NYT
For Drug Makers, China Becomes a Perilous Market
By KATIE THOMAS
Published: July 16, 2013
Global drug companies now employ more sales people in China than they do in the United States, their largest market. Several, including Merck and GlaxoSmithKline, are making huge scientific investments in the country, including building research and development centers. Within the next few years, China is poised to surpass Japan as the world’s second-largest pharmaceutical market.
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Aly Song/Reuters
Selling pharmaceuticals and other health care products in China is increasingly fraught with peril, as shown by bribery allegations this week involving GlaxoSmithKline.
The booming Chinese demand for drugs couldn’t come at a better time for Western manufacturers, whose sales have been slumping because of patent expirations in the United States and stringent price controls in Europe.
But selling pharmaceuticals and other health care products in China is increasingly fraught with peril, as shown by allegations in China this week that GlaxoSmithKline funneled payments through travel agents to doctors, hospitals and government officials to bolster drug sales in the country.
Chinese officials have compared the company’s operations to organized crime and have detained four Chinese executives for questioning. Shortly after government investigators raided the British drugmaker’s Shanghai offices last month, the British executive in charge of the company’s Chinese operations left the country. He hasn’t been back since.
Earlier this month, the top manufacturers of infant formula, including Abbott and Nestlé, lowered their prices in China under government pressure, and Chinese officials have said they are investigating the pricing policies of up to 60 foreign and domestic drug companies.
The rash of investigations is one measure of how critical the health care market has become to global companies — and to the Chinese government. The Chinese have made no secret of their goal of pushing the country’s domestic drug industry into more direct competition with the world’s top manufacturers.
As a result, global companies can expect more scrutiny, said TarunKhanna, a professor at Harvard Business School who has studied foreign investment in China.
“Practices that may have been O.K. some time back may be more scrutinized by foreigners now,” he said, especially as the government seeks to shift from an export-based economy to one that is also focused on selling to Chinese consumers. “They’re trying to get more balance back.”
Several factors are contributing to the boom in China, experts said. China’s growing economy has given rise to a middle class that is increasingly able to afford expensive Western drugs, and to treat conditions – such as depression and respiratory illnesses – that may have otherwise gone undiagnosed or unmedicated.
And under a new health care program, China has expanded insurance coverage to hundreds of millions of new patients – 95 percent of the population had insurance in 2011, compared to 43 percent in 2006, according to a recent report by the consulting firm McKinsey & Company. By 2020, China’s total spending on health care is expected to grow to $1 trillion, from $357 billion in 2011, according to McKinsey.
Even as foreign companies raise their investment, the Chinese are also looking to capitalize on the booming health care market. The government identified the medical industry as one of seven key areas for development in its most recent five-year economic plan, and the country’s medical sector invested $160 billion in research and development in 2012, nearly surpassing Japan, according to a recent report by the Boston-based Lux Research.
“China is interested in building a very strong, homegrown industry,” said Kevin Pang, a research director at Lux.
But some believe Western companies will have an edge because consumers may be willing to pay more for brands that are known for high-quality ingredients.
“There are so many drugs that are poor quality in China, so the ability to differentiate yourself is important,” said Craig A. Wheeler, the chief executive of the American generic drug maker Momenta Pharmaceuticals. His company is developing complex drugs known as biosimilars through a business deal with Baxter, which has an established presence in China.
Mr. Wheeler said the recent crackdowns are to be expected. “These markets are maturing, and these markets are going to be therefore more highly regulated,” he said.
The bribery investigation into GlaxoSmithKline comes as the company has been struggling to rebuild its image in the wake of a historic $3 billion fine in the United States last year, in which the company admitted to improperly promoting its antidepressants and failing to report safety data about the diabetes drug Avandia. Andrew Witty, who took over as chief executive in 2008, has repeatedly pitched the company as a global leader in ethical practices and said it has moved on from its previous lapses.
Chinese investigators told a different story on Monday, however. At a news conference in Beijing, they said senior executives organized fake conferences, overbilled for training sessions and paid kickbacks in cash and luxury travel. The illegal activity was funneled through travel agencies, authorities said, some of whom even hired young women to engage in “sexual bribery” with GSK managers in an effort to win long-term contracts with the company.
The Chinese government said it had detained four senior executives – all Chinese nationals – but noted that the British head of the Chinese operations, Mark Reilly, had left the country shortly after authorities raided their offices. A spokesman for the company confirmed that Mr. Reilly left China about 10 days ago, and that he was currently working from the company’s offices in England. He declined to comment on whether Mr. Reilly planned to return to the country.
In a statement, GSK said it was “deeply concerned and disappointed” by the allegations. “GSK shares the desire of the Chinese authorities to root out corruption,” the company said, adding that it has stopped its relationships with the travel agencies identified in the investigation and is reviewing its past transactions with them. “These allegations are shameful and we regret this has occurred.”
While some said the investigation was unusual for both its scope and the forceful actions taken by the Chinese government, several analysts said that on some level, such activities are typical of foreign companies seeking to do business in China and other emerging markets.
“These days, you don’t see very often the cash stuffed in an envelope given to some government officials,” said Michael Li-Ming Wong, a former assistant United States attorney who often advises companies on how to comply with the Foreign Corrupt Practices Act, the American law that prohibits companies doing business in the United States from giving bribes to foreign officials. “Instead, what you see is benefits disguised in some form, like through travel reimbursements or through speaking fees that are disproportionately high.”
Such practices have attracted growing attention from the United States, which is pursuing investigations of several large pharmaceutical companies, including GlaxoSmithKline, according to financial filings.
Last year, the American drug maker Eli Lilly agreed to pay $29 million to settle charges filed by the Securities and Exchange Commission that it had used third parties to funnel bribes to overseas government officials. In China, employees at a Lilly subsidiary falsified expense reports to provide spa treatments, jewelry and other gifts, S.E.C. officials said. Pfizer and the medical device maker Biomet have also recently settled federal charges of bribery in China and other countries.