Glaxo probe shows China graft endemic since czar executed

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A technician works at the Pfizer Ltd. research and development plant in Dalian, China. Pfizer agreed last August to pay $60.2 million to settle foreign bribery cases it disclosed to U.S. authorities involving alleged payments paid by employees and agents of subsidiaries, including in China.

Since the 1980s, China has modernized its hospitals, added a decade to life expectancy, halved infant mortality, and eliminated diseases such as polio. Now it aims to stamp out medical corruption.

Efforts to clean up the nation's $350 billion health-care industry have gained prominence since police said last month they were investigating GlaxoSmithKline Plc (GSK) for suspected economic crimes. Yesterday, the China Food and Drug Administration said it will "severely crack down" on fake medications, forged documents and bribery.

Six years after executing its chief drug regulator for accepting bribes for approving fake medicines, the government is focusing on ensuring an eightfold increase in health spending over the past decade doesn't also line the pockets of drugmakers, doctors and hospital officials.

"We know that China's corruption is so entrenched in the pharmaceutical space that in order to get things done you have to bribe officials; it's an open secret," said Yanzhong Huang, senior fellow for global health at the Council on Foreign Relations in New York and author of the book, Governing Health in Contemporary China. "Rampant bribes, commissions and corruption raises drug prices. This makes it difficult for public hospital reform to push forward."

Regulator's crackdown

China's drugs regulator will conduct a crackdown from July to December, Yan Jiangying, a spokeswoman for the agency, told reporters at a briefing in Beijing yesterday.

Recent investigations have so far implicated Glaxo, the U.K.'s largest drugmaker, though other foreign companies may also be involved, Gao Feng, head of the economic crimes investigations unit of the country's Public Security Ministry, told reporters at a July 15 briefing.

Eli Lilly & Co. (LLY) in December agreed to pay $29.4 million to settle U.S. Securities and Exchange Commission allegations that employees gave cash and gifts to officials in China, Brazil, Russia and Poland to win millions of dollars in business. Pfizer Inc. (PFE), the world's biggest drugmaker, agreed last August to pay $60.2 million to settle foreign bribery cases it disclosed to U.S. authorities involving alleged payments paid by employees and agents of subsidiaries, including in China.

China's police will seek cooperation with law enforcement agencies overseas in an international effort to root out corruption in the health-care industry, Gao said.

"˜The knife'

"It's a crackdown that positions corruption as a problem for which foreign companies are at least equally responsible," said Erik Gordon, a professor from practice in the University of Michigan's law school.

Eliminating corruption will improve efficiency in a health system that's extended life expectancy by seven years since 1990 to within three years of the U.S. and Denmark, yet remains marred by bribery and counterfeit medicines.

It's time to put bribery in the medical system "to the knife," China's Communist Party said in a commentary yesterday in the People's Daily, its official newspaper.

The focus on corruption coincides with the government's objective to improve access to health care, lower drug prices and improve public hospitals, said Huang at the Council on Foreign Relations.

Inflated prices

China's top economic planning agency is investigating the costs and prices of drugmakers including Glaxo, Merck & Co. (MRK), Novartis AG (NOVN) and Baxter International Inc. (BAX) to improve the pricing system for medicines. The National Development and Reform Commission will examine 27 companies for costs and 33 for pricing, according to a July 2 statement.

Bribery is one of the main reasons why drug prices are at a "falsely high level in China," the Public Security Ministry's Gao said, adding that Glaxo's marketing strategy aids and abets bribery activities.

Steve Nechelput, Glaxo's finance chief in China, can't leave the country, company spokesman Simon Steel said yesterday in a phone interview. Nechelput hasn't been questioned or arrested and isn't being detained, Steel said.

Four of the drugmaker's senior executives were detained amid an investigation involving 3 billionyuan ($489 million) of spurious travel and meeting expenses, and trade in sexual favors, Gao said. The allegations are "shameful" and would be a breach of internal systems and values, the London-based company said in a statement in response.

