SHANGHAI – Sciclone Pharmaceuticals Inc., of Foster City, Calif., will pay $12.8 million to settle charges that it violated the Foreign Corrupt Practices Act (FCPA) when its international subsidiaries reportedly increased sales by making improper payments to health care professionals employed at state health institutions in China.

According to the U.S. SEC statement, Sciclone sales reps provided weekend trips, vacations, gifts, expensive meals, foreign language classes and entertainment in order increase prescriptions. Those violations reportedly occurred between 2007 and 2011.

Sciclone has agreed to pay a total of $12.8 million to the SEC, including disgorgement, pre-judgment interest and a penalty. That payment is in line with the charges Sciclone previously disclosed in August. As part of the agreement, Sciclone neither admitted nor denied it engaged in any wrongdoing.

Company management has been keen to put the investigation behind them and position the firm as having an industry-leading compliance program in China – where it conducts 90 percent of its business and has 430 sales reps – even if they have had to come about developing a robust compliance program the hard way.

“We are very pleased to have reached a final settlement with the SEC and [Department of Justice] that is in line with our previous expectations and brings this matter to conclusion,” Sciclone CEO Friedhelm Blobel told BioWorld Today. “We believe that we have established an industry-leading compliance program, including a commitment to constant improvement, which is a key business asset.”

The Department of Justice has also completed its investigation into Sciclone and will not pursue any action against the company.

Free to move forward in new directions, the company has also stated it has obtained the services of Lazard and is examining strategic options to increase shareholder value. The firm declined to further specify the nature of the options.

However, Sciclone has no plans to pull out of China. “China has been and will remain our strategic focus,” said Blobel. “We continue to see large opportunities in the China health care and pharma markets. We believe that as a U.S.-based, China-focused specialty pharmaceutical company, Sciclone occupies a unique position in the China pharma market.”

CHINA, A CAUTIONARY TALE

As a U.S.-based, Nasdaq-listed company, Sciclone is unique in that almost all of its revenues come from China, largely from sales of Zadaxin (thymalfasin), its top seller. Made in Italy for Sciclone, Zadaxin is approved in 30 countries primarily for the treatment of hepatitis B virus and as a vaccine adjuvant. According to the 2014 annual report, Zadaxin earned $126 million in 2014, with 96 percent of those revenues coming from China.

Zadaxin was one of the largest imported pharmaceutical products in China by revenue in 2014, according to the company.

Sciclone handles global sales for its products through a Cayman-registered subsidiary, Sciclone Pharmaceuticals International Ltd., the entity named in the SEC investigation. That investigation looked into a five-year span and found that money, gifts and other items of value were given to foreign officials, in particular health care providers.

China is considered a high-risk compliance country for foreign companies selling to the country’s state-run hospitals. The FCPA bans bribing of foreign officials, and in China, where doctors are government employees, health care providers can be classified as foreign officials.

That type of risk became especially apparent with the Glaxosmithkline plc scandal that kicked off with a Chinese police investigation in 2013 and swiftly ended in 2014 with the company paying close to $500 million in fines. (The SEC has yet to settle the GSK China case for FCPA violations). (See BioWorld Today, Sept. 22, 2014.)

In 2015, there were eight FCPA enforcement actions with the average settlement coming to $14 million. There were two China-related cases, both of which dealt with bribing of health care professionals. Bristol-Myers Squibb Co., of New York, agreed to pay more than $14 million for violations made by employees in a China-based joint venture.

In Sciclone’s case, the SEC referred to internal sales reports read by management that discussed special treatment given to VIP clients (hospital presidents, surgeons) in order to increase sales. Those included regular trips to the Qingdao Beer festival for golf in the morning and beer drinking at night; trips to Anji and Hainan Island, a resort destination; and international trips for medical conferences that were followed by far longer excursions to destinations such as Las Vegas, the Grand Canyon or Mt. Fuji.

In one incident, Sciclone reportedly hired a regulatory specialist to help facilitate the licensing of a medical device. The specialist organized international travel to Greece for two regulatory officials, but when travel visas fell through, later offered cash, a gift approved by senior management. Sciclone conducted an internal investigation and terminated the contract with the specialist in 2008, but the SEC pointed out Sciclone’s failure to conduct a wider review of the company’s sales and marketing practices in China or to take remedial action.

Travel agents and third parties were another weak link for the company. Travel agencies are often easily influenced to issue falsified receipts that appear to be for valid business events, conferences and trips, but in fact are used to channel kickbacks and bribes.

Before the GSK scandal, that risk was less understood, but, according to Kent Kedl, managing director, Greater China and North Asia of Control Risks, third-party risk continues to be the number one compliance concern for companies operating in China today.

PUTTING COMPLIANCE FIRST

Sciclone has taken actions to create a compliance-focused culture, Blobel said, “which means that compliance is at the core of everything we do. In the last few years Sciclone has built a very strong compliance infrastructure and compliance culture throughout its organization, with the key executives being based in China.”

Sciclone has gone through a to-do list of compliance best practices that has become necessary for foreign firms operating in China.

More specifically, Sciclone has hired a compliance officer for its China operations; undertaken an extensive review of the policies and procedures surrounding employee travel and entertainment reimbursements and third-party due diligence and payments; reduced the number of suppliers providing third-party travel and event planning services; incorporated anti-corruption provisions in its third-party contracts; provided anti-corruption training to its third-party travel and event planning vendors; disciplined employees (and managers) who violate Sciclone’s policies; and created an internal audit department and compliance department.