In Industry Rife With Bribes, GSK Probe Continues

As China continues to investigate British pharmaceutical giant GlaxoSmithKline for bribery, Reuters extracts hints from China’s state media that other foreign pharmaceutical companies may soon find themselves facing similar accusations amid a crackdown on corruption in the healthcare industry:

China’s official news agency hinted that more foreign pharmaceutical firms could soon be implicated in a corruption scandal sweeping the industry, in the wake of bribery accusations against British drug maker GlaxoSmithKline.

“It will not be surprising if more pharmaceutical companies and hospitals, domestic or international, are to be involved in probes in the days to come,” the Xinhua news agency said on Wednesday in an English-language commentary.

Xinhua did not name any firms or hospitals, but said the government was trying to tackle “rampant” malpractice in the pharmaceutical sector, including corruption.

[...]“It is true that malpractice has (been) rampant in China’s pharmaceutical industry and hospitals for years, but now China (is) determined to reform its health system and root out malpractice, including taking kickbacks and price-fixing,” the commentary added. [Source]

As tension mounts for foreign pharmaceutical firms in China, the Globe and Mail describes the complex situation that they face, concluding that “China needs big pharma just as it in turn needs China”:

The [GSK] bribery scandal adds to an already tricky economic and political environment. While the central government plans to boost healthcare spending, local governments will be under pressure to contain costs as the economy slows, and revenue from land sales falls. Deep-pocketed foreign multinationals, who cannot afford to pull out of China, could make easy pickings.

Still, China needs big pharma too. Its population is aging, and moving to urban areas. Its demand for treatment for chronic illnesses will only grow. The government has pumped an estimated $160-billion (U.S.) into developing a domestic pharmaceutical industry, but it needs foreign firms’ know-how and investment too. The hope is that Chinese firms one day will compete on a global scale. For now, both sides need each other. [Source]

After similarly outlining the ongoing health reforms that are making China’s healthcare market both attractive and treacherous for foreign pharmaceutical companies, the Council on Foreign Relations explains how these foreign firms often find corrupt practice a must to survive in a business and political environment saturated with fraud:

[...]China’s healthcare reform has also led to stricter government regulation to rein in the unbridled healthcare costs. In November 2010, China’s top economic planning agency, National Development and Research Commission (NDRC), abolished the independent pricing powers of 16 drugs, 14 of which are made by foreign companies, while capping the retail prices of 174 medicines, 61 percent of which are produced by 40 foreign companies. These heavy-handed measures shrank profit margins for foreign drug makers in China, and, in conjunction with strong competitive pressures from domestic Chinese drug makers, forced local executives of multinational pharmaceuticals to act more aggressively in marketing their products. [...] The problem is that government power has permeated almost every aspect of the approval, manufacture, pricing, and marketing of a pharmaceutical product, and, in absence of transparency, foreign firms find it hard to do business without bending rules and bribing healthcare providers and government officials in China. As the arrested operations manager for Glaxo China admitted, in addition to hospital administrators he had to bribe officials of NDRC, China FDA, Ministry of Human Resources and Social Security, and local public tendering offices. [Source]

Following the GSK probe, a number of professionals have come forward to discuss just how widespread the practice of bribery is in the regional industry in which big pharma is now a major stakeholder. Reuters describes how dysfunctional policies and doctors’ low salaries lead to a systemic reliance on bribery that may prove difficult to quash:

Bribery is the lubricant that helps keep China’s public hospitals running, and the health system would struggle to function without illegal payments to poorly paid doctors and administrators, say medical practitioners and industry experts.

[...]The corruption stems largely from doctors’ low base salaries, which are set in line with a pay scale for government workers. Hospitals can pay bonuses but, given public hospitals are strapped for cash, compensation is usually low, say doctors and industry experts.

A doctor fresh out of medical school in Beijing earns about 3,000 yuan($490) a month including bonuses — roughly the same as a taxi driver. A doctor with 10 years experience makes around 10,000 yuan a month, according to Peter Chen, chief executive of privately run Oasis International Hospital in Beijing. [Source]

Though foreign firms may be an easy target in the government crackdown on corruption in the industry (see Globe and Mail article above), they aren’t the only ones playing dirty. BBC News talks to a former Chinese doctor who says that local firms routinely offered her cash:

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The ongoing probe into foreign pharmaceutical companies has so far led to the detention of four Chinese GSK managers, a British national believed to have contracted for GSK, and an unnamed American citizen. GSK, also embattled in legal suits in the U.S. and risking further investigation at home if convicted in China, has attempted to distance itself from the mainland scandal in a recent statement. AP reports:

UK pharmaceutical company GlaxoSmithKline distanced itself Wednesday from the scandal engulfing its operations in China, saying that four employees suspected of paying bribes were acting outside of company controls.

GSK’s CEO Andrew Witty refused to offer detail on the criminal investigation, but portrayed the company as being a victim of people “acting outside of our processes.” He insisted that “99.9″ percent of GSK’s employees play by the rules

[...]“We have zero tolerance for this kind of behavior,” Witty said during a conference call on its second-quarter earnings. [Source]

China’s pharmaceutical industry has long been riddled with corruption. In 2007, the former director of China’s Food and Drug Administration was executed for taking bribes to approve untested medicine. For more information on China’s medical industry, see a recent Reuters “Factbox” video.