Practices ActPharmaceutical companies are facing continued vigorous enforcement of the Foreign Corrupt Practices Act.In addition, they may be targeted by foreign governments under new FCPA-type laws. Here is a frameworkfor looking at these laws developed by Joseph Tomkins and Paul Gerlach of Sidley Austin Brown & Wood:

Rx COMPLIANCE REPORT 8MARCH 2, 2005

Exceptions and Affirmative Defenses■ Exception:

• “Routine” governmental action (i.e., “greasepayments”)

■ Affirmative defenses• Payments authorized by written foreign law• Bona fide business expenditures

Exception: “Routine” GovernmentalAction■ Anti-bribery rules do not apply to payments to

secure “routine” governmental action■ Examples:

• Obtain permits, licenses, visas• Secure police protection, timely official

inspections• Provide phone, mail, power, water service,

loading/unloading cargo, protecting perishableproducts

• “Actions of a similar nature”■ Ministerial acts, not discretionary actions■ Perform official function faster, not make a

different substantive decision

Affirmative Defense: Written Foreign Law• Lawful under WRITTEN law of host country• Informal business customs or practices NOT

covered• Examples:

• Lawful political contributions, modest gifts,training of officials

• Limited utility• Significant downside risks

Affirmative Defense: Bona FideExpenditures■ Reasonable business expenditures

• Directly related to legitimate promotional orcontract activities

• Reasonable under the circumstances• Bona fide and made in good faith

■ Examples:• Reimbursement for travel, meals,

entertainment• Product samples

Source: Sidley Austin Brown & Wood

I. Components of an effective FCPAcompliance programClearly stated FCPA policy and procedureDescription of the FCPACompany policy prohibiting violationsProcedure to be followed before engaging in anyforeign joint venture or foreign representativeagreement

• Periodic FCPA training sessions• Periodic certification of FCPA awareness and

compliance• Periodic internal audit review of contracts with

and payments to foreign agents

II. Investigating and documentingagreements with foreign agentsInvestigating potential foreign consultants/agents

Consultant questionnaireConsultant’s reputation, business history, past andpresent clientsUse local counsel, U.S. Embassy, State andCommerce Departments

Key requirements for an FCPA compliance program

Preparation of consultant agreementRepresentations and warranties (re: compliancewith FCPA, other U.S. laws)Compliance with foreign country’s laws andregulationsPeriodic certification of compliance with FCPAConsent to review consultant’s books and records,if needed

III. Investigating and documentingagreements with foreign agents

Documentation of compliance effortsInvestigation and agreementReview and approval process followedAudit/internal payment controls

Source: Sidley Austin Brown & Wood

Rx COMPLIANCE REPORT 9MARCH 2, 2005

Ask an executive from a major pharmaceuticalcompany about the PhRMA Code, FDA, or

Office of Inspector General for Health and HumanServices and you will receive a lengthy and well-informed response, says Noah Shannon of PolarisManagement Partners. That is because most majorpharmaceutical firms have spent the past five yearsaggressively responding to healthcare law issues intheir largest market, the United States. Ask thosesame individuals about the EFPIA Code, EMEA,or European Healthcare Fraud and CorruptionOffice, he adds, and you will probably be met with asignificantly less informed response. In short,Shannon says, few U.S-based pharmaceuticalindustry executives, including complianceprofessionals, are familiar with regulations andorganizations governing their marketing and salesactivities in the European Union.

What follows is a primer on European Unionhealthcare law that addresses the legal frameworksimpacting pharmaceutical companies’ internationalsales and marketing activities along withrecommendations on how companies can best craftan effective global compliance approach.

The ChallengeWith prosecutions few and far between, Europeanhealthcare law regulation was previously not acentral focus for pharmaceutical companies.However, as evidenced by recent Italian and Germananti-kickback investigations of a top-five pharmacompany, and the UK’s upcoming prosecution of sixother companies for price-fixing and fraud, thisappears to be changing. Overseas regulators areincreasingly pursuing healthcare fraud prosecutionstargeted at the pharmaceutical industry, presenting anew challenge for global pharmaceutical companies:how to craft a rational approach to healthcare lawcompliance that meets obligations coming from threedirections – U.S. law, non-U.S. national law, andinternational treaties and agreements?

