Beijing takes on big beasts of global drugs industry

July 24, 2013 6:04 pm

Beijing takes on big beasts of global drugs industry

By David Pilling

Regulators are flexing their muscles with greater powers and long-dormant laws

Kill the chicken to scare the monkey is a well-known Chinese expression to describe the tactic of cracking down on the little guy in order to frighten the big beasts into stepping into line. In taking onGlaxoSmithKline, a gorilla of the global pharmaceuticals industry, Chinese authorities have gone straight for the monkey. The Anglo-American drugs company, which employs about 5,000 people in China, has become embroiled in a scandal over alleged payment of bribes to doctors in return for prescribing GSK medicines. According to the allegations, inducements to often lowly paid doctors, hospitals and government officials were funnelled through travel agencies for fictitious or overbilled travel and conference services.Chinese authorities have detained four GSK executives and banned its finance director from leaving the country. Abbas Hussain, GSK’s president of international operations, who was dispatched to China to deal with the fiasco, issued a statement admitting that senior GSK executives appeared to have breached Chinese law. The company would, he said, change its way of doing business and pass on resulting cost savings in the form of lower drug prices.

The affair may not be limited to GSK. The European drugmakers SanofiRoche and Novartis in the past all used Shanghai Linjiang, one of the travel agencies accused of being an intermediary, though the companies said they had stopped their association. Police also briefly detained an AstraZeneca employee and questioned two of its sales executives. Separately, the National Development and Reform Commission has launched an inquiry into the pricing practices of drug companies, including GSK.

There are several interrelated reasons for the sudden and severe crackdown which, in GSK’s case, may have been triggered by a whistleblower. First, regulators have been flexing their muscles beyond pharmaceuticals. Antitrust agents recently put tough conditions on Glencore’s $65bn takeover of the mining group Xstrata. In January the NDRC slapped a $57m fine on six Asian liquid crystal display makers, including Samsung, for price fixing. This year, too, Nestlé cut its prices of infant baby formula by a fifth after regulators launched an inquiry.

Second, as Chinese planners shift their focus from exports to domestic consumption, it is natural that they will pay more attention to protecting the consumers who are now meant to drive the economy. Those consumers have been given a raw deal as a litany of scandals from tainted milk to pig-clogged rivers attests. In the case of pharmaceuticals, looking out for consumers means bearing down on prices and stamping out corruption, an effort that gels with the wider campaign against graft launched by Xi Jinping, the president. China already spends more than $60bn on prescription pharmaceuticals a year, making it the world’s third-largest market after the US and Japan. (LEK, a pharmaceuticals consultancy, reckons it may be worth $80bn.) Moreover, it is growing at about 17 per cent a year, straining health budgets and making it incumbent on Chinese authorities to control costs – and encourage the use of non-branded generics – if they are to extend decent healthcare to more people.

Finally, there may also be a crowd-pleasing, anti-foreign tinge to the crackdown. Many of the transgressions against consumers have involved domestic companies. However, it is the likes of Apple, recently forced to apologise for its allegedly “arrogant” treatment of Chinese customers, that have borne the brunt of the backlash.

In most cases, regulators are not invoking new laws but simply enforcing those long on the statute books. One lawyer with experience of the drugs industry in China says: “The culture of the pharmaceutical industry means they’re already operating close to the line. But now the line is being redrawn.”

In China’s fast-growing, hitherto ill-regulated healthcare market, dodgy practices have long been common, if not de rigueur. Even in relatively tightly regulated western markets, pharmaceutical companies have proved endlessly creative when it comes to encouraging use of their medicines. Physicians and academics, for example, are routinely invited to symposiums on dry-sounding subjects – such as “use of lipids in inflammatory disease” – held in tropical beach resorts or pleasingly close to top-notch golf courses. Last year none other than GSK pleaded guilty to criminal charges in the US and paid a record $3bn fine for aggressively marketing drugs beyond their authorised use.

From now on, all multinationals operating in China are likely to find the regulatory going tougher. If that leads to a more transparent, rules-based regime then, in the long run, such change could turn out to be for the good. In the short run, though, things are likely to become exceedingly uncomfortable for companies unfortunate enough to attract the attention of newly empowered regulators. That is truer for drugs companies than for anyone.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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