Regulators Get Tough on Corruption in China

In July 2013, four Chinese executives from GlaxoSmithKline (GSK) were arrested by the Chinese government for offering up to $534.5 million in bribes to doctors and officials in a move to secure higher prices and market share. Subsequently, other companies such as Bayer, Baxter, and Novartis have also been on the radar of the Chinese government as it extended its probe. Local companies including Sino Biopharmaceutical and Gan & Lee Pharmaceutical have not been spared either.

China’s healthcare spending is poised to grow from $357 billion in 2011 to $1 trillion by 2020, according to a McKinsey & Company report (1). China is an attractive destination for multinational companies and is considered by many industry players as one of the top three markets in total revenue contribution. Looking ahead, China’s healthcare market is likely to be shaped by continued economic and demographic development, further healthcare reform and the direction of the twelfth five-year plan.

Anti-bribery rules enacted
Looking back, the execution of Zheng Xiaoyu, former director of the China State FDA, for accepting over $1 million in exchange for influencing drug approvals, set the momentum for better regulation and enforcement. Over the past six months, Chinese President Xi Jinping has become increasingly vocal in championing compliance reform.

Most recently, China’s National Health and Family Planning Commission (NHFPC) has enacted a stringent “blacklisting” system for those violating anti-bribery rules that will take effect on March 1, 2014. Violators will be banned from bidding in public hospitals and government-aided healthcare facilities (GAHFs) in the province where the offence occurred. The most compelling aspect of the planned move is that first-offender blacklisted companies or sales agents will be banned at the provincial level from bidding for contracts from public hospitals and GAHFs for two years within the province where the confirmed bribery took place. Last December, the authorities also issued warnings to doctors against accepting bribes from companies.

Aaron Zhong, senior consultant healthcare practice of Frost & Sullivan China, says, “The ongoing bribery cases have great impact on the industry. Multinational companies are stepping up efforts to tackle corruption in the China market. These companies are expected to tighten control on fees and expenditures, strengthen training for sales staff, and be more legally compliant. They have to ensure that their activities do not breach China market business rules while also staying in line with China laws and international practices.” Profit margins of pharmaceutical companies also took a hit as a result of the government’s move. Anecdotal evidence suggested that overall growth rates for overseas drug firms has tapered down to approximately 8-10% from some 20%, a distributer working with foreign drug manufacturers in China says.

Culture change needed
Ian Wilcox, global director of Hay Group Life Sciences adds, “Many of the customary ways the Chinese and other emerging market countries have done business in the past no longer work for them in the increasingly global market place, but these practices are hard to shake. The challenge here is to find ways to effectively combat these practices with a combination of comprehensive, yet enforceable regulations that strike a balance between multinational and local interests—and, most importantly protect the well-being of the Chinese citizenry.”

For example, certain underlying social conditions such as low pay for physicians and others in the health science field, create an environment ripe for corruption. Physicians are ‘laying low’ as a result of recent events with many refusing to meet pharmaceutical representatives. If this persists, it is likely that more scandals relating to physicians’ poor economic circumstances will surface, Wilcox says.

Companies must take compliance issues seriously and  implement appropriate actions to fit the changed environment. Wilcox says, “They must maintain conforming internal policies, hire those people in key roles who are equipped and rewarded to follow these policies, and ensure that those who do not to be removed from authority. People must be taught how to manage themselves and their people in a way that creates a ‘compliant culture’—one that operates within the spirit and the letter of the law.”

For example, GSK has acted swiftly by changing the way it pays staff in China. It also did away with rewarding individual sales targets for commercial employees and bonuses linked to the use of its medicines by prescribers visited by sales representatives promoting its drugs.

Looking ahead, we are likely to see more regulation and enforcement, Wilcox says. More importantly, there is a need to ensure consistency and clarity. In the end, China’s interests are served if it can strike a delicate balance between attracting global life sciences players, while at the same time nurturing its domestic development. The country will likely remain a strong market for multinational life sciences companies. But, there is too much complexity, a history of inconsistent policies, and a strong culture of self-protection that will make it hard for outsiders to venture.

Reference
1. McKinsey & Company, Healthcare in China: Entering promising and ‘uncharted’ water, accessed Feb. 21, 2014.

About the Author
Jane Wan is a freelance writer based in Singapore.