Pfizer’s $60.2 Million Settlement under the FCPA Illustrates Ethical Lapses in Pharmaceuticals

On August 7, 2012, Pfizer agreed to pay the federal government $60.2 million to settle allegations that its employees bribed doctors and other foreign officials in Europe and Asia to win business and boost sales. The charges against Pfizer were brought under the Foreign Corrupt Practices Act (FCPA), which bars publicly traded companies from bribing officials in other countries to get or retain business.

The Securities and Exchange Commission said that Pfizer's overseas subsidiaries made illegal payments to health care workers in China, Italy, Russia, Croatia and other Eastern European countries. As early as 2001, Pfizer sales representatives tried to conceal the bribes by recording them as legitimate business expenses for travel, entertainment and marketing purposes, the agency said.

Pfizer subsidiaries in several countries had bribery so entwined in their sales culture that they offered points and bonus programs to improperly reward foreign officials who proved to be their best customers," said Kara Brockmeyer, chief of SEC's foreign enforcement division.

Pfizer's China operation created a point program that allowed doctors to purchase gifts based on points earned for prescribing Pfizer medications. In other cases, Pfizer would invite high-prescribing doctors to club-like meetings as a reward for choosing Pfizer products. (This sounds like the New Orleans Saints bounty hunter program that led to suspensions of coaches and players by the NFL).

The settlement includes alleged violations by Wyeth, the New Jersey-based drugmaker which Pfizer acquired in 2009. Wyeth gave up more than $17 million in profits, plus $1.6 million in interest. Pfizer agreed to disgorge $16 million in profits and interest of $10.3 million

As part of the settlement, Pfizer's HCP subsidiary agreed to pay $15 million to resolve similar bribery allegations with the Department of Justice. In addition to the settlement fee, the Pfizer unit agreed to a two-year deferred prosecution agreement.

New York-based Pfizer first disclosed the misconduct to SEC and Justice Department officials in October 2004, and “cooperated” with the government's investigation. Pfizer, the largest pharmaceutical company by sales, neither admitted nor denied the allegations.

Pfizer's general counsel, Amy Schulman, said of the settlement, "The actions which led to this resolution were disappointing, but the openness and speed with which Pfizer voluntarily disclosed and addressed them reflects our true culture and the real value we place on integrity and meeting commitments."

I take issue with the statement that the “voluntary” disclosure reflects Pfizer’s true culture. The government was already investigating Pfizer and a number of pharmaceutical companies dating back to about 2004.

The fact is the culture of pharmaceuticals seems to be a breeding place for illegal activity. I have previously blogged about the problem. For example, on July 2, 2012, a federal judge approved an agreement by British drugmaker GlaxoSmithKline to pay $3 billion for criminal and civil violations involving 10 drugs, the largest health care fraud settlement in U.S. history. GlaxoSmithKline pleaded guilty to promoting the popular antidepressants Paxil and Wellbutrin for unapproved uses.

Prior to the Glaxo settlement, the record-setting case involved Pfizer. It paid the government $2.3 billion in 2009 in criminal and civil fines for improperly marketing 13 different drugs, including erectile-dysfunction drug Viagra and cholesterol fighter Lipitor, the top-selling drug in the world for years. Pfizer was accused of encouraging doctors to prescribe its drugs with free golf, massages and junkets to posh resorts.

In May 2012, Abbott Laboratories settled for $1.6 billion over its marketing of the antipsychotic drug Depakote. And an agreement with Johnson & Johnson on June 11, 2012, the company agreed to pay up to $2.2 billion, including a criminal penalty portion of as much as $600 million, to settle U.S. investigations and lawsuits into abusive marketing practices involving the antipsychotic Risperdal and other prescription drugs.

What is about the culture in pharmaceutical companies that seems to create a breeding ground for illegal activity? Eight of the world's top 10 drugmakers have warned of potential costs related to charges of corruption in overseas markets, according to a Reuters examination of U.S. filings.

One reason is the executives that approve the payments never seem to be held to account whether through federal prosecution or by their companies. In the case of Pfizer, the SEC said the company payoffs were made “without the knowledge or approval of officers or employees of Pfizer, but the inaccurate books and records of Pfizer subsidiaries were consolidated in the financial reports of Pfizer.” I find this hard to believe. How can no one know about millions paid in bribes?

The culture of an organization sets the tone for the behavior of its employees. By ‘voluntarily’ disclosing the illegal payments, Pfizer is not acting with integrity. It was trying to head off an extensive government investigation that might have cost more to litigate than the $60.2 million paid to settle government charges of illegal payments under the FCPA.

Let’s not give Pfizer, or any other company for that matter, credit for disclosing an illegal activity that never should have occurred in the first place. It’s easy to confess in advance of the expected disclosure of an illegal act and make it seem as though the company is getting ahead of the problem. It’s an entirely different matter to prevent such activity from occurring in the first place.

Blog posted by Steven Mintz, aka Ethics Sage, on August 21, 2012