Europe DefinedAfter the United States, Europe is the world’ssecond largest pharmaceutical market, with nearly$150 billion in annual spending. For the purposes ofthis article, “Europe” will refer to nations that belongto the European Union (EU). While this does notencompass the entirety of the European population,it does account for approximately 90 percent ofEuropean pharmaceutical spending, with Germany,France, and the United Kingdom as the three largestindividual markets.1 Further, the nations of the EUare the most advanced in terms of healthcareregulation, providing a leading indicator of whatcourse other European nations are likely to take.

A Recipe For ProsecutionBefore diving into the specifics of European law, afew words should be said about the increase inEuropean healthcare fraud prosecutions and theaccompanying shift in public perception of theindustry. As in the United States, increasingregulatory scrutiny of the pharmaceutical industry isnot an isolated activity in which prosecutors justdecide to pursue cases against companies. Rather,there appears to be a “recipe” of critical factors,which create an environment ripe for increasedregulatory scrutiny.

Guest commentaryCrafting a Global Healthcare Compliance Strategy:The European Union Compliance LandscapeBy Noah Shannon and Judith Braun-Davis

“Recipe” for Regulatory Scrutiny

Increasing Public Healthcare Expenditure+

Robust Regulatory Framework+

Motivated Regulators+

Media Scrutiny+

Increasingly Unfavorable Public Opinion=

Potential for IncreasedHealthcare Fraud Prosecutions

These factors include: 1) increasing publichealthcare expenditure, which provides governmentsan incentive to recoup funds paid to healthcareproviders, 2) a robust regulatory frameworkproviding laws and precedents to support

prosecution, 3)motivatedregulators withincentives topursue major cases,4) media scrutinyof the industryincluding headlinesintended tohighlightmalfeasance, and 5)increasinglyunfavorable publicopinion of theindustry, oftenresulting frommedia coverage.

These fivefactors are closelyinterrelated,feeding off of one

another and creating a fertile environment forprosecution. While Europe is increasingly exhibitingall of these characteristics, this article will focus ontwo key areas: regulatory frameworks and the role ofregulatory bodies.

European LawWhile the interplay of European regulators is verydifferent from that of their counterparts in theUnited States, the U.S. system provides an instructiveanalogy. U.S. healthcare regulation is primarily

Rx COMPLIANCE REPORT 10MARCH 2, 2005

driven by federal and state laws. In many cases, stateshave their own versions of federal laws, such as anti-kickback and False Claims statutes. Offendingentities may be prosecuted under either or both setsof laws. The European system can be viewedsimilarly with EU Regulations and individualcountry-specific laws taking the place of U.S federaland state laws, respectively. In addition togovernment regulation, companies operating inEurope often voluntarily submit to guidelines set byindustry associations, much like PhRMA andACCME in the United States.

This article will discuss EU laws and regulatorybodies as well as pan-European industry associationguidelines. We will touch on specific national laws,regulators, and associations as necessary to describetheir relationships with EU-wide activities, but willnot go into detail on each nation’s regulatorylandscape.

In the 1990s, thefocus of EUpharmaceuticalregulation was todevelop a unifiedprocess of drugauthorization and toestablish GCMPs.Today, the target appears to

be shifting, with more

emphasis being put on

marketing and sales ethics.

European Union LawsAt a high level, EU law consists of four main typesof legislation — regulations, directives,recommendations, and decisions. Regulations anddirectives are the most relevant to our discussionbecause they are applicable to all member states andtheir enforcement is mandatory.

Relevant EU Regulations and DirectivesIn the 1990s, the focus of EU pharmaceuticalregulation was to develop a unified process of drugauthorization and to establish good clinical andmanufacturing practices. Sales and marketing ofdrugs was primarily regulated by the CouncilDirective 92/28/EEC on Advertising of MedicinalProducts for Human Use but was otherwise not akey regulatory focus.

During the past fouryears the target appearsto be shifting, with moreemphasis being put onmarketing and salesethics. Two Directives,2001/83/EC2 and2004/726/EC3, were putin place to meet thischallenge; the Directivesinclude terms oncreating a more ethicalsales and marketingenvironment by building

Rx COMPLIANCE REPORT 11MARCH 2, 2005

upon existing legislation. The combination of theseDirectives ultimately echoes many provisions of theOIG, PhRMA Code, and ACCME Standards. Forexample, the 2004 Directive states, “hospitality atsales promotion events shall always be strictlylimited to their main purpose and must not beextended to persons other than health-careprofessionals.”

