Pharmaceuticals and life sciences sector analysis of PwC’s 2014 Global Economic Crime Survey Pharmaceuticals and life sciences’ fight against bribery and corruption 60% The majority of pharmaceuticals and life sciences executives see bribery and corruption as one of the highest risks of operating globally. 40% Two-fifths of pharmaceuticals and life sciences executives say damage to corporate reputation is the most severe impact of bribery or corruption. 60% Three-fifths of the sector’s most severe economic crimes were detected by corporate controls. www.pwc.com/crimesurvey Contents Key highlights 1 Economic crime in 2014 3 A ‘safe’ sector? 3 Bribery and corruption is the sector’s biggest threat 4 Operating in markets with high levels of corruption risk 7 Keeping an eye on intellectual property 8 Underestimating cyberthreats? 9 Controls top the list of fraud detection measures 10 Culture should be a priority from day one 11 Visibly cracking down on perpetrators could send a stronger message 12 Contacts13 About the survey We define economic crime as the intentional use of deceit to deprive another of money, property or a legal right. The 2014 Global Economic Crime Survey was completed by 5,128 respondents (compared to 3,877 respondents in 2011) from 99 countries (compared to 78 countries in 2011). Of the total number of respondents, 50% were senior executives of their respective organisations, 35% represented listed companies and 54% represented organisations with more than 1,000 employees. This report looks at responses from 259 pharmaceuticals and life sciences companies. For more information about our methodology and definitions of terminology used, please see our 2013 Global Economic Crime Survey report: ‘Economic crime: A threat to business globally’. Key highlights Pharmaceuticals and life sciences sector survey responses No sector is truly safe… The pharmaceuticals and life sciences (PLS) sector reported one of the lowest overall incidences of economic crime of any sector. So can executives sit back? In our view, the answer is an emphatic no. More than one in four respondents still say their companies have experienced some form of fraud. And the rate of fraud is slightly up from 2011, too. Bribery and corruption are a major threat… It’s the second most commonly reported type of economic crime for PLS companies. Sector respondents are most concerned about the damage it can do to their corporate reputations. Operating in markets with high levels of corruption risk… Expanding globally brings opportunities, but operating in high corruption risk markets can bring additional challenges too. PLS companies should increase their efforts to cope with corruption risks – and be willing to walk away if all else fails. Cybercrime may be underestimated… PLS respondents report a lower incidence of cybercrime than most other sectors. But awareness is increasing. In our 17th Annual Global CEO Survey, 43% of pharmaceuticals and life sciences respondents said they’re concerned that cyber threats including data security could threaten growth. Now is the time to go from paying attention to taking action. And the crown jewels could come under threat too … Intellectual property (IP) is the sector’s most important asset. The rate of IP infringement is currently low, but many PLS executives are concerned about safeguarding intellectual property. Controls are effective… Corporate controls are detecting a significant number of serious economic crimes in the PLS sector, and the internal audit function is especially effective. Yet fraud risk assessment is still rare… The sector is lagging when it comes to implementing annual fraud risk assessments. In our view these can be a valuable addition to your economic crime fighting toolkit and a useful means of focusing your efforts and your expenditures. PLS faces a threat from within… Compared to the overall sample, a greater percentage of serious economic crimes are being committed by insiders at PLS companies. So culture may need a second look. The large number of internal perpetrators suggests the industry may have more work to do when it comes to culture. PLS respondents are less likely to say their companies are contacting law enforcement, and fewer are taking several other types of action against internal or external actors. Many PLS companies may need to take another look at their responses to economic crime once it occurs. PwC | Global Economic Crime Survey 2014 | 1 Figure 1: Economic crime percentage reported by industry 50% 49% Retail & Consumer Banking, Capital Markets and 49% Investment Management Communication 48% Financial Services 45% 45% Hospitality and Leisure 41% 41% Government/State 40% Global—37% Manufacturing 36% Insurance 35% 35% Transportation/Logistics 