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Humongous Pharma Corruption: China Ups The Ante…and India?

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In the ‘pharma bribery’ related scandal in China, many postulated that the Chinese Government has cracked down selectively on Multinational Corporations (MNCs) to extend unfair business advantages for its local players.

Media reports of September 2013 indicate that in all probability the intent of the Chinese Government is not to spare homegrown corruption in this area. The country appears to be taking tough measures against both global and local perpetrators of such criminal acts, which have spread their vicious tentacles deep into the booming Chinese pharmaceutical industry.

The report names the following domestic companies:

  • Sino Biopharmaceutical Ltd has set up a team to investigate allegations broadcast on the state television that its majority-owned subsidiary had paid for illegal overseas trips for doctors to Thailand and Taiwan.
  • Privately held Gan & Lee Pharmaceuticals investigating allegations of spending around US$ 130.75 million to bribe doctors to promote their pharmaceutical products over five years.

More MNCs under investigation:

At the same time, international media are reporting names of more and more big global pharma players allegedly involved in this humongous scam, as follows:

  • In July 2013, the British drug maker GlaxoSmithKline (GSK) was allegedly involved in around US$ 490 million deceptive travel and meeting expenses as well as trade in sexual favors. Chinese authorities detained four senior executives of GSK in China to further investigate into this matter.
  • In the same month Chinese police reportedly visited the Shanghai office of another British pharmaceutical major AstraZeneca for investigation related to this scam.
  • In August 2013, Sanofi of France reportedly said that it would cooperate with a review of its business in China after a whistle-blower’s allegations that the company paid about US$ 276,000 in bribes to 503 doctors in the country.
  • Again in August 2013, a former employee of the Swiss pharmaceutical major Novartis has reportedly claimed that her manager urged her to offer ‘kickback’ to doctors to increase use of the cancer drug Sandostatin LAR. She had about US$ 105,000 budget for payments to doctors who prescribed at least 5 doses, aiming for 50 doses in all. She filed the compensation claim of US $817,000 after resigning from the company.
  • In the same month, another whistleblower has reportedly made bribery allegations involving Eli Lilly of the United States and US$ 4.9 million in purported kickbacks to Chinese doctors.
  • In September 2013, media reports indicated that the Chinese authorities are investigating the German pharma major – Bayer over a “potential case of unfair competition”.
  • Another very recent report of September 17, 2013 states, Alcon Eye Care division of Novartis is investigating allegation of fabricated clinical trials to bribe doctors. The report says Alcon outsourced the trials to a third-party research company, which in turn compensated doctors with “research payments”. It is claimed by the whistleblower that Alcon used funds earmarked for “patient experience surveys” on lens implants to bribe doctors at more than 200 hospitals. One doctor received about US$ 7,300, for studying 150 patients. Alcon allegedly spent more than US$ 230,000, on such studies last year.

This list of pharmaceutical companies involved in alleged serious malpractices to boost their sales and profits in China is probably not exhaustive.

However, only time will unravel whether this juggernaut of scams will keep moving unabated despite all high voltage actions, bulldozing patients’ interest.

Crack down on food companies too:

Crack down of the Chinese Government on alleged malpractices has reportedly extended to milk products’ companies too.

Again in August 2013, Mead Johnson Nutrition and Danone were among six dairy companies ordered to pay a combined 669 million Yuan by the Chinese Government for price fixing of their products.

Global industry lobby has a different view point:

In an interview with the BBC, an expert from APCO Worldwide, considered as the giant of the lobbying industry said:

“China’s behavior was very worrisome for foreign companies. They don’t know what’s hitting them right now. The government is resorting to its traditional “toolbox” of coercive methods, including shaming and ordering people to confess that they’ve done wrong so that your penalties can be minimized. They’re just treating foreign companies the way they’ve treated their own for many years, and this is the way the Party does things.”

He continued, “What may be going on is they’re telling foreign companies and they’re telling private companies here: Behave yourself; remember we’re the Party, we’re in charge.”

This is seemingly an interesting way of pooh-poohing serious allegations of bribery and other malpractices by the pharmaceutical companies in China without even waiting for the results of the pending enquiry.

