* General counsel Ehrat retires, says Cohen deal "an error"
* Novartis says board did not know about Cohen contract
* CEO highlights pipeline strength, scope for bolt-on M&A (Adds comment from former CEO, recasts)
By John Miller
ZURICH, May 16 (Reuters) - Novartis's top lawyer quit on Wednesday over a $1.2 million contract he co-signed with U.S. President Donald Trump's personal attorney, a deal the Swiss drugmaker's ex-CEO also said was a mistake.
The contract with Michael Cohen's Essential Consultants, the same firm used to pay porn star Stormy Daniels, has distracted Novartis's efforts to improve its image after a series of missteps.
Current CEO Vas Narasimhan also said the contract was a major mistake at a meeting with investors in Basel on Wednesday and said Novartis was developing a principles-, not rules-based system to help avert corruption and guide employees' behaviour.
"There will always be a way around the rule," Narasimhan told investors. "Whereas if you ask the question, 'Is this the right thing to do, are you comfortable with this being on the front page of the newspaper?'... that's going to help get us to a better place."
Since 2015, Novartis has paid out hundreds of millions in settlements and fines as a result of kickback allegations in South Korea, the United States and China and faces an investigation of alleged bribery in Greece. A trial for another U.S. kickbacks case is scheduled for 2019.
Former Novartis CEO Joe Jimenez, who had co-signed the contract with Cohen's alongside general counsel Felix Ehrat, said there should have been more due diligence and he should have tried to fire Cohen in March 2017.
"We wanted to terminate the contract at that point, but in the end we decided there would be almost-certain litigation," he said. "This was the mistake. We should have just ended our relationship at that point, regardless of what it was going to cost us."
Novartis had been seeking help understanding the Trump administration's thinking and was referred to Cohen by a third party, Jimenez told Reuters. He did not name the person.
U.S. lawmakers have demanded Novartis and AT&T, which also made payments to Cohen's firm, provide details. Ron Wyden, the top Democrat on the Senate Finance Committee, has initiated an investigation.
Ehrat, Novartis's general counsel since 2011, had been expected to leave within the next 1-1/2 years but now will be done June 1 following his resignation, while Jimenez stepped down on Feb. 1 and was replaced by Narasimhan.
Ehrat, who said he was quitting to take responsibility for the Cohen contract, will be replaced by chief ethics officer Shannon Klinger who Narasimhan elevated to the executive committee this year as he made cultural change a priority. Novartis said she had not been aware of the Cohen contact.
Novartis has also said Narasimhan had nothing to do with the Cohen contract and Chairman Joerg Reinhardt said that the board of directors was not aware of it at the time it was signed.
Narasimhan spent much of the Basel investor meeting reassuring analysts and shareholders that cultural change was a top priority.
Novartis shareholders have urged Narasimhan to exert more "moral influence" over perceived ethical shortcomings that Jimenez in 2016 blamed on a "results-oriented" sales culture and some bad actors. [reut.rs/2Ipdn83 ]
Klinger cited changes to bonus schemes for Novartis's drug sales force that are meant to avoid potential for corruption.
"Any one sales rep can have no more than 40 percent (bonus), so we think that by doing this we have also embedded our values and behaviours for our sales reps," she said.
In his presentation to investors, Narasimhan highlighted a dozen medicines in the group's pipeline that Novartis believes have $1-billion-plus annual sales potential, placing it on track to increase sales and expand profit margins through 2022.
The company will also consider pruning struggling operations, including the Sandoz generics unit's U.S. pills business that has been hit by price pressure. It is also reviewing the future of the Alcon eye surgery division, reiterating that this could include a possible spin-off in early 2019.
Priority areas for M&A include cancer medicine, cell and gene therapies, liver disease and digital and data science.
Narasimhan made a big bet on gene therapy with an $8.7 billion deal to buy AveXis last month.
But Novartis is unlikely to mimic deals such as Takeda's $62 billion takeover of Shire that are transforming the pharmaceuticals industry, Chief Financial Officer Harry Kirsch said.
"I don't think there is a domino effect if some others were to merge or acquire large scale, that our hands would be forced in any way," Kirsch told analysts.
Additional reporting by Ben Hirschler in London; Editing by Michael Shields/Louise Heavens/Alexander Smith/Jane Merriman