GlaxoSmithKline Investigations Reflect Broader Regulatory and Pricing Focus

The Chinese government’s recent investigations into GlaxoSmithKline (GSK) and other pharmaceutical companies have signaled initiatives to review commercial practices of foreign companies that may extend to other sectors. Though the onset of the investigations seems abrupt, they are partly a continuation of recent enforcement efforts regulatory moves in the pharmaceutical industry since 2012. They also reflect the anti-corruption campaign launched by President Xi Jinping’s administration, as well as  price investigations in other industries this year, ranging from milk powder to gold jewelry. These investigations provide insights into China’s current regulatory focus, and important prompts for companies in multiple sectors to monitor the activity of enforcement agencies and review internal compliance practices.

Current investigations of GlaxoSmithKline and other pharmaceutical companies

On June 28, the Ministry of Public Security (MPS) branch in Changsha, Hunan announced it was launching investigations focused on GSK operations and activities in China. Changsha’s efforts were mirrored soon after by local police in other places, including Shanghai, Zhengzhou, and Henan. Fewer than three weeks later, an MPS spokesperson announced its investigations confirmed that since 2007 GSK had paid 700 travel agencies and consultants about RMB 3 billion ($489 million) to provide cash, gifts, and other benefits to Chinese doctors in exchange for prescribing GSK medicines. MPS also alleged that GSK had written false value-added tax invoices directly or had them issued through travel agencies. MPS has detained four GSK executives and at least 20 employees to date. GSK responded by releasing a statement admitting to the bribery allegations and promising to fully cooperate with Chinese authorities on medical reform and corruption. GSK also promised to adjust its operating mechanism to reduce drug prices in the Chinese market.

MPS scrutiny of the pharmaceutical industry has extended beyond GSK. In July, various government agencies conducted a chain of investigations against other foreign pharmaceutical companies including AstraZeneca, UCB, Bayer, Novartis, Pfizer, Roche, Sanofi, Eli Lilly, Siemens, and Abbott. Chinese media reported that local branches of the State Administration of Industry and Commerce (SAIC) visited the offices of several of these firms, investigating whether these companies conducted activities similar to GSK. These investigations gained further steam when a former Novartis pharmaceutical representative exposed promotional fees that the company gave to Chinese doctors. In addition, a whistleblower revealed that Sanofi had bribed 503 doctors at 79 hospitals for RMB 1.69 million ($274,000), sparking investigations from Provincial Health Departments in Zhejiang, Beijing, Shanghai, and Guangdong. An MOC spokesman said the pharmaceutical investigations are not confined to foreign companies, but also include Chinese companies. This is consistent with Xinhua’s report that several medical representatives of domestic pharmaceutical companies have also been requested to assist in relevant judicial investigations.

Drug price control and other healthcare reform efforts

While the GSK case appears to have been the spark for this round of investigations, these actions may fit into broader Chinese regulatory efforts to control drug prices. Domestic sources claim that  bribery and corruption are key factors in rising healthcare costs in China. This is a concern that has prompted a series of pricing-related policies in the pharmaceutical industry since 2012.

·         In March 2012, the National Development and Reform Commission (NDRC) issued a notice requiring pharmaceutical companies to submit the minimum, maximum, and average drug production prices of the previous year to the Drug Information System starting in 2013. All prices must be submitted by April of each year.

·         In August 2012, seven ministries including the State Administration of Taxation and the Ministry of Health jointly launched a special program to crack down on illegal use of invoices in healthcare companies and facilities. This program began implementation at the local level in September 2012.

·         On July 2, 2013, the NDRC announced an ongoing investigation into the production costs and price-setting mechanisms of multiple Chinese and foreign pharmaceutical companies in order to adjust drug prices in a timely manner. NDRC also stated that the investigation of drug production costs involved 27 companies, while the investigation of price-setting mechanisms involved 33 companies, including GSK, Merck, and Sandoz.

·         On July 24, 2013, the State Council released a notice covering priorities and work tasks for healthcare reform in 2013, proposing to resolutely investigate and deal with the “illegal kickbacks” in drug purchasing and sales for the first time. According to this document, the focus of 2013 health care reform is related mostly to “drug reform,” including drug price management policies, government price-setting methods, and reducing drug costs.

Some analysts also view the investigations as part of the anti-corruption campaign launched after President Xi Jinping took office. This viewpoint is bolstered by the fact that the Chinese government’s price investigations are not limited to the pharmaceutical industry, but also involved other industries, including both foreign and domestic enterprises and groups. For example, relevant ministries and agencies have launched five antitrust investigations in industries ranging from wine to LCD screens. Recent price monopoly cases have resulted in fines of RMB 0.67 billion ($0.1 billion) on six (domestic and foreign) milk powder enterprises and separate fines of RMB 10.1 million ($1.63 billion) and RMB 500,000 ($81,300) for companies and associations that sell gold jewelry.

Chinese regulatory agencies have given strong signals in recent weeks that they plan to increase the number and scope of antimonopoly investigations – and that foreign companies could face particular scrutiny.  On August 14, Xu Kunlin, an NDRC director, stated that NDRC would focus its antitrust work on sectors that impact Chinese consumers, with an initial focus on  the petroleum, telecommunications, automobile, and banking industries. A recent Reuters story indicates that this follows a July 24 meeting with approximately thirty foreign firms led by another senior NDRC official, during which NDRC called on companies to admit any antimonopoly violations and to cooperate with regulators as opposed to using outside counsel. SAIC on August 14 also announced  the launch of a new campaign to crack down on practices such as commercial bribery in industries and investigate companies that potentially abuse their dominant market position.

Companies should monitor government activity and ensure internal compliance

Taken together, these cases show that the Chinese government is actively seeking to investigate commercial practices and use a variety of tools to control prices in key sectors. While the pharmaceutical sector has been a particular focus because of the government’s desire to lower consumer healthcare prices, companies in other sectors should nevertheless monitor relationships with key agencies dealing with these issues, including SAIC, MPS, and NDRC. Companies in sectors with a high price gap between domestic and foreign goods and services should be especially vigilant.

These investigations also provide good reasons for companies to review their internal compliance procedures and risk monitoring activities. The US-China Business Council is drafting a best practices report on company compliance and controls, based on a detailed set of conversations with companies through our Shanghai office.