GlaxoChinaGate contd. - how the reps were trained to bribe

Big pharma’s rise in China not held back by scandals

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When Chinese authorities accusedGlaxoSmithKline last summer of being the “godfather” at the centre of a network of corruption, big pharma braced for a prolonged period of turmoil in one of the world’s fastest-growing drugs markets.

China suddenly looked a more perilous place for western drugmakers to do business and the following months saw a slowdown in sales as companies became more cautious in the way they marketed to doctors.

As time has passed, however, industry executives and analysts say the sense of crisis has gradually abated. Bruno Gensburger, external affairs director for Sanofi, the French company, in China, says the market is “back to its former abnormality”.

“It has never been normal, but it does seem to be more quiet now.”

By the end of last year most drugmakers, with the exception of GSK, had returned to strong growth in China and analysts expect the trend to have continued in the first quarter of 2014.

Optimists see this as a sign that last year’s bribery scandal was nothing more than a temporary setback in the upward march of the Chinese pharmaceuticals market, which has been expanding at an average annual rate of about 15 per cent.

Yet some in the local industry say it is too soon to conclude that the corruption storm has passed. Authorities are continuing to investigate GSK and nobody outside the Chinese government knows where the probe will lead.

While GSK has been the prime target – accused of making up to $500m of payments to doctors in the form of travel, entertainment and cash – people familiar with the Chinese market say such practices have long been widespread.

Two former executives of Sinopharm, the state-owned Chinese drug group, weredetained in January for questioning and several western companies, including Eli Lilly, Sanofi and Novartis, have faced whistleblower allegations.

Many in the industry believe Beijing set out to make an example of GSK as part of the wider anti-graft drive by President Xi Jinping – sending a message to drugmakers and doctors that cosy deals to sell medicines at inflated prices would no longer be tolerated.

GSK responded in December by scrapping individual sales targets for commercial staff in China and instead linking incentives to improved patient care and wider measures of performance. No other companies, however, followed suit. “It feels like business as usual,” says one lawyer who works with drugmakers in China.

Novartis is among those reviewing incentives for Chinese employees. But Joe Jimenez, chief executive, is cautious about radical change. While stressing the Swiss group’s commitment to compliance, he told the Financial Times: “We don’t want to do anything that puts us at a competitive disadvantage.”

Western drugmakers have been pouring resources into China to tap rising demand for medicines as the country’s population becomes older, wealthier and more susceptible to “rich world” conditions such as diabetes and heart disease. It is forecast to become the world’s second-biggest drugs market after the US by 2016, with sales of $165bn, according to IMS Health, the research company.

Mr Jimenez says that, while the market has stabilised since last summer, some of the previous fizz has gone for good. “We are going to see more conservatism within hospitals and among physicians that will slow growth a little.”

Pascal Soriot, chief executive of AstraZeneca, told the FT that the Anglo-Swedish group had already embarked on a drive to strengthen compliance in China before the GSK probe: “We can never be sure that all 6,000 of our employees there are going to behave perfectly. But we are confident there is no systemic issue.”

Some local industry insiders believe companies are being complacent. “People think GSK was just unlucky, or they think they have such good guanxi [government relations] that they are protected,” says one, adding that he believes the Chinese crackdown will not stop at GSK.

Potential penalties against guilty companies could include a ban on sales to public hospitals in certain provinces under newly strengthened blacklisting powers. US and European authorities might also take action if wrongdoing is found.

GSK acknowledged last July that some executives appeared to have broken Chinese laws and described the allegations as “shameful". Several Chinese GSK staff remain in detention and its former head of China operations, Mark Reilly, a Briton, is unable to leave the country. GSK said it was continuing to fully co-operate with authorities.

GSK’s problems have provided an opportunity for rivals to gain market share, after the group saw Chinese sales fall 61 per cent year-on-year in the third quarter of 2013 and another 29 per cent in the fourth.

George Baeder, an independent drug industry adviser, says GSK’s overhaul of staff incentives risks a further hit on sales in the short-term – but it puts the company on the right side of a global shift away from commission-based pay in the sector.

“In the end it could be a competitive advantage,” says Mr Baeder. “GSK has been forced to develop innovative solutions. . .ahead of the others that will ultimately be forced to figure out new approaches as well”.

Additional reporting by Zhang Yan

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Speaking in low tones in a busy Starbucks coffeeshop in central Shanghai, a young man recalls his experience as a former drug salesman for GlaxoSmithKline, wr itesPatti Waldmeir in Shanghai

“We did get training in compliance,” he says. “But then our team leader took us off individually to tell us how to offer kickbacks. We weren’t allowed to talk about that, in the office”.

The young man, who declines to be named since his conduct may have been illegal, is in many ways typical of the vast salesforce of drug representatives employed by domestic and foreign pharmaceutical companies in this country of 1.4bn people. He is 20-something, and eager to make money.

“Our sales model was the same as other multinational drug companies in China,” he says: offering cash, meals or travel to low-paid doctors to encourage them to buy drugs.

“GSK’s sales targets were maybe more aggressive than most, but everyone was doing it, domestic and foreign”, he says. “But the bonus was very high if you reached those targets so that stimulated us to try every means to get there”.

Big-ticket bribes were laundered through travel agents whose fake invoicing practices are now being investigated by Chinese authorities. But smaller kickbacks were paid in cash, or in kind, depending on an individual doctor’s preference.

“I bought fake tax receipts, or collected receipts from family and friends for taxis and meals, so that I could account to the company for the amounts I gave to the doctors,” he says.

The pay was very good: a base salary of Rmb7,500 a month (already high by Shanghai standards); and a quarterly bonus of Rmb17,000 if sales targets were met (plus an additional 5 per cent of sales above the target).

Then there was the Rmb5,000 quarterly bonus for visiting doctors: “This was easy to get, you could even make up doctors that you didn’t visit, says the former salesman. Finally there was a monthly allowance of up to Rmb2,500 for taxis and mobile phone fees.

And what was the size of the average kickback? “The industry average was 5 to 20 per cent of the value of the drug,” he says, adding he never met a doctor who refused a handout “unless they thought it was too little”.

He says he left because of the risk of getting caught. Former colleagues who stayed behind “don’t know what they are supposed to be doing because the former model no longer works,” he says. “The company still wants them to talk to doctors about product information but it’s very difficult to find doctors willing to listen without financial benefit”. Some 40 per cent of his former colleagues have left or are working part-time, he says.

The rest are studying for GSK’s new examination-based bonus scheme, which rewards staff partly based on a test of knowledge of product information, and partly based on team sales targets. But he thinks this will not work: “Very few people will have an incentive to sell more because they can’t be sure everyone else will work as hard as they do”.

GSK said: “The behaviour described by this ex-employee is completely unacceptable and we have zero tolerance for unethical conduct of this kind. We believe the vast majority of our employees in China operate to the highest standards and anyone who does not has no place in our company.”

Additional reporting by Zhang Yan

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