Over the past couple of weeks, China has extended its anti-corruption campaign to the pharmaceutical industry. The biggest probe has hit British firm GlaxoSmithKline, whose employees are accused of bribing doctors and hospital employees with gifts, travel, lecture fees, and cash bonuses to get them to prescribe the company's drugs, totaling up to 3 billion yuan ($489 million). Four executives have been detained. Now police in Shanghai have begun investigating AstraZeneca, and state news agency Xinhua warns that the probe could widen further.
So far, the probes have focused on corruption allegations in marketing practices, but The New York Times reports the investigations could spread to the research sub-sector of the industry. The pharmaceutical market in China has huge potential, with the Economist Intelligence Unit estimating sales of $166 billion by 2017, so is a natural target for companies looking for growth. GSK’s revenue has increased 17% from last year, up to $1.1 billion. But the revelation of these shady practices raises questions about the future of the market.
Some have suggested that the investigations are politically motivated. This makes a lot of sense; as Xi Jinping’s new government stresses its authority, the pharmaceutical industry is a visible target to impress consumers. Prices for drugs have risen, so this could be seen as a move to combat price gouging.
An anonymous industry expert has suggested the corruption was inevitable- the margin between what a doctor is paid in Beijing (a couple of hundred U.S. dollars a month) and the high cost of living (German cars, foreign education for children) means that under-the-table payments have to correct the system.
Additionally, Chinese regulations dictate that a local affiliate is not permitted to market the foreign products of its parent company, so the parent is forced to look at other means of marketing. This certainly explains in large part why the companies act as they do. But does it mean they should?
There are certainly some clear inefficiencies in this market, and corruption has flourished in response.
It is perhaps foolish to pay doctors in a cosmopolitan capital such low salaries, but bribes are a dangerous way to compensate for low pay. Transparent competition in a regulated market means companies will have to genuinely improve their products.
If doctors are competing under illegal conditions, business can become a race to see who outbids the other. This doesn’t have much to do with an incentive to make one’s drugs cheaper or more effective. Without effective regulation, bad practice can occur in more impactful areas of the industry – as GSK’s internal audit of its Shanghai lab practices has shown.
These companies are not scheming how to bribe their way to profits; they are simply exploiting a loophole that exists. Such a flagrant architecture of corruption may seem foreign in America but bribes happen here too – GSK has been paid $3 billion to the US in a settlement last year. The transition to more transparent practices might be uncomfortable for some of the companies in China now, but it will be beneficial in the long run.
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