In addition to the above directives, which addressaspects of pharmaceutical sales and marketing, theEU developed legislation that mimics two keyprovisions of U.S. law relevant to the pharmaceuticalindustry, the False Claims Act and the Anti-KickbackStatute. With the passage of the European UnionConventions on Civil and Criminal Corruption, theEU adopted a common definition of corruption,offering specific guidelines of what constitutes abribe as well protections for witnesses to fraudulentactivities that resemble U.S. whistleblower provisions.

EU Regulatory BodiesThe EU enforces healthcare regulations andguidelines through a set of regulatory bodies, eachfocusing on different aspects of policy developmentand enforcement. Its regulatory framework is multi-layered, where EU regulatory bodies createlegislation that is enforced by EU as well as memberstate enforcement agencies.

Again, the United States can be used as ananalogy. In the U.S., regulatory functions such asdrug approval and healthcare fraud investigation arepursued by different bodies. Further, voluntary tradeorganizations focus on providing guidelines in areasrelevant to their members.

Drug ApprovalEstablished in 1995, the European MedicinesEvaluation Agency (EMEA) is the EU’s equivalentto the U.S. Food and Drug Administration (FDA). Itsprimary charter is the evaluation, approval, andreview of pharmaceutical and biotechnologyproducts for marketing within the EU. Approval orwithdrawal of any compound decided by the EMEAis binding in all member nations, making it apowerful player in European healthcare regulation.

In addition to EMEA’s centralized drug reviewprocess, it also supports a decentralized reviewprocess in which it collaborates with EU memberstate counterparts to support pan-Europeanapproval for drugs submitted at the national level.National counterparts include the United Kingdom’s

Medicines & Healthcare products RegulatoryAgency (MHRA), Germany’s Federal Institute forDrugs and Medical Devices (BfARM), and similarnational agencies across the EU.

Beyond drug approval and withdrawal, EMEApursues other healthcare law-related functionsincluding publishing guidance documents andposition papers on such topics as marketingpractices, pharmacovigilance, and other critical areas.

Fraud InvestigationsTwo organizations are active in addressing pan-European healthcare fraud issues: the EuropeanAnti-Fraud Office (OLAF) and the EuropeanHealthcare Fraud and Corruption Office (EHFCO).Since 1989, OLAF has been the EU’s primarymechanism for fighting fraud. OLAF’s charter issimilar to that of the Office of Inspector General(OIG) within each U.S. government agency. Bothorganizations focus on preventing and responding tofraud committed against government bodies withintheir respective purviews.

The EHFCO, still in its formative stages4, wascreated specificallyto addresshealthcare relatedfraud. It can be seenas a Europeananalog to the OfficeInspector Generalof Health andHuman Serviceswithin the UnitedStates. As with theOIG, EHFCOincludes in itscharter the“Prevention,detection,investigation, andsanctions”5 relatedto healthcare fraud.Further, theEHFCO willcoordinate with fraud prevention offices in membernations, such as the United Kingdom’s Serious FraudOffice (SFO) and National Health Service CounterFraud and Security Management (CFSMS)Investigators, to share best practices and provideprocedural support to combat corrupt practices.

The combination ofrising costs,increased mediascrutiny andnegative shifts inpublic opinionsuggests thatincreasingregulatory scrutinyand related finesmay soon follow.

Rx COMPLIANCE REPORT 12MARCH 2, 2005

Trade Organization GuidelinesAs in the United States, European healthcareregulation is impacted by non-governmentalguidelines, such as those developed by tradeorganizations. In the United States, threeorganizations play a major role in driving healthcarepolicy: 1) the Pharmaceutical Research andManufacturers of America (PhRMA), thepharmaceutical industry trade organization, 2) theAmerican Medical Association (AMA), the nation’slargest physician’s association, and 3) theAccreditation Council for Continuing MedicalEducation (ACCME), which maintains standards forproviders of continuing medical education (CME).Europe has its own version of each organization withcharters closely mimicking their U.S. counterparts.

Pharmaceutical Manufacturers TradeOrganizationFounded in 1978, the European Federation ofPharmaceutical Industries and Associations (EFPIA)can be seen as a Europe-wide version of PhRMA,joining together national pharmaceutical industryadvocacy groups to represent their common interestsacross the European continent. EFPIA bringstogether 29 European national pharmaceuticalindustry associations and counts as members 43pharmaceutical firms operating in Europe, includingmany major U.S. firms. In addition to supportingindustry interests involving intellectual property,trade, and other key commercial issues, EFPIA takespositions on several issues relevant to healthcare law,including a recent position on the disclosure ofclinical trial data.