However, such comments coming from an industry lobbying organization or any Public Relations (PR) Agency is not uncommon. That’s their business.

Possible reasons for crack down:

Experts opine that China has a high drug price problem. This is vindicated by the fact that while most developed nations of the world spend not more than 10-12 percent of their healthcare budget on medicines, in China it exceeds 40 percent. This huge disparity is believed to have prompted Beijing’s crackdown on the industry, especially the MNCs that dominate the Chinese pharmaceutical industry with newer drugs. The powerful National Development and Reform Commission (NDRC) of China has already said that it is examining pricing by 60 local and international pharmaceutical companies.

Some other reports point out, low basic salary of the doctors at the 13,500 public hospitals in China, who are the key purchasers of drugs, is the root cause of corruption in the Chinese healthcare industry.

According to McKinsey with estimated healthcare spending of China nearly tripling to US$1 trillion by 2020 from $357 billion in 2011, the country is increasingly attracting pharma and medical equipment companies from all over the world in a very large number.

The fall out:

A recent media report indicates that Chines crackdown on the widespread pharma bribery scandal in the country is quite adversely affecting the sales of both global and local players, as many doctors in the Chinese hospitals are now refusing to see medical representatives for fear of being caught up in this large scam.

Drug expenditure is even more for healthcare in India:

Several studies indicate that Out Of Pocket Expenditure towards Healthcare in India is one of the highest in the world and ranges from 71 to 80%.

According to a 2012 study of IMS Consulting Group, drugs are the biggest expenditure in the total Out Of Pocket (OOP) spend on healthcare as follows:

Items Outpatient/ outside Hospital (%) Inpatient/ Hospitalization (%)
Medicines 63 43
Consultation/Surgery - 23
Diagnostics 17 16
Minor surgeries 01 -
Private Consultation 14 -
Room Charge - 14
Others 05 04

Despite these facts, India has remained virtually inactive in this critical area so far, unlike China, except some sporadic price control measures like, Drug Price Control Order (DPCO 2013) for essential drugs (NLEM 2011), which covers around 18% of the total pharmaceutical market in India.

Universal Healthcare (UHC): A possible answer?

Another interesting study titled, ‘The Cost of Universal Health Care in India: A Model Based Estimate’ concludes as follows:

The estimated cost of UHC delivery through the existing mix of public and private health institutions would be INR 1713 (USD 38) per person per annum in India. This cost would be 24% higher, if branded drugs are used. Extrapolation of these costs to entire country indicates that Indian government needs to spend 3.8% of the GDP for universalizing health care services, although in total (public+private) India spent around 4.2% of its GDP on healthcare (2010) at 11% CAGR from 2001 to 2010 period.

Moreover, important issues such as delivery strategy for ensuring quality, reducing inequities in access, and managing the growth of health care demand need be explored.

Thus, it appears, even UHC will be 24% more expensive after a public spend of staggering 3.8% of the GDP towards healthcare, if branded drugs are used, which attract huge avoidable marketing expenditures, as we have seen in the Chinese pharma industry scandal.

High marketing costs making drugs dearer?

A recent article, captioned “But Don’t Drug Companies Spend More on Marketing?” vindicates the point, though the drug companies spend substantial money on R&D, they spend even more on their marketing related activities, legally or otherwise.

Analyzing six global pharma and biotech majors, the author highlights that SG&A (Sales, General & Administrative) and R&D expenses vary quite a lot from company to company. However, in this particular analysis the range was as follows:

SG&A: 23% to 34%
R&D: 12.5% to 24%

SG&A expenses typically include advertising, promotion, marketing and executive salaries. The author says that most companies do not show the break up of the ‘S’ part separately.

In the pharmaceutical sector all over the world, the marketing practices have still remained a very contentious issue despite many attempts of self-regulation by the industry. Incessant media reports on alleged unethical business practices have not slowed down significantly, across the world, even after so many years of self-regulation. This is indeed a critical point to ponder.

