July 11, 2013 2:42 pm

GSK case highlights broader concerns about China

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In the early years of the new millennium, as China’s healthcare market was beginning to take off and western drug companies sought to cash in, a Pfizer marketing manager official sent a message to one of his colleagues.

He said he would authorise payment for two Chinese doctors to attend a scientific conference in Australia, but only on condition that they promised to “use no less than 4,200 injections a year” and to prescribe a Pfizer product to “more than 80 per cent” of their patients.

Chinese pharma under the microscope

Chinese pharma under the microscope

The tactics employed by local staff of the US pharmaceuticals group to win business were not the exception.

In 2008, at least six members of an “access group” run by Eli Lilly’s Chinese subsidiary to win government reimbursement for its products falsified their expenses to generate cash, which they spent offering public officials spa treatments, meals and cigarettes.

The details of the companies’ activities, which came to light in legal settlements finalised by the US authorities last year, highlight broader concerns about the challenges of doing business in China which have surfaced again in allegations made against GlaxoSmithKline.

The UK-based drug group has been accused by a former employee of making payments to doctors to influence prescribing practices. It has been the subject of police probes in recent days into “economic crimes” in Changsha, Shanghai and Zhengzhou. The Ministry of Public Security said on Thursday the alleged wrongdoing was “huge”, involving many suspects over a long period. GSK denies any wrongdoing and says it is yet to hear details.

Whatever the truth of the allegations, which echo past tactics employed by competitors, analysts argue that in China’s complex business environment they could also reflect the actions of a disgruntled employee, manipulations by local commercial rivals, political manoeuvres, pressures to reduce prices, or even an attempt at a shakedown.

Corruption in the country remains significant, according to most observers. PwC noted in a report last year: “Drug companies still give incentives to doctors who increase sales by writing an excess number of prescriptions after drugs are procured. Only through continued monitoring and enforcement of the bribery legislation can such practices be eliminated.”

The Chinese government has been clamping down on such practices and attempting to keep a lid on drug costs, with an increasing focus on multinational companies. The National Development and Reform Commission in Beijing last week signalled it was examining pricing by 60 companies, including the domestic affiliates of half a dozen international groups such as Astellas of Japan, Merck of the US and GSK.

Incentives tempt China’s low-paid doctors

Pills on a tray

Changing longstanding payment practices that surround the prescribing of drugs in China could prove difficult while the underlying temptations remain strong.

A key factor is the low salaries of medical professionals, which create incentives for individual doctors to prescribe drugs in ways that are more about generating extra income for themselves than the scientific or clinical needs of their patients.

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At the same time, foreign watchdogs including the US Department of Justice and the Securities and Exchange Commission are also more actively seeking evidence of corruption abroad.

“For more than a year now, every western firm in China has been highly focused on strengthening compliance,” says George Baeder, a longstanding China consultant currently working with outsourcing group Quintiles. “This has included more restrictive promotional spending guidelines, tighter monitoring and painful consequences, including firing senior executives.”

He says many companies are now seeking to supervise contact with doctors more tightly by hiring more highly qualified “medical scientific liaisons” in place of traditional sales representatives, and using internet communication instead of private visits. Even funding to support medical education has become swamped in lengthy internal approvals.

Chinese doctors are adopting a “portfolio approach”, seeking traditional under-the-table “red envelope” cash from local companies – which are often provided indirectly via distributors rather than drug manufacturers themselves, Mr Baeder says. They turn to multinationals instead for support in medical training, including attendance at scientific seminars.

That highlights a grey area increasingly under scrutiny by drug companies around the world: the dividing line between acceptable and overly lavish entertainment for doctors. The distinction is between widely accepted industry support for medical training and assistance at conferences (which health systems rarely fund adequately) and events that are a pretext for excessive hospitality designed to unfairly influence prescribing practices.

In China and other emerging markets, evolution of the system could involve following the growing practice in the US and Europe to publicly disclose all industry payments to doctors. Another, as AstraZeneca did last year, was to stop funding doctors’ travel to medical congresses.

After paying a record $3bn fine in the US last year for aggressive marketing, GSK itself went further and has severed any link between drug sales representatives’ bonuses and the prescriptions written as a result of their work.

But the trade-offs will be painful. As Mr Baeder cautions: “The sales reps in China are very driven by compensation. Money works as an incentive and those companies that switch to a higher fixed salary don’t get the same result.”

Additional reporting by Zhang Yan in Shanghai

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