Like PhRMA, EFPIA has also developedvoluntary guidelines for the promotional activitiesconducted by its members. The “EFPIA Code” orEuropean Code of Practice for Promotion ofMedicines6 covers much of the same ground as thePhRMA code, including rules on conductingpromotional and information activities as well asguidelines on gifts and hospitality.

Physician AssociationAs in the United States, every European nation has avoluntary association representing the interests ofphysicians. In 1963, these national associations joinedtogether to form a pan-European confederationrepresenting their collective interests across thecontinent. The organization they formed is called theEuropean Association of Senior Hospital Physicians

(AEMH). As might be expected, the AEMH plays arole similar to that of the American MedicalAssociation (AMA), improving medical training andworking conditions for its members as well as raisingstandards for patient medical care.

Also like the AMA, AEMH commissionsworking groups to develop positions on all issuesrelevant to its members, including healthcare lawcompliance. Its charter states, “In order to fulfill itspurpose, the AEMH implements all appropriate andlegal measures.”7 As scrutiny of the pharmaceuticalindustry’s interactions with physicians increases, it islikely that the AEMH will take more concrete actionto maintain the positive perception of its members,as the AMA has with its guidance on “Gifts toPhysicians from Industry.”

Continuing Medical Education AssociationEstablished in 1999, Europe’s accrediting body forcontinuing medical education (CME) is the aptlynamed EACCME or European AccreditationCouncil for CME. As with its U.S. counterpart, theACCME, the organization is primarily concernedwith maintaining standards that ensure the qualityand effectiveness of continuing medical education. Indoing so, the EACCME developed accreditationguidelines for all members, which require accuracy,objectivity, and avoidance of conflicts of interest. Ofparticular interest to pharmaceutical manufacturers,the EACCME spells out guidelines for commercialfunding of CME. These guidelines include provisionsnearly identical to those laid out in the ACCME’sStandards for Commercial Support, such as, “Theprovider must assure that the educational programapproved for international CME credit is notinfluenced or biased by commercial organizations”and “Educational grants should always be made withno strings attached and should always beacknowledged in the printed program.”

What’s Next?If we return to our “recipe” for regulatory scrutiny, itis clear that the EU has two necessary ingredientsthat may lead to an increase in healthcare industryfraud prosecutions: a framework of laws governinghealthcare and a comprehensive set of regulatorsthat develop and enforce policies. Meanwhile,Europe is facing increasing public healthcareexpenditure, with spending rising significantlyrelative to GDP8. This environment of rising costs,combined with media scrutiny and negative shifts in

Part D Contracting and Fraud and Abuse IssuesThursday, March 3, 2005; 1:00 p.m. – 2:30 p.m. Eastern Time

Speakers:

Bill Sarraille, partner in the firm’s Health Care group who has counseled leadingpharmaceutical manufacturers and others on the strategic and legal implications of the Part Dbenefit

Anna Spencer, senior associate in the firm’s Health Care group

The teleconference will last approximately 90 minutes, and speakers will welcome questions.You will receive a dial-in number upon registering. RSVP ASAP to rsvp@sidley.com or bytelephone at 202/736-8565.

Rx COMPLIANCE REPORT 13MARCH 2, 2005

public opinion, best illustrated by the recent buzz inthe UK over release of clinical trial data, suggeststhat increasing regulatory scrutiny and related finesmay soon follow.

In future articles, we will offer similar primers onthe healthcare law landscapes of additionalinternational markets important to majorpharmaceutical firms. We will also outlinecompliance strategies intended to support a globalview of compliance, incorporating policies andbusiness practices to reduce compliance risk acrossall relevant markets. ■

For more information visit:

EMEA – www.emea.eu.intOLAF –europa.eu.int/comm/anti_fraud/index_en.htmlEFPIA – www.efpia.orgAEMH – www.aemh.orgEACCME – www.eaccme.be

Summary of EU Regulatory Bodies

RegulationType

US GoverningBody

EuropeanUnionEquivalent

Drug Approval Food and DrugAdministration(FDA)

EuropeanMedicinesEvaluation Agency(EMEA)

HealthcareFraudInvestigation

Office of InspectorGeneral (OIG) ofHealth and HumanServices

European Anti-Fraud Office(OLAF)EuropeanHealthcare Fraudand CorruptionOffice (EHFCO)

