1. Legal and Financial Consequences When Risk Management Goes Astray Pharmaceutical Education and Research Institute (PERI) “Developing a Risk Management Strategy: A Hands-On Workshop” November 11, 2004 Washington, D.C. Presented by: Michael A. Swit, Esq. Vice President, Life Sciences

2. 2 LECTURE -- OUR ORGANIZATION/OBJECTIVES I. Administrative Enforcement Tools II. Civil and Criminal Penalties III. Collateral Damage – Worst Case Scenarios from Risk Management Gone Awry

3. 3 I. FDA Administrative Enforcement Tools Each FDA Center has its own Office of Compliance (OC) OC works with Office of Chief Counsel and Department of Justice but, before they haul you into court … Administrative Enforcement Tools

4. 4 ADMINISTRATIVE ENFORCEMENT TOOLS Inspections –Planned and conducted pursuant to FDA annual plan or center compliance program –Pre-approval –“For cause” (e.g., public health crisis due to defective or contaminated FDA-regulated product; follow up to 483 response)

5. 5 ADMINISTRATIVE ENFORCEMENT TOOLS … Inspections … –Government-wide Quality Assurance Program FDA may inspect at the request of the DoD or VA to determine, for example, whether a company bidding on a government contract is in compliance with GMPs and otherwise in compliance with the Federal Food, Drug, and Cosmetic Act (FDCA)

6. 6 ADMINISTRATIVE ENFORCEMENT TOOLS … Inspections... –Combination or joint inspections (EPA, OSHA, or a state food and drug regulatory body) –Consumer, trade, and other complaints –Adverse product effect reports –Congressionally inspired

7. 7 483/EIR: INSPECTION RESULTS NAI - No objectionable conditions or practices were found during the inspection (or the objectionable conditions found do not justify further regulatory action) VAI - Objectionable conditions or practices were found, but the District is not prepared to take or recommend any administrative or regulatory action OAI - Regulatory and/or Administrative actions will be recommended

8. 8 ADMINISTRATIVE ENFORCEMENT OPTIONS BASED ON INSPECTIONAL VIOLATIONS If at investigational stage: –Termination of IND or IDE (if in that phase) –Initiation of disqualification procedures or entry into a consent agreement with the clinical investigator –Disqualification of the investigator simultaneous to criminal prosecution (may occur later than during the investigational stage) –Initiation of stock recovery by sponsor Warning letter

9. 9 ADMINISTRATIVE ENFORCEMENT TOOLS – OTHER Clinical hold Withdrawal or suspension of marketing permit Recall (FDA-requested or “voluntary”) Import detention or refusal Civil money penalties

10. 10 THE PEN IS MIGHTIER THAN THE SWORD: ADVERSE PUBLICITY FDA Website Press release Talk paper Press conference/television and radio interview Speeches Congressional and other testimony Articles in scientific, professional and lay publications

11. 11 FDA ENFORCEMENT TOOLS -- APPLICATION/DATA INTEGRITY POLICY The AIP applies to any application (e.g., NDA, BLA, PMA), amendment, supplement, petition, or other submission in support of the approval or marketing of a regulated product Does not apply only to data tainted or possibly tainted by fraud or other intentional misconduct “Data may be unreliable due to sloppiness and inadvertent errors. A pattern of errors by an applicant involving material subject matter may raise a significant question regarding the general reliability of data in applications from that applicant.”

12. 12 AIP If FDA has significant questions surrounding the reliability of the data in an application, it will defer substantive scientific review of all the data in the application - and, possibly, other applications Deferral will continue until all questions regarding the reliability of the data have been resolved CAP – Corrective Action Plan – detailed & costly

13. 13 FDA ENFORCEMENT DISCRETION – KEY FACTORS WEIGHED Prior History of Company’s Compliance –prior 483’s, warning letters, and company’s response Health risks Likelihood of recurrence

14. 14 II. FDA Judicial Enforcement Weapons Seizure and destruction of product Injunctions –Consent Decrees –Fines/Disgorgement –Enforced via contempt proceedings Criminal prosecution

15. 15 CRIMINAL ENFORCEMENT Criminal prosecution – –Types of Violations – Title 21 -- FDCA Title 18 – Federal Criminal Code –§ 371 (conspiracy) –§ 1001 (false statements) –§ 1341, 43(mail and wire fraud) –§ § 1505, 1509-10 (obstruction) –§ 1962 (RICO) –Penalties -- Imprisonment Fines

16. 16 CRIMINAL PENALTIES -- or “Does Crime Pay?” PRISON or JAIL:  Felonies: up to five (5) years in prison for each violation  Misdemeanors: up to one (1) year in jail for each violation

17. 17 CRIMINAL PENALTIES - - or “Does Crime Pay?” … FINES: amount depends on the person (whether an individual or company), the class of crime (felony v. misdemeanor), and if the crime resulted in a death

18. 18 CRIMINAL PENALTIES - - or “Does Crime Pay?” … FINES Individual: –Misdemeanor: $100,000 per violation –Misdemeanor resulting in death or felony: $250,000 per violation Company: –Misdemeanor: $100,000 per violation –Misdemeanor resulting in death or felony: $500,000 per violation

19. 19 WHAT CAN FDA TARGET IN AN ENFORCEMENT ACTION? Scope of Enforcement Action Can Be Very Broad: All areas where FDA perceives violations, and responsible persons involved in such violations Labeling, promotion, manufacturing, QA, distribution, regulatory affairs, quality control, etc., etc….

