Big Pharma beware: GSK China case may be just the beginning

SHANGHAI Sun May 18, 2014 7:45am EDT

SHANGHAI May 18 (Reuters) - Chinese corruption charges against executives of British drugmaker GlaxoSmithKline Plc (GSK) could be just the start of the pharmaceutical industry's problems in its biggest emerging drugs market, according to industry sources in China.

The charges relating to GSK executives, accused of funnelling hundreds of millions of dollars in bribes to doctors and health officials via travel agencies, were announced by Chinese authorities last week, the culmination of a 10-month police investigation.

But the GSK case is unlikely to represent closure for the drugs industry in China, which is set to become the world's second-biggest pharmaceutical market behind the United States within three years according to consultancy IMS Health.

Drug-company executives, sales staff, lawyers and compliance experts say China's crackdown on drugmakers and other healthcare firms is intensifying as prosecutors grow bolder in the wake of the GSK case, threatening to stymie the growth of any firms caught in the crosshairs of the prolonged corruption crackdown.

"The investigation against GSK may be coming to a close, but these types of probes in the pharmaceutical sector are becoming a weekly occurrence," a sales rep for the Chinese unit of a major global drugmaker said. He requested his name and his firm's name be withheld due to the sensitivity of the topic.

After a series of probes against foreign drugmakers last year, a range of government bodies, including the state planning agency, local commerce bureaus and the health ministry are making frequent, sometimes unannounced spot-checks at foreign healthcare firms, risk consultants and lawyers said.

Lawyers estimate that more than half of all drugmakers operating in China are being investigated in some capacity, from large multinational firms to Chinese state-owned enterprises.

The impact of an investigation can be significant.

GSK's revenues in the country plunged 61 percent in the third quarter last year and were still down by 20 percent in the first quarter of 2014 from a year earlier. Official Chinese media said on Friday that the firm might have suffered "irreparable damage" in the Chinese market.

Legal sources and one source with direct knowledge of the GSK investigation said China's authorities might still try to charge the company itself, which could potentially put GSK's business licences to operate in China at risk.

GSK said in a statement on Wednesday that the firm wanted "to reach a resolution that will enable the company to continue to make an important contribution to the health and welfare of China and its citizens".

A London-based spokesman declined to elaborate on Friday.

KNOCKING ON DOORS

Chinese authorities, led by the State Administration for Industry and Commerce (SAIC) and the country's public security bureau (PSB), are ramping up their visits to foreign drug firms.

"We have certainly been made aware from clients that inspection visits by various government agencies have increased and these visits are now more focused," said risk consultant Bob Youill, Shanghai-based managing director at FTI Consulting.

Authorities are looking to unearth proof that firms have violated anti-corruption laws or artificially inflated drug prices, a sensitive theme as China's leaders look to provide affordable healthcare to the country's near-1.4 billion people.

Last year authorities visited large international drugs manufacturers including Novartis AG, AstraZeneca Plc , Sanofi SA, Eli Lilly & Co and Bayer AG as part of a broad investigation into the sector.

Bayer said its contacts with regulators were within the normal range. Johnson & Johnson spokesman Ernie Knewitz said he was unaware of any "new developments" in China.

Chinese subsidiaries of U.S. drugmaker Merck & Co Inc "have received and may continue to receive inquiries regarding their operations from various Chinese governmental agencies", Merck spokesman Steven Cragle said via email.

Pfizer Inc said that it regularly interacted with government and regulatory agencies in China "to discuss a variety of issues, including patient access, regulatory and compliance matters, and anti-counterfeiting measures".

Roche Holding AG said it had not been contacted or investigated by Chinese authorities over allegations of corruption, while a Novartis spokeswoman said she was not aware of any contact from authorities in China around corruption.

AstraZeneca, Sanofi and Eli Lilly did not have any immediate comment.

Lawyers and consultants say a case as severe as GSK is unlikely to be repeated anytime soon, but that the charges against the British firm are likely to open the floodgates to a number of smaller corruption probes throughout the sector.

Chinese police charged GSK's former China boss, Briton Mark Reilly, and two other colleagues with corruption on Wednesday after the probe found the firm had made billions of yuan from bribing doctors and hospitals.

"Just this morning we are starting with three new compliance investigation cases," John Huang, Shanghai-based partner at law firm MWE China, told Reuters last week. China's PSB and SAIC were actively visiting drug firms, he said.

"We're being asked to do training on how to deal with dawn raids, how to act when people are being arrested, and how individuals should respond to police investigations."

COMPLIANCE BOOST

In turn, companies are looking to boost internal compliance systems and training, company insiders and lawyers said.

"My company's compliance systems have always been strict, but recently there have been more detailed regulations, with more all-encompassing rules and lots of internal probes," said a second China-based sales rep at a large U.S. drugmaker.

This has been a boon for compliance lawyers and risk consultants, said Nat Edmonds, a partner at law firm Paul Hastings and a former Foreign Corrupt Practices Act litigator at the U.S. Justice Department.

"The amount of resources companies are putting into this has increased exponentially," Edmonds told Reuters in Shanghai.

The issue for drugmakers - both Chinese and foreign - is that China's healthcare system is widely accepted to be riddled with bribery and corruption. Graft is often used to smooth business ties between sales reps and doctors.

Without these illicit payments many companies would struggle to compete, lawyers and company insiders said.

This would pose a challenge for firms as they look to hit steep sales targets under the glare of Chinese watchdogs.

"The whole industry is going to get more and more regulated," said a source with direct knowledge of the GSK investigation. (Additional reporting by Ben Hirschler in LONDON, Caroline Copley in ZURICH, Ludwig Burger in FRANKFURT, Bill Berkrot and Caroline Humer in NEW YORK; Editing by Mark Bendeich)

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