SHANGHAI May 18 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
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
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."
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
(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)