Scope and relevance of ‘Corporate Ethical Business Conducts and Values’:

The scope of ‘ethical business conducts and value standards’ of a company should not just be limited to marketing. These should usually encompass the following areas, among many others:

  • The employees, suppliers, customers and other stakeholders
  • Caring for the society and environment
  • Fiduciary responsibilities
  • Business and marketing practices
  • R&D activities, including clinical trials
  • Corporate Governance
  • Corporate espionage

That said, codes of ethical conduct, corporate values and their compliance should not only get limited to the top management, but must get percolated downwards, looking beyond the legal and regulatory boundaries.

Statistics of compliance to codes of business ethics and corporate values are important to know, but perceptible qualitative changes in ethics and value standards of an organization should always be the most important goal to drive any business corporation and the pharmaceutical sector is no exception.

Foreign Corrupt Practices Act (FCPA): A deterrent?

To prevent bribery and corrupt practices, especially in a foreign land, in 1997, along with 33 other countries belonging to the ‘Organization for Economic Co-operation and Development (OECD)’, the United States Congress enacted a law against the bribery of foreign officials, which is known as ‘Foreign Corrupt Practices Act (FCPA)’.

This Act marked the early beginnings of ethical compliance program in the United States and disallows the US companies from paying, offering to pay or authorizing to pay money or anything of value either directly or through third parties or middlemen.

FCPA currently has some impact on the way American companies are required to run their business, especially in the foreign land.

However, looking at the ongoing Chinese story of pharma scams and many other reports of huge sums paid by the global pharmaceutical companies after being found guilty under such Acts in the Europe and USA, it appears, levy of mere fines is not good enough deterrent to stop such (mal)practices in today’s perspective.

China acts against pharma bribery, why not India? 

Like what happened in China, many reports, including from Parliamentary Standing Committee, on alleged pharma malpractices of very significant proportions, which in turn are making drugs dearer to patients, have been coming up in India regularly, since quite sometime.

Keeping these into consideration, abject inertia of the government in taking tough measures in this area is indeed baffling and an important area of concern.

Conclusion:

The need to formulate ‘Codes of Business Ethics & Values’ and more importantly their effective compliance, in letter and spirit, are of increasing relevance in the globalized business environment.

Unfortunately, as an irony, increasingly many companies across the world are reportedly being forced to pay heavy costs and consequences of ‘unethical behavior and business practices’ by the respective governments.

Intense quarterly pressure for expected business performance by stock markets and shareholders, could apparently be the trigger-points for short changing such codes and values.

There is, of course, no global consensus, as yet, on what is ethically and morally acceptable ‘Business Ethics and Values’ uniformly across the world. However, even if these are implemented in country-specific ways, the most challenging obstacle to overcome by the corporates would still remain ‘walking the talk’ and ‘owning responsibility’.

That said, to uphold patients’ interests, China is already giving the perpetrators of the ongoing humongous pharma scam a ‘run for life’, as it were, despite what the industry lobbyists have been laboriously working on for the world to believe. Today, common patients’ in India being in a much worse situation for similar sets of reasons, should the domestic regulators not now wake up from the ‘deep slumber’, up all antennas, effectively act by setting examples and bring the violators to justice?

By: Tapan J. Ray

Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.

 

After Mollycoddling China Cracks Down on Pharma MNCs…But Why Now?

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In tandem with exemplary growth in the healthcare sector, China has started confronting with some consequential hazards in form of serious regulatory violations involving, besides many others, hospitals, pharmaceutical pricing and food and drug safety, which reportedly include contaminated milk powder and rat meat sold as mutton.

A recent report indicates, there are rampant kickbacks at various stages in the healthcare delivery process. For example, hospitals get kickbacks from drug and device companies, and hospital executives give a portion of these kickbacks to their doctors, involving even the pharma MNCs.

While looking back, in 1997, China took its first healthcare reform measures to mend the earlier not so good practices, when medical services used to be considered just as any other commercial product or services in the country. As a result, staggering healthcare expenses made Chinese medical services unaffordable and difficult to access for a vast majority of the local population.

In April 2009, China, a country with over 1.35 billion population, unfolded a blueprint of a new phase of healthcare reform to provide safe, effective, convenient and affordable healthcare services to all its citizens. An incremental budgetary allocation of US$ 124 billion was made for the next three years to achieve this objective.

