Bribery claims infect drug companies’ dealings in China
It began as a rumour on a Chinese social media site in July, but the impact has swiftly spread around the world: allegations that GlaxoSmithKline was the “godfather” of a system of bribery in the country totalling up to $500m.
The corruption claims, which have since expanded to other multinational pharmaceutical companies including Sanofi, Novartis and Eli Lilly, have created a growing sense of concern among executives, investors and doctors alike.
They raise the prospect of a squeeze in future sales growth, and a repetition of the escalating fines imposed on the industry in the US for illegal marketing and overpricing which have exceeded $30bn over the past two decades, according to Public Citizen, a health watchdog.
Last year, GSK paid a record $3bn to settle claims the US Department of Justice described as including “cash payments disguised as consulting fees, expensive meals, weekend boondoggles and lavish entertainment”. Abbott paid $1.6bn for illegal marketing of its bipolar disorder drug Depakote, and Johnson & Johnson paid $181m to settle some claims over marketing of its antipsychotic Risperdal, while the final bill could reach $2.2bn.
Now western companies face accusations in China covering everything from offering doctors luxurious trips to foreign medical conferences and visits to massage parlours, to payments disguised as research fees. All remain unproven and only scantily described. The sources are often anonymous – and potentially disgruntled – whistleblowers.
They also come in a country where commissions to doctors are viewed as a necessary way of supplementing low salaries. “If a doctor is paid no commission at all to use a particular drug, no one will ever prescribe it unless it has no competitors,” says a former drug representative for a mid-level Chinese pharmaceutical company.
But the Chinese probes have caused a drop in marketing activities as companies and the physicians they target seek to understand the new rules of behaviour, against a broader backdrop of concern over price cuts.
Marc de Garidel, chief executive of Ipsen, says some companies have stopped promotion in China, while hospital doctors did not want to meet sales staff. “In certain cities, in certain areas, there is a toughening of the marketing conditions,” he says. “We are monitoring this very closely. We don’t know how long it will last.”
Many investors have shrugged off the US fines, given the relatively modest financial impact compared with the revenues the companies’ drugs generate. They express more concern over costlier product liability litigation sparked by the side effects of drugs such as the painkiller Vioxx, which alone cost Merck more than $5bn.
Even so, the US clampdown has sparked fresh interest by regulators in other countries, who have been considering imposing their own fines.
This threatens to compound the drug companies’ problems. US and UK anti-corruption legislation – the Foreign Corrupt Practices Act and the Bribery Act respectively – raise the prospect of fines in those two countries being imposed on top of local penalties in the markets where bribery occurred.
Johnson & Johnson in 2011 paid nearly $80m to the UK and US for its activities in southern and eastern Europe and Iraq, for instance.
More fundamentally, investors have grown concerned in recent weeks about the impact of the Chinese probes on future sales practices and prices. Jo Walton, pharmaceutical analyst at Credit Suisse, says: “It seems clear that the breadth of the investigation into marketing practices is likely to slow growth for all of the majors.”
Few predict any withdrawal from China, given its strong growth. But they see pressure for price cuts after a period of adjustment to new rules. Deutsche Bank last month predicted the anti-corruption investigations in China would be “longer and larger” than expected, depressing sales growth into the first half of next year.
That also applies to many regional and local companies, perceived to be more aggressive in marketing than their western counterparts. One senior drug company sales representative in China says: “Everyone is afraid of getting caught, everyone. Before GSK, commissions were half public and half hidden, but now everything has been forced to go totally underground.”
“Doctors are trying to avoid drug sales reps, and many companies have put reps on half-time, or sent them for training,” she says. “Before, drug reps were given a quota of doctors they had to see every day; now you still need to go to the hospital, but if someone looks at you suspiciously, you should leave.”
Another multinational company rep said she still pays regular visits to doctors. “We try to avoid unnecessary trouble by hiding our company logo when we enter hospitals, but I am not too worried because what we are doing is legal. Doctors have to find out about our drugs somehow, and it is our job to inform them.”
Others are more critical of the industry’s role. One middleman in Shanghai said he recently began a business for multinationals conducting “phase IV” clinical trials, conducted after a drug is approved – and which critics claim are often for marketing purposes.
He described how over 15 years working for four foreign drug companies, he regularly filled out fake “clinical research forms” on trials that never took place, allowing kickbacks to be paid to the doctors who were on record for conducting the trials.
A medical student in a leading Shanghai hospital says: “The supervising doctor in my department sees as many as 80 patients in a morning, and prescribes as much as Rmb100,000 worth of drugs. She definitely takes commissions from drug companies, but that only affects what she prescribes when there are two similar drugs. It doesn’t affect the quality of care.”
Industry executives argue the multinationals are again reviewing compliance. “There is a real fear right now about doing business in China,” says Gregory Lovas, in charge of life science clients in Asia with CTPartners, an executive recruitment agency.
He says companies which previously saw China postings as a way of exposing their future leaders to an expanding market are now seeking greater existing “language, cultural understanding and market knowledge”. For middle level marketing staff, they want background checks and references stretching back as far as 10 years.
The industry is braced for a squeeze on pricing and tougher marketing rules in future. But given the sluggish growth in their traditional markets, China’s expanding healthcare demand will probably still be worth the price for most.