34% 34% Other Engineering/Construction 33% 31% Entertainment & Media Energy, Utilities, & Mining 31% 30% 28% Automotive Aerospace & Defense 28% 27% Chemicals Pharma & Life Sciences 27% 27% Technology 25% Professional Services 20% 20% % of all respondents who experiences economic crime over the survey period 2 | Global Economic Crime Survey 2014 | PwC Economic crime in 2014 A ‘safe’ sector? Pharmaceuticals and life sciences (PLS) is one of the industries reporting the lowest incidence of economic crime this year (see Figure 1). Still, more than one in four respondents say their companies have experienced some form of fraud. And the rate of fraud is slightly up from 2011 too. So while the risk may be lower than in some sectors, PLS is far from ‘safe’ from economic crime. Asset misappropriation is the most reported type of economic crime, at 60% (see Figure 2). That’s less than across the overall sample, but it’s still enough to be a major issue. For the PLS sector, a particularly damaging type of asset misappropriation is the ‘gray market’ in medicines and the sale of counterfeit medicines. These can impact not just legitimate sales revenues; if such products aren’t safe, they can also have a big impact on the brand. With many of its products literally making a life or death difference for patients, the sector needs to take a strong stand to fight such activities. Bribery, corruption and procurement fraud are also common. And while other types of frauds are less prevalent, PLS companies can’t afford to ignore them. Cyber-crime in particular stands out as an area where the low incidence may be hiding a bigger problem. Figure 2: Top types of economic crime experienced by the PLS sector during the survey period 60 Asset misappropriation 31 Bribery and corruption 27 Procurement fraud Accounting fraud 21 Cybercrime 10 Competition Law/Anti-trust Law 10 9 Human Resources fraud 7 IP Infringement 0 10 20 30 40 50 60 % of 70 pharmaceuticals and life sciences respondents who reported economic crime in the past 24 months PwC | Global Economic Crime Survey 2014 | 3 Bribery and corruption is the sector’s biggest threat Bribery and corruption comes in number two in reported incidence. Of PLS executives whose companies experienced economic crime, 31% say it included bribery and corruption, slightly more than across the sample overall. With highprofile stories making the news, it’s currently top of mind. In recent years the sector has faced criticism and concern over how it interacts with health care professionals. New regulations now require greater transparency from the industry (see Developing a smarter approach to increasing transparency requirements). And over the past several years, there have been a number of high profile cases where PLS companies have been accused of essentially paying doctors to prescribe their medications, or of inappropriately promoting their products for conditions that haven’t received regulatory approval. Some of these have resulted in massive fines; the US government reported in February 2014 that the industry paid out $3.75 billion in fraud penalties in 2013.1 Developing a smarter approach to increasing transparency requirements Transfers of value between pharmaceutical and life sciences companies and the healthcare professionals and organisations with which they do business are now subject to a myriad of local, regional, and global regulations as well as self-imposed industry codes. In 2013 alone, the United States and France implemented transparency and disclosure requirements, and the European Federation of Pharmaceutical Industries and Associations (EFPIA) – encompassing 33 European countries– adopted a code of conduct requiring transparent interactions among member organisations. Key Asia Pacific countries like Japan and Australia have also enacted transparency requirements. To date, transparency and disclosure requirements have generally been country-specific. However, the industry has begun to develop initiatives to harmonise transparency and disclosure requirements across geographic borders. The transparency movement is not a fad; it is gaining steam, and as companies are held to new regulations and standards each year, they should begin to manage their transparency requirements on a global scale. Many of the regulations and requirements imposed on pharmaceutical and life sciences companies have commonalities that create opportunities for businesses to incorporate process efficiencies and economies of scale when developing their transparency strategies. We’ve outlined 5 key steps to developing an optimal global transparency programme (See table Your path to an optimal global transparency programme). For more detailed discussion, please see our