Pharma exec's arrest proves Yates memo isn't just an empty threat

Last week, the senior executive of a high-powered pharmaceutical company was arrested on charges that he orchestrated a multi-million dollar kickback scheme.

Read that again. The senior executive of a high-powered pharmaceutical was arrested…

It's a rare sight to behold. Carl Reichel, who serves as the president of Warner Chilcott PLC, a subsidiary of Allergan, now holds the distinct honor of being one of the very few pharmaceutical execs arrested on fraud charges. Warner Chilcott has already agreed to pay $125 million in civil and criminal fines associated with a kickback scheme, and now Reichel faces individual charges that he oversaw the scheme, instructing sales representatives to provide physicians with meals and speaking fees in an effort push prescription drug sales. He has pleaded not guilty.

Given the federal government's laughably lenient history in prosecuting powerful pharmaceutical companies that commit fraud, I would have sooner expected a herd of unicorns to walk through my backyard than to see a drug exec in handcuffs, but here we are.

For the feds, Reichel's arrest sends a distinct message that the Yates memo, released less than two months ago, is more than just the federal government puffing out its chest. The memo, authored by Deputy U.S. Attorney General Sally Q. Yates, outlines a new approach for the Department of Justice (DOJ), namely, that it will hold individuals accountable for unsavory corporate actions.

Although the Yates memo was broadly written to target virtually any white-collar crime, it took not-so-subtle jabs at the financial sector. But there's arguably no better place to start than the pharmaceutical industry, which has paid billions in False Claims Act settlements, with hardly a wayward glance at industry executives. Take a look through the pharmaceutical industry's largest fraud settlements and you'll find almost no individual accountability. That includes settlements from major players such as Pfizer ($2.3 billion in 2009), GlaxoSmithKline ($3 billion in 2012) and Johnson & Johnson ($2.2 billion in 2013). Some companies, like AstraZeneca, have been repeat offenders, settling for $355 million in 2003 and $520 million in 2010.

Of those cases, the harshest individual penalty was a clause buried in the GlaxoSmithKline and Johnson & Johnson agreements that required each company to recoup bonuses from top executives "if they, or their subordinates, engage in significant misconduct."

Many wondered if the Yates memo contained anything truly revolutionary, and even if it did, would the DOJ actually back it up with enforcement action? If this new appraoch is being applied to an industry that has historically managed to escape individual culpability, it'll likely be applied to every other sector of healthcare. 

Coincidently, just 11 days before Reichel was arrested, the DOJ's Principle Deputy Assistant Attorney General Benjamin C. Mizer addressed attendees at the Pharmaceutical Compliance Congress and Best Practices Forum, according to the MintzLevin blog Securities Matters. In his remarks, Mizer discussed key aspects of the Yates memo, including the fact that "in order to qualify for the reduced multiples provision under the False Claims Act, the organization must voluntarily identify any culpable individuals and provide all material facts about those individuals."

The Reichel arrest is just one indication that the Yates memo isn't just an empty threat. However, there is another case on deck that could add another layer to this enforcement approach. Last week, Novartis agreed in principle to pay $390 million to settle claims that the company paid kickbacks to specialty pharmacies. The proposed settlement is just a fraction of the $3.4 billion that the feds originally sought, which if the government is holding strong to its word, might tell you something about what's to come.

But old habits die hard, as evidenced by what Novartis Chief Executive Joe Jimenez had to say about the settlement.

"We continue to maintain that specialty pharmacies must continue to play a role in ensuring patient adherence," he told the Wall Street Journal. "How that is going to play out as to whether we change our behavior or not remains to be seen."

The DOJ has taken its first step in the right direction. In light of the brash comments from Jimenez, I'll be eager to see what comes of the Novartis settlement. Who knows? Maybe we'll have another unicorn sighting. - Evan (@HealthPayer)

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