The core principle of healthcare reform in China:

The core principle of the new phase of Chinese healthcare reform is to provide basic health care as a “public service” to all its citizens, where more government funding and supervision will play a critical role.

This reform process will ensure availability of basic systems of public health, medical services, medical insurance and medicine supply to the entire population of China. It was also announced that priority would be given to the development of grass-root level hospitals in smaller cities and rural China. The general population will be encouraged to use these facilities for better access to affordable healthcare services. However, public non-profit hospitals would continue to remain one of the important providers of medical services in the country.

Medical Insurance and access to affordable medicines:

Chinese government has planned to set up diversified medical insurance systems to provide basic medical coverage to over 90 percent of the country’s population. In tandem, the new healthcare reform measures will ensure better availability of affordable essential medicines at all public hospitals.

Highly lucrative healthcare business destination:

New Chinese healthcare reform process carries an inherent promise of a large additional spending worth billions of US dollars every year catapulting China as one of the most lucrative healthcare markets of the world.

China’s healthcare spending has reportedly been projected to grow from US$ 357 billion in 2011 to US$1 trillion in 2020.

Consequently, this huge investment has started attracting a large number of global companies of various types, sizes and nationality competing for the right size of their respective pies of profits.

In that process, as the media reports highlight, global pharmaceutical players started fast increasing both their top-line revenue and bottom-line profits from the booming Chinese healthcare market.

Pharma MNCs growing bigger, outpacing local industry:

Another report highlighted, “60% of China’s healthcare stimulus money ended up going to non-Chinese multinationals”. Quoting a recent JP Morgan report the article indicated AstraZeneca, Sanofi, Roche, GlaxoSmithKline, Novo Nordisk, Johnson & Johnson and Pfizer realized over 30 percent growth from their China operations in the early part of 2011.

With the slow down of business in Europe and in the United States, even large global pharmaceutical players like, Bayer, Sanofi, Novartis, Eli Lilly, Novo Nordisk and many more have reportedly invested huge resources for capacity building in sales and distribution channels, local manufacturing and R&D.

Chinese Government woke-up:

Kick starting the reform process and in the face of high level of corruption, Chinese government initiated monitoring the effective management and supervision of healthcare operations of not only the medical institutions, but also the health services, together with basic medical insurance system, in good earnest.

It has been reported, though the public hospitals will receive more government funding and be allowed to charge higher fees for quality treatment, they will not be allowed to make profits through expensive medicines and treatment, which has been a common practice in China.

Violations meted with harsh measures:

Accordingly, with increased vigil in many of these areas since last couple of years, Chinese regulators have started cracking down on the culprits, who are being meted out severe and harsh punishments, consequently.

In 2012, seven public hospital directors were reportedly sent to jails for accepting kickbacks. One corrupt drug regulator was even executed along with two food-company managers involved in a poisoned milk scandal, as the report mentions.

Pharma MNCs targeted for alleged corrupt practices:

As stated above, the new healthcare reform measures include regulation of prices of medicines and medical services, together with strengthening of supervision of health insurance providers, pharmaceutical companies and retailers.

China has now reportedly targeted Multinational Companies (MNCs) for allegedly corrupt practices, including price-fixing, quality issues and consumer rights. This has forced some MNCs to defend their reputations in China where global brands often have a valuable edge over local competitors in terms of public trust.

Recently, in an effort to reduce drug prices, China has initiated probes involving 60 drug manufacturers.

According to a recent report, to make the pricing system for medicines more effective, the regulatory agencies in China are investigating the costs and prices of drug manufacturers including global pharma majors like:

  • GlaxoSmithKline Plc (GSK)
  • Merck & Co.
  • Novartis AG
  • Baxter International Inc.

The regulators are expected to go through the details of 27 companies for costs and 33 companies for pricing, as per the July 2, 2013 statement posted on China’s National Development and Reform Commission’s (NDRC) Evaluation Center of Drug Pricing.

The report highlights that a possible impetus for the NDRC to probe into pricing and costs of domestic and foreign drug companies was the announcement of China’s National Essential Drugs List in March, which increased the items on the list to 500 from 305.

Clampdown on government spending:

To exercise control on public expenditure towards drugs, the government has also reportedly clamped down on drug spending, placing some foreign drug makers’ products under price controls for the first time.

