Insights from the 3rd Annual Pharmaceutical Compliance China Conference

By Dana Liu

Representatives from pharmaceutical and medical device manufacturers and industry associations recently gathered for the IBC 3rd Annual Pharmaceutical Compliance China Conference in Shanghai.

The conference is a forum to discuss the latest legal and compliance challenges in China, share best practices pertaining to internal compliance programs, and gain insights on how to effectively identify and mitigate risks throughout a company’s value chain.

Some of the key discussion points included: (1) China’s “Two-invoice” system; (2) Fair Market Value (FMV) and engagement with healthcare professionals (HCPs) and healthcare organizations (HCOs); and (3) using Big Data and technology to manage evolving compliance risks.

China’s “Two-Invoice” system

China’s healthcare ministry, the National Health and Family Planning Commission, released the implementation plan of the “Two-Invoice” system earlier this year in an effort to optimize the drug procurement process.  The “Two-Invoice” system stipulates that a maximum of two invoices can be issued between the manufacturer and the end customer hospital: one invoice from the manufacturer to the distributor and the second from the distributor to the end customer hospital. The policy applies only to pharmaceutical companies, but some provinces have been implementing similar policies for medical devices as well. Currently, the system is being piloted in 11 provinces. If successful, it will be rolled out nationwide by 2018.

Companies in the region are closely following the pilot program’s implementation and impacts on supply chain, third party and contract management. Many believe that the “Two-Invoice” system could lead to consolidation of distributor networks, including the acquisition of small distributors by large distributors and elimination of some smaller distributors. From a compliance perspective, this will increase transparency in manufacturers’ distribution channels.  Thus, this is an opportune moment for drug and medical device companies to assess the current due diligence and risk management process for third party intermediaries, and implement modifications to minimize compliance risk.

Fair Market Value and Engagement with HCPs and HCOs

The use of a Fair Market Value (FMV) methodology when engaging in fee-for-service arrangements with HCPs/Os was another hot topic at the conference. Polaris APAC Managing Director Joyce Wong led a session and shared her insights on this topic. Joyce opened the presentation with a discussion about the relevance and importance of utilizing a robust and repeatable a FMV methodology. A clear and documented methodology for FMV rates and HCP tiering criteria is a key compliance tool to prevent actual and apparent corrupt activities.  Moreover, the use of FMV methodology is more important than ever as we continue to see one country after another pass and implement their own transparency reporting requirements.  As of today, Japan and Australia are the only countries in the Asia-Pacific region that have transparency reporting requirements, however several other countries, including South Korea, Indonesia and the Philippines, are in the process of implementing them.

Implementing a global FMV methodology can certainly be challenging. However, setting fair market value for HCP engagements should address three broad categories:

Methodology should be robust and consistent, yet flexible

The FMV methodology should use standard and consistent guidelines across global affiliates to ensure consistency of fees for similar services.  However, the methodology should also be flexible to account for the local healthcare system (i.e. public, private, and mixed healthcare system) and other local market differences. Where there is little salary or compensation data to develop FMV rates, such as in emerging markets, indexation can be used by referencing to countries with a similar economy and healthcare environment.

Polaris Managing Director Asia-Pacific Joyce Wong speaks at the Pharmaceutical Congress

Additionally, companies must consider country-specific laws and industry codes when developing FMV rates. For example, South Korea’s industry code sets limits for hourly rates, day rates, and monthly rates; accordingly, we must make sure that the FMV methodology is aligned with these local regulations.

Methodology should be valid globally

Over the past two years we have seen a proliferation of cross-border enforcement of anti-corruption laws, such as the cases by authorities in China, the U.S., Poland, Jordan, Lebanon, among others. These cases highlight the importance of having a FMV methodology that is valid on a global scale Standardized processes including planning and budgeting, as well as a HCP nomination process for cross-border activities that uses consistent HCP selection criteria for all countries, are all essential components of an effective methodology.  The consistent use of standard processes are highly effective tools to ensure a global approach for HCP compensation in cross-border engagements, and to enhance the transparency and efficiency across the enterprise.

Implementation should be practical

Adopting a global FMV approach can be challenging, so it is important to obtain strong support at the global and local levels. Effective training at all levels with cross-functional involvement are also essential.

Process automation is another useful tool to help ensure consistency across the organization. With an automated process, standard procedures can be effectively applied and followed across the organization, while achieving higher work efficiency and establishing more control in the process.

Once the FMV rates are established, companies should refresh these rates periodically, based on country-specific macroeconomic conditions. For example, HCP FMV rates in countries with a less stable economy (perhaps due to political volatility or rapid economic growth/ contraction) will require more frequent updates than rates in more stable markets.

Joyce concluded the presentation by emphasizing the importance of a robust implementation strategy and providing tips for best practices to effectively implement a global FMV methodology:

  • Obtain input and buy-in from global/regional leadership is critical to successful FMV program implementation
  • Design initial trainings and a roll out plan that empowers local stakeholders to own the FMV process
  • Use technology to automate FMV process to increase efficiency and enable consistent application of the methodology throughout the organization
  • Establish “FMV Champions” to ensure ongoing local ownership and organizational buy-in

Using Big Data and technology to manage evolving compliance risks

Throughout the conference, the use of big data analytics to strengthen internal control, monitor business activities and reduce risks was a hot topic. Wong Chae Sing, Director of Compliance-Emerging Markets, from Mundipharma provided an in-depth presentation on this matter.  During this discussion, Wong demonstrated that with the right approach, data analytics can (1) increase visibility to business operations and financial data; (2) provide wider and more accurate risk coverage and identification; and (3) provide information for further investigations if needed.

From a compliance perspective, data analytics can direct the management team to focus on the identified high-risk areas. Furthermore, cross-functional data enables more effective collaborations across the organization to manage risks. For example, linking the general ledger to an event management system that tracks HCP cash and in-kind transfers of value can expose outliers, identify illegitimate payments and duplicated expense claims. A successful big data project requires active involvement and collaboration across the enterprise. It is essential for IT, Compliance and Finance department to work together on project scoping, analysis design, and data extraction to (1) identify key contacts and required data sets, (2) refine technical details and (3) ensure data accuracy.

Polaris Managing Director Asia-Pacific Joyce Wong and Polaris Consultant Dana Liu

In summary, China’s regulatory landscape is evolving rapidly, and the Life Sciences Industry is closely monitoring, anticipating, and adjusting to the changes. Developing an effective FMV methodology is one of the key compliance objectives for many companies and organizations, including R&D-based Pharmaceutical Association Committee (RDPAC). Use of data to enhance internal risk control and monitoring has become an increasingly popular topic as companies continuously search for novel strategies to improve their compliance programs and effectively identify and mitigate risks.