Distilling compliance lessons from Novartis

It’s early in the evening on Jan. 1, 2017. A man is sitting at the Galaxy Bar on the thirteenth floor of the Hilton Hotel in Greece, where an outdoor terrace overlooks the city of Athens. Outside, the air is cold, but it’s the activity inside that creates a sharp chill, when the man reportedly starts making threats about jumping off the building.

Hotel personnel alert the police, who after one hour of intense negotiations persuade him not to end his life. When questioned by police further, the man reportedly breaks down and utters a cryptic message: “They will not put onto me all the ‘sins’ of the company.”

According to Greek news agency, protothema.gr, the unnamed man is a former high-ranking manager of pharmaceutical company Novartis, under investigation by Greek authorities for paying kickbacks to more than 4,000 doctors and government officials in exchange for the promotion of Novartis’s drugs. In February, the Greek parliament voted to establish a special committee to investigate what role ten politicians allegedly played in the scandal.

Outside of Greece, Novartis faces several other governmental investigations around the world for a laundry list of compliance violations, including kickback claims, off-label promotion practices, healthcare fraud, collusion, and more.

But it was the Greece investigation that brought on a firestorm of criticism from shareholders at Novartis’s latest annual shareholder meeting on March 2: “It would appear it’s not just doctors that have been bribed, but members of the political elite who have been stuffing their pockets with Novartis’s money,” said Veronika Hendry, president of shareholder group Actares.

“I don’t really understand why it is that you can’t get those matters under control,” Hendry added. She called on Novartis to “separate the wheat from the chaff and ensure that corruption does not become a tradition for you.”

In response, Chairman Jörg Reinhardt said Novartis is “working fully with relevant authorities. We are also carrying out a detailed investigation of our own. These investigations are going to take a lot of time, because we have to look at all of our interactions with thousands of doctors over a ten-year period.”

“We’ve made it clear to our organization that these kinds of behaviors, if they occur, will be fully investigated and fully not tolerated. We’ve made clear to our organization, as well, that we should never achieve performance by compromising in any way on our values and integrity.”
Vasant Narasimhan, CEO, Novartis International

“So far, the authorities have not brought any formal charges against Novartis or against any of our employees,” Reinhardt added. “What we know is mostly from the press.”

Reinhardt further argued that not all allegations have been proven. “They may never be proven. I don’t believe we should simply assume that the press is correct about the level of issues involved. Myself and my colleagues will clear this with authorities.”

Reinhardt added that what’s behind the allegations in Greece, and what will come from them, is not altogether clear. “We will find that out over the coming months, and I assure you that for the future we will be determined and resolute in our activities to sort this out,” he said. If evidence of misconduct does arise, “we will act rapidly and decisively and do everything we can do prevent such misconduct in the future.”

Novartis Chief Executive Officer Vasant Narasimhan also tried to ease shareholder concerns: “We’ve made it clear to our organization that these kinds of behaviors, if they occur, will be fully investigated and fully not tolerated. We’ve made clear to our organization, as well, that we should never achieve performance by compromising in any way on our values and integrity.”

But several shareholders who spoke out at the annual meeting questioned the sincerity of these words: “It would have had more gravity had it not been read off a teleprompter,” said Mike Moran of Swiss shareholder group Suishare. “As a shareholder, we’d like to see competence expressed in your own words and how you think on your feet.”

Another Novartis shareholder who spoke out at the meeting criticized Novartis’s board. “This board of directors can sit here and say that they expunge the failures of their predecessors. Well, I don’t accept any of this. I keep hearing the word trust, confidence—you want the confidence of the public. If you want to reestablish that confidence, you’ve got to deserve it. What have you done, in fact, to deserve it? I don’t think you’ve done very much.”

This same shareholder further pointed out the flaws in Novartis’s executive compensation structure, which includes bonuses for those that meet sales targets: “This is a vicious system, a crazy system,” the shareholder stated. “You oblige people here to do everything possible to break the law, if necessary, or go beyond what anybody might imagine in order to achieve these benefits. I think this really encourages people to do inappropriate things.”

Reinhardt adamantly disagreed: “This is an incentive for our executives to perform as best as they can, but it’s not an incentive for them to do ethically or morally questionable things.” In the same breath, however, he acknowledged the risk of monetary incentives, but said that the new CEO “has a very close eye on this and will be looking very closely at how people can be motivated by financial incentives.”

Parallel investigations

The investigation in Greece is just one part of an intricate web of allegations Novartis has woven for itself. Greek authorities were first tipped off by the U.S. Federal Bureau of Investigation following the testimony of three unnamed Novartis employees, who alleged that Novartis made illegal payments between 2006 and 2015 to Greek doctors and politicians in exchange for fixing the prices of Novartis’s drugs at artificially high prices and increasing its access to the Greek market.

