News / Asia

Health Care Bribery in China: Why it Worries Global Drug Makers

A Chinese national flag flutters in front of a GlaxoSmithKline (GSK) office building in Shanghai, July 12, 2013.
A Chinese national flag flutters in front of a GlaxoSmithKline (GSK) office building in Shanghai, July 12, 2013.
A high-profile Chinese investigation of alleged bribery at Britain-based drug giant GlaxoSmithKline is drawing attention to the growing presence of foreign pharmaceutical companies in China's booming health care market.

The recent arrest of four Chinese GSK executives implicated in the scandal also highlights the challenges facing the foreign drug makers as they deal with deep-rooted corruption in Chinese health care and Beijing's new efforts to crack down on it.

Chinese authorities announced the arrests on Monday, saying the executives are suspected of bribing doctors, hospitals and government officials to boost sales and prices of GSK products in China.

China also has placed a travel ban on the British finance director of GSK's China division, Steve Nechelput, preventing him from leaving the country.

GSK confirmed the ban on Thursday, but said Nechelput has not been questioned or detained. It also has pledged to cooperate with Chinese authorities in combating corruption.

GSK is one of 38 multinational drug companies with research and development capabilities operating in China. An organization representing those firms, the R&D-Based Pharmaceutical Association Committee (RDPAC)), said they invested $3 billion in China from 2006 to 2010.

Growth potential

Victoria Lai, a New York-based China analyst at the Economist Intelligence Unit, told VOA that foreign drug companies see China as a crucial market to grow their business as sales slow elsewhere.

"The pharmaceutical market in China is still relatively undeveloped," she said. "The size of the market is only around 17 percent of the size of the U.S. market (by value), even though the [Chinese] population is much bigger."

The EIU says pharmaceutical sales in China reached $69 billion in 2012. It predicts those sales will more than double to $166 billion in 2017.

"By then [China] will have surpassed Japan to be the world's second biggest pharmaceutical market," Lai said. "So that is something that foreign drug makers really do not want to miss out on."

Several factors have contributed to surging purchases of pharmaceuticals in China.

"Health care coverage in the country has been expanding rapidly and incomes are rising rapidly as well," Lai said. "As China grows richer, they are experiencing more lifestyle changes leading to different diseases. For example, with changing diets, more people are getting what we would call rich world diseases, like diabetes."

Besides selling drugs in China, multinational companies also have increased research and manufacturing operations there.

Deepening investment

RDPAC says its members spent about $1 billion to build 22 R&D facilities in China from 2006 to 2010. It says 70 percent of member companies also have established Chinese manufacturing plants.

Lai said foreign companies need the R&D facilities to run clinical trials of their medications before Chinese regulators will approve them. She said Chinese officials also have been encouraging the companies to manufacture the drugs inside China.

"Part of this is because they want to boost various sectors of their economy, and biotech and pharmaceuticals manufacturing is very attractive, because it counts as higher value and can generate quite a bit of output and tax income in the future," she said.

The expansion of foreign drug makers in China also has increased their risk of involvement in corrupt practices that have plagued Chinese hospitals and clinics for decades.

Bribery risks

American firms Pfizer and Eli Lilly paid tens of millions of dollars to the U.S. government last year to settle charges of corruption in foreign markets, including China.

Wang Fangqing, a Shanghai-based health reporter for SCRIP Intelligence, told VOA it is common for drug makers, foreign and local, to pay bribes to ensure that drugs are distributed in hospitals and prescribed to patients. "GSK is definitely not alone," she said.

Many Chinese medical workers accept bribes and sell drugs at artificially high prices to supplement low incomes and weak state funding for health care. Such practices are so typical that Chinese people often refer to them by the phrase Yi Yao Yang Yi, or "feeding hospitals by selling drugs."

Wang said China launched health care reform almost a decade ago to change that system. "But little has changed," she said.

EIU analyst Lai blamed the lack of progress on poor enforcement of rules against corrupt behaviors.

"Those [drug companies] that do not adopt these practices find it really hard to compete with those that do," Lai said. "They see themselves as being left behind in terms of being prescribed to patients. This is the case not just for foreign drug makers but for local drug makers as well."

The Chinese government's investigation of GSK and other recent measures indicate that Beijing is getting tougher.

Crackdown intensifies

The State Food and Drug Administration said Wednesday it will stage a six-month operation against drug industry misconduct.

China's National Development and Reform Commission also recently launched an investigation of prices charged by 60 local and international drug makers, including units of GSK, U.S.-based Merck and Japan's Astellas Pharma.

Belgium-based company UCB said Thursday Chinese regulators have visited its offices and those of other drug makers in recent days.

Beijing is under pressure to act in response to long-running public anger about the high prices of medications not covered by state health insurance plans.

But Lai said it is too early to tell if China is serious about including domestic companies in the crackdown.

"It could be another example of Chinese investigators targeting a high profile Western company just to make a point. There is a risk that it is only targeting foreign companies to give local drug makers a bit of a leg up [boost]."

In a commentary published Thursday, Chinese state news agency Xinhua denied any attempt to "sacrifice international firms to give domestic companies unfair advantages."

Xinhua said Beijing is "firmly opposed to commercial bribery in all forms." It vowed that malpractice by "any enterprise -- Chinese, foreign or jointly-funded -- shall be punished."

Michael Lipin

Michael covers international news for VOA on the web, radio and TV, specializing in the Middle East and East Asia Pacific. Follow him on Twitter @Michael_Lipin

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