Corruption And Consolidation In China Pharma

This Bystander has been struggling to put the corruption investigation into GlaxoSmithKline in to a broader context. The U.K.’s largest drugsmaker stands charged with paying up to 3 billion yuan ($488 million) in bribes to prop up its sales and prices in China.

There is clearly more to all this than a simple matter of corruption — if indeed there has been that. For one, the number is relatively small on a global scale. The pharmaceuticals industry is well known for buttering up those who can prescribe its products. In the U.S., drugsmakers spent more than $24 billion in 2012 marketing drugs to doctors, according to a survey by Cegedim Strategic Data. Another, by Deloitte, found that more than one in three American doctors accepted food, entertainment or travel from the pharmaceutical industry, while one in seven accepted consulting or speaking fees. Chinese doctors, to whom payments is a common practice, would need the extra on the side more than their U.S. counterparts.

A sweeping tour of the horizon of China’s healthcare market shows the country facing a tripling of its annual healthcare costs to $1 trillion by 2020. (The forecast comes from the consultancy McKinsey.) Its citizens increasingly expect access to affordable health care as a right of passage into the ranks of middle-income countries — and they are increasingly getting the expensive-to-treat diseases of urban middle-class lifestyles. To reign in its present and future costs, Beijing, like India and Brazil, is imposing price controls on drug makers (particularly the western multinational pharmaceutical companies that are increasingly looking to emerging markets for the next phase of their growth), and encouraging the development of a domestic generics industry.

At the same time, it is toughening up on regulatory enforcement. In recent weeks, it has launched a crackdown on illegal medicines by the State Food and Drug Administration, and started its broadest investigation to date in to prices. Some 60 domestic and multinational drugs company have been asked to supply data. That the National Development and Reform Commission (NDRC) is conducting this audit suggest there is a high-level policy initiative behind it.

Then there is the widening corruption probe into the industry. Two non-Chinese nationals have been detained, including a well-respected consultant linked to GlaxoSmithKline. Four Chinese working for the company have also been detained. Two Chinese nationals working for AstraZeneca have been questioned by police, and 39 Chinese hospital staff in Guangdong are to be punished by the health ministry for taking bribes from drug companies.

GlaxoSmithKline first denied the charges against it. Then it said that some local executives may have broken some local laws and acted in contravention of company policies. (Wednesday’s scheduled announcement of the company’s quarterly financial results may provided a clearer picture.) At this point, we are in no position to make a judgement either way. This may be a case of one man’s marketing expenses being another’s bribes. It may simply be a case of a company being in the wrong place at the wrong time. Or there may indeed have been corporate malpractice and the company is guilty as charged.

As we say, we have no idea at this point. We do, though, take note of a Reuters analysis that eight of the world’s top 10 drugmakers have warned of potential costs related to charges of corruption in overseas markets. At least two companies to our knowledge have made settlements under the U.S.’s Foreign Corrupt Practices Act involving payments in foreign markets including China. We understand more cases are pending.

Beijing may well be using GlaxoSmithKline as a stick to beat other western pharma multinationals, who are seen as giving a new — and expensive — lease on life in developing economies to their blockbuster drugs that are coming off patent in the U.S. and Europe. China has had some success in beating down prices in the food industry. Nestle, Danone and most recently Fonterra announced price cuts after Beijing launched an investigation into the dairy industry. GlaxoSmithKline is already hinting it will be passing some cost savings along in lower prices.

As Dan Harris noted on his China Law Blog, China cracks down on foreigners for political reasons whenever the economy slows. This time, the stars may have aligned to give it a motherlode of benefits: championing lower drugs prices for its citizens by standing up to foreign multinationals, and advancing its policy agenda for developing the domestic industry.

Biomedical  is identified as one of China’s strategic industries under the current five-year plan. This covers a broad range of healthcare businesses from medicines and vaccines to medical devices, diagnostics, and even traditional Chinese medicine. Collectively, these are expected to account for 8% of China’s GDP by 2015 and for 15% by 2020, up from 5% in 2010.

The government also is encouraging rapid consolidation of the some 7,000 small Chinese pharmaceuticals producers  that exist today; it hopes that the top 100 pharmaceutical companies will account for 50% of total pharma sales in the country by 2015, and the top ten wholesalers for 95% of drug distribution.

Consolidation  has been used in a variety of other industries from coal mining to solar power as a way of  improving the productivity of an industry, developing technological capabilities to move it up the value chain, and tackling industrial safety and product quality concerns, a persistent issue across a range of industries. Product safety is a particularly pressing concern for the pharmaceuticals industry, which, like the food industry, has had problems with tainted and counterfeit products.

Beijing is also fostering the emergence of large generic-drug companies, which as India has shown it, is key to holding down drugs costs in the long-term. It is pushing local generics makers to partner with multinationals, to invest more in R&D, and to develop specialities in generics and biosimilars.

That is also a way of tying the multinational drugmakers more closely to the Chinese industry, and to bring their pricing practices  more under the authorities’s sway. No multinational wants to be blacklisted in China, still the global industry’s great hope for its future. Most are deepening or expanding their presence in the country through such partnerships. Beijing is taking every opportunity to see that that is being done on its terms, not theirs.

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One response to “Corruption And Consolidation In China Pharma

  1. Pingback: China Pharma Update | China Bystander

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