Thursday, 19 December 2013

"My department head sees 80 patients in a morning and prescribes Rmb100,000 worth of drugs. She definitely takes commissions." from drug companies

by Andrew Jack and Patty Waldmeir
Unshaven and dressed in a blue and grey striped T-shirt, Liang Hong looked nondescript on screen. But his words, broadcast on Chinese television last July, were explosive. He told two policemen how, as a vice-president of GSK, he had channelled concealed payments via a local travel agency.
On the same day, Gao Feng, a leading fraud investigator, held a highly unusual briefing for foreign journalists at which he likened the British-based pharmaceutical company to the “big boss” in a “criminal partnership”, paying up to Rmb3bn ($500m) to officials and doctors. He claimed it used 700 travel agencies, some in turn offering money and “sex bribery” to GSK executives to win their favour.
This week Sir Andrew Witty, GSK’s chief executive, unveiled measures aimed at removing incentives to sales staff that encouraged excessive marketing, strengthening transparency and cutting funding to doctors. The moves follow both the China scandal and a record $3bn fine from US regulators last year.
While the changes build on reforms Sir Andrew launched in the US to tackle the legacy of his predecessors, the revelations in China were personally embarrassing for him. Most had happened since he took over GSK in 2008, winning the job partly on the basis of his knowledge of Asia acquired during a senior posting in Singapore.
The case has sparked broader concerns about the difficulties of operating in emerging markets and about the pharmaceutical industry’s ethical practices. It raises narrower ones about GSK’s own conduct and the responsibility of senior management.
In so far as Chinese investigators are probing for the facts – rather than responding to broader political or cost-cutting pressures, as some observers suggest – they need to determine how far the company was complicit, suffered from poor compliance or was a victim of sophisticated undetectable fraud.
While the GSK probe is yet to lead to charges or convictions, it has echoed broader concerns about drug company practices around the world. Only last month, Johnson & Johnson agreed a $2bn fine in the US after officials targeted practices including incentives paid to pharmacies to boost prescriptions, fees to sympathetic doctors to give favourable talks on its drugs, and kits of medicines mixed with lollipops to encourage use by children.
In the US alone, in the past three years cumulative fines from government prosecutions exceeded $13bn. Elsewhere, from Western Europe to Central Asia and Latin America, local regulators have been stepping up scrutiny of similar practices, mirrored by probes from the US and the UK.
In China, the authorities have detained four of GSK’s top Chinese executives and, according to local media, questioned another 40 inside and outside the company. Its British finance chief in Shanghai was banned from leaving the country, while Mark Reilly, who ran the national operation and left shortly before the accusations, has since returned and remains under similar restrictions.
Sir Andrew has described the alleged corruption as “shameful”, launchedinternal inquiries, and despatched senior officials to Shanghai, including a replacement for Mr Reilly.
The ripples have spread more widely. Whistleblower allegations against several other foreign drug companies, including Sanofi, Novartis, Lilly and Bayer, were reported by the Chinese media after the GSK investigation. Industry insiders say local drug companies have also been investigated, and their employees detained, though no charges have been announced publicly.
Yet the steady stream of allegations in the Chinese press has ceased in recent months, and the crisis atmosphere seems to have calmed. Bruno Gensburger, head of the pharmaceutical working group at the EU Chamber of Commerce in China, says things are “going back to normal”.
“My feeling is that it had a big psychological impact . . . and after the GSK case many companies reinforced their compliance regulations, but we already had tight compliance regulations so I don’t really know what more we could do,” he says. That might appear a defensive industry posture. But across the healthcare spectrum, from doctors to hospital officials to sales representatives for rival local companies, there is agreement that foreign pharmaceutical groups are not the main culprits of corruption in the Chinese healthcare industry.
GSK’s decision this week to stop paying speakers’ fees and travel expenses for doctors attending medical conferences by 2015 marks an escalation in voluntary efforts and legal requirements alike on drug companies to respond to concerns over excessive marketing, writes Andrew Jack .
