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Spooked by probes, pharma executives ask: should I leave China?

Spooked by probes, pharma executives ask: should I leave China?

Thu, Jun 12 2014

By Adam Jourdan

SHANGHAI (Reuters) – China’s crackdown on corruption in the pharmaceutical sector has frightened foreign executives so much that some fear they could be jailed and have asked their lawyers if they should leave the country for six months. Others are thinking of going for good.

While the crackdown has been building for a year, Chinese police shocked the foreign business community a month ago when they filed corruption charges against Mark Reilly, former China head of British drugmaker GlaxoSmithKline Plc. The Briton, who has been barred from leaving China, could face decades in prison.

Even before then, executives were getting worried about a wave of visits from police and regulators to their offices as well as articles in Chinese media alleging corrupt practices against many global drugmakers.

The charges against Reilly had prompted some senior executives to look at all contingencies, several legal and industry sources said.

“Many of our clients are asking about personal liabilities and insurance, with executives asking if they are put in jail what will happen to their families and how the company will provide protection for them,” said John Huang, Shanghai-based co-founder and managing partner at law firm MWE China.

Police said a year-long investigation found GSK made billions of yuan from schemes to bribe doctors and hospitals. Two senior Chinese executives were also charged.

Britain’s biggest drugmaker has said the accusations were “deeply concerning” and that it had zero tolerance for bribery. Reilly has not been reachable for comment while his lawyer has declined to talk to the media. Reilly’s whereabouts are unknown.

LOOKING FOR THE EXIT

Global drugmakers contacted by Reuters declined to comment about the crackdown and how it was affecting executive morale in the world’s third-largest pharmaceutical market.

But Huang and two pharmaceutical executives said some managers were reconsidering the legal risks involved in holding any position where they were responsible for some of the thousands of marketing and sales staff that global firms employ across China.

Investigators have focused on those staff and how they deal with poorly paid doctors and administrators in public hospitals, the biggest buyers of medicine in China.

The crackdown, which shows no sign of abating, coincides with a wider campaign by President Xi Jinping against corporate and official graft.

Lawyers said some executives and in-house counsel had sought legal advice about leaving China to avoid getting caught up in any future probes. Some top managers were actively pursuing career options outside China, said one source.

Others were contemplating a more temporary escape until the worst blew over.

“They are thinking about leaving China short-term, staying out of the country on a three or six-month rotation,” said another Shanghai-based lawyer, who asked not to be identified because of the sensitivity of the subject.

By moving abroad, executives would avoid being arrested should there be any formal investigation into their firms, lawyers said. Executives had sought advice on relocating to Singapore, Hong Kong and other destinations, they added.

Some international firms were also finding it harder to attract staff to China, said the two pharmaceutical executives at separate global drugmakers, who declined to be identified because they were not authorized to speak to the media.

Other executives believe the GSK case is a one-off event and are more focused on not falling foul of the U.S. Foreign Corrupt Practices Act (FCPA), which can apply to a wide variety of firms that have business ties to the United States.

That would be a mistake, said Steven Dickinson, partner at law firm Harris Moure in the Chinese port city of Qingdao.

“Every week I write an email saying you’re missing the point – you won’t have time to get hit by the U.S. law because you’ll be in jail in China,” Dickinson said.

WIDER SCRUTINY

While formal charges have only been leveled against GSK executives, virtually all big drugmakers in China have come under scrutiny from police or regulators.

Last year authorities visited Novartis AG of Switzerland, Britain’s AstraZeneca Plc, Sanofi SA of France, U.S. firm Eli Lilly & Co, Germany’s Bayer AG and Danish drugmaker Novo Nordisk A/S.

All said they were cooperating with the authorities and that they did not condone bribery.

Most recently, Swiss drugmaker Roche Holding AG said last month its Hangzhou office in eastern China was visited by China’s anti-graft watchdog, the State Administration for Industry & Commerce (SAIC). The regulator declined to give details while Roche said it would cooperate with the authorities.

A leaked memo from the Health Ministry in Hangzhou also named Eli Lilly, Novo Nordisk and AstraZeneca as examples of drugmakers suspected of making kickbacks. The three firms said they had not been contacted by authorities over the matter.

Several global drugmakers including Novo Nordisk, Eli Lilly and Roche have also changed their China heads in the past year. The three firms said the moves had nothing to do with the crackdown.

GSK replaced Reilly in July after the investigation into the company was announced. Johnson & Johnson appointed a China chairman in a newly created role in August to oversee the firm’s business. The U.S. company declined to comment on the move.

 

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About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (www.moatreport.com), a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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