Drugmaker Remedy for Scandal Is More Chinese for China

Photographer: Peter Parks/AFP/Getty Images

An employee enters the GlaxoSmithKline Plc headquarters in Shanghai. Close

An employee enters the GlaxoSmithKline Plc headquarters in Shanghai.

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Photographer: Peter Parks/AFP/Getty Images

An employee enters the GlaxoSmithKline Plc headquarters in Shanghai.

Drugmakers are putting more Chinese nationals in important positions in the country to avoid the kind of bribery scandal plaguing GlaxoSmithKline Plc (GSK), according to the head of Europe’s pharmaceutical industry group.

Chinese police handed a case against Glaxo’s China unit to prosecutors last month, alleging that Mark Reilly, a British national who previously led the group, helped set up and expand sales departments that offered bribes to doctors in return for prescribing drugs. The London-based company also faces a U.K. criminal probe.

“Some companies are having more Chinese people in key positions,” said Richard Bergstroem, director general of the Brussels-based European Federation of Pharmaceutical Industries and Associations. “In order to do audits further down in the organization, and in order to understand what’s going on, they need people on the ground. Preferably you have someone who speaks the local language.”

While companies are taking steps to ensure they don’t harbor improper practices in their Chinese divisions, reforms to the health system are needed to remove incentives for corruption, Bergstroem said. Some Chinese hospitals get as much as half of their revenue from prescribing drugs and procedures, leading to over-prescription, he said.

“This has not been fixed yet in China,” Bergstroem said in a telephone interview. “Despite years of attempts and numerous reports, they’ve not been able to take out these strange incentives in the system. For a Western company coming in with its rules and hopefully its values, it is very difficult to operate in an environment where the other side is not governed properly.”

Multiple Arrests

A probe of sales practices in China that began last year has resulted in the arrests of doctors, hospital administrators and pharmaceutical executives. Roche Holding AG (ROG), the biggest maker of cancer drugs, and Novo Nordisk A/S, the largest insulin producer, are among manufacturers that have been visited by Chinese authorities. Roche said last month that it’s cooperating and had few details about the visit. Novo Nordisk said in May that inspections “are not uncommon” and that a visit last year didn’t have “any significant impact on our business.”

Bergstroem said industry leaders have told him they plan to have more Chinese or Chinese-speaking workers in key positions, and declined to comment on actions by particular companies or on the Glaxo allegations. Foreign companies are also reviewing the way they compensate Chinese doctors for attending medical meetings, he said.

Doctor Junkets

“Even if legal, and even if widely accepted outside of China, people are very cautious about what you can do and not do,” Bergstroem said. “Instead of filling an Airbus with doctors going to Macau, maybe there’s a different way of having them take part in a scientific discussion.”

Drugmakers have poured resources into China over the past decade as rising incomes make health care more affordable, and as the government spends billions of dollars to expand basic care. Chinese President Xi Jinping has made affordable care a key tenet of his agenda, along with a crackdown on corruption.

Sanofi (SAN), France’s second-largest company by market value, isn’t sending fewer non-Chinese to work in the country, Chief Executive Officer Chris Viehbacher said in an interview.

“We are just all going to have to learn how to make sure we know how to do business there,” said Viehbacher, who is also president of the European industry group. “Stamping out corruption makes it a level playing field.”

Glaxo said May 27 that it is “committed to operating its business to the highest ethical standards and will continue to cooperate fully” with the U.K. investigation.

In December, after the Chinese probe began, Glaxo said it planned to stop direct payments to doctors for giving speeches and attending medical meetings by early 2016. Glaxo is also moving to a new compensation program for sales representatives outside the U.S. who deal directly with those who prescribe medicine.

To contact the reporter on this story: Simeon Bennett in Geneva at sbennett9@bloomberg.net

To contact the editors responsible for this story: Phil Serafino at pserafino@bloomberg.net David Risser, Tom Lavell

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