report, EFPIA and Global Transparency Requirements: Implementing an aggregate spend program in a global marketplace. The Department of Health and Human Services and The Department of Justice, ‘Health Care Fraud and Abuse Control Program – Annual Report for Fiscal Year 2013’, (February 2014), http://oig.hhs.gov/publications/docs/hcfac/FY2013-hcfac.pdf 4 | Global Economic Crime Survey 2014 | PwC 1 Your path to global transparency programme Figure 1: an Your path to an optimal global transparency program Figure 1: optimal Your path to an optimal global transparency program 11 22 Identify sources thatthat will will shape youryour global transparency programme Identify sources shape global transparency programme External inputs External inputs Internal sources Internal sources • EFPIA • EFPIA • Master datadata management • Master management • US Sunshine/State Laws • US Sunshine/State Laws • IT• systems andand infrastructure IT systems infrastructure • Industry codes andand guidelines • Industry codes guidelines • Maturity of your company's transparency programme • Maturity of your company's transparency programme • Local country lawslaws • Local country • Company structure • Company structure Define youryour transparency vision andand goals Define transparency vision goals • What does global transparency mean to our company? • What does global transparency mean to our company? • Do simply want to meet requirements, or build an operational model thatthat expands beyond our our transparency efforts? • we Do we simply want to meet requirements, or build an operational model expands beyond transparency efforts? • Do want to be “transparency” business? • we Do we want to in bethe in the “transparency” business? 33 Define youryour optimal framework Define optimal framework • Can we we leverage local country models andand lessons learned? • Can leverage local country models lessons learned? • What operational model (local, regional, national) should we we implement? • What operational model (local, regional, national) should implement? • What resources (people, technology, investment/budget) will will we we need? • What resources (people, technology, investment/budget) need? • How will will we we manage our our data? • How manage data? 44 Evaluate youryour assets Evaluate assets • What is our current operational maturity in this area? IT resources do we have/will we we need? • What is our current operational maturity in this area?• What • What IT resources do we have/will need? • How sustainable/flexible are are our our options? • How will will we we develop/maintain/use master data? • How sustainable/flexible options? • How develop/maintain/use master data? • What are are our our growth/expansion plans? • What growth/expansion plans? • What global resourcing assets do we have thatthat • What global resourcing assets do we have we we maymay leverage? leverage? 55 Define the the operational model thatthat bestbest fits fits youryour organisation Define operational model organisation Next Next steps steps 2 2 • Do want to simply meet requirements or build further datadata • we Do we want to simply meet requirements or build further analytics andand insights? analytics insights? • Build youryour global transparency programme • Build global transparency programme • Define youryour approach including milestones, timeline, resources, etc.etc. • Define approach including milestones, timeline, resources, • Implement youryour optimal approach/operational model • Implement optimal approach/operational model • Periodically assess youryour program to evaluate the the need for possible • Periodically assess program to evaluate need for possible improvements or efficiencies improvements or efficiencies PwCPwC PwC | Global Economic Crime Survey 2014 | 5 So does that mean financial losses are the most severe impact of bribery and corruption? For one in five the answer is yes, but twice as many – 40% – of sector respondents say damage to corporate reputation is actually the greater impact (see Figure 3). That echoes the results of our 17th Annual Global CEO Survey where more than half of PLS CEOs told us they worry that lack of trust in business could threaten growth. And one third of PLS CEOs believe that government and regulator’s trust in the industry has deteriorated over the past five years. Figure 3: Most severe impact of corruption and bribery 80% 70% 60% 40 36 Corporate reputation 50% Financial loss 40% 30% 20 28 Distraction caused by legal/regulatory enforcement action Loss of human capital (recruiting, morale, turnover) 20% 12 10% 8 7 0% Pharmaceuticals and life sciences 5 Total The sector is aware of the risks, particularly as they relate to operating abroad; 60% of PLS executives see bribery and corruption as one of the highest risks of operating globally, compared to 53% across the sample. One in five acknowledge that they’ve been asked to pay a bribe. And some executives worry that acting ethically is costing their business; 26% say they’ve lost an opportunity to a competitor who they suspect paid a bribe. 