Pharmaceutical TradeAssociation

PharmaceuticalResearch andManufacturers ofAmerica (PhRMA)

EuropeanFederation ofPharmaceuticalIndustries andAssociations(EFPIA)

PhysicianAssociation

American MedicalAssociation (AMA)

EuropeanAssociation ofSenior HospitalPhysicians (AEMH)

CME StandardsBoard

AccreditationCouncil forContinuingMedical Education(ACCME)

EuropeanAccreditationCouncil for CME(EACCME)

1 IMS 20032 http://europa.eu.int/eur-

lex/pri/en/oj/dat/2001/l_311/l_31120011128en00670128.pdf3 http://europa.eu.int/eur-

lex/pri/en/oj/dat/2004/l_136/l_13620040430en00340057.pdf4 EHFCO is expected to be fully operation by October 2005,

according to planning documents developed by theEuropean Healthcare Fraud and Corruption Conference

5 European Healthcare Fraud & Corruption Conference 20046 http://www.efpia.org/6_publ/codecon/Promomedicin_.PDF7 www.AEMH.org8 Regulating Pharmaceuticals in Europe, Mossialos 2004

For more information about Polaris ManagementPartners, visit www.polarismanagement.com.

Rx COMPLIANCE REPORT 14MARCH 2, 2005

Mark your calendarOnly three weeks away!

FRAUD AND ABUSE: Sales, Marketing,and Pricing Compliance to Avoid Penalties

March 21st-22nd, 2005The Melrose Hotel, Washington DCwww.pharmedassociates.com/marketing.asp#p203

Speakers include:

Meredyth Smith AndrusOffice of the Attorney General of Maryland

Cherif BenattiaJohnson & Johnson

Cecilia BurkeWyeth Pharmaceuticals

Lester CrawfordFood and Drug Administration

Teri CrouseEli Lilly and Company

Debra DunneSegal, McCambridge, Singer & Mahoney

Gary GiampetruzziPfizer

Wendy GoldsteinEpstein, Becker and Green

Dan KracovPatton Boggs

Michael MisockyImClone Systems, Inc.

Viveca ParkerU.S. Attorney’s Office, Eastern District, PA

David RalstonSchering Plough

Retta RiordanOrganonLynn Shapiro SnyderEpstein, Becker and Green

John SteerU.S. Sentencing Commission

Susan WinklerU.S. Attorney’s Office, Boston, MA

For more information, call 800/686-2276 or visitwww.pharmedassociates.com.

Matthew Hay, Editor & PublisherJoan Shaffer, Editorial Director

107 S. West Street, P.M. 320, Alexandria, VA 22314Phone: 703/960-0034 Fax: 703/960-0079RxCompliance@aol.comwww.biomedical-market-news.com

EDITORIAL ADVISORY BOARDTed Acosta, Director of Pharma Compliance, Ernst &Young, New York, NY, Former Senior Attorney, HHSOffice of Inspector General

David Balto, Partner, Robins, Kaplan, Miller, & Ciresi,Washington, DC, Former Director, Office of Policyand Evaluation, Bureau of Competition, Federal TradeCommission

Kenneth Berkowitz, President, KPB Associates, PineBrook, NJ, Co-principal, PharMed Staffing, President,HMC Council

Marc Farley, Executive Director, WorldwideCompliance, Medical Devices & Diagnostics, Johnson& Johnson, New Brunswick, NJ, Former Assistant U.S.Attorney, District of New Jersey

John Kamp, Attorney, Wiley, Rein & Fielding,Washington, DC, Former Director, Office ofCongressional & Public Affairs, FederalCommunications Commission

Carolyn McElroy, Partner, Mintz, Levin, Ferris,Glovsky & Popeo, Washington, DC, Former Director,Maryland Medicaid Fraud Control Unit

Marc Raspanti, Partner, Miller, Alfano & Raspanti,Philadelphia, PA

Bill Sarraille, Partner, Sidley Austin Brown & Wood,Washington, DC

Brenton Saunders, Senior Vice President, GlobalCompliance and Business Practices, Schering-Plough,Kenilworth, NJ, Past President, Health CareCompliance Association, and Founder and Chair-elect,International Association of Privacy Officers

Steve Tarnoff, Managing Partner, The Franklin Group,Somerville, NJ

Rx Compliance Report is published 24 times a year.Subscription price is $599 per year.Please note: Photocopying is prohibited by Federallaw (including internal use, faxes and other electronictransfers) without written permission.