Thursday, July 25, 2013

China: Massive Kickback Scheme Mars Pharmaceutical Industry, GSK Implicated

According to Reuters and China's official news agency, Xinhua, more foreign pharmaceutical firms could soon be implicated in a corruption scandal sweeping the industry, in the wake of bribery allegations against British drug maker GlaxoSmithKline (GSK). 

Xinhua did not identify any firms or hospitals, but said the government was trying to grapple with "rampant" malpractice in the pharmaceutical sector, including corruption and a system of institutionalized kickbacks. 

Xinhua also reported that more than 1,000 doctors, nurses and administrators at 73 hospitals in Zhangzhou city in the southeastern province of Fujian had been found taking kickbacks.

Also, state broadcaster, CCTV, said 90% of the city's doctors were involved and that authorities had recovered 20.5 million yuan ($3.34 million) in illicit funds after a six-month investigation.

Chinese police have implicated GSK in a system of funneling up to 3 billion yuan ($489 million) to travel agencies to facilitate bribes to doctors and officials to boost sales and the price of its medicines in China. 

Xinhua emphasized that multinational pharmaceutical companies should set a good example for local firms, yet the reality is that because China has so little quality control oversight, most Chinese prefer foreign-made pharmaceuticals because they are more reliable, less harmful or are not produced as placebos. 

COMMENT: Chinese police have also questioned local employees from another British drug maker, AstraZeneca. The company has said police were treating this as an individual case and not related to other investigations. Authorities have also visited the offices of Belgian drug maker UCB. 

Corruption in China's pharmaceutical industry is particularly problematic due in large part to the very low base salaries for physicians at the country's 13,500 public hospitals. 

The reality is that everyone in China knows full well that many Chinese pharmaceutical manufacturers sell low-quality products that may or may not be harmful to humans. Thus, until the Chinese government compensates medical professionals with a fair wage, institutionalized corruption will never end.

Ironically, it is the foreign pharmaceutical companies that produce quality products, which is why the Chinese government is covering up its own ineptitude by blaming foreign drug companies. 

Rather than compensating those in the medical profession adequately (including drug reps), enhancing their quality control of the Chinese pharmaceutical industry, conducting criminal investigations of local manufacturers who market low-quality products and upgrading the yuan to a fair rate against major hard currencies, the Chinese have taken the easier path by harassing foreign companies.

This report will be updated as new information becomes available.