20. 20 WHO CAN FDA TARGET DURING AN ENFORCEMENT ACTION Any and all individuals within the company that have a position of responsibility for the violative aspect of the company’s operation, including: President/CEO/COO Production Manager VP or Director of Quality Control Director of Regulatory Affairs Director of Quality Assurance Technicians General Counsel (none in FDA setting; but see Tyco prosecutions)

21. 21 Bard (1993): Not only Executives are Charged Director for Regulatory Affairs and a supervisor in the R.A. Department among those charged 3 executives convicted of defrauding FDA, but vacated in March 2001 on appeal based on improper instructions to jury by judge June 2001 -- the 3 defendants settled and pleaded to misdemeanor charges in shipment of adulterated heart catheters: one year of probation and 8 months of in-home confinement; Bard paid $61M As with tax law, misunderstanding of FDA law may be a legitimate defense; given complexity of regulatory law, you can violate innocently

22. 22 DISGORGEMENT FDA recovery of company profits –Can’t profit from sales of an illegal product that is nonetheless medically necessary FDA refrains from enjoining production of non-compliant products because it would compromise patient care by causing significant shortages of medically necessary products In return, firms will pay a fixed % of future sales to ensure that they did not profit from the violative products

23. 23 CONSENT DECREE Order of a court Entered by consent of the parties Not technically a judicial sentence, but a negotiated contract between the parties under the sanction of the court Parties represent that it is a just determination of their rights as if the alleged facts of the case had been proven

24. 24 CONSENT DECREES … How do they come about?? Settlement of a court case after FDA has filed for an injunction –Voluntary negotiations with FDA after an adverse inspection –Most terms/conditions negotiable -- but depends on your leverage point –Companies more often concerned about naming executives as individually responsible: FDA finds this point important as a deterrent and necessary to pursue contempt charges if decree becomes ineffective

25. 25 DUTY OF CARE Corporate directors can in turn be personally liable for losses incurred because of corporate failure to meet legal compliance standards McCall (2001): Columbia/HCA shareholder derivative action against board members; –Directors lose protection of “business judgment” rule and are personally liable for failure to detect and correct violations –Board’s duty of care breached through nonfeasance: failure to investigate items from internal audit

26. 26 DUTY OF CARE … If you are subject to a search warrant at one site, begin internal investigation at all sites to see whether similar violative practices exist (otherwise breaches duty of care) Need to investigate whistleblower cases, no matter how frivolous they appear Under FDCA – strict liability – U.S. v. Park

27. 27 III. Collateral Damage – Worst Case Scenarios from Risk Management Gone Awry Or “Does Crime Pay?” – Problems Beyond Jail and Fines

28. 28 “Does Crime Pay?” – Problems Beyond Jail and Fines PROBLEMS FOR INDIVIDUALS IF CONVICTED: –Lose right to vote –Lose right to run for public office –Damage to reputation

29. 29 “Does Crime Pay?” -- Problems Beyond Jail and Fines (cont’d...) PROBLEMS FOR INDIVIDUALS IF CONVICTED (cont’d): –Can be deported if not a U.S. citizen –Financial ruin - - lose your job

30. 30 “Does Crime Pay?” -- Problems Beyond Jail and Fines (cont’d...) PROBLEMS FOR COMPANIES CAUSED BY CRIMINAL CONVICTIONS: –Shareholders sue the company, its officers and directors –Other companies may sue the company (e.g., Mylan Labs sued Par and others) –Federal government may suspend or “debar” company from selling to government

31. 31 “Does Crime Pay?” -- Problems Beyond Jail and Fines (cont’d...) PROBLEMS FOR COMPANIES CAUSED BY CRIMINAL CONVICTIONS: –“Qui Tam” actions under the False Claims Act -- e.g., Lifescan & Neurontin cases -- “whistle blower” cases -- leading to civil damages and may also spawn a criminal prosecution –SEC Enforcement Litigation if publicly held

32. 32 “Does Crime Pay?” -- Problems Beyond Jail and Fines (cont’d...) PROBLEMS FOR COMPANIES CAUSED BY CRIMINAL CONVICTIONS (cont’d): –FDA may refuse to approve NDAs under AIP –May lose state licenses –Customers abandon you –Decreased sales may force lay-offs of employees

