Medical Industries Under the Anticorruption Lens

The pharmaceutical and medical device industries remain subject to increased anticorruption scrutiny by regulators around the world, largely because of their business models. In the United States, the Department of Justice created a specialized unit to investigate Foreign Corrupt Practices Act violations within these industries, which are heavily regulated, largely serve government health care systems, and rely on extensive third-party manufacturing and distribution networks.

Following a sweep of the medical device industry beginning in 2007, the DOJ turned its focus to pharmaceutical companies in November 2009 by launching its “Pharma Initiative” to investigate potential FCPA violations within the industry. Both sweeps led to several investigations and large settlements. Since 2010, $251.8 million has been paid by pharmaceutical and medical device companies to the Securities and Exchange Commission and DOJ in penalties, disgorgement, and interest.

The stakes are higher than ever. The number of global enforcement actions and the size of fines and monetary settlements have increased exponentially in recent years. Coupled with the increasing potential for simultaneous liability under foreign anticorruption laws, companies are at greater risk for devastating financial and reputational consequences. Pharmaceutical and medical device companies also face denial of market access and regulatory approvals as potential sanctions. Regulators receive information leading to investigations from several sources, including other regulators, cooperating companies, and employees, who are now protected by the Dodd-Frank whistleblower provisions.

While many have noted the heightened scrutiny the health care industry faces, few have questioned why. Reviewing trends and statements from regulators, there appear to be three driving factors: (1) the pharmaceutical and medical device industries are heavily regulated; (2) many nations have nationalized health care systems; and (3) manufacturers have extensive global sales and distribution networks.

Heavily Regulated Industries

The pharmaceutical and medical device industries are heavily regulated. Prior to marketing or selling drugs and medical devices, a manufacturer must generally satisfy numerous requirements, including obtaining patents, trademarks, licenses, and other regulatory approvals. Research and development and clinical trials are increasingly conducted abroad, creating additional touch points with foreign officials. A 2010 report by the Office of Inspector General of the Department of Health and Human Services estimated that 40 to 65 percent of clinical trials of Food and Drug Administration-regulated products now occur outside of the United States.

Moreover, depending on where the product is manufactured, significant interaction with customs officials may be required. These steps invariably involve substantial interaction with agencies that have significant discretionary power to approve or deny a manufacturer’s application to sell or ability to move its product. The risk created by the multiple touch points with foreign officials is exacerbated by the industries’ focus on emerging markets where business practices may not yet be fully aligned with applicable anticorruption laws.

Nationalized Health Care Systems