The Golden Gag and Other Sins of Novartis

February 21st, 2013 by Phil Mattera

vasellaNovartis raked in more than $12 billion in profits last year, but it was a planned expenditure of $78 million that prompted an uprising by the Swiss drug giant’s shareholders and compelled the company’s management to make an embarrassing about-face. The reason is that the $78 million was an unwarranted giveaway to the retiring chairman.

In January, Novartis announced that Daniel Vasella (photo) would leave the company after serving in top positions for the past 17 years. Vasella had already been granted more than $12 million in retirement benefits after he gave up the chief executive’s post in 2010 while staying on the board of directors as chairman with another $12 million in additional annual compensation. That payout was highly controversial, coming after years of fat CEO paychecks for Vasella.

It also set the stage for the current scandal, which grew out of a plan to pay Vasella not to work for another pharmaceutical company for the next six years. The non-competition agreement is referred to in the European press as a “golden gag” arrangement.

The pent up anger against Vasella was obvious in the reaction to the announcement. The corporate accountability group Ethos called on shareholders to withhold their support for the re-election of members of the board’s compensation committee. One Swiss official denounced the payment, saying “it does huge damage to the social cohesion in our country.” A lawyer in Zurich filed a criminal complaint against Novartis, the compensation committee and Vasella for breach of trust and lying to shareholders. A public statement by Vasella that he would donate the money to charity did little to quell the uproar.

The subsequent decision by Novartis to drop the plan was a significant victory for corporate accountability activists and critics of excessive executive and director pay, who have been targeting bloated compensation not only at Novartis but also at other large Swiss companies.

What’s ironic, however, is that this planned parting payment to Vasella generated a lot more controversy than other, arguably more serious sins of the company during his tenure, especially those committed in its U.S. operations.

For example, in 2010 Novartis had to pay $422 million to U.S. authorities to resolve criminal and civil liability arising from charges that it engaged in illegal marketing of its epilepsy drug Trileptal, including the payment of kickbacks to doctors to get them to prescribe the medication for off-label and potentially dangerous purposes.

That same year, Eon Laboratories, a Novartis subsidiary, agreed to pay $3.5 million to settle allegations that it violated the U.S. False Claims Act by submitting inaccurate reports to the federal government that obscured the fact that the Food and Drug Administration had found that the company’s Nitroglycerin Sustained Release capsules lacked substantial evidence of effectiveness.

In 2005 a Novartis U.S. unit, OPI Properties, had agreed to pay $49.2 million in civil and criminal fines and be excluded from federal healthcare contracts to resolve charges relating to its improper marketing of nutritional products to the Medicare and Medicaid programs.

In 2005 a group of women who had worked as sales representatives for Novartis in the United States filed a lawsuit against the company, saying they were discriminated against in pay and promotions, especially after becoming pregnant. In 2010 a federal jury ruled in favor of the women, awarding them $3.3 million in compensatory damages and $250 million in punitive damages. Novartis appealed and then settled the case for $152 million.

Novartis has also been at the center of a worldwide controversy over the pricing of its cancer medication Gleevec (Glivec in Europe), a year’s supply of which in the early 2000s was priced at about $27,000. Novartis sought to quiet the criticism by promising to give the drug away to many of those who could not afford it, but in 2003 it was reported that the effort was falling far short of expectations.

Novartis later found itself in a battle with the Indian government, which rejected the company’s patent application for Gleevec as part of its effort to encourage the production of low-cost generic drugs for poor countries. A wide range of non-governmental organizations, such as Doctors Without Borders and the Interfaith Center on Corporate Responsibility, called on Novartis to drop its suit, which was heard by the Indian Supreme Court in 2012.

Novartis was right to cancel its big giveaway to Vasella, but the company has a lot more to answer for.

Note: The latest addition to my Corporate Rap Sheets collection is dossier number 41, describing the track record of another ethically challenged Swiss company, Credit Suisse.

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