A bitter pill to swallow

Bribery Claims against drug multinational may be catalyst for change in Chinese market

The Chinese authorities' investigations into GlaxoSmithKline will serve as a warning to other multinational pharmaceutical companies and encourage them to strengthen their corporate code of ethics in China, experts say.

They say challenges inherent in China's healthcare industry concerning bribery should not be an excuse for foreign drug manufacturers to ignore their own ethics. Instead, they should invest greater efforts in maintaining standards.

"Companies entering China must proceed slowly, engage in vigorous training and auditing, work with other companies to set ethical standards so no one is tempted to bend the rules," says Arthur Caplan, director of the division of medical ethics at New York University Langone Medical Center.

Caplan, who chaired an advisory committee on bioethics at GSK from 2005 to 2008, added that foreign multinationals should work with Chinese health authorities to strengthen ethical standards.

Caplan's views are echoed by Keith Bowman, equity analyst at Hargreaves Lansdown Stockbrokers, who adds that China's investigation of foreign pharmaceutical companies can bring concrete changes to practices in the country.

"We are already seeing these pharmaceutical companies' willingness to improve transparency and adjust their practices, and I believe it will happen," Bowman says.

The Chinese authorities began an investigation early last month into GSK following allegations that it had bribed doctors to prescribe drugs and that it had inflated drug prices.

As evidence of the scandal unfolded, chief executive Andrew Witty apologized on July 24, claiming that GSK's head office had no knowledge of bribery practices until they were discovered by Chinese authorities.

Witty blamed the senior executives being investigated, saying they had "acted outside of our processes and our controls".

Apart from GSK, Chinese authorities have also visited the Chinese offices of UCB, AstraZeneca and Astellas Pharma.

Kenneth Boyd, a professor of medical ethics at the University of Edinburgh, says multinational companies have a responsibility to ensure that practices at overseas subsidiaries are consistent with their overall corporate code of ethics.

"Whether they actually have the capability is an empirical question, and presumably it would be ethically important for companies to have provisions in their corporate code of ethics about how to act in circumstances where their capability is in doubt or questioned," he says.

While pharmaceutical companies in Europe and the US have refused to comment on the GSK case directly, they agree on the need to ensure employees at international subsidiaries follow their headquarters' code of ethics.

The Switzerland-based International Federation of Pharmaceutical Manufacturers and Associations also emphasized the importance of pharmaceutical companies maintaining ethical standards internationally "for the benefit of patients worldwide".

Li Ling, professor of the China Center for Economic Research at Peking University, says bribery is common in China's pharmaceutical industry and results in inflated drug prices.

A sales manager for a foreign drug company in China told China Daily that bribery is "a hidden rule" in the country's medical sector - with money or favors paid to doctors, hospitals and officials to list or prescribe certain drugs - and said it was unfair that Chinese companies are not also being investigated.

A senior executive of one of the major international drug manufacturers says his company now faced a dilemma.

"We have an ambitious investment plan in China, but now we have to be very cautious," he says. "We treasure the opportunities here, while fair treatment must be under consideration."

Sales of pharmaceuticals have grown rapidly in China, reaching 600 billion yuan ($97.72 billion, 74.02 billion euros) last year, with average annual growth exceeding 20 percent over the past five years, compared with 0.3 percent in developed markets, statistics from research company IMS Health Inc show.

Within this emerging market, multinational drug makers have been enjoying double-digit growth for more than a decade, while their performance in the developed nations was flat, or fell during the economic slowdown after 2009.

"The transnationals cannot give up the market," says Liu Junhai, director of the Commerce Law Research Institute at Renmin University of China. "They have enjoyed preferential treatment for many years; now they have to rethink their strategies, as the market is becoming more sophisticated."

He says the Chinese government has sent a signal to the multinational companies that China is regulating its environment to provide fair competition and cracking down on all kinds of malpractices.

China's new leadership is aiming to reform the healthcare system to provide better services for the country's 1.3 billion people.

As a part of an effort to make medicines more affordable, the National Development and Reform Commission has asked 60 drug manufacturers to submit their cost and pricing files for review, including 27 foreign companies.

"The government is putting pressure on drug makers to lower prices," says Peking University professor Li. "Foreign companies should be the first to bear the brunt, because most of their medicines are self-developed and enjoy higher prices compared with their counterparts in China."

Many multinationals claim that the research and development costs - usually 10 years and $1 billion for discovering a new drug - should be taken into account when setting prices. Appropriate returns, they say, enable them to continue to invest in R&D on the next generation of breakthrough drugs.

However, anti-corruption efforts and pressure to cut prices will not solve the fundamental problem if China's medical reforms and changes to the healthcare market mechanism do not go far enough, says Guo Fanli, an analyst at China Investment Consulting Co.

The National Health and Family Planning Commission and the NDRC have both pledged to set up a new mechanism to replace the one in which hospitals mainly depend on medicine sales for revenue.

The separation between healthcare services and drug sales is a must, says Renmin University's Liu, to prevent conflicts of interest.

"Anti-corruption efforts should be strengthened at government level," he says. "Administration and executive responsibilities should be clearly clarified among various government bodies."

This year the Chinese government reiterated its determination to root out corruption and has been seen to punish groups of offending officials.

"The market is turning more and more transparent and standardized," Liu says. "I believe that's a good thing for multinational companies in China."

Contact the writers through liujie@chinadaily.com.cn

(China Daily Africa Weekly 08/09/2013 page21)