Broader enforcement trend

Novartis is not the only pharmaceutical company that has caught the eye of enforcement authorities and regulators for similar violations, many cases resulting in violations of the U.S. Foreign Corrupt Practices Act.
Consider the following examples:
In December 2016, Teva Pharmaceutical Industries settled parallel civil and criminal charges, agreeing to pay more than $519 million concerning violations of the Foreign Corrupt Practices Act by paying bribes to foreign government officials in Russia, Ukraine, and Mexico to win business.
In October 2016, GlaxoSmithKline reached a civil settlement with the SEC for $20 million to settle charges that its China-based subsidiaries provided things of value to foreign officials in China, including healthcare professionals, to increase sales of GSK products in China.
In September 2015, AstraZeneca reached a $5.5 million settlement with the SEC to settle claims that it violated the Foreign Corrupt Practices Act by making improper payments to state-controlled healthcare providers in China and Russia.
In October 2015, Bristol-Myers Squibb reached a $14 million settlement with the SEC to resolve charge that its joint venture in China made cash payments and provided other benefits to healthcare providers at state-owned and state-controlled hospitals in exchange for prescription sales.
In recent years, enforcement authorities have increasingly investigated companies operating in the pharmaceutical industry, and not just in the United States but abroad. Thus, even if your company has never been implicated for a compliance violation—whether for kickback claims, off-label promotion practices, healthcare fraud, or any violation—it would be a mistake to overlook the important ethics and compliance lessons learned from those who have, lest you suffer the same fate.
—Jaclyn Jaeger

“Novartis Group companies in Greece are providing information to the Greek authorities related to these allegations,” the company’s annual report states. Additionally, Greek authorities are receiving assistance from the U.S. Department of Justice and U.S. Securities and Exchange Commission in the investigation, sharing documents related to the allegations; Novartis said it has also responded to a subpoena and document requests from the SEC and Justice Department “in connection with such allegations and is cooperating with their investigation.”

This is not Novartis’s first run-in with U.S authorities. In November 2015, Novartis settled a civil fraud lawsuit for $390 million to resolve claims that the company gave kickbacks to specialty pharmacies in return for recommending two of its drugs, Exjade and Myfortic. Then in March 2016, Novartis settled an FCPA enforcement action with the SEC for $25 million after an SEC investigation found that employees of two China-based Novartis subsidiaries gave money, gifts, and other things of value to healthcare professionals in exchange for several million dollars in sales of pharmaceutical products to China’s state health institutions.

Elsewhere, a criminal trial remains ongoing “concerning allegations that Novartis Korea utilized medical journals to provide inappropriate economic benefits to healthcare professionals,” according to Novartis’s annual report.” Additionally, investigations conducted by other South Korean authorities—the Korea Fair Trade Commission, the Ministry of Food and Drug Safety, and the Ministry of Health and Welfare—led to total fines of approximately $53 million, sales and reimbursement suspensions on Novartis Korea products in 2017 and the indictment of six Novartis executives for issuing improper rebates to local doctors.

Ethics and compliance lessons

For its part, Novartis has over the last few years taken a series of steps to further strengthen its integrity and compliance program. “For example, in South Korea, where we were in breach of industry standards on interactions with healthcare professionals, we created additional internal controls intended to ensure adherence to internal and external standards,” Novartis stated in its annual report. “These include no longer funding healthcare professionals from South Korea to attend overseas academic conferences and meetings.”

Novartis has enhanced its compliance policies and procedures in other areas, as well, including:

Combined compliance and legal function: Novartis’s compliance function now has 473 employees, headed by Chief Ethics and Compliance Officer Shannon Klinger, who assumed the elevated and expanded role of chief risk officer, effective April 1, and reports directly to the CEO. Klinger's expanded role “allow[s] for an integrated approach to risk identification and management that is aligned with our commitment to hold ourselves to the highest ethical standards in all of our activities,” Novartis said.

Klinger also serves as head of litigation, reporting to the group general counsel. “By bringing the integrity and compliance and legal functions closer together, we can evaluate facts that might be at issue in lawsuits to determine if additional compliance actions or policies are warranted,” Novartis said.

New policy for interacting with healthcare professionals: As of January, Novartis now sponsors physicians to attend international congresses “only when they play an active role on behalf of Novartis,” the company’s annual report states. Examples include speaking at or chairing a Novartis-sponsored session or symposium, presenting data from Novartis-sponsored trials, and capturing scientific insights that can be further disseminated to the physicians’ local community.

Adoption of new professional practices policy: Novartis additionally realigned its existing divisional policies by creating a new Groupwide Professional Practices Policy, which outlines how all associates should conduct business and interact with customers, including how they should promote drugs to healthcare professionals. Such a policy “marks a fundamental shift in the way ethics and compliance are handled within Novartis, moving from a rules-based to a principles-based approach,” the annual report stated. The new, harmonized policy—which replaces the three divisional policies that used to govern how Novartis interacted with patients and healthcare professionals—took effect March 1, 2018 (except at Novartis’s subsidiary, Alcon, where the effective date will be determined at a later stage).

Enhanced anti-bribery compliance program. Novartis has also updated its Anti-Bribery Third-Party Guideline and further strengthened its anti-bribery due diligence process. All Novartis Group company associates must complete integrity and compliance training. In 2017, almost 115,000 employees completed the code of conduct course.

Disciplinary proceedings. In 2017, Novartis’s Business Practices Office investigated 2,031 cases related to misconduct covering 2,574 allegations; 1,147 allegations were substantiated and resulted in 521 dismissals or resignations. According to its annual report, the company conducted 230 country and monitoring visits in 2017, an approximate increase of 40 percent from 2016.