Funneling bribes

China's interest in Glaxo was stoked by a $3 billion settlement with U.S. Department of Justice a year ago concerning a failure to report certain safety data and promotion of two popular drugs for uses that the U.S. regulator hadn't approved, Gao said. "We were most shocked," he said.

State broadcaster China Central Television aired a prime-time segment on July 16 detailing how executives at the U.K. drugmaker used a travel agency to funnel bribes to government officials.

The CCTV report featured Liang Hong, operations manager for Glaxo China, explaining how executives passed bribes to drug regulators, pricing officials at the National Development and Reform Commission and hospital officials. Liang is among the four Glaxo executives in police custody, CCTV reported.

"The talk about being appalled at the drug company practices in the U.S. is an attempt to show that America is no better than China," the University of Michigan's Gordon said. "China genuinely wants to crack down on corruption, but they don't want to lose face over it."

"˜Huge' profits

In the past, China has mostly avoided aggravating foreign companies, said Huang at the Council on Foreign Relations. China may be using the Glaxo case, which "represents the tip of the iceberg," to send a signal to other drugmakers that "it's time to stop these types of practices," he said.

"I need to remind foreign pharmaceutical companies that, because they occupy a leading position in the industry and reap huge amounts of commercial profits, they should also bear a great responsibility to society and the public," the Public Security Ministry's Gao said this week. "While we don't expect them to set a moral example, we expect them to obey the law."

The Glaxo case signals that Chinese authorities may be starting to enforce their anti-corruption laws more aggressively, said Rob Morris, who heads the Asia financial advisory services practice for business consultancy AlixPartners.

Czar's execution

Zheng Xiaoyu, China's former chief drug regulator, seen here in Beijing on March 4, 2003. Zheng was executed in 2007 for taking bribes amid a clamp down on fake medicine.

China has been taking action against corrupt health officials for years. Former chief drug regulator Zheng Xiaoyu was executed in 2007 for taking bribes amid a clamp down on fake medicine.

A former deputy director of the same agency was fired for serious violations of discipline and law in 2011, the same year a Shanghai court handed a suspended death sentence to a former chief executive of Shanghai Pharmaceutical Group for corruption that enabled him to amass more than 50 million yuan.

Nine heads or senior executives of 13 hospitals were investigated for graft in the southern city of Shenzhen as part of a campaign targeting spurious purchases of equipment, drugs and consumables, Xinhua News Agency reported last month.

"Over the last year and a half, we've seen a fair bit of activity in terms of a crackdown across the health-care space in China -- for example doctors, lab directors, distributors," said Kelly Austin, partner-in-charge of law firm Gibson, Dunn & Crutcher's Hong Kong office, whose legal practice focuses on government investigations and regulatory compliance. "It's not just targeted at multinational corporations."

Long battle

Low, standardized salaries for doctors and nurses -- who are mostly public servants in China -- have prompted them to bolster their income by prescribing unnecessary medicine and surgery, where they can take a cut of the money, according to Liao Ran, Berlin-based senior program coordinator for East Asia at Transparency International. They also receive "˜donations' in the form of red packets, known as hongbao in Chinese, from patients, as well as kickbacks from drug companies.

"Corruption issues in the health-care sector aren't just about corruption -- it's the entire system's structure that will make this a battle for a long time to come," said Liao, who was born in China. "Because corruption has driven up costs, in China, there's a saying that you cannot afford to be born, you cannot afford to be sick and you cannot afford to be dead."

The effects of the health-care system structure extend beyond the ailing. The Chinese government's campaign to spur domestic spending for economic development is also impacted by unpredictable health-care costs, said Liao.

"It's a huge worry," he said. "If you have an extra 10,000 yuan, you won't dare spend it on travel or leisure -- you'll put it away in case mom or dad get sick next year."

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