Pharma in China: Is Corruption the Cost of Doing Business or Can We Aim for a Higher Standard?

With the pharma industry under close scrutiny and the Chinese government publicly stating it intends to root out corruption within every business sector, what does the future hold for pharma companies in China?

For global pharma companies, doing business in China is essential. McKinsey estimates the Chinese pharma market alone will reach $1 trillion (£625 billion) by 2020. With a massive drive to leverage this earnings potential underway, ethical business practices have often taken second place behind the pursuit of profit.

Indeed, the allegations levelled at GlaxoSmithKline (GSK) are the tip of a seemingly larger iceberg, with China's National Development and Reform Commission (NDRC) reported to be investigating no less than SIXTY local and foreign pharma companies for alleged price-fixing.

Allegations against Novartis and Alcon, its eye care unit, for alleged bribes paid to doctors in over 200 hospitals to promote its eye lens implants, and Eli Lilly for allegedly paying 30 million Yuan (£3.1 million) to doctors to prescribe its drugs, reinforces the view that the pharma industry across China has to change.

The GSK allegations have bought into sharp perspective how the accepted methods of doing business in China clash with what the West considers ethical. China is a country that is often seen as contradictory in the way it approaches its internal business practices, and those it has with companies in the West.

Business leaders have understood for decades that the concept of Guan Xi (while there is no literal translation into English, the concept will be familiar – “you scratch my back and I’ll scratch yours”) underpins all business relationships in China. Breaking these traditions as the Chinese Government attempts to modernise, and simultaneously deal with what can be pervasive corruption in many quarters, has placed the pharma industry under a spotlight it would rather have avoided.

While attempting to adopt western marketing practices, China is discovering that centuries of ingrained behaviour can’t be transformed overnight. The conduct that some pharma companies are alleged to have been engaging in simply reveals a deep seated behavioural disparity between pharma companies and their Chinese customers.

If unethical or non-compliant practices are observed, it is the responsibility of the observer to report and make efforts to fix the transgression.

Says Ana Nicholls, healthcare analyst at The Economist Intelligence Unit: “Pharma is vulnerable to corruption. I wouldn't say it was endemic, but there have been enough cases to suggest it is a persistent problem. Even with the best will in the world, most pharma companies struggle to monitor their subsidiaries well enough to stamp out problems entirely. It isn't easy, especially when those subsidiaries are also under pressure to push for high sales growth.”

Cyrus Chowdhury, CEO & managing director of CBPartners, a global consultancy supporting pharma companies across their market development also comments: “We have worked with many multinational pharmaceutical companies who have, on the spot, fixed any unethical business practices. If unethical or non-compliant practices are observed, it is the responsibility of the observer to report and make efforts to fix the transgression. As part of this mentality, we have seen companies ‘clean house’, particularly when individual executives from headquarters or other established markets arrive to run a function for the local operating company.”

New age pharma

From an industry perspective, pharma companies have seemed to ignore basic ethical business practices across the Chinese market. Moreover, thereappears to have been little oversight. GSK’s CEO Andrew Witty stating that it "looks as if individuals have worked outside our systems," underpins this point. This lack of regard for the seriousness of the practices GSK and others are alleged to have been involved with is at the heart of the issue.

Michael Malarkey, director, Global Investigations and Compliance, Advisory Services – a regulatory compliance, fraud investigation and forensic accounting specialist said: “I think there is some distaste for US companies doing business in China similar to how the US government had scrutinized Chinese companies doing business in the US – Huawei for example.”

With healthcare professionals woefully underpaid, the Chinese government needs to look closely at the system it has been the architect of for several years, and ask how it is culpable. “The Chinese government has created a system that begs for financial supplementation – even if it comes in the form of corrupt behaviour. It was simply a matter of time before some multinational companies felt compelled to follow the lead of domestic pharmaceutical manufacturers,” says Chowdhury.

China is currently ranked 80thout of 176 in the Transparency International index that tracks the perception of corruption across many business sectors. Often directives from central government that are enacted by local bureaucrats will usually fall far short of what central government intended, as Guan Xi persists.

Can the pharma industry change its business practices to appease regulators and central government? Many analysts doubt whether a root and branch reform of the pharma industry’s business practices is even a practical proposition.

The Financial Times reportedly gaining access to an internal memo drafted jointly by RDPAC (R&D-based Pharmaceutical Association Committee) the trade association that supports foreign pharma companies in China, and PhRMA (Pharmaceutical Research and Manufacturers of America) the association of US pharma companies that states that ‘systematic change’ must take place. Whether action by these bodies and the escalation of action by the Chinese government transforms the pharma industry across China remains a mute point until charges are actually bought against any pharma company.

Lessons to learn

Reuters report that a Citigroup analyst has calculated that GSK can expect a 30% drop in its sales revenue as a direct consequence of the bribery scandal. One GSK sales rep based in Shanghai told the Chicago Tribune in no uncertain terms that: “There's a fall in sales for sure.”

What is clear is that the pharma industry can’t continue with its current marketing practices. “If the GSK employees are found guilty, the company may decide to scale back its expansion plans or to modify the way it operates (particularly in on the sales side) so that it can improve oversight,” concluded Economists Intelligence Unit’s Ana Nicholls. “It will also need to do a substantial amount of work to rebuild its reputation within the market - and indeed worldwide. It could also apply some of the lessons it learns here to other subsidiaries, particularly those in emerging markets.”

John Burbidge-King, CEO of Interchange Solutions, a consultancy operating exclusively in the field of bribery, corruption and fraud risk mitigation commented: “GSK could probably withstand a massive fine if this was how this case concluded, but it’s the reputational risk that is the biggest issue.”

It’s hoped the industry will move towards more ethical business practices that can be clearly demonstrated to all parties. The level of scrutiny that the Chinese government and US regulators are now placing on the pharma industry may be bitter pill to swallow, but ultimately it’s a medicine that is sorely needed if the industry ever hopes to shake of the shackles of corruption and negative PR.

CBPartners’ Cyrus Chowdhury concluded: “Now, it is up to the multinationals to seize their role as ethical business leaders and teach the local markets about appropriate but still commercially viable practices.”

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