6 | Global Economic Crime Survey 2014 | PwC Fighting TB could get harder In 2013, a study showed that 1 in 10 of the antibiotics used to treat tuberculosis – and 1 in 6 used in Africa – was sub-standard. Some were shoddily made, or damaged in transit, while others were simply counterfeits. That poses a clear risk to individual patients, who may die due to receiving inadequate medicines. And there’s a menace to public health lurking too. Pills that contain too little of the active ingredient to fight tuberculosis are contributing to the development of new, drug-resistant strains. That’s creating a public health problem that impacts countries around the globe, not just emerging markets. Operating in markets with high levels of corruption risk Around half of PLS companies have operations in markets with high levels of corruption risk. That’s not surprising. Many are important to PLS companies’ growth plans, as shown by the 42% of PLS respondents who say they’ve pursued an opportunity in one of these markets in the past 24 months. But the challenges are changing how they operate; 43% of sector respondents pursuing growth opportunities in regions with high levels of corruption risk say they’ve needed to adapt their business strategies. Just what are they doing? And is it working? There’s no one answer. As is true across the sample, additional due diligence is the most popular choice (see Figure 4). Compared to respondents overall, more PLS executives say they’ll add contractual terms (51%) or will provide additional training to staff (43%). Will this be enough? Not always. Nearly a third of respondents – 30% – say they walked away from an opportunity in response to corruption risk. Corruption and bribery isn’t the only type of economic crime that can pose challenges. In recent years India has seen allegations of manufacturing processes failing to meet safety standards. And the prevalence of sub-standard or counterfeit drugs in Africa is undoubtedly high (see Fighting TB could get harder) Source: R. Bate, P. Jensen, K. Hess, L. Mooney,§ J. Milligan, ‘Substandard and falsified anti-tuberculosis drugs: a preliminary field analysis’, (21 August 2014), http://www.aei.org files/2013/02/05/-substandard-and-falsifiedantituberculosis-drugs-a-preliminary-fieldanalysis_142125219328.pdf Figure 4: Changes to business strategy in response to high corruption risks How did you alter your business plan or strategy? Pharmaceuticals and life sciences Total 74 51 43 30 21 17 17 17 9 2 72 41 36 34 17 16 17 11 5 3 Perform additional due diligence Add contractual terms Provide additional training Walk away from the opportunity Seek an opinion from the Regulator Change the valuation Force Carve out adoption of certain accounting assets system Don’t know Other % of 47 pharmaceuticals and life sciences and 757 total respondents who report their company has altered business plans or strategies in pursuit of an opportunity in a market with a high level of corruption risk PwC | Global Economic Crime Survey 2014 | 7 Keeping an eye on intellectual property 64% of pharmaceuticals and life sciences CEOs said they are concerned that an inability to protect IP could threaten growth. Loss of IP is another major worry, and it’s more pronounced in emerging markets. While just 2% of all PLS respondents have experienced IP infringement over the last 24 months, more than ten times as many (22%) believe it’s likely they will face an incident in the next 24 months. And in our 17th Annual Global CEO Survey, 64% of pharmaceuticals and life sciences CEOs said they are concerned that an inability to protect IP could threaten growth. Here, too, emerging markets are causing the most concern. India’s decision to grant a compulsory license – essentially a 97% price cut – to one cancer medication in 2013 was met with strong protests by the company’s manufacturer, whose CEO argued that the country was setting a precedent that could deter innovation.2 And a decision in 2013 by the Indian Supreme Court not to grant patent protection to a leukemia drug has led to strong protests by the US Chamber of Commerce.3 The issue is a major concern in other emerging PLS markets too, like South Africa and Brazil. Ranjitha Balasubramanyam, ‘Battle over patents: Is India changing the rules of the game?, Intellectual Property Watch (18 February 2014), http://www.ip-watch.org/2014/02/18/battles-over-patents-is-india-changing-the-rules-of-the-game/ 3 