Magazine Article | October 1, 2012

FCPA Compliance For CMOs

Source: Life Science Leader

By Darshan Kulkarni, pharmacist and attorney, Kulkarni

In recent months, Pfizer and several medical device companies, including Johnson and Johnson, Orthofix, Biomet, and Smith & Nephew, were fined millions of dollars for violations of the Foreign Corrupt Practices Act (FCPA). The FCPA was also recently the cause for a potential SEC investigation of Teva Pharmaceutical. This recent increase in charges and fines against life sciences companies is evidence that the SEC and the DOJ are working alongside the U.S. Attorney’s Office to uncover violations of the FCPA. It hence behooves life sciences organizations and their contractors, including CMOs, to be compliant with these organizations.

Impact on CMOs
Violations of the FCPA can arise in multiple ways for a CMO. Specifically, CMOs, their employees, contractors, and/or agents are routinely required to deal with U.S. and non-U.S. governmental agencies. These interactions may occur in multiple ways, including (1) requiring routine forcause or pre-approval inspections, and (2) working with politicians and/or government employees to obtain routine approvals. Potential violations of the FCPA can occur during these visits.

CMOs often work on tight margins. Inspections by U.S. and non-U.S. governmental organizations can mean the difference between a large contract and shutting down business. As a result, during these governmental inspections, individuals within the companies may feel pressured to ensure a clean and clear record for a favorable decision. In foreign countries, where “facilitation payments” are part of doing business, bribes may be exchanged. In such situations, life sciences companies and their CMOs may unwittingly expose themselves to FCPA fines and penalties. It is critical to recognize that the actions of the CMO and its contractors and agents can expose not only the CMO but also its clients to fines and penalties under the FCPA.

Routine Approvals
Working with government officials is often a routine part of doing business in several developing countries. Opportunities to work with these officials vary from the relatively innocuous (e.g. getting an “occupancy certificate” for a building) to getting approvals for drug products that were deemed safe and effective. These governmental officials are often the “oil” that prevents the machinery of government bureaucracy from slowing down business.

Being “welcoming” to these government officials is hence often treated as a usual cost of doing business. Such “welcoming” behavior varies from the minor — getting tea and small talk — to grander gestures like gifts during festivals and special occasions such as birthdays of not only the government officials, but also their family and friends. It is critical for CMOs that work globally to recognize that these behaviors, though “normal” for the country they do business in, may, without appropriate controls, expose their customers to potentially multiple millions in fines and penalties.

Potential Inadequacies of Current Processes
Companies that are working overseas are now becoming wise to the potential violations of these laws and are beginning to require their contractors and affiliates to ensure that individuals who work with them do not violate FCPA requirements. These assurances are typically obtained via language inserted into contracts that are routinely signed by the contractors. Unfortunately, while this language may serve as a “brick” in the wall of taking appropriate preventative steps to avoid FCPA violations, it does not constitute the wall itself. A full compliance program requires not only mere language in a contract, but also the development of policies and procedures, including appropriate training programs, program audits, and appropriate corrective action mechanisms.

CMOs must take the threat of FCPA violations seriously. CMOs who undertake such an FCPA compliance program may be able to advertise such compliance and hence market themselves to potential life sciences clients as an “ethical” and compliant organization. Explaining the potential cost savings associated with such compliance could be lucrative for CMOs.