Big Pharma On Its Heels as China Rounds Up “More Of The Usual Suspects” And Prepares To Slam GSK

Allegations of misconduct continue to plague Big Pharma companies in China.  Charges of bribery, corruption, off-label promotion, and inflated pricing now extend beyond GlaxoSmithKline (GSK) to Novartis, Eli Lilly, and Sanofi.  While these companies react to coming under Chinese scrutiny — with Johnson & Johnson (J&J) reportedly taking “proactive” steps to strengthen its China unit –  the Company that started it all (GSK) braces for major fines.  Background

Let’s recap.  As we first reported in our post titled, “Enemy at the Gates: Bribery Charges Getting Worse for GSK,” only a few short weeks ago, when the Wall Street Journal (WSJ), Reuters and other news organizations were reporting that a whistleblower had charged that GSK had engaged in systemic corruption in China for years — including a plan to target dozens of Chinese physicians for bribes in a strategy dubbed “Vasily” after a famed Russian World War II sniper — GSK at first denied any wrongdoing.  Since that time, former GSK China employees have been arrested, detained from leaving the country and interviewed on Chinese television “confessing” to the corruption.  For its part, GSK acknowledged that its policies had been violated and pledged to work with the Chinese government in rooting out corruption and cleaning house in its Chinese unit.

As we wrote in a July post titled GSK China Bribery Scandal Continues to Grow; Astra Zeneca and Others May Be Next, most observers believed that GSK would not be alone in the burgeoning Chinese probe.  Recent reports confirming that other pharmaceutical companies are now under Chinese government scrutiny have taken at least some of the spotlight off GSK (at least for now).  Here is what we know:

• In early August, a former Novartis saleswoman now turned whistleblower described how she was ordered to offer kickbacks to doctors for prescribing target amounts of particular drugs, as well as offering financial incentives for promoting off-label uses.
• Elli Lilly has been accused of offering 30 million yuan (about $4.9 million) in kickbacks to Chinese doctors to push the company’s key insulin products in Shanghai and Anhui province.  A former senior manager, acting as a whistleblower, described the bribery and illegal payments as widespread, including paid talks, funded doctor conferences, and other illegal contributions.
• A Sanofi whistleblower has alleged that the company bribed over 500 doctors and paid over 1.7 million yuan for research grants in order to boost sales.
• J& J, with Chinese operations encompassing 9,000 employees and $2.5 billion in 2012 sales according to Reuters, has been moving quickly to reorganize multiple Chinese operations that formerly reported to U.S. executives under one local Chinese chairman. While the company denies any connection to the alleged ongoing bribery taking place in other companies, the new reporting structure is expected to add an enhanced layer of oversight to its Chinese operations.
• As the scope of the investigation broadens, AstraZeneca, Lundbeck, UCB and Novo Nordisk have all reportedly been visited by Chinese officials, although it is not certain if these visits were connected to the investigation.

And, then, there’s GSK.  Despite the Company’s aggressive steps in addressing the mess, the Chinese government has shown no sign of letting up on the British pharma giant.  Chinese authorities and cooperating GSK China executives have indicated that the drugmaker’s alleged scheme to bribe local doctors to win business was not the work of individual salespeople gone rogue, but the result of a concerted plan by GSK itself, according to reports this past Tuesday by Chinese media.  Specifically, GSK China executives told China’s official press outlet, Xinhua News Agency, that the Company’s high sales growth targets and a compensation scheme that would have salespeople lose several thousand yuan each month for missing sales targets made it virtually impossible to achieve those sales goals without bribes. (Note: 1,000 yuan is roughly $163 in U.S. dollars).  According to Xinhua, the government investigation has also found that GSK’s sales teams had set aside millions of yuan on what was euphemistically termed a “public relations funds” to cultivate and maintain connections with major hospital executives.  And if this weren’t bad enough, on Tuesday the Chinese government all but announced that it would be slamming GSK with the kind of fines reminiscent of the $3 billion record fine GSK paid just last year in the U.S.  “We should learn from the practice of other countries in imposing astronomical fines,” the Ministry of Public Security said on its website Tuesday, according to the South China Morning Post.

Observations

As the steady stream of alleged illegal conduct on the part of GSK and other Big Pharma companies continues to appear in the press on an almost daily basis, the Chinese government is reportedly intensifying efforts with a fresh three month probe.  Additionally, the Chinese National Development and Reform Commission (NDRC), which oversees drug pricing, is investigating the pricing practices of 60 pharmaceutical companies; moreover, the State Administration for Industry and Commerce (SAIC), which oversees the Chinese markets, is investigating sales practices that might violate a 2008 Chinese anti-monopoly law.

In a prior post, we stated the following:

Although multinational pharmaceutical companies have determined that China’s nearly 1.4 billion population is too large and too lucrative a market to resist, the country is the perfect metaphor for the proverbial “rock and a hard place.” Even if drug companies can appease the Chinese government with price reductions for their products, they will all still find themselves in the same predicament when the dust settles. Chinese physicians will still be underpaid and undoubtedly will still expect something “extra” from a drug company to ensure that his/her prescriptions are written for that company’s products.

When I taught White Collar Crime at Rutgers Law School, I would devote considerable time explaining to my students the difference between extortion ‘under color of law’, where there is one offender (the government official who is both recipient and extortionist) and one victim (the payer), versus bribery, where both recipient and payer are criminal offenders.  Everyone agrees that the allegations in China all involve classic bribery in which both the pharma payers and health care provider-recipients have reportedly violated the law.  If we are to believe current news reports that China will also be cracking down 0n its hospitals and physicians for taking bribes from pharmaceutical companies, then there may be hope for cleaning up  China’s health system and the companies that do business there.