Bribery investigation opens Chinese market to new players

Boosting domestic and unsullied international firms

Pharma - Waleed Alzuhair

Photo courtesy of Waleed Alzuhair

US and UK pharmaceutical firms face investigation and potential prosecution over allegations of bribery in China.

Novartis AG in China - one of the accused firms - Novartis AG

An initial investigation into alleged illegal payments made by the British pharmaceutical firm, GSK (GlaxoSmithKline) has now expanded to include numerous other major pharmaceutical players including the USA’s Eli Lilly, Switzerland’s Novartis and France’s Sanofi.

The implications of the allegations could be widespread. It could change the playing field in what is expected to soon become the second-largest pharmaceutical market (behind the USA and, currently, Japan) as well as trigger further inquiries in the USA, under the Foreign Corrupt Practices Act and other jurisdictions such as the UK under its Bribery Act.

The investigation could change how international drug companies do business in China and other growing markets. Previously, jail sentences for corrupt practices have been essentially non-existent in the USA and many firms view potential American fines as simply a cost of doing lucrative deals in areas with great potential and little regulation, says Peter Grant, conference developer at The International Pharmaceutical Regulatory and Compliance Congress.

Corruption is allegedly widespread in the Chinese medical and pharmaceutical sector – partially due to the low wages doctors are paid. International firms have set high growth targets in China and have traditionally claimed that corrupt practices were the work of a few bad apples, says Grant. “It’s pretty much par for the course out there.”

For example, last year Eli Lily was fined more than £18.6m (£29m) by the US government to settle bribery charges for officials in growing markets including China. The firm said it was the work of rogue employees in its Chinese business – a similar excuse to that given by GSK at the start of the recent Chinese investigations.

“We are deeply concerned and disappointed by these serious allegations of fraudulent behaviour and ethical misconduct by certain individuals at the company and third-party agencies,” said the GSK response at the time. “Such behaviour would be a clear breach of GSK’s systems, governance procedures, values and standards. GSK has zero tolerance for any behaviour of this nature.”

However, this time the Chinese do not appear to be willing to accept the “bad apple” argument – saying that the firms knew they could not achieve the growth targets set without “dubious corporate behaviour”. The investigations are continuing and there is now a chance that senior executives could be charged. Prosecution of senior company officials will significantly impair how these big firms do business in China now and into the future.

“You can’t send someone over to Shanghai if they think there is a chance they could go to jail,” says Grant. “The firms are scared of people going to jail and it could be enough to change company behaviour completely.”

Decreased activity or a level playing field will also open up opportunities for other players in the sector. Chinese pharmaceutical manufacturers and other, smaller international firms that are free of allegations of corruption and bribery stand to benefit from increased opportunities, Grant adds.

GSK now says that some of its senior Chinese executives acted outside of the firm’s controls and processes. It, Eli Lilly and the other firms under investigation will now have to see how things play out in China and whether they shall face further probes in countries such as the USA or UK.

In the meantime, other pharmaceutical firms with clean records could have a chance to get further involved in the Chinese market.

Next steps and more information

1. Asian compliance conference

2.  Times changing in US pharmaceuticals sector

Pharmaceutical research - Dan Harris and Argonne National Laboratory

Photo courtesy of Dan Harris and Argonne National Laboratory
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