CEOs and Pharma Compliance: Tone is Set at the Top
CEOs help organizations establish the tone at the top for the role of compliance at drug and medical device companies. Traditionally, that tone has been one of mixed messages in the life sciences industry.
It’s understandable. CEOs at major life sciences companies mostly come from the ranks of clinicians, engineers, marketers or finance executives. The top job is rarely given to someone from compliance, unless the board feels a need to address regulatory issues.
CEOs need to look beyond their background to have a pro-active compliance-minded culture rather than leave it as a blind spot. Regulators pay particular attention to how drugs and medical devices are developed, manufactured, marketed and paid for, especially when the government is footing the bill for $1 trillion in medical spending by Medicare and Medicaid.
There’s a long list of companies – including some of the biggest in healthcare and life sciences – that are operating under Corporate Integrity Agreements (CIA), revealing a need for CEOs to become more engaged in compliance. Compliance is costly, but compliance failures are costlier.
Mandatory training, regulatory filings, compliance monitoring and auditing, management obligations under CIAs, reputational risk, and fines can cost hundreds of millions, or even billions of dollars. If an analyst is valuing an enterprise using discounted cash flow, fines and risk have a huge impact on a business. Announcements of investigations usually act as a drag on share prices. For example, shares of companies prosecuted for foreign bribery and financial misrepresentation fall an average of 3.11 percent the first day an enforcement action is announced and by nearly 9 percent for all announcements tied to the enforcement, according to research from Jonathan Karpoff at the University of Washington, D. Scott Lee from Texas A&M, and Gerald Martin from American University.
Therefore, running afoul of regulators is not just “a cost of doing business.” The consequences hurt investors. The impact also has a bearing on strategic matters within an organization, particularly with a low share price hurting the cost of capital and influencing compensation – a matter of retaining talent.
Where to Start?
CEOs can avoid this “blind spot” of compliance by establishing it as an organizational value that is a sound, strategic investment and not just an expense. CEOs need to be engaged in the realm of compliance, including regular meetings with the Chief Compliance Officer, and exude leadership about the topic’s importance.
Inside an organization, the CEO can set the tone for a compliance culture with public pronouncements, supporting a compliance hotline and reinforcing the organization’s non-retaliation policy.
Part of this is creating a direct connection between compliance and the organization’s board of directors establishing the Chief Compliance Officer’s independence and organizational importance. Another element for compliance is aimed at ensuring transparency between the audit and finance functions. The behavior of the CEO needs to support this active level of engagement and transparency between the board and compliance executives.
Finding the Pitfalls
From development to commercialization of drugs and medical devices, CEOs need to be aware of potential compliance traps that could get their organizations in trouble with regulators. Clinical trials pose a big compliance challenge between registering studies and making sure that the results do not become skewed in the presentation.
As drug makers go from development to commercialization of a product, the Sunshine Act and a bevy of other regulations tied to marketing and relationships with healthcare providers act as potential landmines that could result in fines and penalties. It important that the CEO supports the compliance and audit functions in these highly regulated areas.
Manufacturing the drugs and medical devices has become globalized, making the supply chain far more complicated. Within that supply chain, drug makers have to be beware of bribes and kickbacks between suppliers and intermediaries. Data and analytic tools can help drug makers spot abnormalities that signal potential violations of the Foreign Corrupt Practices Act (FCPA) or other anti-corruption regulations.
From start to finish for drugs and medical devices, compliance is an enterprise-wide undertaking and the tone is set at the top. Regardless of background, CEOs need to take this into more of an account to protect their businesses and the investors that own their enterprises.