Staff reporter, ‘India patent regime not about access to medicine: US body’, The Hindu (11 February 2014), http://www.thehindu.com/business/Industry/ india-patent-regime-not-about-access-to-medicine-us-body/article5674425.ece 2 8 | Global Economic Crime Survey 2014 | PwC Underestimating cyberthreats? Only around 10% of PLS companies that have experienced fraud say the incidents included cybercrime; that’s well below the overall average of 24%. Our discussions with leaders in combatting cybercrime suggest that companies with valuable R&D can be targeted by cybercriminals and not be aware of it; as such, the PLS sector may be under-reporting this type of economic crime. There’s also other evidence to suggest that the industry is already a target for hackers. In Cisco’s March 2014 Threat Metrics, pharmaceutical and chemical firms were 11 times more likely to encounter Web malware than companies overall.4 Executives are taking note; 46% of respondents say that the awareness of this type of economic crime in their organisation is increasing. And nearly one in five say it’s likely that their company will experience an incident of cybercrime in the coming 24 months. Indeed, in our 17th Annual Global CEO Survey, 43% of PLS CEOs said they’re concerned that cyber threats including lack of data security could threaten growth, so the issue is starting to get the attention of the top executive management. What can you do? 1. Educate employees at all levels (from top to junior management) about cyber threats – cybercrime is not just the domain of the IT/network security function. There are different types of cybercrime, from hacktivism to data theft, which affect different functions of the company in varying ways. 2. Understand the potential culprits and their motivations to engage in a cyber attack on the organisation. 3. Ensure that fundamental safeguards for effective cyber security are in place – including ongoing monitoring, up-to-date personal or sensitive data inventory, a back-up policy and business continuity plans. 4. Remember that technology assets are rarely the weakest link in the chain – people; commonly your own employees, are often the ones who enable a cyber attack. 4 ‘March 2014 Threat Metrics’, Cisco Blogs (10 April 2014), http://blogs.cisco.com/security/march2014-threat-metrics/ PwC | Global Economic Crime Survey 2014 | 9 Controls top the list of fraud detection measures When it comes to identifying fraud, the PLS sector’s investment in internal controls is paying off. Internal audit, suspicious transaction reporting and data analytics are the top ways that PLS companies identify serious economic crime (see Figure 5). The internal audit function is showing particular improvement. In 2011, it detected just 8% of frauds. This year that number is up to 21%, a major jump. Fraud risk management systems were less successful, though. They detected just 1% of the sector’s most serious offences, down from 2011’s 3%, compared to 9% of crimes across the total sample. Why such a big difference? One reason may be quite simply that only a minority of PLS companies are performing fraud risk assessments at least annually. Figure 5: Economic crime detection methods in PLS organisations 16 17 Suspicious transaction reporting 12 Internal audit (routine) 21 11 Fraud risk management 2 Data analytics 14 5 Corporate security (both IT and physical security) Rotation of personnel 7 2 0 11 10 Tip-off (internal) Corporate culture 7 Tip-off (external) Whistle-blowing system Corporate controls 9 5 5 0 4 Don't know 3 Other detection methods (please specify) 5 7 Beyond the influence of management 7 By accident 7 3 By law enforcement 5 2 2 Investigative media 0 5 10 15 20 25 30 35 40 % of 58 pharmaceutical and life sciences and 1538 total respondents who experienced economic crime over the survey period Total Pharmaceuticals and life sciences 10 | Global Economic Crime Survey 2014 | PwC 45 50 About a third of PLS companies conduct fraud risk assessments each year; another 11% conduct them more frequently (see Figure 6). But 26% of sector respondents say their companies don’t perform assessments at all, and 16% don’t know whether their companies do or not. For those which don’t perform fraud risk assessments, nearly half say they either aren’t sure what a fraud risk assessment is, or don’t know why their company has chosen not to perform one. Only 7% say cost is the primary issue. PLS executives may want to take another look. In our view performing a fraud risk assessment at least annually can be a valuable addition to your economic crime fighting toolkit. Figure 6: Only a minority of PLS respondents are conducting fraud assessments at least annually 42% have not conducted a fraud risk assessment in the past 24 months, or don’t know if they have. 16% 16% In the last 24 months, how often has your organisation performed a fraud risk assessment? 