Multinational drug companies currently employ more sales agents in China than they do in the U.S., which is their largest market. Several drug manufacturers, including Merck and GlaxoSmithKline, are investing in China in a big way, including building research and development centers. If this continues, China could become the world’s second largest pharmaceutical market, behind the U.S.
Due to recent patent expirations in the U.S., as well as stringent price controls in Europe, this sudden increase in China’s demand for drugs is very much welcomed by Western manufacturers.
However, at this time, selling pharmaceuticals and other health care products in China may appear suspicious by some.
Earlier this year, authorities began investigating a Shanghai travel agency rumored to have huge revenue but only few bookings. What was discovered was a conspiracy involving tens of millions of dollars, directed by senior executives at GlaxoSmithKline (GSK), the British pharmaceutical giant.
Investigators reported that for years, some high-ranking executives at GSK’s China operations used travel agencies as money-laundering shops to funnel bribes to doctors, hospitals, medical associations, foundations and government officials.
These payoffs, investigators said, helped boost drug sales and allowed GSK to sell its products for higher prices in China.
At a news conference in Beijing this week, authorities accused senior executives at the company’s China operations of organizing sham conferences, overbilling for training sessions and in various other ways, filing bogus expenses for which the cooperating travel agencies would issue sham receipts. That enabled the GSK executives to be reimbursed by their company with money they used for bribes, investigators said.
This practice is such a common form of money laundering and so lucrative for the travel agencies that they would compete for the opportunity to take part. Sometimes they would entice GSK executives to give them the business by offering them cash, first class travel accommodations or even hiring young women to engage in sexual activities, or “sexual bribery”, with GSK managers, Chinese officials said.
Gao Feng, head of the economic crime unit of the Chinese Ministry of Public Security, said at the news conference, “It’s like a criminal organization—there’s always a boss.” He said, “In this case, GSK is the boss.”
Four Chinese executives have been detained for questioning. Shortly after government investigators raided Glaxo’s Shanghai offices, Mark Reilly, the British head of Chinese operations left the country. He has not returned.
After a whistle-blower claimed that bribery was used to bolster drug sales, GSK conducted an internal investigation into its China operations but found no evidence of wrongdoing or bribery in the China operation.
After one of the detained executives appeared on Chinese television and admitted to much of the activity, Glaxo released a statement that the “allegations were shameful and we regret this has occurred.”
The health care market has become critical to global companies, as well as to the Chinese government.
Several factors have contributed to the boom in China, experts say. China’s growing economy now affords middle class the ability to purchase expensive Western drugs and to treat conditions, such as depression and respiratory illnesses, which may have gone untreated or undiagnosed in the past.
The Chinese are looking to capitalize on the booming health care market. The country’s medical sector invested $160 billion in research and development in 2012, nearly surpassing Japan, according to a report by the Boston-based Lux Research.
Some believe Western companies will have an edge because consumers may be willing to pay more for brands that are known for high-quality ingredients. China is known for poor quality in many of their products, including drugs.
It is alleged that Glaxo funneled as much as 3 billion renminbi (about $489 million) through more than 700 travel agencies. That is quite a large bribery investigation.
Last year, American drug maker Eli Lilly was accused of bribery and agreed to pay $29 million to settle charges filed by the Securities and Exchange Commission. In China, employees at a Lilly subsidiary falsified expense reports to provide spa treatments, jewelry and other expensive gifts, SEC officials said. Pfizer and the medical device maker Biomet have also settled federal charges of bribery in China and other countries recently.
It is time to crack down on this corruption. Is this the way to get to the top? What do you think about the conduct of such trusted drug manufacturer’s if these allegations are true? Do you think there should be sanctions against them if this is true? What type of accountability should these international competitors abide by? Let us know what you think. You can contact one of our Gacovino Lake attorneys at 1-800-246-HURT (4878).