A storm is brewing in China, as the country has begun a series of crackdowns on various industries for offenses ranging from bribery to price fixing. The storm has broken most recently over the heads of pharmaceutical company executives, with Britain’s GlaxoSmithKline being accused by Chinese authorities of bribing physicians and officials to increase sales and fix the prices of drugs and other firms being investigated.
At first denying any wrongdoing, saying that it had conducted an internal investigation that revealed no bribery and fraud in its operations, GSK later admitted that its executives in China may have broken the country’s laws. GSX CEO Andrew Witty sent three of the firm’s top officials to China to meet with its government, and Mark Reilly, British head of the firm’s Chinese operations, returned to GSK’s London offices in early July. Toward the end of the month, the company announced that he would be replaced as general manager in China by Herve Gisserot, senior vice president for Europe.
While it is by no means the only pharma company in the hot seat, GSK has been the focus of an investigation that led Chinese officials to raid offices and detain personnel as they looked into allegations of bribery, price fixing and tax evasion. As the investigation proceeded, other companies including Roche and Merck have admitted using a small Shanghai travel agency that police said was a means for GSK to provide bribes to the hospitals, doctors and government officials involved in the scandal. Britain’s AstraZenica has also said that one employee had been questioned by Shanghai police, and that two others had been detained. Brussels-based UCB SA was also paid a visit by authorities.
The success of bribery and price fixing as a means of boosting revenue can be tied to, among other factors, the low salaries of doctors and other medical personnel in the country and the fact that hospitals derive 40% of revenue from the prescribing of drugs. China’s official news agency has said that more pharma companies could be investigated as the government’s six-month-long drug crackdown advances, encompassing not just pharma companies but also illegal drug sales online and counterfeit traditional Chinese medicines.
China’s crackdown on the pharmaceutical industry could end up saving it a great deal of money, since, according to the World Health Organization, medicines account for some 43% of the total that China spends on health care. Another factor to consider is the growth of health care coverage in China, which, according to a recent McKinsey report, rose from 43% in 2006 to 95% in 2011; total government spending on health care was expected to rise from $357 billion in 2011 to $1 trillion by 2020.
Officials have already said they are looking into the pricing practices of perhaps as many as 60 drug companies, both Chinese and foreign. With such a massive market at stake, China’s crackdown has a dual purpose: to cut its costs and also to push domestic companies into competition with global pharmaceutical firms. Foreign pharma companies are pursuing market share in a country that is expected to come in second only to Japan in size as a market for pharmaceuticals in just a few years, and where foreign drugs, despite their higher prices, are popular because of fears of contamination and poor quality of domestically produced medications.