China Wrings Price Cuts in Public Campaign on Graft-to-Collusion

China Wrings Price Cuts in Public Campaign on Graft-to-Collusion

When GlaxoSmithKline Plc (GSK) sent a top executive to Beijing this week to apologize in person for alleged corruption, he delivered a second pledge: cheaper drugs.

“We fully support the efforts of the Chinese authorities in their reforms of the medical sector,” Abbas Hussain, the London-based drugmaker’s president overseeing emerging markets, said in a statement on the website of the Ministry of Public Security, the country’s top law enforcer. Any savings in the way Glaxo operates, he said, will be passed to consumers, “ensuring our medicines are more affordable to Chinese patients.”Behind China’s expanding anti-corruption probe of international drugmakers is a populist campaign to drive down drug prices as China, like the U.S., seeks to expand health care to the poor and uninsured. The pressure on multinationals comes as the country faces a slowing economy that threatens its promise to deliver rising living standards and as President Xi Jinping has made affordable health care a key part of the Communist Party’s agenda.

“Think of it from Xi’s perspective: He knows there’s a billion people outside the Zhongnanhai walls who are very concerned with health-care costs,” said Jason Mann, Hong Kong-based founder of health-care fund Konus Capital, referring to the central-government compound. “He’s looking to improve health care, increase access and lower costs. Especially because the government is paying 60 percent of the overall bill.”

The anti-corruption probe will probably hurt Glaxo’s sales in China, Chief Executive Officer Andrew Witty said in a statement yesterday as the company released second-quarter earnings, adding that it’s too early to say what the impact will be. Glaxo also will probably adopt a tiered pricing structure for the market, Witty said on a conference call.

Goodwill Discounts

While a fine and legal damages are expected, Glaxo may also give further price discounts as a means of goodwill and reparation, Fabian Wenner, a health-care analyst with Kepler Capital Markets in Zurich, said in a note.

China is using anti-corruption probes to put pressure on other multinationals and foreign companies to lower prices on everything from infant formula to television screens.

In July, Nestle SA (NESN), Danone SA (BN) and Mead Johnson Nutrition Co. (MJN), lowered their prices as much as 20 percent after antitrust regulators pursued a probe of foreign infant-formula makers.

In January, regulators fined six liquid crystal display makers from South Korea and Taiwan a record $56 million for price fixing, the first penalties given exclusively to foreign companies.

Top Priority

Controlling costs in China’s $350 billion health-care industry is a top priority for the government, which has vowed to extend drug-price cuts to trim the cost of caring for an aging population.

Authorities budgeted 850 billion yuan ($138 billion) in April 2009 for a health-care overhaul to reduce the costs of essential drugs and provide more than 90 percent of the population with basic health insurance. Spending in the three years since then had exceeded 1.1 trillion yuan, Xinhua reported in March 2012.

Drug markups at hospitals, along with bribes and distribution inefficiencies, have resulted in overcharging patients and the government, who split health-care costs in China, Mann said.

Rampant bribes, commissions and corruption have raised drug prices, making it difficult for public hospital improvements to push forward, according to Yanzhong Huang, senior fellow for global health at the Council on Foreign Relations in New York and author of the book, Governing Health in Contemporary China.

People’s Hearts

“Medical reform is something very close to the heart of the Chinese people and a key part of this is to have a standard list of drugs that can be provided to the people at reasonable prices,” said Joseph Cheng, a political science professor at the City University of Hong Kong. “This crackdown that aims to lower prices increases support for the Communist Party overall.”

Premier Li Keqiang, who’s shown a tougher side than his predecessor when he jolted world markets last month with a hard stance on domestic lending, also is in charge of overhauling the medical system, Cheng said.

Chinese officials charge that Glaxo built a marketing strategy that inflated drug prices because it relied on bribery, pumping billions of yuan through hundreds of travel agencies for kickbacks to China’s underpaid doctors to prescribe their drugs. Drugmakers Sanofi, Novartis AG, Merck & Co. (MRK) and Roche Holding AG (ROG) have said they worked with the same travel agency at the center of the police investigation into Glaxo, and have since stopped using it.

“The government is taking a populist tack,” said Kerry Brown, executive director of the China Studies Center at the University of Sydney. “Foreign companies are going to have to make incredibly hard strategic decisions about how much and how hard they can engage in a market where they are going to be asked to make some huge compromises.”

To contact Bloomberg News staff for this story: Natasha Khan in Hong Kong at nkhan51@bloomberg.net; Henry Sanderson in Beijing at hsanderson@bloomberg.net