Astrazeneca two years ago stopped funding doctors' travel to international conferences, while some other companies including Shire say they have long ceased the practice. Several have set caps on fees they pay to prescribers to talk about their products, and most have trimmed back on lavish entertainment.
Local companies are far more profligate with so-called “commissions” to doctors because they are not subject to the kind of scrutiny that foreign companies face under global anti-bribery laws.
A medical student in a leading Shanghai hospital says: “The supervising doctor in my department sees as many as 80 patients in a morning, and prescribes as much as Rmb100,000 worth of drugs. She definitely takes commissions from drug companies, but that only affects what she prescribes when there are two similar drugs.”
That situation normally arises when both are local generic businesses, industry analysts say. “In China, foreign drug companies are the best boys, but the parents beat them first,” says one industry insider, echoing a sentiment heard frequently from Chinese doctors who say foreign drug companies pay for educational activities that no one else will pay for in China.
“Financial flows – both legal and illegal – tied to drug and device sales are funding perhaps 60-80 per cent of total hospital costs,” says George Baeder, an independent drug industry adviser. “Without this funding, the current system would collapse.”
Many drug analysts see kickbacks as structural, and therefore hard to eradicate: central and provincial Chinese governments cannot afford to pay doctors a living wage, and many patients cannot afford to pay the true cost of care. Up to now, Beijing has turned a blind eye as pharma companies find ways to subsidise doctor salaries and underwrite their medical education.
Because corruption is core to the system, it cannot be eradicated by government fiat – though industry analysts say that fining GSK and imprisoning some of its employees would send an important signal.
At a time when the new government of Xi Jinping has launched an anti-corruption campaign across Chinese society, some habits have already begun to change. One Chinese consultant says she is often invited by drug companies to give lectures in public hospitals. “There used to be a group of people escorting me everywhere and taking me to big meals, but since the GSK thing happened foreign companies have cancelled their invitations and there are very few invitations from local companies either,” she says. “Now I fly on my own and only one person meets me at the airport”.
Despite these changes, most foreign drug companies have experienced only a modest impact on sales. Chinese doctors say they often have little alternative to using foreign drugs, which command a significant price premium, despite being mostly off-patent medicines. Local companies make generic alternatives for many, but doctors and patients do not trust their quality.
Beijing is determined to bring down the cost of such medicines, with consolidation of drug distribution, new quality controls on domestic producers and a revamping of the hospital financing system. “This is just year five in the government’s 12-year healthcare reform plan” to bring quality affordable care to 1.3bn people by 2020, says Franck Le Deu, author of a recent McKinsey report on pharmaceuticals in China. “It’s early days yet.”
Chinese doctors say they often have little alternative to using foreign drugs, which command a significant price premium, despite being mostly off-patent medicines.
By 2020, the drug market in China could top $310bn in retail sales value, the McKinsey report says, making it the world’s largest market after the US. But up to now, it accounts for only 3.8 per cent of the global revenues of the top 10 foreign drug companies. Sales have been rising fast, but now they are coming under increasing price pressure, creating commercial uncertainties alongside the concerns sparked by the unresolved probe against GSK.
There is no shortage of rumours in China about what the outcome of the specific GSK probe might be. The company is widely expected to escape corporate charges, with its four senior Chinese executives likely to go to jail but no punishment for foreign executives. GSK could face financial penalties. Industry insiders caution that, given the opaque nature of China’s judicial system and the almost total silence of GSK on the issue, reading the tea leaves on the eventual outcome is more of an art than a science.
If the facts are as the Chinese authorities claim, investigators and investors alike must question whether the company’s systems were adequate or it turned a blind eye as sales rose.
Whatever the truth, it and other pharmaceuticals companies are bracing for price cuts ahead and the need to be ever more cautious on their practices in emerging markets as well as more industrialised ones.
Source: FT

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