26% 26% 10% 10% Don't know Don't know Not at all Not at all Once Once 14% 14% 34% 34% Annually Annually Every six months Every six months more often or moreoroften Culture should be a priority from day one The need to refocus efforts on corporate culture are underscored by our survey results. Nearly two thirds of PLS respondents (64%) say that the main perpetrator of the most serious economic crime against their organisation was an internal actor, compared to just 56% of executives overall. More of those internal actors were junior staff members (44% vs. 34% overall). Indeed, 20% of the internal perpetrators had been with the company for less than 2 years. While that’s good news on the one hand – crime by senior management has a more wide-reaching impact on the organisation – it’s also a sign that the industry needs to act now to make sure that its whole staff is on-board from Day 1 with efforts to promote an ethical culture. PwC | Global Economic Crime Survey 2014 | 11 Visibly cracking down on perpetrators could send a stronger message Once a perpetrator has been identified, what should companies do? To deter future crime, it’s important to take action. While around 80% of internal perpetrators in the PLS industry were dismissed, in line with the global average, only 36% had to answer to law enforcement, compared to nearly half of internal perpetrators overall (see Figure 7). Fewer PLS executives say their company took civil action or informed regulatory authorities too. The sector is also less likely to take these types of actions against external perpetrators. Fewer PLS executives say their companies notified law enforcement or took civil actions. And fewer ceased business relationships as well. In our view, many PLS companies may need to take another look at their responses to economic crime once it occurs. Figure 7: The PLS sector is taking less legal action against perpetrators of serious economic crimes 7a: Internal perpetrators (not all choices listed) 79 82 Dismissal Law enforcement informed 49 36 Civil action was taken, including recoveries 44 27 17 Warning/reprimand 9 Notified relevant regulatory authorities 23 7 0 Total 20 40 60 80 100 Pharmaceuticals and life sciences % of respondents who reported economic crime in the past 24 months 7b: External perpetrators (not all choices listed) Law inforcement informed 52 Notified relevant regulatory authorities 39 39 37 Cessation of the business relationship 26 Civil action was taken, including recoveries 42 22 0 Total 61 10 20 30 40 50 Pharmaceuticals and life sciences % of respondents who reported economic crime in the past 24 months 12 | Global Economic Crime Survey 2014 | PwC 60 70 80 Contacts For more information on the Global Economic Crime Survey and the survey methodology, please refer to Economic crime: A threat to business globally at www.pwc.com/crimesurvey. If you would like to find out more about the information contained within this report, or to discuss any issues around economic crime and how our team can help you, please get in touch with your local PwC contact or the sector report team: Editorial team Brian Riewerts Marina Bello Valcarce Principal, Sector report lead partner, PwC USA Sector report project manager, PwC United Kingdom T: +1 410 659 3390 E: [email protected] T: +44 20 7212 8642 E: [email protected] Forensic Service Leaders Andrew Gordon Andrew Palmer Partner, PwC United Kingdom, Global Leader Partner, PwC United Kingdom, Central Cluster Leader T: +44 20 7804 4187 E: [email protected] T: +44 20 7212 8656 E: [email protected] John Donker Erik Skramstad Partner, PwC Hong Kong, East Cluster Leader Partner, PwC USA, West Cluster Leader T: +1 852 2289 2411 E: [email protected] T: +1 617 530 6156 M: [email protected] Pharmaceuticals and life sciences forensic specialists Patricia A. Etzold Ryan D. Murphy Partner, PwC USA Partner, PwC USA T: +1 646 471 3691 E: [email protected] T: +1 312 298 3109 E: [email protected] Editorial team acknowledgements In preparing this report, assistance was gratefully received from PwC teams in the US and UK. We’d also like to thank Elizabeth Montgomery (Pwc Germany) for writing and editorial assistance. PwC | Global Economic Crime Survey 2014 | 13 www.pwc.com/crimesurvey PwC helps organisations and individuals create the value they’re looking for. We’re a network of firms in 157 countries with more than 184,000 people who are committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at www.pwc.com This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. © 2014 PwC. All rights reserved. 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