|GSK's Mark Reilly, given a suspended prison sentence by Chinese court for bribery.|
by Michael Woodhead
The main points of GSK's record 3 billion yuan ($500 million) fine for bribery in China have been reported elsewhere - I won't go over the same ground.
Suffice to say that several senior executives (including one from the UK) have been implicated in the giving of massive levels of bribes/kickbacks to institutions and hospitals in China to promote the use of GSK's drugs. The company was also found guilty of transfer pricing - dodgy accounting to transfer profits out of China via pricing mechanisms that favoured the revenues of the parent company over the China subsidiary.
Most of the western reports have focused on the implications for GSK and for the prospects of western businesses in China. Surprisingly few have questioned the ethics of what GSK was doing - except to suggest that "Chinese companies were all doing it, it's the way of doing business in China."
I have been reading some of the Chinese language media reports, and they give a lot more detail of the practices GSK was found guilty of. Very few western media reports have focused on the actual bribery methods used by GSK or the specifics of the transfer pricing arrangements (which I presume are not confined to China).
Here are a few examples reported in the Chinese media:
1. According to Chinese prosecutors the bribery was systematic and on a huge scale. Drug reps bribed doctors. Area managers bribed hospitals and 'VIP clients'. Country managers bribed officials in charge of distribution and purchasing. Bribery was done via travel agencies, gifts, sponsorship and through entertainment budgets and PR agencies. There were separate promotional teams for different product groups - the cold chain (vaccine) group is said to have spent 130 million yuan bribing officials in the regional Communicable Diseases Centres with everything from cameras and electronic equipment to cars.
2. How were individual doctors bribed? One liver specialist physician in Hunan called Dr Lee told the court how it worked. For every lamivudine prescription he wrote he was paid 20 yuan by GSK rep. For every new patient he got a bonus of 100 yuan. Dr Lee said every month he wrote about 150-200 prescriptions for lamivudine and started 5-8 new patients on the drug. Do the maths - that 12,000 yuan ($2000) a month, or 144,000 yuan ($23,400) a year. Dr Lee said the GSK rep arranged to pay him his commission every month at a special meeting when he would be paid for 'lecture fees' and travel expenses for the company. He received these fees 12 time a year but only did 3-4 lectures for GSK each year.
3. It wasn't just individual doctors who were bribed - the court heard how professional 'medical associations' also had huge sums of money transferred to their accounts from GSK to promote the endorsement and use of their products. Medical groups also received millions of yuan in material bribes such as non-medical items like fridges, cars and TVs. Hospital managers were also bribed millions to influence their purchasing policies - sales reps were given a 'Great Wall Plan' and a 'Dragon Plan' of incentives to persuade hospitals to abolish their 'Chinese-made generic drugs only' policies.
The end result was that Chinese consumers paid more for their medicines. Drugs such as Contac, Fenbid and lamivudine were overpriced up to seven-fold compared to other countries. The unit cost of lamivudine was said to be 142 yuan in China compared to 18 yuan in South Korea and 30 yuan in the EU, Japan and Hong Kong. Drug prices were padded to pay for kickbacks. About a third of the cost of GSK pharmaceuticals was said to have been to cover 'commissions', according to a financial controller. This meant Chinese consumers paid 30% extra for drugs just to cover the cost of bribes.
GSK was driven by high pressure sales tactics for pharmaceuticals: GSK's revenue in China rose from 3.9 billion to 7 billion yuan between 2009 and 2012. The sales workforce increased from 1000 to 5500 people over that period, and each rep was given a budget of 3000-5000 yuan per month to influence prescribing - presumably though officials, doctors and health institutions. Sales reps were promised unlimited bonuses and membership of an 'Elite Club' with foreign travel if they met their targets
Cooking the books: from 2009-2013 GSK had almost 22 billion in revenue from drug sales in China and yet recorded a profits of only 100 million yuan. Investigators found this was due to a 'Five Step' transfer pricing system, by which the costs of products such as the antibiotic Zinacef were inflated at various stages of production in Italy and Cyprus until eventually 'sold' to the China subsidiary. This was a way of repatriating profits back to the US, but again meant that Chinese patients paid far more than they needed to for drugs.
The overall picture is not pretty - call it what you want - commissions, kickbacks, bribes, - GSK was guilty of them but they were by no means the only pharma company in China doing it. Commissions and kickbacks are obviously widespread in the Chinese health system, and others have been caught out - such as in the Zhangzhou, Fujian case last year where 73 hospitals were found to be guilty of accepting bribes.
In Chinese media reports on the GSK case, most commentators have concluded that the massive fine and the jail sentences will be a lesson to the pharma industry - and the stamping out of bribes will result in lower medicine prices for Chinese consumers.
However, one leading financial commentator has said the GSK case is a prime example of China's tactic of "killing the rooster to scare the monkey" - but it would not work. Cai Shen Kun says corrupt practices are so entrenched in China's pharmaceutical industry and are so much a part of the healthcare system that even a major case like the GSK one will not put a stop to them. He says kickbacks have become an unwritten rule in the industry that all insiders believe that nobody can ignore if they want to make sales - even a major international company like GSK.
Cai Shen Kun says the long term solution is to reform the health and pharmaceutical system to make it transparent and remove the incentives for commissions. He also says nothing will change until those who accept the bribes are brought to justice - and that means prosecuting the government officials and senior doctors who accept the 'crazy money'.