33. 33 “Does Crime Pay?” -- Problems Beyond Jail and Fines (cont’d...) PROBLEMS FOR COMPANIES CAUSED BY CRIMINAL CONVICTIONS (cont’d): –Financing disappears -- banks may refuse to lend money –May violate lending agreements, real estate mortgages or leases –A criminal investigation can cause great disruption to normal business activities

34. 34 “Does Crime Pay?” -- Problems Beyond Jail and Fines (cont’d...) PROBLEMS FOR COMPANIES CAUSED BY CRIMINAL CONVICTIONS (cont’d): – High cost in money of an investigation: lost sales stock price falls attorney’s fees and costs costs of complying with requests by government for documents

35. 35 PRODUCTS LIABILITY EXPOSURE Negligence per se – legal violation leads to a presumption of violating a standard of care Mass Tort Exposure –Fen-Phen –Ephedra –Vioxx –Baycol

36. 36 QUANTIFYING THE DAMAGE The Par Example (note: some figures are estimated) –Criminal Fines $ 2,750,000 –SEC Fines $100,000 –Lost Sales (just 1 year) ± $49,000,000 –Competitor lawsuits $3,000,000 –Shareholder litigation settlement $2,250,000 –Lost market cap ± $206,000,000 Stock went from $26 to $3 –Attorneys fees ± $4,000,000

37. 37 QUANTIFYING THE DAMAGE The Par Example … –Expert consultant fees under AIP ± $4,000,000 –Employees laid off 450 out of 900 –Time under AIP ± 4 years –Time ineligible to sell to U.S. 2 yrs., 9 mos.

38. 38 QUANTIFYING THE DAMAGE … A FEW BIG BOYS Abbott -- $100,000,000 disgorgement (GMP case) Schering -- $500,000,000 disgorgement (GMP) Pfizer/Neurontin -- $343,000,000 qui tam award Wyeth – Fen/Phen -- $16.6 Billion reserved

39. 39 PARTING THOUGHTS … These are pictures you do not want to see …. –in your newspaper …. –on your local news …. –on the Internet …. or –in FDA regulatory lawyers’ presentations for years to come ….

40. 40 Ex-Imclone CEO Exits Federal Court After Being Charged with Nine Felony Counts

41. 41 Ex-Imclone CEO exits federal court after entering guilty plea …

42. 42 THE RESULT … Pled guilty October 15, 2002 to six counts, including: ►Bank fraud ►Securities fraud, aka “insider trading” ►Conspiracy to obstruct justice, and ►Perjury Faced: up to 65 years in prison; millions in fines

43. 43 THE SENTENCE 7- year 3-month prison sentence –with no parole $3 million fine $1 million in back taxes Where can you find him now? –Schuylkill Federal Correctional Institute in Minersville, Pa. (been there since July 2003)

44. 44 QUESTIONS? Call, e-mail, fax or write: Michael A. Swit, Esq. Vice President, Life Sciences THE WEINBERG GROUP INC. 336 North Pacific Coast Hwy. 101 Suite C Encinitas, CA 92024 Phone 760.633.3343 Fax 760.633.3501 Cell 760.815.4762 D.C. Office 202.730.4123 michael.swit@weinberggroup.com www.weinberggroup.com

45. 45 About the speaker... Michael A. Swit is Vice President, Life Sciences at THE WEINBERG GROUP INC, where he develops and ensures the execution of a broad array of regulatory and other services to clients, both directly and through outside counsel. His expertise includes FDA and CMS development strategies, compliance and enforcement initiatives, recalls and crisis management, submissions and related traditional FDA regulatory activities, labeling and advertising, and clinical research efforts for drug, biologic, device, IVD, and other life sciences companies, as well as those in the food and dietary supplement industries. Mr. Swit has been addressing critical FDA legal and regulatory issues since 1984. His vast and multi-faceted experience includes serving for three and a half years as corporate vice president, general counsel and secretary of Par Pharmaceutical, a prominent, publicly-traded, generic drug company and, thus, he brings an industry and commercial perspective to his work with FDA-regulated companies. Mr. Swit then served for over four years as CEO of FDANews.com, a premier publisher of FDA regulatory newsletters and other specialty information products for the FDA-regulated community. His private FDA regulatory law practice has included service as Special Counsel in the FDA Law Practice Group in the San Diego office of Heller Ehrman White & McAuliffe and with the Food & Drug Law practice at McKenna & Cuneo, both in the firm’s Washington office and later in San Diego. He first practiced FDA regulatory law with the D.C. office of Burditt & Radzius. Mr. Swit has taught and written on a wide variety of subjects relating to FDA law, regulation and related commercial activities, including, since 1989, co-directing a three-day intensive course on the generic drug approval process and editing a guide to the generic drug approval process, Getting Your Generic Drug Approved. A former member of the Food & Drug Law Journal Editorial Board, he also has been a prominent speaker at numerous conferences sponsored by such organizations as RAPS, FDLI, and DIA.