(Bloomberg) — Novartis AG (NYSE:NVS) said it agreed to pay $25 million to settle a U.S. Securities and Exchange Commission (SEC) case that claimed the Swiss drugmaker paid bribes to health professionals in China to increase sales from 2009 to 2013.
The SEC issued a cease-and-desist order late Wednesday saying Novartis submitted a settlement offer and the agency has accepted it. The company’s payment includes $2 million in a civil penalty and $1.47 million in interest, according to the order posted on the SEC’s website.
“The issues raised by the SEC, which relate to our subsidiaries in China and go back as far as 2009, largely pre-date many of the compliance-related measures introduced by Novartis across its global organization in recent years,” Novartis spokesman Eric Althoff said in an e-mailed statement Thursday.
Novartis’s SEC settlement comes at a time when China’s own crackdown on corruption has ensnared the health care industry, with GlaxoSmithKline Plc’s sales in the country falling 17 percent last year after a government probe crippled its growth since 2013. A state-led campaign to slash drug prices has triggered a further slowdown in China sales growth for global drugmakers.
The SEC detailed a number of Foreign Corrupt Practices Act violations where Novartis employees provided items of value to health care professionals in China, under the supervision of complicit managers. It also cited examples of how the company improperly recorded as legitimate expenses payments employees made for travel and entertainment, conferences, lecture fees, marketing events, educational seminars and medical studies.
Novartis began a review of its relationships with travel and event planning vendors in China “in connection with the SEC staff’s investigation and in response to media reports concerning a competitor in August 2013,” according to the SEC. After Novartis identified weaknesses in its internal controls, it “promptly took remedial steps,” the SEC said.
The majority of health care professionals in China work at government-run public hospitals. In September 2014, a Chinese court fined London-based Glaxo 297 million pounds ($419 million), capping a 15-month investigation into its sales practices in the country, which included allegations that it bribed doctors.
In one example cited in the SEC order on Novartis, a sales representative at the drugmaker’s Sandoz China subsidiary submitted a $1,154 receipt to buy holiday gifts for 25 health care professionals, which was instead used to pay for their spa and sauna sessions. A regional sales manager approved the purchase, the SEC said.
The SEC order also cited how Sandoz China sponsored 20 health care professionals to attend a 2009 medical conference in Chicago. During the trip, the company paid for the group’s recreational activities such as a Niagara Falls excursions, $150 in “walking around” money for their spouses, and cover charges to a strip club. The group was accompanied by a Sandoz China senior manager and other staff, according to the SEC.
The difficulty for drugmakers operating in China is that the country’s health care sector has yet to change fundamentally on the demand side, said Kent D. Kedl, senior managing director for Greater China at consulting firm Control Risks. “We’re still waiting as reform is critical to ensure that health care is adequately funded in China.”
Another concern some global companies have in declaring any issues in China that infringe on U.S. anti-corruption laws or the U.K.’s Bribery Act is whether the Chinese authorities will then open their own probes, said Shanghai-based Kedl, who advises companies on the risks of operating in China.
—With assistance from Stephen West.
Have you followed us on Facebook?