The recent revelations about fraud and corruption at GlaxoSmithKline’s China operations have thrown up more questions than answers. How much did the senior management, both in China and at corporate headquarters know? Are the four Chinese nationals currently being held by authorities the only culprits within the company? Why did the authorities zoom in on GSK? And who’s next?
On Transparency International’s Corruption Perception Index China dropped from 75th in 2011 to 80th out of 174 in 2012 and it is hard to be surprised by reports of corruption in China, at least when you are over the border here in Hong Kong where there are daily news reports of mainland Chinese corruption big and small.
Some commentators have asserted that the investment community has been too phlegmatic about the impact of corruption in China on GSK: after all, it only accounts for 3% of the firm’s global sales. But listening in on the July 24 quarterly results investment analyst webcast, that wasn’t my impression.
In his opening remarks, chief executive officer Andrew Witty reiterated what had already been said by company spokespeople, adding his own personal sense of “deep disappointment.” Despite asking the analysts to understand that he could give no more information at this early stage, and clearly hoping to focus on the company’s earnings news and product pipeline, one after the other analysts pressed him for more colour about the implications for their China business; what it said about GSK’s control over its sales force in other emerging markets; and the earnings implications of what Witty described as potentially “changing our business model in China.”
Any international pharmaceutical industry executive engaging with China must be aware of the role that corruption plays in China’s health system. For the uninitiated, Reuters explains it well: when a fresh graduate from medical school earns the same as a taxi driver – approximately RMB3,000 a month (£317, $489, €368) – the balance needed to make a decent living has to come from somewhere.
A much-touted editorial from the state news agency Xinhua on July 24 called on international players to raise the ethical bar for China by shouldering their “due responsibilities to bid farewell to malpractice, setting a good example and serving as a wake-up call for domestic pharmaceutical companies.” That’s easier said than done when the rules of engagement are determined by the structural weaknesses of the Chinese health system itself.
My guess is that senior management at GSK were aware of the lubricating function of backhanders in China’s pharmaceutical industry but didn’t have the inside knowledge required to fully understand the mechanisms by which the transactions are conducted. Witty made an oblique reference to the peculiarities of China’s healthcare environment when he told analysts that “there are many unique characteristics, to state the obvious, about China and, therefore, some of the circumstances that may exist in China simply are not replicated elsewhere.”
So now that fraud at GSK’s China operations has been exposed, the obvious question is: who’s next? There are reports of AstraZeneca and Belgian biopharmaceuticals firm UCB receiving investigative visits from the authorities, and the Xinhua editorial warned that other domestic and international pharmaceutical firms could come under the same harsh spotlight as GSK. Not necessarily. A Chinese idiom sums up the state’s approach to keeping control: kill a chicken to frighten the monkeys. The scale of the alleged corruption (£320 million worth of cash and sexual favours), the public apology by GSK’s head of emerging markets Abbas Hussain, the sudden departure of the head of China operations Mark Reilly and his replacement by vice president for Europe Hervé Gisserot, the likelihood that GSK will lower its prices, will have focused the minds of senior management across the industry in China.
Given that corruption is so widespread in China, one may wonder why the pharmaceuticals industry has been the one in the authorities’ cross hairs. It’s not the first. Booming demand for imported infant formula (the memories of thousands of children sickened and six dead due to melamine poisoning from domestic formula in 2008 are slow to fade) prompted the National Development and Reform Commission to launch an anti-trust investigation into the infant formula sector targeting foreign companies. It was launched on July 2 and a day later Wyeth Nutrition lowered its prices for 2014 by an average of 11%. Now it’s Big Pharma’s turn.
As the income gap widens, China is facing widespread social turmoil, and public distrust of officials exposed time and again, often through social media, as corrupt. The country’s health system is going through a significant process of reform that in time should lead to universal access to healthcare. In the meantime money still talks and the pressure of out-of-pocket expenses for health services is felt across the social spectrum. What better way to unite the populace than to be seen rooting out corruption in the industry that holds the health of the nation in its hands?
Jane Parry is a Hong Kong based public health and medical journalist and researcher.