Healthcare M&A activity could be impacted by further FCPA enforcement
by Marc Longpré
Published in Pharmawire, www.pharmawire.com: April 8, 2009
Merger and acquisition activity within the pharmaceutical and medical device industries will likely increasingly be impacted by an uptick in the enforcement of the Foreign Corrupt Practices Act (FCPA), attorneys told Pharmawire.
The FCPA was passed in 1977 to address both accounting transparency requirements under the Securities Exchange Act of 1934 and the potential bribing of foreign officials. In recent years, the United States government has doled out significant fines and penalties as part of FCPA enforcement, and the burden to complete sufficient due diligence prior to any acquisition has increased accordingly, attorneys told this news service.
And according to one attorney, officials at the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) have said the pharmaceutical industry would continue to be the focus of scrutiny in 2009.
“The pharma industry tends to be global in nature, and their reach internationally is growing. That’s one of the reasons its one of the industries that gets a lot of attention here,” said Franceska Schroeder, a partner at Fish & Richardson.
Already impacted by the trend are AstraZeneca (NYSE:AZN), Eli Lilly (NYSE:LLY), Bristol Myers Squibb (NYSE:BMY), GlaxoSmithKline (NYSE:GSK), Johnson & Johnson (NYSE:JNJ), St. Jude Medical (NYSE:STJ) and Novo Nordisk (NYSE:NVO), among others, according to information provided by the law firm Shearman & Sterling. All of those companies have filed documents with the SEC that show it has been asked for information relating to FCPA enforcement.
AstraZeneca disclosed that it had received a document request from the SEC in 2006 relating to the company’s operations in Italy, Croatia, Russia and Slovakia. According to a 2008 20-F filing, the company has responded to the SEC’s request but cannot predict the outcome of its investigation. Likewise, Eli Lilly has turned over documents to the SEC relating to its Polish subsidiary and has recently stated the investigation is continuing and the company is cooperating with the SEC.
Schroeder pointed out that several factors are leading to the industry’s predicament with the FCPA, including a desire to enter emerging markets in Asia and the Middle East. Practices in a number of countries in those regions make it difficult to determine when an improper payment has occurred, she said. And another attorney pointed out that in many countries many doctors are government employees, further complicating matters.
John Reynolds, a partner at Wiley Rein, pointed out that monetary penalties can be significant even for the largest pharmaceutical companies. In the most notable FCPA case to date, Siemens, the German engineering company, has agreed to pay more than USD 1bn in penalties alone.
And while monetary penalties may not usually be as significant as they are in the Siemans case, attorneys said the increase in enforcement is having an outsize impact on business practices considering the industry’s public relations push. “This is big because it’s a source of distraction, a source of cost,” said Danforth Newcomb, a partner at Sherman & Sterling. “It rarely will completely stop a company from doing anything, but it becomes a problem if you screw it up.”
Newcomb said the due diligence that is currently being put into FCPA questions was unheard of just a decade ago. Now, he said, companies are taking a serious look at any potential problems regarding the FCPA before they proceed with an acquisition. ”You don’t want to acquire a company that puts you into the box of an enforcement proceeding, with all of its various consequences,” he said.
“Absolutely, if you’re in an M&A transaction that’s often a time when [the bidding company] will come across things, especially if there appears to be a pattern of illicit payments going on,” Reynolds agreed. ”It may even scare away a bidder.”