Since 2011, the Chinese Government has reduced the drug prices four times, including 15 percent reduction earlier in 2013, though the price reduction will be as much as 20 percent for the expensive drugs. At the same time, the government has reduced tax rebates on investments.

Mr. Chen Zhu, Health Minister of China has reportedly expressed that healthcare in China is still too expensive and there is still inadequate control over improper use of drugs in the country.

Another report indicates that Nestlé, Abbott Laboratories and Danone are under investigation in China for “monopolistic” pricing.

Crackdown on bribery and kickbacks:

An article in a similar context mentions that the “Chinese police started an investigation into the Chinese unit of the biggest pharmaceutical manufacturers of UK – GlaxoSmithKline and Senior executives at the unit are suspected of ‘economic crimes”.

On the same subject, a different news report also indicates, a senior Glaxo finance executive in Shanghai and employees in Beijing were detained as part of a corruption investigation.

Recently a Chinese Security Ministry official has reportedly said that GlaxoSmithKline (GSK) executives in China have confessed to bribery and tax violations.

The same report quoting the ministry highlighted that the case against GSK involved a large number of staff and a huge sum of money over an extended period of time, with bribes offered to Chinese government officials, medical associations, hospitals and doctors to boost sales and prices. Concerned executives also used fake receipts in unspecified tax law violations.

Interestingly, earlier in 2012, Global CEO of GSK reportedly admitted that the company made “unacceptable” mistakes in “mismarketing” their antidepressants Paxil and Wellbutrin, which were the subject of a US$ 3 billion settlement with the Justice Department of the United States. At that time the CEO was reported to have said “very sorry” for the incident and “determined that this is never going to happen again.” 

Another very recent news highlights that currently China is investigating at least four pharma MNCs as it widens its probe. Chinese enforcers had suggested that these pharma companies were using the same tactics to boost their businesses in the country.

It is now learnt that anti-trust body of China - State Administration for Industry and Commerce (SAIC)  has also visited  Shanghai office of UCB. 

Happening elsewhere too:

Reports of similar alleged malpractices have started surfacing from elsewhere in the world too. For example, in Denmark, a country known for low incidence of corrupt practices, a Norwegian cardiologist was reportedly charged with taking 2 million kronor, or about US$ 350,000, from Merck and Pfizer, despite the fact, Danish law prohibits doctors from accepting money directly from the drug makers. The concerned doctor allegedly used the cash to buy expensive furniture and salmon-fishing holidays in his home country.

Last year, both the Department of Justice and the Securities and Exchange Commission of the United States reportedly charged Pfizer and its subsidiary Wyeth for paying millions of dollars in bribes to officials, doctors and healthcare professionals in Bulgaria, China, Croatia, Czech Republic, Italy, Kazakhstan, Russia, and Serbia during 2001-2007 in violation of the US Foreign Corrupt Practices Act. They had also set hefty fines on the two to settle the charges.

Conclusion:

To effectively address serious and longer term healthcare related issues of the country, the Chinese Government has already started implementing its new healthcare reform measures earnestly. Possibly to maintain equity, stay on course and uproot corrupt practices, they have now started cracking down on the violators in all seriousness, be they are from within the country or beyond its shores.

So far as the pharma MNCs are concerned, such harsh measures are being taken for alleged malpractices probably for the first time ever of this scale and that too with full media glare.

All these measures coupled with pricing pressure and gradual rise of local Chinese players, would make the Chinese market increasingly challenging to  pharma MNCs.

Some global players have already started feeling the scorching heat of tough Chinese measures. But China is too powerful a country and too lucrative a market for any entity to flex its muscle to stall the current juggernaut, at least, till the ‘Dragon’  achieves its objective of bringing down public healthcare expenditure to its expectations…Or is there more to the problem than meets the eye?

Thus, the key question emerges: 

Why has China, after mollycoddling the pharma MNCs for so many years, now started cracking down on them so hard?

By: Tapan J. Ray

Disclaimer: The views/opinions expressed in this article are entirely my own, written in my individual and personal capacity. I do not represent any other person or organization for this opinion.